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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Rathbones Group Plc | LSE:RAT | London | Ordinary Share | GB0002148343 | ORD 5P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 20.00 | 1.25% | 1,622.00 | 1,634.00 | 1,638.00 | 1,638.00 | 1,610.00 | 1,628.00 | 154,550 | 16:35:26 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Commercial Banks, Nec | 570M | 37.5M | 0.5912 | 27.71 | 1.04B |
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Funds under management up 14.3% to GBP39.1 billion
This is a preliminary statement of annual results published in
accordance with FCA Listing Rule 9.7A.
It covers the year ended 31 December 2017.
Mark Nicholls, Chairman of Rathbone Brothers Plc, said:
"UK and global investment markets performed well in 2017, with some
indices reaching record levels towards the end of the year. This outcome
has been positive for both Rathbones and our clients, with our funds
under management reaching a record GBP39.1 billion, up 14.3% in the
year.
"Notwithstanding some caution, which naturally emerges at a time of high
investment markets and political uncertainty, we enter 2018 well
positioned to provide long-term value for shareholders."
Highlights:
-- Underlying profit before tax increased 16.8% from GBP74.9 million to
GBP87.5 million for the year ended 31 December 2017. Underlying profit
margin remained strong at 30.6% compared to 29.8% in 2016. Underlying
earnings per share increased 13.7% to 138.8p (2016: 122.1p).
-- Profit before tax increased 17.6% from GBP50.1 million to GBP58.9
million. Basic earnings per share increased 17.5% to 92.7p (2016: 78.9p).
-- The board recommends a final dividend of 39p for 2017 (2016: 36p), making
a total of 61p for the year (2016: 57p), an increase of 7.0% on 2016.
-- Total funds under management were GBP39.1 billion at 31 December 2017, up
14.3% from GBP34.2 billion at 31 December 2016. The FTSE 100 Index
increased by 7.6% and the MSCI WMA Private Investor Balanced Index
increased by 7.2% over the same period.
-- The total net annual growth rate of funds under management for Investment
Management was 3.9% (2016: 4.5%). This comprised GBP0.9 billion of net
organic growth (2016: GBP0.8 billion) and GBP0.3 billion of acquired
inflows (2016: GBP0.4 billion). The underlying rate of net organic growth
was 3.0% in 2016 (2016: 2.9%).
-- Underlying operating income in Investment Management of GBP254.6 million
for the year ended 31 December 2017 (2016: GBP226.3 million) was up 12.5%,
driven by higher investment markets and continued organic and acquired
growth in all business areas. The average FTSE 100 Index was 7426 on
quarterly billing dates in 2017, compared to 6659 in 2016, an increase of
11.5%.
-- Funds under management in Unit Trusts were GBP5.3 billion at 31 December
2017 (31 December 2016: GBP4.0 billion) and net inflows totalled GBP883
million in the same period (2016: GBP554 million). Underlying operating
income in Unit Trusts was GBP31.4 million in the year ended 31 December
2017, an increase of 25.6% from GBP25.0 million in 2016.
-- Underlying operating expenses of GBP198.5 million (2016: GBP176.4
million) increased 12.5% year-on-year largely due to continuing
investment in strategic initiatives and underlying growth in the
business.
Ends
Issued on 22 February 2018
For further information contact:
Rathbone Brothers Plc
Tel: 020 7399 0000
email: shelly.patel@rathbones.com
Philip Howell, Chief Executive
Paul Stockton, Finance Director
Shelly Patel, Head of Investor Relations
Camarco
Tel: 020 3757 4984
email: ed.gascoigne-pees@camarco.co.uk
Ed Gascoigne-Pees
Rathbone Brothers Plc
Rathbone Brothers Plc ("Rathbones"), through its subsidiaries, is a
leading provider of high-quality, personalised investment and wealth
management services for private clients, charities and trustees. Our
services include discretionary investment management, unit trusts,
banking and loan services, financial planning, unitised portfolio
services, and UK trust, legal, estate and tax advice.
Rathbones has over 1,100 staff in 15 UK locations and Jersey; its
headquarters is 8 Finsbury Circus, London.
rathbones.com https://www.rathbones.com
Chairman's statement
A strong 2017
2017 was a good year for Rathbones and we produced some robust financial
results. The executive team responded well to developments in a rapidly
changing wealth management market, and our investment managers achieved
good risk-adjusted returns for our clients in a time of great
uncertainty and persistently low interest rates.
UK and global investment markets performed well in 2017, with some
indices reaching record levels towards the end of the year. This outcome
has been positive for both Rathbones and our clients, with the WMA
Balanced Index up 7.2% in the year and our funds under management
reaching GBP39.1 billion, up 14.3% in the year.
Profit before tax for 2017 increased 17.6% to GBP58.9 million after
incurring the costs associated with the relocation of our London office
and in pursuing strategic opportunities. These costs were partially
offset by a plan amendment gain arising from the closure of our defined
benefit pension schemes. Accordingly, basic earnings per share of 92.7p
increased 17.5% from the 78.9p reported in last year.
Underlying profit before tax was GBP87.5 million for the year ended 31
December 2017, up 16.8% from the previous year, and we have continued to
balance our need to continue strategic expenditure with maintaining good
profitability, reporting an underlying profit margin of 30.6% (2016:
29.8%) for the year. Underlying earnings per share of 138.8p for 2017,
increased 13.7% from 122.1p last year.
In line with our progressive dividend policy, the board is recommending
a final dividend of 39p per share. This brings the total dividend for
the year to 61p per share, an increase of 7.0% over last year.
We continually monitor opportunities to grow the business through
smaller acquisitions, but during the year we discussed with an industry
peer, Smith & Williamson, the benefits of combining our businesses. The
benefits to both parties and our respective clients could have been
considerable but, following extensive discussions, we were unable to
conclude a transaction that was in the best interests of both parties.
Nevertheless, I believe that our measured approach to this opportunity
served us well. We will continue to apply this discipline when we pursue
other opportunities.
Continued momentum
In 2014 we set out a five-year strategy which had the ambition to reach
GBP40 billion of funds under management by the end of 2018. Accepting
that investment markets have been favourable, we are now well within
sight of that goal with many of our strategic initiatives continuing to
gain momentum.
Accordingly, over the next few months, the board and executive team will
work to refresh our strategy to ensure our core business remains robust
and that we can benefit from the changing landscape of our industry. I
look forward to sharing the outcome of these discussions with our
stakeholders at the appropriate time. We remain committed to ensuring
that Rathbones remains well-positioned for the future.
Governance, culture and the board
Last year, I wrote that one of my priorities was to ensure board
oversight of the firm's culture and its development. This is now a
specific responsibility of the chairman. Rathbones' culture
(professionalism, putting clients first, a collegiate approach and
integrity) has long been a competitive advantage. Despite growth,
regulation and the pace of change in our industry, we have endeavoured
to protect our culture and this remains a board priority.
As part of this initiative both I and my non-executive director
colleagues actively seek opportunities for direct engagement with
employees, both formal and informal, across the firm. From our
engagement this year, we have witnessed the challenging effects that an
increased workload, driven by internal and external change, has placed
on our teams. On the other hand we have been reassured that our strong
culture remains at the heart of the business. Preserving this culture is
clearly fundamental to achieving the best results for clients and
shareholders over the long term.
As part of our normal succession planning, the board continues to
monitor our existing capabilities and assess what new skills are
necessary to develop both the board and the wider business over time,
taking into account the existing balance of knowledge, experience and
diversity. After a rigorous recruitment process we were delighted to
welcome Jim Pettigrew to the board in March 2017. Jim has extensive
experience in financial services and was appointed senior independent
director in August 2017 following the retirement of David Harrel.
In late 2017 we completed an externally-facilitated board effectiveness
review which has confirmed that the board continues to operate well.
There are always areas to improve however and, in particular, we will
ensure that good communication and interaction between the board and the
business remains a priority.
Responding to risks and regulation
We continue to enhance our risk management processes, and this year have
paid particular attention to identifying and monitoring emerging risks
such as cybercrime, money laundering and data theft. We remain vigilant
to the financial risks associated with sub-letting our existing space in
Curzon Street and these risks are also reviewed at every board meeting.
We also took action to reduce the risks associated with our defined
benefit pension schemes. We believe that the other significant risks to
our business are operational risks, which are increased by growth, and
regulatory risks, which are increased by continual changes to
regulations in our sector.
The past year has been a very demanding one from a regulatory
perspective as we prepared for the changes brought about by MiFID II,
the General Data Protection Regulation, the FCA Asset Management Market
Report and PRIIPs. Maintaining our regulatory standards has always been
a high priority for our senior management and we will continue to monitor the regulatory risks that arise from the changes to guidelines and standards in our sector. Engaging with shareholders During the year, we have had the opportunity to engage with shareholders through various channels including conferences, company-hosted events, group meetings and one-on-one discussions. We are fortunate to have a number of longstanding, committed institutional shareholders and will continue to maintain a regular and constructive dialogue with them to gather feedback on our progress. In early 2018, we consulted with them on changes to our remuneration policy. As it has been three years since our last policy was approved, a revised remuneration policy will be laid before shareholders for approval at the Annual General Meeting in May 2018. Working with the company's advisers, the remuneration committee has reassessed our policy in the context of a changing external environment and the firm's own future aspirations. Although we have maintained the principal features of our existing policy, some changes have been proposed to align the interests of executives and investors more closely. These changes follow a number of consultation meetings with shareholders and governing bodies. Listening to our employees As a service business, our people are our greatest asset and we are committed to retaining the many high-calibre individuals we employ across the firm and creating a stimulating and supportive environment for them. I listen carefully to the views of my colleagues and I recognise that this year has been a challenging one for employees, given the pace and nature of change. I am very grateful for their continued perseverance and dedication. Outlook The UK wealth management industry continues to evolve, driven by client needs, regulation, demographics, technological innovation and a changing competitive landscape. Rathbones, as a leading UK discretionary wealth manager, remains well placed to respond to and capitalise on these evolving trends. We remain committed to growing the business both organically, via disciplined investment, and inorganically via acquisitions that not only fit our strategic and financial criteria and but also share our culture and values. Notwithstanding some caution, which naturally emerges at a time of high investment markets and political uncertainty, we enter 2018 well positioned to provide long-term value for shareholders. Mark Nicholls Chairman 21 February 2018 Chief executive's review The wealth management sector remains robust The wealth management industry continues to be an exciting and rapidly changing place to do business. In 2017 the industry has not only had to navigate a particularly uncertain political climate, but has also had to respond to a considerable amount of new regulation. Importantly, many positive drivers for long-term private wealth accumulation are still in place. The challenge the current climate brings is to secure the scale economies and operational efficiencies necessary to respond positively to demographic changes and technological advances, whilst reacting to a climate of increasing price pressure. In this respect, Rathbones continues to be well positioned in the industry with our own funds under management reaching GBP39.1 billion at 31 December 2017, up 14.3% from GBP34.2 billion at the end of 2016. Total funds under management in our Investment Management business at 31 December 2017 were GBP33.8 billion, up 11.9% from GBP30.2 billion in 2016, whilst our Unit Trust business reached a milestone of GBP5.3 billion, up 32.5% from last year. Strong financial performance underpinned by a 30% operating margin Despite investing in a number of areas across the business during the year, we maintained a leading operating margin of 30.6% (2016: 29.8%) through a combination of relatively supportive investment markets and continued net funds growth and cost discipline. Underlying profit before tax totalled GBP87.5 million (2016: GBP74.9 million), generating an underlying earnings per share of 138.8p, an increase of 13.7% from 122.1p in 2016. In 2017, the group added GBP4.8 billion gross funds under management organically, split between GBP3.1 billion in our Investment Management business and GBP1.7 billion in our Unit Trusts business (2016: GBP2.3 billion and GBP1.3 billion respectively). Outflows from intergenerational wealth transfer, property purchases and other uses of funds to support lifestyle continue unabated in this low interest rate environment. Net organic growth in this business was 3.0% (2016: 2.9%), which represents a satisfactory result in an investment climate that was largely directionless until the end of the year. Net flows into our Unit Trusts business were very strong however, totalling GBP883 million in the year (2016: GBP554 million) and helping its total funds under management to reach a record GBP5.3 billion (2016: GBP4.0 billion) at 31 December 2017. Profit before tax for the year of GBP58.9 million was 17.6% higher than the GBP50.1 million in 2016 and reflects the impact of a number of non-underlying items. Our balance sheet remains stable with a consolidated Common Equity Tier 1 ratio at 31 December 2017 of 20.7% compared with 17.7% at 31 December 2016. Our consolidated leverage ratio at 31 December 2017 was 7.8% compared with 6.6% at 31 December 2016. We remain a capital-efficient business, generating an underlying return on capital employed of 19.5% for the year compared to 19.3% a year ago. The journey to GBP40 billion has significantly improved our capabilities as a firm Four years ago, I shared an ambition for the firm to reach GBP40 billion of funds under management by the end of 2018, and I am encouraged that this goal is within our reach. Since 2014, we have delivered a significantly improved investment platform to support our investment teams, built new distribution channels addressing both IFA networks and professional intermediaries, acquired Vision Independent Financial Planning, expanded our research and specialist investment capability, simplified our pricing structures and materially grown our Unit Trusts business. We have also delivered learning and development programmes to employees, strengthened our brand profile, improved our website and broadened our marketing capability. Alongside this demanding programme, we have taken advantage of a number of opportunities to deliver inorganic growth through team hiring and bolt-on acquisitions. Our culture of 'professional autonomy with accountability' on which our investment managers thrive, remains very much at the heart of our business, but does place more demands on our ability to manage risk. Hand in hand with this considerable level of activity, we have ensured that we continue to operate a risk and control framework that allows us to adhere to our core philosophies of delivering an investment-led, highly personal, whole-of-market investment service to our clients. Investing in the future There are, of course, areas of the business that we must continue to develop to adapt to the changing needs of our clients. This year we have been reviewing the processes we use to maintain and manage information about our clients, and have made a number of enhancements. In 2017 we embedded a new way of capturing and evaluating our clients' attitude to investment risk and significantly increased the usage of asset allocation tools across the firm, with over 97% of discretionary funds now linked to these tools. In 2018 we will continue to keep abreast of evolving client suitability standards. We will also be looking to improve our account opening processes, making use of a material upgrade to our client relationship management systems and providing more administrative support to ensure that investment teams can continue to focus on serving our clients well. The output from our research team has increased considerably over the last two years, as has access to this output, through the introduction of a research hub which disseminates information to our growing community of investment managers. In 2018 we will continue to ensure that we attract the right level of investment skills to support and develop our investment process, but, just as importantly, ensure that the amount of external research we procure is right for us. MiFID II has made some significant changes to the way in which external research is priced, delivered and administered, and we will work hard to keep abreast of developments to secure value for money. Building our presence in the intermediary market has remained a key priority, so a May 2017 report by Defaqto which confirmed that the use of Rathbones as a discretionary fund management provider to advisers had more than doubled in the last year was a good outcome. Vision Independent Financial Planning made strong progress during the year, growing funds under management to GBP1.4 billion (2016: GBP1.0 billion) and continuing to attract quality advisers. In addition, our specialist intermediary team continues to focus on a number of important strategic partnerships, and is now well established. We expect flows to improve from the GBP265 million introduced in 2017 to c. GBP350 million as the proposition continues to gain momentum. This year we deliberately invested in establishing the right infrastructure to support our internal financial planning teams and further develop the proposition. We are now able to expand its footprint across more of our regional offices over the next year and expect to increase the number of professional staff in 2018. In total, we expect net costs to increase by up to GBP1.5 million as a result. The Rathbone Private Office became fully operational during 2017 with a marketing programme positioning the firm as a credible alternative for larger and
more complex clients, and raising its profile within the intermediary
community.
We remain mindful that current employee ownership in the business is
culturally important and over recent years there has been a decline,
primarily as a result of retirement. From 2018, we will seek to correct
this by creating opportunities for more employees to build a larger
element of equity ownership.
Finally, investment markets inevitably present an element of cyclicality
to earnings and stock performance and we will continue to monitor this
as we review and update our goals for the next five years.
Regulation and infrastructure continue to evolve
In 2017, we and the industry have had the task of implementing the
significant regulatory changes that arise from the introduction of MiFID
II and the General Data Protection Regulation in particular. Whilst
MiFID II has been successfully delivered on time and work on GDPR is
advanced, these new regimes will continue to require some significant
changes to our core processes and systems, with costs continuing at
similar levels into 2018.
MiFID II in particular will have an impact on our Unit Trusts business,
which will bear the full cost of external research in 2018. Research
costs borne by the funds in 2017 were GBP0.8 million. This is in
addition to the expected ban on 'risk-free' box dealing profits (2017:
3.1 million) following the FCA's Asset Management Market Study. We will
look to offset these impacts in profit terms by continuing to grow the
business and build on the momentum the team has achieved.
Technology continues to be a significant entrant in our sector and I
believe it will continue to play a disruptive role in the future if not
wholly embraced. Whilst we are committed to our highly personal approach
to providing investment and advisory services, we will continue to
invest to capture the opportunities that these new technologies can
offer to improve our services and operational efficiency while
increasing the capacity of our investment teams.
In 2017, we reorganised and upgraded the skills of our IT team, which
over the medium term will improve our data management capabilities,
enhance our client communications and introduce additional security
measures to combat the ever growing cyber threat. We expect that this
expansion of our IT capability, together with more general cost
inflation, will add approximately GBP2.5 million to our running costs.
Outlook
This year has presented many challenges and opportunities and I fully
expect 2018 to do so in equal measure. Brexit continues to be a regular
discussion topic within the investment community, but as a predominantly
UK-based firm our own view is largely focused on the wider economic
environment and any impact it may have on the investments we make for
our clients.
I would like to take this opportunity to praise the efforts of our
employees in this eventful last year. Notwithstanding the demands of our
own change programme and a complicated market environment, they have
kept the needs of our clients at the forefront of what we do and
concentrated on providing an exemplary service.
We enter 2018 in a good position, with industry-leading operating
margins and a strong balance sheet. We will continue to look for
accretive acquisition opportunities and to invest in our future with
discipline.
Philip Howell
Chief Executive
21 February 2018
Financial performance
Table 1. Group's overall performance
2017 2016
GBPm GBPm
(unless stated) (unless stated)
Underlying operating income 286.0 251.3
Underlying operating expenses (198.5) (176.4)
Underlying profit before tax(1) 87.5 74.9
Underlying operating margin(2) 30.6% 29.8%
Profit before tax 58.9 50.1
Effective tax rate 20.5% 23.8%
Taxation (12.1) (11.9)
Profit after tax 46.8 38.2
Underlying earnings per share 138.8p 122.1p
Earnings per share 92.7p 78.9p
Dividend per share(3) 61.0p 57.0p
Return on capital employed(4) 19.5% 19.3%
1. A reconciliation between underlying profit before tax and profit
before tax is shown in table 2
2. Underlying profit before tax as a % of underlying operating income
3. The total interim and final dividend proposed for the financial year
4. Underlying profit after tax as a % of average equity at each quarter
end
Underlying operating income
Underlying operating income grew 13.8% in 2017, driven by higher
investment markets and continued organic and acquired growth in all
business areas.
Fee income of GBP217.5 million in 2017 increased 17.7% compared to
GBP184.8 million in 2016, reflecting positive markets and growth in
organic and acquired new business over the period. Fee income
represented 76.0% of total underlying operating income in the year ended
31 December 2017 (2016: 73.5%), as our fee only tariff becomes more
widely adopted, helping to support our move to higher quality fee-based
income.
Net commission income of GBP38.7 million was broadly consistent with
2016, as the impact of higher trading volumes was offset by the greater
number of accounts now operating on a fee only tariff.
Net interest income was unchanged at GBP11.6 million, as higher
liquidity offset the impact of a lower interest rate environment for
much of 2017.
Underlying operating expenses
Underlying operating expenses increased by 12.5%, largely due to
continuing investment in strategic initiatives and underlying growth in
the business.
In line with our strategy, planned additions to headcount increased
fixed staff costs by 10.0% to GBP87.8 million, with average headcount up
7.6% to 1,147.
Total variable staff costs increased by 18.4% to GBP53.3 million,
principally driven by growth in profits and funds under management as
well as the introduction of additional performance-based incentives for
investment managers during the year. Variable staff costs in 2017
represented 18.6% of underlying operating income (2016: 17.9%) and 37.9%
of underlying profit before variable staff costs and tax (2016: 37.5%).
Underlying operating expenses also included GBP5.1 million (2016: GBP4.0
million) for awards payable to new investment managers for the
introduction of new clients where those managers have been in situ for
more than 12 months (see note 2.1).
The adoption of IFRS 15 in 2018 requires us to change the accounting
policy for these awards, which will result in more of these costs being
capitalised and amortised over the life of the client relationship. The
adoption of IFRS 9 is not expected to have a material impact on our
financial performance. Further details can be found in note 1.
Outlook
Profitability
Staff costs in 2018 will reflect the full year impact of hiring activity
in 2017 in addition to salary inflation of around 3.5%.
During 2018 we plan to continue the IT change programme started in 2017.
This is expected to add approximately GBP2.5 million to our cost base in
2018. We also plan to expand the footprint of our financial planning
service across more regional offices; which is expected to add up to
GBP1.5 million to the cost base of this business, net of growth in
associated revenues.
In addition, from 2018, the unit trusts business will no longer charge
research costs to the funds and it is expected that manager's box
dealing profits will no longer be retained. In 2017, research costs of
GBP0.8 million were incurred by the funds and managers' box dealing
profits totalled GBP3.1 million.
Capital expenditure
Overall, capital expenditure of GBP11.3 million in 2017 was down GBP3.8
million compared to 2016, a fall of 25.2%. As planned, expenditure on
software increased by GBP4.2 million as we upgraded our client
relationship management systems and embarked on an IT change programme.
These activities are expected to continue in to 2018 with a similar
level of capital expenditure.
Premises related capital expenditure fell by GBP7.8 million, primarily
due to the fit out of our new London Head Office, which was largely
completed in 2016.
Group underlying profit before tax/operating margin
Underlying profit before tax and earnings per share are considered by
the board to be a better reflection of true business performance than
looking at our results on a statutory basis only. These measures are
widely used by research analysts covering the group. Underlying results
exclude income and expenditure falling into the four categories
explained below.
Underlying profit before tax grew by 16.8% to GBP87.5 million in 2017.
The underlying operating margin, which is calculated as the ratio of
underlying profit before tax to underlying operating income, was 30.6%
for the year; in line with our target of 30% over the cycle (2016:
29.8%). Profit before tax increased by 17.6% to GBP58.9 million for the
year.
Table 2. Reconciliation of underlying profit before tax to profit before
tax
2017 2016
GBPm GBPm
Underlying profit before tax 87.5 74.9
Gain on plan amendment of defined benefit pension
schemes 5.5 -
Charges in relation to client relationships and goodwill (11.7) (11.8)
Acquisition-related costs (6.2) (6.0)
Head office relocation costs (16.2) (7.0)
Profit before tax 58.9 50.1
Gain on plan amendment of defined benefit pension schemes
With effect from 30 June 2017, we closed the defined benefit pension
schemes, ceasing all future accrual and breaking the link to salaries.
These changes resulted in a plan amendment gain of GBP5.5 million, which
was recognised in operating income. This gain is a significant one-off
item which does not relate to the trading performance of the business
and it has therefore been excluded from underlying results.
Charges in relation to client relationships and goodwill
Client relationship intangible assets are created when we acquire a
business or a team of investment managers. The charges associated with
these assets represent a significant non-cash item and they have,
therefore, been excluded from underlying profit, which represents
largely cash-based earnings more directly relating to the reporting
period. Charges for amortisation of client relationship intangibles in
the year ended 31 December 2017 were GBP11.7 million (2016: GBP11.8
million), reflecting historic acquisitions.
Acquisition-related costs
Acquisition-related costs are significant costs which arise from
strategic investments to grow the business. They primarily relate to
corporate actions rather than trading performance and are therefore
excluded from underlying results.
As announced on 31 August 2017, we incurred professional services costs
of GBP4.9 million in relation to the merger discussions with Smith &
Williamson.
Costs of GBP1.3 million (2016: GBP6.0 million) were incurred in relation
to the acquisitions of Vision Independent Financial Planning and Castle
Investment Solutions, which were completed on 31 December 2015. These
amounts include the cost of payments to vendors of the business who
remain in employment with the group, as required by accounting
standards. Further costs totalling GBP3.6 million will be charged to the
income statement on a straight line basis over the deferral period
ending in 2019.
Head office relocation costs
During February 2017, we moved our London head office to the new
premises following a nine-month fit out period. Charges incurred in
relation to the double running of both London premises and the
relocation amounted to GBP16.2 million in 2017 (2016: GBP7.0 million).
Following the vacation of 1 Curzon Street, a provision has been
recognised for the discounted value of the cost of the surplus property
until the end of the existing lease, net of any expected rental income
from sub-letting the space. As a result, net charges totalling GBP14.1
million were recognised in the income statement during 2017 in relation
to the onerous lease provision.
Charges of GBP2.1 million were also incurred during the year for
professional fees, accelerated depreciation and double running costs
(2016: GBP7.0 million). These costs represent an investment to expand
our operating capacity in a key location and are not expected to recur
in the short to medium term; they have therefore been excluded from
underlying results.
Taxation
The corporation tax charge for 2017 was GBP12.1 million (2016: GBP11.9
million) and represents an effective tax rate of 20.5% (2016: 23.8%). A
full reconciliation of the income tax expense is provided in note 4.
The Finance Bill 2016, which included provisions for the UK corporation
tax rate to be reduced to 17% in April 2020, from 19% in April 2017,
gained royal assent in September 2016. Deferred tax balances have
therefore been calculated based on these reduced rates where timing
differences are forecast to unwind in future years.
Basic earnings per share
Basic earnings per share for the year ended 31 December 2017 were 92.7p
compared to 78.9p in 2016. This reflects the full impact of
non-underlying income and charges and the issue of 0.6 million shares to
satisfy share based remuneration scheme awards. On an underlying basis,
earnings per share increased by 13.7% to 138.8p in 2017 (see note 7).
Dividends
In determining the level of any proposed dividend, the board has regard
to current and forecast financial performance. Any proposal to pay a
dividend is subject to compliance with the Companies Act, which requires
that the company must have sufficient distributable reserves from which
to pay the dividend. The company's distributable reserves are primarily
dependent on:
- compliance with regulatory capital requirements for the minimum level
of own funds;
- the level of profits earned by the company, including distributions
received from trading subsidiaries (some of which are subject to minimum
regulatory capital requirements themselves);
- actuarial changes in the value of the pension schemes that are
recognised in the company's other comprehensive income, net of deferred
tax.
At 31 December 2017 the company's distributable reserves were GBP63.9
million (2016: GBP42.8 million).
In light of the results for the year, the board has proposed a final
dividend for 2017 of 39p. This results in a full year dividend of 61p,
an increase of 4p on 2016 (7.0%). The proposed full year dividend is
covered 1.5 times by basic earnings and 2.3 times by underlying
earnings.
Return on capital employed
The board monitors the return on capital employed (ROCE) as a key
performance measure, which forms part of the assessment of management's
performance for remuneration purposes. For monitoring purposes, ROCE is
defined as underlying profit after tax expressed as a percentage of
quarterly average total equity across the year.
Consideration of the return on capital is a key consideration of all
investment decisions, particularly in relation to acquired growth.
In 2017, ROCE was 19.5% (2016: 19.3%).
Segmental review
The group is managed through two key operating segments, Investment
Management and Unit Trusts.
Investment Management
The financial performance of Investment Management is largely driven by
revenue margins earned from funds under management. Revenue margins are
expressed as a basis point return, which depends on a mix of tiered fee
rates, commissions charged for transactions undertaken on behalf of
clients and the interest margin earned on cash in client portfolios and
client loans.
Year-on-year changes in the key performance indicators for Investment
Management are shown in table 3.
Table 3. Investment Management - key performance indicators
2017 2016
Funds under management at 31 December(1) GBP33.8bn GBP30.2bn
Underlying rate of net organic growth in Investment
Management funds under management(1) 3.0% 2.9%
Underlying rate of total net growth in Investment
Management funds under management(1) 3.9% 4.5%
Average net operating basis point return(2) 72.7 bps 74.2 bps
Number of Investment Management clients 50,000 48,000
Number of investment managers 277 273
1. See table 4
2. See table 7
During 2017, Investment Management has continued to attract new clients
both organically and through acquisitions. The total number of clients
(or groups of closely related clients) increased from 48,000 in 2016 to
approximately 50,000 during the year. During 2017, the total number of
investment managers increased to 277 at 31 December 2017 from 273 at the
end of 2016.
Funds under management
Investment Management funds under management increased by 11.9% to
GBP33.8 billion at 31 December 2017 from GBP30.2 billion at the start of
the year. This increase is analysed in table 4.
Table 4. Investment Management - funds under management
2017 2016
GBPbn GBPbn
As at 1 January 30.2 26.1
Inflows 3.4 2.7
- organic(1) 3.1 2.3
- acquired(2) 0.3 0.4
Outflows(1) (2.2) (1.5)
Market adjustment(3) 2.4 2.9
As at 31 December 33.8 30.2
Net organic new business(4) 0.9 0.8
Underlying rate of net organic growth(5) 3.0% 2.9%
Underlying rate of total net growth(6) 3.9% 4.5%
1. Value at the date of transfer in/(out)
2. Value at 31 December
3. Represents the impact of market movements and investment performance
4. Organic inflows less outflows
5. Net organic new business as a % of opening funds under management
6. Net organic new business and acquired inflows as a % of opening funds
under management
Net organic growth in our investment management business was 3.0% (2016:
2.9%). This was below the 5% target we have set for ourselves, in large
part due to an investment climate that was largely directionless until
the end of the year. We saw outflows of approximately 7% of funds under
management, as clients continued to transfer wealth to younger
generations, purchase property and use capital to support income during
the year.
Charity funds under management continued to grow strongly and reached
GBP4.7 billion at 31 December 2017, up 14.6% from GBP4.1 billion at the
start of the year.
We also retained our strategic focus on intermediaries during the year.
Funds under management in accounts linked to independent financial
advisers and provider panel relationships increased by GBP1.0 billion
during 2017, ending the year at GBP7.7 billion.
In total, net organic and acquired growth added GBP1.2 billion to
Investment Management funds under management in 2017 (2016: GBP1.2
billion), representing an underlying rate of total net growth of 3.9%
(2016: 4.5%).
As at 31 December 2017, Vision advised on client assets of GBP1.4
billion, up 35.9% from 2016.
Average investment returns across all Investment Management clients were
positive and outperformed the MSCI WMA Balanced index by 1.8%. This
outperformance was generated across both UK and Overseas equities as the
global markets rallied on Trump's potential fiscal stimulus, stronger
European economic data and the dollar trending lower throughout the
year. Our overweight position in UK Equities generated the most
outperformance for 2017. Overall performance against other competitor
indices, such as the Private Client Indices published by ARC, was
robust.
Financial performance
Table 5. Investment Management - financial performance
2017 2016
GBPm GBPm
Net investment management fee income(1) 189.5 163.3
Net commission income 38.7 38.9
Net interest income(2) 11.6 11.6
Fees from advisory services(3) and other income 14.8 12.5
Underlying operating income 254.6 226.3
Underlying operating expenses(4) (177.8) (160.1)
Underlying profit before tax 76.8 66.2
Underlying operating margin(5) 30.2% 29.3%
1. Net investment management fee income is stated after deducting fees
and commission expenses paid to introducers
2. Presented net of interest expense paid on client accounts; excludes
interest on own reserves and interest payable on Tier 2 loan notes
issued
3. Fees from advisory services includes income from trust, tax and
financial planning services (including Vision)
4. See table 8
5. Underlying profit before tax as a percentage of underlying operating
income
Net investment management fee income increased by 16.0% to GBP189.5
million in 2017, benefiting from positive markets as well as organic and
acquired growth in funds under management. Fees are applied to the value
of funds on quarterly charging dates. Average funds under management on
these billing dates in 2017 were GBP32.4 billion, up 14.9% from 2016
(see table 6).
Table 6. Investment Management - average funds under management
2017 2016
GBPbn GBPbn
Valuation dates for billing
- 5 April 31.5 26.1
- 30 June 32.0 27.3
- 30 September 32.5 29.3
- 31 December 33.8 30.2
Average 32.4 28.2
Average FTSE 100 level(1) 7426 6659
1. Based on the corresponding valuation dates for billing
In 2017, net commission income of GBP38.7 million was broadly consistent
with 2016. Higher trading volumes offset the impact of the greater
number of accounts operating on a fee only tariff.
Net interest income of GBP11.6 million in the year was unchanged from
2016. The impact of lower base rates during much of 2017 was offset by a
higher balance of cash in client portfolios over the course of the year.
Cash held at the Bank of England grew from GBP1.1 billion at 31 December
2016 to GBP1.4 billion at the end of 2017.
The investment management loan book grew to GBP120.5 million by the end
of the year and contributed GBP3.1 million to net interest income in
2017 (2016: GBP3.0 million). Also included in net interest income is
GBP1.3 million (2016: GBP1.3 million) of interest payable on the Tier 2
notes which are callable in August 2020.
As shown in table 7, the average net operating basis point return on
funds under management has fallen by 1.5 bps to 72.7 bps in 2017. This
largely reflects the changes in business mix and the fee tiering impact
of higher market levels.
Table 7. Investment Management - revenue margin
2017 2016
bps bps
Basis point return(1) from:
- fee income 58.4 57.9
- commission 11.9 13.8
- interest 2.4 2.5
basis point return on funds under management 72.7 74.2
1. Underlying operating income (see table 5), excluding interest on own
reserves, interest payable on Tier 2 notes issued, fees from advisory
services and other income, divided by the average funds under management
on the quarterly billing dates (see table 6)
Fees from advisory services and other income increased 18.4% to GBP14.8
million. This largely reflects a higher level of advisory fees earned by
Vision, following a slower period of activity last year as the business
completed a comprehensive file review exercise, and growth in in-house
financial planning revenues.
Underlying operating expenses in Investment Management for 2017 were
GBP177.8 million, compared to GBP160.1 million in 2016, an increase of
11.1%. This is highlighted in table 8.
Table 8. Investment Management - underlying operating expenses
2017 2016
GBPm GBPm
Staff costs(1)
- fixed 59.5 57.6
- variable 40.2 32.4
Total staff costs 99.7 90.0
Other operating expenses 78.1 70.1
Underlying operating expenses 177.8 160.1
Underlying cost/income ratio(2) 69.8% 70.7%
1. Represents the costs of investment managers and teams directly
involved in client-facing activities
2. Underlying operating expenses as a % of underlying operating income
(see table 5)
Fixed staff costs of GBP59.5 million increased by 3.3% year-on-year,
principally reflecting a 5.9% increase in average headcount and salary
inflation.
As results improved, variable staff costs, also increased by 24.1%
reflecting both the higher profitability in the period and an improved
investment performance element for growth awards.
Other operating expenses of GBP78.1 million include property,
depreciation, settlement, IT, finance and other central support services
costs. The year-to-year increase of GBP8.0 million (11.4%) reflects
increased investment in the business, recruitment and higher variable
awards in support departments in line with overall business performance.
Unit Trusts
Table 9. Unit Trusts - funds
2017 2016
GBPm GBPm
Rathbone Income Fund 1,433 1,366
Rathbone Global Opportunities Fund 1,168 924
Rathbone Ethical Bond Fund 1,100 579
Rathbone Active Income Fund for Charities 173 116
Rathbone Global Alpha Fund 127 120
Rathbone Strategic Bond Fund 108 62
Rathbone Blue Chip Income and Growth Fund 78 71
Rathbone UK Opportunities Fund 61 78
Rathbone Multi Asset Portfolios 736 447
Other funds 383 291
5,367 4,054
Unit Trusts' financial performance is principally driven by the value
and growth of funds under management. Year-on-year changes in the key
performance indicators for Unit Trusts are shown in table 9.
Table 9. Unit Trusts - key performance indicators
2017 2016
Funds under management at 31 December(1) 5.3 4.0
Underlying rate of net growth in Unit Trusts funds
under management(1) 21.8% 18.0%
Underlying profit before tax(2) 10.7 8.7
1. See table 10
2. See table 12
Funds under management
Net retail sales in the asset management industry of approximately GBP47
billion were up around GBP40 billion on 2016, as reported by the
Investment Association (IA). The IA pointed specifically to substantial
growth of inflows into ethical funds, with sustainable investment
becoming an "increasing priority for today's investors". The industry
funds under management total reached a record GBP1.2 trillion by the end
of the year, up around 15% on the total at the end of 2016.
In total, the IA sectors in which we manage funds saw net inflows of
GBP11.9 billion, compared to net outflows of GBP6.1 billion in 2016.
Gross sales in those sectors were up 31.7% at GBP99.8 billion in 2017.
In line with these trends, positive momentum in sales of our funds
continued through 2017, with gross sales up 30.8% in the year to GBP1.7
billion. Redemptions also remained elevated in 2017 at GBP0.9 billion
(2016: GBP0.7 billion), reflecting the increased levels of disinvestment
seen across the industry. This level of net sales put us in the top 20
fund managers for 2017, according to the Pridham Report.
Net inflows of GBP0.9 billion (2016: GBP0.6 billion) continued to be
spread across the range of funds although the Ethical Bond fund saw
particularly strong net flows in the year, nearly doubling in size to
GBP1.1 billion by the end of the year. As a result, Unit Trusts funds
under management closed the year up 32.5% at GBP5.3 billion (see table
10).
At 31 December 2017, we managed GBP428 million via the Luxembourg-based
feeder funds, up 95.4% from GBP219 million at the end of 2016.
Table 10. Unit Trusts - funds under management
2017 2016
GBPbn GBPbn
As at 1 January 4.0 3.1
Net inflows 0.9 0.6
- inflows(1) 1.7 1.3
- outflows(1) (0.8) (0.7)
Market adjustments(2) 0.4 0.3
As at 31 December 5.3 4.0
Underlying rate of net growth(3) 21.8% 18.0%
1. Valued at the date of transfer in/(out)
2. Impact of market movements and relative performance
3. Net inflows as a % of opening funds under management
During the year, the retail and multi asset funds delivered strong
positive returns, and a solid performance against their relevant
benchmarks. The Global Opportunities Fund benefited from a high exposure
to US equities and a substantial weighting to technology stocks. Both
fixed income funds delivered excellent returns and effectively managed
volatility, with the Ethical Bond fund recording the best return of any
fund in its sector. The UK Opportunities fund exposure to mid- and
small-cap names contributed to a top quartile performance.
Whilst the Income and Blue Chip Funds generated positive returns over
the year, both under-performed compared to other funds in the UK Equity
Income sector due the more defensive positioning of the portfolios and a
small number of stock specific issues. The multi asset range of funds
outperformed their risk adjusted benchmarks and added value through
their increased exposure to direct equities.
Table 11. Unit Trusts - performance1, 2
2017/(2016) Quartile ranking(3) over 1 year 3 years 5 years
Rathbone Blue Chip Income and Growth Fund 4 (3) 4 (2) 4 (2)
Rathbone Ethical Bond Fund 1 (4) 1 (2) 1 (1)
Rathbone Global Opportunities Fund 1 (4) 1 (2) 1 (1)
Rathbone Income Fund 4 (3) 3 (1) 3 (2)
Rathbone UK Opportunities Fund 1 (3) 1 (3) 2 (2)
Rathbone Strategic Bond Fund 2 (2) 2 (2) 2 (3)
1. Quartile ranking data is sourced from FE Trustnet
2. Excludes multi-asset funds, for which quartile rankings are
prohibited by the IA, non-publicly marketed funds and segregated
mandates. Funds included in the above table account for 74% of the total
FUM of the Unit Trusts business.
3. Ranking of institutional share classes at 31 December 2017 and 2016
against other funds in the same IA sector, based on total return
performance, net of fees (consistent with investment performance
information reported in the funds' monthly factsheets)
As at 31 December 2017, 88% of holdings in Unit Trusts' retail funds
were in institutional units (31 December 2016: 85%).
During 2017, the total number of investment professionals in Unit Trusts
decreased to 13 at 31 December 2017 from 14 at the end of 2016.
Financial performance
Unit Trusts' income is primarily derived from:
- annual management charges, which are calculated on the daily value of
funds under management, net of rebates and trail commission payable to
intermediaries
- net dealing profits, which are earned on the bid-offer spread from
sales and redemptions of units and market movements on the stock of
units that are held on our books overnight.
Net annual management charges increased 30.2% to GBP28.0 million in
2017, driven principally by the rise in average funds under management.
Net annual management charges as a percentage of average funds under
management fell to 60 bps (2016: 62 bps) reflecting the strong growth in
the Ethical Bond Fund, which levies a lower rate of annual management
charges.
Table 12. Unit Trusts - financial performance
2017 2016
GBPm GBPm
Net annual management charges 28.0 21.5
Net dealing profits 3.1 3.1
Interest and other income 0.3 0.4
Underlying operating income 31.4 25.0
Underlying operating expenses(1) (20.7) (16.3)
Underlying profit before tax 10.7 8.7
Operating % margin(2) 34.1% 34.8%
1. See table 13
2. Underlying profit before tax divided by underlying operating income
Net dealing profits of GBP3.1 million were unchanged compared with the
previous year. We continue to expect that these revenues will be lost
when the FCA publishes its final guidance following the Asset Management
Market Study.
Underlying operating income as a percentage of average funds under
management fell to 67 bps in 2017 from 72 bps in 2016.
Table 13. Unit Trusts - underlying operating expenses
2017 2016
GBPm GBPm
Staff costs(1)
- Fixed 3.0 3.0
- Variable 7.2 5.3
Total staff costs 10.2 8.3
Other operating expenses 10.5 8.0
Underlying operating expenses 20.7 16.3
Underlying cost/income ratio(1) 65.9% 65.2%
1. Underlying operating expenses as a % of underlying operating income
(see table 12)
Fixed staff costs of GBP3.0 million for the year ended 31 December 2017
were unchanged from the GBP3.0 million recorded in 2016. In 2017, the
cost of Unit Trusts' compliance team was absorbed into the central
compliance function and recharged as an inter-segment charge.
Variable staff costs of GBP7.2 million were 35.8% higher than GBP5.3
million in 2016 as higher profitability and growth in gross sales drove
increases in profit share and sales commissions.
Other operating expenses have increased by 31.3% to GBP10.5 million,
reflecting an increase in third party administration costs in line with
growth in the business and higher inter-segment charges for the central
compliance and distribution teams.
Financial position
Table 14. Group's financial position
2017 2016
GBPm GBPm
(unless stated) (unless stated)
Capital resources:
- Common Equity Tier 1 ratio(1) 20.7% 17.7%
- Total Own Funds ratio(2) 22.2% 19.5%
- Total equity 363.3 324.8
- Tier 2 subordinated loan notes 19.7 19.6
- Risk-weighted assets 977.2 892.7
- Return on assets(3) 1.8% 1.8%
- Leverage ratio(4) 7.8% 6.6%
Other resources:
- Total assets 2,738.9 2,404.0
- Treasury assets(5) 2,303.9 1,995.2
- Investment management loan book 120.5 106.3
- Intangible assets from acquired
growth(6) 151.7 160.7
- Tangible assets and software(7) 26.7 23.1
Liabilities:
- Due to customers(8) 2,170.5 1,888.9
- Net defined benefit pension liability 15.6 39.5
1. Common Equity Tier 1 capital as a proportion of total risk exposure
amount
2. Total own funds (see table 15) as a proportion of total risk exposure
amount
3. Profit after tax divided by average total assets
4. Common Equity Tier 1 capital as a % of total assets, excluding
intangible assets, plus certain off balance sheet exposures
5. Balances with central banks, loans and advances to banks and
investment securities
6. Net book value of acquired client relationships and goodwill
7. Net book value of property, plant and equipment and computer software
8. Total amounts of cash in client portfolios held by Rathbone
Investment Management as a bank
Capital resources
Rathbones is classified as a banking group for regulatory capital
purposes and is therefore required to operate within the restrictions on
capital resources and banking exposures prescribed by the Capital
Requirements Regulation, as applied in the UK by the Prudential
Regulation Authority (PRA).
At 31 December 2017, the group's regulatory capital resources (including
verified profits for the year) were GBP216.8 million (2016: GBP174.2
million).
Table 15. Regulatory capital resources
2017 2016
GBPm GBPm
Share capital and share premium 145.7 142.5
Reserves 222.5 188.5
Less:
- Own shares (4.9) (6.2)
- Intangible assets(1) (161.3) (166.4)
Total Common Equity Tier 1 capital resources 202.0 158.4
Tier 2 capital resources 14.8 15.8
Total own funds 216.8 174.2
1. Net book value of goodwill, client relationship intangibles and
software are deducted directly from capital resources
Common Equity Tier 1 capital (CET1) resources increased by GBP43.6
million during 2017, largely due to the inclusion of verified profits
for the 2017 financial year, net of dividends paid in the year, and
post-tax actuarial gains of GBP14.4 million arising from the
remeasurement of defined benefit pension schemes.
The CET1 ratio has grown to 20.7% from 17.7% at the previous year end in
line with the growth in CET1 resources. Our consolidated CET1 ratio is
higher than the banking industry norm, reflecting the low risk nature of
our banking activity.
The leverage ratio was 7.8% at 31 December 2017, up from 6.6% at 31
December 2016. The leverage ratio represents our CET1 capital as a
percentage of our total assets, excluding intangible assets, plus
certain off balance sheet exposures.
The business is primarily funded by equity, but also supported by GBP20
million of 10 year Tier 2 subordinated loan notes. The notes introduce a
small amount of gearing into our balance sheet as a way of financing
future growth in a cost-effective and capital-efficient manner. They are
repayable in August 2025, with a call option for the issuer in August
2020 and annually thereafter. Interest is payable at a fixed rate of
5.856% until the first call option date and at a fixed margin of 4.375%
over six-month LIBOR thereafter.
The consolidated balance sheet remains healthy with total equity of
GBP363.3 million at 31 December 2017, up 11.9% from GBP324.8 million at
the end of 2016, primarily reflecting retained profits for the year and
an improvement in the reported position of our defined benefit pension
schemes.
Own funds and liquidity requirements
As required under PRA rules, we perform an Internal Capital Adequacy
Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment
Process (ILAAP) annually, which include performing a range of stress
tests to determine the appropriate level of regulatory capital and
liquidity that we need to hold. In addition, we monitor a wide range of
capital and liquidity statistics on a daily, monthly or less frequent
basis as required. Surplus capital levels are forecast on a monthly
basis, taking account of proposed dividends and investment requirements,
to ensure that appropriate buffers are maintained. Investment of
proprietary funds is controlled by our treasury department.
We are required to hold capital to cover a range of own funds
requirements, classified as Pillar 1 and Pillar 2.
Pillar 1 - minimum requirement for capital
Pillar 1 focuses on the determination of risk-weighted assets and
expected losses in respect of the group's exposure to credit,
counterparty credit, market and operational risks and sets a minimum
requirement for capital.
At 31 December 2017, the group's risk weighted assets were GBP977.2
million (2016: GBP892.7 million).
Pillar 2 - supervisory review process
Pillar 2 supplements the Pillar 1 minimum requirement with a
firm-specific Individual Capital Guidance (Pillar 2A) and a framework of
regulatory capital buffers (Pillar 2B).
The Pillar 2A own funds requirement (which is set by the PRA) reflects
those risks, specific to the firm, which are not fully captured under
the Pillar 1 own funds requirement.
Our Pillar 2A own funds requirement was reviewed by the PRA during 2017
and we have agreed a revised requirement. This includes the
incorporation of a higher Pillar 2A requirement in respect of pension
risk.
Pension obligation risk
The potential for additional unplanned capital strain or costs that the
group would incur in the event of a significant deterioration in the
funding position of the group's defined benefit pension schemes.
Interest rate risk in the banking book
The potential losses in the non-trading book resulting from interest
rate changes or widening of the spread between Bank of England base
rates and LIBOR rates.
Concentration risk
Greater loss volatility arising from a higher level of loan default
correlation than is assumed by the Pillar 1 assessment.
The group is also required to maintain a number of Pillar 2B regulatory
capital buffers, all of which must be met with CET1 capital.
Capital conservation buffer (CCB)
The CCB is a general buffer, designed to provide for losses in the event
of a stress and is being phased in from 1 January 2016 to 1 January
2019. As at 31 December 2017, the buffer rate was 1.25% of risk-weighted
assets. On 1 January 2018, it increased to 1.875% of risk-weighted
assets and it will finally increase to 2.5% of risk weighted assets from
1 January 2019.
Countercyclical capital buffer (CCyB)
The CCyB is designed to act as an incentive for banks to constrain
credit growth in times of heightened systemic risk. The amount of the
buffer is determined by reference to rates set by the FPC from time to
time, depending on prevailing market conditions, for individual
countries where the group has credit risk exposures.
The buffer rate is currently set at zero for the UK. However, non-zero
rates for Norway, Sweden and Hong Kong, where the group has small
relevant credit risk exposures, result in an overall rate of 0.01% of
risk-weighted assets for the group as at 31 December 2017. The FPC has
announced the rate for UK exposures will increase to 0.5% with effect
from June 2018 and to 1.0% with effect from November 2018.
PRA buffer
The PRA also determines whether any incremental firm-specific buffer is
required, in addition to the CCB and the CCyB. The PRA requires any such
buffer to remain confidential between the group and the PRA.
The group's own funds requirements were as follows:
Table 16. Group's own funds requirements(1)
2017 2016
GBPm GBPm
Credit risk requirement 39.5 36.9
Market risk requirement 0.4 0.4
Operational risk requirement 38.4 34.2
Pillar 1 own funds requirement 78.3 71.5
Pillar 2A own funds requirement 46.1 27.9
Total Pillar 1 and 2A own funds requirements 124.4 99.4
CRD IV buffers:
- capital conservation buffer (CCB) 18.3 11.2
-- countercyclical buffer (CCyB) 0.1 0.3
Total Pillar 1 and 2A own funds requirements and CRD
IV buffers 142.8 110.9
1. Own funds requirements stated above include the impact of trading
results and changes to requirements and buffers that were known as at 31
December and which became effective prior to the publication of the
preliminary results.
The surplus of own funds (including verified profits for the full year)
over total Pillar 1 and 2A own funds requirements and CRD IV buffers was
GBP74.0 million, up from GBP63.3 million at the end of 2016.
In managing the group's regulatory capital position over the next few
years, we will continue to be mindful of:
- future volatility in pension scheme valuations which affect both the
level of CET1 own funds and the value of the Pillar 2A requirement for
pension risk;
- the staged introduction of incremental CRD IV buffers over the next
two years;
- regulatory developments; and
- the demands of future acquisitions which generate intangible assets
and, therefore, directly reduce CET1 resources.
We keep these issues under constant review to ensure that any necessary
capital raising activities are carried out in a planned and controlled
manner.
The group's Pillar 3 disclosures are published annually on our website
(rathbones.com/investor-relations/results-and-presentations) and provide
further details about regulatory capital resources and requirements.
Total assets
Total assets at 31 December 2017 were GBP2.7 billion (2016: GBP2.4
billion), of which GBP2.2 billion (2016: GBP1.9 billion) represents the
cash element of client portfolios that is held as a banking deposit.
Treasury assets
As a licensed deposit taker, Rathbone Investment Management holds our
surplus liquidity on its balance sheet together with clients' cash. Cash
in client portfolios as held on a banking basis of GBP2.2 billion (2016:
GBP1.9 billion) represented 6.4% of total investment management funds at
31 December 2017 compared to 6.3% at the end of 2016. Cash held in
client money accounts was GBP4.5 million (2016: GBP4.5 million).
The treasury department of Rathbone Investment Management, reporting
through the banking committee to the board, operates in accordance with
procedures set out in a board-approved treasury manual and monitors
exposure to market, credit and liquidity risk. It invests in a range of
securities issued by a relatively large number of counterparties. These
counterparties must be single 'A'-rated or higher by Fitch and are
regularly reviewed by the banking committee. During the year, we
increased the share of treasury assets held with the Bank of England to
GBP1.4 billion from GBP1.1 billion at 31 December 2016, reflecting the
increase in the level of cash held in client portfolios over the period
and a consistent appetite for credit risk.
Loans to clients
Loans are provided as a service to Investment Management clients who
have short to medium term cash requirements. Such loans are normally
made on a fully secured basis against portfolios held in our nominee
name, requiring two times cover, and are usually advanced for up to one
year. In addition, charges may be taken on property held by the client
to meet security cover requirements.
All loans (and any extensions to the initial loan period) are subject to
review by the banking committee. Our ability to provide such loans is a
valuable additional service, for example, to clients who require
bridging finance when moving home.
Loans advanced totalled GBP120.5 million at the end of 2017 (2016:
GBP106.3 million).
Intangible assets
Intangible assets arise principally from acquired growth in funds under
management and are categorised as goodwill and client relationships. At
31 December 2017, the total carrying value of intangible assets arising
from acquired growth was GBP151.7 million (2016: GBP160.7 million).
During the year, client relationship intangible assets of GBP2.7 million
were capitalised (2016: GBP7.9 million). No goodwill was acquired during
2017 (2016: GBPnil).
Client relationship intangibles are amortised over the estimated life of
the client relationship, generally a period of 10 to 15 years. When
client relationships are lost, any related intangible asset is
derecognised in the year. The total amortisation charge for client
relationships in 2017, including the impact of any lost relationships,
was GBP11.4 million (2016: GBP11.7 million).
Goodwill which arises from business combinations is not amortised, but
is subject to a test for impairment at least annually. During the year,
the goodwill relating to the trust and tax business was found to be
impaired as the growth forecasts for that business have not kept pace
with cost inflation. An impairment charge of GBP0.3 million was
recognised in relation to this element of goodwill (2016: GBP0.1
million).
As described in note 1, the adoption of IFRS 15 in 2018 requires us to
change the accounting policy for these awards. Currently, the cost of
awards for funds introduced by investment managers who have been in situ
for more than 12 months are charged to profit or loss (2017: GBP5.1
million). Under the new accounting standard, these amounts will also be
capitalised and amortised over the life of the client relationship.
Capital expenditure
During 2017, we have continued to invest for future growth with
capitalised expenditure on our premises and systems totalling GBP11.3
million (2016: GBP15.1 million). As noted above, capital expenditure in
2016 included GBP9.9 million for the fit out of the new London head
office. Further costs of GBP2.8 million were incurred to complete this
in 2017.
Investment in new systems accelerated in 2017 with the development of a
new client relationship management (CRM) system. Total costs of GBP7.1
million for the purchase and development of software were incurred in
2017 (2016: GBP2.9 million).
Excluding the London office fit out costs, new investment accounted for
approximately 79% of capital expenditure in 2017 (2016: 67%), with the
balance being maintenance and replacement of existing software and
equipment. This is more weighted to new investment than prior years due
to the development of the CRM system and improvements relating to the
introduction of MiFID II and the General Data Protection Regime.
Defined benefit pension schemes
We operate two defined benefit pension schemes, both of which have been
closed to new members for several years. With effect from 30 June 2017,
we closed both schemes, ceasing all future benefit accrual and breaking
the link to salary. The closure of the schemes resulted in a GBP5.5
million improvement in the reported position of the schemes.
The member consultation to close the scheme coincided with a period of
historically exceptionally low yields on the government bonds that are
used to derive cash equivalent transfer values (CETVs) for members
wishing to exit the scheme, increasing the value of these CETVs
markedly. This resulted in a significant increase in the number of
members seeking to transfer their benefits out of the scheme by taking a
cash lump sum and over the course of 2017, members transferred benefits
with cumulative CETVs of GBP60.6 million out of the scheme. This reduced
the accounting value of the liabilities of the Laurence Keen Scheme by
17% and the Rathbone 1987 Scheme by 29% compared to the position at 31
December 2016 and helped support an improvement in the schemes' deficit
and funding levels.
As a result of the large value of transfers out, the accounting
valuation of the schemes' liabilities has also fallen. At 31 December
2017 the combined schemes' liabilities, measured on an accounting basis,
had fallen to GBP164.1 million, down 29.4% from GBP232.4 million at the
end of 2016. Reflecting the performance of the schemes' assets over the
course of the year, the reported position of the schemes at 31 December
2017 was a deficit of GBP15.6 million (2016: deficit of GBP39.5
million).
Triennial funding valuations form the basis of the annual contributions
that we make into the schemes. During 2017, funding valuations of the
schemes as at 31 December 2016 were being carried out. We have agreed
with the trustees of the Rathbone 1987 Scheme to put in place a funding
deficit reduction plan, which requires annual contributions of GBP2.75
million, so long as that scheme remains in deficit. The funding
valuation for the LK scheme has not yet been finalised but we do not
expect that it will result in a material funding deficit reduction plan.
Liquidity and cash flow
Table 17. Extracts from the consolidated statement of cash flows
2017 2016
GBPm GBPm
Cash and cash equivalents at the end of the year 1,567.8 1,263.1
Net cash inflows from operating activities 351.5 567.3
Net change in cash and cash equivalents 304.7 559.5
Fee income is largely collected directly from client portfolios and
expenses, by and large, are predictable; consequently, we operate with a
modest amount of working capital. Larger cash flows are principally
generated from banking and treasury operations when investment managers
make asset allocation decisions about the amount of cash to be held in
client portfolios.
As a bank, we are subject to the PRA's ILAAP regime, which requires us
to hold a suitable Liquid Assets Buffer to ensure that short term
liquidity requirements can be met under certain stressed scenarios.
Liquidity risks are actively managed on a daily basis and depend on
operational and investment transaction activity.
Cash and balances at central banks was GBP1.4 billion at 31 December
2017 (2016: GBP1.1 billion).
Cash and cash equivalents, as defined by accounting standards, includes
cash, money market funds and banking deposits, which had an original
maturity of less than three months. Consequently, cash flows, as
reported in the financial statements, include the impact of capital
flows in treasury assets.
Net cash flows from operating activities include the effect of a
GBP282.6 million increase in banking client deposits (2016: GBP486.0
million increase) and a GBP16.6 million increase in the component of
treasury assets placed in term deposits for more than three months
(2016: GBP16.8 million decrease).
Offsetting this, cash flows included a net outflow of GBP4.0 million
from the purchase of longer dated certificates of deposit (2016: GBP7.0
million net inflow from the maturity of longer dated certificates of
deposit), which is shown within investing activities in the consolidated
statement of cash flows.
The most significant non-operating cash flows during the year were as
follows.
- outflows relating to the payment of dividends of GBP29.4 million
(2016: GBP26.5 million)
- outflows relating to payments to acquire intangible assets (other than
as part of a business combination) of GBP11.9 million (2016: GBP14.0
million)
- GBP4.2 million of capital expenditure on property, plant and equipment
(2016: GBP12.2 million).
Risk management
During 2017, we have continued to evolve our risk management approach in
support of our 'three lines of defence' model. Our risk governance,
risk processes and risk infrastructure have continued to mature to
ensure our management of risk considers existing and emerging
challenges. In 2018, we will maintain our approach and ensure that
appropriate risk management is applied across the group to protect our
stakeholders.
Risk culture
We believe that an appropriate risk culture enhances the effectiveness
of risk management. The board is responsible for setting the right tone
and, through our senior management team, encouraging characteristics and
behaviours which support a strong risk culture. The consideration of
risk is therefore accepted as being part of everyone's day-to-day
responsibilities and activities. Risk management is linked to
performance and development, as well as to the group's remuneration and
reward schemes. The purpose of this is to create an open and transparent
working environment, encouraging employees to engage positively in risk
management and support the effective achievement of our strategic
objectives.
Three lines of defence
We continue to apply a 'three lines of defence' model to support our
risk management framework, with responsibility and accountability for
risk management broken down as follows:
First line: Senior management and operational business units are
responsible for managing risks, by developing and maintaining effective
internal controls to mitigate risk.
Second line: The risk, compliance and anti-money laundering functions
maintain a level of independence from the first line. They are
responsible for providing oversight and challenge of the first line's
day-to-day management, monitoring and reporting of risks to both senior
management and governing bodies.
Third line: The internal audit function is responsible for providing
independent assurance to both senior management and governing bodies as
to the effectiveness of the group's governance, risk management and
internal controls.
Risk appetite
We define risk appetite as both the amount and type of risk the group is
prepared to accept or retain in pursuit of our strategy. Our appetite is
subject to regular review to ensure it remains aligned to our strategic
goals. Our risk appetite framework contains some overarching parameters,
alongside specific primary and secondary measures for each principal
risk. At least annually, the board, executive committee and group risk
committee will formally review and approve the group's risk appetite
statement and assess whether the firm has operated in accordance with
the stated risk appetite measures during the year. Notwithstanding the
continued expectations for business growth, along with a strategic and
regulatory change programme for 2018, the board remains committed to
having a relatively low overall appetite for risk, ensuring that our
internal controls mitigate risk to appropriate levels. The board
recognises that the business is susceptible to fluctuations in
investment markets and has the potential to bear losses from financial
and operational risks from time to time, either as reductions in income
or increases in operating costs.
Identification and profiling of principal risks
Our risks are classified using a hierarchical approach. The highest
level (Level 1) comprises financial, conduct and operational risks. The
next level (Level 2) contains 16 risk categories, each allocated to a
Level 1 risk. Detailed risks (Level 3) are then identified as sub-sets
of Level 2 risks. Level 3 risks are captured and maintained within our
group risk register, which is the principal tool for monitoring risks.
We recognise that some Level 2 and Level 3 risks have features which
need to be considered under more than one Level 1 risk, and this is
facilitated in our framework through a system of primary and secondary
considerations. Our risk classification is regularly reviewed and takes
a structured approach to the identification of all known material risks
to the business and those emerging risks which may impact future
performance.
Our risk exposures and overall risk profile are reviewed and monitored
regularly, considering the potential impact, existing internal controls
and management actions required to mitigate the impact of emerging
issues and likelihood of future events. To ensure we identify and manage
our principal risks, reviews take place with risk owners, senior
management and business units across the group. The risk function
conducts these reviews and risk workshops regularly during the year.
A watch list is maintained to record any current, emerging or future
issues, threats, business developments and regulatory or legislative
change, which will or could have the potential to impact the firm's
current or future risk profile and therefore may require active risk
management, usually through process changes or systems development. The
group's risk profile, risk register and watch list are regularly
reviewed by the executive committee, senior management, board and group
risk committee.
We assess risks using a 1-4 scoring system. Each Level 3 risk is rated
by assessing the inherent likelihood of its occurrence in a five-year
period and the associated impact. A residual risk score and overall risk
rating of high, medium, low or very low is then derived for the
five-year period by taking into account an assessment of the internal
control environment or insurance mitigation. The assessment of our
control environment, carried out by senior management within the firm,
includes contributions from first, second and third line data,
monitoring and/or assurance activity.
Risk assessment process
The board and senior management are actively involved in a continuous
risk assessment process as part of our risk management framework,
supported by the annual Internal Capital Adequacy Assessment Process
(ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP) work,
which assesses the principal risks facing the group.
Stress tests include consideration of the impact of a number of severe
but plausible events that could impact the business. The work also takes
account of the availability and likely effectiveness of mitigating
actions that could be taken to avoid or reduce the impact or occurrence
of the underlying risks.
Day to day, our risk assessment process considers both the impact and
likelihood of risk events which could materialise, affecting the
delivery of strategic goals and annual business plans. A top-down and
bottom-up approach ensures that our assessment of key risks is
challenged and reviewed on a regular basis. The board and executive
committee receive regular reports and information from senior management,
operational business units, risk oversight functions and specific risk
committees.
The executive committee, group risk committee and other key risk-focused
committees consider the risk assessments and provide challenge, which is
reported through the governance framework and ultimately considered by
the board.
Profile and mitigation of principal risks
As explained above, our risks are classified hierarchically in a
three-level model. There are three Level 1 risks, 16 Level 2 risks and
at Level 3 there are 44 risks, which form the basis of the group's risk
register.
Our approach to managing risk continues to be underpinned by an
understanding of our current risk exposures and consideration of how
risks change over time.
The underlying risk profile and ratings for the majority of Level 2
risks have remained consistent during 2017. However, there have been
some changes to risk ratings and the following table summarises the most
important.
Based upon the risk assessment processes identified above, the board
believes that the principal risks and uncertainties facing the group
have been identified. These reflect the impact of strategic and
regulatory change in the year including, for example MiFID II and the
General Data Protection Regulation. The board remains vigilant to the
risks associated with the pension schemes' deficit and the sub-letting
of vacant office space in London. Otherwise, the board continues to
believe that the other key risks to the business are operational risks
that arise from growth and regulatory risks that may arise from
continual changes to rules and standards in our sector.
Our overall risk profile and control environment are described below.
The board receives assurance from first line senior management that the
systems of internal control are operating effectively and from the
activities of the second line and third line that there are no material
control issues which would affect the board's view of its principal
risks and uncertainties.
In line with current guidance, we also include in the tables the
potential impacts (I) the firm might face and our assessment of the
likelihood (L) of each principal risk crystallising in the event it
materialises. These assessments take into account the controls in place
to mitigate the risks. However, as is always the case, should a risk
materialise, a range of outcomes (both in scale and type) might be
experienced. This is particularly relevant for firms such as Rathbones
where the outcome of a risk event can be influenced by market conditions
as well as internal control factors.
We have used ratings of high, medium and low in this risk assessment. We
perceive as high-risk items those which have the potential to impact the
delivery of strategic objectives, with medium- and low-rated items
having proportionately less impact on the firm. Likelihood is similarly
based on a qualitative assessment.
Emerging risks and threats
Emerging risks, including legislative and regulatory change, have the
potential to impact the group and its strategy. These risk factors are
monitored through our watch list. During the year, the executive
committee continued to recognise a number of emerging risks and threats
to the financial services sector as a whole and to our business. We also
recognise that the risk profile associated with outsourced activities
can change over time and this will be an area of continued focus in
2018.
In addition to the group's view that we can reasonably expect current
market conditions and uncertainties to remain throughout 2018, other
developing risks include, for example, cyber threats, regulatory change
and scenarios potentially arising from geopolitical developments,
including Brexit.
We are monitoring the potential consequences of Brexit very closely.
Our current assessment is that the direct impacts of Brexit are
manageable given our largely UK based business model. However, we are
conscious that the position might change and could raise unexpected
challenges and also that second order effects might have broader impacts
on the UK economy as a whole.
Ref Risk Description of change Risk change
in 2017
D Pension The schemes' valuation and funding deficit decreased
materially due to the closure of the schemes during
the year with a significant number of members transferring
benefits out of the schemes. However, this still remains
an important risk for the firm to manage.
F Performance Our forward-looking risk assessment increased during
and advice the year, largely reflecting regulatory drivers. In
addition to changes delivered in 2017, we plan to
improve our processes further in 2018 including how
we take on clients and our approach to assessing suitability.
G Regulatory Our risk assessment recognises the extent of regulatory
change implemented in 2017, which continues into 2018,
including, for example, MiFID II optimisation and
the General Data Protection Regulation.
K Data We have increased our risk rating in this area based
Integrity on our assessment of the increasing external threat
and profile, despite continuing investment in technology
Security improvements.
O People Although still regarded as a 'medium' risk, our forward-looking
risk assessment increased during the year, reflecting
industry-wide trends. We also recognise the importance
of addressing the drivers behind our gender pay gap
over the coming years.
Financial risks
Residual
rating
Ref Level 2 risk I L How the risk arises Control environment
A Credit The risk that one or more counterparties fail Low Low This risk can arise from placing funds with other - Banking committee oversight
to fulfil contractual obligations, including stock banks and holding interest-bearing securities. There - Counterparty limits and credit reviews
settlement is also a limited level of lending to clients - Treasury policy and procedures
- Active monitoring of exposures
- Client loan policy and procedures
- Annual Internal Capital Adequacy Assessment Process
B Liquidity The risk of having insufficient financial Low Low This risk can arise through day-to-day operations - Banking committee oversight
resources to meet obligations as they fall due, or in so far as a significant proportion of client funds - Daily treasury procedures, reconciliations and reporting
that to secure access to such resources would be at could be withdrawn in a short time period and marketable to senior management
an excessive cost assets may not be realised in time and at the value - Cash flow forecasting
required - Contingency funding plan
- Annual Internal Liquidity Adequacy Assessment Process
(including stress testing)
C Market The risk that regulatory own funds will be Low Low This risk can arise through two primary areas: the - Banking committee oversight
adversely affected by changes in the level or volatility exposure to mismatch between repricing of the firm's - Documented policies and procedures
of interest rates, foreign currency exchange rates own financial assets and liabilities and, to a lesser - Daily monitoring of interest rates, exchange rates,
or market prices extent, transactional foreign exchange risk maturity mismatch and extent of marketable assets
- Robust application of policy and investment limits
D Pension The risk that the cost of funding our defined High High This risk can arise through a sustained deficit between - Board, senior management and trustee oversight
benefit pension schemes increases, or their valuation the schemes' assets and liabilities. A number of factors - Monthly valuation estimates
affects dividends, reserves and capital impact a deficit including increased life expectancy, - Triennial independent actuarial valuations
falling interest rates and falling equity prices - Investment policy
- Senior management review and defined management
actions
- Annual Internal Capital Adequacy Assessment Process
- Actions taken in October 2016 towards mitigating
this exposure
Conduct risks
Residual
rating
Ref Level 2 risk I L How the risk arises Control environment
E Business model The risk that the business model does Med Med This risk can arise from strategic decisions which - Board and executive oversight
not respond in an optimal manner to changing market fail to consider the current operating environment, - A documented strategy
conditions such that sustainable growth, market share or can be influenced by external factors such as material - Annual business targets, subject to regular review
or profitability is adversely affected changes in regulation or legislation within the financial and challenge
services sector - Regular reviews of pricing structure
- Continued investment in the investment process,
service standards and marketing
- Trade body participation
- Regular competitor benchmarking and analysis
F Performance and advice The risk that clients receive Med Med This risk can arise through a failure to appropriately - Investment governance and structured committee oversight
inappropriate financial, trust or investment advice, understand the wealth management needs of our clients - Management oversight and segregated quality assurance
inadequate documentation or unsuitable portfolios, and a failure to apply suitable advice or investment and performance teams
resulting in a failure to meet clients' investment strategies, along with having inadequate tools and - Performance measurement and attribution analysis
and/or other objectives or expectations systems in place to support our client-facing financial - Know your client suitability processes
professionals - Weekly investment management meetings
- Investment manager reviews through supervisor sampling
- Compliance monitoring
G Regulatory The risk of failure by the group or a subsidiary High Med This risk can arise from failures by the business - Board and executive oversight
to fulfil regulatory requirements and comply with to comply with existing regulation or failure to identify - Active involvement with industry bodies
the introduction of new, or changes to existing regulation and react to regulatory change - Compliance monitoring programme to examine the control
of key regulatory risks
- Separate anti-money laundering role with specific
responsibility
- Oversight of industry and regulatory developments
- Documented policies and procedures
- Staff training and development
H Reputational Med Low This risk can arise due to a variety of reasons, primarily - Staff training and development
The risk of reputational damage from financial and within Rathbones. These could include the conduct - Board and executive oversight
non-financial events or from failing to meet stakeholders' of the company or its employees, or the service or - Strong corporate values and approach to governance
expectations products provided to clients - Positive culture regarding risk and regulation,
supported by appropriate remuneration practices
- Appropriate emphasis on the control environment
through the 'three lines of defence'
- Proactive and positive communications with key stakeholders
- Crisis response plan
- Monitoring of company performance relative to competitors
Operational risks
Residual
rating
Ref Level 2 risk I L How the risk arises Control environment
I Business change The risk that the planning or implementation Med Low This risk can arise if the business is too aggressive - Executive and board oversight of material change
of change is ineffective or fails to deliver desired and unstructured in its change programme to manage programmes
outcomes, the impact of which may lead to unmitigated project risks, resource capacity and capabilities - Group programme board
financial exposures to deliver business benefits. The firm also recognises - Dedicated project office function, use of internal
the risks associated with its office move in London, and, where required, external subject matter experts
which will lead to the sub-letting of some premises - Documented business plans and IT strategy
- Two-stage assessment, challenge and approval of
project plans
- Documented project and change procedures
- Active marketing of vacant space
J Business continuity The risk that an internal or external Med Low This risk can arise from the business failing to effectively - Group business continuity committee oversight
event results in either failure of, or detriment to, control and administer its core operating systems, - Documented crisis/incident management and disaster
core business processes or services manage current and future resource requirements or recovery plans
maintain appropriate security of its infrastructure - Regular disaster recovery testing
- Continuous monitoring of IT systems availability
- Off-site data centre
K Data integrity and security The risk of a lack of Med Med This risk can arise from the firm failing to maintain - Data security committee oversight
integrity of, inappropriate access to or disclosure and keep secure at all times sensitive and confidential - Data protection policy and procedures
of client or company-sensitive information data through its operating infrastructure, including - System access controls and encryption
the activities of employees and cyber threats - Penetration testing and multi-layer network security
- Training and employee awareness programmes
- Physical security
L Fraud The risk of fraudulent action, either internal Med Low This risk can arise from failures to implement appropriate - Executive oversight
or external, being taken against the group or a subsidiary management controls to detect or mitigate impropriety, - Documented policies and procedures
either within or external to the business and services - Segregation of duties between front and back office
provided - System authority and payment limits
- System access controls
- Training and employee awareness programmes
M Legal The risk of legal action being taken against Med Low This risk can arise from inappropriate behaviour of - Executive oversight
the group or a subsidiary or failure to comply with individuals or from the inadequate drafting of the - Retained specialist legal advisers
legislative requirements, resulting in financial loss firm's contractual documentation - Routine control of risks which might lead to litigation
and reputational damage if adverse outcomes are experienced by clients or
other third parties
- Documented policies and procedures
- Training and employee awareness programmes
Residual
rating
Ref Level 2 risk I L How the risk arises Control environment
N Outsourcing The risk of one or more third parties Med Low This risk can arise due to significant unknown operational - Executive oversight
failing to provide or perform outsourced services changes at key outsourced relationships, or a material - Supplier due diligence and regular financial reviews
to standards expected by the group, impacting the change to their business model, which affects their - Active relationship management, including regular
ability to deliver core services ability to provide the required services for Rathbones service review meetings
- Service level agreements and monitoring of key performance
indicators
- Compliance monitoring over regulated activities
O People The risk of loss of key staff, lack of skilled Med Med This risk can arise across all areas of the business - Executive oversight
resources and inappropriate behaviour or actions. as a result of resource management failures or from - Succession and contingency planning
This could lead to lack of capacity or capability external factors such as increased competition or - Transparent, consistent and competitive remuneration
threatening the delivery of business objectives, or material changes in regulation schemes
behaviour leading to complaints, regulatory action - Contractual clauses with restrictive covenants
or litigation - Continual investment in staff training and development
- Employee engagement survey
- Appropriate balanced performance measurement system
P Processing The risk that the design or execution of Low Med This risk can arise from the failure of management - Authorisation limits and management oversight
client/financial/settlement transaction processes to implement and control operational processes and - Dealing limits and supporting system controls
(including dealing activity) are inadequate or fail systems to support the volumes of transactions processed - Active investment in automated processes
to deliver an appropriate level of service and protection on a daily basis - Counter-review/'four-eyes' processes
to client or company assets - Segregation of duties
- Document procedures
- Annual controls assessment (ISAE3402 report)
Assessment of the company's prospects
The board prepares or reviews its strategic plan annually, completing
the ICAAP and ILAAP work which form the basis for capital planning and
regular discussion with the Prudential Regulation Authority (PRA).
During the year, the board has considered a number of stress tests and
scenarios which focus on material or severe but plausible events that
could impact the business and company's financial position. The board
also considers the plans and procedures in place in the event that
contingency funding is required to replenish regulatory capital. On a
monthly basis, critical capital projections and sensitivities have been
refreshed and reviewed taking into account current or expected market
movements and business developments.
The board's assessment considers all the principal risks identified by
the group and assesses the sufficiency of our response to all Pillar 1
risks (credit, market and operational risks) to the required regulatory
standards. In addition, the following risks were focused on for enhanced
stress testing: equity market risk, interest rate risk, a loss of
business/competition risk, business expansion risk and pension
obligation risk.
The group considers the possible impacts of serious business
interruption as part of its operational risk assessment process and
remains mindful of the importance of maintaining its reputation.
Although the business is almost wholly UK-situated, it does not suffer
from any material client, geographical or counterparty concentrations.
Whilst this review does not consider all of the risks that the group may
face, the directors consider that this stress testing-based assessment
of the group's prospects is reasonable in the circumstances of the
inherent uncertainty involved.
Viability statement
In accordance with the UK Corporate Governance Code, the board has
assessed the prospects and viability of the group over a three-year
period taking into account the risk assessments (which are based upon a
five-year period as detailed above). The directors have taken into
account the firm's current position and the potential impact of the
principal risks and uncertainties set out above. As part of the
viability statement, the directors confirm that they have carried out a
robust assessment of both the principal risks facing the group and
stress tests and scenarios that would threaten the sustainability of its
business model, future performance, solvency or liquidity.
The board considers five-year projections as part of its annual
regulatory reporting cycle, which includes strategic and investment
plans and its opinion of the likelihood of risks materialising. However,
the given the uncertainties associated with predicting the future impact
of investment markets on the business over this longer period, the
directors have determined that a three-year period to 31 December 2020
continues to constitute an appropriate period over which to provide its
viability statement. This is more aligned to its detailed capital
planning activity.
Stress testing analysis shows that under scenarios such as a 45% fall in
FTSE 100 levels or a 0% interest rate environment, the group remains
profitable and is able to withstand the impact of such scenarios. An
example of a mitigating action in such scenarios would be a reduction in
dividend.
Based on this assessment, the directors confirm that they have a
reasonable expectation that the company will be able to continue in
operation and meet its liabilities as they fall due over the period to
31 December 2020.
Going concern
Details of the group's business activities, results, cash flows and
resources, together with the risks it faces and other factors likely to
affect its future development, performance and position are set out in
the chairman's statement, chief executive's review, strategic report and
group risk committee report.
Group companies are regulated by the PRA and FCA and perform annual
capital adequacy assessments, which include the modelling of certain
extreme stress scenarios. The company publishes Pillar 3 disclosures
annually on its website, which provide detail about its regulatory
capital resources and requirements. In July 2015, Rathbone Investment
Management issued GBP20 million of 10- year subordinated loan notes to
finance future growth. The group has no other external borrowings.
In 2017, the group has continued to generate organic growth in client
funds under management and this is expected to continue. The directors
believe that the company is well -placed to manage its business risks
successfully despite the continuing uncertain economic and political
outlook. As the directors have a reasonable expectation that the company
has adequate resources to continue in operational existence for the
foreseeable future, they continue to adopt the going concern basis of
accounting in preparing the annual financial statements.
Consolidated statement of comprehensive income
for the year ended 31 December 2017
2017 2016
Note GBP'000 GBP'000
Interest and similar income 13,501 13,890
Interest expense and similar charges (1,907) (2,319)
Net interest income 11,594 11,571
Fee and commission income 292,034 253,192
Fee and commission expense (22,715) (17,936)
Net fee and commission income 269,319 235,256
Net trading income 3,071 3,103
Gain on plan amendment of defined benefit pension
schemes 5,523 -
Other operating income 2,065 1,353
Operating income 291,572 251,283
Charges in relation to client relationships and
goodwill (11,716) (11,735)
Acquisition-related costs (6,178) (5,985)
Head office relocation costs (16,248) (7,031)
Other operating expenses (198,529) (176,403)
Operating expenses (232,671) (201,154)
Profit before tax 58,901 50,129
Taxation 4 (12,072) (11,972)
Profit after tax 46,829 38,157
Profit for the year attributable to equity holders
of the company 46,829 38,157
Other comprehensive income:
Items that will not be reclassified to profit or loss
Net remeasurement of defined benefit liability 17,288 (37,318)
Deferred tax relating to net remeasurement of defined
benefit liability (2,939) 5,936
Items that may be reclassified to profit or loss
Revaluation of available for sale investment
securities:
- net gain from changes in fair value 163 93
- net profit on disposal transferred to profit or
loss during the year (43) -
120 93
Deferred tax relating to revaluation of available
for sale investment securities (20) (14)
Other comprehensive income net of tax 14,449 (31,303)
Total comprehensive income for the year net of tax
attributable to equity holders of the company 61,278 6,854
Dividends paid and proposed for the year per ordinary
share 5 61.0p 57.0p
Dividends paid and proposed for the year 30,429 28,267
Earnings per share for the year attributable to equity
holders of the company: 7
- basic 92.7p 78.9p
- diluted 91.9p 78.2p
Consolidated statement of changes in equity
for the year ended 31 December 2017
Share capital Share premium Merger reserve Available for sale reserve Own shares Retained earnings Total equity
SHY GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2016 2,407 97,643 31,835 71 (6,177) 174,413 300,192
Profit for the year 38,157 38,157
Net remeasurement of defined benefit liability (37,318) (37,318)
Net gain on revaluation of available for sale investment
securities 93 93
Deferred tax relating to components of other comprehensive
income (14) 5,936 5,922
Other comprehensive income net of tax - - - 79 - (31,382) (31,303)
Dividends paid (26,479) (26,479)
Issue of share capital 128 42,003 42,131
Share-based payments:
- value of employee services 3,035 3,035
- cost of own shares acquired (1,585) (1,585)
- cost of own shares vesting 1,084 (1,084) -
- own shares sold 345 435 780
- tax on share-based payments (115) (115)
At 1 January 2017 2,535 139,991 31,835 150 (6,243) 156,545 324,813
Profit for the year 46,829 46,829
Net remeasurement of defined benefit liability 17,288 17,288
Revaluation of available for sale investment securities:
- net gain from changes in fair value 163 163
- net profit on disposal transferred to profit or
loss during the year (43) (43)
Deferred tax relating to components of other comprehensive
income (20) (2,939) (2,959)
Other comprehensive income net of tax - - - 100 - 14,349 14,449
Dividends paid (29,420) (29,420)
Issue of share capital 31 3,098 3,129
Share-based payments:
- value of employee services 3,591 3,591
- cost of own shares acquired (441) (441)
- cost of own shares vesting 1,820 (1,820) -
- tax on share-based payments 328 328
At 31 December 2017 2,566 143,089 31,835 250 (4,864) 190,402 363,278
Consolidated balance sheet
As at 31 December 2017
2017 2016
GBP'000 GBP'000
Assets
Cash and balances with central banks 1,375,382 1,075,673
Settlement balances 46,784 37,787
Loans and advances to banks 117,253 114,088
Loans and advances to customers 126,213 110,951
Investment securities:
- available for sale 109,312 105,421
- held to maturity 701,966 700,000
Prepayments, accrued income and other assets 74,445 65,710
Property, plant and equipment 16,457 16,590
Net deferred tax asset 9,061 10,601
Intangible assets 161,977 167,192
Total assets 2,738,850 2,404,013
Liabilities
Deposits by banks 1,338 294
Settlement balances 54,452 39,289
Due to customers 2,170,498 1,888,895
Accruals, deferred income, provisions and other
liabilities 108,391 85,154
Current tax liabilities 5,598 6,523
Subordinated loan notes 19,695 19,590
Retirement benefit obligations 15,600 39,455
Total liabilities 2,375,572 2,079,200
Equity
Share capital 2,566 2,535
Share premium 143,089 139,991
Merger reserve 31,835 31,835
Available for sale reserve 250 150
Own shares (4,864) (6,243)
Retained earnings 190,402 156,545
Total equity 363,278 324,813
Total liabilities and equity 2,738,850 2,404,013
Consolidated statement of cash flows
for the year ended 31 December 2017
2017 2016
Note GBP'000 GBP'000
Cash flows from operating activities
Profit before tax 58,901 50,129
Net profit on disposal of available for sale investment
securities (43) -
Net interest income (11,594) (11,571)
Net impairment charges on impaired loans and advances 1 9
Net charge for provisions 16,728 1,355
Profit on disposal of property, plant and equipment - (16)
Depreciation, amortisation and impairment 19,415 20,716
Foreign exchange movements 1,480 -
Defined benefit pension scheme charges (2,948) 3,058
Defined benefit pension contributions paid (3,619) (5,422)
Share-based payment charges 3,871 5,201
Interest paid (1,663) (2,308)
Interest received 13,084 14,085
93,613 75,236
Changes in operating assets and liabilities:
- net (increase)/decrease in loans and advances to
banks and customers (16,643) 16,785
- net increase in settlement balance debtors (8,997) (19,839)
- net increase in prepayments, accrued income and
other assets (8,318) (6,392)
- net increase in amounts due to customers and deposits
by banks 282,647 486,000
- net increase in settlement balance creditors 15,163 17,808
- net increase in accruals, deferred income, provisions
and other liabilities 8,146 9,762
Cash generated from operations 365,611 579,360
Tax paid (14,087) (12,025)
Net cash inflow from operating activities 351,524 567,335
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired - (2,532)
Purchase of property, plant, equipment and intangible
assets (16,123) (26,137)
Proceeds from sale of property, plant and equipment - 16
Purchase of investment securities (746,566) (905,701)
Proceeds from sale and redemption of investment
securities 742,581 912,745
Net cash used in investing activities (20,108) (21,609)
Cash flows from financing activities
Issue of ordinary shares 2,688 40,199
Dividends paid 5 (29,420) (26,479)
Net cash (used in)/generated from financing activities (26,732) 13,720
Net increase in cash and cash equivalents 304,684 559,446
Cash and cash equivalents at the beginning of the
year 1,263,074 703,628
Cash and cash equivalents at the end of the year 9 1,567,758 1,263,074
Notes to the preliminary announcement
1 Accounting policies
In preparing the financial information included in this statement the
group has applied accounting policies which are in accordance with
International Financial Reporting Standards as adopted by the EU at 31
December 2017. The accounting policies have been applied consistently to
all periods presented in this statement, except as detailed below.
Rathbone Brothers Plc ('the company') is a public company incorporated
and domiciled in England and Wales under the Companies Act 2006.
Developments in reporting standards and interpretations
Standards and interpretations affecting the reported results or the
financial position
In the current year, the group has adopted the amendments to IAS 7
'Statement of Cash Flows', which improves disclosures on net debt in
these financial statements. The group now provides a reconciliation
between the opening and closing balances for liabilities arising from
financial activities.
No other standards or interpretations, new or revised, have been adopted
that have had a significant impact on the amounts reported in the
financial statements.
Standards not affecting the reported results or the financial position
The following new and revised standards and interpretations have been
adopted in the current year. Their adoption has not had any significant
impact on the amounts reported in these financial statements but may
impact the accounting for future transactions and arrangements:
- Recognition of Deferred Tax Assets for Unrealised Losses (Amendments
to IAS 12)
Future new standards and interpretations
A number of new standards and amendments to standards and
interpretations will be effective for future annual periods beginning
after 1 January 2017 and, therefore, have not been applied in preparing
these consolidated financial statements. The effects of IFRS 9
'Financial Instruments', IFRS 15 'Revenue from Contracts with Customers'
and IFRS 16 'Leases' on the consolidated financial statements of the
group are discussed below.
IFRS 9 'Financial Instruments'
IFRS 9 is effective for periods commencing on or after 1 January 2018.
The standard was endorsed by the EU during 2016. The group has not
adopted this standard early.
IFRS 9 governs the accounting treatment for the classification and
measurement of financial instruments and the timing and extent of credit
provisioning. The standard replaces IAS 39.
Estimated impact of adoption of IFRS 9
The group has assessed the estimated impact that the initial application
of IFRS 9 will have on its consolidated financial statements, based on
the profile of its financial instruments as at the balance sheet date.
From the work completed to date, the group estimates that adoption of
IFRS 9 will not result in any material adjustments to opening equity, or
the carrying amount of financial assets and liabilities recognised on
the balance sheet.
Additional expected credit loss provisions recognised under IFRS 9 are
expected to be immaterial, reflecting the high credit quality of
instruments in the treasury book, the high level of security held
against the Investment Management loan book and relatively low value of
trade receivables.
IFRS 15 ' Revenue from Contracts with Customers'
IFRS 15 is effective for periods commencing on or after 1 January 2018
and replaces existing revenue recognition guidance, in particular under
IAS 18. The standard was endorsed by the EU during 2016. The group has
not adopted this standard early.
IFRS 15 changes how and when revenue is recognised from contracts with
customers and the treatment of the costs of obtaining a contract with a
customer. The standard requires that the recognition of revenue is
linked to the fulfilment of identified performance obligations that are
enshrined in the customer contract. It also requires that the
incremental cost of obtaining a customer contract should be capitalised
if that cost is expected to be recovered.
Estimated impact of adoption of IFRS 15
The group has assessed its current policy for accounting for payments to
newly recruited investment managers (see note 2.1) and expects to remove
the 12 month limit on capitalisation of payments under the new standard.
The policy will be unchanged in all other respects.
From the work completed to date, the group estimates that it will
recognise a pre-tax adjustment of approximately GBP8 million to opening
equity, with a corresponding adjustment to client relationship
intangibles, in respect of the additional capitalisation of payments
made to investment managers.
IFRS 16 ' Leases'
IFRS 16 is effective for periods commencing on or after 1 January 2019.
The standard was endorsed by the EU during 2017. The group has not
adopted this standard early.
IFRS 16 eliminates the classification of leases as either operating
leases or finance leases. The group will be required to recognise all
leases with a term of more than 12 months as a right-of-use lease asset
on its balance sheet; the group will also recognise a financial
liability representing its obligation to make future lease payments.
Potential impact
The group has conducted an initial quantification of the impact of
adopting the standard, based on its existing lease contracts.
The group's total assets and total liabilities will be increased by the
recognition of lease assets and liabilities. The lease assets will be
depreciated over the shorter of the expected life of the asset and the
lease term. The lease liability will be reduced by lease payments,
offset by the unwinding of the liability over the lease term.
The most significant impact is in respect of its London head office
premises. As at 31 December 2017, the group's future minimum lease
payments under non-cancellable operating leases amounted to
GBP90,602,000, on an undiscounted basis, of which GBP75,946,000 relates
to its 8 Finsbury Circus office.
On the group's statement of comprehensive income, the profile of lease
costs will be front-loaded, at least individually, as the interest
charge is higher in the early years of a lease term as the discount rate
unwinds. The total cost of the lease over the lease term is expected to
be unchanged.
In addition to the above impacts, recognition of lease assets will
increase the group's regulatory capital requirement.
Lessor accounting
The group is not required to make any adjustments for leases in which it
is a lessor except where it is an intermediate lessor in a sub-lease.
The work to quantify the impact of being an intermediate lessor remains
ongoing.
2 Critical accounting judgements and key sources of estimation and
uncertainty
The group makes estimates and assumptions that affect the reported
amounts of assets and liabilities within the next financial year.
Estimates and judgements are continually evaluated and are based on
historical experience and other factors, including expectations of
future events that are believed to be reasonable under the
circumstances.
2.1 Client relationship intangibles
Client relationship intangibles purchased through corporate transactions
When the group purchases client relationships through transactions with
other corporate entities, a judgement is made as to whether the
transaction should be accounted for as a business combination or as a
separate purchase of intangible assets. In making this judgement, the
group assesses the assets, liabilities, operations and processes that
were the subject of the transaction against the definition of a business
in IFRS 3. In particular, consideration is given to the scale of the
operations subject to the transaction, whether ownership of a corporate
entity has been acquired and to whom any amounts payable under the
transaction are payable, among other factors.
Payments to newly recruited investment managers
The group assesses whether payments made to newly recruited investment
managers under contractual agreements represent payments for the
acquisition of client relationship intangibles or remuneration for
ongoing services provided to the group. If the payments are judged to be
reliably measurable, capable of being sold separately and have a high
probability of recoverability, they are capitalised as client
relationship intangibles; otherwise, they are judged to be in relation
to the provision of ongoing services and are expensed in the period in
which they are incurred. Upfront payments made to investment managers
upon joining are expensed as they are not judged to be incremental costs
for acquiring the client relationships.
The group determines a suitable period during which awards accruing to
new investment managers are capitalised. Typically, this will be for the
period ending up to 12 months after the cessation of any non-compete
period. After the defined period has elapsed, any payments made are
charged to profit or loss.
During the year the group capitalised GBP2,743,000 of payments made to
investment managers and expensed GBP5,094,000 (2016: GBP7,926,000
capitalised and GBP4,005,000 expensed). A reduction in the
capitalisation period by one month would decrease client relationship
intangibles by GBP281,000 and decrease profit before tax for the year by
GBP281,000 (2016: GBP617,000 and GBP617,000 respectively).
Amortisation of client relationship intangibles
The group makes estimates as to the expected duration of client
relationships to determine the period over which related intangible
assets are amortised. The amortisation period is estimated with
reference to historical data on account closure rates and expectations
for the future. During the year client relationship intangible assets
were amortised over a 10 to 15 year period. Amortisation of
GBP11,433,000 (2016: GBP11,594,000) was charged during the year. A
reduction in the average amortisation period of one year would increase
the amortisation charge by approximately GBP1,076,000 (2016:
GBP1,100,000). At 31 December 2017, the carrying value of client
relationship intangibles was GBP88,511,000 (2016: GBP97,201,000).
2.2 Retirement benefit obligations
The group makes estimates about a range of long term trends and market
conditions to determine the value of the surplus or deficit on its
retirement benefit schemes, based on the group's expectations of the
future and advice taken from qualified actuaries. Long term forecasts
and estimates are necessarily highly judgemental and subject to risk
that actual events may be significantly different to those forecast. If
actual events deviate from the assumptions made by the group then the
reported surplus or deficit in respect of retirement benefit obligations
may be materially different.
2.3 Head office relocation
During the year, the group moved its head office to 8 Finsbury Circus,
vacating 1 Curzon Street but retaining lease commitments until September
2023. This triggered recognition of a provision for the net cost of the
surplus property at 1 Curzon Street until the end of the existing
leases.
The value of the onerous lease provision is dependent on assumptions
about the amount and timing of the cashflows to be received under any
sublet agreement or assignment of the leases.
During the year, the group recognised an onerous lease provision,
including the effect of discounting, of GBP16,265,000 (2016: GBPnil). At
31 December 2017, the outstanding provision stood at GBP11,478,000.
Allowing for alternative assumptions about the duration of any void
period, any rent-free periods offered and any discount on the passing
rent, the onerous lease provision at 31 December 2017 could reasonably
fall within the range of GBP7,600,000 to GBP15,100,000.
3 Segmental information
For management purposes, the group is organised into two operating
divisions: Investment Management and Unit Trusts. Centrally incurred
indirect expenses are allocated to these operating segments on the basis
of the cost drivers that generate the expenditure; principally the
headcount of staff directly involved in providing those services from
which the segment earns revenues, the value of funds under management
and the segment's total revenue. The allocation of these costs is shown
in a separate column in the table below, alongside the information
presented for internal reporting to the group executive committee, which
is the group's chief operating decision maker.
Investment Management Unit Trusts Indirect expenses Total
31 December 2017 GBP'000 GBP'000 GBP'000 GBP'000
Net investment management fee income 189,465 28,020 - 217,485
Net commission income 38,729 - - 38,729
Net interest income 11,594 - - 11,594
Fees from advisory services and other income 14,831 3,410 - 18,241
Underlying operating income 254,619 31,430 - 286,049
Staff costs - fixed (59,457) (3,040) (25,294) (87,791)
Staff costs - variable (40,240) (7,246) (5,843) (53,329)
Total staff costs (99,697) (10,286) (31,137) (141,120)
Other direct expenses (21,893) (4,415) (31,101) (57,409)
Allocation of indirect expenses (56,188) (6,050) 62,238 -
Underlying operating expenses (177,778) (20,751) - (198,529)
Underlying profit before tax 76,841 10,679 - 87,520
Charges in relation to client relationships and
goodwill (11,716) - - (11,716)
Acquisition-related costs (1,273) - (4,905) (6,178)
Segment profit before tax 63,852 10,679 (4,905) 69,626
Gain on plan amendment of defined benefit pension
schemes 5,523
Head office relocation costs (16,248)
Profit before tax attributable to equity holders of
the company 58,901
Taxation (12,072)
Profit for the year attributable to equity holders
of the company 46,829
Investment Management Unit Trusts Total
GBP'000 GBP'000 GBP'000
Segment total assets 2,659,723 74,672 2,734,395
Unallocated assets 4,455
Total assets 2,738,850
Investment Management Unit Trusts Indirect expenses Total
31 December 2016 GBP'000 GBP'000 GBP'000 GBP'000
Net investment management fee income 163,268 21,532 - 184,800
Net commission income 38,904 - - 38,904
Net interest income 11,571 - - 11,571
Fees from advisory services and other income 12,578 3,430 - 16,008
Underlying operating income 226,321 24,962 - 251,283
Staff costs - fixed (57,613) (3,020) (19,123) (79,756)
Staff costs - variable (32,437) (5,333) (7,210) (44,980)
Total staff costs (90,050) (8,353) (26,333) (124,736)
Other direct expenses (22,882) (5,355) (23,430) (51,667)
Allocation of indirect expenses (47,184) (2,579) 49,763 -
Underlying operating expenses (160,116) (16,287) - (176,403)
Underlying profit before tax 66,205 8,675 - 74,880
Charges in relation to client relationships and
goodwill (11,735) - - (11,735)
Acquisition-related costs (5,985) - - (5,985)
Segment profit before tax 48,485 8,675 - 57,160
Head office relocation costs (7,031)
Profit before tax attributable to equity holders of
the company 50,129
Taxation (11,972)
Profit for the year attributable to equity holders
of the company 38,157
Investment Management Unit Trusts Total
GBP'000 GBP'000 GBP'000
Segment total assets 2,340,973 54,912 2,395,885
Unallocated assets 8,128
Total assets 2,404,013
The following table reconciles underlying operating income to operating
income:
2017 2016
GBP'000 GBP'000
Underlying operating income 286,049 251,283
Gain on plan amendment of defined benefit pension
schemes 5,523 -
Operating income 291,572 251,283
The following table reconciles underlying operating expenses to
operating expenses:
2017 2016
GBP'000 GBP'000
Underlying operating expenses 198,529 176,403
Charges in relation to client relationships and goodwill 11,716 11,735
Acquisition-related costs 6,178 5,985
Head office relocation costs 16,248 7,031
Operating expenses 232,671 201,154
Geographic analysis
The following table presents operating income analysed by the
geographical location of the group entity providing the service:
2017 2016
GBP'000 GBP'000
United Kingdom 280,892 241,882
Jersey 10,680 9,401
Operating income 291,572 251,283
The following is an analysis of the carrying amount of non-current
assets analysed by the geographical location of the assets:
2017 2016
GBP'000 GBP'000
United Kingdom 173,496 178,172
Jersey 4,938 5,610
Non-current assets 178,434 183,782
Major clients
The group is not reliant on any one client or group of connected clients
for generation of revenues.
4 Income tax expense
2017 2016
GBP'000 GBP'000
Current tax:
- charge for the year 13,466 12,366
- adjustments in respect of prior years (303) (177)
Deferred tax:
- credit for the year (1,034) (233)
- adjustments in respect of prior years (57) 16
12,072 11,972
The tax charge is calculated based on our best estimate of the amount
payable as at the balance sheet date. Any subsequent differences between
these estimates and the actual amounts paid are recorded as adjustments
in respect of prior years.
The tax charge on profit for the year is higher (2016: higher) than the
standard rate of corporation tax in the UK of 19.2% (2016: 20.0%). The
differences are explained below:
2017 2016
GBP'000 GBP'000
Tax on profit from ordinary activities at the standard
rate of 19.2% (2016: 20.0%) effects of: 11,338 10,026
- disallowable expenses 1,045 958
- share-based payments (79) (72)
- tax on overseas earnings (230) (183)
- adjustments in respect of prior year (360) (161)
- deferred payments to previous owners of acquired
companies 247 1,237
- other (28) 63
Effect of change in corporation tax rate on deferred
tax 139 104
12,072 11,972
5 Dividends
2017 2016
GBP'000 GBP'000
Amounts recognised as distributions to equity holders
in the year:
- final dividend for the year ended 31 December 2016
of 36.0p (2015: 34.0p) per share 18,236 16,336
- interim dividend for the year ended 31 December
2017 of 22.0p (2016: 21.0p) per share 11,184 10,143
Dividends paid in the year of 58.0p (2016: 55.0p)
per share 29,420 26,479
Proposed final dividend for the year ended 31 December
2017 of 39.0p (2016: 36.0p) per share 19,245 18,124
An interim dividend of 22.0p per share was paid on 3 October 2017 to
shareholders on the register at the close of business on 8 September
2017 (2016: 21.0p).
A final dividend declared of 39.0p per share (2016: 36.0p) is payable on
14 May 2018 to shareholders on the register at the close of business on
20 April 2018. The final dividend is subject to approval by shareholders
at the Annual General Meeting on 10 May 2018 and has not been included
as a liability in the financial statements.
6 Distributable reserves
Reserves of Rathbone Brothers Plc available for distribution as at 31
December were comprised as follows:
2017 2016
GBP'000 GBP'000
Net assets of Rathbone Brothers Plc 209,589 185,339
Less:
- share capital (2,566) (2,535)
- share premium (143,089) (139,991)
Distributable reserves of Rathbone Brothers Plc 63,934 42,813
7 Earnings per share
Earnings used to calculate earnings per share on the bases reported in
these financial statements were:
2017 2016
Pre-tax Taxation Post-tax Pre-tax Taxation Post-tax
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Underlying profit attributable to shareholders 87,520 (17,426) 70,094 74,880 (15,816) 59,064
Gain on plan amendment of defined benefit pension
schemes 5,523 (1,063) 4,460 - - -
Charges in relation to client relationships and
goodwill (11,716) 2,255 (9,461) (11,735) 2,347 (9,388)
Acquisition-related costs (6,178) 944 (5,234) (5,985) 91 (5,894)
Head office relocation costs (16,248) 3,218 (13,030) (7,031) 1,406 (5,625)
Profit attributable to shareholders 58,901 (12,072) 46,829 50,129 (11,972) 38,157
Basic earnings per share has been calculated by dividing profit
attributable to shareholders by the weighted average number of shares in
issue throughout the year, excluding own shares, of 50,493,984 (2016:
48,357,728 ).
Diluted earnings per share is the basic earnings per share, adjusted for
the effect of contingently issuable shares under the Executive Incentive
Plan, employee share options remaining capable of exercise and any
dilutive shares to be issued under the Share Incentive Plan, all
weighted for the relevant period:
2017 2016
Weighted average number of ordinary shares in issue
during the year - basic 50,493,984 48,357,728
Effect of ordinary share options/Save As You Earn 188,549 114,415
Effect of dilutive shares issuable under the Share
Incentive Plan 59,030 37,186
Effect of contingently issuable shares under the Executive
Incentive Plan 228,702 260,655
Diluted ordinary shares 50,970,265 48,769,984
2017 2016
Underlying earnings per share for the year attributable
to equity holders of the company:
- basic 138.8p 122.1p
- diluted 137.5p 121.1p
8 Related party transactions
Transactions with key management personnel
The remuneration of the key management personnel of the group, who are
defined as the company's directors and other members of senior
management who are responsible for planning, directing and controlling
the activities of the group, is set out below.
2017 2016
GBP'000 GBP'000
Short term employee benefits 10,951 10,750
Post-employment benefits 327 330
Other long term benefits 2,425 1,581
Share-based payments 2,187 2,775
15,890 15,436
Dividends totalling GBP408,000 were paid in the year (2016: GBP302,000)
in respect of ordinary shares held by key management personnel and their
close family members.
As at 31 December 2017, the group had outstanding interest-free season
ticket loans of GBP6,000 (2016: GBP6,000) issued to key management
personnel.
At 31 December 2017, key management personnel and their close family
members had gross outstanding deposits of GBP4,059,000 (2016:
GBP5,464,000) and gross outstanding banking loans of GBP728,000 (2016:
GBP959,000), all of which (2016: all) were made on normal business
terms. A number of the group's key management personnel and their close
family members make use of the services provided by companies within the
group. Charges for such services are made at various staff rates.
Other related party transactions
At 31 December 2017, no amounts were outstanding with either the
Laurence Keen Scheme or the Rathbone 1987 Scheme (2016: GBPnil).
One group subsidiary, Rathbone Unit Trust Management, has authority to
manage the investments within a number of unit trusts. Another group
company, Rathbone Investment Management International, acted as
investment manager for a protected cell company offering unitised
private client portfolio services. During 2017, the group managed 25
unit trusts, Sociétés d'investissement à Capital Variable
(SICAVs) and open-ended investment companies (OEICs) (together,
'collectives') (2016: 25 unit trusts and OEICs).
The group charges each fund an annual management fee for these services,
but does not earn any performance fees on the unit trusts. The
management charges are calculated on the bases published in the
individual fund prospectuses, which also state the terms and conditions
of the management contract with the group.
The following transactions and balances relate to the group's interest
in the unit trusts:
2017 2016
Year ended 31 December GBP'000 GBP'000
Total management fees 35,525 27,783
2017 2016
As at 31 December GBP'000 GBP'000
Management fees owed to the group 3,266 2,557
Holdings in unit trusts 2,565 1,864
5,831 4,421
Total management fees are included within 'fee and commission income' in
the consolidated statement of comprehensive income.
Management fees owed to the group are included within 'accrued income'
and holdings in unit trusts are classified as 'available for sale equity
securities' in the consolidated balance sheet. The maximum exposure to
loss is limited to the carrying amount on the balance sheet as disclosed
above.
All amounts outstanding with related parties are unsecured and will be
settled in cash. No guarantees have been given or received. No
provisions have been made for doubtful debts in respect of the amounts
owed by related parties.
9 Consolidated statement of cash flows
For the purposes of the consolidated statement of cash flows, cash and
cash equivalents comprise the following balances with less than three
months until maturity from the date of acquisition:
2017 2016
GBP'000 GBP'000
Cash and balances at central banks 1,374,002 1,075,673
Loans and advances to banks 87,009 83,844
Available for sale investment securities 106,747 103,557
At 31 December 1,567,758 1,263,074
Available for sale investment securities are amounts invested in money
market funds, which are realisable on demand.
Cash flows arising from issuing ordinary shares comprise:
2017 2016
GBP'000 GBP'000
Share capital issued 31 128
Share premium on shares issued 3,098 42,348
Shares issued in relation to share-based schemes for
which no cash consideration was received (441) (1,631)
Shares issued in relation to business combinations - (646)
2,688 40,199
A reconciliation of the movements of liabilities to cash flows arising
from financing activities were as follows:
Liabilities Equity
Share capital/
Subordinated loan notes premium Reserves Retained earnings Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 January 2017 19,590 142,526 25,742 156,545 344,403
Changes from
financing cash
flows
Proceeds from
issue of share
capital - 3,129 - - 3,129
Proceeds from sale
of treasury
shares - - 1,379 (1,820) (441)
Dividends paid - - - (29,420) (29,420)
Total changes from
financing cash
flows - 3,129 1,379 (31,240) (26,732)
The effect of
changes in foreign
exchange rates - - - - -
Changes in fair
value - - - - -
Other changes
Liability-related
Interest expense 1,276 - - - 1,276
Interest paid (1,171) - - - (1,171)
Total
liability-related
changes 105 - - - 105
Total
equity-related
other changes - - 100 65,097 65,197
At 31 December
2017 19,695 145,655 27,221 190,402 382,973
10 Events after the balance sheet date
There have been no material events occurring between the balance sheet
date and the date of this preliminary announcement.
11 Financial information
The financial information set out in this preliminary announcement has
been extracted from the Group's financial statements, which have been
approved by the Board of directors and agreed with the Company's
auditor.
The financial information set out above does not constitute the
Company's statutory financial statements for the years ended 31 December
2017 or 2016. Statutory financial statements for 2016 have been
delivered to the Registrar of Companies. Statutory financial statements
for 2017 will be delivered to the Registrar of Companies following the
Company's Annual General Meeting. The auditor has reported on both the
2016 and 2017 financial statements. Their reports were unqualified and
did not draw attention to any matters by way of emphasis. They also did
not contain statements under Section 498 of the Companies Act 2006.
12 Forward-looking statements
This announcement contains certain forward-looking statements, which are
made by the directors in good faith based on the information available
to them at the time of their approval of the 2017 annual report.
Statements contained within this announcement should be treated with
some caution due to the inherent uncertainties (including but not
limited to those arising from economic, regulatory and business risk
factors) underlying any such forward-looking statements. This
announcement has been prepared by Rathbone Brothers Plc to provide
information to its shareholders and should not be relied upon for any
other purpose.
This announcement is distributed by Nasdaq Corporate Solutions on behalf
of Nasdaq Corporate Solutions clients.
The issuer of this announcement warrants that they are solely
responsible for the content, accuracy and originality of the information
contained therein.
Source: Rathbone Brothers Plc via Globenewswire
http://www.rathbones.com/
(END) Dow Jones Newswires
February 22, 2018 02:00 ET (07:00 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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