REG - Arbuthnot Banking - Audited Final Results for the year to 31 Dec 2022
30/03/2023 07:00
For best results when printing this announcement, please click on link below:
http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20230330:nRSd6961Ua&default-theme=true
RNS Number : 6961U Arbuthnot Banking Group PLC 30 March 2023
30 March 2023
For immediate release
ARBUTHNOT BANKING GROUP ("Arbuthnot", "the Group" or "ABG")
Audited Final Results for the year to 31 December 2022
Profit growth accelerates path to "Future State".
Arbuthnot Banking Group today announces its audited results for the year ended
31 December 2022.
Arbuthnot Banking Group PLC is the holding company for Arbuthnot Latham &
Co., Limited ("Arbuthnot Latham").
FINANCIAL HIGHLIGHTS
· Profit Before Tax of £20.0m (2021: £4.6m)
· Operating income increased to £137.4m (2021: £88.7m)
· Earnings per share of 109.6p (2021: 45.2p)
· Final dividend declared increased by 3p to 25p (2021: 22p)
· Total ordinary dividend per share increased by 4p (11%) to 42p
(2021: 38p)*
· Net assets of £212.0m (2021: £200.9m)
· Net assets per share of 1411p (2021: 1337p)
· CET1 ratio of 11.6% (2021: 12.3%) and total capital ratio of
14.0% (2021: 14.9%), significantly greater than the Group's minimum
requirements
· Substantial surplus liquidity at the year end of £535m
OPERATIONAL HIGHLIGHTS
Arbuthnot Latham
· Profit before tax and group recharges of £32.9m (2021: £15.3m),
an increase of 115%
· Average net margin at 5.1% (2021: 4.1%)
· Customer loans increased 10% to £2.2bn (2021: £2.0bn)**
· Customer deposits increased 9% to £3.1bn (2021: £2.8bn)
· Assets under management decreased 2% to £1.33bn (2021: £1.36bn)
mainly due to market performance
· Successful implementation of a significant upgrade to the banking
platform following 18-month project, improving resilience and agility
· Launch of new lending automation system improving the loan
origination process for commercial and private clients
· Medium term "Future State" pre-tax return on capital objective
achieved ahead of plan, with further ambitious targets introduced
Commenting on the results, Sir Henry Angest, Chairman and Chief Executive of
Arbuthnot, said: "The Group made good progress in 2022 after investing over
many years in a business model built on relationship-based banking, while also
diversifying our lending to higher margin specialist sectors. These results
demonstrate the benefits of this strategy."
Note: * This excludes the special dividend of 21p per share paid
in 2021.
** This balance includes both Customer loans and assets available for lease.
The Directors of the Company accept responsibility for the contents of this
announcement.
ENQUIRIES:
Arbuthnot Banking Group 0207 012 2400
Sir Henry Angest, Chairman and Chief Executive
Andrew Salmon, Group Chief Operating Officer
James Cobb, Group Finance Director
Grant Thornton UK LLP (Nominated Adviser and AQSE Corporate Adviser) 0207 383 5100
Colin Aaronson
Samantha Harrison
George Grainger
Ciara Donnelly
Shore Capital (Broker) 0207 408 4090
Daniel Bush
David Coaten
Tom Knibbs
H/Advisors Maitland (Financial PR) 0207 379 5151
Sam Cartwright
The 2022 Annual Report and Notice of Meeting will be available on the
Arbuthnot Banking Group website http://www.arbuthnotgroup.com on or before 24
April 2023. Copies will then be available from the Company Secretary,
Arbuthnot Banking Group PLC, Arbuthnot House, 7 Wilson Street, London, EC2M
2SN, when practicable.
Consolidated statement of comprehensive income
Year ended 31 December
2022 2021
Note £000 £000
Income from banking activities
Interest income 8 120,013 77,102
Interest expense (20,932) (13,027)
Net interest income 99,081 64,075
Fee and commission income 9 21,586 18,472
Fee and commission expense (537) (349)
Net fee and commission income 21,049 18,123
Operating income from banking activities 120,130 82,198
Income from leasing activities
Revenue 10 99,367 74,500
Cost of goods sold 10 (82,109) (68,023)
Gross profit from leasing activities 10 17,258 6,477
Total group operating income 137,388 88,675
Net impairment loss on financial assets 11 (5,503) (3,196)
Gain from bargain purchase 12 - 8,626
Loss on sale of commercial property held as inventory (4,590) -
Other income 13 1,627 3,955
Operating expenses 14 (108,913) (93,422)
Profit before tax 20,009 4,638
Income tax (expense) / credit 15 (3,551) 2,148
Profit after tax 16,458 6,786
Other comprehensive income
Items that will not be reclassified to profit or loss
Changes in fair value of equity investments at fair value through other 627 5,626
comprehensive income
Tax on other comprehensive income (128) 2
Other comprehensive income for the period, net of tax 499 5,628
Total comprehensive income for the period 16,957 12,414
Earnings per share for profit attributable to the equity holders of the
Company during the year
(expressed in pence per share):
Basic earnings per share 17 109.6 45.2
Diluted earnings per share 17 109.6 45.2
Consolidated statement of financial position
At 31 December
2022 2021
Note £000 £000
ASSETS
Cash and balances at central banks 18 732,729 814,692
Loans and advances to banks 19 115,787 73,444
Debt securities at amortised cost 20 439,753 301,052
Assets classified as held for sale 21 3,279 3,136
Derivative financial instruments 22 6,322 1,753
Loans and advances to customers 24 2,036,077 1,870,962
Other assets 26 52,185 110,119
Financial investments 27 3,404 3,169
Deferred tax asset 28 2,425 2,562
Intangible assets 29 32,549 29,864
Property, plant and equipment 30 175,273 125,890
Right-of-use assets 31 7,714 15,674
Investment property 32 6,550 6,550
Total assets 3,614,047 3,358,867
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 39 154 154
Retained earnings 40 212,037 201,026
Other reserves 40 (213) (301)
Total equity 211,978 200,879
LIABILITIES
Deposits from banks 33 236,027 240,333
Derivative financial instruments 22 135 171
Deposits from customers 34 3,092,549 2,837,869
Current tax liability 1,748 413
Other liabilities* 35 26,144 21,154
Lease liabilities* 36 7,872 21,276
Debt securities in issue 37 37,594 36,772
Total liabilities 3,402,069 3,157,988
Total equity and liabilities 3,614,047 3,358,867
*The hire purchase and finance lease liabilities of £5,062k at 31 December
2021 have been reclassified from other liabilities to lease liabilities to
reflect the presentation in notes 35 and 36.
Chairman's statement
Arbuthnot Banking Group ("ABG" or "the Group") is pleased to report a profit
before tax of £20.0m.
This represents a significant increase over the prior year result of £4.6m
and is due to a number of factors but the most important of those is the
increase of the Bank of England ("BoE") base rate during the year.
I always thought that after nearly 15 years of historically low interest
rates, that once rates started to rise, they would move at a speed and quantum
greater than anybody expected. This has proven to be the case in 2022 with
eight separate rate increases, with BoE base rate finishing the year at 3.5%
compared to 0.25% at the start of the year.
I have consistently believed that the strength of a bank should be measured on
the quality and diversity of its deposit base and as a result of this
philosophy we have spent the last few years developing and investing in the
Bank's business model that is based on good quality relationship driven
deposits. This approach was taken in the belief that interest rates would
normalise in due course. We are now seeing the benefits of this business
model.
I should however add a word of caution; given that we have regularly
maintained a very prudent approach to the amount of excess liquidity that we
deposit at the BoE, this asset has no natural hedge in our balance sheet, so
the revenues that relate to this cash will be subject to further changes to
the base rate, both up and down.
Given the improved longer term prospects of the Group we plan to increase the
dividend payment by adding an additional 2p to the usual 1p increase in the
final dividend of 2022. This takes the final dividend to 25p per share (2021:
22p).
Highlights
The clear highlight of 2022 is the financial performance of the Group
recording more than a 400% increase in profit before tax despite having
recognised a loss of £4.6m on the sale of our commercial property located in
King Street in the heart of the West End. Given that commercial property
indices are forecast to fall by over 20% over the next two years we were
pleased to complete this sale. Along with the continued exclusion of the
profit on sale of trucks in our subsidiary Asset Alliance of £6.5m, which
continues to be excluded from our financial results, this means the underlying
profitability of the Group was approximately £31m.
I was also pleased with the continued progress against our medium term "Future
State Plan". We are on course to achieve the most important milestone in that
plan, namely the pre-tax return on capital, during 2023. This is considerably
earlier than we had initially hoped and enables us to revise this plan with
more ambitious targets for future growth.
Having noted that deposits are the life blood of any bank, I was delighted
that our customer deposits exceeded £3 billion during the third quarter of
the year and continued to grow strongly to close the year at £3.1bn. With the
onset of a more negative sentiment in the economy, we decided to exercise
greater caution in our underwriting processes on residential property. As a
result, our lending volumes reduced in the second half of the year but the
overall customer lending balances, including leased assets, increased by 11%
during the year.
Much of the planned evolution in our Future State Plan was the growth in our
specialist divisions, giving us access to higher margin lending markets and
also bringing greater diversity to the assets held by the Group.
As a result of the conflict in Ukraine, Asset Alliance Group continued to see
further disruption to supply chains which affected the availability of new
trucks. However, despite this, the business was able to display strong growth
in its customer balances, which grew by 47% to end the year at £189.1m.
Renaissance Asset Finance experienced strong demand for its range of financing
solutions and saw its customer balances increase by nearly 40% to close at
£133.8m.
Arbuthnot Commercial Asset Based Lending saw strong growth in both client
acquisition and balances. Customer balances grew by 48% finishing the year at
£268.8m. Five years after opening for business, ACABL delivered a profit
before tax of £5.2m after paying internal financing costs of £7.9m.
Our Wealth Management division continued to display strong performance in
attracting criteria clients. The gross inflows for the year were in excess of
£200m, an increase of 21% on the prior year. We hope that these inflows will
be supplemented in 2023 by business generated in the Independent Financial
Advisor (IFA) sector following the launch by the division of its Platform
Model Portfolio Service Proposition in the final quarter of the year.
Although we are proud to provide a personalised banking service to our
clients, it must not be forgotten that our Bank is also founded on a suite of
modern operating platforms and we continued to invest in this foundation
during the year, successfully upgrading our Oracle banking platform to the
latest version and adding the Ncino loan system. This continuous programme of
investment has allowed us to process nearly one million of inbound and
outbound payments in the year, an increase of 24% on 2021.
In light of the cost of living crisis I was pleased that we were able to help
our employees through these difficult times by making a cost of living payment
to all employees in September of £1,500 amounting to approximately £1
million across the Group.
As with all banks and market participants, we have noted the developments
which have followed Silicon Valley Bank's failure in the US and the sale of
its subsidiary to HSBC. Throughout our history of serving clients, Arbuthnot
Latham has proven its ability to adapt and to grow, even during times of
market turbulence. Core to our bank's ability to do this is a sustained focus
on the long-term. It is when faced with circumstances such as those we have
witnessed in the last few weeks that the characteristics which make Arbuthnot
Latham attractive to our clients, and which have made the bank successful,
show their benefit. Arbuthnot Latham adopts a conservative operating model
that targets long-term stability over short-term gain. We maintain strong
levels of capital and liquidity and maintain a high-quality loan book. This
strong underlying position means our bank is well placed to endure any
continued economic uncertainty.
Board Changes and Personnel
At the last AGM Sir Christopher Meyer retired from the Board after fourteen
years of valuable service; however, we were saddened to learn of his sudden
passing last July and I would like to express my condolences to his wife
Baroness Meyer.
Also, as previously indicated, Ruth Lea retired as a Senior Economic Advisor
to our Board after sixteen years' service to the Group and I am happy to
report that she has recently been elevated to the House of Lords.
Lastly in September I was pleased to welcome Frederick Angest to the Group
Board.
As always, the continued success of the Group reflects the hard work and
commitment of our members of staff. On behalf of the Board, I extend our
thanks to all of them for their contribution in 2022. Finally, I would like to
thank my fellow directors on both Boards for their help and advice during the
year.
Dividend
Given the increased profits of the Group in 2022 and the improving outlook,
the Board has decided to accelerate the growth trajectory of the dividend and
is recommending a final dividend of 25p per share. This is an increase of 3p
compared to the final dividend of 2021 and an additional increase of 2p over
the normalised 1p increase. The final dividend, if approved at the 2023 AGM,
will be paid on 2 June 2023 to shareholders on the register at close of
business on 21 April 2023.
Together with the interim dividend of 17p per share, it gives a total dividend
for the year of 42p per share, which compares to the total dividend of 59p per
share paid in 2021 which included a special dividend of 21p per share.
Outlook
During 2022, the increase in the Bank of England base rate clearly provided a
significant and positive impact on the performance of the Group. There has
already been further rate increases in 2023 which will have a further
beneficial impact on revenues.
However, the prospects for the UK economy are less clear; the increase in the
cost of living will almost certainly have an impact on the Group's cost base
and could also affect the ability of our borrowers to maintain payments on
loan facilities.
We remain alert to these headwinds, but remain optimistic as we continue to
focus on developing and diversifying the Group.
Strategic Report - Business Review
Group Key Metrics 2022 2021
Operating income £137.4m £88.7m
Other income £1.6m £4.0m
Operating expenses £108.9m £93.4m
Profit before tax £20.0m £4.6m
Customer loans(1) £2.2bn £2.0bn
Customer deposits £3.1bn £2.8bn
Total assets £3.6bn £3.4bn
Key Performance Indicators
Assets under management £1.3bn £1.4bn
Average net margin (2) 5.1% 4.1%
Loan to deposit ratio (3) 65.8% 65.9%
(1) This balance includes both Customer loans and assets available for lease.
(2) Average net margin: Gross interest income yield less average interest rate
on customer deposits
(3) Loan to deposit ratio: Loans and advances at amortised cost divided by
deposits at amortised cost
The Group has seen a significant increase in profitability in 2022 reporting
profit before tax of £20.0m compared to £4.6m for the prior year. Multiple
successive increases in the Bank of England Base Rate have increased interest
income generated from not only the Bank's lending balances, but also its
treasury assets, including those held at the Bank of England. In response the
Bank has increased its rates payable on deposits in line with the market.
However, unexpired fixed term deposits raised in prior periods at lower rates,
have resulted in interest payable by the Bank being suppressed until the
deposits mature and are renewed at current higher rates, therefore deposit
pricing has increased at a slower pace compared to the loan book and treasury
assets.
As the economy enters a new economic cycle, the Bank continues to maintain its
long-held credit principles and discipline as a key strategy to mitigate
credit losses. However with any lending business, credit losses are
inevitable. The IFRS9 impairment charge for the year is made up of two
factors: firstly, more pessimistic economic assumptions due to the economy's
performance and medium-term outlook resulting in adjustments totalling £0.9m;
in this regard, the Bank has applied an average 11.6% fall in residential
property values and a 21.2% fall in commercial property values compared to a
1.2% increase and 1.7% fall respectively in 2021 for its UK property-based
lending business. The second element of the impairment charge comprises two
specific bad debt cases totalling £3.0m, of which one was the first credit
loss incurred by Arbuthnot Commercial Asset Based Lending - the specialist
invoice discounting business launched in 2018. Despite these two cases, the
non-performing loan book has reduced to its lowest level for over two years
and is showing no signs of material stress in the credit metrics. The average
loan to value ("LTV") against the loan book remains low at 52.5%, giving
significant levels of security to withstand and minimise the effect of any
potential falls in the property markets.
As the business model has benefitted from improved conditions resulting from
the base rate increases, the major headwind on the horizon for the Group is
the upward pressure on its cost base. Although higher inflation will affect
all costs, the most significant will be accelerated increases in staff costs,
as the cost-of-living crisis starts to interact with full employment and
competition for talent intensifies. In September the Board took the decision
to award a one-off cost of living payment to all employees of £1,500. The
cost of this payment was approximately £1m.
During 2022, deposit balances exceeded £3bn for the first time in the Bank's
history. The Bank finished the year with total deposits of £3.1bn compared to
£2.8bn for the prior year. Deposit growth for 2022 was lower than in recent
years. The Bank continued to pursue its strategy of funding the specialist
lending divisions with cheaper yet sticky balances from relationship driven
deposit account clients. Whilst the Bank experienced upward pressure on rates,
it did not compete for deposits on the non-relationship aggregator platforms.
Consequently, during the year up to £100m of non-relationship deposits
matured and were not renewed, to be ultimately replaced by direct relationship
balances.
Overall demand for lending products has continued across the divisions with
balances (including lease assets) growing to £2.2bn, an increase of 10% from
the previous year end 2021 balance of £2.0bn. However, given the current
market uncertainty, the Bank has tightened its credit appetite, particularly
in its real estate lending business, as well as stressing the affordability of
interest payments to levels in excess of the 2% increase in rates as
prescribed by the Prudential Regulation Authority. The effect of this reduces
the LTV for new lending below the Bank's historic guidance of 60%. It is also
expected that the change in appetite will reduce lending volumes in the short
term. However, given the increased levels of profitability, the Bank is well
positioned to retain financial resources for future opportunities that are
expected to arise given the market dislocation.
Included in the result for the year is a charge of £4.6m, following the sale
of the King Street property in the second half of the year. The building was
valued at £60m based on a yield of 3.75%. However, following an extensive
refurbishment and upgrade, the building was in the process of being let out
and so two subsequent purchase price adjustments were made; firstly, any
tenant incentives outstanding at the time of completion were deducted from the
proceeds and secondly, an adjustment for the void period required to find the
remaining tenants to fill the building was made via an escrow account and
limited to 12 months of the expected rental income for each vacant floor. As
in the prior year, the Group's profit also needs to be reduced for the profit
on the sale of trucks generated by Asset Alliance of £6.5m (2021: £5.8m),
which is required to be excluded from our accounts as a result of the
acquisition accounting in the prior year. It is expected that the majority of
the remaining vehicles which were acquired and subject to the adjustment will
be disposed of over the coming year, resulting in any gains or losses on
disposal recognised in the income statements for future periods, as and when
they are sold.
Following a strategic review of its portfolio of businesses in 2023, the Bank
announced its intention to cease new business for Arbuthnot Specialist Finance
Ltd, its specialist lending division. All committed facilities will be
honoured and the book will be wound down over the next 12 to 24 months.
Banking
The Banking business continued its track record of recent years, delivering
growth in client acquisition, deposits and lending in 2022.
The acquisition of criteria clients continued to support growth in
relationship call/current deposit products as well as growth in fixed term
deposits, which has supported our cost of deposits in the changing market.
During 2022, deposits increased by £255m to £3.1bn, equating to 9% year on
year growth. Given the increased interest rate environment, the importance of
continuing to attract and retain criteria clients who value the Bank's service
led proposition remains a key priority.
Loan balances across Private & Commercial Banking increased to £1.5bn in
2022. In addition to this, £35m of Commercial Real Estate loans were
originated under the forward flow arrangement with a third party. The strategy
allows the Bank to support clients with more capital-intensive borrowing
needs, whilst continuing to pursue its objectives of the "Future State" plan.
Following the global pandemic in the previous periods, the Bank tightened its
credit appetite. Given the turbulent economic environment and global
macro-economic developments in 2022, the Bank continued this strategy
throughout the year to ensure new loans were appropriately structured.
Additionally, the Bank proactively worked with existing clients to review loan
structures in order to navigate the new higher rate interest rate environment.
During 2022 the Bank launched a review of its Customer Value Proposition. The
outputs from this project, which encompass client feedback along with external
insights are guiding key strategic initiatives for 2023. Areas of focus
include improving digital capability, automation and efficiency, and enhancing
client engagement, which demonstrate the Bank's commitment to its service-led
proposition.
Wealth Management
Assets Under Management (AUM) finished the year at £1.3bn, resulting in a 2%
decrease over the year. This was despite strong gross inflows of £209m,
representing 16% of AUM at the start of the year, and an increase of 21%
compared to the previous year. After taking into account outflows, there was a
net increase in AUMs of £72m. However, market turbulence in part as a
consequence of the Russia's war in Ukraine, along with domestic inflationary
pressure resulted in adverse market performance, offsetting the net inflows
during the year.
Following the pandemic, the business returned to a new normal of agile working
both in the office and virtually. The business remains committed to delivering
advice through a combination of face to face and virtual client meetings, with
client service as the priority.
New business distribution momentum developed further with the delivery of a
new strategic initiative for external Independent Financial Advisers. In the
fourth quarter the Wealth Management business launched its Platform MPS
proposition and Discretionary Portfolio Service for high-net-worth private
clients, which has received positive initial feedback from intermediaries.
Mortgage Portfolios
Balances for the Banks's acquired mortgage portfolio was £149m at the
year-end. The portfolio continues to perform in line with expectations.
Arbuthnot Commercial Asset Based Lending ("ACABL")
ACABL reported a profit before tax of £5.2m (2021: £4.7m).
In its fifth year the ACABL business recorded strong growth in both client
acquisition and lending.
At the year-end, the business reported drawn balances of £268.8m with a
further £91.8m available for drawdown, equating to a 47% increase from the
prior year.
ACABL completed 30 new transactions in 2022 with £155m of facilities written.
Notably, 60% of these were alongside Private Equity firms where the business
saw continued demand for its products in the transactional acquisition space
where ACABL has a strong reputation.
The average deal size increased from £4.8m to £5.1m with a total client base
of 102 at year-end, an increase of 40% from the prior year, supported by lower
than expected client attrition. This was partly a result of Private Equity
firms remaining invested for longer due to the impact of the pandemic, supply
chain challenges and the current economic outlook. Facility limits increased
36% on the prior year to £523m across a broad range of sectors, underlining
the spread and diverse nature of the portfolio.
The business continued to participate in the Government sponsored lending
schemes and was approved during the year to participate in the Recovery Loan
Scheme Phase 3. The amount issued under these schemes in 2022 represented a
small proportion of overall lending but allowed the business to support both
existing clients and be incorporated into financing structures for new
clients.
In line with the reported strong growth, the business processed £2bn of
invoices during the year, up from £1.3bn and made in excess of 13,000 client
payments totalling £1.85bn.
Included in the result is a £2m impairment charge for an exposure that was
placed into administration by the directors of the business in December 2022.
Renaissance Asset Finance ("RAF")
RAF continues to experience strong demand for its asset finance facilities.
The business delivered strong balance sheet growth in 2022 with the loan book
increasing by nearly 40%, finishing the year at £133.8m.
The Block Discounting business held back profitability in the year due to the
investment cost of setting up this business and the time taken for new
business to draw. However, overall RAF delivered a profitable outcome for the
year and with balances now at the highest level ever seen, revenue in 2023
should grow. RAF benefits from scale in its cost base, and therefore is set to
make another positive contribution in 2023.
During the pandemic the business saw a sharp increase in watchlist clients,
notably in the Black-Taxi cab sector. This trend has since stabilised, with
some accounts now being reclassified to performing.
Arbuthnot Specialist Finance ("ASFL")
ASFL made progress during 2022 with year end balances at £15m, up £5m year
on year. However, with the current economic climate, rising interest rates and
a more uncertain property market, the decision was taken to exit this market
and ASFL is now closed for new business. All committed facilities will be
honoured and the book is expected to be wound down over the next 12 to 24
months.
Asset Alliance Group ("AAG")
As at 31 December 2022 AAG had assets available for lease totalling £171.7m.
The global economy limited the scale of growth in what was a strong year for
AAG. The continued worldwide computer chip shortage and the immediate
consequences of Russia's War in Ukraine had an adverse effect on the
availability of new commercial vehicles. This was exacerbated by fuel price
increases and general economic recession impacting orders.
Delays in pre-ordered stock from manufacturers limited the fleet growth
potential of AAG. Consequently, the leasing strategy re-focussed on contract
extensions and prioritising oldest asset replacement to mitigate increasing
maintenance costs. This was successfully implemented with 40% of the managed
fleet replaced during the year, with the fleet size showing modest growth to
over 4,100 assets.
The shortage of new assets did however result in a continued high demand for
good quality, second-hand assets, which was a key factor in driving strong
performance from the truck sales division, generating an underlying net profit
of £12.4m from the sale of 1410 end-of lease trucks and trailers during the
year. £6.5m of this profit has already been included in the bargain purchase
calculation as part of the fair value uplift at acquisition and is therefore
excluded from the consolidated Group accounts.
Owned Properties
During the year the Bank sold three properties from its Owned Property
portfolio.
Firstly, following the major refurbishment completed in 2021, the King Street
property was sold with gross sale proceeds of £60m. After deductions for
unexpired incentives of £2.4m and void periods of £0.96m, a charge of £4.6m
was recognised in the income statement.
Secondly, the Bank completed the sale of two of its overseas properties. The
Bank retains four assets in its property portfolio of which one is overseas.
Operations
The Bank continues to see strong growth in the acquisition of new banking
clients with over 1,000 new clients onboarded during 2022 and 5,000 new
accounts opened.
Nearly 1 million inbound and outbound payments were processed in 2022, a
growth of 24% on the previous year, with 98% of outbound payments originating
online. In addition, there were over 870,000 card transactions in 2022, an
increase of nearly 35% on the previous year. Confirmation of Payee capability
was added to the Bank's online banking proposition in the first quarter,
further strengthening the Bank's anti-fraud controls.
In respect of the regulatory requirements under the Supervisory Statement (SS)
1/21: Impact Tolerances for Important Business Services, the Bank completed
the required self-assessment of compliance with the expected standards in
March 2022. This continues to be an important area of focus as the Bank
continues its investment in new IT systems.
November 2022 saw the successful implementation of a significant upgrade to
the Bank's Oracle Banking Platform following an 18-month project. The new
platform supports more efficient payment processes and ensures payments are
compatible with future payment standards. The platform has been delivered in a
new cloud hosted environment, improving resilience and agility, and enabling
the Bank to more readily adapt to future market changes.
Another major programme delivered in 2022 saw the launch of a new lending
automation system improving the loan origination process for commercial and
private clients streamlining the operations and management of key lending
artefacts.
Further investment was made in the investment operations, continuing to focus
on increasing automation and streamlining of processes.
Sustainability
The business has made a commitment to reduce its environmental impact and to
improve its environmental performance as an integral part of its business
strategy. In 2022 the business continued its sustainability project with focus
around five pillars to ensure a more sustainable Group: Governance, Employees,
Community, Environment and Clients. Further information is given in the
Sustainability Report on pages 26 to 38.
Strategic Report - Financial Review
Arbuthnot Banking Group adopts a pragmatic approach to risk taking and seeks
to maximise long term revenues and returns. Given its relative size, it is
nimble and able to remain entrepreneurial and capable of taking advantage of
favourable market opportunities when they arise.
The Group provides a range of financial services to clients and customers in
its chosen markets of Banking, Wealth Management, Asset Finance, Asset Based
Lending, Specialist Lending and Commercial Vehicle Finance. The Group's
revenues are derived from a combination of net interest income from lending,
deposit taking and treasury activities, fees for services provided and
commission earned on the sale of financial products. The Group also earns
rental income on its properties and holds financial investments for income.
Highlights
2022 2021
Summarised Income Statement £000 £000
Net interest income 99,081 64,075
Net fee and commission income 21,049 18,123
Operating income from banking activities 120,130 82,198
Revenue 99,367 74,500
Cost of goods sold (82,109) (68,023)
Operating income from leasing activities 17,258 6,477
Total group operating income 137,388 88,675
Gain from a bargain purchase - 8,626
Other income 1,627 3,955
Loss on sale of commercial property held as inventory (4,590) -
Operating expenses (108,913) (93,422)
Impairment losses - loans and advances to customers (5,503) (3,196)
Profit before tax 20,009 4,638
Income tax expense (3,551) 2,148
Profit after tax 16,458 6,786
Basic earnings per share (pence) 109.6 45.2
The Group has reported a profit before tax of £20.0m (2021: £4.6m). The
underlying profit before tax was £31.1m (2021: £17.0m).
There are a number of specific items which are included in the result for the
year that should be noted. These are detailed and compared to the equivalent
adjusted amount for the prior year in the tables below.
Underlying profit/(loss) reconciliation Arbuthnot Latham & Co. Group Centre Arbuthnot Banking Group
31 December 2022 £000 £000 £000
Profit before tax and group recharges 32,865 (12,856) 20,009
Profits realised on sale of trucks previously included in bargain purchase 6,479 - 6,479
Loss on sale of King Street property 4,590 - 4,590
Underlying profit 43,934 (12,856) 31,078
Underlying basic earnings per share (pence) 169.2
Arbuthnot Latham & Co. Group Centre Arbuthnot Banking Group
Underlying profit reconciliation
31 December 2021 £000 £000 £000
Profit before tax and group recharges 15,270 (10,632) 4,638
Exceptional reduction in BoE Base Rate 11,492 - 11,492
Write down of repossessed property in Majorca 3,835 - 3,835
Arena TV Ltd impairment 2,055 - 2,055
Gain on sale of Tay mortgage portfolio (2,239) - (2,239)
Gain from bargain purchase (8,626) - (8,626)
Profits earned on sale of trucks included in bargain purchase 5,830 - 5,830
Underlying profit 27,617 (10,632) 16,985
Underlying basic earnings per share (pence) 108.2
*The Bank of England Base Rate which was at 0.1% for most of 2021 was
estimated to have cost the Group £11.5m of interest earnings in 2021,
compared to when the base rate was at 75 basis points, which is where it was
prior to the onset of the COVID-19 pandemic. No pro-rata adjustment was made
for lost interest income in 2022. The base rate has now moved past the
pre-pandemic level.
Arbuthnot Latham & Co. Group Centre Arbuthnot Banking Group
Underlying profit reconciliation
31 December 2021 £000 £000 £000
Profit before tax and group recharges 15,270 (10,632) 4,638
Exceptional reduction in BoE Base Rate 11,492 - 11,492
Write down of repossessed property in Majorca 3,835 - 3,835
Arena TV Ltd impairment 2,055 - 2,055
Gain on sale of Tay mortgage portfolio (2,239) - (2,239)
Gain from bargain purchase (8,626) - (8,626)
Profits earned on sale of trucks included in bargain purchase 5,830 - 5,830
Underlying profit 27,617 (10,632) 16,985
Underlying basic earnings per share (pence) 108.2
* The Bank of England Base Rate which was at 0.1% for most of 2021 was
estimated to have cost the Group £11.5m of interest earnings in 2021,
compared to when the base rate was at 75 basis points, which is where it was
prior to the onset of the COVID-19 pandemic. No pro-rata adjustment was made
for lost interest income in 2022. The base rate has now moved past the
pre-pandemic level.
In the prior year the Group acquired Asset Alliance Group Holdings Limited,
which completed on 1 April 2021. The business was acquired at a discount to
its fair valued net assets resulting in a bargain purchase of £8.6m. In 2022
£6.5m (2021: £5.8m) of profits earned on the sale of trucks were
consolidated out, as it formed part of the bargain purchase, when these assets
were measured at fair value on date of acquisition.
In 2022, the King Street property was sold at a loss of £4.6m. The offer
price took into consideration outstanding tenant incentives and expected void
periods while tenants were found for vacant areas of the building.
The credit provisions of £5.5m under IFRS 9, include more pessimistic
economic assumptions and also two specific bad debt cases totalling £3m. In
2021 there was one case of £2.1m incurred by one of the Group's specialist
businesses, Renaissance Asset Finance. The provision was against the total
exposure to Arena TV, a highly publicised business collapse, which reportedly
had up to £285m of outstanding debt to 55 lenders.
Total operating income earned by the Group was £137.4m compared to £88.7m
for the prior year. The average net margin on client assets was 5.1% (2021:
4.1%). Included in operating income is revenue from AAG leased assets. This
has contributed 0.2% (2021: 0.5%) to the average yield generated from the
Group's assets.
The Group's operating expenses increased to £113.5m compared to £93.4m for
the prior year, with staff costs increasing by £13.6m mainly due to the
accrual for bonuses.
Balance Sheet Strength
2022 2021
Summarised Balance Sheet £000 £000
Assets
Loans and advances to customers 2,036,077 1,870,962
Assets available for lease 121,563 121, 563
Liquid assets 1,288,269 1,189,188
Other assets 168,138 177,154
Total assets 3,614,047 3,358,867
Liabilities
Customer deposits 3,092,549 2,837,869
Other liabilities 309,520 320,119
Total liabilities 3,402,069 3,157,988
Equity 211,978 200,879
Total equity and liabilities 3,614,047 3,358,867
Total assets increased by £0.2bn to £3.6bn (2021: £3.4bn); £165m was due
to loan book growth from both the Core Bank and the Specialist Lending
subsidiaries, while leased assets in AAG and treasury assets increased by
£50.1m and £99.1m respectively. The Group maintained its conservative
funding policy of relying only on retail deposits and targeting a loan to
deposit ratio of between 65-80%. Included in other assets is the Group's
investment property, which is held at fair value of £6.6m (2021: £6.6m).
Also included in other assets are £19.6m of properties classified as
inventory (2021: £87.1m).
The net assets of the Group now stand at £14.11 per share (2021: £13.37).
Segmental Analysis
The segmental analysis is shown in more detail in Note 46. The Group is
organised into nine operating segments as disclosed below:
1) Banking - Includes Private and Commercial Banking. Private Banking -
Provides traditional private banking services. Commercial Banking - Provides
bespoke commercial banking services and tailored secured lending against
property investments and other assets.
2) Wealth Management - Financial planning and investment management services.
3) Mortgage Portfolios - Acquired mortgage portfolios.
4) RAF - Specialist asset finance lender mainly in high value cars but also
business assets.
5) ACABL - Provides finance secured on either invoices, assets or stock of the
borrower.
6) ASFL - Provides short term secured lending solutions to professional and
entrepreneurial property investors.
7) AAG - Provides vehicle finance and related services, predominantly in the
truck & trailer and bus & coach markets.
8) All Other Divisions - All other smaller divisions and central costs in
Arbuthnot Latham & Co., Ltd (Investment property and Central costs)
9) Group Centre - ABG Group management.
The analysis presented below, and in the business review, is before any
consolidation adjustments to reverse the impact of the intergroup operating
activities and also intergroup recharges and is a fair reflection of the way
the Directors manage the Group.
Banking
2022 2021
Summarised Income Statement £000 £000
Net interest income 64,565 45,011
Net fee and commission income 2,803 2,482
Operating income 67,368 47,493
Operating expenses - direct costs (14,795) (13,812)
Operating expenses - indirect costs (31,888) (27,503)
Impairment losses - loans and advances to customers (1,547) 354
Profit before tax 19,138 6,532
Banking reported a profit before tax of £19.1m (2021: £6.5m). This equated
to a near threefold increase from the prior year. Net interest income grew by
43%, while lending increased by 4% and deposit balances by 17%. The
significantly higher net interest income is the result of successive increases
in the Bank of England Base Rate, with the Bank earning higher income from
both customer loans and excess deposits held mainly at the Bank of England
reserve account. This was partly offset by higher interest paid on deposit
balances. However, this rate increase was at a slower pace as fixed term
deposits only reprice at maturity.
There was a net impairment charge of £1.5m compared to a release of £0.4m
for the prior year. This was due to revised economic scenarios applied in the
expected credit loss models due to a more negative future outlook. The most
significant and relevant to the Banking book was a net decline of 11.6% for
residential property values and a net decline of 21.2% for commercial property
values compared to a 1.2% increase and 1.7% fall respectively for the prior
year.
Operating costs increased by £5.4m largely due to higher staff costs from
higher bonus accrual.
Customer loan balances increased by £56.6m to £1.5bn and customer deposits
also increased to £3.1bn (2021: £2.7bn). The average loan to value was 52.5%
(2021: 51.7%).
Wealth Management
2022 2021
Summarised Income Statement £000 £000
Net fee and commission income 10,689 10,563
Operating income 10,689 10,563
Operating expenses - direct costs (9,237) (7,634)
Operating expenses - indirect costs (5,553) (5,050)
Loss before tax (4,101) (2,121)
Wealth Management reported a loss before tax of £4.1m (2021: loss of £2.1m),
but made a £1m profit before contributing to overheads, but remains a key
pillar in building and maintaining relationships with clients. Fee income
remained flat year on year, while AUMs decreased by 2%, mainly due to market
performance, and finished the year at £1.3bn (2021: £1.4bn).
Mortgage Portfolios
2022 2021
Summarised Income Statement £000 £000
Net interest income 5,110 4,735
Operating income 5,110 4,735
Other income - 2,239
Operating expenses - direct costs (935) (1,154)
Impairment losses - loans and advances to customers (415) (186)
Profit before tax 3,760 5,634
The Mortgage Portfolios reported a profit of £3.8m (2021: £5.6m). The
decrease against the prior year is due to £2.2m of other income which related
to the net profit on sale of the Tay Portfolio in February 2021.
The remaining Santiago mortgage portfolio performed as expected and the
year-end balance was £149.0m (2021: £178.1m).
RAF
2022 2021
Summarised Income Statement £000 £000
Net interest income 5,545 5,929
Net fee and commission income 32 166
Operating income 5,577 6,095
Other income 82 78
Operating expenses - direct costs (4,697) (3,943)
Impairment losses - loans and advances (768) (2,292)
Profit/(loss) before tax 194 (62)
Renaissance Asset Finance returned a profit of £0.2m (2021: loss before tax
of £0.1m).
Net interest income reduced by 6% to £5.5m (2021: £5.9m) as it paid £3.3m
to the Bank for internal cost of funding. Operating expenses increased by
£0.8m, mainly due to higher staff costs from increased staff numbers.
A more pessimistic economic outlook under the IFRS9 expected credit loss
assessment resulted in higher credit provisions in 2022. However, the prior
year also included a £2.2m charge for Arena TV Limited.
Customer loan balances increased by 38% to £133.8m (2021: £97.1m). The
average yield for 2022 was 8.1% (2021: 8.9%).
ACABL
2022 2021
Summarised Income Statement £000 £000
Net interest income 6,762 5,311
Net fee and commission income 5,976 4,224
Operating income 12,738 9,535
Operating expenses - direct costs (5,463) (4,748)
Impairment losses - loans and advances to customers (2,082) (50)
Profit before tax 5,193 4,737
ACABL recorded a £5.2m profit before tax (2021: £4.7m).
Client loan balances increased 48% to £268.8m at the end of the year (2021:
£182.1m), with issued facilities increasing to £523m (2021: £384m). The
higher client balances throughout the year resulted in an increase in
operating income of £3.2m after paying an increased £5.2m for internal
funding. Operating expenses increased by £0.7m, mainly due to an increase in
staff costs.
The impairment charge increase mainly due to £2m charge relating to one
client that was placed into administration.
ASFL
2022 2021
Summarised Income Statement £000 £000
Net interest income 713 578
Net fee and commission income 10 7
Operating income 723 585
Operating expenses - direct costs (1,489) (1,590)
Impairment losses - loans and advances to customers (179) (21)
Loss before tax (945) (1,026)
ASFL recorded a loss before tax of £0.9m (2021: loss of £1.0m).
The decision was taken to exit this market in early 2023.
Customer loan balances closed the year at £15.0m (2021: £10.1m).
AAG
2022 2021
Summarised Income Statement £000 £000
Net interest income (4,456) (2,401)
Revenue 99,367 74,500
Cost of goods sold (82,109) (68,023)
Operating income 12,802 4,076
Gain from bargain purchase - 8,626
Operating expenses - direct costs (14,507) (7,872)
Impairment losses - loans and advances to customers (369) (1,001)
(Loss)/profit before tax (2,074) 3,829
The business generated a loss before tax of £2.1m (2021: profit of £3.8m for
the period).
The prior period of 9 months included a bargain purchase credit to the income
statement of £8.6m. As part of the bargain purchase at acquisition the
carrying value of the truck fleet was adjusted by an overall average increase
of 15.95% resulting in an uplift totalling £19.5m. £6.5m (2021: £5.8m) of
this uplift has been realised through sales in the year, but this has been
excluded from the consolidated result. The current year includes £4.9m
internal cost of funding compared to £2.3m in the prior 9 months.
Operating expenses increased by £6.6m from the prior period. The prior period
only included 9 months of expenditure and the current year also includes
higher costs with the expansion of the business, mainly relating to staff.
Credit provisions reduced by £0.6m.
As at 31 December 2022 the business had £171.7m (2021: £121.6m) of assets
available for lease.
Other Divisions
2022 2021
Summarised Income Statement £000 £000
Net interest income 23,993 7,555
Net fee and commission income 1,539 681
Operating income 25,532 8,236
Other income 2,385 2,081
Operating expenses - direct costs (16,074) (12,570)
Impairment losses - loans and advances to customers (143) -
Loss before tax 11,700 (2,253)
The aggregated profit before tax of other divisions was £11.7m (2021: loss of
£2.3m).
Operating income increased by £17.3m to £25.5m (2021: £8.2m), mostly due to
the increase in the Bank of England Base Rate, with higher income from
intercompany accounts and treasury assets.
Reported within the other divisions in other income was rental income on our
property portfolio of £0.5m (2021: £0.3m). The prior year also included an
adjustment to the RAF deferred consideration of £0.6m, along with dividends
received totalling £0.1m.
Operating expenses increased mainly due to higher staff costs from higher
staff numbers and increased bonus provisions.
Group Centre
2022 2021
Summarised Income Statement £000 £000
Net interest income (363) (309)
Subordinated loan stock interest (2,788) (2,334)
Operating income (3,151) (2,643)
Other income - 397
Operating expenses (9,705) (8,386)
Loss before tax (12,856) (10,632)
The Group costs increased to £12.9m (2021: £10.6m). Subordinated loan
interest increased by £0.5m due to the rising interest rate environment.
The Group received £0.4m dividends from STB in 2021, while there was no
dividend in 2022 as all shares were sold in the prior year.
The increase in operating expenses of £1.3m is mainly due to higher staff
costs with the accrual for bonuses including national insurance increasing by
£1m.
Capital
The Group's capital management policy is focused on optimising shareholder
value over the long term. There is a clear focus on delivering organic growth
and ensuring capital resources are sufficient to support planned levels of
growth. The Board regularly reviews the capital position.
The Group and the individual banking operation are authorised by the
Prudential Regulation Authority ("PRA") and regulated by the Financial Conduct
Authority and the Prudential Regulation Authority and are subject to EU
Capital Requirement Regulation (EU No.575/2013) ("CRR") which forms part of
the retained EU legislation (EU legislation which applied in the UK before
11.00 p.m. on 31 December 2020 has been retained in UK law as a form of
domestic legislation known as 'retained EU legislation') and the PRA Rulebook
for CRR firms. One of the requirements for the Group and the individual
banking operation is that capital resources must be in excess of capital
requirements at all times.
In accordance with the parameters set out in the PRA Rulebook, the Internal
Capital Adequacy Assessment Process ("ICAAP") is embedded in the risk
management framework of the Group. The ICAAP identifies and assesses the risks
to the Group, considers how these risks can be mitigated and demonstrates that
the Group has sufficient resources, after mitigating actions, to withstand all
reasonable scenarios.
Not all material risks can be mitigated by capital, but where capital is
appropriate the Board has adopted a "Pillar 1 plus" approach to determine the
level of capital the Group needs to hold. This method takes the Pillar 1
capital requirement for credit, market and operational risk as a starting
point, and then considers whether each of the calculations delivers a
sufficient amount of capital to cover risks to which the Group is, or could
be, exposed. Where the Board considers that the Pillar 1 calculations do not
adequately cover the risks, an additional Pillar 2A capital requirement is
applied. The PRA will set a Pillar 2A capital requirement in light of the
calculations included within the ICAAP. The Group's Total Capital Requirement,
as issued by the PRA, is the sum of the minimum capital requirements under the
CRR (Pillar 1) and the Pillar 2A requirement.
The ICAAP document will be updated at least annually, or more frequently if
changes in the business, strategy, nature or scale of the Group's activities
or operational environment suggest that the current level of capital resources
is no longer adequate. The ICAAP brings together the management framework
(i.e. the policies, procedures, strategies, and systems that the Group has
implemented to identify, manage and mitigate its risks) and the financial
disciplines of business planning and capital management. The Group's
regulated entity is also the principal trading subsidiary as detailed in Note
45.
The Group's regulatory capital is divided into two tiers:
• Common equity Tier 1 ("CET1"), which comprises shareholder funds less
regulatory deductions for intangible assets, including Goodwill and deferred
tax assets that do not arise from temporary differences.
• Tier 2 comprises qualifying subordinated loans.
Capital ratios are reviewed on a monthly basis to ensure that external
requirements are adhered to. All regulated trading entities have complied with
all of the externally imposed capital requirements to which they are subject.
2022 2021
Capital ratios £000 £000
CET1 Capital Instruments* 212,501 202,479
Deductions (37,126) (26,244)
CET1 Capital after Deductions 175,375 176,235
Tier 2 Capital 37,594 36,772
Own Funds 212,969 213,007
CET1 Capital Ratio (CET1 Capital/Total Risk Exposure) 11.6% 12.3%
Total Capital Ratio (Own Funds/Total Risk Exposure) 14.0% 14.9%
* Includes year-end audited result.
Risks and Uncertainties
The Group regards the monitoring and controlling of risks and uncertainties as
a fundamental part of the management process. Consequently, senior
management are involved in the development of risk management policies and in
monitoring their application. A detailed description of the risk management
framework and associated policies is set out in Note 6.
The principal risks inherent in the Group's business are reputational,
macroeconomic and competitive environment, strategic, credit, market,
liquidity, operational, cyber, conduct and, regulatory and capital.
Reputational risk
Reputational risk is the risk to the Group from a failure to meet reasonable
stakeholder expectations as a result of any event, behaviour, action or
inaction by ABG itself, its employees or those with whom it is associated.
This includes the associated risk to earnings, capital or liquidity.
ABG seeks to ensure that all of its businesses act consistently with the seven
corporate principles as laid out on page 3 of the Annual Report and Accounts.
This is achieved through a central Risk Management framework and supporting
policies, the application of a three-lines of defence model across the Group
and oversight by various committees. Employees are supported in training,
studies and other ways and encouraged to live out the cultural values within
the Group of integrity, energy and drive, respect, collaboration and
empowerment. In applying the seven corporate principles, the risk of
reputational damage is minimised as the Group serves its shareholders,
customers and employees with integrity and high ethical standards.
Macroeconomic and competitive environment
The group is exposed to indirect risk that may arise for the macroeconomic and
competitive environment.
In recent years there have been a number of global and domestic events which
have had significant implications on the Group's operating environment,
namely: Russia's War in the Ukraine, Coronavirus and Brexit. The culmination
of these events has led to significant turmoil in both global and domestic
markets. The most significant economic effect from these events includes
record inflation driven by high fuel costs, leading to sharp and significant
increases in the cost of borrowing. Indicators suggest that conditions may
have improved since the year end however there still remains significant
uncertainty around the state of the UK economy which may have an impact on the
group's customers and assets.
Climate change
Climate change presents financial and reputational risks for the banking
industry. The Board consider Climate change a material risk as per the Board
approved risk appetite framework which provides a structured approach to risk
taking within agreed boundaries. The assessment is proportional at present but
will develop over time as the Group generates further resources and industry
consensus emerges. The assessment is maintained by the Chief Risk officer and
has been informed by the ICAAP review and workshops for employees.
Whilst it is difficult to assess how climate change will unfold, the Group is
continually assessing various risk exposures. The UK has a legally binding
target to cut its greenhouse gas emissions to "net-zero" by 2050. There is
growing consensus that an orderly transition to a low-carbon economy will
bring substantial adjustments to the global economy which will have financial
implications while bringing risks and opportunities.
The risk assessment process has been integrated into existing risk frameworks
and will be governed through the various risk governance structures including
review and recommendations by the Arbuthnot Latham Risk Committee. Arbuthnot
Latham has been assessed against the Task Force on Climate-related Financial
Disclosures' ("TCFD") recommended disclosures and where appropriate the
FCA/PRA guidance as per the Supervisory Statements.
In accordance with the requirements of the PRA's Supervisory Statement
'Enhancing banks' and insurers' approaches to managing the financial risks
from climate change', the Group has allocated responsibility for identifying
and managing the risks from climate change to the relevant existing Senior
Management Function. The Bank is continuously developing a suitable strategic
approach to climate change and the unique challenges it poses.
The FCA have issued 'Climate Change and Green Finance: summary of responses
and next steps'. In addition to the modelling of various scenarios and various
governance reviews, the Group will continue to monitor requirements through
the relationship with UK Finance.
Strategic risk
Strategic risk is the risk that the Group's ability to achieve its corporate
and strategic objectives may be compromised. This risk is particularly
important to the Group as it continues its growth strategy. However, the Group
seeks to mitigate strategic risk by focusing on a sustainable business model
which is aligned to the Group's business strategy. Also, the Directors
normally meet once a year outside a formal Board setting to ensure that the
Group's strategy is appropriate for the market and economy.
Credit risk
Credit risk is the risk that a counterparty (borrower) will be unable to pay
amounts in full when due. This risk exists in Arbuthnot Latham, which
currently has a loan book of £2.2bn (2021: £1.9bn). The lending portfolio in
Arbuthnot Latham is extended to clients, the majority of which is secured
against cash, property or other high quality assets. Credit risk is managed
through the Credit Committee of Arbuthnot Latham.
Market risk
Market risk arises in relation to movements in interest rates, currencies,
property and equity markets. The Group's treasury function operates mainly to
provide a service to clients and does not take significant unmatched positions
in any market for its own account. As a result, the Group's exposure to
adverse movements in interest rates and currencies is limited to interest
earnings on its free cash and interest rate re-pricing mismatches. The Group
actively monitors its exposure to future changes in interest rates. However,
at the current time the Group does not hedge the earnings from the free cash
which currently totals £732.7m. The cost of hedging is prohibitive.
The Group is exposed to changes in the market value of its properties. The
current carrying value of Investment Property is £6.6m and properties
classified as inventory are carried at £19.6m. Any changes in the market
value of the property will be accounted for in the Income Statement for the
Investment Property and could also impact the carrying value of inventory,
which is at the lower of cost and net realisable value. As a result, it could
have a significant impact on the profit or loss of the Group.
Liquidity risk
Liquidity risk is the risk that the Group, although solvent, either does not
have sufficient financial resources to enable it to meet its obligations as
they fall due, or can only secure such resources at an excessive cost. The
Group takes a conservative approach to managing its liquidity profile. Retail
client deposits and drawings from the Bank of England Term Funding Scheme fund
the Bank. The loan to deposit ratio is maintained at a prudent level, and
consequently the Group maintains a high level of liquidity. The Arbuthnot
Latham Board annually approves the Internal Liquidity Adequacy Assessment
Process ("ILAAP"). The Directors model various stress scenarios and assess the
resultant cash flows in order to evaluate the Group's potential liquidity
requirements. The Directors firmly believe that sufficient liquid assets are
held to enable the Group to meet its liabilities in a stressed environment.
Operational risk
Operational risk is the risk that the Group may be exposed to financial losses
from conducting its business. The Group's exposures to operational risk
include its Information Technology ("IT") and Operations platforms. There are
additional internal controls in these processes that are designed to protect
the Group from these risks. The Group's overall approach to managing internal
control and financial reporting is described in the Corporate Governance
section of the Annual Report.
In line with further guidance issued by the Regulator, the Bank has continued
to focus on ensuring that the design of systems and operational plans are
robust to maintain operational resilience in the face of unexpected incidents.
During 2021 the Bank continued to review these plans and undertook tests to
ensure backup and recovery processes were effective even when working in a
hybrid working model.
During the year the FCA, PRA and BoE published their final policy papers on
building operational resilience. The Bank completed the required
self-assessment of compliance with the expected standards in March 2022. This
continues to be an important area of focus as the Bank continues its
investment in new IT systems.
Cyber risk
Cyber risk is an increasing risk for the Group within its operational
processes. It is the risk that the Group is subject to some form of disruption
arising from an interruption to its IT and data infrastructure. The Group
regularly tests the infrastructure to ensure that it remains robust to a range
of threats and has continuity of business plans in place including a disaster
recovery plan.
Conduct risk
As a financial services provider we face conduct risk, including selling
products to customers which do not meet their needs, failing to deal with
clients' complaints effectively, not meeting clients' expectations, and
exhibiting behaviours which do not meet market or regulatory standards.
The Group adopts a low risk appetite for any unfair customer outcomes. It
maintains clear compliance guidelines and provides ongoing training to all
employees. Periodic spot checks, compliance monitoring and internal audits
are performed to ensure these guidelines are followed. The Group also has
insurance policies in place to provide some cover for any claims that may
arise.
Regulatory and capital risk
Regulatory and capital risk includes the risk that the Group will have
insufficient capital resources to support the business and/or does not comply
with regulatory requirements. The Group adopts a conservative approach to
managing its capital. The Board of Arbuthnot Latham approves an ICAAP
annually, which includes the performance of stringent stress tests to ensure
that capital resources are adequate over a three year horizon. Capital and
liquidity ratios are regularly monitored against the Board's approved risk
appetite as part of the risk management framework.
Regulatory change also exists as a risk to the Group's business.
Notwithstanding the assessments carried out by the Group to manage regulatory
risk, it is not possible to predict how regulatory and legislative changes may
alter and impact the business. Significant and unforeseen regulatory changes
may reduce the Group's competitive situation and lower its profitability.
Strategic Report - Non-Financial Information Statement
The table below sets out where stakeholders can find information on
non-financial matters, as required by Sections 414CA and 414CB of the
Companies Act 2006, enabling them to understand the impact of the Group's key
policies and activities.
Reporting Requirement Policies and Standards Information Necessary to
Understand Impact of Activities and
Outcome of Policies
Environmental Matters • Credit Policy • Financial Review, page 20
• Managing Financial Risks of Climate Change Framework • Stakeholder Engagement and S. 172 (1) Statement, pages 23 and 24
• Environmental Management Policy • Sustainability Report, pages 26 to 38
• Corporate Governance Report page 47
Employees • Agile Working Policy • Stakeholder Engagement and S. 172 (1), pages 23 and 24
• Board Diversity Policy • Sustainability Report, pages 26 to 29
• Dignity at Work Policy • Directors Report, page 42
• Equality and Diversity Policy • Corporate Governance Report, page 45
• Flexible Working Policy
• Health and Safety Policy
• Long Service Awards Policy
• Parental Leave Policy
• Personal Appearance Policy
• Remuneration Policy
• Training & Development Policy
• Whistleblowing Policy
Social Matters • Complaints Handling Policy • Arbuthnot Principles, page 3
• Fraud Policy • Stakeholder Engagement and S. 172 (1) Statement, pages 23 and 24
• Tax Strategy • Sustainability Report, pages 26 to 29
• Vulnerable Clients Policy
Respect for • Anti- Modern Slavery Policy • Stakeholder Engagement and s.172 (1) Statement, pages 23 and 24
Human Rights • Dignity at Work Policy • Sustainability Report, pages 26 to 29
• Equality and Diversity Policy
• Personal Data Protection Policy
Anti-Corruption • Anti-Bribery and Corruption Policy • Sustainability Report, pages 26 and 28
and Anti-Bribery • Anti-Money Laundering Policy
• Client Acceptance policy
• Cyber Strategy
• Group Market Abuse and Insider Dealing Policy
• Physical Security Policy
Description of Principal Risks and Impact of Business Activity • Strategic Report, pages 19 to 21
Description of the Business Model • Business Overview
Non-Financial Key Performance Indicators • Sustainability Report, pages 26 and 28
Strategic Report - Stakeholder Engagement and s.172 Report
Stakeholder Engagement and S. 172 (1) Statement
This section of the Strategic Report describes how the Directors have had
regard to the matters set out in section 172 (1) (a) to (f) of the Companies
Act 2006 when making decisions. It forms the Directors' statement required by
ABG as a large-sized company under section 414CZA of the Act.
The Directors have acted in a way that they considered, in good faith, to be
most likely to promote the success of the Company for the benefit of its
members as a whole, and in doing so had regard, amongst other matters, to:
• the likely consequences of any decision in the long term;
• the interests of the Company's employees;
• the need to foster the Company's business relationships with
suppliers, customers and others;
• the impact of the Company's operations on the community and the
environment;
• the desirability of the Company maintaining a reputation for
high standards of business conduct; and
• the need to act fairly as between members of the Company.
The Arbuthnot Principles and Values set out on page 3 explain the Board's
approach to its stakeholders. Details of how the Directors had regard to the
interests of its key stakeholders during the year are set out below, in the
Group Directors Report on page 42 and in the Corporate Governance Report on
page 45.
The Board has regard to the interests of all its key stakeholders in its
decision making since the Directors are conscious that their decisions and
actions have an impact on them. The stakeholders we consider in this regard
are our shareholders, employees, customers, suppliers, regulators and the
environment in which we operate.
Likely consequences of any decision in the long term
The Directors make their decisions to ensure that long-term prospects are not
sacrificed for short term gain, reflecting the values and support of Sir Henry
Angest, Chairman and Chief Executive and majority shareholder, which have
proved successful in creating and maintaining value for all shareholders for
over 40 years. This was demonstrated in the year by a number of Board
decisions.
In February 2022, the Board considered a number of options to manage the
capital resources of the Group, without slowing its lending plans as the
divisions build towards the "future state" strategy. This was necessary
because of the reintroduction by the Financial Policy Committee of the Bank of
England of the countercyclical capital buffer at 1% from December 2022 with a
further increase to 2% in July 2023. As a consequence, a decision was taken to
allocate capital away from non-core assets and accordingly to sell the Group's
long leasehold West End office property situated at 20 King Street in July
with completion in October.
In July 2022, as part of its succession planning, the Board appointed
Frederick Angest as a Director, subject to the approval of Grant Thornton as
Nominated Adviser and Aquis Stock Exchange (AQSE) Corporate Adviser which was
given at the end of August.
Interests of the Company's employees
Also in July 2022, the Directors endorsed the decision of the Remuneration
Committee to approve a one-off payment to all executive directors and
employees in the Group of £1,500 in order to assist them with the increased
costs of living being experienced. It was determined that the payment would be
reduced pro rata to part time employees and for those who had been with the
business less than one year. The Directors were able to agree to this
payment of c. £1m, having assured themselves that the business had the
resources to make it because of its trading considerably in excess of the
planned budget.
Executive Directors and senior management are fully engaged with the
workforce, most of whom interact on a daily basis. Employees are also able to
raise concerns in confidence with the HR Team, with grievances followed up in
line with a specified process which satisfies all legal requirements. As
explained in the section 172 (1) Statement of Arbuthnot Latham, the Company's
banking subsidiary, one of its non-executive directors has been designated by
its board as the director to engage with Arbuthnot Latham group's workforce
whereas the Company itself has fewer than 20 employees, all of whom have
direct access to Board members.
As set out in the Whistleblowing Policy, Ian Dewar, a non-executive director
and chairman of the Audit Committee, is the Company's Whistleblowing Champion
and is available at all times in this role. There is an anonymous
whistleblowing service via an external provider. There is also protection for
employees deriving from the Public Interest Disclosure Act 1998. Any material
whistleblowing events are notified to the Board and to the applicable
regulator.
The Board receives an update on human resource matters at each of its
meetings. It is also kept informed of the results of employee surveys
including one on Diversity & Inclusion, conducted in November 2021, which
received a 76% response rate. In November 2022 it considered the results of
the engagement survey, launched in September 2022 to assess how engaged
employees felt with the business, obtaining feedback on key areas that affect
engagement including Leadership, 'My Manager', Wellbeing, Cultural Values,
Diversity & Inclusion, Reward & Recognition and employees' views in
relation to 2022 ways of working and effectiveness of the Agile Working
approach which was established and endorsed by the Board in 2021 to enable the
business and its employees to benefit from a practical combination of office
and remote working. The Agile Working Policy resumed at the end of February
2022 with all employees on average working in the office for a minimum of
three days per week. This followed its suspension in mid-December 2021 with
the introduction of temporary working arrangements in light of the
Government's request in response to the Covid-19 Omicron variant that
individuals should work from home where possible. The engagement survey
received an 82% response rate from employees, 87% of whom were proud to work
for the business. The Board regards the maintenance of a high level of
employee engagement as key to the Company's future success as an organisation
on every level and the focus will be to develop our working environment to
achieve this aim.
Company's business relationships with suppliers, customers and others
The Directors attach great importance to good relations with customers and
business partners. In particular, our clients are integral to our business
and forging and maintaining client relationships are core to Arbuthnot
Latham's business and crucial for client retention. Regular contact was
maintained with clients throughout the year, including with the resumption
again of meetings in the office in February 2022.
The Company is committed to following agreed supplier payment terms. There is
a Supplier Management Framework in place covering governance around the
Company's procurement and supplier management activities. For due diligence
and compliance purposes, suppliers are assessed through an external
registration system. The Modern Slavery Statement, approved by the Board in
March as part of its annual review of the Company's stance and approach to the
Modern Slavery Act, explains the risk-based approach that the Company has
taken to give assurance that slavery and human trafficking are not taking
place in its supply chains or any part of its business. The Board requires
that Arbuthnot Latham implements a Modern Slavery Policy, procedures and
processes in relation to the AL Group, which reflects the commitment to act
ethically and with integrity, in all their respective business relationships
and additionally, to ensure that slavery and human trafficking are not taking
place anywhere in the AL Group or in the AL Group's supply chain.
Other stakeholders include the Company's Regulators, the PRA and the FCA, with
whom open and regular dialogue is maintained.
Balancing stakeholder interests
An illustration of the balancing of the interests of our stakeholders in their
long-term interest was the Board's decision in July 2022 to return to its
progressive dividend policy, resolving to pay an interim dividend of 17p per
share to shareholders. This was an increase of 1p per share from the normal
interim dividend paid in 2021. Given the increased profits of the Group in
2022 and the improving outlook, the Board have decided to accelerate our
growth trajectory of the dividend and are recommending a final dividend of
25p; this is an increase of 3p compared to the final dividend of 2021 and an
additional increase of 2p over the normalised 1p increase.
Impact of the Company's operations on the community and the environment
As part of the management information reviewed at its regular meetings, the
Board receives a Risk Management report, containing a report on Environmental,
Social and Governance (ESG) matters which includes a Climate Change Dashboard,
monitoring climate change measures in place including Scope 1, 2 and 3 GHG
emissions. The Board is updated on the steps the Group is taking to become
more sustainable, given its exposure to climate change transition risk as the
UK evolves to a low carbon economy. It is also kept informed of the formal
approach to ESG established to develop over time, which will underpin the
Arbuthnot Principles and Values within the workplace under five 'pillars of
sustainability' - governance, employees, community, environment and clients
(ESG Pillars). The ESG actions taken are in recognition of the Group's
responsibility to make a positive societal impact and the political,
regulatory and legal pressure with clients and investors increasingly
interested in the Group's ESG stance. The Board has again approved an energy
and carbon report meeting the requirements of the Streamlined Energy and
Carbon Reporting standards, as set out on page 37 of the Sustainability
Report.
Desirability of the Company maintaining a reputation for high standards of
business conduct
The Directors believe that the Arbuthnot culture set out in the Arbuthnot
Principles and Values manifests itself at Board level and in the external view
of the Group as a whole. The importance of the Group's reputation is
considered at each Board meeting. These Principles are encapsulated in five
Group cultural values, embedded into day-to-day activities. These values are
integrity, respect, empowerment, energy and drive, and collaboration.
Acting fairly as between members of the Company
The majority shareholder, Sir Henry Angest, is the Company's Chairman and
Chief Executive. There is continuing engagement with other major shareholders
and the Directors make their decisions on behalf of all shareholders. The
Board welcomes engagement with them and will continue to maintain
communications via one-to-one meetings as appropriate. The Directors treat all
shareholders equally, albeit that holders of non-voting shares do not have the
right to vote in shareholder meetings.
Strategic Report - Sustainability Report
Introduction
The Group is committed to ensuring its business activities have a positive
impact not just for clients and shareholders, but also for employees, society
and the environment. Two of our key business principles, reciprocity and
stability, rely on recognising our own responsibility to make a positive
societal impact.
The world is in the middle of a profound transition when it comes to
sustainability and we recognise the role we must play in that transition.
Climate change is an important topic for consumers and investors alike. In
parallel, inclusive growth and the impact organisations have on society is
increasingly a focus. More than ever before, organisations are being held
accountable for their impacts on society.
We focus on how we can improve to build a future that delivers growth,
sustainability and inclusion. This means operating with a strong emphasis on
our environmental and societal impact and on our governance procedures.
The Group approaches ESG by considering the impact from our practices and
outputs across five categories of sustainability - Governance, Employees,
Community, Environment and Clients.
Governance
The Group has a solid system of governance in place, endorsing the principles
of openness, integrity and accountability which underpin good corporate
governance. The Group operates to high standards of corporate accountability
with an effective Board and Board committees. This, together with the role and
overall holding of Sir Henry Angest, the ultimate majority shareholder, and
compliance with PRA and FCA regulations and with those of the London Stock
Exchange Alternative Investment Market and the Aquis Exchange, is fundamental
to our success as a business.
Employees
Our employees and culture set us apart from others in our industry. Our high
engagement scores are a testament to this: from a response rate of 89% to the
most recent employee engagement survey (Non-financial Key Performance
Indicator), conducted in September 2022, 87% of employees state they are proud
to work for the Group. As a relationship-led bank, our employees are at the
heart of everything we do.
We are committed to providing a healthy working environment and improving the
quality of working lives for all our employees. Our wellbeing strategy and
offering aims to support and reflect the Group's mission and core values of
Integrity, Respect, Empowerment, Energy & Drive and Collaboration in the
recognition that our employees are our greatest asset.
February 2022 saw the resumption of the Group's Agile Working Policy,
introduced in October 2021 to enable the business and its employees to benefit
from a practical combination of office and remote working. The policy reflects
the Board's view that there are substantial benefits from balancing office
working with working from home. The policy resumed following its suspension
during January 2022 owing to the necessity for employees to work from home in
line with the Government's advice regarding the Covid-19 Omicron variant. The
vast majority of employees indicated their support for the policy. In July
2022, following a review of the policy, a small adjustment was made to it with
the Senior Leadership Team attending the office four days a week and for key
governance meetings to be held in the office, given our culture to be mainly
office based. As a service and relationship business, it is important that we
meet clients and that our employees meet on a regular and frequent basis.
At the same time the Board agreed to make a cost of living payment to all
employees in September 2022 due to the prevailing high inflation rate in order
to help alleviate some of the burden of these increased costs on employees. A
further cost of living payment is to be made in 2023 to those employees
earning salaries of up to £50,000 pa. and who joined the Group before 1
January 2023.
Flexibility is applied to the Agile Working Policy, as shown by its relaxation
at the time of the Met Office extreme weather warnings in mid-July 2022,
during teachers' strikes and during the regular rail and underground strikes
which have affected the London office since June 2022. On strike days,
employees unable to travel to the London office are encouraged to work from
home, thereby mitigating the disruption that would previously have been
caused, the pandemic having demonstrated the ability of the business to
function remotely when necessary.
Our wellbeing strategy focuses on the physical, financial, mental and social
wellbeing of our employees. We have a range of structured internal wellbeing
programmes and established an Active Hub to set up team challenges for health
wellbeing, building on the solo initiatives launched during the pandemic. In
February 2023 we launched the Champion Health app, our new all-in-one
wellbeing platform. The platform was created by more than sixty health
professionals to make one unified platform that covers all areas of wellbeing
for employees and up to three of their friends or family members. We also
hold employee webinars on financial wellbeing and education. A Pension Scheme
Governance Committee was established in January 2022 and the matters discussed
at its six-monthly meetings are communicated to employees, continuing the
focus on their financial wellbeing.
As a rapidly growing business, we encourage career progression and seek to
develop our people's skills to help them grow within the organisation. We
strive to create a working environment that ensures people are treated fairly
and that their wellbeing is supported.
The feedback from our first Diversity & Inclusion Survey, conducted in
November 2021, is being used to create an even better working environment for
employees and to help attract the best talent. The Group's D&I strategy,
approved and communicated to employees during 2022, sets out the value put on
the difference people bring and how we are consciously inclusive in all
aspects of the way we work, recognising the commercial advantage this brings.
We are committed to fostering a more inclusive and dynamic environment,
allowing everyone to achieve their full potential. Employees are encouraged to
speak about what matters to them and to give feedback on our performance in
this area.
The objectives of this strategy are to develop a culture and environment that
allow people of various backgrounds, mindsets and ways of thinking to work
effectively together and to perform to their highest potential to achieve
their objectives and ours; to improve diversity in the Senior Leadership Team;
and to increase diversity at all levels. Pilot management D&I programme
workshops have been launched in three specific business areas as part of the
wider HR agenda and, as part of the Group-wide training strategy, we will
include a D&I module each quarter. Our current gender mix emphasises the
need for us to develop internal talent to enable internal progression, whilst
continuing to attract diverse talent into roles at all levels.
Early Careers: 2022 saw the launch of our first Structured Graduate and
Apprenticeship Programmes for a total of 14 participants, along with the
second year of our Industrial Placement and Summer internship programmes. The
Group now offers five different Early Careers Programmes, including work
experience, summer internships, one-year placements, graduate placements and
apprenticeships. We also launched our Leadership Development Academy in
October 2022, with 14 participants, and have more programmes scheduled for
2023 for existing and aspiring leaders. In January 2023, we hosted an evening
inviting 100 female students interested in a career in banking, providing 80
spaces to Year 13 students from the Young Professionals network and 20 for
female student referrals from employees. We have partnered with the Young
Professionals network, an organisation which works with schools across the UK
from different social backgrounds to provide an insight and introduction to
different industries, in order to grow the quality and diversity of our Early
Careers talent pool.
In November 2022, the existing benefits package was increased as part of the
annual benefits window by giving eligible employees the opportunity to enhance
at favourable rates their cover for certain benefits including life assurance.
Community
The Group recognises that we must commit to driving positive community impact,
creating an impact within the communities in which we exist and operate, and
connecting the dots between the charities we support and the social
initiatives we run.
Our Corporate Social Responsibility activities are being reviewed with plans
for a new strategy to accelerate our effort. Once this new CSR strategy is in
place our primary community focus for 2023 will be around financial education
and literacy. We will also expand our place-based and skills-based outreach,
with greater promotion and engagement from employees. The Group continues to
promote philanthropy and fundraising, supported by our volunteer days and
pound for pound matching scheme. We are also looking to expand our
partnerships with others to help facilitate positive change.
Clients
Relationships with our clients are at the heart of what we do. We take the
time to understand what is important to our clients so we can be confident
that we are working in their best interests, for business, for family, for
life. Being a relationship-led bank, every single one of our clients has a
dedicated relationship manager there to guide and support them. This is
supported by our strong Net Promoter Score (NPS) (Non-financial Key
Performance Indicator) which is reviewed every two years. Our 2022 NPS
increased to 64%, up from 47% in 2020, a reflection of our clients' advocacy.
Our bankers have been engaging pro-actively with customers, following the
tightening of Credit appetite in order to help those struggling due to the
impact of increasing interest rates, inflation and high cost of living.
Policies
The Group has adopted a wide range of policies that straddle the five pillars
to ensure that employees and management are aware of their responsibilities
towards our customers and comply with all regulatory requirements. Some of the
key policies are set out below and in the Non-Financial Statement on page
22.
Environment
The Group takes a long-term view. We recognise as a business that our carbon
footprint needs to move towards net-zero over time. This reduction is not just
an environmental imperative, but a business one as well. We are committed to
having net zero carbon emissions by 2050. As a consequence, we have in place
an Environmental Management policy which sets outs the Group's high-level
approach to managing environmental issues and provides requirements in helping
the Bank work towards achieving its commitments.
The Bank's Credit Policy sets out the Group's limited appetite for financial
and reputational risk emanating from climate change, which includes physical
risk (extreme weather, flooding etc.) and transitional risk (changes to law,
policy, regulation, and culture). The Bank adopts a favourable stance
towards a low carbon economy and lending propositions that have a neutral or
positive impact on the environment / climate. The Bank will also consider the
impact on public perception and potential impact on continuing demand for
clients' products and services, as well as any impact on its underlying
security. These factors are assessed as part of the credit application process
and at least once a year through the annual review process.
Our transition towards sustainability
We are taking steps, guided by our five pillars, to help us become more
sustainable. Further information is given on the Group's website at
Sustainability | Arbuthnot Latham
(https://www.arbuthnotlatham.co.uk/about-us/sustainability-arbuthnot-latham) .
Pillar Current status
Ensure responsible and transparent corporate governance which aligns to • We are developing a transparent framework for embedding
business goals while making a positive societal impact sustainability into our business practices by recording, monitoring, and
publishing performance against pre-defined targets.
We have policies in place, such as our
• Anti- Money Laundering Policy, written to ensure a consistent
approach across the Group to assist with the deterrence and detection of those
suspected of laundering the proceeds of crime or those involved in the funding
or execution of terrorism, and the disclosure to the relevant authorities. In
May 2022, governance in this vital area was further enhanced by the
appointment of the former Head of Compliance as the dedicated Head of
Financial Crime and Money Laundering Reporting Officer.
• Anti-Bribery and Corruption Policy, expressing our condemnation of
such practice, prohibiting employees from engaging in it and expecting third
parties providing services to have similar commitments.
• We have a published Tax Strategy, which sets out the Group's
commitment to compliance with tax law and practice in the UK, which includes
paying the
correct amount of tax at the right place and right time and having a
transparent and constructive relationship with the tax authority.
Creating a supportive and diverse workplace in which employees can thrive • We promote a working environment that seeks to develop employee
skills, and ensures employees are treated fairly and supports their wellbeing.
• In January 2023, we were named as a Five Star Employer by WorkBuzz
for the second year running for sustained high levels of employee engagement.
• We operate an Arbuthnot Achievers employee recognition scheme
• We conduct annual and pulse employee surveys (conducted
anonymously)
• We have adopted agile and flexible working policies
• We pay all employees a living wage and have market aligned job
families. We are also considering applying for Living Wage accreditation.
• All employees are eligible for a bonus, pension contribution, sick
pay and other benefits. From 2023 we have also offered eligible employees the
opportunity to enhance at favourable rates their cover for life assurance and
related cover.
• We publish details of our gender pay gap annually.
Having a positive impact on the community in which we operate Diversity & Inclusion
• We are committed to the promotion of a workplace culture that
provides an equitable, diverse, and inclusive environment.
• In 2022 we communicated a Diversity & Inclusion strategy,
following the first survey for employees the previous year.
Corporate Social Responsibility (CSR)
• We currently support philanthropy through matching charity
donations, payroll giving, and volunteer days.
• Our CSR activities are being reviewed for 2023, with plans for a
new strategy to accelerate our efforts.
• We are increasing our community and volunteer offering, with a
focus for 2023 on financial education and literacy.
• We aim to secure new accreditations and signatories that align
with our CSR activities and values.
Suppliers
• We developed a Supplier Code of Conduct, engaging with suppliers
to build mutually sustainable relationships in line with our values.
• We currently screen suppliers with regards to ethical standards.
• The Group's Modern Slavery Policy sets out our zero-tolerance
approach to modern slavery, and any instance of modern slavery in our business
or supply chain is a breach of the core values of our business.
Ensuring that our business practices have a positive impact on the environment We will set targets and progress against these with a view to reaching
net-zero carbon emissions as a business by 2050.
Energy
• As part of the review of our working environment and practices to
reduce our energy consumption, we signed up for a green tariff for our main
office in Wilson Street, London in February 2022. The introduction of agile
working is continuing to have a positive impact on our energy usage. We are
actively reviewing our premises strategy with specific reference to
environmental factors and agile working.
• Our Wilson Street office has an Energy efficiency B rating.
Waste
• We have reduced paper usage in the office by issuing laptops to
all employees and in 2022 by reducing the number of our photocopiers by more
than a quarter.
• We continue to reduce the printing of client communications and
marketing materials.
• We ensure the responsible disposal of computer equipment and have
a waste recycling programme in place.
Transport
• Our carbon footprint decreased substantially with the introduction
of agile working.
• We have developed our virtual meeting facilities and will continue
to do this, reducing the need for travel between offices.
• Our benefits include a cycle to work scheme and season ticket
loan.
• We continue to finance electric vehicles through our RAF
subsidiary while AAG strives to finance the most environmentally friendly
trucks in the UK which we seek to keep as up to date as possible. AAG is
actively considering how the market in renewable energy develops.
Ensuring best outcomes for our clients • We seek regular feedback from our clients to reinforce our
proposition and service.
• In 2022 we conducted an in-depth review of our client value
proposition which included a client survey and deep-dive individual client
interviews.
• We also have a robust complaints process and take dissatisfaction
seriously, remediating issues promptly.
• We take the protection of our client data seriously and have
robust measures in place to protect client data in line with our legal and
regulatory requirements.
• We offer a Sustainable Investment Service which incorporates
environmental, social, and governance factors to achieve a positive impact
without sacrificing long-term financial returns.
• We make regular anti-fraud communications to clients, alerting
them to the different techniques used by criminals to seek to steal people's
data and money.
• We have set up a project, planning for the implementation of the
FCA's new Consumer Duty for all new and existing products and services that
will be on sale at the end of July 2023. The aim is to deliver good outcomes
for retail customers, reflecting the new, higher standard of the Consumer
Duty.
• In 2022 Aon on behalf of the Group conducted an in-depth client
experience survey, as part of the wider Client Value Proposition project.
• We have continued to invest in the Bank's core banking system,
completing a major project in 2022, thereby demonstrating that operational
resilience and the ability to make services available to our clients is of the
utmost importance.
• We continue to invest in our risk management capabilities across
Credit, Compliance, Operational Risk and Financial Crime with a view to
ensuring good client outcomes through the continuing stability of the Bank.
Progress Towards Task Force on Climate-related Financial Disclosures' (TCFD)
Alignment
During the year, further progress was made in preparation for reporting on the
Group's climate-related risks in line with the recommendations of the global
TCFD. For AIM listed companies, new regulations will come into force for the
Annual Report for the year ending December 2023, requiring us to provide
information on climate change related risks and opportunities, where material.
The information to be given will cover how climate change is addressed in
corporate governance; the impacts on strategy; how climate related risks and
opportunities are managed; and on the performance measures and targets applied
in managing these issues.
The TCFD encourages consistent, reliable and clear measurement and reporting
of climate-related financial risks. Its recommendations provide a framework
for understanding and analysing how climate change affects our customers, our
own operations and our strategy. The recommendations are to assess disclosures
around governance, strategy, risk management and metrics and targets.
As stated in the section on Risks and Uncertainties on page 19 above, we have
assessed the Group against the TCFD recommended disclosures and in preparation
for the new requirements coming into force next year, we set out below our
initial assessments.
Section Requirement Our Response
Governance a. Describe the board's oversight of climate-related risks and opportunities. The "Climate Change Risk Appetite, Risk Assessment and Scenarios" are reviewed
annually and approved by the AL Risk Committee on behalf of the Board.
• The ESG dashboard (that includes Climate Change) is a standing
item on the Risk Committee agenda and forms part of the AL Chief Risk
Officer's regular update to the Board.
• The ESG dashboard details climate-change related actions and
performance against risk tolerances. The tolerances are partly based on the
climate change scenarios outputs.
• Climate change risk is considered in acquisitions or divestitures
decisions, most recently in the case of the acquisition of AAG in 2021.
Governance b. Describe management's role in assessing and managing climate-related risks First Line
and opportunities.
• Accountability for managing the financial risks of climate change
sits with the CEO of AL, Andrew Salmon.
Second line
• The Senior Management Function (SMF) accountability for the
financial risks of climate change sits with Stephen Kelly, the AL CRO. He has
responsibility for assessing climate-related issues.
• Climate change is managed within the Group's existing governance
and risk management frameworks. It is not proportionate to operate further
structures.
• The AL Risk Committee has oversight for Climate Change and it is
included in its Terms of Reference.
• The AL Credit Committee considers implications of climate change
on new and existing lending. All new lending includes a climate change
assessment.
• The AL Investment Committee considers implications of climate
change on investment decisions.
• The Product Governance Committee considers climate change on
propositions
• The ICAAP includes climate change scenarios.
Strategy a. Describe the climate-related risks and opportunities the organisation has The Climate Change Risk Appetite, Risk Assessment and Scenarios consider the
identified over the short, medium, and long term. risks and opportunities for the business model and lending book over following
time periods:
Short term (0-1 years);
Medium term (1-5 years); and
Long term (5-30 years)
• The key opportunities and risks are as follows:
• AL Core transition risk and opportunity on the rising EPC
requirements for buy to let residential property
• AL Core physical risk (flood risk) on residential property.
• RAF transition risk and opportunity from the demise of combustion
engines and switch to electric engines.
• AAG transition risk and opportunity from the demise of combustion
engines and switch to alternatives.
Strategy b. Describe the impact of climate-related risks and opportunities on the • The Group has minimal exposure to the Energy or Utility sectors.
organisation's businesses, strategy, and financial planning.
• AL Core residential property loan risks are mitigated by the loan
durations (typically less than 5 years) and strong loan to values. New
lending includes a costing to get properties to EPC 'C'. In addition, the
business is planning to launch green lending products aimed at attracting
higher EPC portfolios and financing EPC improvements.
• RAF combustion engine risk is mitigated by the short loan
durations (typically less than 5 years). In addition, RAF captures the
opportunity by financing electric and hybrid vehicles.
• AAG combustion engine risk is mitigated by the short leasing
durations (typically less than 5 years), lack of viable alternate technologies
and by the strategic objective to keep the fleet focused on latest Euro 6
models and as young as possible. AAG is well positioned to finance the
transition to cleaner technology vehicles.
Strategy c. Describe the resilience of the organisation's strategy, taking into Based on the risk assessment, the Group's business model is considered
consideration different climate-related scenarios, including a 2°C or lower resilient to climate-related risks and opportunities.
scenario.
Risk Management a. Describe the organisation's processes for identifying and assessing • The "Climate Change Risk Appetite, Risk Assessment and Scenarios"
climate-related risks. are reviewed annually and approved by the AL Risk Committee on behalf of the
Board.
• The risk assessment and scenarios consider existing and emerging
regulatory requirements and other relevant factors, as well as the potential
size and scope of climate-related risks.
• The scenarios are informed by the Bank of England "Key elements of
the 2021 Biennial Exploratory Scenario: Financial risks from climate change"
published on 8 June 2021.
• The risk assessment is informed by the scenarios. It identifies
and assesses the transition and physical risks to the business model and
lending book.
• Climate Change is referenced in the
• ICAAP
• Risk Appetite Framework
• Credit Policy
Risk Management b. Describe the organisation's processes for managing climate-related risks. • The AL Credit Committee considers implications of climate change
on new and existing lending. All new lending includes a climate change
assessment.
• The Investment Committee considers implications of climate change
on investment decisions.
• The AL Product Governance Committee considers climate change on
propositions.
Risk Management c. Describe how processes for identifying, assessing, and managing • The AL Risk Hierarchy includes Climate Change as a risk within the
climate-related risks are integrated into the organisation's overall risk Enterprise & Strategic Risk Category as per the Board-approved Risk
management. Appetite Framework.
Metrics and Targets a. Disclose the metrics used by the organisation to assess climate-related The ESG dashboard details climate-change related actions, metrics and
risks and opportunities in line with its strategy and risk management process. performance against risk tolerances. Metrics are disclosed on energy usage.
It is not considered proportionate to disclose metrics on water, land use and
waste management.
Climate-related performance metrics are not incorporated into remuneration
policies, based on the inherent risk to the Group.
The Group does not operate an internal carbon price mechanism on the basis of
proportionality.
The Risk Assessment documents the Group's exposure to carbon-related assets
(defined as Energy and Utility sectors) as <1% at June 2022.
This analysis was based on the Regulatory Reporting Sector Analysis (SIC code
based).
Metrics and Targets b. Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas (GHG) Scope 1,2 and 3 emissions are reported on page 37 below and have been reported
emissions and the related risks. in the ABG Annual Report since 2020.
Scope 1, 2 and 3 emissions are also reported on the ESG dashboard.
Metrics and Targets c. Describe the targets used by the organisation to manage climate-related The Group is committed to the following:
risks and opportunities and performance against targets.
• To be Net Zero by 2050.
• For AAG vehicles, this will require technology advances as
emissions are expected to increase in line with business growth.
• As part of our London premises strategy, we will consider energy
efficiency as one of the criteria with further gains expected. The remaining
gap to Net Zero post the premises review will be addressed by further
initiatives and potentially carbon off-setting.
Streamlined Energy & Carbon Reporting (SECR)
The Group has worked again with a specialist energy management consultancy,
Carbon Decoded, to gather the information required to be reported by large
unquoted companies under the Companies (Directors' Report) and Limited
Liability Partnerships (Energy and Carbon Report) Regulations 2018:
· All energy in line with Greenhouse Gas Reporting (GHG) Scope One
- gas and owned transport, Scope Two -electricity and Scope Three - non-owned
transport.
· An intensity metric to enable year on year improvements to be
tracked.
The report covers data from 1 January to 31 December 2022 for the Company and
its subsidiaries. The Group has reported all sources of environmental
impact, as required in SECR, over which it has financial control, being the
Company and its subsidiaries.
Base Year
This year the Base Year has been changed to a rolling annual comparison. The
acquisition of Asset Alliance Group (AAG) in 2021 significantly affected the
energy use of the business, making comparisons to the previous 2019 baseline
ineffective for energy reduction purposes. The removal of restrictions as a
result of the Covid-19 pandemic has also continued tohave an impact on a
changing picture of energy use in 2022.
Reporting Methodology
Ø Data has been collected for electricity, gas and transport.
Ø GHG Protocol Corporate Accounting and Reporting Standard has been followed
where relevant.
Ø Data was collected specifically for the purpose of SECR.
Ø The 2021 and 2022 UK Government Conversion Factors for Company Reporting
were used for all calculations of Carbon emissions.
Ø Data was estimated where necessary, as set out below.
Estimated Data
The following data was estimated in 2022:
Dominion Street, London Natural Gas Gas use is included in the rent and sub-metering is not available; estimates
are based on floor area
Bristol and Gatwick Energy is included on the rent and sub-metering for the office is not
available; estimates are based on floor area
On-site Transport Diesel used for Forklift Trucks and Refrigerated Vehicles held on site at
Wolverhampton has been estimated.
Operational Scopes
The report contains all Scope One and Two energy use and Scope Three Grey
Fleet for the Group as required by SECR.
Energy consumption for the commercial office properties owned by the Group has
been further improved to provide more actual data in 2022 where floors in
buildings were unoccupied by tenants and the responsibility for energy
consumption returned to the Group. The Group is actively reviewing its
premises strategy with specific reference to environmental factors.
Reporting Summary
2022 2021
Scope One Measure kWh Carbon Tonnes tCO2e Intensity Ratio tCO2e Measure kWh Carbon Tonnes tCO2e Intensity Ratio tCO2e
Natural Gas - Intensity Ratio tCO2e/m2 5,779 397,824 73 0.013 5,779 305,708 56 0.010
Gas Oil - Intensity Ratio tCO2e/m2 12,923 3 0.002
Kerosene - Intensity Ratio tCO2e/m2 1,545 61,926 15 0.010 1,545 57,356 14 0.009
Diesel - Mixed Onsite Use No Metric Available 38,185 9
Company HGVs Intensity Ratio tCO2e/miles 90,720 643,279 155 0.0017 43,582 255,865 61 0.0014
Company Cars Intensity Ratio tCO2e/miles 314,699 269,795 65 0.0002 365,010 352,752 84 0.0002
Total Scope One 1,411,009 317 984,604 218
Scope Two
Electricity - Intensity Ratio tCO2e/m2 14,274 1,703,083 329 0.023 14,117 1,797,245 382 0.027
Company Cars Intensity Ratio tCO2e/miles 19,656 8,317 2 0.0001
Total Scope Two 1,711,400 331 14,117 1,797,245 382 0.027
Scope Three
Grey Fleet Vehicles Intensity Ratio tCO2e/miles 270,683 337,205 80 0.0003 173,316 212,618 50 0.0003
Total Scope Three 270,683 337,205 80 0.0003 173,316 212,618 50 0.0003
Total of all Scopes 3,459,614 728 2,994,467 649
Estimated Data 7% 20%
Corrective Actions
Data improvement work completed this year has identified a duplication in
reporting the diesel carbon tonnes for AAG. In 2021, two sources of
information were provided for diesel use; the mileage for HGVs and the amount
of diesel held in a tank at Wolverhampton. However, the fuel used by AAG
owned HGVs had already been accounted for in the mileage data leading to an
overstatement of the amount of diesel tonnes in 2021 which has been restated
in the 2021 details above.
Changes from 2021
Scope One
Natural gas and kerosene are used to heat buildings within the portfolio.
This has increased from 2021 due to the return to office working and a
particularly cold December from 70 to 88 tonnes.
In April 2022 the Government changed the law to restrict the use of gas oil
(red oil) which has led to diesel now being used for Fork Lift Trucks and
on-site needs. Therefore, gas oil is not reported in 2022 and a new line for
diesel - Mixed Onsite Use has been reported. As this is for Fork Life Trucks
and refrigerated lorries no metric is available. For 2022 the on-site fuel
data has been estimated.
In 2021 AAG owned two HGVs and this has doubled in 2022, which together with
an increase in demand, has increased the carbon tonnes from 61 to 155.
Company car use has decreased from 84 to 65 tonnes with 60% of the AL fleet
now fully electric. The metric has benefited from AAG ensuring the CO2
emissions of their fleet are monitored.
Scope Two
The electricity use has fallen over 2021 as overnight energy use is being
better controlled. Electric cars feature for the first time in this section.
Scope three
This section relates to employees using their own cars on company business and
is known as grey fleet. This has increased from 2021 as employees have
returned to face-to-face meetings, following the lifting of all COVID-19
related restrictions.
Intensity Ratio
An intensity ratio is used to enable year on year comparison. As Arbuthnot
is an office-based business and the recognised standard measure is
kilowatt-hour per square metre (kWh/m2). This enables the energy use to be
compared to industry standard benchmarks. Similarly for transport, the
metric is kilowatt-hour per mile (kWh/mile). For reporting purposes, the
Carbon Tonnes/floor area and miles have also been reported as required by the
Regulations.
Energy Efficiency Actions
The Group is actively reviewing its premises strategy with specific reference
to environmental factors. The Wilson Street head office profile data
demonstrates that there is improved control of out of office electricity. To
improve the understanding of energy use at Wilson Street, sub-metering is
being reviewed to enable the site to look for further savings. Lighting
reviews were undertaken for Wilson Street and these are now being considered.
AAG have implemented sub-metering effectively at Wolverhampton and have also
taken steps to clarify the Diesel used by the business and by clients when
HGVs are leased. They have also looked at possible energy savings during the
cleaning processes for vehicles.
In terms of improvement in transport emissions AL have changed 60% of their
company cars to electric vehicles. AAG are continuing to improve the emissions
of their company vehicles.
Group Directors' Report
The Directors present their report for the year ended 31 December 2022.
Business Activities
The principal activities of the Group are banking and financial services. The
business review and information about future developments, key performance
indicators and principal risks are contained in the Strategic Report on pages
6 to 38.
Corporate Governance
The Corporate Governance report on pages 44 to 51 contains information about
the Group's corporate governance arrangements, including in relation to the
Board's application of the UK Corporate Governance Code.
Results and Dividends
The results for the year are shown on page 62 of the financial statements. The
profit after tax for the year of £16.5m (2021: £6.8m) is included in
reserves. The Directors recommend the payment of a final dividend of 25p
(2021: 22p) per share which, together with the interim dividend of 17p (2021:
16p) paid on 23 September 2022 represents total dividends for the year of 42p
(2021: 59p). This compares with a total dividend in 2021 of 59p which
comprised a regular total dividend of 38p together with a special dividend for
the year of 21p relating to 2019 that had been cancelled following guidance
from the PRA. The final dividend, if approved by members at the 2023 Annual
General Meeting ("AGM"), will be paid on 2 June 2023 to shareholders on the
register at close of business on 21 April 2023.
Directors
The names of the Directors of the Company at the date of this report, together
with biographical details, are given on page 39 of this Annual Report. Mr.
F.A.H. Angest was appointed to the Board on 1 September 2022. All the other
Directors listed on those pages were directors of the Company throughout the
year. The late Sir Christopher Meyer was also a Director during the year prior
to his retirement from the Board on 25 May 2022.
Mr. F.A.H. Angest offers himself for election under Article 75 of the Articles
of Association. Sir Nigel Boardman and Sir Alan Yarrow being eligible, offer
themselves for re-election under Article 78 of the Articles of Association.
Sir Alan, Sir Nigel and Mr. Angest each has a letter of appointment terminable
on three months' notice.
Articles of Association
The Company's articles of association may only be amended by a special
resolution of the Ordinary shareholders. They were last amended at the AGM in
May 2017 and can be viewed at
www.arbuthnotgroup.com/corporate_governance.html.
Viability Statement
In accordance with the UK Corporate Governance Code, the Directors confirm
that there is a reasonable expectation that the Group will continue to operate
and meet its liabilities, as they fall due, for the three-year period up to 31
December 2025. A period of three years has been chosen because it is the
period covered by the Group's strategic planning cycle and also incorporated
in the Individual Capital Adequacy Assessment Process ("ICAAP"), which
forecasts key capital requirements, expected changes in capital resources and
applies stress testing over that period.
The Directors' assessment has been made with reference to:
• the Group's current position and prospects - please see the Financial
Review on pages 11 to 18;
• the Group's key principles - please see Corporate Philosophy on page 3;
and
• the Group's risk management framework and associated policies, as
explained in Note 6.
The Group's strategy and three-year plan are evaluated and approved by the
Directors annually. The plan considers the Group's future projections of
profitability, cash flows, capital requirements and resources, and other key
financial and regulatory ratios over the period. The ICAAP is embedded in the
risk management framework of the Group and is subject to continuing updates
and revisions when necessary. The ICAAP process is used to stress the capital
position of the Group over the three-year planning period. It is updated at
least annually as part of the business planning process.
Going Concern
In assessing the Company's and the Group's Going Concern position, the
Directors have made appropriate enquiries which assessed the following
factors:
• the Group's strategy, profitability and funding;
• the Group's risk management (see Note 6 to the financial statements) and
capital resources (see Note 7);
• the results of the Group's capital and liquidity stress testing;
• the results of the Group's reverse stress testing and the stress levels
that have the potential to cause its business plan failure; and
• the Group's recovery plan and potential management actions to mitigate
stress impacts on capital and liquidity.
The key Macro-Economic Risks for the stress testing included:
• Property market falls of up to 45% in property values;
• Stock market falls of up to 45% in UK equity prices;
• Interest rate rise/fall; and
• Regulation change.
The key Idiosyncratic Risks for the stress testing included:
• Credit losses;
• Operational events (i.e. fraud, cyber event, etc.);
• Decline in profitability; and
• Liquidity event (i.e. significant deposit outflow).
As a result of the assessment, the Directors are satisfied that the Company
and the Group have adequate resources to continue in operation for a period of
at least twelve months from when the financial statements are authorised for
issue. The financial statements are therefore prepared on the going concern
basis.
Share Capital
The Company has in issue two classes of shares, Ordinary shares and Ordinary
Non-Voting shares. The Non-Voting shares rank pari passu with the Ordinary
shares, including the right to receive the same dividends as the Ordinary
shares, except that they do not have the right to vote in shareholder
meetings.
Authority to Purchase Shares
Shareholders will be asked to approve a Special Resolution renewing the
authority of the Directors to make market purchases of shares not exceeding
10% of the issued Ordinary and Ordinary Non-Voting share capital. The
Directors will keep the position under review in order to maximise the
Company's resources in the best interests of shareholders. Details of the
resolutions renewing this authority are included in the Notice of Meeting on
pages 163 and 164. No shares were purchased during the year. The maximum
number of Treasury shares held at any time during the year was 390,274
Ordinary shares and 19,040 Ordinary Non-Voting shares of 1p each.
Financial Risk Management
Details of how the Group manages risk are set out in in the Strategic Report
and in Note 6 to the financial statements.
Directors' Interests
The interests of current Directors and their families in the shares of the
Company at the dates shown, together with the percentage of the current issued
share capital held (excluding treasury shares), were as follows:
Beneficial Interests - Ordinary shares 1 January 2022 31 December 2022 24 March 2023 %
Sir Henry Angest 8,351,401 8,376,401 8,376,401 56.3
Sir Nigel Boardman 16,313 26,062 26,062 0.2
J.R. Cobb 6,000 6,000 6,000 -
A.A. Salmon 51,699 51,699 51,699 0.3
Beneficial Interests - Ordinary Non-Voting shares 1 January 2022 31 December 2022 24 March 2023 %
Sir Henry Angest 86,674 86,674 86,674 64.9
J.R. Cobb 60 60 60 -
A.A. Salmon 516 516 516 0.4
Substantial Shareholders
The Company was aware at 13 March 2023 of the following substantial holdings
in the Ordinary shares of the Company, other than those held by one director
shown above:
Holder Ordinary Shares %
Liontrust Asset Management 1,785,878 11.9
Slater Investments 1,094,971 7.4
Mr. R Paston 529,130 3.6
Significant Contracts
No Director, either during or at the end of the financial year, was materially
interested in any contract with the Company or any of its subsidiaries, which
was significant in relation to the Group's business. At 31 December 2022, one
Director had a loan from Arbuthnot Latham & Co., Limited amounting to
£1.4m (2021: £0.5m) and five directors had deposits amounting to £4.4m
(2021: £4.0m), all on normal commercial terms as disclosed in Note 44 of the
financial statements.
Directors' Indemnities
The Company's Articles of Association provide that, subject to the provisions
of the Companies Act 2006, the Company may indemnify any Director or former
Director in respect of liabilities (and associated costs and expenses)
incurred in connection with the performance of their duties as a Director of
the Company or any subsidiary and may purchase and maintain insurance against
any such liability. The Company maintained directors and officers liability
insurance throughout the year.
Employee Engagement
The Company gives due consideration to the employment of disabled persons and
is an equal opportunities employer. It also regularly provides employees
with information on matters of concern to them, consults on decisions likely
to affect their interests and encourages their involvement in the performance
of the Company through regular communications and in other ways. Further
information on employee engagement is given in the Strategic Report on pages
23 and 24.
Engagement with Suppliers, Customers and Others
Information on engagement with suppliers, customers and other stakeholders is
given in the Strategic Report on page 24.
Streamlined Energy & Carbon Reporting
The information required by the Companies (Directors' Report) and Limited
Liability Partnerships (Energy and Carbon Report) Regulations 2018 is set out
in the Sustainability Report on pages 35 to 38. These Regulations implement
the Government's policy on Streamlined Energy and Carbon Reporting (SECR) to
support businesses in understanding their Carbon emissions and to help them
establish plans to become Net Zero by 2050.
Political Donations
The Company made political donations of £30,000 during the year (2021:
£20,000), being payment for attendance at political functions.
Events after the Balance Sheet Date
Details of material post balance sheet events are given in Note 49.
Annual General Meeting ("AGM")
The Company's AGM will be held on Wednesday 24 May 2023 at which Ordinary
Shareholders will be asked to vote on a number of resolutions. Shareholders
are encouraged to submit their votes in respect of the business to be
discussed via proxy, appointing the Chairman of the meeting as their proxy.
This will ensure that votes will be counted if shareholders are unable to
attend the meeting in person. The resolutions, together with explanatory notes
about voting arrangements, are set out on pages 163 to 167.
Auditor
A resolution for the re-appointment of Mazars LLP as auditor will be proposed
at the forthcoming AGM in accordance with section 489 of the Companies Act
2006.
Disclosure of Information to the Auditor
Each of the persons who are Directors at the date of approval of this Annual
Report confirm that:
• so far as each director is aware, there is no relevant audit information
of which the Company's auditor is unaware; and
• they have taken all the steps they ought to have taken as a director to
make themselves aware of any relevant audit
information and to establish that the Company's auditor is aware of that
information.
This confirmation is given and should be interpreted in accordance with the
provisions of section 418 of the Companies Act 2006.
Statement of Directors' Responsibilities in Respect of the Strategic Report
and the Directors' Report and the Financial Statements
The Directors are responsible for preparing the Strategic Report, the
Directors' Report and the Financial Statements in accordance with applicable
law and regulations. Company Law requires the Directors to prepare Group and
Parent Company Financial Statements for each financial year. As required by
the AIM Rules for Companies and in accordance with the Rules of the AQSE
Growth Market, they are required to prepare the Group Financial Statements in
accordance with UK-adopted international accounting standards in conformity
with the requirements of the Companies Act 2006 and have elected to prepare
the Parent Company Financial Statements on the same basis.
Financial Statements
Under Company Law the Directors must not approve the Financial Statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Group and the Company and of the Group profit or loss for that
period. In preparing each of the Group and Parent Company Financial
Statements, the Directors are required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and estimates that are reasonable, relevant and
reliable;
• state whether they have been prepared in accordance with
UK-adopted International Financial Reporting Standards (IFRSs) in conformity
with the requirements of the Companies Act 2006;
• assess the Group and Parent Company's ability to continue as a
going concern, disclosing, as applicable, matters related to going concern;
and
• use the going concern basis of accounting unless they intend
either to liquidate the Group or the Parent Company or to cease operations, or
have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Parent Company's transactions and disclose
with reasonable accuracy at any time the financial position of the Parent
Company and enable them to ensure that its Financial Statements comply with
the Companies Act 2006. They are responsible for such internal control as they
determine is necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error, and have
general responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Company and to prevent and detect fraud and other
irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the UK governing the preparation and dissemination of Financial
Statements may differ from legislation in other jurisdictions.
The Directors confirm that the Annual Report and financial statements, taken
as a whole, are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Group and Parent Company's position,
performance, business model and strategy.
Corporate Governance
Introduction and Overview
The Company has a strong and effective corporate governance framework. The
Board endorses the principles of openness, integrity and accountability which
underlie good governance and takes into account the provisions of the UK
Corporate Governance Code, published by the Financial Reporting Council in
July 2018 ("the FRC Code"), in so far as they are considered applicable to and
appropriate for the Company, given its size and circumstances, and the role
and overall shareholding of its majority shareholder. The Company has been
approved by the Prudential Regulation Authority ("PRA") as a parent financial
holding company of its banking subsidiary, Arbuthnot Latham & Co.,
Limited. Arbuthnot Latham is authorised by the PRA and regulated by the
Financial Conduct Authority ("FCA") and by the PRA. Three of its subsidiaries,
Asset Alliance Leasing Limited, Forest Asset Finance Limited and Renaissance
Asset Finance Limited, are regulated by the FCA. Accordingly, the Group
operates to the high standards of corporate accountability and regulatory
compliance appropriate for such a business.
The Board has decided to report against the FRC Code. This decision was made
in light of the requirement in the AIM Rules for Companies that AIM listed
companies state which corporate governance code they have decided to apply,
how the company complies with that code, and where it departs from its chosen
code an explanation of the reasons for doing so. The Rules of the AQSE Growth
Market also require the Company to adopt, as far as possible, the principles
and standards set down in a recognised UK corporate governance code. This
information is published on the Company's website and the Company reviews it
each year as part of its annual reporting cycle. This section of the Annual
Report summarises how the Company applies the FRC Code and in broad terms how
it has complied with its provisions throughout the year, giving explanations
where it has chosen not to do so.
Leadership and Purpose
The Company is led by the Board which comprises seven members: Sir Henry
Angest, the Executive Chairman and Chief Executive; two other executive
directors, Andrew Salmon and James Cobb; three independent non-executive
directors, Sir Nigel Boardman, Ian Dewar and Sir Alan Yarrow; and one other
non-executive Director, Frederick Angest. This means that half of the Board,
excluding the Chairman, comprises independent non-executive directors.
The Board sets the long-term focus and customer-oriented culture of the Group.
The responsibilities of Sir Henry Angest as Chairman include leading the
Board, ensuring its effectiveness in all aspects of its role, ensuring
effective communication with shareholders, setting the Board's agenda and
ensuring that all Directors are encouraged to participate fully in the
activities and decision-making process of the Board.
The Board has for many years led a company which focuses on sustainable growth
over the longer-term with a culture to match. Investment in resources has been
strong and has continued where and as appropriate, with the focus on the
benefit this will bring to bear for stakeholders over time. The aim continues
to be for a culture of openness among the workforce which combines with the
prudent and effective technological and individual controls in place across
the business to ensure strong risk management in the Company's continued
long-term success.
The Group's cultural values are reflected in a brand values document linking
the Arbuthnot Principles to the Group's culture as a way of communicating
culture across the business. These cultural Principles are encapsulated in
five Group values which are fully embedded into day-to-day activities. These
are integrity, respect, empowerment, energy and drive, and collaboration. A
formal approach to Environmental, Social and Governance (ESG) is in place to
develop over time under five 'pillars of sustainability' - governance,
employees, community, environment and clients.
The Board
A number of key decisions are reserved for the Board. The Schedule of Matters
Reserved to the Board is reviewed annually and is published on the Company's
website at http://www.arbuthnotgroup.com/corporate_governance.html
(http://www.arbuthnotgroup.com/corporate_gover5nce.html) . The Board met
regularly throughout the year, holding seven scheduled meetings, five of which
were held jointly with the Board of Arbuthnot Latham with the other two being
held to approve the Annual and Interim Reports. It also held a separate
strategy meeting, together with the Arbuthnot Latham Directors, in September.
Substantive agenda items have briefing papers, which are circulated in a
timely manner before each meeting. The Board ensures that it is supplied with
all the information that it requires and requests in a form and of a quality
to fulfil its duties.
In addition to overseeing the management of the Group, the Board has
determined certain items which are reserved for decision by itself. These
matters include approval of the Group's long-term objectives and commercial
strategy, ensuring a sound system of internal control, risk management
strategy, approval of major investments, acquisitions and disposals, any
changes to the capital structure and the overall review of corporate
governance.
The Company Secretary is responsible for ensuring that the Board processes and
procedures are appropriately followed and support effective decision making.
All directors have access to the Company Secretary's advice and services.
There is an agreed procedure for directors to obtain independent professional
advice in the course of their duties, if necessary, at the Company's expense.
New directors receive induction training upon joining the Board, with
individual listed company training provided by the Company's AIM Nominated
Adviser and AQSE Corporate Adviser. Regulatory and compliance training is
provided by the Heads of Compliance and Financial Crime or by an external
lawyers, accountants and other subject matter experts. Risk management
training is provided, including that in relation to the ICAAP and ILAAP, by
the Arbuthnot Latham Chief Risk Officer with an overview of credit and its
associated risks and mitigation by the Arbuthnot Latham Chief Credit Officer.
Board Evaluation
The annual Board Effectiveness Review was conducted internally. The 2022
evaluation took the form of a confidential online questionnaire which assessed
the performance of the Board and its Committees. The questions were augmented,
particularly those concerning clarity of the business, strategy and risk and
accountability, whilst continuing to explore the themes developed over recent
years including Board effectiveness, Board composition, Board dynamics,
alignment of the Board and executive team, interaction with major
shareholders, induction, performance and training, Board Committees and the
Secretariat. The results were discussed by the Board in November 2022 and
proposed actions arising were considered in February 2023. The responses were
positive, confirming that the Board was of the view that it receives the
correct level of insight into and oversight of the Company, both directly to
it and in terms of management information and oral updates provided during
meetings. Directors also agreed that the Arbuthnot culture set out in the
Arbuthnot Principles and Values manifests itself at Board level and in the
external view of the Group as a whole.
Overview of Compliance with the FRC Code, together with Exceptions
The Board focuses not only on the provisions of the Code but on its
principles, ensuring as follows:
• The Company's purpose, values and strategy as a prudently
managed organisation align with its culture, with a focus on fairness and
long-term shareholder returns.
• The Board has an appropriate combination of executive and
non-executive directors, who have both requisite knowledge and understanding
of the business and the time to commit to their specific roles.
• The Board comprises directors with the necessary combination of
skills to ensure the effective discharge of its obligations, with an annual
evaluation of the capability and effectiveness of each director as well as the
Board as a composite whole; appropriate succession plans are also in place and
reviewed annually, or more frequently if appropriate.
• The Board and Audit Committee monitor the procedures in place to
ensure the independence and effectiveness of both external and internal
auditors, and the risk governance framework of the Company, with all material
matters highlighted to the relevant forum (Board/Committee).
• Remuneration policies and practices are designed to support
strategy and promote long-term sustainable success, with a Remuneration
Committee in place to oversee director and senior management pay.
In respect of the Code's specific provisions, an annual review is carried out,
comparing the Company's governance arrangements and practices against them.
Any divergences are noted, with relevant rationale considered carefully to
determine whether it is appropriate. Consideration is also given to guidance
issued, which may require a review of the relevant reasoning intra-year.
In line with the FRC's Guidance on Board Effectiveness, the Board additionally
takes into account its suggestions of good practice when applying the Code
focusing on the five key principles specified in the Code.
Where the Company's governance does not completely align with the Code, it is
generally as a result of the role of its overall majority shareholder, itself
adding a level of protection to long-term shareholder interests, and it has
had no negative impact on the Company.
All divergences from the Code, with an explanation of the reasons for doing so
are set out below:
Provision 5 - The Board has regard to the interests of all its key
stakeholders in its decision making. Executive Directors and senior management
are fully engaged with the workforce, all of whom interact on a daily basis.
Mr. Dewar is the Company's Whistleblowing Champion and is available at all
times in this role. It has not been deemed necessary to appoint an employee
representative to the Board as the Company has fewer than 20 employees, all of
whom have direct access to the Board including its Non-Executive Directors.
Given its size, as stated in the s.172 Statement on page 23, one of the
non-executive directors of Arbuthnot Latham and its Whistleblowing Champion,
has been designated by its board as the director to engage with the Arbuthnot
Latham Group's workforce.
Provision 9 - The Chairman was not independent on appointment, though he was
appointed prior to the introduction of the provision. Sir Henry Angest carries
out the role of Chairman and Chief Executive, given his long-term interest as
majority shareholder, itself aligning with the interests of other
shareholders. The Company follows the US model that is very successful in
ensuring commercial success with strong corporate governance and stakeholder
awareness, having a shared Chairman and CEO, with a separate, empowered, Chief
Operating Officer. In his role as CEO, Sir Henry Angest is responsible for
the effective operation and delivery of the business and ensures that he is
surrounded by an exceptional management team which ensures the strong
leadership required. In particular, ABG has a strong Group Chief Operating
Officer and Group Finance Director ensuring challenge and independence from a
business perspective, against the stakeholder focus of the Chairman carrying
out his Chairman's role.
Provision 10 ¬ The Board considers Sir Nigel Boardman to be independent,
notwithstanding his chairmanship at Arbuthnot Latham since his views and any
challenge are firmly independent from executive management in both companies.
The Board is of the view that the dual directorships complement one another
and that there is a benefit to be derived from the appointment of one
independent director to both Boards simultaneously.
Provision 12 - The Board has not appointed a Senior Independent Director, as
the main shareholder is the Chairman and other large independent shareholders
communicate frequently with the Chairman, the Group Chief Operating Officer
and the Group Finance Director and with the Company's stockbroker, Shore
Capital.
Provision 14 - Attendance at meetings is not reported. In the event that a
Director is unable to attend a meeting, that Director receives relevant papers
in the normal manner and relays any comments in advance of the meeting to the
Chairman. The same process applies in respect of the Board Committees.
Provision 18 -Directors retire by rotation every three years in accordance
with the Company's Articles of Association and company law. The Directors
seeking re-election at the 2023 AGM are Sir Nigel Boardman and Sir Alan Yarrow
who have served on the Board for 3½ and 6½ years respectively. The
contributions of Sir Nigel and Sir Alan have been invaluable in the successful
development of the Company. Mr. Frederick Angest, appointed to the Board by
the Directors on 1 September 2022 as part of succession planning, will be
seeking election by Ordinary shareholders. Accordingly, the Board fully
supports the resolutions for their respective reappointment and appointment of
these Directors.
Provision 19 - Sir Henry Angest's role as Chairman is critical to and
reflective of the overall group structure. It is through the responsibilities
that derive from this role that he is able to consider and protect not only
the interests of other shareholders, but also his own interests as a majority
shareholder as their interests are aligned. It is for this reason that he
surrounds himself with notably strong directors who individually, and as a
group, ensure the protection of not only his investments, but also those of
other shareholders. As such, he remains as Chairman notwithstanding the length
of his tenure.
Provision 23 - The Nomination Committee takes into account the provisions of
the Board Diversity Policy and in terms of succession planning the Equality
and Diversity Policy which promotes equality of opportunity for all staff.
Further information on diversity and inclusion is given in the Sustainability
Report on pages 27 and 29, though the gender balance of senior management and
their direct reports has not been given.
Provision 32 - Sir Henry Angest is Chairman of the Remuneration Committee, as
is appropriate in the context of his majority shareholding.
Internal Control and Financial Reporting
The Board of directors has overall responsibility for the Group's system of
internal control and for reviewing its effectiveness. Such a system is
designed to manage rather than eliminate risk of failure to achieve business
objectives and can only provide reasonable, but not absolute, assurance
against the risk of material misstatement or loss.
The Directors and senior management of the Group review and approve the
Group's Risk Management Policy and Risk Appetite framework. The Risk
Management Policy describes and articulates the risk management and risk
governance framework, methodologies, processes and infrastructure required to
ensure due attention to all material risks for Arbuthnot Latham, including
compliance with relevant regulatory requirements.
The Risk Appetite framework sets out the Board's risk attitude for the
principal risks through a series of qualitative statements and quantitative
risk tolerance metrics. These guide decision-making at all levels of the
organisation and form the basis of risk reporting. The key business risks and
emerging risks are continuously identified, evaluated and managed by means of
limits and controls at an operational level by Arbuthnot Latham management,
and are governed through Arbuthnot Latham committees.
There are well-established budgeting procedures in place and reports are
presented regularly to the Board detailing the results, in relation to
Arbuthnot Latham, of each principal business unit, variances against budget
and prior year, and other performance data. The Board receives regular reports
on risk matters that need to be brought to its attention, enabling it to
assess the Group's principal and emerging risks. Material items are presented
to the Board in the Risk Report, which includes a risk dashboard, from the
Arbuthnot Latham Chief Risk Officer, who attends the Board meetings held
concurrently with those of Arbuthnot Latham. Significant risks identified in
connection with the development of new activities are subject to consideration
by the Board. The risk dashboard covers key management actions which have
included the climate change agenda and its potential longer-term impact on
property and other asset classes and on management's approach to
sustainability.
In November 2022, the Board received a separate report from the Arbuthnot
Latham CRO enabling it to monitor the company's risk management and internal
control systems and to carry out its annual review of the effectiveness of the
Group's risk management and internal control systems. The report explained the
Risk Management Policy, together with principal risks, risk appetite,
policies, three lines of defence, systems, processes, procedures and controls
and the risk board dashboard. Following its review, the Board confirms the
effectiveness of the Company's risk management and internal control systems.
Shareholder Communications
The majority shareholder is Sir Henry Angest, Chairman and Chief Executive.
The Company maintains communications with its major external shareholders via
one-to-one meetings, as appropriate, by the Chairman and Chief Executive, the
Group Chief Operating Officer or the Group Finance Director on governance and
other matters. When practicable it also makes use of the AGM to communicate
with shareholders in person. The Company aims to present a balanced and
understandable assessment in all its reports to shareholders, its regulators,
other stakeholders and the wider public. Key announcements and other
information can be found at www.arbuthnotgroup.com.
Board Committees
The Board has Audit, Nomination, Remuneration, Donations and Policy
Committees, each with formally delegated duties and responsibilities and with
written terms of reference, which require consideration of the committee's
effectiveness. The Board keeps the governance arrangements under review.
Further information in relation to these committees is set out below and the
terms of reference of the Audit, Nomination and Remuneration Committees are
published on the Company's website. The Board maintains direct responsibility
for issues of Risk without the need for its own Risk Committee, since
responsibility for large lending proposals is a direct responsibility of its
subsidiary, Arbuthnot Latham. Additionally the Chairman of the Arbuthnot
Latham Risk Committee reports to the ABG Board at its regular meetings, held
jointly with the Arbuthnot Latham Board, on the activities of that Committee
which is responsible for monitoring the status of the Arbuthnot Latham group
against its principal risks.
Audit Committee
Membership and meetings
Membership of the Audit Committee comprises Ian Dewar (as Chairman), Sir Nigel
Boardman (since May 2022) and Sir Alan Yarrow. All of the Committee's members
are therefore independent non-executive Directors. The late Sir Christopher
Meyer was a member until his retirement as a director on 25 May 2022. Mr.
Dewar has recent and relevant financial experience and the Committee as a
whole has competence relevant to the financial sector in which the Company
operates. The Company Secretary acts as its Secretary.
The Audit Committee oversees, on behalf of the Board, financial reporting, the
appropriateness and effectiveness of systems and controls, the work of
Internal Audit and the arrangements for and effectiveness of the external
audit. The ultimate responsibility for reviewing and approving the Annual
Report and Accounts and the Interim Report lies with the Board. The Committee
also reviews procedures for detecting fraud and preventing bribery, reviews
whistleblowing arrangements for employees to raise concerns in confidence, and
reviews, as necessary, arrangements for outsourcing significant operations.
External Audit
The external auditors, Mazars LLP, have held office since their appointment in
2019 following a competitive tender. The Committee assesses the independence
and objectivity, qualifications and effectiveness of the external auditors on
an annual basis as well as making a recommendation to the Board on their
reappointment. The Committee received a report showing the level of non-audit
services provided by the external auditors during the year and members were
satisfied that the extent and nature of these did not compromise auditor
independence. The Committee has concluded that Mazars are independent and that
their audit is effective.
Activity in 2022
The Audit Committee held four meetings during the year, three of which were
held jointly with the Audit Committee of Arbuthnot Latham with the other one
being held to review the Annual Report & Accounts and draft results
announcement.
Internal Audit
Internal Audit provides the Audit Committee and the Board with detailed
independent and objective assurance on the effectiveness of governance, risk
management and internal controls. The ultimate responsibility for reviewing
and approving the annual report and accounts rests with the Board.
The Audit Committee approves the Internal Audit risk-based programme of work
and monitors progress against the annual plan. The Committee reviews Internal
Audit resources and the arrangements that: ensure Internal Audit faces no
restrictions or limitations to conducting its work; that it continues to have
unrestricted access to all personnel and information; and that Internal Audit
remains objective and independent from business management.
The Head of Internal Audit reports directly to the Chairman of the Arbuthnot
Latham Audit Committee. He provides reports on the outcomes of Internal Audit
work directly to the Company's Committee and the Committee monitors progress
against actions identified in these reports. Most of the Audit Committee's
meetings are now held concurrently with those of the Arbuthnot Latham Audit
Committee and, as such, it discusses Arbuthnot Latham's internal audits, all
of the reports on which include an assessment of culture.
The Committee received a self-assessment report on Internal Audit from the
Head of Internal Audit in September 2022 and it is satisfied with Internal
Audit arrangements during the year.
Integrity of Financial Statements and oversight of external audit
The Committee:
• Received and agreed the Audit Plan prepared by the external
auditors;
• Considered and formed a conclusion on the critical judgements
underpinning the Financial Statements, as presented in papers prepared by
management. In respect of all of these critical judgements, the Committee
concluded that the treatment in the Financial Statements was appropriate.
• Received reports from the external auditors on the matters
arising from their work, the key issues and conclusions they had reached; and
• Reviewed closely the detailed work carried out by management in
respect of Going Concern and Viability.
The reports from the external auditors include details of internal control
matters that they have identified as part of the annual statutory financial
statements audit. Certain aspects of the system of internal control are also
subject to regulatory supervision, the results of which are monitored closely
by the Committee and the Board. In addition, the Committee receives by
exception reports on the ICAAP and ILAAP which are key control documents that
receive detailed consideration by the board of Arbuthnot Latham.
The Committee approved the terms of engagement and made a recommendation to
the Board on the remuneration to be paid to the external auditors in respect
of their audit services.
Significant areas of judgement and estimation
The Audit Committee considered the following significant issues and accounting
judgements and estimates in relation to the Financial Statements:
Impairment of financial assets
The Committee reviewed presentations from management detailing the
provisioning methodology across the Group as part of the full year results
process. The Committee considered and challenged the provisioning methodology
applied by management, including timing of cash flows, valuation and
recoverability of supporting collateral on impaired assets. The Committee
concluded that the impairment provisions, including management's judgements
and estimates, were appropriate.
The charge for impaired financial assets totalled £5.5m for the year ended 31
December 2022. The disclosures relating to impairment provisions are set out
in Note 4.1(a) to the financial statements.
Property Portfolio
The Group currently owns two commercial office properties and two repossessed
properties. Of these properties, two are held as inventory, one is held for
sale and one as an investment property. The properties held as inventory and
for sale are held at the lower of cost and net realisable value on the basis
of internal discounted cash flow models and external valuation reports. The
investment property is held at fair value on the basis of an external
valuation report. The Committee discussed the bases of valuation with
management and with the auditors who had engaged an internal expert to review
management's valuations.
As at 31 December 2022, the Group's total property portfolio totalled £29.4m.
The disclosures relating to the carrying value of the investment property and
the properties held as inventory and for sale are set out in Notes 4.1(c),
4.1(d), 21, 25 and 31 to the financial statements.
Residual Value Risk
The Committee discussed the fair value adjustment for the portfolio of leased
assets of Asset Alliance Group where an uplift had been applied to represent
markets at the time of acquisition at 31 March 2021. The Committee also
reviewed the maintenance provision, recognised to eliminate temporarily
inflated values. It established that the uplift in lease values at that date
appeared to have been completely justified by the subsequent asset sales
experience where in aggregate losses had not been made on sales of trucks at
the uplifted values. It also established that the residual value provision was
deemed sufficient to cover the shortfall between the value of the portfolio
and the estimated net sales value.
Going Concern and Viability Statement
The financial statements are prepared on the basis that the Group and Company
are each a going concern for a period of at least twelve months from when the
financial statements are authorised for issue. The Audit Committee reviewed
management's assessment, which incorporated analysis of the ICAAP and ILAAP
approved by the Board of Arbuthnot Latham and of relevant metrics, focusing on
liquidity, capital, and the stress scenarios. It is satisfied that the going
concern basis and assessment of the Group's longer-term viability is
appropriate.
Other Committee activities
The Committee reviewed and discussed the minutes of meetings of the Financial
Regulatory Reporting Committee whose main responsibility is to ensure that the
Company meets the PRA's regulatory reporting expectations. The Audit Committee
performs this role since it is concerned with financial reporting as well as
with external reporting.
In November 2022, Committee members contributed to the review of the
Committee's effectiveness as part of its evaluation by the Board. The outcome
of the review was positive and there were no issues or concerns raised by them
in regard to discharging their responsibilities. In March 2023 the Committee
met separately with each of the Head of Internal Audit and the Senior
Statutory Auditor without any other executives present. There were no concerns
raised by them in regard to discharging their responsibilities.
On behalf of the Board, the Committee reviewed the financial statements as a
whole in order to assess whether they were fair, balanced and understandable.
The Committee discussed and challenged the balance and fairness of the overall
report with the executive directors and also considered the views of the
external auditor. The Committee was satisfied that the Annual Report could be
regarded as fair, balanced and understandable and that it provides the
information necessary for shareholders to assess the Company's position and
performance, business model and strategy. It proposed that the Board approve
the Annual Report in that respect.
Nomination Committee
Membership and meetings
The Nomination Committee is chaired by Sir Henry Angest and its other members
are Sir Nigel Boardman and Sir Alan Yarrow. Two thirds of the Committee's
members are therefore independent non-executive Directors. The late Sir
Christopher Meyer was a member until his retirement as a director on 25 May
2022. The Group General Counsel, Nicole Smith, acts as its Secretary. The
Committee meets once a year and otherwise as required.
The Nomination Committee assists the Board in discharging its responsibilities
relating to the composition of the Board. The Nomination Committee is
responsible for and evaluates on a regular basis the balance of skills,
experience, independence and knowledge on the Board, its size, structure and
composition, retirements and appointments of additional and replacement
directors and will make appropriate recommendations to the Board on such
matters. The Nomination Committee also considers performance, training
requirements and succession planning, taking into account the skills and
expertise that will be needed on and beneficial to the Board in the future.
Activity in 2022
The Nomination Committee met three times during the year. It met first to
consider a replacement Non-Executive Director to the Audit, Nomination,
Remuneration and Donations Committees ahead of the retirement of the late Sir
Christopher Meyer. It determined that Sir Nigel Boardman would be a suitable
appointment to each Committee, given his significant experience. It further
recommended that Mr. Salmon be appointed as a replacement member of the
Donations Committee, all with effect from 25 May 2022.
The Committee held a further meeting to consider the appointment of Frederick
Angest as a non-executive director, noting that it was appropriate in the
context of long-term succession planning in order that the ultimate majority
shareholder has representation at all times and in the interests of long-term
stability in line with the Arbuthnot Principles. Sir Henry Angest did not
participate in the vote in relation to the proposed appointment on the basis
that Mr. Angest is his son and as such there was or might be a conflict or
perceived conflict of interests in relation to the decision. The Nomination
Committee, being Sir Nigel and Sir Alan for this purpose, agreed that it was
appropriate to recommend to the Board the appointment of Mr. Angest as an
additional non-executive director.
The Committee also met to assess and confirm the collective and individual
suitability of Board members. The contribution of Sir Henry Angest remains
invaluable in the successful development of the Company. As regards the
non-executive Directors' skill sets, Sir Nigel Boardman's credibility,
knowledge and reputation have been a real benefit to the Board both in terms
of collective and individual suitability and when third parties are
considering dealings with the wider group. Ian Dewar, with a wealth of
experience as a partner in a major accounting firm, has successfully chaired
the Audit Committee. The Board has benefitted from Sir Alan Yarrow's wise
counsel, challenge to management and many years' banking experience in the
City of London. Frederick Angest, appointed to the Board as part of succession
planning, is deepening his knowledge about the business, working at Arbuthnot
Latham currently as a private banker, having previously worked within Wealth
Management and Credit Risk.
In terms of individual performance, the Chairman confirmed that his assessment
of all Directors was that they were performing well, with the Executive
Directors additionally being formally reviewed in the context of the Senior
Managers' Regime applicable to Arbuthnot Latham which confirmed continued
strong performance. The Committee agreed with this assessment individually in
relation to all members of the Board. Collectively, it was agreed that the
Board had operated effectively with a wide range of experience and knowledge.
As noted, in the responses to the Board Effectiveness Questionnaire,
Non-Executives had provided appropriate challenge and guidance.
In terms of the performance of the Company's Board generally, the Committee
noted that it takes into account the provisions of the Board Diversity Policy
and the Board Suitability Policy. It reviewed the summary of training carried
out by each Director during 2022 and noted that Directors had been able to
carry out sufficient training both in person and online.
In November 2022, the Nomination Committee confirmed that the Board's current
composition provides the Company with a balanced, knowledgeable, diverse and
informed group of directors, bringing strategic acumen, foresight and
challenge to the executive, commensurate with the size of the business. The
Committee reviewed succession planning and agreed that a sensible and strong
plan remained in place. It also agreed that it continued to operate
effectively and, as such, no further changes to its membership, composition or
activities were proposed to the Board.
Remuneration Committee
Membership and meetings
Membership is detailed in the Remuneration Report on page 52. The Committee
meets once a year and otherwise as required. The Remuneration Report on pages
52 to 54 gives information on the Committee's responsibilities, together with
details of each Director's remuneration.
Donations Committee
Membership and meetings
The Donations Committee is chaired by Sir Henry Angest and its other members
are Andrew Salmon and Sir Alan Yarrow. The late Sir Christopher Meyer was a
member until his retirement as a director on 25 May 2022. The Group General
Counsel acts as its Secretary. The Committee considers any political donation
or expenditure as defined within sections 366 and 367 of the Companies Act
2006. It meets as necessary.
Activity in 2022
The Donations Committee met once during the year. It agreed that the Committee
was constituted and continued to operate efficiently with its overall
performance and the performance of its individual members effective throughout
the year. As such, no changes to its membership or activities were proposed to
the Board.
Policy Committee
Membership and meetings
The Policy Committee is chaired by Andrew Salmon and its other members are
James Cobb and Nicole Smith who also acts as its Secretary. Amongst its
responsibilities, the Committee reviews the content of policy documentation to
ensure that it meets legal and regulatory requirements and approves it on
behalf of the Board.
Activity in 2022
The Policy Committee met five times during the year to review and approve
Company policies.
Remuneration Report
Remuneration Committee
Membership of the Remuneration Committee is limited to non-executive directors
together with Sir Henry Angest as Chairman. The members of the Committee are
Sir Henry Angest, Sir Nigel Boardman and Sir Alan Yarrow. Two thirds of its
membership therefore comprises independent non-executive Directors. The late
Sir Christopher Meyer was also a member until his retirement as a director on
25 May 2022. The Group General Counsel, Nicole Smith, acts as its Secretary.
The Committee met twice during the year.
The Remuneration Committee has responsibility for approving the overall
remuneration policy for directors for review by the Board. The Committee is
also responsible for remuneration more generally including, inter alia, in
relation to the Company's policy on executive remuneration determining, the
individual remuneration and benefits package of each of the Executive
Directors and the fees for Non-Executive Directors. Members of the Committee
do not vote on their own remuneration.
The Committee also deals with remuneration-related issues, taking into account
the requirements established by the PRA and the FCA.
Remuneration Policy
The Remuneration Committee determines the remuneration of individual directors
having regard to the size and nature of the business; the importance of
attracting, retaining and motivating management of the appropriate calibre
without paying more than is necessary for this purpose; remuneration data for
comparable positions, in particular the rising remuneration packages at
challenger banks; the need to align the interests of executives with those of
shareholders; and an appropriate balance between current remuneration and
longer-term performance-related rewards. The remuneration package can comprise
a combination of basic annual salary and benefits (including pension), a
discretionary annual bonus award related to the Committee's assessment of the
contribution made by the executive during the year and longer-term incentives,
including executive share options. Pension benefits take the form of
contributions paid by the Company to individuals in the form of cash
allowances, and, where applicable, to individual money purchase schemes. The
Remuneration Committee reviews salary levels each year based on the
performance of the Group during the preceding financial period. This review
does not necessarily lead to increases in salary levels. For the purposes of
the requirements established by the PRA and the FCA, the Company and its
subsidiaries are all considered to be Tier 3 institutions.
Activity in 2022
The Remuneration Committee met twice during the year. It undertook its regular
activities including reviewing the operation of the Remuneration Policy,
having regard to the performance of the Company during the year. It also met
to approve a single payment of £1,500 to all Group employees and executive
directors in order to help them with the increased costs of living. The
Committee determined that a set amount would be most beneficial to those on
lower salaries where the increased cost of living being experienced was likely
to be causing the most difficulty. The payment was also intended to aid
employee retention at a time when recruitment was proving more challenging.
Sir Henry did not participate in the vote in relation to the payment in
respect of himself noting his conflict of interest. Additionally, the
Committee, being Sir Nigel and Sir Alan for this purpose, approved the payment
to Frederick Angest of a director's fee of £30,000 per annum, being half of
the standard fee for a non-executive director, Mr. Angest already receiving a
salary in respect of his employment with Arbuthnot Latham. This followed the
precedent of a reduced fee in relation to the previous appointments of Sir
Nigel as a director of both the Company and of Arbuthnot Latham. Sir Henry did
not participate in this decision on the basis that Mr. Angest is his son and
as such there was or might be a conflict or perceived conflict of interests in
relation to the decision.
The Committee met again to review the Company's Remuneration Policy, the level
of fees for Non-Executive Directors and the Executive Directors' remuneration,
approving the award of bonuses to Messrs Salmon and Cobb for exceptional
performance in the year and, after due consideration of comparable market
rates salary rises for Messrs Salmon and Cobb. As in previous years, Sir Henry
Angest waived his right to be considered for receipt of a bonus. The
Remuneration Committee agreed that it continued to operate effectively with
its overall performance and the performance of its individual members
effective throughout the year.
The Committee decided not to change the fees for non-executive directors,
reflecting the appropriate level of fee to continue to secure the services of
a high level non-executive director.
Directors' Service Contracts
Sir Henry Angest, Mr. Salmon and Mr. Cobb each have service contracts
terminable at any time on 12 months' notice in writing by either party.
Long Term Incentive Schemes
Grants were made to Messrs Salmon and Cobb on 14 June 2016 under Phantom
Option Scheme introduced on that date, to acquire ordinary 1p shares in the
Company at 1591p exercisable in respect of 50% on or after 15 June 2020 and in
respect of the remaining 50% on or after 15 June 2021 when a cash payment
would be made equal to any increase in market value.
Under this Scheme, these directors were granted a phantom option to acquire
200,000 and 100,000 ordinary 1p shares respectively in the Company. The value
of each phantom option is related to the market price of an Ordinary Share.
The fair value of these options at the grant date was £1m. The first tranche
of share options remained outstanding at 31 December 2022, but will lapse if
not exercised at 1591p before 14 June 2023. The second tranche has not vested
and so lapsed in 2020 as one of the performance conditions was not met, being
the payment of dividends which was not possible in 2020 due to the regulators'
response to the pandemic, requiring banks to cease payment of dividends, and
to its economic impact.
On 23 July 2021, Messrs Salmon and Cobb were granted further phantom options
relating to 200,000 and 100,000 ordinary shares respectively. The fair value
of these options at the grant date was £1.4m. The value of each Ordinary
Share for the purposes of this grant of phantom options is 990 pence, being
the mid-market share price at close of business on 23 July 2021. An increase
in the value of an Ordinary Share over 990 pence will give rise to an
entitlement to a cash payment by the Company on the exercise of a phantom
option. The right to exercise phantom options is subject to the satisfaction
of performance conditions. 50% of each director's individual holding of
phantom options is exercisable after 23 July 2024 and the other 50% is
exercisable after 23 July 2026. These phantom options will lapse if not
exercised within seven years of the date of grant, i.e. by 23 July 2028. The
fair value of the outstanding options as at 31 December 2022 was £0.1m (2021:
£0.1m).
Details of outstanding options are set out below.
Phantom Options At 1 January 2022 At 31 December 2022 Exercise Price £ Date from which exercisable Expiry
AA Salmon 100,000 100,000 £15.90 15-Jun-19 14-Jun-23
100,000 100,000 £9.90 23-Jul-24 23-Jul-28
100,000 100,000 £9.90 23-Jul-26 23-Jul-28
300,000 300,000
JR Cobb 50,000 50,000 £15.90 15-Jun-19 14-Jun-23
50,000 50,000 £9.90 23-Jul-24 23-Jul-28
50,000 50,000 £9.90 23-Jul-26 23-Jul-28
150,000 150,000
450,000 450,000
Directors' Emoluments
2022 2021
£000 £000
Fees (including benefits in kind) 265 265
Salary payments (including benefits in kind) 4,109 3,172
Pension contributions 70 70
4,444 3,507
Total Total
Salary Bonus Benefits Pension Fees 2022 2021
£000 £000 £000 £000 £000 £000 £000
Sir Henry Angest 1,200 - 78 - - 1,278 1,268
Sir Alan Yarrow - - - - 70 70 70
F Angest 20 5 1 1 10 37 -
JR Cobb 700 745 18 35 - 1,498 1,052
IA Dewar - - - - 75 75 75
Sir Christopher Meyer - - - - 25 25 60
AA Salmon 1,200 1,200 30 35 - 2,465 1,859
The Hon Sir Nigel Boardman - - - - 121 121 60
3,120 1,950 127 71 301 5,569 4,444
Details of any shares or options held by directors are presented above.
The emoluments of the Chairman were £1,278,000 (2021: £1,268,000). The
emoluments of the highest paid director were £2,465,000 (2021: £1,859,000)
including pension contributions of £35,000 (2021:
£35,000).
Retirement benefits are accruing under money purchase schemes for three
directors who served during 2022 (2021: two directors).
Independent Auditor's Report
Opinion
We have audited the financial statements of Arbuthnot Banking Group PLC (the
'Parent Company') and its subsidiaries (the 'Group') for the year ended 31
December 2022 which comprise the Consolidated Statement of Comprehensive
Income, the Consolidated Statement of Financial Position, the Company
Statement of Financial Position, the Consolidated Statement of Changes in
Equity, the Company Statement of Changes in Equity, the Consolidated Statement
of Cash Flows, the Company Statement of Cash Flows, and notes to the financial
statements, including a summary of significant accounting policies.
The financial reporting framework that has been applied in their preparation
is applicable law and UK-adopted international accounting standards and as
regards the Parent Company financial statements, as applied in accordance with
the provisions of the Companies Act 2006.
In our opinion, the financial statements:
· give a true and fair view of the state of the Group's and of the
Parent Company's affairs as at 31 December 2022 and of the Group's profit for
the year then ended;
· have been properly prepared in accordance with UK-adopted
international accounting standards and, as regards the Parent Company
financial statements, as applied in accordance with the provisions of the
Companies Act 2006; and
· have been prepared in accordance with the requirements of the
Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing
(UK) (ISAs (UK)) and applicable law. Our responsibilities under those
standards are further described in the "Auditor's responsibilities for the
audit of the financial statements" section of our report. We are independent
of the Group and the Parent Company in accordance with the ethical
requirements that are relevant to our audit of the financial statements in the
UK, including the Financial Reporting Council's ("FRC") Ethical Standard as
applied to listed entities and public interest entities and we have fulfilled
our other ethical responsibilities in accordance with these requirements. We
believe that the audit evidence we have obtained is sufficient and appropriate
to provide a basis for our opinion.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors'
use of the going concern basis of accounting in the preparation of the
financial statements is appropriate.
Our audit procedures to evaluate the directors' assessment of the Group's and
the Parent Company's ability to continue to adopt the going concern basis of
accounting included but were not limited to:
· Undertaking an initial assessment at the planning stage of the
audit to identify events or conditions that may cast significant doubt on the
Group's and the Parent Company's ability to continue as a going concern;
· Making enquiries of the directors to understand the period of
assessment considered by them, the assumptions they considered and the
implication of those when assessing the Group's and Parent Company's future
financial performance;
· Evaluating management's going concern assessment of the Group and
Parent Company and challenging the appropriateness of the key assumptions used
in and mathematical integrity of management's forecasts, including assessing
the historical accuracy of management's forecasting and budgeting;
· Assessing the sufficiency of the Group's capital and liquidity
taking into consideration the most recent Internal Capital Adequacy Assessment
Process and Internal Liquidity Assessment Process performed by Arbuthnot
Latham & Co., Ltd, a PRA regulated bank and wholly owned subsidiary of the
Group, and evaluating the results of management's scenario and reverse stress
testing which includes sensitivity analysis, and including consideration of
principal and emerging risks on liquidity and regulatory capital;
· Assessing the accuracy of management's forecast through a review
of post year end performance;
· Evaluating the Group's Resolution and Recovery plans which
includes possible cost saving measures that could be taken in the event
circumstances prevent forecast results from being achieved;
· Reading regulatory correspondence, minutes of meetings of the
Audit Committee and the Board of Directors, and post balance sheet events to
identify events of conditions that may impact the Group's and the Parent
Company's ability to continue as a going concern;
· Considering the consistency of management's forecasts with other
areas of the financial statements and our audit; and
· Evaluating the appropriateness of the directors' disclosures in
the financial statements on going concern.
Based on the work we have performed, we have not identified any material
uncertainties relating to events or conditions that, individually or
collectively, may cast significant doubt on the Group's and the Parent
Company's ability to continue as a going concern for a period of twelve months
from when the financial statements are authorised for issue.
Our responsibilities and the responsibilities of the directors with respect to
going concern are described in the relevant sections of this report.
In relation to Arbuthnot Banking Group PLC's reporting on how it has applied
the UK Corporate Governance Code, we have nothing material to add or draw
attention to in relation to the directors' statement in the financial
statements about whether the director's considered it appropriate to adopt the
going concern basis of accounting.
Key Audit Matters
Key audit matters are those matters that, in our professional judgement, were
of most significance in our audit of the financial statements of the current
period and include the most significant assessed risks of material
misstatement (whether or not due to fraud) we identified, including those
which had the greatest effect on: the overall audit strategy; the allocation
of resources in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we do not
provide a separate opinion on these matters.
We summarise below the key audit matters in forming our opinion above,
together with an overview of the principal audit procedures performed to
address each matter and our key observations arising from those procedures.
These matters, together with our findings, were communicated to those charged
with governance through our Audit Completion Report.
Key Audit Matter How our scope addressed this matter
Allowances for expected credit losses Our audit procedures included but were not limited to:
Group - £6.6m; 2021: £6.4m (note 4, note 24 and 25)
Planning
The determination of Expected Credit Loss ('ECL') under IFRS 9 is an We have assessed the methodology of identifying significant increase in credit
inherently judgmental area due to the use of subjective assumptions and a high risk. As part of our audit of the methodology, we tested the model design and
degree of estimation. ECL relating to the Group's loan portfolio requires the model implementation. We also performed benchmarking and sensitivity analysis.
Directors to make judgements over the ability of the Groups' customers to make sensitivities, a detailed IFRS 9 compliance checklist review and a
future loan repayments. recalculation of the key components such as PD, LGD, EAD and final ECL.
The most significant risk relates to loans and advances to customers where the Controls
Group is exposed to secured and unsecured lending to private and commercial
customers. We have evaluated the design and implementation and tested the operating
effectiveness of the key controls operating across the Group in relation to
credit processes (including underwriting, monitoring, collections and
provisioning). This also included:
As set out in note 3.4, ECL is measured based on a three-stage model. For
loans with no significant deterioration in credit risk since origination • attendance at the Potential & Problem Debt
(stage l), ECL is determined through the use of a model. Management Committee meetings
• missed payments monitoring
The model used by the Group to determine expected losses requires judgement to • credit reviews at origination and annual review
the input parameters and assumptions; in particular, uncertainty around
macro-economic assumptions. • review of watch list movements throughout the year
• controls testing over collateral revaluations
For loans that have experienced a significant deterioration in credit risk
since origination (stage 2) or have defaulted (stage 3), the ECL is determined
based on Probability of Default ('PD') and the present value of future cash Test of detail
flows arising primarily from the sale or repossession of security which
determines the Loss Given Default ('LGD') and the Exposure at Default ('EAD'). We have performed credit file reviews in order to verify data used in the
determination of PD and LGD assumptions. This was performed for all loans in
Stage 3 and Stage 2 and for a sample of loans in Stage 1 with characteristics
of heightened credit risk (e.g. high Loan-to-Value secured exposures and
The most significant areas where we identified greater levels of management unsecured exposures).
judgement and estimate are:
ECL models
· Staging of loans and the identification of significant increase
in credit risk We have assessed the models used by management to determine ECL calculations.
We have:
· Key assumptions in the model including PD and LGD including the
present value of future cash flows from collateral; and · considered the methodology used by management;
· Use of macro-economic variables reflecting a range of future · tested the data inputs used in applying the methodology adopted
scenarios. and assessed for reasonableness;
· Post model adjustments to capture uncertainties not captured by · tested the completeness of the loan portfolio applied to the
the models. model;
· tested the process in place to allocate loans to the respective
risk categories (staging);
Further detail on the key judgements and estimates involved are set out within
the critical accounting estimates and judgements in applying accounting · tested and challenged the key assumptions applied to determine
policies note (note 4) and in note 24 and 25 to the financial statements. probability of default and loss given default;
· on sample of higher risk individually assessed loans (stage 3),
we involved our in-house valuation specialist to independently assess the
We consider the risk to have increased in the year given the economic underlying collateral used in the ECL calculations. However, in some cases we
uncertainty. relied on management's external valuation experts and, in this situation, we
assessed the capabilities, professional competence, and objectivity of the
experts;
· we have involved our in-house credit risk specialists and
economists in the assessment of model approach and assumptions, including
macro- economic scenarios and the impact on commercial and residential
property prices;
· we have assessed the valuation, completeness and appropriateness
of post model adjustments; and
· tested the compliance of the model in line with IFRS 9; and
· performed a re-calculation of the key components such as PD, LGD,
EAD and final ECL.
Stand back assessment
· we performed stand back analysis to assess the overall adequacy
of the ECL coverage. In performing this procedure, we considered the credit
quality of the portfolio and performed benchmarking across similar banks
considering both staging percentages and provision coverage ratios; and
Disclosures
· we assessed the adequacy and appropriateness of disclosures made
within the financial statements.
Our observations
We found the approach taken in respect of expected credit losses to be
consistent with the requirements of IFRS 9 and judgements made were
reasonable.
In the prior year, our audit report included significant risks in relation to
the acquisition of Asset Alliance Group (AAG) and investment property
valuation. We determined that the nature and complexity of these areas no
longer contribute significantly to our audit efforts and therefore are no
longer considered as key audit matters.
Our application of materiality and an overview of the scope of our audit
The scope of our audit was influenced by our application of materiality. We
set certain quantitative thresholds for materiality. These, together with
qualitative considerations, helped us to determine the scope of our audit and
the nature, timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating the effect of
misstatements, both individually and on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the
financial statements as a whole as follows:
Group financial statements Parent Company financial statements
Overall materiality £1.0m (2021: £1.0m) £0.2m (2021: £0.2m)
How we determined it 0.5% of Net assets but capped at component materiality levels (2021: 0.5% of
net assets but capped at component materiality levels).
Rationale for benchmark applied We consider net assets to be the main focus for the users of the financial
statements given net assets approximate regulatory capital resources and it
reflects the importance of regulatory capital to the Parent Company's
solvency. Also, the principal activity of the Group is the investment of
capital.
Performance materiality Performance materiality is set to reduce, to an appropriately low level, the
probability that the aggregate of uncorrected and undetected misstatements in
the financial statements exceeds materiality for the financial statements as a
whole.
We set performance materiality at £0.7m (2021: £0.7m) for the Group and
£0.14m (2021: £0.14m) for the Parent Company, which represents 70% of
overall materiality (2021: 70%).
In determining the performance materiality, we considered a number of factors,
including the level and nature of uncorrected and corrected misstatements in
the prior year and the robustness of the control environment, and concluded
that an amount toward the upper end of our normal range was appropriate.
Reporting threshold We agreed with the directors that we would report to them misstatements
identified during our audit above £30,000 (2021: £30,000) for the Group and
£6,000 (2021: £6,000) for the Parent Company as well as misstatements below
that amount that, in our view, warranted reporting for qualitative reasons.
As part of designing our audit, we assessed the risk of material misstatement
in the financial statements, whether due to fraud or error, and then designed
and performed audit procedures responsive to those risks. In particular, we
looked at where the directors made subjective judgements, such as assumptions
on significant accounting estimates.
We tailored the scope of our audit to ensure that we performed sufficient work
to be able to give an opinion on the financial statements as a whole. We used
the outputs of our risk assessment, our understanding of the Group and the
Parent Company, their environment, controls and critical business processes,
to consider qualitative factors in order to ensure that we obtained sufficient
coverage across all financial statement line items.
Our Group audit scope included an audit of the Group and the Parent Company
financial statements. Based on our risk assessment, all components of the
Group, including the Parent Company, were subject to full scope audit
performed by the Group and component audit teams.
We performed a full scope audit on all entities within the Group which is
consistent with the prior year. We used Mazars UK component audit teams as
component auditors for five components (2021: one component).
Our component materiality ranged from £0.02m to £0.7m (2021: £0.02m to
£0.7m). Full scope audits were carried out on all companies in the Group and
therefore, account for 100% (2021: 100%) of the Group's net interest income,
profit before tax, net assets and total assets.
At the Parent Company level, the Group audit team also tested the
consolidation process and carried out analytical procedures to confirm our
conclusion that there were no significant risks of material misstatement of
the consolidated financial information.
Working with our component audit teams
We determined the level of involvement we needed as the Group team in the work
of the component audit teams to be able to conclude whether sufficient and
appropriate audit evidence was obtained to provide a basis for our opinion on
the Group financial statements as a whole. We maintained oversight of the
component audit teams, directing and supervising their activities related to
our audit of the Group. The Group team maintained frequent communications to
monitor progress. The Senior Statutory Auditor and senior members of the Group
team attended component meetings, which were held via video conference. We
issued instructions to our component audit teams and interacted with them
throughout the audit process. In the absence of component visits, we used
video conferencing to review key workpapers prepared by the component teams
and held meetings with component management.
Other information
The other information comprises the information included in the annual report
other than the financial statements and our auditor's report thereon. The
Directors are responsible for the other information. Our opinion on the
financial statements does not cover the other information and, except to the
extent otherwise explicitly stated in our report, we do not express any form
of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the course of audit or otherwise
appears to be materially misstated. If we identify such material
inconsistencies or apparent material misstatements, we are required to
determine whether this gives rise to a material misstatement in the financial
statements themselves. If, based on the work we have performed, we conclude
that there is a material misstatement of this other information, we are
required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, the part of the directors' remuneration report to be audited
has been properly prepared in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
· the information given in the strategic report and the directors'
report for the financial year for which the financial statements are prepared
is consistent with the financial statements; and
· the strategic report and the directors' report have been prepared
in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In light of the knowledge and understanding of the Group and the Parent
Company and their environment obtained in the course of the audit, we have not
identified material misstatements in the strategic report or the directors'
report.
We have nothing to report in respect of the following matters in relation to
which the Companies Act 2006 requires us to report to you if, in our opinion:
· adequate accounting records have not been kept by the Parent
Company, or returns adequate for our audit have not been received from
branches not visited by us; or
· the Parent Company financial statements and the part of the
directors' remuneration report to be audited are not in agreement with the
accounting records and returns; or
· certain disclosures of directors' remuneration specified by law
are not made; or
· we have not received all the information and explanations we
require for our audit;
Corporate governance statement
We have reviewed the directors' statement in relation to going concern, longer
term viability and that part of the Corporate Governance Statement relating to
the Group's and the Parent Company's voluntary compliance with the provisions
of the UK Corporate Governance Code.
Based on the work undertaken as part of our audit, we have concluded that each
of the following elements of the Corporate Governance Statement is materially
consistent with the financial statements or our knowledge obtained during the
audit:
· Directors' statement with regards the appropriateness of adopting
the going concern basis of accounting and any material uncertainties
identified, set out on pages 40 and 41;
· Directors' explanation as to its assessment of the entity's
prospects, the period this assessment covers and why they period is
appropriate, set out on page 40;
· Directors' statement on fair, balanced and understandable, set
out on page 43;
· Board's confirmation that it has carried out a robust assessment
of the emerging and principal risks, set out on page 21;
· The section of the annual report that describes the review of
effectiveness of risk management and internal control systems, set out on page
19; and;
· The section describing the work of the audit committee, set out
on page 48.
Responsibilities of Directors
As explained more fully in the 'Statement of Directors' Responsibilities in
Respect of the Strategic Report and the Directors' Report and the Financial
Statements' set out on page 43, the directors are responsible for the
preparation of the financial statements and for being satisfied that they give
a true and fair view, and for such internal control as the directors determine
is necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for
assessing the Group's and the Parent Company's ability to continue as a going
concern, disclosing, as applicable, matters related to going concern and using
the going concern basis of accounting unless the directors either intend to
liquidate the Group or the Parent Company or to cease operations, or have no
realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to
fraud or error, and to issue an auditor's report that includes our opinion.
Reasonable assurance is a high level of assurance but is not a guarantee that
an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and
are considered material if, individually or in the aggregate, they could
reasonably be expected to influence the economic decisions of users taken on
the basis of these financial statements.
The extent to which our procedures are capable of detecting irregularities,
including fraud is detailed below.
Irregularities, including fraud, are instances of non-compliance with laws and
regulations. We design procedures in line with our responsibilities, outlined
above, to detect material misstatements in respect of irregularities,
including fraud.
Based on our understanding of the Group and the Parent Company and its
industry, we identified that the principal risks of non compliance relate to
regulations and supervisory requirements of the Prudential Regulation
Authority (PRA) and Financial Conduct Authority (FCA), Anti Money Laundering
regulations (AML), General Data Protection Regulation (GDPR), Corporate
Governance Code and other laws and regulations, such as the Companies Act
2006, that have a direct impact on the preparation of the financial
statements, and UK tax legislation.
To help us identify instances of non-compliance with these laws and
regulations, and in identifying and assessing the risks of material
misstatement in respect to non-compliance, our procedures included, but were
not limited to:
• Gaining an understanding of the legal and
regulatory framework applicable to the Group and the Parent Company, the
industry in which they operate, and the structure of the Group, and
considering the risk of acts by the Group and the Parent Company which were
contrary to the applicable laws and regulations, including fraud;
• Inquiring of the directors, management and,
where appropriate, those charged with governance, as to whether the Group and
the Parent Company is in compliance with laws and regulations, and discussing
their policies and procedures regarding compliance with laws and regulations;
• Inspecting correspondence with relevant
licensing or regulatory authorities including the PRA and FCA; and
• Review of minutes of meetings of the Board of
Directors and the Audit Committee held during the year;
• Discussing amongst the engagement team the laws
and regulations listed above, and remaining alert to any indications of
non-compliance.
We also considered those laws and regulations that have a direct effect on the
preparation of the financial statements, such as AIM rules, AQSE rules, SECR
requirements, tax legislation, pension legislation, the Companies Act 2006.
In addition, we evaluated the directors' and management's incentives and
opportunities for fraudulent manipulation of the financial statements,
including the risk of management override of controls, and determined that the
principal risks related to posting manual journal entries to manipulate
financial performance, management bias through judgements and assumptions in
significant accounting estimates, in particular in relation to ECL (as
described in the "Key audit matters" section of our report) and significant
one-off or unusual transactions.
Our procedures in relation to fraud included but were not limited to:
• Making enquiries of the Directors and management
on whether they had knowledge of any actual, suspected or alleged fraud;
• Gaining an understanding of the internal
controls established to mitigate risks related to fraud;
• Discussing amongst the engagement team the risks
of fraud; and
• Addressing the risks of fraud through management
override of controls by performing journal entry testing on a sample basis;
and
• Being sceptical to the potential of management
bias through judgements and assumptions in significant accounting estimates.
The primary responsibility for the prevention and detection of irregularities,
including fraud, rests with both those charged with governance and management.
As with any audit, there remained a risk of non-detection of irregularities,
as these may involve collusion, forgery, intentional omissions,
misrepresentations or the override of internal controls.
The risks of material misstatement that had the greatest effect on our audit
are discussed in the "Key Audit Matters" section of this report.
A further description of our responsibilities is available on the FRC's
website at www.frc.org.uk/auditorsresponsibilities
(http://www.frc.org.uk/auditorsresponsibilities) . This description forms part
of our auditor's report.
Other matters which we are required to address
Following the recommendation of the Audit Committee, we were appointed by the
Board of Directors on 6 December 2019 to audit the financial statements for
the year ended 31 December 2019 and subsequent financial periods. The period
of total uninterrupted engagement is four years, covering the years ended 31
December 2019 to 31 December 2022.
The non-audit services prohibited by the FRC's Ethical Standard were not
provided to the Group or the Parent Company and we remain independent of the
Group and the Parent Company in conducting our audit.
Our audit opinion is consistent with our additional report to the Audit
Committee.
Use of the audit report
This report is made solely to the Company's members as a body in accordance
with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been
undertaken so that we might state to the Company's members those matters we
are required to state to them in an auditor's report and for no other purpose.
To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company's members as a
body for our audit work, for this report, or for the opinions we have formed.
Greg Simpson (Senior Statutory Auditor)
for and on behalf of Mazars LLP
Chartered Accountants and Statutory Auditor
30 Old Bailey
London
EC4M 7AU
29 March 2023
Company statement of financial position
At 31 December
2022 2021
Note £000 £000
ASSETS
Loans and advances to banks 20 8,434 7,587
Debt securities at amortised cost 21 24,437 24,367
Current tax asset - 239
Deferred tax asset 30 523 523
Intangible assets 31 1 2
Property, plant and equipment 32 130 137
Other assets 28 74 56
Interests in subsidiaries 47 159,354 159,404
Total assets 192,953 192,315
EQUITY AND LIABILITIES
Equity
Share capital 41 154 154
Other reserves 42 (1,280) (1,280)
Retained earnings* 42 152,115 153,528
Total equity 150,989 152,402
LIABILITIES
Current tax liability 879 -
Other liabilities 37 3,491 3,141
Debt securities in issue 39 37,594 36,772
Total liabilities 41,964 39,913
Total equity and liabilities 192,953 192,315
*The Company has elected to take the exemption under section 408 of the
Companies Act 2006 not to present the Parent Company profit and loss account.
The Parent Company recorded a profit after tax for the year of £4,446k (2021:
£5,541k).
Consolidated statement of changes in equity
Attributable to equity holders of the Group
Share capital Capital redemption reserve Fair value reserve Treasury shares Retained earnings Total
£000 £000 £000 £000 £000 £000
Balance at 31 December 2021 154 19 979 (1,299) 201,026 200,879
Total comprehensive income for the period
Profit for 2022 - - - - 16,458 16,458
Other comprehensive income, net of tax
Changes in fair value of equity investments at fair value through other - - 628 - - 628
comprehensive income (FVOCI)
Sale of financial assets carried at FVOCI - - (412) - 412 -
Tax on other comprehensive income - - (128) - - (128)
Total other comprehensive income - - 88 - 412 500
Total comprehensive income for the period - - 88 - 16,870 16,958
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Final dividend relating to 2021 - - - - (3,305) (3,305)
Interim dividend relating to 2022 - - - - (2,554) (2,554)
Total contributions by and distributions to owners - - - - (5,859) (5,859)
Balance at 31 December 2022 154 19 1,067 (1,299) 212,037 211,978
Attributable to equity holders of the Group
Share capital Capital redemption reserve Fair value reserve Treasury shares Retained earnings Total
£000 £000 £000 £000 £000 £000
Balance at 31 December 2020 154 19 (12,690) (1,299) 207,839 194,023
Total comprehensive income for the period
Loss for 2021 - - - - 6,786 6,786
Other comprehensive income, net of tax
Changes in fair value of equity investments at fair value through other - - 5,626 - - 5,626
comprehensive income
Tax on other comprehensive income - - 2 - - 2
Total other comprehensive income - - 5,628 - - 5,628
Total comprehensive income for the period - - 5,628 - 6,786 12,414
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Sale of Secure Trust Bank shares - - 8,041 - (8,041) -
Special dividend relating to 2019* - - - - (3,155) (3,155)
Interim dividend relating to 2021 - - - - (2,403) (2,403)
Total contributions by and distributions to owners - - 8,041 - (13,599) (5,558)
Balance at 31 December 2021 154 19 979 (1,299) 201,026 200,879
* On 19 March 2021 the Group paid a special dividend of 21p per share to
replace the dividend that was withdrawn at the request of the regulators at
the outset of the pandemic.
Company statement of changes in equity
Attributable to equity holders of the Company
Share capital Capital redemption reserve Fair value reserve Treasury shares Retained earnings Total
£000 £000 £000 £000 £000 £000
Balance at 1 January 2021 154 19 (12,164) (1,299) 160,721 147,431
Total comprehensive income for the period
Profit for 2021 - - - - 5,541 5,541
Other comprehensive income, net of income tax
Changes in fair value of equity investments at fair value through other - - 4,988 - - 4,988
comprehensive income
Total other comprehensive income - - 4,988 - - 4,988
Total comprehensive income for the period - - 4,988 - 5,541 10,529
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Sale of Secure Trust Bank shares - - 7,176 (7,176) -
Special dividend relating to 2019* - - - - (3,155) (3,155)
Interim dividend relating to 2021 - - - - (2,403) (2,403)
Total contributions by and distributions to owners - - 7,176 - (12,734) (5,558)
Balance at 31 December 2021 154 19 - (1,299) 153,528 152,402
Total comprehensive income for the period
Profit for 2022 - - - - 4,446 4,446
Other comprehensive income, net of income tax
Total comprehensive income for the period - - - - 4,446 4,446
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Final dividend relating to 2021 - - - - (3,305) (3,305)
Interim dividend relating to 2022 - - - - (2,554) (2,554)
Total contributions by and distributions to owners - - - - (5,859) (5,859)
Balance at 31 December 2022 154 19 - (1,299) 152,115 150,989
* On 19 March 2021 the Group paid a special dividend of 21p per share to
replace the dividend that was withdrawn at the request of the regulators at
the outset of the pandemic.
Consolidated statement of cash flows
Year ended 31 December Year ended 31 December
2022 2021*
Note £000 £000
Cash flows from operating activities
Profit before tax 20,009 4,638
Adjustments for:
- Depreciation and amortisation 30,29,31 7,193 7,957
- Impairment loss on loans and advances 25 214 1,759
- Net interest income 80 71
- Elimination of exchange differences on debt securities (8,783) (1,978)
- Gain from bargain purchase 12 - (8,626)
- Other non-cash or non-operating items included in profit before tax 163 20
- Tax expense (3,551) 2,148
Cash flows from operating profits before changes in operating assets and 15,325 5,989
liabilities
Changes in operating assets and liabilities:
- net increase in derivative financial instruments (4,605) (388)
- net increase in loans and advances to customers (165,328) (280,646)
- net (increase)/decrease in assets held for leasing (50,175) 14,855
- net decrease/(increase) in other assets 57,563 (3,554)
- net increase in amounts due to customers 254,680 472,662
- net increase in other liabilities 6,323 4,604
Net cash inflow from operating activities 113,783 213,522
Cash flows from investing activities
Acquisition of financial investments (53) (621)
Disposal of financial investments 640 21,547
Purchase of computer software 29 (6,174) (5,100)
Purchase of property, plant and equipment 30 (1,065) (702)
Proceeds from sale of property, plant and equipment 30 50 2
Acquisition of Asset Alliance Group Holdings Limited 12 - (9,998)
Cash balance acquired through Asset Alliance Holdings Limited acquisition 12 - 3,883
Purchase of debt securities (799,341) (590,492)
Proceeds from redemption of debt securities 670,164 635,155
Net cash (owtflow) / inflow from investing activities (135,779) 53,674
Cash flows from financing activities
Decrease in borrowings (4,306) (117,675)
Lease payments (7,458) (2,893)
Dividends paid (5,860) (5,558)
Net cash outflow from financing activities (17,624) (126,126)
Net (decrease)/increase in cash and cash equivalents (39,620) 141,070
Cash and cash equivalents at 1 January 888,136 747,066
Cash and cash equivalents at 31 December 43 848,516 888,136
*Prior year values have been represented using the indirect method in
accordance with IAS 7.
Company statement of cash flows
Year ended 31 December Year ended 31 December
2022 2021*
Note £000 £000
Cash flows from operating activities
Profit before tax 5,850 5,550
Adjustments for:
- Depreciation and amortisation 29, 30 10 25
- Net interest income 80 71
- Elimination of exchange differences on debt securities 741 (955)
- Other non-cash or non-operating items included in profit before tax (71) 43
- Tax expense (1,404) (9)
Cash flows from operating profits before changes in operating assets and 5,206 4,725
liabilities
Changes in operating assets and liabilities:
- net increase in group company balances (1,013) (1,655)
- net decrease in other assets 221 47
- net increase in other liabilities 2,242 1,237
Net cash inflow from operating activities 6,656 4,354
Cash flows from investing activities
Receipt on dissolution of People's Trust & Savings PLC 45 50 -
Capital contribution to Arbuthnot Latham - (25,500)
Disposal of financial investments - 19,129
Net cash (outflow)/inflow from investing activities 50 (6,371)
Cash flows from financing activities
Dividends paid (5,859) (5,558)
Net cash used in financing activities (5,859) (5,558)
Net increase/(decrease) in cash and cash equivalents 847 (7,575)
Cash and cash equivalents at 1 January 7,587 15,162
Cash and cash equivalents at 31 December 43 8,434 7,587
*Prior year values have been represented using the indirect method in
accordance with IAS 7.
Notes to the Consolidated Financial Statements
1. Reporting entity
Arbuthnot Banking Group PLC is a company domiciled in the United Kingdom. The
registered address of Arbuthnot Banking Group PLC is 7 Wilson Street, London,
EC2M 2SN. The consolidated financial statements of Arbuthnot Banking Group PLC
as at and for the year ended 31 December 2022 comprise Arbuthnot Banking Group
PLC and its subsidiaries (together referred to as the "Group" and individually
as "subsidiaries"). The Company is the holding company of a group primarily
involved in banking and financial services.
2. Basis of preparation
(a) Statement of compliance
The Group's consolidated financial statements and the Company's financial
statements have been prepared in accordance with UK-adopted international
accounting standards in conformity with the requirements of the Companies Act
2006.
The consolidated financial statements were authorised for issue by the Board
of Directors on 29 March 2023.
(b) Basis of measurement
The consolidated and company financial statements have been prepared under the
historical cost convention, as modified by investment property and
derivatives, financial assets and financial liabilities at fair value through
profit or loss or other comprehensive income.
(c) Functional and presentational currency
Items included in the financial statements of each of the Group's entities are
measured using the currency of the primary economic environment in which the
entity operates ("the functional currency"). The consolidated financial
statements are presented in Pounds Sterling, which is the Company's functional
and the Group's presentational currency.
(d) Use of estimates and judgements
The preparation of financial statements in conformity with IFRS requires the
use of certain critical accounting estimates. It also requires management to
exercise its judgement in the process of applying the Group's accounting
policies. The areas involving a higher degree of judgement or complexity, or
areas where assumptions and estimates are significant to the consolidated
financial statements are disclosed in Note 4.
(e) Going concern
After making appropriate enquiries which assessed strategy, profitability,
funding, risk management (see Note 6), capital resources (see Note 7) and the
potential impact of climate-related risks, the directors are satisfied that
the Company and the Group have adequate resources to continue as a going
concern for a period of at least twelve months from when the financial
statements are authorised for issue. The Audit Committee reviewed management's
assessment, which incorporated analysis of the ICAAP and ILAAP approved by the
Board of AL and of relevant metrics, focusing on liquidity, capital, and the
stress scenarios. It is satisfied that the going concern basis and assessment
of the Group's longer-term viability is appropriate. The financial statements
are therefore prepared on the going concern basis.
(f) Accounting developments
The accounting policies adopted are consistent with those of the previous
financial year.
3. Significant accounting policies
The accounting policies applied in the preparation of these consolidated
financial statements are set out below. These policies have been consistently
applied to all the years presented, unless otherwise stated.
3.1. Consolidation
(a) Subsidiaries
Subsidiaries are all investees (including special purpose entities) controlled
by the Group. The Group controls an investee when it is exposed, or has
rights, to variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the investee.
Subsidiaries are fully consolidated from the date on which control is
transferred to the Group. They are de-consolidated from the date that control
ceases.
The acquisition method of accounting is used to account for the acquisition of
subsidiaries by the Group. The cost of an acquisition is measured as the fair
value of the assets given, equity instruments issued and liabilities incurred
or assumed at the date of exchange. Identifiable assets acquired, liabilities
and contingent liabilities assumed in a business combination are measured
initially at their fair values at the acquisition date, irrespective of the
extent of any non-controlling interest. The excess of the cost of acquisition
over the fair value of the Group's shares of the identifiable net assets
acquired is recorded as goodwill. If the cost of acquisition is less than the
fair value of the net assets of the subsidiary acquired, the difference is
recognised directly in the Statement of Comprehensive Income as a gain on
bargain purchase. Contingent consideration related to an acquisition is
initially recognised at the date of acquisition as part of the consideration
transferred, measured at its acquisition date fair value and recognised as a
liability. The fair value of a contingent consideration liability recognised
on acquisition is remeasured at key reporting dates until it is settled,
changes in fair value are recognised in the profit or loss.
The Company's investments in subsidiaries are recorded at cost less, where
appropriate, provisions for impairment in value.
Inter-company transactions, balances and unrealised gains on transactions
between Group companies are eliminated. Unrealised losses are also eliminated.
Accounting policies of subsidiaries have been changed where necessary to
ensure consistency with the policies adopted by the Group.
(b) Special purpose entities
Special purpose entities ("SPEs") are entities that are created to accomplish
a narrow and well-defined objective such as the securitisation of particular
assets or the execution of a specific borrowing or lending transaction. SPEs
are consolidated when the investor controls the investee. The investor would
only control the investee if it had all of the following:
• power over the investee;
• exposure, or rights, to variable returns from its involvement
with the investee; and
• the ability to use its power over the investee to affect the
amount of the investor's returns.
The assessment of whether the Group has control over an SPE is carried out at
inception and the initial assessment is only reconsidered at a later date if
there were any changes to the structure or terms of the SPE, or there were
additional transactions between the Group and the SPE.
3.2. Foreign currency translation
Foreign currency transactions are translated into the functional currency
using the spot exchange rates prevailing at the dates of the transactions or
valuation where items are remeasured. Foreign exchange gains and losses
resulting from the settlement of such transactions and from the translation at
year end exchange rates of monetary assets and liabilities denominated in
foreign currencies are recognised in the Statement of Comprehensive Income.
Foreign exchange differences arising from translation of equity instruments,
where an election has been made to present subsequent fair value changes in
Other Comprehensive Income ("OCI"), will also be recognised in OCI.
3.3. Financial assets and financial liabilities
IFRS 9 requires financial assets and liabilities to be measured at amortised
cost, fair value through other comprehensive income ("FVOCI") or fair value
through the profit and loss ("FVPL"). Liabilities are measured at amortised
cost or FVPL. The Group classifies financial assets and financial liabilities
in the following categories: financial assets and financial liabilities at
FVPL; FVOCI, financial assets and liabilities at amortised cost and other
financial liabilities. Management determines the classification of its
financial instruments at initial recognition.
A financial asset or financial liability is measured initially at fair value
plus, transaction costs that are directly attributable to its acquisition or
issue with the exception of financial assets at FVPL where these costs are
debited to the income statement.
(a) Financial assets measured at amortised cost
Financial assets that are held to collect contractual cash flows where those
cash flows represent solely payments of principal and interest are measured at
amortised cost. A basic lending arrangement results in contractual cash flows
that are solely payments of principal and interest ("SPPI") on the principal
amount outstanding. Financial assets measured at amortised cost are
predominantly loans and advances and debt securities.
Loans and advances
Loans and advances are non-derivative financial assets with fixed or
determinable payments that are not quoted in an active market. They arise when
the Group provides money, goods or services directly to a debtor with no
intention of trading the receivable and the SPPI criteria are met. Loans are
recognised when cash is advanced to the borrowers inclusive of transaction
costs. Loans and advances, other than those relating to assets leased to
customers, are carried at amortised cost using the effective interest rate
method.
Debt securities at amortised cost
Debt securities at amortised cost are non-derivative financial assets with
fixed or determinable payments and fixed maturities that the Group has
determined meets the SPPI criteria. Debt security investments are carried at
amortised cost using the effective interest rate method, less any impairment
loss.
(b) Financial assets and financial liabilities at FVPL
Financial assets and liabilities are classified at FVPL where they do not meet
the criteria to be measured at amortised cost or FVOCI or where financial
assets are designated at FVPL to reduce an accounting mismatch. They are
measured at fair value in the statement of financial position, with fair value
gains/losses recognised in the income statement.
Financial assets that are held for trading or managed within a business model
that is evaluated on a fair value basis are measured at FVPL, because the
business objective is neither hold-to-collect contractual cash flows nor
hold-to-collect-and-sell contractual cash flows.
This category comprises derivative financial instruments and financial
investments. Derivative financial instruments utilised by the Group include
structured notes and derivatives used for hedging purposes.
Financial assets and liabilities at FVPL are initially recognised on the date
from which the Group becomes a party to the contractual provisions of the
instrument, including any acquisition costs. Subsequent measurement of
financial assets and financial liabilities held in this category are carried
at FVPL until the investment is sold.
(c) Financial assets at FVOCI
These include investments in special purpose vehicles and equity investments.
They may be sold in response to liquidity requirements, interest rate,
exchange rate or equity price movements. Financial investments are initially
recognised at cost, which is considered as the fair value of the investment
including any acquisition costs. The securities are subsequently measured at
fair value in the statement of financial position.
Fair value changes in the securities are recognised directly in equity (OCI).
There is a rebuttable presumption that all equity investments are FVPL,
however on initial recognition the Group may make an irrevocable election to
present the fair value movement of equity investments that are not held for
trading within OCI. The election can be made on an instrument by instrument
basis.
For equity instruments, there are no reclassifications of gains and losses to
the profit or loss statement on derecognition and no impairment recognised in
the profit or loss. Equity fair value movements are not reclassified from OCI
under any circumstances.
(d) Financial guarantees and loan commitments
Financial guarantees represent undertakings that the Group will meet a
customer's obligation to third parties if the customer fails to do so.
Commitments to extend credit represent unused portions of authorisations to
extend credit in the form of loans, guarantees or letters of credit. The Group
is exposed to loss in an amount equal to the total guarantees or unused
commitments, however, the likely amount of loss is expected to be
significantly less; most commitments to extend credit are contingent upon
customers maintaining specific credit standards, where the amount of loss
exceeds the total unused commitments an ECL is recognised. Liabilities under
financial guarantee contracts are initially recorded at their fair value, and
the initial fair value is amortised over the life of the financial guarantee.
Subsequently, the financial guarantee liabilities are measured at the higher
of the initial fair value, less cumulative amortisation, and the ECL of the
obligations.
(e) Financial liabilities at amortised cost
Financial liabilities at amortised cost are non-derivative financial
liabilities with fixed or determinable payments. These liabilities are
recognised when cash is received from the depositors and carried at amortised
cost using the effective interest rate method. The fair value of these
liabilities repayable on demand is assumed to be the amount payable on demand
at the Statement of Financial Position date.
Basis of measurement for financial assets and liabilities
Amortised cost measurement
The amortised cost of a financial asset or financial liability is the amount
at which the financial asset or financial liability is measured at initial
recognition, minus principal payments, plus or minus the cumulative
amortisation using the effective interest rate method of any difference
between the initial amount recognised and the maturity amount, less any
reduction for impairment.
Fair value measurement
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date.
When available, the Group measures the fair value of an instrument using
quoted prices in an active market for that instrument. A market is regarded as
active if quoted prices are readily and regularly available and represent
actual and regularly occurring market transactions on an arm's length basis.
If a market for a financial instrument is not active, the Group establishes
fair value using a valuation technique. These include the use of recent arm's
length transactions, reference to other instruments that are substantially the
same for which market observable prices exist, net present value and
discounted cash flow analysis.
Derecognition
Financial assets are derecognised when the rights to receive cash flows from
the financial assets have expired or when the Group has transferred
substantially all risks and rewards of ownership. Any interest in transferred
financial assets that qualify for derecognition that is created or retained by
the Group is recognised as a separate asset or liability in the Statement of
Financial Position. In transactions in which the Group neither retains nor
transfers substantially all the risks and rewards of ownership of a financial
asset and it retains control over the asset, the Group continues to recognise
the asset to the extent of its continuing involvement, determined by the
extent to which it is exposed to changes in the value of the transferred
asset. There have not been any instances where assets have only been partially
derecognised.
The Group derecognises a financial liability when its contractual obligations
are discharged, cancelled, expire, are modified or exchanged.
Offsetting
Financial assets and financial liabilities are offset and the net amount
presented in the statement of financial position when, and only when, the
Group currently has a legally enforceable right to set off the amounts and it
intends either to settle them on a net basis or to realise the asset and
settle the liability simultaneously.
Income and expenses are presented on a net basis only when permitted under
IFRS, or for gains and losses arising from a group of similar transactions
such as the Group's trading activity.
3.4 Impairment for financial assets and lease receivables
IFRS 9 impairment model adopts a three stage expected credit loss approach
("ECL") based on the extent of credit deterioration since origination.
The three stages under IFRS 9 are as follows:
• Stage 1 - if, at the reporting date, the credit risk on a
financial instrument has not increased significantly since initial
recognition, an entity shall measure the loss allowance for that financial
instrument at an amount equal to 12-month expected credit losses.
• Stage 2 - a lifetime loss allowance is held for financial assets
where a significant increase in credit risk has been identified since initial
recognition for financial assets that are not credit impaired. The assessment
of whether credit risk has increased significantly since initial recognition
is performed for each reporting period for the life of the loan.
• Stage 3 - a lifetime ECL allowance is required for financial
assets that are credit impaired at the reporting date.
Measurement of ECL
The assessment of credit risk and the estimation of ECL are unbiased and
probability weighted. ECL is measured on either a 12 month (Stage 1) or
lifetime (Stage 2) basis depending on whether a significant increase in credit
risk has occurred since initial recognition or where an account meets the
Group's definition of default (Stage 3).
The ECL calculation is a product of an individual loan's probability of
default ('PD'), exposure at default ('EAD') and loss given default ('LGD')
discounted at the effective interest rate ('EIR').
Significant increase in credit risk ("SICR") (movement to Stage 2)
The Group's transfer criteria determines what constitutes a significant
increase in credit risk, which results in a financial asset being moved from
Stage 1 to Stage 2. The Group has determined that a significant increase in
credit risk arises when an individual borrower is more than 30 days past due
or if forbearance measures have been put in place.
The Group monitors the ongoing appropriateness of the transfer criteria, where
any proposed amendments will be reviewed and approved by the Groups Credit
Committees at least annually and more frequently if required.
A borrower will move back into Stage 1 conditional upon a period of good
account conduct and the improvement of the Client's situation to the extent
that the probability of default has receded sufficiently and a full repayment
of the loan, without recourse to the collateral, is likely.
Definition of default (movement to Stage 3)
The Group uses a number of qualitative and quantitative criteria to determine
whether an account meets the definition of default and as a result moves into
Stage 3. The criteria are as follows:
• The rebuttable assumption that more than 90 days past due is an
indicator of default. The Group therefore deems more than 90 days past due as
an indicator of default except for cases where the customer is already within
forbearance. This will ensure that the policy is aligned with the
Basel/Regulatory definition of default.
• The Group has also deemed it appropriate to classify accounts
where there has been a breach in agreed forbearance arrangements, recovery
action is in hand or bankruptcy proceedings have been initiated or similar
insolvency process of a client, or director of a company.
A borrower will move out of Stage 3 when their credit risk improves such that
they are no longer past due and remain up to date for a minimum period of six
months and the improvement in the borrower's situation to the extent that
credit risk has receded sufficiently and a full repayment of the loan, without
recourse to the collateral, is likely.
Forward looking macroeconomic scenarios
IFRS 9 requires the entity to consider the risk of default and impairment loss
taking into account expectations of economic changes that are reasonable.
The Group uses bespoke macroeconomic models to determine the most significant
factors which may influence the likelihood of an exposure defaulting in the
future. At present, the most significant macroeconomic factors relate to
property prices, UK real GDP growth and unemployment rate. The Group currently
consider five probability weighted scenarios: baseline; extreme downside
(2021: "severe decline"); downside 2 (2021: "moderate decline"); downside 1
(2021: "decline") and upside. The Group has derived an approach for factoring
probability weighted macroeconomic forecasts into ECL calculations, adjusting
PD and LGD estimates.
Expected life
IFRS 9 requires lifetime expected credit losses to be measured over the
expected life. Currently the Group considers the loans' contractual term as
the maximum period to consider credit losses. This approach will continue to
be monitored and enhanced if and when deemed appropriate.
Government guarantees
During March and April 2020, the UK government launched a series of temporary
schemes designed to support businesses
deal with the impact of Covid-19. The BBLS, CBILS, CLBILS and RLS lending
products were originated by the Group but are
covered by government guarantees. These are to be set against the outstanding
balance of a defaulted facility after the
proceeds of the business assets have been applied. The government guarantee is
80% for CBILS, CLBILS and RLS and 100% for
BBLS. Arbuthnot Latham recognises lower LGDs for these lending products as a
result, with 0% applied to the government guaranteed part of the exposure.
3.5 Derivatives held for risk management purposes and hedge accounting
Derivatives held for risk management purposes include all derivative assets
and liabilities that are not classified as trading assets or liabilities. All
derivatives are measured at fair value in the statement of financial position.
The Group designates certain derivatives held for risk management as hedging
instruments in qualifying hedging relationships.
Policy applicable generally to hedging relationships
On initial designation of the hedge, the Group formally documents the
relationship between the hedging instrument(s) and hedged item(s), including
the risk management objective and strategy in undertaking the hedge, together
with the method that will be used to assess the effectiveness of the hedging
relationship. The Group makes an assessment, both on inception of the hedging
relationship and on an ongoing basis, of whether the hedging instrument(s) is
(are) expected to be highly effective in offsetting the changes in the fair
value of the respective hedged item(s) during the period for which the hedge
is designated, and whether the actual results of each hedge are within a range
of 80-125%.
Fair value hedges
When a derivative is designated as the hedging instrument in a hedge of the
change in fair value of a recognised asset or liability or a firm commitment
that could affect profit or loss, changes in the fair value of the derivative
are recognised immediately in profit or loss. The change in fair value of the
hedged item attributable to the hedged risk is recognised in profit or loss.
If the hedged item would otherwise be measured at cost or amortised cost, then
its carrying amount is adjusted accordingly.
If the hedging derivative expires or is sold, terminated or exercised, or the
hedge no longer meets the criteria for fair value hedge accounting, or the
hedge designation is revoked, then hedge accounting is discontinued
prospectively. However, if the derivative is novated to a central counterparty
by both parties as a consequence of laws or regulations without changes in its
terms except for those that are necessary for the novation, then the
derivative is not considered expired or terminated.
Any adjustment up to the point of discontinuation to a hedged item for which
the effective interest method is used is amortised to profit or loss as an
adjustment to the recalculated effective interest rate of the item over its
remaining life.
On hedge discontinuation, any hedging adjustment made previously to a hedged
financial instrument for which the effective interest method is used is
amortised to profit or loss by adjusting the effective interest rate of the
hedged item from the date on which amortisation begins. If the hedged item is
derecognised, then the adjustment is recognised immediately in profit or loss
when the item is derecognised.
3.6. Impairment of non-financial assets
The carrying amounts of the Group's non-financial assets, other than
inventories and deferred tax assets, are reviewed at each reporting date to
determine whether there is any indication of impairment. If any such
indication exists, then the asset's recoverable amount is estimated.
Impairment for goodwill is discussed in more detail under Note 29.
3.7. Fiduciary activities
The Group commonly acts as trustee and in other fiduciary capacities that
result in the holding or placing of assets on behalf of individuals, trusts,
retirement benefit plans and other institutions. These assets and income
arising thereon are excluded from these financial statements, as they are not
assets of the Group.
3.8. Adoption of new and revised reporting standards
There are no standards, interpretations or amendments to existing standards
that have been published and are mandatory for the Group's accounting periods
beginning on or after 1 January 2022 or later periods, that will have any
material impact on the Group's financial statements.
3.9. Standards issued but not yet effective
A number of new standards and amendments to standards are effective for annual
periods beginning after 1 January 2022 and earlier application is permitted;
however, the Group has not early adopted the new and amended standards in
preparing these consolidated financial statements.
Other standards
The following new and amended standards are not expected to have a significant
impact on the Group's consolidated financial statements.
• Deferred Tax related to Assets and Liabilities arising from a
Single Transaction (Amendments to IAS 12, effective for annual periods
beginning on or after 1 January 2023).
• Classification of Liabilities as Current or Non-Current
(Amendments to IAS 1, effective for annual periods beginning on or after 1
January 2023).
• IFRS 17 Insurance Contracts and amendments to IFRS 17 Insurance
Contracts. (effective for annual reporting periods beginning on or after 1
January 2023).
• Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS
Practice Statement 2).
• Definition of Accounting Estimates (Amendments to IAS 8,
effective for annual periods beginning on or after 1 January 2023)
4. Critical accounting estimates and judgements in applying accounting
policies
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.
4.1 Estimation uncertainty
(a) Expected credit losses ("ECL") on financial assets
The Group reviews its loan portfolios and debt security investments to assess
impairment at least on a quarterly basis. The basis for evaluating impairment
losses is described in Note 11. The measurement of ECL required by the
implementation of IFRS 9, necessitates a number of significant judgements.
Specifically, judgements and estimation uncertainties relate to assessment of
whether credit risk on the financial asset has increased significantly since
initial recognition, incorporation of forward-looking information ("FLI") in
the measurement of ECLs and key assumptions used in estimating recoverable
cash flows. These estimates are driven by a number of factors that are subject
to change which may result in different levels of ECL allowances.
The Group incorporates FLI into the assessment of whether there has been a
significant increase in credit risk. Forecasts for key macroeconomic variables
that most closely correlate with the Bank's portfolio are used to produce five
economic scenarios, comprising of a base case, which is the central scenario,
developed internally based on consensus forecast, and four less likely
scenarios, one upside and three downside scenarios (downside 1, downside 2 and
extreme downside), and the impacts of these scenarios are then probability
weighted. The estimation and application of this FLI will require significant
judgement supported by the use of external information.
12-month ECLs on loans and advances (loans within Stage 1) are calculated
using a statistical model on a collective basis, grouped together by product
and geographical location. The key assumptions are the probability of default,
the economic scenarios and loss given default having consideration to
collateral. Lifetime ECLs on loans and advances (loans within Stage 2 and 3)
are calculated based on an individual valuation of the underlying asset and
other expected cash flows.
For financial assets in Stage 2 and 3, ECL is calculated on an individual
basis and all relevant factors that have a bearing on the expected future cash
flows are taken into account. These factors can be subjective and can include
the individual circumstances of the borrower, the realisable value of
collateral, the Group's position relative to other claimants, and the likely
cost to sell and duration of the time to collect. The level of ECL is the
difference between the value of the recoverable amount (which is equal to the
expected future cash flows discounted at the loan's original effective
interest rate), and its carrying amount.
Five economic scenarios were modelled. A probability was assigned to each
scenario to arrive at an overall weighted impact on ECL. Management judgment
is required in the application of the probability weighting for each scenario.
The Group considered the impact of various assumptions on the calculation of
ECL (changes in GDP, unemployment rates, inflation, exchange rates, equity
prices, wages and collateral values/property prices) and concluded that
collateral values/property prices, UK GDP and UK unemployment rate are key
drivers of credit risk and credit losses for each portfolio of financial
instruments.
Using an analysis of historical data, management has estimated relationships
between macro-economic variables and credit risk and credit losses. The Group
estimates each key driver for credit risk over the active forecast period of
between two and five years. This is followed by a period of mean reversion of
five years.
The five macroeconomic scenarios modelled on future property prices and
macroeconomic variables were as follows:
• Baseline
• Upside
• Downside 1
• Downside 2
• Extreme downside
The tables below therefore reflect the expected probability weightings applied
for each macroeconomic scenario:
Probability weighting*
Group 2022 2021
Economic Scenarios
Baseline 53.0% 52.0%
Upside 13.0% 25.0%
Downside 1 12.0% 16.0%
Downside 2 11.0% 5.0%
Extreme downside 11.0% 2.0%
Due to changes in the UK economic outlook the baseline scenario used at 31
December 2022 is less optimistic than the baseline scenario at 31 December
2021. The tables below show the five-year forecasted average for property
prices growth, UK unemployment rate and UK real GDP growth:
31 December 2022
Base Upside Downside 1 Downside 2 Extreme downside
Five-year summary
UK House price index - average growth (0.8%) 1.7% (1.9%) (3.0%) (4.2%)
UK Commercial real estate price - average growth (2.6%) 0.2% (3.4%) (4.1%) (4.9%)
UK Unemployment rate - average 4.3% 2.8% 5.3% 6.3% 7.3%
UK GDP - average growth 1.2% 2.1% 0.8% 0.4% 0.0%
31 December 2021
Base Upside Decline Moderate Decline Severe Decline
Five-year summary
UK House price index - average growth 2.0% 5.6% (0.7%) (2.8%) (4.8%)
UK Commercial real estate price - average growth 1.4% 5.1% (1.2%) (1.8%) (2.4%)
UK Unemployment rate - average 4.2% 3.8% 5.7% 7.5% 9.4%
UK GDP - average growth 2.3% 3.9% 1.3% 0.6% (0.1%)
The tables below list the macroeconomic assumptions at 31 December 2022 used
in the base, upside and downside scenarios over the five-year forecast period.
The assumptions represent the absolute percentage unemployment rates and
year-on-year percentage change for GDP and property prices.
UK House price index - four quarter growth
Year Baseline Upside Downside 1 Downside 2 Extreme downside
2023 (6.8%) (3.9%) (8.2%) (9.6%) (11.0%)
2024 (3.2%) (0.7%) (7.8%) (12.3%) (16.9%)
2025 1.1% 3.2% (1.5%) (4.1%) (6.8%)
2026 2.2% 4.8% 3.9% 5.5% 7.2%
2027 2.8% 4.9% 4.1% 5.3% 6.6%
5 year average (0.8%) 1.7% (1.9%) (3.0%) (4.2%)
UK Commercial real estate price - four quarter growth
Year Baseline Upside Downside 1 Downside 2 Extreme downside
2023 (14.0%) (4.0%) (19.3%) (24.7%) (30.0%)
2024 (3.0%) - (8.2%) (13.4%) (18.6%)
2025 - 1.0% 2.3% 4.7% 7.0%
2026 2.0% 2.0% 4.2% 6.3% 8.5%
2027 2.0% 2.0% 4.2% 6.4% 8.6%
5 year average (2.6%) 0.2% (3.4%) (4.1%) (4.9%)
UK Unemployment rate - annual average
Year Baseline Upside Downside 1 Downside 2 Extreme downside
2023 4.6% 3.2% 5.1% 5.5% 6.0%
2024 4.3% 2.8% 5.7% 7.0% 8.4%
2025 4.1% 2.5% 5.4% 6.7% 8.0%
2026 4.2% 2.5% 5.3% 6.3% 7.4%
2027 4.2% 2.8% 5.0% 5.9% 6.7%
5 year average 4.3% 2.8% 5.3% 6.3% 7.3%
UK GDP - annual growth
Year Baseline Upside Downside 1 Downside 2 Extreme downside
2023 (0.9%) 0.7% (2.3%) (3.7%) (5.0%)
2024 1.4% 2.4% 1.3% 1.3% 1.2%
2025 2.0% 2.7% 1.7% 1.5% 1.2%
2026 1.8% 2.5% 1.6% 1.4% 1.2%
2027 1.8% 2.3% 1.6% 1.4% 1.2%
5 year average 1.2% 2.1% 0.8% 0.4% -
The graphs below plot the historical data for HPI, Commercial real estate
price, unemployment rate and GDP growth rate in the UK as well as the
forecasted data under each of the five scenarios.
The table below compares the 31 December 2022 ECL provision using the 31
December 2022 economic scenarios and the 31 December 2022 ECL provision using
the 31 December 2021 economic scenarios.
Economic scenarios as at
2022 2021
Group £000 £000
ECL Provision
Stage 1 1,147 546
Stage 2 130 67
Stage 3 5,325 5,107
At 31 December 2022 6,602 5,720
Additionally, management have assessed the impact of assigning a 100%
probability to each of the economic scenarios, which would have the following
impact on the Profit or Loss of the Group:
2022 2021
Group £m £m
Impact of 100% scenario probability
Baseline 0.7 0.1
Upside 1.0 0.1
Downside 1 (2.0) (0.8)
Downside 2 (7.5) (4.0)
Extreme downside (19.1) (13.6)
(b) Effective Interest Rate
Loans and advances to customers are initially recognised at fair value.
Subsequently, they are measured under the effective interest rate method.
Management review the expected cash flows against actual cash flows to ensure
future assumptions on customer behaviour and future cash flows remain valid.
If the estimates of future cash flows are revised, the gross carrying value of
the financial asset is recalculated as the present value of the estimated
future contractual cash flows discounted at the original effective interest
rate. The adjustment to the carrying value of the loan book is recognised in
the Statement of Comprehensive Income.
The accuracy of the effective interest rate is affected by unexpected market
movements resulting in altered customer behaviour, inaccuracies in the models
used compared to actual outcomes and incorrect assumptions.
In 2022 the Group recognised £Nil (2021: £0.1m) additional interest income
to reflect a revision in the timing of expected cash flows on the originated
book, reflecting a shortening of the expected life of originated loan book.
If customer loans repaid 6 months earlier than anticipated on the originated
loan book, interest income would increase by £0.7m (2021: £0.6m), due to
acceleration of fee income.
In 2022 the Group recognised £0.1m additional (2021: reversal £0.3m) of
interest income to reflect actual cash flows received on the acquired mortgage
books being less than forecast cash flows.
The key judgements in relation to calculating the net present value of the
acquired mortgage books relate to the timing of future cash flows on principal
repayments. Management have considered an early and delayed 6-month
sensitivity on the timing of repayment and a 10% increase and decrease of
principal repayments to be reasonably possible.
If the acquired loan books were modelled to accelerate cash flows by 6 months,
it would increase interest income in 2022 by £0.1m (2021: £0.1m) while a 10%
increase in principal repayments will increase interest income in 2022 by
£0.2m (2021: £0.3m) through a cash flow reset adjustment.
(c) Investment property
The valuations that the Group places on its investment properties are subject
to a degree of uncertainty and are calculated on the basis of assumptions in
relation to prevailing market rents and effective yields. These assumptions
may not prove to be accurate, particularly in periods of market volatility.
The uncertainty due to Brexit, rising inflation and interest rates has
resulted in less market evidence being available for Management in making its
judgement on the key assumptions of property yield and market rent. The Group
currently owns one (2021: one) investment property, as outlined in Note 32.
Management valued the investment property utilising externally sourced market
information and property specific knowledge. The valuations were reviewed by
the Group's in-house surveyor.
Crescent Office Park in Bath with value of £6.6m (2021: £6.6m)
In December 2017, the office building was acquired with the intention to be
included within a new property fund initiative that the Group had planned to
start-up. The property had tenants in situ with the Fund recognising rental
income.
The property was initially recognised as held for sale under IFRS 5. In 2018
the launch of the property fund was placed on hold and as a result it was
reclassified as an investment property as the property no longer met the IFRS
5 criteria. The property remained occupied as at 31 December 2022 with the
Group receiving rental income.
In accordance with IAS 40, the property is recognised at fair value, with its
carrying value at year end of £6.55m equal to its fair value.
The valuation of the property has the following key inputs:
• yield: 6.75%
• total topped up rental income per annum: £0.47m
The external valuation that the Group places on its investment property is
subject to a degree of uncertainty and is calculated on the basis of
assumptions in relation to prevailing market conditions and subject to
comparable properties for sale. This valuation is therefore susceptible to
uncertainty particularly where there is a limited level of activity in the
property market.
(d) Inventory
The Group owns one commercial property (2021: two properties) and one
repossessed properties (2021: four), classified as inventory. The properties
are assessed at the reporting date for impairment.
The internal valuations that the Group places on its properties are subject to
a degree of uncertainty and are calculated on the basis of assumptions in
relation to prevailing market rents and effective yields. These assumptions
may not prove to be accurate, particularly in periods of market volatility.
Similarly to investment property, the uncertainty due to Brexit, rising
inflation and interest rates resulted in less market evidence being available
for Management in making its judgement on the key assumptions of property
yield and market rent.
The external valuations that the Group places on its properties are subject to
a degree of uncertainty and are calculated on the basis of assumptions in
relation to prevailing market conditions and subject to comparable properties
for sale. These valuations are therefore susceptible to uncertainty
particularly where there is a limited level of activity in the property
market.
Management have assessed that should the net realisable value less cost to
sell of each of the combined property inventory reduce by 5% this would impact
profit or loss by £0.3m and a reduction of 10% would impact profit or loss by
£1.1m (or 5.6% of cost).
(e) Residual value
At the end of lease terms, assets may be sold to third parties or leased for
further terms. Rentals are calculated to recover the cost of assets less their
residual value ("RV"), and earn finance income. RV's represent the estimated
value of the leased asset at the end of lease period. Residual values are
calculated after analysing the market place and the company's own historical
experience in the market. Expected residual values of leased assets are
prospectively adjusted for through the depreciation adjustments which are
charged to the income statement each year. The key estimates and judgements
that arise in relation to RV's are timing of lease terminations and expected
residual value of returned vehicles.
The profitability of the Group's operating lease contracts is highly dependent
on the RV of the vehicle at the end of the agreement. On inception of the
lease, the Group uses its knowledge and experience of the market and industry
to estimate the final RV of the vehicle. The Group is exposed to the risk that
the RV of the vehicle may be less than anticipated at the outset of the
contract impacting profitability. The Group manages the risk through effective
and robust procedures by continually monitoring historic, current and forecast
RV performance.
Expected residual values underlying the calculation of depreciation of leased
assets are kept under review to take account of any change in circumstances.
Refer to Note 30 for further detail.
(f) Climate change
The Group has considered the potential impact of climate change on the
Group's financial position and performance.
This included performing an assessment over the Group's financial and
non-financial assets and evaluating information about the observable effects
of physical and transition risk of climate change on the Group's financial
position and performance. Many of the effects of climate change will be less
significant in the short term and will have limited impact on accounting
estimates and judgements in the current year. The following items represent
the most significant effects:
· The Group's loan portfolio is exposed to the potential impact of
climate-related risks, due to the ECL implications and expectations on the
ability of the borrowers to meet their loan obligations. As the Group has
limited appetite for financial and reputational risk emanating from climate
change, the potential ECL impact as a result of climate change is not expected
to be material in the short term.
· The assessment of asset impairment and the Group's deferred tax
asset depends on the Group's future performance and cash flows. The Group has
incorporated market expectations on climate risk it its profitability and cash
flow forecasts and doesn't consider any additional adjustments are required.
5. Maturity analysis of assets and liabilities
The table below shows the maturity analysis of assets and liabilities of the
Group as at 31 December 2022:
Due within one year Due after more than one year Total
At 31 December 2022 £000 £000 £000
ASSETS
Cash and balances at central banks 732,729 - 732,729
Loans and advances to banks 115,788 - 115,788
Debt securities at amortised cost 328,988 110,765 439,753
Assets classified as held for sale 3,279 - 3,279
Derivative financial instruments 113 6,209 6,322
Loans and advances to customers 690,145 1,345,932 2,036,077
Other assets 31,034 21,151 52,185
Financial investments - 3,404 3,404
Deferred tax asset - 2,425 2,425
Intangible assets 8,716 23,833 32,549
Property, plant and equipment 77,599 97,674 175,273
Right-of-use assets 3,134 4,580 7,714
Investment property - 6,550 6,550
1,991,525 1,622,523 3,614,048
LIABILITIES
Deposits from banks 11,027 225,000 236,027
Derivative financial instruments 135 - 135
Deposits from customers 3,041,084 51,465 3,092,549
Current tax liability 1,748 - 1,748
Other liabilities 26,144 - 26,144
Lease liabilities 3,325 4,547 7,872
Debt securities in issue - 37,594 37,594
3,083,463 318,606 3,402,069
The table below shows the maturity analysis of assets and liabilities of the
Group as at 31 December 2021:
Due within one year Due after more than one year Total
At 31 December 2021 £000 £000 £000
ASSETS
Cash and balances at central banks 814,692 - 814,692
Loans and advances to banks 73,444 - 73,444
Debt securities at amortised cost 147,696 153,356 301,052
Assets classified as held for sale 3,136 - 3,136
Derivative financial instruments 118 1,635 1,753
Loans and advances to customers 646,507 1,224,455 1,870,962
Other assets 109,741 378 110,119
Financial investments 124 3,045 3,169
Deferred tax asset - 2,562 2,562
Intangible assets 7,340 22,524 29,864
Property, plant and equipment 78,897 46,993 125,890
Right-of-use assets 2,729 12,945 15,674
Investment property - 6,550 6,550
1,884,424 1,474,443 3,358,867
LIABILITIES
Deposits from banks 15,333 225,000 240,333
Derivative financial instruments 132 39 171
Deposits from customers 1,640,627 1,197,242 2,837,869
Current tax liability 413 - 413
Other liabilities 21,126 28 21,154
Lease Liabilities 5,802 15,474 21,276
Debt securities in issue - 36,772 36,772
1,683,433 1,474,555 3,157,988
The table below shows the maturity analysis of assets and liabilities of the
Company as at 31 December 2022:
Due within one year Due after more than one year Total
At 31 December 2022 £000 £000 £000
ASSETS
Loans and advances to banks 6 - 6
Loans and advances to banks - due from subsidiary undertakings 8,427 - 8,427
Debt securities at amortised cost - 24,437 24,437
Deferred tax asset - 522 522
Intangible assets - 1 1
Property, plant and equipment - 130 130
Other assets 73 - 73
Interests in subsidiaries - 159,354 159,354
8,506 184,444 192,950
LIABILITIES
Current tax liability 879 - 879
Other liabilities 3,490 - 3,490
Debt securities in issue - 37,594 37,594
4,369 37,594 41,963
The table below shows the maturity analysis of assets and liabilities of the
Company as at 31 December 2021:
Due within one year Due after more than one year Total
At 31 December 2021 £000 £000 £000
ASSETS
Loans and advances to banks 6 - 6
Loans and advances to banks - due from subsidiary undertakings 7,581 - 7,581
Debt securities at amortised cost - 24,367 24,367
Current tax asset 239 - 239
Deferred tax asset - 523 523
Intangible assets - 2 2
Property, plant and equipment - 137 137
Other assets 55 - 55
Interests in subsidiaries - 159,404 159,404
7,881 184,433 192,314
LIABILITIES
Other liabilities 3,142 - 3,142
Debt securities in issue - 36,772 36,772
3,142 36,772 39,914
6. Financial risk management
Strategy
By their nature, the Group's activities are principally related to the use of
financial instruments. The Directors and senior management of the Group have
formally adopted a Group Risk and Controls Policy which sets out the Board's
attitude to risk and internal controls. Key risks identified by the
Directors are formally reviewed and assessed at least once a year by the
Board, in addition to which key business risks are identified, evaluated and
managed by operating management on an ongoing basis by means of procedures
such as physical controls, credit and other authorisation limits and
segregation of duties. The Board also receives regular reports on any risk
matters that need to be brought to its attention. Significant risks identified
in connection with the development of new activities are subject to
consideration by the Board. There are budgeting procedures in place and
reports are presented regularly to the Board detailing the results of each
principal business unit, variances against budget and prior year, and other
performance data.
The principal non-operational risks inherent in the Group's business are
credit, macroeconomic, market, liquidity and capital.
(a) Credit risk
The Company and Group take on exposure to credit risk, which is the risk that
a counterparty will be unable to pay amounts in full when due. Significant
changes in the economy, or in the health of a particular industry segment that
represents a concentration in the Company and Group's portfolio, could result
in losses that are different from those provided for at the balance sheet
date. Credit risk is managed through the Credit Committee of the banking
subsidiary.
The Committee regularly reviews the credit risk profile of the Group, with a
clear focus on performance against risk appetite statements and risk metrics.
The Committee considered credit conditions during the year, and in particular
the impact of the rising inflation and interest rates on performance against
both credit risk appetite and a range of key credit risk metrics.
The Company and Group structure the levels of credit risk it undertakes by
placing limits on the amount of risk accepted in relation to products, and one
borrower or groups of borrowers. Such risks are monitored on a revolving basis
and subject to an annual or more frequent review. The limits are approved
periodically by the Board of Directors and actual exposures against limits are
monitored daily.
Exposure to credit risk is managed through regular analysis of the ability of
borrowers and potential borrowers to meet interest and capital repayment
obligations and by changing these lending limits where appropriate. Exposure
to credit risk is also managed in part by obtaining collateral, and corporate
and personal guarantees.
The economic environment remains uncertain and future impairment charges may
be subject to further volatility (including from changes to macroeconomic
variable forecasts).
Rising inflation and interest rates have created a challenge for ECL
modelling, given the severity of economic shock and associated uncertainty for
the future economic path coupled with the scale of government and central bank
intervention that have altered the relationships between economic drivers and
default.
The Group has attempted to leverage stress test modelling insights to inform
ECL model refinements to enable reasonable estimates. Management review of
modelling approaches and outcomes continues to inform any necessary
adjustments to the ECL estimates through the form of in-model adjustments,
based on expert judgement including the use of available information.
Management considerations included the potential severity and duration of the
economic shock, including the mitigating effects of government support
actions, as well the potential trajectory of the subsequent recovery.
The Group employs a range of policies and practices to mitigate credit risk.
The most traditional of these is the taking of collateral to secure advances,
which is common practice. The principal collateral types for loans and
advances include, but are not limited to:
• Charges over residential and commercial properties;
• Charges over business assets such as premises, inventory and
accounts receivable;
• Charges over financial instruments such as debt securities and
equities;
• Charges over other chattels; and
• Personal guarantees
Upon initial recognition of loans and advances, the fair value of collateral
is based on valuation techniques commonly used for the corresponding assets.
In order to minimise any potential credit loss the Group will seek additional
collateral from the counterparty as soon as impairment indicators are noticed
for the relevant individual loans and advances. Repossessed collateral, not
readily convertible into cash, is made available for sale in an orderly
fashion, with the proceeds used to reduce or repay the outstanding
indebtedness, or held as inventory where the Group intends to develop and sell
in the future. Where excess funds are available after the debt has been
repaid, they are available either for other secured lenders with lower
priority or are returned to the customer.
Commitments to extend credit represent unused portions of authorisations to
extend credit in the form of loans, guarantees or letters of credit. With
respect to credit risk on commitments to extend credit, the Group is
potentially exposed to loss in an amount equal to the total unused
commitments. However, the likely amount of loss is less than the total unused
commitments, as most commitments to extend credit are contingent upon
customers maintaining specific credit standards.
The Group incorporates forward-looking information into both its assessment of
whether the credit risk of an instrument has increased significantly since its
initial recognition and its measurement of ECL. The key inputs into the
measurement of the ECL are:
• assessment of significant increase in credit risk
• future economic scenarios
• probability of default
• loss given default
• exposure at default
The IFRS 9 impairment model adopts a three stage approach based on the extent
of credit deterioration since origination, see Note 11.
The Group's maximum exposure to credit risk before collateral held or other
credit enhancements is as follows:
2022
Group Banking Mortgage Portfolios RAF ABL ASFL AAG All Other Divisions Total
Credit risk exposures (all stage 1, unless otherwise stated) £000 £000 £000 £000 £000 £000 £000 £000
On-balance sheet:
Cash and balances at central banks - - - - - - 732,513 732,513
Loans and advances to banks - - - - - - 115,788 115,788
Debt securities at amortised cost - - - - - - 439,753 439,753
Derivative financial instruments - - - - - - 6,322 6,322
Loans and advances to customers (Gross of ECL) 1,455,607 148,957 134,724 270,999 14,950 17,442 - 2,042,679
Stage 1 1,363,572 126,726 128,807 267,962 13,756 17,066 - 1,917,889
Stage 2 59,904 10,777 2,454 - 1,001 376 - 74,512
Stage 3 32,131 11,454 3,463 3,037 193 - - 50,278
Other assets - - - - - - 14,160 14,160
Financial investments - - - - - - 3,404 3,404
Off-balance sheet:
Guarantees 2,591 - - - - 662 - 3,253
Loan commitments and other credit related liabilities 219,490 - - 250,276 1,312 - - 471,078
At 31 December 1,677,688 148,957 134,724 521,275 16,262 18,104 1,311,940 3,828,950
2021
Group Banking Mortgage Portfolios RAF ABL ASFL AAG All Other Divisions Total
Credit risk exposures (all stage 1, unless otherwise stated) £000 £000 £000 £000 £000 £000 £000 £000
On-balance sheet:
Cash and balances at central banks - - - - - - 814,499 814,499
Loans and advances to banks - - - - - - 73,444 73,444
Debt securities at amortised cost - - - - - - 301,052 301,052
Derivative financial instruments - - - - - - 1,753 1,753
Loans and advances to customers (Gross of ECL) 1,399,389 178,153 99,969 182,213 10,125 7,500 - 1,877,349
Stage 1 1,297,782 157,566 82,952 182,213 9,896 7,500 - 1,737,909
Stage 2 70,132 13,728 11,374 - 229 - - 95,463
Stage 3 31,475 6,859 5,643 - - - - 43,977
Other assets - - - - - - 13,098 13,098
Financial investments - - - - - - 3,169 3,169
Off-balance sheet:
Guarantees 2,931 - - - - 1,629 - 4,560
Loan commitments and other credit related liabilities 261,797 - - 200,478 2,115 - - 464,390
At 31 December 1,664,117 178,153 99,969 382,691 12,240 9,129 1,207,015 3,553,314
The Company's maximum exposure to credit risk (all stage 1) before collateral
held or other credit enhancements is as follows:
2022 2021
£000 £000
Credit risk exposures relating to on-balance sheet assets are as follows:
Loans and advances to banks 8,434 7,587
Debt securities at amortised cost 24,437 24,367
At 31 December 32,871 31,954
The above tables represent the maximum credit risk exposure (net of
impairment) to the Group and Company at 31 December 2022 and 2021 without
taking account of any collateral held or other credit enhancements attached.
For financial assets, the balances are based on carrying amounts as reported
in the Statement of Financial Position. For guarantees and loan commitments,
the amounts in the table represent the amounts for which the group is
contractually committed.
The table below represents an analysis of the loan to values of the exposures
secured by property for the Group:
2022
Banking Mortgage Portfolios Total
Loan Balance Collateral Loan Balance Collateral Loan Balance Collateral
Group £000 £000 £000 £000 £000 £000
Less than 60% 844,024 1,869,734 53,759 131,561 897,783 2,001,295
Stage 1 797,219 1,781,638 45,833 113,996 843,052 1,895,634
Stage 2 38,781 73,946 4,037 10,277 42,818 84,223
Stage 3 8,024 14,150 3,889 7,288 11,913 21,438
60%-80% 553,383 864,566 62,113 92,996 615,496 957,562
Stage 1 525,296 823,256 53,692 80,529 578,988 903,785
Stage 2 20,900 31,250 4,295 6,209 25,195 37,459
Stage 3 7,187 10,060 4,126 6,258 11,313 16,318
80%-100% 11,911 13,976 20,961 23,563 32,872 37,539
Stage 1 9,776 11,626 17,109 19,136 26,885 30,762
Stage 2 - - 1,231 1,426 1,231 1,426
Stage 3 2,135 2,350 2,621 3,001 4,756 5,351
Greater than 100%* 24,182 13,005 17,142 13,925 41,324 26,930
Stage 1 11,142 6,880 13,191 10,623 24,333 17,503
Stage 2 - - 1,741 1,586 1,741 1,586
Stage 3 13,040 6,125 2,210 1,716 15,250 7,841
Total 1,433,500 2,761,281 153,975 262,045 1,587,475 3,023,326
*In addition to property, other security is taken, including charges over
Arbuthnot Latham Investment Management portfolios, other chattels and personal
guarantees. The increase in loan to values greater than 100% is due to an
increase in exposures collateralised by other assets. Additionally under the
government scheme for BBLs, collateral is not required as the loans are 100%
backed by the government.
Loans in the Banking segment with a loan to value of greater than 100% have
additional collateral of £9.4m in the form of cash deposits and security over
Arbuthnot Latham Investment Management Portfolios and personal guarantees of
£13.1m. Non-property collateral reduces loan to value below 100% for all such
exposures in the Banking segment.
The table below represents an analysis of the loan to values of the exposures
secured by property for the Group:
2021
Banking Mortgage Portfolios Total
Loan Balance Collateral Loan Balance Collateral Loan Balance Collateral
Group £000 £000 £000 £000 £000 £000
Less than 60% 724,604 1,606,614 74,305 174,446 798,909 1,781,060
Stage 1 699,913 1,557,704 67,034 157,905 766,947 1,715,609
Stage 2 17,722 34,470 5,195 12,185 22,917 46,655
Stage 3 6,969 14,440 2,076 4,356 9,045 18,796
60%-80% 586,077 916,749 59,536 86,873 645,613 1,003,622
Stage 1 538,908 847,769 53,182 77,574 592,090 925,343
Stage 2 37,550 55,255 4,090 5,881 41,640 61,136
Stage 3 9,619 13,725 2,264 3,418 11,883 17,143
80%-100% 23,362 27,223 29,387 33,591 52,749 60,814
Stage 1 8,488 10,088 25,498 29,065 33,986 39,153
Stage 2 14,874 17,135 2,557 2,909 17,431 20,044
Stage 3 - - 1,332 1,617 1,332 1,617
Greater than 100%* 27,525 22,002 20,489 16,796 48,014 38,798
Stage 1 14,895 12,914 15,640 12,855 30,535 25,769
Stage 2 - - 2,768 2,435 2,768 2,435
Stage 3 12,630 9,088 2,081 1,506 14,711 10,594
Total 1,361,568 2,572,588 183,717 311,706 1,545,285 2,884,294
*In addition to property, other security is taken, including charges over
Arbuthnot Latham Investment Management portfolios, other chattels and personal
guarantees. The increase in loan to values greater than 100% is due to an
increase in exposures collateralised by other assets. Additionally under the
government scheme for BBLs, collateral is not required as the loans are 100%
backed by the government.
Loans in the Banking segment with a loan to value of greater than 100% have
additional collateral of £10.0m in the form of cash deposits and security
over Arbuthnot Latham Investment Management Portfolios and personal guarantees
of £5.0m. Non-property collateral reduces loan to value below 100% for all
such exposures in the Banking segment.
The table below represents an analysis of loan commitments compared to the
values of collateral for the Group (all Stage 1):
2022
Loan commitments Collateral
Group £000 £000
Less than 60% 122,582 387,942
60%-80% 35,807 51,828
80%-100% 11,100 12,432
Greater than 100% 31,347 19,606
Total 200,836 471,808
2021
Loan commitments Collateral
Group £000 £000
Less than 60% 125,147 437,385
60%-80% 69,960 105,781
80%-100% 9,573 10,331
Greater than 100% 20,660 15,017
Total 225,340 568,514
Renegotiated loans and forbearance
The contractual terms of a loan may be modified due to factors that are not
related to the current or potential credit deterioration of the customer
(changing market conditions, customer retention, etc.). In such cases, the
modified loan may be derecognised and the renegotiated loan recognised as a
new loan at fair value.
When modification results in derecognition, a new loan is recognised and
allocated to Stage 1 (assuming it is not credit-impaired at that time).
The Group renegotiates loans to customers in financial difficulties (referred
to as 'forbearance') to maximise collection opportunities and minimise the
risk of default. Under the Group's forbearance policy, loan forbearance is
granted on a selective basis if the debtor is currently in default on its
debt, or if there is a high risk of default, there is evidence that the debtor
made all reasonable efforts to pay under the original contractual terms and
the debtor is expected to be able to meet the revised terms.
The revised terms can include changing the timing of interest payments,
extending the date of repayment of the loan, transferring a loan to interest
only payments and a payment holiday. Both retail and corporate loans are
subject to the forbearance policy. The Group Credit Committee regularly
reviews reports on forbearance.
For financial assets modified as part of the Group's forbearance policy, the
estimate of PD reflects whether the modification has improved or restored the
Group's ability to collect interest and principal and the Group's previous
experience of similar forbearance action. As part of this process, the Group
evaluates the borrower's payment performance against the modified contractual
terms and considers various behavioural indicators. Whilst the customer is
under forbearance, the customer will be classified as Stage 2 and the Group
recognise a lifetime ECL. The customer will transfer to Stage 1 and revert to
a 12 month ECL when they exit forbearance. This is conditional upon both a
minimum six months' good account conduct and the improvement to the client's
situation to the extent the probability of default has receded sufficiently
and full repayment of the loan, without recourse to the collateral, is likely.
Forbearance is a qualitative indicator of a SICR (see Notes 3.3 and 3.4)
As at 31 December 2022, loans for which forbearance measures were in place
totalled 3.0% (2021: 3.8%) of total value of loans to customers for the Group.
These are set out in the following table:
2022
Stage 1 Stage 2 Stage 3 Total
Number Loan Balance Number Loan Balance Number Loan Balance Number Loan Balance
Group £000 £000 £000 £000
Time for asset sale - - 3 8,836 1 35 4 8,871
Term extension - - 24 1,905 - - 24 1,905
Time for refinance with third party - - 1 2,360 - - 1 2,360
Payment holiday - - 3 4,002 - - 3 4,002
Covenant waived - - 3 28,142 - - 3 28,142
Modification in terms and conditions - - 64 9,184 32 6,073 96 15,257
Restructure - - 7 1,567 - - 7 1,567
Total forbearance - - 105 55,996 33 6,108 138 62,104
2021
Stage 1 Stage 2 Stage 3 Total
Number Loan Balance Number Loan Balance Number Loan Balance Number Loan Balance
Group £000 £000 £000 £000
Interest capitalisation - - 6 7,586 1 43 7 7,629
Time for asset sale - - 9 18,875 - - 9 18,875
Term extension - - 8 14,867 - - 8 14,867
Switch to interest only - - 1 1,651 2 88 3 1,739
Reduced monthly payments - - 4 7,384 - - 4 7,384
Payment holiday - - 1 10,681 - - 1 10,681
More than one measure - - 63 9,809 15 915 78 10,724
Total forbearance - - 92 70,853 18 1,046 110 71,899
Concentration risk
The tables below show the concentration in the loan book based on the most
significant type of collateral held for each loan.
Loans and advances to customers Loan Commitments
2022 2021 2022 2021
£000 £000 £000 £000
Concentration by product
Asset based lending* 268,825 182,306 250,276 200,478
Asset finance 148,788 104,613 1,312 2,115
Cash collateralised 14,143 177,697 611 3,083
Commercial lending 156,250 209,617 25,720 41,865
Investment portfolio secured 24,485 26,353 2,086 8,689
Residential mortgages 1,339,789 1,107,301 109,948 174,452
Mixed collateral* 69,433 37,250 44,590 17,589
Unsecured** 14,364 25,825 36,535 16,119
At 31 December 2,036,077 1,870,962 471,078 464,390
Concentration by location
East Anglia 28,668 25,350 2,776 21,389
London 759,584 767,968 178,576 148,046
Midlands 86,442 97,102 4,778 11,248
North East 3,593 4,707 18 3,122
North West 42,897 50,276 3,531 3,681
Northern Ireland 94,341 111,400 - -
Scotland 20,220 33,952 - 50
South East 236,658 230,384 884 15,049
South West 179,034 189,685 5,273 12,243
Wales 15,174 16,179 5,001 5,662
Non-property collateral 569,466 343,959 270,241 243,900
At 31 December 2,036,077 1,870,962 471,078 464,390
* Mixed collateral is where there is no single, overall majority
collateral type
** Included within unsecured are £9.0m (2021: £11.6m) of loans which are
backed by the government guarantee scheme for
BBLs.
(b) Operational risk
Operational risk is the risk that the Group may be exposed to financial losses
from conducting its business. The Group's exposures to operational risk
include its Information Technology ("IT") and Operations platforms. There are
additional internal controls in these processes that are designed to protect
the Group from these risks. The Group's overall approach to managing internal
control and financial reporting is described in the Corporate Governance
section of the Annual Report.
In line with further guidance issued by the Regulator, the Bank has continued
to focus on ensuring that the design of systems and operational plans are
robust to maintain operational resilience in the face of unexpected incidents.
During 2021 and 2022 the Bank continued to review these plans and undertook
tests to ensure backup and recovery processes were effective even when working
in a hybrid working model.
During 2021 the FCA, PRA and BoE published their final policy papers on
building operational resilience. The Group complied with the initial
requirements prior to the implementation date of 31 March 2022.
Cyber risk
Cyber risk is an increasing risk that the Group is subject to within its
operational processes. This is the risk that the Group is subject to some form
of disruption arising from an interruption to its IT and data infrastructure.
The Group regularly tests the infrastructure to ensure that it remains robust
to a range of threats, and has continuity of business plans in place including
a disaster recovery plan.
Conduct risk
As a financial services provider we face conduct risk, including selling
products to customers which do not meet their needs; failing to deal with
customers' complaints effectively; not meeting customers' expectations; and
exhibiting behaviours which do not meet market or regulatory standards.
The Group adopts a zero risk appetite for any unfair customer outcomes. It
maintains clear compliance guidelines and provides ongoing training to all
staff. Periodic spot checks and internal audits are performed to ensure
these guidelines are being followed. The Group also has insurance policies
in place to provide some cover for any claims that may arise.
(c) Macroeconomic and competitive environment
The group is exposed to indirect risk that may arise for the macroeconomic and
competitive environment.
In recent years there have been a number of global and domestic events which
have had significant implications on the Group's operating environment,
namely: Russia's War in the Ukraine, Coronavirus and Brexit. The culmination
of these events has led to significant turmoil in both global and domestic
markets. The most significant economic effect from these events includes
record inflation driven by high fuel costs, leading to sharp and significant
increases in the cost of borrowing. Conditions have improved since the year
end however there still remains significant uncertainty around the recovery of
the UK economy which may have an impact on the group's customers and assets.
Climate change
Climate change presents financial and reputational risks for the banking
industry. The Board consider Climate change a material risk as per the Board
approved risk appetite framework which provides a structured approach to risk
taking within agreed boundaries. The assessment is proportional at present but
will develop over time as the Group generates further resources and industry
consensus emerges. The assessment is maintained by the Chief Risk officer and
has been informed by the ICAAP review and numerous workshops for staff.
Whilst it is difficult to assess how climate change will unfold, the Group is
continually assessing various risk exposures. The UK has a legally binding
target to cut its greenhouse gas emissions to "net-zero" by 2050. There is
growing consensus that an orderly transition to a low-carbon economy will
bring substantial adjustments to the global economy which will have financial
implications while bringing risks and opportunities.
The risk assessment process has been integrated into existing risk frameworks
and will be governed through the various risk governance structures including
review and recommendations by the AL Risk Committee. Arbuthnot Latham
governance has been assessed against the Task Force on Climate-related
Financial Disclosures' ("TCFD") recommended governance disclosures and where
appropriate the FCA/PRA guidance as per the Supervisory statements.
In accordance with the requirements of the PRA's Supervisory Statement
'Enhancing banks' and insurers' approaches to managing the financial risks
from climate change', the Group has allocated responsibility for identifying
and managing the risks from climate change to the relevant existing Senior
Management Function. The Bank is continuously developing a suitable strategic
approach to climate change and the unique challenges it poses.
The FCA have issued 'Climate Change and Green Finance: summary of responses
and next steps'. In addition to the modelling of various scenarios and various
governance reviews, Arbuthnot Latham will continue to monitor requirements
through the relationship with UK Finance.
(d) Market risk
Price risk
The Company and Group are exposed to price risk from equity investments and
derivatives held by the Group. The Group is not exposed to commodity price
risk.
Based upon the financial investment exposure in Note 27, a stress test
scenario of a 10% (2021: 10%) decline in market prices, would result in a
£Nil (2021: £12k) decrease in the Group's income and a decrease of £0.3m
(2021: £0.3m) in the Group's equity. The Group considers a 10% stress test
scenario appropriate after taking the current values and historic data into
account.
Based upon the financial investment exposure given in Note 27, a stress test
scenario of a 10% (2021: 10%) decline in market prices, would result in a
£nil (2021: £nil) decrease in the Company's income and a decrease of £nil
(2021: £Nil) in the Company's equity.
Currency risk
The Company and Group take on exposure to the effects of fluctuations in the
prevailing foreign currency exchange rates on its financial position and cash
flows. This is managed through the Group entering into forward foreign
exchange contracts. The Board sets limits on the level of exposure for both
overnight and intra-day positions, which are monitored daily. The table below
summarises the Group's exposure to foreign currency exchange rate risk at 31
December 2022. Included in the table below are the Group's assets and
liabilities at carrying amounts, categorised by currency.
GBP (£) USD ($) Euro (€) Other Total
At 31 December 2022 £000 £000 £000 £000 £000
ASSETS
Cash and balances at central banks 732,577 78 71 3 732,729
Loans and advances to banks 18,144 13,581 75,787 8,276 115,788
Debt securities at amortised cost 280,956 158,797 - - 439,753
Assets classified as held for sale - - 3,279 - 3,279
Derivative financial instruments 6,216 100 6 - 6,322
Loans and advances to customers 2,004,654 8,451 22,104 868 2,036,077
Other assets 13,657 - 503 - 14,160
Financial investments - 3,404 - - 3,404
3,056,204 184,411 101,750 9,147 3,351,512
LIABILITIES
Deposits from banks 236,026 - - 1 236,027
Derivative financial instruments 7 107 8 13 135
Deposits from customers 2,814,786 180,483 87,787 9,494 3,092,550
Other liabilities 3,824 188 942 - 4,954
Debt securities in issue 24,437 - 13,157 - 37,594
3,079,080 180,778 101,894 9,508 3,371,260
Net on-balance sheet position (22,876) 3,633 (144) (361) (19,748)
Credit commitments 471,078 - - - 471,078
The table below summarises the Group's exposure to foreign currency exchange
risk at 31 December 2021:
GBP (£) USD ($) Euro (€) Other Total
At 31 December 2021 £000 £000 £000 £000 £000
ASSETS
Cash and balances at central banks 814,601 46 41 4 814,692
Loans and advances to banks 17,438 23,983 24,885 7,138 73,444
Debt securities at amortised cost 204,474 96,579 - (1) 301,052
Derivative financial instruments 1,663 39 - 51 1,753
Loans and advances to customers 1,838,679 7,816 24,870 (403) 1,870,962
Other assets (17,075) 33,314 (4,320) 1,179 13,098
Financial investments - 3,031 138 - 3,169
2,859,780 164,808 45,614 7,968 3,078,170
LIABILITIES
Deposits from banks 240,333 - - - 240,333
Derivative financial instruments 103 - - 68 171
Deposits from customers 2,651,717 128,667 50,340 7,145 2,837,869
Other liabilities 7,601 - (495) - 7,106
Debt securities in issue 24,367 - 12,405 - 36,772
2,924,121 128,667 62,250 7,213 3,122,251
Net on-balance sheet position (64,341) 36,141 (16,636) 755 (44,081)
Credit commitments 464,390 - - - 464,390
Derivative financial instruments (see Note 22) are in place to mitigate
foreign currency risk on net exposures for each currency. A 10% strengthening
of the pound against the US dollar would lead to a £35k decrease (2021: £4k
decrease) in Group profits and equity, while a 10% weakening of the pound
against the US dollar would lead to the same increase in Group profits and
equity. Additionally the Group holds £3.3m of properties classified as assets
held for sale (2021: £3.1m) and £Nil classified as inventory (2021: £7.7m).
These properties are located in the EU and relate to Euro denominated loans
where the properties were repossessed and are either being held for sale or
being developed with a view to sell. Including these Euro assets, the net Euro
exposure is positive £3.3m (2021: £6.1m).
The table below summarises the Company's exposure to foreign currency exchange
rate risk at 31 December 2022:
GBP (£) Euro (€) Total
At 31 December 2022 £000 £000 £000
ASSETS
Loans and advances to banks (4,737) 13,171 8,434
Debt securities at amortised cost 24,437 - 24,437
19,700 13,171 32,871
LIABILITIES
Other liabilities 470 - 470
Debt securities in issue 24,437 13,157 37,594
24,907 13,157 38,064
Net on-balance sheet position (5,207) 14 (5,193)
The table below summarises the Company's exposure to foreign currency exchange
rate risk at 31 December 2021:
GBP (£) Euro (€) Total
At 31 December 2021 £000 £000 £000
ASSETS
Loans and advances to banks (4,923) 12,510 7,587
Debt securities at amortised cost 24,367 - 24,367
Other assets 4 - 4
19,448 12,510 31,958
LIABILITIES
Other liabilities 1,490 - 1,490
Debt securities in issue 24,367 12,405 36,772
25,857 12,405 38,262
Net on-balance sheet position (6,409) 105 (6,304)
A 10% strengthening of the pound against the Euro would lead to £9k increase
(2021: £20k decrease) in the Company profits and equity, conversely a 10%
weakening of the pound against the Euro would lead to a £8k decrease (2021:
£25k increase) in the Company profits and equity.
Interest rate risk
Interest rate risk is the potential adverse impact on the Company and Group's
future cash flows from changes in interest rates, and arises from the
differing interest rate risk characteristics of the Company and Group's assets
and liabilities. In particular, fixed rate savings and borrowing products
expose the Group to the risk that a change in interest rates could cause
either a reduction in interest income or an increase in interest expense
relative to variable rate interest flows. The Group seeks to "match" interest
rate risk on either side of the Statement of Financial Position. However, this
is not a perfect match and interest rate risk is present in: Money market
transactions of a fixed rate nature, fixed rate loans, fixed rate savings
accounts and floating rate products dependent on when they re-price at a
future date.
Interest rate risk is measured throughout the maturity bandings of the book on
a parallel shift scenario for a 200 basis points movement. Interest rate
risk is managed to limit value at risk to be less than £0.5m. The current
position of the balance sheet is such that it results in an adverse impact on
the economic value of equity of £0.3m (2021: adverse impact of £0.3m) for a
positive 200bps shift and a favourable impact of £0.3m (2021: favourable
impact of £37k) for a negative 200bps movement. An upward change of 50bps on
variable rates would decrease pre-tax profits and equity by £23k (2021:
increase pre-tax profits and equity by £51k), while a downward change of
50bps (capped at 25bps) would increase pre-tax profits and equity by £23k
(2021: increase pre-tax profits and equity by £29k).
The following tables summarise the re-pricing periods for the assets and
liabilities in the Company and Group, including derivative financial
instruments which are principally used to reduce exposure to interest rate
risk. Items are allocated to time bands by reference to the earlier of the
next contractual interest rate re-price and the maturity date.
Group Within 3 months More than 3 months but less than 6 months More than 6 months but less than 1 year More than 1 year but less than 5 years More than 5 years Non interest bearing Total
As at 31 December 2022 £000 £000 £000 £000 £000 £000 £000
ASSETS
Cash and balances at central banks 732,728 - - - - - 732,728
Loans and advances to banks 115,737 51 - - - - 115,788
Debt securities at amortised cost 334,700 13,301 85,752 6,000 - - 439,753
Derivative financial instruments 6,322 - - - - - 6,322
Loans and advances to customers 1,814,805 15,785 38,073 146,119 5,633 15,662 2,036,077
Other assets* - - - - - 279,976 279,976
Financial investments - - - - - 3,404 3,404
3,004,292 29,137 123,825 152,119 5,633 299,042 3,614,048
LIABILITIES
Deposits from banks 236,027 - - - - - 236,027
Derivative financial instruments 135 - - - - - 135
Deposits from customers 2,306,952 353,107 240,934 188,556 3,000 - 3,092,549
Other liabilities** - - - - - 35,764 35,764
Debt securities in issue 37,594 - - - - - 37,594
Equity - - - - - 211,979 211,979
2,580,708 353,107 240,934 188,556 3,000 247,743 3,614,048
Impact of derivative instruments 51,376 - - (51,376) - -
Interest rate sensitivity gap 474,960 (323,970) (117,109) (87,813) 2,633 51,299
Cumulative gap 474,960 150,990 33,881 (53,932) (51,299) -
* Other assets include all remaining assets in the Statement of Financial
Position, which are not shown separately above.
** Other liabilities include all remaining liabilities in the Statement of
Financial Position, which are not shown separately above.
Group Within 3 months More than 3 months but less than 6 months More than 6 months but less than 1 year More than 1 year but less than 5 years More than 5 years Non interest bearing Total
As at 31 December 2021 £000 £000 £000 £000 £000 £000 £000
ASSETS
Cash and balances at central banks 814,692 - - - - - 814,692
Loans and advances to banks 73,120 324 - - - - 73,444
Debt securities at amortised cost 262,943 7,403 14,806 15,900 - - 301,052
Derivative financial instruments 118 - - 1,635 - - 1,753
Loans and advances to customers 1,674,763 17,040 40,194 102,488 36,477 - 1,870,962
Other assets - - - - - 293,795 293,795
Financial investments - - - - - 3,169 3,169
2,825,636 24,767 55,000 120,023 36,477 296,964 3,358,867
LIABILITIES
Deposits from banks 240,333 - - - - - 240,333
Derivative financial instruments 171 - - - - - 171
Deposits from customers 2,147,186 109,337 217,645 363,691 10 - 2,837,869
Other liabilities - - - - - 42,843 42,843
Debt securities in issue 36,772 - - - - - 36,772
Equity - - - - - 200,879 200,879
2,424,462 109,337 217,645 363,691 10 243,722 3,358,867
Impact of derivative instruments 57,889 - - (57,889) - -
Interest rate sensitivity gap 459,063 (84,570) (162,645) (303,192) 36,467 53,242
Cumulative gap 459,063 374,493 211,848 (89,709) (53,242) -
* Other assets include all remaining assets in the Statement of Financial
Position, which are not shown separately above.
** Other liabilities include all remaining liabilities in the Statement of
Financial Position, which are not shown separately above.
Company Within 3 months More than 3 months but less than 6 months More than 6 months but less than 1 year More than 1 year but less than 5 years More than 5 years Non interest bearing Total
As at 31 December 2022 £000 £000 £000 £000 £000 £000 £000
ASSETS
Loans and advances to banks 6 - - - - - 6
Debt securities at amortised cost 24,437 - - - - - 24,437
Loans and advances to customers 8,377 - - - - 50 8,427
Other assets* - - - - - 160,081 160,081
32,820 - - - - 160,131 192,951
LIABILITIES
Other liabilities** - - - - - 4,369 4,369
Debt securities in issue 37,594 - - - - - 37,594
Equity - - - - - 150,988 150,988
37,594 - - - - 155,357 192,951
Interest rate sensitivity gap (4,774) - - - - 4,774
Cumulative gap (4,774) (4,774) (4,774) (4,774) (4,774) -
* Other assets include all remaining assets in the Statement of Financial
Position, which are not shown separately above.
** Other liabilities include all remaining liabilities in the Statement of
Financial Position, which are not shown separately above.
Company Within 3 months More than 3 months but less than 6 months More than 6 months but less than 1 year More than 1 year but less than 5 years More than 5 years Non interest bearing Total
As at 31 December 2021 £000 £000 £000 £000 £000 £000 £000
ASSETS
Derivative financial instruments 24,367 - - - - - 24,367
Loans and advances to banks 7,547 - - - - 40 7,587
Other assets* - - - - - 160,361 160,361
31,914 - - - - 160,401 192,315
LIABILITIES
Other liabilities** - - - - - 3,142 3,142
Debt securities in issue 36,772 - - - - - 36,772
Equity - - - - - 152,401 152,401
36,772 - - - - 155,543 192,315
Interest rate sensitivity gap (4,858) - - - - 4,858
Cumulative gap (4,858) (4,858) (4,858) (4,858) (4,858) -
* Other assets include all remaining assets in the Statement of Financial
Position, which are not shown separately above.
** Other liabilities include all remaining liabilities in the Statement of
Financial Position, which are not shown separately above.
(e) Liquidity risk
Liquidity risk is the risk that the Group, although solvent, either does not
have sufficient financial resources to enable it to meet its obligations as
they fall due, or can only secure such resources at excessive cost.
The Group's approach to managing liquidity is to ensure, as far as possible,
that it will always have sufficient liquidity to meet its liabilities when
due, under both normal and stressed conditions, without incurring unacceptable
losses or risking damage to the Group's reputation. The liquidity requirements
of the Group are met through withdrawing funds from its Bank of England
Reserve Account to cover any short-term fluctuations and longer term funding
to address any structural liquidity requirements.
The Group has formal governance structures in place to manage and mitigate
liquidity risk on a day to day basis. The Board of AL sets and approves the
liquidity risk management strategy. The Assets and Liabilities Committee
("ALCO"), comprising senior executives of the Group, monitors liquidity risk.
Key liquidity risk management information is reported by the finance teams and
monitored by the Chief Executive Officer, Finance Director and Deputy CEO on a
daily basis. The ALCO meets monthly to review liquidity risk against set
thresholds and risk indicators including early warning indicators, liquidity
risk tolerance levels and Internal Liquidity Adequacy Assessment Process
("ILAAP") metrics.
The PRA requires the Board to ensure that the Group has adequate levels of
liquidity resources and a prudent funding profile, and that it comprehensively
manages and controls liquidity and funding risks. The Group maintains deposits
placed at the Bank of England and highly liquid unencumbered assets that can
be called upon to create sufficient liquidity to meet liabilities on demand,
particularly in a period of liquidity stress.
Arbuthnot Latham & Co., Limited ("AL") has a Board approved ILAAP, and
maintains liquidity buffers in excess of the minimum requirements. The ILAAP
is embedded in the risk management framework of the Group and is subject to
ongoing updates and revisions when necessary. At a minimum, the ILAAP is
updated annually. The Liquidity Coverage Ratio ("LCR") regime has applied to
the Group from 1 October 2015, requiring management of net 30 day cash
outflows as a proportion of high quality liquid assets. The LCR has exceeded
the regulatory minimum of 100% throughout the year, following the steps taken
by the Group to respond to possible future liquidity constraints arising from
the COVID-19 pandemic. There has been an increase in deposits of 20%, which
has accordingly improved the Bank's liquidity.
The Group is exposed to daily calls on its available cash resources from
current accounts, maturing deposits and loan draw-downs. The Group maintains
significant cash resources to meet all of these needs as they fall due. The
matching and controlled mismatching of the maturities and interest rates of
assets and liabilities is fundamental to the management of the Group. It is
unusual for banks to be completely matched, as transacted business is often of
uncertain term and of different types.
The maturities of assets and liabilities and the ability to replace, at an
acceptable cost, interest bearing liabilities as they mature are important
factors in assessing the liquidity of the Group and its exposure to changes in
interest rates.
The tables below show the undiscounted contractual cash flows of the Group's
financial liabilities and assets as at 31 December 2022:
Carrying amount Gross inflow/ (outflow) Not more than 3 months More than 3 months but less than 1 year More than 1 year but less than 5 years More than 5 years
At 31 December 2022 £000 £000 £000 £000 £000 £000
Financial liability by type
Non-derivative liabilities
Deposits from banks 236,027 (236,027) (236,027) - - -
Deposits from customers 3,092,549 (3,164,453) (1,744,144) (763,156) (657,153) -
Other liabilities 4,954 (4,965) (4,954) - - (11)
Debt securities in issue 37,594 (64,898) (892) (2,719) (14,540) (46,747)
Issued financial guarantee contracts - (3,253) (3,253) - - -
Unrecognised loan commitments - (470,870) (470,870) - - -
3,371,124 (3,944,466) (2,460,140) (765,875) (671,693) (46,758)
Derivative liabilities
Risk management: 135
- Outflows - (135) (135) - - -
135 (135) (135) - - -
Carrying amount Gross inflow/ (outflow) Not more than 3 months More than 3 months but less than 1 year More than 1 year but less than 5 years More than 5 years
At 31 December 2022 £000 £000 £000 £000 £000 £000
Financial asset by type
Non-derivative assets
Cash and balances at central banks 732,728 732,728 732,728 - - -
Loans and advances to banks 115,788 115,788 115,788 - - -
Debt securities at amortised cost 439,753 443,409 336,299 101,110 6,000 -
Loans and advances to customers 2,036,077 2,520,811 505,691 276,657 1,285,151 453,312
Other assets 14,161 14,161 14,161 - - -
Financial investments 3,404 3,404 3,404 - - -
3,341,911 3,830,301 1,708,071 377,767 1,291,151 453,312
Derivative assets
Risk management: 6,322
- Inflows - 6,322 113 - 6,209 -
6,322 6,322 113 - 6,209 -
The tables below show the undiscounted contractual cash flows of the Group's
financial liabilities and assets as at 31 December 2021:
Carrying amount Gross inflow/ (outflow) Not more than 3 months More than 3 months but less than 1 year More than 1 year but less than 5 years More than 5 years
At 31 December 2021 £000 £000 £000 £000 £000 £000
Financial liability by type
Non-derivative liabilities
Deposits from banks 240,333 (240,333) (240,333) - - -
Deposits from customers 2,837,869 (2,894,435) (1,717,377) (672,029) (505,029) -
Other liabilities 7,106 (7,106) (3,052) (2,968) (1,086) -
Debt securities in issue 36,772 (56,567) (586) (1,788) (9,560) (44,633)
Issued financial guarantee contracts - (4,560) (4,560) - - -
Unrecognised loan commitments - (463,783) (463,783) - - -
3,122,080 (3,666,784) (2,429,691) (676,785) (515,675) (44,633)
Derivative liabilities
Risk management: 171
- Outflows - (171) (171) - - -
171 (171) (171) - - -
Carrying amount Gross inflow/ (outflow) Not more than 3 months More than 3 months but less than 1 year More than 1 year but less than 5 years More than 5 years
At 31 December 2021 £000 £000 £000 £000 £000 £000
Financial asset by type
Non-derivative assets
Cash and balances at central banks 814,692 814,692 814,692 - - -
Loans and advances to banks 73,444 73,439 73,439 - - -
Debt securities at amortised cost 301,052 336,772 318,658 9,666 8,448 -
Loans and advances to customers 1,870,962 2,174,795 207,166 296,957 1,361,543 309,130
Other assets 13,098 13,098 13,098 - - -
Financial investments 3,169 3,169 3,169 - - -
3,076,417 3,415,965 1,430,222 306,623 1,369,991 309,130
Derivative assets
Risk management: 1,753
- Inflows - 1,753 118 - 1,635 -
1,753 1,753 118 - 1,635 -
The table below sets out the components of the Group's liquidity reserves:
31 December 2022 31 December 2021
Amount Fair value Amount Fair value
Liquidity reserves £000 £000 £000 £000
Cash and balances at central banks 732,729 732,729 814,692 814,692
Loans and advances to banks 115,787 115,787 73,444 73,444
Debt securities at amortised cost 439,753 439,389 301,052 303,337
1,288,269 1,287,905 1,189,188 1,191,473
Assets pledged as collateral or encumbered
The total financial assets recognised in the statement of financial position
that had been pledged as collateral for liabilities at 31 December 2022 were
£225m (2021: £225m). Assets are encumbered due to the Term Funding Scheme
(Note 33).
Financial assets can be pledged as collateral as part of repurchases
transactions under terms that are usual and customary for such activities.
The table below analyses the contractual cash flows of the Company's financial
liabilities and assets as at 31 December 2022:
Carrying amount Gross inflow/ (outflow) Not more than 3 months More than 3 months but less than 1 year More than 1 year but less than 5 years More than 5 years
At 31 December 2022 £000 £000 £000 £000 £000 £000
Financial liability by type
Non-derivative liabilities
Other liabilities 470 (470) - - - (1,440)
Debt securities in issue 37,594 (64,898) (892) (2,719) (14,540) (46,747)
38,064 (65,368) (892) (2,719) (14,540) (48,187)
Carrying amount Gross inflow/ (outflow) Not more than 3 months More than 3 months but less than 1 year More than 1 year but less than 5 years More than 5 years
At 31 December 2022 £000 £000 £000 £000 £000 £000
Financial asset by type
Non-derivative assets
Loans and advances to banks 8,433 8,433 8,433 - - -
Debt securities at amortised cost 24,437 43,404 732 2,238 11,975 28,459
32,870 51,837 9,165 2,238 11,975 28,459
The table below analyses the contractual cash flows of the Company's financial
liabilities and assets as at 31 December 2021:
Carrying amount Gross inflow/ (outflow) Not more than 3 months More than 3 months but less than 1 year More than 1 year but less than 5 years More than 5 years
At 31 December 2021 £000 £000 £000 £000 £000 £000
Financial liability by type
Non-derivative liabilities
Other liabilities 1,490 (1,490) - - - (1,490)
Debt securities in issue 36,772 (56,567) (586) (1,788) (9,560) (44,633)
38,262 (58,057) (586) (1,788) (9,560) (46,123)
Carrying amount Gross inflow/ (outflow) Not more than 3 months More than 3 months but less than 1 year More than 1 year but less than 5 years More than 5 years
At 31 December 2021 £000 £000 £000 £000 £000 £000
Financial asset by type
Non-derivative assets
Loans and advances to banks 7,587 7,587 7,587 - - -
Debt securities at amortised cost 24,367 39,878 509 1,558 8,336 29,475
31,954 47,465 8,096 1,558 8,336 29,475
The maturities of assets and liabilities and the ability to replace, at an
acceptable cost, interest-bearing liabilities as they mature are important
factors in assessing the liquidity of the Group and its exposure to changes in
interest rates and exchange rates.
Fiduciary activities
The Group provides investment management and advisory services to third
parties, which involve the Group making allocation and purchase and sale
decisions in relation to a wide range of financial instruments. Those assets
that are held in a fiduciary capacity are not included in these financial
statements. These services give rise to the risk that the Group may be accused
of maladministration or underperformance. At the balance sheet date, the Group
had investment management accounts amounting to approximately £1.3bn (2021:
£1.4bn). Additionally, the Group provides investment advisory services.
(f) Financial assets and liabilities
The tables below set out the Group's financial assets and financial
liabilities into their respective classifications:
FVPL FVOCI Amortised cost Total carrying amount Fair value
At 31 December 2022 £000 £000 £000 £000 £000
ASSETS
Cash and balances at central banks - - 732,729 732,729 732,729
Loans and advances to banks - - 115,787 115,787 115,788
Debt securities at amortised cost - - 439,753 439,753 439,389
Derivative financial instruments 6,322 - - 6,322 6,322
Loans and advances to customers - - 2,036,077 2,036,077 1,996,966
Other assets - - 14,160 14,160 14,160
Financial investments - 3,404 - 3,404 3,404
6,322 3,404 3,338,506 3,348,232 3,308,758
LIABILITIES
Deposits from banks - - 236,027 236,027 236,027
Derivative financial instruments 135 - - 135 135
Deposits from customers - - 3,092,549 3,092,549 3,092,549
Other liabilities - - 4,954 4,954 4,954
Debt securities in issue - - 37,594 37,594 37,594
135 - 3,371,124 3,371,259 3,371,259
FVPL FVOCI Amortised cost Total carrying amount Fair value
At 31 December 2021 £000 £000 £000 £000 £000
ASSETS
Cash and balances at central banks - - 814,692 814,692 814,692
Loans and advances to banks - - 73,444 73,444 73,444
Debt securities at amortised cost - - 301,052 301,052 303,337
Derivative financial instruments 1,753 - - 1,753 1,753
Loans and advances to customers - - 1,870,962 1,870,962 1,821,549
Other assets - - 13,098 13,098 13,098
Financial investments 165 3,004 - 3,169 3,169
1,918 3,004 3,073,248 3,078,170 3,031,042
LIABILITIES
Deposits from banks - - 240,333 240,333 240,333
Derivative financial instruments 171 - - 171 171
Deposits from customers - - 2,837,869 2,837,869 2,837,869
Other liabilities - - 7,106 7,106 7,106
Debt securities in issue - - 36,772 36,772 36,772
171 - 3,122,080 3,122,251 3,122,251
The tables below set out the Company's financial assets and financial
liabilities into their respective classifications:
FVPL FVOCI Amortised cost Total carrying amount Fair value
At 31 December 2022 £000 £000 £000 £000 £000
ASSETS
Loans and advances to banks - - 8,433 8,433 8,433
Debt securities at amortised cost - - 24,437 24,437 24,437
- - 32,870 32,870 32,870
LIABILITIES
Other liabilities - - 470 470 470
Debt securities in issue - - 37,594 37,594 37,594
- - 38,064 38,064 38,064
FVPL FVOCI Amortised cost Total carrying amount Fair value
At 31 December 2021 £000 £000 £000 £000 £000
ASSETS
Loans and advances to banks - - 7,587 7,587 7,587
Debt securities at amortised cost - - 24,367 24,367 24,367
Other assets - - 4 4 4
- - 31,958 31,958 31,958
LIABILITIES
Other liabilities - - 1,490 1,490 1,490
Debt securities in issue - - 36,772 36,772 36,772
- - 38,262 38,262 38,262
Valuation of financial instruments
The Group measures the fair value of an instrument using quoted prices in an
active market for that instrument. A market is regarded as active if quoted
prices are readily and regularly available and represent actual and regularly
occurring market transactions. If a market for a financial instrument is not
active, the Group establishes fair value using a valuation technique. These
include the use of recent arm's length transactions, reference to other
instruments that are substantially the same for which market observable prices
exist, net present value and discounted cash flow analysis. The objective of
valuation techniques is to determine the fair value of the financial
instrument at the reporting date as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between
market participants.
The Group measures fair value using the following fair value hierarchy that
reflects the significance of the inputs used in making measurements:
• Level 1: Quoted prices in active markets for identical assets or
liabilities.
• Level 2: Inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly (i.e. as
prices) or indirectly (i.e. derived from prices). This category includes
instruments valued using: quoted market prices in active markets for similar
instruments; quoted prices for identical or similar instruments in markets
that are considered less than active; or other valuation techniques in which
all significant inputs are directly or indirectly observable from market data.
• Level 3: Inputs that are unobservable. This category includes
all instruments for which the valuation technique includes inputs not based on
observable data and the unobservable inputs have a significant effect on the
instrument's valuation. This category includes instruments that are valued
based on quoted prices for similar instruments for which significant
unobservable adjustments or assumptions are required to reflect differences
between the instruments.
The consideration of factors such as the magnitude and frequency of trading
activity, the availability of prices and the size of bid/offer spreads assists
in the judgement as to whether a market is active. If, in the opinion of
management, a significant proportion of the instrument's carrying amount is
driven by unobservable inputs, the instrument in its entirety is classified as
valued using significant unobservable inputs. 'Unobservable' in this context
means that there is little or no current market data available from which to
determine the level at which an arm's length transaction would be likely to
occur. It generally does not mean that there is no market data available at
all upon which to base a determination of fair value (consensus pricing data
may, for example, be used).
The tables below analyse assets and liabilities measured at fair value by the
level in the fair value hierarchy into which the measurement is categorised:
Level 1 Level 2 Level 3 Total
At 31 December 2022 £000 £000 £000 £000
ASSETS
Derivative financial instruments - 6,322 - 6,322
Financial investments - - 3,404 3,404
Investment property - - 6,550 6,550
- 6,322 9,954 16,276
LIABILITIES
Derivative financial instruments - 135 - 135
- 135 - 135
Level 1 Level 2 Level 3 Total
At 31 December 2021 £000 £000 £000 £000
ASSETS
Derivative financial instruments - 1,753 - 1,753
Financial investments - - 3,169 3,169
Investment property - - 6,550 6,550
- 1,753 9,719 11,472
LIABILITIES
Derivative financial instruments - 171 - 171
- 171 - 171
There were no transfers between level 1 and level 2 during the year.
For assets which are accounted at fair value under Level 3 the valuations are
primarily based on Fund Manager valuations and are based on reasonable
estimates. Applying reasonable alternative valuations would not lead to a
significantly different fair value. The following table reconciles the
movement in level 3 financial instruments measured at fair value during the
year:
Group 2022 2021
Movement in level 3 £000 £000
At 1 January 9,719 9,120
Purchases 53 670
Disposals (640) -
Movements recognised in Other Comprehensive Income 822 (57)
Movements recognised in the Income Statement - (14)
At 31 December 9,954 9,719
Visa Inc. investment
Arbuthnot Latham currently holds preference shares in Visa Inc., valued at
£2.0m (2021: £1.6m) as at 31 December 2022. These shares have been valued at
their future conversion value into Visa Inc. common stock.
In 2020, as part of the fourth anniversary of the closing of the Visa Europe
transaction, an assessment was performed of the ongoing risk of liability to
Visa. As part of the adjustment, Visa awarded the Group 59 preference shares
with a carrying value of £920k. In 2022 Visa awarded the Group extra 28
preference shares with a carrying value of £501k. These can be automatically
converted into freely tradeable Class A common stock.
There is a haircut of 31% on the original shares comprising 25% due to a
contingent liability disclosed in Visa Europe's accounts in relation to
litigation and 6% based on a liquidity discount.
Hetz Ventures, L.P.
Arbuthnot Latham currently holds an equity investment in Hetz Ventures, L.P.
which was launched in January 2018. The primary objective was to generate
attractive risk-adjusted returns for its Partners, principally through
long-term capital appreciation, by making, holding and disposing of equity and
equity-related investments in early stage revenue generating Israeli
technology companies, primarily in cyber, fin-tech and the disruptive software
sectors. The company has committed to a capital contribution of USD2.5m of the
total closing fund capital of USD132.5m. At 31 December 2022 Arbuthnot Latham
& Co., Ltd had made capital contributions into the Fund of USD1.8m (2021:
USD1.8m).
The investment is classified as FVOCI and is valued at fair value by Hetz
Ventures, L.P. at £1.4m (2021: £1.4m). As at year end the fair value is
deemed to be the Group's share of the fund based on what a third party would
pay for the underlying investments.
Investment property
Please see Note 4 (c) for investment property valuation detail.
The tables below show the fair value of financial instruments carried at
amortised cost by the level in the fair value hierarchy:
Group Level 1 Level 2 Level 3 Total
At 31 December 2022 £000 £000 £000 £000
ASSETS
Cash and balances at central banks - 732,729 - 732,729
Loans and advances to banks - 115,788 - 115,788
Debt securities at amortised cost - 439,389 - 439,389
Loans and advances to customers - - 1,996,966 1,996,966
Other assets - - 14,160 14,160
- 1,287,906 2,011,126 3,299,032
LIABILITIES
Deposits from banks - 236,027 - 236,027
Deposits from customers - 3,092,549 - 3,092,549
Other liabilities - - 4,954 4,954
Debt securities in issue - - 37,594 37,594
- 3,328,576 42,548 3,371,124
Group Level 1 Level 2 Level 3 Total
At 31 December 2021 £000 £000 £000 £000
ASSETS
Cash and balances at central banks - 814,692 - 814,692
Loans and advances to banks - 73,444 - 73,444
Debt securities at amortised cost - 301,052 - 301,052
Loans and advances to customers - - 1,870,962 1,870,962
Other assets - - 11,375 11,375
- 1,189,188 1,882,337 3,071,525
LIABILITIES
Deposits from banks - 240,333 - 240,333
Deposits from customers - 2,837,869 - 2,837,869
Other liabilities - - 7,106 7,106
Debt securities in issue - - 36,772 36,772
- 3,078,202 43,878 3,122,080
Company Level 1 Level 2 Level 3 Total
At 31 December 2022 £000 £000 £000 £000
ASSETS
Loans and advances to banks - 6 8,427 8,433
Debt securities at amortised cost - 24,437 - 24,437
- 24,443 8,427 32,870
LIABILITIES
Other liabilities - - 470 470
Debt securities in issue - - 37,594 37,594
- - 38,064 38,064
Company Level 1 Level 2 Level 3 Total
At 31 December 2021 £000 £000 £000 £000
ASSETS
Loans and advances to banks - 6 7,581 7,587
Debt securities at amortised cost - 24,367 - 24,367
- 24,373 7,581 31,954
LIABILITIES
Other liabilities - - 1,490 1,490
Debt securities in issue - - 36,772 36,772
- - 38,262 38,262
All above assets and liabilities are carried at amortised cost. Therefore for
these assets, the fair value hierarchy noted above relates to the disclosure
in this note only.
Cash and balances at central banks
The fair value of cash and balances at central banks was calculated based upon
the present value of the expected future principal and interest cash flows.
The rate used to discount the cash flows was the market rate of interest at
the balance sheet date.
At the end of each year, the fair value of cash and balances at central banks
was calculated to be equivalent to their carrying value.
Loans and advances to banks
The fair value of loans and advances to banks was calculated based upon the
present value of the expected future principal and interest cash flows. The
rate used to discount the cash flows was the market rate of interest at the
balance sheet date.
Loans and advances to customers
The fair value of loans and advances to customers was calculated based upon
the present value of the expected future principal and interest cash flows.
The rate used to discount the cash flows was the market rate of interest at
the balance sheet date, and the same assumptions regarding the risk of default
were applied as those used to derive the carrying value.
The Group provides loans and advances to commercial, corporate and personal
customers at both fixed and variable rates. To determine the fair value of
loans and advances to customers, loans are segregated into portfolios of
similar characteristics. A number of techniques are used to estimate the fair
value of fixed rate lending; these take account of expected credit losses
based on historic trends and expected future cash flows.
For the acquired loan book, the discount on acquisition is used to determine
the fair value in addition to the expected credit losses and expected future
cash flows.
Debt securities at amortised cost
The fair value of debt securities is based on the quoted mid-market share
price.
Derivatives
Where derivatives are traded on an exchange, the fair value is based on prices
from the exchange.
Deposits from banks
The fair value of amounts due to banks was calculated based upon the present
value of the expected future principal and interest cash flows. The rate used
to discount the cash flows was the market rate of interest at the balance
sheet date.
At the end of each year, the fair value of amounts due to banks was calculated
to be equivalent to their carrying value due to the short maturity term of the
amounts due.
Deposits from customers
The fair value of deposits from customers was calculated based upon the
present value of the expected future principal and interest cash flows. The
rate used to discount the cash flows was the market rate of interest at the
balance sheet date for the notice deposits and deposit bonds. The fair value
of instant access deposits is equal to book value as they are repayable on
demand.
Financial liabilities
The fair value of other financial liabilities was calculated based upon the
present value of the expected future principal cash flows.
At the end of each year, the fair value of other financial liabilities was
calculated to be equivalent to their carrying value due to their short
maturity. The other financial liabilities include all other liabilities other
than non-interest accruals.
Debt Securities in Issue
The fair value of debt securities in issue was calculated based upon the
present value of the expected future principal cash flows.
7. Capital management (unaudited)
The Group's capital management policy is focused on optimising shareholder
value. There is a clear focus on delivering organic growth and ensuring
capital resources are sufficient to support planned levels of growth. The
Board regularly reviews the capital position.
The Group and the individual banking operation, are authorised by the
Prudential Regulation Authority ("PRA") and regulated by the Financial Conduct
Authority and the Prudential Regulation Authority and are subject to the
Capital Requirement Regulation (EU No.575/2013) ("CRR"), which forms part of
the retained EU legislation, and the PRA Rulebook for CRR firms. One of the
requirements for the Group and the individual banking operation is that
capital resources must be in excess of capital requirements at all times.
In accordance with the parameters set out in the PRA Rulebook, the Internal
Capital Adequacy Assessment Process ("ICAAP") is embedded in the risk
management framework of the Group. The ICAAP identifies and assesses the risks
to the Group, considers how these risks can be mitigated and demonstrates that
the Group has sufficient resources, after mitigating actions, to withstand all
reasonable scenarios.
Not all material risks can be mitigated by capital, but where capital is
appropriate the Board has adopted a "Pillar 1 plus" approach to determine the
level of capital the Group needs to hold. This method takes the Pillar 1
capital requirement for credit, market and operational risk as a starting
point, and then considers whether each of the calculations delivers a
sufficient amount of capital to cover risks to which the Group is, or could
be, exposed. Where the Board considers that the Pillar 1 calculations do not
adequately cover the risks, an additional Pillar 2A capital requirement is
applied. The PRA will set a Pillar 2A capital requirement in light of the
calculations included within the ICAAP. The Group's Total Capital Requirement,
as issued by the PRA, is the sum of the minimum capital requirements under the
CRR (Pillar 1) and the Pillar 2A requirement. The current TCR of the Group is
8.32%.
The Group's regulatory capital is divided into two tiers:
• Common equity Tier 1 which comprises shareholder funds less regulatory
deductions for intangible assets, including goodwill, and deferred tax assets
that do not arise from temporary differences.
• Tier 2 comprises qualifying subordinated loans.
The following table shows the regulatory capital resources as managed by the
Group:
2022 2021
£000 £000
CET1 Capital
Share capital 154 154
Capital redemption reserve 19 19
Treasury shares (1,299) (1,299)
Retained earnings* 212,037 201,026
IFRS 9 - Transitional add back 523 1,600
Fair value reserve 1,067 979
Deduction for goodwill (5,202) (5,202)
Deduction for other intangibles** (27,347) (18,667)
Deduction for deferred tax asset that do not arise from temporary differences (4,567) (2,370)
Deduction for Prudent valuation (10) (5)
CET1 capital resources 175,375 176,235
Tier 2 Capital
Debt securities in issue 37,594 36,772
Total Tier 2 capital resources 37,594 36,772
Own Funds (sum of Tier 1 and Tier 2) 212,969 213,007
CET1 Capital Ratio (CET1 Capital/Total Risk Exposure)* 11.6% 12.3%
Total Capital Ratio (Own Funds/Total Risk Exposure)* 14.0% 14.9%
* Includes current year audited profit.
** From 1 January 2022 the PRA requires the full carrying
amount of software intangibles to be deducted from Common Equity Tier 1
capital.
Capital ratios are reviewed on a monthly basis to ensure that external
requirements are adhered to. During the period all regulated entities have
complied with all of the externally imposed capital requirements to which they
are subject.
Pillar 3 complements the minimum capital requirements (Pillar 1) and the
supervisory review process (Pillar 2). Its aim is to encourage market
discipline by developing a set of disclosure requirements which will allow
market participants to assess key pieces of information on a firm's capital,
risk exposures and risk assessment processes. Our Pillar 3 disclosures for the
year ended 31 December 2022 are published as a separate document on the Group
website under Investor Relations.
8. Net interest income
Interest income and expense are recognised in the Statement of Comprehensive
Income for all instruments measured at amortised cost using the effective
interest rate ("EIR") method.
The effective interest rate is the rate that exactly discounts estimated
future cash payments or receipts through the expected life of the financial
instrument to:
• the gross carrying amount of the financial asset; or
• the amortised cost of the financial liability.
The 'gross carrying amount of a financial asset' is the amortised cost of a
financial asset before adjusting for any expected credit loss allowance. When
calculating the effective interest rate, the Group takes into account all
contractual terms of the financial instrument but does not consider expected
credit losses.
The calculation includes all fees paid or received between parties to the
contract that are an integral part of the effective interest rate, transaction
costs and all other premiums or discounts. The carrying amount of the
financial asset or financial liability is adjusted if the Group revises its
estimates of payments or receipts. The adjusted carrying amount is calculated
based on the original effective interest rate and the change in carrying
amount is recorded as interest income or expense.
For financial assets that have become credit impaired following initial
recognition, interest income is calculated by applying the effective interest
rate to the amortised cost of the financial asset. If the asset is no longer
credit impaired, then the calculation of interest income reverts to the gross
basis.
The Group monitors the actual cash flows for each acquired book and where they
diverge significantly from expectation, the future cash flows are reset.
Expectation may diverge due to factors such as one-off payments or expected
credit losses. In assessing whether to adjust future cash flows on an acquired
portfolio, the Group considers the cash variance on an absolute and percentage
basis. The Group also considers the total variance across all acquired
portfolios. Where cash flows for an acquired portfolio are reset, they are
discounted at the EIR to derive a new carrying value, with changes taken to
the Statement of Comprehensive Income as interest income. The EIR rate is
adjusted for events where there is a change to the reference interest rate
(e.g. Bank of England base rate) affecting portfolios with a variable interest
rate which will impact future cash flows. The revised EIR is the rate which
exactly discounts the revised cash flows to the net carrying value of the loan
portfolio.
2022 2021
£000 £000
Cash and balances at central banks 8,681 521
Loans and advances to banks* 6 (165)
Debt securities at amortised cost 6,374 1,156
Loans and advances to customers 104,952 75,590
Total interest income 120,013 77,102
Deposits from banks (3,334) 69
Deposits from customers (14,243) (10,056)
Debt securities in issue (2,723) (2,016)
Interest on lease liabilities (632) (1,024)
Total interest expense (20,932) (13,027)
Net interest income 99,081 64,075
* Negative value is due to the fluctuation of interest rates which has led to
an increased cost on the variable leg of interest rate swap, which is reported
in interest income.
9. Fee and commission income
Fee and commission income which is integral to the EIR of a financial asset
are included in the effective interest rate (see Note 8).
All other fee and commission income is recognised as the related services are
performed, under IFRS 15, revenues from Contracts with Customers. Fee and
commission income is reported in the below segments.
Types of fee Description
Banking commissions - Banking Tariffs are charged monthly for services provided.
Investment management fees - Annual asset management fees relate to a single performance obligation that
is continuously provided over an extended period of time.
Wealth planning fees - Provision of bespoke, independent Wealth Planning solutions to Arbuthnot
Latham's clients. Fees are recognised as the service is performed.
Foreign exchange fees - Provides foreign currencies for our clients to purchase/sell.
The principles in applying IFRS 15 to fee and commission use the following 5
step model:
• identify the contract(s) with a customer;
• identify the performance obligations in the contract;
• determine the transaction price;
• allocate the transaction price to the performance obligations in
the contract; and
• recognise revenue when or as the Group satisfies its performance
obligations.
Asset and other management, advisory and service fees are recognised, under
IFRS 15, as the related services are performed. The same principle is applied
for wealth planning services that are continuously provided over an extended
period of time.
The Group includes the transaction price of variable consideration only when
it is highly probable that a significant reversal in the amount recognised
will not occur or when the variable element becomes certain.
Fee and commission income is disaggregated below and includes a total for fees
in scope of IFRS 15:
Group Banking Wealth Management RAF ACABL ASFL All other divisions Total
At 31 December 2022 £000 £000 £000 £000 £000 £000 £000
Banking commissions 2,233 - 32 6,178 10 405 8,858
Foreign exchange fees 1,296 - - - - 840 2,136
Investment management fees - 10,285 - - - - 10,285
Wealth planning fees - 307 - - - - 307
Total fee and commission income 3,529 10,592 32 6,178 10 1,245 21,586
Group Banking Wealth Management RAF ACABL ASFL All other divisions Total
At 31 December 2021 £000 £000 £000 £000 £000 £000 £000
Banking and services fees 1,961 - 166 4,308 7 - 6,442
Foreign exchange fees 888 - - - - 681 1,569
Investment management fees - 10,101 - - - - 10,101
Wealth planning fees - 360 - - - - 360
Total fee and commission income 2,849 10,461 166 4,308 7 681 18,472
10. Gross profit from leasing activities
Accounting for operating lease and related income:
The statement of comprehensive income is credited with:
• Income from operating leases recognised on a straight-line basis
over the period of the lease.
• The sales proceeds from the sale of vehicles at the end of
operating lease agreements, when a vehicle is transferred to a buyer, and the
buyer obtains control of the vehicle.
• Income from service and maintenance contracts recognised on a
straight-line method.
Revenue from service and maintenance contracts is recognised in accordance
with the principles of IFRS 15, Revenue from contracts with customers.
Payments from customers for service and maintenance contracts are deferred on
the balance sheet until the point they are recognised and when the performance
obligations are met.
Revenue is the aggregate of operating lease income and service and maintenance
contracts. Revenue also includes the sales proceeds from the same of vehicles
at the end of operating lease agreements and other returned vehicles. Amounts
recognised within gross profit from leasing activities in the statement of
comprehensive income are set out below:
2022 2021
Group £000 £000
Income from lease or rental of commercial vehicles 42,456 33,577
Sale of commercial vehicles 44,385 32,123
Income from service and maintenance contracts 12,088 8,800
Other income 438 -
Revenue 99,367 74,500
Depreciation and rental costs of commercial vehicles held for lease or rent (31,218) (25,197)
Carrying amount of vehicles disposed (38,259) (31,339)
Service & maintenance cost (12,632) (11,487)
Cost of goods sold (82,109) (68,023)
Gross profit from leasing activities 17,258 6,477
11. Net impairment loss on financial assets
(a) Assets carried at amortised cost
The Group recognises loss allowances on an expected credit loss basis for all
financial assets measured at amortised cost, including loans and advances,
debt securities and loan commitments.
Credit loss allowances are measured as an amount equal to lifetime ECL, except
for the following assets, for which they are measured as 12 month ECL:
• Financial assets determined to have a low credit risk at the
reporting date. The assets, to which the low credit risk exemption applies,
include cash and balances at central banks (Note 18), loans and advances to
banks (Note 19) and debt securities at amortised cost (Note 20). These assets
are all considered investment grade.
• Financial assets which have not experienced a significant
increase in credit risk since their initial recognition.
Impairment model
The IFRS 9 impairment model adopts a three stage approach based on the extent
of credit deterioration since origination:
• Stage 1: 12‐month ECL applies to all financial assets that
have not experienced a significant increase in credit risk ("SICR") since
origination and are not credit impaired. The ECL will be computed based on the
probability of default events occurring over the next 12 months. Stage 1
includes the current performing loans (up to date and in arrears of less than
10 days) and those within Heightened Business Monitoring ("HBM"). Accounts
requiring HBM are classified as a short-term deterioration in financial
circumstances and are tightly monitored with additional proactive client
engagement, but not deemed SICR.
• Stage 2: When a financial asset experiences a SICR subsequent to
origination, but is not in default, it is considered to be in Stage 2. This
requires the computation of ECL based on the probability of all possible
default events occurring over the remaining life of the financial asset.
Provisions are higher in this stage (except where the value of charge against
the financial asset is sufficient to enable recovery in full) because of an
increase in credit risk and the impact of a longer time horizon being
considered (compared to 12 months in Stage 1).
Evidence that a financial asset has experienced a SICR includes the following
considerations:
• A loan is in arrears between 31 and 90 days;
• Forbearance action has been undertaken;
• Any additional reasons whereby the Probability of Default is
considered to have increased significantly since inception of the facility.
• Stage 3: Financial assets that are credit impaired are included
in this stage. Similar to Stage 2, the allowance for credit losses will
continue to capture the lifetime expected credit losses. At each reporting
date, the Group will assess whether financial assets carried at amortised cost
are in default. A financial asset will be considered to be in default when an
event(s) that has a detrimental impact on estimated future cash flows have
occurred.
Evidence that a financial asset is within Stage 3 includes the following data:
• A loan is in arrears in excess of 90 days;
• Breach of terms of forbearance;
• Recovery action is in hand; or
• Bankruptcy proceedings or similar insolvency process of a
client, or director of a company.
The credit risk of financial assets that become credit impaired are not
expected to improve, beyond the extent that they are no longer considered to
be credit impaired.
A borrower will move back into Stage 1 conditional upon both a minimum of six
months' good account conduct and the improvement of the Client's situation to
the extent that the credit risk has receded sufficiently and a full repayment
of the loan, without recourse to the collateral, is likely.
Presentation of allowance for ECL in the statement of financial position
For financial assets measured at amortised cost, these are presented as the
gross carrying amount of the assets minus a deduction for the ECL.
Write-off
Loans and debt securities are written off (either partially or in full) when
there is no realistic prospect of recovery. This is the case when the Group
determines that the borrower does not have assets or sources of income that
could generate sufficient cash flows to repay the outstanding amount due.
(b) Renegotiated loans
Renegotiated loans are derecognised if the new terms are significantly
different to the original agreement. Loans that have been modified to such an
extent the renegotiated loan is a substantially different to the original
loan, are no longer considered to be past due and are treated as new loans.
(c) Forbearance
Under certain circumstances, the Group may use forbearance measures to assist
borrowers who are experiencing significant financial hardship. Any forbearance
support is assessed on a case by case basis in line with best practice and
subject to regular monitoring and review. The Group seeks to ensure that any
forbearance results in a fair outcome for both the customer and the Group.
(d) Assets classified as financial investments
Equity instruments at fair value through other comprehensive income
Equity investments are not subject to impairment charges recognised in the
income statement. Any fair value gains and losses are recognised in OCI which
are not subject to reclassification to the income statement on derecognition.
2022 2021
£000 £000
Net Impairment losses on financial assets 5,503 3,196
Of which:
Stage 1 1,078 664
Stage 2 53 (456)
Stage 3 4,231 2,966
Impairment losses on financial investments 142 22
5,503 3,196
During the year, the Group recovered £55k (2021: £60k) of loans which had
previously been written off.
12. Acquisition of Asset Alliance Group Holdings Limited
On 1st April 2021, following receipt of regulatory approval, Arbuthnot Latham
completed the acquisition of 100% of the share capital of AAG from its former
owners made up of institutional investors and the key management team.
AAG provides vehicle finance and related services, predominantly in the truck
& trailer and bus & coach markets. Operating from five locations, it
is the UK's leading independent end-to-end specialist in commercial vehicle
financing and has over 4000 vehicles under management.
The acquisition supported AL's continued strategy to diversify its proposition
within the specialist financial services sector.
The consideration was paid in full in cash following completion. AL has also
provided an intercompany loan to AAG at completion of £127.9m to re-finance
its existing finance liabilities. The consideration and the refinancing of
AAG's funding liabilities have been satisfied from the Group's current cash
resources.
The share capital was acquired at a discount to the fair value of net assets
resulting in a bargain purchase gain recognised in the Statement of
Comprehensive Income on acquisition as set out in the table on the next page.
The fair value of intangibles acquired include £3.5m for the brand.
The acquisition contributed £0.2m to interest income and £3.8m to profit
before tax in the prior period.
Acquired assets/ liabilities Fair value adjustments Recognised values on acquisition
£000 £000 £000
Loans and advances to banks 3,883 - 3,883
Loans and advances to customers 4,226 - 4,226
Other assets 10,128 - 10,128
Stock 1,982 316 2,298
Deferred tax assets - 2,500 2,500
Intangible assets 1,579 2,837 4,416
Property, plant and equipment 120,684 16,261 136,945
Total assets 142,482 21,914 164,396
Deposits from banks 127,918 - 127,918
Deferred tax liabilities - 3,815 3,815
Corporation tax liability 33 - 33
Other liabilities 14,006 - 14,006
Total liabilities 141,957 3,815 145,772
Net identifiable assets 525 18,099 18,624
Cash consideration 9,998
Negative Goodwill / Bargain Purchase (8,626)
13. Other income
In prior year, other income mainly included the profit on sale of the Tay
Mortgage portfolio of £2.2m, an adjustment of £0.6m gain to the contingent
consideration for the acquisition of Renaissance Asset Finance Ltd and
dividends received on the shares held in STB of £0.5m.
Other items reflected in other income include rental income from the
investment property (see Note 32) of £0.9m (2021: £0.3m).
Accounting for rental income
Rental income is recognised on a straight line basis over the term of the
lease. Lease incentives granted are recognised as an integral part of the
total rental income over the term of the lease.
14. Operating expenses
2022 2021
Operating expenses comprise: £000 £000
Staff costs, including Directors:
Wages, salaries and bonuses 61,359 49,754
Social security costs 7,534 5,861
Pension costs 2,861 2,578
Share based payment transactions (Note 41) (18) (53)
Amortisation of intangibles (Note 29) 4,026 3,211
Depreciation (Note 30) 1,772 1,814
Profit on disposals of property, plant and equipment (9) 3
Financial Services Compensation Scheme Levy 174 430
Expenses relating to short-term leases 550 608
Write down of repossessed properties 647 3,835
Other administrative expenses 30,017 25,381
Total operating expenses from continuing operations 108,913 93,422
Details on Directors remuneration are disclosed in the Remuneration Report on
page 53.
2022 2021
Remuneration of the auditor and its associates, excluding VAT, was as follows: £000 £000
Fees payable to the Company's auditor for the audit of the Company's annual 123 112
accounts
Fees payable to the Company's auditor and its associates for other services:
Audit of the accounts of subsidiaries 564 481
Audit related assurance services 116 113
Total fees payable 803 706
15. Income tax expense
Current income tax which is payable on taxable profits is recognised as an
expense in the period in which the profits arise. Income tax recoverable on
tax allowable losses is recognised as an asset only to the extent that it is
regarded as recoverable by offset against current or future taxable profits.
2022 2021
United Kingdom corporation tax at 19% (2021: 19%) £000 £000
Current taxation
Corporation tax charge - current year 3,769 54
Corporation tax charge - adjustments in respect of prior years 246 25
4,015 79
Deferred taxation
Origination and reversal of temporary differences 286 (2,165)
Adjustments in respect of prior years (750) (63)
(464) (2,228)
Income tax expense/(credit) 3,551 (2,149)
Tax reconciliation
Profit before tax 20,009 4,638
Tax at 19% (2021: 19%) 3,802 881
Other permanent differences (225) (1,756)
Tax rate change 477 (1,237)
Prior period adjustments (503) (37)
Corporation tax charge/(credit) for the year 3,551 (2,149)
Permanent differences in 2022 are predominantly due to the disallowed costs on
the sale of the King Street property and Super Deduction allowances. Prior
year permanent differences mainly relate to the acquisition of the Asset
Alliance Group.
In the Budget speech on 3 March 2021, the Chancellor of the Exchequer,
announced the increase of corporation tax from 19% to 25% from 1 April 2023,
which was enacted on 10 June 2021. This increased the deferred tax asset on
the balance sheet (with expected utilisation after 1 April 2023) and similarly
further increased the tax credit recorded in the profit and loss account in
the year.
16. Average number of employees
2022 2021
Banking 251 223
RAF 37 34
ACABL 28 24
ASFL 9 9
AAG 125 51
All Other Divisions 250 246
Group Centre 18 19
718 606
Accounting for employee benefits
(a) Post-retirement obligations
The Group contributes to a defined contribution scheme and to individual
defined contribution schemes for the benefit of certain employees. The schemes
are funded through payments to insurance companies or trustee-administered
funds at the contribution rates agreed with individual employees.
The Group has no further payment obligations once the contributions have been
paid. The contributions are recognised as an employee benefit expense when
they are due. Prepaid contributions are recognised as an asset to the extent
that a cash refund or a reduction in the future payments is available.
There are no post-retirement benefits other than pensions.
(b) Share-based compensation - cash settled
The Group adopts a Black-Scholes valuation model in calculating the fair value
of the share options as adjusted for an attrition rate for members of the
scheme and a probability of pay-out reflecting the risk of not meeting the
terms of the scheme over the vesting period. The number of share options that
are expected to vest are reviewed at least annually.
The fair value of cash settled share-based payments is recognised as personnel
expenses in the profit or loss with a corresponding increase in liabilities
over the vesting period. The liability is remeasured at each reporting date
and at settlement date based on the fair value of the options granted, with a
corresponding adjustment to personnel expenses.
(c) Deferred cash bonus scheme
The Bank has a deferred cash bonus scheme for senior employees. The cost of
the award is recognised to the income statement over the period to which the
performance relates.
(d) Short-term incentive plan
The Group has a short-term incentive plan payable to employees of one of its
subsidiary companies. The award of a profit share is based on a percentage of
the net profit of a Group subsidiary.
17. Earnings per ordinary share
Basic
Basic earnings per ordinary share are calculated by dividing the profit after
tax attributable to equity holders of the Company by the weighted average
number of ordinary shares 15,022,629 (2021: 15,022,629) in issue during the
year (this includes Ordinary shares and Ordinary Non-Voting shares).
Diluted
There are no convertible instruments, conditional ordinary shares or options
or warrants that would create diluted earnings per share. Therefore the
diluted earnings per share is equal to basic earnings per share.
2022 2021
£000 £000
Profit after tax attributable to equity holders of the Company 16,458 6,786
2022 2021
p p
Basic Earnings per share 109.6 45.2
18. Cash and balances at central banks
2022 2021
Group £000 £000
Cash and balances at central banks 732,729 814,692
ECL has been assessed to be insignificant.
Surplus funds are mainly held in the Bank of England reserve account, with the
remainder held in certificates of deposit, fixed and floating rate notes and
money market deposits in investment grade banks.
19. Loans and advances to banks
2022 2021
Group £000 £000
Placements with banks included in cash and cash equivalents (Note 43) 115,787 73,444
The table below presents an analysis of loans and advances to banks by rating
agency designation as at 31 December, based on Moody's short and long term
ratings:
2022 2021
Group £000 £000
A1 115,595 61,527
A2 - 11,909
A3 193 -
Unrated - 8
115,788 73,444
None of the loans and advances to banks are past due (2021: nil). ECL has been
assessed as insignificant.
2022 2021
Company £000 £000
Placements with banks included in cash and cash equivalents (Note 43) 8,434 7,587
Loans and advances to banks include bank balances of £11.5m (2021: £7.6m)
with Arbuthnot Latham & Co., Ltd. ECL has been assessed as insignificant.
20. Debt securities at amortised cost
Debt securities represent certificates of deposit.
The movement in debt securities may be summarised as follows:
2022 2021
Group £000 £000
At 1 January 301,052 344,692
Exchange difference 9,524 1,023
Additions 799,341 590,492
Redemptions (670,164) (635,155)
At 31 December 439,753 301,052
The table below presents an analysis of debt securities by rating agency
designation at 31 December, based on Moody's long term ratings:
2022 2021
Group £000 £000
Aaa 41,907 56,783
Aa1 89,805 33,314
Aa2 44,902 16,403
Aa3 50,000 11,105
A1 213,139 183,447
439,753 301,052
None of the debt securities are past due (2021: nil). ECL has been assessed as
immaterial.
The movement in debt securities for the Company may be summarised as follows:
2022 2021
Company £000 £000
At 1 January 24,367 24,308
Additions - -
Interest 2,396 2,014
Redemptions (2,326) (1,955)
At 31 December 24,437 24,367
The exposure relates to Arbuthnot Latham & Co., Limited, which is unrated.
The subordinated loan notes were issued on 3 June 2019 and are denominated in
Pound Sterling. The principal amount outstanding at 31 December 2022 was £25m
(2021: £25m). The notes carry interest at 7.75% over the three month LIBOR
rate and are repayable at par in June 2029 unless redeemed or repurchased
earlier by the Arbuthnot Latham & Co., Limited. ECL has been assessed as
immaterial. With the discontinuation of LIBOR, the rate charged will reference
to Synthetic LIBOR as administered by ICE Benchmark Administration Limited.
21. Assets classified as held for sale
Assets, or disposal groups comprising assets and liabilities, that are
expected to be recovered primarily through sale rather than through continuing
use, are classified as held for sale.
The criteria that the Group uses to determine whether an asset is held for
sale under IFRS 5 include, but are not limited to the following:
• Management is committed to a plan to sell
• The asset is available for immediate sale
• An active programme to locate a buyer is initiated
• The sale is highly probable, within 12 months of classification
as held for sale
• The asset is being actively marketed for sale at a sales price
reasonable in relation to its fair value
Non-current assets held for sale are measured at the lower of their carrying
amount and fair value less costs to sell in accordance with IFRS 5. Where
investments that have initially been recognised as non-current assets held for
sale, because the Group has been deemed to hold a controlling stake, are
subsequently disposed of or diluted such that the Group's holding is no longer
deemed a controlling stake, the investment will subsequently be reclassified
as fair value through profit or loss or fair value through other comprehensive
income investments in accordance with IFRS 9. Subsequent movements will be
recognised in accordance with the Group's accounting policy for the newly
adopted classification.
Once classified as held for sale, intangible assets and property, plant and
equipment are no longer amortised or depreciated.
Group
2022 2021
£000 £000
Repossessed property held for sale 3,279 3,136
3,279 3,136
Repossessed property held for sale
The repossessed property is expected to be sold within 12 months and can
therefore be recognised as held for sale under IFRS 5.
22. Derivative financial instruments
All derivatives are recognised at their fair value. Fair values are obtained
using recent arm's length transactions or calculated using valuation
techniques such as discounted cash flow models at the prevailing interest
rates, and for structured notes classified as financial instruments fair
values are obtained from quoted market prices in active markets. Derivatives
are shown in the Statement of Financial Position as assets when their fair
value is positive and as liabilities when their fair value is negative.
2022 2021
Contract/ notional amount Fair value assets Fair value liabilities Contract/ notional amount Fair value assets Fair value liabilities
Group £000 £000 £000 £000 £000 £000
Currency swaps 3,049 113 135 8,686 118 132
Interest rate swaps 51,376 6,209 - 57,889 1,635 39
54,425 6,322 135 66,575 1,753 171
The principal derivatives used by the Group are over the counter exchange rate
contracts. Exchange rate related contracts include currency swaps and interest
rate swaps.
A forward foreign exchange contract is an agreement to buy or sell a specified
amount of foreign currency on a specified future date at an agreed rate.
Currency swaps generally involve the exchange of interest payment obligations
denominated in different currencies; exchange of principal can be notional or
actual. The currency swaps are settled net and therefore the fair value is
small in comparison to the contract/notional amount. Interest rate swaps are
used to hedge against the Profit or Loss impact resulting from the movement in
interest rates, due to some exposures having fixed rate terms.
The Group primarily uses investment graded banks as counterparties for
derivative financial instruments.
The table below presents an analysis of derivative financial instruments
contract/notional amounts by rating agency designation of counterparty bank at
31 December, based on Moody's long term ratings:
2022 2021
Group £000 £000
Aa1 250 7,797
A1 52,840 58,778
Unrated 1,335 -
54,425 66,575
23. Derivatives held for risk management and hedge accounting
See accounting policy in Note 3.
Derivatives held for risk management
The following table describes the fair values of derivatives held for risk
management purposes by type of risk exposure.
2022 2021
Fair value assets Fair value liabilities Fair value assets Fair value liabilities
Group £000 £000 £000 £000
Interest rate - Designated fair value hedges 6,184 - 1,635 -
Total interest rate derivatives 6,184 - 1,635 -
Details of derivatives designated as hedging instruments in qualifying hedging
relationships are provided in the hedge accounting section below. The
instruments used principally include interest rate swaps.
For more information about how the Group manages its market risks, see Note 6.
Hedge accounting
Fair value hedges of interest rate risk
The Group uses interest rate swaps to hedge its exposure to changes in the
fair values of fixed rate pound sterling loans to customers in respect of the
SONIA (The Sterling Overnight Index Average) benchmark interest rate.
Pay-fixed/receive-floating interest rate swaps are matched to specific
fixed-rate loans and advances with terms that closely align with the critical
terms of the hedged item.
The Group's approach to managing market risk, including interest rate risk, is
discussed in Note 6. The Group's exposure to interest rate risk is disclosed
in Note 6. Interest rate risk to which the Group applies hedge accounting
arises from fixed-rate loans and advances, whose fair value fluctuates when
benchmark interest rates change. The Group hedges interest rate risk only to
the extent of benchmark interest rates because the changes in fair value of a
fixed-rate loan are significantly influenced by changes in the benchmark
interest rate (SONIA). Hedge accounting is applied where economic hedging
relationships meet the hedge accounting criteria.
By using derivative financial instruments to hedge exposures to changes in
interest rates, the Group also exposes itself to credit risk of the derivative
counterparty, which is not offset by the hedged item. The Group minimises
counterparty credit risk in derivative instruments by entering into
transactions with high-quality counterparties whose credit rating is not lower
than A.
Before fair value hedge accounting is applied by the Group, the Group
determines whether an economic relationship between the hedged item and the
hedging instrument exists based on an evaluation of the qualitative
characteristics of these items and the hedged risk that is supported by
quantitative analysis. The Group considers whether the critical terms of the
hedged item and hedging instrument closely align when assessing the presence
of an economic relationship. The Group evaluates whether the fair value of the
hedged item and the hedging instrument respond similarly to similar risks. The
Group further supports this qualitative assessment by using regression
analysis to assess whether the hedging instrument is expected to be and has
been highly effective in offsetting changes in the fair value of the hedged
item.
The Group establishes a hedge ratio by aligning the par amount of the
fixed-rate loan and the notional amount of the interest rate swap designated
as a hedging instrument. Under the Group policy, in order to conclude that a
hedging relationship is effective, all of the following criteria should be
met.
• The regression co-efficient (R squared), which measures the correlation
between the variables in the regression, is at least 0.8.
• The slope of the regression line is within a 0.8-1.25 range.
• The confidence level of the slope is at least 95%.
In these hedging relationships, the main sources of ineffectiveness are:
• the effect of the counterparty and the Group's own credit risk on the fair
value of the interest rate swap, which is not reflected in the fair value of
the hedged item attributable to the change in interest rate; and
• differences in payable/receivable fixed rates of the interest rate swap
and the loans.
There were no other sources of ineffectiveness in these hedging relationships.
The effective portion of fair value gains on derivatives held in qualifying
fair value hedging relationships and the hedging gain or loss on the hedged
items are included in net interest income.
At 31 December 2022 and 31 December 2021, the Group held the following
interest rate swaps as hedging instruments in fair value hedges of interest
risk.
Maturity 2022 Maturity 2021
Group Less than 1 year 1-5 years More than 5 years Less than 1 year 1-5 years More than 5 years
Risk category: Interest rate risk - Hedge of loans and advances
Nominal amount (in £000) - 48,120 - - 5,335 33,750
Average fixed interest rate - 1.79% - - 0.88% 0.09%
The amounts relating to items designated as hedging instruments and hedge
ineffectiveness at 31 December 2022 were as follows:
2022
Nominal amount Carrying amount
Assets Liabilities
Group £000 £000 £000
Interest rate risk
Interest rate swaps - hedge of loans and advances 48,120 6,184 -
The amounts relating to items designated as hedging instruments and hedge
ineffectiveness at 31 December 2021 were as follows:
2021
Nominal amount Carrying amount
Assets Liabilities
Group £000 £000 £000
Interest rate risk
Interest rate swaps - hedge of loans and advances 39,085 1,635 -
The amounts relating to items designated as hedged items at 31 December 2022
were as follows:
2022
Carrying amount
Assets Liabilities
Group £000 £000
Loans and advances 42,383 -
The amounts relating to items designated as hedged items at 31 December 2021
were as follows:
2021
Carrying amount
Assets Liabilities
Group £000 £000
Loans and advances 39,085 -
Group 2022
Line item in the statement of financial position where the hedging instrument Change in fair value used for calculating hedge ineffectiveness Ineffectiveness recognised in profit or loss
is included
£000 £000 Line item in profit or loss that includes hedge ineffectiveness
Derivative financial instruments 4,549 303 Net interest income
Group 2021
Line item in the statement of financial position where the hedging instrument Change in fair value used for calculating hedge ineffectiveness Ineffectiveness recognised in profit or loss
is included
£000 £000 Line item in profit or loss that includes hedge ineffectiveness
Derivative financial instruments 1,635 144 Net interest income
Group 2022
Change in value used for calculating hedge ineffectiveness Accumulated amount of fair value hedge adjustments on the hedged item included
in the carrying amount of the hedged item
Assets Liabilities
Line item in the statement of financial position in which the hedged item is £000 £000 £000
included
Loans and advances to customers (4,246) (5,737) -
Group 2021
Change in value used for calculating hedge ineffectiveness Accumulated amount of fair value hedge adjustments on the hedged item included
in the carrying amount of the hedged item
Assets Liabilities
Line item in the statement of financial position in which the hedged item is £000 £000 £000
included
Loans and advances to customers (1,490) (1,490) -
24. Loans and advances to customers
Analyses of loans and advances to customers:
2022
Stage 1 Stage 2 Stage 3 Total
Group £000 £000 £000 £000
Gross loans and advances at 1 January 2022 1,737,909 95,463 43,977 1,877,349
Originations and repayments 217,525 (36,398) (10,823) 170,304
Write-offs - - (4,974) (4,974)
Transfer to Stage 1 30,323 (29,720) (603) -
Transfer to Stage 2 (57,245) 59,912 (2,667) -
Transfer to Stage 3 (10,605) (14,743) 25,348 -
Gross loans and advances at 31 December 2022 1,917,907 74,514 50,258 2,042,679
Less allowances for ECLs (see Note 25) (1,147) (130) (5,325) (6,602)
Net loans and advances at 31 December 2022 1,916,760 74,384 44,933 2,036,077
2021
Stage 1 Stage 2 Stage 3 Total
Group £000 £000 £000 £000
Gross loans and advances at 1 January 2021 1,423,332 126,347 42,798 1,592,477
Originations 345,787 (53,132) (11,297) 281,358
Repayments and write-offs - - (614) (614)
Acquired portfolio 4,128 - - 4,128
Transfer to Stage 1 8,726 (8,726) - -
Transfer to Stage 2 (40,132) 44,147 (4,015) -
Transfer to Stage 3 (3,932) (13,173) 17,105 -
Gross loans and advances at 31 December 2021 1,737,909 95,463 43,977 1,877,349
Less allowances for ECLs (see Note 25) (388) (77) (5,922) (6,387)
Net loans and advances at 31 December 2021 1,737,521 95,386 38,055 1,870,962
*Originations include further advances and drawdowns on existing commitments.
For a maturity profile of loans and advances to customers, refer to Note 6.
Loans and advances to customers by division (net of ECL):
Banking Mortgage Portfolios RAF ACABL ASFL AAG All Other Divisions Total
Group £000 £000 £000 £000 £000 £000 £000 £000
Stage 1 1,362,950 126,713 128,594 267,812 13,675 17,016 - 1,916,760
Stage 2 59,844 10,767 2,394 - 1,001 376 - 74,382
Stage 3 29,855 11,037 2,837 1,013 193 - - 44,935
At 31 December 2022 1,452,649 148,517 133,825 268,825 14,869 17,392 - 2,036,077
Banking Mortgage Portfolios RAF ACABL ASFL AAG All Other Divisions Total
Group £000 £000 £000 £000 £000 £000 £000 £000
Stage 1 1,297,625 157,561 82,845 182,122 9,868 7,500 - 1,737,521
Stage 2 70,100 13,719 11,338 - 229 - - 95,386
Stage 3 28,324 6,802 2,929 - - - - 38,055
At 31 December 2021 1,396,049 178,082 97,112 182,122 10,097 7,500 - 1,870,962
Analyses of past due loans and advances to customers by division:
2022
Banking Mortgage Portfolios RAF ACABL ASFL All Other Divisions Total
Group £000 £000 £000 £000 £000 £000 £000
Up to 30 days 119,113 9,216 2,240 - - - 130,569
Stage 1 113,121 8,056 1,858 - - - 123,035
Stage 2 5,626 1,013 215 - - - 6,854
Stage 3 366 147 167 - - - 680
30 - 60 days 1,633 2,277 43 - 1,001 - 4,954
Stage 2 1,625 2,147 43 - 1,001 - 4,816
Stage 3 8 130 - - - - 138
60 - 90 days 5,555 1,135 116 - - - 6,806
Stage 2 5,044 898 52 - - - 5,994
Stage 3 511 237 64 - - - 812
Over 90 days 37,564 8,302 3,214 - 193 - 49,273
Stage 2 9,524 - - - - - 9,524
Stage 3 28,040 8,302 3,214 - 193 - 39,749
At 31 December 2022 163,865 20,930 5,613 - 1,194 - 191,602
Analyses of past due loans and advances to customers by division:
2021
Banking Mortgage Portfolios RAF ACABL ASFL All Other Divisions Total
Group £000 £000 £000 £000 £000 £000 £000
Up to 30 days 42,125 6,293 1,813 - 1,890 - 52,121
Stage 1 36,118 3,699 1,647 - 1,890 - 43,354
Stage 2 4,623 2,594 - - - - 7,217
Stage 3 1,384 - 166 - - - 1,550
30 - 60 days 1,509 2,561 2,736 - - - 6,806
Stage 1 - - 40 - - - 40
Stage 2 1,495 2,561 - - - - 4,056
Stage 3 14 - 2,696 - - - 2,710
60 - 90 days 25,648 1,566 98 - - - 27,312
Stage 2 18,889 1,566 - - - - 20,455
Stage 3 6,759 - 98 - - - 6,857
Over 90 days 31,820 7,753 2,583 - - - 42,156
Stage 2 6,251 - 2 - - - 6,253
Stage 3 25,569 7,753 2,581 - - - 35,903
At 31 December 2021 101,102 18,173 7,230 - 1,890 - 128,395
Loans and advances to customers include finance lease receivables as follows:
2022 2021
Group £000 £000
Gross investment in finance lease receivables:
- No later than 1 year 54,086 45,368
- Later than 1 year and no later than 5 years 117,179 72,392
- Later than 5 years 748 119
172,013 117,879
Unearned future finance income on finance leases (20,798) (12,368)
Net investment in finance leases 151,215 105,511
The net investment in finance leases may be analysed as follows:
- No later than 1 year 43,537 38,609
- Later than 1 year and no later than 5 years 106,979 66,777
- Later than 5 years 699 125
151,215 105,511
(b) Loans and advances renegotiated
Restructuring activities include external payment arrangements, modification
and deferral of payments. Following restructuring, a previously overdue
customer account is reset to a normal status and managed together with other
similar accounts. Restructuring policies and practices are based on indicators
or criteria which, in the judgement of management, indicate that payment will
most likely continue. These policies are kept under continuous review.
Renegotiated loans that would otherwise be past due or impaired totalled £nil
(2021: £nil).
(c) Collateral held
Collateral is measured at fair value less costs to sell. Most of the loans are
secured by property. The fair value of the collateral held against loans and
advances in Stage 3 is £69.2m (2021: £42.6m), against loans of £50.3m
(2021: £38.3m). The weighted average loan-to-value of loans and advances in
Stage 3 is 73% (2021: 73%).
25. Allowances for impairment of loans and advances
An analysis of movements in the allowance for ECLs (2022):
Stage 1 Stage 2 Stage 3 Total
Group £000 £000 £000 £000
At 1 January 2022 388 77 5,922 6,387
Transfer to Stage 1 15 (15) - -
Transfer to Stage 2 (57) 57 - -
Transfer to Stage 3 (8) (70) 78 -
Current year charge 208 18 4,080 4,306
Change in assumptions 601 63 218 882
Repayments and write-offs - - (4,974) (4,974)
At 31 December 2022 1,147 130 5,324 6,601
An analysis of movements in the allowance for ECLs (2021):
Stage 1 Stage 2 Stage 3 Total
Group £000 £000 £000 £000
At 1 January 2021 725 533 3,370 4,628
Transfer to Stage 1 4 (4) - -
Transfer to Stage 2 (13) 13 - -
Transfer to Stage 3 (15) (82) 97 -
Current year charge 194 (49) 3,506 3,651
Adjustment due to variation in expected future cash flows (142) (280) 65 (357)
Change in assumptions (191) (43) (106) (340)
Financial assets that have been derecognised - - (230) (230)
Repayments and write-offs (174) (11) (780) (965)
At 31 December 2021 388 77 5,922 6,387
26. Other assets
2022 2021
Group £000 £000
Trade receivables 14,160 13,098
Inventory 29,210 88,787
Prepayments and accrued income 8,815 8,234
52,185 110,119
Trade receivables
Gross balance 14,506 13,893
Allowance for bad debts (346) (795)
Net receivables 14,160 13,098
Inventory
Inventory is measured at the lower of cost or net realisable value. The cost
of inventories comprises all costs of purchase, costs of conversion and other
costs incurred in bringing the inventories to their present location and
condition. Net realisable value is the estimated selling price in the ordinary
course of business less the estimated costs of completion and the estimated
costs necessary to make the sale.
Pinnacle Universal is a special purpose vehicle, 100% owned by the Bank, which
owns land that is currently in the process of being redeveloped with a view to
selling off as individual residential plots.
Land acquired through repossession of collateral which is subsequently held in
the ordinary course of business with a view to develop and sell is accounted
for as inventory.
In 2019 a property in Spain and in 2020 a property in France, held as
collateral on loans, were repossessed. The Group's intention is to develop and
sell the properties and have therefore been recognised as inventory. The value
of inventory for repossessed collateral at 31 December 2022 is £9.4m (2021:
£16.7m).
In 2019 two properties were reclassified from investment property to inventory
due to being under development with a view to sell. The Group has sold its
King Street property in 2022. At 31 December 2022 the remaining property was
valued at cost of £10.2m (2021: the two properties valued at cost of
£70.6m).
2022 2021
Company £000 £000
Prepayments and accrued income 74 52
74 52
27. Financial investments
2022 2021
Group £000 £000
Designated at fair value through profit and loss
- Debt securities - 124
Designated at fair value through other comprehensive income
- Unlisted securities 3,404 3,045
Total financial investments 3,404 3,169
Unlisted securities
On 23 June 2016 Arbuthnot Latham received €1.3m cash consideration following
Visa Inc.'s completion of the acquisition of Visa Europe. As part of the deal
Arbuthnot Latham also received preference shares in Visa Inc., these have been
valued at their future conversion value into Visa Inc. common stock.
During 2020, as part of the fourth anniversary of the closing of the Visa
Europe transaction, an assessment was performed of the ongoing risk of
liability to Visa. As part of the adjustment, Visa awarded the Group 59
preference shares with a carrying value of £920k. In 2022 Visa awarded the
Group extra 28 preference shares with a carrying value of £501k. These can be
automatically converted into freely tradeable Class A common stock.
Management have assessed the sum of the fair value of the Group's investment
as £2.0m (2021: £1.6m). This valuation includes a 31% haircut on the
original preference shares.
The Group has designated its investment in the security as FVOCI. Dividends
received during the year amounted to £Nil (2021: £Nil).
A further investment in an unlisted investment vehicle was made in 2022. The
carrying value at year end is £1.4m (2021: £1.4m) and the Group received a
distribution of £0.6m (2021: £Nil) which included a gain of £0.5m (2021:
£Nil) in the year.
All unlisted securities have been designated as FVOCI as they are held for
strategic reasons. These securities are measured at fair value in the
Statement of Financial Position with fair value gains/losses recognised in
OCI.
28. Deferred taxation
Deferred tax is provided in full on temporary differences arising between the
tax bases of assets and liabilities and their carrying amounts in the
consolidated financial statements. However, deferred tax is not accounted for
if it arises from the initial recognition of goodwill, the initial recognition
of an asset or liability in a transaction other than a business combination
that at the time of the transaction affects neither accounting nor taxable
profit or loss, and differences relating to investments in subsidiaries to the
extent that they probably will not reverse in the foreseeable future. Deferred
tax is determined using tax rates (and laws) that have been enacted or
substantively enacted by the Statement of Financial Position date and are
expected to apply when the related deferred tax asset is realised or the
deferred tax liability is settled.
Deferred tax assets and liabilities are offset if there is a legally
enforceable right to offset current tax liabilities and assets, and they
relate to taxes levied by the same tax authority on the same taxable entity,
or on different tax entities, when they intend to settle current tax
liabilities and assets on a net basis or the tax assets and liabilities will
be realised simultaneously.
Deferred tax assets are recognised where it is probable that future taxable
profits will be available against which the temporary differences can be
utilised.
The deferred tax asset comprises:
2022 2021
Group £000 £000
Accelerated capital allowances and other short-term timing differences (2,196) 37
Movement in fair value of financial investments FVOCI (209) (152)
Unutilised tax losses 4,567 2,369
IFRS 9 adjustment* 263 308
Deferred tax asset 2,425 2,562
At 1 January 2,562 1,009
On acquisition of AAG - (1,315)
Other Comprehensive Income - FVOCI (57) (35)
Profit and loss account - accelerated capital allowances and other short-term (2,233) 1,923
timing differences
Profit and loss account - tax losses 2,198 945
IFRS 9 adjustment* (45) 35
Deferred tax asset at 31 December 2,425 2,562
* This relates to the timing difference on the adoption of IFRS 9 spread over
10 years for tax purposes.
2022 2021
Company £000 £000
Accelerated capital allowances and other short-term timing differences 10 10
Movement in fair value of financial investments 147 147
Unutilised tax losses 366 366
Deferred tax asset 523 523
At 1 January 523 395
Profit and loss account - accelerated capital allowances and other short-term - 40
timing differences
Profit and loss account - tax losses - 88
Deferred tax asset at 31 December 523 523
Deferred tax assets are recognised for tax losses to the extent that the
realisation of the related tax benefit through future taxable profits is
probable.
29. Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair
value of the Group's share of the net identifiable assets of the acquired
subsidiary at the date of acquisition. Goodwill on acquisitions of
subsidiaries is included in 'intangible assets'. Gains and losses on the
disposal of an entity include the carrying amount of goodwill relating to the
entity sold.
The Group reviews the goodwill for impairment at least annually or more
frequently when events or changes in economic circumstances indicate that
impairment may have taken place and carries goodwill at cost less accumulated
impairment losses. Assets are grouped together in the smallest group of assets
that generates cash inflows from continuing use that are largely independent
of the cash inflows of other assets or groups of assets (the "cash-generating
unit" or "CGU"). For impairment testing purposes goodwill cannot be allocated
to a CGU that is greater than a reported operating segment. CGUs to which
goodwill has been allocated are aggregated so that the level at which
impairment is tested reflects the lowest level at which goodwill is monitored
for internal reporting purposes. Goodwill acquired in a business combination
is allocated to groups of CGUs that are expected to benefit from the synergies
of the combination. The test for impairment involves comparing the carrying
value of goodwill with the present value of pre-tax cash flows, discounted at
a rate of interest that reflects the inherent risks of the CGU to which the
goodwill relates, or the CGU's fair value if this is higher.
(b) Computer software
Acquired computer software licences are capitalised on the basis of the costs
incurred to acquire and bring to use the specific software. These costs are
amortised on a straight line basis over the expected useful lives (three to
fifteen years).
Costs associated with maintaining computer software programs are recognised as
an expense as incurred.
Costs associated with developing computer software which are assets in the
course of construction, which management has assessed to not be available for
use, are not amortised.
During the year the company developed software for customer relationship
management. Relevant costs have been capitalised accordingly and will be
amortised across its useful economic life.
(c) Other intangibles
Other intangibles include trademarks, customer relationships, broker
relationships, technology and banking licences acquired. These costs are
amortised on a straight line basis over the expected useful lives (three to
fourteen years).
Goodwill Computer software Other intangibles Total
Group £000 £000 £000 £000
Cost
At 1 January 2021 5,202 25,386 2,562 33,150
On acquisition of AAG - - 4,416 4,416
Additions - 5,100 - 5,100
At 31 December 2021 5,202 30,486 6,978 42,666
Additions - 6,524 6,524
Disposals - - (687) (687)
At 31 December 2022 5,202 37,010 6,291 48,503
Accumulated amortisation
At 1 January 2021 - (8,388) (1,116) (9,504)
Amortisation charge - (2,715) (583) (3,298)
At 31 December 2021 - (11,103) (1,699) (12,802)
Amortisation charge - (2,964) (188) (3,152)
At 31 December 2022 - (14,067) (1,887) (15,954)
Net book amount
At 31 December 2021 5,202 19,383 5,279 29,864
At 31 December 2022 5,202 22,943 4,404 32,549
Significant management judgements are made in estimations, to evaluate whether
an impairment of goodwill is necessary. Impairment testing is performed at CGU
level and the following two items, with judgements surrounding them, have a
significant impact on the estimations used in determining the necessity of an
impairment charge:
• Future cash flows - Cash flow forecasts reflect management's view of
future business forecasts at the time of the assessment. A detailed three year
budget is done every year and management also uses judgement in applying a
growth rate. The accuracy of future cash flows is subject to a high degree of
uncertainty in volatile market conditions. During such conditions, management
would perform impairment testing more frequently than annually to ensure that
the assumptions applied are still valid in the current market conditions.
• Discount rate - Management also apply judgement in determining the
discount rate used to discount future expected cash flows. The discount rate
is derived from the cost of capital for each CGU.
The recoverable amount of an asset or CGU is the greater of its value in use
and its fair value less costs to sell. There are currently two CGUs (2021:
two) with goodwill attached; the core Arbuthnot Latham CGU (£1.7m) and RAF
CGU (£3.5m).
Management considers the value in use for the Arbuthnot Latham CGU to be the
discounted cash flows over 3 years with a terminal value (2021: 3 years with a
terminal value). The 3 year discounted cash flows with a terminal value are
considered to be appropriate as the goodwill relates to an ongoing well
established business and not underlying assets with finite lives. The terminal
value is calculated by applying a discounted perpetual growth model to the
profit expected in 2024 as per the approved 3 year plan. A growth rate of 3.1%
(2021: 3.6%) was used for income and 8.1% (2021: 4.5%) for expenditure from
2023 to 2025 (these rates were the best estimate of future forecasted
performance), while a 3% (2021: 3%) percent growth rate for income and
expenditure (a more conservative approach was taken for latter years as these
were not budgeted for in detail as per the three year plan approved by the
Board of Directors) was used for cash flows after the approved 3 year plan.
Management considers the value in use for the RAF CGU to be the discounted
cash flows over 3 years with a terminal value. The 3 year discounted cash
flows with a terminal value are considered to be appropriate as the goodwill
relates to an ongoing, well established, business and not underlying assets
with finite lives. The terminal value is calculated by applying a discounted
perpetual growth model to the profit expected in 2024 as per the approved
budget. A growth rate of 3% (2021: 3%) was used (this rate was the best
estimate of future forecasted performance).
The growth rates used are conservative and below the forecast UK growth rate
of 2.5% (forecast baseline average for the following 5 years).
Cash flows were discounted at a pre-tax rate of 14.7% (2021: 12%) to their net
present value. The discount rate of 14.7% is considered to be appropriate
after evaluating current market assessments of the time value of money and the
risks specific to the assets or CGUs.
Currently, the value in use and fair value less costs to sell of both CGUs
exceed the carrying values of the associated goodwill and as a result no
sensitivity analysis was performed.
Computer software
Company £000
Cost
At 1 January 2021 7
At 31 December 2021 7
At 31 December 2022 7
Accumulated amortisation
At 1 January 2021 (3)
Amortisation charge (2)
At 31 December 2021 (5)
Amortisation charge (1)
At 31 December 2022 (6)
Net book amount
At 31 December 2021 2
At 31 December 2022 1
30. Property, plant and equipment
Land and buildings comprise mainly branches and offices and are stated at the
latest valuation with subsequent additions at cost less depreciation. Plant
and equipment is stated at historical cost less depreciation. Historical cost
includes expenditure that is directly attributable to the acquisition of the
items.
Land is not depreciated. Depreciation on other assets is calculated using the
straight-line method to allocate their cost to their residual values over
their estimated useful lives, applying the following annual rates, which are
subject to regular review:
Leasehold improvements 3 to 20 years
Commercial vehicles 2 to 7 years
Plant and machinery 5 years
Computer and other equipment 3 to 10 years
Motor vehicles 4 years
Leasehold improvements are depreciated over the term of the lease (until the
first break clause). Gains and losses on disposals are determined by deducting
carrying amount from proceeds. These are included in the Statement of
Comprehensive Income.
Commercial vehicles are subject to operating leases. The other assets are
owned and used by the Group.
Leasehold improvements Commercial vehicles Plant and machinery Computer and other equipment Motor Vehicles Total
Group £000 £000 £000 £000 £000 £000
Cost or valuation
At 1 January 2021 7,433 - - 5,550 91 13,074
On acquisition of AAG 228 136,418 37 110 193 136,986
Additions 248 35,228 9 398 47 35,930
Disposals (253) (47,362) - (319) (8) (47,942)
Transfer - 33 (33) - - -
At 31 December 2021 7,656 124,317 13 5,739 323 138,048
Additions 92 115,170 - 507 467 116,236
Disposals - (28,918) - - (167) (29,085)
At 31 December 2022 7,748 210,569 13 6,246 623 225,199
Accumulated depreciation
At 1 January 2021 (4,462) - - (3,647) (60) (8,169)
Depreciation charge (753) (30,487) (10) (957) (95) (32,302)
Disposals 253 27,735 7 318 28,313
Transfer (2) 2 -
At 31 December 2021 (4,962) (2,754) (1) (4,286) (155) (12,158)
Depreciation charge (825) (36,885) (8) (848) (118) (38,684)
Disposals - 808 - - 108 916
At 31 December 2022 (5,787) (38,831) (9) (5,134) (165) (49,926)
Net book amount
At 31 December 2021 2,694 121,563 12 1,453 168 125,890
At 31 December 2022 1,961 171,738 4 1,112 458 175,273
Computer and other equipment Motor Vehicles Total
Company £000 £000 £000
Cost or valuation
At 1 January 2021 217 91 308
At 31 December 2021 217 91 308
Additions 1 - 1
At 31 December 2022 218 91 309
Accumulated depreciation
At 1 January 2021 (87) (60) (147)
Depreciation charge (1) (22) (23)
At 31 December 2021 (88) (82) (170)
Depreciation charge - (9) (9)
At 31 December 2022 (88) (91) (179)
Net book amount
At 31 December 2021 129 9 138
At 31 December 2022 130 - 130
Minimum lease payments receivable under operating and contract hire leases
fall due as follows:
2022 2021
Group £000 £000
Maturity analysis for operating lease receivables:
- No later than 1 year 35,848 25,675
- Later than 1 year and no later than 5 years 46,583 25,439
- Later than 5 years 1,095 476
83,526 51,590
31. Right-of-use assets
At inception or on reassessment of a contract, the Group assesses whether a
contract is, or contains, a lease. A contract is, or contains a lease if the
contract conveys the right to control the use of an identified asset for a
period of time in exchange for consideration. To assess whether a contract
conveys the right to control the use of an identified asset, the Group
assesses whether:
· the contract involves the use of an identified asset. This may be
specified explicitly or implicitly, and should be physically distinct or
represent substantially all of the capacity of a physically distinct asset. If
the supplier has a substantive substitution right, then the asset is not
identified;
· the Group has the right to obtain substantially all of the
economic benefits from use of the asset throughout the period of use; and
· the Group has the right to direct the use of the asset. The Group
has this right when it has the decision-making rights that are most relevant
to changing how and for what purpose the asset is used.
At inception or on reassessment of a contract that contains a lease component,
the Group allocates the consideration in the contract to each lease component
on the basis of their relative stand-alone prices.
(a) As a lessee
The Group recognises a right-of-use asset and a lease liability at the lease
commencement date. The right-of-use asset is initially measured at cost, which
comprises the initial amount of the lease liability adjusted for any lease
payments made at or before the commencement date, plus any initial direct
costs incurred and an estimate of costs to dismantle and remove the underlying
asset or to restore it or its site, less any lease incentives received.
The right-of-use asset is subsequently depreciated using the straight-line
method from the commencement date to the earlier of the end of the useful life
of the right-of-use asset or the end of the lease term. The estimated useful
lives of right-of-use assets are determined on the same basis as those of
property and equipment. In addition, the right-of-use asset is periodically
reduced by impairment losses, if any, and adjusted for certain remeasurements
of the lease liability.
Practical exemptions
The Group has elected not to recognise right-of-use assets and lease
liabilities for short-term leases of machinery that have a lease term of 12
months or less and leases of low value assets. The Group recognises the lease
payments associated with these leases as an expense on a straight-line basis
over the lease term.
(b) As a lessor
Assets leased to customers under agreements which transfer substantially all
the risks and rewards of ownership, with or without ultimate legal title, are
classified as finance leases. When assets are held subject to finance leases,
the present value of the lease payments is recognised as a receivable. The
difference between the gross receivable and the present value of the
receivable is recognised as unearned finance income. Lease income is
recognised over the term of the lease using the net investment method, which
reflects a constant periodic rate of return.
Assets leased to customers under agreements which do not transfer
substantially all the risks and rewards of ownership are classified as
operating leases. When assets are held subject to operating leases, the
underlying assets are held at cost less accumulated depreciation. The assets
are depreciated down to their estimated residual values on a straight-line
basis over the lease term. Lease rental income is recognised on a straight
line basis over the lease term.
Breakdown of right-of-use assets:
Investment property Properties Equipment Total
Group £000 £000 £000 £000
At 1 January 2021 - 17,430 273 17,703
Additions - 738 77 815
Amortisation - (2,652) (192) (2,844)
At 31 December 2021 - 15,516 158 15,674
Additions - 1,254 365 1,619
Amortisation - (2,565) 323 (2,242)
Derecognition - (6,796) (543) (7,337)
At 31 December 2022 - 7,409 303 7,714
In the year, the Group received £Nil (2021: £Nil) of rental income from
subleasing right-of-use assets through operating leases.
The Group recognised £0.7m (2021: £0.8m) of interest expense related to
lease liabilities. The Group also recognised £0.6m (2021: £0.6m) of expense
in relation to leases with a duration of less than 12 months.
32. Investment property
Investment property is initially measured at cost. Transaction costs are
included in the initial measurement. Subsequently, investment property is
measured at fair value, with any change therein recognised in profit and loss
within other income.
2022 2021
Group £000 £000
Opening balance 6,550 6,550
At 31 December 2022 6,550 6,550
Crescent Office Park, Bath
The property represents a freehold office building in Bath and comprises
25,528 square ft. over ground and two upper floors with parking spaces. The
property was acquired for £6.35m. On the date of acquisition, the property
was being multi-let to tenants and was at full capacity.
The Group has elected to apply the fair value model (see Note 4.1 (c)).
The Group recognised £0.5m (2021: £0.3m) rental income during the year and
incurred £0.07m (2021: £0.08m) of direct operating expenses. The property
remained tenanted during 2022.
33. Deposits from banks
2022 2021
Group £000 £000
236,027 240,333
Deposits from banks include £225m (2021: £225m) obtained through the Bank of
England Term Funding Scheme with additional incentives for small and
medium-sized enterprises ("TFSME"). For a maturity profile of deposits from
banks, refer to Note 6.
34. Deposits from customers
2022 2021
Group £000 £000
Current/demand accounts 1,924,035 1,859,417
Notice accounts 296,400 309,488
Term deposits 872,114 668,964
3,092,549 2,837,869
Included in customer accounts are deposits of £15.4m (2021: £14.7m) held as
collateral for loans and advances. The fair value of these deposits
approximates their carrying value.
For a maturity profile of deposits from customers, refer to Note 6.
35. Other liabilities
2022 2021
Group £000 £000
Trade payables 4,954 5,079
Other creditors - 2,027
Accruals and deferred income 21,190 14,048
26,144 21,154
2022 2021
Company £000 £000
Trade payables 470 234
Due to subsidiary undertakings - 1,256
Accruals and deferred income 3,021 1,652
3,491 3,142
36. Lease liabilities
The lease liability is initially measured at the present value of the lease
payments that are not paid at the commencement date, discounted using the
interest rate implicit in the lease or, if that rate cannot be readily
determined, the Group's incremental borrowing rate. Primarily, the Group uses
its incremental borrowing rate as the discount rate.
Lease payments included in the measurement of the lease liability comprise the
following:
· fixed payments, including in-substance payments;
· variable lease payments that depend on an index or a rate,
initially measured using the index or rates as at the commencement date;
· amounts expected to be payable under a residual value guarantee.
The lease liability is measured at amortised cost using the effective interest
method. It is remeasured when there is a change in future lease payments
arising from a change in index or rate, if there is a change in the Group's
estimate of the amount expected to be payable under a residual value
guarantee.
When the lease liability is remeasured in this way, a corresponding adjustment
is made to the carrying amount of the right-of-use asset, or is recorded in
the statement of comprehensive income if the carrying amount of the
right-of-use asset has been reduced to zero.
Properties Equipment Total
Group £000 £000 £000
At 1 January 2021 18,070 235 18,305
Additions 725 5,139 5,864
Interest expense 807 9 816
Lease payments (3,503) (206) (3,709)
At 31 December 2021 16,099 5,177 21,276
Additions 848 186 1,034
Interest expense 709 9 718
Lease payments (3,089) (5,087) (8,176)
Derecognition (6,980) - (6,980)
At 31 December 2022 7,587 285 7,872
Maturity analysis
2022 2021
Group £000 £000
Less than one year 3,675 6,669
One to five years 3,502 8,592
More than five years 8,560 57,893
Total undiscounted lease liabilities at 31 December 15,737 73,153
Lease liabilities included in the statement of financial position at 31 7,872 21,276
December
Current 3,398 5,802
Non-current 4,474 15,474
37. Debt securities in issue
Issued financial instruments or their components are classified as liabilities
where the contractual arrangement results in the Group having a present
obligation to either deliver cash or another financial asset to the holder.
Financial liabilities, other than trading liabilities at fair value, are
carried at amortised cost using the effective interest rate method as set out
in the policy in Note 8.
2022 2021
Group and Company £000 £000
Subordinated loan notes 37,594 36,772
Euro subordinated loan notes
The subordinated loan notes 2035 were issued on 7 November 2005 and are
denominated in Euros. The principal amount outstanding at 31 December 2022 was
€15,000,000 ((2021: €15,000,000). The notes carry interest at 3% over the
interbank rate for three month deposits in euros and are repayable at par in
August 2035 unless redeemed or repurchased earlier by the Company.
The contractual undiscounted amount that will be required to be paid at
maturity of the above debt securities is €15,000,000.
Given the fact that the Company has never been subject to a published credit
rating by any of the relevant agencies and the notes in issue are not quoted,
it is not considered possible to approximate a fair value for these notes.
Subordinated loan notes
The subordinated loan notes were issued on 3 June 2019 are denominated in
Pounds Sterling. The principal amount outstanding at 31 December 2022 was
£25,000,000 (2021: £25,000,000). The notes carry interest at 7.75% over the
three month GBP ICE Synthetic LIBOR rate and are repayable at par in June 2029
unless redeemed or repurchases earlier by the Company.
With the discontinuation of LIBOR the rate charged will reference SONIA from
reference dates post 31 March 2023.
The contractual undiscounted amount that will be required to be paid at
maturity of the above debit securities is £25,000,000.
Given the fact that the Company has never been subject to a published credit
rating by any of the relevant agencies and the notes in issue are not quoted,
it is not considered possible to approximate a fair value for these notes.
38. Contingent liabilities and commitments
Financial guarantees and loan commitments policy
Financial guarantees represent undertakings that the Group will meet a
customer's obligation to third parties if the customer fails to do so.
Commitments to extend credit represent unused portions of authorisations to
extend credit in the form of loans, guarantees or letters of credit. The Group
is theoretically exposed to loss in an amount equal to the total guarantees or
unused commitments. However, the likely amount of loss is expected to be
significantly less; most commitments to extend credit are contingent upon
customers maintaining specific credit standards. Liabilities under financial
guarantee contracts are initially recorded at their fair value, and the
initial fair value is amortised over the life of the financial guarantee.
Subsequently, the financial guarantee liabilities are measured at the higher
of the initial fair value, less cumulative amortisation, and the best estimate
of the expenditure to settle obligations.
Provisions and contingent liabilities policy
Provisions are recognised when the Group has a present legal or constructive
obligation as a result of a past event, it is probable that an outflow of
economic resources will be required from the Group and amounts can be reliably
measured.
Onerous contract provisions are recognised for losses on contracts where the
forecast costs of fulfilling the contract throughout the contract period
exceed the forecast income receivable. In assessing the amount of the loss to
provide on any contract, account is taken of the Group's forecast results
which the contract is servicing. The provision is calculated based on
discounted cash flows to the end of the contract.
Contingent liabilities are disclosed when the Group has a present obligation
as a result of a past event, but the probability that it will be required to
settle that obligation is more than remote, but not probable.
Contingent liabilities
The Group is subject to extensive regulation in the conduct of its business. A
failure to comply with applicable regulations could result in regulatory
investigations, fines and restrictions on some of the Group's business
activities or other sanctions. The Group seeks to minimise this risk through
the adoption and compliance with policies and procedures, continuing to refine
controls over business practices and behaviour, employee training, the use of
appropriate documentation, and the involvement of outside legal counsel where
appropriate.
Capital commitments
At 31 December 2022, the Group had capital commitments of £0.5m (2021:
£0.5m) in respect of a contribution in an equity investment.
Credit commitments
The contractual amounts of the Group's off-balance sheet financial instruments
that commit it to extend credit to customers are as follows:
2022 2021
Group £000 £000
Guarantees and other contingent liabilities 3,253 4,560
Commitments to extend credit:
- Original term to maturity of one year or less 471,078 464,390
474,331 468,950
39. Share capital
Ordinary share capital
Number of Share
shares Capital
Group and Company £000
At 1 January 2021 15,279,322 153
At 31 December 2021 & 2022 15,279,322 153
Ordinary non-voting share capital
Number of Share
shares Capital
Group and Company £000
At 1 January 2021 152,621 1
At 31 December 2021 & 2022 152,621 1
Total share capital
Number of Share
shares Capital
Group and Company £000
At 1 January 2021 15,431,943 154
At 31 December 2021 & 2022 15,431,943 154
(a) Share issue costs
Incremental costs directly attributable to the issue of new shares or options
by Company are shown in equity as a deduction, net of tax, from the proceeds.
(b) Dividends on ordinary shares
Dividends on ordinary shares are recognised in equity in the period in which
they are approved.
(c) Share buybacks
Where any Group company purchases the Company's equity share capital (treasury
shares), the consideration paid, including any directly attributable
incremental costs (net of income taxes) is deducted from equity attributable
to the Company's equity holders until the shares are cancelled or reissued.
The Ordinary shares have a par value of 1p per share (2021: 1p per share). At
31 December 2022 the Company held 409,314 shares (2021: 409,314) in treasury.
This includes 390,274 (2021: 390,274) Ordinary shares and 19,040 (2021:
19,040) Ordinary Non-Voting shares.
40. Reserves and retained earnings
2022 2021
Group £000 £000
Capital redemption reserve 19 19
Fair value reserve 1,067 979
Treasury shares (1,299) (1,299)
Retained earnings 212,037 201,026
Total reserves at 31 December 211,824 200,725
The capital redemption reserve represents a reserve created after the Company
purchased its own shares which resulted in a reduction of share capital.
The fair value reserve relates to gains or losses on assets which have been
recognised through other comprehensive income.
2022 2021
Company £000 £000
Capital redemption reserve 19 19
Treasury shares (1,299) (1,299)
Retained earnings 152,115 153,528
Total reserves as 31 December 150,835 152,248
41. Share-based payment options
Company - cash settled
Grants were made to Messrs Salmon and Cobb on 14 June 2016 under Phantom
Option Scheme introduced on that date, to acquire ordinary 1p shares in the
Company at 1591p exercisable in respect of 50% on or after 15 June 2019 and in
respect of the remaining 50% on or after 15 June 2021 when a cash payment
would be made equal to any increase in market value.
Under this Scheme, Mr. Salmon and Mr. Cobb were granted a phantom option to
acquire 200,000 and 100,000 ordinary 1p shares respectively in the Company.
The fair value of these options at the grant date was £1m. The first tranche
of the share options has vested, but will lapse if not exercised at 1591p
before 14 June 2023. The second tranche of the share options will not vest as
the performance conditions have not been met, due to the non payment of
dividends. The first tranche of share options remained outstanding at 31
December 2022. The valuation of the share options are considered as level 2
within the fair value hierarchy, with the Group adopting a Black-Scholes
valuation model as adjusted for an attrition rate for members of the scheme
and a probability of pay-out reflecting the risk of not meeting the terms of
the scheme over the vesting period. The number of share options that are
expected to vest are reviewed at least annually. The fair value of the options
as at 31 December 2022 was £Nil (2021: £0.03m).
On 23 July 2021 Mr. Salmon and Mr. Cobb were granted further phantom options
to subscribe for 200,000 and 100,000 ordinary 1p shares respectively in the
Company at 990p. 50% of each director's individual holding of phantom options
is exercisable at any time after 23 July 2023 and the other 50% is exercisable
at any time after 23 July 2026. All share options awarded 23 July 2021,
regardless of first exercise date, may not be exercised later than 23 July
2028 being the day before the seventh anniversary of the date of grant. The
fair value of the options as at 31 December 2022 was £0.13m (2021: £0.09m).
The performance conditions of the Scheme are that for the duration of the
vesting period, the dividends paid by ABG must have increased in percentage
terms when compared to an assumed dividend of 29p per share in respect of the
financial year ending 31 December 2016, by a minimum of the increase in the
Retail Prices Index during that period.
Also from the grant date to the date the Option is exercised, there must be no
public criticism by any regulatory authority on the operation of ABG or any of
its subsidiaries which has a material impact on the business of ABG.
Options are forfeited if they remain unexercised after a period of more than 7
years from the date of grant. If the participant ceases to be employed by the
Group by reason of injury, disability, ill-health or redundancy; or because
his employing company ceases to be a shareholder of the Group; or because his
employing business is being transferred out of the Group, his option may be
exercised within 6 months after such cessation. In the event of the death of
a participant, the personal representatives of a participant may exercise an
option, to the extent exercisable at the date of death, within 6 months after
the death of the participant.
On cessation of employment for any other reason (or when a participant serves,
or has been served with, notice of termination of such employment), the option
will lapse although the Remuneration Committee has discretion to allow the
exercise of the option for a period not exceeding 6 months from the date of
such cessation.
In such circumstances, the performance conditions may be modified or waived as
the Remuneration Committee, acting fairly and reasonably and taking due
consideration of the circumstances, thinks fit. The number of Ordinary Shares
which can be acquired on exercise will be pro-rated on a time elapsed basis,
unless the Remuneration Committee, acting fairly and reasonably and taking due
consideration of the circumstances, decides otherwise. In determining whether
to exercise its discretion in these respects, the Remuneration Committee must
satisfy itself that the early exercise of an option does not constitute a
reward for failure.
The probability of payout has been assigned based on the likelihood of meeting
the performance criteria, which is 100%. The Directors consider that there is
some uncertainty surrounding whether the participants will all still be in
situ and eligible at the vesting date. Therefore the directors have assumed a
15% attrition rate for the share options vesting in June 2021, July 2023 and
July 2026. The attrition rate will increase by 3% per year until the vesting
date. ABG had a cost £0.02m in relation to share based payments during 2022
(2021: £0.01m income), as disclosed in Note 14.
Measurement inputs and assumptions used in the Black-Scholes model are as
follows:
2022 2021
Expected Stock Price Volatility 33.6% 35.4%
Risk Free Interest Rate 2.5% 0.5%
Average Expected Life (in years) 1.36 2.03
42. Dividends per share
The Directors recommend the payment of a final dividend of 25p (2021: 22p) per
share. This represents total dividends for the year of 42p (2021: 59p). The
final dividend, if approved by members at the 2023 AGM, will be paid on 2 June
2023 to shareholders on the register at close of business on 21 April 2023.
43. Cash and cash equivalents
For the purposes of the Statement of Cash Flows, cash and cash equivalents
comprises cash on hand and demand deposits, and cash equivalents are deemed
highly liquid investments that are convertible into cash with an insignificant
risk of changes in value with a maturity of three months or less at the date
of acquisition.
2022 2021
Group £000 £000
Cash and balances at central banks (Note 18) 732,729 814,692
Loans and advances to banks (Note 19) 115,787 73,444
848,516 888,136
2022 2021
Company £000 £000
Loans and advances to banks 8,434 7,587
44. Related party transactions
Related parties of the Company and Group include subsidiaries, directors, Key
Management Personnel, close family members of Key Management Personnel and
entities which are controlled, jointly controlled or significantly influenced,
or for which significant voting power is held, by Key Management Personnel or
their close family members.
A number of banking transactions are entered into with related parties in the
normal course of business on normal commercial terms. These include loans and
deposits. Directors and Key Management includes solely Executive and
Non-Executive Directors.
2022 2021
Group - Directors and close family members £000 £000
Loans
Loans outstanding at 1 January 502 502
Loans advanced during the year 1,013 39
Loan repayments during the year (106) (39)
Loans outstanding at 31 December 1,409 502
Interest income earned 2 1
The loans to directors are mainly secured on property, shares or cash and bear
interest at rates linked to base rate. No provisions have been recognised in
respect of loans given to related parties (2021: £nil).
2022 2021
Group - Directors and close family members £000 £000
Deposits
Deposits at 1 January 4,018 3,928
Deposits placed during the year 6,707 1,709
Deposits repaid during the year (6,303) (1,619)
Deposits at 31 December 4,422 4,018
Interest expense on deposits 2 -
Details of directors' remuneration are given in the Remuneration Report on
pages 53 and 54. The Directors do not believe that there were any other
transactions with key management or their close family members that require
disclosure.
Details of principal subsidiaries are given in Note 45. Transactions and
balances with subsidiaries are shown below:
2022 2021
Highest balance during the year Balance at 31 December Highest balance during the year Balance at 31 December
£000 £000 £000 £000
ASSETS
Due from subsidiary undertakings - Loans and advances to banks 8,429 8,427 30,879 7,581
Due from subsidiary undertakings - Debt securities at amortised cost 24,885 24,437 24,688 24,367
Shares in subsidiary undertakings 159,404 159,354 159,404 159,404
192,718 192,218 214,971 191,352
Interest income 5 22
LIABILITIES
Due to subsidiary undertakings 776 243 2,334 1,256
776 243 2,334 1,256
Interest expense 369 331
The disclosure of the year end balance and the highest balance during the year
is considered the most meaningful information to represent the transactions
during the year. The above transactions arose during the normal course of
business and are on substantially the same terms as for comparable
transactions with third parties.
The Company undertook the following transactions with other companies in the
Group during the year:
2022 2021
£000 £000
Arbuthnot Latham & Co., Ltd - Recharge of property and IT costs 896 891
Arbuthnot Latham & Co., Ltd - Recharge for costs paid on the Company's 1,127 364
behalf
Arbuthnot Latham & Co., Ltd - Recharge of costs paid on behalf of (675) (2,792)
Arbuthnot Latham & Co., Ltd
Arbuthnot Latham & Co., Ltd - Group recharges for shared services (6,993) (5,560)
Arbuthnot Latham & Co., Ltd - Group recharges for liquidity (5,862) (5,073)
Total (11,507) (12,170)
45. Interests in subsidiaries
Investment at cost Impairment provisions Net
Company £000 £000 £000
At 1 January 2022 159,404 - 159,404
Receipt on dissolution of Peoples Trust & Savings PLC (50) - (50)
At 31 December 2022 159,354 - 159,354
2022 2021
Company £000 £000
Subsidiary undertakings:
Bank 157,814 157,814
Other 1,540 1,590
Total 159,354 159,404
(a) List of subsidiaries
Arbuthnot Latham & Co., Limited is the only significant subsidiary of
Arbuthnot Banking Group. Arbuthnot Latham is incorporated in the United
Kingdom, has a principal activity of Private and Commercial Banking and is
100% owned by the Group.
The table below provides details of other subsidiaries of Arbuthnot Banking
Group PLC at 31 December 2022:
% shareholding Country of incorporation
Principal activity
Direct shareholding
Arbuthnot Fund Managers Limited 100.0% UK Dormant
Arbuthnot Investments Limited 100.0% UK Dormant
Arbuthnot Limited 100.0% UK Dormant
Arbuthnot Properties Limited 100.0% UK Dormant
Arbuthnot Unit Trust Management Limited 100.0% UK Dormant
Gilliat Financial Solutions Limited 100.0% UK Dormant
Indirect shareholding via intermediate holding companies
Arbuthnot Commercial Asset Based Lending Limited 100.0% UK Asset Finance
Arbuthnot Latham (Nominees) Limited 100.0% UK Dormant
Arbuthnot Latham Real Estate PropCo 1 Limited 100.0% Jersey Property Investment
Arbuthnot Securities Limited 100.0% UK Dormant
Arbuthnot Specialist Finance Limited 100.0% UK Specialist Finance
Asset Alliance Finance Limited** 100.0% UK Commercial Vehicle Financing
Asset Alliance Group Finance No.2 Limited** 100.0% UK Commercial Vehicle Financing
Asset Alliance Group Holdings Limited** 100.0% UK Commercial Vehicle Financing
Asset Alliance Leasing Limited** 100.0% UK Commercial Vehicle Financing
Asset Alliance Limited** 100.0% UK Commercial Vehicle Financing
ATE Truck & Trailer Sales Limited** 100.0% UK Dormant
Forest Asset Finance Limited** 100.0% UK Commercial Vehicle Financing
Hanbury Riverside Limited** 100.0% UK Dormant
John K Gilliat & Co., Limited 100.0% UK Dormant
Pinnacle Universal Limited 100.0% UK Property Development
Renaissance Asset Finance Limited 100.0% UK Asset Finance
AAG Traffic Management Limited** 100.0% UK Dormant
The Peacocks Management Company Limited*** 100.0% UK Property Management
Valley Finance Limited** 100.0% UK Dormant
* On 22 February 2022, Arbuthnot Latham Real Estate Holdings Limited was
dissolved.
**Entities acquired as part of the Asset Alliance Group acquisition on 1 April
2021.
***The Peacocks Management Company Limited was incorporated on 2 November 2022
as a subsidiary of Pinnacle Universal Limited.
The following Jersey entities were dissolved during the prior year:
· Arbuthnot Real Estate Investors Limited - dissolved 19 March 2021
· Arbuthnot Latham Real Estate Holdco Limited - dissolved 23 April
2021
· Arbuthnot Real Estate Investors GP 1 Limited - dissolved 30 April
2021
· Arbuthnot Real Estate Investors Funds 1 LP - dissolved 4 May 2021
The following entities were dissolved during the current year:
· Pinnacle Universal Limited's (BVI) was dissolved on 7 June 2022
· Peoples Trust and Savings PLC was dissolved on 22 September 2022.
All the subsidiaries above were 100% owned during the current and prior year
and are unlisted and none are banking institutions. All entities are included
in the consolidated financial statements and have an accounting reference date
of 31 December.
The Jersey entity's registered office is 26 New Street, St Helier, Jersey, JE2
3RA. All other entities listed above have their registered office as 7 Wilson
Street, London, EC2M 2SN.
(b) Non-controlling interests in subsidiaries
There were no non-controlling interests at the end of 2022 or 2021.
(c) Significant restrictions
The Group does not have significant restrictions on its ability to access or
use its assets and settle its liabilities other than those resulting from the
supervisory frameworks within which banking subsidiaries operate. The
supervisory frameworks require banking subsidiaries to keep certain levels of
regulatory capital and liquid assets, limit their exposure to other parts of
the Group and comply with other ratios. The carrying amounts of the banking
subsidiary's assets and liabilities are £3.6bn and £3.4bn respectively
(2021: £3.4bn and £3.2bn respectively).
(d) Risks associated with interests
During the year Arbuthnot Banking Group PLC did not make capital contributions
to Arbuthnot Latham & Co., Ltd. In 2021 Arbuthnot Banking Group PLC made
£25.5m capital contributions to Arbuthnot Latham & Co., Ltd. The
contributions were made to assist the Bank during a period of growth to ensure
that all regulatory capital requirements were met.
46. Operating segments
The Group is organised into nine operating segments as disclosed below:
1) Banking - Includes Private and Commercial Banking. Private Banking -
Provides traditional private banking services. Commercial Banking - Provides
bespoke commercial banking services and tailored secured lending against
property investments and other assets.
2) Wealth Management - Offering financial planning and investment management
services.
3) Mortgage Portfolios - Acquired mortgage portfolios.
4) RAF - Specialist asset finance lender mainly in high value cars but also
business assets.
5) ACABL - Provides finance secured on either invoices, assets or stock of the
borrower.
6) ASFL - Provides short term secured lending solutions to professional and
entrepreneurial property investors.
7) AAG - Provides vehicle finance and related services, predominantly in the
truck & trailer and bus & coach markets.
8) All Other Divisions - All other smaller divisions and central costs in
Arbuthnot Latham & Co., Ltd (Investment property and Central costs)
9) Group Centre - ABG Group management.
Transactions between the operating segments are on normal commercial terms.
Centrally incurred expenses are charged to operating segments on an
appropriate pro-rata basis. Segment assets and liabilities comprise loans and
advances to customers and customer deposits, being the majority of the balance
sheet.
Banking Wealth Management Mortgage Portfolios RAF ACABL ASFL AAG All Other Divisions Group Centre Total
Year ended 31 December 2022 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Interest revenue 70,545 - 7,333 8,898 14,665 1,068 664 16,840 5 120,018
Inter-segment revenue - - - - - - - - (5) (5)
Interest revenue from external customers 70,545 - 7,333 8,898 14,665 1,068 664 16,840 - 120,013
Fee and commission income 3,138 10,689 - 32 6,178 10 - 1,539 - 21,586
Revenue - - - - - - 99,367 - - 99,367
Revenue from external customers 73,683 10,689 7,333 8,930 20,843 1,078 100,031 18,379 - 240,966
Interest expense (5,980) - (2,223) (3,353) (7,903) (355) (5,120) 7,153 (368) (18,149)
Cost of goods sold - - - - - - (82,109) - - (82,109)
Add back inter-segment revenue - - - - - - - - 5 5
Subordinated loan note interest (2,788) (2,788)
Fee and commission expense (335) - - - (202) - - - - (537)
Segment operating income 67,368 10,689 5,110 5,577 12,738 723 12,802 25,532 (3,151) 137,388
Impairment losses (1,547) - (415) (768) (2,082) (179) (369) (143) - (5,503)
Other income - - - 82 - - - 2,385 (840) 1,627
Operating expenses (46,683) (14,790) (935) (4,697) (5,463) (1,489) (14,507) (16,074) (8,865) (113,503)
Segment profit / (loss) before tax 19,138 (4,101) 3,760 194 5,193 (945) (2,074) 11,700 (12,856) 20,009
Income tax (expense) / income - - - 23 (989) 236 (1,016) (401) (1,404) (3,551)
Segment profit / (loss) after tax 19,138 (4,101) 3,760 217 4,204 (709) (3,090) 11,299 (14,260) 16,458
Loans and advances to customers 1,452,649 - 148,517 133,825 268,825 14,869 17,392 11,500 (11,500) 2,036,077
Assets available for lease - - - - - - 171,738 - - 171,738
Other assets - - - - - - - 1,409,231 (2,999) 1,406,232
Segment total assets 1,452,649 - 148,517 133,825 268,825 14,869 189,130 1,420,731 (14,499) 3,614,047
Customer deposits 3,112,478 - - - - - - - (19,929) 3,092,549
Other liabilities - - - - - - - 293,531 15,989 309,520
Segment total liabilities 3,112,478 - - - - - - 293,531 (3,940) 3,402,069
Other segment items:
Capital expenditure - - - - - - - (122,409) (1) (122,410)
Depreciation and amortisation - - - - - - - (41,826) (10) (41,836)
The "Group Centre" segment above includes the parent entity and all
intercompany eliminations.
Banking Wealth Management Mortgage Portfolios RAF ACABL ASFL AAG All Other Divisions Group Centre Total
Year ended 31 December 2021 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Interest revenue 48,281 - 6,805 8,300 8,010 803 190 4,713 22 77,124
Inter-segment revenue - - - - - - - - (22) (22)
Interest revenue from external customers 48,281 - 6,805 8,300 8,010 803 190 4,713 - 77,102
Fee and commission income 2,747 10,563 - 166 4,308 7 - 681 - 18,472
Revenue 74,500 74,500
Revenue from external customers 51,028 10,563 6,805 8,466 12,318 810 74,690 5,394 - 170,074
Interest expense (3,270) - (2,070) (2,371) (2,699) (225) (2,591) 2,842 (201) (10,585)
Cost of goods sold (68,023) (68,023)
Add back inter-segment revenue - - - - - - - - 22 22
Subordinated loan note interest - - - - - - - - (2,464) (2,464)
Fee and commission expense (265) - - - (84) - - - - (349)
Segment operating income 47,493 10,563 4,735 6,095 9,535 585 4,076 8,236 (2,643) 88,675
Impairment losses 354 - (186) (2,292) (50) (21) (1,001) - - (3,196)
Gain from a bargain purchase - - - - - - 8,626 - - 8,626
Other income - - 2,239 78 - - - 2,081 (443) 3,955
Operating expenses (41,315) (12,684) (1,154) (3,943) (4,748) (1,590) (7,872) (12,570) (7,546) (93,422)
Segment profit / (loss) before tax 6,532 (2,121) 5,634 (62) 4,737 (1,026) 3,829 (2,253) (10,632) 4,638
Income tax (expense) / income - - - 52 - - - 2,105 (9) 2,148
Segment profit / (loss) after tax 6,532 (2,121) 5,634 (10) 4,737 (1,026) 3,829 (148) (10,641) 6,786
Loans and advances to customers 1,396,049 - 178,082 97,113 182,122 10,096 7,500 11,500 (11,500) 1,870,962
Assets available for lease - - - - - - 121,563 - - 121,563
Other assets - - - - - - - 1,369,346 (3,004) 1,366342
Segment total assets 1,396,049 - 178,082 97,113 182,122 10,096 129,063 1,380,846 (14,504) 3,358,867
Customer deposits 2,856,949 - - - - - - - (19,080) 2,837,869
Other liabilities - - - - - - - 306,398 13,721 320,119
Segment total liabilities 2,856,949 - - - - - - 306,398 (5,359) 3,157,988
Other segment items:
Capital expenditure - - - - - - - (41,030) - (41,030)
Depreciation and amortisation - - - - - - - (35,575) (25) (35,600)
Segment profit is shown prior to any intra-group eliminations.
The Banking division had a branch in Dubai, which was closed in May 2021. In
2021 the Dubai branch generated £1.7m of income and had direct operating
costs of £1.3m. All Dubai branch income was booked in the UK. Other than the
Dubai branch, all operations of the Group are conducted wholly within the
United Kingdom and geographical information is therefore not presented.
47. Country by Country Reporting
Article 89 of the EU Directive 2013/36/EU otherwise known as the Capital
Requirements Directive IV ('CRD IV') was implemented into UK domestic
legislation through statutory instrument 2013 No. 3118, the Capital
Requirements (Country-by-Country Reporting) Regulations 2013 (the
Regulations), which were laid before the UK Parliament on 10 December 2013 and
which came into force on 1 January 2014.
Article 89 requires credit institutions and investment firms in the EU to
disclose annually, specifying, by Member State and by third country in which
it has an establishment, the following information on a consolidated basis for
the financial year: name, nature of activities, geographical location,
turnover, number of employees, profit or loss before tax, tax on profit or
loss and public subsidies received.
FTE Profit/(loss)
31 December 2022 Turnover employees before tax Tax paid
Location £m Number £m £m
UK 137.4 749 20.0 3.6
FTE Profit/(loss)
31 December 2021 Turnover employees before tax Tax paid
Location £m Number £m £m
UK 88.7 601 5.2 -
Dubai - 6 (0.6) -
The Dubai branch income was booked through the UK, hence the turnover is nil
in the above analysis. Offsetting this income against Dubai branch costs would
result in a £Nil profit (2021: £0.4m). No public subsidies were received
during 2022 or 2021.
Following a strategic review of the Group's operations, the Dubai branch was
closed in May 2021.
48. Ultimate controlling party
The Company regards Sir Henry Angest, the Group Chairman and Chief Executive
Officer, who has a beneficial interest in 56.3% of the issued share capital of
the Company, as the ultimate controlling party. Details of his remuneration
are given in the Remuneration Report and Note 44 of the consolidated financial
statements includes related party transactions with Sir Henry Angest.
49. Events after the balance sheet date
Following a strategic review of the business, the management has taken the
decision to exit the short-term specialist lending market and as a result,
Arbuthnot Specialist Finance Limited (ASFL) will be closed to new business
with immediate effect as formally communicated at 11 January 2023. The exiting
loan book will be managed down over the coming months and any current undrawn
commitments will be honoured. The wind-down of the major part of the lending
book is anticipated to take a number of months.
Five Year Summary
2018 2019 2020 2021 2022
£000 £000 £000 £000 £000
Profit / (loss) for the year after tax (20,033) 6,176 (1,332) 6,786 16,458
Profit / (loss) before tax from continuing operations 6,780 7,011 (1,090) 4,638 20,009
Total Earnings per share
Basic (p) (134.5) 41.2 (8.9) 45.2 109.6
Earnings per share from continuing operations
Basic (p) 38.0 41.2 (8.9) 45.2 109.6
Dividends per share (p) - ordinary 35.0 16.0 - 38.0 42.0
- special - - - 21.0 -
2018 2019 2020 2021 2022
Other KPI:
Net asset value per share (p) 1,282.5 1,363.5 1,291.5 1,337.2 1,411.1
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
or visit
www.rns.com (http://www.rns.com/)
.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our
Privacy Policy (https://www.lseg.com/privacy-and-cookie-policy)
. END FR DBGDXUGDDGXCRecent news on Arbuthnot Banking
See all newsREG - Arbuthnot Banking - Audited Final Results
AnnouncementREG - Arbuthnot Banking - Pre Close Trading Update
AnnouncementREG - Arbuthnot Banking - Director/PDMR Shareholding
AnnouncementREG - Arbuthnot Banking - Renewal of Tier 2 Regulatory Capital Loan facility
AnnouncementREG - Arbuthnot Banking - Director/PDMR Shareholding
Announcement