TIDMCBG
RNS Number : 5164F
Close Brothers Group PLC
10 March 2020
Half Year Results for the Six Months to 31 January 2020
10 March 2020
Highlights
-- Our performance reflects the consistent application of our
business model in a period of lower activity in the UK economy,
with lower profits in Banking partially offset by higher profits in
our market-facing businesses. The group delivered a strong return
on opening equity of 13.6%
-- On an adjusted basis, group operating profit reduced 9% year
on year to GBP125.7 million. On a statutory basis, group operating
profit before tax from continuing operations decreased 8% to
GBP124.1 million
-- Our capital position strengthened further, with the CET1
capital ratio increasing to 13.4%
-- Banking adjusted operating profit reduced 12% year on year to
GBP115.4 million, reflecting modest income growth combined with
some normalisation of bad debts and ongoing investment
-- The net interest margin was 7.8%, reflecting continued
pricing discipline. The loan book remained broadly flat in the
period, and the bad debt ratio increased to 0.9%, from historically
low levels. Overall credit quality of the loan book remains strong.
We have maintained our cost discipline while continuing with our
multi-year investment programmes to protect, improve and extend the
business model
-- Asset Management achieved an adjusted operating profit of
GBP12.6 million, up 17% year on year, supported by strong
annualised net inflows at 12% and positive market movements,
reflecting the strength of our client proposition and ongoing
investment in the business
-- Winterflood benefited from a recovery in investor trading
activity following the UK general election and delivered operating
profit of GBP10.6 million, up 14% year on year
-- We have declared an interim dividend per share of 22.7p, up
3%, in line with our progressive dividend policy
Key Financials (1) First half First half Change
Continuing operations 2020 2019 %
---------------------------------------------- ---------------- ---------------- ---------
Adjusted operating profit(2) GBP125.7m GBP138.8m (9)
Operating profit before tax GBP124.1m GBP135.6m (8)
Adjusted basic earnings per share 63.8p 69.8p (9)
Basic earnings per share 63.0p 68.1p (7)
Ordinary dividend per share 22.7p 22.0p 3
Return on opening equity 13.6% 16.1%
Return on average tangible equity 16.0% 18.8%
Net interest margin 7.8% 8.1%
Bad debt ratio 0.9% 0.6%
31 January 31 July Change
2020 2019 %
---------------------------------------------- ---------------- ---------------- ---------
Loan book GBP7.6bn GBP7.6bn (0.4)
Total client assets GBP14.0bn GBP13.3bn 5
CET1 capital ratio 13.4% 13.0%
Total capital ratio 15.5% 15.2%
---------------------------------------------- ---------------- ---------------- ---------
1 Please refer to definitions on pages 19 and 20.
2 Adjusted operating profit excludes GBP1.6 million (2019: GBP3.2 million)
of amortisation of intangible assets on acquisition, and profit from
discontinued operations of GBPnil (2019: profit of GBP1.2 million).
Preben Prebensen, Chief Executive, said:
"The performance of the group continued to demonstrate the
consistent application of our business model in a period of lower
activity in the UK economy. We delivered a strong return on opening
equity of 13.6% and declared an interim dividend 3% higher than the
prior year. We are confident that our resilient business model and
the deep experience of our people leave us well placed to navigate
the current uncertainty, and to continue serving our customers and
clients in a range of market conditions."
"As a business that focuses on the long term, acting sustainably
is integral to our strategy and culture and forms a fundamental
part of our purpose - to help the people and businesses of Britain
thrive over the long term. We are committed to making a lasting
positive impact for people and communities, and recognise our
responsibility towards the climate and natural environment."
Enquiries
Sophie Gillingham Close Brothers Group plc 020 3857 6574
Camila Sugimura Close Brothers Group plc 020 3857 6577
Matt Bullivant Close Brothers Group plc 020 3857 6576
Andy Donald Maitland 020 7379 5151
A presentation to analysts and investors will be held today at
9.30 am GMT at J.P. Morgan's offices at 60 Victoria Embankment,
London, EC4Y 0JP. A dial-in facility will be available by
registering at
https://webcasts.closebrothers.com/results/HalfYearResults2020/vip_connect
Basis of Presentation
Results are presented both on a statutory and an adjusted basis
to aid comparability between periods. Adjusted measures are
presented on a basis consistent with prior periods and exclude
amortisation of intangible assets on acquisition, to present the
performance of the group's acquired businesses consistent with its
other businesses; any exceptional items, which are non-recurring
and do not reflect trading performance; and discontinued
operations.
Discontinued operations relate to the unsecured retail point of
sale finance business, which was sold on 1 January 2019.
To maintain consistency with the income statement and reflect
the group's continuing operations, the calculation of the bad debt
ratio, net interest margin and return on net loan book for the
Banking division in the first half of 2019 comparative period
excludes the unsecured retail point of sale finance loan book from
both the opening and closing loan book.
About Close Brothers
Close Brothers is a leading UK merchant banking group providing
lending, deposit taking, wealth management services and securities
trading. We employ over 3,000 people, principally in the UK. Close
Brothers Group plc is listed on the London Stock Exchange and is a
member of the FTSE 250.
BUSINESS OVERVIEW
The group's performance for the six months ending 31 January
2020 reflects the disciplined application of our business model in
a period of lower activity in the UK economy. We delivered a return
on opening equity of 13.6% (2019: 16.1%) and are pleased to declare
an interim dividend of 22.7p (2019: 22.0p), up 3%. This confirms
our commitment to our proven, through the cycle approach, which
enables us to support customers, invest in the business and deliver
strong returns to shareholders in a wide range of market
conditions.
Adjusted operating profit decreased 9% to GBP125.7 million
(2019: GBP138.8 million), with lower profits in the Banking
division partially offset by higher profit in our market-facing
businesses; Close Brothers Asset Management and Winterflood.
Statutory operating profit before tax from continuing operations
decreased 8% to GBP124.1 million (2019: GBP135.6 million). Adjusted
basic earnings per share ("EPS") reduced 9% to 63.8p (2019: 69.8p),
and statutory basic earnings per share from continuing operations
also reduced 7% to 63.0p (2019: 68.1p).
DIVISIONAL OVERVIEW
In the Banking division, we maintained our focus on prudent
underwriting and pricing discipline in a period of lower activity.
Adjusted operating profit decreased by 12% to GBP115.4 million
(2019: GBP131.1 million), reflecting modest income growth, higher
bad debts and our continued investment in the business.
Overall, the loan book remained broadly flat in the first half
of the year at GBP7.6 billion (31 July 2019: GBP7.6 billion),
reflecting a softer demand environment driven by the economic and
political uncertainty in the UK. We achieved modest growth in the
Commercial portfolio, offset by a higher level of repayments in
Property and a slight overall contraction in Retail.
The net interest margin reduced on the first half of 2019 (2019:
8.1%) but remained broadly stable on the 2019 financial year at
7.8%, reflecting our pricing discipline, despite ongoing
competition across our markets and continued lower fee income due
to reduced levels of transactional activity.
The bad debt ratio increased to 0.9% (2019: 0.6%) as we have
seen some normalisation of impairments from historically low levels
and a small number of new individual provisions in Property and
Commercial. The overall credit quality of our book remains strong
with a low bad debt ratio, relative to historical levels,
reflecting the disciplined application of our prudent lending
criteria in a competitive market.
Investment in a number of multi-year projects to protect,
improve and extend our business model remains a strategic priority
for the group. This is reflected in our ongoing commitment to
enhancing customer experience and improving operating and capital
efficiency. As a result, total costs in the Banking division
increased by 3% on the prior year and are expected to grow c. 6% in
the 2020 financial year, with investment spend skewed towards the
second half of the year.
In the first half of the year, we continued to expand our range
of deposit products to further diversify the group's funding via
our customer deposit platform and introduced a new online savings
portal. We made good progress with our multi-year transformation
programme in Motor Finance, with early benefits seen in the loan
book growth in the UK. We have initiated our Asset Finance
transformation programme, aiming at increased sales effectiveness
and optimised operational efficiency through upgraded systems and
processes. We also remain on track towards making our application
to use the Internal Ratings Based ("IRB") approach for capital,
which will enhance our risk management framework and help optimise
our capital requirements and increase our long-term strategic
flexibility.
Excluding depreciation and other costs related to investments,
operating expenses remained broadly flat on the prior year, as a
result of our continued focus on improving operational efficiency.
We continue to look for tactical improvements, such as the review
and consolidation of our London office footprint, to create
capacity for further investments.
The Asset Management division maintained good momentum as we
continue to invest in this business. We achieved strong annualised
net inflows at 12% of opening managed assets, reflecting the
strength of our client proposition and the hiring of additional
portfolio managers. Managed assets increased 8% to GBP12.7 billion
(31 July 2019: GBP11.7 billion) and total client assets increased
5% to GBP14.0 billion (31 July 2019: GBP13.3 billion). The division
delivered an adjusted operating profit of GBP12.6 million (2019:
GBP10.8 million), up 17% on the prior year, and an operating margin
of 19% (2019: 18%).
Winterflood benefited from a recovery in investor trading
activity following the UK general election and delivered operating
profit of GBP10.6 million (2019: GBP9.3 million), up 14% on the
prior year. Trading profitability remained strong with no loss days
in the period (2019: one).
FUNDING, LIQUIDITY AND CAPITAL
The prudent management of our financial resources is a core part
of our business model allowing us to grow, invest and pay a
progressive and sustainable dividend, while meeting all regulatory
requirements.
Our capital ratios strengthened further reflecting the group's
profitability and the broadly stable loan book in the period. The
common equity tier 1 ("CET1") capital ratio increased to 13.4% (31
July 2019: 13.0%) and we maintained a strong leverage ratio of
11.3% (31 July 2019: 11.0%).
We continue to diversify our sources of funding with a wider
range of deposit products and access to a broad range of wholesale
funding. The group maintained its strong liquidity position in the
period, ensuring it is comfortably ahead of both internal risk
appetite and regulatory requirements.
SUSTAINABILITY AND RESPONSIBILITY
Sustainability forms a core part of our thinking and we remain
on track to achieve the series of public targets we set ourselves
to help focus our efforts. Over 30% of our senior managers are
female, and we continue to regularly receive strong customer
satisfaction scores across our businesses. Our staff payroll giving
remains comfortably ahead of the Payroll Giving Quality Mark Gold
Award standard, and our environmental improvements are progressing
well, with our head office now sending zero waste to landfill and
our fleet vehicle emissions down 9% since 31 July 2019; well on the
way to achieving our 20% target. We continually look for
opportunities to make a difference for the long term and will be
exploring further actions to make a positive impact over time.
BOARD APPOINTMENTS
On 1 January 2020 the Board was pleased to appoint Sally
Williams as an independent non-executive director. Sally brings
extensive experience of the financial services sector and her
appointment will further strengthen the range of skills, experience
and diversity represented on the Board. On appointment, she has
become a member of the Board's Audit and Risk Committees, and
consistent with the group's other independent non-executive
directors, has also become a director of the group's Banking
subsidiary, Close Brothers Limited.
CEO SUCCESSION UPDATE
In September 2019, the group announced that Preben Prebensen had
decided to step down as chief executive after 10 years with the
company. The Board has made good progress with the formal search
for a successor, in line with our established succession process,
and an announcement will be made in due course.
OUTLOOK
The near-term outlook for the UK economy remains uncertain,
heightened by escalating concern about the Coronavirus and its
potential impact on businesses and financial markets.
Against this backdrop, we remain focused on maintaining the
discipline of our business model, and our readiness to respond to
changes in market conditions.
While it is too early to assess the impact of the Coronavirus on
the UK economy, the Banking division remains focused on maintaining
pricing and underwriting discipline, progressing with strategic
initiatives and improving operating efficiency.
The Asset Management division, while clearly sensitive to market
levels, remains focused on increasing client assets, through
organic new business, selective hiring, and in-fill
acquisitions.
Winterflood has benefited from a significant increase in volumes
since the period end and remains focused on maximising
opportunities across all market conditions, while continuing to
build its institutional sales trading capabilities and Winterflood
Business Services.
We are confident that our prudent and resilient business model
and the deep experience of our people leave us well placed to
navigate the current uncertainty, and to continue serving our
customers and clients in a range of market conditions.
OVERVIEW OF FINANCIAL PERFORMANCE
Group Income Statement
First half First half
2020 2019 Change
Continuing operations GBP million GBP million %
----------------------------------------------- -------------- ------------------ ---------
Adjusted operating income 420.0 407.4 3
Adjusted operating expenses (257.6) (246.7) 4
Impairment losses on financial assets (36.7) (21.9) 68
----------------------------------------------- -------------- ------------------ ---------
Adjusted operating profit 125.7 138.8 (9)
----------------------------------------------- -------------- ------------------ ---------
Banking 115.4 131.1 (12)
-------------- ------------------ ---------
Commercial 38.5 47.3 (19)
Retail 34.1 36.8 (7)
Property 42.8 47.0 (9)
-------------- ------------------ ---------
Asset Management 12.6 10.8 17
Securities 10.6 9.3 14
Group (12.9) (12.4) 4
----------------------------------------------- -------------- ------------------ ---------
Amortisation of intangible assets on
acquisition (1.6) (3.2) (50)
----------------------------------------------- -------------- ------------------ ---------
Operating profit before tax 124.1 135.6 (8)
----------------------------------------------- -------------- ------------------ ---------
Tax (29.6) (33.4) (11)
----------------------------------------------- -------------- ------------------ ---------
Profit after tax: continuing operations 94.5 102.2 (8)
----------------------------------------------- -------------- ------------------ ---------
Profit from discontinued operations,
net of tax - 1.2
----------------------------------------------- -------------- ------------------ ---------
Loss attributable to non-controlling
interests - (0.1)
----------------------------------------------- -------------- ------------------ ---------
Profit attributable to shareholders:
continuing and discontinued operations 94.5 103.5 (9)
----------------------------------------------- -------------- ------------------ ---------
Adjusted basic earnings per share (continuing
operations) 63.8p 69.8p (9)
Basic earnings per share (continuing
operations) 63.0p 68.1p (7)
Basic earnings per share (continuing
and discontinued operations) 63.0p 68.9p (9)
Dividend per share 22.7p 22.0p 3
Return on opening equity 13.6% 16.1%
Return on average tangible equity 16.0% 18.8%
Financial Overview
Adjusted operating profit decreased 9% to GBP125.7 million
(2019: GBP138.8 million), with lower profits in the Banking
division partially offset by higher profits in our market-facing
businesses, Close Brothers Asset Management and Winterflood, and a
reduced operating margin of 30% (2019: 34%). Statutory operating
profit before tax from continuing operations decreased 8% to
GBP124.1 million (2019: GBP135.6 million). Return on opening equity
remained strong at 13.6% (2019: 16.1%) despite the reduction in
adjusted operating profit and continued growth in the equity
base.
The Banking division delivered an adjusted operating profit of
GBP115.4 million (2019: GBP131.1 million), down 12% on the prior
year as modest income growth was offset by higher bad debts and
ongoing investment. The Asset Management division delivered
operating profit of GBP12.6 million (2019: GBP10.8 million), up 17%
on the prior year reflecting higher income and continued investment
to support the long-term growth of the business. The Securities
division achieved operating profit of GBP10.6 million (2019: GBP9.3
million), up 14%, reflecting a recovery in trading volumes
following the UK general election. Group net expenses, which
include the central functions such as finance, legal and
compliance, risk and human resources, were up 4% at GBP12.9 million
(2019: GBP12.4 million).
Adjusted operating income increased 3% to GBP420.0 million
(2019: GBP407.4 million), with all of the divisions achieving
growth on the prior year. Income in the Banking division increased
1%, reflecting loan book growth on the prior year of 3.2% and a
lower net interest margin of 7.8% (2019: 8.1%), driven by changes
in mix and reduction in fee income due to lower transactional
activity. Income in the Asset Management division was up 12%
reflecting higher client assets driven by strong net inflows and
positive market movements. Income in the Securities division
increased by 5% as trading volumes recovered significantly towards
the end of the period.
Adjusted operating expenses increased 4% to GBP257.6 million
(2019: GBP246.7 million), with most of the increase in the Banking
and Asset Management divisions. In the Banking division, costs
increased by 3% primarily driven by our continued strategic
investment and business initiatives, while other operating costs
remained broadly flat on the prior year. As a result, the Banking
expense/income ratio remained unchanged at 50% (2019: 50%). In the
Asset Management division, costs increased by 11% driven by
continued hiring of advisers and portfolio managers, as well as
investment in technology to improve operational efficiency.
Expenses in the Securities division increased by 2%, reflecting
higher variable costs. Overall, the group's expense/income and
compensation ratios remained unchanged at 61% (2019: 61%) and 36%
(2019: 36%), respectively.
While overall credit quality remained strong, impairment losses
increased by GBP14.8 million to GBP36.7 million (2019: GBP21.9
million). We have seen some normalisation of bad debts, from
historically low levels, and a small number of new individual
provisions in Commercial and Property. As a result, the bad debt
ratio has increased to 0.9% (2019: 0.6%).
The tax charge in the period was GBP29.6 million (2019: GBP33.4
million), which corresponds to an effective tax rate of 24% (2019:
25%). The reduction primarily reflects a 0.7% reduction in the
applicable blended UK corporation tax rate from 19.0% to 18.3%.
Adjusted basic earnings per share ("EPS") from continuing
operations decreased 9% to 63.8p (2019: 69.8p) and basic EPS from
continuing operations decreased 7% to 63.0p (2019: 68.1p).
Discontinued Operations
On 1 January 2019, the group completed the sale of its unsecured
retail point of sale finance business, which has been treated as a
discontinued operation in the income statement for first six months
of 2019. The profit from discontinued operations in the first six
months of 2019 was GBP1.2 million and included a GBP2.8 million
profit on disposal net of tax. Basic EPS from continuing and
discontinued operations was 63.0p (2019: 68.9p), down 9% on the
prior year.
Dividend
The interim dividend of 22.7p (2019: 22.0p) represents an
increase of 3% from the prior year and reflects our commitment to a
progressive dividend policy, which aims to grow the dividend year
on year while maintaining a prudent level of dividend cover. The
interim dividend is due to be paid on 22 April 2020 to shareholders
on the register at 20 March 2020.
Group Balance Sheet
31 January 2020 31 July 2019
GBP million GBP million
--------------------------------- ---------------- -------------
Loans and advances to customers 7,619.1 7,649.6
Treasury assets(1) 1,261.6 1,395.4
Market-making assets(2) 767.0 666.1
Other assets 1,021.1 850.2
--------------------------------- ---------------- -------------
Total assets 10,668.8 10,561.3
--------------------------------- ---------------- -------------
Deposits by customers 5,564.4 5,638.4
Borrowings 2,548.0 2,601.0
Market-making liabilities(2) 702.9 582.4
Other liabilities 418.9 333.1
--------------------------------- ---------------- -------------
Total liabilities 9,234.2 9,154.9
--------------------------------- ---------------- -------------
Equity 1,434.6 1,406.4
--------------------------------- ---------------- -------------
Total liabilities and equity 10,668.8 10,561.3
--------------------------------- ---------------- -------------
1 Treasury assets comprise cash and balances at central banks,
and debt securities held to support lending in the Banking
division.
2 Market-making assets and liabilities comprise settlement
balances, long and short trading positions and loans to or from
money brokers.
We maintain a prudent approach to managing our financial
resources, which is reflected in our strong and transparent balance
sheet. The structure of the balance sheet remains unchanged, with
most of the assets and liabilities relating to our lending
activities. Loans and advances make up the majority of assets. Our
loan book is predominantly secured across a diverse range of asset
classes and is generally short term in nature with low average loan
size.
Other items on the balance sheet include treasury assets held
for liquidity purposes, and settlement balances in our Securities
division. Intangibles, property, plant and equipment, and
prepayments are included as other assets. Liabilities are
predominantly made up of customer deposits and both secured and
unsecured borrowings to fund the loan book.
Total assets increased 1% to GBP10.7 billion (31 July 2019:
GBP10.6 billion) and total liabilities were up 1% to GBP9.2 billion
(31 July 2019: GBP9.2 billion), both driven by an increase in
market-making settlement balances reflecting higher trading
activity in our Securities division, with a broadly stable loan
book in the period. Other assets and other liabilities both
increased as a result of IFRS 16 accounting adjustments and
treasury deposit movements.
Shareholders' equity increased by 2% to GBP1.4 billion (31 July
2019: GBP1.4 billion), with profit in the period partially offset
by dividend payments of GBP65.8 million (31 January 2019: GBP62.8
million). The group's return on assets remained broadly stable at
1.8% (31 July 2019: 1.9%).
Group Capital
31 January 2020 31 July 2019
GBP million GBP million
------------------------------ ---------------- -------------
Common equity tier 1 capital 1,205.4 1,169.2
Total capital 1,394.0 1,364.6
Risk weighted assets 9,011.7 8,967.4
Common equity tier 1 capital
ratio 13.4% 13.0%
Total capital ratio 15.5% 15.2%
Leverage ratio 11.3% 11.0%
------------------------------ ---------------- -------------
The group's strong capital generation has allowed us to maintain
capital ratios comfortably ahead of minimum regulatory
requirements. Overall, the CET1 capital ratio increased to 13.4%
(31 July 2019: 13.0%), reflecting continued profitability and
broadly stable loan book. The total capital ratio increased to
15.5% (31 July 2019: 15.2%).
In the last six months, the group generated GBP36.2 million of
CET1 capital, reflecting GBP94.5 million of profit in the year,
partially offset by the regulatory deduction of dividends paid and
foreseen of GBP44.4 million, an increase in intangibles of GBP9.4
million, and other movements in reserves. As a result, CET1 capital
increased 3% to GBP1,205.4 million (31 July 2019: GBP1,169.2
million).
Risk weighted assets remained broadly flat at GBP9.0 billion (31
July 2019: GBP9.0 billion), primarily reflecting the broadly stable
loan book.
The leverage ratio, which is a transparent measure of capital
strength, not affected by risk weightings, increased in the period
and remains strong at 11.3% (31 July 2019: 11.0%).
The group's capital ratios at 31 January 2020 are presented on a
transitional basis after applying IFRS 9 arrangements that allow
the capital impact of expected credit losses to be phased in over a
five-year period, and the Capital Requirements Regulation
transitional arrangements for grandfathered Tier 2 capital
instruments. Before the transitional adjustments, the group's fully
loaded CET1 and total capital ratios at 31 January 2020 were 13.0%
(31 July 2019: 12.6%) and 14.9% (31 July 2019: 14.5%),
respectively.
Our regulatory minimum CET1 capital ratio requirement is 9.0%,
including all applicable buffers and a 1.1% pillar 2 add-on, with a
total capital requirement of 13.4%. Accordingly, we continue to
have good headroom of c.440 bps in our CET1 capital ratio, and
c.210 bps in the total capital ratio. In December 2019 the
Financial Policy Committee announced a 1% increase in the UK
countercyclical capital buffer ("CCyB") requirements to 2%,
effective from early December 2020. The Prudential Regulation
Authority ("PRA") is currently consulting on a reduction of Pillar
2a requirements for certain banks to counterbalance the CCyB
increase. If implemented in the current form, we do not expect a
material impact on our capital position. We continue to monitor the
PRA consultation process.
This leaves us well placed to support future growth in the loan
book and absorb any foreseen regulatory changes, including the
proposed capital adequacy reforms, commonly referred to as Basel
4.
We remain on track towards our IRB application, with increasing
visibility and confidence as we move through our preparations.
Group Funding(1)
31 January 2020 31 July 2019
GBP million GBP million
--------------------------------------- ---------------- -------------
Retail deposits 2,458.1 2,133.4
Non-retail deposits 3,106.3 3,505.0
--------------------------------------- ---------------- -------------
Customer deposits 5,564.4 5,638.4
--------------------------------------- ---------------- -------------
Secured funding 1,355.6 1,404.8
Unsecured funding(2) 1,466.6 1,462.2
Equity 1,434.6 1,406.4
--------------------------------------- ---------------- -------------
Total available funding 9,821.2 9,911.8
--------------------------------------- ---------------- -------------
Of which term funding (>1 year) 4,846.3 5,493.4
Total funding as % of loan book 129% 129%
Average maturity of funding allocated 18 months 20 months
to loan book(3)
1 Numbers relate to core funding and exclude working capital facilities at the business level.
2 Unsecured funding includes GBP295.0 million (2019: GBP295.0 million) of undrawn facilities.
3 Average maturity of total funding excluding equity and funding held for liquidity purposes.
The primary purpose of our treasury function is to manage
funding and liquidity to support the lending businesses and manage
interest rate risk. We maintain a conservative approach, with
diverse funding sources and a prudent maturity profile, which
increases our resilience and flexibility and helps to optimise our
cost of funding.
In the first half, total funding reduced slightly to GBP9.8
billion (31 July 2019: GBP9.9 billion) and accounted for 129% (31
July 2019: 129%) of the loan book at the balance sheet date. Our
average cost of funding of 1.7% (2019: 1.7%) was flat on the prior
year. We maintain a diverse range of funding sources across a
series of maturities, including several public debt securities at
both group and operating company level as well as a number of
securitisation facilities.
Our range of secured funding facilities include securitisations
of our Premium and Motor Finance loan books. We have made limited
use of the Term Funding Scheme, which accounted for only 5% of our
total funding at the balance sheet date, and are well positioned to
replace this as part of our long-term funding plans. Since the
balance sheet date we have issued a third GBP200 million public
Motor Finance securitisation, demonstrating our continued access to
wholesale funding sources.
Our new customer deposit platform has already allowed us to
offer a wider range of deposit products to further diversify our
funding and improve customer experience, with the launch of new
notice accounts as an additional product for our retail, pension
and small and medium-sized enterprise ("SME") customers. In the
first half we introduced a new online portal, with a suite of new
savings products to come during 2020, which will continue to grow
and diversify our retail deposit base and further optimise our cost
of funding and maturity profile. As a result, we increased our
volumes of retail deposits by 15% in the first half.
Deposits remained flat at GBP5.6 billion (31 July 2019: GBP5.6
billion), with non-retail deposits decreasing to GBP3.1 billion (31
July 2019: GBP3.5 billion) as we manage our funding requirements in
a period of flat loan book and retail deposits increasing to GBP2.5
billion (31 July 2019: GBP2.1 billion), benefiting from the launch
of new savings products. Unsecured funding remained broadly
unchanged at GBP1.5 billion (31 July 2019: GBP1.5 billion), while
we continue to make use of smaller private placements.
We have maintained a prudent maturity profile and continue to
borrow long and lend short. Term funding, with a residual maturity
over one year, decreased to GBP4.8 billion (31 July 2019: GBP5.5
billion), reflecting the timing of maturity and renewal of
long-term facilities. The average maturity of funding allocated to
the loan book remained significantly ahead of the loan book at 18
months (31 July 2019: 20 months), while the average loan book
maturity remained at 14 months (31 July 2019: 14 months).
Our strong credit ratings have been reaffirmed by both Moody's
Investors Services ("Moody's") and Fitch Ratings ("Fitch") during
the period. Moody's rates Close Brothers Group A3/P2 and Close
Brothers Limited Aa3/P1 with a negative outlook, following a
revised outlook across our UK peers in November 2019 to reflect
their view on the operating environment for UK banks. Fitch
affirmed ratings for both entities "A/F1" with a stable outlook in
December 2019.
Group Liquidity
31 January 2020 31 July 2019
GBP million GBP million
---------------------------------------- -------------
Cash and balances at central
banks 916.3 1,106.4
Sovereign and central bank
debt 44.3 48.3
Certificates of deposit 301.0 240.7
------------------------------- -------- -------------
Treasury assets 1,261.6 1,395.4
------------------------------- -------- -------------
The group maintains a strong liquidity position, ensuring it is
comfortably ahead of both internal risk appetite and regulatory
requirements. The majority of our liquidity requirements and
surplus funding are held with central banks. Lower liquidity
requirements in the period resulted in a modest decline of treasury
assets to GBP1.3 billion (31 July 2019: GBP1.4 billion). These were
predominantly held on deposit with the Bank of England, and
continued to give us good headroom to both internal and external
liquidity requirements.
We regularly assess and stress test our liquidity requirements
and continue to comfortably meet the liquidity coverage ratio
requirements under the Capital Requirements Directive IV, with an
average liquidity coverage ratio in the first half of 759%
(12-month average to 31 July 2019: 823%).
BUSINESS REVIEW
BANKING
Key Financials
Continuing operations(1) First half First half Change
2020 2019 %
GBP million GBP million
--------------------------------- ---------------- ---------------- -------
Adjusted operating income 306.4 303.1 1
Adjusted operating expenses (154.3) (150.1) 3
Impairment losses on financial
assets (36.7) (21.9) 68
--------------------------------- ---------------- ---------------- -------
Adjusted operating profit 115.4 131.1 (12)
--------------------------------- ---------------- ---------------- -------
Net interest margin(2) 7.8% 8.1%
Expense/income ratio 50% 50%
Bad debt ratio(2) 0.9% 0.6%
Return on net loan book(2) 2.9% 3.5%
Return on opening equity 14.7% 18.2%
--------------------------------- ---------------- ---------------- -------
Average loan book and operating
lease assets(3) 7,862.2 7,518.5 5
--------------------------------- ---------------- ---------------- -------
1 Results from continuing operations exclude the unsecured
retail point of sale finance business, which was classified as a
discontinued operation in the group's income statement for the 2019
financial period.
2 The calculation of the bad debt ratio, net interest margin and
return on net loan book excludes the unsecured retail point of sale
finance loan book from both the opening and closing loan book.
3 Re-presented to exclude the unsecured retail point of sale
finance loan book in the 2019 financial period and is used to
calculate net interest margin, bad debt ratio and return on net
loan book.
Maintaining Pricing, Prudent Underwriting and Investment for the
Long-Term
Banking adjusted operating profit was down 12% to GBP115.4
million (2019: GBP131.1 million), reflecting modest income growth
combined with some normalisation of bad debts and ongoing
investment. The loan book was broadly flat at the balance sheet
date, reflecting a period of lower activity levels during the first
half. Statutory operating profit from continuing operations
decreased 12% to GBP114.4 million (2019: GBP130.2 million). The
return on net loan book remained good at 2.9% (2019: 3.5%),
reflecting the current stage of the cycle.
Adjusted operating income was up 1% at GBP306.4 million (2019:
GBP303.1 million), supported by year-on-year loan book growth
across the lending businesses.
The net interest margin of 7.8% (2019: 8.1%) reduced on the
first half of 2019 but remained broadly stable on the 2019
financial year as a whole (7.9%), reflecting our continued pricing
discipline. The reduction compared to the prior year reflects a
slight change in mix of lending and reduced fee income resulting
from lower activity levels in the first half.
Adjusted operating expenses increased 3% year on year to
GBP154.3 million (2019: GBP150.1 million), as we continue to invest
in initiatives to protect, improve and extend our business. The
increase is primarily driven by investment in strategic projects
and new business initiatives, including enhancements to our cyber
and data security, our multi-year investment programmes in Motor
Finance and Asset Finance and investment to support our IRB
application.
Investing through the cycle remains a long-term strategic
priority for the group, while continuing with our initiatives to
improve operational efficiency and carefully manage the costs of
running the business. Operating expenses excluding depreciation and
other costs related to investments remained broadly flat on the
prior year, and the compensation ratio remained stable at 28%
(2019: 28%), reflecting our disciplined cost focus. The
expense/income ratio was stable at 50% (2019: 50%), although we
expect costs to grow c.6% in the 2020 financial year, with
investment spend skewed towards the second half of the year.
While overall credit quality remained strong, bad debts have
increased from historically low levels, with some normalisation and
a small number of new individual provisions in Commercial and
Property. This resulted in a bad debt ratio of 0.9% (2019: 0.6%)
for the first half.
Loan Book Analysis
31 January
2020 31 July 2019 Change
GBP million GBP million %
---------------------------------- ------------ ------------- -------------
Commercial 3,065.4 2,991.3 2.5
------------ ------------- -------------
Asset Finance 2,047.7 1,946.4 5.2
Invoice and Speciality Finance 1,017.7 1,044.9 (2.6)
------------ ------------- -------------
Retail 2,784.1 2,810.7 (0.9)
------------ ------------- -------------
Motor Finance 1,738.8 1,775.6 (2.1)
Premium Finance 1,045.3 1,035.1 1.0
------------ ------------- -------------
Property 1,769.6 1,847.6 (4.2)
---------------------------------- ------------ ------------- -------------
Closing loan book 7,619.1 7,649.6 (0.4)
---------------------------------- ------------ ------------- -------------
Operating lease assets(1) 235.3 220.4 6.8
---------------------------------- ------------ ------------- -------------
Closing loan book and operating
lease assets 7,854.4 7,870.0 (0.2)
---------------------------------- ------------ ------------- -------------
1 Operating lease assets of GBP3.5 million (31 July 2019: GBP4.2
million) relate to Asset Finance and GBP231.8 million (31 July
2019: GBP216.2 million) to Invoice and Speciality Finance.
Loan book growth has always been an output of our business
model, and we continue to prioritise our margins and credit
quality. Low levels of demand in the approach to the UK general
election resulted in a broadly flat loan book at GBP7.6 billion (31
July 2019: GBP7.6 billion).
We achieved modest growth in our Commercial business lines,
particularly in energy, contract hire and Novitas, offset by a
slight decline in core Invoice Finance.
Premium Finance also delivered modest growth in the first half,
and Motor Finance continued to achieve growth in the UK, benefiting
from ongoing investment. A modest reduction in the Irish Motor
business resulted in a slight decline in the Retail loan book
overall.
Property contracted in the period, with a significant level of
repayments in late 2019 and a mix change in new business with
slightly lower average facility sizes in the growing regional
market. We continue to see strong structural demand for new build
family housing, and the new business pipeline remains solid.
Banking: Commercial
First half First half Change
2020 2019 %
GBP million GBP million
--------------------------------- ------------- ------------- -------
Operating income 129.6 125.3 3
Adjusted operating expenses (72.7) (70.3) 3
Impairment losses on financial
assets (18.4) (7.7) 139
--------------------------------- ------------- ------------- -------
Adjusted operating profit 38.5 47.3 (19)
Net interest margin 8.0% 8.3%
Expense/income ratio 56% 56%
Bad debt ratio 1.1% 0.5%
--------------------------------- ------------- ------------- -------
Average loan book and operating
lease assets 3,256.2 3,021.6 7.8
--------------------------------- ------------- ------------- -------
The Commercial businesses provide specialist, secured lending
principally to the SME market. Asset Finance provides asset
financing, hire-purchase and leasing solutions for a diverse range
of assets and sectors, including commercial vehicles, machine
tools, printing equipment, energy production and aviation and
marine vessels. Invoice and Speciality Finance includes core
Invoice Finance along with smaller specialist businesses such as
Novitas, a specialist provider of finance to the legal sector,
Brewery Rentals, which provides service and finance solutions for
brewery equipment and containers, and Vehicle Hire, which provides
heavy goods and light commercial vehicles on a predominantly
long-term hire basis.
Adjusted operating profit of GBP38.5 million (2019: GBP47.3
million) was down 19% year-on-year, reflecting an increase in bad
debts. Statutory operating profit decreased 19% to GBP37.6 million
(2019: GBP46.5 million).
Operating income of GBP129.6 million (2019: GBP125.3 million)
was 3% higher than the prior year, reflecting good growth in the
loan book and operating lease assets year-on-year. We have
maintained a strong net interest margin of 8.0% (2019: 8.3%),
marginally down on the prior year as a result of lower fee income
from subdued activity levels in the first half.
The Commercial loan book increased 2% overall to GBP3.1 billion
(31 July 2019: GBP3.0 billion), supported by modest growth in more
specialist business lines in an otherwise slow demand environment
with continued competitive pressures. The Asset Finance loan book
was up 5% in the period, benefiting from good growth in aviation,
contract hire and energy. Invoice and Speciality Finance saw
continued growth in Novitas, though this was more than offset by
lower utilisation of facilities in core Invoice Finance, reflecting
a softer demand environment resulting from economic and political
uncertainty.
Costs grew by 3% to GBP72.7 million (2019: GBP70.3 million),
reflecting investment in our recently initiated Asset Finance
transformation programme. This new programme is aimed at increased
sales effectiveness through enhanced data capabilities and
technology, with the first phase expected to deliver additional new
business volumes over time. The next phase will focus on optimising
our operational efficiency, with upgraded systems and processes to
support the long-term resilience of the business. Cost growth was
in line with the subdued growth in operating income for the period
and resulted in a stable expense/income ratio of 56% (2019:
56%).
Following a period of very low levels of bad debt we have seen a
small number of new individual provisions in the period, and as a
result bad debts increased by GBP10.7 million to GBP18.4 million
(2019: GBP7.7 million). However, overall credit quality remains
strong, reflecting the continued application of our prudent and
disciplined underwriting.
Banking: Retail
Continuing operations(1) First half First half Change
2020 2019 %
GBP million GBP million
-------------------------------- ------------- ------------- -------------------
Adjusted operating income 113.4 113.2 0
Adjusted operating expenses (63.9) (63.0) 1
Impairment losses on financial
assets (15.4) (13.4) 15
-------------------------------- ------------- ------------- -------------------
Adjusted operating profit 34.1 36.8 (7)
Net interest margin(2) 8.1% 8.4%
Expense/income ratio 56% 56%
Bad debt ratio(2) 1.1% 1.0%
-------------------------------- ------------- ------------- -------------------
Average loan book (3) 2,797.4 2,686.1 4.1
-------------------------------- ------------- ------------- -------------------
1 Results from continuing operations exclude the unsecured
retail point of sale finance business, which was classified as a
discontinued operation in the group's income statement for the 2019
financial year and sold on 1 January 2019.
2 The calculation of the bad debt ratio and net interest margin
excludes the unsecured retail point of sale finance loan book from
both the opening and closing loan book.
3 Re-presented to exclude the unsecured retail point of sale
finance loan book in the 2019 financial year and is used to
calculate net interest margin, bad debt ratio and return on net
loan book.
The Retail businesses provide intermediated finance, principally
to individuals and small businesses, through motor dealers and
insurance brokers.
Overall, adjusted operating profit for Retail of GBP34.1 million
(2019: GBP36.8 million) was down 7% on the prior year, and
statutory operating profit from continuing operations also reduced
7% to GBP34.0 million (2019: GBP36.7 million).
Adjusted operating income was broadly flat on the prior year at
GBP113.4 million (2019: GBP113.2 million) with a decline in net
interest margin to 8.1% (2019: 8.4%), principally due to the
business mix effect of larger broker relationships in Premium
Finance.
The Retail loan book saw a slight decline to GBP2.8 billion (31
July 2019: GBP2.8 billion), reflecting modest loan book growth in
Premium Finance and UK Motor Finance, offset by a small decline in
Motor Finance in Ireland.
Premium Finance delivered modest growth of 1% to GBP1.0 billion
(31 July 2019: GBP1.0 billion), with growth in personal lines
partially offset by a slight reduction in commercial lines. The
business continues to be well positioned competitively, following
the multi-year investment programme in its infrastructure over
recent years to improve both broker and end customer
experience.
The Motor Finance loan book decreased 2% overall to GBP1.7
billion (31 July 2019: GBP1.8 billion), as growth in the UK was
more than offset by a modest contraction in Ireland.
New business levels in the UK Motor Finance business continue to
increase, benefiting from our recent investment in sales capability
and tooling. We continue to see growth opportunities in the UK
market, supported by solid demand for used cars and increasing
finance penetration. Our ongoing Motor Finance transformation
programme aims to further strengthen our service-oriented,
people-based proposition, drawing on extensive market research and
feedback from partners and end customers. The programme will also
enhance our credit acceptance process and increase sales
effectiveness, leading over time to higher new business volumes and
improved cost efficiency, and we expect to realise further benefits
as the investment programme progresses.
The Republic of Ireland loan book, where we operate through a
third party who provide the distribution and dealer relationships,
contracted slightly in the period, reflecting both the maturity of
the Irish market opportunity and adverse foreign exchange
movements. Ireland now accounts for 25% (2019: 27%) of the Motor
Finance loan book. In both the UK and Ireland, our core product
remains hire-purchase contracts for second-hand vehicles, with
Personal Contract Plans ("PCP") accounting for only 12% of the
Motor Finance loan book at 31 January 2020.
Adjusted operating expenses increased 1% to GBP63.9 million
(2019: GBP63.0 million), resulting in a flat expense/income ratio
of 56% (2019: 56%), and demonstrating our strict management of
costs alongside our investments in the Premium Finance and Motor
Finance businesses.
The bad debt ratio increased slightly in the period to 1.1%
(2019: 1.0%) as a result of an ongoing normalisation, from
historically low levels, of bad debt in Motor Finance, but
continues to reflect our ongoing commitment to our strict lending
criteria.
Banking: Property
First half First half 2019 Change
2020 GBP million %
GBP million
-------------------------------- ------------- ---------------- -------
Operating income 63.4 64.6 (2)
Operating expenses (17.7) (16.8) 5
Impairment losses on financial
assets (2.9) (0.8) 263
-------------------------------- ------------- ---------------- -------
Operating profit 42.8 47.0 (9)
Net interest margin 7.0% 7.1%
Expense/income ratio 28% 26%
Bad debt ratio 0.3% 0.1%
-------------------------------- ------------- ---------------- -------
Average loan book 1,808.6 1,810.7 (0.1)
-------------------------------- ------------- ---------------- -------
Property comprises Property Finance and Commercial Acceptances.
The Property Finance business is focused on specialist residential
development finance to established professional developers in the
UK. Commercial Acceptances provides bridging loans and loans for
refurbishment projects. We do not lend to the buy-to-let sector, or
provide residential or commercial mortgages.
The business delivered an operating profit of GBP42.8 million
(2019: GBP47.0 million), down 9% on the prior year as a result of
higher bad debts and lower fee income.
The net interest margin remained broadly stable at 7.0% (2019:
7.1%), with a small impact from lower transactional fees in the
period.
The Property loan book declined by 4% in the first half to
GBP1.8 billion (31 July 2019: GBP1.8 billion), reflecting high
level of repayments in late 2019 which more than offset new
business, though our levels of undrawn commitments remain strong.
We continued to see good regional growth, which represents an
increasing proportion of new business volumes, albeit at lower
average facility sizes than in London and the South East.
We continue to see good structural demand in our core market of
property development finance for new build family housing. London
and the South East represent c.65% of the portfolio, however there
remains strong growth opportunity in regional locations around
major commuting hubs, including our new bridging finance office in
Manchester. Competition remains active, but our long track record,
expertise and quality of service ensure that the business remains
resilient and continues to generate high levels of repeat
business.
Operating expenses of GBP17.7 million (2019: GBP16.8 million)
were up 5%, reflecting the opening of the new Manchester office and
continued technology investment across the Banking division. The
expense/income ratio increased to 28% (2019: 26%), primarily
reflecting the opening of our new Manchester bridging finance
office and lower income.
The business reported a bad debt ratio of 0.3% (2019: 0.1%),
with a small number of new individual provisions resulting in a
slightly higher ratio than the exceptionally low point in the prior
year.
ASSET MANAGEMENT
Key Financials
First half 2020 First half 2019 Change
GBP million GBP million %
------------------------------ ---------------- ---------------- -------
Investment management 46.2 39.6 17
Advice and other services(1) 18.7 18.7 0
Other income(2) 0.8 0.2 300
------------------------------ ---------------- ---------------- -------
Operating income 65.7 58.5 12
Adjusted operating expenses (53.1) (47.7) 11
Adjusted operating profit 12.6 10.8 17
------------------------------ ---------------- ---------------- -------
Revenue margin (bps) 95 96
Operating margin 19% 18%
Return on opening equity 35.6% 32.1%
1 Income from advice and self-directed services, excluding investment management income.
2 Other income includes net interest income and expense, income
on principal investments and other income. Other income in the
first half of 2020 includes a GBP0.5 million gain on disposal of
non-core assets.
The Asset Management division provides financial advice and
investment management services to private clients in the UK. We
provide a range of investment management services, including full
bespoke management, managed portfolios and funds, distributed both
directly via our own advisers and investment managers, and through
third party IFAs.
Strong momentum
The division delivered strong net inflows of GBP672 million in
the first half, representing an annualised rate of 12% of opening
managed assets. Adjusted operating profit increased 17% to GBP12.6
million (2019: GBP10.8 million), with an operating margin of 19%
(2019: 18%). Statutory operating profit before tax was GBP12.0
million (2019: GBP8.5 million).
Total operating income increased 12% to GBP65.7 million (2019:
GBP58.5 million), driven by higher investment management income
from continued growth in managed assets. Income on advice and other
services remained flat on the prior year, reflecting lower initial
fees on new advice business and a reduction in revenue from the
sale of legacy self-directed assets. Overall, the revenue margin
remained broadly stable at 95 bps (2019: 96 bps).
Adjusted operating expenses increased 11% to GBP53.1 million
(2019: GBP47.7 million), and the expense/income ratio decreased
slightly to 81% (2019: 82%). Growth in expenses was driven by
continued investment in new hires and technology to further enhance
our operational efficiency, as well as higher variable staff costs
reflecting improved profitability, with the compensation ratio
increasing to 56% (2019: 55%).
Movement in Client Assets
31 January 31 July
2020 2019
GBP million GBP million
----------------------------------- -------------- --------------
Opening managed assets 11,673 10,378
Inflows 1,263 2,107
Outflows (591) (1,213)
----------------------------------- -------------- --------------
Net inflows 672 894
Market movements 319 401
Total managed assets 12,664 11,673
Advised only assets 1,331 1,651
----------------------------------- -------------- --------------
Total client assets(1) 13,995 13,324
----------------------------------- -------------- --------------
Net flows as % of opening managed
assets 12% 9%
----------------------------------- -------------- --------------
1 Total client assets include GBP5.2 billion of assets (31 July
2019: GBP5.0 billion) that are both advised and managed
We achieved strong net inflows of GBP672 million, an annualised
net inflow rate of 12%. This reflects continued good demand for
both our investment management and integrated wealth services, with
growth from all of our distribution channels and particularly from
recent portfolio manager hires. Positive market movements
contributed a further GBP319 million to managed assets in the year.
As a result, managed assets increased 8% overall to GBP12.7 billion
(31 July 2019: GBP11.7 billion).
Advised assets under third party management decreased by 19%
principally reflecting the sale of a small portfolio of
self-directed clients, which was reported in September 2019, with
GBP270 million out of the GBP360 million portfolio transferred to
date. We continue to provide self-directed services to clients via
our own platform. Total client assets increased 5% overall, to
GBP14.0 billion (31 July 2019: GBP13.3 billion).
Our funds and segregated bespoke portfolios are designed to
provide attractive long-term risk-adjusted returns for our clients,
in line with their individual goals. Over the 12-month period to 31
January 2020 and the three-year period to 31 January 2020, seven
out of our twelve multi-asset funds outperformed their relevant
peer group average. Over the five-year period to 31 January 2020,
ten out of our twelve multi-asset funds outperformed their relevant
peer group average. All of our bespoke strategy composites
outperformed their relevant peer group average over the year to 31
January 2020, and over a three and a five-year period. We also now
offer a range of increasingly popular socially responsible
investment portfolios and plan to launch further sustainable fund
offerings for our clients during 2020.
We remain committed to driving further growth through net
inflows, continued hiring of new advisers and investment managers,
and selective acquisitions. Our vertically-integrated,
multi-channel business model leaves us well positioned to benefit
from continued demand for our integrated advice and investment
management services and continued industry change.
SECURITIES
Key Financials
First half First half Change
2020 2019 %
GBP million GBP million
-------------------------- ------------- ------------- -------
Operating income 47.9 45.8 5
Operating expenses (37.3) (36.5) 2
Operating profit 10.6 9.3 14
Bargains per day ('000) 57 54 6
Operating margin 22% 20%
Return on opening equity 22.2% 19.2%
Winterflood is a leading UK market maker with focus on
delivering high-quality execution services to stockbrokers, wealth
managers, platforms and institutional investors.
Improved Performance in Challenging Trading Conditions
While investor trading activity remained subdued at the
beginning of the financial year, we have seen an increase in
activity since the UK general election in December. As a result,
Winterflood delivered a solid trading performance, with operating
profit growing 14% to GBP10.6 million (2019: GBP9.3 million), and
strong return on opening equity at 22.2% (2019: 19.2%),
demonstrating its sensitivity to market conditions.
Operating income increased 5% to GBP47.9 million (2019: GBP45.8
million), reflecting higher trading income in the period. Average
daily bargains increased 6% year-on-year to 56,753 (2019: 53,515),
reflecting improvement in trading activity across all segments, and
particularly across the FTSE 350.
Despite the continued difficult market environment at the start
of the year, trading remained consistently profitable, with no loss
days (2019: one loss day). This demonstrates the expertise of our
traders and the strict risk management of our trading
positions.
Operating expenses increased 2% reflecting the increase in
variable cost associated with the higher volumes in the period. The
expense/income ratio decreased to 78% (2019: 80%) due to higher
income in the period and the compensation ratio remained stable at
48% (2019: 48%).
Winterflood is an established execution venue, providing
continuous liquidity and high-quality execution to retail
intermediaries and institutional clients. Following the
establishment of an affiliate licensed broker dealer in the US, the
business made good progress in developing relationships with
institutional clients in the US, obtaining its registration to 14
states.
Winterflood Business Services, which provides outsourced dealing
and custody services for asset managers and platforms in the UK,
continued to focus on developing its client base and the assets
under administration increased 11% to GBP4.1 billion (31 July 2019:
GBP3.7 billion).
Winterflood has benefited from a significant increase in volumes
since the period end and is well positioned to continue trading
profitably in a range of conditions, but due to the nature of the
business, it remains sensitive to changes in the market
environment.
DEFINITIONS
Adjusted : Adjusted measures are used to increase comparability
between periods and exclude amortisation of intangible assets on
acquisition, any exceptional items and discontinued operations
Assets under administration : Total assets for which Winterflood
Business Services provide custody and administrative services
Bad debt ratio : Impairment losses as a percentage of average
net loans and advances to customers and operating lease assets
Bargains per day : Average number of Winterflood's trades with
third parties
Capital Requirements Regulation ("CRR"): European Union
regulation implementing the Basel III requirements in Europe,
alongside CRD IV
CET1 capital ratio : Measure of the group's CET1 capital as a
percentage of risk weighted assets, as required by CRR
Common equity tier 1 ("CET1") capital : Measure of capital as
defined by the CRR. CET1 capital consists of the highest quality
capital including ordinary shares, share premium account, retained
earnings and other reserves, less goodwill and intangible assets
and certain other regulatory adjustments
Compensation ratio : Total staff costs as a percentage of
adjusted operating income
Dividend per share : Comprises the final dividend proposed for
the respective year, together with the interim dividend declared
and paid in the year
Earnings per share ("EPS") : Profit attributable to shareholders
divided by number of basic shares
Effective tax rate : Tax on operating profit/(loss) as a
percentage of operating profit/(loss) on ordinary activities before
tax
Expected credit loss : The unbiased probability-weighted average
credit loss determined by evaluating a range of possible outcomes
and future economic conditions
Expense/income ratio : Total adjusted operating expenses divided
by adjusted operating income
Funding allocated to loan book : Total funding excluding equity
and funding held for liquidity purposes
Funding % loan book : Total funding divided by net loans and
advances to customers
Gross carrying amount : Loan book before expected credit loss
provision
High quality liquid assets ("HQLAs") : Assets which qualify for
regulatory liquidity purposes, including Bank of England deposits
and sovereign and central bank debt, including funds drawn under
the Funding for Lending Scheme
Independent financial adviser: Professional offering
independent, whole of market advice to clients including
investments, pensions, protection and mortgages
Internal ratings based ("IRB") approach: A supervisor-approved
method using internal models, rather than standardised risk
weightings, to calculate regulatory capital requirements for credit
risk
Investment costs: Include depreciation and other costs related
to investment in multi-year projects, new business initiatives and
pilots and cyber resilience. Excludes IFRS16 depreciation.
Leverage ratio : Tier 1 capital as a percentage of total balance
sheet assets, adjusted for certain capital deductions, including
intangible assets, and off balance sheet exposures
Liquidity coverage ratio : Measure of the group's HQLAs as a
percentage of expected net cash outflows over the next 30 days in a
stressed scenario
Loan to value ratio : For a secured loan, the loan balance as a
percentage of the total value of the asset
Managed assets or assets under management ("AUM"): Total market
value of assets which are managed by Close Brothers Asset
Management in one of our investment solutions
Net carrying amount : Loan book value after expected credit loss
provision
Net interest margin : Adjusted income generated by lending
activities, including interest income net of interest expense, fees
and commissions income net of fees and commissions expense, and
operating lease income net of operating lease expense, less
depreciation on operating lease assets, divided by average loans
and advances to customers (net of impaired loans) and operating
lease assets
Operating margin : Adjusted operating profit divided by adjusted
operating income
Personal Contract Plan ("PCP") : PCP is a form of vehicle
finance where the customer defers a significant portion of credit
to the final repayment at the end of the agreement, thereby
lowering the monthly repayments compared to a standard hire
purchase arrangement. At the final repayment date, the customer has
the option to: (a) pay the final payment and take the ownership of
the vehicle; (b) return the vehicle and not pay the final
repayment; or (c) part-exchange the vehicle with any equity being
put towards the cost of a new vehicle
Return on assets : Adjusted profit attributable to shareholders
divided by total closing assets at the balance sheet date
Return on average tangible equity : Adjusted profit attributable
to shareholders from continuing operations divided by average total
shareholder's equity, excluding intangible assets
Return on net loan book : Adjusted operating profit from lending
activities divided by average net loans and advances to customers
and operating lease assets
Return on opening equity : Adjusted profit attributable to
shareholders from continuing operations divided by opening equity,
excluding non-controlling interests
Revenue margin : Income from advice, investment management and
related services divided by average total client assets. Average
total client assets calculated as a two-point average
Risk weighted assets: A measure of the amount of a bank's
assets, adjusted for risk. It is used in determining the capital
requirement for a financial institution
Term funding : Funding with a remaining maturity greater than 12
months
Total client assets ("TCA"): Total market value of all client
assets including both managed assets and assets under advice and/or
administration in the Asset Management division
Principal Risks and Uncertainties
The group faces a number of risks in the normal course of
business. The key elements to the way we manage risk are as
follows:
-- adhering to our established and proven business model;
-- implementing an integrated risk management approach based on
the concept of "three lines of defence"; and
-- setting and operating within clearly defined risk appetites,
monitored with defined metrics and set limits.
While there have been no significant changes to our risk
management approach in the period, we continue to closely monitor
the economic environment in the context of the UK's departure from
the EU as well as the emergence and spread of the coronavirus
(COVID-19).
The principal risks and uncertainties faced by the group remain
unchanged since the year end. A detailed description of each,
including an overview of our risk management and mitigation
approach, is disclosed on pages 18 to 22 of the Annual Report 2019
which can be accessed via the Investor Relations home page on the
group's website at www.closebrothers.com .
A summary of the group's principal risks and uncertainties is
included below:
Credit risk - the group provides loans to a range of businesses
and individuals. There is a risk that customers are unable to repay
their loans and any outstanding interest and fees resulting in
credit losses. The group also has exposure to counterparties with
which it places deposits or trades, and also has a small number of
derivative contracts to hedge interest rate and foreign exchange
exposures.
Economic environment - any downturn in economic conditions may
impact the group's performance through lower demand for the group's
products and services, lower investor risk appetite, higher credit
losses and increased volatility in funding markets.
Legal and regulatory - Failure to comply with existing legal,
regulatory and tax requirements, or to react to changes to these
requirements, could adversely impact the group's performance, as
well as capital, liquidity and the markets in which we operate. For
example, we are currently preparing for change in the Motor Finance
market following publication of FCA Consultation Paper 19/28 on 15
October 2019. Failing to treat customers fairly, safeguard client
assets or to provide advice and products which are in our clients'
best interests also has the potential to damage the group's
reputation and may lead to legal or regulatory sanctions including
litigation and customer redress.
Operational risk - the group is exposed to various operational
risks through its day-to-day operations. Losses typically
crystallise as a result of inadequate or failed internal processes,
people and systems, or as a result of external factors. Adverse
impacts to the business, customers, third parties and the markets
in which we operate are considered within a developing focus on
resilient end-to-end delivery of critical business services.
Competition - the group operates in competitive markets.
Elevated levels of competition may impact the group's ability to
write loans at its desired risk and return criteria, resulting in
lower new business volumes and loss of market share.
Employees - the quality and expertise of our employees is
critical to our success. The loss of key individuals or teams may
have an adverse impact on the group's operations and ability to
deliver its strategy.
Funding and liquidity - access to funding remains key to support
our lending activities and the group's liquidity requirements. Any
material change to funding or liquidity capacity has the potential
to impact the group's ongoing performance.
Market risk - market volatility impacting equity and fixed
income exposures, and/or changes in interest and exchange rates
have the potential to impact the group's performance.
In addition to the principal risks and uncertainties outlined
above, the group continues to monitor its portfolio for emerging
risks, supporting organisational readiness for external
volatility.
Current group-level emerging risks include the risk of economic
and political uncertainty as a result of the UK's exit from the EU,
and the risk of financial loss resulting from the physical or
transitional impacts of climate change. Since the year end, senior
management responsibility for climate risk has been assigned to the
group chief risk officer while the Risk Committee has assumed
responsibility for overseeing and challenging the firm's evolving
climate risk framework.
In recent weeks, the group has also employed preventative
measures to minimise potential risk to colleagues, as well as
business disruption, in the event that COVID-19 becomes more
widespread across the UK. Existing business continuity plans have
been updated, with oversight from the Group Crisis Management Team,
which continues to monitor developments on a day-to-day basis.
Directors' Responsibility Statement
Each of the Directors confirms that, to the best of their
knowledge:
* the interim financial statements have been prepared
in accordance with International Accounting Standard
34 "Interim Financial Reporting";
* the half year report includes a fair review of the
information required by Disclosure and Transparency
Rule 4.2.7R (indication of important events during
the first six months of the financial year and
description of principal risks and uncertainties for
the remaining six months of the financial year); and
* the half year report includes a fair review of the
information required by Disclosure and Transparency
Rule 4.2.8R (disclosure of related parties
transactions that have taken place during the first
six months of the current financial year and that
have materially affected the financial position or
performance of the company, and any changes in the
related parties transactions described in the last
Annual Report that could do so).
The Directors of Close Brothers Group plc as at the date of this
report are as listed on pages 52 and 53 of the company's Annual
Report 2019 together with Sally Williams, who became a Director on
1 January 2020. A list of current Directors is maintained on the
company's website www.closebrothers.com .
On behalf of the board
Michael N. Biggs P. Prebensen
Chairman Chief Executive
10 March 2020
Independent Review Report to close brothers group plc
Report on the interim financial statements
Our conclusion
We have reviewed Close Brothers Group plc's financial statements
(the "interim financial statements") in the Half Year Results for
the six month period ended 31 January 2020. Based on our review,
nothing has come to our attention that causes us to believe that
the interim financial statements are not prepared, in all material
respects, in accordance with International Accounting Standard 34,
'Interim Financial Reporting', as adopted by the European Union and
the Disclosure Guidance and Transparency Rules sourcebook of the
United Kingdom's Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
-- the consolidated balance sheet at 31 January 2020;
-- the conslidated income statement and consolidated statement
of comprehensive income for the period then ended;
-- the consolidated cash flow statement for the period then ended;
-- the consolidated statement of changes in equity for the period then ended; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the Half Year
Results have been prepared in accordance with International
Accounting Standard 34, 'Interim Financial Reporting', as adopted
by the European Union and the Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
As disclosed in note 1 to the interim financial statements, the
financial reporting framework that has been applied in the
preparation of the full annual financial statements of the Group is
applicable law and International Financial Reporting Standards
("IFRSs") as adopted by the European Union.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The Half Year Results, including the interim financial
statements, is the responsibility of, and has been approved by, the
directors. The directors are responsible for preparing the Half
Year Results in accordance with the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
Our responsibility is to express a conclusion on the interim
financial statements in the Half Year Results based on our review.
This report, including the conclusion, has been prepared for and
only for the company for the purpose of complying with the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We
do not, in giving this conclusion, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the Half Year
Results and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
10 March 2020
Consolidated income statement
for the six months ended 31 January 2020
Six months ended Year ended
31 January 31 July
------------------------
2020 2019 2019
Unaudited Unaudited Audited
Note GBP million GBP million GBP million
------------------------------------------------------ ----------- ----------- -----------
Interest income 323.5 314.5 6 35.6
(1 29.9
Interest expense (69.4) (64.7) )
----------------------------------------------------- ----------- ----------- -----------
Net interest income 254.1 24 9.8 505.7
----------------------------------------------------- ----------- ----------- -----------
Fee and commission income 117.7 1 13.5 2 24.9
Fee and commission expense (9.2) ( 6.1 ) (1 9.2 )
Gains less losses arising from dealing in securities 43.8 39.7 81.3
Other income 44.2 36.9 77.4
Depreciation of operating lease assets and other (2 6.4
direct costs (30.6) ) ( 53.7 )
Non-interest income 165.9 15 7.6 31 0.7
----------------------------------------------------- ----------- ----------- -----------
Operating income 2 420.0 40 7.4 8 16.4
----------------------------------------------------- ----------- ----------- -----------
(2 46.7 (4 97.4
Administrative expenses (257.6) ) )
(2 1.9
Impairment losses on financial assets 7 (36.7) ) (4 8.5 )
----------------------------------------------------- ----------- ----------- -----------
Total operating expenses before amortisation
of intangible assets (5 45.9
on acquisition (294.3) (268.6) )
----------------------------------------------------- ----------- ----------- -----------
Operating profit before amortisation of intangible
assets on
acquisition 125.7 138.8 27 0.5
Amortisation of intangible assets on acquisition (1.6) (3. 2 ) ( 5.8 )
----------------------------------------------------- ----------- ----------- -----------
Operating profit before tax 124.1 1 35.6 2 64.7
(3 3.4
Tax 3 (29.6) ) (6 4.4 )
----------------------------------------------------- ----------- ----------- -----------
Profit after tax from continuing operations 94.5 10 2.2 20 0.3
Profit from discontinued operations, net of
tax 4 - 1.2 1.1
----------------------------------------------------- ----------- ----------- -----------
Profit after tax 94.5 103.4 20 1.4
Loss attributable to non-controlling interests
from continuing
operations - (0.1) (0. 2 )
Profit attributable to shareholders 94.5 10 3.5 20 1.6
From continuing operations
Basic earnings per share 5 63.0p 68.1 p 13 3.5 p
Diluted earnings per share 5 62.7p 6 7.5 p 13 2.5 p
From continuing and discontinued operations
Basic earnings per share 5 63.0p 6 8.9 p 134. 2 p
Diluted earnings per share 5 62.7p 68. 3 p 133. 2 p
----------------------------------------------------- ----------- ----------- -----------
Ordinary dividend per share 6 22.7p 2 2 .0p 6 6 .0p
----------------------------------------------------- ----------- ----------- -----------
Consolidated Statement of COMPREHENSIVE INCOME
for the six months ended 31 January 20 20
Six months ended Year ended
31 January 31 July
------------------------
20 20 201 9 201 9
Unaudited Unaudited Audited
GBP million GBP million GBP million
----------------------------------------------------- ----------- ----------- -----------
Profit after tax 94.5 103. 4 201.4
----------------------------------------------------- ----------- ----------- -----------
Other comprehensive expense that may be reclassified
to income statement from continuing operations
Currency translation (losses)/gains (1.5) ( 0.4) 0.4
Gains/(losses) on cash flow hedging 1.3 (1.8) (6.0)
Losses on financial instruments classified at
fair value through other comprehensive income:
Sovereign and central bank debt (0.4) (0.6) (0.1)
Tax relating to items that may be reclassified (0.2) 0.6 1.1
----------------------------------------------------- ----------- ----------- -----------
(0.8) (2.2) (4.6)
----------------------------------------------------- ----------- ----------- -----------
Other comprehensive (expense)/income that will
not be
reclassified to income statement from continuing
operations
Defined benefit pension scheme (losses)/gains (0.1) 0.2 1.9
Tax relating to items that will not be reclassified - - (0.4)
----------------------------------------------------- ----------- ----------- -----------
(0.1) 0.2 1.5
----------------------------------------------------- ----------- ----------- -----------
Other comprehensive expense for the period, net
of tax
from continuing operations (0.9) (2.0) (3.1)
Total comprehensive income 93.6 101.4 198.3
----------------------------------------------------- ----------- ----------- -----------
Attributable to:
Non-controlling interests - (0.1) (0.2)
Shareholders 93.6 101.5 198.5
----------------------------------------------------- ----------- ----------- -----------
93.6 101.4 198.3
----------------------------------------------------- ----------- ----------- -----------
Consolidated Balance Sheet
at 31 January 2020
31 January 31 July
2020 2019
Unaudited Audited
Note GBP million GBP million
----------------------------------------------------- ---- ----------- -----------
Assets
Cash and balances at central banks 916.3 1,106.4
Settlement balances 671.7 562.9
Loans and advances to banks 166.4 108.9
Loans and advances to customers 7 7,619.1 7,649.6
Debt securities 8 367.4 314.4
Equity shares 9 35.1 36.3
Loans to money brokers against stock advanced 38.9 42.5
Derivative financial instruments 29.0 30.1
Intangible assets 10 228.5 219.4
Property, plant and equipment 11 310.9 248.2
Current tax assets 16.1 -
Deferred tax assets 49.9 52.2
Prepayments, accrued income and other assets 219.5 190.4
Total assets 10,668.8 10,561.3
Liabilities
Settlement balances and short positions 12 664.9 568.1
Deposits by banks 13 135.5 58.0
Deposits by customers 13 5,564.4 5,638.4
Loans and overdrafts from banks 13 510.3 519.3
Debt securities in issue 13 1,816.1 1,860.1
Loans from money brokers against stock advanced 38.0 14.3
Derivative financial instruments 12.8 20.6
Current tax liabilities - 21.2
Accruals, deferred income and other liabilities 270.6 233.3
Subordinated loan capital 13 221.6 221.6
Total liabilities 9,234.2 9,154.9
----------------------------------------------------- ---- ----------- -----------
Equity
Called up share capital 38.0 38.0
Retained earnings 1,417.7 1,392.5
Other reserves (20.1) (23.1)
Total shareholders' equity 1,435.6 1,407.4
----------------------------------------------------- ---- ----------- -----------
Non-controlling interests (1.0) (1.0)
----------------------------------------------------- ---- ----------- -----------
Total equity 1,434.6 1,406.4
----------------------------------------------------- ---- ----------- -----------
Total liabilities and equity 10,668.8 10,561.3
----------------------------------------------------- ---- ----------- -----------
Consolidated Statement of CHANGES IN EQUITY
for the six months ended 31 January 2020
Other reserves
Share- Cash Total
Called up Available based Exchange flow attributable
share Retained for sale FVOCI payments movements hedging to equity Non-controlling Total
capital earnings reserve reserve reserve reserve reserve holders interests equity
GBP GBP GBP GBP GBP GBP GBP
GBP million million million million million million million GBP million GBP million million
------------------------ --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
At 31 July
2018
(audited) 38.0 1,327.7 0.8 - (15.9) (1.2) 0.1 1,349.5 (0.8) 1,348.7
IFRS 9 transition - (44.9) (0.8) 0.8 - - - (44.9) - (44.9)
----------------- ----- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
At 1 August
2018
(audited) 38.0 1,282.8 - 0.8 (15.9) (1.2) 0.1 1,304.6 (0.8) 1,303.8
----------------- ----- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
Profit/(loss)
for the
period - 103.5 - - - - - 103.5 (0.1) 103.4
Other
comprehensive
income/(expense)
for the period - 0.2 - (0.4) - (0.4) (1.4) (2.0) - (2.0)
----------------- ----- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
Total
comprehensive
income/(expense)
for the period - 103.7 - (0.4) - (0.4) (1.4) 101.5 (0.1) 101.4
Dividends paid - (62.8) - - - - - (62.8) - (62.8)
Shares purchased - - - - (11.0) - - (11.0) - (11.0)
Shares released - - - - 9.3 - - 9.3 - 9.3
Other movements - 0.9 - - (0.2) - - 0.7 - 0.7
Income tax - (0.4) - - - - - (0.4) - (0.4)
----------------- ----- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
At 31 January
2019
(unaudited) 38.0 1,324.2 - 0.4 (17.8) (1.6) (1.3) 1,341.9 (0.9) 1,341.0
----------------- ----- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
Profit/(loss)
for the
period - 98.1 - - - - - 98.1 (0.1) 98.0
Other comprehensive
income/(expense)
for the period - 1.3 - 0.3 - 0.4 (3.1) (1.1) - (1.1)
-------------------- ----- -------- --- ----- ------- ------ ------- -------- ------- --------
Total comprehensive
income/(expense)
for the period - 99.4 - 0.3 - 0.4 (3.1) 97.0 (0.1) 96.9
Dividends paid - (32.7) - - - - - (32.7) - (32.7)
Shares purchased - - - - - - - - - -
Shares released - - - - 1.6 - - 1.6 - 1.6
Other movements - 1.9 - - (2.0) - - (0.1) - (0.1)
Income tax - (0.3) - - - - - (0.3) - (0.3)
-------------------- ----- -------- --- ----- ------- ------ ------- -------- ------- --------
At 31 July
2019
(audited) 38.0 1,392.5 - 0.7 (18.2) (1.2) (4.4) 1,407.4 (1.0) 1,406.4
-------------------- ----- -------- --- ----- ------- ------ ------- -------- ------- --------
Profit for
the period - 94.5 - - - - - 94.5 - 94.5
Other comprehensive
(expense)/income
for the period - (0.1) - (0.3) - (1.5) 1.0 (0.9) - (0.9)
-------------------- ----- ------- --- ----- ------ ----- ----- ------- ----- -------
Total comprehensive
income/(expense)
for the period - 94.4 - (0.3) - (1.5) 1.0 93.6 - 93.6
Dividends paid - (65.8) - - - - - (65.8) - (65.8)
Shares purchased - - - - (8.0) - - (8.0) - (8.0)
Shares released - - - - 11.0 - - 11.0 - 11.0
Other movements - (3.7) - - 0.8 - - (2.9) - (2.9)
Income tax - 0.3 - - - - - 0.3 - 0.3
-------------------- ----- ------- --- ----- ------ ----- ----- ------- ----- -------
At 31 January
2020
(unaudited) 38.0 1,417.7 - 0.4 (14.4) (2.7) (3.4) 1,435.6 (1.0) 1,434.6
-------------------- ----- ------- --- ----- ------ ----- ----- ------- ----- -------
Consolidated Cash Flow Statement
for the six months ended 31 January 2020
Six months ended Year ended
31 January 31 July
------------------------
2020 2019 2019
Unaudited Unaudited Audited
Note GBP million GBP million GBP million
-------------------------------------------------- ----------- ----------- ------------
Net cash (outflow)/inflow from operating
activities 17(a) (15.8) (387.9) 20.4
------------------------------------------- ----- ----------- ----------- ------------
Net cash (outflow)/inflow from investing
activities
Purchase of:
Property, plant and equipment (2.8) (1.6) (4.9)
Intangible assets - software (23.2) (18.0) (42.2)
Subsidiaries 17(b) (3.3) - (3.6)
Sale of:
Subsidiaries and discontinued operations 17(c) 0.5 86.1 87.6
(28.8) 66.5 36.9
------------------------------------------- ----- ----------- ----------- ------------
Net cash (outflow)/inflow before financing
activities (44.6) (321.4) 57.3
------------------------------------------- ----- ----------- ----------- ------------
Financing activities
Purchase of own shares for employee share
award schemes (8.0) (11.0) (11.0)
Equity dividends paid (65.8) (62.8) (95.5)
Interest paid on subordinated loan capital
and debt financing (7.1) (7.1) (14.2)
Payment of IFRS 16 lease liabilities (note
1) (7.4) - -
Net decrease in cash (132.9) (402.3) (63.4)
Cash and cash equivalents at beginning of
period 1,188.3 1,251.7 1,251.7
------------------------------------------- ----- ----------- ----------- ------------
Cash and cash equivalents at end of period 17(d) 1,055.4 849.4 1,188.3
------------------------------------------- ----- ----------- ----------- ------------
THE NOTES
1. Basis of preparation and accounting policies
The half year financial information has been prepared in
accordance with the Disclosure Guidance and Transparency Rules of
the Financial Conduct Authority and in accordance with the
International Financial Reporting Standards ("IFRS") endorsed by
the European Union. These include International Accounting Standard
("IAS") 34, Interim Financial Reporting, which specifically
addresses the contents of interim financial statements. The
consolidated financial statements incorporate the individual
financial statements of Close Brothers Group plc and the entities
it controls, using the acquisition method of accounting.
The half year report is unaudited and does not constitute
statutory accounts within the meaning of Section 434 of the
Companies Act 2006. However, the information has been reviewed by
the group's auditor, PricewaterhouseCoopers LLP, and their report
appears on pages 23 and 24.
The financial information for the year ended 31 July 2019
contained within this half year report does not constitute
statutory accounts as defined in Section 434 of the Companies Act
2006. A copy of those statutory accounts has been delivered to the
Registrar of Companies. PricewaterhouseCoopers LLP has reported on
those accounts. The report of the auditor on those statutory
accounts was unqualified, did not contain an emphasis of matter
paragraph and did not contain a statement under Section 498(2) or
(3) of the Companies Act 2006.
The directors have a reasonable expectation that the company and
the group as a whole have adequate resources to continue in
operational existence for the foreseeable future, a period of not
less than 12 months from the date of this report. For this reason,
they continue to adopt the going concern basis in preparing the
condensed consolidated half year financial statements.
The accounting policies applied are consistent with those set
out on pages 111 to 116 of the Annual Report 2019 except in
relation to the adoption of IFRS 16 Leases effective from 1 August
2019.
IFRS 16 replaces IAS 17 Leases and introduces a new recognition
model that recognises all leases on a lessee's balance sheet,
subject to certain exemptions. As a result, there is no longer a
distinction between finance and operating leases for lessees.
However, lessor accounting is substantially unchanged.
IFRS 16 has been applied on a modified retrospective basis and
comparative information has not been restated. The impact of the
initial application of IFRS 16 is set out in note 19.
Changes in accounting policy
The accounting policies set out in section (M) in note 1 of the
Annual Report 2019 have been replaced by those below from 1 August
2019 following the adoption of IFRS 16.
Leases
Lessor
A finance lease is a lease or hire purchase contract that
transfers substantially all the risks and rewards incidental to
ownership of an asset to the lessee. Finance leases are recognised
as loans at an amount equal to the gross investment in the lease
discounted at its implicit interest rate. Finance charges on
finance leases are taken to income in proportion to the net funds
invested.
An operating lease is a lease that does not transfer
substantially all the risks and rewards incidental to ownership of
an asset to the lessee. Rental income from operating leases is
recognised in equal instalments over the period of the leases and
included in other income in the consolidated income statement.
Lessee
A lease liability and right of use asset are recognised on the
balance sheet at the lease commencement date. The lease liability
is measured at the present value of future lease payments. The
right of use asset is measured at cost, comprising the initial
lease liability, payments made at or before the commencement date
less lease incentives received, initial direct costs, and estimated
costs of restoring the underlying asset to the condition required
by the lease.
The finance cost relating to the lease liability is charged to
the consolidated income statement over the lease term. The right of
use asset is depreciated over the shorter of the asset's useful
life and the lease term on a straight line basis.
Critical accounting estimates and judgements
The preparation of the half year report requires management to
make estimates and assumptions that affect the reported income and
expense, assets and liabilities and disclosure of contingencies at
the date of the half year report. Although these estimates and
assumptions are based on management's best judgement at that date,
actual results may differ from these estimates. There have been no
significant changes in the basis upon which estimates have been
determined compared to that applied at 31 July 2019.
Forward-looking information
As described in note 1 of the Annual Report 2019, IFRS 9
requires the incorporation of forward-looking macroeconomic
information that is reasonable and supportable. To capture the
effect of changes to the economic environment, the calculation of
expected credit losses incorporates forward-looking information and
assumptions linked to economic variables that impact losses in each
portfolio. Externally sourced forecast economic data and scenarios
are used to project potential credit conditions for each
portfolio.
Economic scenarios are assigned a probability weighting using a
combination of quantitative analysis and expert judgement. Six
different projected economic scenarios are currently considered to
cover a range of possible outcomes, reflecting upside and downside
relative to the baseline and forecast economic conditions. The
economic scenarios are generated to capture a range of possible
economic outcomes to facilitate the calculation of unbiased and
probability-weighted expected credit losses.
Weighted assumptions are aligned to the forward-looking outlook.
The table below shows the key UK economic assumptions within each
of the scenarios, and the weighting applied to each at 31 January
2020. The numbers shown are an average over the five-year period
from 2019 to 2023 and are not necessarily representative of peak to
trough movements.
There has been no significant change to the group's baseline
economic assumptions included in the IFRS 9 models over the course
of the year. The range of scenarios and weightings selected and
applied continues to cover a broad range of potential outcomes,
reflecting the current political and macroeconomic uncertainty in
the UK.
The expected credit loss provision is sensitive to judgement and
estimations made with regard to the selection and weighting of
multiple macroeconomic scenarios. The sensitivity analysis on the
expected credit loss provision outlined on page 117 of the Annual
Report 2019 has been reperformed by management and there are no
significant changes to the sensitivity outcomes.
Upside
(exceptionally Upside Downside Downside
Baseline strong) (strong) Downside (mild) (moderate) (protracted)
----------------- ----------- ---------------- ----------- ----------------- ----------------- -----------------
At 31 January
2020
UK GDP growth 1.1% 2.2% 1.7% 0.8% 0.3% (0.5%)
UK unemployment
rate 4.5% 3.2% 3.6% 5.1% 6.0% 6.7%
House price
index growth 1.0% 4.0% 3.0% (0.2%) (2.2%) (4.1%)
Bank of England
base rate 0.9% 1.3% 1.1% 0.5% 0.2% 0.2%
----------------- ----------- ---------------- ----------- ----------------- ----------------- -----------------
Weighting 40% 0% 5% 40% 10% 5%
----------------- ----------- ---------------- ----------- ----------------- ----------------- -----------------
Upside
(exceptionally Upside Downside Downside
Baseline strong) (strong) Downside (mild) (moderate) (protracted)
----------------- ----------- ---------------- ----------- ----------------- ----------------- -----------------
At 31 July 2019
UK GDP growth 1.5% 2.4% 2.1% 1.2% 0.8% 0.3%
UK unemployment
rate 4.7% 3.3% 3.7% 5.3% 6.4% 7.2%
House price
index growth 1.8% 4.7% 3.7% 0.8% (1.1%) (3.0%)
Bank of England
base rate 1.1% 1.7% 1.5% 0.6% 0.2% 0.1%
----------------- ----------- ---------------- ----------- ----------------- ----------------- -----------------
Weighting 40% 0% 5% 40% 10% 5%
----------------- ----------- ---------------- ----------- ----------------- ----------------- -----------------
2. Segmental analysis
The directors manage the group by class of business and we
present the segmental analysis on that basis. The group's
activities are presented in five (2019: five) operating segments:
Commercial, Retail, Property, Asset Management and Securities.
In the segmental reporting information that follows, Group
consists of central functions as well as various non-trading head
office companies and consolidation adjustments and is presented in
order that the information presented reconciles to the consolidated
income statement. The Group balance sheet primarily includes
treasury assets and liabilities comprising cash and balances at
central banks, debt securities, customer deposits and other
borrowings.
Divisions continue to charge market prices for the limited
services rendered to other parts of the group. Funding charges
between segments take into account commercial demands. More than
90% of the group's activities, revenue and assets are located in
the UK.
Summary Income Statement for the six months ended 31 January
2020
Banking
Asset
Commercial Retail Property Management Securities Group Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Net interest
income/(expense) 90.8 100.3 63.4 - (0.4) - 254.1
Non-interest
income 38.8 13.1 - 65.7 48.3 - 165.9
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating income 129.6 113.4 63.4 65.7 47.9 - 420.0
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Administrative
expenses (64.2) (56.3) (14.9) (50.6) (35.7) (12.9) (234.6)
Depreciation and
amortisation (8.5) (7.6) (2.8) (2.5) (1.6) - (23.0)
Impairment losses
on financial
assets (18.4) (15.4) (2.9) - - - (36.7)
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total operating
expenses (91.1) (79.3) (20.6) (53.1) (37.3) (12.9) (294.3)
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Adjusted
operating
profit/(loss)(1) 38.5 34.1 42.8 12.6 10.6 (12.9) 125.7
Amortisation of
intangible
assets
on acquisition (0.9) (0.1) - (0.6) - - (1.6)
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating
profit/(loss)
before tax from
continuing
operations 37.6 34.0 42.8 12.0 10.6 (12.9) 124.1
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit before tax
from discontinued
operations - - - - - - -
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit/(loss)
before tax 37.6 34.0 42.8 12.0 10.6 (12.9) 124.1
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
External
operating
income/(expense) 156.7 134.9 77.5 65.7 47.9 (62.7) 420.0
Inter segment
operating
(expense)/income (27.1) (21.5) (14.1) - - 62.7 -
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Segment operating
income 129.6 113.4 63.4 65.7 47.9 - 420.0
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1 Adjusted operating profit/(loss) is stated before amortisation
of intangible assets on acquisition, profit from discontinued
operations
and tax.
Balance Sheet Information at 31 January 2020
Banking
Asset
Commercial Retail Property Management Securities Group(2) Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
Total
assets(1) 3,300.7 2,784.1 1,769.6 114.3 834.7 1,865.4 10,668.8
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
Total
liabilities - - - 59.2 762.8 8,412.2 9,234.2
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
1 Total assets for the Banking operating segments comprise the
loan book and operating lease assets only.
2 Balance sheet includes GBP9,710.0 million assets and
GBP8,483.7 million liabilities attributable to the Banking division
primarily comprising the treasury balances described in the second
paragraph of this note.
Equity is allocated across the group as shown below. Banking
division equity, which is managed as a whole rather than on a
segmental basis, reflects loan book and operating lease assets of
GBP7,854.4 million, in addition to assets and liabilities of
GBP9,710.0 million and GBP8,483.7 million respectively primarily
comprising treasury balances which are included within the Group
column above.
Banking total Asset Management Securities Group Total
GBP million GBP million GBP million GBP million GBP million
-------- -------------- ----------------- ------------- ------------ ------------
Equity 1,226.3 55.1 71.9 81.3 1,434.6
-------- -------------- ----------------- ------------- ------------ ------------
Summary Income Statement for the six months ended 31 January
2019
Banking
Asset
Commercial Retail Property Management Securities Group Total
GBP GBP GBP GBP GBP
GBP million million million million GBP million million million
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
Net interest
income/(expense) 87.3 98.0 64.8 0.1 (0.4) - 249.8
Non-interest
income 38.0 15.2 (0.2) 58.4 46.2 - 157.6
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
Operating income 125.3 113.2 64.6 58.5 45.8 - 407.4
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
Administrative
expenses (65.8) (57.2) (14.5) (46.8) (35.7) (12.4) (232.4)
Depreciation and
amortisation (4.5) (5.8) (2.3) (0.9) (0.8) - (14.3)
Impairment losses
on financial
assets (7.7) (13.4) (0.8) - - - (21.9)
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
Total operating
expenses (78.0) (76.4) (17.6) (47.7) (36.5) (12.4) (268.6)
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
Adjusted operating
profit/(loss)(1) 47.3 36.8 47.0 10.8 9.3 (12.4) 138.8
Amortisation of
intangible assets
on acquisition (0.8) (0.1) - (2.3) - - (3.2)
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
Operating
profit/(loss)
before tax from
continuing
operations 46.5 36.7 47.0 8.5 9.3 (12.4) 135.6
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
Profit before tax
from discontinued
operations - 0.9 - - - - 0.9
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
Profit/(loss)
before tax 46.5 37.6 47.0 8.5 9.3 (12.4) 136.5
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
External operating
income/(expense) 150.4 133.9 79.0 58.5 45.8 (60.2) 407.4
Inter segment
operating
(expense)/income (25.1) (20.7) (14.4) - - 60.2 -
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
Segment operating
income 125.3 113.2 64.6 58.5 45.8 - 407.4
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
1 Adjusted operating profit/(loss) is stated before amortisation
of intangible assets on acquisition, loss from discontinued
operations
and tax.
Summary Income Statement for the year ended 31 July 2019
Banking
Asset
Commercial Retail Property Management Securities Group Total
GBP million GBP GBP GBP GBP million GBP GBP
million million million million million
------------------------------ ----------- ----------- ----------- ------------ ----------- -----------
Net interest
income/(expense) 176.7 199.8 129.8 0.1 (0.7) - 505.7
Non-interest
income 73.2 23.4 (0.3) 120.3 94.1 - 310.7
------------------- ---------- ----------- ----------- ----------- ------------ ----------- -----------
Operating income 249.9 223.2 129.5 120.4 93.4 - 816.4
------------------- ---------- ----------- ----------- ----------- ------------ ----------- -----------
Administrative
expenses (128.6) (113.9) (30.2) (96.6) (71.7) (24.9) (465.9)
Depreciation and
amortisation (11.5) (11.6) (4.7) (1.9) (1.7) (0.1) (31.5)
Impairment losses
on
financial assets (23.3) (25.2) 0.1 (0.1) - - (48.5)
------------------- ---------- ----------- ----------- ----------- ------------ ----------- -----------
Total operating
expenses (163.4) (150.7) (34.8) (98.6) (73.4) (25.0) (545.9)
------------------- ---------- ----------- ----------- ----------- ------------ ----------- -----------
Adjusted operating
profit/(loss)(1) 86.5 72.5 94.7 21.8 20.0 (25.0) 270.5
Amortisation of
intangible assets
on
acquisition (1.6) (0.3) - (3.9) - - (5.8)
------------------- ---------- ----------- ----------- ----------- ------------ ----------- -----------
Operating
profit/(loss)
before tax from
continuing
operations 84.9 72.2 94.7 17.9 20.0 (25.0) 264.7
------------------- ---------- ----------- ----------- ----------- ------------ ----------- -----------
Operating profit
before tax from
discontinued
operations - 0.8 - - - - 0.8
------------------- ---------- ----------- ----------- ----------- ------------ ----------- -----------
Operating
profit/(loss)
before tax 84.9 73.0 94.7 17.9 20.0 (25.0) 265.5
------------------- ---------- ----------- ----------- ----------- ------------ ----------- -----------
External operating
income/(expense) 300.8 264.6 158.1 120.5 93.4 (121.0) 816.4
Inter segment
operating
(expense)/income (50.9) (41.4) (28.6) (0.1) - 121.0 -
------------------- ---------- ----------- ----------- ----------- ------------ ----------- -----------
Segment operating
income 249.9 223.2 129.5 120.4 93.4 - 816.4
------------------- ---------- ----------- ----------- ----------- ------------ ----------- -----------
1 Adjusted operating profit/(loss) is stated before amortisation
of intangible assets on acquisition, loss from discontinued
operations
and tax.
Balance Sheet Information at 31 July 2019
Banking
Asset
Commercial Retail Property Management Securities Group(2) Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
Total
assets(1) 3,211.7 2,810.7 1,847.6 115.9 723.8 1,851.6 10,561.3
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
Total
liabilities - - - 59.1 652.6 8,443.2 9,154.9
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
1 Total assets for the Banking operating segments comprise the
loan book and operating lease assets only.
2 Balance sheet includes GBP1,856.2 million assets and
GBP8,533.6 million liabilities attributable to the Banking division
primarily
comprising the treasury balances described in the second
paragraph of this note.
Asset Management
Banking Securities Group Total
GBP million GBP million GBP million GBP million GBP million
------------ ------------ ------------------- ------------- ------------ ------------
Equity (1) 1,192.6 56.8 71.2 85.8 1,406.4
------------ ------------ ------------------- ------------- ------------ ------------
1 Equity of the Banking division reflects loan book and
operating lease assets of GBP7,870.0 million, in addition to assets
and
liabilities of GBP1,856.2 million and GBP8,533.6 million
respectively primarily comprising treasury balances which are
included within the
Group column above.
3. Taxation
Six months ended Year ended
31 January 31 July
--------------------------
2020 2019 2019
GBP million GBP million GBP million
------------------------------------------------------ ------------ ------------ ------------
Tax charged/(credited) to the income statement
Current tax:
UK corporation tax 26.7 30.4 59.4
Foreign tax 0.6 0.9 1.3
Adjustments in respect of previous periods - - (0.9)
------------------------------------------------------ ------------ ------------ ------------
27.3 31.3 59.8
Deferred tax:
Deferred tax charge for the current period 2.3 2.1 3.7
Adjustments in respect of previous periods - - 0.9
------------------------------------------------------ ------------ ------------ ------------
29.6 33.4 64.4
------------------------------------------------------ ------------ ------------ ------------
Tax on items not (credited)/charged to the income
statement
Current tax relating to:
Share-based payments (0.1) (0.1) (0.1)
Deferred tax relating to:
Cash flow hedging 0.3 (0.4) (1.5)
Defined benefit pension scheme - - 0.4
Financial instruments classified at fair value
through other
comprehensive income (0.1) (0.2) -
Share-based payments (0.2) 0.5 0.8
Currency translation gains - - 0.4
Acquisitions - - 0.2
(0.1) (0.2) 0.2
------------------------------------------------------ ------------ ------------ ------------
Reconciliation to tax expense
UK corporation tax for the period at 18.3 %
(2019: 19.0%) on
operating profit 22.7 25.8 50.3
Effect of different tax rates in other jurisdictions (0.1) (0.1) (0.2)
Disallowable items and other permanent differences 0.9 0.6 0.3
Banking surcharge 6.2 7.1 14.0
Deferred tax impact of increased tax rates (0.1) - -
29.6 33.4 64.4
------------------------------------------------------ ------------ ------------ ------------
The effective tax rate for the period is 23.9% (six months ended
31 January 2019: 24.6%; year ended 31 July 2019: 24.3%),
representing the best estimate of the annual effective tax rate
expected for the full year.
The standard UK corporation tax rate for the financial year is
18.3% (six months ended 31 January 2019: 19.0%; year ended 31 July
2019: 19.0%). However, an additional 8% surcharge applies to
banking company profits as defined in legislation. The effective
tax rate is above the UK corporation tax rate primarily due to the
surcharge applying to the majority of the group's profits.
4. Discontinued operations
On 1 January 2019, the group completed the sale of Close
Brothers Retail Finance, which provides unsecured retail point of
sale finance to consumers, to Klarna Bank AB. The transaction
fulfilled the requirements of IFRS 5 to be classified as
"discontinued operations" in the consolidated income statement.
The net assets of Close Brothers Retail Finance on 1 January
2019, the date of disposal, was GBP80.9 million, comprising largely
of loans and advances to customers.
Results of discontinued operations
Six months ended Year ended
31 January 31 July
---------------------------
2020 2019 2019
GBP million GBP million GBP million
----------------------------------------------------------- ------------- ------------ ------------
Operating income - 3.7 3.7
Operating expenses - (4.2) (4.2)
Impairment losses on loans and advances - (1.6) (1.6)
----------------------------------------------------------- ------------- ------------ ------------
Operating loss before tax - (2.1) (2.1)
Tax - 0.5 0.5
Loss after tax - (1.6) (1.6)
Profit on disposal of discontinued operations, net of tax - 2.8 2.7
----------------------------------------------------------- ------------- ------------ ------------
Profit from discontinued operations - 1.2 1.1
----------------------------------------------------------- ------------- ------------ ------------
Cash flow from discontinued operations
Six months ended Year ended
31 January 31 July
---------------------------
2020 2019 2019
GBP million GBP million GBP million
-------------------------------------------- ------------- ------------ ------------
Net cash outflow from operating activities - (16.1) (16.1)
-------------------------------------------- ------------- ------------ ------------
Net cash outflow from investing activities - (0.3) (0.3)
-------------------------------------------- ------------- ------------ ------------
5. Earnings per share
The calculation of basic earnings per share is based on the
profit attributable to shareholders and the number of basic
weighted average shares. When calculating the diluted earnings per
share, the weighted average number of shares in issue is adjusted
for the effects of all dilutive share options and awards.
Six months ended Year ended
31 January 31 July
------------------
2020 2019 2019
--------------------------------------- -------- -------- ----------
Continuing operations
Basic 63.0p 68.1p 133.5p
--------------------------------------- -------- -------- ----------
Diluted 62.7p 67.5p 132.5p
--------------------------------------- -------- -------- ----------
Adjusted basic(1) 63.8p 69.8p 136.7p
--------------------------------------- -------- -------- ----------
Adjusted diluted(1) 63.5p 69.2p 135.7p
--------------------------------------- -------- -------- ----------
Continuing and discontinued operations
Basic 63.0p 68.9p 134.2p
--------------------------------------- -------- -------- ----------
Diluted 62.7p 68.3p 133.2p
--------------------------------------- -------- -------- ----------
1 Excludes amortisation of intangible assets on acquisition and
their tax effects.
Six months ended Year ended
31 January 31 July
------------------------
2020 2019 2019
GBP million GBP million GBP million
-------------------------------------------------- ----------- ----------- -----------
Profit attributable to shareholders 94.5 103.5 201.6
Less profit from discontinued operations, net
of tax - 1.2 1.1
-------------------------------------------------- ----------- ----------- -----------
Profit attributable to shareholders on continuing
operations 94.5 102.3 200.5
-------------------------------------------------- ----------- ----------- -----------
Adjustments:
Amortisation of intangible assets on acquisition 1.6 3.2 5.8
Tax effect of adjustment (0.3) (0.6) (1.0)
-------------------------------------------------- ----------- ----------- -----------
Adjusted profit attributable to shareholders
on continuing operations 95.8 104.9 205.3
-------------------------------------------------- ----------- ----------- -----------
Six months ended Year ended
31 January 31 July
------------------------
2020 2019 2019
million million million
-------------------------------------------------- ----------- ----------- -----------
Average number of shares
Basic weighted 150.1 150.2 150.2
Effect of dilutive share options and awards 0.7 1.4 1.1
-------------------------------------------------- ----------- ----------- -----------
Diluted weighted 150.8 151.6 151.3
-------------------------------------------------- ----------- ----------- -----------
6. Dividends
Six months ended Year ended
31 January 31 July
------------------------
2020 2019 2019
GBP million GBP million GBP million
-------------------------------------------------- ----------- ----------- -----------
For each ordinary share
Interim dividend for previous financial year paid
in April 2019: 22 .0p - - 32.8
Final dividend for previous financial year paid
in November 2019: 44.0p
(November 2018: 42.0p) 65.8 62.8 62.7
65.8 62.8 95.5
-------------------------------------------------- ----------- ----------- -----------
An interim dividend relating to the six months ended 31 January
2020 of 22.7p, amounting to an estimated GBP33.9 million, is
declared. This interim dividend, which is due to be paid on 22
April 2020 to shareholders on the register at 20 March 2020, is not
reflected in these condensed half year financial statements.
7. Loans and advances to customers
The contractual maturity of loans and advances to customers is
set out below:
Between
three Between
Within months Between two and After
On three and one one and five more than Impairment
demand months year two years years five years provisions Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million GBP million
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 31
January
2020 79.0 2,289.2 2,239.1 1,464.2 1,555.3 108.9 (116.6) 7,619.1
------------- ----- ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 31 July
2019 80.7 2,288.8 2,381.0 1,332.0 1,556.3 115.1 (104.3) 7,649.6
------------- ----- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Stage 1 Stage 2 Stage 3 Total
GBP million GBP million GBP million GBP million
------------------------------------------- ------------ ------------ ------------ ------------------
Impairment provisions on loans
and
advances to customers
At 1 August 2019 24.9 27.1 52.3 104.3
New financial assets originated 12.0 - - 12.0
------------ ------------ ------------ ------------------
Transfers to Stage 1 1.0 (4.9) (0.1) (4.0)
Transfers to Stage 2 (3.3) 12.8 (0.3) 9.2
Transfers to Stage 3 (0.8) (6.3) 32.0 24.9
------------------------------------------- ------------ ------------ ------------ ------------------
Net remeasurement of expected credit
losses
arising from transfers between
stages and
repayments (3.1) 1.6 31.6 30.1
Repayments and ECL movements while
stage
remained unchanged and final repayments (5.9) (2.3) 1.1 (7.1)
Changes to model methodologies - - - -
Charge to the income statement 3.0 (0.7) 32.7 35.0
Write offs - (0.4) (22.3) (22.7)
At 31 January 2020 27.9 26.0 62.7 116.6
------------------------------------------- ------------ ------------ ------------ ------------------
Six months
ended 31 January
2020
GBP million
----------------------------------------------------------------------- ------------ ------------------
Impairment losses relating to loans and advances to customers:
Charge to income statement arising from movement in impairment
provisions 35.0
Amounts written off directly to income statement, net
of recoveries and other costs 1.2
----------------------------------------------------------------------- ------------ ------------------
36.2
Impairment losses relating to other financial assets 0.5
----------------------------------------------------------------------- ------------ ------------------
Impairment losses on financial assets recognised in income
statement 36.7
----------------------------------------------------------------------- ------------ ------------------
Stage 1 Stage 2 Stage 3 Total
GBP million GBP million GBP million GBP million
--------------------------------------- ------------ ------------ ------------ ------------
Gross loans and advances to customers
At 1 August 2019 6,864.0 703.7 186.2 7,753.9
New financial assets originated 2,804.1 - - 2,804.1
------------ ------------ ------------ ------------
Transfers to Stage 1 217.5 (235.0) (6.6) (24.1)
Transfers to Stage 2 (585.0) 511.6 (7.2) (80.6)
Transfers to Stage 3 (100.4) (123.9) 188.4 (35.9)
--------------------------------------- ------------ ------------ ------------ ------------
Net transfers between stages and
repayments (467.9) 152.7 174.6 (140.6)
Repayments while stage remained
unchanged
and final repayments (2,403.8) (183.0) (36.9) (2,623.7)
Changes to model methodologies 1.2 0.8 (2.0) -
Write offs (1.2) (1.0) (55.8) (58.0)
--------------------------------------- ------------ ------------ ------------ ------------
At 31 January 2020 6,796.4 673.2 266.1 7,735.7
--------------------------------------- ------------ ------------ ------------ ------------
Stage 1 Stage 2 Stage 3 Total
GBP million GBP million GBP million GBP million
------------------------------------------ ------------ ------------ ------------ --------------
Impairment provisions on loans
and
advances to customers
At 31 July 2018 39.1
IFRS 9 transition 58.2
------------------------------------------ ------------ ------------ ------------ --------------
At 1 August 2018 23.7 24.8 48.8 97.3
New financial assets originated 26.5 - - 26.5
------------ ------------ ------------ --------------
Transfers to Stage 1 1.0 (4.4) (0.4) (3.8)
Transfers to Stage 2 (6.4) 20.8 (0.2) 14.2
Transfers to Stage 3 (2.1) (4.7) 48.2 41.4
------------------------------------------ ------------ ------------ ------------ --------------
Net remeasurement of expected credit
losses
arising from transfers between
stages and
repayments (7.5) 11.7 47.6 51.8
Repayments and ECL movements while
stage
remained unchanged and final repayments (17.5) (7.5) (11.4) (36.4)
Changes to model methodologies - - (0.3) (0.3)
Charge to the income statement 1.5 4.2 35.9 41.6
Write offs (0.3) (1.9) (32.4) (34.6)
At 31 July 2019 24.9 27.1 52.3 104.3
------------------------------------------ ------------ ------------ ------------ --------------
Year ended
31 July 2019
GBP million
---------------------------------------------------------------------- ------------ --------------
Impairment losses relating to loans and advances to customers:
Charge to income statement arising from movement in impairment
provisions 41.6
Amounts written off directly to income statement, net
of recoveries and other costs 5.8
---------------------------------------------------------------------- ------------ --------------
47.4
Impairment losses relating to other financial assets 1.1
---------------------------------------------------------------------- ------------ --------------
Impairment losses on financial assets recognised in income
statement 48.5
---------------------------------------------------------------------- ------------ --------------
Stage 1 Stage 2 Stage 3 Total
GBP million GBP million GBP million GBP million
--------------------------------------- ------------ ------------ ------------ ------------
Gross loans and advances to customers
At 1 August 2018 6,479.2 597.3 260.1 7,336.6
New financial assets originated 5,856.4 - - 5,856.4
------------ ------------ ------------ ------------
Transfers to Stage 1 204.6 (195.3) (65.1) (55.8)
Transfers to Stage 2 (918.4) 791.5 (11.3) (138.2)
Transfers to Stage 3 (249.9) (126.7) 315.4 (61.2)
--------------------------------------- ------------ ------------ ------------ ------------
Net transfers between stages and
repayments (963.7) 469.5 239.0 (255.2)
Repayments while stage remained
unchanged
and final repayments (4,573.0) (369.3) (134.8) (5,077.1)
Changes to model methodologies 86.5 23.0 (109.5) -
Write offs (21.4) (16.8) (68.6) (106.8)
--------------------------------------- ------------ ------------ ------------ ------------
At 31 July 2019 6,864.0 703.7 186.2 7,753.9
--------------------------------------- ------------ ------------ ------------ ------------
Gross loans and advances to customers by stage and the
corresponding impairment provisions and provision coverage ratios
are set out below:
Stage 2
-----------------------------------------
Greater
than
Less than or equal
30 days to 30 days Stage
Stage 1 past due past due Total 3 Total
At 31 January 2020 GBP million GBP million GBP million GBP million GBP million GBP million
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Gross loans and
advances to customers
Commercial 2,728.3 279.1 22.1 301.2 96.3 3,125.8
Retail 2,534.0 255.1 7.6 262.7 28.0 2,824.7
Property 1,534.1 31.1 78.2 109.3 141.8 1,785.2
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Total 6,796.4 565.3 107.9 673.2 266.1 7,735.7
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Impairment provisions
Commercial 16.0 8.7 2.5 11.2 33.2 60.4
Retail 10.3 11.8 1.2 13.0 17.3 40.6
Property 1.6 1.4 0.4 1.8 12.2 15.6
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Total 27.9 21.9 4.1 26.0 62.7 116.6
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Provision coverage
ratio
Commercial 0.6% 3.1% 11.3% 3.7% 34.5% 1.9%
Retail 0.4% 4.6% 15.8% 4.9% 61.8% 1.4%
Property 0.1% 4.5% 0.5% 1.6% 8.6% 0.9%
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Total 0.4% 3.9% 3.8% 3.9% 23.6% 1.5%
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Stage 2
-----------------------------------------
Greater
than
Less than or equal
30 days to 30 days Stage
Stage 1 past due past due Total 3 Total
At 31 July 2019 GBP million GBP million GBP million GBP million GBP million GBP million
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Gross loans and
advances to customers
Commercial 2,647.7 293.1 17.6 310.7 84.7 3,043.1
Retail 2,577.1 239.3 4.9 244.2 26.5 2,847.8
Property 1,639.2 43.2 105.6 148.8 75.0 1,863.0
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Total 6,864.0 575.6 128.1 703.7 186.2 7,753.9
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Impairment provisions
Commercial 12.5 10.8 1.1 11.9 27.4 51.8
Retail 10.4 11.2 0.5 11.7 15.0 37.1
Property 2.0 1.9 1.6 3.5 9.9 15.4
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Total 24.9 23.9 3.2 27.1 52.3 104.3
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Provision coverage
ratio
Commercial 0.5% 3.7% 6.3% 3.8% 32.3% 1.7%
Retail 0.4% 4.7% 10.2% 4.8% 56.6% 1.3%
Property 0.1% 4.4% 1.5% 2.4% 13.2% 0.8%
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Total 0.4% 4.2% 2.5% 3.9% 28.1% 1.3%
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Stage 1 and Stage 2 loans and advances to customers and expected
credit loss provisions have remained broadly flat with stable
provision coverage ratios of 0.4% (31 July 2019: 0.4%) and 3.9% (31
July 2019: 3.9%) respectively.
Stage 3 loans and advances to customers have increased GBP79.9
million to GBP266.1 million (31 July 2019: GBP186.2 million). This
movement is primarily due to the Property segment, where a number
of specific loans and advances to customers met Stage 3 default
triggers in the period. This increase resulted in a change to the
overall Stage 3 provision coverage ratio to 23.6% (31 July 2019:
28.1%) reflecting the secured nature of our portfolios and the
detailed assessments in place to calculate expected credit loss
provisions.
8. Debt securities
Fair value Fair value
through through other
profit or comprehensive Amortised
loss income cost Total
GBP million GBP million GBP million GBP million
Long trading positions in debt
securities 22.1 - - 22.1
Certificates of deposit - - 301.0 301.0
Sovereign and central bank
debt - 44.3 - 44.3
At 31 January 2020 22.1 44.3 301.0 367.4
Fair value Fair value
through through other
profit or comprehensive Amortised
loss income cost Total
GBP million GBP million GBP million GBP million
Long trading positions in debt
securities 25.4 - - 25.4
Certificates of deposit - - 240.7 240.7
Sovereign and central bank
debt - 48.3 - 48.3
At 31 July 2019 25.4 48.3 240.7 314.4
Movements in the book value of sovereign and central bank debt
comprise:
Six months
ended Year ended
31 January 31 July
2020 2019
GBP million GBP million
Sovereign and central bank debt at beginning
of period 48.3 44.5
Currency translation difference (3.5) 1.0
Changes in fair value (0.5) 2.8
Sovereign and central bank debt at end of
period 44.3 48.3
-------------
9. Equity shares
31 January 31 July
2020 2019
GBP million GBP million
Long trading positions 34.3 35.3
Other equity shares 0.8 1.0
35.1 36.3
-----------
10. Intangible assets
Intangible
assets on
Goodwill Software acquisition Total
GBP million GBP million GBP million GBP million
------------ ------------
Cost
At 1 August 2018 150.7 160.8 67.0 378.5
Additions - 23.1 - 23.1
Disposals - (2.6) (0.1) (2.7)
At 31 January 2019 150.7 181.3 66.9 398.9
Additions 0.2 25.0 0.6 25.8
Disposals (0.1) (5.1) - (5.2)
------------ ------------
At 31 July 2019 150.8 201.2 67.5 419.5
Additions - 22.3 - 22.3
Disposals (0.1) (0.3) (0.1) (0.5)
------------ ------------
At 31 January 2020 150.7 223.2 67.4 441.3
------------ ------------
Amortisation and impairment
At 1 August 2018 47.9 87.9 41.4 177.2
Amortisation charge for the period - 9.8 3.2 13.0
Disposals - - - -
At 31 January 2019 47.9 97.7 44.6 190.2
Amortisation charge for the period - 10.7 2.6 13.3
Disposals - (3.4) - (3.4)
At 31 July 2019 47.9 105.0 47.2 200.1
Amortisation charge for the period - 11.5 1.6 13.1
Disposals - (0.3) (0.1) (0.4)
------------ ------------
At 31 January 2020 47.9 116.2 48.7 212.8
------------ ------------
Net book value at 31 January 2020 102.8 107.0 18.7 228.5
------------ ------------
Net book value at 31 July 2019 102.9 96.2 20.3 219.4
------------ ------------
Net book value at 31 January 2019 102.8 83.6 22.3 208.7
------------ ------------
Net book value at 1 August 2018 102.8 72.9 25.6 201.3
------------ ------------
Intangible assets on acquisition relate to broker and customer
relationships and are amortised over a period of eight to 20
years.
In the six months ended 31 January 2020, GBP1.6 million (six
months ended 31 January 2019: GBP3.2 million; year ended 31 July
2019: GBP5.8 million) of the amortisation charge is included in
amortisation of intangible assets on acquisition and GBP11.5
million (six months ended 31 January 2019: GBP9.8 million; year
ended 31 July 2019: GBP20.5 million) of the amortisation charge is
included in administrative expenses shown in the consolidated
income statement.
11 . Property, plant and equipment
Assets
Fixtures, held under
fittings operating Right
Leasehold and leases Motor of use
property equipment vehicles assets Total
GBP million GBP million GBP million GBP million GBP million GBP million
------------ ------------ ------------ ------------ ------------
Cost
At 1 August 2018 22.4 55.8 268.9 0.1 - 347.2
Additions 5.0 1.3 40.6 - - 46.9
Disposals - (5.4) (15.1) -- - (20.5)
At 31 January 2019 27.4 51.7 294.4 0.1 - 373.6
Additions 0.9 4.9 32.3 - - 38.1
Disposals (1.2) (1.1) (12.6) - - (14.9)
------------ ------------ ------------ ------------ ------------
At 31 July 2019 27.1 55.5 314.1 0.1 - 396.8
IFRS 16 transition (note
1) - - - - 44.8 44.8
------------ ------------ ------------ ------------ ------------
At 1 August 2019 27.1 55.5 314.1 0.1 44.8 441.6
Additions 0.1 2.0 38.9 - 12.7 53.7
Disposals (2.9) (3.1) (13.3) - (0.1) (19.4)
------------ ------------ ------------ ------------ ------------
At 31 January 2020 24.3 54.4 339.7 0.1 57.4 475.9
------------ ------------ ------------ ------------ ------------
Depreciation
At 1 August 2018 12.9 38.0 70.1 0.1 - 121.1
Depreciation charge for
the period 1.5 3.3 18.0 - - 22.8
Disposals - (0.6) (7.6) - - (8.2)
At 31 January 2019 14.4 40.7 80.5 0.1 - 135.7
Depreciation charge for
the period 1.2 5.0 18.1 - - 24.3
Disposals (1.0) (5.5) (4.9) - - (11.4)
------------ ------------ ------------ ------------ ------------
At 31 July 2019 14.6 40.2 93.7 0.1 - 148.6
Depreciation charge for
the period 1.2 4.0 19.8 - 6.3 31.3
Disposals (2.9) (2.9) (9.1) - - (14.9)
------------ ------------ ------------ ------------ ------------
At 31 January 2020 12.9 41.3 104.4 0.1 6.3 165.0
------------ ------------ ------------ ------------ ------------
Net book value at 31 January
2020 11.4 13.1 235.3 - 51.1 310.9
------------ ------------ ------------ ------------ ------------
Net book value at 31 July
2019 12.5 15.3 220.4 - - 248.2
------------ ------------ ------------ ------------ ------------
Net book value at 31 January
2019 13.0 11.0 213.9 - - 237.9
------------ ------------ ------------ ------------ ------------
Net book value at 1 August
2018 9.5 17.8 198.8 - - 226.1
------------ ------------ ------------ ------------ ------------
12. Settlement balances and short positions
31 January 31 July
2020 2019
GBP million GBP million
Settlement balances 649.5 547.6
Short positions held for trading:
Debt securities 5.1 9.6
Equity shares 10.3 10.9
-----------
15.4 20.5
-----------
664.9 568.1
13. Financial liabilities
The contractual maturity of financial liabilities, which largely
relate to treasury funding balances, is set out below.
Between Between
Within three months Between two and After
On three and one one and five more than
demand months year two years years five years Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
------------
Deposits by banks 16.2 84.2 35.1 - - - 135.5
Deposits by customers 69.8 1,152.7 2,812.0 1,216.4 313.5 - 5,564.4
Loans and overdrafts
from banks 10.0 10.3 198.2 141.8 150.0 - 510.3
Debt securities
in issue 18.3 48.1 378.9 685.6 415.7 269.5 1,816.1
Subordinated loan
capital(1) 0.7 1.4 0.2 - - 219.3 221.6
------------
At 31 January 2020 115.0 1,296.7 3,424.4 2,043.8 879.2 488.8 8,247.9
------------
1 Comprises issuances of GBP175 million and GBP45 million with
contractual maturity dates of 2027 and 2026 and optional
prepayment
dates of 2022 and 2021 respectively.
Within Between Between Between After
On demand three three months one and two and more than
months and one two years five years five years Total
year
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
Deposits by banks 12.5 15.7 29.8 - - - 58.0
Deposits by customers 78.3 1,232.7 2,817.9 1,157.2 352.3 - 5,638.4
Loans and overdrafts
from banks 19.0 10.3 - 213.2 276.8 - 519.3
Debt securities
in issue 20.7 27.4 143.6 937.8 459.5 271.1 1,860.1
Subordinated loan
capital(1) 0.9 1.4 0.2 - - 219.1 221.6
At 31 July 2019 131.4 1,287.5 2,991.5 2,308.2 1,088.6 490.2 8,297.4
1 Comprises issuances of GBP175 million and GBP45 million with
contractual maturity dates of 2027 and 2026 and optional
prepayment
dates of 2022 and 2021 respectively.
At 31 January 2020, the group was a participant of the Bank of
England's Term Funding Scheme. Under this scheme, asset finance
loan receivables of GBP 796.0 million (31 July 2019: GBP790.6
million) were positioned as collateral with the Bank of England,
against which GBP490.0 million of cash (31 July 2019: GBP490.0
million) was drawn. The term of these transactions is four years
from the date of each drawdown but the group may choose to repay
earlier at its discretion. The risks and rewards of the loan
receivables remain with the group and continue to be recognised in
loans and advances to customers on the consolidated balance
sheet.
The group has securitised without recourse GBP 1,385.4 million
(31 July 2019: GBP1,299.0 million) of its Premium and Motor Finance
loan receivables in return for cash and asset-backed securities in
issue of GBP944.0 million (31 July 2019: GBP949.8 million). This
includes GBP20.2 million (31 July 2019: GBP35.4 million)
asset-backed securities in issue retained for liquidity purposes.
As the group has retained exposure to substantially all the credit
risks and rewards of the residual benefit of the underlying assets,
it continues to recognise these assets in loans and advances to
customers on the consolidated balance sheet.
Since the balance sheet date of 31 January 2020, the group
issued a third GBP200 million public Motor Finance securitisation,
which has not been recognised on the consolidated balance
sheet.
14. Capital
The group's individual regulated entities and the group as a
whole complied with all of the externally imposed capital
requirements to which they were subject for the period to 31
January 2020 and the year ended 31 July 2019. The table below
summarises the composition of regulatory capital and Pillar 1 risk
weighted assets at those financial period ends. The information
presented in this note is outside the scope of the independent
review performed by PricewaterhouseCoopers LLP.
31 January 31 July
2020 2019
GBP million GBP million
Common equity tier 1 ("CET1") capital
Called up share capital 38.0 38.0
Retained earnings(1) 1,417.7 1,392.5
Other reserves recognised for CET1 capital 18.0 19.0
Regulatory adjustments to CET1 capital
Intangible assets, net of associated deferred tax liabilities (225.5) (216.1)
Foreseeable dividend(2) (44.3) (65.7)
Investment in own shares (34.7) (37.7)
Pension asset, net of associated deferred tax liabilities (5.1) (5.3)
Prudent valuation adjustment (0.1) (0.1)
IFRS 9 transitional arrangements(3) 41.4 44.6
CET1 capital 1,205.4 1,169.2
Tier 2 capital - subordinated debt 188.6 195.4
Total regulatory capital(4) 1,394.0 1,364.6
Risk weighted assets (notional)(4)
Credit and counterparty risk 7,986.2 7,930.5
Operational risk(5) 884.4 884.4
Market risk(5) 141.1 152.5
9,011.7 8,967.4
CET1 capital ratio(4) 13.4% 13.0%
Total capital ratio(4) 15.5% 15.2%
1 Retained earnings for the period ended 31 January 2020 include
all profits (both verified and unverified) for the six month
period.
2 Under the Regulatory Technical Standard on own funds, a
deduction has been recognised for a foreseeable dividend. In
accordance with this standard, for 31 January 2020 a foreseeable
dividend has been determined based on the average payout ratio
over the previous three years applied to the retained earnings
for the period. For 31 July 2019 a foreseeable dividend was
determined as the proposed final dividend.
3 The group has elected to apply IFRS 9 transitional
arrangements, which allow the capital impact of expected credit
losses to be
phased in over a five-year period.
4 Shown after applying IFRS 9 transitional arrangements and the
Capital Requirement Regulations transitional and qualifying own
funds arrangements. At 31 January 2020 the fully loaded CET1
capital ratio is 13.0% (31 July 2019: 12.6%) and total capital
ratio is
14.9% (31 July 2019: 14.5%).
5 Operational and market risks include a notional adjustment at
8% in order to determine notional risk weighted assets.
The following table shows a reconciliation between equity and
CET1 capital after deductions:
31 January 31 July
2020 2019
GBP million GBP million
Equity 1,434.6 1,406.4
Regulatory adjustments to CET1 capital:
Intangible assets, net of associated
deferred tax liabilities (225.5) (216.1)
Foreseeable dividend(1) (44.3) (65.7)
IFRS 9 transitional arrangements 41.4 44.6
Pension asset, net of associated deferred
tax liabilities (5.1) (5.3)
Prudent valuation adjustment (0.1) (0.1)
Other reserves not recognised for CET1
capital:
Cash flow hedging reserve 3.4 4.4
Non-controlling interests 1.0 1.0
CET1 capital 1,205.4 1,169.2
1 Under the Regulatory Technical Standard on own funds, a
deduction has been recognised for a foreseeable dividend. In
accordance with this standard, for 31 January 2020 a foreseeable
dividend has been determined based on the average payout
ratio over the previous three years applied to the retained
earnings for the period. For 31 July 2019 a foreseeable
dividend
was determined as the proposed final dividend.
The following table shows the movement in CET1 capital during
the period:
GBP million
CET1 capital at 31 July 2019 1,169.2
Profit in the period attributable to shareholders 94.5
Dividends paid and foreseen (44.4)
Other movements in reserves recognised for CET1 capital (4.5)
Increase in intangible assets, net of associated deferred
tax liabilities (9.4)
Other movements in deductions from CET1 capital -
CET1 capital at 31 January 2020 1,205.4
15. Contingent liabilities
Financial Services Compensation Scheme ("FSCS")
As disclosed in note 23 of the Annual Report 2019, the group is
exposed to the FSCS which provides compensation to customers of
financial institutions in the event that an institution is unable,
or is likely to be unable, to pay claims against it.
Compensation has previously been paid out by the FSCS funded by
loan facilities provided by HM Treasury to FSCS in support of the
FSCS's obligations to the depositors of banks declared in default.
The facilities are expected to be repaid wholly from recoveries
from the failed deposit-takers. In the event of a shortfall, the
FSCS will recover the shortfall by raising levies on the industry.
The amount of future levies payable by the group depends on a
number of factors including the potential recoveries of assets by
the FSCS, the group's participation in the deposit-taking market at
31 December, the level of protected deposits and the population of
FSCS members.
16. Related party transactions
Related party transactions, including salary and benefits
provided to directors and key management, did not have a material
effect on the financial position or performance of the group during
the period. There were no changes to the type and nature of the
related party transactions disclosed in the Annual Report 2019 that
could have a material effect on the financial position and
performance of the group in the six months to 31 January 2020.
17. Consolidated cash flow statement reconciliation
31 January 31 July
2020 2019 2019
GBP million GBP million GBP million
(a) Reconciliation of operating profit before
tax to net cash
inflow from operating activities
Operating profit before tax from continuing
operations 124.1 135.6 264.7
Profit before tax from discontinued operations - 0.9 0.8
Tax paid (64.6) (28.1) (55.6)
Depreciation and amortisation 44.4 35.7 73.5
(Increase)/decrease in:
Interest receivable and prepaid expenses (15.5) 8.1 (4.8)
Net settlement balances and trading positions (7.7) (21.3) (29.2)
Net loans to/from money broker against stock
advanced 27.3 9.5 15.8
(Decrease) in interest payable and accrued expenses (40.5) (45.5) (3.5)
Net cash inflow from trading activities 67.5 94.9 261.7
(Increase)/decrease in:
Loans and advances to banks not repayable on
demand (0.3) (2.1) 1.9
Loans and advances to customers 18.6 (175.9) (416.6)
Assets held under operating leases (34.8) (33.2) (62.7)
Certificates of deposit (60.3) (150.9) 9.8
Sovereign and central bank debt - - -
Other assets less other liabilities 33.5 3.1 9.1
Increase/(decrease) in:
Deposits by banks 77.5 (1.0) 2.8
Deposits by customers (75.9) (147.7) 141.2
Loans and overdrafts from banks (9.0) 8.5 9.5
(Redemption)/issuance of debt securities (32.6) 16.4 63.7
Net cash (outflow)/inflow from operating activities (15.8) (387.9) 20.4
(b) Analysis of net cash outflow in respect of
the purchase of subsidiaries
Cash consideration paid (3.3) - (3.6)
(c) Analysis of net cash inflow in respect of
the sale of subsidiaries and discontinued
operations
Cash consideration received 0.5 86.1 87.6
31 January 31 July
2020 2019 2019
GBP million GBP million GBP million
(d) Analysis of cash and cash equivalents(1)
Cash and balances at central banks 903.9 764.2 1,094.9
Loans and advances to banks repayable on demand 151.5 85.2 93.4
1,055.4 849.4 1,188.3
1 Excludes Bank of England cash reserve account and amounts held
as collateral.
During the period ended 31 January 2020, the non-cash changes on
debt financing amounted to GBP7.0 million (31 January 2019: GBP5.0
million; 31 July 2019: GBP18.6 million) arising largely from
interest accretions and fair value hedging movements.
18. Fair value of financial assets and liabilities
The main differences between the fair values and the carrying
values of the group's financial assets and financial liabilities
are as follows:
31 January 2020 31 July 2019
Fair value Carrying Fair Carrying
value value value
GBP million GBP million GBP million GBP million
------------ ------------
Subordinated loan capital 232.0 221.6 234.1 221.6
Debt securities in issue 1,846.9 1,816.1 1,891.2 1,860.1
The group holds financial instruments that are measured at fair
value subsequent to initial recognition. Each instrument has been
categorised within one of three levels using a fair value hierarchy
that reflects the significance of the inputs used in making the
measurements. These levels are based on the degree to which the
fair value is observable and are defined in note 28 "Financial risk
management" of the Annual Report 2019. The table below shows the
classification of financial instruments held at fair value into the
valuation hierarchy:
Level 1 Level 2 Level 3 Total
GBP million GBP million GBP million GBP million
At 31 January 2020
Assets
Debt securities:
Long trading positions in debt securities 20.6 1.5 - 22.1
Sovereign and central bank debt 44.3 - - 44.3
Equity shares 6.4 28.4 0.3 35.1
Derivative financial instruments - 29.0 - 29.0
Contingent consideration - - 2.2 2.2
71.3 58.9 2.5 132.7
-----------
Liabilities
Short positions:
Debt securities 3.5 1.6 - 5.1
Equity shares 3.3 7.0 - 10.3
Derivative financial instruments - 12.8 - 12.8
Contingent consideration - - 3.1 3.1
6.8 21.4 3.1 31.3
-----------
Level 1 Level 2 Level 3 Total
GBP million GBP million GBP million GBP million
At 31 July 2019
Assets
Debt securities:
Long trading positions in debt securities 24.0 1.4 - 25.4
Sovereign and central bank debt 48.3 - - 48.3
Equity shares 5.6 30.4 0.3 36.3
Derivative financial instruments - 30.1 - 30.1
Contingent consideration - - 2.1 2.1
77.9 61.9 2.4 142.2
----------- -----------
Liabilities
Short positions:
Debt securities 7.9 1.7 - 9.6
Equity shares 2.7 8.2 - 10.9
Derivative financial instruments - 20.6 - 20.6
Contingent consideration - - 6.0 6.0
10.6 30.5 6.0 47.1
----------- -----------
There is no significant change to the valuation methodologies
relating to Level 2 and 3 financial instruments disclosed in note
28 "Financial risk management" of the Annual Report 2019.
Financial instruments classified as Level 3 predominantly
comprise contingent consideration payable and receivable in
relation to the acquisitions and disposal of subsidiaries. The
valuation of contingent consideration is determined on a discounted
expected cash flow basis. The group believes that there is no
reasonably possible change to the technique or inputs used in the
valuation of these positions which would have a material effect on
the group's consolidated income statement.
There were no significant transfers between Level 1, 2 and 3
during the six months ended 31 January 2020 (six months ended 31
January 2019: none).
There were no significant movements in financial instruments
categorised as Level 3 during the six months ended 31 January 2020
(six months ended 31 January 2019: none).
The gains recognised in the consolidated income statement
relating to financial instruments held at 31 January 2020 amounted
to GBP0.3 million (31 January 2019: GBP0.7 million loss; 31 July
2019: GBPnil).
19. Implementation of IFRS 16 Leases
The group adopted IFRS 16 from 1 August 2019. The standard has
been applied on a modified retrospective basis and comparative
information has not been restated. More information on changes to
the group's accounting policies can be found in note 1.
At transition date, the group applied the option to measure
right of use assets at an amount equal to the lease liability,
adjusted for prepaid or accrued payments. This resulted in the
recognition on the balance sheet of right of use assets of GBP44.8
million and lease liabilities of GBP47.4 million, with no impact on
shareholders' equity. The right of use assets and lease
liabilities, which largely relate to properties previously
accounted for as operating leases, are included within Property,
plant and equipment and Other liabilities respectively.
The weighted average incremental borrowing rate applied to lease
liabilities at transition date was 2%. At 31 July 2019, IAS 17
operating lease commitments as disclosed on page 138 of the Annual
Report 2019 amounted to GBP55.2 million. The difference between
this and total lease liabilities recognised at 1 August 2019 on
transition largely relate to the impact of discounting.
The group did not reassess whether a contract is, or contains, a
lease on transition as permitted by IFRS 16. In addition, the
following practical expedients were applied on transition:
-- Reliance on previous assessment of whether a lease is onerous;
-- Recognition exemption for leases with a remaining term of
less than 12 months at transition date;
-- Exclusion of initial direct costs from the measurement of right of use assets;
-- Use of hindsight in determining lease term if the contract
contains options to extend or terminate; and
-- Application of a single discount rate to a portfolio of
leases with reasonably similar characteristics.
Cautionary Statement
Certain statements included or incorporated by reference within
this announcement may constitute "forward-looking statements" in
respect of the group's operations, performance, prospects and/or
financial condition. Forward-looking statements are sometimes, but
not always, identified by their use of a date in the future or such
words as "anticipates", "aims", "due", "could", "may", "will",
"should", "expects", "believes", "intends", "plans", "potential",
"targets", "goal" or "estimates". By their nature, forward-looking
statements involve a number of risks, uncertainties and assumptions
and actual results or events may differ materially from those
expressed or implied by those statements. Accordingly, no assurance
can be given that any particular expectation will be met and
reliance should not be placed on any forward-looking statement.
Additionally, forward-looking statements regarding past trends or
activities should not be taken as a representation that such trends
or activities will continue in the future. Except as may be
required by law or regulation, no responsibility or obligation is
accepted to update or revise any forward-looking statement
resulting from new information, future events or otherwise. Nothing
in this announcement should be construed as a profit forecast.
This announcement does not constitute or form part of any offer
or invitation to sell, or any solicitation of any offer to
subscribe for or purchase any shares or other securities in the
company or any of its group members, nor shall it or any part of it
or the fact of its distribution form the basis of, or be relied on
in connection with, any contract or commitment or investment
decisions relating thereto, nor does it constitute a recommendation
regarding the shares or other securities of the company or any of
its group members. Past performance cannot be relied upon as a
guide to future performance and persons needing advice should
consult an independent financial adviser or other professional.
Statements in this announcement reflect the knowledge and
information available at the time of its preparation. Liability
arising from anything in this announcement shall be governed by
English law. Nothing in this announcement shall exclude any
liability under applicable laws that cannot be excluded in
accordance with such laws.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR FLFSAVAIAIII
(END) Dow Jones Newswires
March 10, 2020 03:00 ET (07:00 GMT)
Close Brothers (LSE:CBG)
Historical Stock Chart
From Apr 2024 to May 2024
Close Brothers (LSE:CBG)
Historical Stock Chart
From May 2023 to May 2024