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Arbuthnot Banking Group PLC   -  ARBB   

Final Results

Released 07:00 28-Mar-2019

RNS Number : 2487U
Arbuthnot Banking Group PLC
28 March 2019
 

28 March 2019

For immediate release

 

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

Audited Final Results for the year to 31 December 2018

 

Diversification as new businesses commence

 

Arbuthnot Banking Group today announces an increase in profit before tax of 172%.

 

Arbuthnot Banking Group PLC is the holding company for Arbuthnot Latham & Co., Limited and has a 15.5% shareholding in Secure Trust Bank PLC.

 

FINANCIAL HIGHLIGHTS

·      Profit Before Tax £6.8m (2017: £2.5m)

·      Underlying profit before tax £7.4m (2017: £3.2m)

·      Operating income increased by 24% to £67.9m (2017: £54.6m)

·      Negative earnings per share 134.5p (2017: positive 43.9p)*

·      Continuing earnings per share 38.0p (2017: 14.0p)

·      Underlying earnings per share 40.3p (2017: 17.6p)

·      Final dividend per share 20p (2017: 19p), an increase of 5%

·      Total full year dividend per share 35p (2017: 33p)

·      Bonus share issue to create new class of non-voting shares

·      Net assets £196m (2017: £236m)

·      Net assets per share 1283p (2017: 1547p)

·      Underlying return on deployed equity 5.6% (2017: 4.2%)

 

OPERATIONAL HIGHLIGHTS

 

Arbuthnot Latham

·      Profit before tax £14.6m (2017: £11m) an increase of 33%**

·      Average net margin at 4.7% (2017: 4.5%)

·      Customer loans increased 17% to £1,225m (2017: £1,049m)

·      Written loan volume increased 1% to £469m (2017: £466m)

·      Customer deposits increased 23% to £1,714m (2017: £1,391m)

·      Assets under management decreased 6% to £985m (2017: £1,044m)

·      Arbuthnot Asset Based Lending launched in May 2018 issuing facilities of £43m

·      Arbuthnot Specialist Finance developed with first loan approved in 2019

·      Arbuthnot Direct established to provide deposit products direct to the retail market

 

Secure Trust Bank - Investment

·      Shareholding now at 15.5% (2017: 18.6%)

·      De-recognised as an associated undertaking due to loss of significant influence

·      Net loss following de-recognition £25.7m

 

Commenting on the results, Sir Henry Angest, Chairman and Chief Executive of Arbuthnot, said: "The Group has had another good year with further deployment of capital. Diversity of earnings increased with good progress being made by the Commercial Bank, along with the launch of our new ventures, Asset Based Lending, Arbuthnot Direct and Specialist Finance. These new businesses should give the Group a strong basis from which to develop in the future." 

 

Note:      *   Results include £25.7m net loss on derecognition of STB associate recorded in discontinued operations.

** Includes an adjustment to RAF earn out liability giving a one off profit of £2.6m.

 

 

ENQUIRIES:

 

 

 

 

 

Arbuthnot Banking Group

0207 012 2400

 

Sir Henry Angest, Chairman and Chief Executive

 

 

Andrew Salmon, Chief Operating Officer

 

 

James Cobb, Group Finance Director

 

 

 

 

 

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

0207 710 7600

 

Robin Mann

 

 

Gareth Hunt

 

 

Stewart Wallace

 

 

 

 

 

Numis Securities Ltd (Joint Broker)

0207 260 1000

 

Stephen Westgate

 

 

 

 

 

Maitland (Financial PR)

0207 379 5151

 

Neil Bennett

 

 

Jais Mehaji

 

 

Sam Cartwright

 

 

 

The 2018 Annual Report and Notice of Meeting will be posted and available on the Arbuthnot Banking Group website http://www.arbuthnotgroup.com on or before 12 April 2019.  Copies may be obtained from the Company Secretary, Arbuthnot Banking Group PLC, Arbuthnot House, 7 Wilson Street, London, EC2M 2SN.

 

Consolidated statement of comprehensive income

 

 

 

 

Year ended 31 December

 

 

 

2018

2017

 

Note

 

£000

£000

Interest income

8

 

65,290

47,427

Interest expense

 

 

(10,107)

(6,334)

Net interest income

 

 

55,183

41,093

Fee and commission income

9

 

12,956

13,805

Fee and commission expense

 

 

(234)

(282)

Net fee and commission income

 

 

12,722

13,523

Operating income

 

 

67,905

54,616

Net impairment loss on financial assets

10

 

(2,731)

(394)

Other income

11

 

6,588

3,033

Operating expenses

12

 

(64,982)

(54,721)

Profit before tax from continuing operations

 

 

6,780

2,534

Income tax expense

13

 

(1,121)

(448)

Profit after tax from continuing operations

 

 

5,659

2,086

Profit from discontinued operations after tax

14

 

(25,692)

4,437

(Loss) / profit for the year

 

 

(20,033)

6,523

Other comprehensive income

 

 

 

 

Items that are or may be reclassified to profit or loss

 

 

 

 

Available-for-sale reserve

 

 

 -  

128

Available-for-sale reserve - Associate

 

 

 -  

389

Tax on other comprehensive income

 

 

 -  

(104)

 

 

 

 

 

Items that will not be reclassified to profit or loss

 

 

 

 

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

 

(13,893)

 -  

Tax on other comprehensive income

 

 

(26)

 -  

Other comprehensive (loss) / income for the period, net of tax

 

 

(13,919)

413

Total comprehensive (loss) / income for the period

 

 

(33,952)

6,936

 

 

 

 

 

Profit attributable to:

 

 

 

 

Equity holders of the Company

 

 

(20,033)

6,523

(Loss) / profit for the year

 

 

(20,033)

6,523

 

 

 

 

 

Total comprehensive income attributable to:

 

 

 

 

Equity holders of the Company

 

 

(33,952)

6,936

Total comprehensive (loss) / income for the period

 

 

(33,952)

6,936

 

 

 

 

 

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

 

 

 

 

(expressed in pence per share):

 

 

 

 

Basic earnings per share - Continuing operations

16

 

38.0

14.0

Basic earnings per share - Discontinued operations

16

 

(172.5)

29.9

Basic earnings per share

16

 

(134.5)

43.9

 

 

 

 

 

Diluted earnings per share - Continuing operations

16

 

38.0

14.0

Diluted earnings per share - Discontinued operations

16

 

(172.5)

29.9

Diluted earnings per share

16

 

(134.5)

43.9

 

 

Consolidated statement of financial position

 

 

 

 

At 31 December

 

 

 

2018

2017

 

Note

 

£000

£000

ASSETS

 

 

 

 

Cash and balances at central banks

17

 

405,325

313,101

Loans and advances to banks

18

 

54,173

70,679

Debt securities at amortised cost / held-to-maturity

19

 

342,691

227,019

Assets classified as held for sale

20

 

8,002

2,915

Derivative financial instruments

21

 

1,846

2,551

Loans and advances to customers

22

 

1,224,656

1,049,269

Other assets

24

 

12,716

20,624

Financial investments

25

 

35,351

2,347

Deferred tax asset

26

 

1,490

1,527

Interests in associates

27

 

83,804

Intangible assets

28

 

16,538

15,995

Property, plant and equipment

30

 

5,304

3,962

Investment property

31

 

67,081

59,439

Total assets

 

 

2,175,173

1,853,232

EQUITY AND LIABILITIES

 

 

 

 

Equity attributable to owners of the parent

 

 

 

 

Share capital

37

 

153

153

Retained earnings

38

 

209,083

237,171

Other reserves

38

 

(13,280)

(949)

Total equity

 

 

195,956

236,375

LIABILITIES

 

 

 

 

Deposits from banks

32

 

232,675

195,097

Derivative financial instruments

21

 

188

931

Deposits from customers

33

 

1,714,286

1,390,781

Current tax liability

 

 

236

705

Other liabilities

34

 

18,549

16,239

Debt securities in issue

35

 

13,283

13,104

Total liabilities

 

 

1,979,217

1,616,857

Total equity and liabilities

 

 

2,175,173

1,853,232

 

 

Chairman's statement

 

I am pleased to report that Arbuthnot Banking Group ("ABG" or "the Group") has achieved a profit before tax for 2018 of £6.8m (2017: £2.5m). It reflects our continued deployment of capital and investment in our principal banking subsidiary, Arbuthnot Latham and Co., Limited ("AL" or the "Bank"). To that end, to allow us to focus solely on managing this investment, Andrew Salmon and I resigned from the Board of Secure Trust Bank PLC in August 2018. While this was the right decision for the Group, it did result in us falling foul of the accounting rules once again. The fact that we no longer had significant influence in our associated company, meant we were required to classify our shareholding as a financial investment and recognise the resultant mark to market loss. This we have shown as discontinued operations. I always felt it was inappropriate that we were required to recognise this unrealised gain in 2016 and now feel justified as we write off a previous profit that we never should have been required to take.

 

As I reflect on the progress that the Group has made, I am encouraged that our strategy of diversification is gathering momentum. It must be noted that two significant market events took place in 2018. Firstly, the large systemic UK banks concluded their ring fencing process and secondly, the final requirement of the phasing in of the capital buffers was completed. Thus, almost ten years since the worst of the financial crisis, the largest banks are able to focus on growth strategies rather than internal projects or capital raising. It is not clear how they will build out their business, but already we have seen an increase in liquidity in the mortgage sector, as the ring fenced banks work to deploy this "trapped funding". However, we remain steadfast in our philosophy of not chasing lending volumes by lowering our returns or taking excessive credit risk.

 

I am confident that clients will still want to receive a personalised service and specialist banks will therefore continue to play a significant role in providing bespoke funding, services and advice to a market that can't be mass processed through automated credit models and algorithms. What is clear to me, is that not relying on generating income from a single market sector, will be important. This is why we have focused on diversifying our revenue streams and invested in developing new businesses.

 

Accordingly, I am pleased to see the progress that our new ventures have made in 2018. Renaissance Asset Finance ("RAF") has grown its lending balances by 21%. Arbuthnot Asset Based Lending ("ABL") commenced trading in May 2018 ahead of plan and has already issued facilities to the value of £43m and has drawn balances of £25m. This business has also carried its momentum into the new year.  In January ABL issued a further £29m of facilities, being an increase of more than 50% on the December balance.

 

The Specialist Finance team joined us in August 2018 and began setting up the infrastructure and operations required to commence trading. This is largely completed now and they have begun a soft launch. Their first loan received Credit Committee approval in February 2019.

 

Given our philosophy of caution when it comes to funding our lending, I have taken a keen interest in the development of our new Arbuthnot Direct deposit platform. This enables us to provide deposit products directly to the retail market via our newly created internet platform, with rates advertised on the best buy tables. Although we do not need to raise deposits via this channel, it is good to have it available, should an attractive opportunity arise, and it is helpful in raising funds of longer duration. 

 

Finally, I am satisfied with the progress that our core business has made. The Private Bank has struggled to maintain its momentum, but I hope by refocussing its strategies to concentrate on sourcing and nurturing new relationships with criteria clients, this should bring good future growth. The Commercial Bank has continued to build out both sides of the balance sheet, increasing its loan balances by 46%, while at the same time remaining self-funding, increasing deposits by £258m. 

 

RBS Remedies Application

As we have previously announced, the Commercial Bank plans to take part in the RBS remedies process. We have already been selected as one of 11 banks accepted into the Incentivised Switching Scheme ("ISS"), where RBS customers are incentivised to join another bank. Additionally, AL will be submitting its application for a grant from the Capabilities and Innovation Fund. We are confident that as a well-established bank with a 186 year history of serving our clients, with high quality products and a tailored relationship-led service, we are a strong candidate for the grant we are seeking.

 

We have a proven track record of building successful businesses which meet customer needs in the sectors in which they operate. Our Commercial Bank launched in 2016 and already has customer loan balances of £443m at the year end. Success with our application for a grant from the Capability and Innovation Fund would enable us to bring our differentiated, private banking style relationship banking offer to a wider range of sectors than we are currently able to service, and to offer a more complete banking service to our clients across the country.

 

We are also delighted to be working closely with Oracle as part of the application process, as we recognise that to service our clients to the highest standards, complementary digital solutions are a prerequisite if we are to provide real competition to this under-served market. We have forged a strong and efficient working partnership with Oracle, who are the providers of our core banking technology. They have been helpful in identifying innovations in the global Commercial Banking industry and plan to deliver them to the UK Market via our bid.

 

If we are successful in this bid process, we will bring forward our plans for further developing our Commercial Banking platform, with the grant money accelerating our transformation of the Bank.

 

Non-voting Shares

In 2016 we asked shareholders to approve, at the AGM, a number of resolutions to enable us to start the process of creating and issuing a new class of shares in Arbuthnot Banking Group. These new shares will rank pari passu with the existing ordinary shares in every way, including their right to receive the same dividends as ordinary shares, except they will not have the right to vote in shareholder meetings. As a Board and Company we believe that the current control structure, has enabled the business to take long term investment decisions and sometimes develop contrarian strategies, like ceasing to lend in the height of the financial boom of the mid 2000s. This strategy paid off when we were able to take full advantage of the opportunities that came our way following the financial crisis, in particular, being able to buy Everyday Loans for £1 in 2012 and then selling it for a profit of £117m in 2016.

 

These new non-voting shares will enable us to maintain the control structure, but will provide us with the means to raise further capital, to continue to develop the business and to fund suitable inorganic deals should the opportunities arise. Thus, I am delighted to announce that we will establish these new shares following the AGM in May. To allow all of our shareholders to benefit from the new class of shares, we intend to offer them to existing shareholders by way of a bonus share issue of one new non-voting share for every 100 ordinary shares held.

 

Since this ia an exploratory exercise, your Board is keen to keep central expenses to a minimum and therefore these new shares will be listed on the NEX Growth Market following the issue and at the same time the ordinary shares will be dual listed on the NEX exchange and also AIM. The NEX Exchange is a fully regulated Recognised Investment Exchnage for shares in growth companies and its costs are significantly lower than either the main market of the London Stock Exchange or AIM. Further details are set out in the circular to shareholders enclosed with the Annual Report.

 

Board Changes and Personnel

Ian Henderson departed from the Board on 31 August and I would like to thank him for the valuable contributions he has made to AL. Jeremy Kaye our Company Secretary, decided to retire after having given 46 years of dedicated service to Arbuthnot. He was succeeded by Nick Jennings. We will miss his attention to detail that only a classical education can develop. I wish him well for a long and happy retirement. Furthermore on 8 August Paul Lynam left the Board. I thank him for the significant contribution he made in developing both Secure Trust Bank and Arbuthnot Banking Group.

 

Most importantly, I should mention that as part of our continued integration of the Group and the Bank, I was pleased to be able to appoint Andrew Salmon as CEO of Arbuthnot Latham in June 2018. Andrew has worked with me in various capacities for over 20 years. He will retain his Group responsibilities. He is supported by two deputies, James Cobb, our Group Finance Director and Stephen Fletcher, previously the Head of our Commercial Bank. 

 

Finally, the performance of the Group also reflects the hard work and commitment of all the members of staff.  On behalf of the Board I extend our thanks to all of them for their dedicated efforts in 2018.

 

Dividend

The Board is proposing a final dividend of 20p, an increase of 1p on last year. Together with the interim dividend of 15p it gives a total dividend of 35p (2017: 33p), which represents an increase of 2p on the ordinary dividend.

 

If approved, the dividend will be paid and the bonus share issue will be made on 17 May 2019 to shareholders on the register at close of business on 26 April 2019. 

 

Outlook

The macro economic outlook has grown increasingly uncertain. Major economies have seen industrial output slow, with Germany narrowly avoiding a technical recession. At the same time trade conflicts may develop further and the impact of Brexit has yet to be reflected fully in the UK economy.

 

However, given our cautious approach to banking, I feel confident that our balance sheet should withstand any likely downturn in the economy. I am also optimistic that our new ventures can continue to make good progress and establish themselves as significant contributors to the future success of Arbuthnot Banking Group PLC.

 

Looking further ahead, the UK economy might surprise us. It has proved to be very resilient, despite all the doom and gloom, and with a strong government introducing the right economic policies to promote business, Brexit could well deliver a bright future.

 

 

Strategic Report

 

 

 

 

 

Business Review

 

 

 

Arbuthnot Latham & Co., Ltd

 

 

 

2018

2017

Operating income

£68.4m

£54.9m

Other income

£6.8m

£3.9m

Operating expenses

£57.8m

£47.4m

Profit before tax (before Group recharges)

£14.6m

£11.0m

Customer loans

£1,224.7m

£1,049.3m

Customer deposits

£1,714.3m

£1,390.8m

Total assets

£2,172.5m

£1,783.7m

Assets under management

£985.1m

£1,044.3m

Average net margin

4.7%

4.5%

Loan to deposit ratio

71.4%

75.4%

 

Arbuthnot Latham & Co., Limited has reported a profit before tax of £14.6m (2017: £11m), which is an increase of 33%. However, the underlying profit increased by 25%, when the impact of the one off adjustment to the management earn out liability for Renaissance Asset Finance and the investment made in our new business ventures are excluded.

 

At the time when the acquisition of RAF was completed, the future liability for the management earn out was estimated to be the maximum permitted under the sale and purchase agreement. This liability has now been reassessed and £2.6m taken back to profit. However, RAF continues to perform well and has increased its customer loan balances by 21% in 2018, even though this is below the level the management team had anticipated at the time of agreeing the earn out contract.

 

Overall the Bank's leading indicators, namely customer balances, showed good growth during the year. Customer loan balances increased by 17% and deposits grew by 23%. Assets under management declined by 6%, largely as a result of the market volatility experienced in the final quarter of the year, as the global markets declined by in excess of 10%.

 

The other important item in the profit of the Bank is the investment made in the new business ventures. This totalled £1.6m in the year and mainly represents the set up costs incurred by ABL and the Arbuthnot Specialist Finance ("ASF") business. The ABL team commenced in January 2018 and made good progress in establishing its operational processes. As a result of this and also of growing customer demand, the business was able to start writing business in May, two months earlier than planned. At the end of the year the business had issued customer facilities of £43m and had drawn balances of £25m. This business will continue to be a drag on earnings of the bank in 2019, but is expected to break even toward the end of 2019.

 

ASF was established in August 2018 and has grown to be a team of seven. This team has now also set up its operating systems and has entered a soft launch in 2019, with its first customer loan being approved by Credit Committee in February 2019. It will remain in build out phase during 2019 and expects to break even in 2020.

 

Credit losses in the year increased to £2.7m (2017: £0.4m), which equates to 22 basis points of the year end customer loan balances. This loss rate remains within our accepted range. However, the increase in reported losses is due to several underlying factors. Firstly, the increased size of the loan book will lead to increased credit losses, even if the loss rate remains constant.  Secondly, the introduction of IFRS9 has played a significant role in the higher impairments. The standard requires losses to be attributed to loans at the time of origination as a 12 month Expected Credit Loss ("ECL") in stage one, so a growing front book requires higher provision balances. Also, the definition of when loans are considered to be in default is clearly identified, where previously some element of judgement was exercised. It is therefore expected that, in some of the stage three lending cases where provisions have been required, we will recover a large proportion of the amount outstanding.

 

Private Banking (including Dubai)

The Private Bank customer loan balances reduced by 1% as the competitive forces within the prime lending market increased during the year. It is clear that the ring fenced banks have been active in the mortgage markets as lending metrics have taken on an all too familiar picture, namely, lowering margins and increasing loan to value ratios. As a result, the Private Bank has refused to be drawn into this competition. Instead, we prefer to extend loans that we believe meet our return criteria, with volumes of loans being the resultant output rather than an input requirement. This can be seen from the loan origination volumes of the Private Bank which fell by 9% during 2018.

 

Throughout 2018 customer deposits in the Private Bank increased by 9% to close the year at £1,041m (2017: £955m). The Investment Management business started the year with funds under management of £1,044m and closed at £985m. The significant movements in this business saw £90m of gross inflows of new money, which was largely offset by transfers out. The market turbulence of the final quarter saw the funds being marked down by £79m, offsetting the gains made in the early part of the year to leave the net performance a fall of £25m. 

 

During the year the management structure in the Private Bank was reorganised. Given the competition in the lending markets the Private Bank has been realigned to focus on growing the Wealth Management sector of the Bank. This will re-emphasise the need to identify and establish banking relationships with criteria clients. Over time, this should increase the flow of customer balances into deposits, investment management and also provide wealth planning opportunities.

 

Commercial Bank

The Commercial Bank continued to trade well during the year. Customer loan balances increased by £140m to close the year at £445m, a growth rate of 46%. Additionally, the Commercial Bank remained self-funding and was able to increase its customer deposits by £258m, an increase of 84%, to reach a yearend balance of £567m. However, as noted in the 2017 Annual Report and Accounts, the Commercial Bank has targeted a higher return on its lending performance and has therefore accepted a lower flow of business, which resulted in lower volumes of business being completed. Lending volumes fell by 12% to £190m as compared to 2017, which generated volumes of £217m.

 

The Commercial Bank has continued to develop its transactional proposition and to that effect has been accepted into the RBS remedies Incentivised Switching Scheme and will be submitting a bid to the Capabilities and Innovation fund for a mid-tier grant.  If successful, the Commercial Bank will continue to develop its SME offering while maintaining a personalised service. This along with technology powered by our partner Oracle, should prove to be successful in the SME banking market.

 

Renaissance Asset Finance

RAF continued to perform well during the year. Customer balances increased by 21% to close the year at £86m and written volumes saw growth of 59% to reach £56m.

 

The salesforce of the business was reinforced during the year and spent time re-engaging in some of the specialist broker markets.  In particular the business wrote deals to finance drainage tankers; these are larger and long term finance deals which should help to extend the term duration of the lending book.

 

The business also had some success in cross selling its products to the Private Bank network. In particular, the higher value and vintage car finance has proved popular.

 

New Ventures

During the year the Bank began developing four new lines of business.

 

Firstly, we launched the Asset Based Lending Business which provides finance secured on either invoices, assets or stock of the borrower.  This business is performing ahead of expectations with issued facilities of £43m at the year end and drawn loan balances of £25m.  The investment made in this business totalled £0.9m net of revenues earned in the year.

 

Secondly, the Specialist Finance business, which provides short term secured lending solutions to professional and entrepreneurial property investors commenced in August 2018, and after having set up the business platform has now entered a soft launch phase. The business cost £0.3m during 2018.

 

Thirdly, the Arbuthnot Direct deposits platform was developed during the year at a cost of £0.2m. This business will enable us to provide deposit products directly to the retail market via a newly created internet platform, with rates advertised on the best buy tables.

 

Finally, the Arbuthnot Real Estate Fund which was established in 2017, continued its exploratory work of identifying the sector of the investment market that will be the most suitable to receive the marketing of the funds products. Progress has been slow and a decision on the future viability of this fund will be concluded in the first half of 2019.  Regardless of the outcome of this review, the ongoing cost of the fund was neutral in 2018.

 

Strategic Report - Financial Review

 

Arbuthnot Banking Group adopts a pragmatic approach to risk taking and seeks to maximise long term revenues and returns.  Given its relative size, it is nimble and able to remain entrepreneurial and capable to taking advantage of favourable market opportunities when they arise.

 

The Group provides a range of financial services to clients and customers in its chosen markets of Private and Commercial Banking and Specialist Lending.  The Group's revenues are derived from a combination of net interest income from lending, deposit taking and treasury activities, fees for services provided and commission earned on the sale of financial instruments and products.  The Group also earns rental income on its investment property and receive dividends from financial investments.

 

Highlights

 

 

 

2018

2017

Summarised Income Statement

£000

£000

Net interest income

55,183

41,093

Net fee and commission income

12,722

13,523

Operating income

67,905

54,616

Other income

6,588

3,033

Operating expenses

(64,982)

(54,721)

Impairment losses - loans and advances to customers

(2,731)

(394)

Profit before tax from continuing operations

6,780

2,534

Income tax expense

(1,121)

(448)

Profit after tax from continuing operations

5,659

2,086

Profit from discontinued operations after tax

(25,692)

4,437

Profit for the year

(20,033)

6,523

 

 

 

Basic earnings per share (pence) - Continuing operations

38.0

14.0

Basic earnings per share (pence) - Discontinuing operations

(172.5)

29.9

Basic earnings per share (pence)

(134.5)

43.9

 

Underlying profit reconciliation

Arbuthnot Latham & Co.

Group Centre

Arbuthnot Banking Group

31 December 2018

£000

£000

£000

Profit before tax from continuing operations

14,574

(7,794)

6,780

AL cost of establishing new ventures

1,579

 -  

1,579

STB dividend income full year at current shareholding

1,000

641

1,641

RAF deferred consideration adjustment

(2,584)

 -  

(2,584)

Underlying profit

14,569

(7,153)

7,416

 

 

 

 

Underlying basic earnings per share (pence) - Continuing operations

 

 

40.3

Underlying basic earnings per share (pence)

 

 

(132.3)

 

Underlying profit reconciliation

Arbuthnot Latham & Co.

Group Centre

Arbuthnot Banking Group

31 December 2017

£000

£000

£000

Profit before tax from continuing operations

10,959

(8,425)

2,534

AL investment in operating systems

78

 -  

78

AL acquisition costs

108

 -  

108

RAF  - full year equivalent income*

466

 -  

466

Underlying profit

11,611

(8,425)

3,186

 

 

 

 

Underlying basic earnings per share (pence) - Continuing operations

 

 

17.6

Underlying basic earnings per share (pence)

 

 

47.5

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

 

The Group has reported a profit before tax on continuing operations of £6.8m (2017: £2.5m). This is an increase on the prior year of 172%. The underlying profit before tax was £7.4m (2017: £3.2m), an increase of 131%.

 

This reflects the progress being made in the core banking business as the surplus capital held by the Group continues to be deployed. However, once again the reported results contain certain one off items that need explanation.

 

Firstly, the results contain an adjustment to the predicted future liability for the amount payable to the RAF management team. At the time of the acquisition, we anticipated that the business performance of RAF would be such that the maximum amount payable of £6.5m would be achieved in the earn out period which ends in 2020. While the business continues to perform robustly, increasing its customer loan balances by 21% in the year, this will not be sufficient to attain the levels forecast in the earn out agreement. Accordingly, the liability has been reduced by £2.6m and the corresponding amount recorded as a one off profit in the Income Statement.

 

Secondly, during the year Sir Henry Angest and Andrew Salmon resigned their positions on the board of Secure Trust Bank PLC ("STB") and the Group has no right to appoint any directors to the STB board in the future. As a result of this the Group was deemed to no longer have significant influence over the associated company and thus the shareholding is now recognised as a financial investment. This required the investment to be marked to market. Given the decline in the share price of STB over the previous years, this assessment resulted in a mark to market loss of £28.7m. The loss was reflected as a discontinued activity, partly offset by the year to date income earned from the associate.

 

Given this accounting requirement, the dividend paid on this investment in the first half of the year, prior to the change in treatment, was not recorded in the profit and loss account, but will be going forward.

 

Finally, the Group continued its policy of diversification and further developed new businesses that have now started trading. The investment in Asset Based Lending, Specialist Finance and Arbuthnot Direct lowered the reported profits by £1.6m as the start-up costs of new staff and operating systems was absorbed by the profit of the Group. These businesses should move toward a breakeven point in 2019 or early 2020 and then reach profitability in 2021.

 

The Group has negative total Basic Earnings per share ("EPS") of 134.5p (2017: positive 43.9p), including the mark to market loss arising on the de-recognition of the associated company. Adjusting for this, the continuing EPS is 38.0p (2017: 14.0p), an increase of 171% or on an underlying basis the continuing EPS is 40.3p (2017: 17.6p), an increase of 129%.

 

Total operating income earned by the Group increased by 26%, largely due to the increased levels of customer loan balances as the capital deployment continued. The net margin of this lending was 4.7% (2017: 4.5%) as declines in the core bank margins 4.1% (2017: 4.4%) were offset by the higher margins earned by the new lending businesses, which has become proportionally more significant to the overall results. Fees and commissions declined due to the lower levels of Assets Under Management resulting from the global market volatility, particularly in the second half of 2018. Also wealth planning advisory fees were lower as the wealth management proposition was realigned.

 

The Group's expense base increased by 20% as the cost of the new businesses were absorbed along with natural inflationary increases and further growth in the core banking proposition. The net increase in growth of income and expenses resulted in positive operating leverage or "Jaws" of 6%.

 

Impairment losses increased to £2.7m (2017: £0.4m), with the previous loss rate of 4 basis points increasing to 22 basis points.  The increase in the loss rate was largely as a result of the introduction of the IFRS9 accounting standard during the year. This has three changes, which will affect the results on an ongoing basis.

 

Firstly, the growth of the front book (Stage 1) requires provisions to be made on newly originated loans regardless of their performance, hence a growing loan book will require higher provisions.

 

Secondly, the standard requires future economic scenarios to be modelled and the result of these "stress tests" need to be factored into the resultant provisions.

 

Finally, the old accounting rules allowed for loans to be deemed "non accrual" whereby interest ceased to be accounted for on underperforming loans. Now we are required to gross up the accounting by continuing to record interest on these loans and at the same time increasing the offsetting provisions. This will result in higher impairment losses but no overall change to net income. 

 

Overall the return on equity on a continuing basis for the Group was 3.0% (2017: 1.1%), which continues to be distorted by the surplus capital. This return when calculated on the capital required is 5.6 (2017: 4.2%).

 

This remains below target levels as the Group continues to develop operational scale. However, given the final increase in the capital conservation buffer on 1 January 2019, the total capital requirements (including the countercyclical buffer) now stand at levels 44% higher than 3 years ago. Thus, the ROE percentage target is now accordingly lower in the mid-teen range.

 

Balance Sheet Strength

 

 

 

2018

2017

Summarised Balance Sheet

£000

£000

Assets

 

 

Loans and advances to customers

1,224,656

1,049,269

Liquid assets

802,189

610,799

Other assets

148,328

193,164

Total assets

2,175,173

1,853,232

 

 

 

Liabilities

 

 

Customer deposits

1,714,286

1,390,781

Other liabilities

264,931

226,076

Total liabilities

1,979,217

1,616,857

Equity

195,956

236,375

Total equity and liabilities

2,175,173

1,853,232

 

During the year total assets increased to £2.2bn (2017: £1.9bn), which was as a result of our ongoing growth of customer loan balances, while at the same time maintaining our conservative funding policy of relying only on retail deposits and targeting a loan to deposit ratio of between 65-75%.  Included in other assets are the Groups investment properties which total £67m and are held at fair value. The most significant of these properties is 20 King Street which is valued at £53.3m. The valuation methodology is based on a discounted cash flow model, with the most important inputs being expected rentals for prime west end office space and yield values for similar properties. These inputs were reviewed and verified by leading surveyors. The methodology has used 4% as the yield, which is in the range of observed yields of 3.75% to 4.15%. The yield gave the property value of £53.9m which was in fact £0.6m higher than the previous fair value of £53.3m. Given the subjective nature of the model, we have taken the conservative view that the valuation should remain unchanged. Further analysis of the methodologies and sensitivities that the inputs may have on the valuation can be found in Note 4 of the Report and Accounts.

 

Thus net assets of the Group now stand at £12.83 per share (2017: £15.47). The decrease is attributable to the accounting adjustments made to derecognise the associated company during the year.

 

Segmental Analysis

The segmental analysis is shown in more detail in Note 44. The Group is organised into six operating segments as disclosed below:

 

1) Private Banking - Provides traditional private banking services as well as offering financial planning and investment

    management services. This segment includes Dubai and the Tay mortgage portfolio.

2) Commercial Banking - Provides bespoke commercial banking services and tailored secured lending against property

    investments and other assets.

3) RAF - Specialist asset finance lender mainly in high value cars but also business assets.

4) All Other Divisions - All other smaller divisions and central costs in Arbuthnot Latham & Co., Ltd (Arbuthnot Commercial

    Asset-Based Lending, Arbuthnot Direct, Arbuthnot Specialist Finance, Investment properties and Central unallocated items)

5) Group Centre - ABG Group Centre management.

 

The analysis presented below, and in the business review, is before any consolidation adjustments to reverse the impact of the intergroup operating activities and also intergroup recharges and is a fair reflection of the way the Directors manage the Group.

 

 

Private Banking

 

 

 

2018

2017

Summarised Income Statement

£000

£000

Net interest income

33,763

31,528

Net fee and commission income

11,494

12,977

Operating income

45,257

44,505

Other income

2

 -  

Operating expenses - direct costs

(15,601)

(14,420)

Operating expenses - indirect costs

(21,891)

(21,848)

Impairment losses - loans and advances to customers

(1,966)

(308)

Profit before tax

5,801

7,929

 

Private Banking reported a profit before tax of £5.8m (2017: £7.9m). This is a decrease of £2.1m or 27%. This decrease is largely attributable to increased credit provisions, which rose by £1.7m, partially due to the introduction of IFRS 9.

 

Operating Income increased by 2% as increased competition in the prime loan markets caused margin compression. Also, volatility in the global markets resulted in reduced fee income from the wealth management division. Direct costs rose by nearly 10%, while allocated indirect costs were largely unchanged. The average customer yield was 4.9% (2017: 5.2%).

 

The customer loan balances of the Private Bank reduced by £7m or 1% during the year, as the competitive forces in the markets left the bank unwilling to give up returns on lending and thus not chase loan volumes at any price.

 

The deposits increased to £1,041m (2017: £955m).  The average loan to value of the private banking loans was 52% (2017: 53%).

 

Commercial Banking

 

 

 

2018

2017

Summarised Income Statement

£000

£000

Net interest income

16,384

6,720

Net fee and commission income

914

471

Operating income

17,298

7,191

Operating expenses - direct costs

(5,636)

(4,584)

Operating expenses - indirect costs

(8,898)

(4,670)

Impairment losses - loans and advances to customers

(278)

 -  

Profit / (loss) before tax

2,486

(2,063)

 

The Commercial Bank generated a profit before tax of £2.5m (2017: loss of £2.1m), an increase of £4.5m. This is due to the increase in operating income as the business benefited from a full year of income from loans that were mainly generated in the second half of 2017.

 

The increase in income was partially offset by a higher level of allocated or indirect costs.  This is a result of the increased significance of the business, but also a higher level of central costs to oversee and control the division.  The average customer loan yield was 4.0% (2017: 3.2%).

 

The customer loan book closed at £445m (2017: £305m), an increase of 46% with deposits increasing by 84% to £567m.

 

The average loan to value of the Commercial Bank loan portfolio was 50% (2017: 63%).

 

RAF

 

 

 

2018

2017

Summarised Income Statement

£000

£000

Net interest income

5,344

3,154

Net fee and commission income

137

75

Operating income

5,481

3,229

Other income

73

 -  

Operating expenses - direct costs

(3,169)

(1,690)

Impairment losses - loans and advances

(437)

(86)

Profit before tax

1,948

1,453

Renaissance Asset Finance recorded a profit before tax of £1.9m (2017: £1.5m). This represents an increase of £0.5m or 34%.

 

The purchase of RAF was completed on 28 April 2017. The 2018 results therefore include a full year for both operating income and direct costs. The annualised 2017 numbers result in the comparatives being in line. An increase in customer loans were offset by a fall in customer yields, which on average for 2018 were 9.6% compared to 9.9% in 2017.

 

The customer loan balances increased by 21% to close the year at £86m (£71m).

 

Other Divisions

 

 

 

2018

2017

Summarised Income Statement

£000

£000

Net interest income

163

 -  

Net fee and commission income

177

 -  

Operating income

340

 -  

Other income

6,683

3,870

Operating expenses - direct costs

(2,634)

(230)

Impairment losses - loans and advances to customers

(50)

 -  

Profit before tax

4,339

3,640

 

The aggregated profit before tax of other divisions was £4.3m (2017: £3.6m). 

 

Reported within the other divisions were Investment Properties £1.8m (2017: £1.9m), New Ventures cost of £1.6m (2017: £nil) and central items, which this year contains the £2.6m adjustment to the RAF management earn out liability and rental income earned on space in our Wilson Street offices.

 

Group Centre

 

 

 

2018

2017

Summarised Income Statement

£000

£000

Net interest income

(105)

51

Subordinated loan stock interest

(366)

(360)

Operating income

(471)

(309)

Other income

760

160

Operating expenses

(8,083)

(8,276)

Profit after tax

(7,794)

(8,425)

 

The Group costs reduced to £7.8m (2017: £8.4m) mainly due to £0.7m receipt of the interim dividend paid by STB in September.

 

IFRS 9

The provisions of IFRS 9 - Financial Instruments have been applied by the Group for the year ended 31 December 2018.

 

As a result of the implementation of IFRS 9, accounting for credit losses has fundamentally changed, moving from an "incurred" to an "expected" basis. This has required the development of credit loss models, which are used to estimate credit impairments by taking into account the composition of individual loan portfolios and the macro economic outlook at each reporting date. Also, the future economic environment has been "stressed" in varying scenarios to ensure the provisions are appropriate.

 

The introduction of IFRS 9 has resulted in an initial increase in impairment provisions and may increase volatility in the Group's Income Statement in the future (see Note 2(f)).

 

Under new capital regulations, the impact of IFRS 9 on regulatory capital is being phased in over a period of five years. The Group has a strong capital position and the fully loaded impact of IFRS 9 is not considered significant.

 

Capital

The Group's capital management policy is focused on optimising shareholder value over the long term. There is a clear focus on delivering organic growth and ensuring capital resources are sufficient to support planned levels of growth. The Board regularly reviews the capital position.

 

The Group's lead regulator, the Prudential Regulation Authority ("PRA"), sets and monitors capital requirements for the Group as a whole and for the individual banking operations. The lead regulator adopted the Basel III capital requirements with effect from 1 January 2014. As a result, the Group's regulatory capital requirements have been based on Basel III since 2014.

 

In accordance with the EU's Capital Requirements Directive ("CRD") and the required parameters set out in the PRA Handbook, the Individual Capital Adequacy Assessment Process ("ICAAP") is embedded in the risk management framework of the Group and is subject to ongoing updates and revisions when necessary.  However, as a minimum, the ICAAP is updated annually as part of the business planning process. The ICAAP is a process that brings together the management framework (i.e. the policies, procedures, strategies, and systems that the Group has implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital management. The Group's regulated entity is also the principal trading subsidiary as detailed in Note 43.

 

Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a "Pillar I plus" approach to determine the level of capital the Group needs to hold. This method takes the Pillar I capital formula calculations (standardised approach for credit, market and operational risk) as a starting point, and then considers whether each of the calculations deliver a sufficient capital sum adequate to cover management's anticipated risks. Where the Board considers that the Pillar I capital does not reflect the risk, an additional capital add-on in Pillar II is applied, as per the Individual Capital Guidance ("ICG") issued by the PRA.

 

The Group's regulatory capital is divided into two tiers:

• Tier 1 comprises mainly shareholders' funds and revaluation reserves, after deducting goodwill, other intangible assets and a

significant investment in a financial institution (STB). The portion of the investment representing up to 10% of ABG's Tier 1 is added back to capital resources and then risk weighted at 250%, while anything above this 10% is deducted.

• Lower Tier 2 comprises qualifying subordinated loan capital. Lower Tier 2 capital cannot exceed 50% of Tier 1 capital.

 

The ICAAP includes a summary of the capital required to mitigate the identified risks from the Group's regulated activities and the amount of capital that the Group has available. All regulated trading entities have complied with all of the externally imposed capital requirements to which they are subject.

 

 

2018

2017

Capital ratios

£000

£000

Core Tier 1 capital

197,942

236,375

Deductions

(32,658)

(77,761)

Tier 1 capital after deductions

165,284

158,614

Tier 2 capital

13,283

13,104

Total capital

178,567

171,718

 

 

 

Core Tier 1 capital ratio (Net Core Tier 1 capital/Basel III Total Risk Exposure)

15.9%

17.3%

Total Capital Ratio (Capital/Basel III Total Risk Exposure)

17.2%

18.8%

 

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, regulatory and macroeconomic.

 

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 £1,225m. The lending portfolio in AL is extended to clients, the majority of which is secured against cash, property or other assets. Credit risk is managed through the Credit Committee of AL.

 

Market risk

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

 

The Group is exposed to changes in the market value of properties. The current carrying value of Investment Property is £67.1m. Any changes in the market value of the property will be accounted for in the Income Statement and as a result could have a significant impact on the profit or loss of the Group.

 

The Group has a 15.5% interest in STB. This is currently recorded in the Group's balance sheet as a Financial Investment.  The carrying value is adjusted to market value at each balance sheet date, according to the share price of STB.  Any gains or losses that arise are 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 AL 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 has continuity of business plans in place including a disaster recovery plan.

 

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 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

Given the uncertainty that exists over Brexit with the UK due to exit from the EU, the Group has tried to anticipate the risks that it may face if an economic shock arises as a result. It has also examined how business activities may be affected if free provision of services cross borders is prohibited.

 

The Group's only overseas operation is in Dubai, so the vast majority of the Group's income and expenditure is based in the UK.  However, after leaving the EU we may no longer be able to provide financial advisory services to EU citizens in the EU. This amounts to an insignificant value of fees within the Income Statement. We have however made plans to be able to generate uninterrupted EU payments via the SEPA network.

 

Analysis is ongoing with our card service provides to ensure that data transfers made from the UK to EU and visa versa are compliant with the appropriate Data Protection Rules.

 

 

Finally, there are two significant business risks that may arise in an economic shock. Firstly, increased credit risk as borrowers are unable to continue to meet their interest obligations as they fall due. This would be alongside a significant fall in the collateral values of our security held against the loans. The average loan to value of our lending book is 53.9%, so to have any material impact this fall in collateral values would have to be severe and prolonged. In our ICAAP stress test scenarios, we are able to withstand a property value fall of 40% over an 18 month period alongside a doubling of our loss rates.

 

The second significant asset class that would be at risk in a down turn would be the Investment Properties, in particular 20 King Street. The sensitivity analysis of how a change in yields may affect the property values is shown in note 4. Any potential reduction in confidence in the West End prime office market would manifest itself in a lower valuation.

 

Board of Directors

 

Sir Henry Angest

Appointed to the Board in December 1985. Sir Henry is the Chairman and Chief Executive and is also Chairman of Arbuthnot Latham & Co., Limited. He gained extensive national and international experience as an executive of The Dow Chemical Company and Dow Banking Corporation. He was previously Chairman of Secure Trust Bank PLC and a Director until August 2018, Chairman of the Banking Committee of the London Investment Banking Association and a Director of the Institute of Directors. He is a Past Master of the Worshipful Company of International Bankers.

 

James Cobb FCA

Joined the Board in 1 November 2008 as Group Finance Director. He was also appointed Deputy Chief Executive of Arbuthnot Latham & Co., Limited in May 2018. He was previously Deputy Chief Financial Officer and Controller of Citigroup's Global Consumer Group in Europe, Middle East and Africa and qualified as a Chartered Accountant with Price Waterhouse.

 

Andrew Salmon FCA

Appointed a Director in March 2004. He joined the Company in 1997 as Head of Business Development and is also Chief Operating Officer and since July 2018 Chief Executive of Arbuthnot Latham & Co., Limited. He was a director of Secure Trust Bank PLC until August 2018. He was previously a director of Hambros Bank Limited and qualified as a Chartered Accountant with KPMG.

 

Ian Dewar FCA

Appointed a Non-Executive Director in August 2015. He is Chairman of the Audit Committee. He was a Partner for 19 years in the Financial Services Practice of KPMG from which he retired in 2012 after 32 years at the firm. He is a non-executive director of Brewin Dolphin Holdings PLC.

 

Sir Christopher Meyer

Appointed a Non-Executive Director in October 2007. He had a distinguished diplomatic career, culminating in 1997 as Ambassador to the USA. He was previously Ambassador to Germany, Press Secretary to Prime Minister John Major and from 2003 to 2009 Chairman of the Press Complaints Commission. He is also on the International Advisory Board of British American Business Inc., Distinguished Fellow of the Royal United Services Institute and Honorary Fellow of Peterhouse, Cambridge.

 

Sir Alan Yarrow FCSI (Hon)

Appointed a Non-Executive Director in June 2016. Sir Alan spent 37 years with Dresdner Kleinwort until 2009, latterly as Group Vice Chairman and Chairman of the UK Bank and then served as Chairman of the Chartered Institute for Securities & Investment until October 2018. He is Chairman of Turquoise Global Holdings Ltd and a director of Institutional Protection Services Ltd. He is also Vice President of the Royal Mencap Society, Independent Partnership Advisor to James Hambro & Partners and an advisor to Zeamo. Sir Alan is an Alderman, Magistrate and HM Lieutenant of the City of London, a member of the Court of the Fishmongers' Company, and Liveryman of several other Livery Companies. He is a member of the Takeover Appeal Board, the Advisory Board of the Commonwealth Investment & Advisory Council. Sir Alan was Lord Mayor of the City of London for the year 2014-15.

 

Nicholas Jennings FCA

Appointed Group Company Secretary in July 2018. He was previously Company Secretary of Daily Mail and General Trust plc and of Close Brothers Group plc. He is a Chartered Accountant.

 

Group Directors' Report

 

The Directors present their report for the year ended 31 December 2018.

 

Business Activities

The principal activities of the Group are banking and financial services. The business review and information about future developments, key performance indicators and principal risks are contained in the Strategic Report on pages 4 to 17.

 

Corporate Governance

The Corporate Governance report on pages 19 to 27 contains information about the Group's corporate governance arrangements, including in relation to the Board's decision to apply the UK Corporate Governance Code, published by the Financial Reporting Council ("FRC") in July 2018, in response to a change in the AIM Rules.

 

Results and Dividends

The results for the year are shown on page 37 of the financial statements. The Directors recommend the payment of a final dividend of 20p (2017: 19p) on the ordinary shares which, together with the interim dividend of 15p paid (2017: 14p) on 28 September 2018, represents total dividends for the year of 35p (2017: 33p). The final dividend, if approved by members at the 2019 Annual General Meeting ("AGM"), will be paid on 17 May 2019 to shareholders on the register at close of business on 26 April 2019.

 

Directors

The names of the Directors of the Company at the date of this report, together with biographical details, are given on page 18 of this Annual Report. All the Directors listed on those pages were directors of the Company throughout the year. Mr. P. A. Lynam and Mr. I.A. Henderson retired from the Board on 8 August and 31 August 2018 respectively.

 

Under Article 78 of the Articles of Association, Sir Henry Angest and Sir Christopher Meyer retire at the AGM and, being eligible, offer themselves for re-election. Sir Henry Angest has a service agreement terminable on twelve months' notice. Sir Christopher Meyer, an independent non-executive director, has a letter of appointment terminable on three months' notice.

 

Company Secretary

On 17 July 2018, Nicholas Jennings was appointed Secretary on the retirement of Jeremy Kaye. He can be contacted at the Company's registered office.

Viability Statement

In accordance with the UK Corporate Governance Code, the Directors confirm that there is a reasonable expectation that the Group will continue to operate and meet its liabilities, as they fall due, for the three-year period up to 31 December 2021. A period of three years has been chosen because it is the period covered by the Group's strategic planning cycle and also incorporated in the ICAAP, which forecasts key capital requirements, expected changes in capital resources and applies stress testing over that period.

 

The Directors' assessment has been made with reference to:

• the Group's current position and prospects - please see the Financial Review on pages 9 to 17;

• the Group's key principles - please see Corporate Philosophy on page 1; and

• the Group's risk management framework and associated policies, as explained in Note 6.

 

The Group's strategy and three-year plan are evaluated and approved by the Directors annually. The plan considers the Group's future projections of profitability, cash flows, capital requirements and resources, and other key financial and regulatory ratios over the period. The ICAAP is updated at least annually as part of the business planning process.

 

Going Concern

After making appropriate enquiries which assessed strategy, profitability, funding, risk management (see Note 6 to the financial statements) and capital resources (see Note 7), the directors are satisfied that the Company and the Group have adequate resources to continue in operation for the foreseeable future.  The financial statements are therefore prepared on the going concern basis.

 

Authority to Purchase Shares

Shareholders will also be asked to approve a Special Resolution renewing the authority of the Directors to make market purchases of shares not exceeding 10% of the issued share capital. The Directors will keep the position under review in order to maximise the Company's resources in the best interests of shareholders.

 

Financial Risk Management

Details of how the Group manages risk are set out in in the Strategic Report and in Note 6 to the financial statements.

 

Directors' Interests

The interests of current Directors and their families in the ordinary shares of the Company at the dates shown, together with the percentage of the current issued share capital held, were as follows:

 

Beneficial Interests

1 January 2018

31 December 2018

26 March 2019

%

Sir Henry Angest

8,200,901

8,351,401

8,351,401

56.1

J.R. Cobb

5,000

6,000

6,000

 -  

A.A. Salmon

51,699

51,699

51,699

0.3

 

Substantial Shareholders

The Company was aware at 11 March 2019 of the following substantial holdings in the ordinary shares of the Company, other than those held by one director shown above:

 

Holder

 

Ordinary Shares

%

Liontrust Asset Management

961,028

6.5

Miton Asset Management

 

662,086

4.4

Slater Investments

 

595,638

4.0

Mr. R Paston

 

529,130

3.6

M&G Investment Management

 

527,268

3.5

 

Significant Contracts

No Director, either during or at the end of the financial year, was materially interested in any contract with the Company or any of its subsidiaries or associated companies, which was significant in relation to the Group's business. At 31 December 2018, one Director had loans from Arbuthnot Latham & Co., Limited amounting to £515,000 and four directors had deposits with Arbuthnot Latham amounting to £1,884,000 all on normal commercial terms as disclosed in Note 42 to the financial statements.

 

At 1 January 2018, one Director had a loan from Secure Trust Bank PLC, which ceased to be an associated company on 8 August 2018, amounting to £409,000 and two Directors had deposits amounting to £403,000, all on normal commercial terms as disclosed in Note 42 to the financial statements.

 

Directors' Indemnities 

The Company's Articles of Association provide that, subject to the provisions of the Companies Act 2006, the Company may indemnify any Director or former Director against any liability and may purchase and maintain insurance against any liability. The Company maintained directors and officers liability insurance throughout the year.

 

Employees

The Company gives due consideration to the employment of disabled persons and is an equal opportunities employer.  It also regularly provides employees with information on matters of concern to them, consults on decisions likely to affect their interests and encourages their involvement in the performance of the Company through regular communications and in other ways.

 

Political Donations

The Company made political donations of £6,000 to the Conservative Party during the year (2017: £32,000).

 

Branches outside of the UK

During the year Arbuthnot Latham operated a branch in Dubai which is regulated by the Dubai Financial Services Authority.

 

Events after the Balance Sheet Date

There were no material post balance sheet events to report.

 

Annual General Meeting

The Company's AGM will be held on Thursday 9 May 2019. At the AGM, Shareholders will be asked to vote on a number of resolutions including the creation and bonus issue of a new class of ordinary non-voting shares and the re-appointment of KPMG LLP as the Company's auditor.

 

Disclosure of Information to the Auditor

Each of the persons who are Directors at the date of approval of this Annual Report confirm that:

• so far as each director is aware, there is no relevant audit information of which the Company's auditor is unaware; and

• they have taken all the steps they ought to have taken as a director to make themselves aware of any relevant audit

  information and to establish that the Company's auditor is aware of that information.

 

This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.

 

 

Statement of Directors' Responsibilities in Respect of the Strategic Report and the Directors' Report and the Financial Statements

The Directors are responsible for preparing the Strategic Report, the Directors' Report and the Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Parent Company Financial Statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the Group Financial Statements in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the EU and applicable law and have elected to prepare the Parent Company Financial Statements on the same basis.

 

Financial Statements

Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the Group profit or loss for that period. In preparing each of the Group and Parent Company Financial Statements, the Directors are required to:

 

•       select suitable accounting policies and then apply them consistently;

 

•       make judgements and estimates that are reasonable, relevant and reliable;

 

•       state whether they have been prepared in accordance with IFRSs as adopted by the EU;

 

•       assess the Group and Parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

 

•       use the going concern basis of accounting unless they intend either to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its Financial Statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.

 

The Directors confirm the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group and Parent Company's position, performance, business model and strategy.

 

By order of the Board

 

N D Jennings

Secretary

27 March 2019

 

Corporate Governance

 

Introduction and Overview

Arbuthnot Banking Group has a strong and effective corporate governance framework. The Board endorses the principles of openness, integrity and accountability which underlie good governance and takes into account the provisions of the UK Corporate Governance Code in so far as they are considered applicable to and appropriate for it, given its size and circumstances, and the role and overall shareholding of its majority shareholder. Moreover, the Group contains two subsidiaries authorised to undertake regulated business under the Financial Services and Markets Act 2000, one of which (Arbuthnot Latham & Co., Ltd) is regulated by the Prudential Regulatory Authority and the Financial Conduct Authority and is an authorised deposit-taking business. It in turn has a subsidiary, Renaissance Asset Finance Limited, which is regulated by the Financial Conduct Authority. Arbuthnot Latham & Co., Ltd also operates a branch in Dubai, which is regulated by the Dubai Financial Services Authority. Accordingly, the Group operates to the high standards of corporate accountability and regulatory compliance appropriate for such a business.

 

In March 2018, the AIM Rules were amended to require AIM companies to state which corporate governance code they had decided to apply, how the AIM company complies with that code, and where it departs from its chosen code an explanation of the reasons for doing so. This information was published, as required, on the Company's website by 28 September 2018 and the Company plans to review it each year as part of its annual reporting cycle. 

 

The Board decided to report against the UK Corporate Governance Code, published by the Financial Reporting Council ("FRC") in July 2018 ("the Code") with effect from 28 September 2018. This section of the Annual Report summarises how the Company applies the Code and in broad terms how it has complied with its provisions since that date, giving explanations where it has chosen not to do so.

 

The Company is led by the Board which, following changes in August 2018, comprises six members: the executive Chairman, two other executive directors, Andrew Salmon and James Cobb, and three independent non-executive directors who thereby constitute half of the Board in line with the Code. The Board sets the long term focus and customer oriented culture of the Group. The responsibilities of Sir Henry Angest as Chairman include leading the Board, ensuring its effectiveness in all aspects of its role, ensuring effective communication with shareholders, setting the Board's agenda and ensuring that all Directors are encouraged to participate fully in the activities and decision-making process of the Board.

 

In 2016 an independent Board Effectiveness Review was carried out by an external consultant. In October 2018 it was determined to carry out the annual Board Effectiveness Review internally. The evaluation took the form of a confidential questionnaire which assessed the performance of the Board and its Committees.  The questions were set to explore the themes developed the previous year, including Board effectiveness, Board composition, Board dynamics, alignment of the Board and executive team, interaction with major shareholders, induction, performance and training, Board Committees and the Secretariat.  The feedback was collated by the Company Secretary and discussed by the Board in November 2018. The responses were positive, confirming that the Board was of the view that it receives the correct level of insight into and oversight of the Company, both directly to it and in terms of management information and oral updates provided during meetings. Directors also agreed that the Arbuthnot culture set out in the Arbuthnot Principles and Values manifests itself at Board level and in the external view of the Group as a whole.

 

The Board

The Board met regularly throughout the year, holding six scheduled meetings as well as a two-day off-site strategy meeting. Substantive agenda items have briefing papers, which are circulated in a timely manner before each meeting. The Board ensures that it is supplied with all the information that it requires and requests in a form and of a quality to fulfil its duties.

 

In addition to overseeing the management of the Group, the Board has determined certain items which are reserved for decision by itself. These matters include approval of the Group's long-term objectives and commercial strategy, ensuring a sound system of internal control, risk management strategy, approval of major investments, acquisitions and disposals, any changes to capital structure and the overall review of corporate governance.

 

The Company Secretary is responsible for ensuring that the Board processes and procedures are appropriately followed and support effective decision making. All directors have access to the Company Secretary's advice and services. There is an agreed procedure for directors to obtain independent professional advice in the course of their duties, if necessary, at the Company's expense.

 

All directors receive induction training upon joining the Board, with individual AIM training provided by the Company's Nominated Adviser, regulatory and compliance training provided by the Group Head of Compliance or an external firm of lawyers, risk management training (including that in relation to the ICAAP and ILAAP) with an overview of credit and its associated risks and mitigation by the Head of Credit Risk in Arbuthnot Latham.

 

Overview of Compliance with the FRC Code, together with Exceptions

The Board focuses not only on the provisions of the Code but its principles, ensuring as follows:

•       The Company's purpose, values and strategy as a prudently managed organisation align with its culture, with a focus on fairness and long-term shareholder returns.

•       The Board has an appropriate combination of executive and non-executive directors, who have both requisite knowledge and understanding of the business and the time to commit to their specific roles.

•       The Board comprises directors with the necessary combination of skills to ensure the effective discharge of its obligations, with an annual evaluation of the capability and effectiveness of each director as well as the Board as a composite whole; appropriate succession plans are also in place and reviewed annually, or more frequently if appropriate.

•       The Board and Audit Committee monitor the procedures in place to ensure the independence and effectiveness of both external and internal auditors, and the risk governance framework of the Company, with all material matters highlighted to the relevant forum (Board/Committee).

•       Remuneration policies and practices are designed to support strategy and promote long-term sustainable success, with a Remuneration Committee in place to oversee director and senior management pay.

 

In respect of the Code's specific provisions, an annual review is carried out, comparing the Company's governance arrangements and practices against them. Any divergences are noted, with relevant rationale considered carefully to determine whether it is appropriate. Consideration is also given to guidance issued, which may require a review of the relevant reasoning intra-year.

In line with the FRC's Guidance on Board Effectiveness, the Board additionally takes into account its suggestions of good practice when applying the Code focusing on the five key principles specified in the Code.

 

Where the Company's governance does not completely align with Code, it is generally as a result of the role of its overall majority shareholder, itself adding a level of protection to long-term shareholder interests, and it has had no negative impact on the Company.

 

All divergences from the Code, with an explanation of the reasons for doing so are set out below:

 

Provision 3 - The majority shareholder is Chairman and Chief Executive of ABG. Engagement with other major shareholders is carried out as appropriate by the Chairman, the Group Chief Operating Officer or the Group Finance Director. There has been no requirement to date to consult with them on matters delegated to Board committees, but if appropriate/when requested, this would be arranged.

 

Provision 5 - The Board has regard to the interests of all its key stakeholders in its decision making. The Company has fewer than 20 employees, all of whom have direct access to Board members. As such, it has not been deemed necessary to appoint an employee representative to the Board, nor a formal workforce advisory panel, nor a designated non-executive Director.

 

Provision 9 - Sir Henry Angest carries out the role of Chairman and Chief Executive, given his long-term interest as majority shareholder, itself aligning with the interests of other shareholders. The Group Chief Operating Officer and the Group Finance Director provide a strong, independent counterbalance, ensuring challenge and independence from a business perspective, against the stakeholder focus of the Chairman carrying out his Chairman's role. The Company follows the US model that is very successful in ensuring commercial success with strong corporate governance and stakeholder awareness, having a shared Chairman and CEO, with a separate, empowered, Chief Operating Officer.  

 

Provision 10 ¬ The Board considers Sir Christopher Meyer to be independent, notwithstanding his serving more than nine years, since his views and any challenge to executive management remain firmly independent.

 

Provision 12 - The Board has not appointed a Senior Independent Director, as major shareholders talk openly with the Chairman, the Group Chief Operating Officer and the Group Finance Director on request.

 

Provision 14 - Attendance at meetings is not reported as, should a Director be unable to attend a meeting, that Director receives relevant papers in the normal manner and relays any comments in advance of the meeting to the Chairman. The same process applies in respect of the Board Committees.

 

Provision 18 - For the purposes of stability and continuity, the Company continues to offer Directors for re-election on a three-year rolling basis in accordance with the Company's Articles of Association and company law. The Directors seeking re-election at the AGM are Sir Henry Angest and Sir Christopher Meyer, who have served on the Board for 33 years and 11 years respectively. The contribution of Sir Henry Angest, who beneficially owns more than 50% of the issued share capital, has been invaluable in the successful development of the Company. Sir Christopher Meyer's wide-ranging experience including as a diplomat at the most senior level has provided an important independent measure of challenge to executive management. Accordingly, the Board fully supports the resolutions for their reappointment.

 

Provision 19 - Sir Henry Angest's role as Chairman has extended over nine years and is expected to continue indefinitely, given his key role as majority shareholder both in protecting the stability of his and other shareholder interests and in overseeing a balanced and risk-managed approach to growing the business with a view to the longer-term.

 

Provision 32 - Sir Henry Angest is Chairman of the Remuneration Committee, as is appropriate in the context of his majority shareholding.  

 

Internal Control and Financial Reporting

The Board of directors has overall responsibility for the Group's system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate risk of failure to achieve business objectives and can only provide reasonable, but not absolute, assurance against the risk of material misstatement or loss.

 

The Directors and senior management of the Group review and approve the Group's Risk Appetite Statement and Risk Management Policy. Risk appetite sets out the Board's attitude to risk and internal control and includes qualitative and quantitative measures which are reported to every Board meeting; the Risk Management Policy details how risks are monitored and controlled within the Bank. Key business risks and emerging risks are continuously identified, evaluated and managed by means of limits and controls set by and managed at an operational level by AL management and governed through Arbuthnot Latham Committees.

 

Significant risks identified in connection with the development of new activities are subject to consideration by the Board. There are well-established budgeting procedures in place and reports are presented regularly to the Board detailing the results, in relation to Arbuthnot Latham, of each principal business unit, variances against budget and prior year, and other performance data. The Board receives regular reports on any risk matters that need to be brought to its attention, enabling it to assess the Group's emerging and principal risks.

 

Shareholder Communications

The Company maintains communications via one to one meetings as appropriate with its major shareholders and makes full use of the AGM to communicate with shareholders. The Company aims to present a balanced and understandable assessment in all its reports to shareholders, its regulators, other stakeholders and the wider public. Key announcements and other information can be found at www.arbuthnotgroup.com.

 

Board Committees

The Board has established Audit, Nomination, Remuneration and Donations Committees, each with formally delegated duties and responsibilities and with written terms of reference, which require consideration of the committee's effectiveness. The Board keeps the governance arrangements under review. Further information in relation to these committees is set out below. The Board maintains direct responsibility for issues of Risk without the need for its own Risk Committee, since responsibility for large lending proposals is a direct responsibility of its subsidiary, Arbuthnot Latham.

 

Audit Committee

Membership and meetings

Membership of the Audit Committee is restricted to non-executive Directors and comprises Ian Dewar (as Chairman), Sir Christopher Meyer and Sir Alan Yarrow. The Company Secretary acts as its Secretary. The Committee met four times during the year.

 

The Audit Committee oversees, on behalf of the Board, financial reporting, the appropriateness and effectiveness of systems and controls, the work of Internal Audit and the arrangements for and effectiveness of the external audit. The ultimate responsibility for reviewing and approving the Annual Report and Accounts and the Interim Report lies with the Board. The Audit Committee also reviews whistleblowing arrangements for employees to raise concerns in confidence.

 

External Audit

The Senior Statutory Auditor of the external auditors, KPMG LLP, changed in April 2018, following a five-year association with the Company. The Committee assesses the independence and objectivity, qualifications and effectiveness of the external auditors on an annual basis as well as making a recommendation on their reappointment to the Board. The Committee received a report showing the level of non-audit services provided by the external auditors during the year and members were satisfied that the extent and nature of these did not compromise auditor independence. The Committee has concluded that KPMG remain independent and that their audit is effective.

KPMG has held office since August 2009.  Consequently, the Committee is required by the EU Audit Regulation 2014 to conduct a competitive audit tender in 2019. The Committee will oversee the tender process and is committed to ensure a fair and transparent process is put in place including a clearly articulated set of selection criteria agreed by the Committee in advance. The tender is not expected to occur before the AGM to be held on 9 May 2019 at which a resolution to re-appoint KPMG LLP as the Company's auditor will be proposed. 

 

Activity in 2018

 

Internal Audit

On behalf of the Board, the Audit Committee monitors the effectiveness of systems and controls. To this end, Internal Audit provides the Audit Committee and the Board with detailed independent and objective assurance on the effectiveness of governance, risk management and internal controls. Since Arbuthnot Latham established its own Audit Committee, the role of the Group Audit Committee has been mainly supervisory in relation to internal audit matters, though it receives items of material note deriving from Arbuthnot Latham's internal audits, including an assessment of culture which forms part of every internal audit.

 

The Audit Committee approves the Internal Audit risk based programme of work and monitors progress against the annual plan. The Committee reviews Internal Audit resources and the arrangements that: ensure Internal Audit faces no restrictions or limitations to conducting its work; that it continues to have unrestricted access to all personnel and information; and that Internal Audit remains objective and independent from business management.

 

The Head of Internal Audit provides reports on the outcomes of Internal Audit work directly to the Committee and the Committee monitors progress against actions identified in these reports.

 

The Committee received a Self-Assessment report on Internal Audit in September 2018 and it is satisfied with Internal Audit arrangements during 2018.

 

Integrity of Financial Statements and oversight of external audit

The Committee:

 

•       Received and agreed the Audit Plan prepared by the external auditors;

•       Considered and formed a conclusion on the critical judgements underpinning the Financial Statements, as presented in papers prepared by management. In respect of all of these critical judgements, the Committee concluded that the treatment in the Financial Statements was appropriate.

•       Received reports from the external auditors on the matters arising from their work, the key issues and conclusions they had reached;

•       The Chairman of the Committee attended, as an observer, Audit Committee meetings of Arbuthnot Latham, the Company's operating subsidiary;

•       The Committee monitored the changes to financial reporting requirements which came in effect on 1 January 2018, principally IFRS 9;

•       In addition, it considered changes to financial reporting requirements that are not yet effective but that are likely to affect the reported results or financial position of the Group and Company in future. The most notable change is IFRS 16, Leases, where the Committee has reviewed Management's methodology, and is satisfied with the disclosures as set out in Note 3.27.

 

The reports from the external auditors include details of internal control matters that they have identified as part of the annual statutory financial statements audit. Certain aspects of the system of internal control are also subject to regulatory supervision, the results of which are monitored closely by the Committee and the Board. In addition, the Committee receives by exception reports on the ICAAP and ILAAP which are key control documents that receive detailed consideration by the board of Arbuthnot Latham.

 

The Committee approved the terms of engagement and made a recommendation to the Board on the remuneration to be paid to the external auditors in respect of their audit services.

 

Significant areas of judgement

The Audit Committee considered the following significant issues and accounting judgements in relation to the Financial Statements:

 

Impairment of loans and advances to customers

The Committee reviewed presentations from management detailing the provisioning methodology across the Group as part of the full year results process. The Committee considered and challenged the provisioning methodology applied by management, including timing of cash flows, valuation and recoverability of supporting collateral on impaired assets. The Committee concluded that the impairment provisions, including management's judgements, were appropriate.

 

The charge for impaired loans and advances totalled £2.7m for the year ended 31 December 2018. The disclosures relating to impairment provisions are set out in Note 4.1(a) to the financial statements.

 

Valuation of Investment Properties

The three investment properties are held at fair value. The Committee reviewed and challenged the key assumptions used in the valuation of the properties including yields, rental income and refurbishment costs.

 

As at 31 December 2018, the Group's property investment portfolio totalled £67.1m, as detailed in Note 31. The disclosures relating to the fair value of investment properties are set out in Note 4.1(c) to the financial statements.

 

Effective Interest rate

Interest earned on loans and receivables is recognised using the Effective Interest Rate ("EIR") method. The EIR is calculated on the initial recognition of a loan through a discounted cash flow model that incorporates fees, costs and other premiums or discounts. There have been no changes to the EIR accounting policies during the year.

 

The Committee considered and challenged the EIR methodology applied by management and specifically in relation to acquired loan portfolios. The Committee considered management assumptions including expected future customer behaviours and concluded that the EIR methodology was appropriate as at 31 December 2018.

 

The disclosures relating to EIR are set out in Note 4.1(b) to the financial statements.

 

Going Concern and Viability Statement

The financial statements are prepared on the basis that the Group and Company are each a going concern. The Audit Committee reviewed management's assessment and is satisfied that the going concern basis and assessment of the Group's longer-term viability is appropriate.

 

Other Committee activities

In November 2018, Committee members contributed to the review of the Committee's effectiveness as part of its evaluation by the Board. The review did not highlight any material concerns.

 

On behalf of the Board, the Committee reviewed the financial statements as a whole in order to assess whether they were fair, balanced and understandable. The Committee discussed and challenged the balance and fairness of the overall report with the executive directors and also considered the views of the external auditor. The Committee was satisfied that the Annual Report could be regarded as fair, balanced and understandable and proposed that the Board approve the Annual Report in that respect.

 

In March 2019 the Committee met separately with each of the Head of Internal Audit and the Senior Statutory Auditor without any other executives present. There were no issues or concerns raised by them in regard to discharging their responsibilities.

 

Nomination Committee

Membership and meetings

The Nomination Committee is chaired by Sir Henry Angest and its other members are Sir Christopher Meyer and Sir Alan Yarrow.  The Head of Corporate Governance acts as its Secretary. The Committee met once during the year. It is required to meet formally at least once per year and otherwise as required.

 

The Nomination Committee assists the Board in discharging its responsibilities relating to the composition of the Board. The Nomination Committee is responsible for and evaluates on a regular basis the balance of skills, experience, independence and knowledge on the Board, its size, structure and composition, retirements and appointments of additional and replacement directors and will make appropriate recommendations to the Board on such matters. The Nomination Committee also considers succession planning, taking into account the skills and expertise that will be needed on and beneficial to the Board in the future.

 

Activity in 2018

The Committee reviewed policies on Board Diversity, Board Suitability and Board Training and Development.  It also assessed and confirmed the collective and individual suitability of Board members. The contribution of Sir Henry Angest remains invaluable in the successful development of the Company. As regards the non-executive Directors' skill sets, Ian Dewar, with a wealth of experience as a partner in a major accounting firm, has successfully chaired the Audit Committee. Sir Christopher Meyer's wide-ranging experience including as a diplomat at the highest level has provided an important independent measure of challenge to executive management. The Board has benefitted from Sir Alan Yarrow's wise counsel, challenge to management and many years' experience in the City of London.  

 

In November 2018, the Committee confirmed that the Board's current composition provides the Company with a balanced, knowledgeable, diverse and informed group of directors, bringing strategic acumen, foresight and challenge to the executive, commensurate with the size of the business.  The Committee reviewed succession planning and agreed that there was a sensible and strong plan in place. In terms of any new hires, it noted that account would be taken of provisions in the Board Diversity Policy.  The Committee also agreed that it continued to operate effectively and, as such, no changes to its membership, composition or activities were proposed to the Board.

 

Remuneration Committee

Membership and meetings

Membership is detailed in the Remuneration Report on page 28. The Committee met twice during the year. It is required to meet formally at least once per year and otherwise as required.

 

The Remuneration Committee assists the Board in determining its responsibilities in relation to remuneration including, inter alia, in relation to the Company's policy on executive remuneration determining, the individual remuneration and benefits package of each of the Executive Directors and the fees for Non-Executive Directors.

 

The Committee also deals with remuneration-related issues under the Prudential Regulation Authority's Remuneration Code applicable to the Company.  The Remuneration Report on pages 28 and 29 gives further information and details of each Director's remuneration.

 

Donations Committee

Membership and meetings

The Donations Committee is chaired by Sir Henry Angest and its other members are Sir Christopher Meyer and Sir Alan Yarrow. The Committee met once during the year.

 

The Committee considers any political donation or expenditure as defined within sections 366 and 367 of the Companies Act 2006.

 

Remuneration Report

 

Remuneration Committee

Membership of the Remuneration Committee is limited to non-executive directors together with Sir Henry Angest as Chairman.  The present members of the Committee are Sir Henry Angest, Sir Christopher Meyer and Sir Alan Yarrow. The Head of Corporate Governance acts as its Secretary. The Committee met twice during the year.

 

The Committee has responsibility for producing recommendations on the overall remuneration policy for directors for review by the Board and for setting the remuneration of individual directors.  Members of the Committee do not vote on their own remuneration.

 

Remuneration Policy

The Remuneration Committee determines the remuneration of individual directors having regard to the size and nature of the business; the importance of attracting, retaining and motivating management of the appropriate calibre without paying more than is necessary for this purpose; remuneration data for comparable positions, in particular the rising remuneration packages at challenger banks; the need to align the interests of executives with those of shareholders; and an appropriate balance between current remuneration and longer-term performance-related rewards. The remuneration package can comprise a combination of basic annual salary and benefits (including pension), a discretionary annual bonus award related to the Committee's assessment of the contribution made by the executive during the year and longer-term incentives, including executive share options.  Pension benefits take the form of annual contributions paid by the Company to individual money purchase schemes.  The Remuneration Committee reviews salary levels each year based on the performance of the Group during the preceding financial period.  This review does not necessarily lead to increases in salary levels.  For the purposes of the FCA Remuneration Code, all the provisions of which have been implemented, the Group and its subsidiaries are all considered to be Tier 3 institutions.

 

Activity in 2018

The Remuneration Committee undertook its regular activities during the year including reviewing the operation of the Remuneration Policy, having regard to the performance of the Company during the year, with particular regard to the level of discretionary bonus awarded and the level of inflation impacting on salaries.

 

Directors' Service Contracts

Sir Henry Angest, Mr. Salmon and Mr. Cobb each have service contracts terminable at any time on 12 months' notice in writing by either party.

 

Long Term Incentive Schemes

Grants were made to three Directors on 14 June 2016 under Phantom Option Scheme introduced on that date, to acquire ordinary 1p shares in the Company at 1591p exercisable in respect of 50% on or after 15 June 2019 and in respect of the remaining 50% on or after 15 June 2021 when a cash payment would be made equal to any increase in market value. 

 

Under this Scheme, Mr. Salmon was granted a phantom option to acquire 200,000 ordinary 1p shares in the Company, which remained outstanding at 31 December 2018. Mr. Cobb was granted a phantom option to acquire 100,000 ordinary 1p shares in the Company, which remained outstanding at 31 December 2018. The phantom option granted to Mr. Henderson to acquire 100,000 ordinary 1p shares in the Company lapsed on 31 August 2018 when he left the Company. The fair value of the remaining options at the grant date was £1m.

 

Directors' Emoluments

 

 

 

2018

2017

 

£000

£000

Fees (including benefits in kind)

205

205

Salary payments (including benefits in kind)

4,387

4,533

Pension contributions

93

105

 

4,685

4,843

 

 

 

 

 

 

 

Total

Total

 

Salary

Bonus

Benefits

Pension

Fees

2018

2017

 

£000

£000

£000

£000

£000

£000

£000

Sir Henry Angest

1,200

 -  

79

 -  

 -  

1,279

1,289

JR Cobb

625

300

17

35

 -  

977

852

IA Dewar

 -  

 -  

 -  

 -  

75

75

75

IA Henderson (to 31/08/2018)

333

 -  

11

23

 -  

367

840

Sir Christopher Meyer

 -  

 -  

 -  

 -  

60

60

60

AA Salmon

1,200

600

22

35

 -  

1,857

1,657

Sir Alan Yarrow

 -  

 -  

 -  

 -  

70

70

70

 

3,358

900

129

93

205

4,685

4,843

 

Details of any shares or options held by directors are presented on page 20 and 122.

 

The emoluments of the Chairman were £1,279,000 (2017: £1,289,000). The emoluments of the highest paid director were £1,857,000 (2017: £1,657,000) including pension contributions of £35,000 (2017: £35,000).  

 

Secure Trust Bank was paid a fee of £36,000 up to 8 August 2018 (2017: £60,000) for the services of Mr. Lynam rendered as a non-executive director.

 

Retirement benefits are accruing under money purchase schemes for three directors who served during 2018 (2017: four directors).

 

Independent Auditor's Report

 

The Independent Auditor's report can be viewed at the following link: 

 

http://www.rns-pdf.londonstockexchange.com/rns/2487U_1-2019-3-27.pdf

 

 

Company statement of financial position

 

 

 

 

At 31 December

 

 

 

2018

2017

 

Note

 

£000

£000

ASSETS

 

 

 

 

Loans and advances to banks

18

 

17,008

36,103

Financial investments

25

 

19,313

140

Current tax asset

 

 

52

 -  

Deferred tax asset

26

 

113

641

Intangible assets

28

 

6

 -  

Property, plant and equipment

30

 

208

157

Other assets

24

 

42

199

Interests in associates

27

 

 -  

5,056

Interests in subsidiaries

43

 

134,614

97,802

Total assets

 

 

171,356

140,098

EQUITY AND LIABILITIES

 

 

 

 

Equity

 

 

 

 

Share capital

37

 

153

153

Other reserves

38

 

(8,133)

(1,111)

Retained earnings

38

 

162,729

124,659

Total equity

 

 

154,749

123,701

LIABILITIES

 

 

 

 

Current tax liability

 

 

 -  

152

Other liabilities

34

 

3,324

3,141

Debt securities in issue

35

 

13,283

13,104

Total liabilities

 

 

16,607

16,397

Total equity and liabilities

 

 

171,356

140,098

 

 

 

 

 

The Company has elected to take the exemption under section 408 of the Companies Act 2006 not to present the Parent Company profit and loss account. The profit for the Parent Company for the year is presented in the Statement of Changes in Equity.

 

 

Consolidated statement of changes in equity

 


Attributable to equity holders of the Group



Share capital

Capital redemption reserve

Fair value reserve*

Treasury shares

Retained earnings

Total


£000

£000

£000

£000

£000

£000

Balance at 31 December 2017

153

20

162

(1,131)

237,171

236,375

IFRS 9 adjustment net of tax

 -  

 -  

 -  

 -  

(2,090)

(2,090)

Balance at 1 January 2018

153

20

162

(1,131)

235,081

234,285








Total comprehensive income for the period







Loss for 2018

 -  

 -  

 -  

 -  

(20,033)

(20,033)








Other comprehensive income, net of tax







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

 -  

 -  

(13,893)

 -  

 -  

(13,893)

Tax on other comprehensive income

 -  

 -  

(26)

 -  

 -  

(26)

Total other comprehensive income

 -  

 -  

(13,919)

 -  

 -  

(13,919)

Total comprehensive income for the period

 -  

 -  

(13,919)

 -  

(20,033)

(33,952)








Transactions with owners, recorded directly in equity







Contributions by and distributions to owners







Unwind Employee Trust

 -  

 -  

 -  

 -  

685

685

Sale of Secure Trust Bank shares

 -  

 -  

1,588

 -  

(1,588)

 -  

Final dividend relating to 2017

 -  

 -  

 -  

 -  

(2,829)

(2,829)

Interim dividend relating to 2018

 -  

 -  

 -  

 -  

(2,233)

(2,233)

Total contributions by and distributions to owners

 -  

 -  

1,588

 -  

(5,965)

(4,377)

Balance at 31 December 2018

153

20

(12,169)

(1,131)

209,083

195,956

*    The Available-for-sale reserve in 2017 was reclassified to the Fair value reserve as from 1 January 2018 with the introduction of IFRS 9.

** Mainly relate to movement in STB share price. There is currently no tax implications to the movement as the shareholding still qualifies for significant shareholding exemption.


 


Attributable to equity holders of the Group



Share capital

Capital redemption reserve

Available-for-sale reserve

Treasury shares

Retained earnings

Total


£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 2017

 -  

 -  

 -  

 -  

6,523

6,523








Other comprehensive income, net of tax







Available-for-sale reserve - net change in fair value

 -  

 -  

128

 -  

 -  

128

Available-for-sale reserve - Associate - net change in fair value

 -  

 -  

389

 -  

 -  

389

Tax on other comprehensive income

 -  

 -  

(104)

 -  

 -  

(104)

Total other comprehensive income

 -  

 -  

413

 -  

 -  

413

Total comprehensive income for the period

 -  

 -  

413

 -  

6,523

6,936








Transactions with owners, recorded directly in equity







Contributions by and distributions to owners







Equity settled share based payment transactions

 -  

 -  

 -  

 -  

(155)

(155)

Final dividend relating to 2016

 -  

 -  

 -  

 -  

(2,680)

(2,680)

Interim dividend relating to 2017

 -  

 -  

 -  

 -  

(2,084)

(2,084)

Total contributions by and distributions to owners

 -  

 -  

 -  

 -  

(4,919)

(4,919)

Balance at 31 December 2017

153

20

162

(1,131)

237,171

236,375


 

Company statement of changes in equity

 


Attributable to equity holders of the Company



Share capital

Capital redemption reserve

Fair value/ available-for-sale reserve*

Treasury shares

Retained earnings

Total


£000

£000

£000

£000

£000

£000

Balance at 1 January 2017

153

20

 -  

(1,131)

133,847

132,889








Total comprehensive income for the period







Loss for 2017

 -  

 -  

 -  

 -  

(4,269)

(4,269)








Other comprehensive income, net of income tax

-

-

-

-

-

-

Total comprehensive income for the period

 -  

 -  

 -  

 -  

(4,269)

(4,269)















Transactions with owners, recorded directly in equity







Contributions by and distributions to owners







Equity settled share based payment transactions

 -  

 -  

 -  

 -  

(155)

(155)

Final dividend relating to 2016

 -  

 -  

 -  

 -  

(2,680)

(2,680)

Interim dividend relating to 2017

 -  

 -  

 -  

 -  

(2,084)

(2,084)

Total contributions by and distributions to owners

 -  

 -  

 -  

 -  

(4,919)

(4,919)

Balance at 31 December 2017

153

20

 -  

(1,131)

124,659

123,701








Total comprehensive income for the period







Profit for 2018

 -  

 -  

 -  

 -  

46,049

46,049








Other comprehensive income, net of income tax

-

-

-

-

-

-

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

 -  

 -  

(10,624)

 -  

 -  

(10,624)

Total other comprehensive income

 -  

 -  

(10,624)

 -  

 -  

(10,624)

Total comprehensive income for the period

 -  

 -  

(10,624)

 -  

46,049

35,425








Transactions with owners, recorded directly in equity







Contributions by and distributions to owners







Unwind Employee Trust

 -  

 -  

 -  

 -  

685

685

Sale of Secure Trust Bank shares

 -  

 -  

1,588

 -  

(1,588)

 -  

Transfer of Secure Trust Bank shares to AL

 -  

 -  

2,014

 -  

(2,014)

 -  

Final dividend relating to 2017

 -  

 -  

 -  

 -  

(2,829)

(2,829)

Interim dividend relating to 2018

 -  

 -  

 -  

 -  

(2,233)

(2,233)

Total contributions by and distributions to owners

 -  

 -  

3,602

 -  

(7,979)

(4,377)

Balance at 31 December 2018

153

20

(7,022)

(1,131)

162,729

154,749

*   The Available-for-sale reserve in 2017 was reclassified to the Fair value reserve as from 1 January 2018 with the introduction of IFRS 9.

** Mainly relate to movement in STB share price. There is currently no tax implications to the movement as the shareholding still qualifies for significant shareholding exemption.


 

Consolidated statement of cash flows

 




Year ended 31 December

Year ended 31 December




2018

2017


Note


£000

£000

Cash flows from operating activities





Interest received



73,879

43,389

Interest paid



(8,290)

(6,093)

Fees and commissions received



13,669

8,682

Other income



6,588

3,033

Cash payments to employees and suppliers



(84,216)

(47,600)

Taxation paid



(1,217)

(379)

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



413

1,032

Changes in operating assets and liabilities:





 - net increase in derivative financial instruments



(38)

(331)

 - net increase in loans and advances to customers



(180,600)

(233,175)

 - net decrease/(increase) in other assets



4,758

(7,952)

 - net increase in amounts due to customers



323,505

392,937

 - net increase/(decrease) in other liabilities



2,310

(843)

Net cash inflow from operating activities



150,348

151,668

Cash flows from investing activities





Disposal of financial investments



9,301

 -  

Purchase of computer software

28


(2,294)

(2,641)

Purchase of property, plant and equipment

30


(2,482)

(666)

Proceeds from sale of property, plant and equipment

30


97

 -  

Purchase of investment property

31


(879)

(6,421)

Disposal of Tarn Crag (Holdings) Limited

27


 -  

900

Purchase of Renaissance Asset Finance Limited

29


 -  

(2,072)

Cash balance acquired through Renaissance Asset Finance Limited acquisition

29


 -  

2,815

Purchase of debt securities



(467,772)

(211,080)

Proceeds from redemption of debt securities



356,883

90,410

Net cash outflow from investing activities



(107,146)

(128,755)

Cash flows from financing activities





Increase/(decrease) in borrowings



37,578

132,928

Dividends paid



(5,062)

(4,764)

Net cash inflow/(outflow) from financing activities



32,516

128,164

Net increase in cash and cash equivalents



75,718

151,077

Cash and cash equivalents at 1 January



383,780

232,703

Cash and cash equivalents at 31 December

41


459,498

383,780


 

Company statement of cash flows

 




Year ended 31 December

Year ended 31 December




2018

2017


Note


£000

£000

Cash flows from operating activities





Dividends received from subsidiaries



3,056

2,618

Interest received



84

202

Interest paid



(559)

(513)

Other income



52,260

1,643

Cash payments to employees and suppliers



(50,316)

(7,977)

Taxation paid



(402)

 -  

Cash flows from operating profit/(loss) before changes in operating assets and liabilities



4,123

(4,027)

Changes in operating assets and liabilities:





 - net decrease/(increase) in group company balances



155

(1,788)

 - net (increase)/decrease in other assets



(1)

690

 - net increase in other liabilities



187

120

Net cash inflow/(outflow) from operating activities



4,464

(5,005)

Cash flows from investing activities





Increase investment in subsidiary

43


(18,500)

(43,200)

Disposal of property, plant and equipment



97

 -  

Purchase of property, plant and equipment

30


(94)

 -  

Net cash (outflow)/inflow from investing activities



(18,497)

(43,200)

Cash flows from financing activities





Dividends paid



(5,062)

(4,764)

Net cash used in financing activities



(5,062)

(4,764)

Net decrease in cash and cash equivalents



(19,095)

(52,969)

Cash and cash equivalents at 1 January



36,103

89,072

Cash and cash equivalents at 31 December

41


17,008

36,103


 

Notes to the Consolidated Financial Statements

 

1.  Reporting entity

Arbuthnot Banking Group PLC is a company domiciled in the United Kingdom. The registered address of Arbuthnot Banking Group PLC is 7 Wilson Street, London, EC2M 2SN. The consolidated financial statements of Arbuthnot Banking Group PLC as at and for the year ended 31 December 2018 comprise Arbuthnot Banking Group PLC and its subsidiaries (together referred to as the "Group" and individually as "subsidiaries"). The Company is the holding company of a group primarily involved in banking and financial services.

 

2.  Basis of preparation

(a) Statement of compliance

The Group's consolidated financial statements and the Company's financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs as adopted and endorsed by the EU) and the Companies Act 2006 applicable to companies reporting under IFRS. 

 

The consolidated financial statements were authorised for issue by the Board of Directors on 27 March 2019.

 

(b) Basis of measurement

The consolidated and company financial statements have been prepared under the historical cost convention, as modified by investment property and derivatives, financial assets and financial liabilities at fair value through profit or loss or other comprehensive income.

 

(c) Functional and presentational currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ("the functional currency"). The consolidated financial statements are presented in Pounds Sterling, which is the Company's functional and the Group's presentational currency.

 

(d) Use of estimates and judgements

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.

 

(e) Going concern

After making appropriate enquiries which assessed strategy, profitability, funding, risk management (see Note 6) and capital resources (see Note 7), the directors are satisfied that the Company and the Group have adequate resources to continue in operation for the foreseeable future. The financial statements are therefore prepared on the going concern basis.

 

(f) Accounting developments

The accounting policies adopted are consistent with those of the previous financial year, except for the following:

 

IFRS 9 'Financial Instruments'

IFRS 9 Financial Instruments is effective for annual periods beginning on or after 1 January 2018. It replaces IAS 39 Financial Instruments: Recognition and Measurement. The Group has adopted IFRS 9 on 1 January 2018. This results in changes in accounting policies previously recognised in the financial statements.

 

In accordance with the transitional arrangements of IFRS 9 comparative figures have not been restated. However, as required by the transitional arrangements if prior periods are not restated, any difference arising between IAS 39 carrying amounts and IFRS 9 carrying amounts at 1 January 2018 are recognised in opening retained earnings (or in other comprehensive income, as applicable) at 1 January 2018.

 

IFRS 9 introduces key changes in the following areas:

•       Classification and measurement, that is based on the business model and contractual cash flow characteristics of the financial instruments.

•       Impairment, introducing an expected credit loss model using forward looking information which replaces the incurred loss model. The expected loss model introduces a three stage approach to impairment.

 

a) Classification and measurement

The Group classifies financial assets into one of the three following categories:

•       Amortised cost, financial assets held in a business model in order to collect contractual cash flows, where the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest ("SPPI") on the principal amount outstanding.

•       Fair value through other comprehensive income ("FVOCI"), financial assets held in a business model which collects contractual cash flows and sells financial assets where the contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest ("SPPI") on the principal amount outstanding. The Group currently has no financial assets within this business model.

•       Fair value through profit or loss ("FVPL), assets not measured at amortised cost or FVOCI. There is an option to make an irrevocable election on initial recognition for non-traded equity investments to be measured at FVOCI, in which case dividends are recognised in profit or loss, but gains or losses are not reclassified to profit or loss upon de-recognition, and impairment is not recognised in the income statement. The election can be made on an instrument by instrument basis.

 

IFRS 9 has not changed the classification or measurement of the Groups financial liabilities.

 

(b) Impairment

IFRS 9 replaced the IAS 39 "incurred loss" impairment recognition framework with a three stage expected credit loss approach ("ECL"). The three stages under IFRS 9 are as follows:

•       Stage 1 - entities are required to recognise a 12 month ECL allowance on initial recognition.

•       Stage 2 - a lifetime loss allowance is held for assets where a significant increase in credit risk has been identified since initial recognition for financial assets that are not credit impaired. The assessment of whether credit risk has increased significantly since initial recognition is performed for each reporting period for the life of the loan.

•       Stage 3 - a lifetime ECL allowance is required for financial assets that are credit impaired at the reporting date.

 

Measurement of ECL

The assessment of credit risk and the estimation of ECL are unbiased and probability weighted. ECL is measured on either a 12 month (Stage 1) or lifetime (Stage 2) basis depending on whether a significant increase in credit risk has occurred since initial recognition or where an account meets the Group's definition of default (Stage 3).

 

The ECL calculation is a product of an individual loan's probability of default ('PD'), exposure at default ('EAD') and loss given default ('LGD') discounted at the effective interest rate ('EIR').

 

Significant increase in credit risk ("SICR") (movement to Stage 2)

The Group's transfer criteria determines what constitutes a significant increase in credit risk, which results in a financial asset being moved from Stage 1 to Stage 2. The Group has determined that a significant increase in credit risk arises when an individual borrower is more than 30 days past due or if forbearance measures have been put in place.

 

The Group monitors the ongoing appropriateness of the transfer criteria, where any proposed amendments will be reviewed and approved by the Groups Credit Committees at least annually and more frequently if required.

 

A borrower will move back into stage 1 conditional upon both a minimum of 6 months' good account conduct and the improvement of the Client's situation to the extent that the probability of default has receded sufficiently and a full repayment of the loan, without recourse to the collateral, is likely.

 

Definition of default (movement to Stage 3)

The Group uses a number of qualitative and quantitative criteria to determine whether an account meets the definition of default and as a result moves into Stage 3. The criteria are as follows:

•       The rebuttable assumption that more than 90 days past due is an indicator of default. The Group therefore deems more than 90 days past due as an indicator of default, except for cases where the customer is already within forbearance. This will ensure that the policy is aligned with the Basel/Regulatory definition of default.

•       The Group has also deemed it appropriate to classify accounts where there has been a breach in agreed forbearance arrangements, recovery action is in hand or Bankruptcy proceedings or similar insolvency process of a client, or director of a company.

A borrower will move out of Stage 3 when their credit risk improves such that they are no longer past due and remain up to date for an internally approved period.

 

Forward looking macroeconomic scenarios

IFRS 9 requires the entity to consider the risk of default and impairment loss taking into account expectations of economic changes that are reasonable.

 

The Group uses a bespoke macroeconomic model to determine the most significant factors which may influence the likelihood of an exposure defaulting in the future. At present, the most significant macroeconomic factor relates to property prices. The Group currently consider five probability weighted scenarios. The model adopts five probability weighted scenarios no change, severe, moderate, growth and decline. The Group has derived an approach for factoring probability weighted macroeconomic forecasts into ECL calculations, adjusting PD and LGD estimates.

 

Expected life

IFRS 9 requires lifetime expected credit losses to be measured over the expected life. Currently the Group considers the loan's behavioural life is equal to the contractual loan term. This approach will continue to be monitored and enhanced if and when deemed appropriate.

 

Transition disclosures

The following table shows the original measurement categories in accordance with IAS 39 and the new measurement categories under IFRS 9 for the Group's financial assets and financial liabilities as at 1 January 2018:

 


Original classification under IAS 39

Carrying amount under IAS 39 on 31 December 2017

New classification under IFRS 9

Carrying amount under IFRS 9 on 1 January 2018

Financial assets

£000

£000

Cash and balances at central banks

Loans and receivables

313,101

Amortised cost

313,101

Loans and advances to banks

Loans and receivables

70,679

Amortised cost

70,679

Debt securities

Held-to-maturity

227,019

Amortised cost

227,019

Derivative financial instruments

FVPL

2,551

Mandatorily at FVPL

2,551

Loans and advances to customers

Loans and receivables

1,049,269

Amortised cost

1,046,689

Financial investments - Equity

Available-for-sale

1,635

Designated FVOCI

1,635

Financial investments - Debt

Available-for-sale

712

FVPL

712

Total financial assets


1,664,966


1,662,386






Financial liabilities





Deposits from banks

Amortised cost

195,097

Amortised cost

195,097

Deposits from customers

Amortised cost

1,390,781

Amortised cost

1,390,781

Derivative financial instruments

FVPL

931

Mandatorily at FVPL

931

Total financial liabilities


1,586,809


1,586,809

 

The following table sets out the impact of adopting IFRS 9 on the statement of financial position carrying amounts and retained earnings as at 1 January 2018. Only balances impacted by the transition to IFRS 9 are included in the table; all other balances are unchanged.

 

Group





Impact of adoption of IFRS 9 on retained earnings



£000

Recognition of expected credit losses under IFRS 9




2,580

Related tax




(490)

Impact at 1 January 2018




2,090

 

Impact of adopting IFRS 9 on the impairment of the financial assets

The most significant impact on the Group's financial statements from the adoption of IFRS 9 results from the new impairment requirements. On the adoption of IFRS 9 on 1 January 2018, the increase in loss allowances (before tax) was £2.6m.

 

The following table reconciles the closing impairment for financial assets in accordance with IAS 39 as at 31 December 2017, to the opening ECL allowance determined in accordance with IFRS 9 as at 1 January 2018:

 


IAS 39 carrying amount on 31 December 2017


IFRS 9 opening balance on 1 January 2019

Of which


Re-measurement

Stage 1

Stage 2

Stage 3

Group

£000

£000

£000

£000

£000

£000

Loans and advances to customers (gross)

1,050,631

 -  

1,050,631

992,252

29,502

28,877

Less allowances for impairment

(1,362)

(2,580)

(3,942)

(1,244)

(1,178)

(1,520)

Loans and advances to customers

1,049,269

(2,580)

1,046,689

991,008

28,324

27,357

 

The ECL coverage as a percentage of gross loans and advances at 1 January 2018 was 0.38% and by Stage as follows: Stage 1 - 0.13%, Stage 2 - 3.99% and Stage 3 - 5.26%.

 

Forward looking information

The Group incorporates forward looking information (FLI) into the assessment of whether there has been a significant increase in credit risk and the calculation of ECLs. 

 

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 of no change, upside case, downside case, moderate stress and severe stress, and the impacts of these scenarios are then probability weighted. The estimation and application of this forward looking information will require significant judgement. External information is used to produce the forecast information.

 

Transition impact including impact on capital

The Group 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 total adjustment to capital was £2.8m.

 

Under IFRS 9, the Group's CET1 ratio has reduced by approximately 1 basis points after transitional relief (23 basis points before transitional relief). This is mainly driven by the increase in IFRS 9 ECL for standardised portfolios that directly impacts CET1 as there is no regulatory deduction to absorb the increase.

 

CET 1 ratio

•       17.32% under IAS 39 at 31 December 2017;

•       17.09% under IFRS 9 at 1 January 2018 before transitional relief;

•       17.31% under IFRS 9 at 1 January 2018 after transitional relief.

 

Transitional relief relates to the phasing of the impact of the initial adoption of ECL as permitted by Regulation (EU) 2017/2395 of the European Parliament and Council. The Group has 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: 5%; 2019 15%; 2020 30%; 2021 50%; 2022 75%. From 2023 onwards, there is no transitional relief.

 

v) Impact on Governance and Controls

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

 

IFRS 15 Revenue from Contracts with customers

On 1 January 2018, the Group adopted the requirements of IFRS 15. IFRS 15 established a comprehensive framework for revenue recognition. It replaces existing revenue recognition guidance, including IAS 18 Revenue.

 

IFRS 15 establishes the principles to apply when reporting information about the nature, amount, timing and uncertainty of revenue and cash flows from a contract with a customer. The standard introduces a five step revenue recognition model to be applied to all contracts with customers to determine whether, how much, and when revenue is recognised. 

 

The new standard replaces IAS 18 'Revenue', IAS 11 'Construction Contracts' and related interpretations. It applies to all revenue arising from contracts with customers but does not apply to insurance contracts, financial instruments or lease contracts, which fall under the scope of other IFRS standards. It also does not apply if two companies in the same line of business exchange non-monetary assets to facilitate sales to other parties. Of particular note, interest income, the main source of revenue for the Group, falls outside the scope of IFRS 15.

 

The Group also generates fees from banking services, primarily management fees and commissions. Fees in respect of banking services are recognised in line with the satisfaction of performance obligations. This can be either at a point in time or over time, in line with the provision of the service to the customer. The majority of banking services are performed at a point in time and payment is due from a customer at the time a transaction takes place. For services performed over time, payment is generally due in line with the satisfaction of performance obligations. The costs of providing these banking services are incurred as the services are rendered. The price is usually fixed and always determinable.

 

The Group has adopted IFRS 15 using the cumulative effect method (without practical expedients), as such the standard is applied as of 1 January 2018 and comparative information is not restated. The cumulative effect of initially applying IFRS 15 is recognised as an adjustment to the opening balance of retained earnings. IFRS 15 is only applied retrospectively to contracts that are not completed contracts at 1 January 2018. 

 

The Group assessed its non-interest revenue streams that fall under the scope of IFRS 15 and determined that there was no material impact on the amount or timing of revenue to be recognised as a result of the adoption of IFRS 15. As such there is no adjustment to the opening balance of retained earnings or related tax balances. Furthermore, there is no impact to the consolidated statement of financial position or the consolidated statements of profit and loss and other comprehensive income. Revenue is disaggregated by reportable segment as detailed in Note 9.

 

3.  Significant accounting policies

 

The accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

 

3.1.  Consolidation

(a)  Subsidiaries

Subsidiaries are all investees (including special purpose entities) controlled by the Group. The Group controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

 

The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group's shares of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the Statement of Comprehensive Income as a gain on bargain purchase. Contingent consideration related to an acquisition is initially recognised at the date of acquisition as part of the consideration transferred, measured at its acquisition date fair value and recognised as a liability. The fair value of a contingent consideration liability recognised on acquisition is remeasured at key reporting dates until it is settled, changes in fair value are recognised in the profit or loss.

 

The Company's investments in subsidiaries are recorded at cost less, where appropriate, provisions for impairment in value.

 

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

 

(b) Changes in ownership and non-controlling interests

Changes in ownership interest in a subsidiary that do not result in the loss of control are accounted for as equity transactions and no gain or loss is recognised. Adjustments to non-controlling interests are based on a proportionate amount of the net assets of the subsidiary.

 

When control of a subsidiary is lost, the Group derecognises the assets, liabilities, non-controlling interest and all other components of equity relating to the former subsidiary from the consolidated statement of financial position. Any resulting gain or loss is recognised in profit or loss. Any investment retained in the former subsidiary is recognised at its fair value at the date when control is lost.

 

(c) Special purpose entities

Special purpose entities ("SPEs") are entities that are created to accomplish a narrow and well-defined objective such as the securitisation of particular assets or the execution of a specific borrowing or lending transaction. SPEs are consolidated when the investor controls the investee. The investor would only control the investee if it had all of the following:

 

•       power over the investee;

•       exposure, or rights, to variable returns from its involvement with the investee; and

•       the ability to use its power over the investee to affect the amount of the investor's returns.

 

The assessment of whether the Group has control over an SPE is carried out at inception and the initial assessment is only reconsidered at a later date if there were any changes to the structure or terms of the SPE, or there were additional transactions between the Group and the SPE.

 

(d) Associates

Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity. Associates are accounted for using the equity method and are initially recognised at cost. The Group's investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include the Group's share of the total comprehensive income and equity movements of equity accounted investees, from the date that significant influence commences until the date that significant influence ceases. When the Group's share of losses exceeds its interest in an equity accounted investee, the Group's carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the investee.

 

3.2.  Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the Group Board. The Group Board, which is responsible for allocating resources and assessing performance of the operating segments, has been identified as the chief operating decision maker. All transactions between segments are conducted on an arm's length basis. Income and expenses directly associated with each segment are included in determining segment performance. There are six operating segments:

 

•       Private Banking - Provides traditional private banking services as well as offering financial planning and investment management services.

•       Commercial Banking - Provides bespoke commercial banking services and tailored secured lending against property investments and other assets.

•       Renaissance Asset Finance - Specialist asset finance lender mainly in high value cars but also business assets.

•       All other divisions - All other smaller divisions and central costs in Arbuthnot Latham & Co., Ltd (Arbuthnot Commercial Asset-Based Lending, Arbuthnot Direct, Arbuthnot Specialist Finance, Dubai, Tay mortgage portfolio, Investment properties and Central costs)

•       Group Centre - ABG Group Centre management

 

3.3.  Foreign currency translation

Foreign currency transactions are translated into the functional currency using the spot exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Comprehensive Income. Foreign exchange differences arising from translation of equity instruments, where an election has been made to present subsequent fair value changes in Other Comprehensive Income ("OCI"), will also be recognised in OCI.

 

3.4.  Interest income and expense

Interest income and expense are recognised in the Statement of Comprehensive Income for all instruments measured at amortised cost using the effective interest rate ("EIR") method.

 

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to:

•       the gross carrying amount of the financial asset; or

•       the amortised cost of the financial liability.

 

The 'gross carrying amount of a financial asset' is the amortised cost of a financial asset before adjusting for any expected credit loss allowance. When calculating the effective interest rate, the Group takes into account all contractual terms of the financial instrument but does not consider expected credit losses.

 

The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense.

 

For financial assets that have become credit impaired following initial recognition, interest income is calculated by applying the effective interest rate to the amortised cost of the financial asset. If the asset is no longer credit impaired, then the calculation of interest income reverts to the gross basis.

 

The Group monitors the actual cash flows for each acquired book and where they diverge significantly from expectation, the future cash flows are reset. Expectation may diverge due to factors such as one-off payments or expected credit losses. In assessing whether to adjust future cash flows on an acquired portfolio, the Group considers the cash variance on an absolute and percentage basis. The Group also considers the total variance across all acquired portfolios. Where cash flows for an acquired portfolio are reset, they are discounted at the EIR to derive a new carrying value, with changes taken to profit or loss as interest income. The EIR rate is adjusted for events where there is a change to the reference interest rate (Bank of England base rate) affecting portfolios with a variable interest rate which will impact future cash flows. The revised EIR is the rate which exactly discounts the revised cash flows to the net carrying value of the loan portfolio.

 

3.5.  Fee and commission income

Fee and commission income which is integral to the EIR on a financial asset are included in the effective interest rate (see note 3.4).

 

All other fee and commission income is recognised as the related services are performed, under IFRS 15. Fee and commission income is reported in the below segments.

 

Types of fee

Description

Banking commissions

- Banking Tariffs are charged monthly for services provided.

 

Investment management fees

 

- Annual asset management fees relate to a single performance  

  obligation that is continuously provided over an extended period

  of time.

 

Wealth planning fees

 

- Provision of bespoke, independent Wealth Planning solutions to 

  Arbuthnot Latham's clients to help them achieve their long-term

  financial goals.

 

Foreign exchange fees

 

- Provides foreign currencies for our clients to purchase/sell.

 

The principles in applying IFRS 15 to fee and commission use the following 5 step model:

•       identify the contract(s) with a customer;

•       identify the performance obligations in the contract;

•       determine the transaction price;

•       allocate the transaction price to the performance obligations in the contract; and

•       recognise revenue when or as the Group satisfies its performance obligations.

 

Asset and other management, advisory and service fees are recognised, under IFRS 15, as the related services are performed. The same principle is applied for financial planning services that are continuously provided over an extended period of time.

 

The Group includes the transaction price, some or all of an amount of, variable consideration estimated only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

 

Policy applicable before 1 January 2018

Fees and commissions which are not considered integral to the effective interest rate are recognised on an accrual basis when the service has been provided.

 

Asset and other management, advisory and service fees are recognised on an accruals basis as the related services are performed. The same principle is applied for financial planning services that are continuously provided over an extended period of time. 

 

3.6.  Rental income

Rental income is recognised on a straight line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income over the term of the lease.

 

3.7.  Discontinued operations

A discontinued operation is a component of the Group's business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which:

•       represents a separate major line of business or geographical area of operations;

•       is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or

•       is a subsidiary acquired exclusively with a view to re-sale.

 

Classification as a discontinued operation occurs on disposal or when the operation meets the criteria to be classified as held for sale (see note 3.14), if earlier. When an operation is classified as a discontinued operation, the comparative Statement of Comprehensive Income is re-presented as if the operation had been discontinued from the start of the comparative year.

 

 

3.8.  Financial assets and financial liabilities

3.8.1 Financial assets and financial liabilities (Policy applicable from 1 January 2018)

IFRS 9 requires financial assets and liabilities to be measured at amortised cost, fair value through other comprehensive income ("FVOCI") or fair value through the profit and loss ("FVPL"). Liabilities are measured at amortised cost or FVPL. The Group classifies financial assets and financial liabilities in the following categories: financial assets and financial liabilities at FVPL; FVOCI, financial assets and liabilities at amortised cost and other financial liabilities. Management determines the classification of its financial instruments at initial recognition.

 

A financial asset or financial liability is measured initially at fair value plus, transaction costs that are directly attributable to its acquisition or issue with the exception of financial assets at FVPL where these costs are debited to the income statement.

 

(a) Financial instruments measured at amortised cost

Financial assets that are held to collect contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. A basic lending arrangement results in contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. Financial assets measured at amortised cost are predominantly loans and advances and debt securities.

 

Loans and advances

Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable and the SPPI criteria are met. Loans are recognised when cash is advanced to the borrowers inclusive of transaction costs. Loans and advances, other than those relating to assets leased to customers, are carried at amortised cost using the effective interest rate method. The accounting for assets leased to customers is set out under note 3.18(a).

 

Debt securities at amortised cost

Debt securities at amortised cost are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group has determined meets the SPPI criteria. Debt security investments are carried at amortised cost using the effective interest rate method, less any impairment loss.

 

(b) Financial assets and financial liabilities at FVPL

Financial assets and liabilities are classified at FVPL where they do not meet the criteria to be measured at amortised cost or FVOCI or where financial assets are designated at FVPL to reduce an accounting mismatch. They are measured at fair value in the statement of financial position, with fair value gains/losses recognised in the income statement.

 

Financial assets that are held for trading or managed within a business model that is evaluated on a fair value basis are measured at FVPL, because the business objective is neither hold-to-collect contractual cash flows nor hold-to-collect-and-sell contractual cash flows.

 

This category comprises derivative financial instruments and financial investments. Derivative financial instruments utilised by the Group include structured notes and derivatives used for hedging purposes.

 

Financial assets and liabilities at FVPL are initially recognised on the date from which the Group becomes a party to the contractual provisions of the instrument, including any acquisition costs. Subsequent measurement of financial assets and financial liabilities held in this category are carried at FVPL until the investment is sold.

 

(c) Financial instruments at FVOCI

Financial instruments at FVOCI are those not classified as another category of financial assets. These include investments in special purpose vehicles and equity investments in unquoted vehicles. They may be sold in response to liquidity requirements, interest rate, exchange rate or equity price movements. Financial investments are initially recognised at cost, which is considered as the fair value of the investment including any acquisition costs. The securities are subsequently measured at fair value in the statement of financial position.

 

Fair value changes in the securities are recognised directly in equity (OCI).

 

A debt instrument is measured at fair value through other comprehensive income if it meets both of the following conditions:

•       the asset is held within a business model whose objective is achieved by collecting contractual cash flows and selling financial assets; and

•       the contractual terms of the financial asset meet the SPPI criterion.

 

There is a rebuttable presumption that all equity investments are FVPL, however on initial recognition the Group may make an irrevocable election to present the fair value movement of equity investments that are not held for trading within OCI. The election can be made on an instrument by instrument basis.

For debt instruments, changes in fair value are recognised in OCI.

For equity instruments, there are no reclassifications of gains and losses to the profit or loss statement on derecognition and no impairment recognised in the profit or loss. Equity fair value movements are not reclassified from OCI under any circumstances.

 

(d)  Financial guarantees and loan commitments

Financial guarantees represent undertakings that the Group will meet a customer's obligation to third parties if the customer fails to do so. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. The Group is theoretically exposed to loss in an amount equal to the total guarantees or unused commitments; however, the likely amount of loss is expected to be significantly less; most commitments to extend credit are contingent upon customers maintaining specific credit standards. Liabilities under financial guarantee contracts are initially recorded at their fair value, and the initial fair value is amortised over the life of the financial guarantee. Subsequently, the financial guarantee liabilities are measured at the higher of the initial fair value, less cumulative amortisation, and the best estimate of the expenditure to settle obligations.

 

(e) Other financial liabilities

Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments. Other financial liabilities are recognised when cash is received from the depositors. Other financial liabilities are carried at amortised cost using the effective interest rate method. The fair value of other liabilities repayable on demand is assumed to be the amount payable on demand at the Statement of Financial Position date.

 

Basis of measurement for financial assets and liabilities

Amortised cost measurement

The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, minus principal payments, plus or minus the cumulative amortisation using the effective interest rate method of any difference between the initial amount recognised and the maturity amount, less any reduction for impairment.

 

Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm's length basis.

 

If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same for which market observable prices exist, net present value and discounted cash flow analysis.

 

For measuring derivatives that might change classification from being an asset to a liability or vice versa such as interest rate swaps, fair values take into account both credit valuation adjustment (CVA) and debit valuation adjustment (DVA) when market participants take this into consideration in pricing the derivatives.

 

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or when the Group has transferred substantially all risks and rewards of ownership. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability in the Statement of Financial Position. In transactions in which the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. There have not been any instances where assets have only been partially derecognised.

 

The Group derecognises a financial liability when its contractual obligations are discharged, cancelled, expire, are modified or exchanged.

 

Offsetting

Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group currently has a legally enforceable right to set off the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously.

 

Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a group of similar transactions such as the Group's trading activity.

 

3.8.2 Financial assets and financial liabilities (Policy applicable before 1 January 2018)

The Group classifies financial assets and financial liabilities in the following categories: financial assets and financial liabilities at FVTPL; loans and receivables; held-to-maturity investments; available-for-sale financial assets and other financial liabilities. Management determines the classification of its investments at acquisition. A financial asset or financial liability is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue.

 

(a) Financial assets and financial liabilities at FVTPL (policy applicable before 1 January 2018)

This category comprises listed securities and derivative financial instruments. Derivative financial instruments utilised by the Group include embedded derivatives and derivatives used for hedging purposes. Financial assets and liabilities at fair value through profit or loss are initially recognised on the date from which the Group becomes a party to the contractual provisions of the instrument. Subsequent measurement of financial assets and financial liabilities held in this category are carried at fair value through profit or loss.

 

(b) Loans and receivables (policy applicable before 1 January 2018)

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active

market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. Loans are recognised when cash is advanced to the borrowers. Loans and receivables, other than those relating to assets leased to customers, are carried at amortised cost using the effective interest rate method.

 

(c) Held-to-maturity (policy applicable before 1 January 2018)

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the

Group has the positive intent and ability to hold to maturity and that have not been designated at FVTPL or as available-for-sale investments. Held-to-maturity investments are carried at amortised cost using the effective interest rate method, less any impairment loss.

 

(d) Available-for-sale (policy applicable before 1 January 2018)

Available-for-sale ("AFS") investments are those not classified as another category of financial assets. These include investments in special purpose vehicles and equity investments in unquoted vehicles. They may be sold in response to liquidity requirements, interest rate, exchange rate or equity price movements. AFS investments are initially recognised at cost, which is considered as the fair value of the investment including any acquisition costs. AFS securities are subsequently measured at fair value in the statement of financial position. 

 

Fair value changes in the AFS securities are recognised directly in equity (AFS reserve) until the investment is sold or impaired. Once sold or impaired, the cumulative gains or losses previously recognised in the AFS reserve are recycled to the profit or loss.

 

(f) Other financial liabilities

Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments. Other financial liabilities are

recognised when cash is received from the depositors. Other financial liabilities are carried at amortised cost using the effective interest rate method. The fair value of other liabilities repayable on demand is assumed to be the amount payable on demand at the Statement of Financial Position date.

 

3.9.  Derivative financial instruments

All derivatives are recognised at their fair value. Fair values are obtained using recent arm's length transactions or calculated using valuation techniques such as discounted cash flow models at the prevailing interest rates, and for structured notes classified as financial instruments fair values are obtained from quoted market prices in active markets. Derivatives are shown in the Statement of Financial Position as assets when their fair value is positive and as liabilities when their fair value is negative.

 

Embedded derivatives (policy before 1 January 2018)

Embedded derivatives arise from contracts ('hybrid contracts') containing both a derivative (the 'embedded derivative') and a non-derivative (the 'host contract'). Where the economic characteristics and risks of the embedded derivatives are not closely related to those of the host contract, and the host contract is not at fair value through profit or loss, the embedded derivative is bifurcated and reported at fair value and gains or losses are recognised in the Statement of Comprehensive Income.

 

3.10.  Impairment of financial assets

(a) Assets carried at amortised cost

The Group recognises loss allowances on an expected credit loss basis for all financial assets measured at amortised cost, including loans and advances, debt securities and loan commitments.

 

Credit loss allowances are measured as an amount equal to lifetime ECL, except for the following assets, for which they are measured as 12 month ECL:

•       Financial assets determined to have a low credit risk at the reporting date

•       Financial assets which have not experienced a significant increase in credit risk since their initial recognition.

 

Impairment model

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 historic approach which estimates a collective allowance to recognise losses that have been incurred but not reported on performing loans. Stage 1 includes the current performing loans (up to date and in arrears of less than 10 days) and those within Heightened Business Monitoring ("HBM"). Accounts requiring HBM are classified as a short-term deterioration in financial circumstances and are tightly monitored with additional proactive client engagement, but not deemed SICR.

 

A financial asset is within HBM where:

•       A loan is in arrears between 10 and 30 days;

•       Bankers become aware of signs of potential future difficulties, such as

-       cash flow difficulties

-       unexpected hard core borrowing

-       regular requests for excesses

-       returned cheques

-       lack of engagement/failure to respond to information requests

-       breach of covenants/conditions

-       count court judgements

 

•       Stage 2: When a financial asset experiences a SICR subsequent to origination, but is not in default, 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 (except where the value of charge against the financial asset is sufficient to enable recovery in full) because of an increase in credit risk and the impact of a longer time horizon being considered (compared to 12 months in Stage 1).

 

Evidence that a financial asset has experienced a SICR includes the following considerations:

•       A loan is in arrears between 31 and 90 days;

•       Forbearance action has been undertaken;

 

•       Stage 3: Financial assets that are credit impaired 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 in default. A financial asset will be considered to be in default when an event(s) that has a detrimental impact on estimated future cash flows have occurred.

 

Evidence that a financial asset is within Stage 3 includes the following data:

•       A loan is in arrears in excess of 90 days;

•       Breach of terms of forbearance;

•       Recovery action is in hand; or

•       Bankruptcy proceedings or similar insolvency process of a client, or director of a company.

 

The credit risk of financial assets that become credit impaired are not expected to improve such that they are no longer considered credit impaired.

 

Presentation of allowance for ECL in the statement of financial position

For financial assets measured at amortised cost, these are presented as the gross carrying amount of the assets minus a deduction for the ECL.

 

Write-off

Loans and debt securities are written off (either partially or in full) when there is no realistic prospect of recovery. This is the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the outstanding amount due.

 

(b) Renegotiated loans

Loans that are neither subject to ECLs nor individually significant, and whose terms have been renegotiated, are no longer considered to be past due but are treated as new loans.

 

(c) Forbearance

Under certain circumstances, the Group may use forbearance measures to assist borrowers who are experiencing significant financial hardship. Any forbearance support is assessed on a case by case basis in line with best practice and subject to regular monitoring and review. The Group seeks to ensure that any forbearance results in a fair outcome for both the customer and the Group.

 

(d) Assets classified as financial investments

Equity instruments at fair value through other comprehensive income

Equity investments are not subject to impairment charges recognised in the income statement. Any fair value gains and losses are recognised in OCI whch are not subject to reclassification to the income statement on derecognition.

 

Debt instruments at FVOCI

Changes in fair value are recognised in OCI, the loss allowance will be recognised in OCI and shall not reduce the carrying amount of the financial asset in the statement of financial position. Impairment costs will be recognised in the profit or loss with a corresponding entry to OCI. On derecognition, cumulative gains and losses in OCI are reclassified to the profit or loss.

 

Impairments to financial assets carried at FVOCI are recognised in the Statement of Comprehensive Income.

 

Impairment of assets carried at amortised cost (Policy applicable before 1 January 2018)

On an ongoing basis the Group assesses whether there is objective evidence that a financial asset or group of financial assets is

impaired. Objective evidence is the occurrence of a loss event, after the initial recognition of the asset, that impacts on the estimated

contractual future cash flows of the financial asset or group of financial assets, and can be reliably estimated.

The criteria that the Group uses to determine whether there is objective evidence of an impairment loss include, but are not limited to the following:

•       Delinquency in contractual payments of principal or interest;

•       Cash flow difficulties experienced by the borrower;

•       Initiation of bankruptcy proceedings;

•       Deterioration in the value of collateral;

•       Deterioration of the borrower's competitive position.

 

If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the Statement of Comprehensive Income.

 

If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.

 

The Group considers evidence of impairment for loans and advances at both a specific asset and collective level. All individually

significant loans and advances are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. In assessing collective impairment, the Group uses historical trends of the probability of default, emergence period, the timing of recoveries and the amount of loss incurred, adjusted for management's judgement as to whether current economic and credit conditions are such that the actual losses are likely to be significantly different to historic trends.

 

When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all

the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts

previously written off decrease the amount of the provision for loan impairment in the Statement of Comprehensive Income.

A customer's account may be modified to assist customers who are in or have recently overcome financial difficulties and have

demonstrated both the ability and willingness to meet the current or modified loan contractual payments. Loans that have renegotiated or deferred terms, resulting in a substantial modification to the cash flows, are no longer considered to be past due but are treated as new loans recognised at fair value, provided the customers comply with the renegotiated or deferred terms.

 

3.11.  Impairment of non-financial assets

The carrying amounts of the Group's non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. Impairment for goodwill is discussed in more detail under note 3.15(a).

 

3.12.  Term Funding Scheme

The Term Funding Scheme ("TFS") was announced by the Bank of England on 4 August 2016 and became effective from 19 September 2016. The scheme is now closed. The TFS allows participants to borrow central bank reserves in exchange for eligible collateral. Amounts drawn from the TFS are included within "Deposits from banks" on the Statement of Financial Position as detailed in Note 32.

 

3.13.  Inventory

Land acquired through repossession of collateral which is subsequently held in the ordinary course of business with a view to develop and sell is accounted for as inventory.

 

Inventory is measured at the lower of cost or net realisable value. The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

 

3.14.  Assets classified as held for sale

Assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale.

 

The criteria that the Group uses to determine whether an asset is held for sale under IFRS 5 include, but are not limited to the following:

•       Management is committed to a plan to sell

•       The asset is available for immediate sale

•       An active programme to locate a buyer is initiated

•       The sale is highly probable, within 12 months of classification as held for sale

•       The asset is being actively marketed for sale at a sales price reasonable in relation to its fair value

 

Current assets held for sale are measured at the lower of their carrying amount and fair value less costs to sell except where measurement and remeasurement is outside the scope of IFRS 5. Where investments that have initially been recognised as current assets held for sale, because the Group has been deemed to hold a controlling stake, are subsequently disposed of or diluted such that the Group's holding is no longer deemed a controlling stake, the investment will subsequently be classified as fair value through profit or loss or fair value through other comprehensive income investments in accordance with IFRS 9. Subsequent movements will be recognised in accordance with the Group's accounting policy for the newly adopted classification.

 

Once classified as held for sale, intangible assets and property, plant and equipment are no longer amortised or depreciated.

 

3.15.  Intangible assets

(a) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary or associate at the date of acquisition. Goodwill on acquisitions of subsidiaries or associates is included in 'intangible assets'. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

 

The Group reviews the goodwill for impairment at least annually or more frequently when events or changes in economic circumstances indicate that impairment may have taken place and carries goodwill at cost less accumulated impairment losses. Assets are grouped together in the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the "cash-generating unit" or "CGU"). For impairment testing purposes goodwill cannot be allocated to a CGU that is greater than a reported operating segment. CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. The test for impairment involves comparing the carrying value of goodwill with the present value of pre-tax cash flows, discounted at a rate of interest that reflects the inherent risks of the CGU to which the goodwill relates, or the CGU's fair value if this is higher.

 

(b) Computer software

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives (three to ten years).

 

Costs associated with maintaining computer software programs are recognised as an expense as incurred.

 

Costs associated with developing computer software which are assets in the course of construction, which management has assessed to not be available for use, are not amortised.

 

(c) Other intangibles

Other intangibles include trademarks, customer relationships, broker relationships, technology and banking licences acquired. These costs are amortised on the basis of the expected useful lives (three to fourteen years).

 

3.16.  Property, plant and equipment

Land and buildings comprise mainly branches and offices and are stated at the latest valuation with subsequent additions at cost less depreciation. Plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

 

Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, applying the following annual rates, which are subject to regular review:

 

Leasehold improvements

3 to 20 years

Office equipment

3 to 10 years

Computer equipment

3 to 5 years

Motor vehicles

4 years

 

Leasehold improvements are depreciated over the term of the lease (until the first break clause). Gains and losses on disposals are determined by deducting carrying amount from proceeds. These are included in the Statement of Comprehensive Income.

 

3.17.  Investment property

Investment property is initially measured at cost. Transaction costs are included in the initial measurement. Subsequently, investment property is measured at fair value, with any change therein recognised in profit and loss within other income.

 

If a change in use occurs and investment property is transferred to owner-occupied property, the property's deemed cost for subsequent reporting is its fair value at the date of change in use.

 

3.18.  Leases

(a) As a lessor

Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title, are classified as finance leases. When assets are held subject to finance leases, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return.

 

Assets leased to customers under agreements which do not transfer substantially all the risks and rewards of ownership are classified as operating leases. When assets are held subject to operating leases, the underlying assets are held at cost less accumulated depreciation. The assets are depreciated down to their estimated residual values on a straight-line basis over the lease term. Lease rental income is recognised on a straight line basis over the lease term.

 

(b) As a lessee

Rentals made under operating leases are recognised in the Statement of Comprehensive Income on a straight-line basis over the term of the lease.

 

Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance leases.  Leased assets by way of finance leases are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation. Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

 

3.19.  Cash and cash equivalents

For the purposes of the Statement of Cash Flows, cash and cash equivalents comprises cash on hand and demand deposits, and cash equivalents are deemed highly liquid investments that are convertible into cash with an insignificant risk of changes in value with a maturity of three months or less at the date of acquisition.

 

3.20.  Employee benefits

(a) Post-retirement obligations

The Group contributes to a defined contribution scheme and to individual defined contribution schemes for the benefit of certain employees. The schemes are funded through payments to insurance companies or trustee-administered funds at the contribution rates agreed with individual employees.

 

The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.

 

There are no post-retirement benefits other than pensions.

(b) Share-based compensation - cash settled

The Group adopts a Black-Scholes valuation model in calculating the fair value of the share options as adjusted for an attrition rate for members of the scheme and a probability of pay-out reflecting the risk of not meeting the terms of the scheme over the vesting period. The number of share options that are expected to vest are reviewed at least annually.

 

The fair value of cash settled share-based payments is recognised as personnel expenses in the profit or loss with a corresponding increase in liabilities over the vesting period. The liability is remeasured at each reporting date and at settlement date based on the fair value of the options granted, with a corresponding adjustment to personnel expenses.

 

(c) Deferred cash bonus scheme

The Bank has a deferred cash bonus scheme for senior employees. The cost of the award is recognised to the income statement over the period to which the performance relates.

 

(d) Short-term incentive plan

The Group has a short-term incentive plan payable to employees of one of its subsidiary companies. The award of a profit share is based on a percentage of the net profit of a Group subsidiary.

 

3.21.  Taxation

Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits arise. Income tax recoverable on tax allowable losses is recognised as an asset only to the extent that it is regarded as recoverable by offset against current or future taxable profits.

 

Deferred tax is provided in full on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax is not accounted for if it arises from the initial recognition of goodwill, the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the Statement of Financial Position date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

 

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, when they intend to settle current tax liabilities and assets on a net basis or the tax assets and liabilities will be realised simultaneously.

 

Deferred tax assets are recognised where it is probable that future taxable profits will be available against which the temporary differences can be utilised.

 

3.22.  Issued debt and equity securities

Issued financial instruments or their components are classified as liabilities where the contractual arrangement results in the Group having a present obligation to either deliver cash or another financial asset to the holder, to exchange financial instruments on terms that are potentially unfavourable. Issued financial instruments, or their components, are classified as equity where they meet the definition of equity and confer on the holder a residual interest in the assets of the Company. The components of issued financial instruments that contain both liability and equity elements are accounted for separately with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component.

 

Financial liabilities, other than trading liabilities at fair value, are carried at amortised cost using the effective interest rate method as set out in policy 3.4. Equity instruments, including share capital, are initially recognised as net proceeds, after deducting transaction costs and any related income tax. Dividend and other payments to equity holders are deducted from equity, net of any related tax.

 

3.23.  Share capital

(a) Share issue costs

Incremental costs directly attributable to the issue of new shares or options by Arbuthnot Banking Group, are shown in equity as a deduction, net of tax, from the proceeds.

 

(b) Dividends on ordinary shares

Dividends on ordinary shares are recognised in equity in the period in which they are approved.

 

(c) Share buybacks

Where any Group company purchases the Company's equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company's equity holders until the shares are cancelled or reissued.

 

3.24.  Financial guarantees and loan commitments

Financial guarantees represent undertakings that the Group will meet a customer's obligation to third parties if the customer fails to do so. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. The Group is theoretically exposed to loss in an amount equal to the total guarantees or unused commitments. However, the likely amount of loss is expected to be significantly less; most commitments to extend credit are contingent upon customers maintaining specific credit standards. Liabilities under financial guarantee contracts are initially recorded at their fair value, and the initial fair value is amortised over the life of the financial guarantee. Subsequently, the financial guarantee liabilities are measured at the higher of the initial fair value, less cumulative amortisation, and the best estimate of the expenditure to settle obligations.

 

 

3.25.  Fiduciary activities

The Group commonly acts as trustee and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income arising thereon are excluded from these financial statements, as they are not assets of the Group.

 

3.26.  Provisions and contingent liabilities

Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic resources will be required from the Group and amounts can be reliably measured.

 

Onerous contract provisions are recognised for losses on contracts where the forecast costs of fulfilling the contract throughout the contract period exceed the forecast income receivable. In assessing the amount of the loss to provide on any contract, account is taken of the Group's forecast results which the contract is servicing. The provision is calculated based on discounted cash flows to the end of the contract.

 

Contingent liabilities are disclosed when the Group has a present obligation as a result of a past event, but the probability that it will be required to settle that obligation is more than remote, but not probable.

 

3.27.  New standards and interpretations not yet adopted

The following standards, interpretations and amendments to existing standards have been published and are mandatory for the Group's accounting periods beginning on or after 1 January 2019 or later periods, but the Group has not early adopted them:

 

IFRS 16, 'Leases' (effective from 1 January 2019).

IFRS 16 is effective for annual periods beginning on or after 1 January 2019.  IFRS 16 replaces existing leases guidance, including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases - Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 removes the distinction between finance and operating leases and instead provides a single lessee accounting model. The Group, as a lessee, will be required to recognise lease liabilities and corresponding right-of-use assets for all applicable leases. The new standard also provides the option not to recognise 'short-term' leases and leases of 'low-value' assets. Where this exemption is taken, such leases will continue to be expensed to the income statement over the term of the lease.

 

The income statement recognition pattern for the Group's leases will differ from the current pattern for operating leases, with interest on the liabilities and depreciation expense on the right-of-use assets recognised separately. In the cash flow statement, lease payments will be categorised within financing activities rather than operating activities.

 

The Group will reassess the classification of subleases in which the Group is a lessor. Based on the information currently available the implementation of IFRS 16 is not expected to have a material impact on the financial statements.

 

IFRS 16 does not significantly change the accounting for finance leases or leases by lessors.

 

Management are currently reviewing all long-term contractual agreements to ensure all leases are correctly transitioned.

 

The Group continues to evaluate the full impact of IFRS 16, but expects to recognise right-of-use assets on its balance sheet at the adoption date in respect of property assets currently accounted for as operating leases. A corresponding lease liability will also be recognised, representing the future payments to be made under these leases, discounted at the rate implicitly defined in the lease or, where no rate is defined in the lease, the Group's incremental borrowing rate at lease inception.

 

Transition

The standard is effective for annual periods beginning on or after 1 January 2019. The Group plans to apply IFRS 16 initially on 1 January 2019, using the modified retrospective approach (option 2). As a result there will be no impact to retained earnings on adoption of IFRS 16, with no restatement of comparative information.

 

Additionally, on transition, the Group will apply the practical expedient to grandfather the definition of a lease on transition

This means that it will apply IFRS 16 to all contracts entered into before 1 January 2019 and identified as leases in accordance with IAS 17 and IFRIC 4

 

The Bank has assessed the impact that the initial application will have on its business and will adopt the standard for the year ending 31 December 2019.

It estimates that the IFRS 16 transition amount will:

•       increase assets and liabilities by approximately £21m as at 1 January 2019;

•       reduce the Group's CETI ratio by 32bps; and

•       increase operating expenditure by £0.4m in 2019.

 

4.  Critical accounting estimates and judgements in applying accounting policies

 

The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

 

4.1 Estimation uncertainty

(a) Expected credit losses ("ECL") on financial assets

The Group reviews its loan portfolios and debt security investments to assess impairment at least on a quarterly basis. The basis for evaluating impairment losses is described in accounting policy 3.10. The measurement of ECL required by the implementation of IFRS 9, from 1 January 2018, necessitates a number of significant judgements. Specifically judgements and estimation uncertainties relate to assessment of whether credit risk on the financial asset has increased significantly since initial recognition, incorporation of forward-looking information ("FLI") in the measurement of ECLs and key assumptions used in estimating recoverable cash flows. These estimates are driven by a number of factors that are subject to change which may result in different levels of ECL allowances.

 

The Group incorporates FLI into the assessment of whether there has been a significant increase in credit risk. Forecasts for key macroeconomic variables that most closely correlate with the Bank's portfolio are used to produce five economic scenarios, comprising of a no change, 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 FLI will require significant judgement supported by the use of external information.

 

12 month ECLs on loans and advances (loans within Stage 1) are calculated using a statistical model. The key assumptions are the probability of default and the economic scenarios. Life time ECLs on loans and advances (loans within Stage 2 and 3) are calculated based on an individual valuation of the underlying asset and other expected cash flows.

 

For individually significant financial assets in Stage 2 and 3, ECL is calculated on an individual basis and all relevant factors that have a bearing on the expected future cash flows are taken into account. These factors can be subjective and can include the individual circumstances of the borrower, the realisable value of collateral, the Group's position relative to other claimants, and the likely cost to sell and duration of the time to collect. The level of ECL is the difference between the value of the recoverable amount (which is equal to the expected future cash flows discounted at the loan's original effective interest rate), and its carrying amount.

 

Management considered a range of variables in determining the level of future ECL. The two of the key judgements were in relation to "time to collect" and "collateral valuations". Sensitivity analysis was carried out based on what was considered reasonably possible in the current market conditions.

 

If time to collect increased by six months across all Stage 2 and 3 client exposures, this would lead to a negative £0.4m impact through the Profit or Loss. A six month reduction in time to collect would lead to a £0.3m favourable impact on the Profit or Loss. 

 

If the collateral valuations increased by 10% across all Stage 3 client exposures, this would lead to a positive £1.3m impact through the Profit or Loss. If the collateral valuations decreased by 10% across all Stage 3 client exposures, this would lead to a £1.9m adverse impact on the Profit or Loss. 

 

Another of the key judgements concerns the probability of the economic scenarios to the measurement of the ECL. The probability weighting and forward looking economic scenarios as at 31 December 2018 are as follows:

 


Probability weighted forward looking economic scenarios


Highest Stress

Moderate Stress

No Change

Growth

Decline

Probability of scenario

1.0%

3.0%

21.0%

25.0%

50.0%







Impact of scenario






 - Change in collateral values






      London

(40.0%)

(20.0%)

 -  

0.5%

(2.0%)

      Rest of UK

(40.0%)

(20.0%)

 -  

0.5%

(1.5%)

      Overseas

(40.0%)

(20.0%)

 -  

2.3%

(1.0%)

 - Movement in share prices*

 -  

 -  

 -  

4.0%

(4.0%)







* - for loans secured against equity portfolios

 

Management assess a range of scenarios and in the current economic climate it is reasonably possible that the  moderate scenario could increase to 9% probability, the decline scenario increase to 60% probability and the growth scenario reduce to 10% probability this would lead to a negative £0.2m impact through Profit or Loss.

 

(b) Effective Interest Rate

Acquired loan books are initially recognised at fair value. Subsequently, they are measured under the effective interest rate method, based on cash flow models which require significant judgement assumptions on prepayment rates, late payments, the probability and timing of defaults and the amount of incurred losses. Management review the expected cash flows against actual cash flows to ensure future assumptions on customer behaviour and future cash flows remain valid. If the estimates of future cash flows are revised, the gross carrying value of the financial asset is recalculated as the present value of the estimated future contractual cash flows discounted at the original effective interest rate, or in the case of the acquired books the credit-adjusted effective interest rate. The adjustment to the carrying value of the loan book is recognised in the Statement of Comprehensive Income.

 

Under both IFRS 9 and IAS 39, for the originated loan portfolio interest income is recorded using the effective interest rate method. The key assumptions applied by Management in the EIR methodology remain materially unchanged from the 2017 financial statements.

 

Management must therefore use judgement to estimate the expected life of each instrument. The accuracy of the effective interest rate would therefore be affected by unexpected market movements resulting in altered customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect assumptions.

 

If customer loans repaid 6 months earlier than anticipated on the originated loan book, interest income would increase by £0.8m (2017: £0.3m), due to acceleration of fee income.

 

In 2018 the Group recognised £0.9m (2017: £64k) of additional interest income to reflect actual cash flows received on the acquired mortgage books being in excess of forecast cash flows.

 

The key judgements in relation to calculating the net present value of the acquired mortgage books relate to the timing of future cash flows and loss rates on principal repayments.  Management have considered an early and delayed 6 month sensitivity on the timing of repayment and a 10% increase and decrease of principal repayments to be to be reasonably possible.

 

If the acquired loan books were modelled to accelerate cash flows by 6 months, it would increase interest income in 2018 by £0.3m (2017: £0.4m) while a 10% increase in principal repayments will increase interest income in 2018 by £0.3m (2017: £0.2m) through a cash flow reset adjustment. Additionally a 10% increase in credit losses would reduce interest income in 2018 by £0.3m (2017: £0.2m) through a cash flow reset adjustment.

 

Management must therefore use judgement to estimate the expected life of each instrument. The accuracy of the effective interest rate would therefore be affected by unexpected market movements resulting in altered customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect assumptions.

 

Due to acceleration of fee income, if customer loans repaid 6 months earlier than anticipated, interest income would increase by £0.8m (2017: £0.3m).

(c) Investment property

The valuations that the Group places on its investment properties are subject to a degree of uncertainty and are calculated on the basis of assumptions in relation to prevailing market rents and effective yields. These assumptions may not prove to be accurate, particularly in periods of market volatility. The current uncertainty due to Brexit has had the effect of reducing the activity in the property market, which, has in turn resulted in less market evidence being available for Management in making its judgement on the key assumptions of property yield and market rent. The Group currently owns three investment properties, as outlined in note 29.

 

The Group's in-house surveyors have valued all three investment properties utilising externally sourced market information and property specific knowledge.

 

King Street in London with value of £53.3m (2017: £53.3m)

The King Street property is currently fully tenanted, with the main lease ending in 2019 at which point the offices will be refurbished and re-let at prevailing market rents. The valuation assessment considers the net present value of net cash flows to be generated from the property, taking into account expected rental growth rate, void periods, occupancy rate, lease incentive costs such as rent-free periods and other costs not paid by tenants. The expected net cash flows are discounted using risk-adjusted discount rates. Among other factors, the discount rate estimation considers the quality of a building and its location, tenant quality and lease terms. Management judgement is required for the inputs used in the discounted cash flow model, which have been assessed as follows:

 

•       yield: 4%

•       future rent forecast (per square ft.) £102.50

•       refurbishment period of 6 months and rent to be increased by 5% (every 5 years)

•       estimated refurbishment costs: £2.2m

 




Revised fair value gain / (loss)


Variable


£'m

%

Forecast yield

4.00%




 - Yield 0.25% lower

3.75%


5.2

9.72%

 - Yield 0.15% lower

3.85%


3.3

6.15%

 - Yield 0.15% higher

4.15%


(1.9)

(3.50%)

 - Yield 0.25% higher

4.25%


(3.4)

(6.40%)






Future forecast rent (Per Square Foot)

102.5




- Positive +5%

107.6


3.0

5.56%

- Negative -5%

97.4


(1.8)

(3.29%)






Forecast periodic Rent Increases (Every 5 years)

5%




- Positive +25%

6%


3.6

6.75%

- Negative -25%

4%


(2.1)

(4.00%)






Forecast refurbishment Costs

2.2









Cost of refurbishment doubles

4.5




- 5% increase to rental value per square foot (p.s.f.)



0.9

1.78%

- No impact to rental value



(1.4)

(2.65%)






No refurbishment undertaken

-




- Existing tenants rent p.s.f maintained and periodic rent increase 5%



0.8

1.52%

- Existing tenants rent p.s.f maintained and periodic rent increase 4%



(2.6)

(4.90%)

 

4 St Philips Place in Birmingham with value of £7m (2017: £6.1m)

The St Philips Place property was acquired on 24 November 2017. The property is currently undergoing comprehensive refurbishment and is therefore unoccupied at the end of the financial year. A development appraisal has been undertaken by estimating the gross development value and deducting the estimated costs to complete the refurbishment, arm's length financing costs and development profit margin.

 

The gross development has the following key inputs:

•       forecast yield: 6.25%

•       forecast annual rent: £0.77m

•       refurbishment costs: £3.2m

 




Revised fair value gain / (loss)


Variable


£'m

%

Forecast yield

6.25%




Yield 0.25% lower

6.00%


0.3

3.89%

Yield 0.25% higher

6.50%


(0.5)

(7.13%)






Forecast net rental value (Total Annual £'m)

0.77




Positive +5%

0.81


0.4

5.42%

Negative -5%

0.73


(0.6)

(9.61%)






Forecast development costs

(3.2)




Costs increase +10%

(3.5)


(0.4)

(6.15%)

Costs decrease -10%

(2.9)


0.2

2.68%

 

Crescent Office Park in Bath with value of £6.8m (2017: £6.8m)

In December 2017, the office building was acquired with the intention to be included within a new property fund initiative that the Group had planned to start-up. The property had tenants in situ with the Fund recognising rental income.

 

It was recognised as held for sale under IFRS 5 and therefore not consolidated in the financial statements in 2017. In 2018 the launch of the property fund was placed on hold and as a result it was reclassified as an investment property as the property no longer met the IFRS 5 criteria. The property remained occupied as at 31 December 2018 with the Group receiving rental income.

 

In accordance with IAS 40, the property is recognised at fair value, with its carrying value at year end of £6.8m equal to its fair value.

 

The valuation of the property has the following key inputs:

•       yield: 6.50%

•       future rent increases (every five years): 4.00%

 




Revised fair value gain / (loss)


Variable


£'m

%

Model Yield

6.50%




 - Yield 0.25% lower

6.25%


0.2

2.25%

 - Yield 0.25% higher

6.75%


(0.4)

(6.10%)






Model Future Rent Increases (Every 5 Years)

4.00%




- Positive +25%

5.00%


0.2

3.11%

- Negative -25%

3.00%


(0.1)

(2.10%)

 

(e) IFRS 9 'Financial Instruments'

On 1 January 2018, the Group adopted the requirements of IFRS 9. IFRS 9 introduces new requirements for the classification and measurement, impairment and hedge accounting of financial assets and liabilities. The new standard replaces IAS 39 'Financial Instruments: Recognition and Measurement'.  

 

The Group has adjusted its opening 1 January 2018 retained earnings to reflect the application of the new requirements of IFRS 9. In accordance with the transition requirements, comparative periods are not restated. As such, the comparative periods in 2017 are reported under the requirements of IAS 39 and are not comparable to the information presented for 2018. 

 

5.  Maturity analysis of assets and liabilities








The table below shows the maturity analysis of assets and liabilities of the Group as at 31 December 2018:


Due within one year

Due after more than one year

Total

At 31 December 2018

£000

£000

£000

ASSETS




Cash and balances at central banks

405,325

405,325

Loans and advances to banks

54,173

54,173

Debt securities at amortised cost

203,211

139,480

342,691

Assets classified as held for sale

8,002

8,002

Derivative financial instruments

192

1,654

1,846

Loans and advances to customers

388,603

836,053

1,224,656

Other assets

8,257

4,459

12,716

Financial investments

14,976

20,375

35,351

Deferred tax asset

1,490

1,490

Intangible assets

16,538

16,538

Property, plant and equipment

5,304

5,304

Investment property

67,081

67,081


1,082,739

1,092,434

2,175,173

LIABILITIES




Deposits from banks

7,675

225,000

232,675

Derivative financial instruments

188

188

Deposits from customers

1,624,978

89,308

1,714,286

Current tax liability

236

236

Other liabilities

18,549

18,549

Debt securities in issue

13,283

13,283


1,651,626

327,591

1,979,217

 

The table below shows the maturity analysis of assets and liabilities of the Group as at 31 December 2017:


Due within one year

Due after more than one year

Total

At 31 December 2017

£000

£000

£000

ASSETS




Cash and balances at central banks

313,101

313,101

Loans and advances to banks

70,679

70,679

Debt securities held-to-maturity

122,236

104,783

227,019

Assets classified as held for sale

2,915

2,915

Derivative financial instruments

950

1,601

2,551

Loans and advances to customers

224,954

824,315

1,049,269

Other assets

16,188

4,436

20,624

Financial investments

128

2,219

2,347

Deferred tax asset

1,527

1,527

Investment in associate

83,804

83,804

Intangible assets

15,995

15,995

Property, plant and equipment

3,962

3,962

Investment property

59,439

59,439


751,151

1,102,081

1,853,232

LIABILITIES




Deposits from banks

195,097

195,097

Derivative financial instruments

931

931

Deposits from customers

1,333,423

57,358

1,390,781

Current tax liability

705

705

Other liabilities

16,239

16,239

Debt securities in issue

13,104

13,104


1,546,395

70,462

1,616,857

 

The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2018:


Due within one year

Due after more than one year

Total

At 31 December 2018

£000

£000

£000

ASSETS




Loans and advances to banks

6

6

Loans and advances to banks - due from subsidiary undertakings

17,002

17,002

Financial investments

19,313

19,313

Current tax asset

52

52

Deferred tax asset

113

113

Intangible assets

6

6

Property, plant and equipment

208

208

Other assets

42

42

Interests in subsidiaries


134,614

134,614


17,102

154,254

171,356

LIABILITIES




Other liabilities

3,324

3,324

Debt securities in issue

13,283

13,283


3,324

13,283

16,607





 

The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2017:


Due within one year

Due after more than one year

Total

At 31 December 2017

£000

£000

£000

ASSETS




Loans and advances to banks

6

6

Loans and advances to banks - due from subsidiary undertakings

36,097

36,097

Financial investments

128

12

140

Deferred tax asset

641

641

Property, plant and equipment

157

157

Other assets

199

199

Interests in associates

5,056

5,056

Interests in subsidiaries

97,802

97,802


36,430

103,668

140,098

LIABILITIES




Current tax liability

152

152

Other liabilities

3,141

3,141

Debt securities in issue

13,104

13,104


3,293

13,104

16,397


 

6.  Financial risk management

Strategy

By their nature, the Group's activities are principally related to the use of financial instruments. The Directors and senior management of the Group have formally adopted a Group Risk and Controls Policy which sets out the Board's attitude to risk and internal controls.  Key risks identified by the Directors are formally reviewed and assessed at least once a year by the Board, in addition to which key business risks are identified, evaluated and managed by operating management on an ongoing basis by means of procedures such as physical controls, credit and other authorisation limits and segregation of duties. The Board also receives regular reports on any risk matters that need to be brought to its attention. Significant risks identified in connection with the development of new activities are subject to consideration by the Board. There are budgeting procedures in place and reports are presented regularly to the Board detailing the results of each principal business unit, variances against budget and prior year, and other performance data.

 

The principal non-operational risks inherent in the Group's business are credit, market, liquidity and capital.

 

(a) Credit risk

The Company and Group take on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Significant changes in the economy, or in the health of a particular industry segment that represents a concentration in the Company and Group's portfolio, could result in losses that are different from those provided for at the balance sheet date. Credit risk is managed through the Credit Committee of the banking subsidiary.

 

The Company and Group structure the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to products, and one borrower or groups of borrowers. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. The limits are approved periodically by the Board of Directors and actual exposures against limits are monitored daily.

 

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral, and corporate and personal guarantees.

 

The Group employs a range of policies and practices to mitigate credit risk.  The most traditional of these is the taking of collateral to secure advances, which is common practice.  The principal collateral types for loans and advances include, but are not limited to:

 

•       Charges over residential and commercial properties;

•       Charges over business assets such as premises, inventory and accounts receivable;

•       Charges over financial instruments such as debt securities and equities;

•       Charges over other chattels; and

•       Personal guarantees

 

Upon initial recognition of loans and advances, the fair value of collateral is based on valuation techniques commonly used for the corresponding assets.  In order to minimise any potential credit loss the Group will seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. Repossessed collateral, not readily convertible into cash, is made available for sale in an orderly fashion, with the proceeds used to reduce or repay the outstanding indebtedness, or held as inventory where the Group intends to develop and sell in the future. Where excess funds are available after the debt has been repaid, they are available either for other secured lenders with lower priority or are returned to the customer.

 

Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards.

 

The Group incorporates forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL. The key inputs into the measurement of the ECL are:

•       future economic scenarios

•       probability of default

•       loss given default

•       exposure at default

 

The Group's maximum exposure to credit risk before collateral held or other credit enhancements is as follows:

 


2018

Group

Private Banking

Commercial Banking

RAF

All Other Divisions

Total

Credit risk exposures (all stage 1, unless otherwise stated)

£000

£000

£000

£000

£000

On-balance sheet:






Cash and balances at central banks

 -  

 -  

 -  

405,325

405,325

Loans and advances to banks

 -  

 -  

354

53,819

54,173

Debt securities at amortised cost

 -  

 -  

 -  

342,691

342,691

Derivative financial instruments

 -  

 -  

 -  

1,846

1,846

Loans and advances to customers (net of ECL)

670,464

443,108

85,957

25,127

1,224,656

   Stage 1

618,487

431,630

84,275

25,127

1,159,519

   Stage 2

20,033

11,478

1,180

 -  

32,691

   Stage 3

31,944

 -  

502

 -  

32,446

Other assets

 -  

 -  

443

2,533

2,976

Financial investments

 -  

 -  

 -  

35,351

35,351







Off-balance sheet:






Guarantees

435

1,309

 -  

 -  

1,744

Loan commitments and other credit related liabilities

51,950

15,930

 -  

 -  

67,880

At 31 December

722,849

460,347

86,754

866,692

2,136,642

 


2017

Group

Private Banking

Commercial Banking

RAF

All Other Divisions

Total

Credit risk exposures (under IAS 39)

£000

£000

£000

£000

£000

On-balance sheet:






Cash and balances at central banks

 -  

 -  

 -  

313,101

313,101

Loans and advances to banks

 -  

 -  

1,087

69,592

70,679

Debt securities held-to-maturity

 -  

 -  

 -  

227,019

227,019

Derivative financial instruments

 -  

 -  

 -  

2,551

2,551

Loans and advances to customers (net of impairment)

650,245

305,055

71,265

22,704

1,049,269

Other assets

 -  

 -  

137

11,827

11,964

Financial investments

 -  

 -  

 -  

2,347

2,347







Off-balance sheet:






Guarantees

443

2,533

 -  

 -  

2,976

Loan commitments and other credit related liabilities

85,303

46,660

 -  

 -  

131,963

At 31 December

735,991

354,248

72,489

649,141

1,811,869

The Company's maximum exposure to credit risk (all stage 1) before collateral held or other credit enhancements is as follows:


 


2018

2017

 


£000

£000

 

Credit risk exposures relating to on-balance sheet assets are as follows:



 

Loans and advances to banks

17,008

36,103

 

Financial investments

19,313

140

 

Other assets

 -  

162

 

At 31 December

36,321

36,405

 

 

The above tables represent the maximum credit risk exposure (net of impairment) to the Group and Company at 31 December 2018 and 2017 without taking account of any collateral held or other credit enhancements attached. For financial assets, the balances are based on gross carrying amounts as reported in the Statement of Financial Position. For guarantees and loan commitments, the amounts in the table represent the amounts for which the group is contractually committed.

 

The table below represents an analysis of the loan to values of the exposures secured by property for the Group:


2018


Private Banking


Commercial Banking


Total


Loan Balance

Collateral


Loan Balance

Collateral


Loan Balance

Collateral

Group

£000

£000


£000

£000


£000

£000

Less than 60%

312,478

698,621


249,446

559,271


561,924

1,257,892

   Stage 1

297,674

659,650


238,071

532,671


535,745

1,192,321

   Stage 2

8,701

25,830


11,375

26,600


20,076

52,430

   Stage 3

6,103

13,141


 -  

 -  


6,103

13,141

60%-80%

224,782

309,329


165,954

259,917


390,736

569,246

   Stage 1

211,737

288,994


165,954

259,917


377,691

548,911

   Stage 2

9,458

14,535


 -  

 -  


9,458

14,535

   Stage 3

3,587

5,800


-

-


-

-

80%-100%

64,649

49,740


6,540

9,400


71,189

59,140

   Stage 1

52,968

37,161


6,540

9,400


59,508

46,561

   Stage 2

531

550


 -  

 -  


531

550

   Stage 3

11,150

12,029


 -  

 -  


11,150

12,029

Greater than 100%*

28,528

16,860


8,918

7,614


37,446

24,474

   Stage 1

16,654

8,245


8,918

7,614


25,572

15,859

   Stage 2

-

-


-

-


-

-

   Stage 3

11,874

8,615


 -  

 -  


11,874

8,615










Total

630,437

1,074,550


430,858

836,202


1,061,295

1,910,752

 

*In addition to property, other security is taken, including charges over Arbuthnot Latham Investment Management portfolios, other chattels and personal guarantees. The increase in loan to values greater than 100% is due to an increase in exposures collateralised by other assets.

 

£19.3m of balances with a loan to value of greater than 100% are within Stage 3. Property valuations used are those from the loan origination date or updated 3rd party valuations where applicable.


2017

 


Private Banking


Commercial Banking


Total

 


Loan Balance

Collateral


Loan Balance

Collateral


Loan Balance

Collateral

 

Group

£000

£000


£000

£000


£000

£000

 

Less than 60%

288,734

740,812


166,666

367,550


455,400

1,108,362

 

60%-80%

238,760

356,242


108,996

168,015


347,756

524,257

 

80%-100%

64,288

75,298


5,538

5,700


69,826

80,998

 

Greater than 100%

32,206

26,124


9,142

8,230


41,348

34,354

 

Total

623,988

1,198,476


290,342

549,495


914,330

1,747,971

 

Prior year numbers are presented under IAS 39 and therefore has no Staging.

 

The table below represents an analysis of loan commitments compared to the values of properties for the Group (all Stage 1):


2018


Private Banking


Commercial Banking


Total


Loan Balance

Collateral


Loan Balance

Collateral


Loan Balance

Collateral

Group

£000

£000


£000

£000


£000

£000

Less than 60%

30,289

83,603


14,880

32,097


45,169

115,700

60%-80%

15,467

23,295


1,050

1,615


16,517

24,910

Total

45,756

106,898


15,930

33,712


61,686

140,610











2017


Private Banking


Commercial Banking


Total


Loan Balance

Collateral


Loan Balance

Collateral


Loan Balance

Collateral

Group

£000

£000


£000

£000


£000

£000

Less than 60%

62,294

218,643


481

56,000


62,775

274,643

60%-80%

20,471

29,935


5,869

8,861


26,340

38,796

80%-100%

28,825

31,982


754

754


29,579

32,736

Greater than 100%

3,590

3,253


1,500

852


5,090

4,105

Total

115,180

283,813


8,604

66,467


123,784

350,280

 

Renegotiated loans and forbearance

The contractual terms of a loan may be modified due to factors that are not related to the current or potential credit deterioration of the customer (changing market conditions, customer retention, etc.). In such cases, the modified loan may be derecognised and the renegotiated loan recognised as a new loan at fair value.

 

When the terms of a financial asset are modified and the modification does not result in derecognition, the determination of whether the asset's credit risk has increased significantly reflects the comparison of:

•       its remaining lifetime PD at the reporting date based on the modified terms; with

•       the remaining lifetime PD estimated based on data on initial recognition and the original contractual terms.

 

When modification results in derecognition, a new loan is recognised and allocated to Stage 1 (assuming it is not credit-impaired at that time).

 

The Group renegotiates loans to customers in financial difficulties (referred to as 'forbearance') to maximise collection opportunities and minimise the risk of default. Under the Group's forbearance policy, loan forbearance is granted on a selective basis if the debtors is currently in default on its debt, or if there is a high risk of default, there is evidence that the debtor made all reasonable efforts to pay under the original contractual terms and the debtor is expected to be able to meet the revised terms.

 

The revised terms can include changing the timing of interest payments, extending the date of repayment of the loan, transferring a loan to interest only payments and a payment holiday. Both retail and corporate loans are subject to the forbearance policy. The Group Credit Committee regularly reviews reports on forbearance.

 

For financial assets modified as part of the Group's forbearance policy, the estimate of PD reflects whether the modification has improved or restored the Group's ability to collect interest and principal and the Group's previous experience of similar forbearance action. As part of this process, the Group evaluates the borrower's payment performance against the modified contractual terms and considers various behavioural indicators.

 

Generally, the forbearance is a qualitative indicator of a SICR (see note 3.10)

 

As at 31 December 2018, loans for which forbearance measures were in place totalled 2.22% (2017: 2.94%) of total value of loans to customers for the Group. 2017 forbearance has been reclassified to align to current forbearance policy. These are set out in the following table:

 


2018


2017


Number

Loan Balance


Number

Loan Balance



£000



£000

Transfer to interest only

1

175


 -  

 -  

Term extension

15

25,814


15

29,586

Payment holiday

16

1,189


5

1,237

Total forbearance

32

27,178


20

30,823

 

Concentration risk

The tables below show the concentration in the loan book based on the most significant type of collateral held for each loan.

 


Loans and advances to customers


Loan Commitments


2018

2017


2018

2017


£000

£000


£000

£000






   Asset based lending*

25,128

 -  


18,122

 -  

   Asset finance

85,958

71,425


 -  

 -  

   Cash collateralised

5,379

17,747


 -  

 -  

   Commercial lending

248,042

202,912


4,806

24,371

   Investment portfolio secured

45,182

49,667


3,136

4,222

   Mixed collateral**

91,167

70,954


4,867

3,957

   Residential mortgages

713,095

633,003


54,346

99,413

   Unsecured

10,705

3,561


725

 -  

At 31 December

1,224,656

1,049,269


86,002

131,963






Concentration by location






   East Anglia

32,960

18,438


294

 -  

   London

455,567

407,805


28,096

56,777

   Midlands

69,686

42,484


3,538

800

   North East

18,448

25,741


1,050

 -  

   North West

59,045

44,630


1,275

825

   Northern Ireland

2,813

2,903


 -  

 -  

   Scotland

10,793

10,988


 -  

 -  

   South East

219,890

203,305


15,522

23,462

   South West

140,560

116,692


9,201

15,236

   Wales

7,521

8,002


426

 -  

   Overseas

30,486

21,556


1,400

 -  

   Non-property collateral

176,887

146,725


25,200

34,863

At 31 December

1,224,656

1,049,269


86,002

131,963

 

*      In 2018 Q1, the Group began its asset-based lending business including invoice discounting, supported by stock, plant & machinery, property and cash flow lending.

**   Mixed collateral is where there is no single, overall, majority collateral type.

 

(b) Operational risk (unaudited)

The Group's objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group's reputation with overall cost effectiveness and to avoid control procedures that restrict initiatives and creativity. 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.

 

Compliance with Group standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results of the Internal Audit reviews are discussed with senior management, with summaries submitted to the Arbuthnot Banking Group Audit Committee.

 

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 has 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.

 

(c) Market risk

Price risk

The Company and Group are exposed to price risk from equity investments and derivatives held by the Group. The Group is not exposed to commodity price risk.

 

Based upon the financial investment exposure in Note 25, a stress test scenario of a 10% (2017: 10%) decline in market prices, would result in a £17,000 (2017: £32,000) decrease in the Group's income and a decrease of £3.5m (2017: £231,000) in the Group's equity. The Group considers a 10% stress test scenario appropriate after taking the current values and historic data into account.

 

Based upon the financial investment exposure given in Note 25, a stress test scenario of a 10% (2017: 10%) decline in market prices, would result in a £nil (2017: £13,000) decrease in the Company's income and a decrease of £1.9m (2017: £11,000) in the Company's equity.

 

Currency risk

The Company and Group take on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. This is managed through the Group entering into forward foreign exchange contracts. The Board sets limits on the level of exposure for both overnight and intra-day positions, which are monitored daily. The table below summarises the Group's exposure to foreign currency exchange rate risk at 31 December 2018. Included in the table below are the Group's assets and liabilities at carrying amounts, categorised by currency.

 


GBP (£)

USD ($)

Euro (€)

Other

Total

At 31 December 2018

£000

£000

£000

£000

£000

ASSETS






Cash and balances at central banks

405,244

30

47

4

405,325

Loans and advances to banks

8,856

13,794

19,714

11,809

54,173

Debt securities at amortised cost

243,680

99,011

 -  

 -  

342,691

Derivative financial instruments

1,655

4

3

184

1,846

Loans and advances to customers

1,169,157

16,122

39,377

 -  

1,224,656

Other assets

2,861

 -  

115

 -  

2,976

Financial investments

34,219

954

178

 -  

35,351


1,865,672

129,915

59,434

11,997

2,067,018

LIABILITIES






Deposits from banks

232,675

 -  

 -  

 -  

232,675

Derivative financial instruments

3

4

1

180

188

Deposits from customers

1,526,623

130,061

46,068

11,534

1,714,286

Other liabilities

1,782

 -  

 -  

 -  

1,782

Debt securities in issue

 -  

 -  

13,283

 -  

13,283


1,761,083

130,065

59,352

11,714

1,962,214

Net on-balance sheet position

104,589

(150)

82

283

104,804

Credit commitments

67,880

 -  

 -  

 -  

67,880

 

The table below summarises the Group's exposure to foreign currency exchange risk at 31 December 2017:








GBP (£)

USD ($)

Euro (€)

Other

Total

At 31 December 2017

£000

£000

£000

£000

£000

ASSETS






Cash and balances at central banks

313,101

 -  

 -  

 -  

313,101

Loans and advances to banks

6,027

40,870

16,944

6,838

70,679

Debt securities held-to-maturity

170,723

56,296

 -  

 -  

227,019

Derivative financial instruments

2,525

1

25

 -  

2,551

Loans and advances to customers

997,025

14,912

37,332

 -  

1,049,269

Other assets

11,964

 -  

 -  

 -  

11,964

Financial investments

140

706

1,501

 -  

2,347


1,501,505

112,785

55,802

6,838

1,676,930

LIABILITIES






Deposits from banks

195,067

 -  

 -  

30

195,097

Derivative financial instruments

914

1

 -  

16

931

Deposits from customers

1,228,878

112,731

42,733

6,439

1,390,781

Other liabilities

1,207

 -  

 -  

 -  

1,207

Debt securities in issue

 -  

 -  

13,104

 -  

13,104


1,426,066

112,732

55,837

6,485

1,601,120

Net on-balance sheet position

75,439

53

(35)

353

75,810

Credit commitments

131,963

 -  

 -  

 -  

131,963

 

Derivative financial instruments (see note 21) are in place to mitigate foreign currency risk on net exposures for each currency. A 10% strengthening of the pound against the US dollar would lead to a £5,000 increase (2017: £5,000 increase) in Group profits and equity, while a 10% weakening of the pound against the US dollar would lead to the same decrease in Group profits and equity. Similarly, a 10% strengthening of the pound against the Euro would lead to a £4,000 increase (2017: £4,000 increase) in Group profits and equity, while a 10% weakening of the pound against the Euro would lead to the same increase in Group profits and equity..

 

The table below summarises the Company's exposure to foreign currency exchange rate risk at 31 December 2018:







GBP (£)

Euro (€)

Total

At 31 December 2018

£000

£000

£000

ASSETS




Loans and advances to banks

3,437

13,571

17,008

Financial investments

19,313

 -  

19,313


22,750

13,571

36,321

LIABILITIES




Other liabilities

1,838

 -  

1,838

Debt securities in issue

 -  

13,283

13,283


1,838

13,283

15,121

Net on-balance sheet position

20,912

288

21,200

 

The table below summarises the Company's exposure to foreign currency exchange rate risk at 31 December 2017:







GBP (£)

Euro (€)

Total

At 31 December 2017

£000

£000

£000

ASSETS




Loans and advances to banks

22,734

13,369

36,103

Financial investments

140

 -  

140

Other assets

162

 -  

162


23,036

13,369

36,405

LIABILITIES




Other liabilities

1,840

 -  

1,840

Debt securities in issue

 -  

13,104

13,104


1,840

13,104

14,944

Net on-balance sheet position

21,196

265

21,461

 

A 10% strengthening of the pound against the Euro would lead to £3,000 (2017: £3,000) decrease in the Company profits and equity, conversely a 10% weakening of the pound against the Euro would lead to the same increase in the Company profits and equity.

 

Interest rate risk

Interest rate risk is the potential adverse impact on the Company and Group's future cash flows from changes in interest rates, and arises from the differing interest rate risk characteristics of the Company and Group's assets and liabilities. In particular, fixed rate savings and borrowing products expose the Group to the risk that a change in interest rates could cause either a reduction in interest income or an increase in interest expense relative to variable rate interest flows. The Group seeks to "match" interest rate risk on either side of the Statement of Financial Position. However, this is not a perfect match and interest rate risk is present in: Money market transactions of a fixed rate nature, fixed rate loans, fixed rate savings accounts and floating rate products dependent on when they re-price at a future date.

 

Interest rate risk is measured throughout the maturity bandings of the book on a parallel shift scenario for a 200 basis points movement.  Interest rate risk is managed to limit value at risk to be less than £1.5m. The current position of the balance sheet is such that it results in a favourable impact on the economic value of equity of £1.3m (2017: £0.8m) for a positive 200bps shift and an adverse impact of £1.4m (2017: £0.8m) for a negative 200bps movement. The negative movement is capped at the Bank of England base rate of 75bps (2017: 50bps), which result in a negative impact of £0.5m (2017: £0.3m). The Company has no fixed rate exposures, but an upward change of 50bps on variable rates would increase pre-tax profits and equity by £10,000 (2017: increase pre-tax profits and equity by £10,000).

 

The following tables summarise the re-pricing periods for the assets and liabilities in the Company and Group, including derivative financial instruments which are principally used to reduce exposure to interest rate risk. Items are allocated to time bands by reference to the earlier of the next contractual interest rate re-price and the maturity date.

 

Group

Within 3 months

More than 3 months but less than 6 months

More than 6 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

Non interest bearing

Total

As at 31 December 2018

£000

£000

£000

£000

£000

£000

£000

ASSETS








Cash and balances at central banks

405,325

 -  

 -  

 -  

 -  

 -  

405,325

Loans and advances to banks

54,115

 -  

58

 -  

 -  

 -  

54,173

Debt securities at amortised cost

269,026

27,846

41,896

3,923

 -  

 -  

342,691

Derivative financial instruments

304

 -  

 -  

1,542

 -  

 -  

1,846

Loans and advances to customers

1,030,316

6,107

17,502

170,525

206

 -  

1,224,656

Other assets*

 -  

 -  

 -  

 -  

 -  

111,131

111,131

Financial investments

 -  

 -  

 -  

 -  

 -  

35,351

35,351


1,759,086

33,953

59,456

175,990

206

146,482

2,175,173

LIABILITIES








Deposits from banks

232,675

 -  

 -  

 -  

 -  

 -  

232,675

Derivative financial instruments

188

 -  

 -  

 -  

 -  

 -  

188

Deposits from customers

1,255,488

197,785

95,868

165,145

 -  

 -  

1,714,286

Other liabilities**

 -  

 -  

 -  

 -  

 -  

18,785

18,785

Debt securities in issue

13,283

 -  

 -  

 -  

 -  

 -  

13,283

Equity

 -  

 -  

 -  

 -  

 -  

195,956

195,956


1,501,634

197,785

95,868

165,145

 -  

214,741

2,175,173

Impact of derivative instruments

25,762

 -  

 -  

(25,762)

 -  

 -  


Interest rate sensitivity gap

283,214

(163,832)

(36,412)

(14,917)

206

(68,259)










Cumulative gap

283,214

119,382

82,970

68,053

68,259

 -  










*   Other assets include all remaining assets in the Statement of Financial Position, which are not shown separately above.

** Other liabilities include all remaining liabilities in the Statement of Financial Position, which are not shown separately above.

 

Group

Within 3 months

More than 3 months but less than 6 months

More than 6 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

Non interest bearing

Total

As at 31 December 2017

£000

£000

£000

£000

£000

£000

£000

ASSETS








Cash and balances at central banks

313,101

 -  

 -  

 -  

 -  

 -  

313,101

Loans and advances to banks

61,211

579

8,889

 -  

 -  

 -  

70,679

Debt securities held-to-maturity

185,926

35,093

6,000

 -  

 -  

 -  

227,019

Derivative financial instruments

950

 -  

 -  

1,601

 -  

 -  

2,551

Loans and advances to customers

880,822

6,938

10,774

143,979

 -  

6,756

1,049,269

Other assets

 -  

 -  

 -  

 -  

 -  

188,266

188,266

Financial investments

 -  

 -  

 -  

 -  

 -  

2,347

2,347


1,442,010

42,610

25,663

145,580

 -  

197,369

1,853,232

LIABILITIES








Deposits from banks

195,097

 -  

 -  

 -  

 -  

 -  

195,097

Derivative financial instruments

931

 -  

 -  

 -  

 -  

 -  

931

Deposits from customers

1,061,442

162,503

109,478

57,358

 -  

 -  

1,390,781

Other liabilities

 -  

 -  

 -  

 -  

 -  

16,944

16,944

Debt securities in issue

13,104

 -  

 -  

 -  

 -  

 -  

13,104

Equity

 -  

 -  

 -  

 -  

 -  

236,375

236,375


1,270,574

162,503

109,478

57,358

 -  

253,319

1,853,232

Impact of derivative instruments

17,824

 -  

 -  

(17,824)

 -  

 -  


Interest rate sensitivity gap

189,260

(119,893)

(83,815)

70,398

 -  

(55,950)










Cumulative gap

189,260

69,367

(14,448)

55,950

55,950

 -  










*   Other assets include all remaining assets in the Statement of Financial Position, which are not shown separately above.

** Other liabilities include all remaining liabilities in the Statement of Financial Position, which are not shown separately above.

 

Company

Within 3 months

More than 3 months but less than 6 months

More than 6 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

Non interest bearing

Total

As at 31 December 2018

£000

£000

£000

£000

£000

£000

£000

ASSETS








Loans and advances to banks

16,977

 -  

 -  

 -  

 -  

31

17,008

Other assets*

 -  

 -  

 -  

 -  

 -  

135,035

135,035

Financial investments

 -  

 -  

 -  

 -  

 -  

19,313

19,313


16,977

 -  

 -  

 -  

 -  

154,379

171,356

LIABILITIES








Other liabilities**

 -  

 -  

 -  

 -  

 -  

3,324

3,324

Debt securities in issue

13,283

 -  

 -  

 -  

 -  

 -  

13,283

Equity

 -  

 -  

 -  

 -  

 -  

154,749

154,749


13,283

 -  

 -  

 -  

 -  

158,073

171,356

Interest rate sensitivity gap

3,694

 -  

 -  

 -  

 -  

(3,694)










Cumulative gap

3,694

3,694

3,694

3,694

3,694

 -  










*   Other assets include all remaining assets in the Statement of Financial Position, which are not shown separately above.

** Other liabilities include all remaining liabilities in the Statement of Financial Position, which are not shown separately above.









Company

Within 3 months

More than 3 months but less than 6 months

More than 6 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

Non interest bearing

Total

As at 31 December 2017

£000

£000

£000

£000

£000

£000

£000

ASSETS








Loans and advances to banks

35,944

 -  

 -  

 -  

 -  

159

36,103

Other assets*

 -  

 -  

 -  

 -  

 -  

103,855

103,855

Financial investments

 -  

 -  

 -  

 -  

 -  

140

140


35,944

 -  

 -  

 -  

 -  

104,154

140,098

LIABILITIES








Other liabilities**

 -  

 -  

 -  

 -  

 -  

3,293

3,293

Debt securities in issue

13,104

 -  

 -  

 -  

 -  

 -  

13,104

Equity

 -  

 -  

 -  

 -  

 -  

123,701

123,701


13,104

 -  

 -  

 -  

 -  

126,994

140,098

Interest rate sensitivity gap

22,840

 -  

 -  

 -  

 -  

(22,840)










Cumulative gap

22,840

22,840

22,840

22,840

22,840

 -  










*   Other assets include all remaining assets in the Statement of Financial Position, which are not shown separately above.

** Other liabilities include all remaining liabilities in the Statement of Financial Position, which are not shown separately above.

 

(d) Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its obligations associated with its financial liabilities that are settled by delivering cash or another financial asset.

 

The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation. The liquidity requirements of the Group are met through withdrawing funds from its Bank of England Reserve Account to cover any short-term fluctuations and longer term funding to address any structural liquidity requirements.

 

The Group has formal governance structures in place to manage and mitigate liquidity risk on a day to day basis. The Board of AL sets and approves the liquidity risk management strategy. The Assets and Liabilities Committee ("ALCO"), comprising senior executives of the Group, monitors liquidity risk. Key liquidity risk management information is reported by the finance teams and monitored by the Chief Executive Officer and Finance Director on a daily basis. The ALCO meets monthly to review liquidity risk against set thresholds and risk indicators including early warning indicators, liquidity risk tolerance levels and Individual Liquidity Adequacy Assessment Process ("ILAAP") metrics.

 

The PRA requires the Board to ensure that the Group has adequate levels of liquidity resources and a prudent funding profile, and that it comprehensively manages and controls liquidity and funding risks. The Group maintains deposits placed at the Bank of England, and  highly liquid unencumbered assets that can be called upon to create sufficient liquidity to meet liabilities on demand, particularly in a period of liquidity stress.

 

Arbuthnot Latham & Co., Limited ("AL") has a Board approved ILAAP, and maintains liquidity buffers in excess of the minimum requirements. The ILAAP is embedded in the risk management framework of the Group and is subject to ongoing updates and revisions when necessary. At a minimum, the ILAAP is undated annually. The Liquidity Coverage Ratio ("LCR") regime has applied to the Group from 1 October 2015, requiring management of net 30 day cash outflows as a proportion of high quality liquid assets. The actual LCR at 282% (2017: 222%) has significantly exceeded the regulatory minimum of 90% (2017: 80%) throughout the year.

 

The Group is exposed to daily calls on its available cash resources from current accounts, maturing deposits and loan draw-downs. The Group maintains significant cash resources to meet all of these needs as they fall due. The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks to be completely matched, as transacted business is often of uncertain term and of different types.

 

The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing liabilities as they mature are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates.

 

The tables below show the undiscounted contractual cash flows of the Group's financial liabilities and assets as at 31 December 2018:









Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2018

£000

£000

£000

£000

£000

£000

Financial liability by type







Non-derivative liabilities







Deposits from banks

232,675

(232,675)

(232,675)

 -  

 -  

 -  

Deposits from customers

1,714,286

(1,719,600)

(1,274,190)

(355,512)

(89,898)

 -  

Other liabilities

1,782

(1,782)

(1,775)

 -  

 -  

(7)

Debt securities in issue

13,283

(19,431)

(90)

(271)

(1,447)

(17,623)

Issued financial guarantee contracts

 -  

(1,744)

(1,744)

 -  

 -  

 -  

Unrecognised loan commitments

 -  

(86,002)

(86,002)

 -  

 -  

 -  


1,962,026

(2,061,234)

(1,596,476)

(355,783)

(91,345)

(17,630)








Derivative liabilities







Risk management:

188






 - Outflows

 -  

(188)

(188)

 -  

 -  

 -  


188

(188)

(188)

 -  

 -  

 -  

 

 

 



 

 





Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2018

£000

£000

£000

£000

£000

£000

Financial asset by type







Non-derivative assets







Cash and balances at central banks

405,325

405,325

405,325

 -  

 -  

 -  

Loans and advances to banks

54,173

54,173

54,115

58

 -  

 -  

Debt securities at amortised cost

342,691

346,694

129,604

101,449

115,641

 -  

Loans and advances to customers

1,224,656

1,382,857

46,646

173,077

1,038,465

124,669

Other assets

2,976

2,976

2,976

 -  

 -  

 -  

Financial investments

35,351

35,351

16,038

 -  

19,313

 -  


2,065,172

2,227,376

654,704

274,584

1,173,419

124,669








Derivative assets







Risk management:

1,846






 - Inflows

 -  

1,846

 -  

 -  

 -  

1,846


1,846

1,846

 -  

 -  

 -  

1,846

 

The tables below show the undiscounted contractual cash flows of the Group's financial liabilities and assets as at 31 December 2017:









Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2017

£000

£000

£000

£000

£000

£000

Financial liability by type







Non-derivative liabilities







Deposits from banks

195,097

(195,097)

(195,097)

 -  

 -  

 -  

Deposits from customers

1,390,781

(1,395,770)

(1,040,893)

(293,425)

(61,452)

 -  

Other liabilities

1,207

(1,207)

(1,207)

 -  

 -  

 -  

Debt securities in issue

13,104

(19,381)

(87)

(262)

(1,395)

(17,637)

Issued financial guarantee contracts

 -  

(2,976)

(2,976)

 -  

 -  

 -  

Unrecognised loan commitments

 -  

(131,963)

(131,963)

 -  

 -  

 -  


1,600,189

(1,746,394)

(1,372,223)

(293,687)

(62,847)

(17,637)








Derivative liabilities







Risk management:

931






 - Outflows

 -  

(931)

(931)

 -  

 -  

 -  


931

(931)

(931)

 -  

 -  

 -  

 

 

 








Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2017

£000

£000

£000

£000

£000

£000

Financial asset by type







Non-derivative assets







Cash and balances at central banks

313,101

313,101

313,101

 -  

 -  

 -  

Loans and advances to banks

70,679

70,679

61,211

579

8,889

 -  

Debt securities held-to-maturity

227,019

227,166

22,886

101,277

103,003

 -  

Loans and advances to customers

1,049,269

1,187,665

126,689

121,493

800,091

139,392

Other assets

11,964

11,964

11,964

 -  

 -  

 -  

Financial investments

2,347

2,347

2,335

 -  

12

 -  


1,674,379

1,812,922

538,186

223,349

911,995

139,392








Derivative assets







Risk management:

2,551






 - Inflows

 -  

2,551

 -  

 -  

 -  

2,551


2,551

2,551

 -  

 -  

 -  

2,551

 

 

The table below sets out the components of the Group's liquidity reserves:











31 December 2018

31 December 2017




Amount

Fair value

Amount

Fair value

Liquidity reserves



£000

£000

£000

£000

Cash and balances at central banks



405,325

405,325

313,101

313,101

Loans and advances to banks



54,173

54,173

70,679

70,679

Debt securities at amortised cost / held-to-maturity



342,691

344,001

227,019

227,951

Undrawn credit lines



10,000

10,000

10,000

10,000




812,189

813,499

620,799

621,731

 

Assets pledged as collateral or encumbered

The total financial assets recognised in the statement of financial position that had been pledged as collateral for liabilities at 31 December 2018 were £308.9m (2017: £208.7m).

 

Financial assets are pledged as collateral as part of sales and repurchases, securities borrowing and securitisation transactions under terms that are usual and customary for such activities. In addition, as part of these transactions, the Group has received collateral that it is permitted to sell or repledge in the absence of default.

 

The table below analyses the contractual cash flows of the Company's financial liabilities and assets as at 31 December 2018:

 


Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2018

£000

£000

£000

£000

£000

£000

Financial liability by type







Non-derivative liabilities







Other liabilities

1,838

(1,838)

(248)

 -  

 -  

(1,590)

Issued financial guarantee contracts

13,283

(19,431)

(90)

(271)

(1,447)

(17,623)


15,121

(21,269)

(338)

(271)

(1,447)

(19,213)









Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2018

£000

£000

£000

£000

£000

£000

Financial asset by type







Non-derivative assets







Loans and advances to banks

17,008

17,008

17,008

 -  

 -  

 -  

Financial investments

19,313

19,313

 -  

 -  

19,313

 -  


36,321

36,321

17,008

 -  

19,313

 -  

 

The table below analyses the contractual cash flows of the Company's financial liabilities and assets as at 31 December 2017:









Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2017

£000

£000

£000

£000

£000

£000

Financial liability by type







Non-derivative liabilities







Other liabilities

1,840

(1,840)

(251)

 -  

 -  

(1,589)

Debt securities in issue

13,104

(19,381)

(87)

(262)

(1,395)

(17,637)


14,944

(21,221)

(338)

(262)

(1,395)

(19,226)









Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2017

£000

£000

£000

£000

£000

£000

Financial asset by type







Non-derivative assets







Loans and advances to banks

36,103

36,103

36,103

 -  

 -  

 -  

Financial investments

140

140

128

 -  

12

 -  

Other assets

162

162

162

 -  

 -  

 -  


36,405

36,405

36,393

 -  

12

 -  

 

The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature

are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates and exchange rates.

 

Fiduciary activities

The Group provides investment management and advisory services to third parties, which involve the Group making allocation and purchase and sale decisions in relation to a wide range of financial instruments. Those assets that are held in a fiduciary capacity are not included in these financial statements. These services give rise to the risk that the Group may be accused of maladministration or underperformance. At the balance sheet date, the Group had investment management accounts amounting to approximately £985m (2017: £1,044m). Additionally, the Group provides investment advisory services.

 

(e) Financial assets and liabilities




















The tables below set out the Group's financial assets and financial liabilities into their respective classifications:
















FVPL

FVOCI

Amortised cost

Total carrying amount

Fair value

At 31 December 2018





£000

£000

£000

£000

£000











ASSETS










Cash and balances at central banks





 -  

 -  

405,325

405,325

405,325

Loans and advances to banks





 -  

 -  

54,173

54,173

54,173

Debt securities at amortised cost





 -  

 -  

342,691

342,691

344,001

Derivative financial instruments





1,846

 -  

 -  

1,846

1,846

Loans and advances to customers





 -  

 -  

1,224,656

1,224,656

1,187,408

Other assets





2,976

 -  

 -  

2,976

2,976

Financial investments