TIDMARBB
RNS Number : 1581J
Arbuthnot Banking Group PLC
28 March 2018
28 March 2018
For immediate release
ARBUTHNOT BANKING GROUP ("Arbuthnot", "the Group" or "ABG")
Audited Final Results for the year to 31 December 2017
Increased profitability as capital successfully deployed
Arbuthnot Banking Group today announces an increase in
underlying profit of 91%.
Arbuthnot Banking Group PLC is the holding company for Arbuthnot
Latham & Co., Limited and has an 18.6% shareholding in Secure
Trust Bank PLC.
FINANCIAL HIGHLIGHTS
-- Profit Before Tax GBP7.0m (2016: GBP0.2m)*
-- Underlying profit before tax GBP7.7m (2016: GBP4.0m)
-- Operating income increased by 32% to GBP54.6m (2016: GBP41.5m)
-- Earnings per share 43.9p (2016: (3.7p))*
-- Final dividend per share 19p (2016: 18p), an increase of 6%
-- Total full year dividend per share 33p (2016: 31p)**
-- Underlying net assets GBP236m (2016: GBP234m)
-- Net assets per share 1547p (2016: 1534p)
-- Underlying return on deployed equity 10.0% (2016: 9.6%)
OPERATIONAL HIGHLIGHTS
Arbuthnot Latham
-- Profit before tax GBP11.0m (2016: GBP9.1m) an increase of 21%
-- Average net margin at 4.8% (2016: 4.8%)
-- Customer loans exceeded GBP1bn increasing 38% to GBP1,049m (2016: GBP759m)
-- Written loan volume increased 105% to GBP466m (2016: GBP227m)
-- Customer deposits exceeded GBP1bn increasing 39% to GBP1,391m (2016: GBP998m)
-- Assets under management exceeded GBP1bn increasing 13% to GBP1,044m (2016: GBP920m)
-- Completed acquisition of Renaissance Asset Finance Limited on 28 April 2017
-- Installed Oracle Flexcube operating system at a total investment of GBP8m
Secure Trust Bank - Associated Undertaking
-- Shareholding maintained at 18.6%
-- Treated as an associated undertaking due to significant influence via three board members
-- Reported GBP4.4m of profit from associate (2016: GBP2.1m)
Commenting on the results, Sir Henry Angest, Chairman and Chief
Executive of Arbuthnot, said: "The Group had a good year, with
profits increasing substantially, supported by the deployment of
capital into the business. Arbuthnot Latham reached a creditable
milestone of surpassing GBP1bn in its key business metrics:
Customer Loans, Customer Deposits and Assets under Management. With
a new banking system successfully installed, strong capital and a
good liquidity surplus, the Group is well set for further
growth."
Note: * The prior year profit and EPS excludes profit from
discontinued operations of GBP228m.
** The total dividend for 2016 excludes special dividend
payments of 325p.
ENQUIRIES:
Arbuthnot Banking Group
Sir Henry Angest, Chairman and Chief Executive 0207 012 2400
Andrew Salmon, Chief Operating Officer
James Cobb, Group Finance Director
Stifel Nicolaus Europe Ltd trading as KBW (Nomad
and Joint Broker) 0207 710 7600
Robin Mann
Gareth Hunt
Stewart Wallace
Numis Securities Ltd (Joint Broker)
Chris Wilkinson 0207 260 1000
Stephen Westgate
Maitland (Financial PR)
Neil Bennett
Jais Mehaji
Sam Cartwright 0207 379 5151
The 2017 Annual Report and Notice of Meeting will be posted and
available on the Arbuthnot Banking Group website
http://www.arbuthnotgroup.com on or before 13 April 2018. Copies
may be obtained from the Company Secretary, Arbuthnot Banking Group
PLC, Arbuthnot House, 7 Wilson Street, London, EC2M 2SN.
Consolidated statement of comprehensive income
Year ended 31
December
2017 2016
Note GBP000 GBP000
------------------------------------------------------ ----- --------- ---------
Interest income 8 47,427 38,071
Interest expense (6,334) (7,626)
------------------------------------------------------ ----- --------- ---------
Net interest income 41,093 30,445
------------------------------------------------------ ----- --------- ---------
Fee and commission income 9 13,805 11,430
Fee and commission expense (282) (425)
------------------------------------------------------ ----- --------- ---------
Net fee and commission income 13,523 11,005
------------------------------------------------------ ----- --------- ---------
Operating income 54,616 41,450
------------------------------------------------------ ----- --------- ---------
Net impairment loss on financial assets 10 (394) (474)
Profit from associates 27 4,437 2,145
Other income 11 3,033 3,169
Operating expenses 12 (54,721) (46,111)
------------------------------------------------------ ----- --------- ---------
Profit before tax from continuing operations 6,971 179
Income tax expense 13 (448) (720)
------------------------------------------------------ ----- --------- ---------
Profit / (loss) after tax from continuing operations 6,523 (541)
Profit from discontinued operations after tax 14 - 228,110
------------------------------------------------------ ----- --------- ---------
Profit for the year 6,523 227,569
------------------------------------------------------ ----- --------- ---------
Other comprehensive income
Items that are or may be reclassified to profit or
loss
Available-for-sale reserve 128 (2,377)
Available-for-sale reserve - Associate 389 (389)
Tax on other comprehensive income (104) 456
------------------------------------------------------ ----- --------- ---------
Other comprehensive income for the period, net of
tax 413 (2,310)
------------------------------------------------------ ----- --------- ---------
Total comprehensive income for the period 6,936 225,259
------------------------------------------------------ ----- --------- ---------
Profit attributable to:
Equity holders of the Company 6,523 166,143
Non-controlling interests - 61,426
------------------------------------------------------ ----- --------- ---------
Profit for the year 6,523 227,569
------------------------------------------------------ ----- --------- ---------
Total comprehensive income attributable to:
Equity holders of the Company 6,936 164,320
Non-controlling interests - 60,939
------------------------------------------------------ ----- --------- ---------
Total comprehensive income for the period 6,936 225,259
------------------------------------------------------ ----- --------- ---------
Earnings per share for profit attributable to the
equity holders of the Company during the year
(expressed in pence per share):
Basic earnings per share - Continuing operations 16 43.9 (3.7)
Basic earnings per share - Discontinued operations 16 - 1,130.9
------------------------------------------------------ ----- --------- ---------
Basic earnings per share 16 43.9 1,127.2
------------------------------------------------------ ----- --------- ---------
Diluted earnings per share - Continuing operations 16 43.9 (3.7)
Diluted earnings per share - Discontinued operations 16 - 1,130.4
------------------------------------------------------ ----- --------- ---------
Diluted earnings per share 16 43.9 1,126.7
------------------------------------------------------ ----- --------- ---------
Consolidated statement of financial position
At 31 December
2017 2016
Note GBP000 GBP000
ASSETS
Cash and balances at central banks 17 313,101 195,752
Loans and advances to banks 18 70,679 36,951
Debt securities held-to-maturity 19 227,019 107,300
Assets classified as held for sale 20 2,915 -
Derivative financial instruments 21 2,551 1,516
Loans and advances to customers 22 1,049,269 758,799
Other assets 24 20,624 11,939
Financial investments 25 2,347 2,145
Deferred tax asset 26 1,527 1,665
Interests in associates 27 83,804 82,574
Intangible assets 28 15,995 8,522
Property, plant and equipment 30 3,962 4,782
Investment property 31 59,439 53,339
--------------------------------------------- ----- ---------- ----------
Total assets 1,853,232 1,265,284
--------------------------------------------- ----- ---------- ----------
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 37 153 153
Retained earnings 38 237,171 235,567
Other reserves 38 (949) (1,362)
--------------------------------------------- ----- ---------- ----------
Total equity 236,375 234,358
--------------------------------------------- ----- ---------- ----------
LIABILITIES
Deposits from banks 32 195,097 3,200
Derivative financial instruments 21 931 227
Deposits from customers 33 1,390,781 997,649
Current tax liability 705 147
Other liabilities 34 16,239 17,082
Debt securities in issue 35 13,104 12,621
--------------------------------------------- ----- ---------- ----------
Total liabilities 1,616,857 1,030,926
--------------------------------------------- ----- ---------- ----------
Total equity and liabilities 1,853,232 1,265,284
--------------------------------------------- ----- ---------- ----------
Chairman's statement
I am pleased to report that Arbuthnot Banking Group ("ABG" or
the "Group") has achieved a profit before tax for 2017 of GBP7.0m
(2016: GBP0.2m), which reflects the financial result of the
deployment of part of our surplus capital into expanding the
businesses of our principal banking subsidiary Arbuthnot Latham
& Co., Ltd ("AL" or the "Bank").
Overview
It has been a notable year for many reasons, not just that of
the financial results. During the year AL reached the creditable
milestone of surpassing GBP1bn in three of its key business
metrics: Customer Loans, Customer Deposits and Assets under
Management. This was achieved while undertaking a significant IT
infrastructure project that touched all parts of the Bank.
Over the May Bank Holiday weekend, the Bank installed its new
banking platform Flexcube, supplied by Oracle, as part of an
investment programme worth in excess of GBP8m. The weekend was a
culmination of two years of careful planning and preparation by a
significant number of our employees. Over the weekend 120
employees, approximately one third of the Group, gave up their time
to achieve a successful transition.
As I mentioned in last year's statement our intention, after
having sold a significant stake in Secure Trust Bank, is to develop
and diversify the business lines within AL. During 2017 we took two
significant steps with this aim in mind. Firstly, we completed the
acquisition of Renaissance Asset Finance Limited ("RAF") in April.
This business has been successfully integrated into the Group and
has returned to growth after being constrained by the limited
access to funding it suffered as an independent entity. AL has
meanwhile benefited from gaining RAF's expertise in the asset
finance markets, by being able to refer a number of lending deals
that previously we might not have been able to complete.
Secondly, our development of the Commercial Banking business
continues at a robust pace. We hired a number of new bankers and
expanded into new business areas and regions during the year. This
business closed the year with over GBP300m of customer loans, a
significant achievement given the fact it was only launched in
early 2016.
We plan to continue our diversification in 2018 as we work with
the team that we have hired to establish Asset Based Lending and
others with whom we are currently developing plans. These are new
start-up ventures that in time should make strong contributions to
the Group, but will require a degree of initial investment. I also
look forward to our Commercial Property Fund becoming established
during 2018.
I initially thought when the financial crisis weakened the
larger banks, the major benefit to us would be that the smaller
banks would be able to compete more equally in their chosen
specialist markets. I hope this may still come to pass, but it has
become much clearer to me that the real benefit of the weakening of
the larger banks has been our ability to attract talented employees
to develop further the success of our Group. We have made a number
of key hires during the year and they are helping to enhance our
business and make the operational structures more resilient and
provide a sound foundation for expansion.
Regulation
Previously I have commented on how unfair I believe both the
regulatory and taxation systems can be when they introduce
retrospective changes. During 2017 we saw a prime example of this
when the Bank of England announced the introduction of a 1%
Countercyclical Capital Buffer, to be effective in 2018. This is
applicable to the back book of lending as well as new business to
be written. How can banks plan over the long term when their
capital requirements can be increased by nearly 10% without
warning? Keeping significant surplus capital for such moments is
inefficient for both the banks and the economy. This buffer on top
of the Capital Conservation Buffer, which will be fully phased in
within a year from now, has increased the capital requirement by up
to 35% for loans that may have been originated prior to these
requirements. This can result in inefficient pricing decisions and
below target returns on equity. Surely it would make more sense to
apply these new capital requirements only to new written business,
so that banks can decide if they want to continue to lend? In this
way they can make fully informed decisions based on the capital
requirements that will be applicable to a loan, rather than trying
to anticipate how regulation will evolve over its lifespan.
I am also concerned about the unintended consequences of
regulatory change. The Countercyclical Capital Buffer was
reportedly introduced by the Bank of England with the intention of
dampening a perceived bubble that may have been developing in the
unsecured credit markets, in particular those related to credit
card loans. If this was the case, would it not have made sense to
apply the buffer to those institutions that actually carry out
unsecured lending? Instead, the buffer has been imposed on all
banks and all types of lending, which is a very blunt instrument to
correct a very specific threat. This will result in all credit
markets being constrained and ultimately putting a strain on the
whole economy.
As banks see their returns on equity falling, due to these
higher capital levels, their inclination will be either to charge
customers more or to move up the risk curve to maintain their
target returns. This may over time increase the risks within the
banking sector rather than reduce them, entirely contrary to the
primary objective of the Bank of England.
The fact that banks shape their business models around the
regulatory rules should be no surprise to both the regulators and
the Government. Thus, you would expect that both of these bodies
would ensure that the rules are complementary to Government policy.
However, there seems to have been a significant breakdown in this
co-ordination regarding the current housing policy. The regulators
have increased the capital requirements for development funding by
at least 50%, so at the time the Government is calling for more
houses to be built, the banks are withdrawing their lending for
property developers. I believe that the Government and regulators
should revisit these rules to ensure the best outcome for the
economy overall.
In the final quarter of the year, the Basel Committee published
its revised Basel III capital rules; in particular, the changes to
the standardised credit risk methodology. From the outset the
Regulators had stated that their objective in these revised rules
was not to increase total capital within the banking system, but to
redistribute it toward credit risks that they felt had been
underestimated in the prior model.
It will come as no surprise, given our long stated conservative
view on risk taking and our business model, that the revised rules
will overall be beneficial to our business. However, I am
disappointed by the fact that these rules will not be effective
until 2022. Once again, I fear that intense lobbying from the big
banks has favoured them to the detriment of the smaller specialist
banks.
Board Changes and Personnel
Once again I would like to thank my colleagues on the Board for
their continued support and the dedication they have shown to the
Group.
The performance of the Group also reflects the hard work and
commitment of the members of staff. On behalf of the Board I extend
our thanks to all of them for their dedicated efforts in 2017.
Dividend
The Board is proposing a final dividend of 19p, an increase of
1p on last year. Together with the interim dividend of 14p it gives
a total dividend of 33p (2016: 356p, including special dividends of
325p), which represents an increase of 2p on the ordinary
dividend.
If approved, the dividend will be paid on 18 May 2018 to
shareholders on the register at close of business on 27 April
2018.
Outlook
During 2017 and early 2018 the stock markets reached record
levels as the global economy continued its recovery, underpinned by
loose fiscal policies and the introduction of business-friendly tax
regimes, in particular in the US. However, more recently those
markets have seen more volatility and corrections to values.
We take note of this macro-economic environment, but remain
focused on developing our current and new businesses within the
Group. This will bring greater diversity to the earnings of
Arbuthnot and should provide greater balance and stability to the
Group for the future, which looks promising.
By the time you receive my next Chairman's report we will be on
the verge of Britain's official exit from the EU. This I believe
should not be the major worry for Britain's business community or
economy and indeed should present an opportunity. The greater risk
must be that of a hard left Labour government. This could have a
significant impact on our clients and business. Such a threat is
something that we all, and in particular businesses and
entrepreneurs, must take very seriously.
Strategic Report
Business Review
Arbuthnot Latham & Co., Ltd
2017 2016
Operating income GBP54.9m GBP41.8m
Other income GBP3.9m GBP4.4m
Operating expenses GBP47.4m GBP36.6m
Profit before tax GBP11.0m GBP9.1m
Customer loans GBP1,049.3m GBP758.8m
Customer deposits GBP1,390.8m GBP997.6m
Total assets GBP1,783.7m GBP1,199.2m
Assets under management GBP1,044.3m GBP919.8m
Average net margin 4.8% 4.8%
Loan to deposit ratio 75.4% 76.0%
Arbuthnot Latham and Co., Limited has reported a profit before
tax of GBP11m (2016: GBP9.1m), which is an increase of 21%.
However, the increase in underlying profit is 48%, if the one off
gain of GBP1.6m from the sale of Visa Europe shares in 2016 is
removed.
Overall, the increased financial performance of the Bank is an
indicator of the growth of the three key business metrics: Customer
Loans, Customer Deposits and Assets under Management.
Significantly, as well as achieving good growth in annual profits,
the Bank achieved a major milestone during the year, with each of
the key metrics increasing beyond the GBP1bn level. Customer Loans
and Deposits increased by 38% and 39% respectively and Asset under
Management grew by 13%.
A contributing factor to the strong financial performance of the
Bank was the completion of the acquisition of RAF. This niche asset
finance lending business specialises in financing high value cars
and other business assets. Prior to the acquisition it had been an
independent business, but was wholly reliant on its funding from a
single banking line. The growth ability of the business was
therefore constrained, and indeed in the period of time between the
announcement of our intention to acquire the operation and the
final completion in April, the lending balances declined as the
original banking line was gradually withdrawn.
At the time of acquisition the customer loan balances were
GBP58m. Once the company became part of the Group, this growth
constraint was removed and it was able to return to the market with
new vigour and was quickly able to re-energise its relationship
with brokers and business introducers, thus returning to a growth
trajectory and closed the year with loan balances of GBP71m.
During its eight full months of ownership it directly
contributed GBP1.6m and a further GBP0.8m to the Group via the
funding benefit achieved by the new banking facilities.
The business saw no significant change in impairments during the
year, with losses running at 20bps.
To support the future growth plans of RAF and the resultant
increase in activities, the business will be moving to new premises
in Basildon toward the end of the first quarter of 2018.
Private Banking
The Private Bank increased loan origination by 22% to a record
of GBP201m. However, this was not sufficient to offset repayment of
loans. Overall the loan portfolio closed the year at GBP578m (2016:
GBP607m). However, more than half of this reduction is due to the
natural amortisation of the acquired loan portfolios, namely those
from Duncan Lawrie and the Dunfermline Building Society. These
portfolios continue to perform ahead of our expected cash flow
forecasts, but still contributed GBP16m of the reduction in overall
balances. The remaining core private banking book reduced by 3%. We
expect that the portfolio will return to growth in 2018, with more
emphasis on finding niche bespoke lending deals rather than vanilla
lending, which has become an increasingly competitive area in
recent years.
The credit performance of the book remained well within our
expected risk tolerance levels with impairments remaining steady
during the year at GBP0.4m (2016: GBP0.4m). This reflects our
conservative lending policies, which focus on not only the standing
of the borrower but also the quality of the collateral that we take
as security. Our experience to date in managing problem debt
positions is that in almost all cases we recover our lending and
expect that this will remain the case for the foreseeable
future.
The Private Bank continued to see a good flow of new client
introductions and was able to increase customer deposit balances by
14% to GBP1,082m (2016: GBP946m).
Many of the new clients transferred their balances into the
Wealth Management division of the Private Bank. The Investment
Management team saw assets under management increase by a net 13%
reaching GBP1,044m (2016: GBP920m). The gross client inflow of
funds was GBP166m, which offset natural withdrawals of GBP135m and
the remaining balance is accountable to market increases in clients
funds under management.
Finally, the Private Bank was the most impacted by the
replacement of our banking platform with a new Oracle sourced
product, Flexcube. A significant number of employees showed true
dedication and commitment to ensure that this project ran as
smoothly as could be expected. The Bank now has the modern
infrastructure it needs on which to build for the future.
Commercial Bank
The Commercial Bank has traded robustly during 2017. Customer
loan balances increased by over 300% to close the year at GBP305m
(2016: GBP76m), as the investment in new bankers resulted in good
quality commercial lending opportunities. The commercial banking
proposition of quality service and relationship banking has also
proved successful in being able to attract deposits, with the
deposit book growing by more than 500% to close the year at GBP308m
(2016: GBP51m).
Now that the business has an established loan portfolio and with
it the resultant positive revenue stream, which supports our
central overheads, the Commercial Bank will focus on generating
higher returns on the capital employed to ensure that this area of
growth continues to add to the Group's targeted return on
equity.
Dubai (included in Private Banking above)
The office in Dubai continued to perform well, contributing
GBP1.8m to the Group's profit. The customer loan balances closed at
GBP94m (2016: GBP74m), deposits were GBP94m (2016: GBP64m) and AUMs
were GBP95m (2016: GBP78m). With a growing confidence that our
business can trade in the region, the office is expanding both with
larger premises and additional private bankers being recruited. The
expansion will double the footprint of the office located in the
Dubai Financial Centre. With EXPO 2020 on the horizon, the business
is well placed to build and develop the proposition in the UAE and
wider region.
Funding
Early in 2018, access to further capacity from the Bank of
England for liquidity schemes (Funding for Lending Scheme and Term
Funding Scheme) was closed. This will leave banks four more years
before funding benefits provided by the schemes fully unwind.
The Bank has participated in these schemes but only to modest
levels. The Bank remains highly liquid with a loan to deposit ratio
of 75%. Importantly, it has also managed to develop a good mix of
customer deposits with call, notice and term balances. This should
give the Bank an advantage over time as interest rates rise. We
anticipate that margins should see a benefit, with our surplus
liquidity balances becoming more valuable and providing greater
strength to the Bank than relying on "best buy" tables for deposit
gathering.
Business Development
During 2018 the Bank plans to continue to diversify its income
sources by developing further businesses.
The first of these is the creation of an Asset Based Lending
("ABL") business. The core team of seven to establish this have
been hired and are based in offices near Gatwick. The Managing
Director, Tim Hawkins, has a long and respected track record in
this business area and was most recently the head of ABL at
Shawbrook. This business expects to write its first customer loans
in late Q2 2018.
We also have plans to launch a Commercial Property Investment
Fund for professional investors and to establish other new lending
businesses that have a synergy with our current business and help
diversify our revenue streams.
A key strength of AL is its ability to raise deposits at
attractive margins. The Private Bank has over the years built a
significant deposit base and recently this has grown well. Since
commencing the Commercial Banking business, the Bank has also
created a good SME deposit base. To supplement this, the Bank is
now developing a direct to market retail deposit offering. The
proposition will further diversify the Bank's sources of funding,
with the ability to raise fixed term deposits from the best buy and
aggregator platforms. "Arbuthnot Direct" is expected to soft launch
in the middle of the year and be available to depositors in the
third quarter. It is planned only to raise a modest amount of
funding from this platform, but it is being put in place,
principally, so that if a compelling acquisition proposition became
available to the Bank, it would be able to raise additional
liquidity at short notice. The platform will be administered from
our Exeter office with two additional staff being directly employed
and a third party service provider adding additional capacity where
needed.
Strategic Report - Financial Review
Arbuthnot Banking Group adopts a pragmatic approach to risk
taking and seeks to maximise long term revenues and returns. Given
its relative size, it is nimble and able to remain entrepreneurial
and capable of taking advantage of favourable market opportunities
when they arise.
The Group provides a range of financial services to clients and
customers in its chosen markets of Private and Commercial Banking
and specialist lending. The Group's revenues are derived from a
combination of net interest income from lending, deposit taking and
treasury activities, fees for services provided and commission
earned on the sale of financial instruments and products.
Highlights
2017 2016
Summarised Income Statement GBP000 GBP000
------------------------------------------------------------- --------- ---------
Net interest income 41,093 30,445
Net fee and commission income 13,523 11,005
------------------------------------------------------------- --------- ---------
Operating income 54,616 41,450
Profit from associates 4,437 2,145
Other income 3,033 3,169
Operating expenses (54,721) (46,111)
Impairment losses - financial investments - (47)
Impairment losses - loans and advances to customers (394) (427)
------------------------------------------------------------- --------- ---------
Profit before tax from continuing operations 6,971 179
Income tax expense (448) (720)
------------------------------------------------------------- --------- ---------
Profit after tax from continuing operations 6,523 (541)
Profit from discontinued operations after tax - 228,110
------------------------------------------------------------- --------- ---------
Profit for the year 6,523 227,569
------------------------------------------------------------- --------- ---------
Basic earnings per share (pence) - Continuing operations 43.9 (3.7)
Basic earnings per share (pence) - Discontinuing operations - 1,130.9
------------------------------------------------------------- --------- ---------
Basic earnings per share (pence) 43.9 1,127.2
------------------------------------------------------------- --------- ---------
Arbuthnot Retail Arbuthnot
Latham Banking Group Banking
Underlying profit reconciliation & Co. Associate Centre Group
31 December 2017 GBP000 GBP000 GBP000
---------------------------------------------- ---------- ----------- -------- ----------
Profit before tax from continuing operations 10,959 4,437 (8,425) 6,971
AL investment in operating systems 78 - - 78
AL acquisition costs 108 - - 108
RAF - full year equivalent income* 466 - - 466
---------------------------------------------- ---------- ----------- -------- ----------
Underlying profit 11,611 4,437 (8,425) 7,623
---------------------------------------------- ---------- ----------- -------- ----------
Underlying basic earnings per share (pence)
- Continuing operations 47.5
---------------------------------------------- ---------- ----------- -------- ----------
Underlying basic earnings per share (pence) 47.5
---------------------------------------------- ---------- ----------- -------- ----------
* - RAF profit contribution adjustment as if received from 1 January
2017 and not as currently included from 28 April 2017 (pro forma basis).
Arbuthnot Retail Arbuthnot
Latham Banking Group Banking
Underlying profit reconciliation & Co. Associate Centre Group
31 December 2016 GBP000 GBP000 GBP000 GBP000
---------------------------------------------- ---------- ----------- --------- ----------
Profit before tax from continuing operations 9,053 2,145 (11,019) 179
ABG Group bonuses relating to sale of ELL - - 2,304 2,304
STB full year equivalent associate income* - 1,732 - 1,732
AL realised profit on AFS investment (Visa) (1,624) - - (1,624)
AL investment in operating systems 21 - - 21
AL commercial banking investment 999 - - 999
AL acquisition costs 398 - - 398
---------------------------------------------- ---------- ----------- --------- ----------
Underlying profit 8,847 3,877 (8,715) 4,009
---------------------------------------------- ---------- ----------- --------- ----------
Underlying basic earnings per share (pence)
- Continuing operations 17.1
---------------------------------------------- ---------- ----------- --------- ----------
Underlying basic earnings per share (pence) 1,148.1
---------------------------------------------- ---------- ----------- --------- ----------
* - STB associate income adjustment (excl. ELL & bonuses relating to
ELL sale) as if received from 1 January 2016 and not as currently included
from 16 June 2016 (pro forma basis).
The Group has reported a profit before tax of GBP7.0m (2016:
GBP0.2m). This is a good increase from the prior year and is the
result of the continued deployment of part of the significant
capital surplus that was created following the part sale of Secure
Trust Bank ("STB") shares in 2016.
On an underlying basis the Group has generated profits of
GBP7.6m compared to GBP4m in the prior year, which represents an
increase of nearly 91%, reflecting the improving scale being
generated in the business.
The deployment of capital has largely been focused on increasing
the lending portfolio of the Group's businesses and notably during
the year the customer loan balances once again exceeded the GBP1bn
mark.
In line with ABG's long standing belief that diversification
gives the Group strength, a portion of the capital was allocated to
complete the acquisition of RAF. This deal was completed on 28
April following the receipt of approval from the relevant
regulatory bodies. At the time of completion the customer balances
of RAF stood at GBP58m. During the eight months that RAF formed
part of the Group, it contributed GBP1.6m at an operating
level.
The total Basic Earnings per share ("EPS") of the Group are
43.9p (2016: 1,127.2p). The reduction is largely due to the impact
of the STB transactions in the prior year. On an underlying basis
the EPS is 47.5p (2016: 17.1p), an increase of 177%. The total
dividend is covered 1.33 times by the earnings.
At the time of the sale of a substantial part of the Group's
ownership of STB, it was determined that the remaining investment
(18.6%) should be treated as an associate, as ABG was considered to
have "significant influence" by way of three directors of Arbuthnot
Banking Group also being directors of STB. The determination
remained consistent throughout 2017 and as a result the income
statement has included a full year of our share of the profit after
tax of STB, which contributed a further GBP2.3m as opposed to a
half year impact in 2016.
The Group's expense base increased to GBP54.7m (2016: GBP46.1m),
an increase of 19%. This increment is largely due to the continued
investment in the diversification of businesses within the Group.
The Commercial Banking business has expanded its numbers in London,
Exeter and Manchester and opened a small office in Bristol. Also,
the acquisition of RAF added GBP1.5m to the expense book in 2017.
Additionally, the Bank has been strengthening its control and
oversight functions to provide a sound foundation from which to
continue to grow the business. The increase in expenses compares
favourably to the 30% increase in operating income, resulting in a
10% positive operating leverage or increase in "Jaws".
Impairment losses on loans remained consistent at GBP0.4m (2016:
GBP0.4m) but the overall loss rate declined to 4 bps on the total
lending book.
Overall, the Return on Equity of the Group was 2.8%, though this
is distorted by the significant unutilised capital within the
Group. However, in the long run the Group remains committed to its
target of 20%, though this will depend on reaching a sufficient
level of operational scale regarding its overhead and also how the
Regulators view the level of capital buffers they require from time
to time.
Balance Sheet Strength
2017 2016
Summarised Balance Sheet GBP000 GBP000
--------------------------------- ---------- ----------
Assets
Loans and advances to customers 1,049,269 758,799
Liquid assets 610,799 340,003
Other assets 193,164 166,482
--------------------------------- ---------- ----------
Total assets 1,853,232 1,265,284
--------------------------------- ---------- ----------
Liabilities
Customer deposits 1,390,781 997,649
Other liabilities 226,076 33,277
--------------------------------- ---------- ----------
Total liabilities 1,616,857 1,030,926
Equity 236,375 234,358
--------------------------------- ---------- ----------
Total equity and liabilities 1,853,232 1,265,284
--------------------------------- ---------- ----------
During the year total assets increased to GBP1.9bn (2016:
GBP1.3bn), driven almost entirely by the increase in customer loan
balances and the incremental treasury assets that arise from our
ability to raise surplus customer deposits, which are then held at
the Bank of England. Customer deposits increased to GBP1.4bn (2016:
GBP1.0bn), an increase of 39%.
The net assets of the Group now stand at GBP15.47 per share
(2016: GBP15.34).
Segmental Analysis
The segmental analysis is shown in more detail in Note 44. The
operating segments are Arbuthnot Latham & Co., Limited and
Retail Banking Associate (being the Group's 18.6% investment in
STB). Group costs and intercompany elimination journals are shown
separately to reconcile back to Group consolidated results.
The analysis presented below, and in the business review, is
before any consolidation adjustments to reverse the impact of the
intergroup operating activities and also intergroup recharges and
is a fair reflection of the way the Directors manage the Group.
Arbuthnot Latham
2017 2016
Summarised Income Statement GBP000 GBP000
----------------------------------------------------- --------- ---------
Net interest income 41,402 30,771
Net fee and commission income 13,523 11,005
----------------------------------------------------- --------- ---------
Operating income 54,925 41,776
Other income 3,870 4,353
Operating expenses (47,442) (36,602)
Impairment losses - financial investments - (47)
Impairment losses - loans and advances to customers (394) (427)
----------------------------------------------------- --------- ---------
Profit before tax 10,959 9,053
----------------------------------------------------- --------- ---------
The profit before tax for AL has reached GBP11m (2016: GBP9.1m),
which is an increase of 21% on a reported basis. However, on an
underlying basis the increase is 48% after the impact of the profit
on sale of Visa Europe shares is excluded from 2016.
Operating income of the Bank increased by 31% as the capital
deployment drove higher lending revenues.
Average net margin has remained stable at 4.8%.
Operating expenses increased by 30% as the expansion of the
Commercial Bank continued and RAF was incorporated from April
2017.
Impairment losses were GBP0.4m (2016: GBP0.4m) as the lending
portfolios continued to perform well.
2017 2016
Summarised Balance Sheet GBP000 GBP000
---------------------------------------------- ---------- ----------
Assets
Loans and advances to customers 1,049,269 758,799
Liquid assets 610,785 339,990
Other assets (including Group balances) 123,621 100,373
---------------------------------------------- ---------- ----------
Total assets 1,783,675 1,199,162
---------------------------------------------- ---------- ----------
Liabilities
Customer deposits 1,390,781 997,649
Other liabilities (including Group balances) 259,957 120,815
---------------------------------------------- ---------- ----------
Total liabilities 1,650,738 1,118,464
Equity 132,937 80,698
---------------------------------------------- ---------- ----------
Total equity and liabilities 1,783,675 1,199,162
---------------------------------------------- ---------- ----------
AL reached a creditable milestone during 2017, with all of its
key business metrics exceeding GBP1bn: Customer Loans, Customer
Deposits and Assets under Management.
Total customer assets increased by 38% to close the year at
GBP1,049m (2016: GBP759m). At the same time the total volume of
loans written in the year increased to GBP466m (2016: GBP227m), an
increase of 105%. Overall, the loan books remain well served with
an average LTV of 53% (2016: 45%) for the Private and Commercial
Banking business.
Total deposits increased by 39% to close the year at GBP1.4bn
(2016: GBP1.0bn).
The investment management business was able to grow its assets
under management by 13% to reach GBP1,044m (2016: GBP920m).
The net assets of the Bank now stand at GBP133m (2016: GBP81m),
an increase of 65% as ABG made further capital contribution to
facilitate additional growth and also to complete the acquisition
of RAF. Additionally, retained reserves from the earnings of the
Bank have contributed to give Arbuthnot Latham a total and core
tier 1 capital ratio of 11.9% (2016: 12.3%).
Group & Other Costs
2017 2016
Summarised Income Statement GBP000 GBP000
---------------------------------- -------- ---------
Net interest income 51 26
Subordinated loan stock interest (360) (352)
---------------------------------- -------- ---------
Operating income (309) (326)
Other income 160 120
Operating expenses (8,276) (10,813)
Profit after tax (8,425) (11,019)
---------------------------------- -------- ---------
The Group costs reduced to GBP8.4m (2016: GBP11m) as the impact
of the bonuses paid in 2016 relating to the STB transaction
recurring. The Group centre continues to oversee the Group
operations, including the remaining investment in STB.
IFRS 9
The provisions of IFRS 9 - Financial Instruments will apply to
the Group for the year ending 31 December 2018.
As a result of the implementation of IFRS 9, accounting for
credit losses will fundamentally change, moving from an "incurred"
to an "expected" basis. This has required the development of credit
loss models, which will be used to estimate credit impairments by
taking into account the composition of individual loan portfolios
and the macro economic outlook at each reporting date. Also, the
future economic environment will be "stressed" in varying scenarios
to ensure the provisions are appropriate.
The initial models have been developed and are currently being
validated and refined ahead of the full implementation.
The introduction of IFRS 9 will result in an initial increase in
impairment provisions and may potentially increase volatility in
the Group's Income Statement in the future (see Note 3.27).
It is expected that the opening entries as at 1 January 2018
required for the implementation will require an adjustment to
shareholder reserves of between GBP2.4m to GBP3.2m. Under new
capital regulations, the impact of IFRS 9 on regulatory capital
will be phased over a period of 5 years. The Group has a strong
capital position and the impact of IFRS 9 is not considered
significant.
Capital
The Group's capital management policy is focused on optimising
shareholder value over the long term. There is a clear focus on
delivering organic growth and ensuring capital resources are
sufficient to support planned levels of growth. The Board regularly
reviews the capital position.
The Group's lead regulator, the Prudential Regulation Authority
("PRA"), sets and monitors capital requirements for the Group as a
whole and for the individual banking operations. The lead regulator
adopted the Basel III capital requirements with effect from 1
January 2014. As a result, the Group's regulatory capital
requirements have been based on Basel III since 2014.
In accordance with the EU's Capital Requirements Directive
("CRD") and the required parameters set out in the PRA Handbook,
the Individual Capital Adequacy Assessment Process ("ICAAP") is
embedded in the risk management framework of the Group and is
subject to ongoing updates and revisions when necessary. However,
at a minimum, the ICAAP is updated annually as part of the business
planning process. The ICAAP is a process that brings together the
management framework (i.e. the policies, procedures, strategies,
and systems that the Group has implemented to identify, manage and
mitigate its risks) and the financial disciplines of business
planning and capital management. The Group's regulated entity is
also the principal trading subsidiary as detailed in Note 43.
Not all material risks can be mitigated by capital, but where
capital is appropriate the Board has adopted a "Pillar I plus"
approach to determine the level of capital the Group needs to hold.
This method takes the Pillar I capital formula calculations
(standardised approach for credit, market and operational risk) as
a starting point, and then considers whether each of the
calculations deliver a sufficient capital sum adequate to cover
management's anticipated risks. Where the Board considers that the
Pillar I calculations do not reflect the risk, an additional
capital add-on in Pillar II is applied, as per the Individual
Capital Guidance ("ICG") issued by the PRA.
The Group's regulatory capital is divided into two tiers:
-- Tier 1 comprises mainly shareholders' funds and revaluation
reserves, after deducting goodwill, other intangible assets and the
deduction for a significant investment in a financial institution
(STB). The portion of the investment representing up to 10% of
ABG's Tier 1 is added back to capital resources and then risk
weighted at 250%, while anything above this 10% is deducted.
-- Lower Tier 2 comprises qualifying subordinated loan capital.
Lower Tier 2 capital cannot exceed 50% of Tier 1 capital.
The ICAAP includes a summary of the capital required to mitigate
the identified risks in its regulated entities and the amount of
capital that the Group has available. All regulated trading
entities have complied with all of the externally imposed capital
requirements to which they are subject.
2017 2016
Capital ratios GBP000 GBP000
------------------------------------------------------------- --------- ---------
Core Tier 1 capital 236,375 234,358
Deductions (77,761) (67,639)
------------------------------------------------------------- --------- ---------
Tier 1 capital after deductions 158,614 166,719
Tier 2 capital 13,104 12,621
------------------------------------------------------------- --------- ---------
Total capital 171,718 179,340
------------------------------------------------------------- --------- ---------
Core Tier 1 capital ratio (Net Core Tier 1 capital/Basel
III Total Risk Exposure) 17.3% 28.1%
------------------------------------------------------------- --------- ---------
Total Capital Ratio (Capital/Basel III Total Risk Exposure) 18.7% 30.2%
------------------------------------------------------------- --------- ---------
Risks and Uncertainties
The Group regards the monitoring and controlling of risks and
uncertainties as a fundamental part of the management process.
Consequently, senior management are involved in the development of
risk management policies and in monitoring their application. A
detailed description of the risk management framework and
associated policies is set out in note 6.
The principal risks inherent in the Group's business are
strategic, credit, market, liquidity, operational, cyber, conduct
and regulatory.
Strategic risk
Strategic risk is the risk that may affect the Group's ability
to achieve its corporate and strategic objectives. This risk is
important to the Group as it continues its growth strategy.
However, the Group seeks to mitigate strategic risk by focusing on
a sustainable business model which is aligned to the Group's
business strategy. Also, the Board of Directors meets once a year
to hold a two day board meeting to ensure that the Group's strategy
is appropriate for the market and economy.
Credit risk
Credit risk is the risk that a counterparty will be unable to
pay amounts in full when due. This risk exists in Arbuthnot Latham,
which currently has a loan book of GBP1,049m. The lending portfolio
in AL is extended to clients, the majority of which is secured
against cash, property or other assets. Credit risk is managed
through the Credit Committee of AL.
Market risk
Market risk arises in relation to movements in interest rates,
currencies and equity markets. The Group's treasury function
operates mainly to provide a service to clients and does not take
significant unmatched positions in any market for its own account.
As a result, the Group's exposure to adverse movements in interest
rates and currencies is limited to interest earnings on its free
cash and interest rate re-pricing mismatches. The Group actively
monitors its exposure to future interest rate rises.
The Group is exposed to changes in the market value of
properties. The current carrying value of Investment Property is
GBP59m. Any changes in the market value of the property will be
accounted for in the Income Statement and as a result could have a
significant impact on the profit or loss of the Group.
The Group has an 18.6% interest in STB. This is currently
recorded in the Group's balance sheet as an interest in associates
and at 31 December 2017 was carried at GBP83.8m or the equivalent
of GBP24.33 per share. At the year end the market price of STB was
GBP17.97 per share. The Board has determined that the current
carrying value remains appropriate after having carried out
extensive analysis to be satisfied that the long term value in use
does not suggest that this carrying value is impaired. These
valuations included the Gordon's Growth model and Dividend Discount
model. The resultant output from the models indicated valuations in
a range that was in excess of GBP24 but this will be ultimately
dependent on the surplus capital within STB being deployed in the
business over the long term. There is a risk that the output of the
value in use models could require an impairment charge to be
recognised in the future.
If the Group was considered to no longer have significant
influence over STB it would lead to the investment being accounted
for as a financial asset at fair value. The value would then be
marked to market with changes in the share price giving rise to
gains or losses being recorded in Other Comprehensive Income or
Profit or Loss - see Note 3.8(d) and Note 3.10(b).
Liquidity risk
Liquidity risk is the risk that the Group cannot meet its
obligations as they fall due. The Group takes a conservative
approach to managing its liquidity profile. Retail client deposits
and drawings from the Bank of England Term Funding Scheme fund the
Group. The loan to deposit ratio is maintained at a prudent level,
and consequently the Group maintains a high level of liquidity. The
Arbuthnot Latham Board annually approves the Individual Liquidity
Adequacy Assessment Process ("ILAAP"). The Directors model various
stress scenarios and assess the resultant cash flows in order to
evaluate the Group's potential liquidity requirements. The
Directors firmly believe that sufficient liquid assets are held to
enable the Group to meet its liabilities in a stressed
environment.
Operational risk
Operational risk is the risk that the Group may be exposed to
financial losses from conducting its business. The Group is exposed
to operational risks from its Information Technology and Operations
platforms. There are additional internal controls in these
processes that are designed to protect the Group from these risks.
The Group's overall approach to managing internal control and
financial reporting is described in the Corporate Governance
section of the Annual Report.
Cyber risk
Cyber risk is an increasing risk that the Group is subject to
within its operational processes. This is the risk that the Group
is subject to some form of disruption arising from an interruption
to its IT and data infrastructure. The Group regularly test the
infrastructure to ensure that it remains robust to a range of
threats, and have continuity of business plans in place including a
disaster recovery provision.
Conduct risk
As a financial services provider we face conduct risk, including
selling products to customers which do not meet their needs;
failing to deal with customers' complaints effectively; not meeting
customers' expectations; and exhibiting behaviours which do not
meet market or regulatory standards.
The Group adopts a zero risk appetite for any unfair customer
outcomes. It maintains clear compliance guidelines and provides
ongoing training to all staff. Periodic spot checks and internal
audits are performed to ensure these guidelines are being followed.
The Group also has insurance policies in place to provide some
cover for any claims that may arise.
Regulatory risk
Regulatory risk is the risk that the Group will have
insufficient capital resources to support the business or does not
comply with regulatory requirements. The Group adopts a
conservative approach to managing its capital. The Board approves
an Individual Capital Adequacy Assessment Process ("ICAAP")
annually, which includes the performance of stringent stress tests
to ensure that capital resources are adequate over a three year
horizon. Capital and liquidity ratios are regularly monitored
against the Board's approved risk appetite as part of the risk
management framework.
Regulatory change also exists as a risk to the Group's business.
Notwithstanding the assessments carried out by the Group to manage
the regulatory risk, it is not possible to predict how regulatory
and legislative changes may alter and impact the business.
Significant and unforeseen regulatory changes may reduce the
Group's competitive situation and lower its profitability.
Macroeconomic and competitive environment
The Group is also exposed to indirect risks that may arise from
the macroeconomic and competitive environment. The economic
environment is relatively stable in the UK. However, the
international landscape is increasingly uncertain. The uncertain
performance of the economies in the EU and the increasingly
protectionist stance being taken by other major economies may have
an adverse affect on the UK. In particular, this may cause a
further softening of central London property prices, which may
spread out further to the South East.
The Group monitors its exposure to future interest rate rises
and currently has minimal lending to customers in products that
would be directly sensitive to interest rate rises. However, at the
current levels of interest rates, the affordability enjoyed by the
Group's customers is beneficial.
Brexit
It is currently difficult to analyse the impacts that Brexit may
have on Arbuthnot Banking Group. However, our only overseas
operation is in Dubai, so the vast majority of the Group's income
and expenditure is based in the UK. It is therefore anticipated
that the financial impact would be minimal, assuming no significant
macro economic shock in the UK.
Group Directors' Report
The Directors submit their annual report and the audited
consolidated financial statements for the year ended 31 December
2017.
Principal Activities and Review
The principal activities of the Group are banking and financial
services. A strategic review in accordance with Section 414 C of
the Companies Act 2006 forming part of this report is set out on
pages 4 to 14.
Results and Dividends
The results for the year are shown on page 1. The profit after
tax for the year of GBP6.5m (2016: GBP227.6m) is included in
reserves.
The Directors recommend the payment of a final dividend of 19p
on the ordinary shares which, together with the interim dividend of
14p paid on 29 September 2017, represents total dividends (other
than special dividends) for the year of 33p (2016: 31p). The final
dividend, if approved by members at the Annual General Meeting,
will be paid on 18 May 2018 to shareholders on the register at
close of business on 27 April 2018.
Going Concern
After making appropriate enquiries which assessed strategy,
profitability, funding, risk management (see note 6) and capital
resources (see note 7), the directors are satisfied that the
Company and the Group have adequate resources to continue in
operation for the foreseeable future. The financial statements are
therefore prepared on the going concern basis.
Share Capital
Shareholders will also be asked to approve a Special Resolution
renewing the authority of the Directors to make market purchases of
shares not exceeding 10% of the existing issued share capital. The
Directors will keep the position under review in order to maximise
the Company's resources in the best interests of shareholders.
Financial Risk Management
Details of how the Group manages risk are set out in in the
Strategic Report and in note 6.
Substantial Shareholders
The Company was aware at 26 March 2018 of the following
substantial holdings in the ordinary shares of the Company, other
than those held by one director shown below:
Ordinary
Holder Shares %
---------------------------- ----------------- -------
Liontrust Asset Management 924,228 6.0
Prudential plc 633,554 4.1
Slater Investments 595,638 3.9
Miton Asset Management 540,896 3.5
Mr. R Paston 529,130 3.5
Directors
Sir Henry Angest Chairman & CEO
J R Cobb Finance Director
I A Dewar
I A Henderson
P A Lynam
Sir Christopher
Meyer
A A Salmon Chief Operating Officer
Sir Alan Yarrow
All these are currently directors and served throughout the
year.
Mr. Cobb and Mr. Dewar retire under Article 78 of the Articles
of Association and, being eligible, offer themselves for
re-election. Mr. Cobb has a service agreement terminable on twelve
months' notice. Mr. Dewar, an independent non-executive director,
has a letter of appointment terminable on three months' notice.
According to the information kept under Section 3 of the
Disclosure and Transparency Rules 2006 and the Market Abuse
Regulation 2016, the interests of directors and their families in
the ordinary 1p shares of the Company at the dates shown were, and
the percentage of the current issued share capital held is, as
follows::
1 January 31 December 27 March
Beneficial Interests 2017 2017 2018 %
---------------------- ---------- ------------ ---------- -----
Sir Henry Angest 8,200,901 8,351,401 8,351,401 54.7
J.R. Cobb 5,000 6,000 6,000 -
P.A. Lynam 10,000 10,000 10,000 0.1
A.A. Salmon 51,699 51,699 51,699 0.3
On 14 June 2016 Mr. Salmon, Mr. Cobb and Mr. Henderson were
granted phantom options to subscribe for 200,000, 100,000 and
100,000 ordinary 1p shares respectively in the Company at 1591p.
50% of each director's individual holding of phantom options is
exercisable at any time after 15 June 2019 and the other 50% is
exercisable at any time after 15 June 2021. The fair value of the
options at the grant date was GBP1.3m.
Apart from the interests disclosed above, no director was
interested at any time in the year in the share capital of Group
companies.
No director, either during or at the end of the financial year,
was materially interested in any contract with the Company or any
of its subsidiaries or associated companies, which was significant
in relation to the Group's business. At 31 December 2017, one
director had loans from Arbuthnot Latham & Co., Limited
amounting to GBP508,000 and one director had a loan from Secure
Trust Bank PLC amounting to GBP409,000, on normal commercial terms
as disclosed in note 42 to the financial statements. At 31 December
2017, six directors had deposits with Arbuthnot Latham & Co.,
Limited amounting to GBP3,233,000 and two directors had deposits
with Secure Trust Bank PLC amounting to GBP403,000, all on normal
commercial terms as disclosed in note 42 to the financial
statements.
The Company maintains insurance to provide liability cover for
directors and officers of the Company.
Board Committees
The report of the Remuneration Committee on pages 24 to 25 will
be the subject of an Ordinary Resolution at the Annual General
Meeting.
Information on the Audit, Nomination and Political Donations
Committees is included in the Corporate Governance section of the
Annual Report on pages 19 to 22.
As explained in the Corporate Governance section of the Annual
Report, the Board now maintains direct responsibility for issues of
risk, as responsibility for large lending proposals has become a
direct responsibility of its subsidiary, Arbuthnot Latham &
Co., Limited.
Employees
The Company gives due consideration to the employment of
disabled persons and is an equal opportunities employer. It also
regularly provides employees with information on matters of concern
to them, consults on decisions likely to affect their interests and
encourages their involvement in the performance of the Company
through share participation and in other ways.
Political Donations
The Company made political donations of GBP32,000 to the
Conservative Party during the year (2016: GBP67,000).
Branches outside of the UK
During the year Arbuthnot Latham & Co., Ltd operated a
branch in Dubai which is regulated by the Dubai Financial Services
Authority.
Events after the balance sheet date
On 3 January 2018, Arbuthnot Latham entered into a 12 year lease
(up to 16 October 2029) to occupy the first, second and third
floors of 10 Dominion Street London, with a break clause on 16
October 2024. The initial rent is GBP0.7m per annum. This is
reflected in contingent liabilities Note 36.
Auditor
A resolution for the re-appointment of KPMG LLP as auditor will
be proposed at the forthcoming Annual General Meeting at a fee to
be agreed in due course by the directors.
Statement of Disclosure of Information to the Auditor
The Directors confirm that:
-- so far as each director is aware, there is no relevant audit
information of which the Company's auditor is unaware; and
-- the Directors have taken all the steps they ought to have
taken as directors to make themselves aware of any relevant audit
information and to establish that the Company's auditor is aware of
that information.
This confirmation is given and shall be interpreted in
accordance with the provisions of section 418 of the Companies Act
2006.
Corporate Governance
Introduction and Overview
Arbuthnot Banking Group has a strong and effective Corporate
Governance framework. This section of the Report and Accounts
summarises key elements of the governance arrangements applicable
to the Group and its compliance with the UK Corporate Governance
Code.
As an AIM company, ABG is not bound by the UK Corporate
Governance Code. However, the Board endorses the principles of
openness, integrity and accountability, which underlie good
corporate governance and takes into account both the provisions of
the UK Corporate Governance Code in so far as they are considered
appropriate to the Group's size and circumstances and in particular
the role and overall holding of the majority shareholder. Moreover,
the Group contains two subsidiaries authorised to undertake
regulated business under the Financial Services and Markets Act
2000, one of which is regulated by the Prudential Regulatory
Authority and the Financial Conduct Authority and is an authorised
deposit-taking business. It in turn has a subsidiary, Renaissance
Asset Finance Limited, which is regulated by the Financial Conduct
Authority. Accordingly, the Group operates to the high standards of
corporate accountability and regulatory compliance appropriate for
such a business.
The Group is led by an effective Board which comprises four
executive directors, two independent non-executive directors and
two other non-executive directors.
Sir Henry Angest is the Chairman of the Group. The Chairman sets
the long term focus and customer oriented culture of the Group and
his role is to ensure good corporate governance. His
responsibilities include leading the Board, ensuring the
effectiveness of the Board in all aspects of its role, ensuring
effective communication with shareholders, setting the Board's
agenda and ensuring that all Directors are encouraged to
participate fully in the activities and decision-making process of
the Board.
There were no changes in Board membership during the year. Paul
Lynam was appointed to the Board when Secure Trust Bank PLC ("STB")
was a subsidiary of the Group, and remains a director of the Group,
in a non-executive role, as well as Chief Executive of STB,
following the reduction in the Group's holding in STB to 18.6%.
The directors seeking re-election are James Cobb and Ian Dewar,
who have served on the Board for 9 years and 2 1/2 years
respectively. The contribution of James Cobb as the Group Financial
Director has been very valuable in determining the capital and
liquidity requirements of the Group. Ian Dewar, with a wealth of
experience as a partner in a major accounting firm, has
successfully chaired the Audit Committee. Accordingly, the Board
fully supports the resolutions for their reappointment.
In 2016, the Board commissioned an independent Board
Effectiveness Review. The Directors were satisfied with the conduct
and outcome of the review and have since implemented its
recommendations.
The Board
The Board meets regularly throughout the year, holding six
formal meetings during the year as well as a two day strategy
meeting. Substantive agenda items have briefing papers, which are
circulated in a timely manner before each meeting. The Board
ensures that it is supplied with all the information that it
requires and requests, in a form and of a quality to fulfil its
duties.
In addition to determining and overseeing the implementation of
the strategy and management of the Company and of the Group, the
Board has determined certain items which are reserved for decision
by itself. These matters include the acquisition and disposal of
other than minor businesses, the issue of capital by any Group
company, monitoring overall regulatory requirements of its
subsidiary companies, and their adherence thereto, and any
transaction by a subsidiary company that cannot be made within its
own resources or that is not in the normal course of its
business.
The Company Secretary is responsible for ensuring that the Board
processes and procedures are appropriately followed and support
effective decision making. All directors have access to the Company
Secretary's advice and services. There is an agreed procedure for
directors to obtain independent professional advice in the course
of their duties, if necessary, at the Company's expense.
All directors receive induction training upon joining the Board,
with individual AIM training provided by the Company's Nominated
Adviser, regulatory and compliance training provided by the Group
Head of Compliance or an external firm of lawyers, risk management
training (including that in relation to the ICAAP and ILAAP) with
an overview of credit and its associated risks and mitigation by
the Head of Credit Risk in Arbuthnot Latham & Co., Limited.
Board Committees
The Board has established Audit, Nomination, Remuneration and
Donations Committees, each with formally delegated duties and
responsibilities and with written terms of reference, which require
consideration of the committee's effectiveness. The Board keeps the
governance arrangements under review. Further information in
relation to these committees is set out below. The Board now
maintains direct responsibility for issues of Risk without the need
for its own Risk Committee, since responsibility for large lending
proposals became a direct responsibility of its subsidiary,
Arbuthnot Latham & Co., Limited.
Audit Committee
Membership and meetings
Membership of the Audit Committee is restricted to non-executive
directors and comprises Ian Dewar (as Chairman), Sir Christopher
Meyer and Sir Alan Yarrow. The Committee met four times during the
year.
The Audit Committee oversees, on behalf of the Board, the
financial reporting, the appropriateness and effectiveness of
systems and controls, the work of Internal Audit and the
arrangements for and effectiveness of the external audit. The
ultimate responsibility for reviewing and approving the annual
report and accounts and the half-yearly report remains with the
Board. The Audit Committee also reviews procedures for detecting
fraud and preventing bribery, reviews whistleblowing arrangements
for employees to raise concerns in confidence, and reviews, as
necessary, arrangements for outsourcing significant operations.
The present auditors, KPMG LLP, have held office since 2009. The
Senior Statutory Auditor changed in 2013 and will change again in
2018, following a five-year association with the Parent Company.
The Board is satisfied with the effectiveness of their audit and
endorses the comments made by the Committee in relation to the
Audit Report set out below. The Committee received a report showing
the level of non-audit services provided by the external auditors
during the year and members were satisfied that the extent and
nature of these did not compromise auditor independence.
Activity in 2017
Internal Audit
On behalf of the Board, the Audit Committee monitors the
effectiveness of systems and controls. To this end, Internal Audit
provides the Audit Committee and the Board with detailed
independent and objective assurance on the effectiveness of
governance, risk management and internal controls. Since Arbuthnot
Latham & Co., Limited established its own Audit Committee, the
role of the Group Audit Committee has been mainly supervisory in
relation to internal audit matters, though it receives items of
material note deriving from Arbuthnot Latham & Co., Limited's
internal audits, including an assessment of culture which forms
part of every internal audit.
The Audit Committee approves the Internal Audit risk based
programme of work and monitors progress against the annual plan.
The Committee reviews Internal Audit resources and the arrangements
that ensure Internal Audit faces no restrictions or limitations to
conducting its work, that it continues to have unrestricted access
to all personnel and information, and that Internal Audit remains
objective and independent from business management.
The Head of Internal Audit provides reports on the outcomes of
Internal Audit work directly to the Committee and the Committee
monitors progress against actions identified in these reports.
The Committee is satisfied with Internal Audit arrangements
during 2017.
Integrity of Financial Statements and oversight of external
audit
In 2017, for the first time, the Group Financial Statements
include a long form audit report and with this change, it is
appropriate
to include further information on the role that the Audit
Committee has played in the approval of these accounts. The
Committee:
-- Received and agreed the Audit Plan prepared by the external auditors;
-- Considered and formed a conclusion on the critical judgements
underpinning the Financial Statements, as presented in papers
prepared by management. In respect of all of these critical
judgements, the Committee concluded that the treatment in the
Financial Statements was appropriate.
-- Received reports from the external auditors on the matters
arising from their work, the key issues and conclusions they had
reached;
-- The Chairman of the Committee attended, as an observer, Audit
Committees of Arbuthnot Latham & Co., Limited, the Company's
operating subsidiary;
-- In addition, the Committee considered changes to financial
reporting requirements that are not yet effective but that are
likely to impact on the reported results or financial position of
the Group and Company in future. The most notable being the
implementation of IFRS 9 (from 1 January 2018) and the carrying
value and disclosure of the Group's interest in Secure Trust Bank
PLC. The Committee has reviewed Management's methodology, and is
satisfied with the disclosures as set out in Note 3.27 and Note 27
to the financial statements.
The Audit Committee also receives reports from the external
auditors which include details of internal control matters that
they have identified as part of the annual statutory Financial
Statements audit. Certain aspects of the system of internal control
are also subject to regulatory supervision, the results of which
are monitored closely by the Committee and the Board. In addition,
the ICAAP and ILAAP are key control documents and received detailed
consideration by the board of Arbuthnot Latham & Co., Limited.
The Committee receives reports on these by exception.
The Committee approved the terms of engagement and the
remuneration to be paid to the external auditors in respect of
their audit services.
Significant areas of judgement
The Audit Committee considered the following significant issues
and accounting judgements in relation to the Financial
Statements:
Impairment review of interest in associate
The Group has an 18.6% interest in STB. This is currently
recorded in the Group's Statement of Financial Position as an
interest in associate and at 31 December 2017 was carried at
GBP83.8m or the equivalent of GBP24.33 per share. At the year end
the market price of STB was GBP17.97 per share.
The Committee reviewed the carrying value to ensure it was still
appropriate. This included reviewing the valuation models and
underlying assumptions used to substantiate the current value as
reflected in the Statement of Financial Position. No impairment was
considered necessary.
Refer to Note 4.1 (e) of the Notes to the Financial Statements
for more information.
Impairment of loans and advances to customers
The Committee reviewed presentations from management detailing
the provisioning methodology across the Group as part of the full
year results process. The Committee considered and challenged the
provisioning methodology applied by management, including timing of
cash flows, valuation and recoverability of supporting collateral
on impaired assets. The Committee concluded that the impairment
provisions, including management's judgements, were
appropriate.
The charge for impaired loans and advances totalled GBP0.4m for
the year ended 31 December 2017. The disclosures relating to
impairment provisions are set out in Note 4.1(a) to the financial
statements.
Effective Interest rate
Interest earned on loans and receivables is recognised using the
Effective Interest Rate ("EIR") method. The EIR is calculated on
the initial recognition of a loan through a discounted cash flow
model that incorporates fees, costs and other premiums or
discounts. There have been no changes to the EIR accounting
policies during the year.
The Committee considered and challenged the EIR methodology
applied by management and specifically in relation to acquired loan
portfolios. The Committee considered management assumptions
including expected future customer behaviours and concluded that
the EIR methodology was appropriate as at 31 December 2017.
The disclosures relating to EIR are set out in Note 4.1(b) to
the financial statements.
Valuation of Investment Property
The two investment properties are held at fair value. The
Committee reviewed the assumptions used in the valuation of the
properties including capital expenditure, incentive periods, rental
income, and yields.
As at 31 December, the Group's property investment portfolio
totalled GBP59.4m, as detailed in Note 31. The disclosures relating
to the fair value of investment property are set out in Note 4.1(c)
to the financial statements.
Acquisition Accounting
During the year Arbuthnot Latham acquired the entire share
capital of Renaissance Asset Finance Limited. The consideration
consisted of an upfront and deferred payment based on future
profits.
The Committee reviewed the accounting and the disclosures for
the acquisition. This included reviewing the assumptions used in
the valuation and identification of the separately identifiable
intangible assets. An intangible asset relating to goodwill on
acquisition was recognised totalling GBP3.5m (see Note 28).
Refer to Note 4.1 (d) of the Notes to the Financial Statements
for more information.
Going Concern
The financial statements are prepared on the basis that the
Group and Company are each a going concern. The Audit Committee
reviewed management's assessment, and is satisfied that the going
concern basis was appropriate.
Other Committee activities
During 2017 the Audit Committee received and reviewed reports
from management relating to:
-- The procedures for detecting fraud and prevention of bribery,
and any instances of non-compliance;
-- Whistleblowing arrangements for employees to raise concerns in confidence;
-- Arrangements involving outsourcing of significant operations.
The Committee met separately with each of the Finance Director,
Head of Internal Audit and the External Audit Partner without any
other executives present. There were no issues or concerns raised
by them in regard to discharging their responsibilities.
In September 2017, the Committee performed a review of its
effectiveness by means of a self-assessment framework and
completion of a questionnaire by members of the Committee. The
review did not highlight any material concerns.
Nomination Committee
Membership and meetings
The Nomination Committee is chaired by Sir Henry Angest and its
other members are Sir Christopher Meyer and Sir Alan Yarrow. The
Committee met once during the year. It is required to meet formally
at least once per year and otherwise as required.
The Nomination Committee assists the Board in discharging its
responsibilities relating to the composition of the Board. The
Nomination Committee is responsible for and evaluates on a regular
basis the balance of skills, experience, independence and knowledge
on the Board, its size, structure and composition, retirements and
appointments of additional and replacement directors and will make
appropriate recommendations to the Board on such matters. The
Nomination Committee also considers succession planning, taking
into account the skills and expertise that will be needed on and
beneficial to the Board in the future.
Activity in 2017
The Committee reviewed the terms of service of the Group Finance
Director. It has also reviewed and reconfirmed Sir Christopher
Meyer's independence. It has examined the balance of executive and
non-executive directors in relation to succession planning and the
extent to which the requirements of a board diversity policy are
met.
Remuneration Committee
Membership and meetings
Membership is detailed in the Remuneration Report on page 24.
The Committee met twice during the year. It is required to meet
formally at least once per year and otherwise as required.
The Remuneration Committee assists the Board in determining its
responsibilities in relation to remuneration including, inter alia,
in relation to the Company's policy on executive remuneration
determining the individual remuneration and benefits package of
each of the Executive Directors, and the fees for Non-Executive
Directors.
The Committee also deals with remuneration-related issues under
the Prudential Regulation Authority's Remuneration Code applicable
to the Company.
A separate Remuneration Report gives further information and
details of each Director's remuneration.
Donations Committee
Membership and meetings
The Donations Committee is chaired by Sir Henry Angest and its
other members are Sir Christopher Meyer and Sir Alan Yarrow. The
Committee met once during the year.
The Committee considers any political donation or expenditure as
defined within sections 366 and 367 of the Companies Act 2006.
Internal Control and Financial Reporting
The Board of directors has overall responsibility for the
Group's system of internal control and for reviewing its
effectiveness. Such a system is designed to manage rather than
eliminate risk of failure to achieve business objectives and can
only provide reasonable but not absolute assurance against the risk
of material misstatement or loss.
The Directors and senior management of the Group have formally
adopted a Group Risk and Controls Policy which sets out the Board's
attitude to risk and internal control. Key risks identified by the
Directors are formally reviewed and assessed at least once a year
by the Board. In addition, key business risks are identified,
evaluated and managed by operating management on an ongoing basis
by means of procedures such as physical controls, credit and other
authorisation limits and segregation of duties. The Board also
receives regular reports on any risk matters that need to be
brought to its attention.
Significant risks identified in connection with the development
of new activities are subject to consideration by the Board. There
are well-established budgeting procedures in place and reports are
presented regularly to the Board detailing the results, in relation
to Arbuthnot Latham & Co., Limited, of each principal business
unit, variances against budget and prior year, and other
performance data.
Shareholder Communications
The Company maintains ongoing communications via one to one
meetings as appropriate with its major shareholders and makes full
use of the Annual General Meeting and other General Meetings (when
held) to communicate with investors. The Company aims to present a
balanced and understandable assessment in all its reports to
shareholders, its regulators, other stakeholders and the wider
public. Key announcements and other information can be found at
www.arbuthnotgroup.com.
Statement of Directors' Responsibilities in Respect of the
Strategic Report and the Directors' Report and the Financial
Statements
The Directors are responsible for preparing the Strategic
Report, the Directors' Report and the Financial Statements in
accordance with applicable law and regulations. Company law
requires the Directors to prepare Group and Parent Company
Financial Statements for each financial year. As required by the
AIM Rules of the London Stock Exchange they are required to prepare
the Group Financial Statements in accordance with International
Financial Reporting Standards ("IFRSs") as adopted by the EU and
applicable law and have elected to prepare the Parent Company
Financial Statements on the same basis.
Financial Statements
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 the Group and the Company and of
the Group profit or loss for that period. In preparing each of the
Group and Parent Company Financial Statements, the Directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable, relevant and reliable;
-- state whether they have been prepared in accordance with IFRSs as adopted by the EU;
-- assess the Group and Parent Company's ability to continue as
a going concern, disclosing, as applicable, matters related to
going concern; and
-- use the going concern basis of accounting unless they intend
either to liquidate the Group or the Parent Company or to cease
operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Parent
Company's transactions and disclose with reasonable accuracy at any
time the financial position of the Parent Company and enable them
to ensure that its Financial Statements comply with the Companies
Act 2006. They are responsible for such internal control as they
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error, and have general responsibility for taking such
steps as are reasonably open to them to safeguard the assets of the
Group and to prevent and detect fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the UK governing the preparation
and dissemination of Financial Statements may differ from
legislation in other jurisdictions.
Remuneration Report
Remuneration Committee
Membership of the Remuneration Committee is limited to
non-executive directors together with Sir Henry Angest as Chairman.
The present members of the Committee are Sir Henry Angest, Sir
Christopher Meyer and Sir Alan Yarrow. The Committee met twice
during the year.
The Committee has responsibility for producing recommendations
on the overall remuneration policy for directors for review by the
Board and for setting the remuneration of individual directors.
Members of the Committee do not vote on their own remuneration.
Remuneration Policy
The Remuneration Committee determines the remuneration of
individual directors having regard to the size and nature of the
business; the importance of attracting, retaining and motivating
management of the appropriate calibre without paying more than is
necessary for this purpose; remuneration data for comparable
positions, in particular the rising remuneration packages at
challenger banks; the need to align the interests of executives
with those of shareholders; and an appropriate balance between
current remuneration and longer-term performance-related rewards.
The remuneration package can comprise a combination of basic annual
salary and benefits (including pension), a discretionary annual
bonus award related to the Committee's assessment of the
contribution made by the executive during the year and longer-term
incentives, including executive share options. Pension benefits
take the form of annual contributions paid by the Company to
individual money purchase schemes. The Remuneration Committee
reviews salary levels each year based on the performance of the
Group during the preceding financial period. This review does not
necessarily lead to increases in salary levels. For the purposes of
the FCA Remuneration Code, all the provisions of which have been
implemented, the Group and its subsidiaries are all considered to
be Tier 3 institutions.
The Remuneration Committee reviewed the operation of the policy,
having regard to the performance of the Company during the year,
with particular regard to the level of discretionary bonus awarded
and the level of inflation impacting on salaries.
Directors' Service Contracts
Sir Henry Angest, Andrew Salmon, James Cobb and Ian Henderson
each have service contracts terminable at any time on 12 months'
notice in writing by either party.
Long Term Incentive Schemes
At the Annual General Meeting in May 2015, shareholders voted by
Ordinary Resolution to extend the Company's Unapproved Executive
Share Option Scheme for a further period of 10 years. No such
options were subsequently granted prior to the setting up of the
Phantom Option Scheme.
On 14 June 2016, the Company announced a Phantom Share Option
Scheme ("Phantom Option Scheme"), intended to replace the
Unapproved Executive Share Option Scheme. The value of each phantom
option is related to the market price of an ordinary share of 1p in
the Company. An increase in the market value of an ordinary share
of 1p in the Company over the market value per share at the date of
grant of the phantom option will give rise to an entitlement to a
cash payment by the Company on the exercise of a phantom
option.
On 14 June 2016 Mr. Salmon was granted a phantom option pursuant
to the Phantom Option Scheme to acquire 200,000 ordinary 1p shares
in the Company at 1591p exercisable in respect of 50% on or after
15 June 2019 and in respect of the remaining 50% on or after 15
June 2021 when a cash payment would be made equal to any increase
in market value. On 14 June 2016 Mr. Cobb and Mr. Henderson were
each granted phantom options pursuant to the Phantom Option Scheme
to acquire 100,000 ordinary 1p shares in the Company at 1591p
exercisable in respect of 50% on or after 15 June 2019 and in
respect of the remaining 50% on or after 15 June 2021 when a cash
payment would be made equal to any increase in market value. The
fair value of the options at the grant date was GBP1.3m.
Directors' Emoluments
2017 2016
GBP000 GBP000
---------------------------------------------- ------- -------
Fees (including benefits in kind) 205 215
Salary payments (including benefits in kind) 4,533 7,731
Pension contributions 105 119
Long term incentive - 992
---------------------------------------------- ------- -------
4,843 9,057
---------------------------------------------- ------- -------
Long
term Total Total
Salary Bonus Benefits Pension Fees incentive 2017 2016
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------- ------- ------- --------- -------- ------- ---------- ------- -------
Sir Henry Angest 1,200 - 89 - - - 1,289 1,260
JR Cobb 550 250 17 35 - - 852 1,583
IA Dewar - - - - 75 - 75 75
JW Fleming (to 14/04/2016) - - - - - - - 145
IA Henderson (from 06/05/2016) 488 300 17 35 - - 840 543
Ms RJ Lea (to 05/05/2016) - - - - - - - 45
PA Lynam - - - - - - - 1,493
Sir Christopher Meyer - - - - 60 - 60 60
AA Salmon 1,200 400 22 35 - - 1,657 3,818
Sir Alan Yarrow (from
10/06/2016) - - - - 70 - 70 35
3,438 950 145 105 205 - 4,843 9,057
-------------------------------- ------- ------- --------- -------- ------- ---------- ------- -------
Details of any shares or options held by directors are presented
on page 16.
The emoluments of the Chairman were GBP1,289,000 (2016:
GBP1,260,000). The emoluments of the highest paid director were
GBP1,657,000 (2016: GBP3,818,000) including pension contributions
of GBP35,000 (2016: GBP35,000).
Secure Trust Bank was paid a fee of GBP60,000 (2016: GBP33,000
from 15 June 2016) for the services of Mr. Lynam rendered as a
non-executive director.
Retirement benefits are accruing under money purchase schemes
for four directors who served during 2017 (2016: five
directors).
Independent Auditor's Report
The Independent Auditor's report can be viewed at the following
link: here
Company statement of financial position
At 31 December
2017 2016
Note GBP000 GBP000
-------------------------------------------- ------- ----------- -----------
ASSETS
Loans and advances to banks 18 36,103 89,072
Financial investments 25 140 121
Deferred tax asset 26 641 397
Property, plant and equipment 30 157 183
Other assets 24 199 887
Interests in associates 27 5,056 5,056
Interests in subsidiaries 43 97,802 54,602
-------------------------------------------- ------- ----------- -----------
Total assets 140,098 150,318
-------------------------------------------- ------- ----------- -----------
EQUITY AND LIABILITIES
Equity
Share capital 37 153 153
Other reserves 38 (1,111) (1,111)
Retained earnings 38 124,659 133,847
-------------------------------------------- ------- ----------- -----------
Total equity 123,701 132,889
-------------------------------------------- ------- ----------- -----------
LIABILITIES
Current tax liability 152 -
Other liabilities 34 3,141 4,808
Debt securities in issue 35 13,104 12,621
-------------------------------------------- ------- ----------- -----------
Total liabilities 16,397 17,429
-------------------------------------------- ------- ----------- -----------
Total equity and liabilities 140,098 150,318
-------------------------------------------- ------- ----------- -----------
The Company has elected to take the exemption under section 408 of the
Companies Act 2006 not to present the Parent Company
profit and loss account. The profit for the Parent Company for the year
is presented in the Statement of Changes in Equity.
Consolidated statement of changes in equity
Attributable to equity holders
of the Group
-------------------------------------------------------------------------------
Capital
Share Revaluation redemption Available-for-sale Treasury Retained Non-controlling
capital reserve reserve reserve shares earnings interests Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------- -------- ------------ ----------- ------------------- --------- ---------- ---------------- --------
Balance at 1
January 2017 153 - 20 (251) (1,131) 235,567 - 234,358
Total comprehensive
income for
the period
Profit for 2017 - - - - - 6,523 - 6,523
Other comprehensive
income,
net of tax
Available-for-sale
reserve -
net change in fair
value - - - 128 - - - 128
Available-for-sale
reserve -
Associate - net
change in fair
value - - - 389 - - - 389
Tax on other
comprehensive
income - - - (104) - - - (104)
-------------------- -------- ------------ ----------- ------------------- --------- ---------- ---------------- --------
Total other
comprehensive
income - - - 413 - - - 413
-------------------- -------- ------------ ----------- ------------------- --------- ---------- ---------------- --------
Total comprehensive
income for
the period - - - 413 - 6,523 - 6,936
-------------------- -------- ------------ ----------- ------------------- --------- ---------- ---------------- --------
Transactions with
owners, recorded
directly in equity
Contributions by
and distributions
to owners
Equity settled
share based
payment
transactions - - - - - (155) - (155)
Final dividend
relating to 2016 - - - - - (2,680) - (2,680)
Interim dividend
relating to
2017 - - - - - (2,084) - (2,084)
Total contributions
by and
distributions
to owners - - - - - (4,919) - (4,919)
-------------------- -------- ------------ ----------- ------------------- --------- ---------- ---------------- --------
Balance at 31
December 2017 153 - 20 162 (1,131) 237,171 - 236,375
-------------------- -------- ------------ ----------- ------------------- --------- ---------- ---------------- --------
Attributable to equity holders
of the Group
-------------------------------------------------------------------------------
Capital
Share Revaluation redemption Available-for-sale Treasury Retained Non-controlling
capital reserve reserve reserve shares earnings interests Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------- -------- ------------ ----------- ------------------- --------- ---------- ---------------- ----------
Balance at 1
January 2016 153 98 20 1,047 (1,131) 123,330 67,887 191,404
Total comprehensive
income for
the period
Profit for 2016 - - - - - 166,143 61,426 227,569
Other comprehensive
income,
net of tax
Available-for-sale
reserve -
net change in fair
value - - - (1,890) - - (487) (2,377)
Available-for-sale
reserve -
Associate - net
change in fair
value - - - (389) - - - (389)
Tax on other
comprehensive
income - - - 456 - - - 456
-------------------- -------- ------------ ----------- ------------------- --------- ---------- ---------------- ----------
Total other
comprehensive
income - - - (1,823) - - (487) (2,310)
-------------------- -------- ------------ ----------- ------------------- --------- ---------- ---------------- ----------
Total comprehensive
income for
the period - - - (1,823) - 166,143 60,939 225,259
-------------------- -------- ------------ ----------- ------------------- --------- ---------- ---------------- ----------
Transactions with
owners, recorded
directly in equity
Contributions by
and distributions
to owners
Equity settled
share based
payment
transactions - - - - - (1,074) 31 (1,043)
Secure Trust Bank
loss of control - (98) - 525 - (427) (124,046) (124,046)
Final dividend
relating to 2015 - - - - - (2,531) (4,811) (7,342)
Special dividend
relating to
2016 - - - - - (3,722) - (3,722)
Interim dividend
relating to
2016 - - - - - (1,936) - (1,936)
Special dividend
relating to
2016 - - - - - (44,216) - (44,216)
-------------------- -------- ------------ ----------- ------------------- --------- ---------- ---------------- ----------
Total contributions
by and
distributions
to owners - (98) - 525 - (53,906) (128,826) (182,305)
-------------------- -------- ------------ ----------- ------------------- --------- ---------- ---------------- ----------
Balance at 31
December 2016 153 - 20 (251) (1,131) 235,567 - 234,358
-------------------- -------- ------------ ----------- ------------------- --------- ---------- ---------------- ----------
Company statement of changes in equity
Attributable to equity
holders of the Company
----------------------------------------------
Capital
Share redemption Treasury Retained
capital reserve shares earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------------------- --------- ------------ --------- ---------- ---------
Balance at 1 January 2016 153 20 (1,131) 46,537 45,579
Total comprehensive income for the period
Profit for 2016 - - - 140,826 140,826
Other comprehensive income, net of income
tax - - - - -
Total comprehensive income for the period - - - 140,826 140,826
------------------------------------------------- --------- ------------ --------- ---------- ---------
Transactions with owners, recorded directly
in equity
Contributions by and distributions to
owners
Equity settled share based payment transactions - - - (1,111) (1,111)
Final dividend relating to 2015 - - - (2,531) (2,531)
Special dividend relating to 2016 - - - (3,722) (3,722)
Interim dividend relating to 2016 - - - (1,936) (1,936)
Special dividend relating to 2016 - - - (44,216) (44,216)
------------------------------------------------- --------- ------------ --------- ---------- ---------
Total contributions by and distributions
to owners - - - (53,516) (53,516)
------------------------------------------------- --------- ------------ --------- ---------- ---------
Balance at 31 December 2016 153 20 (1,131) 133,847 132,889
------------------------------------------------- --------- ------------ --------- ---------- ---------
Total comprehensive income for the period
Loss for 2017 - - - (4,269) (4,269)
Other comprehensive income, net of income
tax - - - - -
Total comprehensive income for the period - - - (4,269) (4,269)
------------------------------------------------- --------- ------------ --------- ---------- ---------
Transactions with owners, recorded directly
in equity
Contributions by and distributions to
owners
Equity settled share based payment transactions - - - (155) (155)
Final dividend relating to 2016 - - - (2,680) (2,680)
Interim dividend relating to 2017 - - - (2,084) (2,084)
Total contributions by and distributions
to owners - - - (4,919) (4,919)
------------------------------------------------- --------- ------------ --------- ---------- ---------
Balance at 31 December 2017 153 20 (1,131) 124,659 123,701
------------------------------------------------- --------- ------------ --------- ---------- ---------
Consolidated statement of cash flows
Year Year
ended ended
31 December 31 December
2017 2016
Note GBP000 GBP000
--------------------------------------------------------- ----- ------------- -------------
Cash flows from operating activities
Interest received 43,389 109,311
Interest paid (6,093) (19,372)
Fees and commissions received 8,682 37,511
Other income 3,033 -
Cash payments to employees and suppliers (47,600) (101,217)
Taxation paid (379) (3,020)
--------------------------------------------------------- ----- ------------- -------------
Cash flows from operating profits before changes
in operating assets and liabilities 1,032 23,213
Changes in operating assets and liabilities:
- net (increase)/decrease in derivative financial
instruments (331) 66
- net (increase)/decrease in loans and advances
to customers (233,175) 855,436
- net (increase)/decrease in other assets (7,952) 41,780
- net increase/(decrease) in amounts due to customers 392,937 (932,189)
- net decrease in other liabilities (843) (23,595)
--------------------------------------------------------- ----- ------------- -------------
Net cash inflow/(outflow) from operating activities 151,668 (35,289)
--------------------------------------------------------- ----- ------------- -------------
Cash flows from investing activities
Disposal of financial investments - 1,078
Purchase of computer software 28 (2,641) (5,155)
Purchase of property, plant and equipment 30 (666) (354)
Purchase of investment property 31 (6,421) (53,339)
Disposal of Tarn Crag (Holdings) Limited 27 900 -
Purchase of Renaissance Asset Finance Limited 29 (2,072) -
Cash balance acquired through Renaissance Asset Finance
Limited acquisition 29 2,815 -
Proceeds from sale of Everyday Loans Group, net of
cash and cash equivalents disposed - 101,723
Proceeds from sale of Secure Trust Bank shares - 147,999
Reduction in cash balance with deconsolidation of
Secure Trust Bank - (194,344)
Purchases of debt securities (211,080) (89,384)
Proceeds from redemption of debt securities 90,410 71,899
--------------------------------------------------------- ----- ------------- -------------
Net cash outflow from investing activities (128,755) (19,877)
--------------------------------------------------------- ----- ------------- -------------
Cash flows from financing activities
Increase/(decrease) in borrowings 132,928 (52,105)
Dividends paid (4,764) (57,215)
--------------------------------------------------------- ----- ------------- -------------
Net cash inflow/(outflow) from financing activities 128,164 (109,320)
--------------------------------------------------------- ----- ------------- -------------
Net increase/(decrease) in cash and cash equivalents 151,077 (164,486)
Cash and cash equivalents at 1 January 232,703 397,189
--------------------------------------------------------- ----- ------------- -------------
Cash and cash equivalents at 31 December 41 383,780 232,703
--------------------------------------------------------- ----- ------------- -------------
Company statement of cash flows
Year Year
ended ended
31 December 31 December
2017 2016
Note GBP000 GBP000
------------------------------------------------------ ----- ------------- -------------
Cash flows from operating activities
Dividends received from subsidiaries 2,618 11,468
Interest received 202 283
Interest paid (513) (611)
Other income 1,643 1,816
Cash payments to employees and suppliers (7,977) (10,107)
Taxation paid - (488)
------------------------------------------------------ ----- ------------- -------------
Cash flows from operating (losses)/profits before
changes in operating assets and liabilities (4,027) 2,361
Changes in operating assets and liabilities:
- net (increase)/decrease in group company balances (1,788) 526
- net decrease in other assets 690 104
- net increase in other liabilities 120 48
------------------------------------------------------ ----- ------------- -------------
Net cash (outflow)/inflow from operating activities (5,005) 3,039
------------------------------------------------------ ----- ------------- -------------
Cash flows from investing activities
Increase investment in subsidiary 43 (43,200) (22,000)
Disposal of share in subsidiaries 43 - 147,999
Purchase of property, plant and equipment 30 - (5)
------------------------------------------------------ ----- ------------- -------------
Net cash (outflow)/inflow from investing activities (43,200) 125,994
------------------------------------------------------ ----- ------------- -------------
Cash flows from financing activities
Dividends paid (4,764) (52,405)
Net cash used in financing activities (4,764) (52,405)
------------------------------------------------------ ----- ------------- -------------
Net (decrease)/increase in cash and cash equivalents (52,969) 76,628
Cash and cash equivalents at 1 January 89,072 12,444
------------------------------------------------------ ----- ------------- -------------
Cash and cash equivalents at 31 December 41 36,103 89,072
------------------------------------------------------ ----- ------------- -------------
Notes to the Consolidated Financial Statements
1. Reporting entity
Arbuthnot Banking Group PLC is a company domiciled in the United
Kingdom. The registered address of Arbuthnot Banking Group PLC is 7
Wilson Street, London, EC2M 2SN. The consolidated financial
statements of Arbuthnot Banking Group PLC as at and for the year
ended 31 December 2017 comprise Arbuthnot Banking Group PLC and its
subsidiaries (together referred to as the "Group" and individually
as "subsidiaries"). The Company is the holding company of a group
primarily involved in banking and financial services.
2. Basis of presentation
(a) Statement of compliance
The Group's consolidated financial statements and the Company's
financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRSs as adopted and
endorsed by the EU) and the Companies Act 2006 applicable to
companies reporting under IFRS.
The consolidated financial statements were authorised for issue
by the Board of Directors on 27 March 2018.
(b) Basis of measurement
The consolidated and company financial statements have been
prepared under the historical cost convention, as modified by the
revaluation of land and buildings, investment property,
available-for-sale financial assets, derivatives, and financial
assets and financial liabilities at fair value through profit or
loss.
(c) Functional and presentational currency
Items included in the financial statements of each of the
Group's entities are measured using the currency of the primary
economic environment in which the entity operates ('the functional
currency'). The consolidated financial statements are presented in
Pounds Sterling, which is the Company's functional and the Group's
presentational currency.
(d) Use of estimates and judgements
The preparation of financial statements in conformity with IFRS
requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of
applying the Group's accounting policies. The areas involving a
higher degree of judgement or complexity, or areas where
assumptions and estimates are significant to the consolidated
financial statements are disclosed in Note 4.
(e) Accounting developments
The accounting policies adopted are consistent with those of the
previous financial year. There were no new or amended standards or
interpretations that resulted in a change in accounting policy.
(f) Going concern
After making appropriate enquiries which assessed strategy,
profitability, funding, risk management (see Note 6) and capital
resources (see Note 7), the directors are satisfied that the
Company and the Group have adequate resources to continue in
operation for the foreseeable future. The financial statements are
therefore prepared on the going concern basis.
3. Significant accounting policies
The accounting policies applied in the preparation of these
consolidated financial statements are set out below. These policies
have been consistently applied to all the years presented, unless
otherwise stated.
3.1. Consolidation
(a) Subsidiaries
Subsidiaries are all investees (including special purpose
entities) controlled by the Group. The Group controls an investee
when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those
returns through its power over the investee. Subsidiaries are fully
consolidated from the date on which control is transferred to the
Group. They are de-consolidated from the date that control
ceases.
The acquisition method of accounting is used to account for the
acquisition of subsidiaries by the Group. The cost of an
acquisition is measured as the fair value of the assets given,
equity instruments issued and liabilities incurred or assumed at
the date of exchange. Identifiable assets acquired, liabilities and
contingent liabilities assumed in a business combination are
measured initially at their fair values at the acquisition date,
irrespective of the extent of any non-controlling interest. The
excess of the cost of acquisition over the fair value of the
Group's shares of the identifiable net assets acquired is recorded
as goodwill. If the cost of acquisition is less than the fair value
of the net assets of the subsidiary acquired, the difference is
recognised directly in the Statement of Comprehensive Income as a
gain on bargain purchase.
The Parent's investments in subsidiaries are recorded at cost
less, where appropriate, provisions for impairment in value.
Inter-company transactions, balances and unrealised gains on
transactions between Group companies are eliminated. Unrealised
losses are also eliminated. Accounting policies of subsidiaries
have been changed where necessary to ensure consistency with the
policies adopted by the Group.
(b) Changes in ownership and non-controlling interests
Changes in ownership interest in a subsidiary that do not result
in the loss of control are accounted for as equity transactions and
no gain or loss is recognised. Adjustments to non-controlling
interests are based on a proportionate amount of the net assets of
the subsidiary.
When control of a subsidiary is lost, the Group derecognises the
assets, liabilities, non-controlling interest and all other
components of equity relating to the former subsidiary from the
consolidated statement of financial position. Any resulting gain or
loss is recognised in profit or loss. Any investment retained in
the former subsidiary is recognised at its fair value at the date
when control is lost.
(c) Special purpose entities
Special purpose entities ("SPEs") are entities that are created
to accomplish a narrow and well-defined objective such as the
securitisation of particular assets or the execution of a specific
borrowing or lending transaction. SPEs are consolidated when the
investor controls the investee. The investor would only control the
investee if it had all of the following:
-- power over the investee;
-- exposure, or rights, to variable returns from its involvement
with the investee; and
-- the ability to use its power over the investee to affect the
amount of the investor's returns.
The assessment of whether the Group has control over an SPE is
carried out at inception and the initial assessment is only
reconsidered at a later date if there were any changes to the
structure or terms of the SPE, or there were additional
transactions between the Group and the SPE.
(d) Associates
Associates are those entities in which the Group has significant
influence, but not control, over the financial and operating
policies. Significant influence is presumed to exist when the Group
holds between 20 and 50 percent of the voting power of another
entity. Associates are accounted for using the equity method and
are initially recognised at cost. The Group's investment includes
goodwill identified on acquisition, net of any accumulated
impairment losses. The consolidated financial statements include
the Group's share of the total comprehensive income and equity
movements of equity accounted investees, from the date that
significant influence commences until the date that significant
influence ceases. When the Group's share of losses exceeds its
interest in an equity accounted investee, the Group's carrying
amount is reduced to nil and recognition of further losses is
discontinued except to the extent that the Group has incurred legal
or constructive obligations or made payments on behalf of the
investee.
3.2. Segment reporting
Operating segments are reported in a manner consistent with the
internal reporting provided to the Group Board. The Group Board,
which is responsible for allocating resources and assessing
performance of the operating segments, has been identified as the
chief operating decision maker. All transactions between segments
are conducted on an arm's length basis. Income and expenses
directly associated with each segment are included in determining
segment performance. There are three main operating segments:
-- Retail Banking
-- Private Banking
-- Group Centre
3.3. Foreign currency translation
Foreign currency transactions are translated into the functional
currency using the spot exchange rates prevailing at the dates of
the transactions or valuation where items are remeasured. Foreign
exchange gains and losses resulting from the settlement of such
transactions and from the translation at year end exchange rates of
monetary assets and liabilities denominated in foreign currencies
are recognised in the Statement of Comprehensive Income. Foreign
exchange differences arising from translation of available-for-sale
equity instruments are recognised in Other Comprehensive
Income.
3.4. Interest income and expense
Interest income and expense are recognised in the Statement of
Comprehensive Income for all instruments measured at amortised cost
using the effective interest rate method.
The effective interest rate is the rate that discounts estimated
future cash payments or receipts through the expected life of the
financial instrument or, when appropriate, a shorter period to the
net carrying amount of the financial asset or financial liability.
When calculating the effective interest rate, the Group takes into
account all contractual terms of the financial instrument but does
not consider future credit losses. The calculation includes all
fees paid or received between parties to the contract that are an
integral part of the effective interest rate, transaction costs and
all other premiums or discounts. The carrying amount of the
financial asset or financial liability is adjusted if the Group
revises its estimates of payments or receipts. The adjusted
carrying amount is calculated based on the original effective
interest rate and the change in carrying amount is recorded as
interest income or expense.
Once a financial asset or a group of similar financial assets
has been written down as a result of an impairment loss, interest
income continues to be recognised using the original effective
interest rate applied to the impaired carrying amount.
3.5. Fee and commission income
Fees and commissions which are not considered integral to the
effective interest rate are generally recognised on an accrual
basis when the service has been provided.
Asset and other management, advisory and service fees are
recognised on an accruals basis as the related services are
performed. The same principle is applied for financial planning and
insurance services that are continuously provided over an extended
period of time.
3.6. Rental income
Rental income is recognised on a straight line basis over the
term of the lease. Lease incentives granted are recognised as an
integral part of the total rental income over the term of the
lease.
3.7. Discontinued operations
A discontinued operation is a component of the Group's business,
the operations and cash flows of which can be clearly distinguished
from the rest of the Group and which:
-- represents a separate major line of business or geographical
area of operations;
-- is part of a single co-ordinated plan to dispose of a
separate major line of business or geographical area of operations;
or
-- is a subsidiary acquired exclusively with a view to
re-sale.
Classification as a discontinued operation occurs on disposal or
when the operation meets the criteria to be classified as held for
sale (see note 3.14), if earlier. When an operation is classified
as a discontinued operation, the comparative Statement of
Comprehensive Income is re-presented as if the operation had been
discontinued from the start of the comparative year.
3.8. Financial assets and financial liabilities
The Group classifies financial assets and financial liabilities
in the following categories: financial assets and financial
liabilities at fair value through profit or loss; loans and
receivables; held-to-maturity investments; available-for-sale
financial assets and other financial liabilities. Management
determines the classification of its investments at acquisition. A
financial asset or financial liability is measured initially at
fair value plus, for an item not at fair value through profit or
loss, transaction costs that are directly attributable to its
acquisition or issue.
(a) Financial assets and financial liabilities at fair value
through profit or loss
This category comprises listed securities and derivative
financial instruments. Derivative financial instruments utilised by
the Group include embedded derivatives and derivatives used for
hedging purposes. Financial assets and liabilities at fair value
through profit or loss are initially recognised on the date from
which the Group becomes a party to the contractual provisions of
the instrument. Subsequent measurement of financial assets and
financial liabilities held in this category are carried at fair
value through profit or loss.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. They arise when the Group provides money, goods or services
directly to a debtor with no intention of trading the receivable.
Loans are recognised when cash is advanced to the borrowers. Loans
and receivables, other than those relating to assets leased to
customers, are carried at amortised cost using the effective
interest rate method. The accounting for assets leased to
customers, is set out under Note 3.18 (a).
(c) Held-to-maturity
Held-to-maturity investments are non-derivative financial assets
with fixed or determinable payments and fixed maturities that the
Group has the positive intent and ability to hold to maturity and
that have not been designated at fair value through profit or loss
or as available-for-sale investments. Held-to-maturity investments
are carried at amortised cost using the effective interest rate
method, less any impairment loss.
(d) Available-for-sale
Available-for-sale ("AFS") investments are those not classified
as another category of financial assets. These include investments
in special purpose vehicles and equity investments in unquoted
vehicles. They may be sold in response to liquidity requirements,
interest rate, exchange rate or equity price movements. AFS
investments are initially recognised at cost, which is considered
as the fair value of the investment including any acquisition
costs. AFS securities are subsequently measured at fair value in
the statement of financial position. Fair value changes in the AFS
securities are recognised directly in equity (AFS reserve) until
the investment is sold or impaired. Once sold or impaired, the
cumulative gains or losses previously recognised in the AFS reserve
are recycled to the profit or loss.
(e) Current financial assets held for sale
Current financial assets held for sale are measured at the lower
of their carrying amount and fair value less costs to sell except
where measurement and remeasurement is outside the scope of IFRS 5.
Where investments that have initially been recognised as current
financial assets held for sale, because the Group has been deemed
to hold a controlling stake, are subsequently disposed of or
diluted such that the Group's holding is no longer deemed a
controlling stake, the investment will subsequently be classified
as fair value through profit or loss investments in accordance with
IAS 39. Subsequent movements will be recognised in accordance with
the Group's accounting policy for the newly adopted
classification.
(f) Other financial liabilities
Other financial liabilities are non-derivative financial
liabilities with fixed or determinable payments. Other financial
liabilities are recognised when cash is received from the
depositors. Other financial liabilities are carried at amortised
cost using the effective interest rate method. The fair value of
other liabilities repayable on demand is assumed to be the amount
payable on demand at the Statement of Financial Position date.
Amortised cost measurement
The amortised cost of a financial asset or financial liability
is the amount at which the financial asset or financial liability
is measured at initial recognition, minus principal payments, plus
or minus the cumulative amortisation using the effective interest
rate method of any difference between the initial amount recognised
and the maturity amount, less any reduction for impairment.
Fair value measurement
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
When available, the Group measures the fair value of an
instrument using quoted prices in an active market for that
instrument. A market is regarded as active if quoted prices are
readily and regularly available and represent actual and regularly
occurring market transactions on an arm's length basis.
If a market for a financial instrument is not active, the Group
establishes fair value using a valuation technique. These include
the use of recent arm's length transactions, reference to other
instruments that are substantially the same for which market
observable prices exist, net present value and discounted cash flow
analysis. In the instance that fair values of assets and
liabilities cannot be reliably measured, they are carried at
cost.
For measuring derivatives that might change classification from
being an asset to a liability or vice versa such as interest rate
swaps, fair values take into account both credit valuation
adjustment (CVA) and debit valuation adjustment (DVA) when market
participants take this into consideration in pricing the
derivatives.
Derecognition
Financial assets are derecognised when the rights to receive
cash flows from the financial assets have expired or when the Group
has transferred substantially all risks and rewards of ownership.
Any interest in transferred financial assets that qualify for
derecognition that is created or retained by the Group is
recognised as a separate asset or liability in the Statement of
Financial Position. In transactions in which the Group neither
retains nor transfers substantially all the risks and rewards of
ownership of a financial asset and it retains control over the
asset, the Group continues to recognise the asset to the extent of
its continuing involvement, determined by the extent to which it is
exposed to changes in the value of the transferred asset. There
have not been any instances where assets have only been partially
derecognised.
The Group derecognises a financial liability when its
contractual obligations are discharged, cancelled, expire, are
modified or exchanged.
3.9. Derivative financial instruments
All derivatives are recognised at their fair value. Fair values
are obtained from quoted market prices in active markets, including
recent arm's length transactions or using valuation techniques such
as discounted cash flow models. Derivatives are shown in the
Statement of Financial Position as assets when their fair value is
positive and as liabilities when their fair value is negative.
Embedded derivatives
Embedded derivatives arise from contracts ('hybrid contracts')
containing both a derivative (the 'embedded derivative') and a
non-derivative (the 'host contract'). Where the economic
characteristics and risks of the embedded derivatives are not
closely related to those of the host contract, and the host
contract is not at fair value through profit or loss, the embedded
derivative is bifurcated and reported at fair value and gains or
losses are recognised in the Statement of Comprehensive Income.
3.10. Impairment of financial assets
(a) Assets carried at amortised cost
On an ongoing basis the Group assesses whether there is
objective evidence that a financial asset or group of financial
assets is impaired. Objective evidence is the occurrence of a loss
event, after the initial recognition of the asset, that impacts on
the estimated contractual future cash flows of the financial asset
or group of financial assets, and can be reliably estimated.
The criteria that the Group uses to determine whether there is
objective evidence of an impairment loss include, but are not
limited to, the following:
-- Delinquency in contractual payments of principal or
interest;
-- Cash flow difficulties experienced by the borrower;
-- Initiation of bankruptcy proceedings;
-- Deterioration in the value of collateral;
-- Deterioration of the borrower's competitive position.
If there is objective evidence that an impairment loss on loans
and receivables or held-to-maturity investments carried at
amortised cost has been incurred, the amount of the loss is
measured as the difference between the asset's carrying amount and
the present value of estimated future cash flows discounted at the
financial asset's original effective interest rate. The carrying
amount of the asset is reduced through the use of an allowance
account and the amount of the loss is recognised in the Statement
of Comprehensive Income. If a loan or held-to-maturity investment
has a variable interest rate, the discount rate for measuring any
impairment loss is the current effective interest rate determined
under the contract.
The Group considers evidence of impairment for loans and
advances at both a specific asset and collective level. All
individually significant loans and advances are assessed for
specific impairment. Those found not to be specifically impaired
are then collectively assessed for any impairment that has been
incurred but not yet identified. In assessing collective impairment
the Group uses historical trends of the probability of default,
emergence period, the timing of recoveries and the amount of loss
incurred, adjusted for management's judgement as to whether current
economic and credit conditions are such that the actual losses are
likely to be significantly different to historic trends.
When a loan is uncollectible, it is written off against the
related provision for loan impairment. Such loans are written off
after all the necessary procedures have been completed and the
amount of the loss has been determined. Subsequent recoveries of
amounts previously written off decrease the amount of the provision
for loan impairment in the Statement of Comprehensive Income.
A customer's account may be modified to assist customers who are
in or have recently overcome financial difficulties and have
demonstrated both the ability and willingness to meet the current
or modified loan contractual payments. Loans that have renegotiated
or deferred terms, resulting in a substantial modification to the
cash flows, are no longer considered to be past due but are treated
as new loans recognised at fair value, provided the customers
comply with the renegotiated or deferred terms.
(b) Assets classified as available-for-sale
The Group assesses at each Statement of Financial Position date
whether there is objective evidence that a financial asset or a
group of financial assets is impaired. In the case of equity
investments classified as available-for-sale, a significant or
prolonged decline in the fair value of the security below its cost
is considered as an indicator that the securities are impaired. If
any such evidence exists for available-for-sale financial assets,
the cumulative loss - measured as the difference between the
acquisition cost and the current fair value, less any impairment
loss on that financial asset previously recognised in profit or
loss - is removed from equity and recognised in the profit or loss.
Impairment losses recognised in the profit or loss on equity
instruments are reversed through other comprehensive income.
(c) Renegotiated loans
Loans that are neither subject to collective impairment
assessment nor individually significant and whose terms have been
renegotiated are no longer considered to be past due but are
treated as new loans.
(d) Forbearance
Under certain circumstances, the Group may use forbearance
measures to assist borrowers who are experiencing significant
financial hardship. Any forbearance support is assessed on a case
by case basis in line with best practice and subject to regular
monitoring and review. The Group seeks to ensure that any
forbearance results in a fair outcome for both the customer and the
Group.
3.11. Impairment of non-financial assets
The carrying amounts of the Group's non-financial assets, other
than inventories and deferred tax assets, are reviewed at each
reporting date to determine whether there is any indication of
impairment. If any such indication exists, then the asset's
recoverable amount is estimated. Impairment for goodwill is
discussed in more detail under note 3.15(a).
3.12. Term Funding Scheme
The Term Funding Scheme ("TFS") was announced by the Bank of
England on 4 August 2016 and became effective from 19 September
2016. The TFS allows participants to borrow central bank reserves
in exchange for eligible collateral. Amounts drawn from the TFS are
included within "Deposits from banks" on the Statement of Financial
Position as detailed in Note 32.
3.13. Inventory
Land acquired through repossession of collateral which is
subsequently held in the ordinary course of business with a view to
develop and sell is accounted for as inventory.
Inventory is measured at the lower of cost or net realisable
value. The cost of inventories comprises all costs of purchase,
costs of conversion and other costs incurred in bringing the
inventories to their present location and condition. Net realisable
value is the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated
costs necessary to make the sale.
3.14. Assets classified as held for sale
Assets, or disposal groups comprising assets and liabilities,
that are expected to be recovered primarily through sale rather
than through continuing use, are classified as held for sale. These
assets and liabilities are subsequently measured at the lower of
carrying amount and fair value less costs to sell. Once classified
as held for sale, intangible assets and property, plant and
equipment are no longer amortised or depreciated.
3.15. Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of an acquisition
over the fair value of the Group's share of the net identifiable
assets of the acquired subsidiary or associate at the date of
acquisition. Goodwill on acquisitions of subsidiaries or associates
is included in 'intangible assets'. Gains and losses on the
disposal of an entity include the carrying amount of goodwill
relating to the entity sold.
The Group reviews the goodwill for impairment at least annually
or more frequently when events or changes in economic circumstances
indicate that impairment may have taken place and carries goodwill
at cost less accumulated impairment losses. Assets are grouped
together in the smallest group of assets that generates cash
inflows from continuing use that are largely independent of the
cash inflows of other assets or groups of assets (the
"cash-generating unit" or "CGU"). For impairment testing purposes
goodwill cannot be allocated to a CGU that is greater than a
reported operating segment. CGUs to which goodwill has been
allocated are aggregated so that the level at which impairment is
tested reflects the lowest level at which goodwill is monitored for
internal reporting purposes. Goodwill acquired in a business
combination is allocated to groups of CGUs that are expected to
benefit from the synergies of the combination. The test for
impairment involves comparing the carrying value of goodwill with
the present value of pre-tax cash flows, discounted at a rate of
interest that reflects the inherent risks of the CGU to which the
goodwill relates, or the CGU's fair value if this is higher.
(b) Computer software
Acquired computer software licences are capitalised on the basis
of the costs incurred to acquire and bring to use the specific
software. These costs are amortised on the basis of the expected
useful lives (three to ten years).
Costs associated with maintaining computer software programs are
recognised as an expense as incurred.
Costs associated with developing computer software which are
assets in the course of construction, which management has assessed
to not be available for use, are not amortised.
(c) Other intangibles
Other intangibles include trademarks, customer relationships,
broker relationships, technology and banking licences acquired.
These costs are amortised on the basis of the expected useful lives
(three to fourteen years).
3.16. Property, plant and equipment
Land and buildings comprise mainly branches and offices and are
stated at the latest valuation with subsequent additions at cost
less depreciation. Plant and equipment is stated at historical cost
less depreciation. Historical cost includes expenditure that is
directly attributable to the acquisition of the items.
Land is not depreciated. Depreciation on other assets is
calculated using the straight-line method to allocate their cost to
their residual values over their estimated useful lives, applying
the following annual rates, which are subject to regular
review:
Freehold buildings 50 years
Office equipment 3 to 10 years
Computer equipment 3 to 5 years
Motor vehicles 4 years
Leasehold improvements are depreciated over the term of the
lease (until the first break clause). Gains and losses on disposals
are determined by deducting carrying amount from proceeds. These
are included in the Statement of Comprehensive Income. Depreciation
on revalued freehold buildings is calculated using the
straight-line method over the remaining useful life. Revaluation of
assets and any subsequent disposals are addressed through the
revaluation reserve and any changes are transferred to retained
earnings.
3.17. Investment property
Investment property is initially measured at cost. Transaction
costs are included in the initial measurement. Subsequently,
investment property is measured at fair value, with any change
therein recognised in profit and loss within other income.
If a change in use occurs and investment property is transferred
to owner-occupied property, the property's deemed cost for
subsequent reporting is its fair value at the date of change in
use.
3.18. Leases
(a) As a lessor
Assets leased to customers under agreements which transfer
substantially all the risks and rewards of ownership, with or
without ultimate legal title, are classified as finance leases.
When assets are held subject to finance leases, the present value
of the lease payments is recognised as a receivable. The difference
between the gross receivable and the present value of the
receivable is recognised as unearned finance income. Lease income
is recognised over the term of the lease using the net investment
method, which reflects a constant periodic rate of return.
Assets leased to customers under agreements which do not
transfer substantially all the risks and rewards of ownership are
classified as operating leases. When assets are held subject to
operating leases, the underlying assets are held at cost less
accumulated depreciation, The assets are depreciated down to their
estimated residual values on a straight-line basis over the lease
term. Lease rental income is recognised on a straight line basis
over the lease term.
(b) As a lessee
Rentals made under operating leases are recognised in the
Statement of Comprehensive Income on a straight-line basis over the
term of the lease.
Leases in which the Group assumes substantially all the risks
and rewards of ownership of the leased asset are classified as
finance leases. Leased assets by way of finance leases are stated
at an amount equal to the lower of their fair value and the present
value of the minimum lease payments at inception of the lease, less
accumulated depreciation. Minimum lease payments are apportioned
between the finance charge and the reduction of the outstanding
liability. The finance charge is allocated to each period during
the lease term so as to produce a constant periodic rate of
interest on the remaining balance of the liability.
3.19. Cash and cash equivalents
For the purposes of the Statement of Cash Flows, cash and cash
equivalents comprises cash on hand and demand deposits, and cash
equivalents are deemed highly liquid investments that are
convertible into cash with an insignificant risk of changes in
value with a maturity of three months or less at the date of
acquisition.
3.20. Employee benefits
(a) Post-retirement obligations
The Group contributes to a defined contribution scheme and to
individual defined contribution schemes for the benefit of certain
employees. The schemes are funded through payments to insurance
companies or trustee-administered funds at the contribution rates
agreed with individual employees.
The Group has no further payment obligations once the
contributions have been paid. The contributions are recognised as
an employee benefit expense when they are due. Prepaid
contributions are recognised as an asset to the extent that a cash
refund or a reduction in the future payments is available.
There are no post-retirement benefits other than pensions.
(b) Share-based compensation
The fair value of equity settled share-based payment awards is
calculated at grant date and recognised over the period in which
the employees become unconditionally entitled to the awards (the
vesting period). The amount is recognised as personnel expenses in
the profit and loss, with a corresponding increase in equity. The
Group adopts a Black-Scholes valuation model in calculating the
fair value of the share options as adjusted for an attrition rate
for members of the scheme and a probability of pay-out reflecting
the risk of not meeting the terms of the scheme over the vesting
period. The number of share options that are expected to vest are
reviewed at least annually.
The fair value of cash settled share-based payments is
recognised as personnel expenses in the profit or loss with a
corresponding increase in liabilities over the vesting period. The
liability is remeasured at each reporting date and at settlement
date based on the fair value of the options granted, with a
corresponding adjustment to personnel expenses.
When share-based payments are changed from equity settled to
cash settled and there is no change in the fair value of the
replacement award, it is seen as a modification to the terms and
conditions on which the equity instruments were granted and is not
seen as the settlement and replacement of the instruments.
Accordingly, on the date of modification, the Group recognises the
entire liability as a reclassification from equity and does not
recognise any profit or loss in the Statement of Comprehensive
Income.
(c) Deferred cash bonus scheme
The Bank has a deferred cash bonus scheme for senior employees.
The cost of the award is recognised to the income statement over
the period to which the performance relates.
3.21. Taxation
Current income tax which is payable on taxable profits is
recognised as an expense in the period in which the profits arise.
Income tax recoverable on tax allowable losses is recognised as an
asset only to the extent that it is regarded as recoverable by
offset against current or future taxable profits.
Deferred tax is provided in full on temporary differences
arising between the tax bases of assets and liabilities and their
carrying amounts in the consolidated financial statements. However,
deferred tax is not accounted for if it arises from the initial
recognition of goodwill, the initial recognition of an asset or
liability in a transaction other than a business combination that
at the time of the transaction affects neither accounting nor
taxable profit or loss, and differences relating to investments in
subsidiaries to the extent that they probably will not reverse in
the foreseeable future. Deferred tax is determined using tax rates
(and laws) that have been enacted or substantively enacted by the
Statement of Financial Position date and are expected to apply when
the related deferred tax asset is realised or the deferred tax
liability is settled.
Deferred tax assets and liabilities are offset if there is a
legally enforceable right to offset current tax liabilities and
assets, and they relate to taxes levied by the same tax authority
on the same taxable entity, or on different tax entities, when they
intend to settle current tax liabilities and assets on a net basis
or the tax assets and liabilities will be realised
simultaneously.
Deferred tax assets are recognised where it is probable that
future taxable profits will be available against which the
temporary differences can be utilised.
3.22. Issued debt and equity securities
Issued financial instruments or their components are classified
as liabilities where the contractual arrangement results in the
Group having a present obligation to either deliver cash or another
financial asset to the holder, to exchange financial instruments on
terms that are potentially unfavourable. Issued financial
instruments, or their components, are classified as equity where
they meet the definition of equity and confer on the holder a
residual interest in the assets of the Company. The components of
issued financial instruments that contain both liability and equity
elements are accounted for separately with the equity component
being assigned the residual amount after deducting from the
instrument as a whole the amount separately determined as the fair
value of the liability component.
Financial liabilities, other than trading liabilities at fair
value, are carried at amortised cost using the effective interest
rate method as set out in policy 3.4. Equity instruments, including
share capital, are initially recognised as net proceeds, after
deducting transaction costs and any related income tax. Dividend
and other payments to equity holders are deducted from equity, net
of any related tax.
3.23. Share capital
(a) Share issue costs
Incremental costs directly attributable to the issue of new
shares or options or the acquisition of a business by Arbuthnot
Banking Group or its subsidiaries, are shown in equity as a
deduction, net of tax, from the proceeds.
(b) Dividends on ordinary shares
Dividends on ordinary shares are recognised in equity in the
period in which they are approved.
(c) Share buybacks
Where any Group company purchases the Company's equity share
capital (treasury shares), the consideration paid, including any
directly attributable incremental costs (net of income taxes) is
deducted from equity attributable to the Company's equity holders
until the shares are cancelled or reissued.
3.24. Financial guarantees and loan commitments
Financial guarantees represent undertakings that the Group will
meet a customer's obligation to third parties if the customer fails
to do so. Commitments to extend credit represent unused portions of
authorisations to extend credit in the form of loans, guarantees or
letters of credit. The Group is theoretically exposed to loss in an
amount equal to the total guarantees or unused commitments.
However, the likely amount of loss is expected to be significantly
less; most commitments to extend credit are contingent upon
customers maintaining specific credit standards. Liabilities under
financial guarantee contracts are initially recorded at their fair
value, and the initial fair value is amortised over the life of the
financial guarantee. Subsequently, the financial guarantee
liabilities are measured at the higher of the initial fair value,
less cumulative amortisation, and the best estimate of the
expenditure to settle obligations.
3.25. Fiduciary activities
The Group commonly acts as trustee and in other fiduciary
capacities that result in the holding or placing of assets on
behalf of individuals, trusts, retirement benefit plans and other
institutions. These assets and income arising thereon are excluded
from these financial statements, as they are not assets of the
Group.
3.26. Provisions and contingent liabilities
Provisions are recognised when the Group has a present legal or
constructive obligation as a result of a past event, it is probable
that an outflow of economic resources will be required from the
Group and amounts can be reliably measured.
Onerous contract provisions are recognised for losses on
contracts where the forecast costs of fulfilling the contract
throughout the contract period exceed the forecast income
receivable. In assessing the amount of the loss to provide on any
contract, account is taken of the Group's forecast results which
the contract is servicing. The provision is calculated based on
discounted cash flows to the end of the contract.
Contingent liabilities are disclosed when the Group has a
present obligation as a result of a past event, but the probability
that it will be required to settle that obligation is more than
remote, but not probable.
3.27. New standards and interpretations not yet adopted
The following standards, interpretations and amendments to
existing standards have been published and are mandatory for the
Group's accounting periods beginning on or after 1 January 2018 or
later periods, but the Group has not early adopted them:
IFRS 9, 'Financial instruments' (effective from 1 January
2018).
In July 2014, the IASB issued the final version of IFRS 9
Financial Instruments (IFRS 9). IFRS 9 replaces IAS 39 Financial
instruments: "Recognition and measurement", and is effective for
annual periods beginning on or after 1 January 2018, with early
adoption permitted. The Group will initially apply IFRS 9 on 1
January 2018. In October 2017, the IASB issued "Prepayment Features
with Negative Compensation" (Amendment to IFRS 9). The amendments
are effective for annual periods beginning on or after 1 January
2019, with early adoption permitted. This Amendment does not have
an impact on Group's financial assets' classification and
measurement. The Group will take advantage of the exemption
allowing it not to restate comparative information for prior
periods with respect to classification and measurement (including
impairment) changes. The changes in measurement arising on initial
application of IFRS 9 will be incorporated through an adjustment to
the opening reserves and retained earnings position as at 1 January
2018.
The assessment below is preliminary and not all transition work
has been finalised yet. The actual impact of adopting IFRS 9 on 1
January 2018 may change because the Group is still refining its
models and methodology for Expected Credit Loss ("ECL")
calculations, and revisions of governance and internal controls
(including IT systems) required for adoption of IFRS 9 are not yet
complete and neither is the testing of these controls. Further, the
assumptions, judgements and estimation techniques employed are
subject to change until the Bank finalises its first financial
statements that include the date of initial application.
i) Classification and Measurement of Financial Assets and
Liabilities
There are three measurement classifications under IFRS 9:
amortised cost, fair value through profit and loss ("FVTPL") and
for financial assets, fair value through other comprehensive income
("FVOCI"). The existing IAS 39 financial asset categories have been
removed. Financial assets are classified into these measurement
classifications based on the business model within which they are
held, and their contractual cash flow characteristics. The business
model reflects how groups of financial assets are managed to
achieve a particular business objective.
Financial assets can only be held at amortised cost if the
instruments are held in order to collect the contractual cash flow
("held to collect") and where those contractual cash flows are
solely payments of principal and interest ("SPPI"). Financial asset
debt instruments where the business model objectives are achieved
by both collecting the contractual cash flows and selling the
assets ("held to collect and sell"), are held at FVOCI, with
unrealised gains and losses deferred within reserves until the
asset is derecognised. All financial assets not classified as
measured at amortised cost or FVOCI, as described above, are
measured at FVTPL.
The Group has assessed the business models that it operates and
most of the loans to banks and customers are held within a "held to
collect" business model. Investment debt securities categorised as
held--to--maturity under IAS 39 are held within a "held to collect"
portfolio. The majority of the remaining investment debt securities
are held within a "held to collect and sell" business model or
trading portfolio. Where the objective of a business is to hold the
assets to collect the contractual cash flows or where the objective
is to hold the assets to collect contractual cash flows and sell, a
further assessment has been undertaken to determine whether the
cash flows of the assets are deemed to meet the SPPI criteria.
Where these instruments have cash flows that meet the SPPI
criteria, the instruments are measured at amortised cost (for held
to collect business models) or FVOCI (for held to collect and sell
business models). Instruments that do not meet the SPPI criteria
are measured at FVTPL regardless of the business model in which
they are held.
IFRS 9 largely retains the existing requirements in IAS 39 for
the classification of financial liabilities, except for changes in
presentation of fair value changes of financial liabilities
designated at FVTPL attributable to changes in liability credit
risk (under IFRS 9 these changes are presented within other
comprehensive income). There has been no change in the way the
Group classifies and measures its financial liabilities.
ii) Impairment of Financial Assets, Loan Commitments and
Financial Guarantee Contracts
IFRS 9 introduces a new forward--looking ECL impairment
framework for all financial assets not measured at FVTPL and
certain off--balance sheet loan commitments and guarantees. It
replaces the "incurred loss model" from IAS 39. The new ECL
framework will result in an allowance for expected credit losses
being recorded on financial assets regardless of whether there has
been an actual loss event. This differs from the current approach
where the allowance recorded on performing loans is designed to
capture only losses that have been incurred, whether or not they
have been specifically identified. The new impairment model applies
to the following financial instruments that are not measured at
fair value through profit or loss:
-- Financial assets that are debt instruments; and;
-- Loan commitments and financial guarantee contracts
issued.
The IFRS 9 impairment model adopts a three stage approach based
on the extent of credit deterioration since origination:
-- Stage 1: 12--month ECL applies to all financial assets that
have not experienced a significant increase in credit risk ("SICR")
since origination and are not credit impaired. The ECL will be
computed based on the probability of default events occurring over
the next 12 months. This Stage 1 approach is different from the
current approach which estimates a collective allowance to
recognise losses that have been incurred but not reported on
performing loans.
-- Stage 2: When a financial asset experiences a SICR subsequent
to origination but is not credit impaired, it is considered to be
in Stage 2. This requires the computation of ECL based on the
probability of all possible default events occurring over the
remaining life of the financial asset. Provisions are higher in
this stage because of an increase in credit risk and the impact of
a longer time horizon being considered (compared to 12 months in
Stage 1).
-- Stage 3: Financial assets that exhibit objective evidence of
impairment are included in this stage. Similar to Stage 2, the
allowance for credit losses will continue to capture the lifetime
expected credit losses. At each reporting date, the Group will
assess whether financial assets carried at amortised cost are
credit impaired. A financial asset will be considered to be credit
impaired when an event(s) that has a detrimental impact on
estimated future cash flows have occurred. Evidence that a
financial asset is credit impaired includes the following
observable data:
-- Initiation of bankruptcy proceedings;
-- Notification of bereavement;
-- Identification of loan meeting debt sale criteria; or
-- Initiation of repossession proceedings.
In addition, a loan that is 90 days or more past due will be
considered credit impaired for all portfolios. The credit risk of
financial assets that become credit impaired are not expected to
improve such that they are no longer considered credit
impaired.
The ECL requirements of IFRS 9 are complex and require
management judgments, estimates and assumptions, particularly in
the areas of assessing whether the credit risk of an instrument has
increased significantly since initial recognition and incorporating
forward--looking information into the measurement of ECLs.
Under IFRS 9, the Group will consider a financial asset to be in
default when:
-- The borrower is unlikely to pay its credit obligations to the
Group in full, without recourse by the Group to actions such as
realising collateral (if any is held); or
-- The borrower is more than 90 days past due on any material
credit obligation to the Group.
This definition is largely consistent with the definition that
is used for the Group's credit risk management process and for
regulatory purposes.
Significant increase in credit risk
Under IFRS 9, when determining whether the credit risk (risk of
default) on a financial instrument has increased significantly
since initial recognition, the Group will consider reasonable and
supportable information that is relevant and available without
undue cost or effort, including both quantitative and qualitative
information and analysis based on the Group's historical
experience, expert credit assessment and forward--looking
information.
The Group has established a methodology and framework that
incorporates both quantitative and qualitative information to
determine whether the credit risk on a particular financial
instrument has increased significantly since initial recognition
and this is aligned to the internal credit risk management
process.
The criteria for determining whether credit risk has increased
significantly will vary according to the individual circumstances
of each loan, given the nature of the loan book, but will also
include a backstop based on delinquency of 30 days past due. In
certain instances, using its judgement and, where possible,
relevant historical experience, the Group may determine that an
exposure has undergone a significant increase in credit risk if
particular qualitative factors indicate so, as the quantitative
analysis may not always capture this on a timely basis.
Measuring ECL
The key inputs to the measurement of ECLs are the following
variables:
-- Probability of default ("PD");
-- Loss given default ("LGD"); and
-- Exposure at default ("EAD").
Off--balance sheet items, such as financial guarantees and loan
commitments, are included within the ECL computation.
Forward--looking information ("FLI")
IFRS 9 requires an unbiased and probability weighted estimate of
credit losses by evaluating a range of possible outcomes that
incorporates forecasts of future economic conditions. FLI is
required to be incorporated into the measurement of ECL as well as
the determination of whether there has been a significant increase
in credit risk since origination. Measurement of ECLs at each
reporting period should reflect reasonable and supportable
information at the reporting date about past events, current
conditions and forecasts of future economic conditions. Forecasts
for key macroeconomic variables that most closely correlate with
the Bank's portfolio are used to produce five economic scenarios,
comprising a central case, upside case, downside case, moderate
stress and severe stress, and the impacts of these scenarios are
then probability weighted. The estimation and application of this
forward--looking information will require significant judgement.
External information is used to produce the forecast
information.
iii) Hedge Accounting
IFRS 9 introduces a new hedge accounting model that expands the
scope of hedged items and risks eligible for hedge accounting and
aligns hedge accounting more closely with risk management. The new
model no longer specifies quantitative measures for effectiveness
testing and does not permit hedge de--designation.
iv) Transitional impact, including impact on capital
The Group will record an adjustment to its opening retained
earnings as at 1 January 2018 to reflect the application of the new
requirements at the adoption date and will not restate comparative
periods. The Group estimates the IFRS 9 transition amount will
reduce shareholders' equity by between GBP2.4m and GBP3.2m before
tax as at 1 January 2018.
Under IFRS 9, it is estimated that the Group's CET1 ratio would
reduce by approximately 2 basis points after transitional relief
(between 26 and 35 basis points before transitional relief). This
is mainly driven by the increase in IFRS 9 ECL for standardised
portfolios that directly impacts CET1 as there is no regulatory
deduction to absorb the increase.
CET 1 ratio:
-- 17.29% under IAS 39 at 31 December 2017;
-- Between 16.93% and 17.03% under IFRS 9 at 1 January 2018
before transitional relief;
-- 17.27% under IFRS 9 at 1 January 2018 after transitional
relief.
Transitional relief relates to the phasing of the impact of the
initial adoption of ECL as permitted by Regulation (EU) 2017/2395
of the European Parliament and Council. The Group is planning to
adopt the transitional relief. Under this approach, the balance of
ECL allowances in excess of the regulatory excess EL and
standardised portfolios are phased into the CET1 capital base over
5 years. The proportion phased in for the balance at each reporting
period is 2018: 5%; 2019 15%; 2020 30%; 2021 50%; 2022 75%. From
2023 onwards, there is no transitional relief.
v) Impact on Governance and Controls
The Group plans to apply its existing governance framework to
ensure that appropriate controls and validations are in place over
key processes and judgments to determine the ECL. As part of the
implementation, the Group is in the process of refining existing
internal controls and implementing new controls where required in
areas that are impacted by IFRS 9, including controls over the
development and probability weighting of macroeconomic scenarios,
credit risk data and systems, and the determination of a
significant increase in credit risk.
IFRS 15, 'Revenue from contracts with customers' (effective 1
January 2017).
This standard replaces IAS 11 Construction Contracts, IAS 18
Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements
for the Construction of Real Estate, IFRIC 18 Transfer of Assets
from Customers and SIC--31 Revenue - Barter of Transactions
Involving Advertising Services. IFRS 15 is effective for annual
periods beginning on or after 1 January 2018, with early adoption
permitted.
The standard contains a single model that applies to contracts
with customers and two approaches to recognising revenue: at a
point in time or over time. The model features a contract--based
five step analysis of transactions to determine whether, how much
and when revenue is recognised. IFRS 15 is not expected to have a
significant impact on the Group, but further analysis is
continuing.
IFRS 16, 'Leases' (effective from 1 January 2019).
This standard sets out the principles for the recognition,
measurement, presentation and disclosure of leases for both parties
to a contract, i.e the customer ('lessee') and the supplier
('lessor'). IFRS 16 eliminates the classification of leases as
required by IAS 17 and introduces a single lease accounting model.
Applying that model, a lessee is required to recognise:
-- Assets and liabilities for leases with a term of more than 12
months, unless the underlying asset is of low value;
-- Depreciation of lease assets separately from interest on
lease liabilities in profit or loss.
The standard is effective for annual periods beginning on or
after 1 January 2019. The Group is currently in the process of
assessing the impact that the initial application would have on its
business and will adopt the standard for the year ending 31
December 2019.
4. Critical accounting estimates and judgements in applying
accounting policies
The Group makes estimates and assumptions that affect the
reported amounts of assets and liabilities within the next
financial year. Estimates and judgements are continually evaluated
and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable
under the circumstances.
4.1 Estimation uncertainty
(a) Credit losses
The Group reviews its loan portfolios and held-to-maturity
investments to assess impairment at least on a quarterly basis. The
basis for evaluating impairment losses is described in accounting
policy 3.10. Where financial assets are individually evaluated for
impairment, management uses its best estimates in calculating the
net present value of future cash flows. Management has to make
judgements on the financial position of the counterparty and the
net realisable value of collateral (where held), in determining the
expected future cash flows.
The recoverable amount is typically dependent on the sale of the
collateral. The amount recoverable is determined with reference
to:
-- The property valuation, which is typically updated every 12
months.
-- The time taken to realise the sale proceeds (UK property is
assumed to take 12 months and Non-UK property 24 months).
-- The property marketing costs (UK property is assumed to be at
3% of property value and Non-UK at 7%).
-- The legal costs of sale (UK legal sales costs are assumed to
be GBP5k, whilst Non-UK are assumed to be EUR10k).
Any change in timing of estimated future cash flows (other than
impairment) will adjust carrying value with gain or loss in profit
or loss. The revised carrying amount will be recalculated by
discounting the revised estimated future cash flows at the loan's
original effective interest rate.
A sensitivity analyses was done on the two main assumptions used
to calculate the recoverable amount and therefore the impairments
required:
-- If the value of the collateral increased or decreased by 10%,
impairments would decrease or increase by GBP1.6m (2016:
GBP1.7m);
-- If the time taken to sell the properties were increased or
decreased by 12 months, impairments would increase or decrease by
GBP0.8m (2016: GBP0.8m).
In determining whether an impairment loss should be recorded in
the Statement of Comprehensive Income, the Group makes judgements
as to whether there is any observable data indicating that there is
a measurable decrease in the estimated future cash flows from a
portfolio of loans or held-to-maturity investments with similar
credit characteristics, before the decrease can be identified with
an individual loan in that portfolio. This evidence may include
observable data indicating that there has been an adverse change in
the payment status of borrowers in a group, or national or local
economic conditions that correlate with defaults on assets in the
Group. Management uses estimates based on historical loss
experience for assets with credit risk characteristics and
objective evidence of impairment similar to those in the portfolio
when scheduling its future cash flows. The methodology and
assumptions used for estimating both the amount and timing of
future cash flows are reviewed regularly to reduce any differences
between loss estimates and actual loss experience.
In assessing collective impairment the Group uses historical
trends of the probability of default, the timing of recoveries and
the amount of loss incurred, adjusted for management's judgement as
to whether current economic and credit conditions are such that the
actual losses are likely to be significantly different to historic
trends. Default rates, loss rates and the expected timing of future
recoveries are regularly benchmarked against actual outcomes to
ensure that they remain appropriate.
(b) Effective Interest Rate
Acquired loan books are initially recognised at fair value.
Subsequently they are measured under the effective interest rate
method, based on cash flow models which require significant
judgement assumptions on prepayment rates, late payments, the
probability and timing of defaults and the amount of incurred
losses. Management review the expected cash flows against actual
cash flows to ensure future assumptions on customer behaviour and
future cash flows remain valid. If the estimates of future cash
flows are revised, the adjustment to the carrying value of the loan
book is recognised in the Statement of Comprehensive Income.
If the acquired loan books were modelled to repay 6 months
earlier, it would increase interest income in 2017 by GBP0.3m
(2016: GBP0.1m), while a 10% increase in credit losses would reduce
interest income in 2017 by GBP0.2m (2016: GBP0.3m), both as a
result of AG8 adjustments.
IAS 39 requires interest earned from lending to be measured
under the effective interest rate method. The effective interest
rate is the rate that exactly discounts estimated future cash
receipts or payments through the expected life of the financial
instrument or, when appropriate, a shorter period to the net
carrying amount of the financial asset.
Management must therefore use judgement to estimate the expected
life of each instrument. The accuracy of the effective interest
rate would therefore be affected by unexpected market movements
resulting in altered customer behaviour, inaccuracies in the models
used compared to actual outcomes and incorrect assumptions.
If customer loans repaid 6 months earlier than anticipated,
interest income would increase by GBP0.3m (2016: GBP0.3m).
(c) Investment property
The valuations that the Group places on its investment
properties are subject to a degree of uncertainty and are
calculated on the basis of assumptions in relation to prevailing
market rents and effective yields. These assumptions may not prove
to be accurate, particularly in periods of market volatility. The
Group currently owns two investment properties, as outlined in Note
31.
The King Street property is currently fully tenanted, with the
main lease ending in 2019 at which point the offices will be
refurbished and re-let at prevailing market rents. The valuation
model considers the net present value of net cash flows to be
generated from the property, taking into account expected rental
growth rate, void periods, occupancy rate, lease incentive costs
such as rent-free periods and other costs not paid by tenants. The
expected net cash flows are discounted using risk-adjusted discount
rates. Among other factors, the discount rate estimation considers
the quality of a building and its location, tenant quality and
lease terms. Management judgement is required for significant
unobservable inputs used in the discounted cash flow model, which
have been assessed as follows:
-- refurbishment period: 6 months
-- void period after refurbishment: 6 months
-- rent free period: 18 months
-- estimated refurbishment costs: GBP2.4m
-- yield rate: 4%
-- expected rental income uplift following re-let: 15%
If the discount rate went up by 25bps, there would be a
reduction in fair value of GBP4.8m, while a decrease in the
discount rate would have a positive fair value impact through the
Profit or Loss of GBP4.0m. If the expected rental uplift following
the re-let of the building is reduced to 10%, there would be a
reduction in fair value through the Profit or Loss of GBP2.4m,
while an increase in the rental uplift to 20%, would have a
positive fair value impact through the Profit or Loss of
GBP2.2m.
The St Philips Place property was acquired on 24 November 2017.
As the property was bought shortly before the year end, the cost of
acquisition is considered to remain a good estimate of fair
value.
(d) Acquisition accounting
The Group recognises identifiable assets and liabilities at
their acquisition date fair values. The exercise of attributing a
fair value to the balance sheet of the acquired entity requires the
use of a number of assumptions and estimates, which are documented
at the time of the acquisition. These fair value adjustments are
determined from the estimated future cash flows generated by the
assets.
Loans and advances to customers
The methodology of attributing a fair value to the loans and
advances to customers involves discounting the estimated future
cash flows, using a risk adjusted market rate discount factor. A
fair value adjustment is then applied to the carrying value in the
acquirers balance sheet.
Intangible assets
Identifying the separately identifiable intangible assets of an
acquired company is subjective and based upon discussions with
management and a review of relevant documentation. During the year,
there were three separately identifiable intangible assets which
met the criteria for separation from goodwill, these being Customer
Relationships, Broker Relationships and Brand.
Customer Relationships are valued through the application of a
discounted cash flow methodology to net anticipated renewal
revenues. The valuation of Broker Relationships is derived from a
costs avoided methodology, by reviewing costs incurred on
non-broker platforms versus costs which are incurred in broker
commission. The Brand is valued considering a market participant's
view on the likely period over which it might be utilised, and its
fair value was estimated using the relief from royalty
methodology.
In calculating the fair value of the assets and liabilities
acquired, management judgement is required as discussed above, in
particular for the discount rate applied to the economic life of
the intangibles assets of GBP2.3m. A 1% movement in the discount
rate applied, would result in a GBP0.06m increase or decrease in
the intangible recognised with an equal and opposite increase or
decrease in goodwill on acquisition.
(e) Impairment review of interest in associate
The Group has an 18.6% interest in STB. This is currently
recorded in the Group's balance sheet as an interest in associates
and at 31 December 2017 was carried at GBP83.8m or the equivalent
of GBP24.33 per share. At the year end the market price of STB was
GBP17.97 per share. The Board have determined that the current
carrying value remains appropriate after having carried out
extensive analysis to be satisfied that the long term value in use
does not suggest that this carrying value is impaired. These
valuations included the Gordon's Growth model and Dividend Discount
model. The resultant output from the models indicated valuations in
a range that was in excess of GBP24 per share, but this will be
ultimately dependent on the surplus capital within STB being
deployed in the business over the long term.
Various judgements were made in the application of the models
used. The following sensitivity analyses were also done on the
assumptions used in the two main models used:
Gordon's Growth Model
-- 1% change in return on equity would change the calculated valuation by GBP2.77 per share
-- 1% change in cost of equity/discount factor would change the
calculated valuation by GBP6.92 per share
-- 0.5% change in GDP would change the calculated valuation by GBP1.54 per share
Dividend Discount Model
-- 1% change in cost of equity/discount factor would change the
calculated valuation by GBP3.38 per share
-- 10% change in earnings/dividend growth would change the
calculated valuation by GBP2.11 per share
Based on the current output of the valuation models, reviewing
sensitivity analyses on assumptions applied in the models and
taking into account the current market consensus on the shares, the
Board is satisfied that the current carrying value remains
appropriate.
There is a risk that the output of the value in use models could
require an impairment charge to be recognised in the future.
If the Group was considered to no longer have significant
influence over STB it would lead to the investment being accounted
for as a financial asset at fair value. The value would then be
marked to market with changes in the share price giving rise to
gains or losses being recorded in Other Comprehensive Income or
Profit or Loss - see Note 3.8(d) and Note 3.10(b).
4.2 Judgements
(a) Valuation of financial instruments
The Group measures the fair value of an instrument using quoted
prices in an active market for that instrument. A market is
regarded as active if quoted prices are readily and regularly
available and represent actual and regularly occurring market
transactions. If a market for a financial instrument is not active,
the Group establishes fair value using a valuation technique. These
include the use of recent arm's length transactions, reference to
other instruments that are substantially the same for which market
observable prices exist, net present value and discounted cash flow
analysis. The objective of valuation techniques is to determine the
fair value of the financial instrument at the reporting date as the
price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. In
the event that fair values of assets and liabilities cannot be
reliably measured, they are carried at cost.
The Group measures fair value using the following fair value
hierarchy that reflects the significance of the inputs used in
making measurements:
-- Level 1: Quoted prices in active markets for identical assets
or liabilities.
-- Level 2: Inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices).
This category includes instruments valued using: quoted market
prices in active markets for similar instruments; quoted prices for
identical or similar instruments in markets that are considered
less than active; or other valuation techniques in which all
significant inputs are directly or indirectly observable from
market data.
-- Level 3: Inputs that are unobservable. This category includes
all instruments for which the valuation technique includes inputs
not based on observable data and the unobservable inputs have a
significant effect on the instrument's valuation. This category
includes instruments that are valued based on quoted prices for
similar instruments for which significant unobservable adjustments
or assumptions are required to reflect differences between the
instruments.
The consideration of factors such as the magnitude and frequency
of trading activity, the availability of prices and the size of
bid/offer spreads assists in the judgement as to whether a market
is active. If in the opinion of management, a significant
proportion of the instrument's carrying amount is driven by
unobservable inputs, the instrument in its entirety is classified
as valued using significant unobservable inputs. 'Unobservable' in
this context means that there is little or no current market data
available from which to determine the level at which an arm's
length transaction would be likely to occur. It generally does not
mean that there is no market data available at all upon which to
base a determination of fair value (consensus pricing data may, for
example, be used).
The tables below analyse financial instruments measured at fair
value by the level in the fair value hierarchy into which the
measurement is categorised:
Level Level Level
1 2 3 Total
At 31 December 2017 GBP000 GBP000 GBP000 GBP000
---------------------------------- ------- ------- ------- -------
ASSETS
Derivative financial instruments - 2,551 - 2,551
Financial investments 144 - 2,203 2,347
---------------------------------- ------- ------- ------- -------
144 2,551 2,203 4,898
---------------------------------- ------- ------- ------- -------
LIABILITIES
Derivative financial instruments - 931 - 931
---------------------------------- ------- ------- ------- -------
- 931 - 931
---------------------------------- ------- ------- ------- -------
Level Level Level
1 2 3 Total
At 31 December 2016 GBP000 GBP000 GBP000 GBP000
---------------------------------- ------- ------- ------- -------
ASSETS
Derivative financial instruments - 1,516 - 1,516
Financial investments 133 - 2,012 2,145
---------------------------------- ------- ------- ------- -------
133 1,516 2,012 3,661
---------------------------------- ------- ------- ------- -------
LIABILITIES
Derivative financial instruments - 227 - 227
---------------------------------- ------- ------- ------- -------
- 227 - 227
---------------------------------- ------- ------- ------- -------
There were no transfers between level 1 and level 2 during
the year.
The following table reconciles the movement in level 3 financial instruments
measured at fair value (financial investments) during the year:
2017 2016
Movement in level 3 GBP000 GBP000
--------------------------------------------------------------- ------- --------
At 1 January 2,012 2,548
Consideration received - 494
Disposals - (1,310)
Movements recognised in Other Comprehensive
Income 136 75
Movements recognised in the Income Statement 55 205
----------------------------------------------------------------- ------- --------
At 31 December 2,203 2,012
----------------------------------------------------------------- ------- --------
Visa Inc. investment
Arbuthnot Latham currently holds preference shares in Visa Inc.,
valued at GBP706k as at 31 December 2017. The valuation includes a
31 % haircut, comprising 25% due to a contingent liability
disclosed in Visa Europe's accounts in relation to litigation and
6% based on a liquidity discount.
A 5% increase in valuation would lead to a 35k increase in the
gain through Other Comprehensive Income. A 5% decrease would lead
to a GBP35k decrease in the gain through Other Comprehensive
Income.
Investment in overseas property company
For those financial investments measured at fair value, the
Group uses proprietary valuation models which are developed from
recognised valuation techniques. Some or all of the significant
inputs into these models may not be observable in the market.
Valuation models that employ significant unobservable inputs
require a higher degree of management judgement and estimation in
the determination of fair value.
The Group has established a valuation methodology for measuring
level 3 financial investments which are categorised as available
for sale. Unobservable inputs used include: yield of 4.60% (2016:
4.90%) and occupancy rates of 90.0% (2016: 95.3%). These inputs are
taken from online real estate reports available from BNP Paribas.
The inputs are stressed to ensure that the fair value is robust.
Increases in the yield or decreases in annual rental value or
occupancy rate would result in lower fair values (an increase in
yield by 0.5% would lead to a decrease in fair value of GBP126k).
Another indicator of appropriate fair value would be if a
reasonable offer were to be made on the value of the property.
Management analyse and investigate any significant movements in the
unobservable inputs which impact the valuation of level 3
instruments.
The tables below analyse financial instruments not measured at
fair value by the level in the fair value hierarchy:
Level Level Level
1 2 3 Total
At 31 December 2017 GBP000 GBP000 GBP000 GBP000
------------------------------------ -------- ---------- ---------- ----------
ASSETS
Cash and balances at central banks - 313,101 - 313,101
Loans and advances to banks - 70,679 - 70,679
Debt securities held-to-maturity - 227,019 - 227,019
Loans and advances to customers - - 1,049,269 1,049,269
Other assets - - 11,964 11,964
------------------------------------ -------- ---------- ---------- ----------
- 610,799 1,061,233 1,672,032
--------------------------------------------- ---------- ---------- ----------
LIABILITIES
Deposits from banks - 195,097 - 195,097
Deposits from customers - 1,390,781 - 1,390,781
Other liabilities - - 1,207 1,207
Debt securities in issue - - 13,104 13,104
------------------------------------ -------- ---------- ---------- ----------
- 1,585,878 14,311 1,600,189
--------------------------------------------- ---------- ---------- ----------
Level Level Level
1 2 3 Total
At 31 December 2016 GBP000 GBP000 GBP000 GBP000
------------------------------------ -------- ---------- -------- ----------
ASSETS
Cash and balances at central banks - 195,752 - 195,752
Loans and advances to banks - 36,951 - 36,951
Debt securities held-to-maturity - 107,300 - 107,300
Loans and advances to customers - 42,691 716,108 758,799
Other assets - - 1,197 1,197
------------------------------------ -------- ---------- -------- ----------
- 382,694 717,305 1,099,999
--------------------------------------------- ---------- -------- ----------
LIABILITIES
Deposits from banks - 3,200 - 3,200
Deposits from customers - 997,649 - 997,649
Other liabilities - - 1,812 1,812
Debt securities in issue - - 12,621 12,621
------------------------------------ -------- ---------- -------- ----------
- 1,000,849 14,433 1,015,282
--------------------------------------------- ---------- -------- ----------
(b) Associate accounting
An associate is an entity over which the investor has
significant influence and that is neither a subsidiary nor an
interest in a joint venture. It is presumed that the investor does
not have significant influence if it has less than 20% of the
voting power of the investee, unless proven otherwise. ABG holds
18.64% of the voting power of STB, but has retained Board
representation (two directors out of eight) and as a result the
Board believes ABG has significant influence. The interest in STB
is therefore accounted for as an associate.
If significant influence is lost, the shareholding will be
accounted for as an available-for-sale financial investment.
5. Maturity analysis of assets and liabilities
The table below shows the maturity analysis of assets and liabilities
of the Group as at 31 December 2017:
Due
after
Due more
within than
one one
year year Total
At 31 December 2017 GBP000 GBP000 GBP000
------------------------------------------------ ---------- ---------- ----------
ASSETS
Cash 313,101 - 313,101
Loans and advances to banks 70,679 - 70,679
Debt securities held-to-maturity 122,236 104,783 227,019
Assets classified as held for sale 2,915 - 2,915
Derivative financial instruments 950 1,601 2,551
Loans and advances to customers 224,954 824,315 1,049,269
Other assets 16,188 4,436 20,624
Financial investments 128 2,219 2,347
Deferred tax asset - 1,527 1,527
Interests in associates - 83,804 83,804
Intangible assets - 15,995 15,995
Property, plant and equipment - 3,962 3,962
Investment property - 59,439 59,439
------------------------------------------------ ---------- ---------- ----------
751,151 1,102,081 1,853,232
------------------------------------------------ ---------- ---------- ----------
LIABILITIES
Deposits from banks 195,097 - 195,097
Derivative financial instruments 931 - 931
Deposits from customers 1,333,423 57,358 1,390,781
Current tax liability 705 - 705
Other liabilities 16,239 - 16,239
Debt securities in issue - 13,104 13,104
------------------------------------------------ ---------- ---------- ----------
1,546,395 70,462 1,616,857
------------------------------------------------ ---------- ---------- ----------
The table below shows the maturity analysis of assets and liabilities
of the Group as at 31 December 2016:
Due
after
Due more
within than
one one
year year Total
At 31 December 2016 GBP000 GBP000 GBP000
----------------------------------------- ---------- --------- -----------
ASSETS
Cash 195,752 - 195,752
Loans and advances to banks 36,951 - 36,951
Debt securities held-to-maturity 85,782 21,518 107,300
Derivative financial instruments 85 1,431 1,516
Loans and advances to customers 337,376 421,423 758,799
Other assets 7,708 4,231 11,939
Financial investments - 2,145 2,145
Deferred tax asset - 1,665 1,665
Investment in associate 900 81,674 82,574
Intangible assets - 8,522 8,522
Property, plant and equipment - 4,782 4,782
Investment property - 53,339 53,339
----------------------------------------- ---------- --------- -----------
664,554 600,730 1,265,284
----------------------------------------- ---------- --------- -----------
LIABILITIES
Deposits from banks 3,200 - 3,200
Derivative financial instruments 227 - 227
Deposits from customers 906,083 91,566 997,649
Current tax liability 147 - 147
Other liabilities 17,082 - 17,082
Debt securities in issue - 12,621 12,621
----------------------------------------- ---------- --------- -----------
926,739 104,187 1,030,926
----------------------------------------- ---------- --------- -----------
The table below shows the maturity analysis of assets and liabilities
of the Company as at 31 December 2017:
Due
after
Due more
within than
one one
year year Total
At 31 December 2017 GBP000 GBP000 GBP000
--------------------------------------------------- -------- -------- --------
ASSETS
Loans and advances to banks 6 - 6
Loans and advances to banks - due from subsidiary
undertakings 36,097 - 36,097
Financial investments 128 12 140
Deferred tax asset - 641 641
Property, plant and equipment - 157 157
Other assets 199 - 199
Interests in associates - 5,056 5,056
Interests in subsidiaries 97,802 97,802
--------------------------------------------------- -------- -------- --------
36,430 103,668 140,098
--------------------------------------------------- -------- -------- --------
LIABILITIES
Current tax liability 152 - 152
Other liabilities 3,141 - 3,141
Debt securities in issue - 13,104 13,104
--------------------------------------------------- -------- -------- --------
3,293 13,104 16,397
--------------------------------------------------- -------- -------- --------
The table below shows the maturity analysis of assets and liabilities
of the Company as at 31 December 2016:
Due
after
Due more
within than
one one
year year Total
At 31 December 2016 GBP000 GBP000 GBP000
--------------------------------------------------- -------- -------- --------
ASSETS
Loans and advances to banks 6 - 6
Loans and advances to banks - due from subsidiary
undertakings 89,066 - 89,066
Financial investments - 121 121
Deferred tax asset - 397 397
Property, plant and equipment - 183 183
Other assets 254 633 887
Interests in associates - 5,056 5,056
Interests in subsidiaries - 54,602 54,602
--------------------------------------------------- -------- -------- --------
89,326 60,992 150,318
--------------------------------------------------- -------- -------- --------
LIABILITIES
Other liabilities 4,808 - 4,808
Debt securities in issue - 12,621 12,621
--------------------------------------------------- -------- -------- --------
4,808 12,621 17,429
--------------------------------------------------- -------- -------- --------
6. Financial risk management
Strategy
By their nature, the Group's activities are principally related
to the use of financial instruments. The Directors and senior
management of the Group have formally adopted a Group Risk and
Controls Policy which sets out the Board's attitude to risk and
internal controls. Key risks identified by the Directors are
formally reviewed and assessed at least once a year by the Board,
in addition to which key business risks are identified, evaluated
and managed by operating management on an ongoing basis by means of
procedures such as physical controls, credit and other
authorisation limits and segregation of duties. The Board also
receives regular reports on any risk matters that need to be
brought to its attention. Significant risks identified in
connection with the development of new activities are subject to
consideration by the Board. There are budgeting procedures in place
and reports are presented regularly to the Board detailing the
results of each principal business unit, variances against budget
and prior year, and other performance data.
The principal non-operational risks inherent in the Group's
business are credit, market and liquidity risks.
(a) Credit risk
The Company and Group take on exposure to credit risk, which is
the risk that a counterparty will be unable to pay amounts in full
when due. Impairment provisions are provided for losses that have
been incurred at the balance sheet date. Significant changes in the
economy, or in the health of a particular industry segment that
represents a concentration in the Company and Group's portfolio,
could result in losses that are different from those provided for
at the balance sheet date. Credit risk is managed through the
Credit Committee of the banking subsidiary.
The Company and Group structure the levels of credit risk it
undertakes by placing limits on the amount of risk accepted in
relation to products, and one borrower or groups of borrowers. Such
risks are monitored on a revolving basis and subject to an annual
or more frequent review. The limits are approved periodically by
the Board of Directors and actual exposures against limits are
monitored daily.
Exposure to credit risk is managed through regular analysis of
the ability of borrowers and potential borrowers to meet interest
and capital repayment obligations and by changing these lending
limits where appropriate. Exposure to credit risk is also managed
in part by obtaining collateral, and corporate and personal
guarantees.
The Group employs a range of policies and practices to mitigate
credit risk. The most traditional of these is the taking of
collateral to secure advances, which is common practice. The
principal collateral types for loans and advances include, but are
not limited to:
-- Charges over residential and commercial properties;
-- Charges over business assets such as premises, inventory and
accounts receivable;
-- Charges over financial instruments such as debt securities
and equities;
-- Charges over other chattels; and
-- Personal guarantees
Upon initial recognition of loans and advances, the fair value
of collateral is based on valuation techniques commonly used for
the corresponding assets. In order to minimise any potential credit
loss the Group will seek additional collateral from the
counterparty as soon as impairment indicators are noticed for the
relevant individual loans and advances. Repossessed collateral, not
readily convertible into cash, is made available for sale in an
orderly fashion, with the proceeds used to reduce or repay the
outstanding indebtedness, or held as inventory where the Group
intends to develop and sell in the future. Where excess funds are
available after the debt has been repaid, they are available either
for other secured lenders with lower priority or are returned to
the customer.
Commitments to extend credit represent unused portions of
authorisations to extend credit in the form of loans, guarantees or
letters of credit. With respect to credit risk on commitments to
extend credit, the Group is potentially exposed to loss in an
amount equal to the total unused commitments. However, the likely
amount of loss is less than the total unused commitments, as most
commitments to extend credit are contingent upon customers
maintaining specific credit standards.
The Group's maximum exposure to credit risk before collateral
held or other credit enhancements is as follows:
2017 2016
GBP000 GBP000
------------------------------------------------------------ ---------- ----------
Credit risk exposures relating to on-balance sheet assets
are as follows:
Cash and balances at central banks 313,101 195,752
Loans and advances to banks 70,679 36,951
Debt securities held-to-maturity 227,019 107,300
Derivative financial instruments 2,551 1,516
Loans and advances to customers 1,049,269 758,799
Other assets 11,964 1,197
Financial investments 2,347 2,145
Credit risk exposures relating to off-balance sheet assets
are as follows:
Guarantees 2,976 274
Loan commitments and other credit related liabilities 131,963 54,934
------------------------------------------------------------ ---------- ----------
At 31 December 1,811,869 1,158,868
------------------------------------------------------------ ---------- ----------
The Company's maximum exposure to credit risk before collateral
held or other credit enhancements is as follows:
2017 2016
GBP000 GBP000
----------------------------------------------------------- ------- -------
Credit risk exposures relating to on-balance sheet assets
are as follows:
Loans and advances to banks 36,103 89,072
Financial investments 140 121
Other assets 162 791
----------------------------------------------------------- ------- -------
At 31 December 36,405 89,984
----------------------------------------------------------- ------- -------
The above tables represent the maximum credit risk exposure (net
of impairment) to the Group and Company at 31 December 2017 and
2016 without taking account of any collateral held or other credit
enhancements attached. For on-balance-sheet assets, the exposures
are based on the net carrying amounts as reported in the Statement
of Financial Position.
The table below represents an analysis of the loan to values of the exposures
secured by property for the Group:
31 December 31 December
2017 2016
Loan Loan
Balance Collateral Balance Collateral
Loan to value GBP000 GBP000 GBP000 GBP000
-------------------------- ------------ --------------- ----------- --------------
Less than 60% 455,398 1,108,363 438,076 1,219,532
60% - 80% 343,864 524,256 167,765 253,550
80% - 100% 69,826 80,998 76,289 88,598
Greater than 100%* 45,242 34,354 32,022 21,387
-------------------------- ------------ --------------- ----------- --------------
Total 914,330 1,747,971 714,152 1,583,067
-------------------------- ------------ --------------- ----------- --------------
*In addition to property, other security is taken, including
charges over Arbuthnot Latham Investment Management portfolios,
other chattels and personal guarantees.
Property valuations used are those from the loan origination
date or updated 3rd party valuations where applicable.
The table below represents an analysis of loan commitments compared to
the values of properties for the Group:
31 December 31 December
2017 2016
Committed Collateral Committed Collateral
Loan commitments and other credit related
liabilities GBP000 GBP000 GBP000 GBP000
------------------------------------------ ---------- ----------- ---------- -----------
Less than 60% 62,775 274,643 26,988 73,659
60% - 80% 26,340 38,796 23,940 42,102
80% - 100% 29,579 32,737 - -
Greater than 100% 5,090 4,104 - -
------------------------------------------ ---------- ----------- ---------- -----------
Total 123,784 350,280 50,928 115,761
------------------------------------------ ---------- ----------- ---------- -----------
Renegotiated loans and forbearance
The contractual terms of a loan may be modified due to factors
that are not related to the current or potential credit
deterioration of the customer (changing market conditions, customer
retention, etc.). In such cases, the modified loan may be
derecognised and the renegotiated loan recognised as a new loan at
fair value.
As at 31 December 2017, loans for which forbearance measures
were in place totalled 0.13% (2016: 0.50%) of total loans to
customers for the Group. These are set out in the following
table:
2017 2016
Loan Loan
Number Balance Number Balance
GBP000 GBP000
---------------------------------------- ------- --------- ------- ---------
Transfer to interest only - - 3 115
Interest temporarily not being charged - - 1 3,607
Long term extension 1 84 - -
Payment holiday 5 1,237 1 78
---------------------------------------- ------- --------- ------- ---------
Total forbearance 6 1,321 5 3,800
---------------------------------------- ------- --------- ------- ---------
Concentration risk
The Group is well diversified in the UK, being exposed to retail
banking, private banking and commercial banking. Management
assesses the potential concentration risk from a number of areas
including:
-- Product concentration;
-- Geographical concentration; and
-- High value residential properties.
Due to the well diversified nature of the Group and the
significant collateral held against the loan book, the Directors do
not consider there to be a potential material exposure arising from
concentration risk.
The tables below show the concentration in the loan book based
on the most significant type of collateral held for each loan.
Where multiple types of collateral are held with no significant
majority, the loan is shown within "mixed collateral".
Loans and advances
to customers Loan Commitments
2017 2016 2017 2016
GBP000 GBP000 GBP000 GBP000
------------------------------ ----------- -------- ---------- -------
Concentration by product
Cash collateralised 17,747 5,245 - -
Commercial Lending 202,912 71,674 24,371 18,260
Asset finance 71,425 - - -
Residential mortgages 633,003 626,751 99,413 32,668
Investment portfolio secured 49,667 34,014 4,222 4,006
Non-Performing - 15,953 - -
Other Collateral 70,954 2,103 3,957 -
Unsecured 3,561 3,059 - -
At 31 December 1,049,269 758,799 131,963 54,934
------------------------------ ----------- -------- ---------- -------
Concentration by location
East Anglia 18,438 2,714 - -
East Midlands - 7,245 - -
London 407,805 422,901 56,777 27,161
Midlands 42,484 3,800 800 -
North East 25,741 2,100 - -
North West 44,630 14,288 825 4,590
Northern Ireland 2,903 - - -
Scotland 10,988 13,410 - -
South East 203,305 117,805 23,462 12,560
South West 116,692 89,018 15,236 3,468
Wales 8,002 7,460 - -
West Midlands - 14,436 - 108
Yorkshire & Humber - 6,398 - -
Overseas 21,556 20,136 - -
Other 146,725 37,088 34,863 7,047
------------------------------ ----------- -------- ---------- -------
At 31 December 1,049,269 758,799 131,963 54,934
------------------------------ ----------- -------- ---------- -------
Commercial lending and Mixed collateral reflect the growth in
the Commercial bank. All non-property loans are disclosed in
"Other" in the concentration by location table above.
(b) Operational risk (unaudited)
The Group's objective is to manage operational risk so as to
balance the avoidance of financial losses and damage to the Group's
reputation with overall cost effectiveness and to avoid control
procedures that restrict initiatives and creativity. Operational
risk arises from all of the Group's operations.
The primary responsibility for the development and
implementation of controls to address operational risk is assigned
to the senior management within each subsidiary.
Compliance with Group standards is supported by a programme of
periodic reviews undertaken by Internal Audit. The results of the
Internal Audit reviews are discussed with senior management, with
summaries submitted to the Arbuthnot Banking Group Audit
Committee.
(c) Market risk
Price risk
The Company and Group are exposed to price risk from equity
investments and derivatives held by the Group and classified in the
Consolidated Statement of Financial Position either as
available-for-sale or at fair value through the profit and loss.
The Group is not exposed to commodity price risk.
Based upon the financial investment exposure in Note 25, a
stress test scenario of a 10% (2016: 10%) decline in market prices,
with all other things being equal, would result in a GBP32,000
(2016: GBP11,000) decrease in the Group's income and a decrease of
GBP231,000 (2016: GBP172,000) in the Group's equity. The Group
considers a 10% stress test scenario appropriate after taking the
current values and historic data into account.
Based upon the financial investment exposure given in Note 25, a
stress test scenario of a 10% (2016: 10%) decline in market prices,
with all other things being equal, would result in a GBP13,000
(2016: GBP11,000) decrease in the Company's income and a decrease
of GBP11,000 (2016: GBP10,000) in the Company's equity.
Currency risk
The Company and Group take on exposure to the effects of
fluctuations in the prevailing foreign currency exchange rates on
its financial position and cash flows. This is managed through the
Group entering into forward foreign exchange contracts. The Board
sets limits on the level of exposure for both overnight and
intra-day positions, which are monitored daily. The table below
summarises the Group's exposure to foreign currency exchange rate
risk at 31 December 2017. Included in the table below are the
Group's assets and liabilities at carrying amounts, categorised by
currency.
GBP USD Euro
(GBP) ($) (EUR) Other Total
At 31 December 2017 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------ ---------- -------- ------- ------- ----------
ASSETS
Cash and balances at central banks 313,101 - - - 313,101
Loans and advances to banks 6,027 40,870 16,944 6,838 70,679
Debt securities held-to-maturity 170,723 56,296 - - 227,019
Derivative financial instruments 2,525 1 25 - 2,551
Loans and advances to customers 997,025 14,912 37,332 - 1,049,269
Other assets 11,964 - - - 11,964
Financial investments 140 706 1,501 - 2,347
------------------------------------ ---------- -------- ------- ------- ----------
1,501,505 112,785 55,802 6,838 1,676,930
------------------------------------ ---------- -------- ------- ------- ----------
LIABILITIES
Deposits from banks 195,067 - - 30 195,097
Derivative financial instruments 914 1 - 16 931
Deposits from customers 1,228,878 112,731 42,733 6,439 1,390,781
Other liabilities 1,207 - - - 1,207
Debt securities in issue - - 13,104 - 13,104
------------------------------------ ---------- -------- ------- ------- ----------
1,426,066 112,732 55,837 6,485 1,601,120
------------------------------------ ---------- -------- ------- ------- ----------
Net on-balance sheet position 75,439 53 (35) 353 75,810
------------------------------------ ---------- -------- ------- ------- ----------
Credit commitments 131,963 - - - 131,963
------------------------------------ ---------- -------- ------- ------- ----------
The table below summarises the Group's exposure to foreign currency exchange
risk at 31 December 2016:
GBP USD Euro
(GBP) ($) (EUR) Other Total
At 31 December 2016 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------------- --------- ------- ------- ------- ----------
ASSETS
Cash and balances at central banks 195,669 35 40 8 195,752
Loans and advances to banks 2,197 24,494 5,062 5,198 36,951
Debt securities held-to-maturity 94,299 13,001 - - 107,300
Derivative financial instruments 1,516 - - - 1,516
Loans and advances to customers 701,165 21,927 35,707 - 758,799
Other assets 1,197 - - - 1,197
Financial investments 120 569 1,456 - 2,145
-------------------------------------- --------- ------- ------- ------- ----------
996,163 60,026 42,265 5,206 1,103,660
-------------------------------------- --------- ------- ------- ------- ----------
LIABILITIES
Deposits from banks 3,198 - - 2 3,200
Derivative financial instruments 227 - - - 227
Deposits from customers 903,687 59,916 28,535 5,511 997,649
Other liabilities 1,812 - - - 1,812
Debt securities in issue - - 12,621 - 12,621
-------------------------------------- --------- ------- ------- ------- ----------
908,924 59,916 41,156 5,513 1,015,509
-------------------------------------- --------- ------- ------- ------- ----------
Net on-balance sheet position 87,239 110 1,109 (307) 88,151
-------------------------------------- --------- ------- ------- ------- ----------
Credit commitments 54,934 - - - 54,934
-------------------------------------- --------- ------- ------- ------- ----------
A 10% strengthening of the pound against the US dollar would
lead to a GBP5,000 increase (2016: GBP3,000 increase) in Group
profits and equity, while a 10% weakening of the pound against the
US dollar would lead to the same decrease in Group profits and
equity. Similarly, a 10% strengthening of the pound against the
Euro would lead to a GBP4,000 increase (2016: GBP6,000 increase) in
Group profits and equity, while a 10% weakening of the pound
against the Euro would lead to the same increase in Group profits
and equity. The above results are after taking into account the
effect of derivative financial instruments (see Note 21), which
cover most of the net exposure in each currency.
The table below summarises the Company's exposure to foreign currency
exchange rate risk at 31 December 2017:
GBP Euro
(GBP) (EUR) Total
At 31 December 2017 GBP000 GBP000 GBP000
------------------------------------------------- ----------- ----------- -------
ASSETS
Loans and advances to banks 22,734 13,369 36,103
Financial investments 140 - 140
Other assets 162 - 162
------------------------------------------------- ----------- ----------- -------
23,036 13,369 36,405
------------------------------------------------- ----------- ----------- -------
LIABILITIES
Other liabilities 1,840 - 1,840
Debt securities in issue - 13,104 13,104
------------------------------------------------- ----------- ----------- -------
1,840 13,104 14,944
------------------------------------------------- ----------- ----------- -------
Net on-balance sheet position 21,196 265 21,461
------------------------------------------------- ----------- ----------- -------
The table below summarises the Company's exposure to foreign currency
exchange rate risk at 31 December 2016:
GBP Euro
(GBP) (EUR) Total
At 31 December 2016 GBP000 GBP000 GBP000
------------------------------------------------- ----------- ----------- -------
ASSETS
Loans and advances to banks 76,037 13,035 89,072
Financial investments 121 - 121
Other assets 791 - 791
------------------------------------------------- ----------- ----------- -------
76,949 13,035 89,984
------------------------------------------------- ----------- ----------- -------
LIABILITIES
Other liabilities 3,624 - 3,624
Debt securities in issue - 12,621 12,621
------------------------------------------------- ----------- ----------- -------
3,624 12,621 16,245
------------------------------------------------- ----------- ----------- -------
Net on-balance sheet position 73,325 414 73,739
------------------------------------------------- ----------- ----------- -------
A 10% strengthening of the pound against the Euro would lead to
GBP3,000 (2016: GBP41,000) decrease in the Company profits and
equity, conversely a 10% weakening of the pound against the Euro
would lead to the same increase in the Company profits and
equity.
Interest rate risk
Interest rate risk is the potential adverse impact on the
Company and Group's future cash flows from changes in interest
rates, and arises from the differing interest rate risk
characteristics of the Company and Group's assets and liabilities.
In particular, fixed rate savings and borrowing products expose the
Group to the risk that a change in interest rates could cause
either a reduction in interest income or an increase in interest
expense relative to variable rate interest flows. The Group seeks
to "match" interest rate risk on either side of the Statement of
Financial Position. However, this is not a perfect match and
interest rate risk is present in: Money market transactions of a
fixed rate nature, fixed rate loans and fixed rate savings
accounts. There is interest rate mismatch in Arbuthnot Latham.
Interest rate risk is measured throughout the maturity bandings of
the book on a parallel shift scenario for a 200 basis points
movement. Interest rate risk is managed to limit value at risk to
be less than GBP1m. The current position of the balance sheet is
such that it results in a favourable impact on the economic value
of equity of GBP0.8m (2016: GBP2.0m) for a positive 200bps shift
and an adverse impact of GBP0.8m (2016: GBP0.5m) for a negative
200bps movement capped at the Bank of England base rate (50bps).
The Company has no fixed rate exposures, but an upward change of
50bps on variable rates would increase pre-tax profits and equity
by GBP10,000 (2016: increase pre-tax profits and equity by
GBP7,000).
The following tables summarise the re-pricing periods for the
assets and liabilities in the Company and Group, including
derivative financial instruments which are principally used to
reduce exposure to interest rate risk. Items are allocated to time
bands by reference to the earlier of the next contractual interest
rate re-price and the maturity date.
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
Group 3 months 6 months 1 year 5 years 5 years bearing Total
As at 31 December 2017 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- ----------
ASSETS
Cash and balances at central
banks 313,101 - - - - - 313,101
Loans and advances to banks 61,211 579 8,889 - - - 70,679
Debt securities held-to-maturity 185,926 35,093 6,000 - - - 227,019
Derivative financial instruments 950 - - 1,601 - - 2,551
Loans and advances to customers 880,822 6,938 10,774 143,979 - 6,756 1,049,269
Other assets - - - - - 188,266 188,266
Financial investments - - - - - 2,347 2,347
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- ----------
1,442,010 42,610 25,663 145,580 - 197,369 1,853,232
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- ----------
LIABILITIES
Deposits from banks 195,097 - - - - - 195,097
Derivative financial instruments 931 - - - - - 931
Deposits from customers 1,061,442 162,503 109,478 57,358 - - 1,390,781
Other liabilities - - - - - 16,944 16,944
Debt securities in issue 13,104 - - - - - 13,104
Equity - - - - - 236,375 236,375
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- ----------
1,270,574 162,503 109,478 57,358 - 253,319 1,853,232
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- ----------
Interest rate sensitivity
gap 171,436 (119,893) (83,815) 88,222 - (55,950)
---------------------------------- ---------- ---------- ---------- --------- --------- ----------
Cumulative gap 171,436 51,543 (32,272) 55,950 55,950 -
---------------------------------- ---------- ---------- ---------- --------- --------- ----------
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
Group 3 months 6 months 1 year 5 years 5 years bearing Total
As at 31 December 2016 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- ----------
ASSETS
Cash and balances at central
banks 195,752 - - - - - 195,752
Loans and advances to banks 36,951 - - - - - 36,951
Debt securities held-to-maturity 78,994 6,813 21,493 - - - 107,300
Derivative financial instruments 85 - - 1,431 - - 1,516
Loans and advances to customers 624,468 120,311 8,755 5,265 - - 758,799
Other assets - - - - - 162,821 162,821
Financial investments - - - - - 2,145 2,145
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- ----------
936,250 127,124 30,248 6,696 - 164,966 1,265,284
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- ----------
LIABILITIES
Deposits from banks 3,200 - - - - - 3,200
Derivative financial instruments 227 - - - - - 227
Deposits from customers 813,047 61,519 84,480 38,603 - - 997,649
Other liabilities - - - - - 17,229 17,229
Debt securities in issue 12,621 - - - - - 12,621
Equity - - - - - 234,358 234,358
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- ----------
829,095 61,519 84,480 38,603 - 251,587 1,265,284
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- ----------
Impact of derivative instruments 3,800 (3,800) - - - -
---------------------------------- ---------- ---------- ---------- --------- --------- ----------
Interest rate sensitivity
gap 110,955 61,805 (54,232) (31,907) - (86,621)
---------------------------------- ---------- ---------- ---------- --------- --------- ----------
Cumulative gap 110,955 172,760 118,528 86,621 86,621 -
---------------------------------- ---------- ---------- ---------- --------- --------- ----------
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
Company 3 months 6 months 1 year 5 years 5 years bearing Total
As at 31 December 2017 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
ASSETS
Loans and advances to banks 35,944 - - - - 159 36,103
Other assets - - - - - 103,855 103,855
Financial investments - - - - - 140 140
----------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
35,944 - - - - 104,154 140,098
----------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
LIABILITIES
Other liabilities - - - - - 3,293 3,293
Debt securities in issue 13,104 - - - - - 13,104
Equity - - - - - 123,701 123,701
----------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
13,104 - - - - 126,994 140,098
----------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
Interest rate sensitivity
gap 22,840 - - - - (22,840)
----------------------------- ---------- ---------- ---------- --------- --------- ----------
Cumulative gap 22,840 22,840 22,840 22,840 22,840 -
----------------------------- ---------- ---------- ---------- --------- --------- ----------
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
Company 3 months 6 months 1 year 5 years 5 years bearing Total
As at 31 December 2016 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
ASSETS
Loans and advances to banks 88,914 - - - - 158 89,072
Other assets - - - - - 61,125 61,125
Financial investments - - - - - 121 121
----------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
88,914 - - - - 61,404 150,318
----------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
LIABILITIES
Other liabilities - - - - - 4,808 4,808
Debt securities in issue 12,621 - - - - - 12,621
Equity - - - - - 132,889 132,889
----------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
12,621 - - - - 137,697 150,318
----------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
Interest rate sensitivity
gap 76,293 - - - - (76,293)
----------------------------- ---------- ---------- ---------- --------- --------- ----------
Cumulative gap 76,293 76,293 76,293 76,293 76,293 -
----------------------------- ---------- ---------- ---------- --------- --------- ----------
(d) Liquidity risk
Liquidity risk is the risk that the Group will not be able to
meet its obligations associated with its financial liabilities that
are settled by delivering cash or another financial asset.
The Group's approach to managing liquidity is to ensure, as far
as possible, that it will always have sufficient liquidity to meet
its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage
to the Group's reputation. The liquidity requirements of the Group
are met through withdrawing funds from its Bank of England Reserve
Account to cover any short-term fluctuations and longer term
funding to address any structural liquidity requirements.
The Group has formal governance structures in place to manage
and mitigate liquidity risk on a day to day basis. The Board of AL
sets and approves the liquidity risk management strategy. The
Assets and Liabilities Committee ("ALCO"), comprising senior
executives of the Group, monitors liquidity risk. Key liquidity
risk management information is reported by the finance teams and
monitored by the Chief Executive Officer and Finance Director on a
daily basis. The ALCO meets monthly to review liquidity risk
against set thresholds and risk indicators including early warning
indicators, liquidity risk tolerance levels and Individual
Liquidity Adequacy Assessment Process ("ILAAP") metrics.
The PRA requires the Board to ensure that the Group has adequate
levels of liquidity resources and a prudent funding profile, and
that it comprehensively manages and controls liquidity and funding
risks. The Group maintains deposits placed at the Bank of England,
and highly liquid unencumbered assets that can be called upon to
create sufficient liquidity to meet liabilities on demand,
particularly in a period of liquidity stress.
Arbuthnot Latham & Co., Limited ("AL") has a Board approved
ILAAP, and maintains liquidity buffers in excess of the minimum
requirements. The ILAAP is embedded in the risk management
framework of the Group and is subject to ongoing updates and
revisions when necessary. At a minimum, the ILAAP is undated
annually. The Liquidity Coverage Ratio ("LCR") regime has applied
to the Group from 1 October 2015, requiring management of net 30
day cash outflows as a proportion of high quality liquid assets.
The actual LCR has significantly exceeded the regulatory minimum
throughout the year.
The Group is exposed to daily calls on its available cash
resources from current accounts, maturing deposits and loan
draw-downs. The Group maintains significant cash resources to meet
all of these needs as they fall due. The matching and controlled
mismatching of the maturities and interest rates of assets and
liabilities is fundamental to the management of the Group. It is
unusual for banks to be completely matched, as transacted business
is often of uncertain term and of different types.
The maturities of assets and liabilities and the ability to
replace, at an acceptable cost, interest bearing liabilities as
they mature are important factors in assessing the liquidity of the
Group and its exposure to changes in interest rates.
The tables below show the undiscounted contractual cash flows of the Group's
financial liabilities and assets as at 31 December 2017:
More More
than than
3 months 1 year
Gross but but
nominal Not more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2017 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------------- ---------- ------------ ------------ ---------- --------- ---------
Financial liability by type
Non-derivative liabilities
Deposits from banks 195,097 (195,097) (195,097) - - -
Deposits from customers 1,390,781 (1,395,770) (1,040,893) (293,425) (61,452) -
Other liabilities 1,207 (1,207) (1,207) - - -
Debt securities in issue 13,104 (19,381) (87) (262) (1,395) (17,637)
Issued financial guarantee contracts - (2,976) (2,976) - - -
Unrecognised loan commitments - (131,963) (131,963) - - -
-------------------------------------- ---------- ------------ ------------ ---------- --------- ---------
1,600,189 (1,746,394) (1,372,223) (293,687) (62,847) (17,637)
-------------------------------------- ---------- ------------ ------------ ---------- --------- ---------
Derivative liabilities
Risk management: 931
- Outflows - (931) (931) - - -
-------------------------------------- ---------- ------------ ------------ ---------- --------- ---------
931 (931) (931) - - -
-------------------------------------- ---------- ------------ ------------ ---------- --------- ---------
More More
than than
3 months 1 year
Gross but but
nominal Not more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2017 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------------- ---------- ------------ ------------ ---------- --------- ---------
Financial asset by type
Non-derivative assets
Cash and balances at central banks 313,101 313,101 313,101 - - -
Loans and advances to banks 70,679 70,679 61,211 579 8,889 -
Debt securities held-to-maturity 227,019 227,166 22,886 101,277 103,003 -
Loans and advances to customers 1,049,269 1,187,665 126,689 121,493 800,091 139,392
Other assets 11,964 11,964 11,964 - - -
Financial investments 2,347 2,347 2,335 - 12 -
-------------------------------------- ---------- ------------ ------------ ---------- --------- ---------
1,674,379 1,812,922 538,186 223,349 911,995 139,392
-------------------------------------- ---------- ------------ ------------ ---------- --------- ---------
Derivative assets
Risk management: 2,551
- Inflows - 2,551 - - - 2,551
2,551 2,551 - - - 2,551
-------------------------------------- ---------- ------------ ------------ ---------- --------- ---------
The tables below show the undiscounted contractual cash flows of the
Group's financial liabilities and assets as at 31 December 2016:
More More
than than
3 months 1 year
Gross but but
nominal Not more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2016 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------------- ---------- ------------ ---------- ---------- --------- ---------
Financial liability by type
Non-derivative liabilities
Deposits from banks 3,200 (3,200) (3,200) - - -
Deposits from customers 997,649 (1,000,384) (716,285) (243,247) (40,852) -
Other liabilities 1,812 (1,812) (223) - - (1,589)
Debt securities in issue 12,621 (14,345) (86) (259) (1,379) (12,621)
Issued financial guarantee contracts - (274) (274) - - -
Unrecognised loan commitments - (54,934) (54,934) - - -
-------------------------------------- ---------- ------------ ---------- ---------- --------- ---------
1,015,282 (1,074,949) (775,002) (243,506) (42,231) (14,210)
-------------------------------------- ---------- ------------ ---------- ---------- --------- ---------
Derivative liabilities
Risk management: 227
- Outflows - (227) (227) - - -
-------------------------------------- ---------- ------------ ---------- ---------- --------- ---------
227 (227) (227) - - -
-------------------------------------- ---------- ------------ ---------- ---------- --------- ---------
More More
than than
3 months 1 year
Gross but but
nominal Not more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2016 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------------- ---------- ------------ ---------- ---------- --------- ---------
Financial asset by type
Non-derivative assets
Cash and balances at central banks 195,752 195,752 195,752 - - -
Loans and advances to banks 36,951 36,951 36,951 - - -
Debt securities held-to-maturity 107,300 130,360 70,082 41,334 18,944 -
Loans and advances to customers 758,799 841,283 218,427 130,870 447,253 44,733
Other assets 1,197 1,197 1,197 - - -
Financial investments 2,145 2,145 2,025 - 120 -
-------------------------------------- ---------- ------------ ---------- ---------- --------- ---------
1,102,144 1,207,688 524,434 172,204 466,317 44,733
-------------------------------------- ---------- ------------ ---------- ---------- --------- ---------
Derivative assets
Risk management: 1,516
- Inflows - 1,516 85 - - 1,431
- Outflows 1,516 - - - - -
-------------------------------------- ---------- ------------ ---------- ---------- --------- ---------
3,032 1,516 85 - - 1,431
-------------------------------------- ---------- ------------ ---------- ---------- --------- ---------
The table below sets out the components of the Group's liquidity reserves:
31 December 31 December
2017 2016
Fair Fair
Amount value Amount value
Liquidity reserves GBP000 GBP000 GBP000 GBP000
-------------------------------------- ---------- ---------- --------- ---------
Cash and balances at central banks 313,101 313,101 195,752 195,752
Loans and advances to banks 70,679 70,679 36,951 36,951
Debt securities held-to-maturity 227,019 227,951 107,300 108,757
Undrawn credit lines 10,000 10,000 12,500 12,500
---------------------------------------- ---------- ---------- --------- ---------
620,799 621,731 352,503 353,960
-------------------------------------- ---------- ---------- --------- ---------
Assets pledged as collateral or encumbered
The total financial assets recognised in the statement of
financial position that had been pledged as collateral for
liabilities at 31 December 2017 were GBP208.7m (2016:
GBP112.0m).
Financial assets are pledged as collateral as part of sales and
repurchases, securities borrowing and securitisation transactions
under terms that are usual and customary for such activities. In
addition, as part of these transactions, the Group has received
collateral that it is permitted to sell or repledge in the absence
of default.
The table below analyses the contractual cash flows of the Company's
financial liabilities and assets as at 31 December 2017:
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2017 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------------- --------- ----------- ---------- ---------- --------- ---------
Financial liability by type
Non-derivative liabilities
Other liabilities 1,840 (1,840) (251) - - (1,589)
Issued financial guarantee contracts 13,104 (19,381) (87) (262) (1,395) (17,637)
-------------------------------------- --------- ----------- ---------- ---------- --------- ---------
14,944 (21,221) (338) (262) (1,395) (19,226)
-------------------------------------- --------- ----------- ---------- ---------- --------- ---------
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2017 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------------- --------- ----------- ---------- ---------- --------- ---------
Financial asset by type
Non-derivative assets
Loans and advances to banks 36,103 36,103 36,103 - - -
Financial investments 140 140 128 - 12 -
Other assets 162 162 162 - - -
-------------------------------------- --------- ----------- ---------- ---------- --------- ---------
36,405 36,405 36,393 - 12 -
-------------------------------------- --------- ----------- ---------- ---------- --------- ---------
The table below analyses the contractual cash flows of the Company's
financial liabilities and assets as at 31 December 2016:
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2016 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------------- --------- ----------- ---------- ---------- --------- ---------
Financial liability by type
Non-derivative liabilities
Other liabilities 3,624 (3,624) (2,035) - - (1,589)
Debt securities in issue 12,621 (14,345) (86) (259) (1,379) (12,621)
16,245 (17,969) (2,121) (259) (1,379) (14,210)
----------------------------- --------- ----------- ---------- ---------- --------- ---------
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2016 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------------- --------- ----------- ---------- ---------- --------- ---------
Financial asset by type
Non-derivative assets
Loans and advances to banks 89,072 89,072 89,072 - - -
Financial investments 121 121 - - 121 -
Other assets 791 791 791 - - -
----------------------------- --------- ----------- ---------- ---------- --------- ---------
89,984 89,984 89,863 - 121 -
----------------------------- --------- ----------- ---------- ---------- --------- ---------
The maturities of assets and liabilities and the ability to
replace, at an acceptable cost, interest-bearing liabilities as
they mature
are important factors in assessing the liquidity of the Group
and its exposure to changes in interest rates and exchange
rates.
Fiduciary activities
The Group provides investment management and advisory services
to third parties, which involve the Group making allocation and
purchase and sale decisions in relation to a wide range of
financial instruments. Those assets that are held in a fiduciary
capacity are not included in these financial statements. These
services give rise to the risk that the Group may be accused of
maladministration or underperformance. At the balance sheet date,
the Group had investment management accounts amounting to
approximately GBP1,044m (2016: GBP920m). Additionally, the Group
provides investment advisory services.
(e) Financial
assets
and liabilities
The tables below set out the Group's financial assets and financial liabilities
into their respective classifications:
Fair
value Liabilities
through Loans at Total
profit and amortised carrying Fair
or loss Held-to-maturity receivables Available-for-sale cost amount value
At 31 December
2017 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------ -------- ----------------- ------------ ------------------- ------------ ---------- ----------
ASSETS
Cash and balances
at
central banks - - 313,101 - - 313,101 313,101
Loans and advances
to
banks - - 70,679 - - 70,679 70,679
Debt securities
held-to-maturity - 227,019 - - - 227,019 227,951
Derivative
financial
instruments 2,551 - - - - 2,551 2,551
Loans and advances
to
customers - - 1,049,269 - - 1,049,269 1,022,816
Other assets - - 11,964 - - 11,964 11,964
Financial
investments - - - 2,347 - 2,347 2,347
-------------------- -------- ----------------- ------------ ------------------- ------------ ---------- ----------
2,551 227,019 1,445,013 2,347 - 1,676,930 1,651,409
------------------ -------- ----------------- ------------ ------------------- ------------ ---------- ----------
LIABILITIES
Deposits from banks - - - - 195,097 195,097 195,097
Derivative
financial
instruments 931 - - - - 931 931
Deposits from
customers - - - - 1,390,781 1,390,781 1,390,781
Other liabilities - - 1,207 - - 1,207 1,207
Debt securities in
issue - - - - 13,104 13,104 13,104
-------------------- -------- ----------------- ------------ ------------------- ------------ ---------- ----------
931 - 1,207 - 1,598,982 1,601,120 1,601,120
------------------ -------- ----------------- ------------ ------------------- ------------ ---------- ----------
Fair
value Liabilities
through Loans at Total
profit and amortised carrying Fair
or loss Held-to-maturity receivables Available-for-sale cost amount value
At 31 December
2016 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------ -------- ----------------- ------------ ------------------- ------------ ---------- ----------
ASSETS
Cash and balances
at
central banks - - 195,752 - - 195,752 195,752
Loans and advances
to
banks - - 36,951 - - 36,951 36,951
Debt securities
held-to-maturity - 107,300 - - - 107,300 108,757
Derivative
financial
instruments 1,516 - - - - 1,516 1,516
Loans and advances
to
customers - - 758,799 - - 758,799 742,894
Other assets - - 1,197 - - 1,197 1,197
Financial
investments - - - 2,145 - 2,145 2,145
-------------------- -------- ----------------- ------------ ------------------- ------------ ---------- ----------
1,516 107,300 992,699 2,145 - 1,103,660 1,089,212
------------------ -------- ----------------- ------------ ------------------- ------------ ---------- ----------
LIABILITIES
Deposits from banks - - - - 3,200 3,200 3,200
Derivative
financial
instruments 227 - - - - 227 227
Deposits from
customers - - - - 997,649 997,649 997,649
Other liabilities - - 1,812 - - 1,812 1,812
Debt securities in
issue - - - - 12,621 12,621 12,621
-------------------- -------- ----------------- ------------ ------------------- ------------ ---------- ----------
227 - 1,812 - 1,013,470 1,015,509 1,015,509
------------------ -------- ----------------- ------------ ------------------- ------------ ---------- ----------
Cash, loans and advances to banks, debt securities
held-to-maturity, deposits from banks and deposits from customers
are classified as level 2 financial instruments, on the basis that
they are liquid but not traded in an active market. Loans and
advances to customers and debt securities in issue are classified
as level 3 as there is no observable market data for these
instruments.
7. Capital management
The Group's capital management policy is focused on optimising
shareholder value. There is a clear focus on delivering organic
growth and ensuring capital resources are sufficient to support
planned levels of growth. The Board regularly reviews the capital
position.
The Group's lead regulator, the Prudential Regulatory Authority
("PRA"), sets and monitors capital requirements for the Group as a
whole and for the individual banking operations. The lead regulator
adopted the Basel III capital requirements with effect from 1
January 2014. As a result, the Group's regulatory capital
requirements were based on Basel III in 2014.
In accordance with the EU's Capital Requirements Directive
("CRD") and the required parameters set out in the PRA Handbook
(BIPRU 2.2), the Individual Capital Adequacy Assessment Process
("ICAAP") is embedded in the risk management framework of the Group
and is subject to ongoing updates and revisions when necessary.
However, at a minimum, the ICAAP is updated annually as part of the
business planning process. The ICAAP is a process that brings
together the management framework (i.e. the policies, procedures,
strategies, and systems that the Group has implemented to identify,
manage and mitigate its risks) and the financial disciplines of
business planning and capital management. The Group's regulated
entities are also the principal trading subsidiaries as detailed in
Note 43.
Not all material risks can be mitigated by capital, but where
capital is appropriate the Board has adopted a "Pillar I plus"
approach to determine the level of capital the Group needs to hold.
This method takes the Pillar I capital formula calculations
(standardised approach for credit, market and operational risk) as
a starting point, and then considers whether each of the
calculations delivers a sufficient capital sum adequately to cover
management's anticipated risks. Where the Board considered that the
Pillar I calculations did not reflect the risk, an additional
capital add-on in Pillar II is applied, as per the Individual
Capital Guidance ("ICG") issued by the PRA.
The Group's regulatory capital is divided into two tiers:
-- Tier 1 comprises mainly shareholders' funds and revaluation
reserves, after deducting goodwill, other intangible assets and the
deduction for a significant investment in a financial institution
(STB). The portion of the investment representing up to 10% of
ABG's Tier 1 is added back to capital resources and then risk
weighted at 250%, while anything above this 10% is deducted.
-- Lower Tier 2 comprises qualifying subordinated loan capital
and collective provisions. Lower Tier 2 capital cannot exceed 50%
of Tier 1 capital.
The following table shows the regulatory capital resources
as managed by the Group:
2017 2016
GBP000 GBP000
------------------------------------------------------------ --------- ---------
Tier 1
Share capital 153 153
Retained earnings 237,171 235,567
Deduction for significant investment (83,804) (81,674)
Add back 10% of CET1 (risk weighted at 250%) 22,038 22,557
Capital redemption reserve 20 20
Treasury shares (1,131) (1,131)
Goodwill (5,202) (1,682)
Deductions for other intangibles (10,793) (6,840)
Available-for-sale reserve 162 (251)
------------------------------------------------------------ --------- ---------
Total tier 1 capital resources 158,614 166,719
------------------------------------------------------------ --------- ---------
Tier 2
Debt securities in issue 13,104 12,621
------------------------------------------------------------ --------- ---------
Total tier 2 capital resources 13,104 12,621
------------------------------------------------------------ --------- ---------
Total tier 1 & tier 2 capital resources 171,718 179,340
------------------------------------------------------------ --------- ---------
The ICAAP includes a summary of the capital required to mitigate
the identified risks in its regulated entities and the amount of
capital that the Group has available. The PRA sets ICG for each UK
bank calibrated by reference to its Capital Resources Requirement,
broadly equivalent to 8 percent of risk weighted assets and thus
representing the capital required under Pillar I of the Basel III
framework. The ICAAP is a key input into the PRA's ICG setting
process, which addresses the requirements of Pillar II of the Basel
III framework. The PRA's approach is to monitor the available
capital resources in relation to the ICG requirement. Each entity
maintains an extra internal buffer and capital ratios are reviewed
on a monthly basis to ensure that external requirements are adhered
to. All regulated entities have complied with all of the externally
imposed capital requirements to which they are subject.
Pillar III complements the minimum capital requirements (Pillar
I) and the supervisory review process (Pillar II). Its aim is to
encourage market discipline by developing a set of disclosure
requirements which will allow market participants to assess key
pieces of information on a firm's capital, risk exposures and risk
assessment processes. Our Pillar III disclosures for the year ended
31 December 2017 are published as a separate document on the Group
website under Investor Relations (Announcements & Shareholder
Info).
8. Net interest income
2017 2016
GBP000 GBP000
------------------------------------------------------ ------------ ------------
Cash and balances at central banks 801 873
Loans and advances to banks 258 124
Debt securities held-to-maturity 1,353 844
Loans and advances to customers 45,015 36,230
-------------------------------------------------------- ------------ ------------
47,427 38,071
------------------------------------------------------ ------------ ------------
Deposits from banks (35) (297)
Deposits from customers (5,939) (6,977)
Debt securities in issue (360) (352)
-------------------------------------------------------- ------------ ------------
Interest expense (6,334) (7,626)
-------------------------------------------------------- ------------ ------------
Net interest income 41,093 30,445
-------------------------------------------------------- ------------ ------------
In 2017, the Group recognised GBP0.1m (2016: GBP0.3m) of additional interest
income to reflect actual cash flows received on the aquired loan portfolios
having been in excess of forecast cash flows.
9. Fee and commission income
2017 2016
GBP000 GBP000
-------------------------------------------- ------- -------
Banking commissions 2,263 1,947
Investment management fees and commissions 7,887 7,122
Wealth planning fees and commissions 2,593 2,156
Other fee income 1,062 205
-------------------------------------------- ------- -------
13,805 11,430
-------------------------------------------- ------- -------
10. Net impairment loss on financial assets
2017 2016
GBP000 GBP000
-------------------------------------------------------------- ------- -------
Net Impairment losses on loans and advances to customers 394 427
Impairment losses on financial investments - 47
-------------------------------------------------------------- ------- -------
394 474
-------------------------------------------------------------- ------- -------
During the year, the Group recovered GBP116k (2016: GBPnil) of loans which
had previously been written off.
11. Other income
Other income mainly consists of rental income from the
investment property (see Note 31) of GBP2.1m (2016: GBP1.1m) and
premises recharges of GBP0.7m (2016: GBP0.4m) to Secure Trust Bank
for office space occupied. In 2016, other income also included
GBP1.6m realised on the investment in Visa Europe Ltd (see Note
25).
12. Operating expenses
2017 2016
Operating expenses comprise: GBP000 GBP000
----------------------------------------------------- ------- -------
Staff costs, including Directors:
Wages, salaries and bonuses 30,937 26,708
Social security costs 3,576 3,154
Pension costs 1,558 1,247
Share based payment transactions (note 39) 189 215
Amortisation of intangibles (note 28) 1,036 521
Depreciation (note 30) 1,508 1,146
Financial Services Compensation Scheme Levy 190 233
Operating lease rentals 3,087 2,610
Operating expenses for investment property 230 115
Acquisitions costs 108 398
Other administrative expenses 12,302 9,764
----------------------------------------------------- ------- -------
Total operating expenses from continuing operations 54,721 46,111
----------------------------------------------------- ------- -------
Details on Directors remuneration are disclosed in the
Remuneration Report on page ##RREP.
2017 2016
Remuneration of the auditor and its associates, excluding
VAT, was as follows: GBP000 GBP000
----------------------------------------------------------- ------- -------
Fees payable to the Company's auditor for the audit of
the Company's annual accounts 105 99
Fees payable to the Company's auditor and its associates
for other services:
Audit of the accounts of subsidiaries 221 237
Audit related assurance services 85 157
Taxation compliance services - 36
Taxation advisory services - 99
Other assurance services 17 170
Other non-audit services - 15
----------------------------------------------------------- ------- -------
Total fees payable 428 813
----------------------------------------------------------- ------- -------
Other assurance services include regulatory assessments.
Corporate finance services include due diligence work on a
potential corporate transaction.
13. Income tax expense
2017 2016
United Kingdom corporation tax at 19.25% (2016: 20%) GBP000 GBP000
---------------------------------------------------------- ------- -------
Current taxation
Corporation tax charge - current year 472 179
Corporation tax charge - adjustments in respect of prior
years (141) 457
---------------------------------------------------------- ------- -------
331 636
---------------------------------------------------------- ------- -------
Deferred taxation
Origination and reversal of temporary differences (135) 11
Adjustments in respect of prior years 252 73
---------------------------------------------------------- ------- -------
117 84
---------------------------------------------------------- ------- -------
Income tax expense 448 720
---------------------------------------------------------- ------- -------
Tax reconciliation
Profit before tax 6,971 179
Tax at 19.25% (2016: 20%) 1,342 36
Permanent difference - Tax on associate income (854) (429)
Other permanent differences (152) 496
Tax rate change 1 87
Prior period adjustments 111 530
---------------------------------------------------------- ------- -------
Corporation tax charge for the year 448 720
---------------------------------------------------------- ------- -------
Permanent differences mainly relate to associate income which is
reflected after tax.
The tax charge on discontinuing operations is disclosed in note
14.
On 26 October 2015 the Government substantively enacted a
reduction in the UK corporation tax rate from 20% to 19% (effective
from 1 April 2017). An additional reduction to 17% (effective from
1 April 2020) was substantively enacted on 6 September 2016. This
will reduce the Bank's future current tax charge accordingly. The
deferred tax asset at 31 December 2017 has been calculated based on
the rate of 19%.
14. Discontinued operations
The profit after tax from discontinued operations is made up as
follows:
Year Year
ended ended
31 December 31 December
2017 2016
Discontinued operations GBP000 GBP000
----------------------------------------------------- -------------- -------------
Profit after tax from discontinued operations - ELL
(up to 13 April 2016) - 2,027
Profit after tax on sale of discontinued operations
- ELL - 116,754
Profit after tax from discontinued operations - STB
(up to 15 June 2016) - 9,149
Profit after tax on sale of discontinued operations
- STB - 100,180
------------------------------------------------------- ------------ -------------
Profit after tax from discontinued operations - 228,110
------------------------------------------------------- ------------ -------------
On 4 December 2015, STB agreed to the conditional sale of its
non-standard consumer lending business, ELL, which comprises
Everyday Loans Holdings Limited and subsidiary companies Everyday
Lending Limited and Everyday Loans Limited, to Non Standard Finance
PLC (NSF) for GBP106.9 million in cash subject to a net asset
adjustment and GBP16.3 million in NSF ordinary shares. The Disposal
completed on 13 April 2016, and on completion, NSF repaid
intercompany debt of GBP108.1 million to STB. After selling costs
of GBP6.2m, this resulted in a gain recognised on disposal of
GBP116.8m.
Details of the profits of discontinued operations, net assets
disposed of and consequential gain recognised on disposal and cash
flow from discontinued operations are set out below.
From
1 January
to 13
April
2016
GBP000
------------------------------------------------------- ---- --------------
Interest income 11,137
Net interest income 11,137
------------------------------------------------------- ---- --------------
Fee and commission income 147
Fee and commission expense (124)
------------------------------------------------------- ---- --------------
Net fee and commission income 23
------------------------------------------------------- ---- --------------
Operating income 11,160
------------------------------------------------------- ---- --------------
Net impairment loss on financial assets (2,610)
Operating expenses (6,016)
------------------------------------------------------- ---- --------------
Profit before tax 2,534
Tax expense (507)
------------------------------------------------------- ---- --------------
Profit after tax 2,027
------------------------------------------------------- ---- --------------
Profit on sale of business 116,754
------------------------------------------------------- ---- --------------
Total profit from discontinued operation 118,781
------------------------------------------------------- ---- --------------
Profit attributable to:
Equity holders of the Company 61,667
Non-controlling interests 57,114
------------------------------------------------------- ---- --------------
Profit after tax 118,781
------------------------------------------------------- ---- --------------
Earnings per share for profit attributable to the equity holders of the
Company from discontinued operations during the year
(expressed in pence per share):
- basic 16 418.4
- diluted 16 418.2
The following assets were sold as part of the sale of ELL:
Recognised
values
on sale
2016
GBP000
----------------------------------------------------------------------- -----------
Loans and advances to banks 457
Loans and advances to customers 116,744
Property, plant and equipment 452
Intangible assets 1,258
Deferred tax assets 371
Prepayments and accrued income 451
Other assets 11
----------------------------------------------------------------------- -----------
Total assets 119,744
Intercompany funding 108,088
Current tax liability 3,212
Other liabilities 4,748
----------------------------------------------------------------------- -----------
Total liabilities 116,048
Net identifiable assets / (liabilities) 3,696
----------------------------------------------------------------------- -----------
Consideration 123,206
Costs (2,756)
Profit on sale of ELL 116,754
----------------------------------------------------------------------- -----------
The intercompany funding was repaid by NSF at the time of completion.
From
1 January
to 13
Cash flow from discontinued operations - ELL April
2016
GBP000
----------------------------------------------------- -----------
Cash flows from operating activities
Interest received 11,137
Fees and commissions received 23
Cash payments to employees and suppliers (8,626)
Taxation paid (507)
-------------------------------------------------------- -----------
Cash flows from operating profits before changes in
operating assets and liabilities 2,027
Changes in operating assets and liabilities:
- net increase in loans and advances to customers (3,618)
- net increase in other assets (249)
- net increase in other liabilities 2,621
-------------------------------------------------------- -----------
Net cash inflow from operating activities 781
-------------------------------------------------------- -----------
Cash flows from investing activities
Purchase of property, plant and equipment (9)
-------------------------------------------------------- -----------
Net cash outflow from investing activities (9)
-------------------------------------------------------- -----------
Net increase in cash and cash equivalents 772
Cash and cash equivalents at 1 January 1,661
-------------------------------------------------------- -----------
Cash and cash equivalents at 13 April 2,433
-------------------------------------------------------- -----------
On 15 June 2016 ABG sold 6 million shares in STB, which reduced
its shareholding in STB from 51.92% to 18.93%. From this date the
Group accounted for its remaining shareholding in STB as an
associate. After the sale of the 6 million shares, the Group
retained Board representation and as such is seen to have
significant influence over STB. The profit and cash flow from
discontinued operations relating to ELL have been shown in the
tables above. The ELL entities were subsidiaries of STB and
therefore formed part of the STB result reported in the operating
segments of ABG. The tables below therefore reflect the profit and
cash flow from the STB group excluding ELL. The combined impact can
be seen in the operating segments (see note 44 - Retail
banking).
From
1 January
to 15
June
2016
GBP000
------------------------------------------------------- ---- --------------
Interest income 57,498
Interest expense (12,107)
------------------------------------------------------- ---- --------------
Net interest income 45,391
------------------------------------------------------- ---- --------------
Fee and commission income 7,981
Fee and commission expense (779)
------------------------------------------------------- ---- --------------
Net fee and commission income 7,202
------------------------------------------------------- ---- --------------
Operating income 52,593
------------------------------------------------------- ---- --------------
Net impairment loss on financial assets (12,172)
Operating expenses (29,073)
------------------------------------------------------- ---- --------------
Profit before tax 11,348
Tax expense (2,199)
------------------------------------------------------- ---- --------------
Profit after tax 9,149
------------------------------------------------------- ---- --------------
Profit on sale of shares 100,180
------------------------------------------------------- ---- --------------
Total profit from discontinued operation 109,329
------------------------------------------------------- ---- --------------
Profit attributable to:
Equity holders of the Company 105,017
Non-controlling interests 4,312
------------------------------------------------------- ---- --------------
Profit after tax 109,329
------------------------------------------------------- ---- --------------
Earnings per share for profit attributable to the equity holders of the
Company from discontinued operations during the year
(expressed in pence per share):
- basic 16 712.5
- diluted 16 712.2
The following assets were deconsolidated as part of the sale of 6 million
shares in STB:
Recognised
values
on sale
2016
GBP000
-------------------------------------------------------------- -------------
Cash and balances at central banks 176,647
Loans and advances to banks 27,618
Loans and advances to customers 1,117,700
Other assets 5,805
Financial investments 15,030
Deferred tax asset 606
Intangible assets 7,017
Property, plant and equipment 8,606
-------------------------------------------------------------- -------------
Total assets 1,359,029
Deposits from banks 25,000
Deposits from customers 1,046,009
Current tax liability 293
Other liabilities 29,748
-------------------------------------------------------------- -------------
Total liabilities 1,101,050
Net identifiable assets 257,979
-------------------------------------------------------------- -------------
Profit on sale of shares was calculated as follows:
2016
GBP000
-------------------------------------------------------------- -------------
Consideration received 150,000
Less costs (2,001)
Less net identifiable assets (257,979)
Add back non-controlling interest 124,046
Add back fair value of remaining investment in STB 86,114
Profit on sale of STB 100,180
-------------------------------------------------------------- -------------
From
1 January
Cash flow from discontinued operations - STB excluding to 15
ELL June
2016
GBP000
-------------------------------------------------------- -----------
Cash flows from operating activities
Interest received 68,635
Interest paid (12,107)
Fees and commissions received 7,226
Cash payments to employees and suppliers (51,552)
Taxation paid (6,034)
----------------------------------------------------------- -----------
Cash flows from operating profits before changes in
operating assets and liabilities 6,168
Changes in operating assets and liabilities:
- net increase in loans and advances to customers (165,976)
- net decrease in other assets 117,395
- net decrease in deposits from banks (10,000)
- net increase in amounts due to customers 12,936
- net decrease in other liabilities (5,031)
----------------------------------------------------------- -----------
Net cash outflow from operating activities (44,508)
----------------------------------------------------------- -----------
Cash flows from investing activities
Purchase of computer software (1,754)
Purchase of property, plant and equipment (531)
Disposal of property, plant and equipment 2,179
Proceeds from disposal of businesses 106,912
Proceeds from sale of property, plant and equipment 456
----------------------------------------------------------- -----------
Net cash inflow from investing activities 107,262
----------------------------------------------------------- -----------
Cash flows from financing activities
Dividends paid (10,005)
Net cash used in financing activities (10,005)
----------------------------------------------------------- -----------
Net increase in cash and cash equivalents 52,749
Cash and cash equivalents at 1 January 141,595
----------------------------------------------------------- -----------
Cash and cash equivalents at 15 June 194,344
----------------------------------------------------------- -----------
15. Average number of employees
2017 2016
-------------------------------------------------------- -------- --------
Central 161 146
Private banking 136 108
Commercial banking 38 14
Renaissance Asset Finance 13 -
Group 17 19
-------------------------------------------------------- -------- --------
365 287
-------------------------------------------------------- -------- --------
As STB was deconsolidated during 2016, the employees have been removed
from the above averages in 2016.
16. Earnings per ordinary share
Basic
Basic earnings per ordinary share are calculated by dividing the
profit after tax attributable to equity holders of the Company by
the weighted average number of ordinary shares 14,852,763 (2016:
14,738,548) in issue during the year.
Diluted
Diluted earnings per ordinary share are calculated by dividing
the dilutive profit after tax attributable to equity holders of the
Company by the weighted average number of ordinary shares in issue
during the year, as well as the number of dilutive share options in
issue during the year. The number of dilutive share options in
issue at the year end was nil (2016: 50,000).
2017 2016
Profit attributable GBP000 GBP000
----------------------------------------------------------------- ------- --------
Total profit after tax attributable to equity holders of
the Company 6,523 166,143
Profit/(loss) after tax from continuing operations attributable
to equity holders of the Company 6,523 (541)
Profit after tax from discontinued operations attributable
to equity holders of the Company (STB excl. ELL) - 105,017
Profit after tax from discontinued operations attributable
to equity holders of the Company (ELL) - 61,667
----------------------------------------------------------------- ------- --------
2017 2016
Dilutive profit attributable GBP000 GBP000
----------------------------------------------------------------- ------- --------
Total profit after tax attributable to equity holders of
the Company 6,523 166,143
Loss after tax from continuing operations attributable to
equity holders of the Company 6,523 (541)
Profit after tax from discontinued operations attributable
to equity holders of the Company (STB excl. ELL) - 105,017
Profit after tax from discontinued operations attributable
to equity holders of the Company (ELL) - 61,667
----------------------------------------------------------------- ------- --------
2017 2016
Basic Earnings per share p p
----------------------------------------------------------------- ------- --------
Total Basic Earnings per share 43.9 1,127.2
Basic Earnings per share from continuing operations 43.9 (3.7)
Basic Earnings per share from discontinued operations (STB
excl. ELL) - 712.5
Basic Earnings per share from discontinued operations (ELL) - 418.4
----------------------------------------------------------------- ------- --------
2017 2016
Diluted Earnings per share p p
----------------------------------------------------------------- ------- --------
Total Diluted Earnings per share 43.9 1,126.7
Diluted Earnings per share from continuing operations 43.9 (3.7)
Diluted Earnings per share from discontinued operations (STB
excl. ELL) - 712.2
Diluted Earnings per share from discontinued operations (ELL) - 418.2
----------------------------------------------------------------- ------- --------
17. Cash and balances at central banks
2017 2016
Group GBP000 GBP000
---------------------------------------- --------- --------
Cash and balances at central banks 313,101 195,752
---------------------------------------- --------- --------
Surplus funds are mainly held in the Bank of England reserve
account, with the remainder held in certificates of deposit, fixed
rate notes and money market deposits in highly rated banks (the
majority held in UK clearing banks).
18. Loans and advances to banks
2017 2016
Group GBP000 GBP000
------------------------------------------------------------------ ------- -------
Placements with banks included in cash and cash equivalents
(note 41) 70,679 36,951
------------------------------------------------------------------ ------- -------
The table below presents an analysis of loans and advances to banks by
rating agency designation as at 31 December, based on Moody's long term
ratings:
2017 2016
Group GBP000 GBP000
------------------------------------------------------------------ ------- -------
Aa3 39,871 -
A1 20,553 20,696
A2 10,012 15,582
A3 - 110
Baa1 235 563
Unrated 8 -
------------------------------------------------------------------ ------- -------
70,679 36,951
------------------------------------------------------------------ ------- -------
None of the loans and advances to banks are either past
due or impaired (2016: GBPnil).
2017 2016
Company GBP000 GBP000
------------------------------------------------------------------ ------- -------
Placements with banks included in cash and cash equivalents
(note 41) 36,103 89,072
------------------------------------------------------------------ ------- -------
Loans and advances to banks include bank balances of GBP36.1m (2016: GBP89.1m)
with Arbuthnot Latham & Co., Ltd.
19. Debt securities held-to-maturity
Debt securities represent certificates of deposit. The Group's
intention is to hold them to maturity and, therefore, they are
presented in the Statement of Financial Position at amortised
cost.
The movement in debt securities held to maturity may be
summarised as follows:
2017 2016
Group GBP000 GBP000
--------------------------------------------------------- --------- ---------
At 1 January 107,300 87,728
Exchange difference (951) 2,087
Additions 211,080 89,384
Redemptions (90,410) (68,103)
Deconsolidation of STB - (3,796)
--------------------------------------------------------- --------- ---------
At 31 December 227,019 107,300
--------------------------------------------------------- --------- ---------
The table below presents an analysis of debt securities by rating agency
designation at 31 December, based on Moody's long term ratings:
2017 2016
Group GBP000 GBP000
---------------------------------------------------------- -------- --------
Aaa 100,106 40,337
Aa1 51,389 23
Aa2 5,946 26,089
Aa3 18,384 6,000
A1 18,187 31,953
A3 33,007 2,898
227,019 107,300
---------------------------------------------------------- -------- --------
None of the debt securities held-to-maturity are either
past due or impaired.
20. Assets classified as held for sale
Group
----------------
2017 2016
GBP000 GBP000
--------------------------------------- ------- -------
Seed capital investments held for sale - -
Repossessed property held for sale 2,915 -
--------------------------------------- ------- -------
2,915 -
--------------------------------------- ------- -------
Seed capital investments held for sale
The Group considers itself a sponsor of an investment fund when
it facilitates the establishment of a fund in which the Group is
the investment manager. The Group ordinarily provides seed capital
in order to provide initial scale and facilitate marketing of the
funds to third-party investors. The fund is then financed through
the issue of units to investors. Aggregate interests held by the
Group include seed capital, management fees and performance fees.
The Group generates management and performance fee income from
managing the assets on behalf of third-party investors.
The Group has an investment of GBP1 in the share capital of the
SPV created to administer the fund. At 31 December 2017, the Group
has a receivable of GBP6.8m from the SPV, which is reflected in
Note 24.
Repossessed property held for sale
During the year a property held as collateral on a loan was
repossessed. The property is expected to be sold within 12 months
and is therefore classified in the accounts as held for sale.
21. Derivative financial
instruments
2017 2016
----------------------------------- -----------------------------------
Contract/ Fair Fair Contract/ Fair Fair
notional value value notional value value
amount assets liabilities amount assets liabilities
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------- ---------- -------- ------------- ---------- -------- -------------
Currency swaps 9,614 950 931 6,566 85 218
Interest rate swaps 17,824 - - 3,800 - 9
Structured notes 1,607 1,601 - 1,607 1,431 -
-------------------------- ---------- -------- ------------- ---------- -------- -------------
29,045 2,551 931 11,973 1,516 227
-------------------------- ---------- -------- ------------- ---------- -------- -------------
The principal derivatives used by the Group are over the counter
exchange rate contracts. Exchange rate related contracts include
currency swaps and interest rate swaps.
A forward foreign exchange contract is an agreement to buy or
sell a specified amount of foreign currency on a specified future
date at an agreed rate. Currency swaps generally involve the
exchange of interest payment obligations denominated in different
currencies; exchange of principal can be notional or actual. The
currency swaps are settled net and therefore the fair value is
small in comparison to the contract/notional amount. Interest rate
swaps are used to hedge against the Profit or Loss impact resulting
from the movement in interest rates, due to some exposures having
fixed rate terms.
Also included in derivative financial instruments are structured
notes. These notes contain embedded derivatives (embedded options
to buy and sell indices) and non-derivative host contracts
(discounted bonds). Both the host and embedded derivatives are
presented net within derivative financial instruments. The Group
invested in the structured notes, which are maturing in 2021.
The Group only uses investment graded banks as counterparties
for derivative financial instruments. None of the contracts are
collateralised.
The table below presents an analysis of derivative financial instruments
contract/notional amounts by rating agency designation of
counterparty bank at 31 December, based on Moody's long
term ratings:
2017 2016
Group GBP000 GBP000
------------------------------------------------------------ ------- -------
A1 26,521 10,366
A2 2,524 -
Baa1 - 1,607
------------------------------------------------------------ ------- -------
29,045 11,973
------------------------------------------------------------ ------- -------
22. Loans and advances to customers
2017 2016
Group GBP000 GBP000
------------------------------------------------------------- ---------- --------
Gross loans and advances 1,050,631 759,772
Less: allowances for impairment on loans and advances (note
23) (1,362) (973)
------------------------------------------------------------- ---------- --------
1,049,269 758,799
------------------------------------------------------------- ---------- --------
For a maturity profile of loans and advances to customers, refer
to note 6.
Loans and advances to customers can be further summarised
as follows:
2017 2016
Group GBP000 GBP000
------------------------------------------------------------------- ---------- --------
Neither past due nor impaired 888,332 719,515
Past due but not impaired 131,247 23,379
Impaired 31,052 16,878
------------------------------------------------------------------- ---------- --------
Gross 1,050,631 759,772
Less: allowance for impairment (1,362) (973)
------------------------------------------------------------------- ---------- --------
Net 1,049,269 758,799
------------------------------------------------------------------- ---------- --------
Loans and advances to customers include finance lease receivables
as follows:
2017 2016
Group GBP000 GBP000
------------------------------------------------------------------- ---------- --------
Gross investment in finance lease receivables:
- No later than 1 year 28,911 -
- Later than 1 year and no later than 5 years 53,766 -
82,677 -
Unearned future finance income on finance leases (11,412) -
------------------------------------------------------------------- ---------- --------
Net investment in finance leases 71,265 -
------------------------------------------------------------------- ---------- --------
The net investment in finance leases may be analysed as
follows:
- No later than 1 year 23,170 -
- Later than 1 year and no later than 5 years 48,095 -
71,265 -
------------------------------------------------------------------- ---------- --------
(a) Loans and advances past due but not impaired
Gross amounts of loans and advances to customers that were
past due but not impaired were as follows:
2017 2016
Group GBP000 GBP000
------------------------------------------------------------------- ---------- --------
Past due up to 30 days 115,126 961
Past due 30 - 60 days 11,043 5,689
Past due 60 - 90 days 5,078 638
Over 90 days - 16,091
------------------------------------------------------------------- ---------- --------
Total 131,247 23,379
------------------------------------------------------------------- ---------- --------
The newly implemented banking system has enabled the Group to
establish a more sophisticated tracking of early stage arrears. The
majority of loans and advances up to 30 days past due were
subsequently up to date post year end.
Loans and advances typically fall into this category when there
is a delay in either the sale of the underlying collateral or the
completion of formalities to extend the credit facilities for a
further period. Management have no material concerns regarding the
quality of the collateral that secures the lending.
Additionally, the Group updated its impairment policy in the
year to include all loans and advances over 90 days past due within
impaired loans. Interest income on loans classified as impaired
totalled GBP338,000 (2016: GBP126,000).
(b) Loans and advances renegotiated
Restructuring activities include external payment arrangements,
modification and deferral of payments. Following restructuring, a
previously overdue customer account is reset to a normal status and
managed together with other similar accounts. Restructuring
policies and practices are based on indicators or criteria which,
in the judgement of management, indicate that payment will most
likely continue. These policies are kept under continuous review.
Renegotiated loans that would otherwise be past due or impaired
totalled GBPnil (2016: GBPnil).
(c) Collateral held
Collateral is measured at fair value less costs to sell.
Most of the loans are secured by property. The fair value of the
collateral held against past due but not impaired or impaired
balances is GBP302.9m (2016: GBP103.7m) against loans of GBP162.3m
(2016: GBP40.3m), giving an average loan-to-value of 54% (2016:
39%). The weighted average loan-to-value is 46% (2016: 61%). The
net amount of individually impaired loans and advances to customers
after impairment but before taking into account the cash flows from
collateral held is GBP29.7m (2016: GBP15.9m).
23. Allowances for impairment of loans and advances
Reconciliation of specific allowance for impairments:
2017 2016
Group GBP000 GBP000
--------------------------------------------------------- ------- ---------
At 1 January 973 35,696
Impairment losses 329 474
On acquisition of RAF (see note 29) 51 -
De-consolidation of STB - (34,285)
Loans written off during the year as uncollectible (15) (962)
Amounts recovered during the year (116) 50
--------------------------------------------------------- ------- ---------
At 31 December 1,222 973
--------------------------------------------------------- ------- ---------
Reconciliation of collective allowance for impairments:
2017 2016
Group GBP000 GBP000
--------------------------------------------------------- ------- ---------
At 1 January - 3,141
On acquisition of RAF (see note 29) 75 -
Impairment losses 65 -
De-consolidation of STB - (3,141)
At 31 December 140 -
--------------------------------------------------------- ------- ---------
24. Other assets
2017 2016
Group GBP000 GBP000
----------------------------------------------- ------- -------
Trade receivables 5,208 1,197
Inventory 4,436 5,213
Receivable from investment fund held for sale 6,756 -
Prepayments and accrued income 4,224 5,529
----------------------------------------------- ------- -------
20,624 11,939
----------------------------------------------- ------- -------
Inventory
Land acquired through repossession of collateral which is
subsequently held in the ordinary course of business with a view to
develop and sell is accounted for as inventory. The land is
currently in the process of being redeveloped and will ultimately
be sold off as individual residential plots. The proceeds from the
sale of these plots will be used to repay the outstanding loans.
Pinnacle Universal is a special purpose vehicle, 100% owned by the
Group, which owns this land.
2017 2016
Company GBP000 GBP000
---------------------------------- ------- -------
Trade receivables 3 633
Due from subsidiary undertakings 159 158
Prepayments and accrued income 37 96
---------------------------------- ------- -------
199 887
---------------------------------- ------- -------
25. Financial investments
2017 2016
Group GBP000 GBP000
-------------------------------------------------- ------- -------
Designated at fair value through profit and loss
- Listed securities 128 108
Available-for-sale
- Listed securities 4 13
- Debt securities 1,497 1,443
- Unlisted securities 718 581
-------------------------------------------------- ------- -------
Total financial investments 2,347 2,145
-------------------------------------------------- ------- -------
Listed securities
The Group holds investments in listed securities which are
valued based on quoted prices.
Debt securities
The Group has made an investment in an unlisted special purpose
vehicle, set up to acquire and enhance the value of a commercial
property. This investment is of a medium term nature. There is no
open market for the investment and therefore the Group has valued
it using appropriate valuation methodologies (see Note 4.2 (a)),
which include net asset valuations and discounted future cash
flows. The Directors intend to dispose of the underlying asset when
a suitable buyer has been identified and when the Directors believe
that the underlying asset has reached its optimal value.
Unlisted securities
On 23 June 2016 Arbuthnot Latham received EUR1.3m cash
consideration following Visa Inc.'s completion of the acquisition
of Visa Europe. As part of the deal Arbuthnot Latham also received
preference shares in Visa Inc., these have been valued at their
future conversion value into Visa Inc. common stock. Management has
assessed the fair value of the Group's investment as GBP706k (2016:
GBP569k). This valuation includes a 31% haircut, as referred to in
Note 4.
2017 2016
Company GBP000 GBP000
-------------------------------------------------------- ------- -------
Financial investments comprise:
- Listed securities (at fair value through profit and
loss) 128 108
- Unlisted securities (available-for-sale) 12 13
-------------------------------------------------------- ------- -------
Total financial investments 140 121
-------------------------------------------------------- ------- -------
26. Deferred taxation
The deferred tax asset comprises:
2017 2016
Group GBP000 GBP000
------------------------------------------------------------ ------- -------
Accelerated capital allowances and other short-term timing
differences 372 943
Movement in fair value of available-for-sale securities (40) (14)
Unutilised tax losses 1,195 736
------------------------------------------------------------ ------- -------
Deferred tax asset 1,527 1,665
------------------------------------------------------------ ------- -------
At 1 January 1,665 1,784
On acquisition of RAF 5 -
Other Comprehensive Income - available-for-sale securities (26) 456
Profit and loss account - accelerated capital allowances
and other short-term timing differences (576) (21)
Profit and loss account - tax losses 459 (64)
Deconsolidate / Transfer to assets classified as held for
sale - (490)
------------------------------------------------------------ ------- -------
Deferred tax asset at 31 December 1,527 1,665
------------------------------------------------------------ ------- -------
2017 2016
Company GBP000 GBP000
------------------------------------------------------------ ------- -------
Accelerated capital allowances and other short-term timing
differences 346 397
Tax losses 295 -
------------------------------------------------------------ ------- -------
Deferred tax asset 641 397
------------------------------------------------------------ ------- -------
At 1 January 397 418
Profit and loss account - accelerated capital allowances
and other short-term timing differences (51) (21)
Profit and loss account - tax losses 295 -
------------------------------------------------------------ ------- -------
Deferred tax asset at 31 December 641 397
------------------------------------------------------------ ------- -------
Deferred tax assets are recognised for tax losses to the extent
that the realisation of the related tax benefit through future
taxable profits is probable.
27. Interests in associates
2017 2016
Group GBP000 GBP000
----------------------------- ------- -------
Tarn Crag - 900
Secure Trust Bank PLC 83,804 81,674
----------------------------- ------- -------
Interests in associates 83,804 82,574
----------------------------- ------- -------
Tarn Crag
On 11 October 2013, AL together with Praxis (Holding) Limited,
formed a special purpose vehicle in the form of a separate legal
entity (Tarn Crag Limited). The purpose of this legal entity was to
refurbish and re-let a property in Glasgow, with the intention to
exit via a sale to an institutional investor in circa 5 years time.
The investment was accounted for using the equity method.
On 28 March 2017 AL sold its investment in Tarn Crag to Praxis
(Holding) Ltd at book value of GBP900k.
During the year the associate recorded a loss of GBPnil (2016:
loss of GBP197k). Legal costs of GBPnil (2016: GBP43k), previously
capitalised against the carrying value of the associate, were
written off in the year.
The summarised balance sheet for Tarn Crag at the previous year
end is set out below:
2016
At 31 December GBP000
------------------------------------ --------
ASSETS
Cash and balances at central banks 3,468
Other assets 656
Property, plant and equipment 9,201
------------------------------------- --------
13,325
------------------------------------ --------
EQUITY AND LIABILITIES
Deposits from banks 12,474
Other liabilities 1,484
Debt securities in issue 1,400
Revaluation reserve (1,418)
Retained Earnings (615)
------------------------------------- --------
13,325
------------------------------------ --------
Secure Trust Bank
On 15 June 2016 Arbuthnot Banking Group sold 6 million shares in
Secure Trust Bank PLC ('STB') for GBP150m, which reduced its
shareholding in STB from 51.92% to 18.93%. From this date the Group
accounted for its remaining shareholding in STB as an associate.
After the sale of the 6 million shares, the Group retained Board
representation and as such is seen to have significant influence
over STB. The principal place of business of STB is the United
Kingdom. Subsequent to initial recognition at fair value, the
investment is accounted for using the equity method. The fair value
of the investment as at 31 December 2016 was GBP75.4m. STB recorded
a profit after tax of GBP11.4m in the period from 16 June to 31
December 2016. The carrying value of the interest in STB is shown
as the fair value at the date of sale adjusted for the share of the
Group's profit after tax and dividends received. STB is listed on
the main market of the London Stock Exchange.
(a) Significant restrictions
The Group does not have significant restrictions on its ability
to access funds, other than the liquidity in the market for the
sale of the shares.
(b) Risks associated with interests
As STB is a publicly listed company, there are a number of
risks, e.g. conduct risk, regulatory risk and macroeconomic and
competitive environment risks that could have an impact on the
share price and ultimate recoverability of the investment.
(c) Changes in ownership interest
On 15 June 2016 Arbuthnot Banking Group sold 6 million shares in
STB for GBP150m, which reduced its shareholding in STB from 51.92%
to 18.93%. From this date the Group accounted for its remaining
shareholding in STB as an associate. After the sale of the 6
million shares, the Group retained Board representation and as such
is seen to have significant influence over STB.
On 7 November 2016, 460,419 share options in STB vested. On the
same date 283,335 share options were exercised with admission of
the shares on the stock market on 9 November. This increased STB's
shares in issue from 18,191,894 to 18,475,229 and as a result ABG's
shareholding was diluted from 18.93% to 18.64%. If the remaining
177,084 share options were exercised, ABG's shareholding would
further dilute to 18.47%.
The summarised Income Statement and Balance Sheet for STB is set
out below (STB reports in millions):
Year ended 31
December
2017 2016
GBPm GBPm
------------------------------------------------------- ------- -------
Interest income 141.3 118.8
Interest expense (26.7) (26.3)
--------------------------------------------------------- ------- -------
Net interest income 114.6 92.5
--------------------------------------------------------- ------- -------
Fee and commission income 16.0 16.3
Fee and commission expense (1.1) (1.8)
--------------------------------------------------------- ------- -------
Net fee and commission income 14.9 14.5
--------------------------------------------------------- ------- -------
Operating income 129.5 107.0
--------------------------------------------------------- ------- -------
Net impairment loss on financial assets (33.5) (23.3)
Other income 0.3 -
Operating expenses (71.3) (64.3)
--------------------------------------------------------- ------- -------
Profit before tax 25.0 19.4
Income tax expense (5.1) (5.2)
--------------------------------------------------------- ------- -------
Profit after tax 19.9 14.2
Profit from discontinued operations after tax 3.9 123.3
--------------------------------------------------------- ------- -------
Profit for the year 23.8 137.5
--------------------------------------------------------- ------- -------
Other comprehensive income
Items that will not be reclassified to profit or loss
Revaluation reserve 0.1 1.2
Tax on other comprehensive income - (0.2)
--------------------------------------------------------- ------- -------
0.1 1.0
------------------------------------------------------- ------- -------
Items that are or may be reclassified to profit or
loss
Available-for-sale reserve 2.8 (2.8)
2.8 (2.8)
------------------------------------------------------- ------- -------
Other comprehensive income for the period, net of
tax 2.9 (1.8)
--------------------------------------------------------- ------- -------
Total comprehensive income for the period 26.7 135.7
--------------------------------------------------------- ------- -------
Profit attributable to:
------------------------------------------------------- ------- -------
Equity holders of the Company 23.8 137.5
--------------------------------------------------------- ------- -------
Total comprehensive income attributable to:
------------------------------------------------------- ------- -------
Equity holders of the Company 26.7 135.7
--------------------------------------------------------- ------- -------
At 31 December
2017 2016
GBPm GBPm
ASSETS
Cash and balances at central banks 226.1 112.0
Loans and advances to banks 34.3 18.2
Loans and advances to customers 1,598.3 1,321.0
Debt securities held-to-maturity 5.0 20.0
Financial investments - 13.5
Property, plant and equipment 11.5 11.4
Intangible assets 10.4 9.0
Deferred tax asset 0.6 -
Other assets 5.4 4.9
----------------------------------------------- -------- --------
Total assets 1,891.6 1,510.0
----------------------------------------------- -------- --------
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 7.4 7.4
Share premium account 81.2 81.2
Retained earnings 159.2 149.0
Other reserves 1.3 (1.6)
----------------------------------------------- -------- --------
Total equity 249.1 236.0
----------------------------------------------- -------- --------
LIABILITIES
Deposits from banks 113.0 70.0
Deposits from customers 1,483.2 1,151.8
Current tax liability 3.0 1.7
Deferred tax liability - 0.2
Other liabilities 43.3 50.3
Total liabilities 1,642.5 1,274.0
----------------------------------------------- -------- --------
Total equity and liabilities 1,891.6 1,510.0
----------------------------------------------- -------- --------
Interest in associate for the Company is set out below:
2017 2016
Company GBP000 GBP000
--------------------------------------------------------- ------- -------
Secure Trust Bank PLC 5,056 5,056
--------------------------------------------------------- ------- -------
Interests in associates 5,056 5,056
--------------------------------------------------------- ------- -------
28. Intangible assets
Computer Other
Goodwill software intangibles Total
Group GBP000 GBP000 GBP000 GBP000
--------------------------------------- --------- ---------- ------------- ---------
Cost
At 1 January 2016 2,695 12,653 2,414 17,762
Additions - 5,155 - 5,155
Transfer out on deconsolidation - STB (1,013) (9,301) (2,200) (12,514)
At 31 December 2016 1,682 8,507 214 10,403
--------------------------------------- --------- ---------- ------------- ---------
Additions - 2,641 - 2,641
On Acquisition - RAF (see note 29) 3,520 - 2,348 5,868
At 31 December 2017 5,202 11,148 2,562 18,912
--------------------------------------- --------- ---------- ------------- ---------
Accumulated amortisation
At 1 January 2016 - (6,048) (840) (6,888)
Amortisation charge - (478) (43) (521)
Transfer out on deconsolidation - STB - 4,794 734 5,528
At 31 December 2016 - (1,732) (149) (1,881)
--------------------------------------- --------- ---------- ------------- ---------
Amortisation charge - (830) (206) (1,036)
At 31 December 2017 - (2,562) (355) (2,917)
--------------------------------------- --------- ---------- ------------- ---------
Net book amount
--------------------------------------- --------- ---------- ------------- ---------
At 31 December 2016 1,682 6,775 65 8,522
--------------------------------------- --------- ---------- ------------- ---------
At 31 December 2017 5,202 8,586 2,207 15,995
--------------------------------------- --------- ---------- ------------- ---------
Included within Computer Software additions is an amount of
GBP2.6m (2016: GBP5.5m) relating to the new banking system which
went live in 2017.
The accounting policy for goodwill is described in note 3.15
(a). The Group reviews the goodwill for impairment at least
annually or when events or changes in economic circumstances
indicate that impairment may have taken place. Significant
management judgements are made in estimations, to evaluate whether
an impairment of goodwill is necessary. Impairment testing is
performed at CGU level and the following two items, with judgements
surrounding them, have a significant impact on the estimations used
in determining the necessity of an impairment charge:
-- Future cash flows - Cash flow forecasts reflect management's
view of future business forecasts at the time of the assessment. A
detailed three year budget is done every year and management also
uses judgement in applying a growth rate. The accuracy of future
cash flows is subject to a high degree of uncertainty in volatile
market conditions. During such conditions, management would perform
impairment testing more frequently than annually to ensure that the
assumptions applied are still valid in the current market
conditions.
-- Discount rate - Management also apply judgement in
determining the discount rate used to discount future expected cash
flows. The discount rate is derived from the cost of capital for
each CGU.
The recoverable amount of an asset or CGU is the greater of its
value in use and its fair value less costs to sell. There are
currently two CGUs (2016: one) with goodwill attached; the core
Arbuthnot Latham CGU (GBP1.7m) and RAF CGU (GBP3.5m).
Management considers the value in use for both CGUs to be the
discounted cash flows over 5 years with a terminal value (2016: 5
years with a terminal value). The 5 year discounted cash flows with
a terminal value are considered to be appropriate as the goodwill
relates to an ongoing well established business and not underlying
assets with finite lives. The terminal value is calculated by
applying a discounted perpetual growth model to the profit expected
in 2020 as per the approved 3 year plan. A growth rate of 12.5%
(2016: 11%) was used for income and 18% (2016: 13%) for expenditure
from 2018 to 2020 (these rates were the best estimate of future
forecasted performance), while a 3% (2016: 3%) percent growth rate
for income and expenditure (a more conservative approach was taken
for latter years as these were not budgeted for in detail as per
the three year plan approved by the Board of Directors) was used
for cash flows after the approved three year plan.
Management considers the value in use for the RAF CGU to be the
discounted cash flows over 5 years with a terminal value. The 5
year discounted cash flows with a terminal value are considered to
be appropriate as the goodwill relates to an ongoing, well
established, business and not underlying assets with finite lives.
The terminal value is calculated by applying a discounted perpetual
growth model to the profit expected in 2022 as per the approved
budget. A growth rate of 5% was used (this rate was the best
estimate of future forecasted performance).
The growth rates used are above the forecast UK growth rate of
1.8% to reflect the Bank's current growth strategy enabled by
capital available at parent level.
Cash flows were discounted at a pre-tax rate of 12% (2016: 12%)
to their net present value. The discount rate of 12% is considered
to be appropriate after evaluating current market assessments of
the time value of money and the risks specific to the assets or
CGUs.
Currently, the value in use and fair value less costs to sell of
both CGUs exceed the carrying values of the associated goodwill and
as a result no sensitivity analysis was performed.
29. Acquisition of Renaissance Asset Finance Ltd
On 28 April 2017, Arbuthnot Latham & Co. Ltd completed the
acquisition of 100% of the share capital of Renaissance Asset
Finance Limited ("RAF") from its founders following receipt of
regulatory approval.
RAF is a provider of finance for a range of specialist assets
which includes vintage and expensive cars and SME business assets.
The acquisition supported ALs strategy to diversify its proposition
within the specialist financial services sector.
The consideration will be paid in four staged amounts, all of
which will be in cash. The first payment was equal to the net
assets at completion of GBP2.1m. The remaining three payments are
performance related and will be based on the profits of RAF in each
of the three calendar years 2018 to 2020. The maximum amount
payable for the performance based payments is limited to GBP6.5m.
AL has also provided an intercompany loan to RAF at completion of
GBP57m to re-finance RAF's existing finance liabilities. The
consideration and the refinancing of RAF's funding liabilities have
been satisfied from the Group's current cash resources.
The assets acquired and resulting goodwill on acquisition are
set out in the table below. The fair value of intangibles acquired
include GBP0.4m relating to customer relationships, GBP1.5m
relating to broker relationships and GBP0.4m for the brand. The
resultant goodwill represented the assembled specialist workforce,
established process and control environment, cross selling
opportunities between the two companies and the opportunity cost of
a fully operational company within the sector.
The acquisition contributed GBP4.2m to interest income and
GBP1.6m to profit before tax.
Acquired Recognised
assets Fair values
/ value on
liabilities adjustments acquisition
GBP000 GBP000 GBP000
--------------------------------- ------------ ------------ ------------
Loans and advances to banks 2,815 - 2,815
Loans and advances to customers 57,684 - 57,684
Other asset 1,341 - 1,341
Deferred tax assets 5 - 5
Intangible assets - 2,348 2,348
Property, plant and equipment 23 - 23
--------------------------------- ------------ ------------ ------------
Total assets 61,868 2,348 64,216
--------------------------------- ------------ ------------ ------------
Deposits from banks 58,969 - 58,969
Current tax liability 195 - 195
Other liabilities 632 - 632
--------------------------------- ------------ ------------ ------------
Total liabilities 59,796 - 59,796
--------------------------------- ------------ ------------ ------------
Net identifiable assets 2,072 2,348 4,420
--------------------------------- ------------ ------------ ------------
Consideration 7,940
Goodwill 3,520
--------------------------------- ------------ ------------ ------------
30. Property, plant and equipment
Freehold Computer
land and
and Leasehold other Motor
buildings improvements equipment Vehicles Total
Group GBP000 GBP000 GBP000 GBP000
--------------------------------------- ----------- -------------- ----------- ---------- ---------
Cost or valuation
At 1 January 2016 7,488 4,686 12,443 97 24,714
Additions - 127 227 - 354
Transfer out on deconsolidation - STB (7,488) (226) (9,929) - (17,643)
--------------------------------------- ----------- -------------- ----------- ---------- ---------
At 31 December 2016 - 4,587 2,741 97 7,425
--------------------------------------- ----------- -------------- ----------- ---------- ---------
Additions - 408 258 - 666
On acquisition - RAF (see note 29) - 20 52 - 72
Disposals - - (10) - (10)
At 31 December 2017 - 5,015 3,041 97 8,153
--------------------------------------- ----------- -------------- ----------- ---------- ---------
At 1 January 2016 (1,037) (530) (9,121) (22) (10,710)
Depreciation charge - (697) (425) (24) (1,146)
Transfer out on deconsolidation - STB 1,037 10 8,166 - 9,213
--------------------------------------- ----------- -------------- ----------- ---------- ---------
At 31 December 2016 - (1,217) (1,380) (46) (2,643)
--------------------------------------- ----------- -------------- ----------- ---------- ---------
Depreciation charge - (944) (540) (25) (1,509)
On acquisition - RAF (see note 29) (16) (33) - (49)
Disposals - - 10 - 10
At 31 December 2017 - (2,177) (1,943) (71) (4,191)
--------------------------------------- ----------- -------------- ----------- ---------- ---------
Net book amount
--------------------------------------- ----------- -------------- ----------- ---------- ---------
At 31 December 2016 - 3,370 1,361 51 4,782
--------------------------------------- ----------- -------------- ----------- ---------- ---------
At 31 December 2017 - 2,838 1,098 26 3,962
--------------------------------------- ----------- -------------- ----------- ---------- ---------
The Group's opening freehold property in 2016 is also the
Registered Office of Secure Trust Bank and was fully utilised for
the Group's own purposes. Included within the depreciation charge
for the year is GBP78k (2016: GBPnil) of additional depreciation in
relation to the early termination of a property lease.
Computer
and
other Motor
equipment Vehicles Total
Company GBP000 GBP000 GBP000
-------------------------- ----------- ---------- -------
Cost or valuation
At 1 January 2016 209 97 306
Additions 5 - 5
At 31 December 2016 214 97 311
-------------------------- ----------- ---------- -------
At 31 December 2017 214 97 311
-------------------------- ----------- ---------- -------
Accumulated depreciation
At 1 January 2016 (80) (22) (102)
Depreciation charge (2) (24) (26)
At 31 December 2016 (82) (46) (128)
-------------------------- ----------- ---------- -------
Depreciation charge (2) (24) (26)
At 31 December 2017 (84) (70) (154)
-------------------------- ----------- ---------- -------
Net book amount
-------------------------- ----------- ---------- -------
At 31 December 2016 132 51 183
-------------------------- ----------- ---------- -------
At 31 December 2017 130 27 157
-------------------------- ----------- ---------- -------
31. Investment property
2017 2016
Group GBP000 GBP000
------------------------- ------- -------
Opening balance 53,339 -
Additions 6,100 50,200
Acquisition costs 321 3,139
Fair value adjustment (321) -
------------------------- ------- -------
At 31 December 2017 59,439 53,339
------------------------- ------- -------
King Street London
Arbuthnot Latham & Co., Limited acquired premises in the
West End of London (namely 20 King Street/10 St James's Street) on
23 June 2016. The property comprises 22,450 square feet of office
space and approximately 7,000 square feet of retail space. The
property is held by way of leasehold from The Crown Estate
Commissioners with 119 years unexpired and with a rent review every
five years.
The property is currently fully tenanted, with the main lease
ending in 2019. It is accounted for as investment property and the
Group has elected to apply the fair value model. It is therefore
initially recognised at cost and then subsequently at fair value.
The fair value is determined using the rental income on the
property and the associated effective yield of similar properties
in the surrounding area (see note 4.1(d)). At 31 December 2017
there was no material difference between the cost of the property
and the fair value. No independent valuation was undertaken at year
end.
The Group received GBP2.1m (2016: GBP1.1m) rental income during
the year and incurred GBP0.2m (2016: GBP0.1m) of direct operating
expenses.
St Philips Place Birmingham
On 24 November 2017, Arbuthnot Latham & Co., Limited
acquired leasehold premises in Birmingham (St Philips House, 4 St
Philips Place). The property comprises 24,286 square feet of office
space.
The property is unoccupied and will be refurbished at an
estimated cost of GBP3.4m. After refurbishment the property will be
let out. It is accounted for as investment property and the Group
has elected to apply the fair value model. It is therefore
initially recognised at cost and then subsequently at fair value.
As the property was bought shortly before yearend, the capitalised
acquisition costs of GBP0.3m were written off and the cost at
acquisition was deemed to be the fair value. No independent
valuation was undertaken at year end.
No property interests are held under operating leases and
accounted for as investment property.
32. Deposits from banks
2017 2016
Group GBP000 GBP000
-------------------------------------------------- --------------- -------------
Deposits from other banks 195,097 3,200
-------------------------------------------------- --------------- -------------
Deposits from banks include GBP188m obtained through the Bank of England
Term Funding Scheme ("TFS"). For a maturity profile of deposits from banks,
refer to Note 6.
33. Deposits from customers
2017 2016
Group GBP000 GBP000
----------------------------- ---------- --------
Current/demand accounts 868,855 610,512
Notice accounts 101,909 141,728
Term deposits 420,017 245,409
----------------------------- ---------- --------
1,390,781 997,649
----------------------------- ---------- --------
Included in customer accounts are deposits of GBP29.2m (2016:
GBP8.4m) held as collateral for loans and advances. The fair value
of these deposits approximates their carrying value.
For a maturity profile of deposits from customers, refer to Note
6.
34. Other liabilities
2017 2016
Group GBP000 GBP000
------------------------------ ------- -------
Trade payables 1,207 1,814
Accruals and deferred income 15,032 15,268
------------------------------ ------- -------
16,239 17,082
------------------------------ ------- -------
Financial Services Compensation Scheme Levy
In common with all regulated UK deposit takers, AL pays levies
to the Financial Services Compensation Scheme ("FSCS") to enable
the FSCS to meet claims against the Scheme. The FSCS levy consists
of two parts: a management expenses levy and a more significant
compensation levy. The management expenses levy covers the costs of
running the scheme and the compensation levy covers the amount of
compensation and associated interest the Scheme pays, net of any
recoveries it makes using the rights that have been assigned to
it.
The Group's FSCS provision reflects market participation up to
the reporting date and the accrual of GBP0.1m (2016: GBP0.1m)
relates to the interest levy for the Scheme year 2017/18 which is
payable in September 2017. This amount was calculated on the basis
of the Group's share of protected deposits and the FSCS's estimate
of total interest levies payable for each Scheme year.
2017 2016
Company GBP000 GBP000
-------------------------------- ------- -------
Due to subsidiary undertakings 1,840 3,624
Accruals and deferred income 1,301 1,184
-------------------------------- ------- -------
3,141 4,808
-------------------------------- ------- -------
35. Debt securities in issue
2017 2016
Group and Company GBP000 GBP000
------------------------------ ------- -------
Subordinated loan notes 13,104 12,621
------------------------------ ------- -------
`The subordinated loan notes were issued on 7 November 2005 and
are denominated in Euros. The principal amount outstanding at 31
December 2017 was EUR15,000,000 (2016: EUR15,000,000). The notes
carry interest at 3% over the interbank rate for three month
deposits in euros and are repayable at par in August 2035 unless
redeemed or repurchased earlier by the Company.
The contractual undiscounted amount that will be required to be
paid at maturity of the above debt securities is EUR15,000,000.
Given the fact that the Group has never been subject to a
published credit rating by any of the relevant agencies and the
notes in issue are not quoted, it is not considered possible to
estimate a fair value for these notes.
36. Contingent liabilities and commitments
Contingent liabilities
The Group is subject to extensive regulation in the conduct of
its business. A failure to comply with applicable regulations could
result in regulatory investigations, fines and restrictions on some
of the Group's business activities or other sanctions. The Group
seeks to minimise this risk through the adoption of compliance and
other policies and procedures, continuing to refine controls over
business practices and behaviour, employee training, the use of
appropriate documentation, and the involvement of outside legal
counsel where appropriate.
Capital commitments
At 31 December 2017, the Group had capital commitments of GBPnil
(2016: GBPnil) in respect of equipment purchases.
Credit commitments
The contractual amounts of the Group's off-balance sheet
financial instruments that commit it to extend credit to customers
are as follows:
2017 2016
Group GBP000 GBP000
--------------------------------------------------------- ---------- -------
Guarantees and other contingent liabilities 2,976 274
Commitments to extend credit:
- Original term to maturity of one year or less 131,963 54,934
--------------------------------------------------------- ---------- -------
134,939 55,208
--------------------------------------------------------- ---------- -------
Operating lease commitments
Where a Group company is the lessee, the future aggregate lease payments
under non-cancellable operating leases are as follows:
2017 2016
Group GBP000 GBP000
--------------------------------------------------------- ---------- -------
Expiring:
Within 1 year 2,330 2,635
Later than 1 year and no later than 5 years 10,943 8,422
Later than 5 years 5,384 5,745
--------------------------------------------------------- ---------- -------
18,657 16,802
--------------------------------------------------------- ---------- -------
In 2013, Arbuthnot Latham & Co., Ltd entered into a 16 year
lease on 7 Wilson Street, London (the head office for Arbuthnot
Banking Group PLC, the principal location for Arbuthnot Latham
& Co., Ltd and London offices for Secure Trust Bank PLC), with
a break at 11 years and rent reviews after 5, 10 and 15 years. The
initial rent is GBP1.75m per annum. This lease forms the most
significant part of the operating leases disclosed in the table
above.
In 2015, the Bank entered into a 10 year lease to occupy part of
the ground floor of The Senate, Southernhay Gardens, Exeter, with a
break clause and rent review after 5 years. The initial rent is
GBP0.1m per annum.
In 2017, the Bank entered into a 10 year lease to occupy part of
the eighth floor of 82 King Street, Manchester, with a break clause
and rent review after 5 years. The initial rent is GBP0.1m per
annum.
On 3 January 2018, Arbuthnot Latham entered into a 12 year lease
(up to 16 October 2029) to occupy the first, second and third floor
of 10 Dominion Street London, with a break clause on 16 October
2024. The initial rent is GBP0.7m per annum. This is reflected in
the table above as an adjusting post balance sheet event.
Prior to the year end, the Bank reached agreement on the early
termination of a property lease, which gave rise to an onerous
lease provision of GBP0.3m (2016: GBPnil).
In addition to the above commitments, ground rent of GBP0.2m per
annum is payable for the remaining term of 119 years of the King
Street investment property.
37. Share capital
Ordinary
Number share Share
of shares capital premium
Group and Company GBP000 GBP000
------------------------------------- ----------- --------- ---------
At 1 January 2016 15,279,322 153 -
At 31 December 2016 & December 2017 15,279,322 153 -
------------------------------------- ----------- --------- ---------
The Ordinary shares have a par value of 1p per share (2016: 1p
per share). At 31 December 2017 the Company held 390,274 shares
(2016: 390,274) in treasury.
38. Reserves and retained earnings
2017 2016
Group GBP000 GBP000
------------------------------------ -------- --------
Capital redemption reserve 20 20
Available-for-sale reserve 162 (251)
Treasury shares (1,131) (1,131)
Retained earnings 237,171 235,567
------------------------------------ -------- --------
Total reserves at 31 December 236,222 234,205
------------------------------------ -------- --------
The capital redemption reserve represents a reserve created
after the Company purchased its own shares which resulted in a
reduction of share capital.
2017 2016
Company GBP000 GBP000
------------------------------- -------- --------
Capital redemption reserve 20 20
Treasury shares (1,131) (1,131)
Retained earnings 124,659 133,847
------------------------------- -------- --------
Total reserves as 31 December 123,548 132,736
------------------------------- -------- --------
39. Share-based payment options
Company - equity settled
The Company had no equity settled share-based payment awards
outstanding at 31 December 2017.
On 1 April 2014 Mr Fleming was granted an option to subscribe
for 50,000 ordinary 1p shares in the Company between April 2017 and
April 2022 at 1185p. The fair value of these shares at grant date
was GBP53,000. On 11 April 2017 Mr. Fleming exercised all his
options granted on 1 April 2014 at a price of 1457p. The Board
agreed to make a cash settlement rather than allot new shares.
On 16 April 2013 Mr. Salmon and Mr. Cobb were granted options to
subscribe between April 2016 and April 2021 for 100,000 and 50,000
ordinary 1p shares respectively in the Company at 930p. The fair
value of the options at grant date was GBP125,000. On 14 June 2016
Mr. Salmon and Mr. Cobb each exercised all their respective options
granted on 16 April 2013 at a price of 1591p. The Board agreed to
make a cash settlement rather than allot new shares.
No equity settled share options were granted, forfeited, or
expired during the year. ABG incurred an expense in relation to
share based payments of GBP4,000 during 2017 (2016: GBP31,000), as
disclosed in Note 12. In line with the Group accounting policy,
where the equity settled scheme was modified to cash settled, the
entire liability totalling GBP155,000 (2016: GBP1,128,000) was
accounted for as a reserves reclassification, with no profit or
loss recognised in the Income Statement.
Measurement inputs and assumptions used in the Black-Scholes model are
as follows:
2016
-------------------------------------------------------------- ----------
Expected Stock Price Volatility 17%
Expected Dividend Yield 2.7%
Risk Free Interest Rate 1.20%
Average Expected Life (in years) 0.25
Company - cash settled
On 14 June 2016 Mr. Salmon was granted phantom options pursuant
to the Phantom Option Scheme to acquire 200,000 ordinary 1p shares
in the Company at 1591p exercisable in respect of 50% on or after
15 June 2019 and in respect of the remaining 50% on or after 15
June 2021 when a cash payment would be made equal to any increase
in value. On 14 June 2016 Mr. Cobb and Mr. Henderson were each
granted phantom options pursuant to the Phantom Option Scheme to
acquire 100,000 ordinary 1p shares in the Company at 1591p
exercisable in respect of 50% on or after 15 June 2019 and in
respect of the remaining 50% on or after 15 June 2021 when a cash
payment would be made equal to any increase in market value. The
fair value of the options at grant date was GBP1.3m. At 31 December
2017, the fair value of the options was GBP0.8m.
The performance conditions of the Scheme are that for the
duration of the vesting period, the dividends paid by ABG must have
increased in percentage terms when compared to an assumed dividend
of 29p per share in respect of the financial year ending 31
December 2016, by a minimum of the increase in the Retail Prices
Index during that period.
Also from the grant date to the date the Option is exercised,
there must be no public criticism by any regulatory authority on
the operation of ABG or any of its subsidiaries which has a
material impact on the business of ABG.
Options are forfeited if they remain unexercised after a period
of more than 7 years from the date of grant. If the participant
ceases to be employed by the Group by reason of injury, disability,
ill-health or redundancy; or because his employing company ceases
to be a shareholder of the Group; or because his employing business
is being transferred out of the Group, his option may be exercised
within 6 months after such cessation. In the event of the death of
a participant, the personal representatives of a participant may
exercise an option, to the extent exercisable at the date of death,
within 6 months after the death of the participant.
On cessation of employment for any other reason (or when a
participant serves, or has been served with, notice of termination
of such employment), the option will lapse although the
Remuneration Committee has discretion to allow the exercise of the
option for a period not exceeding 6 months from the date of such
cessation.
In such circumstances, the performance conditions may be
modified or waived as the Remuneration Committee, acting fairly and
reasonably and taking due consideration of the circumstances,
thinks fit. The number of Ordinary Shares which can be acquired on
exercise will be pro-rated on a time elapsed basis, unless the
Remuneration Committee, acting fairly and reasonably and taking due
consideration of the circumstances, decides otherwise. In
determining whether to exercise its discretion in these respects,
the Remuneration Committee must satisfy itself that the early
exercise of an option does not constitute a reward for failure.
The probability of payout has been assigned based on the
likelihood of meeting the performance criteria, which is 100%. The
Directors consider that there is some uncertainty surrounding
whether the participants will all still be in situ and eligible at
the vesting date. Therefore the directors have assumed a 9%
attrition rate for the share options vesting in June 2019 and 15%
attrition rate for the share options vesting in June 2021. The
attrition rate will increase by 3% per year until the vesting date.
ABG incurred an expense in relation to share based payments of
GBP0.2m during 2017 (2016: GBP0.2m), as disclosed in Note 12.
Measurement inputs and assumptions used in the Black-Scholes model are
as follows:
2017 2016
------------------------------------------------------ --------- ---------
Expected Stock Price Volatility 27.0% 33.0%
Expected Dividend Yield 2.5% 2.3%
Risk Free Interest Rate 0.5% 0.4%
Average Expected Life (in years) 2.46 3.46
40. Dividends per share
Final dividends are not accounted for until they have been
approved at the Annual General Meeting. At the meeting on 10 May
2017, a dividend in respect of 2017 of 19p per share (2016: actual
dividend 18p per share) amounting to a total of GBP2.83m (2016:
actual GBP2.68m) is to be proposed. The financial statements for
the year ended 31 December 2017 do not reflect the final dividend
which will be accounted for in shareholders' equity as an
appropriation of retained profits in the year ending 31 December
2018.
41. Cash and cash equivalents
For the purposes of the Statement of Cash Flows, cash and cash
equivalents are comprised of the following balances with less than
three months maturity from the date of acquisition.
2017 2016
Group GBP000 GBP000
---------------------------------------------- -------- --------
Cash and balances at central banks (Note 17) 313,101 195,752
Loans and advances to banks (Note 18) 70,679 36,951
---------------------------------------------- -------- --------
383,780 232,703
---------------------------------------------- -------- --------
2017 2016
Company GBP000 GBP000
---------------------------------------------- -------- --------
Loans and advances to banks 36,103 89,072
---------------------------------------------- -------- --------
42. Related party transactions
Related parties of the Company and Group include subsidiaries,
Key Management Personnel, close family members of Key Management
Personnel and entities which are controlled, jointly controlled or
significantly influenced, or for which significant voting power is
held, by Key Management Personnel or their close family
members.
Other than the directors' remuneration (see Remuneration Report
pages 20 to 21), payment of dividends and transactions with
subsidiaries and associates, there were no related party
transactions within the Parent Company. A number of banking
transactions are entered into with related parties in the normal
course of business on normal commercial terms. These include loans
and deposits. Except for the directors' disclosures, there were no
other Key Management Personnel disclosures; therefore the tables
below relate to directors and their close family members.
2017 2016
Group - subsidiaries GBP000 GBP000
-------------------------------------- -------- --------
Loans
Loans outstanding at 1 January 1,361 3,123
Loans advanced during the year 150 2,076
Loan repayments during the year (3) (3,429)
Transferred to loans with associates (1,000) (409)
-------------------------------------- -------- --------
Loans outstanding at 31 December 508 1,361
-------------------------------------- -------- --------
Interest income earned 23 122
-------------------------------------- -------- --------
2017 2016
Group - associates GBP000 GBP000
------------------------------------------ ------- -------
Loans
Loans outstanding at 1 January 404 -
Loans advanced during the year 5 5
Loan repayments during the year - (10)
Transferred from loans with subsidiaries 1,000 409
------------------------------------------ ------- -------
Loans outstanding at 31 December 1,409 404
------------------------------------------ ------- -------
Interest income earned 5 5
------------------------------------------ ------- -------
The loans to directors are mainly secured on property, shares or
cash and bear interest at rates linked to base rate. No provisions
have been recognised in respect of loans given to related parties
(2016: GBPnil).
2017 2016
Group - subsidiaries GBP000 GBP000
----------------------------------------- -------- --------
Deposits
Deposits at 1 January 3,398 2,692
Deposits placed during the year 3,563 6,644
Deposits repaid during the year (2,728) (5,623)
Transferred to deposits with associates (1,000) (315)
----------------------------------------- -------- --------
Deposits at 31 December 3,233 3,398
----------------------------------------- -------- --------
Interest expense on deposits 46 12
----------------------------------------- -------- --------
2017 2016
Group - associates GBP000 GBP000
--------------------------------------------- ------- -------
Deposits
Deposits at 1 January 318 -
Deposits placed during the year 85 3
Transferred from deposits with subsidiaries 1,000 315
--------------------------------------------- ------- -------
Deposits at 31 December 1,403 318
--------------------------------------------- ------- -------
Interest expense on deposits 5 3
--------------------------------------------- ------- -------
Details of directors' remuneration are given in the Remuneration
Report. The Directors do not believe that there were any other
transactions with key management or their close family members that
require disclosure.
Details of principal subsidiaries are given in Note 43. Transactions
and balances with subsidiaries are shown below:
2017 2016
Highest Balance Highest Balance
balance at 31 balance at 31
during December during December
the year the year
GBP000 GBP000 GBP000 GBP000
----------------------------------- ---------- ---------- ---------- ----------
ASSETS
Due from subsidiary undertakings 89,150 36,256 150,776 89,224
Shares in subsidiary undertakings 97,802 97,802 54,602 54,602
----------------------------------- ---------- ---------- ---------- ----------
186,952 134,058 205,378 143,826
----------------------------------- ---------- ---------- ---------- ----------
LIABILITIES
Due to subsidiary undertakings 4,011 1,570 3,650 3,357
----------------------------------- ---------- ---------- ---------- ----------
4,011 1,570 3,650 3,357
----------------------------------- ---------- ---------- ---------- ----------
The disclosure of the year end balance and the highest balance
during the year is considered the most meaningful information to
represent the transactions during the year. The above transactions
arose during the normal course of business and are on substantially
the same terms as for comparable transactions with third
parties.
The Company undertook the following transactions with other companies
in the Group during the year:
2017 2016
GBP000 GBP000
---------------------------------------------------------- -------- --------
Arbuthnot Latham & Co., Ltd - Recharge of property and
IT costs 1,087 1,087
Arbuthnot Latham & Co., Ltd - Recharge for costs paid
on the Company's behalf 1,501 4,015
Arbuthnot Latham & Co., Ltd - Group recharges for shared
services (1,483) (1,483)
Secure Trust Bank PLC (up to 15 June 2016 as subsidiary)
- Group recharges for shared services - (212)
Secure Trust Bank PLC (up to 15 June 2016 as subsidiary)
- Dividends received - (5,195)
Secure Trust Bank PLC (from 16 June 2016 as associate)
- Group recharges for shared services (813) (490)
Secure Trust Bank PLC (from 16 June 2016 as associate)
- Dividends received (2,618) (6,273)
---------------------------------------------------------- -------- --------
Total (2,326) (8,551)
---------------------------------------------------------- -------- --------
43. Interests in subsidiaries
Investment Impairment
at cost provisions Net
Company GBP000 GBP000 GBP000
-------------------------------------------------- ----------- ------------ ---------
At 1 January 2016 49,030 (2,564) 46,466
Capital contributions to Arbuthnot Latham & Co.,
Limited 22,000 - 22,000
Disposal of Secure Trust Bank PLC (13,864) - (13,864)
-------------------------------------------------- ----------- ------------ ---------
At 31 December 2016 57,166 (2,564) 54,602
-------------------------------------------------- ----------- ------------ ---------
Capital contributions to Arbuthnot Latham & Co.,
Limited 43,200 - 43,200
-------------------------------------------------- ----------- ------------ ---------
At 31 December 2017 100,366 (2,564) 97,802
-------------------------------------------------- ----------- ------------ ---------
2017 2016
Company GBP000 GBP000
-------------------------- ------- -------
Subsidiary undertakings:
Bank 95,502 52,302
Other 2,300 2,300
-------------------------- ------- -------
Total 97,802 54,602
-------------------------- ------- -------
(a) List of subsidiaries
Arbuthnot Latham & Co., Limited is the only significant
subsidiary of Arbuthnot Banking Group. Arbuthnot Latham is
incorporated in the United Kingdom, has a principal activity of
Private and Commercial Banking and is 100% owned by the Group.
Secure Trust Bank PLC became an associate company of the Group
from 15 June 2016.
The table below provides details of other subsidiaries and related undertakings
of Arbuthnot Banking Group PLC at 31 December:
Country
% shareholding of incorporation Principal activity
---------------------------------- --------------- ------------------ ------------------------
Direct shareholding
Arbuthnot Fund Managers Limited 100.0% UK Dormant
Arbuthnot Investments Limited 100.0% UK Dormant
Arbuthnot Limited 100.0% UK Dormant
Arbuthnot Properties Limited 100.0% UK Dormant
Arbuthnot Unit Trust Management 100.0% UK
Limited Dormant
Gilliat Financial Solutions 100.0% UK
Limited Dormant
Peoples Trust and Savings Plc 100.0% UK Dormant
Secure Trust Bank PLC* 18.6% UK Retail banking
West Yorkshire Insurance Company 100.0% UK
Limited Non-trading
Windward Insurance Company 100.0% Guernsey
PCC Limited Insurance
Indirect shareholding via intermediate
holding companies
Arbuthnot Latham (Nominees) 100.0% UK
Limited Dormant
Arbuthnot Latham Real Estate 100.0% Jersey
Holdco Limited Property Investment
Arbuthnot Latham Real Estate 100.0% UK
Holdings Limited Property Investment
Arbuthnot Latham Real Estate 100.0% Jersey
PropCo Limited Property Investment
Arbuthnot Real Estate Capital 100.0% Jersey
Limited Property Investment
Arbuthnot Real Estate Capital 100.0% Jersey
GP 1 Limited Property Investment
Arbuthnot Real Estate Capital 100.0% Jersey
Fund 1 Limited Property Investment
Arbuthnot Securities Limited 100.0% UK Dormant
Artillery Nominees Limited 100.0% UK Dormant
Debt Managers (Services) Limited* 18.6% UK Debt collection company
John K Gilliat & Co., Limited 100.0% UK Dormant
Pinnacle Universal Limited 100.0% BVI Property development
Renaissance Asset Finance Limited 100.0% UK Asset Finance
Secure Homes Services Limited* 18.6% UK Property rental
STB Leasing Limited* 18.6% UK Leasing
V12 Finance Group Limited* 18.6% UK Holding company
V12 Personal Finance Limited* 18.6% UK Dormant
18.6% UK Sourcing and servicing
V12 Retail Finance Limited* of unsecured loans
---------------------------------- --------------- ------------------ --------------------------
* Treated as interests in associates.
All the subsidiary and related undertakings above are unlisted
and none are banking institutions, except for Secure Trust Bank
PLC. All 100% owned entities are included in the consolidated
financial statements and have an accounting reference date of 31
December. All other entities are disclosed in the consolidated
financial statements under interests in associates (see note 27).
On 16 January 2018, Artillery Nominees Limited was dissolved.
All Jersey entities have their registered office as 26 New
Street, St Helier, Jersey, JE2 3RA. Pinnacle Universal Limited's
registered office is 9 Columbus Centre, Pelican Drive, Road Town,
Tortola, BVI. The companies treated as associates have their
registered office as One Arleston Way, Solihull, West Midlands, B90
4LH. All other entities listed above have their registered office
as 7 Wilson Street, London, EC2M 2SN.
(b) Non-controlling interests in subsidiaries
There were no non-controlling interests at the end of 2016 or
2017.
(c) Significant restrictions
The Group does not have significant restrictions on its ability
to access or use its assets and settle its liabilities other than
those resulting from the supervisory frameworks within which
banking subsidiaries operate. The supervisory frameworks require
banking subsidiaries to keep certain levels of regulatory capital
and liquid assets, limit their exposure to other parts of the Group
and comply with other ratios. The carrying amounts of the banking
subsidiary's assets and liabilities are GBP1,784m and GBP1,651m
respectively (2016: GBP1,199m and GBP1,118m respectively).
(d) Risks associated with interests
During the year Arbuthnot Banking Group PLC made GBP43.2m (2016:
GBP22m) capital contributions to Arbuthnot Latham & Co., Ltd.
The contributions were made to assist the Bank during a period of
growth to ensure that all regulatory capital requirements were
met.
(e) Changes in ownership interest
On 15 June 2016 Arbuthnot Banking Group sold 6 million shares in
Secure Trust Bank PLC ('STB') for GBP150m, which reduced its
shareholding in STB from 51.92% to 18.93%. From this date the Group
accounted for its remaining shareholding in STB as an associate.
After the sale of the 6 million shares, the Group retained Board
representation and as a result is seen to have significant
influence over STB.
44. Operating segments
The Group is organised into three main operating segments,
arranged over three separate companies with each having its own
specialised banking service, as disclosed below:
1) Retail banking (associate) - incorporating household cash
management, personal lending and banking and insurance
services.
2) UK Private banking - incorporating private banking,
commercial banking and wealth management.
3) Group Centre - ABG Group Centre management
Transactions between the operating segments are on normal
commercial terms. Centrally incurred expenses are charged to
operating segments on an appropriate pro-rata basis. Segment assets
and liabilities comprise operating assets and liabilities, being
the majority of the balance sheet.
Continuing operations
-----------------------------------------------
Retail
Bank
Associate UK Private Group
Income banking Centre Total
Year ended 31 December 2017 GBP000 GBP000 GBP000 GBP000
------------------------------------------ ----------- ----------- --------- ----------
Interest revenue - 47,601 204 47,805
Inter-segment revenue - (174) (204) (378)
------------------------------------------ ----------- ----------- --------- ----------
Interest revenue from external customers - 47,427 - 47,427
------------------------------------------ ----------- ----------- --------- ----------
Fee and commission income - 13,805 - 13,805
------------------------------------------ ----------- ----------- --------- ----------
Revenue from external customers - 61,232 - 61,232
------------------------------------------ ----------- ----------- --------- ----------
Interest expense - (6,199) 225 (5,974)
Add back inter-segment revenue - 174 (174) -
Subordinated loan note interest - - (360) (360)
Fee and commission expense - (282) - (282)
------------------------------------------ ----------- ----------- --------- ----------
Segment operating income - 54,925 (309) 54,616
------------------------------------------ ----------- ----------- --------- ----------
Impairment losses - (394) - (394)
Other income - 3,870 (837) 3,033
Income from associates 4,437 4,437
Operating expenses - (47,442) (7,279) (54,721)
------------------------------------------ ----------- ----------- --------- ----------
Segment profit / (loss) before tax 4,437 10,959 (8,425) 6,971
------------------------------------------ ----------- ----------- --------- ----------
Income tax (expense) / income - (540) 92 (448)
------------------------------------------ ----------- ----------- --------- ----------
Segment profit / (loss) after tax 4,437 10,419 (8,333) 6,523
------------------------------------------ ----------- ----------- --------- ----------
Segment profit / (loss) after tax 4,437 10,419 (8,333) 6,523
------------------------------------------ ----------- ----------- --------- ----------
Loans and advances to customers 1,049,269 - 1,049,269
Other assets 734,406 69,557 803,963
------------------------------------------ ----------- ----------- --------- ----------
Segment total assets 1,783,675 69,557 1,853,232
------------------------------------------ ----------- ----------- --------- ----------
Customer deposits 1,390,781 - 1,390,781
Other liabilities 259,957 (33,881) 226,076
------------------------------------------ ----------- ----------- --------- ----------
Segment total liabilities 1,650,738 (33,881) 1,616,857
------------------------------------------ ----------- ----------- --------- ----------
Other segment items:
Capital expenditure (3,307) - (3,307)
Depreciation and amortisation (2,354) (26) (2,380)
------------------------------------------ ----------- ----------- --------- ----------
The "Group Centre" segment above includes the parent entity and all
intercompany eliminations.
Discontinued operations
(Retail Banking) Continuing operations
------------------------------ -----------------------------------------------
UK Private UK Private Group Group
ELL STB Total banking banking Centre Total Total
Year ended 31 December GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
2016
------------------------- -------- --------- --------- ----------- ----------- --------- ---------- ----------
Interest revenue 11,137 57,498 68,635 - 38,245 285 38,530
Inter-segment revenue - - - - (174) (285) (459)
------------------------- -------- --------- --------- ----------- ----------- --------- ----------
Interest revenue from
external customers 11,137 57,498 68,635 - 38,071 - 38,071
------------------------- -------- --------- --------- ----------- ----------- --------- ----------
Fee and commission
income 147 7,981 8,128 - 11,430 - 11,430
------------------------- -------- --------- --------- ----------- ----------- --------- ----------
Revenue from external
customers 11,284 65,479 76,763 - 49,501 - 49,501
------------------------- -------- --------- --------- ----------- ----------- --------- ----------
Interest expense - (12,107) (12,107) - (7,474) 200 (7,274)
Add back inter-segment
revenue - - - - 174 (174) -
Subordinated loan note
interest - - - - - (352) (352)
Fee and commission
expense (124) (779) (903) - (425) - (425)
------------------------- -------- --------- --------- ----------- ----------- --------- ----------
Segment operating income 11,160 52,593 63,753 - 41,776 (326) 41,450
------------------------- -------- --------- --------- ----------- ----------- --------- ----------
Impairment losses (2,610) (12,172) (14,782) - (474) - (474)
Other income - - - - 4,353 (1,184) 3,169
Income from associates - - - 2,145 - - 2,145
Operating expenses (6,016) (29,073) (35,089) - (36,602) (9,509) (46,111)
------------------------- -------- --------- --------- ----------- ----------- --------- ---------- ----------
Segment profit / (loss)
before tax 2,534 11,348 13,882 2,145 9,053 (11,019) 179 14,061
------------------------- -------- --------- --------- ----------- ----------- --------- ---------- ----------
Income tax (expense)
/ income (507) (2,199) (2,706) - (211) (509) (720) (3,426)
------------------------- -------- --------- --------- ----------- ----------- --------- ---------- ----------
Segment profit / (loss)
after tax 2,027 9,149 11,176 2,145 8,842 (11,528) (541) 10,635
------------------------- -------- --------- --------- ----------- ----------- --------- ---------- ----------
Profit on sale of
discontinued
operations 116,754 100,180 216,934 - - - - 216,934
------------------------- -------- --------- --------- ----------- ----------- --------- ---------- ----------
Segment profit / (loss)
after tax 118,781 109,329 228,110 2,145 8,842 (11,528) (541) 227,569
------------------------- -------- --------- --------- ----------- ----------- --------- ---------- ----------
Loans and advances to
customers - 758,799 - 758,799
Other assets - 440,363 66,122 506,485
------------------------- -------- --------- --------- ----------- ----------- --------- ---------- ----------
Segment total assets - 1,199,162 66,122 1,265,284 1,265,284
------------------------- -------- --------- --------- ----------- ----------- --------- ---------- ----------
Customer deposits - 997,649 - 997,649
Other liabilities - 120,815 (87,538) 33,277
------------------------- -------- --------- --------- ----------- ----------- --------- ---------- ----------
Segment total
liabilities - 1,118,464 (87,538) 1,030,926 1,030,926
------------------------- -------- --------- --------- ----------- ----------- --------- ---------- ----------
Other segment items:
Capital expenditure - (5,504) (5) (5,509)
Depreciation and
amortisation - (1,641) (26) (1,667)
------------------------- -------- --------- --------- ----------- ----------- --------- ---------- ----------
Segment profit is shown prior to any intra-group
eliminations.
The UK private bank has a branch in Dubai, which generated
GBP4.5m (2016: GBP3.1m) fee income and had operating costs of
GBP2.7m (2016: GBP2.2m). All Dubai branch income is booked in the
UK. Other than the Dubai branch, all operations of the Group are
conducted wholly within the United Kingdom and geographical
information is therefore not presented.
45. Country by Country Reporting
Article 89 of the EU Directive 2013/36/EU otherwise known as the
Capital Requirements Directive IV ('CRD IV') was implemented into
UK domestic legislation through statutory instrument 2013 No. 3118,
the Capital Requirements (Country-by-Country Reporting) Regulations
2013 (the Regulations), which were laid before the UK Parliament on
10 December 2013 and which came into force on 1 January 2014.
Article 89 requires credit institutions and investment firms in
the EU to disclose annually, specifying, by Member State and by
third country in which it has an establishment, the following
information on a consolidated basis for the financial year: name,
nature of activities, geographical location, turnover, number of
employees, profit or loss before tax, tax on profit or loss and
public subsidies received.
31 December 2017 Turnover Number Profit/(loss) Tax paid
FTE
Name Nature of Location (GBPm) employees before (GBPm)
activity tax (GBPm)
------------------- ------------------ ---------- --------- ---------- -------------- ---------
Arbuthnot Banking
Group PLC Banking Services UK 54.6 350 9.8 -
Arbuthnot Banking
Group PLC Banking Services Dubai - 16 (2.7) -
31 December 2016 Turnover Number Profit/(loss) Tax paid
FTE
Name Nature of Location (GBPm) employees before (GBPm)
activity tax (GBPm)
------------------- ------------------ ---------- --------- ---------- -------------- ---------
Arbuthnot Banking
Group PLC Banking Services UK 105.2 272 247.1 6.1
Arbuthnot Banking
Group PLC Banking Services Dubai - 15 (2.2) -
The Dubai branch income is booked through the UK, hence the turnover
is nil in the above analysis. Offsetting this income
against Dubai branch costs would result in a GBP1.8m profit (2016: GBP0.9m).
No public subsidies were received during 2017 or 2016.
46. Ultimate controlling party
The Company regards Sir Henry Angest, the Group Chairman and
Chief Executive Officer, who has a beneficial interest in 54.7% of
the issued share capital of the Company, as the ultimate
controlling party. Details of his remuneration are given in the
Remuneration Report and Note 42 of the consolidated financial
statements includes related party transactions with Sir Henry
Angest.
47. Events after the balance sheet date
On 3 January 2018, Arbuthnot Latham entered into a 12 year lease
(up to 16 October 2029) to occupy the first, second and third
floors of 10 Dominion Street London, with a break clause on 16
October 2024. The initial rent is GBP0.7m per annum. This is
reflected in contingent liabilities (Note 36) as an adjusting post
balance sheet event.
Five Year Summary
2013 2014 2015 2016 2017
GBP000 GBP000 GBP000 GBP000 GBP000
--------------------- ---------------- -------- -------- -------- -------- --------
Profit for the year after tax 11,515 17,016 26,524 227,569 6,523
Profit before tax from continuing
operations* (1,480) (3,824) (2,606) 179 6,971
Total Earnings per share
Basic (p) 53.8 58.6 86.3 1,127.2 43.9
Earnings per share from continuing
operations*
Basic (p) (5.7) (24.8) (16.9) (3.7) 43.9
Dividends per
share (p) - ordinary 26.0 27.0 29.0 31.0 33.0
- special 18.0 - - 325.0 -
Other KPI:
2013 2014 2015 2016 2017
GBP000 GBP000 GBP000 GBP000 GBP000
--------------------- ---------------- -------- -------- -------- -------- --------
Net asset value per share (p) 570.5 1,136.0 1,252.7 1,533.8 1,547.0
* - Prior year numbers have been restated
for continuing operations.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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