Regulatory Story
Go to market news section View chart   Print
RNS
Arbuthnot Banking Group PLC  -  ARBB   

Half Year Report

Released 07:00 17-Jul-2018

RNS Number : 8069U
Arbuthnot Banking Group PLC
17 July 2018
 

17 July 2018

For immediate release

 

ARBUTHNOT BANKING GROUP ("Arbuthnot", "the Group" or "ABG")

Results for the six months to 30 June 2018

 

 

Arbuthnot Banking Group announces a half yearly profit before tax of £3.5m compared to £2.5m in the prior year.

 

Included in the profit figure for the six months ended 30 June is an estimated* income of £2.3m for Secure Trust Bank PLC ("STB") being an associated undertaking.

 

Arbuthnot Banking Group PLC is the holding company for Arbuthnot Latham & Co., Limited and Secure Trust Bank PLC is an associated company.

 

FINANCIAL HIGHLIGHTS

 

·      Profit before tax £3.5m (H1 2017: £2.5m)

·      Underlying profit before tax £4.2m (H1 2017: £3.2m)

·      Earnings per share £0.22 (H1 2017: £0.17)

·      Interim dividend per share increased to 15p (H1 2017: 14p)

·      Net assets £235m (H1 2017: £234m)

·      Net assets per share £15.40 (H1 2017: £15.33)

 

OPERATIONAL HIGHLIGHTS

 

·      Customer loans £1,097m (H1 2017: £879m), increased by 25%

·      Customer deposits £1,547m (H1 2017: £1,234m), increased by 25%

·      Assets Under Management £1,069m (H1 2017: £1,001m), increased by 7%

·      Launched Asset Based Lending business, with first client loan funded in May 2018

·      Management team joining to set up a Specialist Secured Lending business

 

Commenting on the results, Sir Henry Angest, Chairman and Chief Executive of Arbuthnot, said: "The Group has continued to develop. The Asset Based Lending business has commenced trading ahead of schedule. We have also reached an agreement with a management team to establish a Specialist Secured Lending business. Given the continued growth and diversification of the Group, I believe our long term prospects are encouraging."

 

The interim results are available at http://www.arbuthnotgroup.com.

 

*The estimate for associate income is based on our 18.6% share of the after tax earnings of STB calculated using the full year market consensus of the equity research performed on STB, with an assumed straight-line growth in profits over the first half of the year. STB is scheduled to announce its interim results on 8 August 2018. For the avoidance of doubt, ABG's estimate for the income from STB is not an estimate being made on its behalf. The Group's profit before tax, profit after tax and earnings per share therefore include this estimated income from STB.

 

 

ENQUIRIES:

Arbuthnot Banking Group

0207 012 2400

Sir Henry Angest, Chairman and Chief Executive

Andrew Salmon, Group Chief Operating Officer

James Cobb, Group Finance Director

 

Stifel Nicolaus Europe Ltd trading as KBW (Nomad and Joint Broker)

0207 710 7600

Robin Mann

Gareth Hunt

Stewart Wallace

 

Numis Securities Ltd (Joint Broker)

0207 260 1000

Chris Wilkinson

Stephen Westgate

 

Maitland (Financial PR)

0207 379 5151

Neil Bennett

Jais Mehaji

Sam Cartwright

 

 

Chairman's Statement

 

Arbuthnot Banking Group PLC

I am pleased to report that Arbuthnot Banking Group ("ABG") has delivered a profit before tax of £3.5m for the first six months of 2018. This compares to a profit of £2.5m for the same period of 2017, an increase of 39%. This includes an estimated profit from our associate, Secure Trust Bank PLC ("STB"), which will publish its interim results on 8 August.

 

As highlighted in the Annual Report and Accounts for 2017, the Group believes in diversification of its income streams and has accordingly been developing new businesses. I am encouraged with the progress being made by our new Asset Based Lending team. The team joined us on 2 January and from a standing start have set up their business in an efficient manner. The policies, processes and operating systems were all in place ahead of plan so they were able to fund their first deal on 4 May. At the end of June they had drawn balances of £8.9m from four clients and a pipeline of new business totalling £76.5m. The core team is now nearly complete and will consist of 10 employees by the end of the year. With sales executives covering the North, Midlands, London, South and soon to be added South West, the business has a national sales coverage.

 

In line with our diversification strategy we have also reached an agreement with an incoming management team to establish a new lending division that will be named "Arbuthnot Specialist Lending". This business will focus on providing short-term secured lending solutions to professional property businesses and entrepreneurs. The team will join us on 1 August with a core team of 6 employees. We expect that it will open for business in the fourth quarter of 2018. Its costs will be an organic investment in the current year, and the business should reach monthly break even and become fully profitable during 2020.

 

Given that the long-term prospects for the Group are encouraging and in line with previous years, the Board has decided to increase the interim dividend by 1p to 15p, which will be paid on 28 September 2018 to shareholders on the register on 31 August 2018.

 

Arbuthnot Latham & Co., Limited

Arbuthnot Latham ("AL") has reported a profit before tax for the first half of the year of £5.4m (H1 2017: £4.9m), which represents an increase of 10%.

 

Total assets of the bank have increased to £1.96bn (H1 2017: £1.43bn), an increase of 37%. This increase is the result of continued growth in both the customer loans and deposit balances.

 

Customer loans ended the first half at £1.10bn, an increase of 24% from the prior year and £47m higher than the year ended December 2017. The bank has originated £207m of loans during the first half, but has continued to experience a number of repayments as the lending markets remain competitive. During the period we have followed our principles of pricing appropriately for risk and return on capital employed and not relaxing our credit criteria such as loan to value limits. The resulting output from these input criteria is the volume of loans originated. We believe this is the prudent way to grow the business as compared to setting volume and balance sheet targets that require reductions in returns or higher credit risks to be taken.

 

Customer deposits have increased to £1.55bn (H1 2017: £1.24bn), an increase of 25% and £156m higher than the end of 2017.  The increase in customer deposits reflects the diversity of sources of deposit funding. The Private Bank continues to attract deposits but the Commercial Bank has also been successful in developing new business and has now raised £471m of deposits.

 

Assets under management have grown to £1.07bn (H1 2017: £1bn).

 

Renaissance Asset Finance ("RAF") has continued to grow its loan balances, which stood at £78m (H1 2017: £60m), an increase of 30%. This is £7m higher than at the year end and represents good growth in increasingly competitive markets. The business has invested in developing its sales force and is seeing the benefit of the recruitment of four new Sales Executives and a new Sales Director at the end of 2017.

 

Overall, impairments continue to show an improvement with only £0.2m of losses incurred even after the introduction of IFRS 9.

 

Secure Trust Bank PLC

We have recorded £2.3m of income related to STB (H1 2017: £2.1m). This represents an estimate of our 18.6% share of the after tax earnings of the investment in our associate undertaking.  In calculating this estimate, the Group has used the full year market consensus of the equity research on STB, with an assumed straight-line growth in profits over the first half, noting the trading statement made by STB on 16 May 2018 in relation to STB's first quarter trading being in line with STB's management expectations. This method is consistent with that used for the Group's 2017 Interim Report.

 

Capital Efficiency

The Board continually reviews the Group's capital structure and options to optimise the capital base in order to support the Group's strategy most effectively. The Board has noted recent announcements by a number of the smaller UK banks that have raised capital in the debt markets. To that extent, the Board is considering opportunities to raise Sterling denominated Additional Tier 1 or Tier 2 Capital, subject to market conditions and the Board determining that it is advantageous to do so.

 

Outlook

The Group has successfully been deploying the surplus capital generated from the sale of STB shares in 2016. New opportunities to deploy this capital have been created with the establishment of our Asset Based Lending and Specialist Lending businesses. Therefore the Group remains confident in its long-term prospects, despite the continuing uncertainty in the geopolitical and macroeconomic environment.

 

 

Consolidated Statement of Comprehensive Income

 




Six months ended 30 June

Six months ended 30 June




2018

2017


Note


£000

£000

Interest income



28,628

22,106

Interest expense



(3,651)

(2,839)

Net interest income



24,977

19,267

Fee and commission income



6,513

6,183

Fee and commission expense



(112)

(322)

Net fee and commission income



6,401

5,861

Operating income



31,378

25,128

Net impairment loss on financial assets



(208)

(343)

Other income

6


1,649

1,104

Profit from associates

5


2,329

2,145

Operating expenses



(31,636)

(25,499)

Profit before income tax



3,512

2,535

Income tax expense



(275)

(90)

Profit after income tax from continuing operations



3,237

2,445

Profit for the period



3,237

2,445






Other comprehensive income





Items that may be reclassified to profit or loss





Available-for-sale reserve - Associate



 -  

389

Tax on other comprehensive income



 -  

(78)






Items that will not be reclassified to profit or loss





Changes in fair value of equity investments at fair value through other comprehensive income



135

 -  

Tax on other comprehensive income



(26)

 -  

Other comprehensive income for the period, net of tax



109

311

Total comprehensive income for the period



3,346

2,756






Profit attributable to:





Equity holders of the Company



3,237

2,445




3,237

2,445






Total comprehensive income attributable to:





Equity holders of the Company



3,346

2,756




3,346

2,756






Earnings per share for profit attributable to the equity holders of the Company during the period





(expressed in pence per share):





 - basic

8


21.7

16.5

 - diluted

8


21.7

16.5

 

 

Consolidated Statement of Financial Position

 




At 30 June

At 30 June

At 31 December




2018

2017

2017




£000

£000

£000

ASSETS






Cash and balances at central banks



361,892

253,309

313,101

Loans and advances to banks



76,840

35,898

70,679

Debt securities at amortised cost / held-to-maturity



307,560

158,515

227,019

Assets classified as held for sale



8,017

2,915

Derivative financial instruments



1,906

1,816

2,551

Loans and advances to customers



1,096,739

879,348

1,049,269

Other assets



23,036

20,102

20,624

Financial investments



2,459

2,173

2,347

Deferred tax asset



2,032

1,689

1,527

Investment in associate



84,032

82,132

83,804

Intangible assets



15,941

16,953

15,995

Property, plant and equipment



5,311

7,629

3,962

Investment properties



59,439

50,200

59,439

Total assets



2,045,204

1,509,764

1,853,232

EQUITY AND LIABILITIES






Equity attributable to owners of the parent






Share capital



153

153

153

Retained earnings



236,007

235,178

237,171

Other reserves



(840)

(1,051)

(949)

Total equity



235,320

234,280

236,375

LIABILITIES






Deposits from banks



232,152

6,579

195,097

Derivative financial instruments



1,383

931

Deposits from customers



1,546,607

1,234,445

1,390,781

Current tax liability



550

450

705

Other liabilities



16,103

21,042

16,239

Debt securities in issue



13,089

12,968

13,104

Total liabilities



1,809,884

1,275,484

1,616,857

Total equity and liabilities



2,045,204

1,509,764

1,853,232

 

 

Consolidated Statement of Changes in Equity

 


Attributable to equity holders of the Group



Share capital

Revaluation reserve

Capital redemption reserve

Fair value reserve*

Treasury shares

Retained earnings

Total


£000

£000

£000

£000

£000

£000

£000

Balance at 31 December 2017

153

 -  

20

162

(1,131)

237,171

236,375

IFRS 9 adjustment

 -  

 -  

 -  

 -  

 -  

(2,257)

(2,257)

Balance at 1 January 2018

153

 -  

20

162

(1,131)

234,914

234,118









Total comprehensive income for the period








Profit for the six months ended 30 June 2018

 -  

 -  

 -  

 -  

 -  

3,237

3,237









Other comprehensive income, net of income tax








Changes in the fair value of financial assets at FVOCI

 -  

 -  

 -  

109

 -  

 -  

109

Total other comprehensive income

 -  

 -  

 -  

109

 -  

 -  

109

Total comprehensive income for the period

 -  

 -  

 -  

109

 -  

3,237

3,346









Transactions with owners, recorded directly in equity








Contributions by and distributions to owners








Equity settled share based payment transactions

 -  

 -  

 -  

 -  

 -  

685

685

Final dividend relating to 2017

 -  

 -  

 -  

 -  

 -  

(2,829)

(2,829)

Total contributions by and distributions to owners

 -  

 -  

 -  

 -  

 -  

(2,144)

(2,144)

Balance at 30 June 2018

153

 -  

20

271

(1,131)

236,007

235,320









* - The Available-for-sale reserve was reclassified as the Fair value reserve as from 1 January 2018.

 


Attributable to equity holders of the Group



Share capital

Revaluation reserve

Capital redemption reserve

Available-for-sale reserve

Treasury shares

Retained earnings

Total


£000

£000

£000

£000

£000

£000

£000

Balance at 1 January 2017

153

 -  

20

(251)

(1,131)

235,567

234,358









Total comprehensive income for the period








Profit for the six months ended 30 June 2017

 -  

 -  

 -  

 -  

 -  

2,445

2,445









Other comprehensive income, net of income tax








Available-for-sale reserve

 -  

 -  

 -  

389

 -  

 -  

389

Available-for-sale reserve - Associate

 -  

 -  

 -  

(78)

 -  

 -  

(78)

Total other comprehensive income

 -  

 -  

 -  

311

 -  

 -  

311

Total comprehensive income for the period

 -  

 -  

 -  

311

 -  

2,445

2,756









Transactions with owners, recorded directly in equity








Contributions by and distributions to owners








Equity settled share based payment transactions

 -  

 -  

 -  

 -  

 -  

(154)

(154)

Final dividend relating to 2016

 -  

 -  

 -  

 -  

 -  

(2,680)

(2,680)

Total contributions by and distributions to owners

 -  

 -  

 -  

 -  

 -  

(2,834)

(2,834)

Balance at 30 June 2017

153

 -  

20

60

(1,131)

235,178

234,280

 

 

Consolidated Statement of Cash Flows

 




Six months ended 30 June

Six months ended 30 June




2018

2017




£000

£000

Cash flows from operating activities





Interest received



39,584

20,004

Interest paid



(3,889)

(3,347)

Fees and commissions received



6,740

4,966

Net trading and other income



1,649

1,104

Cash payments to employees and suppliers



(40,947)

(16,392)

Cash flows from operating profits before changes in operating assets and liabilities



3,137

6,335

Changes in operating assets and liabilities:





 - net decrease / (increase) in derivative financial instruments



1,097

(527)

 - net increase in loans and advances to customers



(50,442)

(121,290)

 - net increase in other assets



(7,742)

(7,720)

 - net increase in deposits from banks



37,055

3,379

 - net increase in amounts due to customers



155,826

236,796

 - net (decrease) / increase in other liabilities



(136)

3,960

Net cash inflow from operating activities



138,795

120,933

Cash flows from investing activities





Purchase of financial investments



(107)

 -  

Disposal of financial investments



136

 -  

Purchase of computer software



(748)

(8,797)

Purchase of property, plant and equipment



(1,799)

(361)

Proceeds from sale of property, plant and equipment



39

 -  

Purchases of debt securities



(153,823)

(108,363)

Proceeds from redemption of debt securities



75,288

55,772

Net cash outflow from investing activities



(81,014)

(61,749)

Cash flows from financing activities





Dividends paid



(2,829)

(2,680)

Net cash used in financing activities



(2,829)

(2,680)

Net increase in cash and cash equivalents



54,952

56,504

Cash and cash equivalents at 1 January



383,780

232,703

Cash and cash equivalents at 30 June



438,732

289,207

 

 

1.  Basis of preparation

The interim financial statements have been prepared on the basis of accounting policies set out in the Group's 2017 statutory accounts as amended by standards and interpretations effective during 2018 as set out below and in accordance with IAS 34 "Interim Financial Reporting". The directors do not consider the fair value of the assets and liabilities presented in these financial statements to be materially different from their carrying value.

 

The statements were approved by the Board of Directors on 16 July 2018 and are unaudited. The interim financial statements will be posted to shareholders and copies may be obtained from The Company Secretary, Arbuthnot Banking Group PLC, Arbuthnot House, 7 Wilson Street, London EC2M 2SN.

 

2.  Risks and uncertainties

The Group regards the monitoring and controlling of risks and uncertainties as a fundamental part of the management process.  Consequently, senior management are involved in the development of risk management policies and in monitoring their application.  A detailed description of the risk management framework and associated policies is set out in note 6.

 

The principal risks inherent in the Group's business are strategic, credit, market, liquidity, operational, cyber, conduct and regulatory.

 

Strategic risk

Strategic risk is the risk that may affect the Group's ability to achieve its corporate and strategic objectives. This risk is important to the Group as it continues its growth strategy. However, the Group seeks to mitigate strategic risk by focusing on a sustainable business model which is aligned to the Group's business strategy. Also, the Board of Directors meets once a year to hold a two day board meeting to ensure that the Group's strategy is appropriate for the market and economy.

 

Credit risk

Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. This risk exists in Arbuthnot Latham, which currently has a loan book of £1,049m. The lending portfolio in AL is extended to clients, the majority of which is secured against cash, property or other assets. Credit risk is managed through the Credit Committee of AL.

 

Market risk

Market risk arises in relation to movements in interest rates, currencies and equity markets. The Group's treasury function operates mainly to provide a service to clients and does not take significant unmatched positions in any market for its own account.  As a result, the Group's exposure to adverse movements in interest rates and currencies is limited to interest earnings on its free cash and interest rate re-pricing mismatches. The Group actively monitors its exposure to future interest rate rises.

 

The Group is exposed to changes in the market value of properties. The current carrying value of Investment Properties is £59m. Any changes in the market value of the properties will be accounted for in the Income Statement and as a result could have a significant impact on the profit or loss of the Group.

 

The Group has an 18.6% interest in STB. This is currently recorded in the Group's balance sheet as an interest in associates and at 30 June 2018 was carried at £84.0m or the equivalent of £24.40 per share (31 December 2017: carried at £83.8m or the equivalent of £24.33 per share). At 30 June 2018 the market price of STB was £18.20 per share (31 December 2017: £17.97 per share). The Board has determined that the current carrying value remains appropriate after having carried out extensive analysis to be satisfied that the long term value in use does not suggest that this carrying value is impaired. These valuations included the Gordon's Growth model and Dividend Discount model. The resultant output from the models indicated valuations in a range that was in excess of £24 but this will be ultimately dependent on the surplus capital within STB being deployed in the business over the long term. There is a risk that the output of the value in use models could require an impairment charge to be recognised in the future.

 

If the Group was considered to no longer have significant influence over STB it would lead to the investment being accounted for as a financial asset at fair value. The value would then be marked to market with changes in the share price giving rise to gains or losses being recorded in Other Comprehensive Income.

 

Liquidity risk

Liquidity risk is the risk that the Group cannot meet its obligations as they fall due. The Group takes a conservative approach to managing its liquidity profile. Retail client deposits and drawings from the Bank of England Term Funding Scheme fund the Group. The loan to deposit ratio is maintained at a prudent level, and consequently the Group maintains a high level of liquidity. The Arbuthnot Latham Board annually approves the Individual Liquidity Adequacy Assessment Process ("ILAAP"). The Directors model various stress scenarios and assess the resultant cash flows in order to evaluate the Group's potential liquidity requirements. The Directors firmly believe that sufficient liquid assets are held to enable the Group to meet its liabilities in a stressed environment.

 

Operational risk

Operational risk is the risk that the Group may be exposed to financial losses from conducting its business. The Group is exposed to operational risks from its Information Technology and Operations platforms. There are additional internal controls in these processes that are designed to protect the Group from these risks. The Group's overall approach to managing internal control and financial reporting is described in the Corporate Governance section of the Annual Report.

 

Cyber risk

Cyber risk is an increasing risk that the Group is subject to within its operational processes. This is the risk that the Group is subject to some form of disruption arising from an interruption to its IT and data infrastructure. The Group regularly test the infrastructure to ensure that it remains robust to a range of threats, and have continuity of business plans in place including a disaster recovery provision.

 

Conduct risk

As a financial services provider we face conduct risk, including selling products to customers which do not meet their needs; failing to deal with customers' complaints effectively; not meeting customers' expectations; and exhibiting behaviours which do not meet market or regulatory standards.

 

The Group adopts a zero risk appetite for any unfair customer outcomes. It maintains clear compliance guidelines and provides ongoing training to all staff.  Periodic spot checks and internal audits are performed to ensure these guidelines are being followed.  The Group also has insurance policies in place to provide some cover for any claims that may arise.

 

Regulatory risk

Regulatory risk is the risk that the Group will have insufficient capital resources to support the business or does not comply with regulatory requirements. The Group adopts a conservative approach to managing its capital. The Board approves an Individual Capital Adequacy Assessment Process ("ICAAP") annually, which includes the performance of stringent stress tests to ensure that capital resources are adequate over a three year horizon. Capital and liquidity ratios are regularly monitored against the Board's approved risk appetite as part of the risk management framework.

 

Regulatory change also exists as a risk to the Group's business. Notwithstanding the assessments carried out by the Group to manage the regulatory risk, it is not possible to predict how regulatory and legislative changes may alter and impact the business. Significant and unforeseen regulatory changes may reduce the Group's competitive situation and lower its profitability.

 

Macroeconomic and competitive environment

The Group is also exposed to indirect risks that may arise from the macroeconomic and competitive environment. The economic environment is relatively stable in the UK. However, the international landscape is increasingly uncertain. The uncertain performance of the economies in the EU and the increasingly protectionist stance being taken by other major economies may have an adverse affect on the UK. In particular, this may cause a further softening of central London property prices, which may spread out further to the South East.

 

The Group monitors its exposure to future interest rate rises and currently has minimal lending to customers in products that would be directly sensitive to interest rate rises. However, at the current levels of interest rates, the affordability enjoyed by the Group's customers is beneficial.

 

Brexit

It is currently difficult to analyse the impacts that Brexit may have on Arbuthnot Banking Group. However, our only overseas operation is in Dubai, so the vast majority of the Group's income and expenditure is based in the UK. It is therefore anticipated that the financial impact would be minimal, assuming no significant macro economic shock in the UK. 

 

3.  Changes in significant accounting policies

 

IFRS 9, 'Financial instruments' 

In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments (IFRS 9). IFRS 9 replaces IAS 39 Financial instruments: "Recognition and measurement", and is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted. The Group applied IFRS 9 from 1 January 2018. In October 2017, the IASB issued "Prepayment Features with Negative Compensation" (Amendment to IFRS 9). The amendments are effective for annual periods beginning on or after 1 January 2019, with early adoption permitted. This Amendment does not have an impact on Group's financial assets' classification and measurement. The Group has taken advantage of the exemption allowing it not to restate comparative information for prior periods with respect to classification and measurement (including impairment) changes. The changes in measurement arising on initial application of IFRS 9, has been incorporated through an adjustment to the opening reserves and retained earnings position as at 1 January 2018.

 

The following table summarises the impact, net of tax, of transition to IFRS 9 on the opening balance of retained earnings:






Retained Earnings




£000

Recognition of expected credit losses under IFRS 9




2,787

Related tax




(530)

Impact at 1 January 2018




2,257

 

i) Classification and Measurement of Financial Assets and Liabilities

There are three measurement classifications under IFRS 9: amortised cost, fair value through profit or loss ("FVPL") and for financial assets, fair value through other comprehensive income ("FVOCI"). The existing IAS 39 financial asset categories have been removed. Financial assets are classified into these measurement classifications based on the business model within which they are held, and their contractual cash flow characteristics. The business model reflects how groups of financial assets are managed to achieve a particular business objective.

 

Financial assets can only be held at amortised cost if the instruments are held in order to collect the contractual cash flow ("held to collect") and where those contractual cash flows are solely payments of principal and interest ("SPPI"). Financial asset debt instruments where the business model objectives are achieved by both collecting the contractual cash flows and selling the assets ("held to collect and sell"), are held at FVOCI, with unrealised gains and losses deferred within reserves until the asset is derecognised. All financial assets not classified as measured at amortised cost or FVOCI, as described above, are measured at FVPL.

 

The Group has assessed the business models that it operates and most of the loans to banks and customers are held within a "held to collect" business model. Investment debt securities categorised as heldtomaturity under IAS 39 are held within a "held to collect" portfolio. The majority of the remaining investment debt securities are held within a "held to collect and sell" business model or trading portfolio. Where the objective of a business is to hold the assets to collect the contractual cash flows or where the objective is to hold the assets to collect contractual cash flows and sell, a further assessment has been undertaken to determine whether the cash flows of the assets are deemed to meet the SPPI criteria. Where these instruments have cash flows that meet the SPPI criteria, the instruments are measured at amortised cost (for held to collect business models) or FVOCI (for held to collect and sell business models). Instruments that do not meet the SPPI criteria are measured at FVPL regardless of the business model in which they are held.

 

IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities, except for changes in presentation of fair value changes of financial liabilities designated at FVPL attributable to changes in liability credit risk (under IFRS 9 these changes are presented within other comprehensive income). There has been no change in the way the Group classifies and measures its financial liabilities.

 

As mentioned above, IFRS 9 was adopted without restating comparative information. The reclassifications and the adjustments arising from the new impairment rules are therefore not reflected in a restated statement of financial position as at 31 December 2017, but are recognised in the opening balances on 1 January 2018. The following tables show the adjustments and reclassifications recognised for each individual line item in the statement of financial position. All financial assets and liabilities are disclosed below.

 






FVPL

FVOCI

Amortised cost

Total carrying amount

Fair value

At 1 January 2018 (under IFRS 9)





£000

£000

£000

£000

£000











ASSETS










Cash and balances at central banks





 -  

 -  

313,101

313,101

313,101

Loans and advances to banks





 -  

 -  

70,679

70,679

70,679

Debt securities at amortised cost




 -  

 -  

227,019

227,019

227,951

Derivative financial instruments





2,551

 -  

 -  

2,551

2,551

Loans and advances to customers





 -  

 -  

1,046,482

1,046,482

1,022,816

Other assets





11,964

 -  

 -  

11,964

11,964

Financial investments





128

2,219

 -  

2,347

2,347






14,643

2,219

1,657,281

1,674,143

1,651,409











LIABILITIES










Deposits from banks





 -  

 -  

195,097

195,097

195,097

Derivative financial instruments





931

 -  

 -  

931

931

Deposits from customers





 -  

 -  

1,390,781

1,390,781

1,390,781

Other liabilities





1,207

 -  

 -  

1,207

1,207

Debt securities in issue





 -  

 -  

13,104

13,104

13,104






2,138

 -  

1,598,982

1,601,120

1,601,120

 




FVPL

Held-to-maturity

Loans and receivables

Available-for-sale

Liabilities at amortised cost

Total carrying amount

Fair value

At 31 December 2017 (under IAS 39)



£000

£000

£000

£000

£000

£000

£000











ASSETS










Cash and balances at central banks



 -  

 -  

313,101

 -  

 -  

313,101

313,101

Loans and advances to banks



 -  

 -  

70,679

 -  

 -  

70,679

70,679

Debt securities held-to-maturity



 -  

227,019

 -  

 -  

 -  

227,019

227,951

Derivative financial instruments



2,551

 -  

 -  

 -  

 -  

2,551

2,551

Loans and advances to customers



 -  

 -  

1,049,269

 -  

 -  

1,049,269

1,022,816

Other assets



 -  

 -  

11,964

 -  

 -  

11,964

11,964

Financial investments



 -  

 -  

 -  

2,347

 -  

2,347

2,347




2,551

227,019

1,445,013

2,347

 -  

1,676,930

1,651,409











LIABILITIES










Deposits from banks



 -  

 -  

 -  

 -  

195,097

195,097

195,097

Derivative financial instruments



931

 -  

 -  

 -  

 -  

931

931

Deposits from customers



 -  

 -  

 -  

 -  

1,390,781

1,390,781

1,390,781

Other liabilities



 -  

 -  

1,207

 -  

 -  

1,207

1,207

Debt securities in issue



 -  

 -  

 -  

 -  

13,104

13,104

13,104




931

 -  

1,207

 -  

1,598,982

1,601,120

1,601,120

 

ii) Impairment of Financial Assets, Loan Commitments and Financial Guarantee Contracts

IFRS 9 introduced a new forwardlooking expected credit loss ("ECL") impairment framework for all financial assets not measured at FVPL and certain offbalance sheet loan commitments and guarantees. It replaced the "incurred loss model" from IAS 39. The new ECL framework resulted in an allowance for ECL recorded on financial assets regardless of whether there has been an actual loss event. This differs from the previous approach where the allowance recorded on performing loans was designed to capture only losses that have been incurred, whether or not they have been specifically identified. The new impairment model applies to the following financial instruments that are not measured at fair value through profit or loss:

 

• Financial assets that are debt instruments; and;

• Loan commitments and financial guarantee contracts issued.

 

The IFRS 9 impairment model adopts a three stage approach based on the extent of credit deterioration since origination:

• Stage 1: 12month ECL applies to all financial assets that have not experienced a significant increase in credit risk ("SICR") since origination and are not credit impaired. The ECL will be computed based on the probability of default events occurring over the next 12 months. This Stage 1 approach is different from the previous approach, which estimated a collective allowance to recognise losses that have been incurred but not reported on performing loans.

 

• Stage 2: When a financial asset experiences a SICR subsequent to origination but is not credit impaired, it is considered to be in Stage 2. This requires the computation of ECL based on the probability of all possible default events occurring over the remaining life of the financial asset. Provisions are higher in this stage because of an increase in credit risk and the impact of a longer time horizon being considered (compared to 12 months in Stage 1).

 

• Stage 3: Financial assets that exhibit objective evidence of impairment are included in this stage. Similar to Stage 2, the allowance for credit losses will continue to capture the lifetime expected credit losses. At each reporting date, the Group will assess whether financial assets carried at amortised cost are credit impaired. A financial asset will be considered to be credit impaired when an event(s) that has a detrimental impact on estimated future cash flows have occurred. Evidence that a financial asset is credit impaired includes, but is not limited to, the following observable data:

• Initiation of bankruptcy proceedings;

• Notification of bereavement;

• Identification of loan meeting debt sale criteria; or

• Initiation of repossession proceedings.

In addition, a loan that is 90 days or more past due will be considered credit impaired for all portfolios. The credit risk of financial assets that become credit impaired are not expected to improve such that they are no longer considered credit impaired.

 

The ECL requirements of IFRS 9 are complex and require management judgments, estimates and assumptions, particularly in the areas of assessing whether the credit risk of an instrument has increased significantly since initial recognition and incorporating forwardlooking information into the measurement of ECLs.

 

Under IFRS 9, the Group consider a financial asset to be in default when:

 

• The borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realising collateral (if any is held); or

• The borrower is more than 90 days past due on any material credit obligation to the Group.

 

This definition is largely consistent with the definition that is used for the Group's credit risk management process and for regulatory purposes.

 

Significant increase in credit risk

Under IFRS 9, when determining whether the credit risk (risk of default) on a financial instrument has increased significantly since initial recognition, the Group consider reasonable and supportable information that is relevant and available without undue cost or effort, including both quantitative and qualitative information and analysis based on the Group's historical experience, expert credit assessment and forwardlooking information.

 

The Group has established a methodology and framework that incorporates both quantitative and qualitative information to determine whether the credit risk on a particular financial instrument has increased significantly since initial recognition and this is aligned to the internal credit risk management process.

 

The criteria for determining whether credit risk has increased significantly will vary according to the individual circumstances of each loan, given the nature of the loan book, but also include a backstop based on delinquency of 30 days past due. In certain instances, using its judgement and, where possible, relevant historical experience, the Group may determine that an exposure has undergone a significant increase in credit risk if particular qualitative factors indicate so, as the quantitative analysis may not always capture this on a timely basis.

 

Measuring ECL

The key inputs to the measurement of ECLs are the following variables:

 

• Probability of default ("PD");

• Loss given default ("LGD"); and

• Exposure at default ("EAD").

 

Offbalance sheet items, such as financial guarantees and loan commitments, are included within the ECL computation.

 

Forwardlooking information ("FLI")

IFRS 9 requires an unbiased and probability weighted estimate of credit losses by evaluating a range of possible outcomes that incorporates forecasts of future economic conditions. FLI is required to be incorporated into the measurement of ECL as well as the determination of whether there has been a significant increase in credit risk since origination. Measurement of ECLs at each reporting period should reflect reasonable and supportable information at the reporting date about past events, current conditions and forecasts of future economic conditions. Forecasts for key macroeconomic variables that most closely correlate with the Bank's portfolio are used to produce five economic scenarios, comprising a central case, upside case, downside case, moderate stress and severe stress, and the impacts of these scenarios are then probability weighted. The estimation and application of this forwardlooking information will require significant judgement. External information is used to produce the forecast information.

 

iii) Hedge Accounting

IFRS 9 introduces a new hedge accounting model that expands the scope of hedged items and risks eligible for hedge accounting and aligns hedge accounting more closely with risk management. The new model no longer specifies quantitative measures for effectiveness testing and does not permit hedge dedesignation.

 

iv) Impact of new impairment model, including impact on capital

The Group has recorded an adjustment to its opening retained earnings as at 1 January 2018 to reflect the application of the new requirements at the adoption date and has not restated comparative periods. The application of IFRS 9 resulted in additional impairment allowance as at 1 January 2018 of £2.8m, as disclosed below:

 

Impairment allowance




£000

Loss allowance at 3 December 2017 under IAS 39




1,362

Additional impairment recognised at 1 January 2018 on loans and advances to customers

2,787

Loss allowance at 1 January 2018 under IFRS 9




4,149

 

CET 1 ratio at 30 June 2018:

• 15.22% before transitional relief;

• 15.43% after transitional relief.

 

Transitional relief relates to the phasing of the impact of the initial adoption of ECL as permitted by Regulation (EU) 2017/2395 of the European Parliament and Council. The Group adopted the transitional relief. Under this approach, the balance of ECL allowances in excess of the regulatory excess EL and standardised portfolios are phased into the CET1 capital base over 5 years. The proportion phased in for the balance at each reporting period is 2018: 10%; 2019 20%; 2020 40%; 2021 60%; 2022 80%. From 2023 onwards, there is no transitional relief.

 

v) Impact on Governance and Controls

The Group applied its existing governance framework to ensure that appropriate controls and validations were in place over key processes and judgments to determine the ECL. As part of the implementation, the Group refined internal controls and implemented new controls where required in areas that were impacted by IFRS 9, including controls over the development and probability weighting of macroeconomic scenarios, credit risk data and systems, and the determination of a significant increase in credit risk.

 

IFRS 15, 'Revenue from contracts with customers' 

This standard replaces IAS 11 Construction Contracts, IAS 18 Revenue, IFRIC 13 Customer Loyalty Programmes, IFRIC 15 Agreements for the Construction of Real Estate, IFRIC 18 Transfer of Assets from Customers and SIC31 Revenue - Barter of Transactions Involving Advertising Services. The Group applied IFRS 15 from 1 January 2018.

 

The standard contains a single model that applies to contracts with customers and two approaches to recognising revenue: at a point in time or over time. The model features a contractbased five step analysis of transactions to determine whether, how much and when revenue is recognised. Revenue recognition for current revenue streams were unchanged after the implementation of IFRS 15.

 

4.  Valuation of financial instruments

 

The Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions. If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same for which market observable prices exist, net present value and discounted cash flow analysis. The objective of valuation techniques is to determine the fair value of the financial instrument at the reporting date as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. In the event that fair values of assets and liabilities cannot be reliably measured, they are carried at cost.

 

The Group measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making measurements:

 

• Level 1: Quoted prices in active markets for identical assets or liabilities.

• Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data.

• Level 3: Inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument's valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.

 

The consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads assists in the judgement as to whether a market is active. If in the opinion of management, a significant proportion of the instrument's carrying amount is driven by unobservable inputs, the instrument in its entirety is classified as valued using significant unobservable inputs. 'Unobservable' in this context means that there is little or no current market data available from which to determine the level at which an arm's length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used).

 

The tables below analyse financial instruments measured at fair value by the level in the fair value hierarchy into which the measurement is categorised:

 


Level 1

Level 2

Level 3

Total

At 30 June 2018

£000

£000

£000

£000

ASSETS





Derivative financial instruments

 -  

1,452

 -  

1,452

Financial assets at FVOCI

17

 -  

2,442

2,459


17

1,452

2,442

3,911

LIABILITIES





Derivative financial instruments

 -  

2,787

 -  

2,787


 -  

2,787

 -  

2,787

 


Level 1

Level 2

Level 3

Total

At 30 June 2017

£000

£000

£000

£000

ASSETS





Derivative financial instruments

 -  

1,816

 -  

1,816

Financial investments

112

 -  

2,061

2,173


112

1,816

2,061

3,989

 


Level 1

Level 2

Level 3

Total

At 31 December 2017

£000

£000

£000

£000

ASSETS





Derivative financial instruments

 -  

2,551

 -  

2,551

Financial investments

144

 -  

2,203

2,347


144

2,551

2,203

4,898

LIABILITIES





Derivative financial instruments

 -  

931

 -  

931


 -  

931

 -  

931

 

There were no transfers between level 1 and level 2 during the year.








The following table reconciles the movement in level 3 financial instruments measured at fair value (financial investments) during the year:



At 30 June

At 30 June

At 31 December



2018

2017

2017

Movement in level 3


£000

£000

£000

At 1 January


2,203

2,012

2,012

Consideration received


104

 -  

 -  

Movements recognised in Other Comprehensive Income


135

 -  

136

Movements recognised in the Income Statement


 -  

49

55

At 30 June / 31 December


2,442

2,061

2,203

 

 

5.  Operating segments

The Group is organised into three main operating segments as disclosed below:

1) Retail banking (associate) - incorporating household cash management, personal lending and banking services.

2) UK Private banking - incorporating private banking, wealth management and commercial banking.

3) Group Centre - ABG Group Centre management.

Transactions between the operating segments are on normal commercial terms. Centrally incurred expenses are charged to operating segments on an appropriate pro-rata basis.  Segment assets and liabilities comprise operating assets and liabilities, being the majority of the balance sheet.

 

In calculating the Income from associates, the Company has used an estimate based on the full year market consensus of the equity research performed on STB with an assumed straight-line growth in profits over the first half, noting the trading statement made by STB on 16 May 2018 in relation to STB's first 4 months trading being in-line with STB's management's expectations. The Group's profit before tax, profit after tax and earnings per share therefore include this estimated income from STB.

 


Continuing operations


Retail Bank Associate Income

UK Private banking

Group       Centre

Total

Six months ended 30 June 2018

£000

£000

£000

£000

Interest revenue

 -  

28,720

54

28,774

Inter-segment revenue

 -  

(92)

(54)

(146)

Interest revenue from external customers

 -  

28,628

 -  

28,628

Fee and commission income

 -  

6,513

 -  

6,513

Revenue from external customers

 -  

35,141

 -  

35,141

Interest expense

 -  

(3,525)

54

(3,471)

Add back inter-segment revenue

 -  

92

(92)

 -  

Subordinated loan note interest

 -  

 -  

(180)

(180)

Fee and commission expense

 -  

(112)

 -  

(112)

Segment operating income

 -  

31,596

(218)

31,378

Impairment losses

 -  

(208)

 -  

(208)

Other income

 -  

1,980

(331)

1,649

Income from associates

2,329

 -  

 -  

2,329

Operating expenses

 -  

(27,986)

(3,650)

(31,636)

Segment profit / (loss) before tax

2,329

5,382

(4,199)

3,512

Income tax (expense) / income

 -  

(237)

(38)

(275)

Segment profit / (loss) after tax

2,329

5,145

(4,237)

3,237

Segment profit / (loss) after tax

2,329

5,145

(4,237)

3,237






Loans and advances to customers

 -  

1,096,739

 -  

1,096,739

Other assets

 -  

867,281

81,184

948,465

Segment total assets

 -  

1,964,020

81,184

2,045,204

Customer deposits

 -  

1,546,607

 -  

1,546,607

Other liabilities

 -  

284,108

(20,831)

263,277

Segment total liabilities

 -  

1,830,715

(20,831)

1,809,884

Other segment items:





Capital expenditure

 -  

(2,456)

(95)

(2,551)

Depreciation and amortisation

 -  

(1,459)

(13)

(1,472)

 


Continuing operations


Retail Bank Associate Income

UK Private banking

Group       Centre

Total

Six months ended 30 June 2017

£000

£000

£000

£000

Interest revenue

 -  

22,184

117

22,301

Inter-segment revenue

 -  

(78)

(117)

(195)

Interest revenue from external customers

 -  

22,106

 -  

22,106

Fee and commission income

 -  

6,183

 -  

6,183

Revenue from external customers

 -  

28,289

 -  

28,289

Interest expense

 -  

(2,782)

117

(2,665)

Add back inter-segment revenue

 -  

78

(78)

 -  

Subordinated loan note interest

 -  

 -  

(174)

(174)

Fee and commission expense

 -  

(322)

 -  

(322)

Segment operating income

 -  

25,263

(135)

25,128

Impairment losses

 -  

(343)

 -  

(343)

Other income

 -  

1,588

(484)

1,104

Income from associates

2,145

 -  

 -  

2,145

Operating expenses

 -  

(21,632)

(3,867)

(25,499)

Segment profit / (loss) before tax

2,145

4,876

(4,486)

2,535

Income tax (expense) / income

 -  

(90)

 -  

(90)

Segment profit / (loss) after tax

2,145

4,786

(4,486)

2,445

Segment profit / (loss) after tax

2,145

4,786

(4,486)

2,445






Loans and advances to customers

 -  

879,348

 -  

879,348

Other assets

 -  

551,239

79,177

630,416

Segment total assets

 -  

1,430,587

79,177

1,509,764

Customer deposits

 -  

1,234,445

 -  

1,234,445

Other liabilities

 -  

111,199

(70,160)

41,039

Segment total liabilities

 -  

1,345,644

(70,160)

1,275,484

Other segment items:





Capital expenditure

 -  

(2,658)

 -  

(2,658)

Depreciation and amortisation

 -  

(1,046)

(1)

(1,047)

 

Segment profit is shown prior to any intra-group eliminations.

 

The UK private bank has a branch in Dubai, which generated £2.2m (2017: £2.1m) income and had operating costs of £1.5m (2017: £1.4m). All Dubai branch income is booked in the UK. Other than the Dubai branch, all operations of the Group are conducted wholly within the United Kingdom and geographical information is therefore not presented.

 

6.  Other income

Other income mainly consists out of rental income received from the investment properties and from STB for office space occupied.

 

 

7.  Underlying profit reconciliation

The profit before tax from continuing operations as reported in the operating segments can be reconciled to the underlying profit from continuing operations for the year as disclosed in the tables below.

 

Underlying profit reconciliation

Arbuthnot Latham & Co.

Arbuthnot Banking Group

Six months ended 30 June 2018

£000

£000

Profit before tax from continuing operations

5,382

3,512

Investment in new ventures

670

670

Underlying profit

6,052

4,182

 

Underlying profit reconciliation

Arbuthnot Latham & Co.

Arbuthnot Banking Group

Six months ended 30 June 2017

£000

£000

Profit before tax from continuing operations

4,876

2,535

Investment in operating systems

97

97

Acquisition costs

67

67

RAF - full year equivalent income*

466

466

Underlying profit

5,506

3,165




* RAF profit contribution adjustment as if received from 1 January 2017 and not as included from 28 April 2017 (pro forma basis).

 

8.  Earnings per ordinary share

Basic

Basic earnings per ordinary share are calculated by dividing the profit after tax attributable to equity holders of the Company by the weighted average number of ordinary shares 14,889,048 (2017: 14,815,045) in issue during the period. On 30 March 2017, Sir Henry Angest bought 150,500 shares previously held in an ESOP trust.

 

Diluted

Diluted earnings per ordinary share are calculated by dividing the dilutive profit after tax attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period, as well as the number of dilutive share options in issue during the period. There were no dilutive share options in issue at the end of June (2017: nil).

 


Six months ended 30 June

Six months ended 30 June


2018

2017

Profit attributable

£000

£000

Total profit after tax attributable to equity holders of the Company

3,237

2,445

Profit after tax attributable to equity holders of the Company

3,237

2,445





Six months ended 30 June

Six months ended 30 June


2018

2017

Dilutive profit attributable

£000

£000

Total profit after tax attributable to equity holders of the Company

3,237

2,445

Profit after tax attributable to equity holders of the Company

3,237

2,445





Six months ended 30 June

Six months ended 30 June


2018

2017

Basic Earnings per share

p

p

Total Basic Earnings per share

21.7

16.5

Basic Earnings per share from continuing operations

21.7

16.5





Six months ended 30 June

Six months ended 30 June


2018

2017

Diluted Earnings per share

p

p

Total Diluted Earnings per share

21.7

16.5

Diluted Earnings per share from continuing operations

21.7

16.5

 


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 LLFVDDVIRLIT
Close


London Stock Exchange plc is not responsible for and does not check content on this Website. Website users are responsible for checking content. Any news item (including any prospectus) which is addressed solely to the persons and countries specified therein should not be relied upon other than by such persons and/or outside the specified countries. Terms and conditions, including restrictions on use and distribution apply.

 


Half Year Report - RNS