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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Close Brothers Group Plc | LSE:CBG | London | Ordinary Share | GB0007668071 | ORD 25P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 7.40 | 1.61% | 466.20 | 467.80 | 470.40 | 481.00 | 447.60 | 455.00 | 539,644 | 16:35:22 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Asset - Backed Securities | 1.01B | 81.1M | - | N/A | 0 |
From Apr 2019 to Apr 2024
TIDMCBG
RNS Number : 5218S
Close Brothers Group PLC
12 March 2019
Half Year Results for the Six Months to 31 January 2019
Solid Performance in the First Half
-- The group reported a solid performance, maintaining strong returns and profitability with a return on opening equity of 16.1%
-- Banking adjusted operating profit increased 1% year on year to GBP131.1 million, benefiting from our continued disciplined approach and the diversity of our business portfolio
-- Group adjusted operating profit of GBP138.8 million reduced 4% year on year, reflecting difficult market conditions for Winterflood and Asset Management
-- The net interest margin remained strong at 8.1%, and the bad debt ratio remained low at 0.6%
-- The loan book grew by 2.0% to GBP7.4 billion, up 6.3%(1) year on year, driven by good new business volumes across our Commercial and Premium Finance businesses, while our Motor Finance and Property loan books contracted slightly
-- Asset Management achieved good net inflows at 7% (annualised) and adjusted operating profit of GBP10.8 million, down 5% year on year reflecting the impact of negative market movements
-- Winterflood, the group's market-making business, delivered solid profitability in a difficult market, with operating profit of GBP9.3 million, down 37% year on year reflecting lower trading volumes
-- The CET1 ratio increased to 13.0% and we have declared an interim dividend per share of 22.0p, up 5% year on year
-- On a statutory basis, group operating profit before tax decreased 3% to GBP135.6 million
Hot Features
Premium
First half First Change
2019 half %
Financial Highlights(2) 2018
------------------------------------------------------- ------------ ---------- -------
Adjusted operating profit(3) GBP138.8m GBP143.9m (4)
Operating profit before tax (continuing operations) GBP135.6m GBP140.2m (3)
Adjusted basic earnings per share (continuing
operations) 69.8p 72.0p (3)
Basic earnings per share (continuing operations) 68.1p 70.0p (3)
Basic earnings per share (continuing and discontinued
operations) 68.9p 69.2p -
Dividend per share 22.0p 21.0p 5
Return on opening equity 16.1% 17.5%
Net interest margin 8.1% 8.2%
Bad debt ratio 0.6% 0.6%
31 January 1 August Change
2019 2018 %
------------------------------------------------------- ------------ ---------- -------
Loan book GBP7.4bn GBP7.2bn 2.0
Total client assets GBP12.0bn GBP12.2bn (2.1)
Common equity tier 1 capital ratio 13.0% 12.7%
Total capital ratio 15.2% 15.0%
------------------------------------------------------- ------------ ---------- -------
1 The calculation of year on year loan book growth uses an opening
loan book of GBP6.9 billion excluding the retail point of sale finance
business under IAS 39, and in accordance with the requirements of IFRS
9 has not been restated.
2 Please refer to definitions on page 18.
3 Adjusted measures exclude GBP3.2 million (2018: GBP3.7 million) of
amortisation of intangible assets on acquisition, and profit from discontinued
operations of GBP1.2m (2018: loss of GBP1.2 million) net of tax.
Preben Prebensen, Chief Executive, said:
"We delivered another solid performance in the first half, continuing to achieve strong returns while staying true to our service led business model, disciplined approach, and commitment to investing through the cycle.
The Banking division has continued its good performance year to date, and our market facing businesses have remained solidly profitable in difficult market conditions.
Longer term, we are confident that the disciplined application of our business model will continue to allow us to support our clients and customers and invest in our business, while maintaining strong returns and profitability in a wide range of market conditions."
Enquiries
Sophie Gillingham Close Brothers Group plc 020 7655 3844 Eva Hatfield Close Brothers Group plc 020 7655 3350 Matt Bullivant Close Brothers Group plc 020 7655 3698 Andy Donald Maitland 020 7379 5151
A presentation to analysts and investors will be held today at 9.30 am GMT at our offices at 10 Crown Place, London EC2A 4FT. A listen-only dial-in facility will be available by registering at https://webcasts.closebrothers.com/results/InterimResults2019/vip_connect
Basis of Presentation
Results are presented both on a statutory and an adjusted basis to aid comparability between periods. Adjusted measures are presented on a basis consistent with prior periods and exclude amortisation of intangible assets on acquisition, to present the performance of the group's acquired businesses consistent with its other businesses; any exceptional items, which are non-recurring and do not reflect trading performance; and discontinued operations.
Discontinued operations relate to the unsecured retail point of sale finance business, which was sold on 1 January 2019, and has been classified as a discontinued operation in the group's income statement for the 2018 and 2019 half year periods. The related assets and liabilities are classified as held for sale on the group's balance sheet as at 31 July 2018 and 1 August 2018.
To maintain consistency with the income statement and reflect the group's continuing operations, the calculation of the bad debt ratio, net interest margin and return on net loan book for the Banking division in the first half 2018 comparative period excludes the unsecured retail point of sale finance loan book from both the opening and closing loan book.
As previously communicated, the group has adopted IFRS 9 Financial Instruments with effect from 1 August 2018, and is presenting its results for the half year 2019 under IFRS 9. In accordance with the requirements of IFRS 9, comparative information has not been restated and transitional adjustments have been accounted for through retained earnings at 1 August 2018.
The comparative income statement for the half year 2018 continues to be reported under IAS 39 Financial Instruments - Recognition and Measurement. The group has presented its opening balance sheet as at 1 August 2018 and reported under IFRS 9 to aid comparability and consistency with half year 2019 closing balances (see also note 17 to the consolidated financial statements).
About Close Brothers
Close Brothers is a leading UK merchant banking group providing lending, deposit taking, wealth management services and securities trading. We employ over 3,000 people, principally in the UK. Close Brothers Group plc is listed on the London Stock Exchange and is a member of the FTSE 250.
BUSINESS OVERVIEW
Close Brothers has delivered a solid first half, maintaining strong returns and profitability. Return on opening equity has remained strong at 16.1% (2018: 17.5%) and we are pleased to declare an interim dividend of 22.0p (2018: 21.0p) per share, up 5% year on year.
Adjusted operating profit decreased 4% to GBP138.8 million (2018: GBP143.9 million), reflecting the difficult market environment for our market facing businesses, Asset Management and Winterflood, and statutory operating profit before tax from continuing operations decreased 3% to GBP135.6 million (2018: GBP140.2 million). Adjusted basic earnings per share reduced 3% to 69.8p (2018: 72.0p), and statutory basic earnings per share from continuing operations also reduced 3% to 68.1p (2018: 70.0p).
Our proven and resilient business model enables us to support our customers and clients, invest in our business and deliver strong returns to shareholders throughout the economic cycle. As always, our focus remains on maintaining the discipline of this model and continuously investing in its long-term potential through a number of strategic infrastructure and business initiatives.
Good Profitability in the Lending Businesses
The Banking division continued to deliver good profitability, benefiting from our disciplined approach and diverse portfolio of businesses, with adjusted operating profit increasing 1% to GBP131.1 million (2018: GBP130.1 million).
We continuously focus on maintaining our strong net interest margin and underwriting discipline in all market conditions. The net interest margin remained broadly stable on the prior year period at 8.1% (2018: 8.2%), as we continue to maintain our pricing discipline despite ongoing competition in many of our markets. The unchanged low bad debt ratio of 0.6% (2018: 0.6%) reflects consistently strong credit performance across our lending portfolios, and the continued application of our prudent lending criteria.
Overall the loan book increased 2.0% in the first half to GBP7.4 billion (1 August 2018: GBP7.2 billion). We achieved good growth in our Commercial portfolio, benefiting from continued growth in both core Asset and Invoice Finance, as well as an increasing contribution from our new civil litigation finance offering. Premium Finance also delivered good growth, benefiting from new business wins following the significant investment in this business in recent years. Within Property, we continue to extend our business into UK regional markets where we see consistently strong demand for development of new build family homes, although the overall loan book was broadly flat in the period.
The long-term resilience of our business model allows us to invest through the cycle, and we are continuing to progress a number of strategic investment programmes to protect, improve and extend our business for the long term. In the Treasury function, we have recently implemented a new deposit platform, which will enable us to provide a wider range of retail deposit products and an online offering. In Motor Finance, we have initiated a multi-year transformation programme which will significantly enhance our service proposition to dealers and customers. We are also making good progress developing the models, systems and processes required to use the Internal Ratings Based approach, and currently expect to submit our formal application to the PRA by the end of the 2019 calendar year.
Solid Performance in Difficult Conditions for Asset Management and Winterflood
The Asset Management division continued to make good progress, although total client assets and profit were impacted by falling markets in the first half. We achieved good net inflows at 7% (annualised) of opening managed assets, reflecting the strength of our client proposition for both advice and investment management. The division delivered an adjusted operating profit of GBP10.8 million (2018: GBP11.4 million), down 5% year on year, and an operating margin of 18% (2018: 20%).
Winterflood continued to deliver solid profitability in a difficult market, although operating profit of GBP9.3 million (2018: GBP14.7 million) reduced on the prior year period due to lower investor trading activity, particularly in December. Trading remained consistently profitable, with only one loss day in the period (2018: none).
Prudent Funding, Liquidity and Capital
The prudent management of our funding, liquidity and capital is a core part of our business model allowing us to grow, invest and pay a progressive and sustainable dividend, while meeting all regulatory requirements. Our capital ratios strengthened further in the period, with a common equity tier 1 capital ratio of 13.0% (1 August 2018: 12.7%) and leverage ratio of 11.2% (1 August 2018: 10.6%). We have also continued to actively diversify our sources of funding and optimise our liquidity, to maximise both cost efficiency and future flexibility.
Outlook
We recognise the uncertainties in the external economic and political environment, but believe that our proven and resilient business model leaves us well placed to support our customers and deliver good returns in a wide range of market conditions.
Our Banking division remains well positioned, benefiting from the diversity of its business portfolio and strong customer focus. We remain committed to protecting margins, maintaining our prudent underwriting and continuing to invest in our businesses for the long-term.
The Asset Management division remains focused on the long-term strength of our client proposition and on growing its asset base through ongoing investment and maintaining good net inflows.
Winterflood continues to maintain its market-leading position and maximise its trading opportunities, but remains sensitive to external market conditions.
Overall, we remain well positioned for the remainder of the year.
OVERVIEW OF FINANCIAL PERFORMANCE
Income Statement
First half First half
2019 2018 Change
GBP million GBP million %
--------------------------------------- -------------- ------------------ ---------
Adjusted operating income 407.4 402.5 1
Adjusted operating expenses (246.7) (235.8) 5
Impairment losses on financial
assets (21.9) (22.8) (4)
---------------------------------------- -------------- ------------------ ---------
Adjusted operating profit 138.8 143.9 (4)
---------------------------------------- -------------- ------------------ ---------
Banking 131.1 130.1 1
-------------- ------------------ ---------
Commercial 47.3 39.7 19
Retail 36.8 44.4 (17)
Property 47.0 46.0 2
-------------- ------------------ ---------
Asset Management 10.8 11.4 (5)
Securities 9.3 14.7 (37)
Group (12.4) (12.3) 1
---------------------------------------- -------------- ------------------ ---------
Amortisation of intangible assets
on acquisition (3.2) (3.7) (14)
---------------------------------------- -------------- ------------------ ---------
Operating profit before tax 135.6 140.2 (3)
---------------------------------------- -------------- ------------------ ---------
Tax (33.4) (35.1) (5)
---------------------------------------- -------------- ------------------ ---------
Profit after tax from continuing
operations 102.2 105.1 (3)
---------------------------------------- -------------- ------------------ ---------
Profit/(loss) from discontinued
operations, net of tax 1.2 (1.2)
---------------------------------------- -------------- ------------------ ---------
Loss attributable to non-controlling
interests from continuing operations (0.1) (0.1) -
---------------------------------------- -------------- ------------------ ---------
Profit attributable to shareholders 103.5 104.0 -
---------------------------------------- -------------- ------------------ ---------
Adjusted basic earnings per share
(continuing operations) 69.8p 72.0p (3)
Basic earnings per share (continuing
operations) 68.1p 70.0p (3)
Basic earnings per share (continuing
and discontinued operations) 68.9p 69.2p -
Dividend per share 22.0p 21.0p 5
Return on opening equity 16.1% 17.5%
Solid Performance in the First Half
The group delivered a solid performance in the first half. The Banking division continued to deliver good profitability, although the difficult trading environment for Asset Management and Winterflood led to a 4% decrease in group adjusted operating profit to GBP138.8 million (2018: GBP143.9 million), resulting in an operating margin of 34% (2018: 36%). Statutory operating profit before tax from continuing operations reduced 3% to GBP135.6 million (2018: GBP140.2 million). Return on opening equity ("RoE") remained strong at 16.1% (2018: 17.5%) despite the lower profits in our market facing businesses and continued growth in the equity base.
The Banking division continued to deliver loan book growth at strong returns, with adjusted operating profit up 1% to GBP131.1 million (2018: GBP130.1 million), as a strong performance in Commercial offset lower profits in Retail. Asset Management delivered good net inflows, though adjusted operating profit reduced 5% to GBP10.8 million (2018: GBP11.4 million) year on year, as a result of negative market movements. Winterflood remained solidly profitable, although operating profit reduced 37% to GBP9.3 million (2018: GBP14.7 million) reflecting lower trading volumes. Group net expenses, which include the central functions such as finance, legal and compliance, risk and human resources, were broadly flat at GBP12.4 million (2018: GBP12.3 million).
Adjusted operating income increased 1% to GBP407.4 million (2018: GBP402.5 million), with higher income in the Banking division and Asset Management offset by reduced trading income in Winterflood. Income in Banking increased 4% reflecting loan book growth and a broadly stable net interest margin of 8.1% (2018: 8.2%), while income in Asset Management was also up 4% reflecting higher opening managed assets. In Securities income reduced 18% as a result of lower trading volumes.
Adjusted operating expenses increased 5% to GBP246.7 million (2018: GBP235.8 million), driven predominantly by continued growth and investment in the Banking division. Costs in Asset Management also increased, as a result of investment in front office hires and research capability, while expenses in Securities reduced, reflecting lower variable costs. Overall, the expense/income ratio increased to 61% (2018: 59%) while the compensation ratio reduced to 36% (2018: 37%).
Impairment losses of GBP21.9 million (2018: GBP22.8 million) remained low with a bad debt ratio of 0.6% (2018: 0.6%), reflecting continued strong credit performance and the current benign credit environment.
The tax charge in the period was GBP33.4 million (2018: GBP35.1 million), which corresponds to a broadly unchanged effective tax rate of 25% (2018: 25%).
Overall, adjusted basic earnings per share ("EPS") decreased 3% to 69.8p (2018: 72.0p).
Adjusted operating profit and EPS exclude amortisation of intangible assets on acquisition of GBP3.2 million (2018: GBP3.7 million). Including this, basic EPS from continuing operations decreased 3% to 68.1p (2018: 70.0p).
On 1 January 2019 the group completed the sale of the unsecured retail point of sale finance business. This business has been classified as a discontinued operation in the group's income statement, with a profit from discontinued operations of GBP1.2 million (2018: loss of GBP1.2 million) net of tax in the first half, including an estimated profit on disposal of GBP2.8 million net of tax (2018: GBPnil). Basic earnings per share from continuing and discontinued operations was broadly flat at 68.9 pence (2018: 69.2 pence).
Dividend
The group has a progressive dividend policy, which aims to grow the dividend year on year while maintaining a prudent level of dividend cover. The interim dividend of 22.0p (2018: 21.0p) represents an increase of 5% from the prior year, and is due to be paid on 24 April 2019 to shareholders on the register at 22 March 2019.
Group Balance Sheet
31 January 1 August
2019 2018
GBP million GBP million(3)
--------------------------------- ------------- ----------------
Loans and advances to customers 7,385.1 7,239.3
Treasury assets(1) 1,224.8 1,435.1
Market-making assets(2) 604.1 635.7
Other assets 804.2 896.0
---------------------------------- ------------- ----------------
Total assets 10,018.2 10,206.1
---------------------------------- ------------- ----------------
Deposits by customers 5,349.5 5,497.2
Borrowings 2,531.2 2,501.1
Market-making liabilities(2) 522.0 565.5
Other liabilities 274.5 338.5
---------------------------------- ------------- ----------------
Total liabilities 8,677.2 8,902.3
---------------------------------- ------------- ----------------
Equity 1,341.0 1,303.8
---------------------------------- ------------- ----------------
Total liabilities and equity 10,018.2 10,206.1
---------------------------------- ------------- ----------------
1 Treasury assets comprise cash and balances at central banks, and debt securities held to support lending in the Banking division.
2 Market-making assets and liabilities comprise settlement balances, long and short trading positions and loans to or from money brokers.
3 Opening balance sheet reported under IFRS 9 - see page 10 for transitional impact.
We maintain a prudent approach to managing our financial resources, which is reflected in our strong and transparent balance sheet. Assets are made up predominantly of loans and advances to customers as well as treasury assets held for liquidity purposes, and settlement balances in our Securities division. Other assets principally comprise intangibles, property, plant and equipment, and prepayments. Liabilities are predominantly made up of customer deposits, and both secured and unsecured borrowings to fund the loan book.
Total assets decreased to GBP10.0 billion (1 August 2018: GBP10.2 billion), driven by a reduction in excess liquidity and the sale of the unsecured retail point of sale finance business. Total liabilities decreased GBP225.1 million to GBP8.7 billion (1 August 2018: GBP8.9 billion). Shareholders' equity of GBP1.3 billion (1 August 2018: GBP1.3 billion) continued to build, with profit in the period partially offset by dividend payments of GBP62.8 million. The group's return on assets remained broadly stable at 2.1% (1 August 2018: 2.0%).
Capital Position
31 January 1 August
2019 2018
GBP million GBP million
------------------------------ ------------- -------------
Common equity tier 1 capital 1,131.2 1,082.2
Total capital 1,322.8 1,280.1
Risk weighted assets 8,698.0 8,542.6
Common equity tier 1 capital
ratio 13.0% 12.7%
Total capital ratio 15.2% 15.0%
Leverage ratio 11.2% 10.6%
------------------------------- ------------- -------------
The group aims to maintain a strong capital position, which supports our ability to lend through the cycle, invest in our business and pay a progressive dividend to shareholders while continuing to meet all regulatory requirements.
In the first half the common equity tier 1 ("CET1") capital ratio increased to 13.0% (1 August 2018: 12.7%), reflecting our continued profitability and modest loan book growth at this stage in the cycle. CET1 capital increased to GBP1,131.2 million (1 August 2018: GBP1,082.2 million), reflecting GBP103.5 million of profit for the period, a regulatory deduction for foreseeable dividends of GBP47.1 million and other movements in reserves and intangibles. Risk weighted assets increased 2% to GBP8.7 billion (1 August 2018: GBP8.5 billion), broadly reflecting the increase in the loan book.
The group's total capital ratio also increased to 15.2% (1 August 2018: 15.0%), and the leverage ratio increased further to 11.2% (1 August 2018: 10.6%) reflecting the reduction in total assets in the period.
The group's capital ratios at 31 January 2019 are presented on a transitional basis, in accordance with the IFRS 9 transitional arrangements that allow the capital impact of expected credit losses to be phased in over a five year period. Before transitional arrangements, the group's fully loaded CET1 capital ratio at 31 January 2019 was 12.5% (1 August 2018: 12.2%).
There has been no change to the group's minimum capital requirements in the period, with a minimum CET1 capital ratio of 9.0% and total capital ratio of 13.4% on a fully loaded basis, effective July 2019, including all applicable buffers and a pillar 2 add-on of 1.1% CET1 and 1.9% total capital.
Accordingly, all the group's capital ratios remain comfortably ahead of minimum regulatory requirements, and we continue to maintain good levels of headroom allowing for future growth and any regulatory changes, including the impact of IFRS 9 and the proposed Basel 3 reforms.
We are continuing to progress our plans for transitioning to an Internal Ratings Based approach, and currently expect to submit our formal application to the PRA by the end of the 2019 calendar year.
Funding(1)
31 January 1 August
2019 2018
GBP million GBP million
--------------------------------------- ------------- -------------
Customer deposits 5,349.5 5,497.2
Secured funding 1,394.1 1,360.3
Unsecured funding(2) 1,403.9 1,421.2
Equity 1,341.0 1,303.8
---------------------------------------- ------------- -------------
Total available funding 9,488.5 9,582.5
---------------------------------------- ------------- -------------
Of which term funding (over one year) 5,553.3 4,913.6
Total funding as % of loan book 128% 132%
Term funding as % of loan book 75% 68%
Average maturity of funding allocated 22 months 23 months
to loan book(3)
1 Numbers relate to core funding and exclude working capital facilities at the business level.
2 Unsecured funding includes GBP295.0 million (1 August 2018: GBP295.0 million) of undrawn facilities.
3 Average maturity of total funding excluding equity and funding held for liquidity purposes.
The main purpose of our treasury function is to manage funding and liquidity to support the lending businesses, and manage interest rate risk. We maintain a conservative approach, with diverse funding sources and a prudent maturity profile.
We continue to have access to a wide range of funding sources, including retail and corporate deposits, both secured and unsecured debt, and wholesale facilities. This maximises our flexibility on pricing, and means we have low reliance on any single source of funding. Retail deposits comprise 20% of our total available funding and we have made limited use of the Term Funding Scheme, which represents only 5% of our total funding with a total of GBP490 million drawn at the balance sheet date.
In the first half, total funding was marginally reduced to GBP9.5 billion (1 August 2018: GBP9.6 billion), representing 128% of the loan book, as loan book growth in the period was funded by a reduction in excess liquidity. The decrease was driven by lower deposits, down 3% to GBP5.3 billion (1 August 2018: GBP5.5 billion), reflecting the maturity of short term deposits. During the period we renewed and increased our Premium Finance securitisation facility to GBP500 million.
We have maintained a prudent funding maturity profile. At 31 January 2019, term funding with a residual maturity over one year covered 75% (1 August 2018: 68%) of the loan book, reflecting the renewal of long term facilities. The average maturity of funding allocated to the loan book at 22 months (1 August 2018: 23 months) remains significantly ahead of the loan book maturity of 14 months (1 August 2018: 14 months).
Our average cost of funding increased slightly to 1.7% (2018: 1.6%), as disciplined deposit pricing and renewal of facilities at lower cost partly offset the 25bps increase in the base rate in August 2018.
Our wide range of funding sources, strong credit ratings and access to wholesale markets increase our resilience to any change in availability or pricing, and we continue to actively diversify our funding sources. In the first half, we successfully completed the transition to a new customer deposit platform, which will allow us to build an online distribution channel and offer a wider range of savings products, which will further increase flexibility over time.
During the first half, both Moody's Investors Services ("Moody's") and Fitch Ratings ("Fitch") reaffirmed our credit ratings. Moody's rates Close Brothers Group ("CBG") A3/P2 and Close Brothers Limited ("CBL") Aa3/P1, with stable outlook. Fitch rates both CBG and CBL A/F1 with stable outlook.
Liquidity
31 January 1 August
2019 2018
GBP million GBP million
---------------------------- ------------- -------------
Bank of England deposits 779.1 1,140.3
Sovereign and central bank
debt 44.3 44.5
High quality liquid assets 823.4 1,184.8
Certificates of deposit 401.4 250.3
Treasury assets 1,224.8 1,435.1
----------------------------- ------------- -------------
We maintain a prudent liquidity position, and regularly assess and stress test our liquidity to ensure it is comfortably ahead of both internal risk appetite and regulatory requirements.
At the same time, we continuously optimise our liquidity position and mix to ensure it remains efficient. In the period, Treasury assets were reduced to GBP1.2 billion (1 August 2018: GBP1.4 billion), as excess liquidity was deployed into loan book growth. We also increased our holding of high quality Certificates of Deposit to GBP401.4 million (1 August 2018: GBP250.3 million), although the majority of our treasury assets continue to be in high quality liquid assets, predominantly deposits with the Bank of England.
We continue to comfortably meet the liquidity coverage ratio requirements under CRD IV, with an average ratio of 740% in the first half of the year.
IFRS 9 Transitional Impact
The group has adopted IFRS 9 Financial Instruments with effect from 1 August 2018, and in accordance with the requirements of IFRS 9, transitional adjustments have been accounted for through retained earnings at 1 August 2018. The implementation of IFRS 9 resulted in an increase in impairment provisions of GBP59.0 million, a GBP44.9 million reduction in shareholders' equity and a GBP14.1 million increase in deferred tax assets at 1 August 2018.
Before transitional relief the impact upon the group's CET1 capital ratio at 1 August 2018 was a reduction of 49 bps to 12.2% on a fully-loaded basis. The group has elected to apply IFRS 9 transitional arrangements, which allow the capital impact of expected credit losses to be phased in over a five year period, and the impact of the transition to IFRS 9 on the group's capital position in the 2019 financial year is therefore minimal at 2 bps.
Further details of the impact of implementing IFRS 9 can be found in the group's IFRS 9 Transition Report publication located on the group's website at https://www.closebrothers.com/investor-relations/results-reports-and-presentations/.
BUSINESS REVIEW
BANKING
Key Financials
Continuing operations(1) First half First half
2019 2018 Change
GBP million GBP million %
--------------------------------- ---------------- ---------------- ---------
Adjusted operating income 303.1 290.9 4
Adjusted operating expenses (150.1) (138.0) 9
Impairment losses on financial
assets (21.9) (22.8) (4)
---------------------------------- ---------------- ---------------- ---------
Adjusted operating profit 131.1 130.1 1
---------------------------------- ---------------- ---------------- ---------
Net interest margin(2) 8.1% 8.2%
Expense/income ratio 50% 47%
Bad debt ratio(2) 0.6% 0.6%
Return on net loan book(2) 3.5% 3.7%
Return on opening equity 18% 20%
---------------------------------- ---------------- ---------------- ---------
Average loan book and operating
lease assets(3) 7,518.5 7,088.1
---------------------------------- ---------------- ---------------- ---------
1 Results from continuing operations exclude the unsecured retail point of sale finance business, which was classified as a discontinued operation in the group's income statement for the 2018 financial year and sold on 1 January 2019.
2 The calculation of the bad debt ratio, net interest margin and return on net loan book excludes the unsecured retail point of sale finance loan book from both the opening and closing loan book.
3 Re-presented to exclude the unsecured retail point of sale finance loan book in both periods and is used to calculate net interest margin, bad debt ratio and return on net loan book.
Good Financial Performance Continued in the First Half
Adjusted operating profit for the Banking division was up 1% to GBP131.1 million (2018: GBP130.1 million), driven by 4% income growth to GBP303.1 million (2018: GBP290.9 million) and continued low impairments. Statutory operating profit increased 1% to GBP130.2 million (2018: GBP129.1 million).
The loan book grew 2.0% in the period, and 6.3% year on year, with a continued strong return on net loan book of 3.5% (2018: 3.7%). Return on opening equity remained strong at 18% (2018: 20%), albeit lower year on year reflecting continued growth in the equity base.
The net interest margin remained broadly stable at 8.1% (2018: 8.2%), reflecting our continued pricing discipline. Although competition remains active in many parts of our business, we continue to focus on holding our pricing across the overall portfolio.
Adjusted operating expenses at GBP150.1 million (2018: GBP138.0 million) increased 9% year on year. Over half of this increase relates to investment in our technology and business propositions, including both ongoing investment to support our operational resilience and regulatory compliance, as well as a number of current strategic initiatives. These include the development of our new deposit platform in Treasury, a significant programme to enhance our technology and service proposition in Motor Finance, and preparations for a transition to the internal ratings based approach for capital.
We remain fully committed to maintaining the necessary investment to protect, improve and extend our business for the long term, while at the same time continuously looking for ways to further optimise our cost efficiency. We have maintained tight control of our underlying business and volume driven costs, which increased broadly in line with income in the first half. Overall, the compensation ratio remained stable at 28% (2018: 28%), while the expense/income ratio increased to 50% (2018: 47%).
The bad debt ratio remained low at 0.6% (2018: 0.6%), reflecting continued strong underlying credit performance. We have not seen any significant change to the current benign credit environment in the period, which alongside our disciplined lending criteria continues to support low impairments and a broadly stable bad debt ratio.
Loan Book Analysis
31 January 1 August
2019 2018(1) Change
GBP million GBP million %
--------------------------------- ------------ ------------ -------------
Commercial(2) 2,883.3 2,747.5 4.9
------------ ------------ -------------
Asset Finance 1,910.5 1,828.2 4.5
Invoice and Speciality Finance 972.8 919.3 5.8
------------ ------------ -------------
Retail 2,701.7 2,670.5 1.2
------------ ------------ -------------
Motor Finance 1,692.8 1,722.7 (1.7)
Premium Finance 1,008.9 947.8 6.4
------------ ------------ -------------
Property 1,800.1 1,821.3 (1.2)
--------------------------------- ------------ ------------ -------------
Closing loan book 7,385.1 7,239.3 2.0
--------------------------------- ------------ ------------ -------------
1 Re-presented to exclude the unsecured retail point of sale finance business, which was classified as a discontinued operation in the group's income statement for the 2018 financial year and sold on 1 January 2019.
2 The Asset Ireland loan book has been reclassified in the period from Asset Finance to Invoice and Speciality Finance, to align with where this business is managed. Both 31 January 2019 and comparative 1 August 2018 opening loan book figures have been re-presented accordingly.
The loan book grew 2.0% in the first half, to GBP7.4 billion (1 August 2018: GBP7.2 billion) driven by our Commercial business lines and Premium Finance, with Property remaining broadly flat. In Motor Finance, the loan book contracted modestly, reflecting our pricing and underwriting discipline in the competitive UK market.
Banking: Commercial
First half First half
2019 2018 Change
GBP million GBP million %
--------------------------------- -------------- ------------- -------
Operating income 125.3 110.4 13
Adjusted operating expenses (70.3) (65.1) 8
Impairment losses on financial
assets (7.7) (5.6) 38
--------------------------------- -------------- ------------- -------
Adjusted operating profit 47.3 39.7 19
--------------------------------- -------------- ------------- -------
Net interest margin 8.3% 8.0%
Expense/income ratio 56% 59%
Bad debt ratio 0.5% 0.4%
Average loan book and operating
leases 3,021.6 2,767.7 9.2
--------------------------------- -------------- ------------- -------
The Commercial businesses focus on specialist lending principally to the SME market. The Asset Finance business provides secured financing across a wide range of asset classes. Invoice and Speciality Finance includes our core invoice finance business as well as our brewery and vehicle rentals businesses; Novitas, which provides finance for legal fees; and our commercial lending activities in Ireland.
The Commercial loan book increased 4.9% to GBP2.9 billion (1 August 2018: GBP2.7 billion), with growth across both Asset Finance and Invoice and Speciality Finance. Although competition in many areas remains active, the Asset Finance book grew 4.5%, benefiting from the diversity and specialism of the business, with particularly good growth in transport and contract hire. In Invoice and Speciality Finance, we saw good loan book growth of 5.8%, with continued growth in the core invoice finance client base as well as strong growth in Novitas, driven by expansion of its new litigation finance offering.
Adjusted operating profit of GBP47.3 million (2018: GBP39.7 million) was up 19%, driven by higher income and continued low impairments. Statutory operating profit increased 20% to GBP46.5 million (2018: GBP38.8 million).
Operating income of GBP125.3 million (2018: GBP110.4 million) was 13% higher year on year, reflecting good loan book growth in the period. Our net interest margin strengthened further to 8.3% (2018: 8.0%), principally due to mix with good growth in higher margin products.
Costs were up 8% to GBP70.3 million (2018: GBP65.1 million) following growth across our Commercial business lines, but increased less than income in the period, resulting in a reduction in the expense/income ratio to 56% (2018: 59%).
The bad debt ratio remained broadly unchanged at 0.5% (2018: 0.4%), reflecting the current benign credit environment, continued low arrears and a strong collections performance.
Banking: Retail
Continuing operations(1) First half First half
2019 2018 Change
GBP million GBP million %
-------------------------------- ------------- ------------- -------
Adjusted operating income 113.2 115.6 (2)
Adjusted operating expenses (63.0) (57.8) 9
Impairment losses on financial
assets (13.4) (13.4) -
-------------------------------- ------------- ------------- -------
Adjusted operating profit 36.8 44.4 (17)
-------------------------------- ------------- ------------- -------
Net interest margin 8.4% 8.7%
Expense/income ratio 56% 50%
Bad debt ratio 1.0% 1.0%
Average loan book 2,686.1 2,658.7 1.0
-------------------------------- ------------- ------------- -------
1 Results from continuing operations exclude the unsecured retail point of sale finance business, which was classified as a discontinued operation in the group's income statement for the 2018 financial year and sold on 1 January 2019.
The Retail businesses provide intermediated finance, principally to individuals, through motor dealers and insurance brokers, and incorporate our Motor Finance and Premium Finance businesses.
The Retail loan book remained broadly flat at GBP2.7 billion (1 August 2018: GBP2.7 billion). In Premium Finance, we saw good growth of 6.4% to GBP1.0 billion (1 August 2018: GBP0.9 billion), as recent investment has enabled new broker wins and increased penetration of existing brokers, by simplifying the customer journey and onboarding process.
In Motor Finance, a highly competitive sector, we continue to consistently apply our model, holding margin and prioritising credit quality. The loan book continued to contract slightly, down 1.7% to GBP1.7 billion (1 August 2018: GBP1.7 billion), though we continue to see growth potential in the UK second hand car finance market. The business in the Republic of Ireland, where we operate through a local partner, remained broadly flat.
Adjusted operating income was down 2% year on year at GBP113.2 million (2018: GBP115.6 million) reflecting the slight decline in the Motor Finance loan book, with the net interest margin reducing to 8.4% (2018: 8.7%), principally due to growth in the lower margin Irish motor book, and an increased proportion of lower margin commercial loans in Premium Finance.
Adjusted operating expenses increased 9% to GBP63.0 million (2018: GBP57.8 million), reflecting the cost of onboarding new brokers in Premium Finance, and our ongoing investment in this business. In the current financial year we have also initiated a significant transformation programme in Motor Finance, which will over time enable better efficiency in operational processes, and higher service levels for our dealer partners and customers. Alongside the reduction in revenue, this resulted in an increase in the expense/income ratio to 56% (2018: 50%).
The bad debt ratio of 1.0% (2018: 1.0%) remains consistent with the last financial year. We remain comfortable with the credit quality of our loan book, which continues to perform as expected at this stage of the cycle.
Overall, adjusted operating profit for Retail was down 17% year on year to GBP36.8 million (2018: GBP44.4 million), with statutory operating profit also down 17% at GBP36.7 million (2018: GBP44.3 million).
Banking: Property
First half First half
2019 2018 Change
GBP million GBP million %
-------------------------------- ---------------- ------------- ---------
Operating income 64.6 64.9 (0)
Operating expenses (16.8) (15.1) 11
Impairment losses on financial
assets (0.8) (3.8) (79)
-------------------------------- ---------------- ------------- ---------
Operating profit 47.0 46.0 2
-------------------------------- ---------------- ------------- ---------
Net interest margin 7.1% 7.8%
Expense/income ratio 26% 23%
Bad debt ratio 0.1% 0.5%
Average loan book 1,810.7 1,661.7 9.0
-------------------------------- ---------------- ------------- ---------
The Property business is focused on specialist residential development finance to established professional developers in the UK. We concentrate on smaller developments of family housing in high-quality locations and maintain conservative underwriting criteria. We do not lend to the buy-to-let sector, or provide residential or commercial mortgages.
The Property business delivered a solid performance in the period, with an operating profit of GBP47.0 million (2018: GBP46.0 million), a marginal increase year on year. The bad debt ratio in the current period reduced to 0.1% (2018: 0.5%) reflecting continued strong credit quality, with no material new provisions in the period. The net interest margin reduced to 7.1% (2018: 7.8%) principally due to lower fee income and the impact of the higher base rate.
The loan book remained broadly flat at GBP1.8 billion (1 August 2018: GBP1.8 billion), reflecting a number of large repayments offsetting new lending in the period. We continue to see good demand for residential property development finance and the pipeline remains solid. Our focus remains on new build family homes where we see strong structural demand, and we continue to extend our offering to high-quality regional locations where we see good growth potential.
Operating expenses of GBP16.8 million (2018: GBP15.1 million) were up on the prior year period, but the expense/income ratio remained comparatively low at 26% (2018: 23%), reflecting the lower operational requirements of the business.
ASSET MANAGEMENT
Key Financials
First half First half
2019 2018 Change
GBP million GBP million %
------------------------------ ------------- ------------- ---------
Investment management 39.6 35.8 11
Advice and other services(1) 18.7 20.0 (7)
Other income(2) 0.2 0.2 -
------------------------------- ------------- ------------- ---------
Operating income 58.5 56.0 4
Adjusted operating expenses (47.7) (44.6) 7
------------------------------- ------------- ------------- ---------
Adjusted operating profit 10.8 11.4 (5)
------------------------------- ------------- ------------- ---------
Revenue margin (bps) 96 97
Operating margin 18% 20%
Return on opening equity 32% 33%
1 Income from advice and self-directed services, excluding investment management income.
2 Net interest income and expense, income on principal investments and other income.
Solid Performance Supported by Good Net Inflows
Asset Management delivered good net inflows of GBP376 million in the first half, representing an annualised rate of 7% of opening managed assets. Adjusted operating profit of GBP10.8 million (2018: GBP11.4 million) was down 5% year on year reflecting the impact of negative market movements. Statutory operating profit decreased 2% to GBP8.5 million (2018: GBP8.7 million).
Operating income increased 4% to GBP58.5 million (2018: GBP56.0 million). This was driven by good growth in investment management fees, following the strong growth in our managed assets in the last financial year. Reduced income on advice and other services reflects lower initial fees associated with lower net inflow levels compared to the prior year. The revenue margin remained broadly flat at 96bps (2018: 97bps).
Adjusted operating expenses increased 7% to GBP47.7 million (2018: GBP44.6 million), and the expense/income ratio increased to 82% (2018: 80%), reflecting ongoing investment in front office staff and research capability, while the compensation ratio decreased slightly to 55% (2018: 57%) reflecting lower variable compensation.
We remain focused on improving operational efficiency through investment in technology, and continue to make good progress upgrading our client relationship management systems and digital functionality.
Movement in Client Assets
31 January 2019
GBP million
------------------------------------------------------- ----------------
Opening managed assets 10,378
Inflows 944
Outflows (568)
------------------------------------------------------- ----------------
Net inflows 376
Market movements (453)
Total managed assets 10,301
Advised only assets 1,667
------------------------------------------------------- ----------------
Total client assets(1) 11,968
------------------------------------------------------- ----------------
Net flows as % of opening managed assets (annualised) 7%
------------------------------------------------------- ----------------
1 Total client assets include GBP4.4 billion of assets that are both
advised and managed.
We achieved good net inflows of GBP376 million, an annualised net inflow rate of 7%, reflecting continued demand for both our integrated wealth and investment management services, and the benefit of recent hires in line with our growth strategy. However, this was more than offset by negative market movements of GBP453 million, and as a result managed assets decreased 1% overall to GBP10.3 billion (31 July 2018: GBP10.4 billion).
Total client assets, which also include advised assets under third-party management, reduced 2% to GBP12.0 billion (31 July 2018: GBP12.2 billion).
Our funds and segregated bespoke portfolios are designed to provide attractive risk adjusted returns for our clients, in line with their long-term goals. Over the 12 month period to 31 January 2019, 11 out of our 12 multi-asset funds outperformed their relevant peer group average. For the five year period to 31 January 2019, 11 out of our 12 multi-asset funds also outperformed their relevant sector average, with 8 out of 12 in either the first or second quartile versus their relevant peer group. All of our bespoke strategy composites outperformed their relevant peer group average over the year to 31 January 2019, and over a 5 year period, in line with our strong long-term outperformance track record for our bespoke strategies.
The continued momentum in the first half underpins the long-term growth potential of this business, and we remain committed to driving further growth through net inflows, hiring of new advisers and investment managers, and selective acquisitions.
SECURITIES
Key Financials
First half First half
2019 2018 Change
GBP million GBP million %
-------------------------- ------------- ------------- ---------
Operating income 45.8 55.6 (18)
Operating expenses (36.5) (40.9) (11)
--------------------------- ------------- ------------- ---------
Operating profit 9.3 14.7 (37)
--------------------------- ------------- ------------- ---------
Bargains per day 54k 70k (24)
Operating margin 20% 26%
Return on opening equity 19% 30%
Solid Profitability in Difficult Trading Conditions
Winterflood remains focused on delivering high-quality execution services to stockbrokers, wealth managers and institutional investors.
The business was impacted by difficult and volatile equity market conditions and low levels of investor risk appetite throughout the first half. As a result, operating profit decreased 37% to GBP9.3 million (2018: GBP14.7 million).
Operating income reduced 18% to GBP45.8 million (2018: GBP55.6 million) reflecting lower volumes and trading income in the period. Average daily bargains decreased 24% year on year to 53,515 (2018: 70,284), reflecting low retail investor activity, particularly in AIM stocks.
We remain focused on closely managing our risk exposures, while continuing to provide liquidity and high quality execution to our clients. Despite the recent challenging market environment, trading remained profitable throughout, with only one loss day (2018: no loss days) in the period.
Operating expenses decreased 11% as a result of Winterflood's largely variable cost base. The expense/income ratio increased to 80% (2018: 74%) reflecting lower income, while the compensation ratio remained stable at 48% (2018: 48%).
As the first half results demonstrate, Winterflood remains well positioned to continue trading profitably and provide continuous liquidity to its customers in a wide range of market conditions. We are continuing to extend our offering to institutional clients, and through Winterflood Business Services develop our outsourced dealing and custody services for asset managers in the UK.
DEFINITIONS
Adjusted: Adjusted measures are used to increase comparability between periods and exclude amortisation of intangible assets on acquisition and any exceptional items and discontinued operations
Bad debt ratio: Impairment losses on financial assets as a percentage of average net loans and advances to customers and operating lease assets
Compensation ratio: Total staff costs as a percentage of adjusted operating income
Dividend per share ("DPS"): Comprises the final dividend proposed for the respective year together with the interim dividend declared and paid in the year
Earnings per share ("EPS"): Profit attributable to shareholders divided by number of basic shares
Effective tax rate: Tax on operating profit/(loss) as a percentage of operating profit/(loss) on ordinary activities before tax
Expense/income ratio: Total adjusted operating expenses divided by adjusted operating income
Funding allocated to loan book: Total funding excluding equity and funding held for liquidity purposes
Funding % loan book: Total funding divided by net loans and advances to customers
High quality liquid assets ("HQLAs"): Assets which qualify for regulatory liquidity purposes, including Bank of England deposits, and sovereign and central bank debt, including funds drawn under the Funding for Lending Scheme
Leverage ratio: Tier 1 capital as a percentage of total balance sheet assets, adjusted for certain capital deductions, including intangible assets, and off balance sheet exposures
Liquidity coverage ratio: Measure of the group's HQLAs as a percentage of expected net cash outflows over the next 30 days in a stressed scenario
Loan to value ratio ("LTV"): For a secured loan, the loan balance as a percentage of the total value of the asset
Net interest margin ("NIM"): Adjusted income generated by lending activities, including interest income net of interest expense, fees and commissions income net of fees and commissions expense, and operating lease income net of operating lease expense, less depreciation on operating lease assets, divided by average loans and advances to customers (net of impaired loans) and operating lease assets
Operating margin: Adjusted operating profit divided by adjusted operating income
Return on assets: Profit attributable to shareholders divided by total assets at balance sheet date
Return on net loan book ("RoNLB"): Adjusted operating profit from lending activities divided by average net loans and advances to customers, and operating lease assets
Return on opening equity ("RoE"): Adjusted operating profit after tax and non-controlling interests divided by opening equity, excluding non-controlling interests
Revenue margin: Income from advice, investment management and related services divided by average total client assets
Term funding: Funding with a remaining maturity greater than 12 months
Principal Risks and Uncertainties
The group faces a number of risks in the normal course of business. The key elements to the way we manage risk are as follows:
-- adhering to our established and proven business model;
-- implementing an integrated risk management approach based on the concept of "three lines of defence"; and
-- setting and operating within clearly defined risk appetites, monitored with defined metrics and set limits.
A detailed description of the principal risks and our approach to managing and mitigating these risks is disclosed on pages 20 to 23 of the Annual Report 2018 which can be accessed via the Investor Relations home page on the group's website at www.closebrothers.com.
While there have been no significant changes to our risk management approach in the period we continue to closely monitor the economic environment in the context of the UK's planned departure from the EU. The principal risks faced by the group are summarised below.
Credit losses - the group provides loans to a range of small businesses and individuals. There is a risk that customers are unable to repay their loans and any outstanding interest and fees resulting in credit losses. The group also has exposure to counterparties with which it places deposits or trades and also has a small number of derivative contracts to hedge interest rate and foreign exchange exposures.
Economic environment - any downturn in economic conditions may impact the group's performance through lower demand for the group's products and services, lower investor risk appetite, higher credit losses and increased volatility in funding markets.
Legal and regulatory - changes to existing legal, regulatory and tax environments, or failure to comply with existing requirements could adversely impact the group's performance, as well as capital, liquidity and the markets in which we operate. For example, we are currently monitoring the potential for regulatory change in the Motor Finance market following publication of the FCA's final report on 4 March 2019. Failing to treat customers fairly also has the potential to damage the group's reputation and may lead to legal or regulatory sanctions including litigation and customer redress.
Technology and operational resilience - providing robust, contemporary and secure technology is fundamental to enabling the group to provide a high quality customer experience, respond and adapt to emerging opportunities and risks, protect client and company data and counter the evolving cyber threat. Failure to keep up with changing customer expectations or provide reliable, secure IT services has the potential to impact group performance.
Competition - the group operates in competitive markets. Elevated levels of competition may impact the group's ability to write loans at its desired risk and return criteria, resulting in lower new business volumes and loss of market share.
Employees - the quality and expertise of our employees is critical to our success. The loss of key individuals or teams may have an adverse impact on the group's operations and ability to deliver its strategy.
Funding and liquidity - access to funding remains key to support our lending activities and the group's liquidity requirements. Any material change to funding or liquidity capacity has the potential to impact the group's ongoing performance.
Market risk - market volatility impacting equity and fixed income exposures, and / or changes in interest and exchange rates have the potential to impact the group's performance.
Directors' Responsibility Statement
Each of the Directors confirms that, to the best of their knowledge:
* the condensed set of consolidated financial
statements has been prepared in accordance with
International Accounting Standard 34 "Interim
Financial Reporting";
* the half yearly report includes a fair review of the
information required by Disclosure and Transparency
Rule 4.2.7R (indication of important events during
the first six months of the financial year and
description of principal risks and uncertainties for
the remaining six months of the financial year); and
* the half yearly report 2019 includes a fair review of
the information required by Disclosure and
Transparency Rule 4.2.8R (disclosure of related
parties transactions that have taken place during the
first six months of the current financial year and
that have materially affected the financial position
or performance of the company, and any changes in the
related parties transactions described in the last
Annual Report that could do so).
The Directors of Close Brothers Group plc as at the date of this report are as listed on pages 58 and 59 of the company's Annual Report 2018, subject to the following changes: Jonathan Howell ceased to be a director on 15 November 2018; Mike Morgan was appointed as a director and Group Finance Director with effect from 15 November 2018; and Peter Duffy was appointed as an independent non-executive director with effect from 1 January 2019. A list of current Directors is maintained on the company's website www.closebrothers.com.
On behalf of the board
Michael N. Biggs P. Prebensen Chairman Chief Executive
12 March 2019
Independent Review Report
Report on the condensed half yearly financial statements
Our conclusion
We have reviewed Close Brothers Group plc's condensed half yearly financial statements in the half yearly report of Close Brothers Group plc for the 6 month period ended 31 January 2019. Based on our review, nothing has come to our attention that causes us to believe that the condensed half yearly financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
What we have reviewed
The condensed half yearly financial statements comprise:
-- the consolidated balance sheet at 31 January 2019;
-- the consolidated income statement and consolidated statement of comprehensive income for the period then ended;
-- the consolidated cash flow statement for the period then ended; -- the consolidated statement of changes in equity for the period then ended; and -- the explanatory notes to the condensed half yearly financial statements.
The condensed half yearly financial statements included in the half yearly report have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
As disclosed in note 1 to the condensed half yearly financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.
Responsibilities for the condensed half yearly financial statements and the review
Our responsibilities and those of the directors
The half yearly report, including the condensed half yearly financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half yearly report in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express a conclusion on the condensed half yearly financial statements in the half yearly report based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
What a review of condensed half yearly financial statements involves
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the half yearly report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed half yearly financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
12 March 2019
Consolidated income statement
for the six months ended 31 January 2019
Six months ended Year ended
31 January 31 July
------------------------
2019 2018(1) 2018
Unaudited Unaudited Audited
Note GBP million GBP million GBP million
------------------------------------------------------ ----------- ----------- -----------
Interest income 314.5 298.7 601.0
Interest expense (64.7) (55.7) (114.9)
----------------------------------------------------- ----------- ----------- -----------
Net interest income 249.8 243.0 486.1
----------------------------------------------------- ----------- ----------- -----------
Fee and commission income 113.5 106.1 213.3
Fee and commission expense (6.1) (7.6) (13.7)
Gains less losses arising from dealing in securities 39.7 51.8 100.1
Other income 36.9 31.4 65.1
Depreciation of operating lease assets and other
direct costs (26.4) (22.2) (45.1)
Non-interest income 157.6 159.5 319.7
----------------------------------------------------- ----------- ----------- -----------
Operating income 2 407.4 402.5 805.8
----------------------------------------------------- ----------- ----------- -----------
Administrative expenses (246.7) (235.8) (480.5)
Impairment losses on financial assets (21.9) (22.8) (46.7)
----------------------------------------------------- ----------- ----------- -----------
Total operating expenses before amortisation
of intangible assets
on acquisition (268.6) (258.6) (527.2)
----------------------------------------------------- ----------- ----------- -----------
Operating profit before amortisation of intangible
assets on
acquisition 138.8 143.9 278.6
Amortisation of intangible assets on acquisition (3.2) (3.7) (7.4)
----------------------------------------------------- ----------- ----------- -----------
Operating profit before tax 135.6 140.2 271.2
Tax 3 (33.4) (35.1) (67.0)
----------------------------------------------------- ----------- ----------- -----------
Profit after tax from continuing operations 102.2 105.1 204.2
Profit/(loss) from discontinued operations,
net of tax 4 1.2 (1.2) (2.2)
----------------------------------------------------- ----------- ----------- -----------
Profit after tax 103.4 103.9 202.0
Loss attributable to non-controlling interests
from continuing
operations (0.1) (0.1) (0.3)
Profit attributable to shareholders 103.5 104.0 202.3
From continuing operations
Basic earnings per share 5 68.1p 70.0p 136.2p
Diluted earnings per share 5 67.5p 69.5p 135.3p
From continuing and discontinued operations
Basic earnings per share 5 68.9p 69.2p 134.7p
Diluted earnings per share 5 68.3p 68.7p 133.8p
----------------------------------------------------- ----------- ----------- -----------
Ordinary dividend per share 6 22.0p 21.0p 63.0p
----------------------------------------------------- ----------- ----------- -----------
1 Restated - see notes 1 and 4.
Consolidated Statement of COMPREHENSIVE INCOME
for the six months ended 31 January 2019
Six months ended Year ended
31 January 31 July
------------------------
2019 2018 2018
Unaudited Unaudited Audited
GBP million GBP million GBP million
---------------------------------------------------- ----------- ----------- -----------
Profit after tax 103.4 103.9 202.0
---------------------------------------------------- ----------- ----------- -----------
Other comprehensive (expense)/income that may
be reclassified
to income statement from continuing operations
Currency translation (losses)/gains (0.4) 0.1 0.3
(Losses)/gains on cash flow hedging (1.8) 3.7 4.4
Gains/(losses) on financial instruments classified
as available for sale:
Sovereign and central bank debt - - 0.6
Contingent consideration - (0.3) (0.3)
Losses on financial instruments classified at
fair value through other comprehensive income:
Sovereign and central bank debt (0.6) - -
Tax relating to items that may be reclassified 0.6 (0.9) (1.3)
---------------------------------------------------- ----------- ----------- -----------
(2.2) 2.6 3.7
---------------------------------------------------- ----------- ----------- -----------
Other comprehensive income/(expense) that will
not be
reclassified to income statement from continuing
operations
Defined benefit pension scheme gains 0.2 1.1 1.7
Tax relating to items that will not be reclassified - (0.2) (0.4)
---------------------------------------------------- ----------- ----------- -----------
0.2 0.9 1.3
---------------------------------------------------- ----------- ----------- -----------
Other comprehensive (expense)/income for the
period, net of tax
from continuing operations (2.0) 3.5 5.0
Total comprehensive income 101.4 107.4 207.0
---------------------------------------------------- ----------- ----------- -----------
Attributable to:
Non-controlling interests (0.1) (0.1) (0.3)
Shareholders 101.5 107.5 207.3
---------------------------------------------------- ----------- ----------- -----------
101.4 107.4 207.0
---------------------------------------------------- ----------- ----------- -----------
Consolidated Balance Sheet
at 31 January 2019
31 January 1 August 31 July
2019 2018(1) 2018
Unaudited Unaudited Audited
Note GBP million GBP million GBP million
---------------------------------------------------- ----------- ----------- -----------
Assets
Cash and balances at central banks 779.1 1,140.3 1,140.4
Settlement balances 501.5 512.1 512.2
Loans and advances to banks 101.3 140.1 140.2
Loans and advances to customers 7 7,385.1 7,239.3 7,297.5
Debt securities 8 470.7 320.4 320.6
Equity shares 9 28.0 32.1 32.1
Loans to money brokers against stock advanced 50.1 66.4 66.4
Derivative financial instruments 17.9 16.6 16.6
Intangible assets 208.7 201.3 201.3
Property, plant and equipment 237.9 226.1 226.1
Deferred tax assets 55.1 57.1 43.0
Prepayments, accrued income and other assets 182.8 186.8 187.1
Assets classified as held for sale 4 - 67.5 67.5
Total assets 10,018.2 10,206.1 10,251.0
Liabilities
Settlement balances and short positions 10 506.4 543.1 543.1
Deposits by banks 11 54.2 55.2 55.2
Deposits by customers 11 5,349.5 5,497.2 5,497.2
Loans and overdrafts from banks 11 518.3 509.8 509.8
Debt securities in issue 11 1,793.8 1,773.4 1,773.4
Loans from money brokers against stock advanced 15.6 22.4 22.4
Derivative financial instruments 12.1 15.7 15.7
Current tax liabilities 20.2 17.4 17.4
Accruals, deferred income and other liabilities 188.0 249.6 249.6
Subordinated loan capital 11 219.1 217.9 217.9
Liabilities classified as held for sale 4 - 0.6 0.6
Total liabilities 8,677.2 8,902.3 8,902.3
------------------------------------------------ ----------- ----------- -----------
Equity
Called up share capital 38.0 38.0 38.0
Retained earnings 1,324.2 1,282.8 1,327.7
Other reserves (20.3) (16.2) (16.2)
Total shareholders' equity 1,341.9 1,304.6 1,349.5
------------------------------------------------ ----------- ----------- -----------
Non-controlling interests (0.9) (0.8) (0.8)
------------------------------------------------ ----------- ----------- -----------
Total equity 1,341.0 1,303.8 1,348.7
------------------------------------------------ ----------- ----------- -----------
Total liabilities and equity 10,018.2 10,206.1 10,251.0
------------------------------------------------ ----------- ----------- -----------
1 See notes 1 and 17.
Consolidated Statement of CHANGES IN EQUITY
for the six months ended 31 January 2019
Other reserves
Share- Cash Total
Called up Share Available based Exchange flow attributable
share premium Retained for sale FVOCI payments movements hedging to equity Non-controlling Total
capital account earnings reserve reserve reserve reserve reserve holders interests equity
GBP GBP GBP GBP GBP GBP GBP GBP
GBP million million million million million million million million GBP million GBP million million
------------------------ --------- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
At 1 August
2017
(audited) 38.0 307.8 906.6 0.7 - (11.9) (1.5) (3.2) 1,236.5 (0.5) 1,236.0
----------------- ----- --------- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
Profit/(loss)
for the
period - - 104.0 - - - - - 104.0 (0.1) 103.9
Other
comprehensive
income/(expense)
for the period - - 0.9 (0.2) - - 0.1 2.7 3.5 - 3.5
----------------- ----- --------- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
Total
comprehensive
income/(expense)
for the period - - 104.9 (0.2) - - 0.1 2.7 107.5 (0.1) 107.4
Dividends paid - - (59.7) - - - - - (59.7) - (59.7)
Shares purchased - - - - - (15.9) - - (15.9) - (15.9)
Shares released - - - - - 11.2 - - 11.2 - 11.2
Other movements - - 0.3 - - (2.3) - - (2.0) - (2.0)
Share premium
cancellation - (307.8) 307.8 - - - - - - - -
Income tax - - 0.2 - - - - - 0.2 - 0.2
----------------- ----- --------- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
At 31 January
2018
(unaudited) 38.0 - 1,260.1 0.5 - (18.9) (1.4) (0.5) 1,277.8 (0.6) 1,277.2
----------------- ----- --------- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
Profit/(loss)
for the
period - - 98.3 - - - - - 98.3 (0.2) 98.1
Other
comprehensive
income for
the
period - - 0.4 0.3 - - 0.2 0.6 1.5 - 1.5
----------------- ----- --------- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
Total
comprehensive
income/(expense)
for the period - - 98.7 0.3 - - 0.2 0.6 99.8 (0.2) 99.6
Dividends paid - - (31.3) - - - - - (31.3) - (31.3)
Shares purchased - - - - - (0.1) - - (0.1) - (0.1)
Shares released - - - - - 1.3 - - 1.3 - 1.3
Other movements - - (0.3) - - 1.8 - - 1.5 - 1.5
Share premium
cancellation - - - - - - - - - - -
Income tax - - 0.5 - - - - - 0.5 - 0.5
----------------- ----- --------- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
At 31 July
2018
(audited) 38.0 - 1,327.7 0.8 - (15.9) (1.2) 0.1 1,349.5 (0.8) 1,348.7
----------------- ----- --------- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
Consolidated Statement of CHANGES IN EQUITY continued
for the six months ended 31 January 2019
Other reserves
Share- Cash Total
Called up Share Available based Exchange flow attributable
share premium Retained for sale FVOCI payments movements hedging to equity Non-controlling Total
capital account earnings reserve reserve reserve reserve reserve holders interests equity
GBP GBP GBP GBP GBP GBP GBP GBP
GBP million million million million million million million million GBP million GBP million million
------------------------ -------- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
At 31 July
2018
(audited) 38.0 - 1,327.7 0.8 - (15.9) (1.2) 0.1 1,349.5 (0.8) 1,348.7
IFRS 9 transition
(note 17) - - (44.9) (0.8) 0.8 - - - (44.9) - (44.9)
----------------- ----- -------- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
At 1 August
2018
(unaudited) 38.0 - 1,282.8 - 0.8 (15.9) (1.2) 0.1 1,304.6 (0.8) 1,303.8
----------------- ----- -------- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
Profit/(loss)
for the
period - - 103.5 - - - - - 103.5 (0.1) 103.4
Other
comprehensive
income/(expense)
for the period - - 0.2 - (0.4) - (0.4) (1.4) (2.0) - (2.0)
----------------- ----- -------- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
Total
comprehensive
income/(expense)
for the period - - 103.7 - (0.4) - (0.4) (1.4) 101.5 (0.1) 101.4
Dividends paid - - (62.8) - - - - - (62.8) - (62.8)
Shares purchased - - - - - (11.0) - - (11.0) - (11.0)
Shares released - - - - - 9.3 - - 9.3 - 9.3
Other movements - - 0.9 - - (0.2) - - 0.7 - 0.7
Share premium
cancellation - - - - - - - - - - -
Income tax - - (0.4) - - - - - (0.4) - (0.4)
----------------- ----- -------- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
At 31 January
2019
(unaudited) 38.0 - 1,324.2 - 0.4 (17.8) (1.6) (1.3) 1,341.9 (0.9) 1,341.0
----------------- ----- -------- --------- ---------- -------- -------- ---------- -------- ------------ ---------------- --------
Consolidated Cash Flow Statement
for the six months ended 31 January 2019
Six months ended Year ended
31 January 31 July
------------------------
2019 2018 2018
Unaudited Unaudited Audited
Note GBP million GBP million GBP million
--------------------------------------------------- ----------- ----------- ------------
Net cash (outflow)/inflow from operating
activities 15(a) (387.9) 149.8 306.0
-------------------------------------------- ----- ----------- ----------- ------------
Net cash (outflow)/inflow from investing
activities
Purchase of:
Property, plant and equipment (1.6) (8.5) (11.4)
Intangible assets (18.0) (19.0) (33.0)
Subsidiaries and non-controlling interest 15(b) - (0.9) (1.2)
Sale of:
Discontinued operations and subsidiary 15(c) 86.1 0.7 0.9
66.5 (27.7) (44.7)
-------------------------------------------- ----- ----------- ----------- ------------
Net cash (outflow)/inflow before financing
activities (321.4) 122.1 261.3
-------------------------------------------- ----- ----------- ----------- ------------
Financing activities
Purchase of own shares for employee share
award schemes (11.0) (15.9) (16.0)
Equity dividends paid (62.8) (59.7) (91.0)
Interest paid on subordinated loan capital
and debt financing (7.1) (5.4) (10.8)
Issuance of group bond, net of transaction
costs - - 248.6
Net (decrease)/increase in cash (402.3) 41.1 392.1
Cash and cash equivalents at beginning of
period 1,251.7 859.6 859.6
-------------------------------------------- ----- ----------- ----------- ------------
Cash and cash equivalents at end of period 15(d) 849.4 900.7 1,251.7
-------------------------------------------- ----- ----------- ----------- ------------
THE NOTES
1. Basis of preparation and accounting policies
The half yearly financial information has been prepared in accordance with the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority and in accordance with the International Financial Reporting Standards ("IFRS") endorsed by the European Union. These include International Accounting Standard ("IAS") 34, Interim Financial Reporting, which specifically addresses the contents of condensed half yearly financial statements. The consolidated financial statements incorporate the individual financial statements of Close Brothers Group plc and the entities it controls, using the acquisition method of accounting.
The half yearly report is unaudited and does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006. However, the information has been reviewed by the group's auditor, PricewaterhouseCoopers LLP, and their report appears on pages 21 and 22.
The financial information for the year ended 31 July 2018 contained within this half yearly report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. A copy of those statutory accounts has been delivered to the Registrar of Companies. PricewaterhouseCoopers LLP has reported on those accounts. The report of the auditor on those statutory accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.
The directors have a reasonable expectation that the company and the group as a whole have adequate resources to continue in operational existence for the foreseeable future, a period of not less than 12 months from the date of this report. For this reason, they continue to adopt the going concern basis in preparing the condensed consolidated half yearly financial statements.
The accounting policies applied are consistent with those set out on pages 115 to 119 of the Annual Report 2018 except in relation to the adoption of IFRS 9 Financial Instruments effective from 1 August 2018. IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement. There are significant changes in the accounting for financial instruments, particularly with regards to impairment. The main differences between IFRS 9 and IAS 39 are summarised on pages 115 to 116 of the Annual Report 2018.
In accordance with the requirements of IFRS 9, comparative information has not been restated and transitional adjustments have been accounted for through retained earnings at 1 August 2018, the date of initial application. IFRS 9 includes an accounting policy choice to continue to apply hedge accounting under IAS 39 and the group elected to apply this accounting policy choice for the foreseeable future.
The impact of the transition to IFRS 9 is set out below and in note 17. Further detail can be found in the group's 'IFRS 9 Transition Report' published on 7 November 2018 and is available on the following webpage: https://www.closebrothers.com/investor-relations/investor-information/results-reports-and-presentations.
The group also adopted IFRS 15 Revenue from Contracts with Customers effective from 1 August 2018. IFRS 15 replaces IAS 18 Revenue and IAS 11 Construction Contracts and does not apply to financial instruments, lease contracts or insurance contracts which fall under the scope of other IFRSs. The standard introduces a new revenue recognition model which features a contract-based five-step analysis of transactions to determine whether, how much, and when revenue is recognised. The group's existing accounting policies comply with the requirements of the standard. The standard has no impact on the group's financial statements.
Comparative information for the six months ended 31 January 2018 have been restated for discontinued operations as set out in note 4. Fee and commission expense in the consolidated income statement for the six months ended 31 January 2018 has been restated to exclude other direct costs of GBP6.7 million, which are now presented alongside depreciation of operating lease assets.
The consolidated balance sheet and notes 7 and 12 include 1 August 2018 balances to aid comparability following the adoption of IFRS 9. In addition, the consolidated balance sheet and related notes no longer include comparative information for the prior half year.
Changes in accounting policy
The accounting policies set out in sections (i) and (j) in note 1 of the Annual Report 2018 have been replaced by those below from 1 August 2018 following the adoption of IFRS 9.
Financial assets and liabilities
Classification and measurement
Financial assets are classified at initial recognition on the basis of the business model within which they are managed and their contractual cash flow characteristics. The classification categories are amortised cost, fair value through other comprehensive income ("FVOCI") and fair value through profit or loss ("FVTPL").
Financial assets that are held to collect contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. Initial recognition is at fair value plus directly attributable transaction costs. Interest income is accounted for using the effective interest rate method.
Financial assets that are held to collect contractual cash flows and for subsequent sale, where the assets' cash flows represent solely payments of principal and interest, are classified at fair value through other comprehensive income. Directly attributable transaction costs are added to the initial fair value. Gains and losses arising from changes in fair value except when due to credit risk are recognised in other comprehensive income until the financial asset is either sold or matures, at which time the cumulative gain or loss is recognised in the income statement. Gains and losses arising from changes in fair value due to credit risk are recognised in the income statement.
Financial assets are classified at fair value through profit or loss where they do not meet the criteria to be measured at amortised cost or fair value through other comprehensive income or where they are designated at fair value through profit or loss to reduce an accounting mismatch. Financial assets at fair value through profit or loss are recognised at fair value. Transaction costs are not added to or deducted from the initial fair value, they are immediately recognised in profit or loss on initial recognition. Gains and losses that subsequently arise on changes in fair value are recognised in the income statement.
Financial liabilities are classified at initial recognition at amortised cost except for the following which are classified at fair value through profit or loss: derivatives; financial liabilities held for trading; and financial liabilities designated at fair value through profit or loss to eliminate an accounting mismatch.
Financial liabilities at amortised cost are measured at fair value less directly attributable transaction costs on initial recognition. Interest expense is accounted for using the effective interest rate method. Financial liabilities at fair value through profit or loss are measured at fair value on initial recognition. Transaction costs are not added to or deducted from the initial fair value, they are immediately recognised in profit or loss on initial recognition. Subsequent changes in fair value are recognised in the income statement except for financial liabilities designated at fair value through profit or loss, changes in fair value attributable to changes in credit risk are recognised in other comprehensive income.
The fair values of quoted financial assets or financial liabilities in active markets are based on bid or offer prices. If the market for a financial asset or financial liability is not active, or they relate to unlisted securities, the group establishes fair value by using valuation techniques. These include the use of recent arm's length transactions, discounted cash flow analysis and other valuation techniques commonly used by market participants.
Derecognition
Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the group has transferred substantially all risks and rewards of ownership. If substantially all the risks and rewards have been neither retained nor transferred the assets continue to be recognised to the extent of the group's continuing involvement. Financial liabilities are derecognised when they are extinguished.
Expected credit losses
Expected credit losses are recognised for loans and advances to customers and banks, other financial assets held at amortised cost, financial assets measured at fair value through other comprehensive income, loan commitments and financial guarantee contracts. The impairment charge in the income statement includes the change in expected credit losses.
At initial recognition, a provision is recognised for 12 months of expected credit losses. These financial assets are considered to be in Stage 1. When a significant increase in credit risk since initial recognition occurs, a provision is made for the lifetime expected credit losses. These financial assets are considered to be in Stage 2. When objective evidence exists that a financial asset is credit impaired, with a 90 days past due back stop, the financial asset is considered to be in Stage 3. A financial asset will remain classified as Stage 2 until the credit risk has improved such that it no longer represents a significant increase since origination and will be returned to Stage 1. Loans and advances to customers are written off against the related provisions when there are no reasonable expectations of recovery.
The calculation of expected credit losses for loans and advances to customers is based on the probability of default ("PD"), adjusted to reflect a range of forward-looking macroeconomic scenarios, the estimated exposure at default ("EAD") and the estimated loss given default ("LGD"), which represents the expected losses on the EAD after taking into account cash recoveries including the value of collateral held. EAD and LGD are adjusted to account for the impact of discounting using the effective interest.
Critical accounting estimates and judgements
The preparation of the half yearly report requires management to make estimates and assumptions that affect the reported income and expense, assets and liabilities and disclosure of contingencies at the date of the half yearly report. Although these estimates and assumptions are based on the management's best judgement at that date, actual results may differ from these estimates. There have been no significant changes in the basis upon which estimates have been determined compared to that applied at 31 July 2018 other than in relation to the implementation of IFRS 9, which are set out below.
Significant increase in credit risk
The assessment of whether a significant increase in credit risk has occurred requires judgement. The assessment is unbiased, probability weighted and uses forward-looking information. The group uses a multifactor approach based on quantitative measures and qualitative indicators to help make such an assessment. Quantitative measures include changes in PD or credit score since origination and qualitative indicators include forbearance and watch list processes. As a backstop, all financial assets that are 30 days past due are considered to have experienced a significant increase in credit risk.
Definition of default
The definition of default is a judgement. Loans and advances to customers are considered defaulted when the borrower is in breach of contract, is bankrupt, or experiences other significant financial difficulties which are expected to have a detrimental impact on their ability to pay interest or principal on the loan.
Forward-looking information
IFRS 9 requires the incorporation of forward-looking macroeconomic information that is reasonable and supportable. To capture the effect of changes to the economic environment, the calculation of expected credit losses incorporates forward-looking information and assumptions linked to economic variables that impact losses in each portfolio. Externally sourced forecast economic data and scenarios are used to project potential credit conditions for each portfolio.
Economic scenarios are assigned a probability weighting using a combination of quantitative analysis and expert judgement. Six different projected economic scenarios are currently considered to cover a range of possible outcomes, reflecting upside and downside relative to the baseline and forecast economic conditions. Weighted assumptions are aligned to the forward-looking outlook. The impact varies across the group's lending businesses because of the sensitivity of each portfolio to specific macroeconomic variables.
The table below shows the key UK economic assumptions within each of the scenarios, and the weighting applied to each at 31 January 2019. The numbers shown are an average over the five-year period from 2018 to 2022. The range of scenarios and weightings applied are selected to cover a broad range of potential outcomes, reflecting the current political and macro-economic uncertainty in the UK.
Upside
(exceptionally Upside Downside Downside
Baseline strong) (strong) Downside (mild) (moderate) (protracted)
----------------- ----------- ---------------- ----------- ----------------- ----------------- -----------------
UK gross
domestic
product growth 1.5% 2.5% 2.2% 1.2% 0.7% 0.2%
UK unemployment
rate 4.6% 3.3% 3.7% 5.2% 6.1% 6.8%
House price
index growth 2.0% 5.1% 4.1% 1.0% (1.1%) (3.0%)
Bank of England
base rate 1.2% 1.5% 1.3% 0.5% 0.2% 0.1%
Weighting at 31
January 2019 40% 0% 5% 40% 10% 5%
----------------- ----------- ---------------- ----------- ----------------- ----------------- -----------------
2. Segmental analysis
The directors manage the group by class of business and we present the segmental analysis on that basis. The group's activities are presented in five (2018: five) operating segments: Commercial, Retail, Property, Asset Management and Securities.
In the segmental reporting information that follows, Group consists of central functions as well as various non-trading head office companies and consolidation adjustments and is presented in order that the information presented reconciles to the consolidated income statement. The Group balance sheet primarily includes treasury assets and liabilities comprising cash and balances at central banks, debt securities, customer deposits and other borrowings.
Divisions continue to charge market prices for the limited services rendered to other parts of the group. Funding charges between segments take into account commercial demands. More than 90% of the group's activities, revenue and assets are located in the UK.
Summary Income Statement for the six months ended 31 January 2019
Banking
Asset
Commercial Retail Property Management Securities Group Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Net interest
income/(expense) 87.3 98.0 64.8 0.1 (0.4) - 249.8
Non-interest
income 38.0 15.2 (0.2) 58.4 46.2 - 157.6
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating income 125.3 113.2 64.6 58.5 45.8 - 407.4
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Administrative
expenses (65.8) (57.2) (14.5) (46.8) (35.7) (12.4) (232.4)
Depreciation and
amortisation (4.5) (5.8) (2.3) (0.9) (0.8) - (14.3)
Impairment losses
on financial
assets (7.7) (13.4) (0.8) - - - (21.9)
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total operating
expenses (78.0) (76.4) (17.6) (47.7) (36.5) (12.4) (268.6)
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Adjusted
operating
profit/(loss)(1) 47.3 36.8 47.0 10.8 9.3 (12.4) 138.8
Amortisation of
intangible
assets
on acquisition (0.8) (0.1) - (2.3) - - (3.2)
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating
profit/(loss)
before tax from
continuing
operations 46.5 36.7 47.0 8.5 9.3 (12.4) 135.6
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit before tax
from
discontinued
operations - 0.9 - - - - 0.9
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Profit/(loss)
before tax 46.5 37.6 47.0 8.5 9.3 (12.4) 136.5
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
External
operating
income/(expense) 150.4 133.9 79.0 58.5 45.8 (60.2) 407.4
Inter segment
operating
income/(expense) (25.1) (20.7) (14.4) - - 60.2 -
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Segment operating
income 125.3 113.2 64.6 58.5 45.8 - 407.4
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1 Adjusted operating profit/(loss) is stated before amortisation of intangible assets on acquisition, profit from discontinued operations
and tax.
Balance Sheet Information at 31 January 2019
Banking
Asset
Commercial Retail Property Management Securities Group(2) Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
Total
assets(1) 3,097.2 2,701.7 1,800.1 102.1 654.9 1,662.2 10,018.2
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
Total
liabilities - - - 46.6 583.9 8,046.7 8,677.2
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
1 Total assets for the Banking operating segments comprise the loan book and operating lease assets only.
2 Balance sheet includes GBP1,660.0 million assets and GBP8,108.2 million liabilities attributable to the Banking division primarily
comprising the treasury balances described in the second paragraph of this note on page 32.
Equity is allocated across the group as shown below. Banking division equity, which is managed as a whole rather than on a segmental basis, reflects loan book and operating lease assets of GBP7,599.0 million, in addition to assets and liabilities of GBP1,660.0 million and GBP8,108.2 million respectively primarily comprising treasury balances which are included within the Group column above.
Banking total Asset Management Securities Group Total
GBP million GBP million GBP million GBP million GBP million
-------- -------------- ----------------- ------------- ------------ ------------
Equity 1,150.8 55.5 71.0 63.7 1,341.0
-------- -------------- ----------------- ------------- ------------ ------------
Summary Income Statement for the six months ended 31 January 2018(1)
Banking
Asset
Commercial Retail Property Management Securities Group Total
GBP GBP GBP GBP GBP
GBP million million million million GBP million million million
------------------ ------------ --------- ---------- ----------- ------------ ---------- ----------
Net interest
income/(expense) 77.1 101.3 64.9 - (0.4) 0.1 243.0
Non-interest
income 33.3 14.3 - 56.0 56.0 (0.1) 159.5
------------------ ------------ --------- ---------- ----------- ------------ ---------- ----------
Operating income 110.4 115.6 64.9 56.0 55.6 - 402.5
------------------ ------------ --------- ---------- ----------- ------------ ---------- ----------
Administrative
expenses (61.8) (53.2) (13.3) (43.7) (40.0) (12.3) (224.3) Depreciation and amortisation (3.3) (4.6) (1.8) (0.9) (0.9) - (11.5) Impairment losses on loans and advances (5.6) (13.4) (3.8) - - - (22.8) ------------------ ------------ --------- ---------- ----------- ------------ ---------- ---------- Total operating expenses (70.7) (71.2) (18.9) (44.6) (40.9) (12.3) (258.6) ------------------ ------------ --------- ---------- ----------- ------------ ---------- ---------- Adjusted operating profit/(loss)(2) 39.7 44.4 46.0 11.4 14.7 (12.3) 143.9 Amortisation of intangible assets on acquisition (0.9) (0.1) - (2.7) - - (3.7) ------------------ ------------ --------- ---------- ----------- ------------ ---------- ---------- Operating profit/(loss) before tax from continuing operations 38.8 44.3 46.0 8.7 14.7 (12.3) 140.2 ------------------ ------------ --------- ---------- ----------- ------------ ---------- ---------- Loss before tax from discontinued operations - (1.6) - - - - (1.6) ------------------ ------------ --------- ---------- ----------- ------------ ---------- ---------- Profit/(loss) before tax 38.8 42.7 46.0 8.7 14.7 (12.3) 138.6 ------------------ ------------ --------- ---------- ----------- ------------ ---------- ---------- External operating income/(expense) 132.2 135.1 76.3 56.1 55.6 (52.8) 402.5 Inter segment operating income/(expense) (21.8) (19.5) (11.4) (0.1) - 52.8 - ------------------ ------------ --------- ---------- ----------- ------------ ---------- ---------- Segment operating income 110.4 115.6 64.9 56.0 55.6 - 402.5 ------------------ ------------ --------- ---------- ----------- ------------ ---------- ----------
1 Restated - see note 4.
2 Adjusted operating profit/(loss) is stated before amortisation of intangible assets on acquisition, loss from discontinued operations
and tax.
Summary Income Statement for the year ended 31 July 2018
Banking
Asset
Commercial Retail Property Management Securities Group Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
------------------------------ ------------ ------------ ------------ ------------ ------------ ------------
Net interest
income/(expense) 160.9 195.9 129.8 0.1 (0.7) 0.1 486.1
Non-interest
income 64.6 29.6 0.2 115.4 109.8 0.1 319.7
------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Operating income 225.5 225.5 130.0 115.5 109.1 0.2 805.8
------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Administrative
expenses (124.2) (109.5) (27.2) (90.6) (79.2) (24.6) (455.3)
Depreciation and
amortisation (8.0) (9.7) (3.9) (1.8) (1.8) - (25.2)
Impairment losses
on loans and
advances (17.2) (25.2) (4.3) - - - (46.7)
------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Total operating
expenses (149.4) (144.4) (35.4) (92.4) (81.0) (24.6) (527.2)
------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Adjusted operating
profit/(loss)(1) 76.1 81.1 94.6 23.1 28.1 (24.4) 278.6
Amortisation of
intangible assets
on acquisition (1.6) (0.3) - (5.5) - - (7.4)
------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Operating
profit/(loss)
before tax from
continuing
operations 74.5 80.8 94.6 17.6 28.1 (24.4) 271.2
------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Loss before tax
from discontinued
operations - (3.0) - - - - (3.0)
------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Profit/(loss)
before
tax 74.5 77.8 94.6 17.6 28.1 (24.4) 268.2
------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
External operating
income/(expense) 270.7 265.3 154.4 115.6 109.1 (109.3) 805.8
Inter segment
operating
income/(expense) (45.2) (39.8) (24.4) (0.1) - 109.5 -
------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
Segment operating
income 225.5 225.5 130.0 115.5 109.1 0.2 805.8
------------------- ---------- ------------ ------------ ------------ ------------ ------------ ------------
1 Adjusted operating profit/(loss) is stated before amortisation of intangible assets on acquisition, loss from discontinued operations
and tax.
Balance Sheet Information at 31 July 2018
Banking
Asset
Commercial Retail Property Management Securities Group(2) Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
-------------- ------------- ------------ ------------ -------------- ------------- ------------ ------------
Total
assets(1) 2,982.4 2,686.4 1,827.5 119.4 711.4 1,923.9 10,251.0
-------------- ------------- ------------ ------------ -------------- ------------- ------------ ------------
Total
liabilities - - - 63.9 640.3 8,198.1 8,902.3
-------------- ------------- ------------ ------------ -------------- ------------- ------------ ------------
1 Total assets for the Banking operating segments comprise the loan book and operating lease assets only.
2 Balance sheet includes GBP1,915.0 million assets and GBP8,278.6 million liabilities attributable to the Banking division primarily
comprising the treasury balances described in the second paragraph of this note on page 32.
Banking
total Asset Management Securities Group Total
GBP million GBP million GBP million GBP million GBP million
----------- ------------ ----------------- ------------- ------------ ------------
Equity(1) 1,132.7 55.5 71.1 89.4 1,348.7
----------- ------------ ----------------- ------------- ------------ ------------
1 Equity of the Banking division reflects loan book and operating lease assets of GBP7,496.3 million, in addition to assets and
liabilities of GBP1,915.0 million and GBP8,278.6 million respectively primarily comprising treasury balances which are included within the
Group column above.
3. Taxation
Six months ended Year ended
31 January 31 July
--------------------------
2019 2018(1) 2018
GBP million GBP million GBP million
------------------------------------------------------ ------------ ------------ ------------
Tax charged/(credited) to the income statement
Current tax:
UK corporation tax 30.4 33.2 64.7
Foreign tax 0.9 1.0 1.5
Adjustments in respect of previous periods - - (2.3)
------------------------------------------------------ ------------ ------------ ------------
31.3 34.2 63.9
Deferred tax:
Deferred tax charge for the current period 2.1 0.9 1.1
Adjustments in respect of previous periods - - 2.0
------------------------------------------------------ ------------ ------------ ------------
33.4 35.1 67.0
------------------------------------------------------ ------------ ------------ ------------
Tax on items not (credited)/charged to the income
statement
Current tax relating to:
Share-based payments (0.1) (0.1) (0.3)
Deferred tax relating to:
Cash flow hedging (0.4) 1.0 1.1
Defined benefit pension scheme - 0.2 0.4
Financial instruments classified as available
for sale - (0.1) 0.2
Financial instruments classified at fair value
through other
comprehensive income (0.2) - -
Share-based payments 0.5 (0.1) (0.4)
(0.2) 0.9 1.0
------------------------------------------------------ ------------ ------------ ------------
Reconciliation to tax expense
UK corporation tax for the period at 19.0% (2018:
19.0%) on
operating profit 25.8 26.6 51.5
Effect of different tax rates in other jurisdictions (0.1) (0.1) (0.2)
Disallowable items and other permanent differences 0.6 0.6 1.1
Banking surcharge 7.1 7.9 15.1
Deferred tax impact of decreased/(increased)
tax rates - 0.1 (0.2)
Prior period tax provision - - (0.3)
------------------------------------------------------ ------------ ------------ ------------
33.4 35.1 67.0
------------------------------------------------------ ------------ ------------ ------------
1 Restated - see note 4.
The effective tax rate for the period is 24.6% (six months ended 31 January 2018: 25.0%; year ended 31 July 2018: 24.7%), representing the best estimate of the annual effective tax rate expected for the full year.
The standard UK corporation tax rate for the financial year is 19.0% (six months ended 31 January 2018: 19.0%; year ended 31 July 2018: 19.0%). However, an additional 8% surcharge applies to banking company profits as defined in legislation. The effective tax rate is above the UK corporation tax rate primarily due to the surcharge applying to the majority of the group's profits.
4. Discontinued operations
On 1 January 2019, the group completed the sale of Close Brothers Retail Finance, which provides unsecured retail point of sale finance to consumers, to Klarna Bank AB. The transaction fulfilled the requirements of IFRS 5 to be classified as "discontinued operations" in the consolidated income statement.
The net assets of Close Brothers Retail Finance on 1 January 2019, the date of disposal, was GBP80.9 million, comprising largely of loans and advances to customers. In the 31 July 2018 consolidated balance sheet, net assets of GBP66.9 million relating to Close Brothers Retail Finance were presented as "held for sale". No impairment has been recognised in relation to these net assets.
Results of discontinued operations
Six months ended Year ended
31 January 31 July
--------------------------
2019 2018 2018
GBP million GBP million GBP million
------------------------------------------------------------ ------------ ------------ ------------
Operating income 3.7 3.0 6.6
Operating expenses (4.2) (3.6) (7.2)
Impairment losses on loans and advances (1.6) (1.0) (2.3)
------------------------------------------------------------ ------------ ------------ ------------
Operating loss before tax (2.1) (1.6) (2.9)
Tax 0.5 0.4 0.8
Impairment of plant, property and equipment and intangible
assets - - (0.1)
------------------------------------------------------------ ------------ ------------ ------------
Loss after tax (1.6) (1.2) (2.2)
Profit on disposal of discontinued operations, net of tax 2.8 - -
------------------------------------------------------------ ------------ ------------ ------------
Profit/(loss) from discontinued operations 1.2 (1.2) (2.2)
------------------------------------------------------------ ------------ ------------ ------------
Assets and liabilities held for sale
The major classes of assets and liabilities classified as held for sale are as follows:
31 January 31 July
2019 2018
GBP million GBP million
-------------------------------------------- ------------- ------------
Balance sheet
Intangible assets - 0.9
Loans and advances to customers - 66.2
Other assets - 0.4
--------------------------------------------- ------------ ------------
Total assets classified as held for sale - 67.5
--------------------------------------------- ------------ ------------
Other liabilities - 0.6
--------------------------------------------- ------------ ------------
Total liabilities classified as held for
sale - 0.6
--------------------------------------------- ------------ ------------
Cash flow from discontinued operations
Six months ended Year ended
31 January 31 July
--------------------------
2019 2018 2018
GBP million GBP million GBP million
----------------------------------------- ------------ ------------ ------------
Net cash flow from operating activities (16.1) (13.9) (31.9)
----------------------------------------- ------------ ------------ ------------
Net cash flow from investing activities (0.3) (0.2) (0.4)
----------------------------------------- ------------ ------------ ------------
5. Earnings per share
The calculation of basic earnings per share is based on the profit attributable to shareholders and the number of basic weighted average shares. When calculating the diluted earnings per share, the weighted average number of shares in issue is adjusted for the effects of all dilutive share options and awards.
Six months ended Year ended
31 January 31 July
------------------
2019 2018(1) 2018
--------------------------------------- ------- --------- ----------
Continuing operations
Basic 68.1p 70.0p 136.2p
--------------------------------------- ------- --------- ----------
Diluted 67.5p 69.5p 135.3p
--------------------------------------- ------- --------- ----------
Adjusted basic(2) 69.8p 72.0p 140.2p
--------------------------------------- ------- --------- ----------
Adjusted diluted(2) 69.2p 71.5p 139.3p
--------------------------------------- ------- --------- ----------
Continuing and discontinued operations
Basic 68.9p 69.2p 134.7p
--------------------------------------- ------- --------- ----------
Diluted 68.3p 68.7p 133.8p
--------------------------------------- ------- --------- ----------
1 Restated - see note 4.
2 Excludes amortisation of intangible assets on acquisition, discontinued operations and their tax effects.
Six months ended Year ended
31 January 31 July
------------------------
2019 2018(1) 2018
GBP million GBP million GBP million
-------------------------------------------------- ----------- ----------- -----------
Profit attributable to shareholders 103.5 104.0 202.3
Less profit/(loss) from discontinued operations,
net of tax 1.2 (1.2) (2.2)
-------------------------------------------------- ----------- ----------- -----------
Profit attributable to shareholders on continuing
operations 102.3 105.2 204.5
-------------------------------------------------- ----------- ----------- -----------
Adjustments:
Amortisation of intangible assets on acquisition 3.2 3.7 7.4
Tax effect of adjustment (0.6) (0.7) (1.3)
-------------------------------------------------- ----------- ----------- -----------
Adjusted profit attributable to shareholders
on continuing operations 104.9 108.2 210.6
1 Restated - see note 4.
Six months ended Year ended
31 January 31 July
------------------------
2019 2018 2018
million million million
-------------------------------------------------- ----------- ----------- -----------
Average number of shares
Basic weighted 150.2 150.3 150.2
Effect of dilutive share options and awards 1.4 1.0 1.0
-------------------------------------------------- ----------- ----------- -----------
Diluted weighted 151.6 151.3 151.2
6. Dividends
Six months ended Year ended
31 January 31 July
2019 2018 2018
GBP million GBP million GBP million
For each ordinary share
Interim dividend for previous financial year paid
in April 2018: 21.0p - - 31.3
Final dividend for previous financial year paid
in November 2018: 42.0p
(November 2017: 40.0p) 62.8 59.7 59.7
62.8 59.7 91.0
An interim dividend relating to the six months ended 31 January 2019 of 22.0p, amounting to an estimated GBP32.8 million, is declared. This interim dividend, which is due to be paid on 24 April 2019 to shareholders on the register at 22 March 2019, is not reflected in these condensed half yearly financial statements.
7. Loans and advances to customers
The contractual maturity of loans and advances to customers is set out below:
Between
three Between
Within months Between two and After
On three and one one and five more than Impairment
demand months year two years years five years provisions Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million GBP million
At 31 January
2019 79.2 2,230.4 2,272.0 1,316.3 1,489.2 100.0 (102.0) 7,385.1
At 1 August 2018 77.3 2,135.8 2,301.1 1,324.3 1,402.3 95.8 (97.3) 7,239.3
At 31 July 2018 77.3 2,135.8 2,301.1 1,324.3 1,402.3 95.8 (39.1) 7,297.5
Stage Stage Stage
1 2 3 Total
GBP million GBP million GBP million GBP million
Impairment provisions on loans
and advances to customers
Balance at 31 July 2018 39.1
IFRS 9 transition (note 17) 58.2
Balance at 1 August 2018 23.7 24.8 48.8 97.3
Charge to the income statement 1.5 2.2 15.1 18.8
Amounts written off (0.5) (0.5) (13.1) (14.1)
Impairment provisions at 31 January 2019 24.7 26.5 50.8 102.0
Gross loans and advances to customers by stage and the corresponding impairment provisions and provision coverage ratios are set out below:
Stage 2
Greater
than
Less than or equal
30 days to 30 days Stage
Stage 1 past due past due Total 3 Total
At 31 January 2019 GBP million GBP million GBP million GBP million GBP million GBP million
------------ ------------
Gross loans and
advances to customers
Commercial 2,529.7 291.2 25.5 316.7 86.4 2,932.8
Retail 2,478.4 233.9 1.7 235.6 24.8 2,738.8
Property 1,437.4 100.1 70.3 170.4 207.7 1,815.5
------------ ------------
Total 6,445.5 625.2 97.5 722.7 318.9 7,487.1
Impairment provisions
Commercial 12.5 10.6 1.4 12.0 25.0 49.5
Retail 10.4 11.5 0.1 11.6 15.1 37.1
Property 1.8 2.7 0.2 2.9 10.7 15.4
------------ ------------
Total 24.7 24.8 1.7 26.5 50.8 102.0
Provision coverage
ratio
Commercial 0.5% 3.6% 5.5% 3.8% 28.9% 1.7%
Retail 0.4% 4.9% 5.9% 4.9% 60.9% 1.4%
Property 0.1% 2.7% 0.3% 1.7% 5.2% 0.8%
------------ ------------
Total 0.4% 4.0% 1.7% 3.7% 15.9% 1.4%
Stage 2
Greater
than
Less than or equal
30 days to 30 days Stage
Stage 1 past due past due Total 3 Total
At 1 August 2018 GBP million GBP million GBP million GBP million GBP million GBP million
------------ ------------
Gross loans and
advances to customers
Commercial 2,452.4 246.1 16.8 262.9 81.2 2,796.5
Retail 2,452.1 224.9 4.3 229.2 24.0 2,705.3
Property 1,574.7 58.9 46.3 105.2 154.9 1,834.8
------------ ------------
Total 6,479.2 529.9 67.4 597.3 260.1 7,336.6
Impairment provisions
Commercial 11.8 10.5 1.1 11.6 25.7 49.1
Retail 10.0 10.1 0.4 10.5 14.2 34.7
Property 1.9 2.4 0.3 2.7 8.9 13.5
------------ ------------
Total 23.7 23.0 1.8 24.8 48.8 97.3
Provision coverage
ratio
Commercial 0.5% 4.3% 6.5% 4.4% 31.7% 1.8%
Retail 0.4% 4.5% 9.3% 4.6% 59.2% 1.3%
Property 0.1% 4.1% 0.6% 2.6% 5.7% 0.7%
------------ ------------
Total 0.4% 4.3% 2.7% 4.2% 18.8% 1.3%
8. Debt securities
Fair value Fair value
through through other
profit or comprehensive Amortised
loss income cost Total
GBP million GBP million GBP million GBP million
--------------------------------
Long trading positions in debt
securities 25.0 - - 25.0
Certificates of deposit - - 401.4 401.4
Sovereign and central bank
debt - 44.3 - 44.3
At 31 January 2019 25.0 44.3 401.4 470.7
--------------------------------
Held for Available for Loans and
trading sale receivables Total
GBP million GBP million GBP million GBP million
-------------------------------- ------------
Long trading positions in debt
securities 25.6 - - 25.6
Certificates of deposit - - 250.5 250.5
Sovereign and central bank
debt - 44.5 - 44.5
-------------------------------- ------------
At 31 July 2018 25.6 44.5 250.5 320.6
-------------------------------- ------------
Movements in the book value of sovereign and central bank debt comprise:
Six months
ended Year ended
31 January 31 July
2019 2018
GBP million GBP million
--------------------------------------------------- ------------
Sovereign and central bank debt at beginning
of period 44.5 43.6
Additions - -
Currency translation difference (0.8) -
Changes in fair value 0.6 0.9
---------------------------------------------------- ------------
Sovereign and central bank debt at end of period 44.3 44.5
9. Equity shares
31 January 31 July
2019 2018
GBP million GBP million
Long trading positions 27.5 31.6
Other equity shares 0.5 0.5
28.0 32.1
-----------------------
10. Settlement balances and short positions
31 January 31 July
2019 2018
GBP million GBP million
Settlement balances 480.7 512.5
Short positions in:
Debt securities 10.7 16.4
Equity shares 15.0 14.2
25.7 30.6
506.4 543.1
11. Financial liabilities
The contractual maturity of financial liabilities, which largely relate to treasury funding balances, is set out below.
Between Between
Within three months Between two and After
On three and one one and five more than
demand months year two years years five years Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
Deposits by banks 10.3 13.1 30.8 - - - 54.2
Deposits by customers 85.8 1,038.5 2,632.7 1,175.0 417.5 - 5,349.5
Loans and overdrafts
from banks 18.2 10.1 - - 490.0 - 518.3
Debt securities
in issue 5.3 48.8 123.8 684.8 643.6 287.5 1,793.8
Subordinated loan
capital(1) (1.4) 1.4 0.2 - - 218.9 219.1
At 31 January 2019 118.2 1,111.9 2,787.5 1,859.8 1,551.1 506.4 7,934.9
1 Comprises issuances of GBP175 million and GBP45 million with contractual maturity dates of 2027 and 2026 and optional prepayment
dates of 2022 and 2021 respectively.
Between Between
Within three months Between two and After
On three and one one and five more than
demand months year two years years five years Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
Deposits by banks 7.9 16.1 31.2 - - - 55.2
Deposits by customers 86.5 1,275.0 2,570.6 1,142.6 422.5 - 5,497.2
Loans and overdrafts
from banks 9.6 5.2 - - 495.0 - 509.8
Debt securities
in issue 0.6 23.1 561.3 190.3 709.9 288.2 1,773.4
Subordinated loan
capital(1) (2.4) 1.4 0.2 - - 218.7 217.9
At 31 July 2018 102.2 1,320.8 3,163.3 1,332.9 1,627.4 506.9 8,053.5
1 Comprises issuances of GBP175 million and GBP45 million with contractual maturity dates of 2027 and 2026 and optional prepayment
dates of 2022 and 2021 respectively.
At 31 January 2019, the group was a participant of the Bank of England's Term Funding Scheme. Under this scheme, asset finance loan receivables of GBP776.9 million (31 July 2018: GBP773.8 million) were positioned as collateral with the Bank of England, against which GBP490.0 million of cash (31 July 2018: GBP495.0 million) was drawn. The term of these transactions is four years from the date of each drawdown but the group may choose to repay earlier at its discretion. The risks and rewards of the loan receivables remain with the group and continue to be recognised in loans and advances to customers on the consolidated balance sheet.
The group has securitised without recourse GBP1,406.6 million (31 July 2018: GBP1,499.3 million) of its insurance premium and motor loan receivables in return for cash and asset-backed securities in issue of GBP982.7 million (31 July 2018: GBP983.3 million). This includes GBP78.6 million (31 July 2018: GBP118.1 million) asset-backed securities in issue retained for liquidity purposes. As the group has retained exposure to substantially all the credit risks and rewards of the residual benefit of the underlying assets, it continues to recognise these assets in loans and advances to customers on the consolidated balance sheet.
12. Capital
The group's individual regulated entities and the group as a whole complied with all of the externally imposed capital requirements to which they were subject for the period to 31 January 2019 and the year ended 31 July 2018. The table below summarises the composition of regulatory capital and Pillar 1 risk weighted assets at those financial period ends.
31 January 1 August 31 July
2019 2018 2018
GBP million GBP million GBP million
Common equity tier 1 ("CET1") capital
Called up share capital 38.0 38.0 38.0
Retained earnings(1) 1,324.2 1,282.8 1,327.7
Other reserves recognised for CET1 capital 20.3 21.3 21.3
Regulatory adjustments to CET1 capital
Intangible assets, net of associated deferred tax liabilities (205.2) (198.1) (198.1)
Foreseeable dividend(2) (47.1) (62.7) (62.7)
Investment in own shares (39.3) (37.6) (37.6)
Pension asset, net of associated deferred tax liabilities (4.1) (4.0) (4.0)
Prudent valuation adjustment (0.2) (0.2) (0.2)
IFRS 9 transitional arrangements(3) 44.6 42.7 -
CET1 capital 1,131.2 1,082.2 1,084.4
Tier 2 capital - subordinated debt 191.6 197.9 197.9
Total regulatory capital(4) 1,322.8 1,280.1 1,282.3
Risk weighted assets (notional)(4) - unaudited
Credit and counterparty risk 7,764.9 7,600.5 7,605.4
Operational risk(5) 845.8 845.8 845.8
Market risk(5) 87.3 96.3 96.3
8,698.0 8,542.6 8,547.5
CET1 capital ratio(4) 13.0% 12.7% 12.7%
Total capital ratio(4) 15.2% 15.0% 15.0%
1 Retained earnings for the period ended 31 January 2019 include all profits (both verified and unverified) for the six month period.
2 Under the Regulatory Technical Standard on own funds, a deduction has been recognised for a foreseeable dividend. In
accordance with this standard, for 31 January 2019 a foreseeable dividend has been determined based on the average payout ratio
over the previous three years applied to the retained earnings for the period. For 31 July 2018 a foreseeable dividend was determined
as the proposed final dividend.
3 The group has elected to apply IFRS 9 transitional arrangements for 31 January 2019, which allow the capital impact of expected
credit losses to be phased in over a five-year period.
4 Shown after applying the Capital Requirement Regulations transitional and qualifying own funds arrangements. At 31 January 2019
the fully loaded CET1 capital ratio is 12.5% and total capital ratio is 14.5% (1 August 2018: CET1 capital ratio 12.2% and total capital
ratio 14.2%).
5 Operational and market risk include a notional adjustment at 8% in order to determine notional risk weighted assets.
The following table shows a reconciliation between equity and CET1 capital after deductions:
31 January 1 August 31 July
2019 2018 2018
GBP million GBP million GBP million
Equity 1,341.0 1,303.8 1,348.7
Regulatory adjustments to CET1 capital:
Intangible assets, net of associated
deferred tax liabilities (205.2) (198.1) (198.1)
Foreseeable dividend(1) (47.1) (62.7) (62.7)
IFRS 9 transitional arrangements 44.6 42.7 -
Pension asset, net of associated deferred
tax liabilities (4.1) (4.0) (4.0)
Prudent valuation adjustment (0.2) (0.2) (0.2)
Other reserves not recognised for CET1
capital:
Cash flow hedging reserve 1.3 (0.1) (0.1)
Non-controlling interests 0.9 0.8 0.8
CET1 capital 1,131.2 1,082.2 1,084.4
1 Under the Regulatory Technical Standard on own funds, a deduction has been recognised for a foreseeable
dividend. In
accordance with this standard, for 31 January 2019 a foreseeable dividend has been determined based on the average payout ratio
over the previous three years applied to the retained earnings for the period. For 31 July 2018 a foreseeable dividend was determined
as the proposed final dividend.
The following table shows the movement in CET1 capital during the period:
GBP million
CET1 capital at 31 July 2018 1,084.4
Profit in the period attributable to shareholders 103.5
Dividends paid and foreseen (47.2)
Reduction in shareholders' equity from IFRS 9 (44.9)
Other movements in reserves recognised for CET1 capital (0.3)
IFRS 9 transitional arrangements 44.6
Increase in intangible assets, net of associated deferred
tax liabilities (7.1)
Other movements in deductions from CET1 capital (1.8)
CET1 capital at 31 January 2019 1,131.2
13. Contingent liabilities
Financial Services Compensation Scheme ("FSCS")
As disclosed in note 23 of the Annual Report 2018, the group is exposed to the FSCS which provides compensation to customers of financial institutions in the event that an institution is unable, or is likely to be unable, to pay claims against it.
Compensation has previously been paid out by the FSCS funded by loan facilities provided by HM Treasury to FSCS in support of the FSCS's obligations to the depositors of banks declared in default. The facilities are expected to be repaid wholly from recoveries from the failed deposit-takers. In the event of a shortfall, the FSCS will recover the shortfall by raising levies on the industry. The amount of future levies payable by the group depends on a number of factors including the potential recoveries of assets by the FSCS, the group's participation in the deposit-taking market at 31 December, the level of protected deposits and the population of FSCS members.
14. Related party transactions
Related party transactions, including salary and benefits provided to directors and key management, did not have a material effect on the financial position or performance of the group during the period. There were no changes to the type and nature of the related party transactions disclosed in the Annual Report 2018 that could have a material effect on the financial position and performance of the group in the six months to 31 January 2019.
15. Consolidated cash flow statement reconciliation
31 January 31 July
2019 2018 2018
GBP million GBP million GBP million
(a) Reconciliation of operating profit before
tax to net cash
inflow from operating activities
Operating profit before tax from continuing
operations 135.6 140.2 271.2
Profit/(loss) before tax from discontinued operations(1) 0.9 (1.6) (3.0)
Tax paid (28.1) (33.1) (66.8)
Depreciation and amortisation 35.7 30.8 63.9
Decrease/(increase) in:
Interest receivable and prepaid expenses 8.1 (11.4) (18.4)
Net settlement balances and trading positions (21.3) 49.5 15.9
Net loans to/from money broker against stock
advanced 9.5 5.9 0.3
(Decrease)/increase in interest payable and
accrued expenses (45.5) (31.9) 9.4
Net cash inflow from trading activities 94.9 148.4 272.5
(Increase)/decrease in:
Loans and advances to banks not repayable on
demand (2.1) (28.9) 16.4
Loans and advances to customers(2) (175.9) (113.7) (449.8)
Assets held under operating leases (33.2) (38.7) (68.0)
Certificates of deposit (150.9) (70.7) (70.2)
Sovereign and central bank debt - 0.8 (0.9)
Other assets less other liabilities 3.1 9.5 14.1
(Decrease)/increase in:
Deposits by banks (1.0) (13.4) (16.8)
Deposits by customers (147.7) 137.1 384.1
Loans and overdrafts from banks 8.5 45.7 178.9
Issuance/redemption of debt securities 16.4 73.7 45.7
Net cash (outflow)/inflow from operating activities (387.9) 149.8 306.0
(b) Analysis of net cash outflow in respect of
the purchase of subsidiaries and non-controlling
interests
Cash consideration paid - (0.9) (1.2)
(c) Analysis of net cash inflow in respect of
the sale of discontinued operations and a
subsidiary
Cash consideration received 86.1 0.7 0.9
31 January 31 July
2019 2018 2018
GBP million GBP million GBP million
(d) Analysis of cash and cash equivalents(3)
Cash and balances at central banks 764.2 834.3 1,126.2
Loans and advances to banks repayable on demand 85.2 66.4 125.5
849.4 900.7 1,251.7
1 Restated - see note 4.
2 Excludes IFRS 9 transitional adjustment.
3 Excludes Bank of England cash reserve account and amounts held as collateral.
During the period ended 31 January 2019, the non-cash changes on debt financing amounted to GBP5.0 million (31 January 2018: GBP2.6 million; 31 July 2018: GBP9.4 million) arising largely from interest accretion.
16. Fair value of financial assets and liabilities
The main differences between the fair values and the carrying values of the group's financial assets and financial liabilities are as follows:
31 January 2019 31 July 2018
Carrying Fair Carrying
Fair value value value value
GBP million GBP million GBP million GBP million
------------ ------------
Subordinated loan capital 232.0 219.1 233.7 217.9
------------ ------------
Debt securities in issue 1,805.3 1,793.8 1,797.4 1,773.4
------------ ------------
The group holds financial instruments that are measured at fair value subsequent to initial recognition. Each instrument has been categorised within one of three levels using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. These levels are based on the degree to which the fair value is observable and are defined in note 28 "Financial risk management" of the Annual Report 2018. The table below shows the classification of financial instruments held at fair value into the valuation hierarchy:
Level 1 Level 2 Level 3 Total
GBP million GBP million GBP million GBP million
At 31 January 2019
Assets
Debt securities:
Long trading positions in debt securities 23.1 1.9 - 25.0
Sovereign and central bank debt 44.3 - - 44.3
Equity shares 4.2 23.3 0.5 28.0
Derivative financial instruments - 17.9 - 17.9
Contingent consideration - - 1.5 1.5
71.6 43.1 2.0 116.7
-----------
Liabilities
Short positions:
Debt securities 8.5 2.2 - 10.7
Equity shares 6.6 8.4 - 15.0
Derivative financial instruments - 12.1 - 12.1
Contingent consideration - - 6.1 6.1
15.1 22.7 6.1 43.9
-----------
Level 1 Level 2 Level 3 Total
GBP million GBP million GBP million GBP million
At 31 July 2018
Assets
Debt securities:
Long trading positions in debt securities 22.9 2.7 - 25.6
Sovereign and central bank debt 44.5 - - 44.5
Equity shares 5.5 26.1 0.5 32.1
Derivative financial instruments - 16.6 - 16.6
Contingent consideration - - 2.1 2.1
72.9 45.4 2.6 120.9
----------- -----------
Liabilities
Short positions:
Debt securities 14.2 2.2 - 16.4
Equity shares 4.2 10.0 - 14.2
Derivative financial instruments - 15.7 - 15.7
Contingent consideration - - 5.4 5.4
18.4 27.9 5.4 51.7
----------- -----------
Financial instruments classified as Level 3 predominantly comprise contingent consideration payable and receivable in relation to the acquisitions and disposal of subsidiaries.
The valuation of contingent consideration is determined on a discounted expected cash flow basis. The group believes that there is no reasonably possible change to the technique or inputs used in the valuation of these positions which would have a material effect on the group's consolidated income statement.
There were no significant transfers between Level 1, 2 and 3 during the six months ended 31 January 2019 (year ended 31 July 2018: none).
Movements in financial instruments categorised as Level 3 during the periods were:
Contingent
Equity shares consideration
GBP million GBP million
At 1 August 2017 0.8 (3.9)
Total losses recognised in the consolidated
income statement - (0.3)
Total losses recognised in other comprehensive
income - (0.3)
Purchases and issues - -
Sales and settlements (0.2) 0.2
At 31 January 2018 0.6 (4.3)
Total gains recognised in the consolidated income
statement - 0.9
Total gains recognised in other comprehensive
income - 0.6
Purchases and issues - (1.2)
Sales and settlements (0.1) 0.7
At 31 July 2018 0.5 (3.3)
Total losses recognised in the consolidated
income statement - (0.7)
Total gains/(losses) recognised in other comprehensive
income - -
Purchases and issues - -
Sales and settlements - (0.6)
At 31 January 2019 0.5 (4.6)
The losses recognised in the consolidated income statement relating to instruments held at 31 January 2019 amounted to GBP0.7 million (31 January 2018: GBP0.3 million; 31 July 2018: GBPnil).
17. Implementation of IFRS 9
The group has adopted IFRS 9 Financial Instruments with effect from 1 August 2018. In accordance with the requirements of IFRS 9, comparative information has not been restated and transitional adjustments have been accounted for through retained earnings at 1 August 2018, the date of initial application.
At 1 August 2018, retained earnings decreased by GBP44.9 million reflecting an increase in impairment provisions of GBP59.0 million partly offset by an increase in deferred tax assets of GBP14.1 million. GBP58.2 million of the increase in impairment provisions relate to loans and advances to customers while the remaining GBP0.8m relate to other financial assets.
This increase in impairment provisions principally reflects the additional expected credit loss on performing and underperforming loans, as well as a broader definition of default compared to IAS 39 and the addition of macroeconomic assumptions.
The following table sets out the impact of IFRS 9 on the group balance sheet at 1 August 2018.
IAS 39 IFRS 9
carrying carrying
amount IFRS 9 amount
31 July
Classification and measurement(1) 2018 transitional adjustment 1 August 2018
IAS 39 IFRS 9 GBP million GBP million GBP million
Assets
Cash and balances at
central banks LAR AC 1,140.4 (0.1) 1,140.3
Settlement balances LAR AC 512.2 (0.1) 512.1
Loans and advances to
banks LAR AC 140.2 (0.1) 140.1
Loans and advances to
customers LAR AC 7,297.5 (58.2) 7,239.3
Debt securities 320.6 (0.2) 320.4
LAR AC 250.5 (0.2) 250.3
AFS FVOCI 44.5 - 44.5
HFT FVPL 25.6 - 25.6
Equity shares 32.1 - 32.1
AFS FVPL 0.5 - 0.5
HFT FVPL 31.6 - 31.6
Loans to money brokers
against stock advanced LAR AC 66.4 - 66.4
Derivative financial instruments 16.6 - 16.6
HFT FVPL 1.1 - 1.1
FV(H) FV(H) 15.5 - 15.5
Intangible assets 201.3 - 201.3
Property, plant and equipment 226.1 - 226.1
Deferred tax assets 43.0 14.1 57.1
Prepayments, accrued income and other assets 187.1 (0.3) 186.8
Trade and other
receivables LAR AC 49.4 (0.3) 49.1
AFS FVPL 2.1 - 2.1
Prepayments and accrued
income AC AC 135.6 - 135.6
Assets classified as held for sale 67.5 - 67.5
Total assets 10,251.0 (44.9) 10,206.1
Liabilities
Settlement balances and short positions 543.1 - 543.1
AC AC 512.5 - 512.5
HFT FVPL 30.6 - 30.6
Deposits by banks AC AC 55.2 - 55.2
Deposits by customers AC AC 5,497.2 - 5,497.2
Loans and overdrafts from
banks AC AC 509.8 - 509.8
Debt securities in issue AC AC 1,773.4 - 1,773.4
Loans from money brokers
against stock advanced AC AC 22.4 - 22.4
Derivative financial
instruments FVPL FVPL 15.7 - 15.7
Current tax liabilities AC AC 17.4 - 17.4
Accruals, deferred income and other liabilities 249.6 - 249.6
AC AC 245.4 - 245.4
FVPL FVPL 4.2 - 4.2
Subordinated loan capital AC AC 217.9 - 217.9
Liabilities classified as held for sale 0.6 - 0.6
Total liabilities 8,902.3 - 8,902.3
Total equity 1,348.7 (44.9) 1,303.8
Total liabilities and equity 10,251.0 (44.9) 10,206.1
1 Abbreviations
AC - amortised cost FVPL - fair value through profit
or loss
AFS - available for sale HFT - held for trading
FV(H) - derivatives held for hedging LAR - loans and receivables
and carried at fair value
FVOCI - fair value through other
comprehensive income
Cautionary Statement
Certain statements included or incorporated by reference within this announcement may constitute "forward-looking statements" in respect of the group's operations, performance, prospects and/or financial condition. Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or such words as "anticipates", "aims", "due", "could", "may", "will", "should", "expects", "believes", "intends", "plans", "potential", "targets", "goal" or "estimates". By their nature, forward-looking statements involve a number of risks, uncertainties and assumptions and actual results or events may differ materially from those expressed or implied by those statements. Accordingly, no assurance can be given that any particular expectation will be met and reliance should not be placed on any forward-looking statement. Additionally, forward-looking statements regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. Except as may be required by law or regulation, no responsibility or obligation is accepted to update or revise any forward-looking statement resulting from new information, future events or otherwise. Nothing in this announcement should be construed as a profit forecast.
This announcement does not constitute or form part of any offer or invitation to sell, or any solicitation of any offer to subscribe for or purchase any shares or other securities in the company or any of its group members, nor shall it or any part of it or the fact of its distribution form the basis of, or be relied on in connection with, any contract or commitment or investment decisions relating thereto, nor does it constitute a recommendation regarding the shares or other securities of the company or any of its group members. Past performance cannot be relied upon as a guide to future performance and persons needing advice should consult an independent financial adviser or other professional. Statements in this announcement reflect the knowledge and information available at the time of its preparation. Liability arising from anything in this announcement shall be governed by English law. Nothing in this announcement shall exclude any liability under applicable laws that cannot be excluded in accordance with such laws.
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 LFFVIVDILLIA
(END) Dow Jones Newswires
March 12, 2019 03:01 ET (07:01 GMT)
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