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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 | |
|---|---|---|---|---|---|---|---|---|---|---|
| -10.00 | -0.93% | 1,065.00 | 1,030.00 | 1,100.00 | 916 | 16:35:13 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Commercial Banks, Nec | 181.44M | 35.38M | 2.1678 | 4.96 | 175.44M |
From Apr 2019 to Apr 2024
TIDMARBB
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.
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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
IR LLFFRDFIRLIA
(END) Dow Jones Newswires
July 17, 2019 02:00 ET (06:00 GMT)
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