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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Arbuthnot Banking Group Plc | LSE:ARBB | London | Ordinary Share | GB0007922338 | ORD 1P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -30.00 | -2.97% | 980.00 | 960.00 | 1,040.00 | 980.00 | 980.00 | 980.00 | 3,988 | 10:38:11 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Commercial Banks, Nec | 181.44M | 35.38M | 2.1678 | 4.52 | 159.94M |
From May 2022 to May 2024
TIDMARBB
RNS Number : 6961U
Arbuthnot Banking Group PLC
30 March 2023
30 March 2023
For immediate release
ARBUTHNOT BANKING GROUP ("Arbuthnot", "the Group" or "ABG")
Audited Final Results for the year to 31 December 2022
Profit growth accelerates path to "Future State".
Arbuthnot Banking Group today announces its audited results for the year ended 31 December 2022.
Arbuthnot Banking Group PLC is the holding company for Arbuthnot Latham & Co., Limited ("Arbuthnot Latham").
FINANCIAL HIGHLIGHTS
-- Profit Before Tax of GBP20.0m (2021: GBP4.6m) -- Operating income increased to GBP137.4m (2021: GBP88.7m) -- Earnings per share of 109.6p (2021: 45.2p) -- Final dividend declared increased by 3p to 25p (2021: 22p) -- Total ordinary dividend per share increased by 4p (11%) to 42p (2021: 38p)* -- Net assets of GBP212.0m (2021: GBP200.9m) -- Net assets per share of 1411p (2021: 1337p)
-- CET1 ratio of 11.6% (2021: 12.3%) and total capital ratio of 14.0% (2021: 14.9%), significantly greater than the Group's minimum requirements
-- Substantial surplus liquidity at the year end of GBP535m
OPERATIONAL HIGHLIGHTS
Arbuthnot Latham
-- Profit before tax and group recharges of GBP32.9m (2021: GBP15.3m), an increase of 115% -- Average net margin at 5.1% (2021: 4.1%) -- Customer loans increased 10% to GBP2.2bn (2021: GBP2.0bn)** -- Customer deposits increased 9% to GBP3.1bn (2021: GBP2.8bn)
-- Assets under management decreased 2% to GBP1.33bn (2021: GBP1.36bn) mainly due to market performance
-- Successful implementation of a significant upgrade to the banking platform following 18-month project, improving resilience and agility
-- Launch of new lending automation system improving the loan origination process for commercial and private clients
-- Medium term "Future State" pre-tax return on capital objective achieved ahead of plan, with further ambitious targets introduced
Commenting on the results, Sir Henry Angest, Chairman and Chief Executive of Arbuthnot, said: "The Group made good progress in 2022 after investing over many years in a business model built on relationship-based banking, while also diversifying our lending to higher margin specialist sectors. These results demonstrate the benefits of this strategy. "
Note: * This excludes the special dividend of 21p per share paid in 2021.
** This balance includes both Customer loans and assets available for lease.
The Directors of the Company accept responsibility for the contents of this announcement.
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ENQUIRIES:
0207 012
Arbuthnot Banking Group 2400
Sir Henry Angest, Chairman and Chief Executive
Andrew Salmon, Group Chief Operating Officer
James Cobb, Group Finance Director
Grant Thornton UK LLP (Nominated Adviser and AQSE Corporate 0207 383
Adviser) 5100
Colin Aaronson
Samantha Harrison
George Grainger
Ciara Donnelly
0207 408
Shore Capital (Broker) 4090
Daniel Bush
David Coaten
Tom Knibbs
0207 379
H/Advisors Maitland (Financial PR) 5151
Sam Cartwright
The 2022 Annual Report and Notice of Meeting will be available on the Arbuthnot Banking Group website http://www.arbuthnotgroup.com on or before 24 April 2023. Copies will then be available from the Company Secretary, Arbuthnot Banking Group PLC, Arbuthnot House, 7 Wilson Street, London, EC2M 2SN, when practicable.
Consolidated statement of comprehensive income
Year ended 31
December
2022 2021
Note GBP000 GBP000
------------------------------------------------------ ---- --------- --------
Income from banking activities
Interest income 8 120,013 77,102
Interest expense (20,932) (13,027)
------------------------------------------------------ ---- --------- --------
Net interest income 99,081 64,075
------------------------------------------------------ ---- --------- --------
Fee and commission income 9 21,586 18,472
Fee and commission expense (537) (349)
------------------------------------------------------ ---- --------- --------
Net fee and commission income 21,049 18,123
------------------------------------------------------ ---- --------- --------
Operating income from banking activities 120,130 82,198
------------------------------------------------------ ---- --------- --------
Income from leasing activities
Revenue 10 99,367 74,500
Cost of goods sold 10 (82,109) (68,023)
------------------------------------------------------ ---- --------- --------
Gross profit from leasing activities 10 17,258 6,477
------------------------------------------------------ ---- --------- --------
Total group operating income 137,388 88,675
------------------------------------------------------ ---- --------- --------
Net impairment loss on financial assets 11 (5,503) (3,196)
Gain from bargain purchase 12 - 8,626
Loss on sale of commercial property held as inventory (4,590) -
Other income 13 1,627 3,955
Operating expenses 14 (108,913) (93,422)
------------------------------------------------------ ---- --------- --------
Profit before tax 20,009 4,638
Income tax (expense) / credit 15 (3,551) 2,148
------------------------------------------------------ ---- --------- --------
Profit after tax 16,458 6,786
------------------------------------------------------ ---- --------- --------
Other comprehensive income
Items that will not be reclassified to profit or loss
Changes in fair value of equity investments at fair
value through other comprehensive income 627 5,626
Tax on other comprehensive income (128) 2
------------------------------------------------------ ---- --------- --------
Other comprehensive income for the period, net of
tax 499 5,628
------------------------------------------------------ ---- --------- --------
Total comprehensive income for the period 16,957 12,414
------------------------------------------------------ ---- --------- --------
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 17 109.6 45.2
------------------------------------------------------ ---- --------- --------
Diluted earnings per share 17 109.6 45.2
------------------------------------------------------ ---- --------- --------
Consolidated statement of financial position
At 31 December
2022 2021
Note GBP000 GBP000
ASSETS
Cash and balances at central banks 18 732,729 814,692
Loans and advances to banks 19 115,787 73,444
Debt securities at amortised cost 20 439,753 301,052
Assets classified as held for sale 21 3,279 3,136
Derivative financial instruments 22 6,322 1,753
Loans and advances to customers 24 2,036,077 1,870,962
Other assets 26 52,185 110,119
Financial investments 27 3,404 3,169
Deferred tax asset 28 2,425 2,562
Intangible assets 29 32,549 29,864
Property, plant and equipment 30 175,273 125,890
Right-of-use assets 31 7,714 15,674
Investment property 32 6,550 6,550
---------------------------------------------------- ----- ---------- ----------
Total assets 3,614,047 3,358,867
---------------------------------------------------- ----- ---------- ----------
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 39 154 154
Retained earnings 40 212,037 201,026
Other reserves 40 (213) (301)
---------------------------------------------------- ----- ---------- ---------- Total equity 211,978 200,879 ---------------------------------------------------- ----- ---------- ---------- LIABILITIES Deposits from banks 33 236,027 240,333 Derivative financial instruments 22 135 171 Deposits from customers 34 3,092,549 2,837,869 Current tax liability 1,748 413 Other liabilities* 35 26,144 21,154 Lease liabilities* 36 7,872 21,276 Debt securities in issue 37 37,594 36,772 ---------------------------------------------------- ----- ---------- ---------- Total liabilities 3,402,069 3,157,988 ---------------------------------------------------- ----- ---------- ---------- Total equity and liabilities 3,614,047 3,358,867 ---------------------------------------------------- ----- ---------- ---------- *The hire purchase and finance lease liabilities of GBP5,062k at 31 December 2021 have been reclassified from other liabilities to lease liabilities to reflect the presentation in notes 35 and 36.
Chairman's statement
Arbuthnot Banking Group ("ABG" or "the Group") is pleased to report a profit before tax of GBP20.0m.
This represents a significant increase over the prior year result of GBP4.6m and is due to a number of factors but the most important of those is the increase of the Bank of England ("BoE") base rate during the year.
I always thought that after nearly 15 years of historically low interest rates, that once rates started to rise, they would move at a speed and quantum greater than anybody expected. This has proven to be the case in 2022 with eight separate rate increases, with BoE base rate finishing the year at 3.5% compared to 0.25% at the start of the year.
I have consistently believed that the strength of a bank should be measured on the quality and diversity of its deposit base and as a result of this philosophy we have spent the last few years developing and investing in the Bank's business model that is based on good quality relationship driven deposits. This approach was taken in the belief that interest rates would normalise in due course. We are now seeing the benefits of this business model.
I should however add a word of caution; given that we have regularly maintained a very prudent approach to the amount of excess liquidity that we deposit at the BoE, this asset has no natural hedge in our balance sheet, so the revenues that relate to this cash will be subject to further changes to the base rate, both up and down.
Given the improved longer term prospects of the Group we plan to increase the dividend payment by adding an additional 2p to the usual 1p increase in the final dividend of 2022. This takes the final dividend to 25p per share (2021: 22p).
Highlights
The clear highlight of 2022 is the financial performance of the Group recording more than a 400% increase in profit before tax despite having recognised a loss of GBP4.6m on the sale of our commercial property located in King Street in the heart of the West End. Given that commercial property indices are forecast to fall by over 20% over the next two years we were pleased to complete this sale. Along with the continued exclusion of the profit on sale of trucks in our subsidiary Asset Alliance of GBP6.5m, which continues to be excluded from our financial results, this means the underlying profitability of the Group was approximately GBP31m.
I was also pleased with the continued progress against our medium term "Future State Plan". We are on course to achieve the most important milestone in that plan, namely the pre-tax return on capital, during 2023. This is considerably earlier than we had initially hoped and enables us to revise this plan with more ambitious targets for future growth.
Having noted that deposits are the life blood of any bank, I was delighted that our customer deposits exceeded GBP3 billion during the third quarter of the year and continued to grow strongly to close the year at GBP3.1bn. With the onset of a more negative sentiment in the economy, we decided to exercise greater caution in our underwriting processes on residential property. As a result, our lending volumes reduced in the second half of the year but the overall customer lending balances, including leased assets, increased by 11% during the year.
Much of the planned evolution in our Future State Plan was the growth in our specialist divisions, giving us access to higher margin lending markets and also bringing greater diversity to the assets held by the Group.
As a result of the conflict in Ukraine, Asset Alliance Group continued to see further disruption to supply chains which affected the availability of new trucks. However, despite this, the business was able to display strong growth in its customer balances, which grew by 47% to end the year at GBP189.1m.
Renaissance Asset Finance experienced strong demand for its range of financing solutions and saw its customer balances increase by nearly 40% to close at GBP133.8m.
Arbuthnot Commercial Asset Based Lending saw strong growth in both client acquisition and balances. Customer balances grew by 48% finishing the year at GBP268.8m. Five years after opening for business, ACABL delivered a profit before tax of GBP5.2m after paying internal financing costs of GBP7.9m.
Our Wealth Management division continued to display strong performance in attracting criteria clients. The gross inflows for the year were in excess of GBP200m, an increase of 21% on the prior year. We hope that these inflows will be supplemented in 2023 by business generated in the Independent Financial Advisor (IFA) sector following the launch by the division of its Platform Model Portfolio Service Proposition in the final quarter of the year.
Although we are proud to provide a personalised banking service to our clients, it must not be forgotten that our Bank is also founded on a suite of modern operating platforms and we continued to invest in this foundation during the year, successfully upgrading our Oracle banking platform to the latest version and adding the Ncino loan system. This continuous programme of investment has allowed us to process nearly one million of inbound and outbound payments in the year, an increase of 24% on 2021.
In light of the cost of living crisis I was pleased that we were able to help our employees through these difficult times by making a cost of living payment to all employees in September of GBP1,500 amounting to approximately GBP1 million across the Group.
As with all banks and market participants, we have noted the developments which have followed Silicon Valley Bank's failure in the US and the sale of its subsidiary to HSBC. Throughout our history of serving clients, Arbuthnot Latham has proven its ability to adapt and to grow, even during times of market turbulence. Core to our bank's ability to do this is a sustained focus on the long-term. It is when faced with circumstances such as those we have witnessed in the last few weeks that the characteristics which make Arbuthnot Latham attractive to our clients, and which have made the bank successful, show their benefit. Arbuthnot Latham adopts a conservative operating model that targets long-term stability over short-term gain. We maintain strong levels of capital and liquidity and maintain a high-quality loan book. This strong underlying position means our bank is well placed to endure any continued economic uncertainty.
Board Changes and Personnel
At the last AGM Sir Christopher Meyer retired from the Board after fourteen years of valuable service; however, we were saddened to learn of his sudden passing last July and I would like to express my condolences to his wife Baroness Meyer.
Also, as previously indicated, Ruth Lea retired as a Senior Economic Advisor to our Board after sixteen years' service to the Group and I am happy to report that she has recently been elevated to the House of Lords.
Lastly in September I was pleased to welcome Frederick Angest to the Group Board.
As always, the continued success of the Group reflects the hard work and commitment of our members of staff. On behalf of the Board, I extend our thanks to all of them for their contribution in 2022. Finally, I would like to thank my fellow directors on both Boards for their help and advice during the year.
Dividend
Given the increased profits of the Group in 2022 and the improving outlook, the Board has decided to accelerate the growth trajectory of the dividend and is recommending a final dividend of 25p per share. This is an increase of 3p compared to the final dividend of 2021 and an additional increase of 2p over the normalised 1p increase. The final dividend, if approved at the 2023 AGM, will be paid on 2 June 2023 to shareholders on the register at close of business on 21 April 2023.
Together with the interim dividend of 17p per share, it gives a total dividend for the year of 42p per share, which compares to the total dividend of 59p per share paid in 2021 which included a special dividend of 21p per share.
Outlook
During 2022, the increase in the Bank of England base rate clearly provided a significant and positive impact on the performance of the Group. There has already been further rate increases in 2023 which will have a further beneficial impact on revenues.
However, the prospects for the UK economy are less clear; the increase in the cost of living will almost certainly have an impact on the Group's cost base and could also affect the ability of our borrowers to maintain payments on loan facilities.
We remain alert to these headwinds, but remain optimistic as we continue to focus on developing and diversifying the Group.
Strategic Report - Business Review Group Key Metrics 2022 2021 ------------------------------------------- ----------------- -------------- Operating income GBP137.4m GBP88.7m Other income GBP1.6m GBP4.0m Operating expenses GBP108.9m GBP93.4m Profit before tax GBP20.0m GBP4.6m Customer loans (1) GBP2.2bn GBP2.0bn Customer deposits GBP3.1bn GBP2.8bn Total assets GBP3.6bn GBP3.4bn Key Performance Indicators Assets under management GBP1.3bn GBP1.4bn Average net margin (2) 5.1% 4.1% Loan to deposit ratio (3) 65.8% 65.9% (1) This balance includes both Customer loans and assets available for lease. (2) Average net margin: Gross interest income yield less average interest rate on customer deposits (3) Loan to deposit ratio: Loans and advances at amortised cost divided by deposits at amortised cost
The Group has seen a significant increase in profitability in 2022 reporting profit before tax of GBP20.0m compared to GBP4.6m for the prior year. Multiple successive increases in the Bank of England Base Rate have increased interest income generated from not only the Bank's lending balances, but also its treasury assets, including those held at the Bank of England. In response the Bank has increased its rates payable on deposits in line with the market. However, unexpired fixed term deposits raised in prior periods at lower rates, have resulted in interest payable by the Bank being suppressed until the deposits mature and are renewed at current higher rates, therefore deposit pricing has increased at a slower pace compared to the loan book and treasury assets.
As the economy enters a new economic cycle, the Bank continues to maintain its long-held credit principles and discipline as a key strategy to mitigate credit losses. However with any lending business, credit losses are inevitable. The IFRS9 impairment charge for the year is made up of two factors: firstly, more pessimistic economic assumptions due to the economy's performance and medium-term outlook resulting in adjustments totalling GBP0.9m; in this regard, the Bank has applied an average 11.6% fall in residential property values and a 21.2% fall in commercial property values compared to a 1.2% increase and 1.7% fall respectively in 2021 for its UK property-based lending business. The second element of the impairment charge comprises two specific bad debt cases totalling GBP3.0m, of which one was the first credit loss incurred by Arbuthnot Commercial Asset Based Lending - the specialist invoice discounting business launched in 2018. Despite these two cases, the non-performing loan book has reduced to its lowest level for over two years and is showing no signs of material stress in the credit metrics. The average loan to value ("LTV") against the loan book remains low at 52.5%, giving significant levels of security to withstand and minimise the effect of any potential falls in the property markets.
As the business model has benefitted from improved conditions resulting from the base rate increases, the major headwind on the horizon for the Group is the upward pressure on its cost base. Although higher inflation will affect all costs, the most significant will be accelerated increases in staff costs, as the cost-of-living crisis starts to interact with full employment and competition for talent intensifies. In September the Board took the decision to award a one-off cost of living payment to all employees of GBP1,500. The cost of this payment was approximately GBP1m.
During 2022, deposit balances exceeded GBP3bn for the first time in the Bank's history. The Bank finished the year with total deposits of GBP3.1bn compared to GBP2.8bn for the prior year. Deposit growth for 2022 was lower than in recent years. The Bank continued to pursue its strategy of funding the specialist lending divisions with cheaper yet sticky balances from relationship driven deposit account clients. Whilst the Bank experienced upward pressure on rates, it did not compete for deposits on the non-relationship aggregator platforms. Consequently, during the year up to GBP100m of non-relationship deposits matured and were not renewed, to be ultimately replaced by direct relationship balances.
Overall demand for lending products has continued across the divisions with balances (including lease assets) growing to GBP2.2bn, an increase of 10% from the previous year end 2021 balance of GBP2.0bn. However, given the current market uncertainty, the Bank has tightened its credit appetite, particularly in its real estate lending business, as well as stressing the affordability of interest payments to levels in excess of the 2% increase in rates as prescribed by the Prudential Regulation Authority. The effect of this reduces the LTV for new lending below the Bank's historic guidance of 60%. It is also expected that the change in appetite will reduce lending volumes in the short term. However, given the increased levels of profitability, the Bank is well positioned to retain financial resources for future opportunities that are expected to arise given the market dislocation.
Included in the result for the year is a charge of GBP4.6m, following the sale of the King Street property in the second half of the year. The building was valued at GBP60m based on a yield of 3.75%. However, following an extensive refurbishment and upgrade, the building was in the process of being let out and so two subsequent purchase price adjustments were made; firstly, any tenant incentives outstanding at the time of completion were deducted from the proceeds and secondly, an adjustment for the void period required to find the remaining tenants to fill the building was made via an escrow account and limited to 12 months of the expected rental income for each vacant floor. As in the prior year, the Group's profit also needs to be reduced for the profit on the sale of trucks generated by Asset Alliance of GBP6.5m (2021: GBP5.8m), which is required to be excluded from our accounts as a result of the acquisition accounting in the prior year. It is expected that the majority of the remaining vehicles which were acquired and subject to the adjustment will be disposed of over the coming year, resulting in any gains or losses on disposal recognised in the income statements for future periods, as and when they are sold.
Following a strategic review of its portfolio of businesses in 2023, the Bank announced its intention to cease new business for Arbuthnot Specialist Finance Ltd, its specialist lending division. All committed facilities will be honoured and the book will be wound down over the next 12 to 24 months.
Banking
The Banking business continued its track record of recent years, delivering growth in client acquisition, deposits and lending in 2022.
The acquisition of criteria clients continued to support growth in relationship call/current deposit products as well as growth in fixed term deposits, which has supported our cost of deposits in the changing market. During 2022, deposits increased by GBP255m to GBP3.1bn, equating to 9% year on year growth. Given the increased interest rate environment, the importance of continuing to attract and retain criteria clients who value the Bank's service led proposition remains a key priority.
Loan balances across Private & Commercial Banking increased to GBP1.5bn in 2022. In addition to this, GBP35m of Commercial Real Estate loans were originated under the forward flow arrangement with a third party. The strategy allows the Bank to support clients with more capital-intensive borrowing needs, whilst continuing to pursue its objectives of the "Future State" plan.
Following the global pandemic in the previous periods, the Bank tightened its credit appetite. Given the turbulent economic environment and global macro-economic developments in 2022, the Bank continued this strategy throughout the year to ensure new loans were appropriately structured. Additionally, the Bank proactively worked with existing clients to review loan structures in order to navigate the new higher rate interest rate environment.
During 2022 the Bank launched a review of its Customer Value Proposition. The outputs from this project, which encompass client feedback along with external insights are guiding key strategic initiatives for 2023. Areas of focus include improving digital capability, automation and efficiency, and enhancing client engagement, which demonstrate the Bank's commitment to its service-led proposition.
Wealth Management
Assets Under Management (AUM) finished the year at GBP1.3bn, resulting in a 2% decrease over the year. This was despite strong gross inflows of GBP209m, representing 16% of AUM at the start of the year, and an increase of 21% compared to the previous year. After taking into account outflows, there was a net increase in AUMs of GBP72m. However, market turbulence in part as a consequence of the Russia's war in Ukraine, along with domestic inflationary pressure resulted in adverse market performance, offsetting the net inflows during the year.
Following the pandemic, the business returned to a new normal of agile working both in the office and virtually. The business remains committed to delivering advice through a combination of face to face and virtual client meetings, with client service as the priority.
New business distribution momentum developed further with the delivery of a new strategic initiative for external Independent Financial Advisers. In the fourth quarter the Wealth Management business launched its Platform MPS proposition and Discretionary Portfolio Service for high-net-worth private clients, which has received positive initial feedback from intermediaries.
Mortgage Portfolios
Balances for the Banks's acquired mortgage portfolio was GBP149m at the year-end. The portfolio continues to perform in line with expectations.
Arbuthnot Commercial Asset Based Lending ("ACABL")
ACABL reported a profit before tax of GBP5.2m (2021: GBP4.7m).
In its fifth year the ACABL business recorded strong growth in both client acquisition and lending.
At the year-end, the business reported drawn balances of GBP268.8m with a further GBP91.8m available for drawdown, equating to a 47% increase from the prior year.
ACABL completed 30 new transactions in 2022 with GBP155m of facilities written. Notably, 60% of these were alongside Private Equity firms where the business saw continued demand for its products in the transactional acquisition space where ACABL has a strong reputation.
The average deal size increased from GBP4.8m to GBP5.1m with a total client base of 102 at year-end, an increase of 40% from the prior year, supported by lower than expected client attrition. This was partly a result of Private Equity firms remaining invested for longer due to the impact of the pandemic, supply chain challenges and the current economic outlook. Facility limits increased 36% on the prior year to GBP523m across a broad range of sectors, underlining the spread and diverse nature of the portfolio.
The business continued to participate in the Government sponsored lending schemes and was approved during the year to participate in the Recovery Loan Scheme Phase 3. The amount issued under these schemes in 2022 represented a small proportion of overall lending but allowed the business to support both existing clients and be incorporated into financing structures for new clients.
In line with the reported strong growth, the business processed GBP2bn of invoices during the year, up from GBP1.3bn and made in excess of 13,000 client payments totalling GBP1.85bn.
Included in the result is a GBP2m impairment charge for an exposure that was placed into administration by the directors of the business in December 2022.
Renaissance Asset Finance ("RAF")
RAF continues to experience strong demand for its asset finance facilities. The business delivered strong balance sheet growth in 2022 with the loan book increasing by nearly 40%, finishing the year at GBP133.8m.
The Block Discounting business held back profitability in the year due to the investment cost of setting up this business and the time taken for new business to draw. However, overall RAF delivered a profitable outcome for the year and with balances now at the highest level ever seen, revenue in 2023 should grow. RAF benefits from scale in its cost base, and therefore is set to make another positive contribution in 2023.
During the pandemic the business saw a sharp increase in watchlist clients, notably in the Black-Taxi cab sector. This trend has since stabilised, with some accounts now being reclassified to performing.
Arbuthnot Specialist Finance ("ASFL")
ASFL made progress during 2022 with year end balances at GBP15m, up GBP5m year on year. However, with the current economic climate, rising interest rates and a more uncertain property market, the decision was taken to exit this market and ASFL is now closed for new business. All committed facilities will be honoured and the book is expected to be wound down over the next 12 to 24 months.
Asset Alliance Group ("AAG")
As at 31 December 2022 AAG had assets available for lease totalling GBP171.7m.
The global economy limited the scale of growth in what was a strong year for AAG. The continued worldwide computer chip shortage and the immediate consequences of Russia's War in Ukraine had an adverse effect on the availability of new commercial vehicles. This was exacerbated by fuel price increases and general economic recession impacting orders.
Delays in pre-ordered stock from manufacturers limited the fleet growth potential of AAG. Consequently, the leasing strategy re-focussed on contract extensions and prioritising oldest asset replacement to mitigate increasing maintenance costs. This was successfully implemented with 40% of the managed fleet replaced during the year, with the fleet size showing modest growth to over 4,100 assets.
The shortage of new assets did however result in a continued high demand for good quality, second-hand assets, which was a key factor in driving strong performance from the truck sales division, generating an underlying net profit of GBP12.4m from the sale of 1410 end-of lease trucks and trailers during the year. GBP6.5m of this profit has already been included in the bargain purchase calculation as part of the fair value uplift at acquisition and is therefore excluded from the consolidated Group accounts.
Owned Properties
During the year the Bank sold three properties from its Owned Property portfolio.
Firstly, following the major refurbishment completed in 2021, the King Street property was sold with gross sale proceeds of GBP60m. After deductions for unexpired incentives of GBP2.4m and void periods of GBP0.96m, a charge of GBP4.6m was recognised in the income statement.
Secondly, the Bank completed the sale of two of its overseas properties. The Bank retains four assets in its property portfolio of which one is overseas.
Operations
The Bank continues to see strong growth in the acquisition of new banking clients with over 1,000 new clients onboarded during 2022 and 5,000 new accounts opened.
Nearly 1 million inbound and outbound payments were processed in 2022, a growth of 24% on the previous year, with 98% of outbound payments originating online. In addition, there were over 870,000 card transactions in 2022, an increase of nearly 35% on the previous year. Confirmation of Payee capability was added to the Bank's online banking proposition in the first quarter, further strengthening the Bank's anti-fraud controls.
In respect of the regulatory requirements under the Supervisory Statement (SS) 1/21: Impact Tolerances for Important Business Services, the Bank completed the required self-assessment of compliance with the expected standards in March 2022. This continues to be an important area of focus as the Bank continues its investment in new IT systems.
November 2022 saw the successful implementation of a significant upgrade to the Bank's Oracle Banking Platform following an 18-month project. The new platform supports more efficient payment processes and ensures payments are compatible with future payment standards. The platform has been delivered in a new cloud hosted environment, improving resilience and agility, and enabling the Bank to more readily adapt to future market changes.
Another major programme delivered in 2022 saw the launch of a new lending automation system improving the loan origination process for commercial and private clients streamlining the operations and management of key lending artefacts.
Further investment was made in the investment operations, continuing to focus on increasing automation and streamlining of processes.
Sustainability
The business has made a commitment to reduce its environmental impact and to improve its environmental performance as an integral part of its business strategy. In 2022 the business continued its sustainability project with focus around five pillars to ensure a more sustainable Group: Governance, Employees, Community, Environment and Clients. Further information is given in the Sustainability Report on pages 26 to 38.
Strategic Report - Financial Review
Arbuthnot Banking Group adopts a pragmatic approach to risk taking and seeks to maximise long term revenues and returns. Given its relative size, it is nimble and able to remain entrepreneurial and capable of taking advantage of favourable market opportunities when they arise.
The Group provides a range of financial services to clients and customers in its chosen markets of Banking, Wealth Management, Asset Finance, Asset Based Lending, Specialist Lending and Commercial Vehicle Finance. 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 products. The Group also earns rental income on its properties and holds financial investments for income.
Highlights
2022 2021
Summarised Income Statement GBP000 GBP000
-------------------------------------------------------------------------- ----------- ---------
Net interest income 99,081 64,075
Net fee and commission income 21,049 18,123
-------------------------------------------------------------------------- ----------- ---------
Operating income from banking activities 120,130 82,198
-------------------------------------------------------------------------- ----------- ---------
Revenue 99,367 74,500
Cost of goods sold (82,109) (68,023)
-------------------------------------------------------------------------- ----------- ---------
Operating income from leasing activities 17,258 6,477
-------------------------------------------------------------------------- ----------- ---------
Total group operating income 137,388 88,675
-------------------------------------------------------------------------- ----------- ---------
Gain from a bargain purchase - 8,626
Other income 1,627 3,955
Loss on sale of commercial property held as inventory (4,590) -
Operating expenses (108,913) (93,422)
Impairment losses - loans and advances to customers (5,503) (3,196)
-------------------------------------------------------------------------- ----------- ---------
Profit before tax 20,009 4,638
-------------------------------------------------------------------------- ----------- ---------
Income tax expense (3,551) 2,148
-------------------------------------------------------------------------- ----------- ---------
Profit after tax 16,458 6,786
-------------------------------------------------------------------------- ----------- ---------
Basic earnings per share (pence) 109.6 45.2
-------------------------------------------------------------------------- ----------- ---------
The Group has reported a profit before tax of GBP20.0m (2021: GBP4.6m).
The underlying profit before tax was GBP31.1m (2021: GBP17.0m).
There are a number of specific items which are included in the result
for the year that should be noted. These are detailed and compared to
the equivalent adjusted amount for the prior year in the tables below.
Arbuthnot Arbuthnot
Latham Group Banking
Underlying profit/(loss) reconciliation & Co. Centre Group
31 December 2022 GBP000 GBP000 GBP000
------------------------------------------------------- --------- -------- ---------
Profit before tax and group recharges 32,865 (12,856) 20,009
Profits realised on sale of trucks previously included
in bargain purchase 6,479 - 6,479
Loss on sale of King Street property 4,590 - 4,590
Underlying profit 43,934 (12,856) 31,078
------------------------------------------------------- --------- -------- ---------
Underlying basic earnings per share (pence) 169.2
------------------------------------------------------- --------- -------- ---------
Arbuthnot Arbuthnot
Latham Group Banking
Underlying profit reconciliation & Co. Centre Group
31 December 2021 GBP000 GBP000 GBP000
----------------------------------------------------- --------- -------- ---------
Profit before tax and group recharges 15,270 (10,632) 4,638
Exceptional reduction in BoE Base Rate 11,492 - 11,492
Write down of repossessed property in Majorca 3,835 - 3,835
Arena TV Ltd impairment 2,055 - 2,055
Gain on sale of Tay mortgage portfolio (2,239) - (2,239)
Gain from bargain purchase (8,626) - (8,626)
Profits earned on sale of trucks included in bargain
purchase 5,830 - 5,830
----------------------------------------------------- --------- -------- ---------
Underlying profit 27,617 (10,632) 16,985
----------------------------------------------------- --------- -------- ---------
Underlying basic earnings per share (pence) 108.2
----------------------------------------------------- --------- -------- ---------
* The Bank of England Base Rate which was at 0.1% for most of 2021 was
estimated to have cost the Group GBP11.5m of interest earnings in 2021,
compared to when the base rate was at 75 basis points, which is where
it was prior to the onset of the COVID-19 pandemic. No pro-rata adjustment
was made for lost interest income in 2022. The base rate has now moved
past the pre-pandemic level.
In the prior year the Group acquired Asset Alliance Group Holdings Limited, which completed on 1 April 2021. The business was acquired at a discount to its fair valued net assets resulting in a bargain purchase of GBP8.6m. In 2022 GBP6.5m (2021: GBP5.8m) of profits earned on the sale of trucks were consolidated out, as it formed part of the bargain purchase, when these assets were measured at fair value on date of acquisition.
In 2022, the King Street property was sold at a loss of GBP4.6m. The offer price took into consideration outstanding tenant incentives and expected void periods while tenants were found for vacant areas of the building.
The credit provisions of GBP5.5m under IFRS 9, include more pessimistic economic assumptions and also two specific bad debt cases totalling GBP3m. In 2021 there was one case of GBP2.1m incurred by one of the Group's specialist businesses, Renaissance Asset Finance. The provision was against the total exposure to Arena TV, a highly publicised business collapse, which reportedly had up to GBP285m of outstanding debt to 55 lenders.
Total operating income earned by the Group was GBP137.4m compared to GBP88.7m for the prior year. The average net margin on client assets was 5.1% (2021: 4.1%). Included in operating income is revenue from AAG leased assets. This has contributed 0.2% (2021: 0.5%) to the average yield generated from the Group's assets.
The Group's operating expenses increased to GBP113.5m compared to GBP93.4m for the prior year, with staff costs increasing by GBP13.6m mainly due to the accrual for bonuses.
Balance Sheet Strength
2022 2021
Summarised Balance Sheet GBP000 GBP000
-------------------------------- --------- ---------
Assets
Loans and advances to customers 2,036,077 1,870,962
121,
Assets available for lease 121,563 563
Liquid assets 1,288,269 1,189,188
Other assets 168,138 177,154
-------------------------------- --------- ---------
Total assets 3,614,047 3,358,867
-------------------------------- --------- ---------
Liabilities
Customer deposits 3,092,549 2,837,869
Other liabilities 309,520 320,119
-------------------------------- --------- ---------
Total liabilities 3,402,069 3,157,988
Equity 211,978 200,879
-------------------------------- --------- ---------
Total equity and liabilities 3,614,047 3,358,867
-------------------------------- --------- ---------
Total assets increased by GBP0.2bn to GBP3.6bn (2021: GBP3.4bn); GBP165m was due to loan book growth from both the Core Bank and the Specialist Lending subsidiaries, while leased assets in AAG and treasury assets increased by GBP50.1m and GBP99.1m respectively. The Group maintained its conservative funding policy of relying only on retail deposits and targeting a loan to deposit ratio of between 65-80%. Included in other assets is the Group's investment property, which is held at fair value of GBP6.6m (2021: GBP6.6m). Also included in other assets are GBP19.6m of properties classified as inventory (2021: GBP87.1m).
The net assets of the Group now stand at GBP14.11 per share (2021: GBP13.37).
Segmental Analysis
The segmental analysis is shown in more detail in Note 46. The Group is organised into nine operating segments as disclosed below:
1) Banking - Includes Private and Commercial Banking. Private Banking - Provides traditional private banking services. Commercial Banking - Provides bespoke commercial banking services and tailored secured lending against property investments and other assets.
2) Wealth Management - Financial planning and investment management services.
3) Mortgage Portfolios - Acquired mortgage portfolios.
4) RAF - Specialist asset finance lender mainly in high value cars but also business assets.
5) ACABL - Provides finance secured on either invoices, assets or stock of the borrower.
6) ASFL - Provides short term secured lending solutions to professional and entrepreneurial property investors.
7) AAG - Provides vehicle finance and related services, predominantly in the truck & trailer and bus & coach markets.
8) All Other Divisions - All other smaller divisions and central costs in Arbuthnot Latham & Co., Ltd (Investment property and Central costs)
9) Group Centre - ABG Group 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.
Banking
2022 2021
Summarised Income Statement GBP000 GBP000
---------------------------------------------------- -------- --------
Net interest income 64,565 45,011
Net fee and commission income 2,803 2,482
---------------------------------------------------- -------- --------
Operating income 67,368 47,493
Operating expenses - direct costs (14,795) (13,812)
Operating expenses - indirect costs (31,888) (27,503)
Impairment losses - loans and advances to customers (1,547) 354
---------------------------------------------------- -------- --------
Profit before tax 19,138 6,532
---------------------------------------------------- -------- --------
Banking reported a profit before tax of GBP19.1m (2021: GBP6.5m). This equated to a near threefold increase from the prior year. Net interest income grew by 43%, while lending increased by 4% and deposit balances by 17%. The significantly higher net interest income is the result of successive increases in the Bank of England Base Rate, with the Bank earning higher income from both customer loans and excess deposits held mainly at the Bank of England reserve account. This was partly offset by higher interest paid on deposit balances. However, this rate increase was at a slower pace as fixed term deposits only reprice at maturity.
There was a net impairment charge of GBP1.5m compared to a release of GBP0.4m for the prior year. This was due to revised economic scenarios applied in the expected credit loss models due to a more negative future outlook. The most significant and relevant to the Banking book was a net decline of 11.6% for residential property values and a net decline of 21.2% for commercial property values compared to a 1.2% increase and 1.7% fall respectively for the prior year.
Operating costs increased by GBP5.4m largely due to higher staff costs from higher bonus accrual.
Customer loan balances increased by GBP56.6m to GBP1.5bn and customer deposits also increased to GBP3.1bn (2021: GBP2.7bn). The average loan to value was 52.5% (2021: 51.7%).
Wealth Management
2022 2021
Summarised Income Statement GBP000 GBP000
------------------------------------ ------- -------
Net fee and commission income 10,689 10,563
------------------------------------ ------- -------
Operating income 10,689 10,563
Operating expenses - direct costs (9,237) (7,634)
Operating expenses - indirect costs (5,553) (5,050)
Loss before tax (4,101) (2,121)
------------------------------------ ------- -------
Wealth Management reported a loss before tax of GBP4.1m (2021: loss of GBP2.1m), but made a GBP1m profit before contributing to overheads, but remains a key pillar in building and maintaining relationships with clients. Fee income remained flat year on year, while AUMs decreased by 2%, mainly due to market performance, and finished the year at GBP1.3bn (2021: GBP1.4bn).
Mortgage Portfolios
2022 2021
Summarised Income Statement GBP000 GBP000
---------------------------------------------------- ------ -------
Net interest income 5,110 4,735
Operating income 5,110 4,735
Other income - 2,239
Operating expenses - direct costs (935) (1,154)
Impairment losses - loans and advances to customers (415) (186)
---------------------------------------------------- ------ -------
Profit before tax 3,760 5,634
---------------------------------------------------- ------ -------
The Mortgage Portfolios reported a profit of GBP3.8m (2021: GBP5.6m). The decrease against the prior year is due to GBP2.2m of other income which related to the net profit on sale of the Tay Portfolio in February 2021.
The remaining Santiago mortgage portfolio performed as expected and the year-end balance was GBP149.0m (2021: GBP178.1m).
RAF
2022 2021
Summarised Income Statement GBP000 GBP000
--------------------------------------- ------- -------
Net interest income 5,545 5,929
Net fee and commission income 32 166
--------------------------------------- ------- -------
Operating income 5,577 6,095
Other income 82 78
Operating expenses - direct costs (4,697) (3,943)
Impairment losses - loans and advances (768) (2,292)
--------------------------------------- ------- -------
Profit/(loss) before tax 194 (62)
--------------------------------------- ------- -------
Renaissance Asset Finance returned a profit of GBP0.2m (2021: loss before tax of GBP0.1m).
Net interest income reduced by 6% to GBP5.5m (2021: GBP5.9m) as it paid GBP3.3m to the Bank for internal cost of funding. Operating expenses increased by GBP0.8m, mainly due to higher staff costs from increased staff numbers.
A more pessimistic economic outlook under the IFRS9 expected credit loss assessment resulted in higher credit provisions in 2022. However, the prior year also included a GBP2.2m charge for Arena TV Limited.
Customer loan balances increased by 38% to GBP133.8m (2021: GBP97.1m). The average yield for 2022 was 8.1% (2021: 8.9%).
ACABL
2022 2021
Summarised Income Statement GBP000 GBP000
---------------------------------------------------- ------- -------
Net interest income 6,762 5,311
Net fee and commission income 5,976 4,224
---------------------------------------------------- ------- -------
Operating income 12,738 9,535
Operating expenses - direct costs (5,463) (4,748)
Impairment losses - loans and advances to customers (2,082) (50)
---------------------------------------------------- ------- -------
Profit before tax 5,193 4,737
---------------------------------------------------- ------- -------
ACABL recorded a GBP5.2m profit before tax (2021: GBP4.7m).
Client loan balances increased 48% to GBP268.8m at the end of the year (2021: GBP182.1m), with issued facilities increasing to GBP523m (2021: GBP384m). The higher client balances throughout the year resulted in an increase in operating income of GBP3.2m after paying an increased GBP5.2m for internal funding. Operating expenses increased by GBP0.7m, mainly due to an increase in staff costs.
The impairment charge increase mainly due to GBP2m charge relating to one client that was placed into administration.
ASFL
2022 2021
Summarised Income Statement GBP000 GBP000
---------------------------------------------------- ------- -------
Net interest income 713 578
Net fee and commission income 10 7
---------------------------------------------------- ------- -------
Operating income 723 585
Operating expenses - direct costs (1,489) (1,590)
Impairment losses - loans and advances to customers (179) (21)
---------------------------------------------------- ------- -------
Loss before tax (945) (1,026)
---------------------------------------------------- ------- -------
ASFL recorded a loss before tax of GBP0.9m (2021: loss of GBP1.0m).
The decision was taken to exit this market in early 2023.
Customer loan balances closed the year at GBP15.0m (2021: GBP10.1m).
AAG
2022 2021
Summarised Income Statement GBP000 GBP000
---------------------------------------------------- -------- --------
Net interest income (4,456) (2,401)
Revenue 99,367 74,500
Cost of goods sold (82,109) (68,023)
---------------------------------------------------- -------- --------
Operating income 12,802 4,076
Gain from bargain purchase - 8,626
Operating expenses - direct costs (14,507) (7,872)
Impairment losses - loans and advances to customers (369) (1,001)
---------------------------------------------------- -------- --------
(Loss)/profit before tax (2,074) 3,829
---------------------------------------------------- -------- --------
The business generated a loss before tax of GBP2.1m (2021: profit of GBP3.8m for the period).
The prior period of 9 months included a bargain purchase credit to the income statement of GBP8.6m. As part of the bargain purchase at acquisition the carrying value of the truck fleet was adjusted by an overall average increase of 15.95% resulting in an uplift totalling GBP19.5m. GBP6.5m (2021: GBP5.8m) of this uplift has been realised through sales in the year, but this has been excluded from the consolidated result. The current year includes GBP4.9m internal cost of funding compared to GBP2.3m in the prior 9 months.
Operating expenses increased by GBP6.6m from the prior period. The prior period only included 9 months of expenditure and the current year also includes higher costs with the expansion of the business, mainly relating to staff.
Credit provisions reduced by GBP0.6m.
As at 31 December 2022 the business had GBP171.7m (2021: GBP121.6m) of assets available for lease.
Other Divisions
2022 2021
Summarised Income Statement GBP000 GBP000
---------------------------------------------------- -------- --------
Net interest income 23,993 7,555
Net fee and commission income 1,539 681
---------------------------------------------------- -------- --------
Operating income 25,532 8,236
Other income 2,385 2,081
Operating expenses - direct costs (16,074) (12,570)
Impairment losses - loans and advances to customers (143) -
Loss before tax 11,700 (2,253)
---------------------------------------------------- -------- --------
The aggregated profit before tax of other divisions was GBP11.7m (2021: loss of GBP2.3m).
Operating income increased by GBP17.3m to GBP25.5m (2021: GBP8.2m), mostly due to the increase in the Bank of England Base Rate, with higher income from intercompany accounts and treasury assets.
Reported within the other divisions in other income was rental income on our property portfolio of GBP0.5m (2021: GBP0.3m). The prior year also included an adjustment to the RAF deferred consideration of GBP0.6m, along with dividends received totalling GBP0.1m.
Operating expenses increased mainly due to higher staff costs from higher staff numbers and increased bonus provisions.
Group Centre
2022 2021
Summarised Income Statement GBP000 GBP000
--------------------------------- -------- --------
Net interest income (363) (309)
Subordinated loan stock interest (2,788) (2,334)
--------------------------------- -------- --------
Operating income (3,151) (2,643)
Other income - 397
Operating expenses (9,705) (8,386)
Loss before tax (12,856) (10,632)
--------------------------------- -------- --------
The Group costs increased to GBP12.9m (2021: GBP10.6m). Subordinated loan interest increased by GBP0.5m due to the rising interest rate environment.
The Group received GBP0.4m dividends from STB in 2021, while there was no dividend in 2022 as all shares were sold in the prior year.
The increase in operating expenses of GBP1.3m is mainly due to higher staff costs with the accrual for bonuses including national insurance increasing by GBP1m.
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 and the individual banking operation are authorised by the Prudential Regulation Authority ("PRA") and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and are subject to EU Capital Requirement Regulation (EU No.575/2013) ("CRR") which forms part of the retained EU legislation (EU legislation which applied in the UK before 11.00 p.m. on 31 December 2020 has been retained in UK law as a form of domestic legislation known as 'retained EU legislation') and the PRA Rulebook for CRR firms. One of the requirements for the Group and the individual banking operation is that capital resources must be in excess of capital requirements at all times.
In accordance with the parameters set out in the PRA Rulebook, the Internal Capital Adequacy Assessment Process ("ICAAP") is embedded in the risk management framework of the Group. The ICAAP identifies and assesses the risks to the Group, considers how these risks can be mitigated and demonstrates that the Group has sufficient resources, after mitigating actions, to withstand all reasonable scenarios.
Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a "Pillar 1 plus" approach to determine the level of capital the Group needs to hold. This method takes the Pillar 1 capital requirement for credit, market and operational risk as a starting point, and then considers whether each of the calculations delivers a sufficient amount of capital to cover risks to which the Group is, or could be, exposed. Where the Board considers that the Pillar 1 calculations do not adequately cover the risks, an additional Pillar 2A capital requirement is applied. The PRA will set a Pillar 2A capital requirement in light of the calculations included within the ICAAP. The Group's Total Capital Requirement, as issued by the PRA, is the sum of the minimum capital requirements under the CRR (Pillar 1) and the Pillar 2A requirement.
The ICAAP document will be updated at least annually, or more frequently if changes in the business, strategy, nature or scale of the Group's activities or operational environment suggest that the current level of capital resources is no longer adequate. The ICAAP 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 45.
The Group's regulatory capital is divided into two tiers:
-- Common equity Tier 1 ("CET1"), which comprises shareholder funds less regulatory deductions for intangible assets, including Goodwill and deferred tax assets that do not arise from temporary differences.
-- Tier 2 comprises qualifying subordinated loans.
Capital ratios are reviewed on a monthly basis to ensure that external requirements are adhered to. All regulated trading entities have complied with all of the externally imposed capital requirements to which they are subject.
2022 2021
Capital ratios GBP000 GBP000
------------------------------------------------------ -------- --------
CET1 Capital Instruments* 212,501 202,479
Deductions (37,126) (26,244)
------------------------------------------------------ -------- --------
CET1 Capital after Deductions 175,375 176,235
Tier 2 Capital 37,594 36,772
------------------------------------------------------ -------- --------
Own Funds 212,969 213,007
------------------------------------------------------ -------- --------
CET1 Capital Ratio (CET1 Capital/Total Risk Exposure) 11.6% 12.3%
------------------------------------------------------ -------- --------
Total Capital Ratio (Own Funds/Total Risk Exposure) 14.0% 14.9%
------------------------------------------------------ -------- --------
* Includes year-end audited result.
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 reputational, macroeconomic and competitive environment, strategic, credit, market, liquidity, operational, cyber, conduct and, regulatory and capital.
Reputational risk
Reputational risk is the risk to the Group from a failure to meet reasonable stakeholder expectations as a result of any event, behaviour, action or inaction by ABG itself, its employees or those with whom it is associated. This includes the associated risk to earnings, capital or liquidity.
ABG seeks to ensure that all of its businesses act consistently with the seven corporate principles as laid out on page 3 of the Annual Report and Accounts. This is achieved through a central Risk Management framework and supporting policies, the application of a three-lines of defence model across the Group and oversight by various committees. Employees are supported in training, studies and other ways and encouraged to live out the cultural values within the Group of integrity, energy and drive, respect, collaboration and empowerment. In applying the seven corporate principles, the risk of reputational damage is minimised as the Group serves its shareholders, customers and employees with integrity and high ethical standards.
Macroeconomic and competitive environment
The group is exposed to indirect risk that may arise for the macroeconomic and competitive environment.
In recent years there have been a number of global and domestic events which have had significant implications on the Group's operating environment, namely: Russia's War in the Ukraine, Coronavirus and Brexit. The culmination of these events has led to significant turmoil in both global and domestic markets. The most significant economic effect from these events includes record inflation driven by high fuel costs, leading to sharp and significant increases in the cost of borrowing. Indicators suggest that conditions may have improved since the year end however there still remains significant uncertainty around the state of the UK economy which may have an impact on the group's customers and assets.
Climate change
Climate change presents financial and reputational risks for the banking industry. The Board consider Climate change a material risk as per the Board approved risk appetite framework which provides a structured approach to risk taking within agreed boundaries. The assessment is proportional at present but will develop over time as the Group generates further resources and industry consensus emerges. The assessment is maintained by the Chief Risk officer and has been informed by the ICAAP review and workshops for employees.
Whilst it is difficult to assess how climate change will unfold, the Group is continually assessing various risk exposures. The UK has a legally binding target to cut its greenhouse gas emissions to "net-zero" by 2050. There is growing consensus that an orderly transition to a low-carbon economy will bring substantial adjustments to the global economy which will have financial implications while bringing risks and opportunities.
The risk assessment process has been integrated into existing risk frameworks and will be governed through the various risk governance structures including review and recommendations by the Arbuthnot Latham Risk Committee. Arbuthnot Latham has been assessed against the Task Force on Climate-related Financial Disclosures' ("TCFD") recommended disclosures and where appropriate the FCA/PRA guidance as per the Supervisory Statements.
In accordance with the requirements of the PRA's Supervisory Statement 'Enhancing banks' and insurers' approaches to managing the financial risks from climate change', the Group has allocated responsibility for identifying and managing the risks from climate change to the relevant existing Senior Management Function. The Bank is continuously developing a suitable strategic approach to climate change and the unique challenges it poses.
The FCA have issued 'Climate Change and Green Finance: summary of responses and next steps'. In addition to the modelling of various scenarios and various governance reviews, the Group will continue to monitor requirements through the relationship with UK Finance.
Strategic risk
Strategic risk is the risk that the Group's ability to achieve its corporate and strategic objectives may be compromised. This risk is particularly 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 Directors normally meet once a year outside a formal Board setting to ensure that the Group's strategy is appropriate for the market and economy.
Credit risk
Credit risk is the risk that a counterparty (borrower) will be unable to pay amounts in full when due. This risk exists in Arbuthnot Latham, which currently has a loan book of GBP2.2bn (2021: GBP1.9bn). The lending portfolio in Arbuthnot Latham is extended to clients, the majority of which is secured against cash, property or other high quality assets. Credit risk is managed through the Credit Committee of Arbuthnot Latham.
Market risk
Market risk arises in relation to movements in interest rates, currencies, property 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 changes in interest rates. However, at the current time the Group does not hedge the earnings from the free cash which currently totals GBP732.7m. The cost of hedging is prohibitive.
The Group is exposed to changes in the market value of its properties. The current carrying value of Investment Property is GBP6.6m and properties classified as inventory are carried at GBP19.6m. Any changes in the market value of the property will be accounted for in the Income Statement for the Investment Property and could also impact the carrying value of inventory, which is at the lower of cost and net realisable value. As a result, it could have a significant impact on the profit or loss of the Group.
Liquidity risk
Liquidity risk is the risk that the Group, although solvent, either does not have sufficient financial resources to enable it to meet its obligations as they fall due, or can only secure such resources at an excessive cost. 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 Bank. The loan to deposit ratio is maintained at a prudent level, and consequently the Group maintains a high level of liquidity. The Arbuthnot Latham Board annually approves the Internal 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's exposures to operational risk include its Information Technology ("IT") 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.
In line with further guidance issued by the Regulator, the Bank has continued to focus on ensuring that the design of systems and operational plans are robust to maintain operational resilience in the face of unexpected incidents. During 2021 the Bank continued to review these plans and undertook tests to ensure backup and recovery processes were effective even when working in a hybrid working model.
During the year the FCA, PRA and BoE published their final policy papers on building operational resilience. The Bank completed the required self-assessment of compliance with the expected standards in March 2022. This continues to be an important area of focus as the Bank continues its investment in new IT systems.
Cyber risk
Cyber risk is an increasing risk for the Group within its operational processes. It 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 tests 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 clients' complaints effectively, not meeting clients' expectations, and exhibiting behaviours which do not meet market or regulatory standards.
The Group adopts a low risk appetite for any unfair customer outcomes. It maintains clear compliance guidelines and provides ongoing training to all employees. Periodic spot checks, compliance monitoring and internal audits are performed to ensure these guidelines are followed. The Group also has insurance policies in place to provide some cover for any claims that may arise.
Regulatory and capital risk
Regulatory and capital risk includes the risk that the Group will have insufficient capital resources to support the business and/or does not comply with regulatory requirements. The Group adopts a conservative approach to managing its capital. The Board of Arbuthnot Latham 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 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.
Strategic Report - Non-Financial Information Statement
The table below sets out where stakeholders can find information on
non-financial matters, as required by Sections 414CA and 414CB of the
Companies Act 2006, enabling them to understand the impact of the Group's
key policies and activities.
Reporting Policies and Standards Information Necessary
Requirement to
Understand Impact of
Activities and
Outcome of Policies
---------------- ------------------------------------------------------------ -------------------------------------------
Environmental
Matters * Credit Policy * Financial Review, page 20
* Managing Financial Risks of Climate Change Framework * Stakeholder Engagement and S. 172 (
1) Statement,
pages 23 and 24
* Environmental Management Policy
* Sustainability Report, pages 26 to
38
* Corporate Governance Report page 47
---------------- ------------------------------------------------------------ -------------------------------------------
Employees
* Agile Working Policy * Stakeholder Engagement and S. 172 (1
), pages 23 and
24
* Board Diversity Policy
* Sustainability Report, pages 26 to 2
* Dignity at Work Policy 9
* Equality and Diversity Policy * Directors Report, page 42
* Flexible Working Policy * Corporate Governance Report, page 45
* Health and Safety Policy
* Long Service Awards Policy
* Parental Leave Policy
* Personal Appearance Policy
* Remuneration Policy
* Training & Development Policy
* Whistleblowing Policy
---------------- ------------------------------------------------------------ -------------------------------------------
Social Matters
* Complaints Handling Policy * Arbuthnot Principles, page 3
* Fraud Policy * Stakeholder Engagement and S. 172 (
1) Statement,
pages 23 and 24
* Tax Strategy
* Sustainability Report, pages 26 to
* Vulnerable Clients Policy 29
---------------- ------------------------------------------------------------ -------------------------------------------
Respect for
Human Rights * Anti- Modern Slaver y Policy * Stakeholder Engagement and s.172 (1
) Statement, pages
23 and 24
* Dignity at Work Policy
* Sustainability Report, pages 26 to
* Equality and Diversity Policy 29
* Personal Data Protection Policy
---------------- ------------------------------------------------------------ -------------------------------------------
Anti-Corruption
and * Anti-Bribery and Corruption Policy * Sustainability Report, pages 26 and
Anti-Bribery 28
* Anti-Money Laundering Policy
* Client Acceptance policy
* Cyber Strategy
* Gro up Market Abuse and Insider Dealing Policy
* Physical Security Policy
---------------- ------------------------------------------------------------ -------------------------------------------
Description of
Principal * Strategic Report, pages 19 to 21
Risks and
Impact of
Business
Activity
---------------- ------------------------------------------------------------ -------------------------------------------
Description of
the Business * Business Overview
Model
---------------- ------------------------------------------------------------ -------------------------------------------
Non-Financial
Key Performance * Sustainability Report, pages 26 and
Indicators 28
---------------- ------------------------------------------------------------ -------------------------------------------
Strategic Report - Stakeholder Engagement and s.172 Report
Stakeholder Engagement and S. 172 (1) Statement
This section of the Strategic Report describes how the Directors have had regard to the matters set out in section 172 (1) (a) to (f) of the Companies Act 2006 when making decisions. It forms the Directors' statement required by ABG as a large-sized company under section 414CZA of the Act.
The Directors have acted in a way that they considered, in good faith, to be most likely to promote the success of the Company for the benefit of its members as a whole, and in doing so had regard, amongst other matters, to:
-- the likely consequences of any decision in the long term; -- the interests of the Company's employees;
-- the need to foster the Company's business relationships with suppliers, customers and others;
-- the impact of the Company's operations on the community and the environment;
-- the desirability of the Company maintaining a reputation for high standards of business conduct; and
-- the need to act fairly as between members of the Company.
The Arbuthnot Principles and Values set out on page 3 explain the Board's approach to its stakeholders. Details of how the Directors had regard to the interests of its key stakeholders during the year are set out below, in the Group Directors Report on page 42 and in the Corporate Governance Report on page 45.
The Board has regard to the interests of all its key stakeholders in its decision making since the Directors are conscious that their decisions and actions have an impact on them. The stakeholders we consider in this regard are our shareholders, employees, customers, suppliers, regulators and the environment in which we operate.
Likely consequences of any decision in the long term
The Directors make their decisions to ensure that long-term prospects are not sacrificed for short term gain, reflecting the values and support of Sir Henry Angest, Chairman and Chief Executive and majority shareholder, which have proved successful in creating and maintaining value for all shareholders for over 40 years. This was demonstrated in the year by a number of Board decisions.
In February 2022, the Board considered a number of options to manage the capital resources of the Group, without slowing its lending plans as the divisions build towards the "future state" strategy. This was necessary because of the reintroduction by the Financial Policy Committee of the Bank of England of the countercyclical capital buffer at 1% from December 2022 with a further increase to 2% in July 2023. As a consequence, a decision was taken to allocate capital away from non-core assets and accordingly to sell the Group's long leasehold West End office property situated at 20 King Street in July with completion in October.
In July 2022, as part of its succession planning, the Board appointed Frederick Angest as a Director, subject to the approval of Grant Thornton as Nominated Adviser and Aquis Stock Exchange (AQSE) Corporate Adviser which was given at the end of August.
Interests of the Company's employees
Also in July 2022, the Directors endorsed the decision of the Remuneration Committee to approve a one-off payment to all executive directors and employees in the Group of GBP1,500 in order to assist them with the increased costs of living being experienced. It was determined that the payment would be reduced pro rata to part time employees and for those who had been with the business less than one year. The Directors were able to agree to this payment of c. GBP1m, having assured themselves that the business had the resources to make it because of its trading considerably in excess of the planned budget.
Executive Directors and senior management are fully engaged with the workforce, most of whom interact on a daily basis. Employees are also able to raise concerns in confidence with the HR Team, with grievances followed up in line with a specified process which satisfies all legal requirements. As explained in the section 172 (1) Statement of Arbuthnot Latham, the Company's banking subsidiary, one of its non-executive directors has been designated by its board as the director to engage with Arbuthnot Latham group's workforce whereas the Company itself has fewer than 20 employees, all of whom have direct access to Board members.
As set out in the Whistleblowing Policy, Ian Dewar, a non-executive director and chairman of the Audit Committee, is the Company's Whistleblowing Champion and is available at all times in this role. There is an anonymous whistleblowing service via an external provider. There is also protection for employees deriving from the Public Interest Disclosure Act 1998. Any material whistleblowing events are notified to the Board and to the applicable regulator.
The Board receives an update on human resource matters at each of its meetings. It is also kept informed of the results of employee surveys including one on Diversity & Inclusion, conducted in November 2021, which received a 76% response rate. In November 2022 it considered the results of the engagement survey, launched in September 2022 to assess how engaged employees felt with the business, obtaining feedback on key areas that affect engagement including Leadership, 'My Manager', Wellbeing, Cultural Values, Diversity & Inclusion, Reward & Recognition and employees' views in relation to 2022 ways of working and effectiveness of the Agile Working approach which was established and endorsed by the Board in 2021 to enable the business and its employees to benefit from a practical combination of office and remote working. The Agile Working Policy resumed at the end of February 2022 with all employees on average working in the office for a minimum of three days per week. This followed its suspension in mid-December 2021 with the introduction of temporary working arrangements in light of the Government's request in response to the Covid-19 Omicron variant that individuals should work from home where possible. The engagement survey received an 82% response rate from employees, 87% of whom were proud to work for the business. The Board regards the maintenance of a high level of employee engagement as key to the Company's future success as an organisation on every level and the focus will be to develop our working environment to achieve this aim.
Company's business relationships with suppliers, customers and others
The Directors attach great importance to good relations with customers and business partners. In particular, our clients are integral to our business and forging and maintaining client relationships are core to Arbuthnot Latham's business and crucial for client retention. Regular contact was maintained with clients throughout the year, including with the resumption again of meetings in the office in February 2022.
The Company is committed to following agreed supplier payment terms. There is a Supplier Management Framework in place covering governance around the Company's procurement and supplier management activities. For due diligence and compliance purposes, suppliers are assessed through an external registration system. The Modern Slavery Statement, approved by the Board in March as part of its annual review of the Company's stance and approach to the Modern Slavery Act, explains the risk-based approach that the Company has taken to give assurance that slavery and human trafficking are not taking place in its supply chains or any part of its business. The Board requires that Arbuthnot Latham implements a Modern Slavery Policy, procedures and processes in relation to the AL Group, which reflects the commitment to act ethically and with integrity, in all their respective business relationships and additionally, to ensure that slavery and human trafficking are not taking place anywhere in the AL Group or in the AL Group's supply chain.
Other stakeholders include the Company's Regulators, the PRA and the FCA, with whom open and regular dialogue is maintained.
Balancing stakeholder interests
An illustration of the balancing of the interests of our stakeholders in their long-term interest was the Board's decision in July 2022 to return to its progressive dividend policy, resolving to pay an interim dividend of 17p per share to shareholders. This was an increase of 1p per share from the normal interim dividend paid in 2021. Given the increased profits of the Group in 2022 and the improving outlook, the Board have decided to accelerate our growth trajectory of the dividend and are recommending a final dividend of 25p; this is an increase of 3p compared to the final dividend of 2021 and an additional increase of 2p over the normalised 1p increase.
Impact of the Company's operations on the community and the environment
As part of the management information reviewed at its regular meetings, the Board receives a Risk Management report, containing a report on Environmental, Social and Governance (ESG) matters which includes a Climate Change Dashboard, monitoring climate change measures in place including Scope 1, 2 and 3 GHG emissions. The Board is updated on the steps the Group is taking to become more sustainable, given its exposure to climate change transition risk as the UK evolves to a low carbon economy. It is also kept informed of the formal approach to ESG established to develop over time, which will underpin the Arbuthnot Principles and Values within the workplace under five 'pillars of sustainability' - governance, employees, community, environment and clients (ESG Pillars). The ESG actions taken are in recognition of the Group's responsibility to make a positive societal impact and the political, regulatory and legal pressure with clients and investors increasingly interested in the Group's ESG stance. The Board has again approved an energy and carbon report meeting the requirements of the Streamlined Energy and Carbon Reporting standards, as set out on page 37 of the Sustainability Report.
Desirability of the Company maintaining a reputation for high standards of business conduct
The Directors believe 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 importance of the Group's reputation is considered at each Board meeting. These Principles are encapsulated in five Group cultural values, embedded into day-to-day activities. These values are integrity, respect, empowerment, energy and drive, and collaboration.
Acting fairly as between members of the Company
The majority shareholder, Sir Henry Angest, is the Company's Chairman and Chief Executive. There is continuing engagement with other major shareholders and the Directors make their decisions on behalf of all shareholders. The Board welcomes engagement with them and will continue to maintain communications via one-to-one meetings as appropriate. The Directors treat all shareholders equally, albeit that holders of non-voting shares do not have the right to vote in shareholder meetings.
Strategic Report - Sustainability Report
Introduction
The Group is committed to ensuring its business activities have a positive impact not just for clients and shareholders, but also for employees, society and the environment. Two of our key business principles, reciprocity and stability, rely on recognising our own responsibility to make a positive societal impact.
The world is in the middle of a profound transition when it comes to sustainability and we recognise the role we must play in that transition. Climate change is an important topic for consumers and investors alike. In parallel, inclusive growth and the impact organisations have on society is increasingly a focus. More than ever before, organisations are being held accountable for their impacts on society.
We focus on how we can improve to build a future that delivers growth, sustainability and inclusion. This means operating with a strong emphasis on our environmental and societal impact and on our governance procedures.
The Group approaches ESG by considering the impact from our practices and outputs across five categories of sustainability - Governance, Employees, Community, Environment and Clients.
Governance
The Group has a solid system of governance in place, endorsing the principles of openness, integrity and accountability which underpin good corporate governance. The Group operates to high standards of corporate accountability with an effective Board and Board committees. This, together with the role and overall holding of Sir Henry Angest, the ultimate majority shareholder, and compliance with PRA and FCA regulations and with those of the London Stock Exchange Alternative Investment Market and the Aquis Exchange, is fundamental to our success as a business.
Employees
Our employees and culture set us apart from others in our industry. Our high engagement scores are a testament to this: from a response rate of 89% to the most recent employee engagement survey (Non-financial Key Performance Indicator), conducted in September 2022, 87% of employees state they are proud to work for the Group. As a relationship-led bank, our employees are at the heart of everything we do.
We are committed to providing a healthy working environment and improving the quality of working lives for all our employees. Our wellbeing strategy and offering aims to support and reflect the Group's mission and core values of Integrity, Respect, Empowerment, Energy & Drive and Collaboration in the recognition that our employees are our greatest asset.
February 2022 saw the resumption of the Group's Agile Working Policy, introduced in October 2021 to enable the business and its employees to benefit from a practical combination of office and remote working. The policy reflects the Board's view that there are substantial benefits from balancing office working with working from home. The policy resumed following its suspension during January 2022 owing to the necessity for employees to work from home in line with the Government's advice regarding the Covid-19 Omicron variant. The vast majority of employees indicated their support for the policy. In July 2022, following a review of the policy, a small adjustment was made to it with the Senior Leadership Team attending the office four days a week and for key governance meetings to be held in the office, given our culture to be mainly office based. As a service and relationship business, it is important that we meet clients and that our employees meet on a regular and frequent basis.
At the same time the Board agreed to make a cost of living payment to all employees in September 2022 due to the prevailing high inflation rate in order to help alleviate some of the burden of these increased costs on employees. A further cost of living payment is to be made in 2023 to those employees earning salaries of up to GBP50,000 pa. and who joined the Group before 1 January 2023.
Flexibility is applied to the Agile Working Policy, as shown by its relaxation at the time of the Met Office extreme weather warnings in mid-July 2022, during teachers' strikes and during the regular rail and underground strikes which have affected the London office since June 2022. On strike days, employees unable to travel to the London office are encouraged to work from home, thereby mitigating the disruption that would previously have been caused, the pandemic having demonstrated the ability of the business to function remotely when necessary.
Our wellbeing strategy focuses on the physical, financial, mental and social wellbeing of our employees. We have a range of structured internal wellbeing programmes and established an Active Hub to set up team challenges for health wellbeing, building on the solo initiatives launched during the pandemic. In February 2023 we launched the Champion Health app, our new all-in-one wellbeing platform. The platform was created by more than sixty health professionals to make one unified platform that covers all areas of wellbeing for employees and up to three of their friends or family members. We also hold employee webinars on financial wellbeing and education. A Pension Scheme Governance Committee was established in January 2022 and the matters discussed at its six-monthly meetings are communicated to employees, continuing the focus on their financial wellbeing.
As a rapidly growing business, we encourage career progression and seek to develop our people's skills to help them grow within the organisation. We strive to create a working environment that ensures people are treated fairly and that their wellbeing is supported.
The feedback from our first Diversity & Inclusion Survey, conducted in November 2021, is being used to create an even better working environment for employees and to help attract the best talent. The Group's D&I strategy, approved and communicated to employees during 2022, sets out the value put on the difference people bring and how we are consciously inclusive in all aspects of the way we work, recognising the commercial advantage this brings. We are committed to fostering a more inclusive and dynamic environment, allowing everyone to achieve their full potential. Employees are encouraged to speak about what matters to them and to give feedback on our performance in this area.
The objectives of this strategy are to develop a culture and environment that allow people of various backgrounds, mindsets and ways of thinking to work effectively together and to perform to their highest potential to achieve their objectives and ours; to improve diversity in the Senior Leadership Team; and to increase diversity at all levels. Pilot management D&I programme workshops have been launched in three specific business areas as part of the wider HR agenda and, as part of the Group-wide training strategy, we will include a D&I module each quarter. Our current gender mix emphasises the need for us to develop internal talent to enable internal progression, whilst continuing to attract diverse talent into roles at all levels.
Early Careers: 2022 saw the launch of our first Structured Graduate and Apprenticeship Programmes for a total of 14 participants, along with the second year of our Industrial Placement and Summer internship programmes. The Group now offers five different Early Careers Programmes, including work experience, summer internships, one-year placements, graduate placements and apprenticeships. We also launched our Leadership Development Academy in October 2022, with 14 participants, and have more programmes scheduled for 2023 for existing and aspiring leaders. In January 2023, we hosted an evening inviting 100 female students interested in a career in banking, providing 80 spaces to Year 13 students from the Young Professionals network and 20 for female student referrals from employees. We have partnered with the Young Professionals network, an organisation which works with schools across the UK from different social backgrounds to provide an insight and introduction to different industries, in order to grow the quality and diversity of our Early Careers talent pool.
In November 2022, the existing benefits package was increased as part of the annual benefits window by giving eligible employees the opportunity to enhance at favourable rates their cover for certain benefits including life assurance.
Community
The Group recognises that we must commit to driving positive community impact, creating an impact within the communities in which we exist and operate, and connecting the dots between the charities we support and the social initiatives we run.
Our Corporate Social Responsibility activities are being reviewed with plans for a new strategy to accelerate our effort. Once this new CSR strategy is in place our primary community focus for 2023 will be around financial education and literacy. We will also expand our place-based and skills-based outreach, with greater promotion and engagement from employees. The Group continues to promote philanthropy and fundraising, supported by our volunteer days and pound for pound matching scheme. We are also looking to expand our partnerships with others to help facilitate positive change.
Clients
Relationships with our clients are at the heart of what we do. We take the time to understand what is important to our clients so we can be confident that we are working in their best interests, for business, for family, for life. Being a relationship-led bank, every single one of our clients has a dedicated relationship manager there to guide and support them. This is supported by our strong Net Promoter Score (NPS) (Non-financial Key Performance Indicator) which is reviewed every two years. Our 2022 NPS increased to 64%, up from 47% in 2020, a reflection of our clients' advocacy. Our bankers have been engaging pro-actively with customers, following the tightening of Credit appetite in order to help those struggling due to the impact of increasing interest rates, inflation and high cost of living.
Policies
The Group has adopted a wide range of policies that straddle the five pillars to ensure that employees and management are aware of their responsibilities towards our customers and comply with all regulatory requirements. Some of the key policies are set out below and in the Non-Financial Statement on page 22.
Environment
The Group takes a long-term view. We recognise as a business that our carbon footprint needs to move towards net-zero over time. This reduction is not just an environmental imperative, but a business one as well. We are committed to having net zero carbon emissions by 2050. As a consequence, we have in place an Environmental Management policy which sets outs the Group's high-level approach to managing environmental issues and provides requirements in helping the Bank work towards achieving its commitments.
The Bank's Credit Policy sets out the Group's limited appetite for financial and reputational risk emanating from climate change, which includes physical risk (extreme weather, flooding etc.) and transitional risk (changes to law, policy, regulation, and culture). The Bank adopts a favourable stance towards a low carbon economy and lending propositions that have a neutral or positive impact on the environment / climate. The Bank will also consider the impact on public perception and potential impact on continuing demand for clients' products and services, as well as any impact on its underlying security. These factors are assessed as part of the credit application process and at least once a year through the annual review process.
Our transition towards sustainability
We are taking steps, guided by our five pillars, to help us become more sustainable. Further information is given on the Group's website at Sustainability | Arbuthnot Latham .
Pillar Current status
Ensure responsible
and transparent * We are developing a transparent framework for
corporate governance embedding sustainability into our business practices
which aligns by recording, monitoring, and publishing performance
to business against pre-defined targets.
goals while
making a positive
societal impact We have policies in place, such as our
* Anti- Money Laundering Policy, written to ensure a
consistent approach across the Group to assist with
the deterrence and detection of those suspected of
laundering the proceeds of crime or those involved in
the funding or execution of terrorism, and the
disclosure to the relevant authorities. In May 2022,
governance in this vital area was further enhanced by
the appointment of the former Head of Compliance as
the dedicated Head of Financial Crime and Money
Laundering Reporting Officer.
* Anti-Bribery and Corruption Policy, expressing our
condemnation of such practice, prohibiting employees
from engaging in it and expecting third parties
providing services to have similar commitments.
* We have a published Tax Strategy, which sets out the
Group's commitment to compliance with tax law and
practice in the UK, which includes paying the
correct amount of tax at the right place and right time
and having a transparent and constructive relationship
with the tax authority.
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Creating a supportive
and diverse * We promote a working environment that seeks to
workplace in develop employee skills, and ensures employees are
which employees treated fairly and supports their wellbeing.
can thrive
* In January 2023, we were named as a Five Star
Employer by WorkBuzz for the second year running for
sustained high levels of employee engagement.
* We operate an Arbuthnot Achievers employee
recognition scheme
* We conduct annual and pulse employee surveys
(conducted anonymously)
* We have adopted agile and flexible working policies
* We pay all employees a living wage and have market
aligned job families. We are also considering
applying for Living Wage accreditation.
* All employees are eligible for a bonus, pension
contribution, sick pay and other benefits. From 2023
we have also offered eligible employees the
opportunity to enhance at favourable rates their
cover for life assurance and related cover.
* We publish details of our gender pay gap annually.
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Having a positive Diversity & Inclusion
impact on the * We are committed to the promotion of a workplace
community in culture that provides an equitable, diverse, and
which we operate inclusive environment.
* In 2022 we communicated a Diversity & Inclusion
strategy, following the first survey for employees
the previous year.
Corporate Social Responsibility (CSR)
* We currently support philanthropy through matching
charity donations, payroll giving, and volunteer
days.
* Our CSR activities are being reviewed for 2023, with
plans for a new strategy to accelerate our efforts.
* We are increasing our community and volunteer
offering, with a focus for 2023 on financial
education and literacy.
* We aim to secure new accreditations and signatories
that align with our CSR activities and values.
Suppliers
* We developed a Supplier Code of Conduct, engaging
with suppliers to build mutually sustainable
relationships in line with our values.
* We currently screen suppliers with regards to ethical
standards.
* The Group's Modern Slavery Policy sets out our
zero-tolerance approach to modern slavery, and any
instance of modern slavery in our business or supply
chain is a breach of the core values of our business.
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Ensuring that We will set targets and progress against these with a
our business view to reaching net-zero carbon emissions as a business
practices have by 2050.
a positive impact
on the environment Energy
* As part of the review of our working environment and
practices to reduce our energy consumption, we signed
up for a green tariff for our main office in Wilson
Street, London in February 2022. The introduction of
agile working is continuing to have a positive impact
on our energy usage. We are actively reviewing our
premises strategy with specific reference to
environmental factors and agile working.
* Our Wilson Street office has an Energy efficiency B
rating.
Waste
* We have reduced paper usage in the office by issuing
laptops to all employees and in 2022 by reducing the
number of our photocopiers by more than a quarter.
* We continue to reduce the printing of client
communications and marketing materials.
* We ensure the responsible disposal of computer
equipment and have a waste recycling programme in
place.
Transport
* Our carbon footprint decreased substantially with the
introduction of agile working.
* We have developed our virtual meeting facilities and
will continue to do this, reducing the need for
travel between offices.
* Our benefits include a cycle to work scheme and
season ticket loan.
* We continue to finance electric vehicles through our
RAF subsidiary while AAG strives to finance the most
environmentally friendly trucks in the UK which we
seek to keep as up to date as possible. AAG is
actively considering how the market in renewable
energy develops.
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Ensuring best
outcomes for * We seek regular feedback from our clients to
our clients reinforce our proposition and service.
* In 2022 we conducted an in-depth review of our client
value proposition which included a client survey and
deep-dive individual client interviews.
* We also have a robust complaints process and take
dissatisfaction seriously, remediating issues
promptly.
* We take the protection of our client data seriously
and have robust measures in place to protect client
data in line with our legal and regulatory
requirements.
* We offer a Sustainable Investment Service which
incorporates environmental, social, and governance
factors to achieve a positive impact without
sacrificing long-term financial returns.
* We make regular anti-fraud communications to clients,
alerting them to the different techniques used by
criminals to seek to steal people's data and money.
* We have set up a project, planning for the
implementation of the FCA's new Consumer Duty for all
new and existing products and services that will be
on sale at the end of July 2023. The aim is to
deliver good outcomes for retail customers,
reflecting the new, higher standard of the Consumer
Duty.
* In 2022 Aon on behalf of the Group conducted an
in-depth client experience survey, as part of the
wider Client Value Proposition project.
* We have continued to invest in the Bank's core
banking system, completing a major project in 2022,
thereby demonstrating that operational resilience and
the ability to make services available to our clients
is of the utmost importance.
* We continue to invest in our risk management
capabilities across Credit, Compliance, Operational
Risk and Financial Crime with a view to ensuring good
client outcomes through the continuing stability of
the Bank.
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Progress Towards Task Force on Climate-related Financial Disclosures' (TCFD) Alignment
During the year, further progress was made in preparation for reporting on the Group's climate-related risks in line with the recommendations of the global TCFD. For AIM listed companies, new regulations will come into force for the Annual Report for the year ending December 2023, requiring us to provide information on climate change related risks and opportunities, where material. The information to be given will cover how climate change is addressed in corporate governance; the impacts on strategy; how climate related risks and opportunities are managed; and on the performance measures and targets applied in managing these issues.
The TCFD encourages consistent, reliable and clear measurement and reporting of climate-related financial risks. Its recommendations provide a framework for understanding and analysing how climate change affects our customers, our own operations and our strategy. The recommendations are to assess disclosures around governance, strategy, risk management and metrics and targets.
As stated in the section on Risks and Uncertainties on page 19 above, we have assessed the Group against the TCFD recommended disclosures and in preparation for the new requirements coming into force next year, we set out below our initial assessments.
Section Requirement Our Response
Governance a. Describe the board's The "Climate Change Risk Appetite, Risk
oversight of climate-related Assessment and Scenarios" are reviewed
risks and opportunities. annually and approved by the AL Risk
Committee on behalf of the Board.
* The ESG dashboard (that includes Climate Change) is a
standing item on the Risk Committee agenda and forms
part of the AL Chief Risk Officer's regular update to
the Board.
* The ESG dashboard details climate-change related
actions and performance against risk tolerances. The
tolerances are partly based on the climate change
scenarios outputs.
* Climate change risk is considered in acquisitions or
divestitures decisions, most recently in the case of
the acquisition of AAG in 2021.
-------------------------------- ------------------------------------------------------------------
Governance b. Describe management's First Line
role in assessing * Accountability for managing the financial risks of
and managing climate-related climate change sits with the CEO of AL, Andrew
risks and opportunities. Salmon.
Second line
* The Senior Management Function (SMF) accountability
for the financial risks of climate change sits with
Stephen Kelly, the AL CRO. He has responsibility for
assessing climate-related issues.
* Climate change is managed within the Group's existing
governance and risk management frameworks. It is not
proportionate to operate further structures.
* The AL Risk Committee has oversight for Climate
Change and it is included in its Terms of Reference.
* The AL Credit Committee considers implications of
climate change on new and existing lending. All new
lending includes a climate change assessment.
* The AL Investment Committee considers implications of
climate change on investment decisions.
* The Product Governance Committee considers climate
change on propositions
* The ICAAP includes climate change scenarios.
-------------------------------- ------------------------------------------------------------------
Strategy a. Describe the climate-related The Climate Change Risk Appetite, Risk
risks and opportunities Assessment and Scenarios consider the
the organisation risks and opportunities for the business
has identified over model and lending book over following
the short, medium, time periods:
and long term. Short term (0-1 years);
Medium term (1-5 years); and
Long term (5-30 years)
* The key opportunities and risks are as follows:
* AL Core transition risk and opportunity on the rising
EPC requirements for buy to let residential property
* AL Core physical risk (flood risk) on residential
property.
* RAF transition risk and opportunity from the demise
of combustion engines and switch to electric engines.
* AAG transition risk and opportunity from the demise
of combustion engines and switch to alternatives.
-------------------------------- ------------------------------------------------------------------
Strategy b. Describe the impact
of climate-related * The Group has minimal exposure to the Energy or
risks and opportunities Utility sectors.
on the organisation's
businesses, strategy,
and financial planning.
* AL Core residential property loan risks are mitigated
by the loan durations (typically less than 5 years)
and strong loan to values. New lending includes a
costing to get properties to EPC 'C'. In addition,
the business is planning to launch green lending
products aimed at attracting higher EPC portfolios
and financing EPC improvements.
* RAF combustion engine risk is mitigated by the short
loan durations (typically less than 5 years). In
addition, RAF captures the opportunity by financing
electric and hybrid vehicles.
* AAG combustion engine risk is mitigated by the short
leasing durations (typically less than 5 years), lack
of viable alternate technologies and by the strategic
objective to keep the fleet focused on latest Euro 6
models and as young as possible. AAG is well
positioned to finance the transition to cleaner
technology vehicles.
-------------------------------- ------------------------------------------------------------------
Strategy c. Describe the resilience Based on the risk assessment, the Group's
of the organisation's business model is considered resilient
strategy, taking to climate-related risks and opportunities.
into consideration
different climate-related
scenarios, including
a 2degC or lower
scenario.
-------------------------------- ------------------------------------------------------------------
Risk Management a. Describe the organisation's
processes for identifying * The "Climate Change Risk Appetite, Risk Assessment
and assessing climate-related and Scenarios" are reviewed annually and approved by
risks. the AL Risk Committee on behalf of the Board.
* The risk assessment and scenarios consider existing
and emerging regulatory requirements and other
relevant factors, as well as the potential size and
scope of climate-related risks.
* The scenarios are informed by the Bank of England
"Key elements of the 2021 Biennial Exploratory
Scenario: Financial risks from climate change"
published on 8 June 2021.
* The risk assessment is informed by the scenarios. It
identifies and assesses the transition and physical
risks to the business model and lending book.
* Climate Change is referenced in the -- ICAAP -- Risk
Appetite Framework -- Credit Policy
-------------------------------- ------------------------------------------------------------------
Risk Management b. Describe the organisation's
processes for managing * The AL Credit Committee considers implications of
climate-related risks. climate change on new and existing lending. All new
lending includes a climate change assessment.
* The Investment Committee considers implications of
climate change on investment decisions.
* The AL Product Governance Committee considers climate
change on propositions.
-------------------------------- ------------------------------------------------------------------
Risk Management c. Describe how processes
for identifying, * The AL Risk Hierarchy includes Climate Change as a
assessing, and managing risk within the Enterprise & Strategic Risk Category
climate-related risks as per the Board-approved Risk Appetite Framework.
are integrated into
the organisation's
overall risk management.
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Metrics and a. Disclose the metrics The ESG dashboard details climate-change
Targets used by the organisation related actions, metrics and performance
to assess climate-related against risk tolerances. Metrics are
risks and opportunities disclosed on energy usage.
in line with its
strategy and risk It is not considered proportionate to
management process. disclose metrics on water, land use
and waste management.
Climate-related performance metrics
are not incorporated into remuneration
policies, based on the inherent risk
to the Group.
The Group does not operate an internal
carbon price mechanism on the basis
of proportionality.
The Risk Assessment documents the Group's
exposure to carbon-related assets (defined
as Energy and Utility sectors) as <1%
at June 2022.
This analysis was based on the Regulatory
Reporting Sector Analysis (SIC code
based).
-------------------------------- ------------------------------------------------------------------
Metrics and b. Disclose Scope Scope 1,2 and 3 emissions are reported
Targets 1, Scope 2 and, if on page 37 below and have been reported
appropriate, Scope in the ABG Annual Report since 2020.
3 greenhouse gas
(GHG) emissions and Scope 1, 2 and 3 emissions are also
the related risks. reported on the ESG dashboard.
-------------------------------- ------------------------------------------------------------------
Metrics and c. Describe the targets The Group is committed to the following:
Targets used by the organisation * To be Net Zero by 2050.
to manage climate-related
risks and opportunities
and performance against * For AAG vehicles, this will require technology
targets. advances as emissions are expected to increase in
line with business growth.
* As part of our London premises strategy, we will
consider energy efficiency as one of the criteria
with further gains expected. The remaining gap to Net
Zero post the premises review will be addressed by
further initiatives and potentially carbon
off-setting.
-------------------------------- ------------------------------------------------------------------
Streamlined Energy & Carbon Reporting (SECR)
The Group has worked again with a specialist energy management consultancy, Carbon Decoded, to gather the information required to be reported by large unquoted companies under the Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018:
-- All energy in line with Greenhouse Gas Reporting (GHG) Scope One - gas and owned transport, Scope Two -electricity and Scope Three - non-owned transport.
-- An intensity metric to enable year on year improvements to be tracked.
The report covers data from 1 January to 31 December 2022 for the Company and its subsidiaries. The Group has reported all sources of environmental impact, as required in SECR, over which it has financial control, being the Company and its subsidiaries.
Base Year
This year the Base Year has been changed to a rolling annual comparison. The acquisition of Asset Alliance Group (AAG) in 2021 significantly affected the energy use of the business, making comparisons to the previous 2019 baseline ineffective for energy reduction purposes. The removal of restrictions as a result of the Covid-19 pandemic has also continued tohave an impact on a changing picture of energy use in 2022.
Reporting Methodology
Ø Data has been collected for electricity, gas and transport.
Ø GHG Protocol Corporate Accounting and Reporting Standard has been followed where relevant.
Ø Data was collected specifically for the purpose of SECR.
Ø The 2021 and 2022 UK Government Conversion Factors for Company Reporting were used for all calculations of Carbon emissions.
Ø Data was estimated where necessary, as set out below.
Estimated Data
The following data was estimated in 2022:
Dominion Street, Gas use is included in the rent and sub-metering
London Natural Gas is not available; estimates are based on
floor area
Bristol and Gatwick Energy is included on the rent and sub-metering
for the office is not available; estimates
are based on floor area
-------------------------------------------------
On-site Transport Diesel used for Forklift Trucks and Refrigerated
Vehicles held on site at Wolverhampton has
been estimated.
-------------------------------------------------
Operational Scopes
The report contains all Scope One and Two energy use and Scope Three Grey Fleet for the Group as required by SECR.
Energy consumption for the commercial office properties owned by the Group has been further improved to provide more actual data in 2022 where floors in buildings were unoccupied by tenants and the responsibility for energy consumption returned to the Group. The Group is actively reviewing its premises strategy with specific reference to environmental factors.
Reporting Summary
2022 2021
-------------------------------------- --------------------------------------
Carbon Intensity Carbon Intensity
Tonnes Ratio Tonnes Ratio
Scope One Measure kWh tCO2e tCO2e Measure kWh tCO2e tCO2e
----------------------------- ------- --------- ------- --------- ------- --------- ------- ---------
Natural Gas - Intensity
Ratio tCO2e/m2 5,779 397,824 73 0.013 5,779 305,708 56 0.010
Gas Oil - Intensity
Ratio tCO2e/m2 12,923 3 0.002
Kerosene - Intensity
Ratio tCO2e/m2 1,545 61,926 15 0.010 1,545 57,356 14 0.009
Diesel - Mixed Onsite
Use No Metric Available 38,185 9
Company HGVs Intensity
Ratio tCO2e/miles 90,720 643,279 155 0.0017 43,582 255,865 61 0.0014
Company Cars Intensity
Ratio tCO2e/miles 314,699 269,795 65 0.0002 365,010 352,752 84 0.0002
----------------------------- ------- --------- ------- --------- ------- --------- ------- ---------
Total Scope One 1,411,009 317 984,604 218
----------------------------- ------- --------- ------- --------- ------- --------- ------- ---------
Scope Two
Electricity - Intensity
Ratio tCO2e/m2 14,274 1,703,083 329 0.023 14,117 1,797,245 382 0.027
Company Cars Intensity
Ratio tCO2e/miles 19,656 8,317 2 0.0001
----------------------------- ------- --------- ------- --------- ------- --------- ------- ---------
Total Scope Two 1,711,400 331 14,117 1,797,245 382 0.027
----------------------------- ------- --------- ------- --------- ------- --------- ------- ---------
Scope Three
Grey Fleet Vehicles
Intensity Ratio tCO2e/miles 270,683 337,205 80 0.0003 173,316 212,618 50 0.0003
----------------------------- ------- --------- ------- --------- ------- --------- ------- ---------
Total Scope Three 270,683 337,205 80 0.0003 173,316 212,618 50 0.0003
----------------------------- ------- --------- ------- --------- ------- --------- ------- ---------
Total of all Scopes 3,459,614 728 2,994,467 649
----------------------------- --------- ------- --------- -------
Estimated Data 7% 20%
----------------------------- --------- ---------
Corrective Actions
Data improvement work completed this year has identified a duplication in reporting the diesel carbon tonnes for AAG. In 2021, two sources of information were provided for diesel use; the mileage for HGVs and the amount of diesel held in a tank at Wolverhampton. However, the fuel used by AAG owned HGVs had already been accounted for in the mileage data leading to an overstatement of the amount of diesel tonnes in 2021 which has been restated in the 2021 details above.
Changes from 2021
Scope One
Natural gas and kerosene are used to heat buildings within the portfolio. This has increased from 2021 due to the return to office working and a particularly cold December from 70 to 88 tonnes.
In April 2022 the Government changed the law to restrict the use of gas oil (red oil) which has led to diesel now being used for Fork Lift Trucks and on-site needs. Therefore, gas oil is not reported in 2022 and a new line for diesel - Mixed Onsite Use has been reported. As this is for Fork Life Trucks and refrigerated lorries no metric is available. For 2022 the on-site fuel data has been estimated.
In 2021 AAG owned two HGVs and this has doubled in 2022, which together with an increase in demand, has increased the carbon tonnes from 61 to 155. Company car use has decreased from 84 to 65 tonnes with 60% of the AL fleet now fully electric. The metric has benefited from AAG ensuring the CO2 emissions of their fleet are monitored.
Scope Two
The electricity use has fallen over 2021 as overnight energy use is being better controlled. Electric cars feature for the first time in this section.
Scope three
This section relates to employees using their own cars on company business and is known as grey fleet. This has increased from 2021 as employees have returned to face-to-face meetings, following the lifting of all COVID-19 related restrictions.
Intensity Ratio
An intensity ratio is used to enable year on year comparison. As Arbuthnot is an office-based business and the recognised standard measure is kilowatt-hour per square metre (kWh/m2). This enables the energy use to be compared to industry standard benchmarks. Similarly for transport, the metric is kilowatt-hour per mile (kWh/mile). For reporting purposes, the Carbon Tonnes/floor area and miles have also been reported as required by the Regulations.
Energy Efficiency Actions
The Group is actively reviewing its premises strategy with specific reference to environmental factors. The Wilson Street head office profile data demonstrates that there is improved control of out of office electricity. To improve the understanding of energy use at Wilson Street, sub-metering is being reviewed to enable the site to look for further savings. Lighting reviews were undertaken for Wilson Street and these are now being considered.
AAG have implemented sub-metering effectively at Wolverhampton and have also taken steps to clarify the Diesel used by the business and by clients when HGVs are leased. They have also looked at possible energy savings during the cleaning processes for vehicles.
In terms of improvement in transport emissions AL have changed 60% of their company cars to electric vehicles. AAG are continuing to improve the emissions of their company vehicles.
Group Directors' Report
The Directors present their report for the year ended 31 December 2022.
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 6 to 38.
Corporate Governance
The Corporate Governance report on pages 44 to 51 contains information about the Group's corporate governance arrangements, including in relation to the Board's application of the UK Corporate Governance Code.
Results and Dividends
The results for the year are shown on page 62 of the financial statements. The profit after tax for the year of GBP16.5m (2021: GBP6.8m) is included in reserves. The Directors recommend the payment of a final dividend of 25p (2021: 22p) per share which, together with the interim dividend of 17p (2021: 16p) paid on 23 September 2022 represents total dividends for the year of 42p (2021: 59p). This compares with a total dividend in 2021 of 59p which comprised a regular total dividend of 38p together with a special dividend for the year of 21p relating to 2019 that had been cancelled following guidance from the PRA. The final dividend, if approved by members at the 2023 Annual General Meeting ("AGM"), will be paid on 2 June 2023 to shareholders on the register at close of business on 21 April 2023.
Directors
The names of the Directors of the Company at the date of this report, together with biographical details, are given on page 39 of this Annual Report. Mr. F.A.H. Angest was appointed to the Board on 1 September 2022. All the other Directors listed on those pages were directors of the Company throughout the year. The late Sir Christopher Meyer was also a Director during the year prior to his retirement from the Board on 25 May 2022.
Mr. F.A.H. Angest offers himself for election under Article 75 of the Articles of Association. Sir Nigel Boardman and Sir Alan Yarrow being eligible, offer themselves for re-election under Article 78 of the Articles of Association. Sir Alan, Sir Nigel and Mr. Angest each has a letter of appointment terminable on three months' notice.
Articles of Association
The Company's articles of association may only be amended by a special resolution of the Ordinary shareholders. They were last amended at the AGM in May 2017 and can be viewed at www.arbuthnotgroup.com/corporate_governance.html.
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 2025. 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 Individual Capital Adequacy Assessment Process ("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 11 to 18;
-- the Group's key principles - please see Corporate Philosophy on page 3; 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 embedded in the risk management framework of the Group and is subject to continuing updates and revisions when necessary. The ICAAP process is used to stress the capital position of the Group over the three-year planning period. It is updated at least annually as part of the business planning process.
Going Concern
In assessing the Company's and the Group's Going Concern position, the Directors have made appropriate enquiries which assessed the following factors:
-- the Group's strategy, profitability and funding;
-- the Group's risk management (see Note 6 to the financial statements) and capital resources (see Note 7);
-- the results of the Group's capital and liquidity stress testing;
-- the results of the Group's reverse stress testing and the stress levels that have the potential to cause its business plan failure; and
-- the Group's recovery plan and potential management actions to mitigate stress impacts on capital and liquidity.
The key Macro-Economic Risks for the stress testing included:
-- Property market falls of up to 45% in property values;
-- Stock market falls of up to 45% in UK equity prices;
-- Interest rate rise/fall; and
-- Regulation change.
The key Idiosyncratic Risks for the stress testing included:
-- Credit losses;
-- Operational events (i.e. fraud, cyber event, etc.);
-- Decline in profitability; and
-- Liquidity event (i.e. significant deposit outflow).
As a result of the assessment, the Directors are satisfied that the Company and the Group have adequate resources to continue in operation for a period of at least twelve months from when the financial statements are authorised for issue. The financial statements are therefore prepared on the going concern basis.
Share Capital
The Company has in issue two classes of shares, Ordinary shares and Ordinary Non-Voting shares. The Non-Voting shares rank pari passu with the Ordinary shares, including the right to receive the same dividends as the Ordinary shares, except that they do not have the right to vote in shareholder meetings.
Authority to Purchase Shares
Shareholders will 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 Ordinary and Ordinary Non-Voting share capital. The Directors will keep the position under review in order to maximise the Company's resources in the best interests of shareholders. Details of the resolutions renewing this authority are included in the Notice of Meeting on pages 163 and 164. No shares were purchased during the year. The maximum number of Treasury shares held at any time during the year was 390,274 Ordinary shares and 19,040 Ordinary Non-Voting shares of 1p each.
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 shares of the Company at the dates shown, together with the percentage of the current issued share capital held (excluding treasury shares), were as follows:
Beneficial Interests - Ordinary 1 January 31 December 24 March shares 2022 2022 2023 % -------------------------------- --------- ----------- --------- ---- Sir Henry Angest 8,351,401 8,376,401 8,376,401 56.3 Sir Nigel Boardman 16,313 26,062 26,062 0.2 J.R. Cobb 6,000 6,000 6,000 - A.A. Salmon 51,699 51,699 51,699 0.3 Beneficial Interests - Ordinary 1 January 31 December 24 March Non-Voting shares 2022 2022 2023 % -------------------------------- --------- ----------- --------- ---- Sir Henry Angest 86,674 86,674 86,674 64.9 J.R. Cobb 60 60 60 - A.A. Salmon 516 516 516 0.4
Substantial Shareholders
The Company was aware at 13 March 2023 of the following substantial holdings in the Ordinary shares of the Company, other than those held by one director shown above:
Ordinary
Holder Shares %
--------------------------- --------- ----
Liontrust Asset Management 1,785,878 11.9
Slater Investments 1,094,971 7.4
Mr. R Paston 529,130 3.6
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, which was significant in relation to the Group's business. At 31 December 2022, one Director had a loan from Arbuthnot Latham & Co., Limited amounting to GBP1.4m (2021: GBP0.5m) and five directors had deposits amounting to GBP4.4m (2021: GBP4.0m), all on normal commercial terms as disclosed in Note 44 of 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 in respect of liabilities (and associated costs and expenses) incurred in connection with the performance of their duties as a Director of the Company or any subsidiary and may purchase and maintain insurance against any such liability. The Company maintained directors and officers liability insurance throughout the year.
Employee Engagement
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. Further information on employee engagement is given in the Strategic Report on pages 23 and 24.
Engagement with Suppliers, Customers and Others
Information on engagement with suppliers, customers and other stakeholders is given in the Strategic Report on page 24.
Streamlined Energy & Carbon Reporting
The information required by the Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 is set out in the Sustainability Report on pages 35 to 38. These Regulations implement the Government's policy on Streamlined Energy and Carbon Reporting (SECR) to support businesses in understanding their Carbon emissions and to help them establish plans to become Net Zero by 2050.
Political Donations
The Company made political donations of GBP30,000 during the year (2021: GBP20,000), being payment for attendance at political functions.
Events after the Balance Sheet Date
Details of material post balance sheet events are given in Note 49.
Annual General Meeting ("AGM")
The Company's AGM will be held on Wednesday 24 May 2023 at which Ordinary Shareholders will be asked to vote on a number of resolutions. Shareholders are encouraged to submit their votes in respect of the business to be discussed via proxy, appointing the Chairman of the meeting as their proxy. This will ensure that votes will be counted if shareholders are unable to attend the meeting in person. The resolutions, together with explanatory notes about voting arrangements, are set out on pages 163 to 167.
Auditor
A resolution for the re-appointment of Mazars LLP as auditor will be proposed at the forthcoming AGM in accordance with section 489 of the Companies Act 2006.
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 for Companies and in accordance with the Rules of the AQSE Growth Market, they are required to prepare the Group Financial Statements in accordance with UK-adopted international accounting standards in conformity with the requirements of the Companies Act 2006 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 UK-adopted International Financial Reporting Standards (IFRSs) in conformity with the requirements of the Companies Act 2006;
-- 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 Company 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 that 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.
Corporate Governance
Introduction and Overview
The Company 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, published by the Financial Reporting Council in July 2018 ("the FRC Code"), in so far as they are considered applicable to and appropriate for the Company, given its size and circumstances, and the role and overall shareholding of its majority shareholder. The Company has been approved by the Prudential Regulation Authority ("PRA") as a parent financial holding company of its banking subsidiary, Arbuthnot Latham & Co., Limited. Arbuthnot Latham is authorised by the PRA and regulated by the Financial Conduct Authority ("FCA") and by the PRA. Three of its subsidiaries, Asset Alliance Leasing Limited, Forest Asset Finance Limited and Renaissance Asset Finance Limited, are regulated by the FCA. Accordingly, the Group operates to the high standards of corporate accountability and regulatory compliance appropriate for such a business.
The Board has decided to report against the FRC Code. This decision was made in light of the requirement in the AIM Rules for Companies that AIM listed companies state which corporate governance code they have decided to apply, how the company complies with that code, and where it departs from its chosen code an explanation of the reasons for doing so. The Rules of the AQSE Growth Market also require the Company to adopt, as far as possible, the principles and standards set down in a recognised UK corporate governance code. This information is published on the Company's website and the Company reviews it each year as part of its annual reporting cycle. This section of the Annual Report summarises how the Company applies the FRC Code and in broad terms how it has complied with its provisions throughout the year, giving explanations where it has chosen not to do so.
Leadership and Purpose
The Company is led by the Board which comprises seven members: Sir Henry Angest, the Executive Chairman and Chief Executive; two other executive directors, Andrew Salmon and James Cobb; three independent non-executive directors, Sir Nigel Boardman, Ian Dewar and Sir Alan Yarrow; and one other non-executive Director, Frederick Angest. This means that half of the Board, excluding the Chairman, comprises independent non-executive directors.
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.
The Board has for many years led a company which focuses on sustainable growth over the longer-term with a culture to match. Investment in resources has been strong and has continued where and as appropriate, with the focus on the benefit this will bring to bear for stakeholders over time. The aim continues to be for a culture of openness among the workforce which combines with the prudent and effective technological and individual controls in place across the business to ensure strong risk management in the Company's continued long-term success.
The Group's cultural values are reflected in a brand values document linking the Arbuthnot Principles to the Group's culture as a way of communicating culture across the business. These cultural Principles are encapsulated in five Group values which are fully embedded into day-to-day activities. These are integrity, respect, empowerment, energy and drive, and collaboration. A formal approach to Environmental, Social and Governance (ESG) is in place to develop over time under five 'pillars of sustainability' - governance, employees, community, environment and clients.
The Board
A number of key decisions are reserved for the Board. The Schedule of Matters Reserved to the Board is reviewed annually and is published on the Company's website at http://www.arbuthnotgroup.com/corporate_governance.html . The Board met regularly throughout the year, holding seven scheduled meetings, five of which were held jointly with the Board of Arbuthnot Latham with the other two being held to approve the Annual and Interim Reports. It also held a separate strategy meeting, together with the Arbuthnot Latham Directors, in September. 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 the 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.
New directors receive induction training upon joining the Board, with individual listed company training provided by the Company's AIM Nominated Adviser and AQSE Corporate Adviser. Regulatory and compliance training is provided by the Heads of Compliance and Financial Crime or by an external lawyers, accountants and other subject matter experts. Risk management training is provided, including that in relation to the ICAAP and ILAAP, by the Arbuthnot Latham Chief Risk Officer with an overview of credit and its associated risks and mitigation by the Arbuthnot Latham Chief Credit Officer.
Board Evaluation
The annual Board Effectiveness Review was conducted internally. The 2022 evaluation took the form of a confidential online questionnaire which assessed the performance of the Board and its Committees. The questions were augmented, particularly those concerning clarity of the business, strategy and risk and accountability, whilst continuing to explore the themes developed over recent years 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 results were discussed by the Board in November 2022 and proposed actions arising were considered in February 2023. 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.
Overview of Compliance with the FRC Code, together with Exceptions
The Board focuses not only on the provisions of the Code but on 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 the 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 5 - The Board has regard to the interests of all its key stakeholders in its decision making. Executive Directors and senior management are fully engaged with the workforce, all of whom interact on a daily basis. Mr. Dewar is the Company's Whistleblowing Champion and is available at all times in this role. It has not been deemed necessary to appoint an employee representative to the Board as the Company has fewer than 20 employees, all of whom have direct access to the Board including its Non-Executive Directors. Given its size, as stated in the s.172 Statement on page 23, one of the non-executive directors of Arbuthnot Latham and its Whistleblowing Champion, has been designated by its board as the director to engage with the Arbuthnot Latham Group's workforce.
Provision 9 - The Chairman was not independent on appointment, though he was appointed prior to the introduction of the provision. 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 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. In his role as CEO, Sir Henry Angest is responsible for the effective operation and delivery of the business and ensures that he is surrounded by an exceptional management team which ensures the strong leadership required. In particular, ABG has a strong Group Chief Operating Officer and Group Finance Director ensuring challenge and independence from a business perspective, against the stakeholder focus of the Chairman carrying out his Chairman's role.
Provision 10 -- The Board considers Sir Nigel Boardman to be independent, notwithstanding his chairmanship at Arbuthnot Latham since his views and any challenge are firmly independent from executive management in both companies. The Board is of the view that the dual directorships complement one another and that there is a benefit to be derived from the appointment of one independent director to both Boards simultaneously.
Provision 12 - The Board has not appointed a Senior Independent Director, as the main shareholder is the Chairman and other large independent shareholders communicate frequently with the Chairman, the Group Chief Operating Officer and the Group Finance Director and with the Company's stockbroker, Shore Capital.
Provision 14 - Attendance at meetings is not reported. In the event that a Director is 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 -Directors retire by rotation every three years in accordance with the Company's Articles of Association and company law. The Directors seeking re-election at the 2023 AGM are Sir Nigel Boardman and Sir Alan Yarrow who have served on the Board for 3 1/2 and 6 1/2 years respectively. The contributions of Sir Nigel and Sir Alan have been invaluable in the successful development of the Company. Mr. Frederick Angest, appointed to the Board by the Directors on 1 September 2022 as part of succession planning, will be seeking election by Ordinary shareholders. Accordingly, the Board fully supports the resolutions for their respective reappointment and appointment of these Directors.
Provision 19 - Sir Henry Angest's role as Chairman is critical to and reflective of the overall group structure. It is through the responsibilities that derive from this role that he is able to consider and protect not only the interests of other shareholders, but also his own interests as a majority shareholder as their interests are aligned. It is for this reason that he surrounds himself with notably strong directors who individually, and as a group, ensure the protection of not only his investments, but also those of other shareholders. As such, he remains as Chairman notwithstanding the length of his tenure.
Provision 23 - The Nomination Committee takes into account the provisions of the Board Diversity Policy and in terms of succession planning the Equality and Diversity Policy which promotes equality of opportunity for all staff. Further information on diversity and inclusion is given in the Sustainability Report on pages 27 and 29, though the gender balance of senior management and their direct reports has not been given.
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 Management Policy and Risk Appetite framework. The Risk Management Policy describes and articulates the risk management and risk governance framework, methodologies, processes and infrastructure required to ensure due attention to all material risks for Arbuthnot Latham, including compliance with relevant regulatory requirements.
The Risk Appetite framework sets out the Board's risk attitude for the principal risks through a series of qualitative statements and quantitative risk tolerance metrics. These guide decision-making at all levels of the organisation and form the basis of risk reporting. The key business risks and emerging risks are continuously identified, evaluated and managed by means of limits and controls at an operational level by Arbuthnot Latham management, and are governed through Arbuthnot Latham committees.
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 risk matters that need to be brought to its attention, enabling it to assess the Group's principal and emerging risks. Material items are presented to the Board in the Risk Report, which includes a risk dashboard, from the Arbuthnot Latham Chief Risk Officer, who attends the Board meetings held concurrently with those of Arbuthnot Latham. Significant risks identified in connection with the development of new activities are subject to consideration by the Board. The risk dashboard covers key management actions which have included the climate change agenda and its potential longer-term impact on property and other asset classes and on management's approach to sustainability.
In November 2022, the Board received a separate report from the Arbuthnot Latham CRO enabling it to monitor the company's risk management and internal control systems and to carry out its annual review of the effectiveness of the Group's risk management and internal control systems. The report explained the Risk Management Policy, together with principal risks, risk appetite, policies, three lines of defence, systems, processes, procedures and controls and the risk board dashboard. Following its review, the Board confirms the effectiveness of the Company's risk management and internal control systems.
Shareholder Communications
The majority shareholder is Sir Henry Angest, Chairman and Chief Executive. The Company maintains communications with its major external shareholders via one-to-one meetings, as appropriate, by the Chairman and Chief Executive, the Group Chief Operating Officer or the Group Finance Director on governance and other matters. When practicable it also makes use of the AGM to communicate with shareholders in person. 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 Audit, Nomination, Remuneration, Donations and Policy 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 and the terms of reference of the Audit, Nomination and Remuneration Committees are published on the Company's website. 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. Additionally the Chairman of the Arbuthnot Latham Risk Committee reports to the ABG Board at its regular meetings, held jointly with the Arbuthnot Latham Board, on the activities of that Committee which is responsible for monitoring the status of the Arbuthnot Latham group against its principal risks.
Audit Committee
Membership and meetings
Membership of the Audit Committee comprises Ian Dewar (as Chairman), Sir Nigel Boardman (since May 2022) and Sir Alan Yarrow. All of the Committee's members are therefore independent non-executive Directors. The late Sir Christopher Meyer was a member until his retirement as a director on 25 May 2022. Mr. Dewar has recent and relevant financial experience and the Committee as a whole has competence relevant to the financial sector in which the Company operates. The Company Secretary acts as its Secretary.
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 Committee also reviews procedures for detecting fraud and preventing bribery, reviews whistleblowing arrangements for employees to raise concerns in confidence, and reviews, as necessary, arrangements for outsourcing significant operations.
External Audit
The external auditors, Mazars LLP, have held office since their appointment in 2019 following a competitive tender. The Committee assesses the independence and objectivity, quali cations and effectiveness of the external auditors on an annual basis as well as making a recommendation to the Board on their reappointment. 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 Mazars are independent and that their audit is effective.
Activity in 2022
The Audit Committee held four meetings during the year, three of which were held jointly with the Audit Committee of Arbuthnot Latham with the other one being held to review the Annual Report & Accounts and draft results announcement.
Internal Audit
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. The ultimate responsibility for reviewing and approving the annual report and accounts rests with the Board.
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 reports directly to the Chairman of the Arbuthnot Latham Audit Committee. He provides reports on the outcomes of Internal Audit work directly to the Company's Committee and the Committee monitors progress against actions identified in these reports. Most of the Audit Committee's meetings are now held concurrently with those of the Arbuthnot Latham Audit Committee and, as such, it discusses Arbuthnot Latham's internal audits, all of the reports on which include an assessment of culture.
The Committee received a self-assessment report on Internal Audit from the Head of Internal Audit in September 2022 and it is satisfied with Internal Audit arrangements during the year.
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; and
-- Reviewed closely the detailed work carried out by management in respect of Going Concern and Viability.
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 and estimation
The Audit Committee considered the following significant issues and accounting judgements and estimates in relation to the Financial Statements:
Impairment of financial assets
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 and estimates, were appropriate.
The charge for impaired financial assets totalled GBP5.5m for the year ended 31 December 2022. The disclosures relating to impairment provisions are set out in Note 4.1(a) to the financial statements.
Property Portfolio
The Group currently owns two commercial office properties and two repossessed properties. Of these properties, two are held as inventory, one is held for sale and one as an investment property. The properties held as inventory and for sale are held at the lower of cost and net realisable value on the basis of internal discounted cash flow models and external valuation reports. The investment property is held at fair value on the basis of an external valuation report. The Committee discussed the bases of valuation with management and with the auditors who had engaged an internal expert to review management's valuations.
As at 31 December 2022, the Group's total property portfolio totalled GBP29.4m. The disclosures relating to the carrying value of the investment property and the properties held as inventory and for sale are set out in Notes 4.1(c), 4.1(d), 21, 25 and 31 to the financial statements.
Residual Value Risk
The Committee discussed the fair value adjustment for the portfolio of leased assets of Asset Alliance Group where an uplift had been applied to represent markets at the time of acquisition at 31 March 2021. The Committee also reviewed the maintenance provision, recognised to eliminate temporarily inflated values. It established that the uplift in lease values at that date appeared to have been completely justified by the subsequent asset sales experience where in aggregate losses had not been made on sales of trucks at the uplifted values . It also established that the residual value provision was deemed sufficient to cover the shortfall between the value of the portfolio and the estimated net sales value .
Going Concern and Viability Statement
The financial statements are prepared on the basis that the Group and Company are each a going concern for a period of at least twelve months from when the financial statements are authorised for issue. The Audit Committee reviewed management's assessment, which incorporated analysis of the ICAAP and ILAAP approved by the Board of Arbuthnot Latham and of relevant metrics, focusing on liquidity, capital, and the stress scenarios. It is satisfied that the going concern basis and assessment of the Group's longer-term viability is appropriate.
Other Committee activities
The Committee reviewed and discussed the minutes of meetings of the Financial Regulatory Reporting Committee whose main responsibility is to ensure that the Company meets the PRA's regulatory reporting expectations. The Audit Committee performs this role since it is concerned with financial reporting as well as with external reporting.
In November 2022, Committee members contributed to the review of the Committee's effectiveness as part of its evaluation by the Board. The outcome of the review was positive and there were no issues or concerns raised by them in regard to discharging their responsibilities. In March 2023 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 concerns raised by them in regard to discharging their responsibilities.
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 that it provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy. It proposed that the Board approve the Annual Report in that respect.
Nomination Committee
Membership and meetings
The Nomination Committee is chaired by Sir Henry Angest and its other members are Sir Nigel Boardman and Sir Alan Yarrow. Two thirds of the Committee's members are therefore independent non-executive Directors. The late Sir Christopher Meyer was a member until his retirement as a director on 25 May 2022. The Group General Counsel, Nicole Smith, acts as its Secretary. The Committee meets once a 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 performance, training requirements and succession planning, taking into account the skills and expertise that will be needed on and beneficial to the Board in the future.
Activity in 2022
The Nomination Committee met three times during the year. It met first to consider a replacement Non-Executive Director to the Audit, Nomination, Remuneration and Donations Committees ahead of the retirement of the late Sir Christopher Meyer. It determined that Sir Nigel Boardman would be a suitable appointment to each Committee, given his significant experience. It further recommended that Mr. Salmon be appointed as a replacement member of the Donations Committee, all with effect from 25 May 2022.
The Committee held a further meeting to consider the appointment of Frederick Angest as a non-executive director, noting that it was appropriate in the context of long-term succession planning in order that the ultimate majority shareholder has representation at all times and in the interests of long-term stability in line with the Arbuthnot Principles. Sir Henry Angest did not participate in the vote in relation to the proposed appointment on the basis that Mr. Angest is his son and as such there was or might be a conflict or perceived conflict of interests in relation to the decision. The Nomination Committee, being Sir Nigel and Sir Alan for this purpose, agreed that it was appropriate to recommend to the Board the appointment of Mr. Angest as an additional non-executive director.
The Committee also met to assess and confirm 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, Sir Nigel Boardman's credibility, knowledge and reputation have been a real benefit to the Board both in terms of collective and individual suitability and when third parties are considering dealings with the wider group. Ian Dewar, with a wealth of experience as a partner in a major accounting firm, has successfully chaired the Audit Committee. The Board has benefitted from Sir Alan Yarrow's wise counsel, challenge to management and many years' banking experience in the City of London. Frederick Angest, appointed to the Board as part of succession planning, is deepening his knowledge about the business, working at Arbuthnot Latham currently as a private banker, having previously worked within Wealth Management and Credit Risk.
In terms of individual performance, the Chairman confirmed that his assessment of all Directors was that they were performing well, with the Executive Directors additionally being formally reviewed in the context of the Senior Managers' Regime applicable to Arbuthnot Latham which confirmed continued strong performance. The Committee agreed with this assessment individually in relation to all members of the Board. Collectively, it was agreed that the Board had operated effectively with a wide range of experience and knowledge. As noted, in the responses to the Board Effectiveness Questionnaire, Non-Executives had provided appropriate challenge and guidance.
In terms of the performance of the Company's Board generally, the Committee noted that it takes into account the provisions of the Board Diversity Policy and the Board Suitability Policy. It reviewed the summary of training carried out by each Director during 2022 and noted that Directors had been able to carry out sufficient training both in person and online.
In November 2022, the Nomination 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 a sensible and strong plan remained in place. It also agreed that it continued to operate effectively and, as such, no further 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 52. The Committee meets once a year and otherwise as required. The Remuneration Report on pages 52 to 54 gives information on the Committee's responsibilities, together with 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 Andrew Salmon and Sir Alan Yarrow. The late Sir Christopher Meyer was a member until his retirement as a director on 25 May 2022. The Group General Counsel acts as its Secretary. The Committee considers any political donation or expenditure as defined within sections 366 and 367 of the Companies Act 2006. It meets as necessary.
Activity in 2022
The Donations Committee met once during the year. It agreed that the Committee was constituted and continued to operate efficiently with its overall performance and the performance of its individual members effective throughout the year. As such, no changes to its membership or activities were proposed to the Board.
Policy Committee
Membership and meetings
The Policy Committee is chaired by Andrew Salmon and its other members are James Cobb and Nicole Smith who also acts as its Secretary. Amongst its responsibilities, the Committee reviews the content of policy documentation to ensure that it meets legal and regulatory requirements and approves it on behalf of the Board.
Activity in 2022
The Policy Committee met five times during the year to review and approve Company policies.
Remuneration Report
Remuneration Committee
Membership of the Remuneration Committee is limited to non-executive directors together with Sir Henry Angest as Chairman. The members of the Committee are Sir Henry Angest, Sir Nigel Boardman and Sir Alan Yarrow. Two thirds of its membership therefore comprises independent non-executive Directors. The late Sir Christopher Meyer was also a member until his retirement as a director on 25 May 2022. The Group General Counsel, Nicole Smith, acts as its Secretary. The Committee met twice during the year.
The Remuneration Committee has responsibility for approving the overall remuneration policy for directors for review by the Board. The Committee is also responsible for remuneration more generally 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. Members of the Committee do not vote on their own remuneration.
The Committee also deals with remuneration-related issues, taking into account the requirements established by the PRA and the FCA.
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 contributions paid by the Company to individuals in the form of cash allowances, and, where applicable, 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 requirements established by the PRA and the FCA, the Company and its subsidiaries are all considered to be Tier 3 institutions.
Activity in 2022
The Remuneration Committee met twice during the year. It undertook its regular activities including reviewing the operation of the Remuneration Policy, having regard to the performance of the Company during the year. It also met to approve a single payment of GBP1,500 to all Group employees and executive directors in order to help them with the increased costs of living. The Committee determined that a set amount would be most beneficial to those on lower salaries where the increased cost of living being experienced was likely to be causing the most difficulty. The payment was also intended to aid employee retention at a time when recruitment was proving more challenging. Sir Henry did not participate in the vote in relation to the payment in respect of himself noting his conflict of interest. Additionally, the Committee, being Sir Nigel and Sir Alan for this purpose, approved the payment to Frederick Angest of a director's fee of GBP30,000 per annum, being half of the standard fee for a non-executive director, Mr. Angest already receiving a salary in respect of his employment with Arbuthnot Latham. This followed the precedent of a reduced fee in relation to the previous appointments of Sir Nigel as a director of both the Company and of Arbuthnot Latham. Sir Henry did not participate in this decision on the basis that Mr. Angest is his son and as such there was or might be a conflict or perceived conflict of interests in relation to the decision.
The Committee met again to review the Company's Remuneration Policy, the level of fees for Non-Executive Directors and the Executive Directors' remuneration, approving the award of bonuses to Messrs Salmon and Cobb for exceptional performance in the year and, after due consideration of comparable market rates salary rises for Messrs Salmon and Cobb. As in previous years, Sir Henry Angest waived his right to be considered for receipt of a bonus. The Remuneration Committee agreed that it continued to operate effectively with its overall performance and the performance of its individual members effective throughout the year.
The Committee decided not to change the fees for non-executive directors, reflecting the appropriate level of fee to continue to secure the services of a high level non-executive director.
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 Messrs Salmon and Cobb 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 2020 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, these directors were granted a phantom option to acquire 200,000 and 100,000 ordinary 1p shares respectively in the Company. The value of each phantom option is related to the market price of an Ordinary Share. The fair value of these options at the grant date was GBP1m. The first tranche of share options remained outstanding at 31 December 2022, but will lapse if not exercised at 1591p before 14 June 2023. The second tranche has not vested and so lapsed in 2020 as one of the performance conditions was not met, being the payment of dividends which was not possible in 2020 due to the regulators' response to the pandemic, requiring banks to cease payment of dividends, and to its economic impact.
On 23 July 2021, Messrs Salmon and Cobb were granted further phantom options relating to 200,000 and 100,000 ordinary shares respectively. The fair value of these options at the grant date was GBP1.4m. The value of each Ordinary Share for the purposes of this grant of phantom options is 990 pence, being the mid-market share price at close of business on 23 July 2021. An increase in the value of an Ordinary Share over 990 pence will give rise to an entitlement to a cash payment by the Company on the exercise of a phantom option. The right to exercise phantom options is subject to the satisfaction of performance conditions. 50% of each director's individual holding of phantom options is exercisable after 23 July 2024 and the other 50% is exercisable after 23 July 2026. These phantom options will lapse if not exercised within seven years of the date of grant, i.e. by 23 July 2028. The fair value of the outstanding options as at 31 December 2022 was GBP0.1m (2021: GBP0.1m).
Details of outstanding options are set out below.
Date
At 1 At 31 Exercise from
January December Price which
Phantom Options 2022 2022 GBP exercisable Expiry
---------------- -------- --------- -------- ------------ ---------
AA Salmon 100,000 100,000 GBP15.90 15-Jun-19 14-Jun-23
100,000 100,000 GBP9.90 23-Jul-24 23-Jul-28
100,000 100,000 GBP9.90 23-Jul-26 23-Jul-28
-------- ---------
300,000 300,000
-------- ---------
JR Cobb 50,000 50,000 GBP15.90 15-Jun-19 14-Jun-23
50,000 50,000 GBP9.90 23-Jul-24 23-Jul-28
50,000 50,000 GBP9.90 23-Jul-26 23-Jul-28
-------- ---------
150,000 150,000
-------- ---------
450,000 450,000
-------- ---------
Directors' Emoluments
2022 2021
GBP000 GBP000
--------------------------------------------- ------ ------
Fees (including benefits in kind) 265 265
Salary payments (including benefits in kind) 4,109 3,172
Pension contributions 70 70
4,444 3,507
--------------------------------------------- ------ ------
Total Total
Salary Bonus Benefits Pension Fees 2022 2021
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- ------ ------ -------- ------- ------ ------ ------
Sir Henry Angest 1,200 - 78 - - 1,278 1,268
Sir Alan Yarrow - - - - 70 70 70
F Angest 20 5 1 1 10 37 -
JR Cobb 700 745 18 35 - 1,498 1,052
IA Dewar - - - - 75 75 75
Sir Christopher Meyer - - - - 25 25 60
AA Salmon 1,200 1,200 30 35 - 2,465 1,859
The Hon Sir Nigel Boardman - - - - 121 121 60
3,120 1,950 127 71 301 5,569 4,444
--------------------------- ------ ------ -------- ------- ------ ------ ------
Details of any shares or options held by directors are presented above.
The emoluments of the Chairman were GBP1,278,000 (2021: GBP1,268,000). The emoluments of the highest paid director were GBP2,465,000 (2021: GBP1,859,000) including pension contributions of GBP35,000 (2021: GBP35,000).
Retirement benefits are accruing under money purchase schemes for three directors who served during 2022 (2021: two directors).
Independent Auditor's Report
Opinion
We have audited the financial statements of Arbuthnot Banking Group PLC (the 'Parent Company') and its subsidiaries (the 'Group') for the year ended 31 December 2022 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement of Financial Position, the Company Statement of Financial Position, the Consolidated Statement of Changes in Equity, the Company Statement of Changes in Equity, the Consolidated Statement of Cash Flows, the Company Statement of Cash Flows, and notes to the financial statements, including a summary of significant accounting policies.
The financial reporting framework that has been applied in their preparation is applicable law and UK-adopted international accounting standards and as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
In our opinion, the financial statements:
-- give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31 December 2022 and of the Group's profit for the year then ended;
-- have been properly prepared in accordance with UK-adopted international accounting standards and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006; and
-- have been prepared in accordance with the requirements of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the "Auditor's responsibilities for the audit of the financial statements" section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council's ("FRC") Ethical Standard as applied to listed entities and public interest entities and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Our audit procedures to evaluate the directors' assessment of the Group's and the Parent Company's ability to continue to adopt the going concern basis of accounting included but were not limited to:
-- Undertaking an initial assessment at the planning stage of the audit to identify events or conditions that may cast significant doubt on the Group's and the Parent Company's ability to continue as a going concern;
-- Making enquiries of the directors to understand the period of assessment considered by them, the assumptions they considered and the implication of those when assessing the Group's and Parent Company's future financial performance;
-- Evaluating management's going concern assessment of the Group and Parent Company and challenging the appropriateness of the key assumptions used in and mathematical integrity of management's forecasts, including assessing the historical accuracy of management's forecasting and budgeting;
-- Assessing the sufficiency of the Group's capital and liquidity taking into consideration the most recent Internal Capital Adequacy Assessment Process and Internal Liquidity Assessment Process performed by Arbuthnot Latham & Co., Ltd, a PRA regulated bank and wholly owned subsidiary of the Group, and evaluating the results of management's scenario and reverse stress testing which includes sensitivity analysis, and including consideration of principal and emerging risks on liquidity and regulatory capital;
-- Assessing the accuracy of management's forecast through a review of post year end performance;
-- Evaluating the Group's Resolution and Recovery plans which includes possible cost saving measures that could be taken in the event circumstances prevent forecast results from being achieved;
-- Reading regulatory correspondence, minutes of meetings of the Audit Committee and the Board of Directors, and post balance sheet events to identify events of conditions that may impact the Group's and the Parent Company's ability to continue as a going concern;
-- Considering the consistency of management's forecasts with other areas of the financial statements and our audit; and
-- Evaluating the appropriateness of the directors' disclosures in the financial statements on going concern.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group's and the Parent Company's ability to continue as a going concern for a period of twelve months from when the financial statements are authorised for issue.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
In relation to Arbuthnot Banking Group PLC's reporting on how it has applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors' statement in the financial statements about whether the director's considered it appropriate to adopt the going concern basis of accounting.
Key Audit Matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
We summarise below the key audit matters in forming our opinion above, together with an overview of the principal audit procedures performed to address each matter and our key observations arising from those procedures.
These matters, together with our findings, were communicated to those charged with governance through our Audit Completion Report.
Key Audit Matter How our scope addressed this matter
Allowances for expected credit Our audit procedures included but were
losses not limited to :
Group - GBP6.6m; 2021: GBP6.4m
(note 4, note 24 and 25) Planning
We have assessed the methodology of identifying
The determination of Expected significant increase in credit risk. As
Credit Loss ('ECL') under IFRS part of our audit of the methodology, we
9 is an inherently judgmental tested the model design and model implementation.
area due to the use of subjective We also performed benchmarking and sensitivity
assumptions and a high degree analysis. sensitivities, a detailed IFRS
of estimation. ECL relating to 9 compliance checklist review and a recalculation
the Group's loan portfolio requires of the key components such as PD, LGD,
the Directors to make judgements EAD and final ECL.
over the ability of the Groups'
customers to make future loan Controls
repayments. We have evaluated the design and implementation
and tested the operating effectiveness
The most significant risk relates of the key controls operating across the
to loans and advances to customers Group in relation to credit processes (including
where the Group is exposed to underwriting, monitoring, collections and
secured and unsecured lending provisioning). This also included:
to private and commercial customers. -- attendance at the Potential & Problem
Debt Management Committee meetings
As set out in note 3.4, ECL is -- missed payments monitoring
measured based on a three-stage -- credit reviews at origination and annual
model. For loans with no significant review
deterioration in credit risk -- review of watch list movements throughout
since origination (stage l), the year
ECL is determined through the -- controls testing over collateral revaluations
use of a model.
Test of detail
The model used by the Group to We have performed credit file reviews in
determine expected losses requires order to verify data used in the determination
judgement to the input parameters of PD and LGD assumptions. This was performed
and assumptions; in particular, for all loans in Stage 3 and Stage 2 and
uncertainty around macro-economic for a sample of loans in Stage 1 with characteristics
assumptions. of heightened credit risk (e.g. high Loan-to-Value
secured exposures and unsecured exposures).
For loans that have experienced
a significant deterioration in ECL models
credit risk since origination We have assessed the models used by management
(stage 2) or have defaulted (stage to determine ECL calculations. We have:
3), the ECL is determined based * considered the methodology used by management;
on Probability of Default ('PD')
and the present value of future
cash flows arising primarily * tested the data inputs used in applying the
from the sale or repossession methodology adopted and assessed for reasonableness;
of security which determines
the Loss Given Default ('LGD')
and the Exposure at Default ('EAD'). * tested the completeness of the loan portfolio applied
to the model;
The most significant areas where
we identified greater levels
of management judgement and estimate * tested the process in place to allocate loans to the
are: respective risk categories (staging);
* Staging of loans and the identification of
significant increase in credit risk * tested and challenged the key assumptions applied to
determine probability of default and loss given
default;
* Key assumptions in the model including PD and LGD
including the present value of future cash flows from
collateral; and * on sample of higher risk individually assessed loans
(stage 3), we involved our in-house valuation
specialist to independently assess the underlying
* Use of macro-economic variables reflecting a range of collateral used in the ECL calculations. However, in
future scenarios. some cases we relied on management's external
valuation experts and, in this situation, we assessed
the capabilities, professional competence, and
* Post model adjustments to capture uncertainties not objectivity of the experts;
captured by the models.
* we have involved our in-house credit risk specialists
and economists in the assessment of model approach
Further detail on the key judgements and assumptions, including macro- economic scenarios
and estimates involved are set and the impact on commercial and residential property
out within the critical accounting prices;
estimates and judgements in applying
accounting policies note (note
4) and in note 24 and 25 to the * we have assessed the valuation, completeness and
financial statements. appropriateness of post model adjustments; and
We consider the risk to have
increased in the year given the * tested the compliance of the model in line with IFRS
economic uncertainty. 9; and
* performed a re-calculation of the key components such
as PD, LGD, EAD and final ECL.
Stand back assessment
* we performed stand back analysis to assess the
overall adequacy of the ECL coverage. In performing
this procedure, we considered the credit quality of
the portfolio and performed benchmarking across
similar banks considering both staging percentages
and provision coverage ratios; and
Disclosures
* we assessed the adequacy and appropriateness of
disclosures made within the financial statements.
Our observations
We found the approach taken in respect
of expected credit losses to be consistent
with the requirements of IFRS 9 and judgements
made were reasonable.
------------------------------------------------------------
In the prior year, our audit report included significant risks in relation to the acquisition of Asset Alliance Group (AAG) and investment property valuation. We determined that the nature and complexity of these areas no longer contribute significantly to our audit efforts and therefore are no longer considered as key audit matters.
Our application of materiality and an overview of the scope of our audit
The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements Parent Company financial statements
Overall materiality GBP1.0m (2021: GBP1.0m) GBP0.2m (2021: GBP0.2m)
--------------------------- ------------------------------------
How we determined 0.5% of Net assets but capped at component materiality
it levels (2021: 0.5% of net assets but capped at component
materiality levels).
-----------------------------------------------------------------
Rationale for benchmark We consider net assets to be the main focus for the
applied users of the financial statements given net assets
approximate regulatory capital resources and it reflects
the importance of regulatory capital to the Parent
Company's solvency. Also, the principal activity of
the Group is the investment of capital.
-----------------------------------------------------------------
Performance materiality Performance materiality is set to reduce, to an appropriately
low level, the probability that the aggregate of uncorrected
and undetected misstatements in the financial statements
exceeds materiality for the financial statements as
a whole.
We set performance materiality at GBP0.7m (2021: GBP0.7m)
for the Group and GBP0.14m (2021: GBP0.14m) for the
Parent Company, which represents 70% of overall materiality
(2021: 70%).
In determining the performance materiality, we considered
a number of factors, including the level and nature
of uncorrected and corrected misstatements in the prior
year and the robustness of the control environment,
and concluded that an amount toward the upper end of
our normal range was appropriate.
-----------------------------------------------------------------
Reporting threshold We agreed with the directors that we would report to
them misstatements identified during our audit above
GBP30,000 (2021: GBP30,000) for the Group and GBP6,000
(2021: GBP6,000) for the Parent Company as well as
misstatements below that amount that, in our view,
warranted reporting for qualitative reasons.
-----------------------------------------------------------------
As part of designing our audit, we assessed the risk of material misstatement in the financial statements, whether due to fraud or error, and then designed and performed audit procedures responsive to those risks. In particular, we looked at where the directors made subjective judgements, such as assumptions on significant accounting estimates.
We tailored the scope of our audit to ensure that we performed sufficient work to be able to give an opinion on the financial statements as a whole. We used the outputs of our risk assessment, our understanding of the Group and the Parent Company, their environment, controls and critical business processes, to consider qualitative factors in order to ensure that we obtained sufficient coverage across all financial statement line items.
Our Group audit scope included an audit of the Group and the Parent Company financial statements. Based on our risk assessment, all components of the Group, including the Parent Company, were subject to full scope audit performed by the Group and component audit teams.
We performed a full scope audit on all entities within the Group which is consistent with the prior year. We used Mazars UK component audit teams as component auditors for five components (2021: one component).
Our component materiality ranged from GBP0.02m to GBP0.7m (2021: GBP0.02m to GBP0.7m). Full scope audits were carried out on all companies in the Group and therefore, account for 100% (2021: 100%) of the Group's net interest income, profit before tax, net assets and total assets.
At the Parent Company level, the Group audit team also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the consolidated financial information.
Working with our component audit teams
We determined the level of involvement we needed as the Group team in the work of the component audit teams to be able to conclude whether sufficient and appropriate audit evidence was obtained to provide a basis for our opinion on the Group financial statements as a whole. We maintained oversight of the component audit teams, directing and supervising their activities related to our audit of the Group. The Group team maintained frequent communications to monitor progress. The Senior Statutory Auditor and senior members of the Group team attended component meetings, which were held via video conference. We issued instructions to our component audit teams and interacted with them throughout the audit process. In the absence of component visits, we used video conferencing to review key workpapers prepared by the component teams and held meetings with component management.
Other information
The other information comprises the information included in the annual report other than the financial statements and our auditor's report thereon. The Directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, the part of the directors' remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
-- the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
-- the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In light of the knowledge and understanding of the Group and the Parent Company and their environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the directors' report.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:
-- adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
-- the Parent Company financial statements and the part of the directors' remuneration report to be audited are not in agreement with the accounting records and returns; or
-- certain disclosures of directors' remuneration specified by law are not made; or -- we have not received all the information and explanations we require for our audit;
Corporate governance statement
We have reviewed the directors' statement in relation to going concern, longer term viability and that part of the Corporate Governance Statement relating to the Group's and the Parent Company's voluntary compliance with the provisions of the UK Corporate Governance Code.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements or our knowledge obtained during the audit:
-- Directors' statement with regards the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified, set out on pages 40 and 41;
-- Directors' explanation as to its assessment of the entity's prospects, the period this assessment covers and why they period is appropriate, set out on page 40;
-- Directors' statement on fair, balanced and understandable, set out on page 43;
-- Board's confirmation that it has carried out a robust assessment of the emerging and principal risks, set out on page 21;
-- The section of the annual report that describes the review of effectiveness of risk management and internal control systems, set out on page 19; and;
-- The section describing the work of the audit committee, set out on page 48.
Responsibilities of Directors
As explained more fully in the 'Statement of Directors' Responsibilities in Respect of the Strategic Report and the Directors' Report and the Financial Statements' set out on page 43, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group's and the Parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below.
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud.
Based on our understanding of the Group and the Parent Company and its industry, we identified that the principal risks of non compliance relate to regulations and supervisory requirements of the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA), Anti Money Laundering regulations (AML), General Data Protection Regulation (GDPR), Corporate Governance Code and other laws and regulations, such as the Companies Act 2006, that have a direct impact on the preparation of the financial statements, and UK tax legislation.
To help us identify instances of non-compliance with these laws and regulations, and in identifying and assessing the risks of material misstatement in respect to non-compliance, our procedures included, but were not limited to:
-- Gaining an understanding of the legal and regulatory framework applicable to the Group and the Parent Company, the industry in which they operate, and the structure of the Group, and considering the risk of acts by the Group and the Parent Company which were contrary to the applicable laws and regulations, including fraud;
-- Inquiring of the directors, management and, where appropriate, those charged with governance, as to whether the Group and the Parent Company is in compliance with laws and regulations, and discussing their policies and procedures regarding compliance with laws and regulations;
-- Inspecting correspondence with relevant licensing or regulatory authorities including the PRA and FCA; and
-- Review of minutes of meetings of the Board of Directors and the Audit Committee held during the year;
-- Discussing amongst the engagement team the laws and regulations listed above, and remaining alert to any indications of non-compliance.
We also considered those laws and regulations that have a direct effect on the preparation of the financial statements, such as AIM rules, AQSE rules, SECR requirements, tax legislation, pension legislation, the Companies Act 2006.
In addition, we evaluated the directors' and management's incentives and opportunities for fraudulent manipulation of the financial statements, including the risk of management override of controls, and determined that the principal risks related to posting manual journal entries to manipulate financial performance, management bias through judgements and assumptions in significant accounting estimates, in particular in relation to ECL (as described in the "Key audit matters" section of our report) and significant one-off or unusual transactions.
Our procedures in relation to fraud included but were not limited to:
-- Making enquiries of the Directors and management on whether they had knowledge of any actual, suspected or alleged fraud;
-- Gaining an understanding of the internal controls established to mitigate risks related to fraud;
-- Discussing amongst the engagement team the risks of fraud; and
-- Addressing the risks of fraud through management override of controls by performing journal entry testing on a sample basis; and
-- Being sceptical to the potential of management bias through judgements and assumptions in significant accounting estimates.
The primary responsibility for the prevention and detection of irregularities, including fraud, rests with both those charged with governance and management. As with any audit, there remained a risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations or the override of internal controls.
The risks of material misstatement that had the greatest effect on our audit are discussed in the "Key Audit Matters" section of this report.
A further description of our responsibilities is available on the FRC's website at www.frc.org.uk/auditorsresponsibilities . This description forms part of our auditor's report.
Other matters which we are required to address
Following the recommendation of the Audit Committee, we were appointed by the Board of Directors on 6 December 2019 to audit the financial statements for the year ended 31 December 2019 and subsequent financial periods. The period of total uninterrupted engagement is four years, covering the years ended 31 December 2019 to 31 December 2022.
The non-audit services prohibited by the FRC's Ethical Standard were not provided to the Group or the Parent Company and we remain independent of the Group and the Parent Company in conducting our audit.
Our audit opinion is consistent with our additional report to the Audit Committee.
Use of the audit report
This report is made solely to the Company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body for our audit work, for this report, or for the opinions we have formed.
Greg Simpson (Senior Statutory Auditor)
for and on behalf of Mazars LLP
Chartered Accountants and Statutory Auditor
30 Old Bailey
London
EC4M 7AU
29 March 2023
Company statement of financial position
At 31 December
2022 2021
Note GBP000 GBP000
---------------------------------------------------- ------- ---------- ----------
ASSETS
Loans and advances to banks 20 8,434 7,587
Debt securities at amortised cost 21 24,437 24,367
Current tax asset - 239
Deferred tax asset 30 523 523
Intangible assets 31 1 2
Property, plant and equipment 32 130 137
Other assets 28 74 56
Interests in subsidiaries 47 159,354 159,404
---------------------------------------------------- ------- ---------- ----------
Total assets 192,953 192,315
---------------------------------------------------- ------- ---------- ----------
EQUITY AND LIABILITIES
Equity
Share capital 41 154 154
Other reserves 42 (1,280) (1,280)
Retained earnings* 42 152,115 153,528
---------------------------------------------------- ------- ---------- ----------
Total equity 150,989 152,402
---------------------------------------------------- ------- ---------- ----------
LIABILITIES
Current tax liability 879 -
Other liabilities 37 3,491 3,141
Debt securities in issue 39 37,594 36,772
---------------------------------------------------- ------- ---------- ----------
Total liabilities 41,964 39,913
---------------------------------------------------- ------- ---------- ----------
Total equity and liabilities 192,953 192,315
---------------------------------------------------- ------- ---------- ----------
*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 Parent Company recorded a profit after tax for the year of GBP4,446k
(2021: GBP5,541k).
Consolidated statement of changes in equity
Attributable to equity holders
of the Group
----------------------------------------------------
Capital Fair
Share redemption value Treasury Retained
capital reserve reserve shares earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------------------- -------- ----------- -------- -------- --------- -------
Balance at 31 December 2021 154 19 979 (1,299) 201,026 200,879
Total comprehensive income for the period
Profit for 2022 - - - - 16,458 16,458
Other comprehensive income, net of tax
Changes in fair value of equity investments
at fair value through other comprehensive
income (FVOCI) - - 628 - - 628
Sale of financial assets carried at FVOCI - - (412) - 412 -
Tax on other comprehensive income - - (128) - - (128)
-------------------------------------------- -------- ----------- -------- -------- --------- -------
Total other comprehensive income - - 88 - 412 500
-------------------------------------------- -------- ----------- -------- -------- --------- -------
Total comprehensive income for the period - - 88 - 16,870 16,958
-------------------------------------------- -------- ----------- -------- -------- --------- -------
Transactions with owners, recorded directly
in equity
Contributions by and distributions to
owners
Final dividend relating to 2021 - - - - (3,305) (3,305)
Interim dividend relating to 2022 - - - - (2,554) (2,554)
Total contributions by and distributions
to owners - - - - (5,859) (5,859)
-------------------------------------------- -------- ----------- -------- -------- --------- -------
Balance at 31 December 2022 154 19 1,067 (1,299) 212,037 211,978
-------------------------------------------- -------- ----------- -------- -------- --------- -------
Attributable to equity holders
of the Group
----------------------------------------------------
Capital Fair
Share redemption value Treasury Retained
capital reserve reserve shares earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------------------- -------- ----------- -------- -------- --------- -------
Balance at 31 December 2020 154 19 (12,690) (1,299) 207,839 194,023
Total comprehensive income for the period
Loss for 2021 - - - - 6,786 6,786
Other comprehensive income, net of tax
Changes in fair value of equity investments
at fair value through other comprehensive
income - - 5,626 - - 5,626
Tax on other comprehensive income - - 2 - - 2
-------------------------------------------- -------- ----------- -------- -------- --------- -------
Total other comprehensive income - - 5,628 - - 5,628
-------------------------------------------- -------- ----------- -------- -------- --------- -------
Total comprehensive income for the period - - 5,628 - 6,786 12,414
-------------------------------------------- -------- ----------- -------- -------- --------- -------
Transactions with owners, recorded directly
in equity
Contributions by and distributions to
owners
Sale of Secure Trust Bank shares - - 8,041 - (8,041) -
Special dividend relating to 2019* - - - - (3,155) (3,155)
Interim dividend relating to 2021 - - - - (2,403) (2,403)
-------------------------------------------- -------- ----------- -------- -------- --------- -------
Total contributions by and distributions
to owners - - 8,041 - (13,599) (5,558)
-------------------------------------------- -------- ----------- -------- -------- --------- -------
Balance at 31 December 2021 154 19 979 (1,299) 201,026 200,879
-------------------------------------------- -------- ----------- -------- -------- --------- -------
* On 19 March 2021 the Group paid a special dividend of 21p per share
to replace the dividend that was withdrawn at the request of the regulators
at the outset of the pandemic.
Company statement of changes in equity
Attributable to equity holders
of the Company
-----------------------------------------------------------------
Capital Fair
Share redemption value Treasury Retained
capital reserve reserve shares earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------------------- -------- ---------- -------------- ------------- ------------ ------------
Balance at 1 January 2021 154 19 (12,164) (1,299) 160,721 147,431
Total comprehensive income for the
period
Profit for 2021 - - - - 5,541 5,541
Other comprehensive income, net of
income tax
Changes in fair value of equity
investments
at fair value through other
comprehensive
income - - 4,988 - - 4,988
----------------------------------- -------- ---------- -------------- ------------- ------------ ------------
Total other comprehensive income - - 4,988 - - 4,988
----------------------------------- -------- ---------- -------------- ------------- ------------ ------------
Total comprehensive income for the
period - - 4,988 - 5,541 10,529
----------------------------------- -------- ---------- -------------- ------------- ------------ ------------
Transactions with owners, recorded
directly in equity
Contributions by and distributions
to owners
Sale of Secure Trust Bank shares - - 7,176 (7,176) -
Special dividend relating to 2019* - - - - (3,155) (3,155)
Interim dividend relating to 2021 - - - - (2,403) (2,403)
----------------------------------- -------- ---------- -------------- ------------- ------------ ------------
Total contributions by and
distributions
to owners - - 7,176 - (12,734) (5,558)
----------------------------------- -------- ---------- -------------- ------------- ------------ ------------
Balance at 31 December 2021 154 19 - (1,299) 153,528 152,402
----------------------------------- -------- ---------- -------------- ------------- ------------ ------------
Total comprehensive income for the
period
Profit for 2022 - - - - 4,446 4,446
Other comprehensive income, net of
income tax
Total comprehensive income for the
period - - - - 4,446 4,446
----------------------------------- -------- ---------- -------------- ------------- ------------ ------------
Transactions with owners, recorded
directly in equity
Contributions by and distributions
to owners
Final dividend relating to 2021 - - - - (3,305) (3,305)
Interim dividend relating to 2022 - - - - (2,554) (2,554)
----------------------------------- -------- ---------- -------------- ------------- ------------ ------------
Total contributions by and
distributions
to owners - - - - (5,859) (5,859)
----------------------------------- -------- ---------- -------------- ------------- ------------ ------------
Balance at 31 December 2022 154 19 - (1,299) 152,115 150,989
----------------------------------- -------- ---------- -------------- ------------- ------------ ------------
* On 19 March 2021 the Group paid a special dividend of 21p per share
to replace the dividend that was withdrawn at the request of the regulators
at the outset of the pandemic.
Consolidated statement of cash flows
Year ended Year ended
31 December 31 December
2022 2021*
Note GBP000 GBP000
----------------------------------------------------------------- ------------ ---------------- --------------
Cash flows from operating activities
Profit before tax 20,009 4,638
Adjustments for:
- Depreciation and amortisation 30,29,31 7,193 7,957
- Impairment loss on loans and advances 25 214 1,759 - Net interest income 80 71 - Elimination of exchange differences on debt securities (8,783) (1,978) - Gain from bargain purchase 12 - (8,626) - Other non-cash or non-operating items included in profit before tax 163 20 - Tax expense (3,551) 2,148 ----------------------------------------------------------------- ------------ ---------------- -------------- Cash flows from operating profits before changes in operating assets and liabilities 15,325 5,989 Changes in operating assets and liabilities: - net increase in derivative financial instruments (4,605) (388) - net increase in loans and advances to customers (165,328) (280,646) - net (increase)/decrease in assets held for leasing (50,175) 14,855 - net decrease/(increase) in other assets 57,563 (3,554) - net increase in amounts due to customers 254,680 472,662 - net increase in other liabilities 6,323 4,604 ----------------------------------------------------------------- ------------ ---------------- -------------- Net cash inflow from operating activities 113,783 213,522 ----------------------------------------------------------------- ------------ ---------------- -------------- Cash flows from investing activities Acquisition of financial investments (53) (621) Disposal of financial investments 640 21,547 Purchase of computer software 29 (6,174) (5,100) Purchase of property, plant and equipment 30 (1,065) (702) Proceeds from sale of property, plant and equipment 30 50 2 Acquisition of Asset Alliance Group Holdings Limited 12 - (9,998) Cash balance acquired through Asset Alliance Holdings Limited acquisition 12 - 3,883 Purchase of debt securities (799,341) (590,492) Proceeds from redemption of debt securities 670,164 635,155 ----------------------------------------------------------------- ------------ ---------------- -------------- Net cash (owtflow) / inflow from investing activities (135,779) 53,674 ----------------------------------------------------------------- ------------ ---------------- -------------- Cash flows from financing activities Decrease in borrowings (4,306) (117,675) Lease payments (7,458) (2,893) Dividends paid (5,860) (5,558) ----------------------------------------------------------------- ------------ ---------------- -------------- Net cash outflow from financing activities (17,624) (126,126) ----------------------------------------------------------------- ------------ ---------------- -------------- Net (decrease)/increase in cash and cash equivalents (39,620) 141,070 Cash and cash equivalents at 1 January 888,136 747,066 ----------------------------------------------------------------- ------------ ---------------- -------------- Cash and cash equivalents at 31 December 43 848,516 888,136 ----------------------------------------------------------------- ------------ ---------------- -------------- *Prior year values have been represented using the indirect method in accordance with IAS 7.
Company statement of cash flows
Year ended Year ended
31 December 31 December
2022 2021*
Note GBP000 GBP000
--------------------------------------------------------- ---- ------------ ------------
Cash flows from operating activities
Profit before tax 5,850 5,550
Adjustments for:
29,
- Depreciation and amortisation 30 10 25
- Net interest income 80 71
- Elimination of exchange differences on debt securities 741 (955)
- Other non-cash or non-operating items included in
profit before tax (71) 43
- Tax expense (1,404) (9)
--------------------------------------------------------- ---- ------------ ------------
Cash flows from operating profits before changes in
operating assets and liabilities 5,206 4,725
Changes in operating assets and liabilities:
- net increase in group company balances (1,013) (1,655)
- net decrease in other assets 221 47
- net increase in other liabilities 2,242 1,237
--------------------------------------------------------- ---- ------------ ------------
Net cash inflow from operating activities 6,656 4,354
--------------------------------------------------------- ---- ------------ ------------
Cash flows from investing activities
Receipt on dissolution of People's Trust & Savings
PLC 45 50 -
Capital contribution to Arbuthnot Latham - (25,500)
Disposal of financial investments - 19,129
Net cash (outflow)/inflow from investing activities 50 (6,371)
--------------------------------------------------------- ---- ------------ ------------
Cash flows from financing activities
Dividends paid (5,859) (5,558)
Net cash used in financing activities (5,859) (5,558)
--------------------------------------------------------- ---- ------------ ------------
Net increase/(decrease) in cash and cash equivalents 847 (7,575)
Cash and cash equivalents at 1 January 7,587 15,162
--------------------------------------------------------- ---- ------------ ------------
Cash and cash equivalents at 31 December 43 8,434 7,587
--------------------------------------------------------- ---- ------------ ------------
*Prior year values have been represented using the indirect method in
accordance with IAS 7.
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 2022 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 UK-adopted international accounting standards in conformity with the requirements of the Companies Act 2006.
The consolidated financial statements were authorised for issue by the Board of Directors on 29 March 2023.
(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), capital resources (see Note 7) and the potential impact of climate-related risks, the directors are satisfied that the Company and the Group have adequate resources to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. The Audit Committee reviewed management's assessment, which incorporated analysis of the ICAAP and ILAAP approved by the Board of AL and of relevant metrics, focusing on liquidity, capital, and the stress scenarios. It is satisfied that the going concern basis and assessment of the Group's longer-term viability is appropriate. 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.
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) 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.
3.2. 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.
3.3. Financial assets and financial liabilities
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 assets 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 ("SPPI") 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.
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 assets at FVOCI
These include investments in special purpose vehicles and equity investments. 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).
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 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 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, where the amount of loss exceeds the total unused commitments an ECL is recognised. 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 ECL of the obligations.
(e) Financial liabilities at amortised cost
Financial liabilities at amortised cost are non-derivative financial liabilities with fixed or determinable payments. These liabilities are recognised when cash is received from the depositors and carried at amortised cost using the effective interest rate method. The fair value of these 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.
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.
3.4 Impairment for financial assets and lease receivables
IFRS 9 impairment model adopts a three stage expected credit loss approach ("ECL") based on the extent of credit deterioration since origination.
The three stages under IFRS 9 are as follows:
-- Stage 1 - if, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, an entity shall measure the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses.
-- Stage 2 - a lifetime loss allowance is held for financial 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 a period of 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 have been initiated 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 a minimum period of six months and the improvement in the borrower's situation to the extent that credit risk has receded sufficiently and a full repayment of the loan, without recourse to the collateral, is likely.
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 bespoke macroeconomic models to determine the most significant factors which may influence the likelihood of an exposure defaulting in the future. At present, the most significant macroeconomic factors relate to property prices, UK real GDP growth and unemployment rate. The Group currently consider five probability weighted scenarios: baseline; extreme downside (2021: "severe decline"); downside 2 (2021: "moderate decline"); downside 1 (2021: "decline") and upside. 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 loans' contractual term as the maximum period to consider credit losses. This approach will continue to be monitored and enhanced if and when deemed appropriate.
Government guarantees
During March and April 2020, the UK government launched a series of temporary schemes designed to support businesses
deal with the impact of Covid-19. The BBLS, CBILS, CLBILS and RLS lending products were originated by the Group but are
covered by government guarantees. These are to be set against the outstanding balance of a defaulted facility after the
proceeds of the business assets have been applied. The government guarantee is 80% for CBILS, CLBILS and RLS and 100% for
BBLS. Arbuthnot Latham recognises lower LGDs for these lending products as a result, with 0% applied to the government guaranteed part of the exposure.
3.5 Derivatives held for risk management purposes and hedge accounting
Derivatives held for risk management purposes include all derivative assets and liabilities that are not classified as trading assets or liabilities. All derivatives are measured at fair value in the statement of financial position.
The Group designates certain derivatives held for risk management as hedging instruments in qualifying hedging relationships.
Policy applicable generally to hedging relationships
On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument(s) and hedged item(s), including the risk management objective and strategy in undertaking the hedge, together with the method that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both on inception of the hedging relationship and on an ongoing basis, of whether the hedging instrument(s) is (are) expected to be highly effective in offsetting the changes in the fair value of the respective hedged item(s) during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80-125%.
Fair value hedges
When a derivative is designated as the hedging instrument in a hedge of the change in fair value of a recognised asset or liability or a firm commitment that could affect profit or loss, changes in the fair value of the derivative are recognised immediately in profit or loss. The change in fair value of the hedged item attributable to the hedged risk is recognised in profit or loss. If the hedged item would otherwise be measured at cost or amortised cost, then its carrying amount is adjusted accordingly.
If the hedging derivative expires or is sold, terminated or exercised, or the hedge no longer meets the criteria for fair value hedge accounting, or the hedge designation is revoked, then hedge accounting is discontinued prospectively. However, if the derivative is novated to a central counterparty by both parties as a consequence of laws or regulations without changes in its terms except for those that are necessary for the novation, then the derivative is not considered expired or terminated.
Any adjustment up to the point of discontinuation to a hedged item for which the effective interest method is used is amortised to profit or loss as an adjustment to the recalculated effective interest rate of the item over its remaining life.
On hedge discontinuation, any hedging adjustment made previously to a hedged financial instrument for which the effective interest method is used is amortised to profit or loss by adjusting the effective interest rate of the hedged item from the date on which amortisation begins. If the hedged item is derecognised, then the adjustment is recognised immediately in profit or loss when the item is derecognised.
3.6. 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 29.
3.7. 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.
3.8. Adoption of new and revised reporting standards
There are no standards, interpretations or amendments to existing standards that have been published and are mandatory for the Group's accounting periods beginning on or after 1 January 2022 or later periods, that will have any material impact on the Group's financial statements.
3.9. Standards issued but not yet effective
A number of new standards and amendments to standards are effective for annual periods beginning after 1 January 2022 and earlier application is permitted; however, the Group has not early adopted the new and amended standards in preparing these consolidated financial statements.
Other standards
The following new and amended standards are not expected to have a significant impact on the Group's consolidated financial statements.
-- Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12, effective for annual periods beginning on or after 1 January 2023).
-- Classification of Liabilities as Current or Non-Current (Amendments to IAS 1, effective for annual periods beginning on or after 1 January 2023).
-- IFRS 17 Insurance Contracts and amendments to IFRS 17 Insurance Contracts. (effective for annual reporting periods beginning on or after 1 January 2023).
-- Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2).
-- Definition of Accounting Estimates (Amendments to IAS 8, effective for annual periods beginning on or after 1 January 2023)
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 Note 11. The measurement of ECL required by the implementation of IFRS 9, 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 base case, which is the central scenario, developed internally based on consensus forecast, and four less likely scenarios, one upside and three downside scenarios (downside 1, downside 2 and extreme downside), 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 on a collective basis, grouped together by product and geographical location. The key assumptions are the probability of default, the economic scenarios and loss given default having consideration to collateral. Lifetime 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 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.
Five economic scenarios were modelled. A probability was assigned to each scenario to arrive at an overall weighted impact on ECL. Management judgment is required in the application of the probability weighting for each scenario.
The Group considered the impact of various assumptions on the calculation of ECL (changes in GDP, unemployment rates, inflation, exchange rates, equity prices, wages and collateral values/property prices) and concluded that collateral values/property prices, UK GDP and UK unemployment rate are key drivers of credit risk and credit losses for each portfolio of financial instruments.
Using an analysis of historical data, management has estimated relationships between macro-economic variables and credit risk and credit losses. The Group estimates each key driver for credit risk over the active forecast period of between two and five years. This is followed by a period of mean reversion of five years.
The five macroeconomic scenarios modelled on future property prices and macroeconomic variables were as follows:
-- Baseline -- Upside -- Downside 1 -- Downside 2 -- Extreme downside
The tables below therefore reflect the expected probability weightings applied for each macroeconomic scenario:
Probability weighting*
Group 2022 2021
------------------- ----------- -----------
Economic Scenarios
Baseline 53.0% 52.0%
Upside 13.0% 25.0%
Downside 1 12.0% 16.0%
Downside 2 11.0% 5.0%
Extreme downside 11.0% 2.0%
Due to changes in the UK economic outlook the baseline scenario used at 31 December 2022 is less optimistic than the baseline scenario at 31 December 2021. The tables below show the five-year forecasted average for property prices growth, UK unemployment rate and UK real GDP growth:
31 December 2022
Downside Downside Extreme
Base Upside 1 2 downside
-------------------------------- ------ ------ -------- -------- ---------
Five-year summary
UK House price index - average
growth (0.8%) 1.7% (1.9%) (3.0%) (4.2%)
UK Commercial real estate price
- average growth (2.6%) 0.2% (3.4%) (4.1%) (4.9%)
UK Unemployment rate - average 4.3% 2.8% 5.3% 6.3% 7.3%
UK GDP - average growth 1.2% 2.1% 0.8% 0.4% 0.0%
31 December 2021
Moderate Severe
Base Upside Decline Decline Decline
-------------------------------- ------ ------ -------- -------- ---------
Five-year summary
UK House price index - average
growth 2.0% 5.6% (0.7%) (2.8%) (4.8%)
UK Commercial real estate price
- average growth 1.4% 5.1% (1.2%) (1.8%) (2.4%)
UK Unemployment rate - average 4.2% 3.8% 5.7% 7.5% 9.4%
UK GDP - average growth 2.3% 3.9% 1.3% 0.6% (0.1%)
The tables below list the macroeconomic assumptions at 31 December 2022 used in the base, upside and downside scenarios over the five-year forecast period. The assumptions represent the absolute percentage unemployment rates and year-on-year percentage change for GDP and property prices.
UK House price index - four
quarter growth
Downside Downside Extreme
Year Baseline Upside 1 2 downside
-------------------------------- -------- ------ -------- -------- ---------
2023 (6.8%) (3.9%) (8.2%) (9.6%) (11.0%)
2024 (3.2%) (0.7%) (7.8%) (12.3%) (16.9%)
2025 1.1% 3.2% (1.5%) (4.1%) (6.8%)
2026 2.2% 4.8% 3.9% 5.5% 7.2%
2027 2.8% 4.9% 4.1% 5.3% 6.6%
5 year average (0.8%) 1.7% (1.9%) (3.0%) (4.2%)
UK Commercial real estate price
- four quarter growth
Downside Downside Extreme
Year Baseline Upside 1 2 downside
-------------------------------- -------- ------ -------- -------- ---------
2023 (14.0%) (4.0%) (19.3%) (24.7%) (30.0%)
2024 (3.0%) - (8.2%) (13.4%) (18.6%)
2025 - 1.0% 2.3% 4.7% 7.0%
2026 2.0% 2.0% 4.2% 6.3% 8.5%
2027 2.0% 2.0% 4.2% 6.4% 8.6%
5 year average (2.6%) 0.2% (3.4%) (4.1%) (4.9%)
UK Unemployment rate - annual
average
Downside Downside Extreme
Year Baseline Upside 1 2 downside
-------------------------------- -------- ------ -------- -------- ---------
2023 4.6% 3.2% 5.1% 5.5% 6.0%
2024 4.3% 2.8% 5.7% 7.0% 8.4%
2025 4.1% 2.5% 5.4% 6.7% 8.0%
2026 4.2% 2.5% 5.3% 6.3% 7.4%
2027 4.2% 2.8% 5.0% 5.9% 6.7%
5 year average 4.3% 2.8% 5.3% 6.3% 7.3%
UK GDP - annual growth
Downside Downside Extreme
Year Baseline Upside 1 2 downside
-------------------------------- -------- ------ -------- -------- ---------
2023 (0.9%) 0.7% (2.3%) (3.7%) (5.0%)
2024 1.4% 2.4% 1.3% 1.3% 1.2%
2025 2.0% 2.7% 1.7% 1.5% 1.2%
2026 1.8% 2.5% 1.6% 1.4% 1.2%
2027 1.8% 2.3% 1.6% 1.4% 1.2%
5 year average 1.2% 2.1% 0.8% 0.4% -
The graphs below plot the historical data for HPI, Commercial real estate price, unemployment rate and GDP growth rate in the UK as well as the forecasted data under each of the five scenarios.
The table below compares the 31 December 2022 ECL provision using the 31 December 2022 economic scenarios and the 31 December 2022 ECL provision using the 31 December 2021 economic scenarios.
Economic scenarios
as at
2022 2021
Group GBP000 GBP000
----------------------------------------------------- ---------- --------
ECL Provision
Stage 1 1,147 546
Stage 2 130 67
Stage 3 5,325 5,107
----------------------------------------------------- ---------- --------
At 31 December 2022 6,602 5,720
----------------------------------------------------- ---------- --------
Additionally, management have assessed the impact of assigning a 100%
probability to each of the economic scenarios, which would have the
following impact on the Profit or Loss of the Group:
2022 2021
Group GBPm GBPm
----------------------------------------------------- ---------- --------
Impact of 100% scenario probability
Baseline 0.7 0.1
Upside 1.0 0.1
Downside 1 (2.0) (0.8)
Downside 2 (7.5) (4.0)
Extreme downside (19.1) (13.6)
(b) Effective Interest Rate
Loans and advances to customers are initially recognised at fair value. Subsequently, they are measured under the effective interest rate method. 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. The adjustment to the carrying value of the loan book is recognised in the Statement of Comprehensive Income.
The accuracy of the effective interest rate is affected by unexpected market movements resulting in altered customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect assumptions.
In 2022 the Group recognised GBPNil (2021: GBP0.1m) additional interest income to reflect a revision in the timing of expected cash flows on the originated book, reflecting a shortening of the expected life of originated loan book.
If customer loans repaid 6 months earlier than anticipated on the originated loan book, interest income would increase by GBP0.7m (2021: GBP0.6m), due to acceleration of fee income.
In 2022 the Group recognised GBP0.1m additional (2021: reversal GBP0.3m) of interest income to reflect actual cash flows received on the acquired mortgage books being less than 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 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 reasonably possible.
If the acquired loan books were modelled to accelerate cash flows by 6 months, it would increase interest income in 2022 by GBP0.1m (2021: GBP0.1m) while a 10% increase in principal repayments will increase interest income in 2022 by GBP0.2m (2021: GBP0.3m) through a cash flow reset adjustment.
(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 uncertainty due to Brexit, rising inflation and interest rates has 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 one (2021: one) investment property, as outlined in Note 32.
Management valued the investment property utilising externally sourced market information and property specific knowledge. The valuations were reviewed by the Group's in-house surveyor.
Crescent Office Park in Bath with value of GBP6.6m (2021: GBP6.6m)
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.
The property was initially recognised as held for sale under IFRS 5. 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 2022 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 GBP6.55m equal to its fair value.
The valuation of the property has the following key inputs:
-- yield: 6.75% -- total topped up rental income per annum: GBP0.47m
The external valuation that the Group places on its investment property is subject to a degree of uncertainty and is calculated on the basis of assumptions in relation to prevailing market conditions and subject to comparable properties for sale. This valuation is therefore susceptible to uncertainty particularly where there is a limited level of activity in the property market.
(d) Inventory
The Group owns one commercial property (2021: two properties) and one repossessed properties (2021: four), classified as inventory. The properties are assessed at the reporting date for impairment.
The internal valuations that the Group places on its 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.
Similarly to investment property, the uncertainty due to Brexit, rising inflation and interest rates resulted in less market evidence being available for Management in making its judgement on the key assumptions of property yield and market rent.
The external valuations that the Group places on its properties are subject to a degree of uncertainty and are calculated on the basis of assumptions in relation to prevailing market conditions and subject to comparable properties for sale. These valuations are therefore susceptible to uncertainty particularly where there is a limited level of activity in the property market.
Management have assessed that should the net realisable value less cost to sell of each of the combined property inventory reduce by 5% this would impact profit or loss by GBP0.3m and a reduction of 10% would impact profit or loss by GBP1.1m (or 5.6% of cost).
(e) Residual value
At the end of lease terms, assets may be sold to third parties or leased for further terms. Rentals are calculated to recover the cost of assets less their residual value ("RV"), and earn finance income. RV's represent the estimated value of the leased asset at the end of lease period. Residual values are calculated after analysing the market place and the company's own historical experience in the market. Expected residual values of leased assets are prospectively adjusted for through the depreciation adjustments which are charged to the income statement each year. The key estimates and judgements that arise in relation to RV's are timing of lease terminations and expected residual value of returned vehicles.
The profitability of the Group's operating lease contracts is highly dependent on the RV of the vehicle at the end of the agreement. On inception of the lease, the Group uses its knowledge and experience of the market and industry to estimate the final RV of the vehicle. The Group is exposed to the risk that the RV of the vehicle may be less than anticipated at the outset of the contract impacting profitability. The Group manages the risk through effective and robust procedures by continually monitoring historic, current and forecast RV performance.
Expected residual values underlying the calculation of depreciation of leased assets are kept under review to take account of any change in circumstances. Refer to Note 30 for further detail.
(f) Climate change
The Group has considered the potential impact of climate change on the Group's financial position and performance.
This included performing an assessment over the Group's financial and non-financial assets and evaluating information about the observable effects of physical and transition risk of climate change on the Group's financial position and performance. Many of the effects of climate change will be less significant in the short term and will have limited impact on accounting estimates and judgements in the current year. The following items represent the most significant effects:
-- The Group's loan portfolio is exposed to the potential impact of climate-related risks, due to the ECL implications and expectations on the ability of the borrowers to meet their loan obligations. As the Group has limited appetite for financial and reputational risk emanating from climate change, the potential ECL impact as a result of climate change is not expected to be material in the short term.
-- The assessment of asset impairment and the Group's deferred tax asset depends on the Group's future performance and cash flows. The Group has incorporated market expectations on climate risk it its profitability and cash flow forecasts and doesn't consider any additional adjustments are required.
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 2022:
Due after
more
Due within than
one year one year Total
At 31 December 2022 GBP000 GBP000 GBP000
----------------------------------------------- ---------- --------- ---------
ASSETS
Cash and balances at central banks 732,729 - 732,729
Loans and advances to banks 115,788 - 115,788
Debt securities at amortised cost 328,988 110,765 439,753
Assets classified as held for sale 3,279 - 3,279
Derivative financial instruments 113 6,209 6,322
Loans and advances to customers 690,145 1,345,932 2,036,077
Other assets 31,034 21,151 52,185
Financial investments - 3,404 3,404
Deferred tax asset - 2,425 2,425
Intangible assets 8,716 23,833 32,549
Property, plant and equipment 77,599 97,674 175,273
Right-of-use assets 3,134 4,580 7,714
Investment property - 6,550 6,550
----------------------------------------------- ---------- --------- ---------
1,991,525 1,622,523 3,614,048
----------------------------------------------- ---------- --------- ---------
LIABILITIES
Deposits from banks 11,027 225,000 236,027
Derivative financial instruments 135 - 135
Deposits from customers 3,041,084 51,465 3,092,549
Current tax liability 1,748 - 1,748
Other liabilities 26,144 - 26,144
Lease liabilities 3,325 4,547 7,872
Debt securities in issue - 37,594 37,594
----------------------------------------------- ---------- --------- ---------
3,083,463 318,606 3,402,069
----------------------------------------------- ---------- --------- ---------
The table below shows the maturity analysis of assets and liabilities
of the Group as at 31 December 2021:
Due after
more
Due within than
one year one year Total
At 31 December 2021 GBP000 GBP000 GBP000
--------------------------------------- ----------- ---------- ----------
ASSETS
Cash and balances at central banks 814,692 - 814,692
Loans and advances to banks 73,444 - 73,444
Debt securities at amortised cost 147,696 153,356 301,052
Assets classified as held for sale 3,136 - 3,136
Derivative financial instruments 118 1,635 1,753
Loans and advances to customers 646,507 1,224,455 1,870,962
Other assets 109,741 378 110,119
Financial investments 124 3,045 3,169
Deferred tax asset - 2,562 2,562
Intangible assets 7,340 22,524 29,864
Property, plant and equipment 78,897 46,993 125,890
Right-of-use assets 2,729 12,945 15,674
Investment property - 6,550 6,550
--------------------------------------- ----------- ---------- ----------
1,884,424 1,474,443 3,358,867
--------------------------------------- ----------- ---------- ----------
LIABILITIES
Deposits from banks 15,333 225,000 240,333
Derivative financial instruments 132 39 171
Deposits from customers 1,640,627 1,197,242 2,837,869
Current tax liability 413 - 413
Other liabilities 21,126 28 21,154
Lease Liabilities 5,802 15,474 21,276
Debt securities in issue - 36,772 36,772
--------------------------------------- ----------- ---------- ----------
1,683,433 1,474,555 3,157,988
--------------------------------------- ----------- ---------- ----------
The table below shows the maturity analysis of assets and liabilities
of the Company as at 31 December 2022:
Due after
more
Due within than
one year one year Total
At 31 December 2022 GBP000 GBP000 GBP000
--------------------------------------------------------------- ---------- --------- -------
ASSETS
Loans and advances to banks 6 - 6
Loans and advances to banks - due from subsidiary undertakings 8,427 - 8,427
Debt securities at amortised cost - 24,437 24,437
Deferred tax asset - 522 522
Intangible assets - 1 1
Property, plant and equipment - 130 130
Other assets 73 - 73
Interests in subsidiaries - 159,354 159,354
--------------------------------------------------------------- ---------- --------- -------
8,506 184,444 192,950
--------------------------------------------------------------- ---------- --------- -------
LIABILITIES
Current tax liability 879 - 879
Other liabilities 3,490 - 3,490
Debt securities in issue - 37,594 37,594
--------------------------------------------------------------- ---------- --------- -------
4,369 37,594 41,963
--------------------------------------------------------------- ---------- --------- -------
The table below shows the maturity analysis of assets and liabilities
of the Company as at 31 December 2021:
Due after
more
Due within than
one year one year Total
At 31 December 2021 GBP000 GBP000 GBP000
--------------------------------------------------------------- ---------- --------- -------
ASSETS
Loans and advances to banks 6 - 6
Loans and advances to banks - due from subsidiary undertakings 7,581 - 7,581
Debt securities at amortised cost - 24,367 24,367
Current tax asset 239 - 239
Deferred tax asset - 523 523
Intangible assets - 2 2
Property, plant and equipment - 137 137
Other assets 55 - 55
Interests in subsidiaries - 159,404 159,404
--------------------------------------------------------------- ---------- --------- -------
7,881 184,433 192,314
--------------------------------------------------------------- ---------- --------- -------
LIABILITIES
Other liabilities 3,142 - 3,142
Debt securities in issue - 36,772 36,772
--------------------------------------------------------------- ---------- --------- -------
3,142 36,772 39,914
--------------------------------------------------------------- ---------- --------- -------
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, macroeconomic, 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 Committee regularly reviews the credit risk profile of the Group, with a clear focus on performance against risk appetite statements and risk metrics. The Committee considered credit conditions during the year, and in particular the impact of the rising inflation and interest rates on performance against both credit risk appetite and a range of key credit risk metrics.
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 economic environment remains uncertain and future impairment charges may be subject to further volatility (including from changes to macroeconomic variable forecasts).
Rising inflation and interest rates have created a challenge for ECL modelling, given the severity of economic shock and associated uncertainty for the future economic path coupled with the scale of government and central bank intervention that have altered the relationships between economic drivers and default.
The Group has attempted to leverage stress test modelling insights to inform ECL model refinements to enable reasonable estimates. Management review of modelling approaches and outcomes continues to inform any necessary adjustments to the ECL estimates through the form of in-model adjustments, based on expert judgement including the use of available information. Management considerations included the potential severity and duration of the economic shock, including the mitigating effects of government support actions, as well the potential trajectory of the subsequent recovery.
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:
-- assessment of significant increase in credit risk -- future economic scenarios -- probability of default -- loss given default -- exposure at default
The IFRS 9 impairment model adopts a three stage approach based on the extent of credit deterioration since origination, see Note 11.
The Group's maximum exposure to credit risk before collateral held or other credit enhancements is as follows:
2022
Mortgage All Other
Group Banking Portfolios RAF ABL ASFL AAG Divisions Total
Credit risk exposures (all stage
1, unless otherwise stated) GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------------- --------- ----------- ------- ------- ------ ------ ---------- ---------
On-balance sheet:
Cash and balances at central
banks - - - - - - 732,513 732,513
Loans and advances to banks - - - - - - 115,788 115,788
Debt securities at amortised
cost - - - - - - 439,753 439,753
Derivative financial instruments - - - - - - 6,322 6,322
Loans and advances to customers
(Gross of ECL) 1,455,607 148,957 134,724 270,999 14,950 17,442 - 2,042,679
--------- ----------- ------- ------- ------ ------ ---------- ---------
Stage 1 1,363,572 126,726 128,807 267,962 13,756 17,066 - 1,917,889
Stage 2 59,904 10,777 2,454 - 1,001 376 - 74,512
Stage 3 32,131 11,454 3,463 3,037 193 - - 50,278
--------- ----------- ------- ------- ------ ------ ---------- ---------
Other assets - - - - - - 14,160 14,160
Financial investments - - - - - - 3,404 3,404
Off-balance sheet:
Guarantees 2,591 - - - - 662 - 3,253
Loan commitments and other credit
related liabilities 219,490 - - 250,276 1,312 - - 471,078
---------------------------------- --------- ----------- ------- ------- ------ ------ ---------- ---------
At 31 December 1,677,688 148,957 134,724 521,275 16,262 18,104 1,311,940 3,828,950
---------------------------------- --------- ----------- ------- ------- ------ ------ ---------- ---------
2021
Mortgage All Other
Group Banking Portfolios RAF ABL ASFL AAG Divisions Total
Credit risk exposures (all stage
1, unless otherwise stated) GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------------- --------- ----------- ------ ------- ------ ------ ---------- ---------
On-balance sheet:
Cash and balances at central
banks - - - - - - 814,499 814,499
Loans and advances to banks - - - - - - 73,444 73,444
Debt securities at amortised
cost - - - - - - 301,052 301,052
Derivative financial instruments - - - - - - 1,753 1,753
Loans and advances to customers
(Gross of ECL) 1,399,389 178,153 99,969 182,213 10,125 7,500 - 1,877,349
--------- ----------- ------ ------- ------ ------ ---------- ---------
Stage 1 1,297,782 157,566 82,952 182,213 9,896 7,500 - 1,737,909
Stage 2 70,132 13,728 11,374 - 229 - - 95,463
Stage 3 31,475 6,859 5,643 - - - - 43,977
--------- ----------- ------ ------- ------ ------ ---------- ---------
Other assets - - - - - - 13,098 13,098
Financial investments - - - - - - 3,169 3,169
Off-balance sheet:
Guarantees 2,931 - - - - 1,629 - 4,560
Loan commitments and other credit
related liabilities 261,797 - - 200,478 2,115 - - 464,390
---------------------------------- --------- ----------- ------ ------- ------ ------ ---------- ---------
At 31 December 1,664,117 178,153 99,969 382,691 12,240 9,129 1,207,015 3,553,314
---------------------------------- --------- ----------- ------ ------- ------ ------ ---------- ---------
The Company's maximum exposure to credit risk (all stage 1) before
collateral held or other credit enhancements is as follows:
2022 2021
GBP000 GBP000
------------------------------------------------------------- ------ ------
Credit risk exposures relating to on-balance sheet assets
are as follows:
Loans and advances to banks 8,434 7,587
Debt securities at amortised cost 24,437 24,367
At 31 December 32,871 31,954
------------------------------------------------------------- ------ ------
The above tables represent the maximum credit risk exposure (net of impairment) to the Group and Company at 31 December 2022 and 2021 without taking account of any collateral held or other credit enhancements attached. For financial assets, the balances are based on 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:
2022
-------------------------------------------------------------------------
Banking Mortgage Portfolios Total
Loan Loan Loan
Balance Collateral Balance Collateral Balance Collateral
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------- ---------- ----------- --------- ---------- --------- ----------
Less than 60% 844,024 1,869,734 53,759 131,561 897,783 2,001,295
---------- ----------- --------- ---------- --------- ----------
Stage 1 797,219 1,781,638 45,833 113,996 843,052 1,895,634
Stage 2 38,781 73,946 4,037 10,277 42,818 84,223
Stage 3 8,024 14,150 3,889 7,288 11,913 21,438
---------- ----------- --------- ---------- --------- ----------
60%-80% 553,383 864,566 62,113 92,996 615,496 957,562
---------- ----------- --------- ---------- --------- ----------
Stage 1 525,296 823,256 53,692 80,529 578,988 903,785
Stage 2 20,900 31,250 4,295 6,209 25,195 37,459
Stage 3 7,187 10,060 4,126 6,258 11,313 16,318
---------- ----------- --------- ---------- --------- ----------
80%-100% 11,911 13,976 20,961 23,563 32,872 37,539
---------- ----------- --------- ---------- --------- ----------
Stage 1 9,776 11,626 17,109 19,136 26,885 30,762
Stage 2 - - 1,231 1,426 1,231 1,426
Stage 3 2,135 2,350 2,621 3,001 4,756 5,351
---------- ----------- --------- ---------- --------- ----------
Greater than 100%* 24,182 13,005 17,142 13,925 41,324 26,930
---------- ----------- --------- ---------- --------- ----------
Stage 1 11,142 6,880 13,191 10,623 24,333 17,503
Stage 2 - - 1,741 1,586 1,741 1,586
Stage 3 13,040 6,125 2,210 1,716 15,250 7,841
---------- ----------- --------- ---------- --------- ----------
Total 1,433,500 2,761,281 153,975 262,045 1,587,475 3,023,326
------------------- ---------- ----------- --------- ---------- --------- ----------
*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. Additionally under the government scheme for BBLs, collateral is not required as the loans are 100% backed by the government.
Loans in the Banking segment with a loan to value of greater than 100% have additional collateral of GBP9.4m in the form of cash deposits and security over Arbuthnot Latham Investment Management Portfolios and personal guarantees of GBP13.1m. Non-property collateral reduces loan to value below 100% for all such exposures in the Banking segment.
The table below represents an analysis of the loan to values of the exposures
secured by property for the Group:
2021
-------------------------------------------------------------------------
Banking Mortgage Portfolios Total
Loan Loan Loan
Balance Collateral Balance Collateral Balance Collateral
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------- ---------- ----------- --------- ---------- --------- ----------
Less than 60% 724,604 1,606,614 74,305 174,446 798,909 1,781,060
---------- ----------- --------- ---------- --------- ----------
Stage 1 699,913 1,557,704 67,034 157,905 766,947 1,715,609
Stage 2 17,722 34,470 5,195 12,185 22,917 46,655
Stage 3 6,969 14,440 2,076 4,356 9,045 18,796
---------- ----------- --------- ---------- --------- ----------
60%-80% 586,077 916,749 59,536 86,873 645,613 1,003,622
---------- ----------- --------- ---------- --------- ----------
Stage 1 538,908 847,769 53,182 77,574 592,090 925,343
Stage 2 37,550 55,255 4,090 5,881 41,640 61,136
Stage 3 9,619 13,725 2,264 3,418 11,883 17,143
---------- ----------- --------- ---------- --------- ----------
80%-100% 23,362 27,223 29,387 33,591 52,749 60,814
---------- ----------- --------- ---------- --------- ----------
Stage 1 8,488 10,088 25,498 29,065 33,986 39,153
Stage 2 14,874 17,135 2,557 2,909 17,431 20,044
Stage 3 - - 1,332 1,617 1,332 1,617
---------- ----------- --------- ---------- --------- ----------
Greater than 100%* 27,525 22,002 20,489 16,796 48,014 38,798
---------- ----------- --------- ---------- --------- ----------
Stage 1 14,895 12,914 15,640 12,855 30,535 25,769
Stage 2 - - 2,768 2,435 2,768 2,435
Stage 3 12,630 9,088 2,081 1,506 14,711 10,594
---------- ----------- --------- ---------- --------- ----------
Total 1,361,568 2,572,588 183,717 311,706 1,545,285 2,884,294
------------------- ---------- ----------- --------- ---------- --------- ----------
*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. Additionally under the government scheme for BBLs, collateral is not required as the loans are 100% backed by the government.
Loans in the Banking segment with a loan to value of greater than 100% have additional collateral of GBP10.0m in the form of cash deposits and security over Arbuthnot Latham Investment Management Portfolios and personal guarantees of GBP5.0m. Non-property collateral reduces loan to value below 100% for all such exposures in the Banking segment.
The table below represents an analysis of loan commitments compared to
the values of collateral for the Group (all Stage 1):
2022
Loan commitments Collateral
Group GBP000 GBP000
---------------------------- -------------------------- ----------------
Less than 60% 122,582 387,942
60%-80% 35,807 51,828
80%-100% 11,100 12,432
Greater than 100% 31,347 19,606
---------------------------- -------------------------- ----------------
Total 200,836 471,808
---------------------------- -------------------------- ----------------
2021
Loan commitments Collateral
Group GBP000 GBP000
---------------------------- -------------------------- ---------------- Less than 60% 125,147 437,385 60%-80% 69,960 105,781 80%-100% 9,573 10,331 Greater than 100% 20,660 15,017 ---------------------------- -------------------------- ---------------- Total 225,340 568,514 ---------------------------- -------------------------- ----------------
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 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 debtor 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. Whilst the customer is under forbearance, the customer will be classified as Stage 2 and the Group recognise a lifetime ECL. The customer will transfer to Stage 1 and revert to a 12 month ECL when they exit forbearance. This is conditional upon both a minimum six months' good account conduct and the improvement to the client's situation to the extent the probability of default has receded sufficiently and full repayment of the loan, without recourse to the collateral, is likely.
Forbearance is a qualitative indicator of a SICR (see Notes 3.3 and 3.4)
As at 31 December 2022, loans for which forbearance measures were in place totalled 3.0% (2021: 3.8%) of total value of loans to customers for the Group. These are set out in the following table:
2022
-------------------------------------------------------------------------
Stage 1 Stage 2 Stage 3 Total
------------------ ---------------- ---------------- ----------------
Loan Loan Loan Loan
Number Balance Number Balance Number Balance Number Balance
Group GBP000 GBP000 GBP000 GBP000
------------------------ ------- --------- ------ -------- ------ -------- ------ --------
Time for asset sale - - 3 8,836 1 35 4 8,871
Term extension - - 24 1,905 - - 24 1,905
Time for refinance with
third party - - 1 2,360 - - 1 2,360
Payment holiday - - 3 4,002 - - 3 4,002
Covenant waived - - 3 28,142 - - 3 28,142
Modification in terms
and conditions - - 64 9,184 32 6,073 96 15,257
Restructure - - 7 1,567 - - 7 1,567
------------------------ ------- ---------- ------ -------- ------ -------- ------ --------
Total forbearance - - 105 55,996 33 6,108 138 62,104
------------------------ ------- ---------- ------ -------- ------ -------- ------ --------
2021
-------------------------------------------------------------------------
Stage 1 Stage 2 Stage 3 Total
------------------ ---------------- ---------------- ----------------
Loan Loan Loan Loan
Number Balance Number Balance Number Balance Number Balance
Group GBP000 GBP000 GBP000 GBP000
------------------------- ------- --------- ------ -------- ------ -------- ------ --------
Interest capitalisation - - 6 7,586 1 43 7 7,629
Time for asset sale - - 9 18,875 - - 9 18,875
Term extension - - 8 14,867 - - 8 14,867
Switch to interest only - - 1 1,651 2 88 3 1,739
Reduced monthly payments - - 4 7,384 - - 4 7,384
Payment holiday - - 1 10,681 - - 1 10,681
More than one measure - - 63 9,809 15 915 78 10,724
------------------------- ------- ---------- ------ -------- ------ -------- ------ --------
Total forbearance - - 92 70,853 18 1,046 110 71,899
------------------------- ------- ---------- ------ -------- ------ -------- ------ --------
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
2022 2021 2022 2021
GBP000 GBP000 GBP000 GBP000
------------------------------- --------- --------- -------- --------
Concentration by product
Asset based lending* 268,825 182,306 250,276 200,478
Asset finance 148,788 104,613 1,312 2,115
Cash collateralised 14,143 177,697 611 3,083
Commercial lending 156,250 209,617 25,720 41,865
Investment portfolio secured 24,485 26,353 2,086 8,689
Residential mortgages 1,339,789 1,107,301 109,948 174,452
Mixed collateral* 69,433 37,250 44,590 17,589
Unsecured** 14,364 25,825 36,535 16,119
------------------------------- --------- --------- -------- --------
At 31 December 2,036,077 1,870,962 471,078 464,390
------------------------------- --------- --------- -------- --------
Concentration by location
East Anglia 28,668 25,350 2,776 21,389
London 759,584 767,968 178,576 148,046
Midlands 86,442 97,102 4,778 11,248
North East 3,593 4,707 18 3,122
North West 42,897 50,276 3,531 3,681
Northern Ireland 94,341 111,400 - -
Scotland 20,220 33,952 - 50
South East 236,658 230,384 884 15,049
South West 179,034 189,685 5,273 12,243
Wales 15,174 16,179 5,001 5,662
Non-property collateral 569,466 343,959 270,241 243,900
------------------------------- --------- --------- -------- --------
At 31 December 2,036,077 1,870,962 471,078 464,390
------------------------------- --------- --------- -------- --------
* Mixed collateral is where there is no single, overall majority collateral type
** Included within unsecured are GBP9.0m (2021: GBP11.6m) of loans which are backed by the government guarantee scheme for
BBLs.
(b) Operational risk
Operational risk is the risk that the Group may be exposed to financial losses from conducting its business. The Group's exposures to operational risk include its Information Technology ("IT") 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.
In line with further guidance issued by the Regulator, the Bank has continued to focus on ensuring that the design of systems and operational plans are robust to maintain operational resilience in the face of unexpected incidents. During 2021 and 2022 the Bank continued to review these plans and undertook tests to ensure backup and recovery processes were effective even when working in a hybrid working model.
During 2021 the FCA, PRA and BoE published their final policy papers on building operational resilience. The Group complied with the initial requirements prior to the implementation date of 31 March 2022.
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 tests 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.
(c) Macroeconomic and competitive environment
The group is exposed to indirect risk that may arise for the macroeconomic and competitive environment.
In recent years there have been a number of global and domestic events which have had significant implications on the Group's operating environment, namely: Russia's War in the Ukraine, Coronavirus and Brexit. The culmination of these events has led to significant turmoil in both global and domestic markets. The most significant economic effect from these events includes record inflation driven by high fuel costs, leading to sharp and significant increases in the cost of borrowing. Conditions have improved since the year end however there still remains significant uncertainty around the recovery of the UK economy which may have an impact on the group's customers and assets.
Climate change
Climate change presents financial and reputational risks for the banking industry. The Board consider Climate change a material risk as per the Board approved risk appetite framework which provides a structured approach to risk taking within agreed boundaries. The assessment is proportional at present but will develop over time as the Group generates further resources and industry consensus emerges. The assessment is maintained by the Chief Risk officer and has been informed by the ICAAP review and numerous workshops for staff.
Whilst it is difficult to assess how climate change will unfold, the Group is continually assessing various risk exposures. The UK has a legally binding target to cut its greenhouse gas emissions to "net-zero" by 2050. There is growing consensus that an orderly transition to a low-carbon economy will bring substantial adjustments to the global economy which will have financial implications while bringing risks and opportunities.
The risk assessment process has been integrated into existing risk frameworks and will be governed through the various risk governance structures including review and recommendations by the AL Risk Committee. Arbuthnot Latham governance has been assessed against the Task Force on Climate-related Financial Disclosures' ("TCFD") recommended governance disclosures and where appropriate the FCA/PRA guidance as per the Supervisory statements.
In accordance with the requirements of the PRA's Supervisory Statement 'Enhancing banks' and insurers' approaches to managing the financial risks from climate change', the Group has allocated responsibility for identifying and managing the risks from climate change to the relevant existing Senior Management Function. The Bank is continuously developing a suitable strategic approach to climate change and the unique challenges it poses.
The FCA have issued 'Climate Change and Green Finance: summary of responses and next steps'. In addition to the modelling of various scenarios and various governance reviews, Arbuthnot Latham will continue to monitor requirements through the relationship with UK Finance.
(d) 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 27, a stress test scenario of a 10% (2021: 10%) decline in market prices, would result in a GBPNil (2021: GBP12k) decrease in the Group's income and a decrease of GBP0.3m (2021: GBP0.3m) 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 27, a stress test scenario of a 10% (2021: 10%) decline in market prices, would result in a GBPnil (2021: GBPnil) decrease in the Company's income and a decrease of GBPnil (2021: GBPNil) 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 2022. Included in the table below are the Group's assets and liabilities at carrying amounts, categorised by currency.
Euro
GBP (GBP) USD ($) (EUR) Other Total
At 31 December 2022 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------------------- --------- ------- ------- ------ ---------
ASSETS
Cash and balances at central banks 732,577 78 71 3 732,729
Loans and advances to banks 18,144 13,581 75,787 8,276 115,788
Debt securities at amortised cost 280,956 158,797 - - 439,753
Assets classified as held for sale - - 3,279 - 3,279
Derivative financial instruments 6,216 100 6 - 6,322
Loans and advances to customers 2,004,654 8,451 22,104 868 2,036,077
Other assets 13,657 - 503 - 14,160
Financial investments - 3,404 - - 3,404
----------------------------------- --------- ------- ------- ------ ---------
3,056,204 184,411 101,750 9,147 3,351,512
----------------------------------- --------- ------- ------- ------ ---------
LIABILITIES
Deposits from banks 236,026 - - 1 236,027
Derivative financial instruments 7 107 8 13 135
Deposits from customers 2,814,786 180,483 87,787 9,494 3,092,550
Other liabilities 3,824 188 942 - 4,954
Debt securities in issue 24,437 - 13,157 - 37,594
----------------------------------- --------- ------- ------- ------ ---------
3,079,080 180,778 101,894 9,508 3,371,260
----------------------------------- --------- ------- ------- ------ ---------
Net on-balance sheet position (22,876) 3,633 (144) (361) (19,748)
----------------------------------- --------- ------- ------- ------ ---------
Credit commitments 471,078 - - - 471,078
----------------------------------- --------- ------- ------- ------ ---------
The table below summarises the Group's exposure to foreign currency exchange
risk at 31 December 2021:
Euro
GBP (GBP) USD ($) (EUR) Other Total
At 31 December 2021 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------- ---------- ------- -------- ------ ---------
ASSETS
Cash and balances at central banks 814,601 46 41 4 814,692
Loans and advances to banks 17,438 23,983 24,885 7,138 73,444
Debt securities at amortised cost 204,474 96,579 - (1) 301,052
Derivative financial instruments 1,663 39 - 51 1,753
Loans and advances to customers 1,838,679 7,816 24,870 (403) 1,870,962
Other assets (17,075) 33,314 (4,320) 1,179 13,098
Financial investments - 3,031 138 - 3,169
------------------------------------- ---------- ------- -------- ------ ---------
2,859,780 164,808 45,614 7,968 3,078,170
------------------------------------- ---------- ------- -------- ------ ---------
LIABILITIES
Deposits from banks 240,333 - - - 240,333
Derivative financial instruments 103 - - 68 171
Deposits from customers 2,651,717 128,667 50,340 7,145 2,837,869
Other liabilities 7,601 - (495) - 7,106
Debt securities in issue 24,367 - 12,405 - 36,772
------------------------------------- ---------- ------- -------- ------ ---------
2,924,121 128,667 62,250 7,213 3,122,251
------------------------------------- ---------- ------- -------- ------ ---------
Net on-balance sheet position (64,341) 36,141 (16,636) 755 (44,081)
------------------------------------- ---------- ------- -------- ------ ---------
Credit commitments 464,390 - - - 464,390
------------------------------------- ---------- ------- -------- ------ ---------
Derivative financial instruments (see Note 22) 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 GBP35k decrease (2021: GBP4k decrease) in Group profits and equity, while a 10% weakening of the pound against the US dollar would lead to the same increase in Group profits and equity. Additionally the Group holds GBP3.3m of properties classified as assets held for sale (2021: GBP3.1m) and GBPNil classified as inventory (2021: GBP7.7m). These properties are located in the EU and relate to Euro denominated loans where the properties were repossessed and are either being held for sale or being developed with a view to sell. Including these Euro assets, the net Euro exposure is positive GBP3.3m (2021: GBP6.1m).
The table below summarises the Company's exposure to foreign currency
exchange rate risk at 31 December 2022:
Euro
GBP (GBP) (EUR) Total
At 31 December 2022 GBP000 GBP000 GBP000
------------------------------------------------- ------------- -------- -------
ASSETS
Loans and advances to banks (4,737) 13,171 8,434
Debt securities at amortised cost 24,437 - 24,437
19,700 13,171 32,871
------------------------------------------------- ------------- -------- -------
LIABILITIES
Other liabilities 470 - 470
Debt securities in issue 24,437 13,157 37,594
------------------------------------------------- ------------- -------- -------
24,907 13,157 38,064
------------------------------------------------- ------------- -------- -------
Net on-balance sheet position (5,207) 14 (5,193)
------------------------------------------------- ------------- -------- -------
The table below summarises the Company's exposure to foreign currency
exchange rate risk at 31 December 2021:
Euro
GBP (GBP) (EUR) Total
At 31 December 2021 GBP000 GBP000 GBP000
------------------------------------------------- ------------- -------- -------
ASSETS
Loans and advances to banks (4,923) 12,510 7,587
Debt securities at amortised cost 24,367 - 24,367
Other assets 4 - 4
------------------------------------------------- ------------- -------- -------
19,448 12,510 31,958
------------------------------------------------- ------------- -------- -------
LIABILITIES
Other liabilities 1,490 - 1,490
Debt securities in issue 24,367 12,405 36,772
------------------------------------------------- ------------- -------- -------
25,857 12,405 38,262
------------------------------------------------- ------------- -------- -------
Net on-balance sheet position (6,409) 105 (6,304)
------------------------------------------------- ------------- -------- -------
A 10% strengthening of the pound against the Euro would lead to GBP9k increase (2021: GBP20k decrease) in the Company profits and equity, conversely a 10% weakening of the pound against the Euro would lead to a GBP8k decrease (2021: GBP25k 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 GBP0.5m. The current position of the balance sheet is such that it results in an adverse impact on the economic value of equity of GBP0.3m (2021: adverse impact of GBP0.3m) for a positive 200bps shift and a favourable impact of GBP0.3m (2021: favourable impact of GBP37k) for a negative 200bps movement. An upward change of 50bps on variable rates would decrease pre-tax profits and equity by GBP23k (2021: increase pre-tax profits and equity by GBP51k), while a downward change of 50bps (capped at 25bps) would increase pre-tax profits and equity by GBP23k (2021: increase pre-tax profits and equity by GBP29k).
The following tables summarise the re-pricing periods for the assets and liabilities in the Company and Group, including derivative financial instruments which are principally used to reduce exposure to interest rate risk. Items are allocated to time bands by reference to the earlier of the next contractual interest rate re-price and the maturity date.
More More More
than than than
3 months 6 months 1 year
but less but less but less More
Within than than than than Non interest
Group 3 months 6 months 1 year 5 years 5 years bearing Total
As at 31 December 2022 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------------- --------- --------- --------- --------- -------- ------------ ---------
ASSETS
Cash and balances at central
banks 732,728 - - - - - 732,728
Loans and advances to banks 115,737 51 - - - - 115,788
Debt securities at amortised
cost 334,700 13,301 85,752 6,000 - - 439,753
Derivative financial instruments 6,322 - - - - - 6,322
Loans and advances to customers 1,814,805 15,785 38,073 146,119 5,633 15,662 2,036,077
Other assets* - - - - - 279,976 279,976
Financial investments - - - - - 3,404 3,404
--------------------------------- --------- --------- --------- --------- -------- ------------ ---------
3,004,292 29,137 123,825 152,119 5,633 299,042 3,614,048
--------------------------------- --------- --------- --------- --------- -------- ------------ ---------
LIABILITIES
Deposits from banks 236,027 - - - - - 236,027
Derivative financial instruments 135 - - - - - 135
Deposits from customers 2,306,952 353,107 240,934 188,556 3,000 - 3,092,549
Other liabilities** - - - - - 35,764 35,764
Debt securities in issue 37,594 - - - - - 37,594
Equity - - - - - 211,979 211,979
--------------------------------- --------- --------- --------- --------- -------- ------------ ---------
2,580,708 353,107 240,934 188,556 3,000 247,743 3,614,048
--------------------------------- --------- --------- --------- --------- -------- ------------ ---------
Impact of derivative instruments 51,376 - - (51,376) - -
--------------------------------- --------- --------- --------- --------- -------- ------------
Interest rate sensitivity gap 474,960 (323,970) (117,109) (87,813) 2,633 51,299
--------------------------------- --------- --------- --------- --------- -------- ------------
Cumulative gap 474,960 150,990 33,881 (53,932) (51,299) -
--------------------------------- --------- --------- --------- --------- -------- ------------
* 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.
More More More
than than than
3 months 6 months 1 year
but less but less but less More
Within than than than than Non interest
Group 3 months 6 months 1 year 5 years 5 years bearing Total
As at 31 December 2021 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------------- --------- --------- --------- --------- -------- ------------ ---------
ASSETS
Cash and balances at central
banks 814,692 - - - - - 814,692
Loans and advances to banks 73,120 324 - - - - 73,444
Debt securities at amortised
cost 262,943 7,403 14,806 15,900 - - 301,052
Derivative financial instruments 118 - - 1,635 - - 1,753
Loans and advances to customers 1,674,763 17,040 40,194 102,488 36,477 - 1,870,962
Other assets - - - - - 293,795 293,795
Financial investments - - - - - 3,169 3,169
--------------------------------- --------- --------- --------- --------- -------- ------------ ---------
2,825,636 24,767 55,000 120,023 36,477 296,964 3,358,867
--------------------------------- --------- --------- --------- --------- -------- ------------ ---------
LIABILITIES
Deposits from banks 240,333 - - - - - 240,333
Derivative financial instruments 171 - - - - - 171
Deposits from customers 2,147,186 109,337 217,645 363,691 10 - 2,837,869
Other liabilities - - - - - 42,843 42,843
Debt securities in issue 36,772 - - - - - 36,772
Equity - - - - - 200,879 200,879
--------------------------------- --------- --------- --------- --------- -------- ------------ ---------
2,424,462 109,337 217,645 363,691 10 243,722 3,358,867
--------------------------------- --------- --------- --------- --------- -------- ------------ ---------
Impact of derivative instruments 57,889 - - (57,889) - -
--------------------------------- --------- --------- --------- --------- -------- ------------
Interest rate sensitivity gap 459,063 (84,570) (162,645) (303,192) 36,467 53,242
--------------------------------- --------- --------- --------- --------- -------- ------------
Cumulative gap 459,063 374,493 211,848 (89,709) (53,242) -
--------------------------------- --------- --------- --------- --------- -------- ------------
* 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.
More More More
than than than
3 months 6 months 1 year
but less but less but less More
Within than than than than Non interest
Company 3 months 6 months 1 year 5 years 5 years bearing Total
As at 31 December 2022 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------------- --------- --------- --------- --------- -------- ------------ -------
ASSETS
Loans and advances to banks 6 - - - - - 6
Debt securities at amortised
cost 24,437 - - - - - 24,437
Loans and advances to customers 8,377 - - - - 50 8,427
Other assets* - - - - - 160,081 160,081
32,820 - - - - 160,131 192,951
--------------------------------- --------- --------- --------- --------- -------- ------------ -------
LIABILITIES
Other liabilities** - - - - - 4,369 4,369
Debt securities in issue 37,594 - - - - - 37,594
Equity - - - - - 150,988 150,988
--------------------------------- --------- --------- --------- --------- -------- ------------ -------
37,594 - - - - 155,357 192,951
--------------------------------- --------- --------- --------- --------- -------- ------------ -------
Interest rate sensitivity gap (4,774) - - - - 4,774
--------------------------------- --------- --------- --------- --------- -------- ------------
Cumulative gap (4,774) (4,774) (4,774) (4,774) (4,774) -
--------------------------------- --------- --------- --------- --------- -------- ------------
* 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.
More More More
than than than
3 months 6 months 1 year
but less but less but less More
Within than than than than Non interest
Company 3 months 6 months 1 year 5 years 5 years bearing Total
As at 31 December 2021 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------------- --------- --------- --------- --------- -------- ------------ -------
ASSETS
Derivative financial instruments 24,367 - - - - - 24,367
Loans and advances to banks 7,547 - - - - 40 7,587
Other assets* - - - - - 160,361 160,361
31,914 - - - - 160,401 192,315
--------------------------------- --------- --------- --------- --------- -------- ------------ -------
LIABILITIES
Other liabilities** - - - - - 3,142 3,142
Debt securities in issue 36,772 - - - - - 36,772
Equity - - - - - 152,401 152,401
--------------------------------- --------- --------- --------- --------- -------- ------------ -------
36,772 - - - - 155,543 192,315
--------------------------------- --------- --------- --------- --------- -------- ------------ -------
Interest rate sensitivity gap (4,858) - - - - 4,858
--------------------------------- --------- --------- --------- --------- -------- ------------
Cumulative gap (4,858) (4,858) (4,858) (4,858) (4,858) -
--------------------------------- --------- --------- --------- --------- -------- ------------
* 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.
(e) Liquidity risk
Liquidity risk is the risk that the Group, although solvent, either does not have sufficient financial resources to enable it to meet its obligations as they fall due, or can only secure such resources at excessive cost.
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, Finance Director and Deputy CEO 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 Internal 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 updated 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 LCR has exceeded the regulatory minimum of 100% throughout the year, following the steps taken by the Group to respond to possible future liquidity constraints arising from the COVID-19 pandemic. There has been an increase in deposits of 20%, which has accordingly improved the Bank's liquidity.
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 2022:
More More
than than
3 months 1 year
Gross Not more but less but less More
Carrying inflow/ than 3 than than than
amount (outflow) months 1 year 5 years 5 years
At 31 December 2022 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------- --------- ----------- ----------- --------- --------- --------
Financial liability by type
Non-derivative liabilities
Deposits from banks 236,027 (236,027) (236,027) - - -
Deposits from customers 3,092,549 (3,164,453) (1,744,144) (763,156) (657,153) -
Other liabilities 4,954 (4,965) (4,954) - - (11)
Debt securities in issue 37,594 (64,898) (892) (2,719) (14,540) (46,747)
Issued financial guarantee contracts - (3,253) (3,253) - - -
Unrecognised loan commitments - (470,870) (470,870) - - -
------------------------------------- --------- ----------- ----------- --------- --------- --------
3,371,124 (3,944,466) (2,460,140) (765,875) (671,693) (46,758)
------------------------------------- --------- ----------- ----------- --------- --------- --------
Derivative liabilities
Risk management: 135
- Outflows - (135) (135) - - -
------------------------------------- --------- ----------- ----------- --------- --------- --------
135 (135) (135) - - -
------------------------------------- --------- ----------- ----------- --------- --------- --------
More More
than than
3 months 1 year
Gross Not more but less but less More
Carrying inflow/ than 3 than than than
amount (outflow) months 1 year 5 years 5 years
At 31 December 2022 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------- --------- ----------- ----------- --------- --------- --------
Financial asset by type
Non-derivative assets
Cash and balances at central banks 732,728 732,728 732,728 - - -
Loans and advances to banks 115,788 115,788 115,788 - - -
Debt securities at amortised cost 439,753 443,409 336,299 101,110 6,000 -
Loans and advances to customers 2,036,077 2,520,811 505,691 276,657 1,285,151 453,312
Other assets 14,161 14,161 14,161 - - -
Financial investments 3,404 3,404 3,404 - - -
------------------------------------- --------- ----------- ----------- --------- --------- --------
3,341,911 3,830,301 1,708,071 377,767 1,291,151 453,312
------------------------------------- --------- ----------- ----------- --------- --------- --------
Derivative assets
Risk management: 6,322
- Inflows - 6,322 113 - 6,209 -
6,322 6,322 113 - 6,209 -
------------------------------------- --------- ----------- ----------- --------- --------- --------
The tables below show the undiscounted contractual cash flows of the Group's
financial liabilities and assets as at 31 December 2021:
More More
than than
3 months 1 year
Gross Not more but less but less More
Carrying inflow/ than 3 than than than
amount (outflow) months 1 year 5 years 5 years
At 31 December 2021 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------- --------- ----------- ----------- --------- --------- --------
Financial liability by type
Non-derivative liabilities
Deposits from banks 240,333 (240,333) (240,333) - - -
Deposits from customers 2,837,869 (2,894,435) (1,717,377) (672,029) (505,029) -
Other liabilities 7,106 (7,106) (3,052) (2,968) (1,086) -
Debt securities in issue 36,772 (56,567) (586) (1,788) (9,560) (44,633)
Issued financial guarantee contracts - (4,560) (4,560) - - -
Unrecognised loan commitments - (463,783) (463,783) - - -
------------------------------------- --------- ----------- ----------- --------- --------- --------
3,122,080 (3,666,784) (2,429,691) (676,785) (515,675) (44,633)
------------------------------------- --------- ----------- ----------- --------- --------- --------
Derivative liabilities
Risk management: 171
- Outflows - (171) (171) - - -
------------------------------------- --------- ----------- ----------- --------- --------- --------
171 (171) (171) - - -
------------------------------------- --------- ----------- ----------- --------- --------- --------
More More
than than
3 months 1 year
Gross Not more but less but less More
Carrying inflow/ than 3 than than than
amount (outflow) months 1 year 5 years 5 years
At 31 December 2021 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------- --------- ----------- ----------- --------- --------- --------
Financial asset by type
Non-derivative assets
Cash and balances at central banks 814,692 814,692 814,692 - - -
Loans and advances to banks 73,444 73,439 73,439 - - -
Debt securities at amortised cost 301,052 336,772 318,658 9,666 8,448 -
Loans and advances to customers 1,870,962 2,174,795 207,166 296,957 1,361,543 309,130
Other assets 13,098 13,098 13,098 - - -
Financial investments 3,169 3,169 3,169 - - -
------------------------------------- --------- ----------- ----------- --------- --------- --------
3,076,417 3,415,965 1,430,222 306,623 1,369,991 309,130
------------------------------------- --------- ----------- ----------- --------- --------- --------
Derivative assets
Risk management: 1,753
- Inflows - 1,753 118 - 1,635 -
1,753 1,753 118 - 1,635 -
------------------------------------- --------- ----------- ----------- --------- --------- --------
The table below sets out the components of the Group's liquidity reserves:
31 December 31 December
2022 2021
Fair Fair
Amount value Amount value
Liquidity reserves GBP000 GBP000 GBP000 GBP000
------------------------------------- ---------- ---------- --------- ---------
Cash and balances at central banks 732,729 732,729 814,692 814,692
Loans and advances to banks 115,787 115,787 73,444 73,444
Debt securities at amortised cost 439,753 439,389 301,052 303,337
1,288,269 1,287,905 1,189,188 1,191,473
------------------------------------- ---------- ---------- --------- ---------
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 2022 were GBP225m (2021: GBP225m). Assets are encumbered due to the Term Funding Scheme (Note 33).
Financial assets can be pledged as collateral as part of repurchases transactions under terms that are usual and customary for such activities.
The table below analyses the contractual cash flows of the Company's financial
liabilities and assets as at 31 December 2022:
More More
than than
3 months 1 year
Gross Not more but less but less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2022 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------------- -------- ---------- --------- --------- --------- --------
Financial liability by type
Non-derivative liabilities
Other liabilities 470 (470) - - - (1,440)
Debt securities in issue 37,594 (64,898) (892) (2,719) (14,540) (46,747)
38,064 (65,368) (892) (2,719) (14,540) (48,187)
---------------------------------- -------- ---------- --------- --------- --------- --------
More More
than than
3 months 1 year
Gross Not more but less but less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2022 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------------- -------- ---------- --------- --------- --------- --------
Financial asset by type
Non-derivative assets
Loans and advances to banks 8,433 8,433 8,433 - - -
Debt securities at amortised cost 24,437 43,404 732 2,238 11,975 28,459
32,870 51,837 9,165 2,238 11,975 28,459
---------------------------------- -------- ---------- --------- --------- --------- --------
The table below analyses the contractual cash flows of the Company's financial
liabilities and assets as at 31 December 2021:
More More
than than
3 months 1 year
Gross Not more but less but less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2021 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------------- -------- ---------- --------- --------- --------- --------
Financial liability by type
Non-derivative liabilities
Other liabilities 1,490 (1,490) - - - (1,490)
Debt securities in issue 36,772 (56,567) (586) (1,788) (9,560) (44,633)
38,262 (58,057) (586) (1,788) (9,560) (46,123)
---------------------------------- -------- ---------- --------- --------- --------- --------
More More
than than
3 months 1 year
Gross Not more but less but less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2021 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------------- -------- ---------- --------- --------- --------- --------
Financial asset by type
Non-derivative assets
Loans and advances to banks 7,587 7,587 7,587 - - -
Debt securities at amortised cost 24,367 39,878 509 1,558 8,336 29,475
31,954 47,465 8,096 1,558 8,336 29,475
---------------------------------- -------- ---------- --------- --------- --------- --------
The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates and exchange rates.
Fiduciary activities
The Group provides investment management and advisory services to third parties, which involve the Group making allocation and purchase and sale decisions in relation to a wide range of financial instruments. Those assets that are held in a fiduciary capacity are not included in these financial statements. These services give rise to the risk that the Group may be accused of maladministration or underperformance. At the balance sheet date, the Group had investment management accounts amounting to approximately GBP1.3bn (2021: GBP1.4bn). Additionally, the Group provides investment advisory services.
(f) Financial assets
and liabilities
The tables below set out the Group's financial assets and financial liabilities
into their respective classifications:
Total
Amortised carrying Fair
FVPL FVOCI cost amount value
At 31 December 2022 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------- ------- ------ ---------- ---------- ----------
ASSETS
Cash and balances at central
banks - - 732,729 732,729 732,729
Loans and advances to
banks - - 115,787 115,787 115,788
Debt securities at amortised
cost - - 439,753 439,753 439,389
Derivative financial instruments 6,322 - - 6,322 6,322
Loans and advances to
customers - - 2,036,077 2,036,077 1,996,966
Other assets - - 14,160 14,160 14,160
Financial investments - 3,404 - 3,404 3,404
----------------------------------------- ------- ------ ---------- ---------- ----------
6,322 3,404 3,338,506 3,348,232 3,308,758
------------------------------------- ------- ------ ---------- ---------- ----------
LIABILITIES
Deposits from banks - - 236,027 236,027 236,027
Derivative financial instruments 135 - - 135 135
Deposits from customers - - 3,092,549 3,092,549 3,092,549
Other liabilities - - 4,954 4,954 4,954
Debt securities in issue - - 37,594 37,594 37,594
----------------------------------------- ------- ------ ---------- ---------- ----------
135 - 3,371,124 3,371,259 3,371,259
------------------------------------- ------- ------ ---------- ---------- ----------
Total
Amortised carrying Fair
FVPL FVOCI cost amount value
At 31 December 2021 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------- ------- ------ ---------- ---------- ----------
ASSETS
Cash and balances at central
banks - - 814,692 814,692 814,692
Loans and advances to
banks - - 73,444 73,444 73,444
Debt securities at amortised
cost - - 301,052 301,052 303,337
Derivative financial instruments 1,753 - - 1,753 1,753
Loans and advances to
customers - - 1,870,962 1,870,962 1,821,549
Other assets - - 13,098 13,098 13,098
Financial investments 165 3,004 - 3,169 3,169
----------------------------------------- ------- ------ ---------- ---------- ----------
1,918 3,004 3,073,248 3,078,170 3,031,042
------------------------------------- ------- ------ ---------- ---------- ----------
LIABILITIES
Deposits from banks - - 240,333 240,333 240,333
Derivative financial instruments 171 - - 171 171
Deposits from customers - - 2,837,869 2,837,869 2,837,869
Other liabilities - - 7,106 7,106 7,106
Debt securities in issue - - 36,772 36,772 36,772
----------------------------------------- ------- ------ ---------- ---------- ----------
171 - 3,122,080 3,122,251 3,122,251
------------------------------------- ------- ------ ---------- ---------- ----------
The tables below set out the Company's financial assets and financial liabilities
into their respective classifications:
Total
Amortised carrying Fair
FVPL FVOCI cost amount value
At 31 December 2022 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------- --------- --------- ----------- ----------- -------
ASSETS
Loans and advances to
banks - - 8,433 8,433 8,433
Debt securities at amortised
cost - - 24,437 24,437 24,437
- - 32,870 32,870 32,870
--------- ----------------------------------------------- ----------- ----------- -------
LIABILITIES
Other liabilities - - 470 470 470
Debt securities in issue - - 37,594 37,594 37,594
----------------------------------------- --------- ----- ----------- ----------- -------
- - 38,064 38,064 38,064
--------- ----------------------------------------------- ----------- ----------- -------
Total
Amortised carrying Fair
FVPL FVOCI cost amount value
At 31 December 2021 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------- --------- --------- ----------- ----------- -------
ASSETS
Loans and advances to
banks - - 7,587 7,587 7,587
Debt securities at amortised
cost - - 24,367 24,367 24,367
Other assets - - 4 4 4
- - 31,958 31,958 31,958
--------- ----------------------------------------------- ----------- ----------- -------
LIABILITIES
Other liabilities - - 1,490 1,490 1,490
Debt securities in issue - - 36,772 36,772 36,772
----------------------------------------- --------- ----- ----------- ----------- -------
- - 38,262 38,262 38,262
--------- ----------------------------------------------- ----------- ----------- -------
Valuation of financial instruments
The Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions. If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same for which market observable prices exist, net present value and discounted cash flow analysis. The objective of valuation techniques is to determine the fair value of the financial instrument at the reporting date as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
The Group measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making measurements:
-- Level 1: Quoted prices in active markets for identical assets or liabilities.
-- Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data.
-- Level 3: Inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument's valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.
The consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads assists in the judgement as to whether a market is active. If, in the opinion of management, a significant proportion of the instrument's carrying amount is driven by unobservable inputs, the instrument in its entirety is classified as valued using significant unobservable inputs. 'Unobservable' in this context means that there is little or no current market data available from which to determine the level at which an arm's length transaction would be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value (consensus pricing data may, for example, be used).
The tables below analyse assets and liabilities measured at fair value by the level in the fair value hierarchy into which the measurement is categorised:
Level Level Level
1 2 3 Total
At 31 December 2022 GBP000 GBP000 GBP000 GBP000
--------------------------------- ------- ------ ------ ------
ASSETS
Derivative financial instruments - 6,322 - 6,322
Financial investments - - 3,404 3,404
Investment property - - 6,550 6,550
--------------------------------- ------- ------ ------ ------
- 6,322 9,954 16,276
----------------------------------------- ------ ------ ------
LIABILITIES
Derivative financial instruments - 135 - 135
--------------------------------- ------- ------ ------ ------
- 135 - 135
----------------------------------------- ------ ------ ------
Level Level Level
1 2 3 Total
At 31 December 2021 GBP000 GBP000 GBP000 GBP000
--------------------------------- ------- ------ ------ ------
ASSETS
Derivative financial instruments - 1,753 - 1,753
Financial investments - - 3,169 3,169
Investment property - - 6,550 6,550
--------------------------------- ------- ------ ------ ------
- 1,753 9,719 11,472
----------------------------------------- ------ ------ ------
LIABILITIES
Derivative financial instruments - 171 - 171
--------------------------------- ------- ------ ------ ------
- 171 - 171
----------------------------------------- ------ ------ ------
There were no transfers between level 1 and level 2 during
the year.
For assets which are accounted at fair value under Level 3 the valuations
are primarily based on Fund Manager valuations and are based on reasonable
estimates. Applying reasonable alternative valuations would not lead to
a significantly different fair value. The following table reconciles the
movement in level 3 financial instruments measured at fair value during
the year:
Group 2022 2021
Movement in level 3 GBP000 GBP000
---------------------------------------------------------------- ------ ------
At 1 January 9,719 9,120
Purchases 53 670
Disposals (640) -
Movements recognised in Other Comprehensive
Income 822 (57)
Movements recognised in the Income Statement - (14)
------------------------------------------------------------------ ------ ------
At 31 December 9,954 9,719
------------------------------------------------------------------ ------ ------
Visa Inc. investment
Arbuthnot Latham currently holds preference shares in Visa Inc., valued at GBP2.0m (2021: GBP1.6m) as at 31 December 2022. These shares have been valued at their future conversion value into Visa Inc. common stock.
In 2020, as part of the fourth anniversary of the closing of the Visa Europe transaction, an assessment was performed of the ongoing risk of liability to Visa. As part of the adjustment, Visa awarded the Group 59 preference shares with a carrying value of GBP920k. In 2022 Visa awarded the Group extra 28 preference shares with a carrying value of GBP501k. These can be automatically converted into freely tradeable Class A common stock.
There is a haircut of 31% on the original shares comprising 25% due to a contingent liability disclosed in Visa Europe's accounts in relation to litigation and 6% based on a liquidity discount.
Hetz Ventures, L.P.
Arbuthnot Latham currently holds an equity investment in Hetz Ventures, L.P. which was launched in January 2018. The primary objective was to generate attractive risk-adjusted returns for its Partners, principally through long-term capital appreciation, by making, holding and disposing of equity and equity-related investments in early stage revenue generating Israeli technology companies, primarily in cyber, fin-tech and the disruptive software sectors. The company has committed to a capital contribution of USD2.5m of the total closing fund capital of USD132.5m. At 31 December 2022 Arbuthnot Latham & Co., Ltd had made capital contributions into the Fund of USD1.8m (2021: USD1.8m).
The investment is classified as FVOCI and is valued at fair value by Hetz Ventures, L.P. at GBP1.4m (2021: GBP1.4m). As at year end the fair value is deemed to be the Group's share of the fund based on what a third party would pay for the underlying investments.
Investment property
Please see Note 4 (c) for investment property valuation detail.
The tables below show the fair value of financial instruments carried at amortised cost by the level in the fair value hierarchy:
Level Level Level
Group 1 2 3 Total
At 31 December 2022 GBP000 GBP000 GBP000 GBP000
----------------------------------- ------- --------- --------- ---------
ASSETS
Cash and balances at central banks - 732,729 - 732,729
Loans and advances to banks - 115,788 - 115,788
Debt securities at amortised cost - 439,389 - 439,389
Loans and advances to customers - - 1,996,966 1,996,966
Other assets - - 14,160 14,160
----------------------------------- ------- --------- --------- ---------
- 1,287,906 2,011,126 3,299,032
------------------------------------------- --------- --------- ---------
LIABILITIES
Deposits from banks - 236,027 - 236,027
Deposits from customers - 3,092,549 - 3,092,549
Other liabilities - - 4,954 4,954
Debt securities in issue - - 37,594 37,594
----------------------------------- ------- --------- --------- ---------
- 3,328,576 42,548 3,371,124
------------------------------------------- --------- --------- ---------
Level Level Level
Group 1 2 3 Total
At 31 December 2021 GBP000 GBP000 GBP000 GBP000
----------------------------------- ------- --------- --------- ---------
ASSETS
Cash and balances at central banks - 814,692 - 814,692
Loans and advances to banks - 73,444 - 73,444
Debt securities at amortised cost - 301,052 - 301,052
Loans and advances to customers - - 1,870,962 1,870,962
Other assets - - 11,375 11,375
----------------------------------- ------- --------- --------- ---------
- 1,189,188 1,882,337 3,071,525
------------------------------------------- --------- --------- ---------
LIABILITIES
Deposits from banks - 240,333 - 240,333
Deposits from customers - 2,837,869 - 2,837,869
Other liabilities - - 7,106 7,106
Debt securities in issue - - 36,772 36,772
----------------------------------- ------- --------- --------- ---------
- 3,078,202 43,878 3,122,080
------------------------------------------- --------- --------- ---------
Level Level Level
Company 1 2 3 Total
At 31 December 2022 GBP000 GBP000 GBP000 GBP000
---------------------------------- ------- ------ ------ ------
ASSETS
Loans and advances to banks - 6 8,427 8,433
Debt securities at amortised cost - 24,437 - 24,437
- 24,443 8,427 32,870
------------------------------------------ ------ ------ ------
LIABILITIES
Other liabilities - - 470 470
Debt securities in issue - - 37,594 37,594
---------------------------------- ------- ------ ------ ------
- - 38,064 38,064
------------------------------------------ ------ ------ ------
Level Level Level
Company 1 2 3 Total
At 31 December 2021 GBP000 GBP000 GBP000 GBP000
---------------------------------- ------- ------ ------ ------
ASSETS
Loans and advances to banks - 6 7,581 7,587
Debt securities at amortised cost - 24,367 - 24,367
- 24,373 7,581 31,954
------------------------------------------ ------ ------ ------
LIABILITIES
Other liabilities - - 1,490 1,490
Debt securities in issue - - 36,772 36,772
---------------------------------- ------- ------ ------ ------
- - 38,262 38,262
------------------------------------------ ------ ------ ------
All above assets and liabilities are carried at amortised cost. Therefore for these assets, the fair value hierarchy noted above relates to the disclosure in this note only.
Cash and balances at central banks
The fair value of cash and balances at central banks was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date.
At the end of each year, the fair value of cash and balances at central banks was calculated to be equivalent to their carrying value.
Loans and advances to banks
The fair value of loans and advances to banks was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date.
Loans and advances to customers
The fair value of loans and advances to customers was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date, and the same assumptions regarding the risk of default were applied as those used to derive the carrying value.
The Group provides loans and advances to commercial, corporate and personal customers at both fixed and variable rates. To determine the fair value of loans and advances to customers, loans are segregated into portfolios of similar characteristics. A number of techniques are used to estimate the fair value of fixed rate lending; these take account of expected credit losses based on historic trends and expected future cash flows.
For the acquired loan book, the discount on acquisition is used to determine the fair value in addition to the expected credit losses and expected future cash flows.
Debt securities at amortised cost
The fair value of debt securities is based on the quoted mid-market share price.
Derivatives
Where derivatives are traded on an exchange, the fair value is based on prices from the exchange.
Deposits from banks
The fair value of amounts due to banks was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date.
At the end of each year, the fair value of amounts due to banks was calculated to be equivalent to their carrying value due to the short maturity term of the amounts due.
Deposits from customers
The fair value of deposits from customers was calculated based upon the present value of the expected future principal and interest cash flows. The rate used to discount the cash flows was the market rate of interest at the balance sheet date for the notice deposits and deposit bonds. The fair value of instant access deposits is equal to book value as they are repayable on demand.
Financial liabilities
The fair value of other financial liabilities was calculated based upon the present value of the expected future principal cash flows.
At the end of each year, the fair value of other financial liabilities was calculated to be equivalent to their carrying value due to their short maturity. The other financial liabilities include all other liabilities other than non-interest accruals.
Debt Securities in Issue
The fair value of debt securities in issue was calculated based upon the present value of the expected future principal cash flows.
7. Capital management (unaudited)
The Group's capital management policy is focused on optimising shareholder value. There is a clear focus on delivering organic growth and ensuring capital resources are sufficient to support planned levels of growth. The Board regularly reviews the capital position.
The Group and the individual banking operation, are authorised by the Prudential Regulation Authority ("PRA") and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and are subject to the Capital Requirement Regulation (EU No.575/2013) ("CRR"), which forms part of the retained EU legislation, and the PRA Rulebook for CRR firms. One of the requirements for the Group and the individual banking operation is that capital resources must be in excess of capital requirements at all times.
In accordance with the parameters set out in the PRA Rulebook, the Internal Capital Adequacy Assessment Process ("ICAAP") is embedded in the risk management framework of the Group. The ICAAP identifies and assesses the risks to the Group, considers how these risks can be mitigated and demonstrates that the Group has sufficient resources, after mitigating actions, to withstand all reasonable scenarios.
Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a "Pillar 1 plus" approach to determine the level of capital the Group needs to hold. This method takes the Pillar 1 capital requirement for credit, market and operational risk as a starting point, and then considers whether each of the calculations delivers a sufficient amount of capital to cover risks to which the Group is, or could be, exposed. Where the Board considers that the Pillar 1 calculations do not adequately cover the risks, an additional Pillar 2A capital requirement is applied. The PRA will set a Pillar 2A capital requirement in light of the calculations included within the ICAAP. The Group's Total Capital Requirement, as issued by the PRA, is the sum of the minimum capital requirements under the CRR (Pillar 1) and the Pillar 2A requirement. The current TCR of the Group is 8.32%.
The Group's regulatory capital is divided into two tiers:
-- Common equity Tier 1 which comprises shareholder funds less regulatory deductions for intangible assets, including goodwill, and deferred tax assets that do not arise from temporary differences.
-- Tier 2 comprises qualifying subordinated loans.
The following table shows the regulatory capital resources
as managed by the Group:
2022 2021
GBP000 GBP000
----------------------------------------------------------- -------- --------
CET1 Capital
Share capital 154 154
Capital redemption reserve 19 19
Treasury shares (1,299) (1,299)
Retained earnings* 212,037 201,026
IFRS 9 - Transitional add back 523 1,600
Fair value reserve 1,067 979
Deduction for goodwill (5,202) (5,202)
Deduction for other intangibles** (27,347) (18,667)
Deduction for deferred tax asset that do not arise from
temporary differences (4,567) (2,370)
Deduction for Prudent valuation (10) (5)
----------------------------------------------------------- -------- --------
CET1 capital resources 175,375 176,235
----------------------------------------------------------- -------- --------
Tier 2 Capital
Debt securities in issue 37,594 36,772
----------------------------------------------------------- -------- --------
Total Tier 2 capital resources 37,594 36,772
----------------------------------------------------------- -------- --------
Own Funds (sum of Tier 1 and Tier 2) 212,969 213,007
----------------------------------------------------------- -------- --------
CET1 Capital Ratio (CET1 Capital/Total Risk Exposure)* 11.6% 12.3% ----------------------------------------------------------- -------- -------- Total Capital Ratio (Own Funds/Total Risk Exposure)* 14.0% 14.9% ----------------------------------------------------------- -------- -------- * Includes current year audited profit.
** From 1 January 2022 the PRA requires the full carrying amount of software intangibles to be deducted from Common Equity Tier 1 capital.
Capital ratios are reviewed on a monthly basis to ensure that external requirements are adhered to. During the period all regulated entities have complied with all of the externally imposed capital requirements to which they are subject.
Pillar 3 complements the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2). Its aim is to encourage market discipline by developing a set of disclosure requirements which will allow market participants to assess key pieces of information on a firm's capital, risk exposures and risk assessment processes. Our Pillar 3 disclosures for the year ended 31 December 2022 are published as a separate document on the Group website under Investor Relations.
8. Net interest income
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 the Statement of Comprehensive Income as interest income. The EIR rate is adjusted for events where there is a change to the reference interest rate (e.g. 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.
2022 2021
GBP000 GBP000
---------------------------------------------------- ------------ -----------
Cash and balances at central banks 8,681 521
Loans and advances to banks* 6 (165)
Debt securities at amortised cost 6,374 1,156
Loans and advances to customers 104,952 75,590
------------------------------------------------------ ------------ -----------
Total interest income 120,013 77,102
------------------------------------------------------ ------------ -----------
Deposits from banks (3,334) 69
Deposits from customers (14,243) (10,056)
Debt securities in issue (2,723) (2,016)
Interest on lease liabilities (632) (1,024)
------------------------------------------------------ ------------ -----------
Total interest expense (20,932) (13,027)
------------------------------------------------------ ------------ -----------
Net interest income 99,081 64,075
------------------------------------------------------ ------------ -----------
* Negative value is due to the fluctuation of interest rates which has
led to an increased cost on the variable leg of interest rate swap, which
is reported in interest income.
9. Fee and commission income
Fee and commission income which is integral to the EIR of a financial asset are included in the effective interest rate (see Note 8).
All other fee and commission income is recognised as the related services are performed, under IFRS 15, revenues from Contracts with Customers. 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. Fees are recognised
as the service is performed.
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 wealth planning services that are continuously provided over an extended period of time.
The Group includes the transaction price of variable consideration only when it is highly probable that a significant reversal in the amount recognised will not occur or when the variable element becomes certain.
Fee and commission income is disaggregated below and includes a total for
fees in scope of IFRS 15:
Wealth All other
Group Banking Management RAF ACABL ASFL divisions Total
At 31 December 2022 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- ------- ----------- ------ ------ ------ ---------- ------
Banking commissions 2,233 - 32 6,178 10 405 8,858
Foreign exchange fees 1,296 - - - - 840 2,136
Investment management fees - 10,285 - - - - 10,285
Wealth planning fees - 307 - - - - 307
--------------------------- ------- ----------- ------ ------ ------ ---------- ------
Total fee and commission
income 3,529 10,592 32 6,178 10 1,245 21,586
--------------------------- ------- ----------- ------ ------ ------ ---------- ------
Wealth All other
Group Banking Management RAF ACABL ASFL divisions Total
At 31 December 2021 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- ------- ----------- ------ ------ ------ ---------- ------
Banking and services fees 1,961 - 166 4,308 7 - 6,442
Foreign exchange fees 888 - - - - 681 1,569
Investment management fees - 10,101 - - - - 10,101
Wealth planning fees - 360 - - - - 360
--------------------------- ------- ----------- ------ ------ ------ ---------- ------
Total fee and commission
income 2,849 10,461 166 4,308 7 681 18,472
--------------------------- ------- ----------- ------ ------ ------ ---------- ------
10. Gross profit from leasing activities
Accounting for operating lease and related income:
The statement of comprehensive income is credited with:
-- Income from operating leases recognised on a straight-line basis over the period of the lease.
-- The sales proceeds from the sale of vehicles at the end of operating lease agreements, when a vehicle is transferred to a buyer, and the buyer obtains control of the vehicle.
-- Income from service and maintenance contracts recognised on a straight-line method.
Revenue from service and maintenance contracts is recognised in accordance with the principles of IFRS 15, Revenue from contracts with customers. Payments from customers for service and maintenance contracts are deferred on the balance sheet until the point they are recognised and when the performance obligations are met.
Revenue is the aggregate of operating lease income and service and maintenance contracts. Revenue also includes the sales proceeds from the same of vehicles at the end of operating lease agreements and other returned vehicles. Amounts recognised within gross profit from leasing activities in the statement of comprehensive income are set out below:
2022 2021
Group GBP000 GBP000
---------------------------------------------------------- -------- --------
Income from lease or rental of commercial vehicles 42,456 33,577
Sale of commercial vehicles 44,385 32,123
Income from service and maintenance contracts 12,088 8,800
Other income 438 -
---------------------------------------------------------- -------- --------
Revenue 99,367 74,500
---------------------------------------------------------- -------- --------
Depreciation and rental costs of commercial vehicles held
for lease or rent (31,218) (25,197)
Carrying amount of vehicles disposed (38,259) (31,339)
Service & maintenance cost (12,632) (11,487)
---------------------------------------------------------- -------- --------
Cost of goods sold (82,109) (68,023)
---------------------------------------------------------- -------- --------
Gross profit from leasing activities 17,258 6,477
---------------------------------------------------------- -------- --------
11. Net impairment loss on 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. The assets, to which the low credit risk exemption applies, include cash and balances at central banks (Note 18), loans and advances to banks (Note 19) and debt securities at amortised cost (Note 20). These assets are all considered investment grade.
-- 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: 12--month ECL applies to all financial assets that have not experienced a significant increase in credit risk ("SICR") since origination and are not credit impaired. The ECL will be computed based on the probability of default events occurring over the next 12 months. 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.
-- 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;
-- Any additional reasons whereby the Probability of Default is considered to have increased significantly since inception of the facility.
-- 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, beyond the extent that they are no longer considered to be credit impaired.
A borrower will move back into Stage 1 conditional upon both a minimum of six months' good account conduct and the improvement of the Client's situation to the extent that the credit risk has receded sufficiently and a full repayment of the loan, without recourse to the collateral, is likely.
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
Renegotiated loans are derecognised if the new terms are significantly different to the original agreement. Loans that have been modified to such an extent the renegotiated loan is a substantially different to the original loan, are no longer considered to be past due and 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 which are not subject to reclassification to the income statement on derecognition.
2022 2021
GBP000 GBP000
----------------------------------------------------------- -------- -------
Net Impairment losses on financial assets 5,503 3,196
Of which:
Stage 1 1,078 664
Stage 2 53 (456)
Stage 3 4,231 2,966
Impairment losses on financial investments 142 22
----------------------------------------------------------- -------- -------
5,503 3,196
----------------------------------------------------------- -------- -------
During the year, the Group recovered GBP55k (2021: GBP60k) of loans which
had previously been written off.
12. Acquisition of Asset Alliance Group Holdings Limited
On 1st April 2021, following receipt of regulatory approval, Arbuthnot Latham completed the acquisition of 100% of the share capital of AAG from its former owners made up of institutional investors and the key management team.
AAG provides vehicle finance and related services, predominantly in the truck & trailer and bus & coach markets. Operating from five locations, it is the UK's leading independent end-to-end specialist in commercial vehicle financing and has over 4000 vehicles under management.
The acquisition supported AL's continued strategy to diversify its proposition within the specialist financial services sector.
The consideration was paid in full in cash following completion. AL has also provided an intercompany loan to AAG at completion of GBP127.9m to re-finance its existing finance liabilities. The consideration and the refinancing of AAG's funding liabilities have been satisfied from the Group's current cash resources.
The share capital was acquired at a discount to the fair value of net assets resulting in a bargain purchase gain recognised in the Statement of Comprehensive Income on acquisition as set out in the table on the next page. The fair value of intangibles acquired include GBP3.5m for the brand.
The acquisition contributed GBP0.2m to interest income and GBP3.8m to profit before tax in the prior period.
Acquired Recognised
assets/ Fair value values
liabilities adjustments on acquisition
GBP000 GBP000 GBP000
------------------------------------- ------------ ------------ ---------------
Loans and advances to banks 3,883 - 3,883
Loans and advances to customers 4,226 - 4,226
Other assets 10,128 - 10,128
Stock 1,982 316 2,298
Deferred tax assets - 2,500 2,500
Intangible assets 1,579 2,837 4,416
Property, plant and equipment 120,684 16,261 136,945
------------------------------------- ------------ ------------ ---------------
Total assets 142,482 21,914 164,396
------------------------------------- ------------ ------------ ---------------
Deposits from banks 127,918 - 127,918
Deferred tax liabilities - 3,815 3,815
Corporation tax liability 33 - 33
Other liabilities 14,006 - 14,006
------------------------------------- ------------ ------------ ---------------
Total liabilities 141,957 3,815 145,772
------------------------------------- ------------ ------------ ---------------
Net identifiable assets 525 18,099 18,624
------------------------------------- ------------ ------------ ---------------
Cash consideration 9,998
Negative Goodwill / Bargain Purchase (8,626)
------------------------------------- ------------ ------------ ---------------
13. Other income
In prior year, other income mainly included the profit on sale of the Tay Mortgage portfolio of GBP2.2m, an adjustment of GBP0.6m gain to the contingent consideration for the acquisition of Renaissance Asset Finance Ltd and dividends received on the shares held in STB of GBP0.5m.
Other items reflected in other income include rental income from the investment property (see Note 32) of GBP0.9m (2021: GBP0.3m).
Accounting for 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.
14. Operating expenses
2022 2021
Operating expenses comprise: GBP000 GBP000
----------------------------------------------------- ------- ------
Staff costs, including Directors:
Wages, salaries and bonuses 61,359 49,754
Social security costs 7,534 5,861
Pension costs 2,861 2,578
Share based payment transactions (Note 41) (18) (53)
Amortisation of intangibles (Note 29) 4,026 3,211
Depreciation (Note 30) 1,772 1,814
Profit on disposals of property, plant and equipment (9) 3
Financial Services Compensation Scheme Levy 174 430
Expenses relating to short-term leases 550 608
Write down of repossessed properties 647 3,835
Other administrative expenses 30,017 25,381
----------------------------------------------------- ------- ------
Total operating expenses from continuing operations 108,913 93,422
----------------------------------------------------- ------- ------
Details on Directors remuneration are disclosed in the Remuneration Report on page 53.
2022 2021
Remuneration of the auditor and its associates, excluding
VAT, was as follows: GBP000 GBP000
----------------------------------------------------------- ------ ------
Fees payable to the Company's auditor for the audit of the
Company's annual accounts 123 112
Fees payable to the Company's auditor and its associates
for other services:
Audit of the accounts of subsidiaries 564 481
Audit related assurance services 116 113
Total fees payable 803 706
----------------------------------------------------------- ------ ------
15. Income tax expense
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.
2022 2021
United Kingdom corporation tax at 19% (2021: 19%) GBP000 GBP000
--------------------------------------------------------- ------ -------
Current taxation
Corporation tax charge - current year 3,769 54
Corporation tax charge - adjustments in respect of prior
years 246 25
--------------------------------------------------------- ------ -------
4,015 79
--------------------------------------------------------- ------ -------
Deferred taxation
Origination and reversal of temporary differences 286 (2,165)
Adjustments in respect of prior years (750) (63)
--------------------------------------------------------- ------ -------
(464) (2,228)
--------------------------------------------------------- ------ -------
Income tax expense/(credit) 3,551 (2,149)
--------------------------------------------------------- ------ -------
Tax reconciliation
Profit before tax 20,009 4,638
Tax at 19% (2021: 19%) 3,802 881
Other permanent differences (225) (1,756)
Tax rate change 477 (1,237)
Prior period adjustments (503) (37)
--------------------------------------------------------- ------ -------
Corporation tax charge/(credit) for the year 3,551 (2,149)
--------------------------------------------------------- ------ -------
Permanent differences in 2022 are predominantly due to the disallowed costs on the sale of the King Street property and Super Deduction allowances. Prior year permanent differences mainly relate to the acquisition of the Asset Alliance Group.
In the Budget speech on 3 March 2021, the Chancellor of the Exchequer, announced the increase of corporation tax from 19% to 25% from 1 April 2023, which was enacted on 10 June 2021. This increased the deferred tax asset on the balance sheet (with expected utilisation after 1 April 2023) and similarly further increased the tax credit recorded in the profit and loss account in the year.
16. Average number of employees
2022 2021
-------------------------------- ---- ----
Banking 251 223
RAF 37 34
ACABL 28 24
ASFL 9 9
AAG 125 51
All Other Divisions 250 246
Group Centre 18 19
-------------------------------- ---- ----
718 606
-------------------------------- ---- ----
Accounting for 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.
17. Earnings per ordinary share
Basic
Basic earnings per ordinary share are calculated by dividing the profit after tax attributable to equity holders of the Company by the weighted average number of ordinary shares 15,022,629 (2021: 15,022,629) in issue during the year (this includes Ordinary shares and Ordinary Non-Voting shares).
Diluted
There are no convertible instruments, conditional ordinary shares or options or warrants that would create diluted earnings per share. Therefore the diluted earnings per share is equal to basic earnings per share.
2022 2021
GBP000 GBP000
--------------------------------------------------------------- ------ ------
Profit after tax attributable to equity holders of the Company 16,458 6,786
--------------------------------------------------------------- ------ ------
2022 2021
p p
--------------------------------------------------------------- ------ ------
Basic Earnings per share 109.6 45.2
--------------------------------------------------------------- ------ ------
18. Cash and balances at central banks
2022 2021
Group GBP000 GBP000
--------------------------------------- ------------- -------
Cash and balances at central banks 732,729 814,692
--------------------------------------- ------------- -------
ECL has been assessed to be insignificant.
Surplus funds are mainly held in the Bank of England reserve account, with the remainder held in certificates of deposit, fixed and floating rate notes and money market deposits in investment grade banks.
19. Loans and advances to banks
2022 2021
Group GBP000 GBP000
----------------------------------------------------------------- ------- ------
Placements with banks included in cash and cash equivalents
(Note 43) 115,787 73,444
----------------------------------------------------------------- ------- ------
The table below presents an analysis of loans and advances to banks by
rating agency designation as at 31 December, based on Moody's short and
long term ratings:
2022 2021
Group GBP000 GBP000
----------------------------------------------------------------- ------- ------
A1 115,595 61,527
A2 - 11,909
A3 193 -
Unrated - 8
----------------------------------------------------------------- ------- ------
115,788 73,444
----------------------------------------------------------------- ------- ------
None of the loans and advances to banks are past due (2021: nil). ECL has
been assessed as insignificant.
2022 2021
Company GBP000 GBP000
----------------------------------------------------------------- ------- ------
Placements with banks included in cash and cash equivalents
(Note 43) 8,434 7,587
----------------------------------------------------------------- ------- ------
Loans and advances to banks include bank balances of GBP11.5m (2021: GBP7.6m)
with Arbuthnot Latham & Co., Ltd. ECL has been assessed as insignificant.
20. Debt securities at amortised cost
Debt securities represent certificates of deposit.
The movement in debt securities may be summarised as follows:
2022 2021
Group GBP000 GBP000
-------------------------------------------------------------- --------- ---------
At 1 January 301,052 344,692
Exchange difference 9,524 1,023
Additions 799,341 590,492
Redemptions (670,164) (635,155)
-------------------------------------------------------------- --------- ---------
At 31 December 439,753 301,052
-------------------------------------------------------------- --------- ---------
The table below presents an analysis of debt securities by rating agency
designation at 31 December, based on Moody's long term ratings:
2022 2021
Group GBP000 GBP000
------------------------------------------------------------------ ------- -------
Aaa 41,907 56,783
Aa1 89,805 33,314
Aa2 44,902 16,403
Aa3 50,000 11,105
A1 213,139 183,447
439,753 301,052
------------------------------------------------------------------ ------- -------
None of the debt securities are past due (2021: nil). ECL has been assessed
as immaterial.
The movement in debt securities for the Company may be summarised
as follows:
2022 2021
Company GBP000 GBP000
------------------------------------------------------------------ ------- -------
At 1 January 24,367 24,308
Additions - -
Interest 2,396 2,014
Redemptions (2,326) (1,955)
------------------------------------------------------------------ ------- -------
At 31 December 24,437 24,367
------------------------------------------------------------------ ------- -------
The exposure relates to Arbuthnot Latham & Co., Limited, which is unrated.
The subordinated loan notes were issued on 3 June 2019 and are denominated
in Pound Sterling. The principal amount outstanding at 31 December 2022
was GBP25m (2021: GBP25m). The notes carry interest at 7.75% over the three
month LIBOR rate and are repayable at par in June 2029 unless redeemed
or repurchased earlier by the Arbuthnot Latham & Co., Limited. ECL has
been assessed as immaterial. With the discontinuation of LIBOR, the rate
charged will reference to Synthetic LIBOR as administered by ICE Benchmark
Administration Limited.
21. 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
Non-current assets held for sale are measured at the lower of their carrying amount and fair value less costs to sell in accordance with IFRS 5. Where investments that have initially been recognised as non-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 reclassified 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.
Group
--------------
2022 2021
GBP000 GBP000
----------------------------------- ------ ------
Repossessed property held for sale 3,279 3,136
----------------------------------- ------ ------
3,279 3,136
----------------------------------- ------ ------
Repossessed property held for sale
The repossessed property is expected to be sold within 12 months and can therefore be recognised as held for sale under IFRS 5.
22. 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.
2022 2021
----------------------------------- -----------------------------------
Contract/ Contract/
notional Fair value Fair value notional Fair value Fair value
amount assets liabilities amount assets liabilities
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------- --------- ---------- ------------ --------- ---------- ------------
Currency swaps 3,049 113 135 8,686 118 132
Interest rate swaps 51,376 6,209 - 57,889 1,635 39
54,425 6,322 135 66,575 1,753 171
-------------------- --------- ---------- ------------ --------- ---------- ------------
The principal derivatives used by the Group are over the counter exchange rate contracts. Exchange rate related contracts include currency swaps and interest rate swaps.
A forward foreign exchange contract is an agreement to buy or sell a specified amount of foreign currency on a specified future date at an agreed rate. Currency swaps generally involve the exchange of interest payment obligations denominated in different currencies; exchange of principal can be notional or actual. The currency swaps are settled net and therefore the fair value is small in comparison to the contract/notional amount. Interest rate swaps are used to hedge against the Profit or Loss impact resulting from the movement in interest rates, due to some exposures having fixed rate terms.
The Group primarily uses investment graded banks as counterparties for derivative financial instruments.
The table below presents an analysis of derivative financial instruments contract/notional amounts by rating agency designation of counterparty bank at 31 December, based on Moody's long term ratings:
2022 2021
Group GBP000 GBP000
-------- ------ ------
Aa1 250 7,797
A1 52,840 58,778
Unrated 1,335 -
-------- ------ ------
54,425 66,575
-------- ------ ------
23. Derivatives held for risk management and hedge accounting
See accounting policy in Note 3.
Derivatives held for risk management
The following table describes the fair values of derivatives held for risk management purposes by type of risk exposure.
2022 2021
------------------------ ------------------------
Fair value Fair value Fair value Fair value
assets liabilities assets liabilities
Group GBP000 GBP000 GBP000 GBP000
-------------------------------------- ---------- ------------ ---------- ------------
Interest rate - Designated fair value
hedges 6,184 - 1,635 -
-------------------------------------- ---------- ------------ ---------- ------------
Total interest rate derivatives 6,184 - 1,635 -
-------------------------------------- ---------- ------------ ---------- ------------
Details of derivatives designated as hedging instruments in qualifying hedging relationships are provided in the hedge accounting section below. The instruments used principally include interest rate swaps.
For more information about how the Group manages its market risks, see Note 6.
Hedge accounting
Fair value hedges of interest rate risk
The Group uses interest rate swaps to hedge its exposure to changes in the fair values of fixed rate pound sterling loans to customers in respect of the SONIA (The Sterling Overnight Index Average) benchmark interest rate. Pay-fixed/receive-floating interest rate swaps are matched to specific fixed-rate loans and advances with terms that closely align with the critical terms of the hedged item.
The Group's approach to managing market risk, including interest rate risk, is discussed in Note 6. The Group's exposure to interest rate risk is disclosed in Note 6. Interest rate risk to which the Group applies hedge accounting arises from fixed-rate loans and advances, whose fair value fluctuates when benchmark interest rates change. The Group hedges interest rate risk only to the extent of benchmark interest rates because the changes in fair value of a fixed-rate loan are significantly influenced by changes in the benchmark interest rate (SONIA). Hedge accounting is applied where economic hedging relationships meet the hedge accounting criteria.
By using derivative financial instruments to hedge exposures to changes in interest rates, the Group also exposes itself to credit risk of the derivative counterparty, which is not offset by the hedged item. The Group minimises counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties whose credit rating is not lower than A.
Before fair value hedge accounting is applied by the Group, the Group determines whether an economic relationship between the hedged item and the hedging instrument exists based on an evaluation of the qualitative characteristics of these items and the hedged risk that is supported by quantitative analysis. The Group considers whether the critical terms of the hedged item and hedging instrument closely align when assessing the presence of an economic relationship. The Group evaluates whether the fair value of the hedged item and the hedging instrument respond similarly to similar risks. The Group further supports this qualitative assessment by using regression analysis to assess whether the hedging instrument is expected to be and has been highly effective in offsetting changes in the fair value of the hedged item.
The Group establishes a hedge ratio by aligning the par amount of the fixed-rate loan and the notional amount of the interest rate swap designated as a hedging instrument. Under the Group policy, in order to conclude that a hedging relationship is effective, all of the following criteria should be met.
-- The regression co-efficient (R squared), which measures the correlation between the variables in the regression, is at least 0.8.
-- The slope of the regression line is within a 0.8-1.25 range.
-- The confidence level of the slope is at least 95%.
In these hedging relationships, the main sources of ineffectiveness are:
-- the effect of the counterparty and the Group's own credit risk on the fair value of the interest rate swap, which is not reflected in the fair value of the hedged item attributable to the change in interest rate; and
-- differences in payable/receivable fixed rates of the interest rate swap and the loans.
There were no other sources of ineffectiveness in these hedging relationships.
The effective portion of fair value gains on derivatives held in qualifying fair value hedging relationships and the hedging gain or loss on the hedged items are included in net interest income.
At 31 December 2022 and 31 December 2021, the Group held the following interest rate swaps as hedging instruments in fair value hedges of interest risk.
Maturity 2022 Maturity 2021
------------------------- ----------------------------
Less More Less More
than 1-5 than than 1-5 than
Group 1 year years 5 years 1 year years 5 years
------------------------------------- ------- ------ -------- ------- ------ -----------
Risk category: Interest rate risk
- Hedge of loans and advances
Nominal amount (in GBP000) - 48,120 - - 5,335 33,750
Average fixed interest rate - 1.79% - - 0.88% 0.09%
------------------------------------- ------- ------ -------- ------- ------ -----------
The amounts relating to items designated as hedging instruments and hedge
ineffectiveness at 31 December 2022 were as follows:
2022
----------------------------
Carrying amount
Nominal Assets Liabilities
amount
Group GBP000 GBP000 GBP000
------------------------------------- ------- ------ -------- ------- ------ -----------
Interest rate risk
Interest rate swaps - hedge of loans
and advances 48,120 6,184 -
------------------------------------- ------- ------ -------- ------- ------ -----------
The amounts relating to items designated as hedging instruments and hedge
ineffectiveness at 31 December 2021 were as follows:
2021
----------------------------
Carrying amount
Nominal Assets Liabilities
amount
Group GBP000 GBP000 GBP000
------------------------------------- ------- ------ -------- ------- ------ -----------
Interest rate risk
Interest rate swaps - hedge of loans
and advances 39,085 1,635 -
------------------------------------- ------- ------ -------- ------- ------ -----------
The amounts relating to items designated as hedged items at 31 December
2022 were as follows:
2022
Carrying amount
------------------------------------
Assets Liabilities
Group GBP000 GBP000
-------------------------------------- ------------ ----------------------
Loans and advances 42,383 -
------------------------------------------- ------------ ----------------------
The amounts relating to items designated as hedged items at 31 December
2021 were as follows:
2021
Carrying amount
------------------------------------
Assets Liabilities
Group GBP000 GBP000
-------------------------------------- ------------ ----------------------
Loans and advances 39,085 -
------------------------------------------- ------------ ----------------------
Group 2022
--------------------------------- -----------------------------------------------------------------------------
Change in fair Ineffectiveness
value used recognised
for calculating in profit
hedge ineffectiveness or loss
---------------------------------
Line item in the statement
of financial position
where the hedging instrument Line item in profit or loss
is included GBP000 GBP000 that includes hedge ineffectiveness
--------------------------------- ---------------------- --------------- ------------------------------------
Derivative financial instruments 4,549 303 Net interest income
--------------------------------- ---------------------- --------------- ------------------------------------
Group 2021
--------------------------------- -----------------------------------------------------------------------------
Change in Ineffectiveness
fair value recognised
used for calculating in profit
hedge ineffectiveness or loss
---------------------------------
Line item in the statement
of financial position
where the hedging instrument Line item in profit or loss
is included GBP000 GBP000 that includes hedge ineffectiveness
--------------------------------- ---------------------- --------------- ------------------------------------
Derivative financial instruments 1,635 144 Net interest income
--------------------------------- ---------------------- --------------- ------------------------------------
Group 2022
---------------------------
Accumulated amount of fair value
Change in value hedge adjustments on the hedged
used for calculating item included in the carrying
hedge ineffectiveness amount of the hedged item
Assets Liabilities
Line item in the statement
of financial position
in which the hedged item
is included GBP000 GBP000 GBP000
Loans and advances to
customers (4,246) (5,737) -
---------------------------
Group 2021
Accumulated amount of fair value
Change in value hedge adjustments on the hedged
used for calculating item included in the carrying
hedge ineffectiveness amount of the hedged item
Assets Liabilities
Line item in the statement
of financial position
in which the hedged item
is included GBP000 GBP000 GBP000
Loans and advances to
customers (1,490) (1,490) -
24. Loans and advances to customers
Analyses of loans and advances to customers:
2022
Stage Stage Stage
1 2 3 Total
Group GBP000 GBP000 GBP000 GBP000
--------- -------- -------- ---------
Gross loans and advances at 1 January 2022 1,737,909 95,463 43,977 1,877,349
--------- -------- -------- ---------
Originations and repayments 217,525 (36,398) (10,823) 170,304
Write-offs - - (4,974) (4,974)
Transfer to Stage 1 30,323 (29,720) (603) -
Transfer to Stage 2 (57,245) 59,912 (2,667) -
Transfer to Stage 3 (10,605) (14,743) 25,348 -
--------- -------- -------- ---------
Gross loans and advances at 31 December
2022 1,917,907 74,514 50,258 2,042,679
--------- -------- -------- ---------
Less allowances for ECLs (see Note 25) (1,147) (130) (5,325) (6,602)
Net loans and advances at 31 December 2022 1,916,760 74,384 44,933 2,036,077
--------- -------- -------- ---------
2021
Stage Stage Stage
1 2 3 Total
Group GBP000 GBP000 GBP000 GBP000
--------- -------- -------- ---------
Gross loans and advances at 1 January 2021 1,423,332 126,347 42,798 1,592,477
--------- -------- -------- ---------
Originations 345,787 (53,132) (11,297) 281,358
Repayments and write-offs - - (614) (614)
Acquired portfolio 4,128 - - 4,128
Transfer to Stage 1 8,726 (8,726) - -
Transfer to Stage 2 (40,132) 44,147 (4,015) -
Transfer to Stage 3 (3,932) (13,173) 17,105 -
--------- -------- -------- ---------
Gross loans and advances at 31 December
2021 1,737,909 95,463 43,977 1,877,349
--------- -------- -------- ---------
Less allowances for ECLs (see Note 25) (388) (77) (5,922) (6,387)
Net loans and advances at 31 December 2021 1,737,521 95,386 38,055 1,870,962
--------- -------- -------- ---------
*Originations include further advances and drawdowns on existing commitments.
For a maturity profile of loans and advances to customers, refer to Note 6.
Loans and advances to customers by division (net of ECL):
Mortgage All Other
Banking Portfolios RAF ACABL ASFL AAG Divisions Total
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------- ----------- ------- ------- ------ ------ ---------- ---------
Stage 1 1,362,950 126,713 128,594 267,812 13,675 17,016 - 1,916,760
Stage 2 59,844 10,767 2,394 - 1,001 376 - 74,382
Stage 3 29,855 11,037 2,837 1,013 193 - - 44,935
--------- ----------- ------- ------- ------ ------ ---------- ---------
At 31 December 2022 1,452,649 148,517 133,825 268,825 14,869 17,392 - 2,036,077
--------- ----------- ------- ------- ------ ------ ---------- ---------
Mortgage All Other
Banking Portfolios RAF ACABL ASFL AAG Divisions Total
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------- ----------- ------- ------- ------ ------ ---------- ---------
Stage 1 1,297,625 157,561 82,845 182,122 9,868 7,500 - 1,737,521
Stage 2 70,100 13,719 11,338 - 229 - - 95,386
Stage 3 28,324 6,802 2,929 - - - - 38,055
--------- ----------- ------- ------- ------ ------ ---------- ---------
At 31 December 2021 1,396,049 178,082 97,112 182,122 10,097 7,500 - 1,870,962
--------- ----------- ------- ------- ------ ------ ---------- ---------
Analyses of past due loans and advances to customers by division:
2022
Mortgage All Other
Banking Portfolios RAF ACABL ASFL Divisions Total
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------- ----------- ------ ------ ------ ---------- -------
Up to 30 days 119,113 9,216 2,240 - - - 130,569
------- ----------- ------ ------ ------ ---------- -------
Stage 1 113,121 8,056 1,858 - - - 123,035
Stage 2 5,626 1,013 215 - - - 6,854
Stage 3 366 147 167 - - - 680
------- ----------- ------ ------ ------ ----------
30 - 60 days 1,633 2,277 43 - 1,001 - 4,954
------- ----------- ------ ------ ------ ---------- -------
Stage 2 1,625 2,147 43 - 1,001 - 4,816
Stage 3 8 130 - - - - 138
------- ----------- ------ ------ ------ ----------
60 - 90 days 5,555 1,135 116 - - - 6,806
------- ----------- ------ ------ ------ ---------- -------
Stage 2 5,044 898 52 - - - 5,994
Stage 3 511 237 64 - - - 812
------- ----------- ------ ------ ------ ----------
Over 90 days 37,564 8,302 3,214 - 193 - 49,273
------- ----------- ------ ------ ------ ---------- -------
Stage 2 9,524 - - - - - 9,524
Stage 3 28,040 8,302 3,214 - 193 - 39,749
------- ----------- ------ ------ ------ ----------
At 31 December 2022 163,865 20,930 5,613 - 1,194 - 191,602
------- ----------- ------ ------ ------ ---------- -------
Analyses of past due loans and advances to customers by division:
2021
Mortgage All Other
Banking Portfolios RAF ACABL ASFL Divisions Total
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------- ----------- ------ ------ ------ ---------- -------
Up to 30 days 42,125 6,293 1,813 - 1,890 - 52,121
------- ----------- ------ ------ ------ ---------- -------
Stage 1 36,118 3,699 1,647 - 1,890 - 43,354
Stage 2 4,623 2,594 - - - - 7,217
Stage 3 1,384 - 166 - - - 1,550
------- ----------- ------ ------ ------ ----------
30 - 60 days 1,509 2,561 2,736 - - - 6,806
------- ----------- ------ ------ ------ ---------- -------
Stage 1 - - 40 - - - 40
Stage 2 1,495 2,561 - - - - 4,056
Stage 3 14 - 2,696 - - - 2,710
------- ----------- ------ ------ ------ ----------
60 - 90 days 25,648 1,566 98 - - - 27,312
------- ----------- ------ ------ ------ ---------- -------
Stage 2 18,889 1,566 - - - - 20,455
Stage 3 6,759 - 98 - - - 6,857
------- ----------- ------ ------ ------ ----------
Over 90 days 31,820 7,753 2,583 - - - 42,156
------- ----------- ------ ------ ------ ---------- -------
Stage 2 6,251 - 2 - - - 6,253
Stage 3 25,569 7,753 2,581 - - - 35,903
------- ----------- ------ ------ ------ ----------
At 31 December 2021 101,102 18,173 7,230 - 1,890 - 128,395
------- ----------- ------ ------ ------ ---------- -------
Loans and advances to customers include finance lease receivables
as follows:
2022 2021
Group GBP000 GBP000
-------- --------
Gross investment in finance lease receivables:
- No later than 1 year 54,086 45,368
- Later than 1 year and no later than 5 years 117,179 72,392
- Later than 5 years 748 119
-------- --------
172,013 117,879
Unearned future finance income on finance leases (20,798) (12,368)
-------- --------
Net investment in finance leases 151,215 105,511
-------- --------
The net investment in finance leases may be analysed as follows:
- No later than 1 year 43,537 38,609
- Later than 1 year and no later than 5 years 106,979 66,777
- Later than 5 years 699 125
-------- --------
151,215 105,511
-------- --------
(b) Loans and advances renegotiated
Restructuring activities include external payment arrangements, modification and deferral of payments. Following restructuring, a previously overdue customer account is reset to a normal status and managed together with other similar accounts. Restructuring policies and practices are based on indicators or criteria which, in the judgement of management, indicate that payment will most likely continue. These policies are kept under continuous review. Renegotiated loans that would otherwise be past due or impaired totalled GBPnil (2021: GBPnil).
(c) Collateral held
Collateral is measured at fair value less costs to sell. Most of the loans are secured by property. The fair value of the collateral held against loans and advances in Stage 3 is GBP69.2m (2021: GBP42.6m), against loans of GBP50.3m (2021: GBP38.3m). The weighted average loan-to-value of loans and advances in Stage 3 is 73% (2021: 73%).
25. Allowances for impairment of loans
and advances
An analysis of movements in the allowance
for ECLs (2022):
Stage Stage Stage
1 2 3 Total
Group GBP000 GBP000 GBP000 GBP000
------ ------ ------- -------
At 1 January 2022 388 77 5,922 6,387
------ ------ ------- -------
Transfer to Stage 1 15 (15) - -
Transfer to Stage 2 (57) 57 - -
Transfer to Stage 3 (8) (70) 78 -
Current year charge 208 18 4,080 4,306
Change in assumptions 601 63 218 882
Repayments and write-offs - - (4,974) (4,974)
------ ------ ------- -------
At 31 December 2022 1,147 130 5,324 6,601
------ ------ ------- -------
An analysis of movements in the allowance
for ECLs (2021):
Stage Stage Stage
1 2 3 Total
Group GBP000 GBP000 GBP000 GBP000
------ ------ ------ ------
At 1 January 2021 725 533 3,370 4,628
------ ------ ------ ------
Transfer to Stage 1 4 (4) - -
Transfer to Stage 2 (13) 13 - -
Transfer to Stage 3 (15) (82) 97 -
Current year charge 194 (49) 3,506 3,651
Adjustment due to variation in expected
future cash flows (142) (280) 65 (357)
Change in assumptions (191) (43) (106) (340)
Financial assets that have been derecognised - - (230) (230)
Repayments and write-offs (174) (11) (780) (965)
------ ------ ------ ------
At 31 December 2021 388 77 5,922 6,387
------ ------ ------ ------
26. Other assets
2022 2021
Group GBP000 GBP000
------------------------------- ------ -------
Trade receivables 14,160 13,098
Inventory 29,210 88,787
Prepayments and accrued income 8,815 8,234
52,185 110,119
------------------------------- ------ -------
Trade receivables
Gross balance 14,506 13,893
Allowance for bad debts (346) (795)
------------------------------- ------ -------
Net receivables 14,160 13,098
------------------------------- ------ -------
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.
Pinnacle Universal is a special purpose vehicle, 100% owned by the Bank, which owns land that is currently in the process of being redeveloped with a view to selling off as individual residential plots.
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.
In 2019 a property in Spain and in 2020 a property in France, held as collateral on loans, were repossessed. The Group's intention is to develop and sell the properties and have therefore been recognised as inventory. The value of inventory for repossessed collateral at 31 December 2022 is GBP9.4m (2021: GBP16.7m).
In 2019 two properties were reclassified from investment property to inventory due to being under development with a view to sell. The Group has sold its King Street property in 2022. At 31 December 2022 the remaining property was valued at cost of GBP10.2m (2021: the two properties valued at cost of GBP70.6m).
2022 2021
Company GBP000 GBP000
------------------------------- ------ ------
Prepayments and accrued income 74 52
------------------------------- ------ ------
74 52
------------------------------- ------ ------
27. Financial investments
2022 2021
Group GBP000 GBP000
------------------------------------------------------------ ------ ------
Designated at fair value through profit and loss
- Debt securities - 124
Designated at fair value through other comprehensive income
- Unlisted securities 3,404 3,045
------------------------------------------------------------ ------ ------
Total financial investments 3,404 3,169
------------------------------------------------------------ ------ ------
Unlisted securities
On 23 June 2016 Arbuthnot Latham received EUR1.3m cash consideration following Visa Inc.'s completion of the acquisition of Visa Europe. As part of the deal Arbuthnot Latham also received preference shares in Visa Inc., these have been valued at their future conversion value into Visa Inc. common stock.
During 2020, as part of the fourth anniversary of the closing of the Visa Europe transaction, an assessment was performed of the ongoing risk of liability to Visa. As part of the adjustment, Visa awarded the Group 59 preference shares with a carrying value of GBP920k. In 2022 Visa awarded the Group extra 28 preference shares with a carrying value of GBP501k. These can be automatically converted into freely tradeable Class A common stock.
Management have assessed the sum of the fair value of the Group's investment as GBP2.0m (2021: GBP1.6m). This valuation includes a 31% haircut on the original preference shares.
The Group has designated its investment in the security as FVOCI. Dividends received during the year amounted to GBPNil (2021: GBPNil).
A further investment in an unlisted investment vehicle was made in 2022. The carrying value at year end is GBP1.4m (2021: GBP1.4m) and the Group received a distribution of GBP0.6m (2021: GBPNil) which included a gain of GBP0.5m (2021: GBPNil) in the year.
All unlisted securities have been designated as FVOCI as they are held for strategic reasons. These securities are measured at fair value in the Statement of Financial Position with fair value gains/losses recognised in OCI.
28. Deferred taxation
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.
The deferred tax asset comprises:
2022 2021
Group GBP000 GBP000
----------------------------------------------------------- ------- -------
Accelerated capital allowances and other short-term timing
differences (2,196) 37
Movement in fair value of financial investments FVOCI (209) (152)
Unutilised tax losses 4,567 2,369
IFRS 9 adjustment* 263 308
----------------------------------------------------------- ------- -------
Deferred tax asset 2,425 2,562
----------------------------------------------------------- ------- -------
At 1 January 2,562 1,009
On acquisition of AAG - (1,315)
Other Comprehensive Income - FVOCI (57) (35)
Profit and loss account - accelerated capital allowances
and other short-term timing differences (2,233) 1,923
Profit and loss account - tax losses 2,198 945
IFRS 9 adjustment* (45) 35
----------------------------------------------------------- ------- -------
Deferred tax asset at 31 December 2,425 2,562
----------------------------------------------------------- ------- -------
* This relates to the timing difference on the adoption
of IFRS 9 spread over 10 years for tax purposes.
2022 2021
Company GBP000 GBP000
----------------------------------------------------------- ------ ------
Accelerated capital allowances and other short-term timing
differences 10 10
Movement in fair value of financial investments 147 147
Unutilised tax losses 366 366
----------------------------------------------------------- ------ ------
Deferred tax asset 523 523
----------------------------------------------------------- ------ ------
At 1 January 523 395
Profit and loss account - accelerated capital allowances
and other short-term timing differences - 40
Profit and loss account - tax losses - 88
----------------------------------------------------------- ------ ------
Deferred tax asset at 31 December 523 523
----------------------------------------------------------- ------ ------
Deferred tax assets are recognised for tax losses to the extent that the realisation of the related tax benefit through future taxable profits is probable.
29. 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 at the date of acquisition. Goodwill on acquisitions of subsidiaries 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 a straight line basis over the expected useful lives (three to fifteen 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.
During the year the company developed software for customer relationship management. Relevant costs have been capitalised accordingly and will be amortised across its useful economic life.
(c) Other intangibles
Other intangibles include trademarks, customer relationships, broker relationships, technology and banking licences acquired. These costs are amortised on a straight line basis over the expected useful lives (three to fourteen years).
Computer Other
Goodwill software intangibles Total
Group GBP000 GBP000 GBP000 GBP000
-------- --------- ------------ --------
Cost
At 1 January 2021 5,202 25,386 2,562 33,150
On acquisition of AAG - - 4,416 4,416
Additions - 5,100 - 5,100
-------- --------- ------------ --------
At 31 December 2021 5,202 30,486 6,978 42,666
-------- --------- ------------ --------
Additions - 6,524 6,524
Disposals - - (687) (687)
At 31 December 2022 5,202 37,010 6,291 48,503
-------- --------- ------------ --------
Accumulated amortisation
At 1 January 2021 - (8,388) (1,116) (9,504)
Amortisation charge - (2,715) (583) (3,298)
-------- --------- ------------ --------
At 31 December 2021 - (11,103) (1,699) (12,802)
-------- --------- ------------ --------
Amortisation charge - (2,964) (188) (3,152)
At 31 December 2022 - (14,067) (1,887) (15,954)
-------- --------- ------------ --------
Net book amount
-------- --------- ------------ --------
At 31 December 2021 5,202 19,383 5,279 29,864
-------- --------- ------------ --------
At 31 December 2022 5,202 22,943 4,404 32,549
-------- --------- ------------ --------
Significant management judgements are made in estimations, to evaluate whether an impairment of goodwill is necessary. Impairment testing is performed at CGU level and the following two items, with judgements surrounding them, have a significant impact on the estimations used in determining the necessity of an impairment charge:
-- Future cash flows - Cash flow forecasts reflect management's view of future business forecasts at the time of the assessment. A detailed three year budget is done every year and management also uses judgement in applying a growth rate. The accuracy of future cash flows is subject to a high degree of uncertainty in volatile market conditions. During such conditions, management would perform impairment testing more frequently than annually to ensure that the assumptions applied are still valid in the current market conditions.
-- Discount rate - Management also apply judgement in determining the discount rate used to discount future expected cash flows. The discount rate is derived from the cost of capital for each CGU.
The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. There are currently two CGUs (2021: two) with goodwill attached; the core Arbuthnot Latham CGU (GBP1.7m) and RAF CGU (GBP3.5m).
Management considers the value in use for the Arbuthnot Latham CGU to be the discounted cash flows over 3 years with a terminal value (2021: 3 years with a terminal value). The 3 year discounted cash flows with a terminal value are considered to be appropriate as the goodwill relates to an ongoing well established business and not underlying assets with finite lives. The terminal value is calculated by applying a discounted perpetual growth model to the profit expected in 2024 as per the approved 3 year plan. A growth rate of 3.1% (2021: 3.6%) was used for income and 8.1% (2021: 4.5%) for expenditure from 2023 to 2025 (these rates were the best estimate of future forecasted performance), while a 3% (2021: 3%) percent growth rate for income and expenditure (a more conservative approach was taken for latter years as these were not budgeted for in detail as per the three year plan approved by the Board of Directors) was used for cash flows after the approved 3 year plan.
Management considers the value in use for the RAF CGU to be the discounted cash flows over 3 years with a terminal value. The 3 year discounted cash flows with a terminal value are considered to be appropriate as the goodwill relates to an ongoing, well established, business and not underlying assets with finite lives. The terminal value is calculated by applying a discounted perpetual growth model to the profit expected in 2024 as per the approved budget. A growth rate of 3% (2021: 3%) was used (this rate was the best estimate of future forecasted performance).
The growth rates used are conservative and below the forecast UK growth rate of 2.5% (forecast baseline average for the following 5 years).
Cash flows were discounted at a pre-tax rate of 14.7% (2021: 12%) to their net present value. The discount rate of 14.7% is considered to be appropriate after evaluating current market assessments of the time value of money and the risks specific to the assets or CGUs.
Currently, the value in use and fair value less costs to sell of both CGUs exceed the carrying values of the associated goodwill and as a result no sensitivity analysis was performed.
Computer
software
Company GBP000
---------
Cost
At 1 January 2021 7
At 31 December 2021 7
---------
At 31 December 2022 7
---------
Accumulated amortisation
At 1 January 2021 (3)
Amortisation charge (2)
At 31 December 2021 (5)
---------
Amortisation charge (1)
At 31 December 2022 (6)
---------
Net book amount
---------
At 31 December 2021 2
---------
At 31 December 2022 1
---------
30. 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 Commercial vehicles 2 to 7 years Plant and machinery 5 years Computer and other equipment 3 to 10 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.
Commercial vehicles are subject to operating leases. The other assets are owned and used by the Group.
Computer
Leasehold Commercial Plant and other Motor
improvements vehicles and machinery equipment Vehicles Total
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------- ---------- -------------- ---------- --------- --------
Cost or valuation
At 1 January 2021 7,433 - - 5,550 91 13,074
On acquisition of AAG 228 136,418 37 110 193 136,986
Additions 248 35,228 9 398 47 35,930
Disposals (253) (47,362) - (319) (8) (47,942)
Transfer - 33 (33) - - -
------------- ---------- -------------- ---------- --------- --------
At 31 December 2021 7,656 124,317 13 5,739 323 138,048
------------- ---------- -------------- ---------- --------- --------
Additions 92 115,170 - 507 467 116,236
Disposals - (28,918) - - (167) (29,085)
At 31 December 2022 7,748 210,569 13 6,246 623 225,199
------------- ---------- -------------- ---------- --------- --------
Accumulated depreciation
At 1 January 2021 (4,462) - - (3,647) (60) (8,169)
Depreciation charge (753) (30,487) (10) (957) (95) (32,302)
Disposals 253 27,735 7 318 28,313
Transfer (2) 2 -
---------- -------------- ---------- --------- --------
At 31 December 2021 (4,962) (2,754) (1) (4,286) (155) (12,158)
------------- ---------- -------------- ---------- --------- --------
Depreciation charge (825) (36,885) (8) (848) (118) (38,684)
Disposals - 808 - - 108 916
At 31 December 2022 (5,787) (38,831) (9) (5,134) (165) (49,926)
------------- ---------- -------------- ---------- --------- --------
Net book amount
---------- -------------- ---------- --------- --------
At 31 December 2021 2,694 121,563 12 1,453 168 125,890
------------- ---------- -------------- ---------- --------- --------
At 31 December 2022 1,961 171,738 4 1,112 458 175,273
------------- ---------- -------------- ---------- --------- --------
Computer
and other Motor
equipment Vehicles Total
Company GBP000 GBP000 GBP000
------------------------- ---------- --------- ------
Cost or valuation
At 1 January 2021 217 91 308
At 31 December 2021 217 91 308
---------- --------- ------
Additions 1 - 1
At 31 December 2022 218 91 309
---------- --------- ------
Accumulated depreciation
At 1 January 2021 (87) (60) (147)
Depreciation charge (1) (22) (23)
At 31 December 2021 (88) (82) (170)
---------- --------- ------
Depreciation charge - (9) (9)
At 31 December 2022 (88) (91) (179)
---------- --------- ------
Net book amount
------------------------- ---------- --------- ------
At 31 December 2021 129 9 138
------------------------- ---------- --------- ------
At 31 December 2022 130 - 130
---------- --------- ------
Minimum lease payments receivable under operating and contract
hire leases fall due as follows:
2022 2021
Group GBP000 GBP000
Maturity analysis for operating lease receivables:
- No later than 1 year 35,848 25,675
- Later than 1 year and no later than 5 years 46,583 25,439
- Later than 5 years 1,095 476
83,526 51,590
31. Right-of-use assets
At inception or on reassessment of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Group assesses whether:
-- the contract involves the use of an identified asset. This may be specified explicitly or implicitly, and should be physically distinct or represent substantially all of the capacity of a physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified;
-- the Group has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use; and
-- the Group has the right to direct the use of the asset. The Group has this right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used.
At inception or on reassessment of a contract that contains a lease component, the Group allocates the consideration in the contract to each lease component on the basis of their relative stand-alone prices.
(a) As a lessee
The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore it or its site, less any lease incentives received.
The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.
Practical exemptions
The Group has elected not to recognise right-of-use assets and lease liabilities for short-term leases of machinery that have a lease term of 12 months or less and leases of low value assets. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.
(b) 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.
Breakdown of right-of-use assets:
Investment
property Properties Equipment Total
Group GBP000 GBP000 GBP000 GBP000
--------------- ------------- ----------- ---------
At 1 January 2021 - 17,430 273 17,703
Additions - 738 77 815
Amortisation - (2,652) (192) (2,844)
At 31 December 2021 - 15,516 158 15,674
--------------- ------------- ----------- ---------
Additions - 1,254 365 1,619
Amortisation - (2,565) 323 (2,242)
Derecognition - (6,796) (543) (7,337)
--------------- ------------- ----------- ---------
At 31 December 2022 - 7,409 303 7,714
--------------- ------------- ----------- ---------
In the year, the Group received GBPNil (2021: GBPNil) of rental income
from subleasing right-of-use assets through operating leases.
The Group recognised GBP0.7m (2021: GBP0.8m) of interest expense related
to lease liabilities. The Group also recognised GBP0.6m (2021: GBP0.6m)
of expense in relation to leases with a duration of less than 12 months.
32. 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.
2022 2021
Group GBP000 GBP000
------ ------
Opening balance 6,550 6,550
At 31 December 2022 6,550 6,550
------ ------
Crescent Office Park, Bath
The property represents a freehold office building in Bath and comprises 25,528 square ft. over ground and two upper floors with parking spaces. The property was acquired for GBP6.35m. On the date of acquisition, the property was being multi-let to tenants and was at full capacity.
The Group has elected to apply the fair value model (see Note 4.1 (c)).
The Group recognised GBP0.5m (2021: GBP0.3m) rental income during the year and incurred GBP0.07m (2021: GBP0.08m) of direct operating expenses. The property remained tenanted during 2022.
33. Deposits from banks
2022 2021
Group GBP000 GBP000
------------------------------------------------ -------------- --------------
236,027 240,333
------------------------------------------------ -------------- --------------
Deposits from banks include GBP225m (2021: GBP225m) obtained through the
Bank of England Term Funding Scheme with additional incentives for small
and medium-sized enterprises ("TFSME"). For a maturity profile of deposits
from banks, refer to Note 6.
34. Deposits from customers
2022 2021
Group GBP000 GBP000
---------------------------- --------- ---------
Current/demand accounts 1,924,035 1,859,417
Notice accounts 296,400 309,488
Term deposits 872,114 668,964
---------------------------- --------- ---------
3,092,549 2,837,869
---------------------------- --------- ---------
Included in customer accounts are deposits of GBP15.4m (2021: GBP14.7m) held as collateral for loans and advances. The fair value of these deposits approximates their carrying value.
For a maturity profile of deposits from customers, refer to Note 6.
35. Other liabilities
2022 2021
Group GBP000 GBP000
Trade payables 4,954 5,079
Other creditors - 2,027
Accruals and deferred income 21,190 14,048
26,144 21,154
2022 2021
Company GBP000 GBP000
------------------------------- ------ ------
Trade payables 470 234
Due to subsidiary undertakings - 1,256
Accruals and deferred income 3,021 1,652
------------------------------- ------ ------
3,491 3,142
------------------------------- ------ ------
36. Lease liabilities
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. Primarily, the Group uses its incremental borrowing rate as the discount rate.
Lease payments included in the measurement of the lease liability comprise the following:
-- fixed payments, including in-substance payments;
-- variable lease payments that depend on an index or a rate, initially measured using the index or rates as at the commencement date;
-- amounts expected to be payable under a residual value guarantee.
The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in index or rate, if there is a change in the Group's estimate of the amount expected to be payable under a residual value guarantee.
When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in the statement of comprehensive income if the carrying amount of the right-of-use asset has been reduced to zero.
Properties Equipment Total
Group GBP000 GBP000 GBP000
---------- --------- -------
At 1 January 2021 18,070 235 18,305
Additions 725 5,139 5,864
Interest expense 807 9 816
Lease payments (3,503) (206) (3,709)
---------- --------- -------
At 31 December 2021 16,099 5,177 21,276
---------- --------- -------
Additions 848 186 1,034
Interest expense 709 9 718
Lease payments (3,089) (5,087) (8,176)
Derecognition (6,980) - (6,980)
---------- --------- -------
At 31 December 2022 7,587 285 7,872
---------- --------- -------
Maturity analysis
2022 2021
Group GBP000 GBP000
---------- --------- -------
Less than one year 3,675 6,669
One to five years 3,502 8,592
More than five years 8,560 57,893
---------- --------- -------
Total undiscounted lease liabilities at 31 December 15,737 73,153
--------- -------
Lease liabilities included in the statement
of financial position at 31 December 7,872 21,276
--------- -------
Current 3,398 5,802
Non-current 4,474 15,474
---------- --------- -------
37. Debt securities in issue
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.
Financial liabilities, other than trading liabilities at fair value, are carried at amortised cost using the effective interest rate method as set out in the policy in Note 8.
2022 2021
Group and Company GBP000 GBP000
------------------------ ------ ------
Subordinated loan notes 37,594 36,772
------------------------ ------ ------
Euro subordinated loan notes
The subordinated loan notes 2035 were issued on 7 November 2005 and are denominated in Euros. The principal amount outstanding at 31 December 2022 was EUR15,000,000 ((2021: EUR15,000,000). The notes carry interest at 3% over the interbank rate for three month deposits in euros and are repayable at par in August 2035 unless redeemed or repurchased earlier by the Company.
The contractual undiscounted amount that will be required to be paid at maturity of the above debt securities is EUR15,000,000.
Given the fact that the Company has never been subject to a published credit rating by any of the relevant agencies and the notes in issue are not quoted, it is not considered possible to approximate a fair value for these notes.
Subordinated loan notes
The subordinated loan notes were issued on 3 June 2019 are denominated in Pounds Sterling. The principal amount outstanding at 31 December 2022 was GBP25,000,000 (2021: GBP25,000,000). The notes carry interest at 7.75% over the three month GBP ICE Synthetic LIBOR rate and are repayable at par in June 2029 unless redeemed or repurchases earlier by the Company.
With the discontinuation of LIBOR the rate charged will reference SONIA from reference dates post 31 March 2023.
The contractual undiscounted amount that will be required to be paid at maturity of the above debit securities is GBP25,000,000.
Given the fact that the Company has never been subject to a published credit rating by any of the relevant agencies and the notes in issue are not quoted, it is not considered possible to approximate a fair value for these notes.
38. Contingent liabilities and commitments
Financial guarantees and loan commitments policy
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.
Provisions and contingent liabilities policy
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.
Contingent liabilities
The Group is subject to extensive regulation in the conduct of its business. A failure to comply with applicable regulations could result in regulatory investigations, fines and restrictions on some of the Group's business activities or other sanctions. The Group seeks to minimise this risk through the adoption and compliance with policies and procedures, continuing to refine controls over business practices and behaviour, employee training, the use of appropriate documentation, and the involvement of outside legal counsel where appropriate.
Capital commitments
At 31 December 2022, the Group had capital commitments of GBP0.5m (2021: GBP0.5m) in respect of a contribution in an equity investment.
Credit commitments
The contractual amounts of the Group's off-balance sheet financial instruments that commit it to extend credit to customers are as follows:
2022 2021
Group GBP000 GBP000
Guarantees and other contingent liabilities 3,253 4,560
Commitments to extend credit:
- Original term to maturity of one year or less 471,078 464,390
474,331 468,950
39. Share capital
Ordinary share capital
Number Share
of Capital
shares
Group and Company GBP000
--------
At 1 January 2021 15,279,322 153
At 31 December 2021 & 2022 15,279,322 153
Ordinary non-voting share capital
Number Share
of Capital
shares
Group and Company GBP000
--------
At 1 January 2021 152,621 1
At 31 December 2021 & 2022 152,621 1
Total share capital
Number Share
of Capital
shares
Group and Company GBP000
--------
At 1 January 2021 15,431,943 154
At 31 December 2021 & 2022 15,431,943 154
(a) Share issue costs
Incremental costs directly attributable to the issue of new shares or options by Company 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.
The Ordinary shares have a par value of 1p per share (2021: 1p per share). At 31 December 2022 the Company held 409,314 shares (2021: 409,314) in treasury. This includes 390,274 (2021: 390,274) Ordinary shares and 19,040 (2021: 19,040) Ordinary Non-Voting shares.
40. Reserves and retained earnings
2022 2021
Group GBP000 GBP000
----------------------------------- ------- -------
Capital redemption reserve 19 19
Fair value reserve 1,067 979
Treasury shares (1,299) (1,299)
Retained earnings 212,037 201,026
----------------------------------- ------- -------
Total reserves at 31 December 211,824 200,725
----------------------------------- ------- -------
The capital redemption reserve represents a reserve created after the Company purchased its own shares which resulted in a reduction of share capital.
The fair value reserve relates to gains or losses on assets which have been recognised through other comprehensive income.
2022 2021
Company GBP000 GBP000
------------------------------ ------- -------
Capital redemption reserve 19 19
Treasury shares (1,299) (1,299)
Retained earnings 152,115 153,528
------------------------------ ------- -------
Total reserves as 31 December 150,835 152,248
------------------------------ ------- -------
41. Share-based payment options
Company - cash settled
Grants were made to Messrs Salmon and Cobb 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 and Mr. Cobb were granted a phantom option to acquire 200,000 and 100,000 ordinary 1p shares respectively in the Company. The fair value of these options at the grant date was GBP1m. The first tranche of the share options has vested, but will lapse if not exercised at 1591p before 14 June 2023. The second tranche of the share options will not vest as the performance conditions have not been met, due to the non payment of dividends. The first tranche of share options remained outstanding at 31 December 2022. The valuation of the share options are considered as level 2 within the fair value hierarchy, with the Group adopting a Black-Scholes valuation model 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 the options as at 31 December 2022 was GBPNil (2021: GBP0.03m).
On 23 July 2021 Mr. Salmon and Mr. Cobb were granted further phantom options to subscribe for 200,000 and 100,000 ordinary 1p shares respectively in the Company at 990p. 50% of each director's individual holding of phantom options is exercisable at any time after 23 July 2023 and the other 50% is exercisable at any time after 23 July 2026. All share options awarded 23 July 2021, regardless of first exercise date, may not be exercised later than 23 July 2028 being the day before the seventh anniversary of the date of grant. The fair value of the options as at 31 December 2022 was GBP0.13m (2021: GBP0.09m).
The performance conditions of the Scheme are that for the duration of the vesting period, the dividends paid by ABG must have increased in percentage terms when compared to an assumed dividend of 29p per share in respect of the financial year ending 31 December 2016, by a minimum of the increase in the Retail Prices Index during that period.
Also from the grant date to the date the Option is exercised, there must be no public criticism by any regulatory authority on the operation of ABG or any of its subsidiaries which has a material impact on the business of ABG.
Options are forfeited if they remain unexercised after a period of more than 7 years from the date of grant. If the participant ceases to be employed by the Group by reason of injury, disability, ill-health or redundancy; or because his employing company ceases to be a shareholder of the Group; or because his employing business is being transferred out of the Group, his option may be exercised within 6 months after such cessation. In the event of the death of a participant, the personal representatives of a participant may exercise an option, to the extent exercisable at the date of death, within 6 months after the death of the participant.
On cessation of employment for any other reason (or when a participant serves, or has been served with, notice of termination of such employment), the option will lapse although the Remuneration Committee has discretion to allow the exercise of the option for a period not exceeding 6 months from the date of such cessation.
In such circumstances, the performance conditions may be modified or waived as the Remuneration Committee, acting fairly and reasonably and taking due consideration of the circumstances, thinks fit. The number of Ordinary Shares which can be acquired on exercise will be pro-rated on a time elapsed basis, unless the Remuneration Committee, acting fairly and reasonably and taking due consideration of the circumstances, decides otherwise. In determining whether to exercise its discretion in these respects, the Remuneration Committee must satisfy itself that the early exercise of an option does not constitute a reward for failure.
The probability of payout has been assigned based on the likelihood of meeting the performance criteria, which is 100%. The Directors consider that there is some uncertainty surrounding whether the participants will all still be in situ and eligible at the vesting date. Therefore the directors have assumed a 15% attrition rate for the share options vesting in June 2021, July 2023 and July 2026. The attrition rate will increase by 3% per year until the vesting date. ABG had a cost GBP0.02m in relation to share based payments during 2022 (2021: GBP0.01m income), as disclosed in Note 14.
Measurement inputs and assumptions used in the Black-Scholes model are
as follows:
2022 2021
-------- --------
Expected Stock Price Volatility 33.6% 35.4%
Risk Free Interest Rate 2.5% 0.5%
Average Expected Life (in years) 1.36 2.03
42. Dividends per share
The Directors recommend the payment of a final dividend of 25p (2021: 22p) per share. This represents total dividends for the year of 42p (2021: 59p). The final dividend, if approved by members at the 2023 AGM, will be paid on 2 June 2023 to shareholders on the register at close of business on 21 April 2023.
43. 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.
2022 2021
Group GBP000 GBP000
--------------------------------------------- ------- -------
Cash and balances at central banks (Note 18) 732,729 814,692
Loans and advances to banks (Note 19) 115,787 73,444
--------------------------------------------- ------- -------
848,516 888,136
--------------------------------------------- ------- -------
2022 2021
Company GBP000 GBP000
--------------------------------------------- ------- -------
Loans and advances to banks 8,434 7,587
--------------------------------------------- ------- -------
44. Related party transactions
Related parties of the Company and Group include subsidiaries, directors, Key Management Personnel, close family members of Key Management Personnel and entities which are controlled, jointly controlled or significantly influenced, or for which significant voting power is held, by Key Management Personnel or their close family members.
A number of banking transactions are entered into with related parties in the normal course of business on normal commercial terms. These include loans and deposits. Directors and Key Management includes solely Executive and Non-Executive Directors.
2022 2021
Group - Directors and close family members GBP000 GBP000
------------------------------------------- ------ ------
Loans
Loans outstanding at 1 January 502 502
Loans advanced during the year 1,013 39
Loan repayments during the year (106) (39)
Loans outstanding at 31 December 1,409 502
Interest income earned 2 1
------------------------------------------- ------ ------
The loans to directors are mainly secured on property, shares or cash and bear interest at rates linked to base rate. No provisions have been recognised in respect of loans given to related parties (2021: GBPnil).
2022 2021
Group - Directors and close family members GBP000 GBP000
------------------------------------------- ------- -------
Deposits
Deposits at 1 January 4,018 3,928
Deposits placed during the year 6,707 1,709
Deposits repaid during the year (6,303) (1,619)
Deposits at 31 December 4,422 4,018
Interest expense on deposits 2 -
------------------------------------------- ------- -------
Details of directors' remuneration are given in the Remuneration Report on pages 53 and 54. The Directors do not believe that there were any other transactions with key management or their close family members that require disclosure.
Details of principal subsidiaries are given in Note 45. Transactions and
balances with subsidiaries are shown below:
2022 2021
Highest Balance Highest Balance
balance at 31 December balance at 31 December
during during
the year the year
GBP000 GBP000 GBP000 GBP000
ASSETS
Due from subsidiary undertakings - Loans
and advances to banks 8,429 8,427 30,879 7,581
Due from subsidiary undertakings - Debt
securities at amortised cost 24,885 24,437 24,688 24,367
Shares in subsidiary undertakings 159,404 159,354 159,404 159,404
192,718 192,218 214,971 191,352
Interest income 5 22
LIABILITIES
Due to subsidiary undertakings 776 243 2,334 1,256
776 243 2,334 1,256
Interest expense 369 331
The disclosure of the year end balance and the highest balance during the year is considered the most meaningful information to represent the transactions during the year. The above transactions arose during the normal course of business and are on substantially the same terms as for comparable transactions with third parties.
The Company undertook the following transactions with other companies
in the Group during the year:
2022 2021
GBP000 GBP000
Arbuthnot Latham & Co., Ltd - Recharge of property and
IT costs 896 891
Arbuthnot Latham & Co., Ltd - Recharge for costs paid
on the Company's behalf 1,127 364
Arbuthnot Latham & Co., Ltd - Recharge of costs paid
on behalf of Arbuthnot Latham & Co., Ltd (675) (2,792)
Arbuthnot Latham & Co., Ltd - Group recharges for shared
services (6,993) (5,560)
Arbuthnot Latham & Co., Ltd - Group recharges for liquidity (5,862) (5,073)
Total (11,507) (12,170)
45. Interests in subsidiaries
Investment Impairment
at cost provisions Net
Company GBP000 GBP000 GBP000
---------- ----------- -------
At 1 January 2022 159,404 - 159,404
Receipt on dissolution of Peoples Trust & Savings
PLC (50) - (50)
---------- ----------- -------
At 31 December 2022 159,354 - 159,354
---------- ----------- -------
2022 2021
Company GBP000 GBP000
------------------------- ------- -------
Subsidiary undertakings:
Bank 157,814 157,814
Other 1,540 1,590
------------------------- ------- -------
Total 159,354 159,404
------------------------- ------- -------
(a) List of subsidiaries
Arbuthnot Latham & Co., Limited is the only significant subsidiary of Arbuthnot Banking Group. Arbuthnot Latham is incorporated in the United Kingdom, has a principal activity of Private and Commercial Banking and is 100% owned by the Group.
The table below provides details of other subsidiaries of Arbuthnot Banking
Group PLC at 31 December 2022:
Country
% shareholding of incorporation Principal activity
Direct shareholding
Arbuthnot Fund Managers Limited 100.0% UK Dormant
Arbuthnot Investments Limited 100.0% UK Dormant
Arbuthnot Limited 100.0% UK Dormant
Arbuthnot Properties Limited 100.0% UK Dormant
Arbuthnot Unit Trust Management 100.0% UK
Limited Dormant
Gilliat Financial Solutions Limited 100.0% UK Dormant
Indirect shareholding via intermediate holding
companies
Arbuthnot Commercial Asset Based 100.0% UK
Lending Limited Asset Finance
Arbuthnot Latham (Nominees) Limited 100.0% UK Dormant
Arbuthnot Latham Real Estate PropCo 100.0% Jersey
1 Limited Property Investment
Arbuthnot Securities Limited 100.0% UK Dormant
Arbuthnot Specialist Finance Limited 100.0% UK Specialist Finance
100.0% UK Commercial Vehicle
Asset Alliance Finance Limited** Financing
Asset Alliance Group Finance No.2 100.0% UK Commercial Vehicle
Limited** Financing
100.0% UK Commercial Vehicle
Asset Alliance Group Holdings Limited** Financing
100.0% UK Commercial Vehicle
Asset Alliance Leasing Limited** Financing
100.0% UK Commercial Vehicle
Asset Alliance Limited** Financing
ATE Truck & Trailer Sales Limited** 100.0% UK Dormant
100.0% UK Commercial Vehicle
Forest Asset Finance Limited** Financing
Hanbury Riverside Limited** 100.0% UK Dormant
John K Gilliat & Co., Limited 100.0% UK Dormant
Pinnacle Universal Limited 100.0% UK Property Development
Renaissance Asset Finance Limited 100.0% UK Asset Finance
AAG Traffic Management Limited** 100.0% UK Dormant
The Peacocks Management Company 100.0% UK
Limited*** Property Management
Valley Finance Limited** 100.0% UK Dormant
* On 22 February 2022, Arbuthnot Latham Real Estate Holdings Limited was dissolved.
**Entities acquired as part of the Asset Alliance Group acquisition on 1 April 2021.
***The Peacocks Management Company Limited was incorporated on 2 November 2022 as a subsidiary of Pinnacle Universal Limited.
The following Jersey entities were dissolved during the prior year:
-- Arbuthnot Real Estate Investors Limited - dissolved 19 March 2021 -- Arbuthnot Latham Real Estate Holdco Limited - dissolved 23 April 2021 -- Arbuthnot Real Estate Investors GP 1 Limited - dissolved 30 April 2021 -- Arbuthnot Real Estate Investors Funds 1 LP - dissolved 4 May 2021
The following entities were dissolved during the current year:
-- Pinnacle Universal Limited's (BVI) was dissolved on 7 June 2022 -- Peoples Trust and Savings PLC was dissolved on 22 September 2022.
All the subsidiaries above were 100% owned during the current and prior year and are unlisted and none are banking institutions. All entities are included in the consolidated financial statements and have an accounting reference date of 31 December.
The Jersey entity's registered office is 26 New Street, St Helier, Jersey, JE2 3RA. All other entities listed above have their registered office as 7 Wilson Street, London, EC2M 2SN.
(b) Non-controlling interests in subsidiaries
There were no non-controlling interests at the end of 2022 or 2021.
(c) Significant restrictions
The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities other than those resulting from the supervisory frameworks within which banking subsidiaries operate. The supervisory frameworks require banking subsidiaries to keep certain levels of regulatory capital and liquid assets, limit their exposure to other parts of the Group and comply with other ratios. The carrying amounts of the banking subsidiary's assets and liabilities are GBP3.6bn and GBP3.4bn respectively (2021: GBP3.4bn and GBP3.2bn respectively).
(d) Risks associated with interests
During the year Arbuthnot Banking Group PLC did not make capital contributions to Arbuthnot Latham & Co., Ltd. In 2021 Arbuthnot Banking Group PLC made GBP25.5m capital contributions to Arbuthnot Latham & Co., Ltd. The contributions were made to assist the Bank during a period of growth to ensure that all regulatory capital requirements were met.
46. Operating segments
The Group is organised into nine operating segments as disclosed below:
1) Banking - Includes Private and Commercial Banking. Private Banking - Provides traditional private banking services. Commercial Banking - Provides bespoke commercial banking services and tailored secured lending against property investments and other assets.
2) Wealth Management - Offering financial planning and investment management services.
3) Mortgage Portfolios - Acquired mortgage portfolios.
4) RAF - Specialist asset finance lender mainly in high value cars but also business assets.
5) ACABL - Provides finance secured on either invoices, assets or stock of the borrower.
6) ASFL - Provides short term secured lending solutions to professional and entrepreneurial property investors.
7) AAG - Provides vehicle finance and related services, predominantly in the truck & trailer and bus & coach markets.
8) All Other Divisions - All other smaller divisions and central costs in Arbuthnot Latham & Co., Ltd (Investment property and Central costs)
9) Group Centre - ABG Group management.
Transactions between the operating segments are on normal commercial terms. Centrally incurred expenses are charged to operating segments on an appropriate pro-rata basis. Segment assets and liabilities comprise loans and advances to customers and customer deposits, being the majority of the balance sheet.
Wealth Mortgage All Other Group
Banking Management Portfolios RAF ACABL ASFL AAG Divisions Centre Total
Year ended 31 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
December
2022
Interest
revenue 70,545 - 7,333 8,898 14,665 1,068 664 16,840 5 120,018
Inter-segment
revenue - - - - - - - - (5) (5)
Interest
revenue from
external
customers 70,545 - 7,333 8,898 14,665 1,068 664 16,840 - 120,013
Fee and
commission
income 3,138 10,689 - 32 6,178 10 - 1,539 - 21,586
Revenue - - - - - - 99,367 - - 99,367
Revenue from
external
customers 73,683 10,689 7,333 8,930 20,843 1,078 100,031 18,379 - 240,966
Interest
expense (5,980) - (2,223) (3,353) (7,903) (355) (5,120) 7,153 (368) (18,149)
Cost of goods
sold - - - - - - (82,109) - - (82,109)
Add back
inter-segment
revenue - - - - - - - - 5 5
Subordinated
loan note
interest (2,788) (2,788)
Fee and
commission
expense (335) - - - (202) - - - - (537)
Segment
operating
income 67,368 10,689 5,110 5,577 12,738 723 12,802 25,532 (3,151) 137,388
Impairment
losses (1,547) - (415) (768) (2,082) (179) (369) (143) - (5,503)
Other income - - - 82 - - - 2,385 (840) 1,627
Operating
expenses (46,683) (14,790) (935) (4,697) (5,463) (1,489) (14,507) (16,074) (8,865) (113,503)
Segment profit
/ (loss)
before tax 19,138 (4,101) 3,760 194 5,193 (945) (2,074) 11,700 (12,856) 20,009
Income tax
(expense)
/ income - - - 23 (989) 236 (1,016) (401) (1,404) (3,551)
Segment profit
/ (loss)
after tax 19,138 (4,101) 3,760 217 4,204 (709) (3,090) 11,299 (14,260) 16,458
Loans and
advances
to customers 1,452,649 - 148,517 133,825 268,825 14,869 17,392 11,500 (11,500) 2,036,077
Assets
available for
lease - - - - - - 171,738 - - 171,738
Other assets - - - - - - - 1,409,231 (2,999) 1,406,232
Segment total
assets 1,452,649 - 148,517 133,825 268,825 14,869 189,130 1,420,731 (14,499) 3,614,047
Customer
deposits 3,112,478 - - - - - - - (19,929) 3,092,549
Other
liabilities - - - - - - - 293,531 15,989 309,520
Segment total
liabilities 3,112,478 - - - - - - 293,531 (3,940) 3,402,069
Other segment
items:
Capital
expenditure - - - - - - - (122,409) (1) (122,410)
Depreciation
and
amortisation - - - - - - - (41,826) (10) (41,836)
The "Group Centre" segment above includes the parent entity and all intercompany
eliminations.
All
Wealth Mortgage Other Group
Banking Management Portfolios RAF ACABL ASFL AAG Divisions Centre Total
Year ended 31 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
December
2021
Interest
revenue 48,281 - 6,805 8,300 8,010 803 190 4,713 22 77,124
Inter-segment
revenue - - - - - - - - (22) (22)
Interest
revenue
from external
customers 48,281 - 6,805 8,300 8,010 803 190 4,713 - 77,102
Fee and
commission
income 2,747 10,563 - 166 4,308 7 - 681 - 18,472
Revenue 74,500 74,500
Revenue from
external
customers 51,028 10,563 6,805 8,466 12,318 810 74,690 5,394 - 170,074
Interest
expense (3,270) - (2,070) (2,371) (2,699) (225) (2,591) 2,842 (201) (10,585)
Cost of goods
sold (68,023) (68,023)
Add back
inter-segment
revenue - - - - - - - - 22 22
Subordinated
loan
note interest - - - - - - - - (2,464) (2,464)
Fee and
commission
expense (265) - - - (84) - - - - (349)
Segment
operating
income 47,493 10,563 4,735 6,095 9,535 585 4,076 8,236 (2,643) 88,675
Impairment
losses 354 - (186) (2,292) (50) (21) (1,001) - - (3,196)
Gain from a
bargain
purchase - - - - - - 8,626 - - 8,626
Other income - - 2,239 78 - - - 2,081 (443) 3,955
Operating
expenses (41,315) (12,684) (1,154) (3,943) (4,748) (1,590) (7,872) (12,570) (7,546) (93,422)
Segment profit
/
(loss) before
tax 6,532 (2,121) 5,634 (62) 4,737 (1,026) 3,829 (2,253) (10,632) 4,638 Income tax (expense) / income - - - 52 - - - 2,105 (9) 2,148 -------------- --------- --------- Segment profit / (loss) after tax 6,532 (2,121) 5,634 (10) 4,737 (1,026) 3,829 (148) (10,641) 6,786 Loans and advances to customers 1,396,049 - 178,082 97,113 182,122 10,096 7,500 11,500 (11,500) 1,870,962 Assets available for lease - - - - - - 121,563 - - 121,563 Other assets - - - - - - - 1,369,346 (3,004) 1,366342 Segment total assets 1,396,049 - 178,082 97,113 182,122 10,096 129,063 1,380,846 (14,504) 3,358,867 Customer deposits 2,856,949 - - - - - - - (19,080) 2,837,869 Other liabilities - - - - - - - 306,398 13,721 320,119 Segment total liabilities 2,856,949 - - - - - - 306,398 (5,359) 3,157,988 Other segment items: Capital expenditure - - - - - - - (41,030) - (41,030) Depreciation and amortisation - - - - - - - (35,575) (25) (35,600)
Segment profit is shown prior to any intra-group eliminations.
The Banking division had a branch in Dubai, which was closed in May 2021. In 2021 the Dubai branch generated GBP1.7m of income and had direct operating costs of GBP1.3m. All Dubai branch income was booked in the UK. Other than the Dubai branch, all operations of the Group are conducted wholly within the United Kingdom and geographical information is therefore not presented.
47. Country by Country Reporting
Article 89 of the EU Directive 2013/36/EU otherwise known as the Capital Requirements Directive IV ('CRD IV') was implemented into UK domestic legislation through statutory instrument 2013 No. 3118, the Capital Requirements (Country-by-Country Reporting) Regulations 2013 (the Regulations), which were laid before the UK Parliament on 10 December 2013 and which came into force on 1 January 2014.
Article 89 requires credit institutions and investment firms in the EU to disclose annually, specifying, by Member State and by third country in which it has an establishment, the following information on a consolidated basis for the financial year: name, nature of activities, geographical location, turnover, number of employees, profit or loss before tax, tax on profit or loss and public subsidies received.
FTE Profit/(loss)
31 December 2022 Turnover employees before Tax paid
tax
Location GBPm Number GBPm GBPm
UK 137.4 749 20.0 3.6
FTE Profit/(loss)
31 December 2021 Turnover employees before Tax paid
tax
Location GBPm Number GBPm GBPm
UK 88.7 601 5.2 -
Dubai - 6 (0.6) -
The Dubai branch income was booked through the UK, hence the turnover
is nil in the above analysis. Offsetting this income against Dubai branch
costs would result in a GBPNil profit (2021: GBP0.4m). No public subsidies
were received during 2022 or 2021.
Following a strategic review of the Group's operations, the Dubai branch
was closed in May 2021.
48. Ultimate controlling party
The Company regards Sir Henry Angest, the Group Chairman and Chief Executive Officer, who has a beneficial interest in 56.3% of the issued share capital of the Company, as the ultimate controlling party. Details of his remuneration are given in the Remuneration Report and Note 44 of the consolidated financial statements includes related party transactions with Sir Henry Angest.
49. Events after the balance sheet date
Following a strategic review of the business, the management has taken the decision to exit the short-term specialist lending market and as a result, Arbuthnot Specialist Finance Limited (ASFL) will be closed to new business with immediate effect as formally communicated at 11 January 2023. The exiting loan book will be managed down over the coming months and any current undrawn commitments will be honoured. The wind-down of the major part of the lending book is anticipated to take a number of months.
Five Year Summary
2018 2019 2020 2021 2022
GBP000 GBP000 GBP000 GBP000 GBP000
-------- ------- ------- ------- -------
Profit / (loss) for the year after
tax (20,033) 6,176 (1,332) 6,786 16,458
Profit / (loss) before tax from continuing
operations 6,780 7,011 (1,090) 4,638 20,009
Total Earnings per share
Basic (p) (134.5) 41.2 (8.9) 45.2 109.6
Earnings per share from continuing
operations
Basic (p) 38.0 41.2 (8.9) 45.2 109.6
Dividends per share
(p) - ordinary 35.0 16.0 - 38.0 42.0
- special - - - 21.0 -
2018 2019 2020 2021 2022
Other KPI:
Net asset value per
share (p) 1,282.5 1,363.5 1,291.5 1,337.2 1,411.1
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