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Arbuthnot Banking Group PLC Half Year Results

17/07/2019 7:00am

UK Regulatory (RNS & others)


Arbuthnot Banking (NEX:ARBB)
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RNS Number : 7472F

Arbuthnot Banking Group PLC

17 July 2019

17 July 2019

For immediate release

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

Unaudited results for the six months to 30 June 2019

Arbuthnot Banking Group is pleased to announce a half yearly profit before tax of GBP2.9m compared to GBP1.2m in the prior year.

Arbuthnot Banking Group PLC is the holding company for Arbuthnot Latham & Co., Limited.

FINANCIAL HIGHLIGHTS

   --      Profit before tax GBP2.9m (H1 2018: GBP1.2m) 
   --      Underlying profit before tax GBP3.4m (H1 2018: GBP2.7m) 
   --      Earnings per share 16.6p (H1 2018: 21.7p)* 
   --      Interim dividend per share increased to 16p (H1 2018: 15p) 
   --      Net assets per share GBP13.21 (H1 2018: GBP15.40)* 

OPERATIONAL HIGHLIGHTS

   --      Customer loans GBP1,275m (H1 2018: GBP1,097m), increased by 16% 
   --      Customer deposits GBP1,829m (H1 2018: GBP1,547m), increased by 18% 

-- Assets Under Management GBP1,029m (H1 2018: GBP1,069m), decreased by 4%, but was up 4.5% compared to December 2018

   --      Capital raising activities have secured GBP39.5m of regulatory capital 

-- Agreed the purchase of GBP266m Residential Mortgage portfolio expected to complete on 8 August 2019

Commenting on the results, Sir Henry Angest, Chairman and Chief Executive of Arbuthnot, said: "The Group has had a good start to the year. We have raised new capital, grown our existing businesses and continued to deliver on our plans to diversify. We have also agreed to buy a mortgage portfolio which should help to improve the returns of the Group."

* The Group recognised a net loss of GBP25.7m on derecognition of the Secure Trust Bank ("STB") as an associate undertaking during the second half of 2018, which has been treated as a discontinued activity in the 2019 Interim Accounts.

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

 
 ENQUIRIES: 
 
                                                                 020 7012 
 Arbuthnot Banking Group                                          2400 
 Sir Henry Angest, Chairman and Chief Executive 
 Andrew Salmon, Group Chief Operating Officer 
 James Cobb, Group Finance Director 
 
 Grant Thornton (Nominated Adviser and NEX Exchange Corporate    020 7383 
  Adviser)                                                        5100 
 Colin Aaronson 
 Samantha Harrison 
 Niall McDonald 
 
                                                                 020 7260 
 Numis Securities Ltd (Joint Broker)                              1000 
 Chris Wilkinson 
 Stephen Westgate 
 
                                                                 020 7408 
 Shore Capital Stockbrokers Limited (Joint Broker)                4090 
 Hugh Morgan 
 Daniel Bush 
 
                                                                 020 7379 
 Maitland/AMO (Financial PR)                                      5151 
 Neil Bennett 
 Jais Mehaji 
 Sam Cartwright 
 

Chairman's Statement

Arbuthnot Banking Group PLC

I am pleased to report that Arbuthnot Banking Group ("ABG", "the Group") has delivered a profit before tax of GBP2.9m for the first six months of 2019. This compares to a profit of GBP1.2m for the same period in 2018.

While profit before tax has increased by 142%, this is not the main highlight of the first half. The capital raising activities that have been completed are more significant for the longer term prospects. Firstly, following a good set of financial results by Secure Trust Bank PLC, we were able to sell a further 1.05 million shares or 37% of our remaining holding in that company. This was completed at the market price of GBP14.60 per share and released a further GBP15.3m of capital, which is available for use by the Group.

Secondly, following the AGM the Group dual listed its Ordinary Shares on the NEX Exchange Growth Market ("NEX") and on admission issued 152,621 new Ordinary Non-Voting shares. This now provides an alternative potential means of raising capital.

Interestingly, the issuance of the new non-voting shares received 99.9% approval at the AGM after the shareholder service agency, ISS, recommended that shareholders should vote in favour of the resolution, pointing out that "...the Company has clearly explained the rationale behind the proposal and no significant concerns have been identified". In the current environment of heightened scrutiny on corporate governance, we welcomed such a resounding endorsement of our plans.

Finally, on 3 June we announced that we had issued GBP25m of subordinated tier 2 qualifying loan notes to Proventus, a Swedish debt fund. We are delighted to have found such a partner for the business and hope that we can develop a long-term relationship, such that the capital instrument can be increased and also renewed over time.

Given the increase in surplus capital, strong liquidity and also the newly established Arbuthnot Direct deposit platform, the Group was in a good position to participate in a residential mortgage portfolio transaction that was introduced to us in the second quarter of the year. Following on from the due diligence phases, we announced on 3 July that we had exchanged contracts to purchase approximately GBP266m of loan balances for a blended discounted rate of 97.2%. This transaction is expected to complete on 8 August 2019 when the mortgage contracts will be released from the securitisation vehicle in which they are currently held. The loans have very similar characteristics to the portfolio that we acquired from the administrators of the Dunfermline Building Society in December 2014. This portfolio has performed very well for us over the past 4 and a half years, with our credit loss experience totalling only GBP40,000 compared to forecast losses at the time of the acquisition of approximately GBP3m.

Given the strong financial position of the Group, the Board has decided to increase the interim dividend by 1p to 16p, which will be paid on 16 August 2019 to shareholders on the register on 26 July 2019.

Arbuthnot Latham & Co., Limited

Arbuthnot Latham ("AL") has reported a profit before tax for the first half of the year of GBP6.7m (H1 2018: GBP5.4m), which represents an increase of 24%. The total assets of the Bank have increased to GBP2.33bn (H1 2018: GBP1.96bn), an increase of 19%. This is a result of the ongoing activity in the Bank to generate new customer loan and deposit balances. Customer loans ended the first half at GBP1.28bn (H1 2018: GBP1.10bn), an increase of 16% from the previous year and GBP51m higher than the balance at 31 December 2018.

The Bank originated new loans of GBP206m during the first half which is in line with the prior period. However, as previously communicated, the lending markets remain competitive and the number of loan repayments continues to impact the loan portfolios of the Bank.

Customer deposits have increased to GBP1.83bn (H1 2018: GBP1.55bn), an increase of 18% and GBP115m higher than at the end of 2018. The increase reflects the good work done by both the Private and Commercial Bankers in attracting new clients to the Bank and also building on existing relationships. Assets Under Management have increased from the low point at the end of 2018 to GBP1.03bn (H1 2018: GBP1.07bn).

Credit impairments have increased by GBP1.1m, with GBP200k of impairments as a result of the IFRS 9 Stage 1 requirement. Outside of this, the credit trends appear to be in line with expectations although Renaissance Asset Finance ("RAF") has seen a slight increase in arrears in the SME sector, which appears to be an industry wide occurrence.

Private Bank

As the strategy has evolved to refocus the Private Bankers on developing relationships with new and existing criteria clients, the lending activities have migrated toward the Commercial Bank that contains specialist lenders better placed to underwrite the lending. As a result, the Private Banking loan portfolio has fallen by 2% with written loan volumes being 32% lower than in the previous year. Loan repayments have also remained at high levels as we continue to refuse to defend refinance offers instead, preferring to maintain our stance of not chasing business that offers returns below our expectations or that are not appropriately priced for the risk we would take.

However, interaction and activity levels with criteria clients have increased as the new business development team became established. As a result, the level of new private clients joining the Bank has increased by 13% compared to the prior year, which has led to an increase in deposits balances to GBP1.04bn.

Commercial Bank

The Commercial Bank continues to make good progress. The volume of transactional payments has increased by 16% year on year and online transactions have seen an uplift of 15%. Lending balances have increased 36% compared to the previous period.

The relationship banking model is proving to be popular with clients as demonstrated by the increase in the level of deposits to GBP669m, compared to GBP471m in the previous year.

We were disappointed that the Commercial Bank was not successful in its application for the second tranche of the Capability and Innovation Fund awards, which is part of the RBS remedies scheme. However, the Bank has reapplied to be part of the third tranche.

Renaissance Asset Finance ("RAF")

The lead indicators for the business have continued to show good performance during the first half. Customer balances have increased by 26% compared to the previous year to GBP98m. RAF delivered a record growth of lending in May 2019, generating new lending volumes of GBP9.1m.

However, despite the higher level of activity, profitability has declined due to yield compression with increased competition in asset finance markets. The business has also experienced materially lower levels of early termination of contracts. In particular, clients who have financed the purchase of high value cars are holding on to these vehicles for longer than before. This has resulted in the income being earned over a longer period of time rather than being brought forward at the termination event.

Other Divisions

The Asset Based Lending division had a good start to the year, increasing its customer balances by 559% to stand at GBP58m. This is also an increase of 130% from the balances at year end 31 December 2018.

The business has developed a good network of introducers with a distribution team that covers the vast majority of England. The future pipeline of opportunities remains healthy.

The management team have consistently delivered ahead of their forecast milestones and as a result, have managed to achieve monthly breakeven since April 2019.

The Specialist Lending division have written its first loan in the second quarter of the year and despite holding back market interest while they remain in a soft launch phase, has a growing pipeline of deals on which to concentrate on as they move into full production in the second half of the year.

Secure Trust Bank PLC

As explained in the Annual Report and Accounts for 2018, our holding in Secure Trust Bank ("STB") is now classified as a financial investment, rather than an Associate company. This treatment results in the dividend income of GBP1m for the first half of the year being recorded in Other Income, while the income received from the Associate in the prior year is classified as a discontinued activity.

Outlook

The geopolitical and macroeconomic environment is unclear and the potential damaging effect of a hard left Labour government remains a real threat. However, the Group continues to diversify its sources of income and deposits. This, along with the soon to be completed purchase of the mortgage portfolio, means that we are confident that the prospects of the Group remain good.

Consolidated Statement of Comprehensive Income

 
                                                                    Six months   Six months 
                                                                         ended        ended 
                                                                       30 June      30 June 
                                                                          2019         2018 
                                                             Note       GBP000       GBP000 
----------------------------------------------------------  -----  -----------  ----------- 
 Interest income                                                        35,251       28,628 
 Interest expense                                                      (6,483)      (3,651) 
----------------------------------------------------------  -----  -----------  ----------- 
 Net interest income                                                    28,768       24,977 
----------------------------------------------------------  -----  -----------  ----------- 
 Fee and commission income                                               6,935        6,513 
 Fee and commission expense                                               (80)        (112) 
----------------------------------------------------------  -----  -----------  ----------- 
 Net fee and commission income                                           6,855        6,401 
----------------------------------------------------------  -----  -----------  ----------- 
 Operating income                                                       35,623       31,378 
----------------------------------------------------------  -----  -----------  ----------- 
 Net impairment loss on financial assets                               (1,317)        (208) 
 Other income                                                   6        2,384        1,649 
 Operating expenses                                                   (33,801)     (31,636) 
----------------------------------------------------------  -----  -----------  ----------- 
 Profit before income tax                                                2,889        1,183 
 Income tax expense                                                      (413)        (275) 
----------------------------------------------------------  -----  -----------  ----------- 
 Profit after income tax from continuing operations                      2,476          908 
 Profit from discontinued operations after tax                  9            -        2,329 
----------------------------------------------------------  -----  -----------  ----------- 
 Profit for the period                                                   2,476        3,237 
----------------------------------------------------------  -----  -----------  ----------- 
 
 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                               7,370          135 
 Tax on other comprehensive income                                        (53)         (26) 
----------------------------------------------------------  -----  -----------  ----------- 
 Other comprehensive income for the period, net of tax                   7,317          109 
----------------------------------------------------------  -----  -----------  ----------- 
 Total comprehensive income for the period                               9,793        3,346 
----------------------------------------------------------  -----  -----------  ----------- 
 
 Profit attributable to: 
 Equity holders of the Company                                           2,476        3,237 
                                                                         2,476        3,237 
----------------------------------------------------------  -----  -----------  ----------- 
 
 Total comprehensive income attributable to: 
 Equity holders of the Company                                           9,793        3,346 
                                                                         9,793        3,346 
----------------------------------------------------------  -----  -----------  ----------- 
 
 Earnings per share for profit attributable to the equity 
  holders of the Company during the period 
 (expressed in pence per share): 
  - basic                                                       8         16.6         21.7 
  - diluted                                                     8         16.6         21.7 
 

Consolidated Statement of Financial Position

 
                                                      At 30       At 30       At 31 
                                                       June        June    December 
                                                       2019        2018        2018 
                                                     GBP000      GBP000      GBP000 
 ASSETS 
 Cash and balances at central banks                 431,760     361,892     405,325 
 Loans and advances to banks                         85,775      76,840      54,173 
 Debt securities at amortised cost                  383,459     307,560     342,691 
 Assets classified as held for sale                   8,020       8,017       8,002 
 Derivative financial instruments                     1,354       1,906       1,846 
 Loans and advances to customers                  1,275,372   1,096,739   1,224,656 
 Other assets                                        15,286      23,036      12,716 
 Financial investments                               27,467       2,459      35,351 
 Deferred tax asset                                   1,438       2,032       1,490 
 Investment in associate                                  -      84,032           - 
 Intangible assets                                   17,349      15,941      16,538 
 Property, plant and equipment                        5,453       5,311       5,304 
 Right-of-use assets                                 20,559           -           - 
 Investment properties                               69,446      59,439      67,081 
-----------------------------------------------  ----------  ----------  ---------- 
 Total assets                                     2,342,738   2,045,204   2,175,173 
-----------------------------------------------  ----------  ----------  ---------- 
 EQUITY AND LIABILITIES 
 Equity attributable to owners of the parent 
 Share capital                                          154         153         153 
 Retained earnings                                  207,940     236,007     209,083 
 Other reserves                                     (4,273)       (840)    (13,280) 
-----------------------------------------------  ----------  ----------  ---------- 
 Total equity                                       203,821     235,320     195,956 
-----------------------------------------------  ----------  ----------  ---------- 
 LIABILITIES 
 Deposits from banks                                236,203     232,152     232,675 
 Derivative financial instruments                       174       1,383         188 
 Deposits from customers                          1,829,227   1,546,607   1,714,286 
 Current tax liability                                  649         550         236 
 Other liabilities                                   14,124      16,103      18,549 
 Lease liabilities                                   20,882           -           - 
 Debt securities in issue                            37,658      13,089      13,283 
-----------------------------------------------  ----------  ----------  ---------- 
 Total liabilities                                2,138,917   1,809,884   1,979,217 
-----------------------------------------------  ----------  ----------  ---------- 
 Total equity and liabilities                     2,342,738   2,045,204   2,175,173 
-----------------------------------------------  ----------  ----------  ---------- 
 

Consolidated Statement of Changes in Equity

 
                                                          Attributable to equity holders 
                                                                   of the Group 
                                     ----------------------------------------------------------------------- 
                                                                   Capital       Fair 
                                         Share   Revaluation    redemption      value   Treasury    Retained 
                                       capital       reserve       reserve    reserve     shares    earnings     Total 
                                        GBP000        GBP000        GBP000     GBP000     GBP000      GBP000    GBP000 
-----------------------------------  ---------  ------------  ------------  ---------  ---------  ----------  -------- 
 Balance at 1 January 2019                 153             -            20   (12,169)    (1,131)     209,083   195,956 
 
 Total comprehensive income for the 
 period 
 Profit for the six months ended 30 
  June 
  2019                                       -             -             -          -          -       2,476     2,476 
 
 Other comprehensive income, net of 
 income 
 tax 
 Changes in the fair value of 
  financial 
  assets at FVOCI                            -             -             -      7,370          -           -     7,370 
 Tax on other comprehensive income           -             -             -       (53)          -           -      (53) 
 Total other comprehensive income            -             -             -      7,317          -           -     7,317 
-----------------------------------  ---------  ------------  ------------  ---------  ---------  ----------  -------- 
 Total comprehensive income for the 
  period                                     -             -             -      7,317          -       2,476     9,793 
-----------------------------------  ---------  ------------  ------------  ---------  ---------  ----------  -------- 
 
 Transactions with owners, recorded 
 directly 
 in equity 
 Contributions by and distributions 
 to 
 owners 
 Issue of non-voting share capital           1             -           (2)          -          -        (32)      (33) 
 Unwind Employee Trust                       -             -             -          -          -       1,083     1,083 
 Sale of Secure Trust Bank shares            -             -             -      1,692          -     (1,692)         - 
 Final dividend relating to 2018             -             -             -          -          -     (2,978)   (2,978) 
 Total contributions by and 
  distributions 
  to owners                                  1             -           (2)      1,692          -     (3,619)   (1,928) 
-----------------------------------  ---------  ------------  ------------  ---------  ---------  ----------  -------- 
 Balance at 30 June 2019                   154             -            18    (3,160)    (1,131)     207,940   203,821 
-----------------------------------  ---------  ------------  ------------  ---------  ---------  ----------  -------- 
 
 
                                                          Attributable to equity holders 
                                                                   of the Group 
                                     ----------------------------------------------------------------------- 
                                                                   Capital       Fair 
                                         Share   Revaluation    redemption      value   Treasury    Retained 
                                       capital       reserve       reserve    reserve     shares    earnings     Total 
                                        GBP000        GBP000        GBP000     GBP000     GBP000      GBP000    GBP000 
-----------------------------------  ---------  ------------  ------------  ---------  ---------  ----------  -------- 
 Balance at 31 December 2017               153             -            20        162    (1,131)     237,171   236,375 
 IFRS 9 adjustment                           -             -             -          -          -     (2,257)   (2,257) 
-----------------------------------  ---------  ------------  ------------  ---------  ---------  ----------  -------- 
 Balance at 1 January 2018                 153             -            20        162    (1,131)     234,914   234,118 
-----------------------------------  ---------  ------------  ------------  ---------  ---------  ----------  -------- 
 
 Total comprehensive income for the 
 period 
 Profit for the six months ended 30 
  June 
  2018                                       -             -             -          -          -       3,237     3,237 
 
 Other comprehensive income, net of 
 income 
 tax 
 Changes in the fair value of 
  financial 
  assets at FVOCI                            -             -             -        135          -           -       135 
 Tax on other comprehensive income           -             -             -       (26)          -           -      (26) 
 Total other comprehensive income            -             -             -        109          -           -       109 
-----------------------------------  ---------  ------------  ------------  ---------  ---------  ----------  -------- 
 Total comprehensive income for the 
  period                                     -             -             -        109          -       3,237     3,346 
-----------------------------------  ---------  ------------  ------------  ---------  ---------  ----------  -------- 
 
 Transactions with owners, recorded 
 directly 
 in equity 
 Contributions by and distributions 
 to 
 owners 
 Unwind Employee Trust                       -             -             -          -          -         685       685 
 Final dividend relating to 2017             -             -             -          -          -     (2,829)   (2,829) 
 Total contributions by and 
  distributions 
  to owners                                  -             -             -          -          -     (2,144)   (2,144) 
-----------------------------------  ---------  ------------  ------------  ---------  ---------  ----------  -------- 
 Balance at 30 June 2018                   153             -            20        271    (1,131)     236,007   235,320 
-----------------------------------  ---------  ------------  ------------  ---------  ---------  ----------  -------- 
 

Consolidated Statement of Cash Flows

 
                                                          Six months   Six months 
                                                               ended        ended 
                                                             30 June      30 June 
                                                                2019         2018 
                                                              GBP000       GBP000 
-----------------------------------------------------    -----------  ----------- 
 Cash flows from operating activities 
 Interest received                                            46,707       39,584 
 Interest paid                                               (6,796)      (3,889) 
 Fees and commissions received                                 4,798        6,740 
 Net trading and other income                                  2,384        1,649 
 Cash payments to employees and suppliers                   (16,938)     (40,947) 
 Cash flows from operating profits before changes in 
  operating assets and liabilities                            30,155        3,137 
 Changes in operating assets and liabilities: 
  - net decrease in derivative financial instruments             478        1,097 
  - net increase in loans and advances to customers         (51,806)     (50,442) 
  - net increase in other assets                            (23,147)      (7,742) 
  - net increase in deposits from banks                        3,528       37,055 
  - net increase in amounts due to customers                 114,941      155,826 
  - net increase / (decrease) in other liabilities            16,457        (136) 
-------------------------------------------------------  -----------  ----------- 
 Net cash inflow from operating activities                    90,606      138,795 
-------------------------------------------------------  -----------  ----------- 
 Cash flows from investing activities 
 Purchase of financial investments                             (128)        (107) 
 Disposal of financial investments                            15,330          136 
 Purchase of computer software                               (1,723)        (748) 
 Refurbishment cost investment property                      (2,365)            - 
 Purchase of property, plant and equipment                     (837)      (1,799) 
 Proceeds from sale of property, plant and equipment               -           39 
 Purchases of debt securities                              (325,055)    (153,823) 
 Proceeds from redemption of debt securities                 285,187       75,288 
-------------------------------------------------------  -----------  ----------- 
 Net cash outflow from investing activities                 (29,591)     (81,014) 
-------------------------------------------------------  -----------  ----------- 
 Cash flows from financing activities 
 Dividends paid                                              (2,978)      (2,829) 
-------------------------------------------------------  -----------  ----------- 
 Net cash used in financing activities                       (2,978)      (2,829) 
-------------------------------------------------------  -----------  ----------- 
 Net increase in cash and cash equivalents                    58,037       54,952 
 Cash and cash equivalents at 1 January                      459,498      383,780 
-------------------------------------------------------  -----------  ----------- 
 Cash and cash equivalents at 30 June                        517,535      438,732 
-------------------------------------------------------  -----------  ----------- 
 

Notes to the Consolidated Financial Statements

1. Basis of preparation

The interim financial statements have been prepared on the basis of accounting policies set out in the Group's 2018 statutory accounts as amended by standards and interpretations effective during 2019 as set out below and in accordance with IAS 34 "Interim Financial Reporting". The directors do not consider the fair value of the assets and liabilities presented in these financial statements to be materially different from their carrying value.

The statements were approved by the Board of Directors on 16 July 2019 and are unaudited. The interim financial statements will be available on the Group website (www.arbuthnotgroup.com) from 17 July 2019.

2. Risks and uncertainties

The Group regards the monitoring and controlling of risks and uncertainties as a fundamental part of the management process. Consequently, senior management are involved in the development of risk management policies and in monitoring their application.

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

Strategic risk

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

Credit risk

Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. This risk exists in Arbuthnot Latham, which currently has a loan book of GBP1,275m. The lending portfolio in AL is extended to clients, the majority of which is secured against cash, property or other assets. Credit risk is managed through the Credit Committee of AL.

Market risk

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

The Group is exposed to changes in the market value of properties. The current carrying value of Investment Property is GBP69.4m. Any changes in the market value of the property will be accounted for in the Income Statement and as a result could have a significant impact on the profit or loss of the Group.

The Group has a 9.85% interest in STB. This is currently recorded in the Group's balance sheet as a Financial Investment. The carrying value is adjusted to market value at each balance sheet date, according to the share price of STB. Any gains or losses that arise are recorded in Other Comprehensive Income.

Liquidity risk

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

Operational risk

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

Cyber risk

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

Conduct risk

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

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

Regulatory risk

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

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

Macroeconomic and competitive environment

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

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

Brexit

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

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

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

Finally, there are two significant business risks that may arise in an economic shock. Firstly, increased credit risk as borrowers are unable to continue to meet their interest obligations as they fall due. This would be alongside a significant fall in the collateral values of our security held against the loans. The average loan to value of our lending book is 53.7%, so to have any material impact this fall in collateral values would have to be severe and prolonged. In our ICAAP stress test scenarios, we are able to withstand a property value fall of 40% over an 18 month period alongside a doubling of our loss rates.

The second significant asset class that would be at risk in a down turn would be the Investment Properties, in particular 20 King Street. Any potential reduction in confidence in the West End prime office market would manifest itself in a lower valuation.

3. Changes in significant accounting policies

IFRS 16, 'Leases'

This note explains the impact of the adoption of IFRS 16 Leases on the Group's financial statements.

The Group has adopted IFRS 16 under the modified retrospective transition approach from 1 January 2019 and has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard.

   a)    Adjustments recognised on adoption of IFRS 16 

On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate as of 1 January 2019.

The associated right-of-use assets were measured on the modified retrospective transition approach option two. The right-of-use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 31 December 2018. There were no onerous lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application.

 
 The recognised right-of-use assets relate to the following types of assets: 
                                                         30 June          1 January 
                                                            2019               2019 
                                                          GBP000             GBP000 
----------------------------------------------    --------------  ----------------- 
 Investment properties                                     7,992              8,029 
 Properties                                               12,131             13,385 
 Equipment                                                   436                  - 
----------------------------------------------    --------------  ----------------- 
 Total Right-of-use assets                                20,559             21,414 
------------------------------------------------  --------------  ----------------- 
 

The change in accounting policy affected the following items on the balance sheet on 1 January 2019:

-- Investment properties - increase by GBP8,029k (shown as right-of-use asset)

-- Property, plant and equipment - increase by GBP13,385k (shown as right-of-use asset)

-- Lease liabilities - increase by GBP21,459k

There was no impact to retained earnings due to the retrospective modified approach option two being used.

   b)    Practical expedients applied 

In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard:

-- the use of a single discount rate to a portfolio of leases with reasonably similar characteristics

-- reliance on previous assessments on whether leases are onerous

-- the accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases

-- the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application, and

-- the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date the group relied on its assessment made applying IAS 17 and IFRIC 4 Determining whether an Arrangement contains a Lease.

   c)     The Group's leasing activities and how these are accounted for 

The Group has leasehold investment property, offices and equipment all under operating leases. Rental contracts are typically made for fixed periods but may have extension or termination options. Extension and termination options are included in a number of property and equipment leases across the Group. These terms are used to maximise operational flexibility in terms of managing contracts. The extension and termination options held are exercisable only by the Group and not by the respective lessor.

Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes.

Until the 2018 financial year, leases of investment property and property, plant and equipment were classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) were charged to profit or loss on a straight-line basis over the period of the lease.

From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.

Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments:

-- fixed payments less any lease incentives receivable

-- the exercise price of a purchase option if the lessee is reasonably certain to exercise that option, and

-- payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.

The lease payments are discounted using the lessee's incremental borrowing rate, being the rate that the Group would have to pay to borrow the funds necessary to obtain an asset of similar value in a similar economic environment with similar terms and conditions.

Right-of-use assets are measured at cost comprising the following:

-- the amount of the initial measurement of the lease liability

-- any lease payments made at or before the commencement date less any lease incentives received

-- any initial direct costs, and

-- any restoration costs payable.

Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less.

4. Valuation of financial instruments

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

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

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

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

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

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

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

 
                                      Level    Level    Level 
                                          1        2        3    Total 
 At 30 June 2019                     GBP000   GBP000   GBP000   GBP000 
----------------------------------  -------  -------  -------  ------- 
 ASSETS 
 Derivative financial instruments         -    1,354        -    1,354 
 Financial assets at FVOCI           25,932        -    1,535   27,467 
----------------------------------  -------  -------  -------  ------- 
                                     25,932    1,354    1,535   28,821 
----------------------------------  -------  -------  -------  ------- 
 LIABILITIES 
 Derivative financial instruments         -      174        -      174 
----------------------------------  -------  -------  -------  ------- 
                                          -      174        -      174 
----------------------------------  -------  -------  -------  ------- 
 
 
                                      Level    Level    Level 
                                          1        2        3    Total 
 At 30 June 2018                     GBP000   GBP000   GBP000   GBP000 
----------------------------------  -------  -------  -------  ------- 
 ASSETS 
 Derivative financial instruments         -    1,906        -    1,906 
 Financial investments                   17        -    2,442    2,459 
----------------------------------  -------  -------  -------  ------- 
                                         17    1,906    2,442    4,365 
----------------------------------  -------  -------  -------  ------- 
 LIABILITIES 
 Derivative financial instruments         -    1,383        -    1,383 
----------------------------------  -------  -------  -------  ------- 
                                          -    1,383        -    1,383 
----------------------------------  -------  -------  -------  ------- 
 
 
                                      Level    Level    Level 
                                          1        2        3    Total 
 At 31 December 2018                 GBP000   GBP000   GBP000   GBP000 
----------------------------------  -------  -------  -------  ------- 
 ASSETS 
 Derivative financial instruments         -    1,846        -    1,846 
 Financial investments               34,223        -    1,128   35,351 
----------------------------------  -------  -------  -------  ------- 
                                     34,223    1,846    1,128   37,197 
----------------------------------  -------  -------  -------  ------- 
 LIABILITIES 
 Derivative financial instruments         -      188        -      188 
----------------------------------  -------  -------  -------  ------- 
                                          -      188        -      188 
----------------------------------  -------  -------  -------  ------- 
 
 
 There were no transfers between level 1 and level 2 during 
  the year. 
 
 The following table reconciles the movement in level 3 financial instruments 
  measured at fair value (financial investments) during the year: 
                                                           At 30    At 30       At 31 
                                                            June     June    December 
                                                            2019     2018        2018 
 Movement in level 3                                      GBP000   GBP000      GBP000 
------------------------------------------------------   -------  -------  ---------- 
 At 1 January                                              1,128    2,203       2,203 
 Acquisitions                                                128        -           - 
 Consideration received                                        -      104         163 
 Disposals                                                     -        -     (1,403) 
 Movements recognised in Other Comprehensive 
  Income                                                     279      135         135 
 Movements recognised in the Income Statement                  -        -          30 
-------------------------------------------------------  -------  -------  ---------- 
 At 30 June / 31 December                                  1,535    2,442       1,128 
-------------------------------------------------------  -------  -------  ---------- 
 

5. Operating segments

The Group is organised into five operating segments as disclosed below:

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

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

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

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

4) All Other Divisions - All other smaller divisions and central costs in Arbuthnot Latham & Co., Ltd (Arbuthnot Commercial Asset Based Lending, Arbuthnot Direct, Arbuthnot Specialist Finance, Investment properties and Central unallocated items)

5) Group Centre - ABG Group Centre management.

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.

 
                                                                    Continuing operations 
------------------------------------------  --------------------------------------------------------------------- 
                                                                                       All 
                                               Private   Commercial                  Other      Group       Group 
                                               banking      Banking       RAF    Divisions     Centre       Total 
 Six months ended 30 June 2019                  GBP000       GBP000    GBP000       GBP000     GBP000      GBP000 
------------------------------------------  ----------  -----------  --------  -----------  ---------  ---------- 
 Interest revenue                               17,582       12,210     4,562        1,002         33      35,389 
 Inter-segment revenue                               -            -         -            -      (138)       (138) 
------------------------------------------  ----------  -----------  --------  -----------  ---------  ---------- 
 Interest revenue from external customers       17,582       12,210     4,562        1,002      (105)      35,251 
------------------------------------------  ----------  -----------  --------  -----------  ---------  ---------- 
 Fee and commission income                       5,522          634       144          635          -       6,935 
------------------------------------------  ----------  -----------  --------  -----------  ---------  ---------- 
 Revenue from external customers                23,104       12,844     4,706        1,637      (105)      42,186 
------------------------------------------  ----------  -----------  --------  -----------  ---------  ---------- 
 Interest expense                              (2,253)      (1,539)   (1,312)      (1,072)      (105)     (6,281) 
 Add back inter-segment revenue                      -            -         -            -        138         138 
 Subordinated loan note interest                     -                                          (340)       (340) 
 Fee and commission expense                       (28)         (34)      (12)          (6)          -        (80) 
------------------------------------------  ----------  -----------  --------  -----------  ---------  ---------- 
 Segment operating income                       20,823       11,271     3,382          559      (412)      35,623 
------------------------------------------  ----------  -----------  --------  -----------  ---------  ---------- 
 Impairment losses                               (824)        (225)     (202)         (66)          -     (1,317) 
 Other income                                        -            -         -        1,872        512       2,384 
 Operating expenses                           (17,931)      (8,054)   (2,319)      (1,600)    (3,897)    (33,801) 
------------------------------------------  ----------  -----------  --------  -----------  ---------  ---------- 
 Segment profit / (loss) before tax              2,068        2,992       861          765    (3,797)       2,889 
------------------------------------------  ----------  -----------  --------  -----------  ---------  ---------- 
 Income tax expense                                  -            -     (188)            -      (225)       (413) 
------------------------------------------  ----------  -----------  --------  -----------  ---------  ---------- 
 Segment profit / (loss) after tax               2,068        2,992       673          765    (4,022)       2,476 
------------------------------------------  ----------  -----------  --------  -----------  ---------  ---------- 
 
 Loans and advances to customers               645,524      474,302    97,663       69,384   (11,500)   1,275,373 
 Other assets                                        -            -         -    1,046,678     20,687   1,067,365 
------------------------------------------  ----------  -----------  --------  -----------  ---------  ---------- 
 Segment total assets                          645,524      474,302    97,663    1,116,062      9,187   2,342,738 
------------------------------------------  ----------  -----------  --------  -----------  ---------  ---------- 
 Customer deposits                           1,042,634      668,792         -      117,801          -   1,829,227 
 Other liabilities                                   -            -         -      322,279   (12,589)     309,690 
------------------------------------------  ----------  -----------  --------  -----------  ---------  ---------- 
 Segment total liabilities                   1,042,634      668,792         -      440,080   (12,589)   2,138,917 
------------------------------------------  ----------  -----------  --------  -----------  ---------  ---------- 
 Other segment items: 
 Capital expenditure                                 -            -       (5)      (4,920)          -     (4,925) 
 Depreciation and amortisation                       -            -       (6)      (1,581)       (13)     (1,600) 
------------------------------------------  ----------  -----------  --------  -----------  ---------  ---------- 
 The "Group Centre" segment above includes the parent entity and all intercompany 
  eliminations. 
 

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

The UK private bank has a branch in Dubai, which generated GBP2.1m (2018: GBP2.2m) income and had direct costs of GBP1.4m (2018: GBP1.5m). All Dubai branch income is booked in the UK. Other than the Dubai branch, all operations of the Group are conducted wholly within the United Kingdom and geographical information is therefore not presented.

 
                                                                                              Discontinued 
                                               Continuing operations                            operations 
---------------------  --------------------------------------------------------------------  ------------- 
                                                                                                    Retail 
                                                                 All                                  Bank 
                         Private   Commercial                  Other      Group                  Associate       Group 
                         Banking      Banking       RAF    Divisions     Centre       Total         Income       Total 
 Six months ended 30      GBP000       GBP000    GBP000       GBP000     GBP000      GBP000         GBP000      GBP000 
 June 
 2018 
---------------------  ---------  -----------  --------  -----------  ---------  ----------  -------------  ---------- 
 Interest revenue         17,166        7,580     3,948           26         54      28,774              -      28,774 
 Inter-segment 
  revenue                      -            -         -            -      (146)       (146)              -       (146) 
---------------------  ---------  -----------  --------  -----------  ---------  ----------  -------------  ---------- 
 Interest revenue 
  from external 
  customers               17,166        7,580     3,948           26       (92)      28,628              -      28,628 
---------------------  ---------  -----------  --------  -----------  ---------  ----------  -------------  ---------- 
 Fee and commission 
  income                   5,885          527       100            1          -       6,513              -       6,513 
---------------------  ---------  -----------  --------  -----------  ---------  ----------  -------------  ---------- 
 Revenue from 
  external customers      23,051        8,107     4,048           27       (92)      35,141              -      35,141 
---------------------  ---------  -----------  --------  -----------  ---------  ----------  -------------  ---------- 
 Interest expense        (1,046)      (1,132)   (1,007)        (340)       (92)     (3,617)              -     (3,617) 
 Add back 
  inter-segment 
  revenue                      -            -         -            -        146         146              -         146 
 Subordinated loan 
  note 
  interest                     -            -         -            -      (180)       (180)              -       (180) 
 Fee and commission 
  expense                   (57)         (47)       (8)            -          -       (112)              -       (112) 
---------------------  ---------  -----------  --------  -----------  ---------  ----------  -------------  ---------- 
 Segment operating 
  income                  21,948        6,928     3,033        (313)      (218)      31,378              -      31,378 
---------------------  ---------  -----------  --------  -----------  ---------  ----------  -------------  ---------- 
 Impairment losses         (122)         (52)      (34)            -          -       (208)              -       (208) 
 Other income                  -            -        31        1,949      (331)       1,649              -       1,649 
 Operating expenses     (17,335)      (7,724)   (1,940)        (987)    (3,650)    (31,636)              -    (31,636) 
---------------------  ---------  -----------  --------  -----------  ---------  ----------  -------------  ---------- 
 Segment profit / 
  (loss) 
  before tax               4,491        (848)     1,090          649    (4,199)       1,183              -       1,183 
---------------------  ---------  -----------  --------  -----------  ---------  ----------  -------------  ---------- 
 Income tax expense            -            -     (237)            -          -       (237)              -       (237) 
---------------------  ---------  -----------  --------  -----------  ---------  ----------  -------------  ---------- 
 Segment profit / 
  (loss) 
  after tax                4,491        (848)       853          649    (4,199)         946              -         946 
---------------------  ---------  -----------  --------  -----------  ---------  ----------  -------------  ---------- 
 Profit from 
  discontinued 
  operations                   -            -         -            -          -           -          2,329       2,329 
---------------------  ---------  -----------  --------  -----------  ---------  ----------  -------------  ---------- 
 Segment profit / 
  (loss) 
  after tax                4,491        (848)       853          649    (4,199)         946          2,329       3,275 
---------------------  ---------  -----------  --------  -----------  ---------  ----------  -------------  ---------- 
 
 Loans and advances 
  to customers           664,127      346,160    77,602       20,350   (11,500)   1,096,739              -   1,096,739 
 Other assets                  -            -         -      855,781     92,684     948,465              -     948,465 
---------------------  ---------  -----------  --------  -----------  ---------  ----------  -------------  ---------- 
 Segment total assets    664,127      346,160    77,602      876,131     81,184   2,045,204              -   2,045,204 
---------------------  ---------  -----------  --------  -----------  ---------  ----------  -------------  ---------- 
 Customer deposits       964,190      471,442         -      110,975          -   1,546,607              -   1,546,607 
 Other liabilities             -            -         -      284,108   (20,831)     263,277              -     263,277 
---------------------  ---------  -----------  --------  -----------  ---------  ----------  -------------  ---------- 
 Segment total 
  liabilities            964,190      471,442         -      395,083   (20,831)   1,809,884              -   1,809,884 
---------------------  ---------  -----------  --------  -----------  ---------  ----------  -------------  ---------- 
 Other segment items: 
 Capital expenditure           -            -      (40)      (2,416)       (95)     (2,551)              -     (2,551) 
 Depreciation and 
  amortisation                 -            -       (7)      (1,452)       (13)     (1,472)              -     (1,472) 
---------------------  ---------  -----------  --------  -----------  ---------  ----------  -------------  ---------- 
 

6. Other income

Other income mainly includes rental income received from the investment properties of GBP1.3m (2018: GBP1.2m) and GBP1m dividend income received from STB (2018: GBPnil). 2018 also included GBP0.3m rental income from STB for office space occupied.

7. Underlying profit reconciliation

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

 
                                                 Arbuthnot   Arbuthnot 
                                                    Latham     Banking 
 Underlying profit reconciliation                    & Co.       Group 
 Six months ended 30 June 2019                      GBP000      GBP000 
----------------------------------------------  ----------  ---------- 
 Profit before tax from continuing operations        6,686       2,889 
 Investment in new ventures                            482         482 
----------------------------------------------  ----------  ---------- 
 Underlying profit                                   7,168       3,371 
----------------------------------------------  ----------  ---------- 
 
 
                                                               Arbuthnot   Arbuthnot 
                                                                  Latham     Banking 
 Underlying profit reconciliation                                  & Co.       Group 
 Six months ended 30 June 2018                                    GBP000      GBP000 
------------------------------------------------------------  ----------  ---------- 
 Profit before tax from continuing operations                      5,382       1,183 
 Investment in new ventures                                          621         621 
 Dividend from STB as if deconsolidated from 1 January 2018            -       1,110 
 IFRS 16 impact applied to 2018                                    (241)       (241) 
------------------------------------------------------------  ----------  ---------- 
 Underlying profit                                                 5,762       2,673 
------------------------------------------------------------  ----------  ---------- 
 

8. Earnings per ordinary share

Basic

Basic earnings per ordinary share are calculated by dividing the profit after tax attributable to equity holders of the Company by the weighted average number of ordinary shares 14,926,992 (2018: 14,889,048) in issue during the period. On 17 May 2019, the Company issued 152,621 Ordinary Non-Voting shares.

Diluted

Diluted earnings per ordinary share are calculated by dividing the dilutive profit after tax attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the period, as well as the number of dilutive share options in issue during the period. There were no dilutive share options in issue at the end of June (2018: nil).

 
                                                               Six months   Six months 
                                                                    ended        ended 
                                                                  30 June      30 June 
                                                                     2019         2018 
 Profit attributable                                               GBP000       GBP000 
------------------------------------------------------------  -----------  ----------- 
 Total profit after tax attributable to equity holders of 
  the Company                                                       2,476        3,237 
 Profit after tax from continuing operations attributable 
  to equity holders of the Company                                  2,476          908 
 Profit after tax from discontinued operations attributable 
  to equity holders of the Company                                      -        2,329 
------------------------------------------------------------  -----------  ----------- 
 
                                                               Six months   Six months 
                                                                    ended        ended 
                                                                  30 June      30 June 
                                                                     2019         2018 
 Basic Earnings per share                                               p            p 
------------------------------------------------------------  -----------  ----------- 
 Total Basic Earnings per share                                      16.6         21.7 
 Basic Earnings per share from continuing operations                 16.6          6.1 
 Basic Earnings per share from discontinued operations                  -         15.6 
------------------------------------------------------------  -----------  ----------- 
 

9. Discontinued operations

On 8 August 2018 Sir Henry Angest and Andrew Salmon resigned their positions on the board of STB and the Group do not have the right to appoint any future directors to the board of STB. As a result of this the Group lost significant influence over the associated company and the shareholding has since been recognised as a financial investment. The investment is marked to market through the Fair Value Reserve in Other Comprehensive Income. The profit from associate for the period up to 30 June 2018 is reflected as a discontinued operation as the income was previously shown as a separately reported operating segment.

Since the 8 August 2018, ABG sold 575,000 STB shares in November 2018 and a further 1,050,000 shares in April 2019. The current shareholding in STB is 9.85%.

10. Events after the balance sheet date

On 3 July 2019, Arbuthnot Latham & Co., Limited agreed the purchase of a residential mortgage portfolio for cash consideration of approximately GBP258m, which is subject to adjustment for the final loan balances at completion. The mortgages are being acquired from Raphael Mortgages Limited Designated Activity Company ("Raphael" or "Portfolio A") and Magellan Funding No2. Designated Activity Company ("Magellan" or "Portfolio B").

Portfolio A has been in run off since it was originated by Edeus Mortgages and Victoria Mortgage Funding between 2005 and 2008. Portfolio B was originated in 2018 and 2019 by Magellan Homeloans. Both portfolios are geographically distributed around the UK.

Based on loan balances as at 31 March 2019 Portfolio A consists of 1,457 loans with customer balances of GBP201m of which 20 per cent are buy-to-let and the remainder are owner occupied with an average loan to value of 67.4 per cent. Portfolio B consists of 462 loans with customer balances of GBP65m all of which are owner occupied with an average loan to value of 70 per cent.

The overall yield on the portfolios is 3.6 per cent before taking into account the effect of the negotiated purchase discount. The aggregate consideration of the purchase will be 97 per cent of Portfolio A and 98 per cent of Portfolio B at the time of the completion, which is expected to be 8 August 2019. The consideration will be satisfied by cash from the Group's own resources.

It is expected that in due course the Group will preposition these assets with the Bank of England to act as collateral for the schemes within the Sterling Monetary Framework. It is expected that these assets will then be included in the Group's liquidity resources.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

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