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Rathbone Brothers PLC  -  RAT   

Rathbone Brothers Plc : Half-yearly report 2017

Released 07:00 25-Jul-2017

Rathbone Brothers Plc : Half-yearly report 2017

Underlying profit before tax up 22.7% to £43.3 million

Philip Howell, Chief Executive of Rathbone Brothers Plc, said:

"The first six months of 2017 has seen another busy period for Rathbones as we continue to deliver our strategic plans without detracting from our high standards of service to our clients. We remain confident in the medium term potential of our growth initiatives. Short term market conditions are dominated by a backdrop of ongoing geopolitical uncertainty and we will continue to invest with discipline." 

Highlights:

* Excluding a plan amendment gain on the closure of the defined benefit pension schemes and charges in relation to client relationships and goodwill, acquisition-related costs and London head office relocation costs.

25 July 2017

For further information contact:

Rathbone Brothers Plc
Tel: 020 7399 0000
email: shelly.patel@rathbones.com

 

Philip Howell, Chief Executive
Paul Stockton, Finance Director
Shelly Patel, Investor Relations Manager
Camarco
Tel: 020 3757 4984
email: ed.gascoigne-pees@camarco.co.uk

 

Ed Gascoigne-Pees

Rathbone Brothers Plc

Rathbone Brothers Plc ("Rathbones"), through its subsidiaries, is a leading provider of high-quality, personalised investment and wealth management services for private clients, charities and trustees. Our services include discretionary investment management, unit trusts, banking and loan services, financial planning, unitised portfolio services, and UK trust, legal, estate and tax advice.

Rathbones has over 1,100 staff in 16 locations in the UK and Jersey; its headquarters is 8 Finsbury Circus, London.

rathbones.com


Investment management report
Continuing growth in funds under management

In the first half of 2017, investment markets largely shrugged off political events, and continued to build momentum with the FTSE 100 reaching all time highs during the period. Our own funds under management grew 7.0% to reach £36.6 billion at 30 June 2017, benefitting from a combination of continued acquired and organic growth and these resilient conditions. This compares to a 2.4% increase in the FTSE 100 Index and a 2.7% increase in the MSCI WMA Private Investor Balanced Index. 

Funds under management in our Investment Management business were £32.0 billion at 30 June 2017 (2016: £30.2 billion).  Investment Management net inflows were £0.6 billion in the first half (2016: £0.5 billion) representing a total annualised growth rate of 4.0% (2016: 4.2%).  Net organic growth totalled £0.4 billion up from £0.3 billion at 30 June 2016, equating to an annualised net organic growth rate of 2.9%. In the period, we experienced higher outflows from low margin accounts and adjusting for this, the annualised net organic growth rate was 3.4%. Purchased growth totalled £0.2 billion (2016: £0.2 billion), with nearly all investment managers set to meet or exceed their earn-out targets. Our charities business continued to perform well and retained the position of the second biggest investment management provider to the top 5,000 charities in the UK. Its funds under management grew 4.9% to £4.3 billion in the first six months of 2017. The market profile of our ethical business, Rathbone Greenbank Investments, continues to rise with funds under management increasing by 9.6% to reach £946 million in the first half.

Funds under management in our Unit Trusts business increased 15.0% from £4.0 billion at 31 December 2016 to £4.6 billion at 30 June 2017.  Positive markets and competitive investment performance helped to attract gross sales of £733 million compared to £576 million for the same period in 2016. In common with many in the industry, redemptions of £464 million were higher at the start of 2017 as investor concerns heightened, and many sought to realise gains. Whilst the lead up to and subsequent results of the UK election did have some adverse impacts in June, net inflows for the first half totalled £269 million compared to £259 million at 30 June 2016.

We continue to strive to provide high quality service to our clients and in May 2017, for the second year in a row, Rathbones was named both "Private Client Asset Manager of the Year (Institutional)" at the Citywealth awards and "Asset Manager of the Year" at the Better Society Awards. These awards recognise a continued excellence in client service, leadership and an overall contribution to the profession.

Underlying profit before tax up 22.7% to £43.3 million 

Underlying profit before tax increased 22.7% to £43.3 million (2016: £35.3 million) in the first six months of 2017, representing an underlying profit margin of 30.4% (2016: 29.4%). Underlying earnings per share of 68.4p increased 21.1% from 56.5p in 2016.   

Profit before tax for the half year of £26.6 million is 16.7% higher than the £22.8 million in 2016 and reflects £15.8 million of costs associated with the London office move (see note 3), offset by a plan amendment gain of £5.5 million arising from the closure of our defined benefit pension schemes with effect from 30 June 2017 (see note 13). Prior year profit before tax included charges of £4.4 million in respect of the acquisition of the Vision businesses. We are working hard to let our Curzon Street premises, though the rental market remains soft particularly in light of Brexit uncertainty.

Fee income of £105.5 million in the first half of 2017 increased 21.1% compared to the same period last year (2016: £87.1 million) reflecting positive markets and growth in organic and acquired new business over the period. The average FTSE 100 Index (calculated on our fee billing dates) was 7322, up 16.3% compared to 6298 a year ago.  Fee income represented 74.1% of total underlying operating income in the six months ended 30 June 2017 (2016: 72.5%), as our fee only tariff becomes more widely adopted, helping to support our move to higher quality fee-based income. 

Net commission income of £21.9 million was up 12.3% from £19.5 million in the first half of 2016, reflecting more positive investing conditions and a strong first quarter in particular. Net interest income was relatively stable at £5.6 million in the first half (2016: £5.7 million), as higher liquidity largely offset the impact of lower base interest rates. As active investment managers, we remain focused on balancing risks and returns, and as a result saw overall cash weightings in portfolios rise to 7.1% compared to 6.6% a year ago reflecting a greater degree of uncertainty over future equity markets. Average deposits were £2.3 billion in the first half of the year compared to £1.7 billion a year ago. Client loans increased 8.7% to £115.5 million from £106.3 million at 31 December 2016. Fees from advisory services and other income increased 19.0% to £9.4 million (2016: £7.9 million) reflecting more positive flows from Vision following a slower period last year as the business completed a comprehensive file review exercise.

Underlying operating expenses of £99.1 million (2016: £84.9 million) increased 16.7% year-on-year. This was largely as a result of variable staff costs, which increased 32.3% to £25.8 million (2016: £19.5 million) reflecting both the higher profitability in the period and an improved investment performance element for growth awards. Variable staff costs as a percentage of underlying profit before variable staff costs also therefore increased to 37.3% (2016: 35.6%).  In line with our strategy, planned additions in headcount increased fixed staff costs by 11.2% to £44.7 million (2016: £40.2 million) and average headcount in the first half of 2017 was 1,123, up 7.5% compared to 1,045 a year ago. Other direct costs of £28.6 million (2016: £25.2 million) were up 13.5% as a result of higher property costs and planned project expenditure.

Our effective tax rate for the first half of 2017 was 21.1% (2016: 25.3%). The prior year rate was higher as a result of deferred payments to acquire the Vision businesses. Our interim dividend has been increased by 1p per share to 22p (2016: 21p) and will be paid on 3 October 2017.

Progress on growth strategy

Vision continues to gain momentum and now has £1.2 billion of funds under advice on its discretionary investment management panel, up 20.0% from the £1.0 billion at 31 December 2016, and 108 advisers, up from 99 at 31 December 2016. The business remains on track to grow to our target of 150 advisers and we remain confident in its growth prospects.

Our distribution strategy continues to focus on promoting our discretionary investment management services to professional intermediaries, principally national and regional IFA networks. It continues to make good progress with net flows of £108 million in the first six months of the year, up 96.4% from £55 million at the same time last year. We continue to build our presence in the intermediary market as evidenced by a May 2017 Defaqto report which confirmed that the usage of Rathbones as a discretionary fund management provider to advisers had more than doubled in the last year, and  placed Rathbones very highly in the critical areas of  'Quality of investment staff' and 'Service'. We successfully launched an execution only Managed Portfolio Service in March 2017 which attracted £7.2 million of net flows in its first 3 months of launch.

With the Credit Suisse partnership fully operational, the Rathbone Private Office was formally launched in January. The nucleus team of three senior client advisers and four support staff is making good progress in promoting this new advisory capability. This service is offered directly to super high net worth clients and family offices as well as seeking introductions from the professional intermediary market and from our own investment manager community. The team has already engaged its first clients and is developing an encouraging pipeline of prospective clients for the full year. 

We continue to focus on improving our client experience and striving for greater operational efficiency in our support functions with the aim of creating additional capacity for growth. At the full year, we outlined our plans to spend an additional £1 million in 2017 to implement a new client relationship management system and improve our client take on processes. These plans are developing more quickly than originally planned and in light of more favourable investment conditions, we have chosen to bring forward capital expenditure originally planned for 2018 to the second half of this year in order to accelerate delivery and improve functionality through greater automation. This brings the total expected capital expenditure in relation to our client relationship management system and client take on process improvement to approximately £2 million in 2017.

Expenditure on the other growth strategies remains in line with expectations. The relocation of our London head office to 8 Finsbury Circus has proved very successful. 

Financial position and regulatory capital

Shareholders' equity of £342.4 million at 30 June 2017 increased 5.4% since 31 December 2016 (£324.8 million) and 22.4% since 30 June 2016 (£279.7 million). This is largely as a result of the fall in value of retirement benefit obligations which totalled £20.0 million at 30 June 2017, 49.4% lower than the £39.5 million recorded at 31 December 2016. This reflected a high number of members transferring their benefits out of the scheme, a reduction in the assumed rates of improvement in longevity and breakage of the link between pension entitlements and final salaries. Triennial valuation discussions with trustees are ongoing and are expected to complete in the second half of the year. 

Total assets at 30 June 2017 were £2,829.9 million (31 December 2016: £2,404.0 million; 30 June 2016: £2,344.8 million), of which £2,215.1 million (31 December 2016: £1,888.9 million; 30 June 2016: £1,860.0 million) represents the cash element of client portfolios that is held as a banking deposit. As a result of these higher levels of cash, balances with central banks increased from £1,075.7 million at 31 December 2016 to £1,480.9 million at 30 June 2017 (30 June 2016: £960.1 million).

Our consolidated Common Equity Tier 1 ratio was 18.2 % at 30 June 2017 (31 December 2016: 17.7%; 30 June 2016: 16.0%). Our consolidated leverage ratio was 6.2% at 30 June 2017 (31 December 2016: 6.6%; 30 June 2016: 6.2%). The capital surplus of own funds over the Pillar 1 and 2A requirements and CRD IV buffers was £69.9m at 30 June 2017 (excluding year to date post tax profits and improvements in the value of retirement benefit obligations) compared to £49.2m at 30 June 2016, largely reflecting the impact of additional equity raised in October 2016 offset by higher capital requirements.

Business risks

The board believes that the nature of the principal risks and uncertainties which may have a material effect on the group's performance during the remainder of its financial year remain unchanged from those identified in the strategic report and group risk committee report in our 2016 annual report and accounts (pages 18-25 and pages 80-81 respectively). 

Regulatory changes 

We continue to prepare for the changes brought on by MiFID II and the General Data Protection Regime and are working hard to ensure our people and systems are compliant. We anticipate that the cost of these projects will be approximately £1.5 million which will be absorbed by our normal expenditure budget for the year.

We note the recommendations of the recent FCA Asset Management Market Report and the sequence of consultations prior to final implementation. While we broadly welcome the proposals, they will have an impact on margins of our Unit Trust business from 2018. In addition, as part of our implementation of MiFID II, research payments that have long been charged to our funds will, from 1 January 2018 be borne by the business. The impact of these changes will be significantly offset by a reduction in variable remuneration, some cost actions and by the continued funds growth momentum through this year and beyond. Fund box profits in our Unit Trust business for the six months ended 30 June 2017 were £1.8 million and research costs currently borne by the funds totalled approximately £0.5 million for the same period. 

Board and senior management changes

Following the announcement of David Harrel stepping down after nine years on the board, we are pleased to announce that Sarah Gentleman has now completed the regulatory approval process and has formally succeeded David as the chairman of the remuneration committee.

Outlook

The first six months of 2017 has seen another busy period for Rathbones as we continue to deliver our strategic plans without detracting from our high standards of service to our clients. We remain confident in the medium term potential of our growth strategy. Short term market conditions are dominated by a backdrop of ongoing geopolitical uncertainty and we will continue to invest with discipline. 

Mark Nicholls Philip Howell
Chairman Chief Executive

Consolidated interim statement of comprehensive income
for the six months ended 30 June 2017

    Note   Unaudited
Six months to
30 June 2017
£'000
  Unaudited
Six months to
30 June 2016
£'000
  Audited
Year to
31 December 2016
£'000
Interest and similar income       6,323   7,141   13,890
Interest expense and similar charges       (723)   (1,394)   (2,319)
Net interest income       5,600   5,747   11,571
Fee and commission income       144,600   120,948   253,192
Fee and commission expense       (10,636)   (8,596)   (17,936)
Net fee and commission income       133,964   112,352   235,256
Net trading income       1,769   1,445   3,103
Gain on plan amendment of defined benefit pension schemes   13   5,523    
Other operating income       1,041   657   1,353
Operating income       147,897   120,201   251,283
Charges in relation to client relationships and goodwill   10   (5,960)   (5,778)   (11,735)
Acquisition-related costs       (487)   (4,431)   (5,985)
Head office relocation costs   3   (15,769)   (2,257)   (7,031)
Other operating expenses       (99,095)   (84,910)   (176,403)
Operating expenses       (121,311)   (97,376)   (201,154)
Profit before tax       26,586   22,825   50,129
Taxation   5   (5,612)   (5,778)   (11,972)
Profit for the period attributable to                
equity holders of the company       20,974   17,047   38,157
                 
Other comprehensive income:                
Items that will not be reclassified to profit or loss                
Net remeasurement of defined benefit liability       13,495   (29,080)   (37,318)
Deferred tax relating to the net remeasurement of defined benefit liability       (2,294)   4,535   5,936
                 
Items that may be reclassified to profit or loss                
Revaluation of available for sale investment securities:                
- net gain from changes in fair value       110   12   93
- net profit on disposal transferred to profit or loss during the year       (43)   -  
        67   12   93
Deferred tax relating to revaluation of available for sale investment securities       (11)   -   (14)
Other comprehensive income net of tax       11,257   (24,533)   (31,303)
Total comprehensive income for the period net of tax attributable to equity holders of the company       32,231   (7,486)   6,854
                 
Dividends paid and proposed for the period per ordinary share   6   22.0p   21.0p   57.0p
Dividends paid and proposed for the period       11,274   10,160   28,267
                 
Earnings per share for the period attributable to equity holders of the company:   7            
- basic       41.6p   35.7p   78.9p
- diluted       41.3p   35.4p   78.2p

The accompanying notes form an integral part of the condensed consolidated interim financial statements.



Consolidated interim statement of changes in equity
for the six months ended 30 June 2017

    Note   Share capital
£'000
  Share premium
£'000
  Merger reserve
£'000
  Available for sale reserve
£'000
  Own shares
£'000
  Retained earnings
£'000
  Total equity
£'000
At 1 January 2016 (audited)       2,407   97,643   31,835   71   (6,177)   174,413   300,192
Profit for the period                           17,047   17,047
                                 
Net remeasurement of defined benefit liability                           (29,080)   (29,080)
Net gain on revaluation of available for sale investment securities                   12           12
Deferred tax relating to components of other comprehensive income                   -       4,535   4,535
Other comprehensive income net of tax             12     (24,545)   (24,533)
                                 
Dividends paid                           (16,336)   (16,336)
Issue of share capital   14   12   3,817                   3,829
Share-based payments:                                
- value of employee services                           734   734
- cost of own shares acquired                       (1,043)       (1,043)
- cost of own shares vesting                       659   (659)  
- tax on share-based payments                           (149)   (149)
At 30 June 2016 (unaudited)       2,419   101,460   31,835   83   (6,561)   150,505   279,741
Profit for the period                           21,110   21,110
                                 
Net remeasurement of defined benefit liability                           (8,238)   (8,238)
Net gain on revaluation of available for sale investment securities                   81           81
Deferred tax relating to components of other comprehensive income                   (14)       1,401   1,387
Other comprehensive income net of tax             67     (6,837)   (6,770)
                                 
Dividends paid                           (10,143)   (10,143)
Issue of share capital   14   116   38,186                   38,302
Share-based payments:                                
- value of employee services                           2,301   2,301
- cost of own shares acquired                       (542)       (542)
- cost of own shares vesting                       425   (425)  
- own shares sold           345           435       780
- tax on share-based payments                           34   34
At 31 December 2016 (audited)       2,535   139,991   31,835   150   (6,243)   156,545   324,813
Profit for the period               20,974   20,974
                 
Net remeasurement of defined benefit liability                           13,495   13,495
Revaluation of available for sale investment securities:                  
- net gain from changes in fair value           110       110
- net profit on disposal transferred to profit or loss during the year           (43)       (43)
Deferred tax relating to components of other comprehensive income                   (11)       (2,294)   (2,305)
Other comprehensive income net of tax           56     11,201   11,257
                 
Dividends paid               (18,236)   (18,236)
Issue of share capital   14   27   2,718           2,745
Share-based payments:                 
- value of employee services                           1,095   1,095
- cost of own shares acquired                       (437)       (437)
- cost of own shares vesting                       1,336   (1,336)  
- tax on share-based payments                           232   232
At 30 June 2017 (unaudited)       2,562   142,709   31,835   206   (5,344)   170,475   342,443


Consolidated interim balance sheet
as at 30 June 2017

    Note   Unaudited
30 June 2017
£'000
  Unaudited
30 June 2016
£'000
  Audited
31 December 2016
£'000
Assets                
Cash and balances with central banks       1,480,932   960,115   1,075,673
Settlement balances       99,197   99,198   37,787
Loans and advances to banks       148,257   105,869   114,088
Loans and advances to customers   8   123,303   111,382   110,951
Investment securities:                
- available for sale       126,800   84,705   105,421
- held to maturity       590,005   725,000   700,000
Prepayments, accrued income and other assets       72,323   70,516   65,710
Property, plant and equipment   9   17,133   9,492   16,590
Deferred tax asset       8,623   8,083   10,601
Intangible assets   10   163,323   170,409   167,192
Total assets       2,829,896   2,344,769   2,404,013
Liabilities                
Deposits by banks       9,065   3,434   294
Settlement balances       122,026   74,856   39,289
Due to customers       2,215,117   1,860,023   1,888,895
Accruals, deferred income and other liabilities       71,497   55,309   70,410
Current tax liabilities       5,395   4,820   6,523
Provisions for liabilities and charges   11   24,692   15,080   14,744
Subordinated loan notes   12   19,643   19,541   19,590
Retirement benefit obligations   13   20,018   31,965   39,455
Total liabilities       2,487,453   2,065,028   2,079,200
Equity                
Share capital   14   2,562   2,419   2,535
Share premium   14   142,709   101,460   139,991
Merger reserve       31,835   31,835   31,835
Available for sale reserve       206   83   150
Own shares       (5,344)   (6,561)   (6,243)
Retained earnings       170,475   150,505   156,545
Total equity       342,443   279,741   324,813
Total liabilities and equity       2,829,896   2,344,769   2,404,013

The condensed consolidated interim financial statements were approved by the board of directors and authorised for issue on 24 July 2017 and were signed on their behalf by:

Philip Howell
Chief Executive
Paul Stockton
Finance Director

Company registered number: 01000403

The accompanying notes form an integral part of the condensed consolidated interim financial statements.


Consolidated interim statement of cash flows
for the six months ended 30 June 2017

    Note   Unaudited
30 June 2017
£'000
  Unaudited
30 June 2016
£'000
  Audited
31 December 2016
£'000
Cash flows from operating activities                
Profit before tax       26,586   22,825   50,129
Net profit on disposal of available for sale investment securities       (43)    
Net interest income       (5,600)   (5,747)   (11,571)
Net (recoveries)/impairment charges on impaired loans and advances       (15)   1   9
Net charge for provisions   11   16,198   1,014   1,355
Profit on disposal of property, plant and equipment         (13)   (16)
Depreciation, amortisation and impairment       10,014   9,925   20,716
Gain on plan amendment of defined benefit pension schemes   13   (5,523)    
Defined benefit pension scheme charges       2,134   1,652   3,058
Defined benefit pension contributions paid       (2,553)   (3,268)   (5,422)
Share-based payment charges       1,765   1,860   5,201
Interest paid       (676)   (1,428)   (2,308)
Interest received       9,455   10,466   14,085
        51,742   37,287   75,236
Changes in operating assets and liabilities:                
- net decrease in loans and advances to banks and customers       17,364   46,368   16,785
- net increase in settlement balance debtors       (61,410)   (81,250)   (19,839)
- net increase in prepayments, accrued income and  other assets       (9,746)   (14,328)   (6,392)
- net increase in amounts due to customers and deposits by banks       334,991   460,268   486,000
- net increase in settlement balance creditors       82,737   53,375   17,808
- net (decrease)/increase in accruals, deferred income, provisions and other liabilities       (2,592)   (5,057)   9,762
Cash generated from operations       413,086   496,663   579,360
Tax paid       (6,833)   (6,435)   (12,025)
Net cash inflow from operating activities       406,253   490,228   567,335
Cash flows from investing activities                
Acquisition of subsidiaries, net of cash acquired         (2,258)   (2,532)
Purchase of property, equipment and intangible assets       (9,923)   (11,439)   (26,137)
Proceeds from sale of property, plant and equipment         13   16
Purchase of investment securities       (295,703)   (540,000)   (905,701)
Proceeds from sale and redemption of investment securities       405,160   522,745   912,745
Net cash generated from/(used in) investing activities       99,534   (30,939)   (21,609)
Cash flows from financing activities                
Issue of ordinary shares   17   2,308   2,786   40,199
Dividends paid       (18,236)   (16,336)   (26,479)
Net cash (used in)/generated from financing activities       (15,928)   (13,550)   13,720
Net increase in cash and cash equivalents       489,859   445,739   559,446
Cash and cash equivalents at the beginning of the period       1,263,074   703,628   703,628
Cash and cash equivalents at the end of the period   17   1,752,933   1,149,367   1,263,074

The accompanying notes form an integral part of the condensed consolidated interim financial statements.



Notes to the condensed consolidated interim financial statements
1     Basis of preparation

Rathbone Brothers Plc ('the company') is the parent company of a group of companies ('the group') that provides personalised investment and wealth management services for private clients, charities and trustees. The group also provides financial planning, private banking, offshore fund management and trust administration services. The products and services from which the group derives its revenues are described in 'our services' on page 3 of the annual report and accounts for the year ended 31 December 2016 and have not materially changed since that date.

These condensed consolidated interim financial statements are presented in accordance with IAS 34 'Interim Financial Reporting' as adopted by the EU. The condensed consolidated interim financial statements have been prepared on a going concern basis, using the accounting policies, methods of computation and presentation set out in the group's financial statements for the year ended 31 December 2016 except as disclosed below. The condensed consolidated interim financial statements should be read in conjunction with the group's audited financial statements for the year ended 31 December 2016, which are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU.

The information in this announcement does not comprise statutory financial statements within the meaning of section 434 of the Companies Act 2006. The comparative figures for the financial year ended 31 December 2016 are not the group's statutory accounts for that financial year. The group's financial statements for the year ended 31 December 2016 have been reported on by its auditors and delivered to the Registrar of Companies. The report of the auditors on those financial statements was unqualified and did not draw attention to any matters by way of emphasis. It also did not contain a statement under section 498 of the Companies Act 2006.

Developments in reporting standards and interpretations

Future new standards and interpretations

A number of new standards and amendments to standards and interpretations will be effective for future annual periods beginning after
1 January 2017 and, therefore, have not been applied in preparing these consolidated financial statements. IFRS 9 'Financial Instruments', IFRS 15 'Revenue from Contracts with Customers' and IFRS 16 'Leases' are expected to have the most significant effect on the consolidated financial statements of the group.

IFRS 9 'Financial Instruments'

IFRS 9 is effective for periods commencing on or after 1 January 2018. The standard was endorsed by the EU during 2016. The group has not adopted this standard early.

IFRS 9 changes the classification and measurement of financial instruments and the timing and extent of credit provisioning. The group has conducted a preliminary assessment of the potential impact, based on the profile of its financial instruments as at the balance sheet date, and is well advanced in its approach to classification and valuation.

Classification of financial assets

The basis of classification for financial assets under IFRS 9 is different from that under IAS 39. Financial assets will be classified into one of three categories: amortised cost, fair value through profit or loss (FVTPL) or fair value through other comprehensive income (FVOCI). The held to maturity, loans and receivables and available for sale categories available under IAS 39 have been removed. In addition, the classification criteria for allocating financial assets between categories are different under IFRS 9. The group is well advanced in its classification of financial assets under the new standard.

IFRS 9 uses the same measurement bases as IAS 39 and the group has not yet identified any material differences arising from applying the new standard. Debt securities currently classified as held to maturity will be classified as amortised cost. Other assets currently carried at amortised cost such as cash with central banks and loans and advances to banks and customers will also continue to be classified as such. Money market funds currently classified as available for sale will be classified as FVOCI, given that although they are generally held to collect contractual cash flows, they can be redeemed, should the need arise.

Impairment of financial assets

Under IFRS 9, an expected credit loss model replaces the incurred loss model, meaning there no longer needs to be a triggering event in order to recognise impairment losses. A provision must be made for the amount of any loss expected to arise over the life of the group's financial assets. Under IAS 39, credit losses are recognised when they incurred.

Under the expected credit loss model, a dual measurement approach applies whereby a financial asset will attract a loss allowance equal to either 12 month expected credit losses or lifetime expected credit losses. The latter applies if there has been a significant deterioration in the credit quality of the asset. This will require considerable judgement as to how changes in economic factors affect expected credit losses, which will be determined on a probability-weighted basis.

The group's trade receivables (including trust and financial planning debtors) are generally short term and does not contain significant financing components. Therefore, the group expects to apply the simplified approach and reflect lifetime expected credit losses.

Treasury assets currently held by the group are of high credit quality and the group has not experienced any historical credit losses in its treasury or loan portfolios. Work conducted to date suggests that any impairment charges recognised in the financial statements under the new standard will be minimal.

Classification of financial liabilities

The basis of classification for financial liabilities under IFRS 9 remains unchanged from that under IAS 39. The two categories are amortised cost or fair value through profit or loss (either designated as such or held for trading)

The group does not currently designate any liabilities as fair value through profit or loss, and do not anticipate doing so. Therefore, under IFRS 9, the group expects to classify all financial liabilities as amortised cost, with no material impact on measurement.

IFRS 15 ' Revenue from Contracts with Customers'

IFRS 15 is effective for periods commencing on or after 1 January 2018. The standard was endorsed by the EU during 2016. The group has not adopted this standard early.

IFRS 15 changes how and when revenue is recognised from contracts with customers. The group will be required to identify all contracts it has with customers in order to determine whether, how much and when revenue is recognised. The group is in the process of quantifying the potential impact of adopting the standard, based on its existing revenue streams. In addition, the group is considering the impact on its policy of capitalising costs to secure investment management contracts.

Net fee and commission income

Included within net fee and commission income are initial fees, charged by a number of group companies in relation to certain business activities. Under IFRS 15, the group will be required to make an assessment as to whether the work performed to earn such fees constitutes the transfer of services and, therefore, fulfils any performance obligation(s). If so, then these fees can be recognised when charged; if not, then the fees can only be recognised in the period the services are provided.

The group has not yet identified any other revenue streams that will be materially impacted by the new standard.

Client relationship intangibles

Where payments are made to new investment managers to secure investment management contracts, such costs are capitalised and amortised, where they are separable, reliably measurable and expected to be recovered, under IAS 18.

IFRS 15 reinforces this view, stating that incremental costs of obtaining any contract with a customer shall be capitalised if the entity expects to recover those costs.

Therefore, the group does not believe the adoption of IFRS 15 will materially change the way it accounts for client relationship intangibles.

Transition

The group plans to adopt IFRS 15 in its consolidated financial statements for the year ending 31 December 2018, using the retrospective approach.

IFRS 16 ' Leases'

IFRS 16 is effective for periods commencing on or after 1 January 2019. The standard was endorsed by the EU during 2017. The group does not plan to adopt this standard early.

IFRS 16 eliminates the classification of leases as either operating leases or finance leases. The group will be required to recognise all leases with a term of more than 12 months as a right-of-use lease asset on its balance sheet; the group will also recognise a financial liability representing its obligation to make future lease payments.

The group has conducted an initial quantification of the impact of adopting the standard, based on its existing lease contracts. The most significant impact is in respect of its new London head office premises.

Transition

Definition of a lease

On transition to IFRS 16, the Group can choose whether to:

- Apply the new definition of a lease to all its contracts as if IFRS 16 had always applied; or

- Apply a practical expedient and retain its previous assessments of which contracts contain a lease.

The group intends to apply the practical expedient and therefore will not be reassessing those contracts that are not deemed to contain a lease prior to the date of adoption.

Retrospective approach

As a lessee, the Group can either apply the standard using a:

- Retrospective approach; or

- Modified retrospective approach with optional practical expedients.

The Group has assessed the impact of both approaches in relation to its existing lease contracts, and is most likely to apply the modified retrospective approach.

Potential impact

The group's total assets and total liabilities will be increased by the recognition of lease assets and liabilities. The lease assets will be depreciated over the shorter of the expected life of the asset and the lease term. The lease liability will be reduced by lease payments, offset by the unwinding of the liability over the lease term.

On the group's statement of comprehensive income, the profile of lease costs will be front-loaded, at least individually, as the interest charge is higher in the early years of a lease term as the discount rate unwinds. The total cost of the lease over the lease term is expected to be unchanged.

In addition to the above impacts, recognition of lease assets will increase the group's regulatory capital requirement.

Lessor accounting

Where the Group acts as an intermediate lessor in a sub-lease arrangement it will need to make adjustments for such leases.

2     Segmental information

For management purposes, the group is organised into two operating divisions: Investment Management and Unit Trusts. Centrally incurred indirect expenses are allocated to these operating segments on the basis of the cost drivers that generate the expenditure; principally the headcount of staff directly involved in providing those services from which the segment earns revenues, the value of funds under management and the segment's total revenue. The allocation of these costs is shown in a separate column in the table below, alongside the information presented for internal reporting to the executive committee, which is the group's chief operating decision maker.

Six months ended 30 June 2017 (unaudited)   Investment Management
£'000
  Unit Trusts
£'000
  Indirect expenses
£'000
  Total
£'000
Net investment management fee income   92,523   13,018     105,541
Net commission income   21,869       21,869
Net interest income   5,600       5,600
Fees from advisory services and other income   7,433   1,931     9,364
Underlying operating income   127,425   14,949     142,374
                 
Staff costs - fixed   (30,448)   (1,545)   (12,744)   (44,737)
Staff costs - variable   (19,675)   (3,507)   (2,604)   (25,786)
Total staff costs   (50,123)   (5,052)   (15,348)   (70,523)
Other direct expenses   (10,389)   (1,830)   (16,353)   (28,572)
Allocation of indirect expenses   (28,743)   (2,958)   31,701  
Underlying operating expenses   (89,255)   (9,840)     (99,095)
Underlying profit before tax   38,170   5,109     43,279
Charges in relation to client relationships and goodwill (note 10)   (5,960)       (5,960)
Acquisition-related costs   (487)       (487)
Segment profit before tax   31,723   5,109     36,832
Gain on plan amendment of defined benefit pension schemes (note 13)               5,523
Head office relocation costs (note 3)               (15,769)
Profit before tax               26,586
Taxation (note 5)               (5,612)
Profit for the period attributable to equity holders of the company               20,974
                 
    Investment Management
£'000
  Unit Trusts
£'000
      Total
£'000
Segment total assets   2,758,696   66,358       2,825,054
Unallocated assets               4,842
Total assets               2,829,896

Six months ended 30 June 2016 (unaudited)   Investment Management
£'000
  Unit Trusts
£'000
  Indirect expenses
£'000
  Total
£'000
Net investment management fee income   77,315   9,799     87,114
Net commission income   19,443       19,443
Net interest income   5,747       5,747
Fees from advisory services and other income   6,288   1,609     7,897
Underlying operating income   108,793   11,408     120,201
                 
Staff costs - fixed   (29,075)   (1,541)   (9,576)   (40,192)
Staff costs - variable   (14,430)   (2,290)   (2,780)   (19,500)
Total staff costs   (43,505)   (3,831)   (12,356)   (59,692)
Other direct expenses   (11,254)   (2,600)   (11,364)   (25,218)
Allocation of indirect expenses   (22,487)   (1,233)   23,720  
Underlying operating expenses   (77,246)   (7,664)     (84,910)
Underlying profit before tax   31,547   3,744     35,291
Charges in relation to client relationships and goodwill (note 10)   (5,778)       (5,778)
Acquisition-related costs   (4,431)       (4,431)
Segment profit before tax   21,338   3,744     25,082
Head office relocation costs (note 3)               (2,257)
Profit before tax               22,825
Taxation (note 5)               (5,778)
Profit for the period attributable to equity holders of the company               17,047
                 
    Investment Management
£'000
  Unit Trusts
£'000
      Total
£'000
Segment total assets   2,290,797   47,735       2,338,532
Unallocated assets               6,238
Total assets               2,344,770



Year ended 31 December 2016 (audited)   Investment Management
£'000
  Unit Trusts
£'000
  Indirect expenses
£'000
  Total
£'000
Net investment management fee income   163,268   21,532     184,800
Net commission income   38,904       38,904
Net interest income   11,571       11,571
Fees from advisory services and other income   12,578   3,430     16,008
Underlying operating income   226,321   24,962     251,283
                 
Staff costs - fixed   (57,613)   (3,020)   (19,123)   (79,756)
Staff costs - variable   (32,437)   (5,333)   (7,210)   (44,980)
Total staff costs   (90,050)   (8,353)   (26,333)   (124,736)
Other direct expenses   (22,882)   (5,355)   (23,430)   (51,667)
Allocation of indirect expenses   (47,184)   (2,579)   49,763  
Underlying operating expenses   (160,116)   (16,287)     (176,403)
Underlying profit before tax   66,205   8,675     74,880
Charges in relation to client relationships and goodwill (note 10)   (11,735)       (11,735)
Acquisition-related costs   (5,985)       (5,985)
Segment profit before tax   48,485   8,675     57,160
Head office relocation costs (note 3)               (7,031)
Profit before tax               50,129
Taxation (note 5)               (11,972)
Profit for the year attributable to equity holders of the company               38,157
                 
    Investment Management
£'000
  Unit Trusts
£'000
      Total
£'000
Segment total assets   2,340,973   54,912       2,395,885
Unallocated assets               8,128
Total assets               2,404,013

The following table reconciles underlying operating income to operating income:

    Unaudited
Six months to
30 June 2017
£'000
  Unaudited
Six months to
30 June 2016
£'000
  Audited
Year to
31 December 2016
£'000
Underlying operating income   142,374   120,201   251,283
Gain on plan amendment of defined benefit pension schemes (note 13)   5,523    
Operating income   147,897   120,201   251,283

The following table reconciles underlying operating expenses to operating expenses:

    Unaudited
Six months to
30 June 2017
£'000
  Unaudited
Six months to
30 June 2016
£'000
  Audited
Year to
31 December 2016
£'000
Underlying operating expenses   99,095   84,910   176,403
Charges in relation to client relationships and goodwill (note 10)   5,960   5,778   11,735
Acquisition-related costs   487   4,431   5,985
Head office relocation costs (note 3)   15,769   2,257   7,031
Operating expenses   121,311   97,376   201,154

Included within Investment Management underlying operating income is £951,000 (30 June 2016: £634,000; 31 December 2016: £1,412,000) of fees and commissions receivable from Unit Trusts. Intersegment sales are charged at prevailing market prices.

Geographic analysis

The following table presents operating income analysed by the geographical location of the group entity providing the service:

    Unaudited
Six months to
30 June 2017
£'000
  Unaudited
Six months to
30 June 2016
£'000
  Audited
Year to
31 December 2016
£'000
United Kingdom   142,503   115,798   241,882
Jersey   5,394   4,403   9,401
Operating income   147,897   120,201   251,283

The group's non-current assets are substantially all located in the United Kingdom.

Major clients

The group is not reliant on any one client or group of connected clients for generation of revenues. At 30 June 2017, the group provided investment management services to 49,000 clients (30 June 2016: 48,000; 31 December 2016: 48,000).


3     Head office relocation

On 6 January 2016, the group exchanged contracts for five 17-year leases for a total of 75,000 sq ft of office space at 8 Finsbury Circus. The group began recognising costs relating to rent and dilapidations on the new premises from the date the leases began, 13 May 2016.

The move to the 8 Finsbury Circus office concluded on 13 February 2017, which triggered recognition of a provision for the net cost of the surplus property at 1 Curzon Street until the end of the existing lease (see note 11).

During the six months to 30 June 2017, incremental costs of £15,769,000 (30 June 2016: £2,257,000; 31 December 2016: £7,031,000) were incurred as a result of the decision to move the head office to 8 Finsbury Circus. These incremental costs were as follows:

    Unaudited
Six months to
30 June 2017
£'000
  Unaudited
Six months to
30 June 2016
£'000
  Audited
Year to
31 December 2016
£'000
Rental costs for 8 Finsbury Circus prior to relocation   538   599   3,328
Accelerated depreciation charge for 1 Curzon Street   779   1,409   2,745
Provision for dilapidations   123   181   739
Net charge in relation to onerous lease provision (note 11)   13,807    
Professional and other costs   522   68   219
    15,769   2,257   7,031

4     Staff numbers

The average number of employees, on a full time equivalent basis, during the period was as follows:

    Unaudited
Six months to
30 June 2017
£'000
  Unaudited
Six months to
30 June 2016
£'000
  Audited
Year to
31 December 2016
£'000
Investment Management:            
- investment management services   724   679   698
- advisory services   89   81   82
Unit Trusts   27   26   27
Shared services   283   259   259
    1,123   1,045   1,066

5     Taxation

The tax expense for the six months ended 30 June 2017 was calculated based on the estimated average annual effective tax rate. The overall effective tax rate for this period was 21.1% (six months ended 30 June 2016: 25.3%; year ended 31 December 2016: 23.9%).

    Unaudited
Six months to
30 June 2017
£'000
  Unaudited
Six months to
30 June 2016
£'000
  Audited
Year to
31 December 2016
£'000
United Kingdom taxation   5,527   4,805   11,953
Overseas taxation   179   92   236
Deferred taxation   (94)   881   (217)
    5,612   5,778   11,972

The underlying UK corporation tax rate for the year ending 31 December 2017 is 19.2% (2016: 20.0%).

The Finance Bill 2016 contained legislation to reduce the UK corporation tax rate to 17.0% in April 2020 and was substantively enacted in September 2016. Deferred income taxes are calculated on all temporary differences under the liability method using the rate expected to apply when the relevant timing differences are forecast to unwind.

6     Dividends

An interim dividend of 22.0p per share was declared on 24 July 2017 and is payable on 3 October 2017 to shareholders on the register at the close of business on 8 September 2017 (30 June 2016: 21.0p). In accordance with IFRS, the interim dividend has not been included as a liability in this interim statement. A final dividend for 2016 of 36.0p per share was paid on 16 May 2017.


7     Earnings per share

Earnings used to calculate earnings per share on the bases reported in these condensed consolidated interim financial statements were:

    Unaudited
Six months to
30 June 2017
  Unaudited
Six months to
30 June 2016
  Audited
Year to
31 December 2016

    Pre-tax
£'000
  Post-tax
£'000
  Pre-tax
£'000
  Post-tax
£'000
  Pre-tax
£'000
  Post-tax
£'000
Underlying profit attributable to equity holders   43,279   34,457   35,291   27,020   74,880   59,064
Gain on plan amendment of defined benefit pension schemes (note 13)   5,523   4,460   -   -   -   -
Charges in relation to client relationships and goodwill (note 10)   (5,960)   (4,813)   (5,778)   (4,622)   (11,735)   (9,388)
Acquisition-related costs   (487)   (487)   (4,431)   (3,545)   (5,985)   (5,894)
Head office relocation costs (note 3)   (15,769)   (12,643)   (2,257)   (1,806)   (7,031)   (5,625)
Profit attributable to equity holders   26,586   20,974   22,825   17,047   50,129   38,157

Basic earnings per share has been calculated by dividing profit attributable to equity holders by the weighted average number of shares in issue throughout the period, excluding own shares, of 50,403,394 (30 June 2016: 47,805,338 ; 31 December 2016: 48,357,728 ).

Diluted earnings per share is the basic earnings per share, adjusted for the effect of contingently issuable shares under Long Term and Executive Incentive Plans, employee share options remaining capable of exercise and any dilutive shares to be issued under the Share Incentive Plan, all weighted for the relevant period:

    Unaudited
30 June 2017
  Unaudited
30 June 2016
  Audited
31 December 2016
Weighted average number of ordinary shares in issue during the period - basic   50,403,394   47,805,338   48,357,728
Effect of ordinary share options/Save As You Earn   171,711   134,226   114,415
Effect of dilutive shares issuable under the Share Incentive Plan   11,043   12,207   37,186
Effect of contingently issuable ordinary shares under Long Term and Executive Incentive Plans   221,128   217,754   260,655
Diluted ordinary shares   50,807,276   48,169,525   48,769,984

    Unaudited
Six months to
30 June 2017
  Unaudited
Six months to
30 June 2016
  Audited
Year to
31 December 2016
Underlying earnings per share for the period attributable to equity holders of the company:            
- basic   68.4p   56.5p   122.1p
- diluted   67.8p   56.1p   121.1p

8     Loans and advances to customers

    Unaudited
30 June 2017
£'000
  Unaudited
30 June 2016
£'000
  Audited
31 December 2016
£'000
Overdrafts   6,997   6,232   3,740
Investment management loan book   115,538   104,180   106,335
Trust and financial planning debtors   748   953   855
Other debtors   20   17   21
    123,303   111,382   110,951

9     Property, plant and equipment

During the six months ended 30 June 2017, the group purchased assets with a cost of £3,022,000 (six months ended 30 June 2016: £2,276,000; year ended 31 December 2016: £12,175,000). The move to 8 Finsbury Circus accounted for £2,760,000 (six months ended 30 June 2016: £1,457,000; year ended 31 December 2016: £9,900,000) of the amount capitalised in the six months ended 30 June 2017.

No assets were disposed of in the six months ended 30 June 2017 (six months ended 30 June 2016 and year ended 31 December 2016: assets with net book value of £nil) with no resulting gain or loss on disposal (six months ended 30 June 2016: gain on disposal of £13,000; year ended 31 December 2016: gain on disposal of £16,000).


10   Intangible assets

    Goodwill
£'000
  Client relationships
£'000
  Software development costs
£'000
  Purchased software
£'000
  Total Intangibles
£'000
Cost                    
At 1 January 2017   64,272   144,652   4,936   24,354   238,214
Internally developed in the period   -   -   392     392
Purchased in the period   -   1,596     1,677   3,273
Disposals     (1,061)       (1,061)
At 30 June 2017   64,272   145,187   5,328   26,031   240,818
                     
Amortisation and impairment                    
At 1 January 2017   807   47,451   4,037   18,727   71,022
Charge in the period   283   5,677   241   1,333   7,534
Disposals     (1,061)       (1,061)
At 30 June 2017   1,090   52,067   4,278   20,060   77,495
Carrying value at 30 June 2017 (unaudited)   63,182   93,120   1,050   5,971   163,323
Carrying value at 30 June 2016 (unaudited)   63,465   100,017   890   6,037   170,409
Carrying value at 31 December 2016 (audited)   63,465   97,201   899   5,627   167,192

The total amount charged to profit or loss in the period, in relation to goodwill and client relationships, was £5,960,000 (six months ended 30 June 2016: £5,778,000; year ended 31 December 2016: £11,735,000). A further £2,301,000 (six months ended 30 June 2016: £1,553,000; year ended 31 December 2016: £4,005,000) was expensed as staff costs during the period, representing amounts due for client relationships introduced more than 12 months after the cessation of any non-compete period.

Impairment

During the period, the group updated its assessment of goodwill allocated to the investment management, trust and tax and Rooper & Whately cash generating units (CGUs) for impairment.

The recoverable amounts of goodwill allocated to the CGUs are determined from value-in-use calculations. There was no indication of impairment of goodwill allocated to the investment management or Rooper & Whately CGUs during the period.

The calculated recoverable amount of goodwill allocated to the trust and tax CGU at 30 June 2017 was £864,000, which was lower than the carrying value of £1,147,000 at 31 December 2016. The recoverable amount was calculated based on forecast earnings for the current year, extrapolated for a ten year period, assuming an annual decrease in revenues of 1.0% per annum (31 December 2016: decrease of 1.0% per annum). The pre-tax rate used to discount the forecast cash flows was 14.0% (31 December 2016: 11.3%) as the group judges this discount rate appropriately reflects the market in which the CGU operates and, in particular, its small size. The group has therefore recognised an impairment charge of £283,000 during the period. This impairment has been included in the Investment Management segment in the segmental analysis (note 2).

11   Provisions for liabilities and charges

    Deferred, variable costs to acquire client relationship intangibles
£'000
  Deferred and contingent consideration in business combinations
£'000
  Legal and compensation
£'000
  Property-related
£'000
  Total
£'000
                     
At 1 January 2016   13,392   3,908   721   1,795   19,816
Charged to profit or loss       855   306   1,161
Unused amount credited to profit or loss     (58)   (89)     (147)
Net charge to profit or loss     (58)   766   306   1,014
Other movements   4,783   48       4,831
Utilised/paid during the period   (7,902)   (2,258)   (421)     (10,581)
At 30 June 2016 (unaudited)   10,273   1,640   1,066   2,101   15,080
Charged to profit or loss       62   697   759
Unused amount credited to profit or loss     (21)   (397)     (418)
Net charge to profit or loss     (21)   (335)   697   341
Other movements   3,143   34       3,177
Utilised/paid during the period   (3,204)   (517)   (133)     (3,854)
At 1 January 2017 (audited)   10,212   1,136   598   2,798   14,744
Charged to profit or loss       93   16,105   16,198
Unused amount credited to profit or loss          
Net charge to profit or loss   -    -    93   16,105   16,198
Other movements   1,597   (13)       1,584
Utilised/paid during the period   (4,820)     (46)   (2,968)   (7,834)
At 30 June 2017 (unaudited)   6,989   1,123   645   15,935   24,692
                     
Payable within 1 year   5,118     645   5,528   11,291
Payable after 1 year   1,871   1,123     10,407   13,401
At 30 June 2017 (unaudited)   6,989   1,123   645   15,935   24,692

Deferred, variable costs to acquire client relationship intangibles

Other movements in provisions relate to deferred payments to investment managers and third parties for the introduction of client relationships, which have been capitalised in the period.

Deferred and contingent consideration in business combinations

Deferred and contingent consideration of £1,123,000 (30 June 2016: £1,640,000; 31 December 2016: £1,136,000) is the present value of amounts payable at the end of 2019 in respect of the acquisition of Vision and Castle.

Legal & compensation

During the ordinary course of business the group may, from time to time, be subject to complaints, as well as threatened and actual legal proceedings (which may include lawsuits brought on behalf of clients or other third parties) both in the UK and overseas. Any such material matters are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of the group incurring a liability. In those instances where it is concluded that it is more likely than not that a payment will be made, a provision is established to the group's best estimate of the amount required to settle the obligation at the relevant balance sheet date. The timing of settlement of provisions for client compensation or litigation is dependent, in part, on the duration of negotiations with third parties.

Property-related

Property-related provisions of £15,935,000 relate to dilapidation and onerous lease provisions expected to arise on leasehold premises held by the group (30 June 2016: £2,101,000; 31 December 2016: £2,798,000).

The move to the 8 Finsbury Circus office was completed on 13 February 2017, which triggered the recognition of a provision for the net cost of the surplus property at 1 Curzon Street until the end of the existing lease. The ultimate amount of the provision is dependent on the timing of any subletting arrangement and the associated terms agreed with prospective third parties. Based on management's expectations of future costs for the premises and potential rental income, and timings thereof, on 13 February 2017, the group recognised a provision of £12,148,000 whilst releasing the unamortised portion of the rent free period and a landlord contribution totalling £2,148,000. Since the middle of February 2017, management have altered their expected timings of a potential sublet; this has led to a further charge of £3,807,000 being recognised. The group utilised £2,264,000 (30 June 2016 and 31 December 2016: £nil) of the onerous lease provision during the period, being the payment of rent, rates and service charge.

Dilapidation provisions are calculated using a discounted cash flow model; during the six months ended 30 June 2017, dilapidation provisions decreased by £554,000 (30 June 2016: increased £306,000; 31 December 2016: increased £1,003,000). The group utilised £704,000 (30 June 2016 and 31 December 2016: £nil) of the dilapidations provision held for the surplus property at 1 Curzon Street during the period. The impact of discounting led to an additional £150,000 (30 June 2016: £306,000; 31 December 2016: £1,003,000) being provided for over the period.

Amounts payable after 1 year

Property-related provisions of £10,407,000 are expected to be settled within 19  years of the balance sheet date, which corresponds to the longest lease for which a dilapidations provision is being held. Provisions for deferred and contingent consideration in business  combinations of £1,123,000 are expected to be settled within three years of the balance sheet date. Remaining provisions payable after one year are expected to be settled within three years of the balance sheet date.

12   Subordinated loan notes

    Unaudited
30 June 2017
£'000
  Unaudited
30 June 2016
£'000
  Audited
31 December 2016
£'000
Subordinated loan notes            
- Face value   20,000   20,000   20,000
- Carrying value   19,643   19,541   19,590

Subordinated loan notes consist of 10-year Tier 2 notes, which are repayable in August 2025, with a call option in August 2020 and annually thereafter. Interest is payable at a fixed rate of 5.856% until the first call option date and at a fixed margin of 4.375% over 6 month LIBOR thereafter.

13   Long term employee benefits

The group operates two defined benefit pension schemes providing benefits based on pensionable salary for staff employed by the company. For the purposes of calculating the pension benefit obligations, the following assumptions have been used:

    Unaudited
30 June 2017
% p.a.
  Unaudited
30 June 2016
% p.a.
  Audited
31 December 2016
% p.a.
Rate of increase in salaries   N/A   4.10   4.50
Rate of increase of pensions in payment:            
- Laurence Keen Scheme   3.60   3.40   3.60
- Rathbones 1987 Scheme   3.40   3.10   3.40
Rate of increase of deferred pensions   3.50   3.10   3.50
Discount rate   2.75   3.05   2.80
Inflation*   3.50   3.10   3.50
* Inflation assumptions are based on the Retail Prices Index            

The assumed life expectations of members retiring, aged 65 were:

    Unaudited 30 June 2017   Unaudited 30 June 2016   Audited 31 December 2016
    Males   Females   Males   Females   Males   Females  
Retiring today    23.7   25.6   24.3   26.5   24.3   26.5  
Retiring in 20 years    25.4   27.4   26.6   28.8   26.6   28.8  

The amount included in the balance sheet arising from the group's obligations in respect of the schemes is as follows:

    Unaudited 30 June 2017   Unaudited 30 June 2016   Audited 31 December 2016
    Rathbone 1987 Scheme
£'000
  Laurence Keen Scheme
£'000
  Rathbone 1987 Scheme
£'000
  Laurence Keen Scheme
£'000
  Rathbone 1987 Scheme
£'000
  Laurence Keen Scheme
£'000
Present value of defined benefit obligations   (165,322)   (12,937)   (199,897)   (16,801)   (216,238)   (16,203)
Fair value of scheme assets   146,218   12,023   169,915   14,818   178,887   14,099
Total deficit   (19,104)   (914)   (29,982)   (1,983)   (37,351)   (2,104)

Following a consultation with members of the schemes, the decision was taken to close the scheme to future accrual and to break the link to salary in both schemes. This has resulted in a plan amendment gain of £5,523,000 being recognised in operating income.

The group made special contributions into its pension schemes of £1,750,000 during the period (30 June 2016: £1,936,000; 31 December 2016: £2,936,000).

14   Share capital and share premium

The following movements in share capital occurred during the period:

    Number of shares   Exercise price
pence
  Share capital
£'000
  Share premium
£'000
  Total
£'000
At 1 January 2016   48,134,286       2,407   97,643   100,050
Shares issued:                    
- in relation to business combinations   37,898   1,705.0   2   644   646
- to Share Incentive Plan   104,667   1,968.0 - 2,039.0   5   2,069   2,074
- to Save As You Earn scheme   102,319   934.0 - 1,641.0   5   1,104   1,109
At 30 June 2016 (unaudited)   48,379,170       2,419   101,460   103,879
Shares issued:                    
- to Share Incentive Plan   65,510   1,934.0 - 2,264.0   4   1,190   1,194
- to Save As You Earn scheme   13,789   934.0 - 1,641.0   1   166   167
- on placing   2,224,210   1,710.0   111   36,830   36,941
Own shares sold   -   1,754.0 - 1,949.0   -   345   345
At 31 December 2016 (audited)   50,682,679       2,535   139,991   142,526
Shares issued:                    
- to Share Incentive Plan   76,983   1,784.0 - 2,429.0   4   1,475   1,479
- to Save As You Earn scheme   85,838   984.0 - 1,648.0   4   1,243   1,247
- to Employee Benefit Trust   397,761   5.0   19   -   19
At 30 June 2017 (unaudited)   51,243,261       2,562   142,709   145,271

At 30 June 2017, the group held 672,909 own shares (30 June 2016: 376,273; 31 December 2016: 336,987).

15   Financial instruments

The table below analyses the group's financial instruments measured at fair value into a fair value hierarchy based on the valuation technique used to determine the fair value.

At 30 June 2017 (unaudited)   Level 1
£'000
  Level 2
£'000
  Level 3
£'000
  Total
£'000
Assets                
Available for sale securities:                
- equity securities   2,513       2,513
- money market funds     124,287     124,287
Total financial assets   2,513   124,287     126,800

At 30 June 2016 (unaudited)   Level 1
£'000
  Level 2
£'000
  Level 3
£'000
  Total
£'000
Assets                
Available for sale securities:                
- equity securities   1,082       1,082
- money market funds     83,623     83,623
Total financial assets   1,082   83,623   -   84,705



At 31 December 2016 (audited)   Level 1
£'000
  Level 2
£'000
  Level 3
£'000
  Total
£'000
Assets                
Available for sale securities:                
- equity securities   1,864       1,864
- money market funds     103,557     103,557
Total financial assets   1,864   103,557     105,421

The group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred. There have been no transfers between levels during the period.

The fair value of listed equity securities is their quoted price. Money market funds are demand securities and changes to estimates of interest rates will not affect their fair value. The fair value of money market funds is their daily redemption value.

The fair values of the group's other financial assets and liabilities are not materially different from their carrying values with the exception of the following:

16   Contingent liabilities and commitments

(a)   Indemnities are provided in the normal course of business to a number of directors and employees who provide tax and trust advisory services in connection with them acting as trustees/directors of client companies and providing other services.

(b)   Capital expenditure authorised and contracted for at 30 June 2017 but not provided for in the condensed consolidated interim financial statements amounted to £2,074,000 (30 June 2016: £434,000; 31 December 2016: £4,430,000).

The contractual amounts of the group's commitments to extend credit to its clients are as follows:

    Unaudited
30 June 2017
£'000
  Unaudited
30 June 2016
£'000
  Audited
31 December 2016
£'000
Guarantees   117   -   117
Undrawn commitments to lend of 1 year or less   22,644   22,146   25,661
Undrawn commitments to lend of more than 1 year   5,204   -   5,981
    27,965   22,146   31,759

The fair value of the guarantees is £nil (30 June 2016 and 31 December 2016: £nil).

(c)   The arrangements put in place by the Financial Services Compensation Scheme (FSCS) to protect depositors and investors from loss in the event of failure of financial institutions has resulted in significant levies on the industry in recent years. The financial impact of unexpected FSCS levies is largely out of the group's control as they result from other industry failures.

There is uncertainty over the level of future FSCS levies as they depend on the ultimate cost to the FSCS of industry failures. The group contributes to the deposit class, investment fund management class and investment intermediation levy classes and accrues levy costs for future levy years when the obligation arises.

17   Consolidated interim statement of cash flows

For the purposes of the consolidated interim statement of cash flows, cash and cash equivalents comprise the following balances with less than three months until maturity from the date of acquisition:

    Unaudited
Six months to
30 June 2017
£'000
  Unaudited
Six months to
30 June 2016
£'000
  Audited
Year to
31 December 2016
£'000
Cash and balances at central banks   1,480,932   960,115   1,075,673
Loans and advances to banks   147,714   105,629   83,844
Available for sale investment securities   124,287   83,623   103,557
    1,752,933   1,149,367   1,263,074

Available for sale investment securities are amounts invested in money market funds which are realisable on demand.

Cash flows arising from issue of ordinary shares comprise:

    Unaudited
Six months to
30 June 2017
£'000
  Unaudited
Six months to
30 June 2016
£'000
  Audited
Year to
31 December 2016
£'000
Share capital issued (note 14)   27   12   128
Share premium on shares issued (note 14)   2,718   3,817   42,348
Shares issued in relation to share-based schemes for which no cash consideration was received   (437)   (1,043)   (1,631)
Shares issued in relation to business combinations   -   -   (646)
    2,308   2,786   40,199

18   Related party transactions

The key management personnel of the group are defined as the company's directors and other members of senior management who are responsible for planning, directing and controlling the activities of the group.

Dividends totalling £204,000 were paid in the period (six months ended 30 June 2016: £122,000; year ended 31 December 2016: £302,000) in respect of ordinary shares held by key management personnel.

As at 30 June 2017, the group had provided interest-free season ticket loans of £4,000 (30 June 2016: £3,000; 31 December 2016: £6,000) to key management personnel.

At 30 June 2017, key management personnel and their close family members had gross outstanding deposits of £4,252,000 (30 June 2016: £4,104,000; 31 December 2016: £5,464,000) and gross outstanding loans of £723,000 (30 June 2016: £949,000; 31 December 2016: £959,000) which were made on normal business terms. A number of the company's directors and their close family members make use of the services provided by companies within the group. Charges for such services are made at various staff rates.

One group subsidiary, Rathbone Unit Trust Management, has authority to manage the investments within a number of unit trusts. Another group company, Rathbone Investment Management International, acted as investment manager for a protected cell company offering unitised private client portfolio services. During the first half of 2017, the group managed 25 unit trusts, Sociétés d'investissement à Capital Variable (SICAVs) and open-ended investment companies (OEICs) (together, 'collectives') (six months ended 30 June 2016: 25 unit trusts and OEICs; year ended 31 December 2016: 27 unit trusts and OEICs).

The group charges each fund an annual management fee for these services, but does not earn any performance fees on the unit trusts. The management charges are calculated on the bases published in the individual fund prospectuses, which also state the terms and conditions of the management contract with the group.

The following transactions and balances relate to the group's interest in the unit trusts:

   Unaudited
Six months to
30 June 2017
£'000
  Unaudited
Six months to
30 June 2016
£'000
  Audited
Year to
31 December 2016
£'000
Total management fees   16,592   12,856   27,783

   Unaudited
30 June 2017
£'000
  Unaudited
30 June 2016
£'000
  Audited
31 December 2016
£'000
Management fees owed to the group   2,931   2,183   2,557
Holdings in unit trusts (note 15)   2,513   1,082   1,864
   5,444   3,265   4,421

Total management fees are included within 'fee and commission income' in the consolidated interim statement of comprehensive income.

Management fees owed to the group are included within 'accrued income' and holdings in unit trusts are classified as 'available for sale equity securities' in the consolidated interim balance sheet. The maximum exposure to loss is limited to the carrying amount on the balance sheet as disclosed above.

All amounts outstanding with related parties are unsecured and will be settled in cash. No guarantees have been given or received. No provisions have been made for doubtful debts in respect of the amounts owed by related parties.

19   Interest in unconsolidated structured entities

As described in note 18, at 30 June 2017, the group owned units in collectives managed by Rathbone Unit Trust Management with a value of £2,513,000 (30 June 2016: £1,082,000; 31 December 2016: £1,864,000), representing 0.05% (30 June 2016: 0.03%; 31 December 2016: 0.05%) of the total value of the collectives managed by the group. These assets are held to hedge the group's exposure to deferred remuneration schemes for employees of Unit Trusts.

The group's primary risk associated with its interest in the unit trusts is from changes in fair value of its holdings in the funds.

The group is not judged to control, and therefore does not consolidate, the collectives. Although the fund trustees have limited rights to remove Rathbone Unit Trust Management as manager, the group is exposed to very low variability of returns from its management and share of ownership of the funds and is therefore judged to act as an agent rather than having control under IFRS 10.

20   Events after the balance sheet date

An interim dividend of 22.0p per share was declared on 24 July 2017 (see note 6).

There have been no other material events occurring between the balance sheet date and 24 July 2017.


Regulatory capital

The group is classified as a banking group under the Capital Requirements Directive (CRD) and is therefore required to operate within the restrictions on capital resources and banking exposures prescribed by the Capital Requirements Regulation, as applied by the Prudential Regulation Authority (PRA).

Regulatory own funds

The group's regulatory own funds (excluding profits for the six months ended 30 June, which have not yet been independently verified, but including independently verified profits to 31 December) are shown in the table below:

    Unaudited
30 June 2017
£'000
  Unaudited
30 June 2016
£'000
  Unaudited
31 December 2016
£'000
Share capital and share premium   145,271   103,880   142,526
Reserves   188,586   206,331   188,530
Less:            
- Own shares   (5,344)   (6,561)   (6,243)
- Intangible assets (net of deferred tax)   (162,589)   (169,582)   (166,414)
Total Common Equity Tier 1 capital   165,924   134,068   158,399
Tier 2 capital   16,498   15,456   15,804
Total own funds   182,422   149,524   174,203

Own funds requirements

The group is required to hold capital to cover a range of own funds requirements, classified as Pillar 1 and Pillar 2.

Pillar 1 - minimum requirement for capital

Pillar 1 focuses on the determination of risk-weighted assets and expected losses in respect of the group's exposure to credit, counterparty credit, market and operational risks and sets a minimum requirement for capital.

At 30 June 2017, the group's risk-weighted assets were £911,163,000 (30 June 2016: £837,975,000; 31 December 2016: £892,650,000).

Pillar 2 - Supervisory review process

Pillar 2 supplements the Pillar 1 minimum requirement with firm-specific Individual Capital Guidance (Pillar 2A) and a framework of regulatory capital buffers (Pillar 2B).

The Pillar 2A own funds requirement is set by the PRA to reflect those risks, specific to the firm, which are not fully captured under the Pillar 1 own funds requirement.

Pension obligation risk
The potential for additional unplanned costs that the group would incur in the event of a significant deterioration in the funding position of the group's defined benefit pension schemes.

Interest rate risk in the banking book
The potential losses in the non-trading book resulting from interest rate changes or widening of the spread between Bank of England base rates and LIBOR rates.

Concentration risk
Greater loss volatility arising from a higher level of loan default correlation than is assumed by the Pillar 1 assessment.


The group is also required to maintain a number of Pillar 2B regulatory capital buffers.

Capital conservation buffer (CCB)
The CCB is a general buffer of 2.5% of risk-weighted assets designed to provide for losses in the event of a stress and is being phased in from 1 January 2016 to 1 January 2019. As at 30 June 2017, the buffer rate was 1.25% of risk-weighted assets. The CCB must be met with Common Equity Tier 1 capital.

Countercyclical capital buffer (CCyB)
The CCyB is time-varying and is designed to act as an incentive for banks to constrain credit growth in times of heightened systemic risk. The amount of the buffer is determined by reference to rates set by the Financial Policy Committee (FPC) for individual countries where the group has credit exposures.  The buffer rate is currently set at zero for the UK, however non-zero rates for Norway, Sweden and Hong Kong, where the group has small relevant credit exposures, results in an overall rate of 0.02% of risk weighted assets for the group as at 30 June 2017. The FPC has announced that the rate will increase to 0.5%, with binding effect from 27 June 2018. Absent a material change in the outlook, it expects to increase the rate to 1.0% with effect from November 2018. The CCyB must be met with Common Equity Tier 1 capital.

PRA buffer
The PRA also determines whether any incremental firm-specific buffer is required, in addition to the CCB and the CCyB. The PRA requires any PRA buffer to remain confidential between the group and the PRA.

The group's own funds requirements were as follows:

    Unaudited
30 June 2017
£'000
  Unaudited
30 June 2016
£'000
  Unaudited
31 December 2016
£'000
Own funds requirement for credit risk   38,729   36,630   36,859
Own funds requirement for market risk   -   -   389
Own funds requirement for operational risk   34,164   30,407   34,164
Pillar 1 own funds requirement   72,893   67,037   71,412
Pillar 2A own funds requirement   28,105   27,285   27,898
Total Pillar 1 and 2A own funds requirement   100,998   94,322   99,310
CRD IV buffers:            
- Capital conservation buffer (CCB)   11,390   5,237   5,579
- Countercyclical capital buffer (CCyB)   182   754   357
Total Pillar 1 and 2A own funds requirement and CRD IV buffers   112,570   100,313   105,246


Statement of directors' responsibilities in respect of the interim statement
Confirmations by the board

We confirm to the best of our knowledge that:

Going concern basis of preparation

Details of the group's results, cash flows and resources, together with an update on the risks it faces and other factors likely to affect its future development, performance and position are set out in this interim management report.

Group companies are regulated by the PRA and FCA and perform annual capital adequacy assessments, which include the modelling of certain extreme stress scenarios. The group publishes Pillar 3 disclosures annually on its website, which provide further detail about its regulatory capital resources and requirements. During the first half of 2017, and as at 30 June 2017, the group was primarily equity-financed, with a small amount of gearing in the form of the Tier 2 debt.

In 2017, the group has continued to grow client funds under management, both organically and through acquisition, and the group remains profitable. The directors believe that the company remains well-placed to manage its business risks successfully, despite an uncertain economic and political backdrop.

As we believe that the group has, and is forecast to continue to have, sufficient financial and regulatory resources we continue to adopt the going concern basis of accounting in preparing the condensed consolidated interim financial statements. In forming our view, we have considered the company's prospects for a period exceeding 12 months from the date the condensed consolidated interim financial statements are approved.

By Order of the Board

Philip Howell
Chief Executive

24 July 2017


Independent review report Rathbone Brothers Plc
We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2017 as set out on pages 6 to 25 which comprises the consolidated interim statement of comprehensive income, consolidated interim statement of changes in equity, consolidated interim balance sheet, consolidated interim statement of cash flows and the related explanatory notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA"). Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting," as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

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 Ireland) 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.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2017 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

Nicholas Edmonds
for and on behalf of KPMG LLP

Chartered Accountants
15 Canada Square, London E14 5GL

24 July 201724 July 201724 July 2017




This announcement is distributed by Nasdaq Corporate Solutions on behalf of Nasdaq Corporate Solutions clients.
The issuer of this announcement warrants that they are solely responsible for the content, accuracy and originality of the information contained therein.
Source: Rathbone Brothers Plc via Globenewswire


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Rathbone Brothers Plc : Half-yearly report 2017 - RNS