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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 | |
|---|---|---|---|---|---|---|---|---|---|---|
| 7.20 | 1.58% | 464.20 | 462.40 | 468.40 | 468.60 | 452.00 | 452.00 | 168,594 | 16:35:29 |
| 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 : 7816B
Close Brothers Group PLC
25 September 2018
Preliminary results for the year ended 31 July 2018
Good Performance in the Year
Hot Features
Premium
-- The group reported a good performance in the year, with a 4% increase
in adjusted(1) operating profit to GBP278.6 million, an increase
of 5% in adjusted basic earnings per share to 140.2p and an RoE
of 17.0%(2)
-- The proposed full year dividend per share of 63.0p represents
growth of 5%, reflecting our progressive dividend policy
-- Banking delivered an adjusted operating profit of GBP251.8 million,
up 2% on the prior year, with continued low impairments and a
strong net interest margin as we maintain our pricing and underwriting
discipline
-- The increase in Banking was driven by Commercial, with adjusted
operating profit growth of 5% and Property, up 3%, while adjusted
operating profit in Retail was down 2%
-- The loan book grew 6.6% on an underlying(3) basis to GBP7.3 billion,
reflecting our strong customer proposition and the diversification
benefits of our loan portfolio
-- Winterflood delivered another strong result, with operating profit
of GBP28.1 million, in line with the prior year
-- Asset Management delivered a 33% increase in adjusted operating
profit to GBP23.1 million, with strong net inflows at 12% of opening
managed assets
Full year 2018 Full year 2017 Change
Financial Highlights(2) %
----------------------------------------- ------------------------ ----------------- ---------
Adjusted operating profit(1) GBP278.6m GBP268.7m 4
Operating profit before tax (continuing
operations) GBP271.2m GBP262.5m 3
Adjusted basic earnings per share
(continuing operations) 140.2p 133.6p 5
Basic earnings per share (continuing
operations) 136.2p 130.2p 5
Basic earnings per share (continuing
and discontinued operations) 134.7p 128.3p 5
Dividend per share 63.0p 60.0p 5
Return on opening equity 17.0% 18.1%
Net interest margin 8.0% 8.1%
Bad debt ratio 0.6% 0.6%
31 July 2018 31 July 2017 Change
%
----------------------------------------- ------------------------ ----------------- ---------
Loan book(3) GBP7.3bn GBP6.9bn 6.0
Total client assets GBP12.2bn GBP11.2bn 10
Common equity tier 1 capital ratio 12.7% 12.6%
Total capital ratio 15.0% 15.2%
----------------------------------------- ------------------------ ----------------- ---------
1 Adjusted operating profit excludes amortisation of intangible assets
on acquisition of GBP7.4 million (2017: GBP6.2 million), exceptional
items of GBPnil (2017: GBPnil), and loss from discontinued operations
of GBP2.9 million (2017: GBP3.9 million) and is stated before tax.
2 Please refer to basis of presentation on page 2 and additional
definitions on page 19.
3 Loan book growth of 6.0% excludes the unsecured retail point of
sale finance business, with a loan book of GBP66.2 million, which
was held for sale at 31 July 2018. Excluding this from 2017 and 2018,
underlying loan book growth was 6.6%.
Preben Prebensen, Chief Executive, said:
"I am pleased to report another good performance in the 2018 financial year, achieving both continued strong profitability and significant strategic progress.
All of our businesses have continued to successfully navigate and make the most of current trading conditions, while continuing to focus on maximising opportunities in future years.
Our strategic priorities are clear and unchanged, and we remain strongly committed to our proven business model, maintaining confidence in our ability to trade successfully in a range of economic conditions.
All of this ensures we can continue to support our customers and clients, and deliver value for our shareholders, through all stages of the financial cycle."
Enquiries
Sophie Gillingham Close Brothers Group plc 020 7655 3844 Liya Dashkina Close Brothers Group plc 020 7655 3468 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 dialling +44 20 3059 5868.
Basis of Presentation
The group presents its results on both a statutory and adjusted basis. Adjusted measures are presented on a basis consistent with prior periods and are used for internal management reporting purposes. Adjusted measures 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.
In the 2018 financial year, adjusted operating profit excludes amortisation of intangible assets on acquisition of GBP7.4 million (2017: GBP6.2 million), exceptional items of GBPnil (2017: GBPnil), and loss from discontinued operations of GBP2.9 million (2017: GBP3.9 million). Discontinued operations relate to the unsecured retail point of sale finance business, which has been classified as a discontinued operation in the group's income statement for the 2017 and 2018 financial years. The related assets and liabilities are classified as held for sale on the group's balance sheet at 31 July 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 excludes the unsecured retail point of sale finance loan book from both the opening and closing loan book. This does not result in any change to the ratios previously published for the 2017 financial year. Underlying loan book growth of 6.6% excludes the unsecured retail point of sale finance loan book of GBP66.2 million (31 July 2017: GBP36.7 million).
About Close Brothers
Close Brothers is a leading UK merchant banking group providing lending, deposit taking, wealth management services and securities trading. We employ around 3,300 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
The consistent application of our business model underpins our long track record of performance in a range of market conditions. We continue to prioritise margins and underwriting over growth, and we maintain our investment through the cycle and for the long term. We maintain strong funding and capital positions and a prudent level of dividend cover, which supports a long track record of holding or increasing our dividend.
Our strategic priorities are clear and unchanged: to protect, improve and extend our successful business model, providing exceptional service to our customers and clients across lending, savings, trading and wealth management.
Strong, sustainable profitability
The group achieved another year of strong profitability with adjusted operating profit up 4% to GBP278.6 million (2017: GBP268.7 million) and a return on opening equity of 17.0% (2017: 18.1%), reflecting good performance in all three of our divisions. On a statutory basis, operating profit before tax from continuing operations increased 3% to GBP271.2 million (2017: GBP262.5 million). The board proposes a full-year dividend of 63.0p (2017: 60.0p) per share, up 5% on last year, in line with our progressive dividend policy.
In Banking we achieved 2% growth in adjusted operating profit to GBP251.8 million (2017: GBP247.4 million). We have seen no significant change in the operating environment for our lending businesses, and the market overall remains competitive. We continue to focus on maintaining our prudent approach to lending, evidenced by our strong net interest margin at 8.0% (2017: 8.1%), and conservative loan to value ratios across our businesses. The credit environment remains benign, and bad debts have remained near historical lows with no significant change in credit performance across the portfolio.
Notwithstanding our disciplined approach, we have achieved underlying(1) loan book growth of 6.6%. This reflects our strong customer proposition and the diversification benefits of our loan portfolio, with our core Property, Premium and Invoice Finance businesses in particular continuing to achieve good growth. Our Asset Finance business also grew, despite significant competition in this market, while the Motor Finance loan book contracted slightly. We have also seen an increasing contribution from some of our smaller, specialist businesses.
Winterflood had another strong year, with operating profit in line with the prior year at GBP28.1 million (2017: GBP28.1 million), benefiting from consistently high trading activity across the UK market. Trading performance was strong throughout the year, with no loss days (2017: one loss day).
The Asset Management business has moved forward significantly in the last year, reporting 17% growth in managed assets, which now exceed GBP10 billion (31 July 2017: GBP8.9 billion), and a 33% increase in adjusted operating profit to GBP23.1 million (2017: GBP17.4 million). This reflects good new business levels from both our direct and intermediated distribution channels, and continued strong demand for both our advice and investment management propositions.
1 Underlying loan book growth of 6.6% excludes the unsecured retail point of sale finance loan book of GBP66.2 million (31 July 2017: GBP36.7 million).
Managing our business for the long term
We take a long term approach to managing our business, ensuring that our lending criteria, funding, and capital position are sustainable as the market environment changes. This in turn allows us to deliver good returns to shareholders and support our customers in a wide range of market conditions.
During the year, we further strengthened and diversified our funding position, through the issuance of a senior unsecured bond and a second public motor securitisation. Our capital ratios remain strong and comfortably ahead of minimum requirements, with a common equity tier 1 ("CET1") ratio of 12.7% (31 July 2017: 12.6%).
During the 2019 financial year we will roll out our new deposit platform, which will enable us to provide a wider range of retail deposit products and an online offering, while further improving the customer experience. We are also making good progress on developing the models, systems and processes required to use the Internal Ratings Based ("IRB") approach, which will optimise our capital position and better reflect the risk profile of our lending portfolio longer term.
We also work continuously to respond to evolving regulatory requirements. The last year has seen the successful implementation of a number of regulatory initiatives, including GDPR and MiFID II, as well as the transition to IFRS 9. We are also investing in cyber security to ensure we protect our business and our clients' data.
Maximising potential through long term investment
We are continuously looking for ways to improve our client offering and extend our business in both existing and new markets. Providing exceptional service to our customers and clients is at the heart of our strategy, and manifests itself in long-term customer relationships, high levels of repeat business and strong net promoter scores across our businesses.
During the last year we have undertaken a significant review to understand better the evolving needs of our customer base, making it easier for them to do business with us, and make better use of technology. This has included a detailed mapping of the customer journey across our Retail businesses, resulting in a number of process enhancements.
Our ongoing investment in the Premium Finance proposition and associated technology has supported strong new business levels in recent years. We have also commenced a multi-year investment programme in our Motor Finance business, to enhance our service to dealers and end customers, and respond to evolving customer behaviour in this market.
We recognise that the disciplined management of costs is critical to our ability to maintain profitability and invest through the cycle. We remain focused on controlling our expenditure alongside continued investment, while maintaining the high service levels and personal touch which are at the heart of our client proposition.
We are constantly looking to maximise market opportunities for our businesses, both in existing and new markets. In the last year this has included the continued expansion of our Property business into UK regional markets. The last year has also seen the successful expansion of our Invoice Finance business, and growth in the Brewery Rentals business which provides financing and servicing of beer kegs and casks to the brewery industry, as well as Novitas Loans, acquired in 2017, a specialist provider of loans to the clients of the legal profession. We are also continuing to explore the market opportunity for asset finance and other services in the German market, albeit this remains at an early stage.
Winterflood is diversifying its income by expanding its presence in the institutional market, and we continue to develop Winterflood Business Services which provides outsourced dealing and execution services to fund managers in the UK.
We have seen strong growth in our Asset Management business with positive net inflows exceeding GBP1 billion in the last year. We continue to see good long-term growth potential in this business, and have further expanded its growth capacity by optimising our adviser force and recruiting additional portfolio managers.
On 14 September we announced the sale of our unsecured retail point of sale finance business which had a loan book at 31 July 2018 of GBP66.2 million (31 July 2017: GBP36.7 million). After gradually and incrementally developing this business and assessing the market opportunity over the last several years, we have concluded that it does not provide a long-term fit with our predominantly secured business model. The sale is expected to complete in the current calendar year, subject to regulatory approval and other customary conditions.
Outlook
In the Banking division, we will maintain our disciplined approach and expect continued growth at good returns benefiting from the diversity of our portfolio. Bad debts remain low, with no significant change in credit performance to date, and our strong margins and service led customer relationships position us well to respond to any change in market conditions.
Winterflood has performed well since the financial year end, but remains sensitive to any change in trading conditions.
In Asset Management, we are focused on building further scale in the business, by growing client assets both organically and through selective hires and opportunistic acquisitions.
Overall, we remain well positioned to continue performing well in a range of market conditions.
OVERVIEW OF FINANCIAL PERFORMANCE
Key Financials
2018 2017 Change
Continuing operations GBP million GBP million %
------------------------------------------- -------------- ------------------ ---------
Adjusted operating income 805.8 761.4 6
Adjusted operating expenses (480.5) (453.7) 6
Impairment losses on loans and
advances (46.7) (39.0) 20
-------------------------------------------- -------------- ------------------ ---------
Adjusted operating profit 278.6 268.7 4
-------------------------------------------- -------------- ------------------ ---------
Banking 251.8 247.4 2
-------------- ------------------ ---------
Retail 81.1 82.8 (2)
Commercial 76.1 72.6 5
Property 94.6 92.0 3
-------------- ------------------ ---------
Securities 28.1 28.1 -
Asset Management 23.1 17.4 33
Group (24.4) (24.2) 1
-------------------------------------------- -------------- ------------------ ---------
Amortisation of intangible assets
on acquisition (7.4) (6.2) 19
-------------------------------------------- -------------- ------------------ ---------
Operating profit before tax 271.2 262.5 3
-------------------------------------------- -------------- ------------------ ---------
Tax (67.0) (68.8) (3)
-------------------------------------------- -------------- ------------------ ---------
Profit attributable to shareholders:
continuing operations 204.2 193.7 5
-------------------------------------------- -------------- ------------------ ---------
Loss from discontinued operations (2.2) (2.8) (21)
-------------------------------------------- -------------- ------------------ ---------
Loss attributable to non-controlling
interests (0.3) (0.3) -
-------------------------------------------- -------------- ------------------ ---------
Profit attributable to shareholders:
continuing and discontinued operations 202.3 191.2 6 -------------------------------------------- -------------- ------------------ --------- Adjusted basic earnings per share (continuing operations) 140.2p 133.6p 5 Basic earnings per share (continuing operations) 136.2p 130.2p 5 Basic earnings per share (continuing and discontinued operations) 134.7p 128.3p 5 Dividend per share 63.0p 60.0p 5 Return on opening equity 17.0% 18.1%
Good Performance in the Year
The group delivered another good performance, with adjusted operating profit up 4% to GBP278.6 million (2017: GBP268.7 million) and statutory operating profit before tax from continuing operations up 3% to GBP271.2 million (2017: GBP262.5 million). The operating margin remained flat on the prior year at 35% (2017: 35%).
The Banking division continued to perform well, delivering an adjusted operating profit of GBP251.8 million (2017: GBP247.4 million), up 2% on the prior year, with higher income and continued low bad debts across the businesses. Winterflood delivered another strong result, with operating profit of GBP28.1 million (2017: GBP28.1 million), in line with the prior year. Asset Management continued its good performance, achieving strong net inflows, with adjusted operating profit of GBP23.1 million (2017: GBP17.4 million). Group net expenses, which include the central functions such as finance, legal and compliance, risk and human resources, were broadly unchanged at GBP24.4 million (2017: GBP24.2 million).
Adjusted operating income increased 6% to GBP805.8 million (2017: GBP761.4 million), driven by good income growth in the Banking businesses and in Asset Management.
Adjusted operating expenses increased 6% to GBP480.5 million (2017: GBP453.7 million), with most of the uplift seen in Banking, where we continue to invest in a number of business initiatives and infrastructure projects. In Asset Management, costs also increased, driven by higher staff costs reflecting ongoing growth in the business. Overall, both the group's expense/income and compensation ratios were stable at 60% (2017: 60%) and 37% (2017: 37%) respectively.
The bad debt ratio remained low at 0.6% (2017: 0.6%), reflecting the continued prudent application of our lending criteria and the current benign credit environment.
The tax charge in the period was GBP67.0 million (2017: GBP68.8 million), which corresponds to an effective tax rate of 25% (2017: 26%), reflecting the reduction in the corporation tax rate during the year.
As a result, adjusted basic earnings per share ("EPS") from continuing operations increased 5% to 140.2p (2017: 133.6p), generating a strong return on opening equity ("RoE") of 17.0% (2017: 18.1%). Basic EPS from continuing operations increased 5% to 136.2p (2017: 130.2p).
Since the financial year end, the group has announced the sale of its unsecured retail point of sale finance business, which has been treated as a discontinued operation in the income statement for 2018 and in the comparable year, and as an asset held for sale on the balance sheet at 31 July 2018. The loss from discontinued operations was GBP2.2 million (2017: GBP2.8 million) net of tax.
Basic EPS from continuing and discontinued operations increased 5% to 134.7p (2017: 128.3p).
The board is proposing a final dividend per share of 42.0p (2017: 40.0p), resulting in a full-year dividend per share of 63.0p (2017: 60.0p), an increase of 5% on the prior year. This reflects our progressive dividend policy, which aims to provide sustainable dividend growth year on year, while maintaining a prudent level of dividend cover. Subject to shareholder approval at the Annual General Meeting, the final dividend will be paid on 20 November 2018 to shareholders on the register at 12 October 2018.
Group Balance Sheet
31 July 31 July
2018 2017
GBP million GBP million
--------------------------------- ------------- -------------
Loans and advances to customers 7,297.5 6,884.7
Treasury assets(1) 1,435.4 1,029.0
Market-making assets(2) 635.8 643.4
Other assets 882.3 728.1
---------------------------------- ------------- -------------
Total assets 10,251.0 9,285.2
---------------------------------- ------------- -------------
Deposits by customers 5,497.2 5,113.1
Borrowings 2,501.1 2,041.2
Market-making liabilities(2) 565.5 556.9
Other liabilities 338.5 338.0
---------------------------------- ------------- -------------
Total liabilities 8,902.3 8,049.2
---------------------------------- ------------- -------------
Equity 1,348.7 1,236.0
---------------------------------- ------------- -------------
Total liabilities and equity 10,251.0 9,285.2
---------------------------------- ------------- -------------
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.
The structure of our balance sheet remains unchanged, with the majority of assets and liabilities relating to our lending activities. Loans and advances to customers make up the majority of our assets. These are c.90% secured and short-term in nature, with an average maturity of approximately 14 months (31 July 2017: 14 months). Other items on the balance sheet include treasury assets held for liquidity purposes, and settlement balances in our Securities division. Intangibles, property, plant and equipment, and prepayments are included as other assets. Liabilities are predominantly made up of customer deposits and both secured and unsecured borrowings to fund the loan book.
In the year, total assets increased by GBP965.8 million to GBP10.3 billion (31 July 2017: GBP9.3 billion), driven by loan book growth in the year, as well as an increase in treasury assets. Total liabilities increased GBP853.1 million to GBP8.9 billion (31 July 2017: GBP8.0 billion), driven by higher customer deposits and an increase in borrowings, including the issue of a senior unsecured bond.
Total equity increased to GBP1.3 billion (31 July 2017: GBP1.2 billion), principally reflecting profit in the period, partially offset by dividend payments of GBP91.0 million. The group's return on assets remained broadly stable at 2.0% (31 July 2017: 2.1%).
IFRS 9
The provisions of IFRS 9 Financial Instruments apply to the group from 1 August 2018. Under IFRS 9, impairment losses are recognised in the group's financial statements on a forward looking basis, taking into account both the risk profile of the loan book and the macroeconomic outlook at the balance sheet date. This will result in earlier recognition of bad debts in the group's financial statements, and consequently a higher balance of bad debt provisions on the balance sheet, compared to the incurred loss approach under IAS 39.
The implementation of IFRS 9 is expected to increase bad debt provisions on the balance sheet by GBP59.0 million at 1 August 2018, resulting in a GBP44.9 million reduction in shareholders' equity and a GBP14.1 million increase in deferred tax assets. This increase principally reflects the additional forward looking provision on performing and underperforming loans, as well as a broader definition of default compared to IAS 39 and the addition of a macroeconomic overlay.
This corresponds to a 49 bps reduction in the group's CET1 capital ratio on a fully loaded basis, in line with the group's expectation of a 45-55 bps impact. The group will be applying the European Banking Authority's transitional arrangements, which phase in the initial impact over a period of five years and, therefore, the impact on the group's regulatory capital position in the 2019 financial year will be minimal at 2 bps.
The group will be publishing an IFRS 9 transition document with further details on the implementation of IFRS 9 in early November.
Group Capital Position
31 July 31 July
2018 2017
GBP million GBP million
------------------------------ ------------- -------------
Common equity tier 1 capital 1,084.4 990.6
Total capital 1,282.3 1,196.2
Risk weighted assets 8,547.5 7,859.0
Common equity tier 1 capital
ratio 12.7% 12.6%
Total capital ratio 15.0% 15.2%
Leverage ratio 10.6% 10.7%
------------------------------- ------------- -------------
The group's strong capital generation has allowed us to support continued loan book growth in the year while maintaining capital ratios comfortably ahead of minimum requirements. Overall, the CET1 capital ratio increased marginally to 12.7% (31 July 2017: 12.6%), reflecting continued strong profitability and loan book growth in the period. The total capital ratio decreased marginally to 15.0% (31 July 2017: 15.2%).
In the last year, we generated GBP93.8 million of CET1 capital, reflecting GBP202.3 million of profit in the year, partly offset by dividends paid and foreseen of GBP93.9 million, an increase in intangibles, and other movements in reserves. As a result, CET1 capital increased 9% to GBP1,084.4 million (31 July 2017: GBP990.6 million).
Risk weighted assets also increased 9% to GBP8.5 billion (31 July 2017: GBP7.9 billion), reflecting continued loan book growth and particularly strong growth in our property development loan book which is risk weighted at 150% under the standardised approach.
Our leverage ratio, which is a transparent measure of capital strength not affected by risk weightings, remains very strong at 10.6% (31 July 2017: 10.7%).
These capital ratios remain comfortably ahead of minimum regulatory requirements. Our fully loaded minimum CET1 capital ratio requirement, effective July 2019, is 9.0%, including all applicable buffers and a 1.1% pillar 2 add-on, with a total capital requirement of 13.4%. Accordingly, we continue to have good headroom of c.370 bps in our CET1 capital ratio, and c.160 bps in the total capital ratio.
This leaves us well placed to support continued growth in the loan book and absorb any foreseen regulatory changes, including the proposed Basel 3 reforms and the impact of IFRS 9.
We are also continuing to develop the models, systems and processes required to use the Internal Ratings Based approach for capital, which we believe will better reflect the risk profile of our lending longer term. We currently expect to submit our formal application to the PRA during the 2019 calendar year.
Group Funding(1)
31 July 31 July
2018 2017
GBP million GBP million
--------------------------------------------- ------------- -------------
Customer deposits 5,497.2 5,113.1
Secured funding 1,360.3 1,297.3
Unsecured funding(2) 1,421.2 1,120.3
Equity 1,348.7 1,236.0
---------------------------------------------- ------------- -------------
Total available funding 9,627.4 8,766.7
---------------------------------------------- ------------- -------------
Of which term funding (>1 year) 4,958.5 4,766.2
Total funding as % of loan book 132% 127%
Term funding as % of loan book 68% 69%
Average maturity of term funding (excluding 43 months 38 months
equity)
Average maturity of funding allocated 23 months 21 months
to loan book(3)
1 Numbers relate to core funding and exclude working capital facilities at the business level.
2 Unsecured funding excludes GBP14.6 million (2017: GBP16.1 million) of non-facility overdrafts included in borrowings and includes GBP295.0 million (2017: GBP295.0 million) of undrawn facilities.
3 Average maturity of total funding excluding equity and funding held for liquidity purposes.
The primary purpose of our treasury function is to manage funding and liquidity to support the lending businesses. We maintain a conservative approach, with diverse funding sources and a prudent maturity profile, which increases resilience and helps to manage changes in the cost of funding.
Overall, the funding environment remained favourable during the year. Total funding increased to GBP9.6 billion (31 July 2017: GBP8.8 billion) and accounted for 132% (31 July 2017: 127%) of the loan book at the balance sheet date. Our average cost of funding of 1.6% (2017: 1.7%) was marginally below the prior year, reflecting new lower cost funding, including a GBP200 million public motor securitisation issued in November 2017.
The loan book growth in the year was primarily funded by an increase in customer deposits and unsecured funding. Deposits increased 8% to GBP5.5 billion (31 July 2017: GBP5.1 billion) with rises in both retail and corporate deposits. The latter represents around two-thirds of the deposit base. Unsecured funding increased to GBP1.4 billion (31 July 2017: GBP1.1 billion), reflecting the successful issuance of a GBP250 million senior unsecured bond in April 2018.
Our range of secured funding facilities include securitisations of our Premium and Motor finance loan books. We have made limited use of the Term Funding Scheme, which accounted for c.5% of our total funding at the year end.
We have maintained a prudent maturity profile. Term funding, with a residual maturity over one year, increased to GBP5.0 billion (31 July 2017: GBP4.8 billion) and now covers 68% (31 July 2017: 69%) of the loan book. The average maturity of funding allocated to the loan book increased to 23 months (31 July 2017: 21 months), while the average loan book maturity remained at 14 months (31 July 2017: 14 months).
During the year we invested in a new deposit platform, which will allow us to offer a wider range of savings products and to add online capability to our channels of distribution. The programme will enable us to further diversify our funding as well as improve the customer experience. We anticipate the new platform to be rolled out during the 2019 financial year.
Our strong credit ratings have been reaffirmed by both Moody's Investors Services ("Moody's") and Fitch Ratings ("Fitch"). Moody's rates Close Brothers Group ("CBG") A3/P2 and Close Brothers Limited ("CBL") Aa3/P1, with a stable outlook. Fitch rates both CBG and CBL A/F1 with a stable outlook.
Group Liquidity
31 July 31 July
2018 2017
GBP million GBP million
---------------------------- ------------- -------------
Bank of England deposits 1,140.4 805.1
Sovereign and central bank
debt 44.5 43.6
High quality liquid assets 1,184.9 848.7(1)
Certificates of deposit 250.5 180.3
Treasury assets 1,435.4 1,029.0
----------------------------- ------------- -------------
1 In addition to and not included in the above, at 31 July 2017 the group held GBP97.5 million of Treasury Bills drawn under the Funding for Lending Scheme that were not in repurchase agreements.
The group maintains a strong liquidity position, ensuring it is comfortably ahead of both internal risk appetite and regulatory requirements. The majority of our liquidity requirements and surplus funding are held in the form of high quality liquid assets.
We regularly assess and stress test our liquidity requirements and continue to comfortably meet the liquidity coverage ratio requirements under CRD IV, with a 12-month average liquidity coverage ratio of 1,038%. Treasury assets increased to GBP1.4 billion (31 July 2017: GBP1.0 billion) and were predominantly held on deposit with the Bank of England, giving us continued good headroom to both internal and external liquidity requirements.
BUSINESS REVIEW
BANKING
Key Financials
2018 2017 Change
Continuing operations(1) GBP million GBP million %
--------------------------------- ---------------- ---------------- -------
Adjusted operating income 581.0 551.1 5
Adjusted operating expenses (282.5) (264.7) 7
Impairment losses on loans
and advances (46.7) (39.0) 20
---------------------------------- ---------------- ---------------- -------
Adjusted operating profit 251.8 247.4 2
---------------------------------- ---------------- ---------------- -------
Net interest margin(2) 8.0% 8.1%
Expense/income ratio 49% 48%
Bad debt ratio(2) 0.6% 0.6%
Return on net loan book(2) 3.5% 3.6%
Return on opening equity 20% 23%
Average loan book and operating
lease assets(3) 7,261.1 6,795.6 7
---------------------------------- ---------------- ---------------- -------
1 Results from continuing operations exclude the unsecured retail point of sale finance business, which has been classified as a discontinued operation in the group's income statement for the 2017 and 2018 financial years.
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. This does not result in any change to the ratios previously published for the 2017 financial year.
3 Re-presented to exclude the unsecured retail point of sale finance loan book in both the 2017 and 2018 financial years and is used to calculate net interest margin, bad debt ratio and return on net loan book.
Good Financial Performance for the Full Year
Banking adjusted operating profit was up 2% to GBP251.8 million (2017: GBP247.4 million), as good loan book growth was partly offset by a marginal reduction in the net interest margin, increased investment and the non-recurrence of provision releases in the prior year. Statutory operating profit from continuing operations increased 1% to GBP249.9 million (2017: GBP246.5 million).
The loan book grew 6.0% (2017: 7.0%), with underlying growth of 6.6% excluding the unsecured retail point of sale finance portfolio. This growth reflects our strong customer proposition and the diversification benefits of our loan portfolio, with growth in most of our core businesses, as well as an increasing contribution from some of our smaller, specialist businesses. The return on net loan book remained strong at 3.5% (2017: 3.6%).
Adjusted operating income was up 5% at GBP581.0 million (2017: GBP551.1 million), supported by loan book growth at strong margins across the lending businesses. The net interest margin remained strong at 8.0% (2017: 8.1%), albeit with slightly lower yield compared to the prior year. Our strong margins and service led customer relationships position us well to respond to any change in market conditions.
Adjusted operating expenses increased 7% to GBP282.5 million (2017: GBP264.7 million), as we continue to invest in a number of strategic projects and new business initiatives, including a new multi-year investment programme in Motor Finance and to support our planned application for IRB. Staff costs, which represent the majority of the cost base, also increased, reflecting continued growth in both front office and support functions. The expense/income ratio was marginally up to 49% (2017: 48%), while the compensation ratio remained flat on the prior year at 29%.
We have seen no change in credit performance and the bad debt ratio remained low at 0.6% (2017: 0.6%), although slightly higher on the prior year, which benefited from GBP7.5 million of bad debt provision releases. The credit environment remained benign overall and we continue to see low levels of arrears across the businesses.
Return on opening equity remained strong at 20% (2017: 23%), reflecting continued profitability of the business, offset by continued strong growth in the equity base.
Loan Book Analysis
31 July 31 July
2018 2017 Change
GBP million GBP million %
------------------- ------------ ------------ -------------
Retail 2,686.4(1) 2,702.8 (0.6)
------------ ------------ -------------
Motor Finance 1,736.3 1,761.9 (1.5)
Premium Finance 950.1(1) 940.9 1.0
------------ ------------ -------------
Commercial 2,783.6 2,552.6 9.0
------------ ------------ -------------
Asset Finance 2,071.2 2,017.0 2.7
Invoice Finance 712.4 535.6 33.0
------------ ------------ -------------
Property 1,827.5 1,629.3 12.2
------------------- ------------ ------------ -------------
Closing loan book 7,297.5(1) 6,884.7 6.0
------------------- ------------ ------------ -------------
1 The loan book at 31 July 2018 excludes the unsecured retail point of sale finance loan book of GBP66.2 million, which was classified as held for sale at the balance sheet date. The loan book at 31 July 2017 includes GBP36.7 million in relation to this business.
Loan book growth has always been an output of our business model, and we continue to prioritise margin and credit quality over growth. Our portfolio is diverse, which ensures that our business remains resilient through the cycle. Loan book growth was 6.0% in the year to GBP7.3 billion (31 July 2017: GBP6.9 billion), with underlying growth of 6.6% excluding the unsecured retail point of sale finance loan book, which was classified as held for sale at the balance sheet date.
We achieved particularly good growth in Property, which has remained resilient to competitive pressure, as well as Invoice Finance, with growth in both the core business and from smaller, specialist areas. Both Asset and Premium Finance also delivered good growth in the year, while Motor Finance saw a slight contraction, as we prioritise our strict lending criteria in the face of continued competition.
The Republic of Ireland, where we provide Motor, Premium, Asset and Invoice Finance, represents c.10% of the overall Banking loan book. The Irish portfolio also grew in the period, although we now see growth moderating in this market.
BANKING: Retail
2018 2017 Change
Continuing operations(1) GBP million GBP million %
----------------------------- ------------- ------------- -------
Adjusted operating income 225.5 218.2 3
Adjusted operating expenses (119.2) (110.8) 8
Impairment losses on loans
and advances (25.2) (24.6) 2
----------------------------- ------------- ------------- -------
Adjusted operating profit 81.1 82.8 (2)
----------------------------- ------------- ------------- -------
Net interest margin(2) 8.4% 8.5%
Expense/income ratio 53% 51%
Bad debt ratio(2) 0.9% 1.0%
Average loan book(3) 2,676.3 2,575.6 4
----------------------------- ------------- ------------- -------
1 Results from continuing operations exclude the unsecured retail point of sale finance business, which has been classified as a discontinued operation in the group's income statement for the 2017 and 2018 financial years.
2 The calculation of the bad debt ratio and net interest margin excludes the unsecured retail point of sale finance loan book from both the opening and closing loan book. This does not result in any change to the ratios previously published for the 2017 financial year.
3 Re-presented to exclude the unsecured retail point of sale finance loan book in both the 2017 and 2018 financial years and is used to calculate net interest margin, bad debt ratio and return on net loan book.
The Retail segment provides intermediated finance, principally to individuals, through motor dealers and insurance brokers and incorporates our Premium and Motor Finance businesses.
The Retail loan book was broadly flat overall at GBP2.7 billion (31 July 2017: GBP2.7 billion), as good underlying loan book growth in Premium Finance was offset by a slight decline in the Motor Finance book and the agreed sale of the unsecured retail point of sale finance business.
Premium Finance delivered good underlying growth of 5% driven by volumes from recent broker wins. The Premium Finance business continues to be well positioned competitively, benefiting from the ongoing multi-year investment programme in its infrastructure aimed at improving both broker and end customer experience.
The Motor Finance loan book reduced 1% to GBP1.7 billion (31 July 2017: GBP1.8 billion). The UK book saw a small contraction in the period, as we continue to prioritise margin and credit quality in a highly competitive market. This was partly offset by continued modest growth in the Republic of Ireland, which accounts for 26% (2017: 23%) of the Motor Finance loan book, where we operate through a local partner, First Auto Finance, who provide the distribution and dealer relationships. In both the UK and Ireland, our core product remains hire-purchase contracts for second-hand vehicles, with Personal Contract Plans ("PCP") accounting for 13% of the Motor Finance loan book at 31 July 2018.
On 14 September we announced the sale of our unsecured retail point of sale finance business, which provides finance to consumers through retailers, and had a loan book of GBP66.2 million (31 July 2017: GBP36.7 million) at the balance sheet date. After gradually and incrementally developing this business and assessing the market opportunity over the last several years, we have concluded that it does not provide a long-term fit with our predominantly secured business model.
Overall, adjusted operating profit for the Retail segment of GBP81.1 million (2017: GBP82.8 million) was marginally down on the prior year, and statutory operating profit from continuing operations reduced to GBP80.8 million (2017: GBP82.4 million). This was due to ongoing investment in both Premium and Motor Finance as well as lower income in the Motor Finance business.
Adjusted operating income was up 3% year on year at GBP225.5 million (2017: GBP218.2 million) with the net interest margin broadly stable at 8.4% (2017: 8.5%).
Adjusted operating expenses increased 8%, to GBP119.2 million (2017: GBP110.8 million), as our multi-year investment in both Premium Finance and, more recently, the Motor Finance business continues. The investment programme in our Motor Finance business is still in its early stage and is aimed at improving the service proposition, streamlining operational processes and increasing sales effectiveness. As a result, the expense/income ratio increased to 53% (2017: 51%).
Credit performance remains in line with our expectations at this stage of the cycle, with the bad debt ratio at 0.9% (2017: 1.0%), reflecting continued commitment to our strict lending criteria.
BANKING: Commercial
2018 2017 Change
GBP million GBP million %
--------------------------------- -------------- -------------- -------
Operating income 225.5 213.3 6
Adjusted operating expenses (132.2) (125.2) 6
Impairment losses on loans and
advances (17.2) (15.5) 11
--------------------------------- -------------- -------------- -------
Adjusted operating profit 76.1 72.6 5
--------------------------------- -------------- -------------- -------
Net interest margin 7.9% 8.0%
Expense/income ratio 59% 59%
Bad debt ratio 0.6% 0.6%
Average loan book and operating
leases 2,856.4 2,676.8 7
--------------------------------- -------------- -------------- -------
The Commercial segment focuses on specialist, secured lending principally to the SME market and includes Asset and Invoice Finance, including smaller, specialist businesses such as Novitas Loans, a specialist provider of finance to clients of the legal profession acquired in 2017, and Brewery Rentals, which provides service and finance solutions for brewery equipment and containers in the UK and Germany.
The overall Commercial loan book increased 9% to GBP2.8 billion (31 July 2017: GBP2.6 billion), with growth across all businesses, but particularly in the core Invoice Finance business, Novitas Loans and Brewery Rentals. The Asset Finance loan book was also up 3% in the year, notwithstanding active competition from both new and existing lenders in this market.
Adjusted operating profit of GBP76.1 million (2017: GBP72.6 million) was up 5%, driven by good income growth and continued low bad debt. Statutory operating profit increased 3% to GBP74.5 million (2017: GBP72.1 million).
Operating income of GBP225.5 million (2017: GBP213.3 million) was 6% higher than the prior year, reflecting growth in the loan book. Despite ongoing pricing pressure in the Asset Finance market, we have maintained a strong net interest margin of 7.9% (2017: 8.0%), which remains ahead of the industry.
Costs grew by 6% to GBP132.2 million (2017: GBP125.2 million), driven by ongoing investment in new initiatives. These include our Technology Services business, where we offer financing solutions for IT infrastructure, the expansion of our Asset Finance offering into Germany, and post-acquisition integration of Novitas Loans. Despite this ongoing investment, the expense/income ratio remained stable at 59% (2017: 59%).
The bad debt ratio remained in line with the prior year at 0.6% (2017: 0.6%), with good overall credit performance.
BANKING: Property
2018 2017 Change
GBP million GBP million %
---------------------------- -------------------- -------------------- -------
Operating income 130.0 119.6 9
Operating expenses (31.1) (28.7) 8
Impairment losses on loans
and advances (4.3) 1.1
---------------------------- -------------------- -------------------- -------
Operating profit 94.6 92.0 3
---------------------------- -------------------- -------------------- -------
Net interest margin 7.5% 7.7%
Expense/income ratio 24% 24%
Bad debt ratio 0.2% (0.1%)
Average loan book 1,728.4 1,543.3 12
---------------------------- -------------------- -------------------- -------
The Property segment is focused on specialist residential development finance to established professional developers in the UK. We do not lend to the buy-to-let sector, or provide residential or commercial mortgages.
Property delivered another year of strong loan book growth at 12%, to GBP1.8 billion (31 July 2017: GBP1.6 billion). We continue to see strong structural demand in our core market of property development finance for new build family housing with an average unit price of GBP500,000. London and the South East represent c.70% of the portfolio, however growth also remains strong in regional locations, around major commuting hubs such as Manchester, Birmingham and Bristol. Our long track record, expertise and quality of service ensure the business remains resilient to competitive pressures and continues to generate high levels of repeat business.
The business delivered an operating profit of GBP94.6 million (2017: GBP92.0 million), up 3% on the prior year. The net interest margin reduced slightly to 7.5% (2017: 7.7%), predominantly reflecting the mix of new business in the period. The bad debt ratio was low at 0.2% (2017: -0.1%), with the net recovery in the 2017 financial year reflecting provision releases in that year.
Operating expenses of GBP31.1 million (2017: GBP28.7 million) were up 8%, and the expense/income ratio remained at 24% (2017: 24%), reflecting the lower operational requirements of the business with larger transaction sizes at lower volumes.
SECURITIES
Key Financials
2018 2017 Change
GBP million GBP million %
-------------------------- ------------- ------------- -------
Operating income 109.1 106.7 2
Operating expenses (81.0) (78.6) 3
-------------------------- ------------- ------------- -------
Operating profit 28.1 28.1 -
-------------------------- ------------- ------------- -------
Bargains per day 68k 65k 3
Operating margin 26% 26%
Return on opening equity 29% 29%
-------------------------- ------------- ------------- -------
Continued Good Performance in Favourable Market Conditions
Winterflood had another strong year, maximising revenue opportunities in mostly favourable market conditions and delivering operating profit of GBP28.1 million (2017: GBP28.1 million), in line with the prior year.
Operating income increased 2% to GBP109.1 million (2017: GBP106.7 million), reflecting strong trading income across all trading sectors and particularly in AIM, investment trusts and FTSE 350. Geopolitical developments and rising markets attracted higher levels of investor trading activity both on the retail and institutional sides, benefitting most trading sectors. Winterflood is also diversifying its income by increasing its presence in the institutional market, which contributed to income growth in the period.
Average daily bargains increased 3% to 67,520 (2017: 65,286), reflecting increased trading activity. Winterflood had no loss days in the year (2017: one), and at the financial year end had 16 consecutive months without a loss day, notwithstanding some periods of higher market volatility, demonstrating the skill and expertise of our traders.
Operating expenses increased 3% to GBP81.0 million (2017: GBP78.6 million), reflecting slightly higher variable costs and settlement fees, as a result of increased trading activity. We also continue to invest in Winterflood Business Services, which provides flexible outsourced dealing, custody and settlement services.
Both the expense/income ratio and the compensation ratio were broadly in line with the prior year, at 74% (2017: 74%) and 47% (2017: 48%) respectively.
Winterflood has a long track record of trading profitably in a range of conditions; however, due to the nature of the business, it always remains sensitive to changes in the market environment.
ASSET MANAGEMENT
Key Financials
2018 2017 Change%
GBP million GBP million
------------------------------ ------------- ------------- -----------
Investment management 75.2 63.7 18
Advice and other services(1) 39.6 37.1 7
Other income 0.7 2.1 (67)
------------------------------- ------------- ------------- -----------
Operating income 115.5 102.9 12
Adjusted operating expenses (92.4) (85.5) 8
------------------------------- ------------- ------------- -----------
Adjusted operating profit(2) 23.1 17.4 33
------------------------------- ------------- ------------- -----------
Revenue margin (bps) 98 96
Operating margin 20% 17%
Return on opening equity 34% 26%
------------------------------- ------------- -------------
1 Income from advice and self-directed services, excluding investment management income.
2 Excluding the OLIM Investment Managers ("OLIM") business sold in 2017, adjusted operating profit increased by 49% to GBP23.1 million (2017: GBP15.5 million), with an underlying operating margin of 20% (2017: 15%).
Strong Performance in the Year
Asset Management made significant progress in the year, achieving strong net inflows and significant growth in operating profit, with continued good demand for our integrated advice and investment management services.
The division delivered a 33% increase in adjusted operating profit to GBP23.1 million (2017: GBP17.4 million) and an operating margin of 20% (2017: 17%). Statutory operating profit was also up at GBP17.6 million (2017: GBP12.1 million). Managed assets increased 17% to GBP10.4 billion (31 July 2017: GBP8.9 billion), with positive net flows of GBP1,083 million (31 July 2017: GBP757 million), or 12% (2017: 9%) of opening managed assets.
Operating income increased 12% to GBP115.5 million (2017: GBP102.9 million), driven by growth in client assets from both strong net inflows and rising markets. The revenue margin increased to 98 bps (2017: 96 bps) reflecting growth of our integrated wealth management offering, which combines advice and investment management.
Adjusted operating expenses increased 8% to GBP92.4 million (2017: GBP85.5 million), and the expense/income ratio improved to 80% (2017: 83%) reflecting the benefits of operating leverage. The increase in expenses was predominantly driven by staff costs, reflecting greater numbers of support staff and hiring of investment managers. The compensation ratio remained in line with the prior year at 55% (2017: 55%).
The increase in staff costs was partly offset by ongoing savings from the consolidation of custody, trading and administration onto a single platform, enabling investment in people to drive growth in our advice and investment management offering.
Positive Inflows Across All Channels
After seeing strong growth in the first half, we continued to sustain good net inflows alongside mixed market conditions in the second, achieving 17% growth in managed assets to GBP10.4 billion (31 July 2017: GBP8.9 billion). For the full year, net inflows increased 43% to GBP1,083 million (2017: GBP757 million), with strong flows both directly from our own advisers and investment managers, and through third party IFAs. Positive market movements contributed a further GBP395 million (2017: GBP588 million) to growth in managed assets.
During the year we saw positive inflows into our investment propositions from the 2017 acquisitions of EOS Wealth Management and Adrian Smith & Partners, both of which are now fully incorporated into our integrated wealth management offering and making strong contributions. We also benefited from the addition of new clients and managed assets resulting from hiring additional high net worth investment managers.
Advised assets under third party management decreased by 18% following transfers of assets into our management. Overall, total client assets grew 10% to GBP12.2 billion (31 July 2017: GBP11.2 billion).
Movement in Client Assets
31 July 31 July
2018 2017
GBP million GBP million
--------------------------------------- ---------------- ---------------
Opening managed assets 8,900 8,047
Inflows 1,961 1,884
Outflows (878) (1,127)
--------------------------------------- ---------------- ---------------
Net inflows 1,083 757
Market movements 395 588
Disposals - (492)
--------------------------------------- ---------------- ---------------
Total managed assets 10,378 8,900
Advised only assets 1,841 2,257
--------------------------------------- ---------------- ---------------
Total client assets(1) 12,219 11,157
--------------------------------------- ---------------- ---------------
Net flows as % of opening managed
assets 12% 9%
--------------------------------------- ---------------- ---------------
1 Total client assets include GBP4.2 billion (31 July 2017: GBP3.7
billion) of assets that are both advised and managed.
Our investment strategy focuses on delivering long-term returns to clients using a prudent investment approach tailored to an individual client's risk profile. Over the year, all our funds and segregated strategies have continued to deliver strong positive risk-adjusted returns. Relative to their peer group, 11 of our 14 unitised funds have outperformed their respective Investment Association sectors, and our segregated bespoke investment strategies have continued to outperform their ARC peer group average returns.
During the year, our focus remained on providing excellent service to our clients, while optimising our adviser productivity, allowing us to drive operating leverage, revenue growth and net inflows.
In addition, we have made significant progress implementing strategic technological changes to improve our operating efficiency, and support our ability to offer a range of alternative propositions. We will continue to invest through selective hiring of advisers and investment managers, as well as opportunistic acquisitions, and we see good growth potential for the business longer term.
DEFINITIONS
Adjusted: Adjusted measures are used to increase comparability between periods and exclude amortisation of intangible assets on acquisition, any exceptional items and discontinued operations
Bad debt ratio(1) : Impairment losses as a percentage of average continuing operations net loans and advances to customers and operating lease assets
Compensation ratio: Total staff costs as a percentage of 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 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")(1) : 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 continuing operations 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") (1) : Adjusted operating profit from lending activities divided by average continuing operations 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
(1) The calculation for the 2018 financial year excludes the unsecured retail point of sale finance loan book from both the opening and closing loan book
Consolidated Income Statement
for the year ended 31 July 2018
2018 2017(1)
Note GBP million GBP million
---------------------------------------------------------------------------------------------------------------------- ----------- -----------
Interest income 601.0 574.3
Interest expense (114.9) (116.8)
--------------------------------------------------------------------------------------------------- ----------------- ----------- -----------
Net interest income 486.1 457.5
--------------------------------------------------------------------------------------------------- ----------------- ----------- -----------
Fee and commission income 213.3 206.4
Fee and commission expense (13.7) (16.7)
Gains less losses arising from dealing in securities 100.1 94.2 Other income 65.1 57.3 Depreciation of operating lease assets and other direct costs 11 (45.1) (37.3) Non-interest income 319.7 303.9 --------------------------------------------------------------------------------------------------- ----------------- ----------- ----------- Operating income 805.8 761.4 --------------------------------------------------------------------------------------------------- ----------------- ----------- ----------- Administrative expenses (480.5) (453.7) Impairment losses on loans and advances (46.7) (39.0) --------------------------------------------------------------------------------------------------- ----------------- ----------- ----------- Total operating expenses before amortisation of intangible assets on acquisition (527.2) (492.7) --------------------------------------------------------------------------------------------------- ----------------- ----------- ----------- Operating profit before amortisation of intangible assets on acquisition 278.6 268.7 Amortisation of intangible assets on acquisition 10 (7.4) (6.2) --------------------------------------------------------------------------------------------------- ----------------- ----------- ----------- Operating profit before tax 271.2 262.5 Tax 3 (67.0) (68.8) --------------------------------------------------------------------------------------------------- ----------------- ----------- ----------- Profit after tax from continuing operations 204.2 193.7 Loss from discontinued operations, net of tax (2.2) (2.8) --------------------------------------------------------------------------------------------------- ----------------- ----------- ----------- Profit after tax 202.0 190.9 Loss attributable to non-controlling interests from continuing operations (0.3) (0.3) Profit attributable to shareholders 202.3 191.2 --------------------------------------------------------------------------------------------------- ----------------- ----------- ----------- From continuing operations Basic earnings per share 5 136.2p 130.2p Diluted earnings per share 5 135.3p 129.3p --------------------------------------------------------------------------------------------------- ----------------- ----------- ----------- From continuing and discontinued operations Basic earnings per share 5 134.7p 128.3p Diluted earnings per share 5 133.8p 127.5p --------------------------------------------------------------------------------------------------- ----------------- ----------- ----------- Interim dividend per share paid 6 21.0p 20.0p --------------------------------------------------------------------------------------------------- ----------------- ----------- ----------- Final dividend per share 6 42.0p 40.0p --------------------------------------------------------------------------------------------------- ----------------- ----------- -----------
1 Restated - see note 4.
Consolidated Statement of COMPREHENSIVE INCOME
for the year ended 31 July 2018
2018 2017
GBP million GBP million
--------------------------------------------------------- ----------- -----------
Profit after tax 202.0 190.9
--------------------------------------------------------- ----------- -----------
Other comprehensive income/(expense) that may be
reclassified to income statement from continuing
operations
Currency translation gains 0.3 0.4
Gains on cash flow hedging 4.4 4.7
Gains/(losses) on financial instruments classified
as available for sale:
Sovereign and central bank debt 0.6 0.7
Contingent consideration (0.3) 0.3
Tax relating to items that may be reclassified (1.3) (2.3)
--------------------------------------------------------- ----------- -----------
3.7 3.8
--------------------------------------------------------- ----------- -----------
Other comprehensive income/(expense) that will not
be reclassified to
income statement from continuing operations
Defined benefit pension scheme gains 1.7 2.7
Tax relating to items that will not be reclassified (0.4) (0.5)
--------------------------------------------------------- ----------- -----------
1.3 2.2
--------------------------------------------------------- ----------- -----------
Other comprehensive income, net of tax from continuing
operations 5.0 6.0
Total comprehensive income 207.0 196.9
--------------------------------------------------------- ----------- -----------
Attributable to
Non-controlling interests (0.3) (0.3)
Shareholders 207.3 197.2
--------------------------------------------------------- ----------- -----------
207.0 196.9
--------------------------------------------------------- ----------- -----------
Consolidated Balance Sheet
at 31 July 2018
2018 2017
Note GBP million GBP million
---------------------------------------------------- ----------- -----------
Assets
Cash and balances at central banks 1,140.4 805.1
Settlement balances 512.2 546.7
Loans and advances to banks 140.2 99.8
Loans and advances to customers 7 7,297.5 6,884.7
Debt securities 8 320.6 240.1
Equity shares 9 32.1 32.7
Loans to money brokers against stock advanced 66.4 48.6
Derivative financial instruments 16.6 27.0
Intangible assets 10 201.3 191.7
Property, plant and equipment 11 226.1 202.7
Deferred tax assets 43.0 47.4
Prepayments, accrued income and other assets 187.1 158.7
Assets classified as held for sale 4 67.5 -
Total assets 10,251.0 9,285.2
Liabilities
Settlement balances and short positions 12 543.1 552.6
Deposits by banks 13 55.2 72.0
Deposits by customers 13 5,497.2 5,113.1
Loans and overdrafts from banks 13 509.8 330.9
Debt securities in issue 13 1,773.4 1,489.6
Loans from money brokers against stock advanced 22.4 4.3
Derivative financial instruments 15.7 11.5
Current tax liabilities 17.4 21.4 Accruals, deferred income and other liabilities 249.6 233.1 Subordinated loan capital 217.9 220.7 Liabilities classified as held for sale 4 0.6 - Total liabilities 8,902.3 8,049.2 ------------------------------------------------ ----------- ----------- Equity Called up share capital 38.0 38.0 Share premium account - 307.8 Retained earnings 1,327.7 906.6 Other reserves (16.2) (15.9) ------------------------------------------------ ----------- ----------- Total shareholders' equity 1,349.5 1,236.5 ------------------------------------------------ ----------- ----------- Non-controlling interests (0.8) (0.5) ------------------------------------------------ ----------- ----------- Total equity 1,348.7 1,236.0 ------------------------------------------------ ----------- ----------- Total liabilities and equity 10,251.0 9,285.2 ------------------------------------------------ ----------- -----------
COnsolidated Statement of CHANGES IN EQUITY
for the year ended 31 July 2018
Other reserves
--------------------------------------------
Available Share-based Cash Total
Called up Share for sale payments Exchange flow attributable Non-controlling
share premium Retained movements reserve movements hedging to equity interests Total
capital account earnings reserve reserve reserve holders equity
GBP million GBP GBP GBP GBP million GBP GBP GBP million GBP million GBP
million million million million million million
----------------------- --------- --------- --------- ----------- ---------- -------- ------------ ---------------- -------
At 1 August
2016 37.7 284.0 797.5 - (14.3) (1.1) (6.7) 1,097.1 (0.2) 1,096.9
----------------- ---- --------- --------- --------- ----------- ---------- -------- ------------ ---------------- -------
Profit/(loss)
for the year - - 191.2 - - - - 191.2 (0.3) 190.9
Other
comprehensive
income/(expense) - - 2.2 0.7 - (0.4) 3.5 6.0 - 6.0
----------------- ---- --------- --------- --------- ----------- ---------- -------- ------------ ---------------- -------
Total
comprehensive
income/(expense)
for the year - - 193.4 0.7 - (0.4) 3.5 197.2 (0.3) 196.9
Exercise of
options - 0.1 - - - - - 0.1 - 0.1
Dividends paid - - (85.6) - - - - (85.6) - (85.6)
Shares purchased - - - - (12.7) - - (12.7) - (12.7)
Shares issued 0.3 23.7 - - - - - 24.0 - 24.0
Shares released - - - - 15.8 - - 15.8 - 15.8
Other movements - - 0.2 - (0.7) - - (0.5) - (0.5)
Share premium
cancellation - - - - - - - - - -
Income tax - - 1.1 - - - - 1.1 - 1.1
At 31 July 2017 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 year - - 202.3 - - - - 202.3 (0.3) 202.0
Other
comprehensive
income - - 1.3 0.1 - 0.3 3.3 5.0 - 5.0
----------------- ---- --------- --------- --------- ----------- ---------- -------- ------------ ---------------- -------
Total
comprehensive
income/(expense)
for the year - - 203.6 0.1 - 0.3 3.3 207.3 (0.3) 207.0
Exercise of - - - - - - - - - -
options
Dividends paid - - (91.0) - - - - (91.0) - (91.0)
Shares purchased - - - - (16.0) - - (16.0) - (16.0)
Shares issued - - - - - - - - - -
Shares released - - - - 12.5 - - 12.5 - 12.5
Other movements - - - - (0.5) - - (0.5) - (0.5)
Share premium
cancellation - (307.8) 307.8 - - - - - - -
Income tax - - 0.7 - - - - 0.7 - 0.7
At 31 July 2018 38.0 - 1,327.7 0.8 (15.9) (1.2) 0.1 1,349.5 (0.8) 1,348.7
----------------- ---- --------- --------- --------- ----------- ---------- -------- ------------ ---------------- -------
Consolidated Cash Flow Statement
for the year ended 31 July 2018
2018 2017
Note GBP million GBP million
---------------------------------------------------- ----- ----------- -----------
Net cash inflow from operating activities 15(a) 306.0 120.0
---------------------------------------------------- ----- ----------- -----------
Net cash (outflow)/inflow from investing activities
Purchase of:
Property, plant and equipment (11.4) (7.1)
Intangible assets - software (33.0) (33.1)
Subsidiaries and non-controlling interest 15(b) (1.2) (6.3)
Sale of:
Property, plant and equipment - -
Equity shares held for investment - 1.3
Subsidiary 15(c) 0.9 (0.3)
(44.7) (45.5)
---------------------------------------------------- ----- ----------- -----------
Net cash inflow before financing activities 261.3 74.5
---------------------------------------------------- ----- ----------- -----------
Financing activities
Purchase of own shares for employee share award
schemes (16.0) (12.7)
Equity dividends paid (91.0) (85.6)
Interest paid on subordinated loan capital and
debt financing (10.8) (13.6)
Issuance/(redemption) of group bonds, net of
transaction costs 248.6 (200.0)
Issuance of subordinated loan capital, net of
transaction costs - 173.7
Net increase/(decrease) in cash 392.1 (63.7)
Cash and cash equivalents at beginning of year 859.6 923.3
---------------------------------------------------- ----- ----------- -----------
Cash and cash equivalents at end of year 15(d) 1,251.7 859.6
---------------------------------------------------- ----- ----------- -----------
THE NOTES
1. Basis of preparation and accounting policies
The financial information contained in this announcement does not constitute the statutory accounts for the years ended 31 July 2018 or 31 July 2017 within the meaning of section 435 of the Companies Act 2006, but is derived from those accounts. The accounting policies used are consistent with those set out in the Annual Report 2017.
On the Consolidated Income Statement, fee and commission expense in the prior year has been restated to exclude other direct costs of GBP12.3 million, which are now presented alongside depreciation of operating lease assets.
IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement and is effective for the group from 1 August 2018. The group estimates the transition to IFRS 9 will reduce shareholders' equity by GBP44.9 million reflecting an increase in impairment provisions of GBP59.0 million offset by a deferred tax asset of GBP14.1 million.
The financial statements are prepared on a going concern basis.
Whilst the financial information has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ("IFRS"), this announcement does not itself contain sufficient information to comply with IFRS. The company expects to publish full financial statements that comply with IFRS by 1 October 2018.
Following a competitive tender process for the audit of the group and its subsidiaries in 2017, PricewaterhouseCoopers LLP was formally appointed as the group's auditors at the 2017 Annual General Meeting.
The financial information for the year ended 31 July 2018 has been derived from the audited financial statements of Close Brothers Group plc for that year. Statutory accounts for 2017 have been delivered to the Registrar of Companies and those for 2018 will be delivered following the company's Annual General Meeting. The previous auditor, Deloitte LLP, has reported on the 2017 accounts and PricewaterhouseCoopers LLP on the 2018 accounts: their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under Section 498(2) or (3) of the Companies Act 2006.
2. Segmental analysis
The directors manage the group by class of business and present the segmental analysis on that basis. The group's activities are presented in five (2017: five) operating segments: Retail, Commercial, Property, Securities and Asset Management.
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 year ended 31 July 2018
Banking
Asset Group
Retail Commercial Property Securities Management Total
GBP million GBP million GBP GBP million GBP GBP GBP
million million million million
------------------------------ ------------ ---------- ------------ ----------- ---------- ------------
Net interest
income/(expense) 195.9 160.9 129.8 (0.7) 0.1 0.1 486.1
Non-interest
income 29.6 64.6 0.2 109.8 115.4 0.1 319.7
------------------- ---------- ------------ ---------- ------------ ----------- ---------- ------------
Operating income 225.5 225.5 130.0 109.1 115.5 0.2 805.8
------------------- ---------- ------------ ---------- ------------ ----------- ---------- ------------
Administrative
expenses (109.5) (124.2) (27.2) (79.2) (90.6) (24.6) (455.3)
Depreciation and
amortisation (9.7) (8.0) (3.9) (1.8) (1.8) - (25.2)
Impairment losses
on
loans and
advances (25.2) (17.2) (4.3) - - - (46.7)
------------------- ---------- ------------ ---------- ------------ ----------- ---------- ------------
Total operating
expenses (144.4) (149.4) (35.4) (81.0) (92.4) (24.6) (527.2)
------------------- ---------- ------------ ---------- ------------ ----------- ---------- ------------
Adjusted operating
profit/(loss)(1) 81.1 76.1 94.6 28.1 23.1 (24.4) 278.6
Amortisation of
intangible assets
on
acquisition (0.3) (1.6) - - (5.5) - (7.4)
------------------- ---------- ------------ ---------- ------------ ----------- ---------- ------------
Operating
profit/(loss)
before tax from
continuing
operations 80.8 74.5 94.6 28.1 17.6 (24.4) 271.2
------------------- ---------- ------------ ---------- ------------ ----------- ---------- ------------
Operating loss
before tax from
discontinued
operations (3.0) - - - - - (3.0)
------------------- ---------- ------------ ---------- ------------ ----------- ---------- ------------
Operating
profit/(loss)
before tax 77.8 74.5 94.6 28.1 17.6 (24.4) 268.2
------------------- ---------- ------------ ---------- ------------ ----------- ---------- ------------
External operating
income/(expense) 265.3 270.7 154.4 109.1 115.6 (109.3) 805.8
Inter segment
operating
(expense)/income (39.8) (45.2) (24.4) - (0.1) 109.5 -
------------------- ---------- ------------ ---------- ------------ ----------- ---------- ------------
Segment operating
income 225.5 225.5 130.0 109.1 115.5 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 Group(2)
Retail Commercial Property Securities Management Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
-------------- ------------ ------------- ------------ ------------- -------------- ------------ ------------
Total
assets(1) 2,686.4 2,982.4 1,827.5 711.4 119.4 1,923.9 10,251.0
-------------- ------------ ------------- ------------ ------------- -------------- ------------ ------------
Total
liabilities - - - 640.3 63.9 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.
Equity is allocated across the group as set out below. Banking division equity which is managed as a whole rather than on a segmental basis, reflects loan book and operating lease assets of GBP7,496.3 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.
Asset Management
Banking Securities Group Total
GBP million GBP million GBP million GBP million GBP million
-------- ------------ ------------- ----------------- ------------ ------------
Equity 1,132.7 71.1 55.5 89.4 1,348.7
-------- ------------ ------------- ----------------- ------------ ------------
Other segmental information for the year ended 31 July 2018
Banking
Asset Management Group
Retail Commercial Property Securities Total
Employees
(average number)(1) 1,079 1,046 146 262 647 61 3,241
---------------------- --------- ------------- ----------- ------------- ----------------- ------- --------
1 Banking segments are inclusive of a central function headcount allocation.
Summary income statement for the year ended 31 July 2017(1)
Banking
Asset Group
Retail Commercial Property Securities Management Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
------------------------------ ------------- ------------ ------------- ------------ ------------ ------------
Net interest
income/(expense) 191.8 146.4 119.8 (0.9) (0.1) 0.5 457.5
Non-interest
income 26.4 66.9 (0.2) 107.6 103.0 0.2 303.9
------------------- ---------- ------------- ------------ ------------- ------------ ------------ ------------
Operating income 218.2 213.3 119.6 106.7 102.9 0.7 761.4
------------------- ---------- ------------- ------------ ------------- ------------ ------------ ------------
Administrative
expenses (99.8) (117.4) (24.9) (76.7) (83.7) (24.9) (427.4)
Depreciation and
amortisation (11.0) (7.8) (3.8) (1.9) (1.8) - (26.3)
Impairment losses
on
loans and
advances (24.6) (15.5) 1.1 - - - (39.0)
------------------- ---------- ------------- ------------ ------------- ------------ ------------ ------------
Total operating
expenses (135.4) (140.7) (27.6) (78.6) (85.5) (24.9) (492.7)
------------------- ---------- ------------- ------------ ------------- ------------ ------------ ------------
Adjusted operating
profit/(loss)(2) 82.8 72.6 92.0 28.1 17.4 (24.2) 268.7
Amortisation of
intangible assets
on
acquisition (0.4) (0.5) - - (5.3) - (6.2)
------------------- ---------- ------------- ------------ ------------- ------------ ------------ ------------
Operating
profit/(loss)
before tax from
continuing
operations 82.4 72.1 92.0 28.1 12.1 (24.2) 262.5
------------------- ---------- ------------- ------------ ------------- ------------ ------------ ------------
Operating loss
before tax from
discontinued
operations (3.9) - - - - - (3.9)
------------------- ---------- ------------- ------------ ------------- ------------ ------------ ------------
Operating
profit/(loss)
before tax 78.5 72.1 92.0 28.1 12.1 (24.2) 258.6
------------------- ---------- ------------- ------------ ------------- ------------ ------------ ------------
External operating
income/(expense) 262.0 260.9 141.8 106.7 103.2 (113.2) 761.4
Inter segment
operating
(expense)/income (43.8) (47.6) (22.2) - (0.3) 113.9 -
------------------- ---------- ------------- ------------ ------------- ------------ ------------ ------------
Segment operating
income 218.2 213.3 119.6 106.7 102.9 0.7 761.4
------------------- ---------- ------------- ------------ ------------- ------------ ------------ ------------
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.
Balance sheet information at 31 July 2017
Banking
Asset Group(2)
Retail Commercial Property Securities Management Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
-------------- ------------ ------------- ------------ ------------- -------------- ------------ ------------
Total
assets(1) 2,702.8 2,730.4 1,629.3 699.5 113.2 1,410.0 9,285.2
-------------- ------------ ------------- ------------ ------------- -------------- ------------ ------------
Total
liabilities - - - 628.8 57.7 7,362.7 8,049.2
-------------- ------------ ------------- ------------ ------------- -------------- ------------ ------------
1 Total assets for the Banking operating segments comprise the loan book and operating lease assets only.
2 Balance sheet includes GBP1,402.7 million assets and GBP7,490.9 million liabilities attributable to the Banking division primarily
comprising the treasury balances described in the second paragraph of this note.
Asset Management
Banking Securities Group Total
GBP million GBP million GBP million GBP million GBP million
----------- ------------ ------------- ----------------- ------------ ------------
Equity(1) 974.3 70.7 55.5 135.5 1,236.0
----------- ------------ ------------- ----------------- ------------ ------------
1 Equity of the Banking division reflects loan book and operating lease assets of GBP7,062.5 million, in addition to assets and
liabilities of GBP1,402.7 million and GBP7,490.9 million respectively primarily comprising treasury balances which are included within
the Group column in the balance sheet information above.
Other segmental information for the year ended 31 July 2017
Banking
Asset Management Group
Retail Commercial Property Securities Total
Employees
(average number)(1) 1,055 1,013 139 246 600 61 3,114
---------------------- --------- ------------- ----------- ------------- ----------------- ------- --------
1 Banking segments are inclusive of a central function headcount allocation.
3. Taxation
2018 2017(1)
GBP million GBP million
------------------------------------------------------ ------------ ------------
Tax charged/(credited) to the income statement
Current tax:
UK corporation tax 64.7 65.9
Foreign tax 1.5 2.1
Adjustments in respect of previous years (2.3) (0.6)
------------------------------------------------------ ------------ ------------
63.9 67.4
Deferred tax:
Deferred tax charge for the current year 1.1 0.5
Adjustments in respect of previous years 2.0 0.9
------------------------------------------------------ ------------ ------------
67.0 68.8
------------------------------------------------------ ------------ ------------
Tax on items not charged/(credited) to the income
statement
Current tax relating to:
Financial instruments classified as available for
sale - 0.2
Share-based payments (0.3) (1.0)
Deferred tax relating to:
Cash flow hedging 1.1 1.2
Defined benefit pension scheme 0.4 0.5
Financial instruments classified as available for
sale 0.2 0.1
Share-based payments (0.4) (0.1)
Currency translation gains - 0.8
------------------------------------------------------ ------------ ------------
1.0 1.7
------------------------------------------------------ ------------ ------------
Reconciliation to tax expense
UK corporation tax for the year at 19.0% (2017:
19.7%) on operating profit 51.5 51.7
Gain on sale of subsidiary - (0.3)
Effect of different tax rates in other jurisdictions (0.2) (0.4)
Disallowable items and other permanent differences 1.1 0.9
Banking surcharge 15.1 14.5
Deferred tax impact of (increased)/decreased tax
rates (0.2) 2.1
Prior year tax provision (0.3) 0.3
------------------------------------------------------ ------------ ------------
67.0 68.8
------------------------------------------------------ ------------ ------------
1 Restated - see note 4.
The standard UK corporation tax rate for the financial year is 19.0% (2017: 19.7%). However, an additional 8% surcharge applies to banking company profits as defined in legislation. The effective tax rate of 24.7% (2017: 26.2%) is above the UK corporation tax rate primarily due to the surcharge applying to most of the group's profits.
Movements in deferred tax assets and liabilities were as follows:
Share-based
payments Available Cash
Capital Pension and deferred for sale flow Intangible
allowances scheme compensation assets hedging assets Other Total
GBP million GBP GBP million GBP GBP GBP million GBP GBP million
million million million million
--------------------------- ----------- ------------- ----------- ---------- ------------ ----------- ------------
At 1 August 2016 44.9 (0.3) 10.2 - 2.3 (2.6) 0.7 55.2
(Charge)/credit
to the
income
statement (1.5) - (0.8) - - 1.1 (0.2) (1.4)
Charge to other
comprehensive
income (0.8) (0.5) - (0.1) (1.2) - - (2.6)
Credit to equity - - 0.1 - - - - 0.1
Acquisitions - - - - - (3.9) - (3.9)
----------------- -------- ----------- ------------- ----------- ---------- ------------ ----------- ------------
At 31 July 2017 42.6 (0.8) 9.5 (0.1) 1.1 (5.4) 0.5 47.4
(Charge)/credit
to the
income
statement (4.2) 0.1 (0.3) - - 1.3 - (3.1)
Charge to other
comprehensive
income - (0.4) - (0.2) (1.1) - - (1.7)
Credit to equity - - 0.4 - - - - 0.4
Acquisitions - - - - - - - -
----------------- -------- ----------- ------------- ----------- ---------- ------------ ----------- ------------
At 31 July 2018 38.4 (1.1) 9.6 (0.3) - (4.1) 0.5 43.0
----------------- -------- ----------- ------------- ----------- ---------- ------------ ----------- ------------
As the group has been and is expected to continue to be consistently profitable, the full deferred tax assets
have been recognised.
4. Discontinued operations and non-current assets held for sale
On 14 September 2018, the group announced the sale of Close Brothers Retail Finance, which provides unsecured retail point of sale finance to consumers, to Klarna Bank AB.
At the balance sheet date, the business fulfilled the requirements of IFRS 5 to be classified as "discontinued operations" in the consolidated income statement. Additionally, the assets that have not yet been sold are presented as "held for sale" in the 31 July 2018 consolidated balance sheet.
Results of discontinued operations
2018 2017
GBP million GBP million
------------------------------------------------- ------------ ------------
Operating income 6.6 4.2
Operating expenses (7.2) (6.9)
Impairment losses on loans and advances (2.3) (1.2)
------------------------------------------------- ------------ ------------
Operating loss before tax (2.9) (3.9)
------------------------------------------------- ------------ ------------
Tax 0.8 1.1
------------------------------------------------- ------------ ------------
Impairment of plant, property and equipment and (0.1) -
intangible assets
------------------------------------------------- ------------ ------------
Loss after tax (2.2) (2.8)
------------------------------------------------- ------------ ------------
Assets and liabilities held for sale
The major classes of assets and liabilities classified as held for sale are as follows:
2018
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
2018 2017
GBP million GBP million
----------------------------------------- ------------ ------------
Net cash flow from operating activities (31.9) (14.4)
----------------------------------------- ------------ ------------
Net cash flow from investing activities (0.4) (0.3)
----------------------------------------- ------------ ------------
Net cash flow from financing activities - -
----------------------------------------- ------------ ------------
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.
2018 2017(1)
--------------------------------------- ------ -------
Continuing operations
--------------------------------------- ------ -------
Basic 136.2p 130.2p
--------------------------------------- ------ -------
Diluted 135.3p 129.3p
--------------------------------------- ------ -------
Adjusted basic(2) 140.2p 133.6p
--------------------------------------- ------ -------
Adjusted diluted(2) 139.3p 132.7p
--------------------------------------- ------ -------
Continuing and discontinued operations
--------------------------------------- ------ -------
Basic 134.7p 128.3p
--------------------------------------- ------ -------
Diluted 133.8p 127.5p
--------------------------------------- ------ -------
1 Restated - see note 4.
2 Excludes amortisation of intangible assets on acquisition and their tax effects.
2018 2017
GBP million GBP million
----------------------------------------------------------- ----------- -----------
Profit attributable to shareholders 202.3 191.2
----------------------------------------------------------- ----------- -----------
Less loss from discontinued operations, net of tax (2.2) (2.8)
----------------------------------------------------------- ----------- -----------
Profit attributable to shareholders on continuing
operations 204.5 194.0
Adjustments:
Amortisation of intangible assets on acquisition 7.4 6.2
Tax effect of adjustments (1.3) (1.2)
Adjusted profit attributable to shareholders on continuing
operations 210.6 199.0
----------------------------------------------------------- ----------- -----------
2018 2017
million million
-------------------------------------------- ------- -------
Average number of shares
Basic weighted 150.2 149.0
Effect of dilutive share options and awards 1.0 1.0
-------------------------------------------- ------- -------
Diluted weighted 151.2 150.0
-------------------------------------------- ------- -------
6. Dividends
2018 2017
GBP million GBP million
--------------------------------------------------- ----------- -----------
For each ordinary share
Final dividend for previous financial year paid in
November 2017: 40.0p
(2016: 38.0p) 59.7 56.0
Interim dividend for current financial year paid
in April 2018: 21.0p
(2017: 20.0p) 31.3 29.6
--------------------------------------------------- ----------- -----------
91.0 85.6
--------------------------------------------------- ----------- -----------
A final dividend relating to the year ended 31 July 2018 of 42.0p, amounting to an estimated GBP62.7 million, is proposed. This final dividend, which is due to be paid on 20 November 2018 to shareholders on the register at 12 October 2018, is not reflected in these financial statements.
7. Loans and advances to customers
Between
three
Within months Between Between After
On three and one and two and more than Impairment
demand months one year two years five five years provisions Total
years
GBP million GBP million GBP million GBP million GBP million GBP million GBP million GBP million
------------------- ------------ ------------ ------------ ------------ ------------ ------------- ------------
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
------------ ----- ------------ ------------ ------------ ------------ ------------ ------------- ------------
At 31 July
2017 59.3 1,914.3 2,115.2 1,340.7 1,431.6 76.0 (52.4) 6,884.7
------------ ----- ------------ ------------ ------------ ------------ ------------ ------------- ------------
2018 2017
GBP million GBP million
---------------------------------------------------------- ------------ ------------
Impairment provisions on loans and advances to customers
At 1 August 52.4 59.7
Charge for the year 46.7 40.2
Amounts written off net of recoveries (60.0) (47.5)
---------------------------------------------------------- ------------ ------------
At 31 July 39.1 52.4
---------------------------------------------------------- ------------ ------------
Loans and advances to customers comprise
Hire purchase agreement receivables 2,852.4 2,842.9
Finance lease receivables 447.6 418.9
Other loans and advances 3,997.5 3,622.9
---------------------------------------------------------- ------------ ------------
At 31 July 7,297.5 6,884.7
---------------------------------------------------------- ------------ ------------
At 31 July 2018, gross impaired loans were GBP131.0 million (31 July 2017: GBP135.8 million) and equate to 1.8% (31 July 2017: 2.0%) of the gross loan book before impairment provisions. The majority of the group's lending is secured and therefore the gross impaired loans quoted do not reflect the expected loss.
8. Debt securities
Held for Available Loans and
trading for 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
--------------------------------- ------------ ------------ ------------- ------------
Held for Available Loans and
trading for sale receivables Total
GBP million GBP million GBP million GBP million
--------------------------------- ------------ ------------ ------------- ------------
Long trading positions in debt
securities 16.2 - - 16.2
Certificates of deposit - - 180.3 180.3
Sovereign and central bank debt - 43.6 - 43.6
--------------------------------- ------------ ------------ ------------- ------------
At 31 July 2017 16.2 43.6 180.3 240.1
--------------------------------- ------------ ------------ ------------- ------------
Movements on the book value of sovereign and central bank debt comprise:
2018 2017
GBP million GBP million
--------------------------------------------- ------------ ------------
Sovereign and central bank debt at 1 August 43.6 -
Additions - 41.6
Currency translation differences - 1.7
Movement in value 0.9 0.3
Sovereign and central bank debt at 31 July 44.5 43.6
--------------------------------------------- ------------ ------------
9. Equity shares
31 July 31 July
2018 2017
GBP million GBP million
------------------------ ------------ ------------
Long trading positions 31.6 31.9
Other equity shares 0.5 0.8
32.1 32.7
------------------------ ------------ ------------
Movements on the book value of other equity shares comprise:
2018 2017
GBP million GBP million
------------------------------------------------ ------------ ------------
Other equity shares held at 1 August 0.8 2.1
Disposals (0.3) (1.4)
Currency translation differences - 0.1
Movement in value of:
Equity shares classified as available for sale - -
Other equity shares held at 31 July 0.5 0.8
------------------------------------------------ ------------ ------------
10. Intangible assets
Intangible
assets on
Goodwill Software acquisition Total
GBP million GBP million GBP million GBP million
---------------------------------- ------------ ------------ ------------- ------------
Cost
At 1 August 2016 140.8 104.6 44.3 289.7
Additions 16.9 31.1 22.7 70.7
Disposals (7.0) (4.1) - (11.1)
At 31 July 2017 150.7 131.6 67.0 349.3
Additions - 36.2 - 36.2
Disposals - (7.0) - (7.0)
At 31 July 2018 150.7 160.8 67.0 378.5
---------------------------------- ------------ ------------ ------------- ------------
Amortisation and impairment
At 1 August 2016 54.9 59.1 27.8 141.8
Amortisation charge for the year - 17.2 6.2 23.4
Disposals (7.0) (0.6) - (7.6)
At 31 July 2017 47.9 75.7 34.0 157.6
Amortisation charge for the year - 16.6 7.4 24.0
Disposals - (4.4) - (4.4)
At 31 July 2018 47.9 87.9 41.4 177.2
---------------------------------- ------------ ------------ ------------- ------------
Net book value at 31 July 2018 102.8 72.9 25.6 201.3
---------------------------------- ------------ ------------ ------------- ------------ Net book value at 31 July 2017 102.8 55.9 33.0 191.7 ---------------------------------- ------------ ------------ ------------- ------------ Net book value at 1 August 2016 85.9 45.5 16.5 147.9 ---------------------------------- ------------ ------------ ------------- ------------
Additions in goodwill in 2017 of GBP12.1 million, GBP3.9 million and GBP0.9 million and intangible assets on acquisition of GBP15.9 million, GBP5.1 million and GBP1.7 million relate to the 100% acquisitions of Novitas Loans Limited ("Novitas"), EOS Wealth Management Limited ("EOS") and Adrian Smith & Partners Limited ("ASPL") respectively. Novitas is a specialist provider of secured finance to law firms and their clients and EOS and ASPL are independent financial advisers. These acquisitions are not regarded as material in the context of the group's financial statements and therefore information required for material acquisitions by IFRS 3 has not been disclosed.
The GBP7.0 million disposal of goodwill in 2017 relates to the sale of Asset Management's OLIM Limited business.
Intangible assets on acquisition relate to broker and customer relationships and are amortised over a period of eight to 20 years.
In the 2018 financial year, GBP7.4 million (2017: GBP6.2 million) of the amortisation charge is included in amortisation of intangible assets on acquisition and GBP16.6 million (2017: GBP17.2 million) of the amortisation charge is included in administrative expenses shown in the consolidated income statement.
11. Property, plant and equipment
Assets
Fixtures, held under
Leasehold fittings operating Motor
property and leases vehicles Total
equipment
GBP million GBP million GBP million GBP million GBP million
---------------------------- ------------ ------------ ------------ ------------ ------------
Cost
At 1 August 2016 21.5 40.2 201.4 0.4 263.5
Additions 1.6 5.4 56.2 - 63.2
Disposals (0.7) (0.5) (26.8) (0.1) (28.1)
At 31 July 2017 22.4 45.1 230.8 0.3 298.6
Additions 0.3 11.2 79.6 - 91.1
Disposals (0.3) (0.5) (41.5) (0.2) (42.5)
At 31 July 2018 22.4 55.8 268.9 0.1 347.2
---------------------------- ------------ ------------ ------------ ------------ ------------
Depreciation
At 1 August 2016 9.7 26.1 41.6 0.3 77.7
Charge for the year 2.0 7.1 25.0 - 34.1
Disposals (0.6) (1.5) (13.6) (0.2) (15.9)
At 31 July 2017 11.1 31.7 53.0 0.1 95.9
Charge for the year 2.1 6.5 31.3 - 39.9
Disposals (0.3) (0.2) (14.2) - (14.7)
At 31 July 2018 12.9 38.0 70.1 0.1 121.1
---------------------------- ------------ ------------ ------------ ------------ ------------
Net book value at 31 July
2018 9.5 17.8 198.8 - 226.1
---------------------------- ------------ ------------ ------------ ------------ ------------
Net book value at 31 July
2017 11.3 13.4 177.8 0.2 202.7
---------------------------- ------------ ------------ ------------ ------------ ------------
Net book value at 1 August
2016 11.8 14.1 159.8 0.1 185.8
---------------------------- ------------ ------------ ------------ ------------ ------------
The gain from the sale of assets held under operating leases for the year ended 31 July 2018 was GBP0.1 million (2017: GBP0.1 million loss).
12. Settlement balances and short positions
31 July 31 July
2018 2017
GBP million GBP million
----------------------------------- ------------ ------------
Settlement balances 512.5 524.9
Short positions held for trading:
Debt securities 16.4 11.5
Equity shares 14.2 16.2
----------------------------------- ------------ ------------
30.6 27.7
----------------------------------- ------------ ------------
543.1 552.6
----------------------------------- ------------ ------------
13. Financial liabilities
Within Between Between Between After
On demand three three months one and two and more than
months and one two years five years five years Total
year
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
At 31 July 2018 104.6 1,319.4 3,163.1 1,332.9 1,627.4 288.2 7,835.6
---------------------- ------ ------------ -------------- ------------ ------------ ------------ ------------
Within Between Between Between After
On demand three three months one and two and more than
months and one two years five years five years Total
year
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
----------------------------- ------------ -------------- ------------ ------------ ------------ ------------
Deposits by banks 18.4 15.4 37.5 0.7 - - 72.0
Deposits by
customers 123.4 956.6 2,528.2 991.3 513.6 - 5,113.1
Loans and overdrafts
from banks 12.3 74.9 - 20.5 223.2 - 330.9
Debt securities
in issue 13.6 22.8 108.4 516.0 540.9 287.9 1,489.6
At 31 July 2017 167.7 1,069.7 2,674.1 1,528.5 1,277.7 287.9 7,005.6
--------------------- ------- ------------ -------------- ------------ ------------ ------------ ------------
The group has accessed GBP495.0 million (31 July 2017: GBP224.4 million) cash under the Bank of England's Term Funding Scheme and GBPnil (31 July 2017: GBP197.5 million) UK Treasury Bills under the Bank of England's Funding for Lending Scheme. At 31 July 2017, GBP100.0 million of the GBP197.5 million UK Treasury Bills drawn under the Funding for Lending Scheme were lent in exchange for cash. The UK Treasury Bills were not recorded on the group's consolidated balance sheet as ownership remained with the Bank of England. Cash from the Term Funding Scheme and repurchase agreements is included within bank loans and overdrafts. Residual maturities of the Term Funding Scheme and repurchase agreements are as follows:
Within Between Between Between After
On demand three three months one and two and more than
months and one two years five years five years Total
year
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
----------------------- ------------ -------------- ------------ ------------ ------------ ------------
At 31 July 2018 - 0.2 - - 495.0 - 495.2
------------------ ---- ------------ -------------- ------------ ------------ ------------ ------------
At 31 July 2017 1.2 69.9 - 20.5 223.2 - 314.8
------------------ ---- ------------ -------------- ------------ ------------ ------------ ------------
14. Capital
At 31 July 2018, the group's common equity tier 1 ("CET1") capital ratio was 12.7% (31 July 2017: 12.6%). CET1 capital increased to GBP1,084.4 million (31 July 2017: GBP990.6 million) primarily due to retained profit.
Risk weighted assets calculated using the standardised approach increased to GBP8,547.5 million (31 July 2017: GBP7,859.0 million) as a result of growth in credit and counterparty risk associated with the loan book. Notional risk weighted assets for operational risk also increased reflecting increased revenues and loan book growth over recent years.
All risk weighted assets and capital ratios shown are unaudited.
31 July 31 July
2018 2017
GBP million GBP million
----------------------------------------------- ------------ ------------
CET1 capital
Called up share capital 38.0 38.0
Share premium account - 307.8
Retained earnings 1,327.7 906.6
Other reserves recognised for CET1 capital 21.3 21.4
Deductions from CET1 capital
Intangible assets, net of associated deferred
tax liabilities (198.1) (186.3)
Foreseeable dividend(1) (62.7) (59.8)
Investment in own shares (37.6) (34.1)
Pension asset, net of associated deferred tax
liabilities (4.0) (2.8)
Prudent valuation adjustment (0.2) (0.2)
CET1 capital 1,084.4 990.6
----------------------------------------------- ------------ ------------
Tier 2 capital - subordinated debt(2) 197.9 205.6
----------------------------------------------- ------------ ------------
Total regulatory capital 1,282.3 1,196.2
----------------------------------------------- ------------ ------------
Risk weighted assets (notional) - unaudited
Credit and counterparty credit risk 7,605.4 6,967.6
Operational risk(3) 845.8 806.8
Market risk(3) 96.3 84.6
8,547.5 7,859.0
----------------------------------------------- ------------ ------------
CET1 capital ratio - unaudited 12.7% 12.6%
----------------------------------------------- ------------ ------------
Total capital ratio - unaudited 15.0% 15.2%
----------------------------------------------- ------------ ------------
1 Under the Regulatory Technical Standard on own funds, a deduction has been recognised at 31 July 2018 and 31 July 2017
for a foreseeable dividend being the proposed final dividend as set out in note 6.
2 Shown after applying the Capital Requirements Regulations transitional and qualifying own funds arrangements.
3 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 July 31 July
2018 2017
GBP million GBP million
------------------------------------------------- ------------ ------------
Equity 1,348.7 1,236.0
Regulatory deductions from equity:
Intangible assets, net of associated deferred
tax liabilities (198.1) (186.3)
Foreseeable dividend(1) (62.7) (59.8)
Pension asset, net of associated deferred tax
liabilities (4.0) (2.8)
Prudent valuation adjustment (0.2) (0.2)
Other reserves not recognised for CET1 capital:
Cash flow hedging reserve (0.1) 3.2
Non-controlling interests 0.8 0.5
CET1 capital 1,084.4 990.6
------------------------------------------------- ------------ ------------
1 Under the Regulatory Technical Standard on own funds, a deduction has been recognised at 31 July 2018 and 31 July 2017
for a foreseeable dividend being the proposed final dividend as set out in note 6.
The following table shows the movement in CET1 capital during the year:
GBP million
----------------------------------------------------------- ------------
CET1 capital at 31 July 2017 990.6
Profit in the period attributable to shareholders 202.3
Dividends paid and foreseen (93.9)
Increase in intangible assets, net of associated deferred
tax liabilities (11.8)
Share premium cancellation (307.8)
Other movements in reserves recognised for CET1 capital 309.7
Other movements in deductions from CET1 capital (4.7)
CET1 capital at 31 July 2018 1,084.4
------------------------------------------------------------ ------------
15. Consolidated cash flow statement reconciliation
31 July 31 July
2018 2017
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 271.2 262.5
Loss before tax from discontinued operations(1) (3.0) (3.9)
Tax paid (66.8) (63.6)
Depreciation and amortisation 63.9 57.5
(Increase)/decrease in:
Interest receivable and prepaid expenses (18.4) (18.1)
Net settlement balances and trading positions 15.9 6.7
Net loans to/from money brokers against stock advanced 0.3 (21.9)
Increase in interest payable and accrued expenses 9.4 19.1
------------------------------------------------------------------------------------------ ----------- -----------
Net cash inflow from trading activities 272.5 238.3
Decrease/(increase) in:
Loans and advances to banks not repayable on demand 16.4 0.3
Loans and advances to customers (449.8) (453.1)
Assets let under operating leases (68.0) (43.2)
Certificates of deposit (70.2) 20.7
Sovereign and central bank debt (0.9) (44.5)
Other assets less other liabilities 14.1 22.5
Increase/(decrease) in:
Deposits by banks (16.8) 0.9
Deposits by customers 384.1 218.5
Loans and overdrafts from banks 178.9 (138.2)
Issuance/redemption of debt securities, net of transaction
costs 45.7 297.8
Net cash inflow from operating activities 306.0 120.0
------------------------------------------------------------------------------------------ ----------- -----------
(b) Analysis of net cash outflow in respect of
the purchase
of
subsidiaries and non-controlling interests
Cash consideration paid (1.2) (6.3)
(c) Analysis of net cash inflow/(outflow) in
respect
of the sale of a subsidiary
Cash consideration received 0.9 0.3
Cash and cash equivalents disposed of - (0.6)
0.9 (0.3)
------------------------------------------------------------------------------------------ ----------- -----------
(d) Analysis of cash and cash equivalents(2)
Cash and balances at central banks 1,126.2 798.2
Loans and advances to banks repayable on demand 125.5 61.4
1,251.7 859.6
1 Restated - see note 4.
2 Excludes Bank of England cash reserve account and amounts held as collateral.
During the year ended 31 July 2018, the non-cash changes on debt financing amounted to GBP9.4 million (31 July 2017: GBP8.3 million) arising largely from interest accretion.
Cautionary Statement
Certain statements included or incorporated by reference within this preliminary results 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. 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 preliminary results announcement should be construed as a profit forecast. Past performance is no guide to future performance and persons needing advice should consult an independent financial adviser.
This preliminary results 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. Statements in this preliminary results announcement reflect the knowledge and information available at the time of its preparation. Liability arising from anything in this preliminary results announcement shall be governed by English law. Nothing in this preliminary results 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
FR ZMGZLLDLGRZM
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September 25, 2018 02:01 ET (06:01 GMT)
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