REG - Arbuthnot Banking - Audited Final Results
28/03/2024 07:00
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RNS Number : 6079I Arbuthnot Banking Group PLC 28 March 2024
28 March 2024
For immediate release
ARBUTHNOT BANKING GROUP ("Arbuthnot", "the Group" or "ABG")
Audited Final Results for the year to 31 December 2023
Strategic plan progress delivers strong, profitable growth
Arbuthnot Banking Group today announces its audited results for the year ended
31 December 2023.
Arbuthnot Banking Group PLC is the holding company for Arbuthnot Latham &
Co., Limited ("Arbuthnot Latham").
FINANCIAL HIGHLIGHTS
· Profit Before Tax of £47.1m (2022: £20.0m), an increase of 135%
· Operating income increased to £178.9m (2022: £137.4m)
· Average net margin of 5.7% (2022: 5.1%)
· Earnings per share increased by 103% to 222.8p (2022: 109.6p)
· Final dividend declared increased by 2p to 27p (2022: 25p)
· Total dividend per share for the year of 46p (2022: 42p), an
increase of 10%
· Net assets of £252.4m (2022: £212.0m)
· Year-end net assets per share of 1547p (2022: 1411p)
· CET1 ratio of 13.0% (2022: 11.6%) and total capital ratio of
15.2% (2022: 14.0%), well above the Group's minimum requirements
· Substantial surplus liquidity at the year-end of £962m above the
regulatory minimum (2022: £535m)
OPERATIONAL HIGHLIGHTS
· Customer deposits increased 21% to £3.8bn (2022: £3.1bn) driven
by the success of the Group's relationship-based approach across both Private
& Commercial Banking
· Customer loans increased 6% to £2.3bn (2022: £2.2bn)* as the
Group tightened its credit appetite during the year
· Funds under management and administration increased 29% to
£1.71bn (2022: £1.33bn)
· Successful £12m placing completed in May 2023
· Tier 2 debt instrument renewed and increased from £25m to £26m
at more favourable rates and is due to draw down in June 2024
· Secured a new office located at 20 Finsbury Circus with space for
growth
Commenting on the results, Sir Henry Angest, Chairman and Chief Executive of
Arbuthnot, said: "Arbuthnot delivered an exceptional performance in 2023,
enabled by the continued delivery of the Group's "Future State 2" strategic
plan, focused on diversification, first-rate client service and helped by
rising interest rates. We are confident that the continued delivery of our
strategic plan will enable Arbuthnot to prosper through the softening monetary
environment we anticipate in the year ahead."
Note: * 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
Ciara Donnelly
Shore Capital (Broker) 0207 408 4090
Daniel Bush
David Coaten
Tom Knibbs
H/Advisors (Financial PR) 0207 379 5151
Sam Cartwright
The 2023 Annual Report and Notice of Meeting will be available on the
Arbuthnot Banking Group website http://www.arbuthnotgroup.com on or before 16
April 2024. 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
2023 2022
Note £000 £000
Income from banking activities
Interest income 8 231,836 120,013
Interest expense (95,217) (20,932)
Net interest income 136,619 99,081
Fee and commission income 9 23,170 21,586
Fee and commission expense (768) (537)
Net fee and commission income 22,402 21,049
Operating income from banking activities 159,021 120,130
Income from leasing activities
Revenue 10 100,952 99,367
Cost of goods sold 10 (81,074) (82,109)
Gross profit from leasing activities 10 19,878 17,258
Total group operating income 178,899 137,388
Net impairment loss on financial assets 11 (3,191) (5,503)
Loss on sale of commercial property held as inventory - (4,590)
Other income 12 2,522 1,627
Operating expenses 13 (131,113) (108,913)
Profit before tax 47,117 20,009
Income tax expense 14 (11,738) (3,551)
Profit after tax 35,379 16,458
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 412 627
comprehensive income
Tax on other comprehensive income (91) (128)
Other comprehensive income for the period, net of tax 321 499
Total comprehensive income for the period 35,700 16,957
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 16 222.8 109.6
Diluted earnings per share 16 222.8 109.6
Consolidated statement of financial position
At 31 December
2023 2022
Note £000 £000
ASSETS
Cash and balances at central banks 17 826,559 732,729
Loans and advances to banks 18 79,381 115,787
Debt securities at amortised cost 19 942,437 439,753
Assets classified as held for sale 20 3,281 3,279
Derivative financial instruments 21 4,214 6,322
Loans and advances to customers 23 2,064,217 2,036,077
Other assets 25 57,150 52,185
Financial investments 26 3,942 3,404
Deferred tax asset 27 - 2,425
Intangible assets 28 29,587 32,549
Property, plant and equipment 29 274,306 175,273
Right-of-use assets 30 52,816 7,714
Investment property 31 5,950 6,550
Total assets 4,343,840 3,614,047
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 38 167 154
Share premium 38 11,606 -
Retained earnings 39 240,606 212,037
Other reserves 39 61 (213)
Total equity 252,440 211,978
LIABILITIES
Deposits from banks 32 193,410 236,027
Derivative financial instruments 21 1,032 135
Deposits from customers 33 3,759,567 3,092,549
Current tax liability 294 1,748
Other liabilities 34 40,700 26,144
Deferred tax liability 27 4,910 -
Lease liabilities 35 53,761 7,872
Debt securities in issue 36 37,726 37,594
Total liabilities 4,091,400 3,402,069
Total equity and liabilities 4,343,840 3,614,047
Chairman's statement
Arbuthnot Banking Group ("ABG" or "The Group") is pleased to report a profit
before tax of £47.1m. This represents a continued trend of improved financial
performance compared to the prior years and an increase of 135% over 2022
which was £20.0m.
While the Group has been developing its business in accordance with the
"Future State 2" strategic plan, the financial results have also benefited
from the continued upward movement in the Bank of England ("BOE") base rate
which increased from 3.5% to 5.25% in 2023. The impact of this has been
two-fold.
Firstly, the significant surplus liquidity balances that the Bank holds at the
BOE have earned more income in line with the higher rates. Secondly, the
lending balances that are linked to the base rate have repriced immediately,
while the cost of deposits has naturally lagged behind, despite the Bank
quickly adjusting its rates in favour of depositors. This is due to the fact
that fixed rate deposits have to reach their maturity in order to be able to
take advantage of the higher rates. Typically, it takes 12 months for the lag
to completely catch up with current pricing levels. Clearly, the reverse will
be the case in a falling rate environment.
We have begun a strategy of locking in higher rates by offering more fixed
rate lending products and also switching some of our surplus liquidity into
high quality fixed income assets such as Gilts with a short maturity date.
This, we hope, will soften the impact of any rate reductions in the near
future.
Highlights
My long-held belief that has been borne out in the strategy of the Group over
the years is that of diversification and I was pleased to see this evidenced
during the year.
The Bank continued its strong growth, especially in its ability to attract new
deposits. This has been particularly apparent within the Commercial Banking
division, where the fact that customers enjoy private banking levels of
service seems to resonate well in this market, where the larger banks have
left companies underserved.
Deposit balances ended the year at £3.8bn, an increase of 21%. During the
year we opened up relationships in new sectors such as the construction and
computer gaming industries. This gave us the ability to allow non-relationship
deposits to mature, without us needing to compete on price to retain the
balances.
Elsewhere in the Group, our asset finance business, Renaissance Asset Finance
("RAF"), delivered a strong increase in its customer balances which grew from
£134m to close the year at £199m, an increase of 49% with both of its
business sectors, "flow" and "block discounting", seeing good levels of new
loan originations. Continuing the theme of diversification RAF has added
"wholesale financing" to its product set and this will come online in 2024.
Asset Alliance, our vehicle leasing business, also delivered outstanding
growth with its assets available for lease growing to £327m from £189m in
the prior year, an increase of 73%. This growth was enabled not only by the
improvements in the supply chain for new trucks, but also the fact that it now
has access to the Group's funding resources. This allowed it to complete the
purchase of a £50m portfolio of buses used in the Transport for London
network. Asset Alliance now has an 8% market share of buses used in London.
Finally, I would like to highlight the performance of our Wealth Management
division that grew its Funds Under Management and Administration by 29% to
close at £1.7bn, exhibiting strong investment performance against peers,
despite uncertain markets across the globe.
20 Finsbury Circus
As previously announced, we are all looking forward to the next phase of the
Group's future; in 2023 we celebrated our 190th anniversary given that
Arbuthnot Latham was founded in 1833. Our confidence in the future is
demonstrated by the fact that we have secured an impressive new head office
located at 20 Finsbury Circus, situated in the heart of the city not far from
our current location.
The new building offers us 45% more space to grow and will allow us to bring
our London operations together under one roof. This should provide more
collaboration and allow the next generation of Arbuthnot Bankers to develop
and perhaps even set an example for more workers in the City to return to
working more frequently in such a vibrant global financial centre, that is the
City of London.
Capital Raise
The continuing theme for regulators of the increasing requirement for banks to
hold more capital, coupled with the current market opportunities that are
presenting themselves to the Group, led us to decide to push ahead with a
capital raise via a conditional placing.
Initially we intended to raise £10m but we were pleasantly surprised to find
that demand for the publicly available allocation was heavily oversubscribed,
so the issue was increased to £12m to satisfy some of this excess demand.
This capital raise was completed on 5 May.
Later in the year we were also pleased to agree the early refinancing of the
Tier 2 debt instrument that we had previously issued to P Capital Partners, a
Swedish debt fund, in 2019. We appreciate their confidence in both our
business and management team, which resulted in the extension of this loan for
another 10 years at a lower margin than before. We hope this relationship can
continue into the future beyond even this new issue.
Regulation
As we have become accustomed in recent years, the pace of regulatory change
has not slowed and there are a number of significant issues in consultation
for which we need to be prepared.
Basel 3.1 is likely to become applicable to the Group in 2026. This is later
than the generally applicable date as we will be a late adopter, given that we
have applied to become part of the new Small Domestic Deposit Takers ("SDDT")
regime which is the evolution of "Strong and Simple".
We are waiting for the capital rules for such to be revealed in the second
quarter of this year. While many of the rules have been sign-posted, we
continue to hold out hope that the capital buffer regime will be altered to
address the unintended consequences of the counter cyclical buffer. It is
clear from evidence during COVID that no bank will utilise this buffer in its
current form in down turns for fear of the speed at which it is brought back.
This means about 20% of the industry's capital has been sterilised and is
unproductive. A change in status of this buffer could provide economic growth
without creating undue risk in the banking sector.
I never doubted the need for strong regulation to promote safety and soundness
of the banking industry and I believe confidence in the sector continues to
grow. It is my hope that this confidence will empower regulators to permit the
development of a diverse set of banks with different business models, which is
likely to create less inherent risk in the industry.
Board Changes and Personnel
During the year I was pleased to welcome Jayne Almond, Angela Knight, and Lord
Sassoon to the Board. We are delighted to attract such notable directors to
our company. They bring with them a wealth of knowledge and experience gained
through their respective careers. I look forward to receiving their advice and
counsel on how we can further develop the Group.
As always, the continued success of the Group reflects the hard work and
commitment of our members of staff, who are our greatest asset. On behalf of
the Board, I extend our thanks to all of them for their contribution in 2023.
Finally, I would like to thank my fellow directors on both Boards for their
help and advice during the year.
Dividend
In 2022 we increased the trajectory of growth in the dividend, and given the
continued positive outlook for the Group, this is maintained.
The Board therefore are recommending a final dividend of 27p per share. This
is an increase of 2p compared to the final dividend of 2022. The final
dividend, if approved at the 2024 AGM, will be paid on 31 May 2024 to
shareholders on the register at the close of business on 19 April 2024.
Together with the interim dividend of 19p per share, this gives a total
dividend for the year of 46p per share, which compares to the total dividend
of 42p per share paid in 2022.
Outlook
The interest rate environment appears to have reached the top of the current
cycle and many analysts are now predicting reductions in the future. Whilst
this will have an impact on the profitability of the Group; in the long run,
the opportunities for Arbuthnot to grow and prosper continue to be
undiminished. Therefore, we remain focused on delivering on our strategic
plan.
Strategic Report - Business Review
Group Key Metrics 2023 2022
Operating income £178.9m £137.4m
Other income £2.5m £1.6m
Operating expenses £131.1m £108.9m
Profit before tax £47.1m £20.0m
Customer loans(1) £2.3bn £2.2bn
Customer deposits £3.8bn £3.1bn
Total assets £4.3bn £3.6bn
Key Performance Indicators
Funds under management and administration £1.7bn £1.3bn
Average net margin (2) 5.7% 5.1%
Loan to deposit ratio (3) 62.0% 71.4%
(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: Customer loans divided by customer deposits (prior
year restated to include assets available for lease)
The Bank of England Base Rate (BBR) continued to rise throughout 2023 starting
the year at 3.50% and finishing at a 15-year high of 5.25% with a rise of
1.75% in the year. Although it seems that inflation has stabilised and in
response the Bank of England has steadied its base rate, the effect of the
higher interest rate environment and the rate of increase has significantly
contributed to the Group's income. As a consequence of the rate rises the Bank
has passed on the increases to its depositors, however two factors have
reduced the cost to the Bank. Firstly, the rate of the Bank's fixed term
deposits lag behind the base rate rises, with balances placed at lower rates
in previous periods yet to mature. Secondly, high levels of call balances were
held for much of the year. However, towards the end of the year, the Bank saw
increased activity of depositors switching balances to higher yielding term
products, based on the expectation that interest rates have peaked. These
factors will increase the cost of deposits going forward, while the rate of
increase in BBR compared to that of deposit pricing has contributed
significantly to an increased net interest income for 2023.
As signalled in the prior year's Annual Report, the current economic
environment has resulted in economy-wide headwinds for borrowers. However, the
non-performing loan book has reduced to its lowest level in over three years
with credit metrics showing no signs of material stress. The average loan to
value ("LTV") against the loan book remains low at 47.8% (2022: 52.5%), giving
significant levels of security to withstand and minimise the effect of any
potential falls in the property markets.
Despite higher inflation and interest rates, the prospect of further increases
in interest rates and inflation has receded. Consequently, the outlook for
economic conditions has improved over the last twelve months, notably with the
outlook for residential property values expected to fall 6.4% compared to
11.6% the prior year and commercial property values expected to fall 4.9%
compared to 21.2% the prior year. These factors have resulted in a release of
£0.2m from the expected credit loss provision.
Counteracting the benefit from the base rate increases, inflation has produced
upward pressure on the cost base. Notably salary costs have increased due to
not only growth in headcount but also increases in annual pay awards, as the
cost-of-living crisis started to interact with full employment and the
competition for talent intensified.
The Bank finished the year with total deposits of £3.8bn compared to £3.1bn
for the prior year and 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.
Lending balances (including lease assets) finished the year at £2.3bn,
compared to £2.2bn in the previous year. However, as mentioned in the
previous year's Annual Report and Accounts, the Bank tightened its credit
appetite and reduced LTVs for new lending below its historic guidance of 60%
which has reduced lending volumes. However, the increased levels of
profitability, mean the Bank is well positioned to retain financial resources
for future opportunities that are expected to arise given the market
dislocation.
In April 2023, the Group carried out a successful capital raise of £12m with
demand heavily oversubscribed against the original target of £10m. The
capital raise has allowed the Group to maintain growth momentum, whilst
continuing to pursue its strategic objectives.
Included on the balance sheet is the Right of Use Asset for the Group's new
London Office at 20 Finsbury Circus. The building is approximately 75,000
square feet, which equates to an increase of 45% compared to the current
office space. Given the robust position in which the Group finds itself and
its predicted future growth prospects, it has secured a new long-term solution
for its office premises. The planned fit-out, due to be completed in the third
quarter of 2024, will provide both high specification working space and also
new client meeting and entertainment suites, which will help to deepen the
relationship banking offering that is proving successful in both our Private
and Commercial banking businesses. The increased footprint and depreciation of
the fit-out costs will increase the annual expenditure on premises by
approximately £5.0m on a steady state basis. During 2024 the Group will also
incur the additional cost of running both premises until the lease on our
current office ends in October 2024.
As in prior years, the Group's profit excludes the profit on the sale of
trucks generated by Asset Alliance of £4.3m (2022: £6.5m), following the
acquisition accounting in 2021. At the year end the uplift on the portfolio of
assets from the acquisition has been fully realised through sales, meaning any
gains or losses for future disposals will be recognised in the income
statement as and when they are sold.
Banking
The Banking business continued to deliver growth in client acquisition, for
both lending and deposit products, leveraging off the underlying relationship
management franchise whilst supporting the strategic aims of the wider group.
The Bank continued to focus on existing segments across Private &
Commercial Banking, as well as entering new emerging segments with long term
growth opportunities such as Technology and E-games where the Bank's
capability and relationship management focus fits well with the needs of the
market.
Deposits finished the year at £3.8bn, equating to growth in excess of 23%
compared to £3.1bn the previous year end, generating liquidity to be deployed
across the Group. This was despite a number of non-relationship deposits that
were exited during the year.
Given the higher interest rate environment, there was a trend with clients
being more proactive in managing deposits transferring to time from current
and call products for improved returns. Despite this, strong client
acquisition in the year continued to contribute to growth in current balances.
It is expected that the competitive environment for low-cost deposits will
increase, however, the Bank's client service led model is well placed against
potential headwinds albeit at a lower growth rate than the current year.
The cost of deposits has increased steadily throughout the year, as the effect
of increases in interest rates lag behind as fixed rate deposits are repriced
when they mature, ultimately narrowing the Bank's net interest margin. Deposit
pricing stabilised towards the latter part of the year, however, the full year
effect of the increased pricing will cause downward pressure on the 2024
financial result. The Bank's relationship banking model combined with
competitive pricing supports the strategy to grow relationship deposits rather
than rely on more expensive best buy table deposit rates. Over the long term,
this will provide material value to the Group in a normalised interest rate
environment.
The loan book was £1.4bn at the year-end (2022: £1.5bn). Despite the
inherent credit risk in the current environment, the book continued to perform
robustly, supported by the Bank's conservative credit appetite, which was
tightened over a year ago in the wake of economic uncertainty. The pressure of
a higher interest rate environment on clients has resulted in reduced debt
levels that businesses can raise and sustain, however there has been a trend
of clients opting to pay down debt from surplus liquidity in order to mitigate
the effect of higher interest rates. The Bank will continue to operate its
long held principle of operating a conservative credit appetite, and deploying
capital only where disciplined risk and return hurdles are met.
Wealth Management
Funds Under Management and Administration increased by 29% during 2023, to
£1.7bn (2022: £1.3bn), with gross inflows of £437m, representing 33% of
balances at the start of the year. The year's backdrop of rising interest
rates negatively impacted outflows as clients elected to pay down debt secured
against investments and accelerate gifts to children when acquiring property
to mitigate the need to take out more costly mortgages, resulting in gross
outflows of £165m for the period.
Wealth Planning issued advice on £151m of new assets, a similar value
compared with 2022, representing approximately 64% of discretionary asset
inflows. A total of 139 clients were onboarded during 2023, broadly consistent
with the prior year.
The business made good progress against a key strategic objective, to
stream-line the investment suitability process which is expected to improve
client outcomes and generate internal process efficiencies.
Mortgage Portfolios
Balances for the Banks's acquired mortgage portfolio was £123.7m at the
year-end (2022: £149.0m). The portfolio continues to perform in line with
expectations.
Arbuthnot Commercial Asset Based Lending ("ACABL")
ACABL reported a profit of £8.5m (2022: £5.2m), an increase of 63% compared
to the prior year which was largely generated through higher client volume
generating increased interest charges and service fees.
ACABL completed 17 new transactions in 2023 (2022: 30) with £73.1m of
facilities written.
Despite the increase in profitability, at the year-end, the business reported
drawn balances of £239.8m with a further £115m available for drawdown (2022:
£268.8m with further £91.8m available for drawdown) equating to a fall of
11% year on year. The fall was driven by a combination of lower origination
due to the macro-economic environment, along with expected attrition, as the
business entered its sixth year and some of the original client's facilities
reached maturity. This was compounded by some clients holding higher levels of
undrawn availability than historically seen.
Inflationary pressures, a higher interest rate environment and ongoing supply
chain challenges resulted in a significant reduction in the number of
event-driven transactions in the marketplace in addition to fewer Private
Equity backed buy-outs, with the latter being traditionally the mainstay of
new business. The business also wrote fewer refinancing deals given the market
challenges and cautious risk appetite with extensions favouring existing
lenders.
As expected in the context of the current macro-economic environment, the
business observed a higher number of watchlist clients compared to previous
periods. However, the business model of lending against high-quality
realisable assets along with a low ratio of clients to client manager resulted
in no incurred losses for the year. The expected credit loss rate on the book
remains low at 9.8bps.
The average deal size increased from £5.1m to £5.8m with a total client base
of 104 at year-end. (2022: 102). Facility limits of £536m (2022: £523m)
remained relatively flat, with clients continuing to operate in a broad range
of sectors, underlining the spread and diverse nature of the portfolio.
In line with the reported strong growth in profits, the business processed
£2.3bn of invoices during the year, an increase of 15% on the prior year.
Renaissance Asset Finance ("RAF")
RAF reported a profit before tax of £1.6m (2022: £0.2m) with a loan book of
£198.8m equating to an increase of 49% compared to the prior year end balance
of £133.8m.
The average margin achieved on new business grew strongly in the higher
interest rate environment along with the volume of new deals written being at
the highest level seen in RAF since the business was acquired in 2017.
The new Block Discounting business launched in late 2021 began to mature with
strong growth in the latter part of the year, delivering a positive
contribution to the profitability of the business.
The increase in forbearance cases and problem accounts seen during the
pandemic period has now been worked through, with a majority of positive
outcomes and whilst the economic environment has caused some client strain,
particularly in sectors such as construction, the loan book performance
remains well within tolerance levels.
RAF does provide finance via brokers to enable our borrowers to purchase motor
vehicles. However, the business does not have regulatory permissions to carry
out regulated lending, so this is carried out on an unregulated basis.
Arbuthnot Specialist Finance ("ASFL")
The ASFL loan book reduced from £14.9m as at 31 December 2022 to £3.1m at
the year end.
ASFL was closed for new business early in 2023, with the book being run-down
for the remainder of 2023. Repayments are currently ahead of schedule.
Asset Alliance Group ("AAG")
AAG reported a loss before tax of £3.2m (2022: £2.1m loss). As at 31
December 2023 the business had assets available for lease and finance leases
totalling £326.8m (2022: £189.1m), with strong growth in new lending
equating to an increase of 73% over the year.
Strategic diversification into new lending channels particularly in the Bus
& Coach sector, including a dedicated Bus Rental Division launched towards
the end of 2023, contributed to the portfolio's growth.
During the year the supply of new commercial vehicles gradually returned to a
degree of normality, albeit the cost per unit remains significantly higher
than pre-COVID levels and is unlikely to reduce in the foreseeable future. New
vehicle leases were subdued in the first half of the year, with a recovery in
the latter part of the year.
The market for the disposal of previously leased vehicles was lower than
historically seen, particularly in the second half of 2023. This was not
entirely unexpected given the increased supply of used assets into the market
the previous year and the increased supply of new assets in 2023. Whilst
demand for used assets slowed, encouragingly margins remained in line with
previous years.
During the year the remaining fair value adjustment of £6.8m at the start of
the year, recognised at acquisition of the business, was fully realised
following the sale of assets; along with the remaining residual value
provision of £2.5m. Future gains or losses from asset disposals will be
recognised in the income statement as and when they are sold.
Owned Properties
The Bank retains four assets in its property portfolio of which one is
overseas.
As a result of higher interest rates, property investment yields have also
risen. However, the effect of inflationary increases in rental income delayed
until scheduled rent reviews, has resulted in property values being marked
down. £2.6m of impairments have been charged to the income statement for the
Group's property portfolio.
Operations
The Bank has continued to drive positive momentum in the acquisition of
clients from its target markets. Net growth in new clients has been strong
with over 1,200 new banking clients onboarded in 2023, of which 62% were
non-personal clients. This growth has seen operational aspects of the business
continue to increase, with over 1 million inbound and outbound payments
processed in 2023, a growth of 12% on the previous year. 98% of outbound
payments were originated online, underpinning the need for continued
investment in the Bank's digital strategy.
During 2023, the Bank achieved a 97% increase in the volume of fixed term
deposits as clients took advantage of the increase in interest rates to lock
in a guaranteed low risk return on their money by moving from instant access
accounts and placing their money into longer term fixed rate deposits.
Work continued on meeting the regulatory requirements under Statement (SS)
1/21: Impact Tolerances for Important Business Services, with a focus on
further embedding continuity plans and enhancing technology resilience, as
well as further investment in the Bank's Investment Management Operations,
focusing on increasing automation and streamlining of processes which
supported an increase in trading of 9% with the total value of trades up 38%
to nearly £2bn.
In 2023, the Bank continued to invest in systems and infrastructure,
initiating the final phase of its migration to the cloud along with developing
a digital roadmap aimed at improving the customer experience and
organisational efficiency over the coming years. Additionally, work commenced
in 2023 on a significant transformation project to upgrade the Bank's online
and mobile banking offering.
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.
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
2023 2022
Summarised Income Statement £000 £000
Net interest income 136,619 99,081
Net fee and commission income 22,398 21,049
Operating income from banking activities 159,017 120,130
Revenue 100,952 99,367
Cost of goods sold (81,074) (82,109)
Operating income from leasing activities 19,878 17,258
Total group operating income 178,895 137,388
Other income 2,526 1,627
Loss on sale of commercial property held as inventory - (4,590)
Operating expenses (131,113) (108,913)
Impairment losses - loans and advances to customers (3,191) (5,503)
Profit before tax 47,117 20,009
Income tax expense (11,738) (3,551)
Profit after tax 35,379 16,458
Basic earnings per share (pence) 222.8 109.6
The Group has reported a profit before tax of £47.1m (2022: £20.0m). The
underlying profit before tax was £51.4m (2022: £31.1m).
Total operating income earned by the Group was £178.9m compared to £137.4m
for the prior year. The higher interest rate environment has significantly
contributed to the Group's income. This was as a result of significant excess
liquidity held at the BOE, together with lending linked to the BOE base rate
that has repriced immediately, while fixed rate deposits naturally lag behind
as these are only repriced on maturity. With the general consensus in the
market that rates are expected to fall, the Group has shifted its focus to
longer term fixed rate lending products and also started to invest some of the
excess liquidity into high quality and short dated fixed income assets, such
as gilts. This will hopefully soften the impact as interest rates start to
come down in the near future. The average net margin on client lending was
5.7% (2022: 5.1%). Also included in operating income is revenue from AAG
leased assets of £19.9m (2022: £17.3m).
The Group's operating expenses increased to £131.1m compared to £108.9m for
the prior year. Higher staff costs (£8.2m), further investment in information
technology (£6.7m higher than in 2022), a combined impairment of £2.6m on
the remaining investment property, property held for sale and held as
inventory, and the general expansion of all businesses contributed to the
increase.
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 2023 £000 £000 £000
Profit before tax and group recharges 62,688 (15,573) 47,115
Profits realised on sale of trucks previously included in bargain purchase 4,267 - 4,267
Underlying profit 66,955 (15,573) 51,382
Underlying basic earnings per share (pence) 244.6
Underlying profit 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
In 2021, the Group acquired Asset Alliance Group Holdings Limited. The
business was acquired at a discount to its fair value resulting in a bargain
purchase of £8.6m. Included in the fair value adjustments at acquisition was
an uplift to the valuation of lease assets, together with a residual value
provision. The remaining fair value uplift of £6.8m at the beginning of the
year, has been realised through sales of vehicles in the year (2022: £6.9m
realised). Similarly, the remaining residual value provision at the beginning
of the year of £2.5m was released (2022: £0.4m released). In future years,
no adjustment will therefore be required.
Balance Sheet Strength
2023 2022
Summarised Balance Sheet £000 £000
Assets
Loans and advances to customers 2,064,217 2,036,077
Assets available for lease 267,591 171,738
Liquid assets 1,848,377 1,288,269
Other assets 163,655 117,963
Total assets 4,343,840 3,614,047
Liabilities
Customer deposits 3,759,567 3,092,549
Other liabilities 331,833 309,520
Total liabilities 4,091,400 3,402,069
Equity 252,440 211,978
Total equity and liabilities 4,343,840 3,614,047
Total assets increased by £0.7bn to £4.3bn (2022: £3.6bn). Loans and
advances to customers together with assets available for lease increased by 6%
from the prior year. Customer deposits increased by 22% in the year and
contributed to the 44% increase in liquid assets.
The net assets of the Group now stand at £15.47 per share (2022: £14.11).
Capital Raise
An intended £10m capital raise through a conditional placing was
significantly oversubscribed and resulted in £12m (£11.6m after costs) of
extra capital. The capital raise was completed on 5 May.
Later in the year the Tier 2 debt instrument from P Capital Partners was
refinanced early and extended for a further 10 years at a lower margin than
before. The facility was also increased from £25m to £26m and is due to draw
down in 2024.
Segmental Analysis
The segmental analysis is shown in more detail in Note 45. 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. This segment is being wound down.
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
2023 2022
Summarised Income Statement £000 £000
Net interest income 114,131 64,565
Net fee and commission income 2,613 2,803
Operating income 116,744 67,368
Operating expenses - direct costs (15,318) (14,795)
Operating expenses - indirect costs (36,755) (31,888)
Impairment losses - loans and advances to customers (1,227) (1,547)
Profit before tax 63,444 19,138
Banking reported a profit before tax of £63.4m (2022: £19.1m). This equated
to a more than threefold increase from the prior year. Net interest income
grew by 77%, while lending remained flat and deposit balances increased by
21%. The significantly higher net interest income is the result of successive
increases in the BOE 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.
There was a net impairment charge of £1.2m compared to £1.5m for the prior
year. The lower charge in the year was as a result of revised economic
scenarios applied in the expected credit loss models due to a more positive
future outlook, most notably a reduction in the expected fall in property
values (both residential and commercial).
Indirectly allocated operating costs increased by £4.9m, mainly as a result
of increased staff costs in support departments and further investment in
information technology.
Customer loan balances reduced by £13m to remain flat from the prior year at
£1.4bn and customer deposits increased to £3.8bn (2022: £3.1bn). The
average loan to value was 47.8% (2022: 52.5%).
Wealth Management
2023 2022
Summarised Income Statement £000 £000
Net fee and commission income 11,328 10,689
Operating income 11,328 10,689
Operating expenses - direct costs (10,097) (9,237)
Operating expenses - indirect costs (5,487) (5,553)
Loss before tax (4,256) (4,101)
Wealth Management reported a loss of £4.3m (2022: loss of £4.1m). Fee and
commission income increased by £0.6m and was more than offset by a £0.8m
increase in costs. Funds Under Management and Administration increased by
£0.4bn to £1.7bn, with most of the increase in the latter part of the final
quarter.
Mortgage Portfolios
2023 2022
Summarised Income Statement £000 £000
Net interest income 4,245 5,110
Operating income 4,245 5,110
Operating expenses - direct costs (833) (935)
Impairment losses - loans and advances to customers (821) (415)
Profit before tax 2,591 3,760
The Mortgage Portfolios reported a profit of £2.6m (2022: £3.8m). Net
interest income reduced by £0.9m, as the loan book went down by £24.8m in
the year.
The Santiago mortgage portfolio performed as expected and the year-end balance
was £123.7m (2022: £148.5m).
RAF
2023 2022
Summarised Income Statement £000 £000
Net interest income 8,044 5,545
Net fee and commission income 34 32
Operating income 8,078 5,577
Other income 170 82
Operating expenses - direct costs (5,634) (4,697)
Impairment losses - loans and advances (982) (768)
Profit before tax 1,632 194
Renaissance Asset Finance returned a profit of £1.6m (2022: £0.2m). Interest
income increased by £3.7m from higher balances and higher rates, which was
partly offset by higher funding costs of £1.2m. Operating expenses were
£0.9m higher than in 2022 due to higher staff costs and general expansion of
the business.
Customer loan balances increased by 49% to £198.8m (2022: £133.8m). The
average yield for 2023 was 8.2% (2022: 8.1%).
ACABL
2023 2022
Summarised Income Statement £000 £000
Net interest income 8,642 6,762
Net fee and commission income 6,911 5,976
Operating income 15,553 12,738
Operating expenses - direct costs (6,777) (5,463)
Impairment losses - loans and advances to customers (234) (2,082)
Profit before tax 8,542 5,193
ACABL recorded a profit before tax of £8.5m (2022: £5.2m).
Client loan balances were £239.8m at the end of the year (2022: £268.8m),
with issued facilities increasing to £536m (2022: £523m). Despite a 11%
reduction in loan balances, operating income increased by £2.8m. Higher
interest income of £8.6m was partially offset by higher internal funding
costs of £6.7m, while fee and commission income also increased by £0.9m.
Operating expenses increased by £1.3m, mainly due to an increase in staff
costs.
The prior year impairment charge included £2m relating to one client that was
placed into administration.
ASFL
2023 2022
Summarised Income Statement £000 £000
Net interest income 751 713
Net fee and commission income 13 10
Operating income 764 723
Operating expenses - direct costs (1,507) (1,489)
Impairment losses - loans and advances to customers 46 (179)
Loss before tax (697) (945)
ASFL recorded a loss before tax of £0.7m (2022: loss of £0.9m).
The decision was taken to exit this market early in 2023.
Customer loan balances closed the year at £3.1m (2022: £15.0m).
AAG
2023 2022
Summarised Income Statement £000 £000
Net interest expense (7,864) (4,456)
Net fee and commission income (12) -
Revenue 100,952 99,367
Cost of goods sold (81,074) (82,109)
Operating income 12,002 12,802
Operating expenses - direct costs (15,093) (14,507)
Impairment losses - loans and advances to customers (98) (369)
Loss before tax (3,189) (2,074)
The business generated a loss before tax of £3.2m (2022: loss of £2.1m for
the period).
As part of the bargain purchase at acquisition, the carrying value of the
truck and trailer fleet was adjusted by an overall average increase of 15.95%
resulting in an uplift totalling £19.5m. At the same point a provision of
£2.9m was booked relating to residual values, also forming part of the
bargain purchase recognised in 2021. The remaining fair value uplift of £6.8m
at the beginning of the year, has been realised through sales in the year
(2022: £6.9m). Similarly, the remaining residual value provision at the
beginning of the year of £2.5m was released (2022: £0.4m released). In
future years, no adjustment will therefore be required.
It should be noted that the current year includes £10.2m internal funding
costs compared to £4.9m in the prior year. While the increasing interest rate
environment in 2023 resulted in higher funding costs, the adjustment to income
earned on lending and assets available for lease will lag behind, as contracts
are only re-priced at the end of their fixed term.
The supply of new commercial vehicles gradually returned to a degree of
normality, although the cost per unit remains significantly higher than
pre-COVID and is not expected to reduce in the foreseeable future. New vehicle
leases were subdued but started to recover in the second half of the year.
The market for the disposal of second-hand vehicles was lower than
historically seen, especially towards the end of the year. This was expected
due to the increased supply of used assets into the market, as new assets
became more readily available.
In May 2023, AAG acquired a portfolio of circa 400 buses for £41.3m. All
these assets are on contract to operators within the Transport for London
network, and the portfolio has a range of asset specifications including
electric, hybrid and diesel buses. Following the transaction, AAG are now one
of the main funders of buses within the TfL network, which leaves them well
placed to capitalise on future opportunities, including the on-going
transition to electric.
Operating expenses increased by £0.6m from the prior year.
Credit provisions were £0.1m (2022: £0.4m).
As at 31 December 2023 the business had a total of £326.8m (2022: £189.1m)
of assets available for lease and finance leases, which is a 73% increase on
the prior year.
Other Divisions
2023 2022
Summarised Income Statement £000 £000
Net interest income 13,371 23,993
Net fee and commission income 1,511 1,539
Operating income 14,882 25,532
Other income 3,191 2,385
Operating expenses - direct costs (23,577) (16,074)
Impairment losses - loans and advances to customers 125 (143)
(Loss) / profit before tax (5,379) 11,700
The aggregated loss before tax of other divisions was £5.4m (2022: profit of
£11.7m).
Operating income reduced by £10.7m to £14.9m (2022: £25.5m), as a result of
higher internal funding costs.
Reported within the other divisions in other income was rental income on our
property portfolio of £0.7m (2022: £0.5m).
Operating expenses increased mainly due to higher staff costs, further
investment in information technology and the £2.6m impairment of owned
properties (investment property, property held for sale and held as
inventory).
Group Centre
2023 2022
Summarised Income Statement £000 £000
Net interest income (220) (363)
Subordinated loan stock interest (4,481) (2,788)
Operating income (4,701) (3,151)
Operating expenses (10,877) (9,705)
Loss before tax (15,578) (12,856)
The Group costs increased to £15.6m (2022: £12.9m). Subordinated loan
interest increased by £1.7m due to the rising interest rate environment.
The increase in operating expenses of £1.2m is mainly due to higher staff
costs.
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 pm 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 PRA
regulated entity is also the principal trading subsidiary as detailed in Note
44.
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.
2023 2022
Capital ratios £000 £000
CET1 Capital Instruments* 252,705 212,501
Deductions (30,414) (37,126)
CET1 Capital after Deductions 222,291 175,375
Tier 2 Capital 37,726 37,594
Own Funds 260,017 212,969
CET1 Capital Ratio (CET1 Capital/Total Risk Exposure) 13.0% 11.6%
Total Capital Ratio (Own Funds/Total Risk Exposure) 15.2% 14.0%
* 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, climate change, strategic, credit,
market, liquidity, operational, cyber, residual value, 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 risks that may arise from 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, the Israel-Hamas war in Gaza, 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 stabilised, however geo-political volatility and
uncertainty remains high with the potential to adversely affect the UK
economy, as well as 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 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 £2.1bn (2022: £2.0bn). 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.
Interest rate and currency risk
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 £827m.
The cost of hedging is prohibitive. Cash is held at the BOE and with the
general consensus in the market that rates are expected to fall, the Group has
shifted its focus to longer term fixed rate lending products and also started
to invest some of the excess liquidity into high quality short dated fixed
income assets, such as gilts.
Property and equity market risk
The Group is exposed to changes in the market value of its properties. The
current carrying value of Investment Property is £6.0m, properties held for
sale £3.3m, and properties classified as inventory £14.7m. 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.
The Group is also exposed to changes in the value of equity investments. The
current carrying value of financial investments is £3.9m. Any changes in the
value of financial investments will be accounted for in Other Comprehensive
Income.
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, together with drawings from the Bank of England Term Funding
Scheme and capital 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 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.
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.
Residual value risk
Residual value risk equals the difference in the residual value of a leased
asset set at lease inception and the lower salvage value realised upon its
disposal or re-lease at the end of the lease term. The Group is exposed to
residual value risk in its AAG business. Normal residual value risk is managed
through the process set out below, and it should be noted that the transition
to greener technology may further impact residual values in two ways. Firstly,
residual values could decrease due to assets becoming obsolete; climate
related regulations might change, which could result in legal restrictions on
the use of assets or technological advances could lead to preferred
environmental technologies. Secondly, the lack of historical information on
green vehicles could lead to inaccurate measurement of residual values at
inception of leases.
The AAG business manage Residual Value setting through its Residual Value
Committee that comprises representatives from its Asset Management,
Procurement, Sales and Leasing divisions and is chaired by the Residual Value
Manager. Assets are valued using either an approved Residual Value matrix or
individually, dependent upon the nature of the asset and current market
conditions. The strategy for Residual Value setting and oversight of the
Residual Value Committee is conducted by the AAG Residual Risk Committee,
which in turn reports into Asset Alliance Group Holdings Limited board. The
Residual Risk Committee, chaired by the AAG Group Risk Director, includes AAG
CEO, AL Group Risk Director, AAG Managing Director, AAG Finance Director and
heads of Asset Management, Sales and Leasing divisions in AAG.
Conduct risk
As a financial services provider the Group faces 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.
Financial Crime
The Group is exposed to risk due to financial crime including money
laundering, sanctions evasion, bribery and corruption, market abuse, tax
evasion and fraud. The Group operates policies and controls which are
designed to ensure that financial crime risks are identified, appropriately
mitigated and managed.
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 and Sustainability 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 19
• Managing Financial Risks of Climate Change Framework • Stakeholder Engagement and S. 172 (1) Statement, pages 22 and 23
• Environmental Management Policy • Sustainability Report, pages 25 to 38
• Corporate Governance Report page 49
Employees • Agile Working Policy • Stakeholder Engagement and S. 172 (1), pages 22 and 23
• Board Diversity Policy • Sustainability Report, pages 25 to 31
• Dignity at Work Policy • Directors Report, page 43
• Equality, Diversity and Inclusion Policy • Corporate Governance Report, page 47
• 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 22 and 23
• Tax Strategy • Sustainability Report, pages 25, 26 and 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 25 to 29
• Equality, Diversity and Inclusion Policy
• Personal Data Protection Policy
Anti-Corruption • Anti-Bribery and Corruption Policy • Sustainability Report, pages 25 and 29
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 18 to 20
Description of the Business Model • Business Overview
Non-Financial Key Performance Indicators • Sustainability Report, pages 25 and 26
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 44 and in the Corporate Governance Report on
page 49.
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 March 2023, the Board gave approval for management to agree terms for a
lease on new office premises at 20 Finsbury Circus in the City of London. The
decision was made, taking a long-term view, because the building offers a more
flexible and modern working environment which should retain and attract
talented staff, and enhance the client and staff experience. It would allow
the Group to progress with its future growth plans in one location. It will
assist the Group in achieving its ESG targets and all London staff will be
housed in one location. The Board regarded its decision as a significant step
forward, maintaining the Group's reputation with its customers and employees,
and a statement of confidence in its future.
In July 2023, as part of its succession planning and of its consideration of
diversity, the Board appointed Jayne Almond, Angela Knight and Lord Sassoon as
non-executive directors with effect from 1 September 2023, subject to the
approval of Grant Thornton as Nominated Adviser and Aquis Stock Exchange
(AQSE) Corporate Adviser which was given towards the end of August.
Interests of the Company's employees
As explained above, the decision to move London offices was driven partly by
the intention to enhance the staff experience. 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 September 2023, which
received a 73% response rate. It noted that on most measures the Group scored
around 60 to 70 with the exception of the measure of Arbuthnot as an Employer,
scoring 87. In November 2023 an engagement survey was launched to focus on
other important topics that matter to employees, including their personal
growth, wellbeing, communication from senior leaders, reward and recognition
as well as the important measure of the Group's engagement score and the
results will be considered by the Board in due course. 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 continue
to 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 ("AL") business and crucial for client retention. The decision to
move offices was driven partly by the intention to enhance the client
experience. As regards customers, the Board reviewed the continuing Consumer
Duty project, which is overseen by the AL Risk Committee, from regular reports
to it and updates from its Board Champion, Angela Knight.
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 an Anti-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.
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 2023 to continue its
progressive dividend policy, resolving to pay an interim dividend of 19p per
share to shareholders. This was an increase of 2p per share from the interim
dividend paid in 2022. Given the increased profits of the Group in 2023, the
Board has decided to recommend a final dividend of 27p per share; this is an
increase of 2p per share compared to the final dividend of 2022.
A further example of the balancing of stakeholders' interests was the decision
in December 2023 to renew the private issue of the Company's subordinated loan
issued on a bilateral basis to P Capital Partners, a Swedish Debt fund. The
loan, which is being increased by £1 million to £26 million before fees and
expenses, is expected to be drawn on 3 June 2024 which is the fifth
anniversary of the initial loan. It is expected to be classified as Tier 2 for
capital purposes which will maintain the current levels of capital to support
the strategic plans of the Group.
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 Sustainability
/ 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. This dashboard sets out
climate-change measures and actions.
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, clients, employees, community and environment
(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 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 in the Sustainability Report on pages 37 to 39.
In September 2023 the Board approved the enterprise-wide climate change risk
appetite, risk assessments, and stress test scenarios and results. It also
considered climate change risk in major change decisions, including in the
case of the planned 2024 London premises relocation initiated during 2023.
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. This need to treat all shareholders
equally was an important consideration in limiting the amount of the
fundraising in May 2023 to £12m, a rights issue to all shareholders not being
practicable due to the additional complexity and associated high costs. As a
consequence for practical reasons, in addition to the subscription by Sir
Henry Angest, only institutional shareholders were approached in conjunction
with the Company's stockbroker, Shore Capital, and invited to participate in
the placing of shares. The newly subscribed and placed shares represented just
over 8% of the Company's issued share capital which was approved by Ordinary
shareholders at the General Meeting held on 4 May 2023.
Strategic Report - Sustainability Report
Introduction
The Group has continued to embed sustainable practices across the business and
remains 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.
Climate change is an important topic for consumers and investors alike. In
parallel, inclusive growth and the impact organisations have on society are
increasingly a focus. More than ever before, organisations are being held
accountable for their impact. We focus on how we can improve to build a future
that delivers growth, sustainability and inclusion.
Our responsible business initiatives enable us to monitor and measure our
social impact by considering the impact of our practices and outputs across
five pillars: governance, clients, community, environment and employees as
explained on pages 30 to 32 below.
Governance
The Group has a solid system of governance in place, endorsing the principles
of openness, integrity, and accountability that 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.
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 and Sustainability
Statement on page 22.
Human Rights commitments
The Group is committed to operating in an ethical manner, and ensuring the
relationships we have with all our stakeholders adhere to high standards.
These are reflected in both our Anti-Modern Slavery Policy and in our Supplier
Code of Conduct.
The Group is committed to finding and reducing the risk of slavery or human
trafficking in every part of our supply chain.
Clients
Relationships with our clients is at the heart of what we do. We take the time
to understand what is important to our clients so that 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 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 most recent, 2022, NPS increased to
64%, up from 47% in 2020, a reflection of our clients' support.
Our bankers have been engaging pro-actively with clients, 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.
Consumer Duty
Our approach to the Financial Conduct Authority's Consumer Duty means
continuing to ensure that clients are at the heart of everything we do.
Over the past year, we have undertaken a large-scale assessment of the
Consumer Duty outcomes by reviewing our products and services, pricing
structure, communications and support infrastructure.
Client support
As a relationship-led bank, our purpose is to help our clients go further.
This means ensuring that they receive a bespoke service, tailored to their
needs, helping them achieve their financial goals. As part of our product
reviews, we have assessed the level of support provided to clients and the
channels available to access this support.
The review spanned the entire client base and we have concluded that the range
of support channels provided to clients, including those with characteristics
of vulnerability, enables them to pursue their financial goals and receive
good outcomes.
Vulnerable clients
The term 'vulnerability' captures a range of circumstances our clients can
face. To ensure we are treating vulnerable clients fairly, we have implemented
vulnerable client guidance focused on identifying and supporting vulnerable
clients and recording information about them. We have a Vulnerable Client
Committee to ensure we continue to support our staff with treating vulnerable
clients; this includes providing training resources.
Employees
We continually focus on creating an outstanding culture and workplace for all
our employees. Our high engagement scores are a testament to this. In the most
recent employee engagement survey (Non-Financial Key Performance Indicator),
conducted in November 2023, our overall engagement score maintained a very
high-level of 83. Once again, benchmarking across the industry showcases our
significant lead over competitors. 84% of employees would recommend Arbuthnot
as a great place to work, up 5% from last year and 17% against the benchmark.
This achievement is something we take pride in and solidifies our reputation
as a high-performing organisation.
Wellbeing
Our work environment fosters and enhances the wellbeing of our employees.
Aligned with our mission and core values - Integrity, Respect, Empowerment,
Energy & Drive and Collaboration, our wellbeing strategy is designed to
resonate with the recognition that our employees constitute our greatest
asset. Our wellbeing strategy focuses on four pillars: mental, physical,
social and financial. Through these pillars, we provide our employees with a
range of resources and tools to support their wellbeing, including resources
provided by BUPA, Headspace, Hargreaves Lansdown and our Employee Assistance
Programme.
We work with external provider Activehub to encourage and incentivise our
employees to get active, with 322 employees downloading the app in 2023 to
keep active. In June we held a headline event with Activehub, rewarding
employees activity with tree planting. Through Eden Reforestation Project we
pledged to plant 7,696 trees.
Early Careers and Young Professionals
2023 saw the continuation of our Structured Graduate and Apprenticeship
Programme, with a total of 16 participants, along with the third 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 continued our Leadership Development Academy, with 13
new participants, 28 participants in total, and have more programmes scheduled
for 2024 for existing and aspiring leaders.
We partner with Young Professionals, an organisation which works with schools
across the UK from different socio-economic 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 February 2023, we hosted an evening inviting female students interested in
a career in banking, 40 Year 13 students from the Young Professionals network
and 20 for female student referrals from employees. A further female student
event was hosted in October, this time attended by 90 Year 13 student from the
Young Professionals network and referrals from employees.
Employee development
As a rapidly growing business, we encourage career progression and seek to
develop our people's skills to help them grow within the organisation.
Mentoring
We support our employees' continued developed through our internal mentoring
programme between our employees. We partner with Pushfar, an internal
mentoring platform to ensure mentees can find a suitable mentor to assist them
in their careers.
Cost-of-living
To support our employees with the economic uncertainties over the last year
and to help alleviate some of the burden of these increased costs on
employees, we provided further cost-of-living payments of £750 in both April
and September to those employees earning salaries of up to £50,000 pa. and
who joined the Group before 1 January 2023.
Benefits
We offer our employees an array of benefits. The annual benefits window offers
a benefits package which includes the opportunity for eligible employees to
enhance at favourable rates their cover for certain benefits including life
assurance.
Workplace pension scheme
The Group offers all eligible employees membership of a contributory defined
contribution plan, which is operated by Hargreaves Lansdown who present
six-monthly to the Pension Scheme Governance Committee. The matters discussed
at this Committee's meetings are communicated to employees, continuing the
focus on their financial wellbeing.
Employee networking forum: Connect
2023 marked the launch of our employee network, Connect. The purpose of
Connect is to:
1. Promote a safe and supportive workplace for all to
work, learn and thrive.
2. Understand the challenges faced in our workplace in
order to effect change to increase diversity.
3. Attract and retain a diverse workforce.
Our Connect network hosted a range of events covering Diversity, Equity and
Inclusion ("DEI") educational topics, including Eid al-Fitr, conscious
inclusion, and invisible illnesses.
Diversity, Equity, and Inclusion
In September 2023 we conducted an employee survey to form a long-term DEI
strategy. 73% of employees completed the survey and the responses have been
used to form our strategy.
Our ambition is to create an environment which enables everyone to perform to
the best of their potential.
We know that by leading a culture which reduces groupthink, draws on
everyone's diverse mindsets, skills, backgrounds and perspectives we will
develop the best leaders and teams. We also understand that this will support
our product and service offering, tailoring these to reflect the differing
needs of our client base and ensuring that we provide good customer outcomes.
This will enable us to achieve our ambition to be the leading full-service,
human-scale relationship bank powered by modern technology.
Therefore, we will continue to create a culture where everyone is committed
and empowered to create a diverse and inclusive environment for all. An
ambitious, high performing culture where we support, enable and inspire our
people to be their best selves.
Together we will learn, collaborate and challenge each other to create an
organisation where everyone can contribute towards our shared ambition and
collectively operate with a professional attitude towards our colleagues and
external stakeholders alike.
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 responsibility strategy expanded in 2023 with the formation of a
CSR Steering Committee to ensure our CSR activities are focused on the Bank's
goals. In 2023, the strategy focused on both quality education and no poverty.
Volunteering and Philanthropy
We partnered with The Felix Project, a charity fighting hunger and food waste,
and The Whitechapel Mission, a homeless shelter in East London. We also
partnered with Surrey Docks Farm, a working city farm in the heart of London,
providing opportunities for local communities to learn about farming and food
production.
To assist with our skills-based volunteering and to ensure we support
education and financial education, we partnered with The Switch, offering our
employees the opportunity to volunteer in schools in Tower Hamlets. Sessions
here included CV-writing workshops, Money Matter workshops and interview
preparation.
At The Felix Project, our employees have volunteered in their warehouses and
kitchens, preparing and packaging meals made from surplus food. We also had
employees help sort clothes for homeless people in East London, supporting the
Whitechapel Mission.
Supported by the Worshipful Company of Farmers, at Surrey Docks Farm, we have
had large teams of employees help with the running of the farm, including
cleaning out the goats, mucking out the sheep, hedge trimming, installing
raised beds, creating dead hedges, clearing overgrown areas and more.
In 2024 we will work more closely at our impact in our regional offices and
aligning their philanthropy and community impact with the Group's wider social
impact goals.
Pound for Pound and Payroll giving
We provide pound for pound matching of up to £250 for UK registered charity
fundraising events each year.
We also offer our employees the opportunity to donate regularly from their
gross pay to charities of their choice.
Environment
We have made a commitment to reduce our environmental impact and to improve
our environmental performance as an integral part of our business strategy. We
are committed to achieving net-zero by 2050 and effective management of our
carbon footprint is an important part of our strategy.
As a consequence, we have in place an Environmental Management policy which
sets out our high-level approach to managing environmental issues and provides
requirements to help the Bank to achieve its commitments. Enhancing
transparency within our own supply chains is part of our mission to work
closely with our third-party relationships. In doing so, working together will
help us establish how we can better engage and be held accountable.
Due to the nature of the Group's business, we are primarily a consumer of
services rather than goods and materials. However, we are still committed to
reducing the impact of our supply chain. As a minimum, we expect our suppliers
to provide evidence towards their environmental status, where relevant and
appropriate.
Ahead of the relocation of our London headquarters in the summer of 2024, we
have been presented with the opportunity to review and reduce our
environmental impact. Scope 1 and 2 emissions will be managed through energy
efficiency, renewable energy sourcing, and moving our company car fleet to be
fully electric or hybrid by 2035. We are also reviewing our waste management;
we currently send zero waste to landfill but need to reduce the waste we
produce across the business. We will be managing paper use, printing,
improving waste facilities and raising recycling awareness across the
workplace.
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.
20 Finsbury Circus
In 2024, we will be relocating our London offices to a new site at 20 Finsbury
Circus. As well as creating a modern and collaborative workplace,
sustainability and our environmental impact have been taken into consideration
for the relocation.
20 Finsbury Circus is a BREEAM-excellent-rated building that has undergone a
new CAT fit-out. The building itself is fitted with a modern building
management system and heating and cooling technology. We will have access to a
new lighting control system that will allow us to create our own lighting
zones and determine when and how each zone operates on weekdays and weekends.
Electricity consumption is recorded for every circuit in the building,
allowing us to analyse consumption data to increase our efficiency.
While working on the fit-out design, we have made efforts to re-use existing
fixtures where possible, such as lighting and ceilings in the staff working
areas. For example, the tea point worktops that are being installed are made
from 100% post-consumer plastic waste, the barista bar is made from 65% wood
waste, the acoustic panels in meeting rooms are made from recycled plastic
bottles, and the carpets are 71% recycled content and carbon neutral. We have
endeavoured to reuse existing furniture where possible.
We have also reviewed our refuse management process, including the
installation of a compactor, which will reduce the number of waste
collections.
Over the next few years, the plan is to roll out initiatives in our regional
locations as well.
Summary across our five pillars
We are taking steps, guided by our five pillars of governance, clients,
community, environment and employees, to help us become more sustainable.
Governance Current status
Ensure responsible and transparent corporate governance which aligns to We have embedding sustainability into our business practices by recording,
business goals while making a positive societal impact. monitoring, and publishing performance.
We have policies in place, such as our:
Anti-Money Laundering Policy
Board and Senior Management Diversity Policy
Anti-Bribery and Corruption Policy
Client Acceptance Policy
Group Market Abuse and Insider Dealing Policy
Whistleblowing Policy
Anti-Modern Slavery Policy
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.
We have effective risk management which underpins our strong risk culture
supporting the Group's vision.
We have a Supplier Code of Conduct that promotes equal opportunities and
diversity, acting with integrity, endorsement of sustainable procurement
within the supply chain, safe working practices, and data, cyber and privacy
protection.
Clients Current status
Ensuring best outcomes for our clients. We seek regular feedback from our clients to reinforce our proposition and
service.
As reported last year, we conducted an in-depth review of our client value
proposition in 2022 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 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 continued to invest in the Bank's core banking system, 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.
We implemented the FCA's Consumer Duty requirements for all relevant products
and services from 31 July 2023. We continue to consider ways that we can
improve outcomes for our customers.
We have initiated a Digital Transformation Project to further enhance the
Bank's services to clients.
We have policies in place, such as our:
Complaints Handling Policy
Fraud Policy
Personal Data Protection Policy
Physical Security Policy
Vulnerable Clients Policy
We provide all our employees access to our extensive Learning and Development
Programme. We also have a Leadership Development Academy and Early Careers
Programme.
We have a Pension Governance Committee to manage and communicate our workplace
pension scheme.
Community Current status
Having a positive impact on the community in which we operate. We support philanthropy through matching charity donations, payroll giving,
and volunteer days. In 2023 we supported The Felix Project, The Whitechapel
Mission, The Switch and Surrey Docks Farm.
We will continue to encourage skills-based and team-based volunteering,
increasing our focus on education and financial literacy.
We continue to encourage employees fundraising and challenges.
We have established a CSR Steering Committee that ensures the Bank's community
impact is aligned with the Bank's goals and objectives.
We aim to secure new accreditations and signatories that align with our CSR
activities and values.
Environment Current status
Ensuring that our business practices have a positive impact on the We will set goals and progress against these with a view to reaching net-zero
environment. carbon emissions as a business by 2050.
We have reported this year in line with the requirements of the Companies
(Strategic Report) (Climate-related Financial Disclosure) Regulations 2022.
We assess both direct and indirect climate-related risks and opportunities.
We incorporate annual sustainability reporting into our annual reports and
accounts.
We have an Environmental Management Policy to help us achieve our commitments.
We have established a Sustainable investment Service (SPS).
Energy and Waste
With the relocation of our London headquarters we will be reviewing our energy
consumption and emissions across Scope 1, 2, and 3. We are actively reviewing
our premises strategy with specific reference to environmental factors and
agile working.
We have updated our Supplier Management Framework to reflect the AL
Environmental Management Policy.
We ensure the responsible disposal of computer equipment and have a waste
recycling programme in place.
Transport
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.
We provided ESG training to relationship managers and credit managers.
Employees Current status
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. Policies to
support this include:
Agile Working Policy
Flexible Working Policy
Health and Safety Policy
Parental Leave Policy
Remuneration Policy
Training & Development Policy
Dignity at Work Policy
Equality and Diversity Policy
We have invested in new offices and working environments in Bristol and in our
London headquarters.
We operate an internal recognition scheme: Arbuthnot Achievers.
We conduct annual 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.
All eligible employees may receive a bonus, in addition to pension
contribution, absence pay and other core and flex benefits. We 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.
We will launch a Group-wide DEI strategy in 2024. And in 2023 we launched our
internal staff networking forum: Connect.
We have an internal colleague wellbeing programme and wellbeing support
resources.
We provide all our staff access to our extensive Learning and Development
Programme. We also have a Leadership Development Academy and Early Careers
Programme.
We have a colleague Pension Governance Committee to manage and communicate our
workplace pension scheme.
Metrics
Disclosures around metrics are given in the section on Climate-related
Financial Disclosures above.
Climate-related Financial Disclosures
This section of the Strategic Report describes how the Directors have
implemented the requirements of the Companies (Strategic Report)
(Climate-related Financial Disclosure) Regulations 2022 which amended the
Companies Act 2006 to introduce Task Force on Climate-related Financial
Disclosures' ("TCFD") aligned disclosure requirements into the existing
non-financial information requirements.
These regulations apply to the Group from its financial year ended 31 December
2023 and are broadly in line with the recommendations of the global TCFD,
information on which was given voluntarily in last year's Report.
This report covers 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 we set out
below our assessments.
Requirement Our Response
Governance The Board annually review and approve the enterprise-wide climate change
· Risk appetite,
Describe the board's oversight of climate-related risks and opportunities. · Risk assessments, and
· Stress test scenarios and results.
Describe management's role in assessing and managing climate-related risks and
opportunities.
The Board review the ESG dashboard (that includes Climate Change) at each
meeting. This dashboard details climate-change measures and actions. The
tolerances are partly based on the climate change stress test scenarios
outputs.
Climate change risk is considered as falling within two categories:
Physical Risk: Arising from longer-term changes in the climate and
weather-related events, rising average temperatures, heatwaves, droughts,
floods, storms, sea-level rise, coastal erosion and subsidence.
Transition Risk: Arising from the adjustment towards a low-carbon economy and
could lead to changes in risk appetite, strategy, policy, technology and
sentiment.
The Board also consider climate change risk in major change decisions, most
recently in the case of the planned 2024 London premises relocation initiated
this year.
The Senior Management Function ("SMF") accountability for the financial risks
of climate change sits with Stephen Kelly, the AL CRO.
Climate change is managed within the Group's governance and risk management
frameworks which includes the consideration of both current and emerging
risks.
Strategy The Board considers the Group's business model to be resilient to the
financial risks from climate-related risks based on the risk assessments and
stress test scenario results.
Describe the climate-related risks and opportunities the organisation has
identified over the short, medium, and long term.
The existing income streams are not materially impacted by either transitional
or physical risks.
Describe the impact of climate-related risks and opportunities on the
organisation's businesses, strategy, and financial planning.
The business strategy is also positioned to capture opportunities and support
the transition to a low carbon economy.
Describe the resilience of the organisation's strategy, taking into
consideration different climate-related scenarios, including a 2°C or lower
scenario. The key risks and opportunities are:
Short and medium term (0-5 years)
· Growing investor, client, and employee preference to work with,
or for companies promoting a low-carbon economy
· AL Core transition risk and opportunity on the rising EPC
expectations for buy to let 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.
Long term (5-30 years)
· AL Core physical risk (flood risk) on residential property.
These risks are mitigated as follows:
· Residential property loan risks are mitigated by the loan
durations (typically less than 5 years) and strong loan to values.
· RAF combustion engine risks are mitigated by the short loan
durations (typically less than five years).
· AAG heavy goods vehicles combustion engine risks are mitigated by
the short leasing durations (typically less than five 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. Asset residual
values and lifespans are monitored considering possible technology changes.
· The Group exposure to the Energy or Utility sectors is less than
1% of the portfolio.
The Group is positively minded toward supporting the transition to a low
carbon economy and seeks to capitalise on opportunities as follows:
· AL looks more positively on lending applications with property
collateral that is C or better. The business is also piloting a green lending
product aimed at attracting higher EPC portfolios and funding EPC
improvements.
· RAF is supporting clients by financing leases on electric and
hybrid vehicles. It has had success in financing hybrid London taxis and
smaller electric vehicles.
· AAG finances electric buses and is working with the industry on
transition pathways to cleaner technology alternatives for heavy goods
vehicles.
· AL has offered clients the option to invest funds in a
Sustainable Investment Service since 2021. This service seeks to incorporate
environmental, social and governance ("ESG") factors to achieve a positive
impact without sacrificing long-term financial returns.
Risk Management The Board approve the climate change risk assessment and stress test scenarios
prepared by risk management.
Describe the organisation's processes for identifying and assessing
climate-related risks. The risk assessments identify and assesses the transition and physicals risk
to the business model and lending book. They consider the existing and
emerging regulatory requirements and other relevant factors, as well as the
potential size and scope of climate-related risks.
Describe the organization's processes for managing climate-related risks.
The stress test scenarios inform the risk assessments. The scenarios are
Describe how processes for identifying, assessing, and managing tailored versions of the 2021 Climate Biennial Exploratory Scenario ("CBES")
climate-related risks are integrated into the organisation's overall risk as outlined in the BOE "Key elements of the 2021 Biennial Exploratory
management. Scenario: Financial risks from climate change".
Three scenarios are considered which are plausible representations of what
might happen based on different future paths of governments' climate policies.
They cover the period to 2050 and assume either early action (in current
year), late action (ten years' time) or no additional action.
Two scenarios consider routes to net-zero carbon dioxide emissions globally by
2050: an Early Action scenario and a Late Action scenario. These scenarios
primarily explore transition risks from climate change:
· Early Action: Under this scenario, climate policy is ambitious
from the beginning, with a gradual intensification of carbon taxes and other
policies over time. Global carbon dioxide emissions are reduced to net-zero by
around 2050 and global warming (relative to pre-industrial levels) is
successfully limited to 1.8°C by the end of the scenario, falling to around
1.5°C by the end of century. The required adjustment in the economy creates a
temporary headwind to growth but this dissipates in the latter half of the
scenario once a significant portion of the required transition has occurred,
and the productivity benefits of green technology investments begin to be
realised.
· Late Action: The implementation of policy to drive the transition
to a net-zero economy is assumed to be delayed by a decade under this
scenario. Policy measures are then more sudden and disorderly as a result of
the delay. Global warming is limited to 1.8°C by the end of the scenario
(2050) relative to pre-industrial levels, but then remains around this level
at the end of the century. The more compressed nature of the reduction in
emissions also results in material short-term macroeconomic and financial
markets disruption. UK unemployment rises to 8.5% and the economy goes into
recession for a short period. Falls in output are particularly concentrated in
emissions-intensive sectors.
The third scenario is based on the physical risks that would begin to
materialise if governments around the world fail to enact policy responses to
global warming and no additional action is taken to address climate change.
This is considered a severe scenario, being based on climate outcomes that
would only occur later this century under the assumption that no additional
action is taken to address climate change, and represents a worse than
expected outcome even under such conditions. The absence of transition
policies in this scenario leads to a growing concentration of greenhouse gas
emissions in the atmosphere and, as a result, global temperature levels
continue to increase, reaching 3.3°C higher relative to pre-industrial levels
by the end of the scenario. This leads to chronic changes in precipitation,
ecosystems and sea-levels, which are unevenly distributed globally, and in
some cases irreversible. There is also a rise in the frequency and severity of
extreme weather events. There are permanent impacts on living and working
conditions, buildings and infrastructure. As a result, UK and global GDP
growth is permanently lower and macroeconomic uncertainty increases.
Reflecting the fact that the future looks materially worse at the end of the
scenario, with the adverse effects of climate change set to worsen further, UK
and US equity prices are respectively just under 20 and 25% lower than they
might otherwise be.
Climate change is managed within the Group's governance and risk management
frameworks.
Specifically, the
· AL Risk Committee oversees ESG and the financial risks of climate
change.
· AL Credit Committee considers implications of climate change on
new and existing lending.
· AL Investment Committee considers implications of climate change
on investment decisions.
· AL Product Governance Committee considers climate change on
propositions.
Climate Change is referenced in key documents including the:
· ICAAP,
· Risk appetite framework,
· AL risk hierarchy,
· Credit policy.
Metrics and Targets Aspirations Metrics
All Buy To Let properties to be either EPC C, or have valid exemption by 2035 • % of Buy To Let properties EPC C and above
Describe the targets used by the organisation to manage climate-related risks
and opportunities and performance against targets.
AL lend against high quality residential collateral. Typically these
properties are EPC C. AL also support Landlords to improve the quality of
their collateral, including EPC gradings, where they are currently beneath C.
Disclose the metrics used by the organisation to assess climate-related risks
and opportunities in line with its strategy and risk management process.
Following systems upgrade, EPC ratings are now collected on all new lending
and this metric will be shared going forward.
Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 greenhouse gas ("GHG")
emissions and the related risks.
All leases to be for electric, or clean alternative, vehicles by 2050 with • Current year % of new electric and hybrid of total vehicles
exception of classic cars.
financed.
AL want to support clients as they transition to the low carbon economy and
recognise the transition will occur at different speeds. However, AL will
cease providing financing on petrol and diesel cars and vans from 2035, and
non-zero emission heavy goods vehicles from 2040.
Energy & utility exposure to be maintained at less than 1% of AL lending • Energy and Utility Exposure as a % of portfolio.
portfolio (0.22%, June 2023).
Be Net Zero by 2050 • Scope 1 and 2 intensity ratios
By reducing carbon emissions and minimising waste • General Waste Recycling %
• Complete switch to new London
building which is rated "Excellent"
• Company car fleet to be fully electric
or hybrid by 2035
• Company heavy goods fleet (AAG)
to be powered by non-combustion
engines by 2040
Improve recycling rates to 60% by 2025
Scope 1,2 and 3 emissions are reported on page 38 below.
(Scope 3 emissions will remain as per 2022. We have investigated and decided
against extending Scope 3 emissions reporting to the lending and investment
portfolios. The Scope 3 emissions methodology and data would not be reliable
and would give an illusion of accuracy that would not help decision making.)
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 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 2023. 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
The Base Year for the organisation is a rolling annual comparison.
Reporting Methodology
• Data has been collected for electricity, gas and transport.
• GHG Protocol Corporate Accounting and Reporting Standard has been
followed where relevant.
• Data was collected specifically for the purpose of SECR.
• The 2022 and 2023 UK Government Conversion Factors for Company Reporting
were used for all calculations of Carbon emissions.
• Data was estimated where necessary, as set out below.
Estimated Data
The following data was estimated in 2023:
Dominion Street, London Natural Gas Gas use is included in the rent for the property and sub-metering is not
available, estimates are based on floor area
Bristol and Gatwick Energy is included in the rent, and sub-metering for the office is not
available, estimates are based on floor area. Note that the floor area,
occupied by the business in Bristol, increased this year as has the estimated
electricity for this property.
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 whole Group as required by SECR.
Reporting Summary
2023 2022
Scope One Measure kWh Carbon Tonnes tCO2e Intensity Ratio tCO2e Measure kWh Carbon Tonnes tCO2e Intensity Ratio tCO2e
Natural Gas - Intensity Ratio tCO2e/m2 5,779 407,063 75 0.0130 5,779 397,824 73 0.0130
Kerosene - Intensity Ratio tCO2e/m2 1,545 57,345 14 0.0090 1,545 61,926 15 0.0100
Diesel - Mixed Onsite Use No Metric Available 336,008 80 287,841 69
Company HGVs Intensity Ratio tCO2e/miles 68,985 293,381 70 0.0010 90,720 397,340 96 0.0017
Company Cars Intensity Ratio tCO2e/miles 384,242 273,464 64 0.0002 314,699 269,795 65 0.0002
Total Scope One 1,367,261 303 1,414,726 318
Scope Two
Electricity - Intensity Ratio tCO2e/m2 12,400 1,693,514 351 0.0283 14,274 1,703,083 329 0.0231
Company Cars Intensity Ratio tCO2e/miles 17,106 3,063 1 - 19,656 8,317 2 0.0001
Total Scope Two 1,696,577 351 1,711,401 331
Scope Three
Grey Fleet Vehicles Intensity Ratio tCO2e/miles 272,158 294,941 69 0.0003 270,683 337,205 80 0.0003
Total Scope Three 272,158 294,941 69 0.0003 270,683 337,205 80 0.0003
Total of all Scopes 3,358,778 724 3,463,331 729
Estimated Data 18% 15%
Corrective Actions
The prior year numbers have been restated due to further details about diesel
use at Wolverhampton being identified during the Energy Savings Opportunity
Scheme ("ESOS") audit. The calculation in 2022 for HGVs was assessed as
average laden, but the ESOS audit revealed that this should be unladen. The
audit also showed that the value used for on-site transport was under
reported. Both of these numbers have been corrected and restated for 2022,
representing an overall increase of one tonne of carbon for the prior year.
Changes from 2022
Scope One
There was a 2.6% increase in carbon tonnes for Natural Gas. This is attributed
to an increase at Wilson Street for heating and hot water.
AAG fuels show improved control in 2023 with an 7.2% decrease in Kerosene, but
Diesel used on-site has increased by 15.7%, an overall increase in these fuels
of 9.8 tCO2e.
The carbon tonnes for AAG HGVs have reduced by 27.1% due to a reduction in
miles of 24%.
Scope Two
There have been small changes in the portfolio of properties compared to last
year. Whilst electricity measured in kWh shows a small decrease compared to
2022, the conversion factor for electricity has risen this year due to the mix
of fuels generating electricity for the grid. This has caused a 6% increase in
tCO2e in 2023, compared to 2022.
Scope Three Transport
Mileage driven by employees in their own vehicles on behalf of the business
has remained reasonably similar in 2023 compared to 2022 with a 0.5% increase.
The significant drop in tCO2e of 13.9% is related to the type of vehicles
being driven with a higher number of miles driven in petrol hybrid and
electric vehicles.
Intensity Ratio
An intensity ratio is used to enable year on year comparison. As Arbuthnot
is an office-based business 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
Further improvement in transport emissions have been made with Arbuthnot
Latham running 100% electric company cars and driving fewer company miles in
2023, representing a 62.5% reduction in tCO2e. AAG have also continued to
improve the emissions of vehicles in the fleet, moving significantly to petrol
hybrid vehicles; however, increased mileage in company vehicles means savings
have only led to a drop of one tCO2e.
Following the decision to relocate the offices at Wilson Street and Dominion
Street later in the year to new head office premises at 20 Finsbury Circus,
there has been no further investment in energy savings in 2023 at these
buildings.
Group Directors' Report
The Directors present their report for the year ended 31 December 2023.
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
7 to 39.
Corporate Governance
The Corporate Governance report on pages 47 to 54 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 66 of the financial statements. The
profit after tax for the year of £35.4m (2022: £16.5m) is included in
reserves. The Directors recommend the payment of a final dividend of 27p
(2022: 25p) per share which, together with the interim dividend of 19p (2022:
17p) paid on 22 September 2023 represents total dividends for the year of 46p
(2022: 42p). The final dividend, if approved by members at the 2024 Annual
General Meeting ("AGM"), will be paid on 31 May 2024 to shareholders on the
register at close of business on 19 April 2024.
Directors
The names of the Directors of the Company at the date of this report, together
with biographical details, are given on pages 40 and 41 of this Annual Report.
Ms J.D. Almond, Ms A.A. Knight and Lord Sassoon were appointed to the Board on
1 September 2023. All the other Directors listed on those pages were directors
of the Company throughout the year.
Ms Almond, Ms Knight and Lord Sassoon offer themselves for election under
Article 75 of the Articles of Association. Messrs Cobb and Dewar being
eligible, offer themselves for re-election under Article 78 of the Articles of
Association. Mr. Cobb has a service agreement terminable on twelve months'
notice. Mr. Dewar, an independent non-executive director, 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.arbuthnotlatham.co.uk/group/investor-relations/announcements.
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 2026. 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 21;
• 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 to the financial statements.
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, each with a nominal value of 1p each. 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.
During the year the Company's issued share capital increased by 1,297,297
ordinary shares through the allotment and issue of ordinary shares through the
placing of and subscription for new voting Ordinary shares in the Company,
raising approximately £12.0 million in a fundraising. The shares were
allotted and issued on 5 May 2023 at the placing price on a non-pre-emptive
basis pursuant to authorities granted to the directors of the Company at the
general meeting held on 4 May 2023. As a result of the issue, the Company's
issued share capital increased by 8.64%. In the three year period prior to the
issue, the Company did not issue any other shares for cash on a
non-pre-emptive basis.
Related Party Transaction
Of these newly issued shares, Sir Henry Angest subscribed for 729,843 shares
at a cost of £6,751,047.75 which is disclosed in accordance with Rule 19 of
the AIM Rules for Companies.
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 2023 31 December 2023 22 March 2024 %
Sir Henry Angest 8,376,401 9,176,185 9,276,185 57.3
Sir Nigel Boardman 26,062 26,062 26,062 0.2
J.D. Almond -* 11,617 11,617 0.1
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 2023 31 December 2023 22 March 2024 %
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
*At date of appointment
Substantial Shareholders
The Company was aware at 12 March 2024 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 1,643,954 10.2
Slater Investments 1,190,376 7.4
Mr. R Paston 529,130 3.3
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 2023, one
Director had a loan from Arbuthnot Latham & Co., Limited amounting to
£1.5m (2022: £1.4m) and four directors had deposits amounting to £3.2m
(2022: £4.4m), all on normal commercial terms as disclosed in Note 43 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
27 and 28.
The Company has a policy in place to ensure that it applies the Equality Act
2010 which makes it unlawful to discriminate on the grounds of disability and
other protected characteristics. At the recruitment stage, reasonable
adjustments are made to ensure that no candidate is disadvantaged because of
their disability. Should existing employees become disabled, every effort is
made to retain them within the workforce wherever reasonable and practicable.
The Group also endeavours to provide equal opportunities in the training,
promotion and general career development of disabled employees.
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 37 to 39. These Regulations implement
the Government's policy on Streamlined Energy and Carbon Reporting (SECR) to
support business in understanding its responsibility for carbon emissions and
to help establish plans to become Net Zero by 2050.
Political Donations
The Company made political donations of £7,500 during the year (2022:
£30,000), being payment for attendance at political functions. An Ordinary
resolution will be proposed at the forthcoming AGM to renew the authority,
last given in June 2020, to make such donations in accordance with Sections
366 and 367 of the Companies Act 2006. This resolution is for the total amount
donated or expended not to exceed £250,000, which is the same level as the
current authority granted in June 2020, over a further four years to 22 May
2028.
Shareholders may recall that at the AGM in June 2020 74.6% of total votes cast
were in favour of the resolution and so, in line with the UK Corporate
Governance Code, the Company consulted with five institutional shareholders,
comprising almost all of the votes of those which it identified as not having
supported the resolution, in order to understand why they had voted against
the resolution. The renewal of the resolution in 2020 followed an exceptional
amount of expenditure of £77,000 being incurred during 2019, being donations
to the Conservative Party ahead of the 2019 General Election in view of the
significant adverse impact that a Labour government under Jeremy Corbyn would
have had on the Group's clients and business. Having explained its position,
the Board was encouraged by the continued support of its major shareholders.
Since June 2020, aggregated political donations have been well within the
authorised amount, totalling £67,500 (£10,000 in 2020, £20,000 in 2021,
£30,000 in 2022 and £7,500 in 2023). These payments were made for payment
mainly for attendance at political functions associated with the Conservative
Party for which, as publicly disclosed in the Electoral Commission register,
Arbuthnot Latham & Co., Limited acts as a banker.
The Board continues to believe that it is in the interests of shareholders
that it has the flexibility to make such payments in light of prevailing
political circumstances over the next few years. It accepts that institutional
shareholders may have a policy of voting against political donations, but
believes the Company's circumstances justify a different approach. The Board
therefore recommends approval of the resolution which is for a further
four-year period in order to retain this flexibility. It welcomes engagement
with shareholders and continues to maintain communications via one-to-one
meetings as appropriate.
Events after the Balance Sheet Date
There were no material post balance sheet events.
AGM
The Company's AGM will be held on Wednesday 22 May 2024 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 Accounting Standards 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.
By order of the Board
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 applies the principles of the UK Corporate
Governance Code, published by the Financial Reporting Council in July 2018
("the FRC Code"), and complies with its provisions in so far as they are
considered 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 authorised and 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 decided in 2018 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.
In January 2024 the FRC made limited revisions to its Code, publishing a UK
Corporate Governance Code 2024 ("the 2024 Code"). The 2024 Code is not
applicable to the Company until its year beginning 1 January 2025 and for one
provision until its year beginning 1 January 2026. The Company will be
reviewing its procedures to enable the Board to report under the 2024 Code, as
required, in due course.
Leadership and Purpose
The Company is led by the Board which comprises ten members: Sir Henry Angest,
the Executive Chairman and Chief Executive; two other executive directors,
Andrew Salmon and James Cobb; six independent non-executive directors, Sir
Nigel Boardman, Angela Knight, Ian Dewar, Sir Alan Yarrow, Jayne Almond and
Lord Sassoon; and one other non-executive Director, Frederick Angest. This
means that more than 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
The Board met regularly throughout the year. In total it held eight scheduled
meetings, six of which were held jointly with the Board of Arbuthnot Latham
with the other two being held to approve the Annual and Interim Reports, and
two ad-hoc meetings relating to the fundraising. It also held a separate
strategy meeting, together with the AL 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, as set out
in the Schedule of Matters Reserved to the Board which is reviewed annually
and is published on the Company's website at
https://www.arbuthnotlatham.co.uk/group/about/corporate-governance
(http://www.arbuthnotgroup.com/corporate_gover5nce.html) . 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 AL Chief Compliance Officer or by an external firm of lawyers,
accountants and other subject matter experts. Risk management training is
provided, including that in relation to the ICAAP and ILAAP, by the AL Chief
Risk Officer with an overview of credit and its associated risks and
mitigation by the AL Chief Credit Officer.
Board Evaluation
The annual Board Effectiveness Review was conducted internally. The 2023
evaluation took the form of a confidential online questionnaire which assessed
the performance of the Board and its Committees. The questions were set 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. They also covered clarity of the
business, strategy and risk and accountability. The results were discussed by
the Board in February 2024 and proposed actions arising will be considered in
due course. 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 align completely 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, which has had
a positive 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 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 Jayne Almond, Sir Nigel Boardman, Angela
Knight and Lord Sassoon to be independent, notwithstanding their directorships
and, in the case of Sir Nigel his chairmanship, at Arbuthnot Latham since
their 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 independent directors 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 2024 AGM are James Cobb and Ian Dewar, who have
served on the Board for 15 years and 8½ years respectively. The contribution
of Mr. Cobb as the Group Financial Director has been invaluable in managing
the capital and liquidity requirements of the Group. He has also played a
pivotal role in sourcing and delivering the acquisitions that have shaped the
strategy of the Group. Mr. Dewar, with a wealth of experience as a partner in
a major accounting firm, has successfully chaired the Audit Committee. Jayne
Almond, Angela Knight and Lord Sassoon, appointed to the Board by the
Directors on 1 September 2023, 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,
Diversity and Inclusion Policy which promotes equality of opportunity for all
staff. Further information on diversity and inclusion is given in the
Sustainability Report on pages 27, 28 and 32, 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 AL 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 AL
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 2023, the Board received a separate report from the AL 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 AL Risk
Committee reports to the 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, Sir Alan Yarrow and, since September 2023, Jayne Almond, Angela
Knight and Lord Sassoon. All of the Committee's members are therefore
independent non-executive Directors. Mr. Dewar and Lord Sassoon have 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 2023
The Audit Committee held five meetings during the year, four 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 final results
announcement.
Internal Audit
On behalf of the Board, the Audit Committee monitors the effectiveness of
systems and controls. To this end, Internal Audit provides the Committee and
the Board with detailed independent and objective assurance on the
effectiveness of governance, risk management and internal controls. It
additionally provides assurance to the Board that the culture throughout the
business is aligned with the Group's values, incorporating within each
internal audit an assessment of culture in the area under review.
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. In April 2023, the incumbent moved into a new senior
internal position after six years in the role and was succeeded by an external
candidate who had previously been Senior Manager of the Group's Internal
Audit, thereby providing a seamless transition. He provides reports on the
outcomes of Internal Audit work directly to the Committee which monitors
progress against actions identified in these reports.
The Committee received a self-assessment report on Internal Audit from the
Head of Internal Audit in September 2023 and 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 £3.2m for the year ended 31
December 2023. The disclosures relating to impairment provisions are set out
in Note 4.1(a) to the financial statements.
Property Portfolio
The Group 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
held for sale are measured 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 measured 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 2023, the Group's total property portfolio totalled £23.9m.
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), 20, 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 at
that time was deemed sufficient to cover the shortfall between the value of
the portfolio and the estimated net sales value. This provision has since been
realised through sales, with no remaining balance at year-end.
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 Audit Committee reviewed and discussed the minutes of meetings of the
Financial Regulatory Reporting Committee whose main responsibility is to
ensure that the Group meets the PRA's regulatory reporting expectations. The
Committee performs this role since it is concerned with financial reporting as
well as with external reporting. During the year, it also reviewed the FRC
Publication: Audit Committees and the External Audit: Minimum Standard in
particular around audit tendering, albeit that the report is only applicable
to premium listed FTSE 350 companies.
In November 2023, Committee members contributed to the review of the
Committee's effectiveness as part of its evaluation by the Board. In February
2024, the Committee reviewed its performance and agreed that it continued to
operate effectively. In March 2024 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 Audit 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. A majority of the Committee's
members are therefore independent non-executive Directors. The Company
Secretary 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 2023
The Nomination Committee met twice during the year. It met first to assess and
recommend the appointment of Jayne Almond, Lord Sassoon and Angela Knight as
three new independent Non-Executive Directors as part of succession planning
and of its consideration of diversity as directors of the Company. Jayne
Almond is a highly experienced professional in the banking, mortgages and
financial services arenas, with past and present appointments as Chairman,
Chief Executive and NED in a wide range of organisations. Angela Knight has a
wealth of commercial and financial experience from her time in government as a
Treasury Minister, as Chief Executive of the British Bankers' Association (now
UK Finance) and of Energy UK and as a non-executive director of a range of
listed companies over many years. Lord Sassoon is a highly experienced
professional in the banking and financial services industry.
It was not considered appropriate to widen the search to include other banking
and financial services experts for the roles, given the status and profile of
these individuals, and their exceptional knowledge of the sector and, in the
case of Ms Knight, her knowledge of the Group as a director of Arbuthnot
Latham since October 2016. In each case, it was regarded that their careers
and reputation demonstrably reflected a good cultural fit with the Group and
its Principles, Values and ESG Pillars. For all of these reasons, each
individual was approached directly and it not being considered necessary to
widen the search to comprise other experts for the role, and so neither
advertising nor an external consultancy was used for these appointments.
The Committee also met to assess and confirm the collective and individual
suitability of the existing 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 is deepening his knowledge about the
business, working at Arbuthnot Latham as a private banker, having worked
previously 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 2023 and noted that Directors had been able to
carry out sufficient training both in person and online.
In November 2023, 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 55. The Committee
meets once a year and otherwise as required. The Remuneration Report on pages
55 to 57 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 Company Secretary 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 2023
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. 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. In December 2023, the Board approved a proposal to
combine the Committee with that of the Arbuthnot Latham Policy Committee. In
addition to Mr. Salmon and its other members, James Cobb and the AL Chief
Compliance Officer, two other members of the AL Committee, being the AL Chief
Risk Officer and an AL non-executive director were appointed to it. A member
of the Operational Risk team acts as its Secretary.
Activity in 2023
The Policy Committee met three 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 other members of the
Committee are Sir Nigel Boardman and Sir Alan Yarrow. As such, a majority of
the Committee's members are therefore independent non-executive Directors. The
Company Secretary acts as its Secretary. The Committee normally meets twice a
year and otherwise, as required.
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 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 2023
The Remuneration Committee met four times 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
reviewed the level of fees for non-executive Directors which it decided to
standardise, reflecting the appropriate level of fee to continue to secure the
services of a high level non-executive director. It also reviewed and approved
the Executive Directors' remuneration.
The Committee also met to approve the payment to Jayne Almond, and Lord
Sassoon of the standardised director's fee for a non-executive director, and
to Angela Knight who receives an extra amount being for her additional role as
the Board's Consumer Duty Champion, her fee already being received in her
capacity as a non-executive director of Arbuthnot Latham.
In March 2024, the Committee met again to review the Executive Directors'
remuneration, approving, after due consideration of comparable market rates,
salary rises for each of them and the award of bonuses to Messrs Salmon and
Cobb for exceptional performance in the year. As in previous years, Sir Henry
Angest waived his right to be considered for receipt of a bonus. It decided to
increase by £5,000 p.a. with effect from June 2024 the additional fee payable
for chairing the Audit Committee, whilst leaving unchanged the basic fee for
acting as a non-executive director. The Committee also agreed that it
continued to operate effectively with its overall performance and the
performance of its individual members effective throughout the 2023 year.
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 lapsed on 14 June 2023 when not exercised at 1591p. The second
tranche had 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, as set out in note 40 to the financial statements.
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 at 31
December 2023 was £0.1m (2022: £0.1m).
Details of outstanding options are set out below.
Phantom Options At 1 January 2023 At 31 December 2023 Exercise Price £ Date from which exercisable Expiry
AA Salmon 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
300,000 200,000
JR Cobb 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
150,000 100,000
450,000 300,000
Directors' Emoluments
2023 2022
£000 £000
Fees (including benefits in kind) 416 301
Salary payments (including benefits in kind) 6,094 5,197
Pension contributions 73 71
6,583 5,569
Total Total
Salary Bonus Benefits Pension Fees 2023 2022
£000 £000 £000 £000 £000 £000 £000
Sir Henry Angest 1,200 - 61 - - 1,261 1,278
JD Almond - - - - 23 23 -
F Angest 68 20 1 3 34 126 37
The Hon Sir Nigel Boardman - - - - 158 158 121
JR Cobb 850 1,000 20 35 - 1,905 1,498
IA Dewar - - - - 83 83 75
AA Knight - - - - 25 25 -
Sir Christopher Meyer - - - - - - 25
AA Salmon 1,350 1,500 24 35 - 2,909 2,465
Lord Sassoon - - - - 23 23 -
Sir Alan Yarrow - - - - 70 70 70
3,468 2,520 106 73 416 6,583 5,569
Details of any shares or options held by directors are presented above.
The emoluments of the Chairman were £1,261,000 (2022: £1,278,000). The
emoluments of the highest paid director were £2,909,000 (2022: £2,465,000)
including pension contributions of £35,000 (2022: £35,000). The emoluments
reported on the previous page for Ms Knight and in the prior year for Mr. F
Angest are pro-rated from the date they became Directors of the Company.
Retirement benefits are accruing under money purchase schemes for three
directors who served during 2023 (2022: three 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 2023 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 material accounting policy information.
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 and of the
Parent Company's affairs as at 31 December 2023 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 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 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;
· Obtaining an understanding of the relevant controls relating to
the directors' going concern assessment;
· 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 the Parent Company's
future financial performance;
· Evaluating management's going concern assessment of the Group and
the Parent Company and challenging the appropriateness of the key assumptions
used in and mathematical accuracy 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 ('ICAAP') and Internal Liquidity Assessment Process ('ILAAP')
performed by Arbuthnot Latham & Co., Ltd, a wholly owned subsidiary within
the Group which is a bank regulated by the Prudential Regulation Authority
('PRA'), and evaluating the results of management's scenarios 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 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 disclosures in the
financial statements related to 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 at least
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 directors 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 impairment of loans and advances Our audit procedures included but were not limited to:
Group - £6.8m; 2022: £6.6m (refer to notes 4, 23 and 24)
Staging of loans
The determination of Expected Credit Loss ('ECL') under IFRS 9 is an We have:
inherently judgmental area due to the use of subjective assumptions and a high
degree of estimation. ECL relating to the Group's loan portfolio requires the • Assessed the methodology of identifying significant increase
directors to make judgements over the ability of the Groups' customers to make in credit risk to ensure compliance with IFRS 9;
future loan repayments.
• Tested the design and implementation and tested the operating
effectiveness of the key controls in relation to credit monitoring, including
missed payments monitoring, covenants monitoring and annual reviews;
As set out in note 3.4, ECL is measured using a three-stage model. ECL is
determined based on Probability of Default ('PD') and the present value of • Tested management's controls to allocate loans to the
future cash flows arising primarily from the sale of or repossession of respective staging categories;
security which determines the Loss Given Default ('LGD') and the Exposure at
Default ('EAD'). For loans with no significant deterioration in credit risk • Tested the appropriateness of staging movements throughout the
since origination (stage l), ECL is determined using collective portfolio year;
assumptions. For loans that have experienced a significant deterioration in
credit risk since origination (stage 2) or have defaulted (stage 3), key • Back tested the staging criteria to assess previous
assumptions are determined on a case-by-case basis. effectiveness of the criteria; and
• Assessed loans that have cured during the year, including
ensuring the curing is in line with policy and IFRS 9.
The model used by the Group to determine the ECL provision requires judgement
to the input parameters and assumptions, in particular, uncertainty around
macro-economic assumptions.
Stage 3 impairment assessments
We have:
The most significant areas where we identified greater levels of management
judgement and estimate are: • Performed credit file reviews to test data used in the
determination of LGD assumptions;
• Staging of loans and advances to customers and the
identification of significant increase in credit risk; • Re-calculated the ECL provision for a sample of higher risk
loans, including consideration of multiple economic scenarios; and
• Stage 3 impairment assessments;
• Involved our in-house valuation specialist to independently
• Key LGD assumptions around adjustments to collateral when assess the underlying collateral used in the ECL calculations for a sample of
estimating the present value of future recoverable cashflows; and higher risk loans. However, in some cases, we relied on management's external
valuation experts with indexing applied and, in this situation, we assessed
• Use of macro-economic variables reflecting a range of future the capabilities, professional competence, and objectivity of the experts.
scenarios.
Key LGD assumptions
Further detail on the key judgements and estimates involved are set out within
the critical accounting estimates and judgements in applying accounting We have:
policies (note 4) and in notes 23 and 24 to the financial statements.
• Tested and challenged the key assumptions applied to LGD; and
• Back tested key assumptions to assess appropriateness.
We consider the risk to have increased in the year given the sustained impact
of high interest rates and inflation, as well as the sustained economic impact
of the rising cost of living on the ECL provision.
Use of macro-economic variables
We have:
• Involved our in-house credit risk specialists and economist
experts in the assessment of model approach and assumptions, including
assessing the impact on commercial and residential property prices, the
completeness and appropriateness of key economic variables and the
appropriateness of the economic scenarios and the probability weightings
applied by management.
Stand back assessment
We have:
• Performed a 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.
Disclosures
We have assessed the adequacy and appropriateness of the disclosures in the
financial statements in relation to ECL.
Our observations
We found the approach taken in respect to ECL is materially in accordance with
the requirements of IFRS 9 and determined that the allowance for impairment of
loans and advances is not materially misstated at 31 December 2023.
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 materiality
Overall materiality £2.4m (2022: £1.0m)
How we determined it 5% of profit before tax (2022: 0.5% of net assets but capped at component
materiality levels)
Rationale for benchmark applied Our materiality benchmark for the Group has changed during the year from net
assets to profit before tax. We consider profit before tax to be the
appropriate benchmark as the Group's profits have now established a track
record following the pandemic and the low interest rate environment, and
profit is increasingly a key focus for the users of the financial statements
in assessing the performance of the Group.
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 £1.6m (2022: £0.7m), which represents 70%
of overall materiality (2022: 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 £71k (2022: £30k) as well as misstatements
below that amount that, in our view, warranted reporting for qualitative
reasons.
Parent company materiality
Overall materiality £0.8m (2022: £0.2m)
How we determined it 0.5% of net assets (2022: 0.5% of net assets but capped at component
materiality levels).
Rationale for benchmark applied Given that the Parent Company's primary purpose is to be an investment holding
entity, we consider net assets to be the most appropriate benchmark to apply
in our determination of materiality. The Parent Company does not have
significant revenue generating activities and therefore a profit-based measure
was not considered to be appropriate.
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 £0.6m (2022: £0.1m), which represents 70%
of overall materiality (2022: 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 £24k (2022: £6k) 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, six components of the
Group, including the Parent Company, were subject to full scope audit. We used
a Mazars UK component audit team as component auditor for one component (2022:
one component). All other components were audited by the Group audit team.
Our component performance materiality ranged from £0.05m to £1.5m (2022:
£0.02m to £0.7m). Full scope audits carried out on six components (2022:
eight components), including the Parent Company, account for 99.5% of interest
income (2022: 100%), 97.3% of profit before tax (2022: 100%), 99.1% of net
assets (2022: 100%) and 99.8% of total assets (2022: 100%).
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 aggregated financial information.
Working with our component audit team
We determined the level of involvement we needed as the Group team in the work
of the component audit team 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 team, 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 team and interacted with them
throughout the audit process. In the absence of component visits, we reviewed
electronic work papers remotely which were prepared by the component audit
team 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 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 42 and 43;
· 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 42;
· Directors' statement on fair, balanced and understandable, set
out on page 46;
· Board's confirmation that it has carried out a robust assessment
of the emerging and principal risks, set out on page 50;
· The section of the annual report that describes the review of
effectiveness of risk management and internal control systems, set out on
pages 49 and 50; and;
· The section describing the work of the audit committee, set out
on pages 50 to 52.
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 46, 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 their
industry, we considered that non-compliance with the following laws and
regulations might have a material effect on the financial statements:
regulations and supervisory requirements of the PRA and the Financial Conduct
Authority ('FCA'), Alternative Investment Market ('AIM') rules, Aquis Stock
Exchange ('AQSE') rules, Streamlined Energy and Carbon Reporting ('SECR')
requirements, Anti Money Laundering regulations ('AML'), General Data
Protection Regulation ('GDPR') and the UK Corporate Governance Code.
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;
· Review of minutes of meetings of the Board of Directors and the
Audit Committee held during the year and up until the date of approval of the
financial statements;
· Discussing amongst the engagement team the laws and regulations
listed above, and remaining alert to any indications of non-compliance; and
· Focusing on areas of laws and regulations that could reasonably
be expected to have a material effect on the financial statements from our
general commercial and sector experience and through discussions with those
charged with governance and senior management, review of regulatory and legal
correspondence, and review of minutes of meetings of the Board of Directors
and the Audit Committee during the year and up until the date of the approval
of the financial statements.
We also considered those laws and regulations that have a direct effect on the
preparation of the financial statements, such as UK tax legislation, pension
legislation and 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, 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;
· 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 five years, covering the years ended 31
December 2019 to 31 December 2023.
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
27 March 2024
Company statement of financial position
At 31 December
2023 2022
Note £000 £000
ASSETS
Loans and advances to banks 18 623 8,434
Debt securities at amortised cost 19 38,129 24,437
Deferred tax asset 27 520 523
Intangible assets 28 - 1
Property, plant and equipment 29 130 130
Other assets 25 1,449 74
Interests in subsidiaries 44 164,354 159,354
Total assets 205,205 192,953
EQUITY AND LIABILITIES
Equity
Share capital 38 167 154
Share premium account 38 11,606 -
Other reserves 39 (1,280) (1,280)
Retained earnings* 39 148,809 152,115
Total equity 159,302 150,989
LIABILITIES
Current tax liability 2,641 879
Other liabilities 34 5,536 3,491
Debt securities in issue 36 37,726 37,594
Total liabilities 45,903 41,964
Total equity and liabilities 205,205 192,953
*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 £3,551k (2022:
£4,446k).
Consolidated statement of changes in equity
Attributable to equity holders of the Group
Share capital Share premium Capital redemption reserve Fair value reserve Treasury shares Retained earnings Total
£000 £000 £000 £000 £000 £000 £000
Balance at 31 December 2022 154 - 19 1,067 (1,299) 212,037 211,978
Total comprehensive income for the period
Profit for 2023 - - - - - 35,379 35,379
Other comprehensive income, net of tax
Changes in fair value of equity investments at fair value through other - - - 412 - - 412
comprehensive income (FVOCI)
Sale of financial assets carried at FVOCI - - - (47) - 47 -
Tax on other comprehensive income - - - (91) - - (91)
Total other comprehensive income - - - 274 - 47 321
Total comprehensive income for the period - - - 274 - 35,426 35,700
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Issue of new ordinary shares 13 11,606 - - - - 11,619
Final dividend relating to 2022 - - - - - (3,756) (3,756)
Interim dividend relating to 2023 - - - - - (3,101) (3,101)
Total contributions by and distributions to owners 13 11,606 - - - (6,857) 4,762
Balance at 31 December 2023 167 11,606 19 1,341 (1,299) 240,606 252,440
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 - - 628 - - 628
through other 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
Special 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
Company statement of changes in equity
Attributable to equity holders of the Company
Share capital Share premium Capital redemption reserve Fair value reserve Treasury shares Retained earnings Total
£000 £000 £000 £000 £000 £000 £000
Balance at 1 January 2022 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
Total comprehensive income for the period
Profit for 2023 - - - - - 3,551 3,551
Other comprehensive income, net of income tax
Total comprehensive income for the period - - - - - 3,551 3,551
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Issue of new ordinary shares 13 11,606 - - - - 11,619
Final dividend relating to 2022 - - - - - (3,756) (3,756)
Interim dividend relating to 2023 - - - - - (3,101) (3,101)
Total contributions by and distributions to owners 13 11,606 - - - (6,857) 4,762
Balance at 31 December 2023 167 11,606 19 - (1,299) 148,809 159,302
Consolidated statement of cash flows
Year ended 31 December Year ended 31 December
2023 2022
Note £000 £000
Cash flows from operating activities
Profit before tax 47,117 20,009
Adjustments for:
- Depreciation and amortisation 29,28,30 9,819 7,193
- Impairment loss on loans and advances 24 208 214
- Net interest expense 564 80
- Elimination of exchange differences on debt securities 8,712 (8,783)
- Other non-cash or non-operating items included in profit before tax 155 163
- Tax expense (11,738) (3,551)
Cash flows from operating profits before changes in operating assets and 54,837 15,325
liabilities
Changes in operating assets and liabilities:
- net decrease/(increase) in derivative financial instruments 3,005 (4,605)
- net increase in loans and advances to customers (28,347) (165,328)
- net increase in assets held for leasing (95,853) (50,175)
- net (increase)/decrease in other assets (1,176) 57,563
- net increase in amounts due to customers 667,018 254,680
- net increase in other liabilities 18,013 6,323
Net cash inflow from operating activities 617,497 113,783
Cash flows from investing activities
Acquisition of financial investments (174) (53)
Disposal of financial investments 63 640
Purchase of intangible assets 28 (1,523) (6,174)
Purchase of property, plant and equipment 29 (4,846) (1,065)
Proceeds from sale of property, plant and equipment 29 5 50
Purchase of debt securities (1,582,889) (799,341)
Proceeds from redemption of debt securities 1,071,232 670,164
Net cash outflow from investing activities (518,132) (135,779)
Cash flows from financing activities
Issue of new ordinary shares 11,619 -
Decrease in borrowings (43,049) (4,306)
Lease payments (3,654) (7,458)
Dividends paid (6,857) (5,860)
Net cash outflow from financing activities (41,941) (17,624)
Net increase/(decrease) in cash and cash equivalents 57,424 (39,620)
Cash and cash equivalents at 1 January 848,516 888,136
Cash and cash equivalents at 31 December 42 905,940 848,516
Company statement of cash flows
Year ended 31 December Year ended 31 December
2023 2022
Note £000 £000
Cash flows from operating activities
Profit before tax 6,856 5,850
Adjustments for:
- Depreciation and amortisation 28, 29 1 10
- Net interest (income) / expense (523) 80
- Elimination of exchange differences on debt securities (170) 741
- Other non-cash or non-operating items included in profit before tax 84 (71)
- Tax expense (3,305) (1,404)
Cash flows from operating profits before changes in operating assets and 2,943 5,206
liabilities
Changes in operating assets and liabilities:
- net increase in group company balances (93) (1,013)
- net (increase)/decrease in other assets (1,372) 221
- net increase in other liabilities 3,900 2,242
Net cash inflow from operating activities 5,378 6,656
Cash flows from investing activities
Issue of subordinated debt to Arbuthnot Latham (12,951) -
Receipt on dissolution of People's Trust & Savings PLC - 50
Capital contribution to Arbuthnot Latham (5,000) -
Net cash (outflow)/inflow from investing activities (17,951) 50
Cash flows from financing activities
Issue of new shares 11,619 -
Dividends paid (6,857) (5,859)
Net cash used in financing activities 4,762 (5,859)
Net (decrease)/increase in cash and cash equivalents (7,811) 847
Cash and cash equivalents at 1 January 8,434 7,587
Cash and cash equivalents at 31 December 42 623 8,434
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 2023 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 27 March 2024.
(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. Material 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. Certain debt securities are held by the
Group Central Treasury in a separate portfolio for long-term yield. These
securities may be sold, but such sales are not expected to be more than
infrequent. The Group considers that these securities are held within a
business model whose objective is to hold assets to collect the contractual
cash flows. 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.
Modification of financial assets
If the terms of financial assets are modified, then the Group evaluates
whether the cash flow of the modified asset are substantially different.
If the cash flows are substantially different, then the contractual rights to
cash flows from the original financial asset are deemed to have expired. In
this case, the original financial asset is derecognised and a new financial
asset is recognised at fair value plus any eligible transaction costs. Any
fees received as part of the modification are accounted as follows:
• fees that are considered in determining the fair value of the
new asset and fees that represent reimbursement of eligible transaction costs
are included in the initial measurement of the asset; and
• other fees are included in profit or loss as part of gain or
loss on derecognition.
3.4 Impairment for financial assets at amortised cost 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 in other circumstances such as forbearance measures.
The Group monitors the ongoing appropriateness of the transfer criteria, where
any proposed amendments will be reviewed and approved by the Group's 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;
downside 2; downside 1 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
The Group has elected, as an accounting policy choice permitted under IFRS 9
'Financial Instruments', to continue to apply the hedge accounting rules set
out in IAS 39 'Financial Instruments - Recognition and measurement'. However,
additional hedge accounting disclosures introduced by IFRS 9's consequential
amendments to IFRS 7 are provided.
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 28.
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 2023 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 2023 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.
• International Tax Reform - Pillar Two Model Rules (Amendments
to IAS 12, effective for annual periods beginning on or after 23 May 2023).
• Non-current Liabilities with Covenants (Amendments to IAS 1,
effective for annual periods beginning on or after 1 January 2024).
• Classification of Liabilities as Current or Non-Current
(Amendments to IAS 1, effective for annual periods beginning on or after 1
January 2024).
• Lease Liability in a Sale and Leaseback (Amendments to IFRS
16, effective for annual periods beginning on or after 1 January 2024).
• Supplier Finance Arrangements (Amendments to IAS 7 and IFRS 7,
effective for annual periods beginning on or after 1 January 2024).
• Lack of Exchangeability (Amendments to IAS 21, effective for
annual periods beginning on or after 1 January 2025).
• Sale or Contribution of Assets between an Investor and its
Associate or Joint Venture (Amendments to IFRS 10 and IAS 28, available for
optional adoption/ effective date deferred indefinitely).
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 Critical accounting judgements
Information about judgements made in applying accounting policies that have
the most significant effects on the amounts recognised in the consolidated
financial statements is included in the following notes:
• Notes 3.4 and 6(a): establishing the criteria for determining
whether credit risk on a financial asset has increased significantly since
initial recognition.
• Notes 3.4 and 6(a): establishing the criteria to determine
whether an account meets the definition of default and as a result moves into
Stage 3.
• Notes 3.3 and 6(f): classification of financial assets:
assessment of the business model within which the assets are held and
assessment of whether the contractual terms of financial asset are SPPI on the
principal amount outstanding.
4.2 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 2023 2022
Economic Scenarios
Baseline 46.0% 53.0%
Upside 16.0% 13.0%
Downside 1 18.0% 12.0%
Downside 2 12.0% 11.0%
Extreme downside 8.0% 11.0%
The tables below show the five-year forecasted average for property prices
growth, UK unemployment rate and UK real GDP growth:
31 December 2023
Base Upside Downside 1 Downside 2 Extreme downside
Five-year summary
UK House price index - average growth 1.5% 5.8% -0.4% -2.3% -4.2%
UK Commercial real estate price - average growth 1.5% 3.6% -0.7% -2.8% -4.9%
UK Unemployment rate - average 4.9% 3.9% 5.7% 6.5% 7.3%
UK GDP - average growth 1.3% 2.1% 0.9% 0.4% 0.0%
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%
The tables below list the macroeconomic assumptions at 31 December 2023 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
2024 (2.3%) 5.5% (5.2%) (8.1%) (11.0%)
2025 (2.2%) 3.8% (7.1%) (12.0%) (16.9%)
2026 2.1% 4.8% (0.9%) (3.8%) (6.8%)
2027 5.0% 7.7% 5.7% 6.4% 7.2%
2028 5.1% 7.2% 5.6% 6.1% 6.6%
5 year average 1.5% 5.8% (0.4%) (2.3%) (4.2%)
UK Commercial real estate price - four quarter growth
Year Baseline Upside Downside 1 Downside 2 Extreme downside
2024 0.8% 7.5% (9.5%) (19.8%) (30.0%)
2025 1.5% 3.9% (5.2%) (11.9%) (18.6%)
2026 1.9% 3.1% 3.6% 5.3% 7.0%
2027 1.6% 1.9% 3.9% 6.2% 8.5%
2028 1.6% 1.9% 3.9% 6.3% 8.6%
5 year average 1.5% 3.6% (0.7%) (2.8%) (4.9%)
UK Unemployment rate - annual average
Year Baseline Upside Downside 1 Downside 2 Extreme downside
2024 4.7% 3.9% 5.1% 5.5% 6.0%
2025 4.7% 3.9% 5.9% 7.2% 8.4%
2026 4.9% 3.9% 5.9% 6.9% 8.0%
2027 5.2% 3.9% 5.9% 6.6% 7.4%
2028 5.0% 3.9% 5.6% 6.1% 6.7%
5 year average 4.9% 3.9% 5.7% 6.5% 7.3%
UK GDP - annual growth
Year Baseline Upside Downside 1 Downside 2 Extreme downside
2024 0.4% 1.9% (1.4%) (3.2%) (5.0%)
2025 1.4% 2.0% 1.3% 1.4% 1.2%
2026 1.7% 2.4% 1.5% 1.4% 1.2%
2027 1.6% 2.2% 1.5% 1.3% 1.2%
2028 1.6% 2.1% 1.5% 1.3% 1.2%
5 year average 1.3% 2.1% 0.9% 0.4% 0.0%
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 2023 ECL provision using the 31
December 2023 economic scenarios and the 31 December 2023 ECL provision using
the 31 December 2022 economic scenarios.
Economic scenarios as at
2023 2022
Group £000 £000
ECL Provision
Stage 1 900 852
Stage 2 429 429
Stage 3 5,479 5,642
At 31 December 2023 6,808 6,923
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:
2023 2022
Group £m £m
Impact of 100% scenario probability
Baseline 0.8 0.7
Upside 1.6 1.0
Downside 1 (1.7) (2.0)
Downside 2 (8.1) (7.5)
Extreme downside (24.0) (19.1)
(b) Effective Interest Rate
Loans and advances to customers are initially recognised at fair value. The
fair value of a loan on initial recognition is generally its transaction
price. 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 2023 the Group recognised £28k (2022: £Nil) 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 £0.5m (2022: £0.7m), due to
acceleration of fee income.
In 2023 the Group recognised £13k additional (2022: additional £0.1m) 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 2023 by £0.03m (2022: £0.1m) while a
10% increase in principal repayments will increase interest income in 2023 by
£0.1m (2022: £0.2m) 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 (2022: one) investment property, as outlined in Note 31.
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 £6.0m (2022: £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 2023 with the
Group receiving rental income.
In accordance with IAS 40, the property is measured at fair value, with its
carrying value at year end of £5.95m equal to its fair value.
The valuation of the property has the following key inputs:
• yield: 7.48%
• 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.
Management have assessed that should the fair value of the investment property
reduce by 5% this would impact profit or loss by £0.3m and a reduction of 10%
would impact profit or loss by £0.6m.
(d) Inventory
The Group owns one commercial property (2022: one property) and one
repossessed property (2022: one property), classified as inventory and
presented as part of other assets in the Statement of Financial Position. 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 £0.7m and a reduction of 10% would impact profit or loss by
£1.5m (or 10% 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.
Management have assessed that should the residual value decrease by 5% this
would impact profit or loss by £2.1m and a reduction of 10% would impact
profit or loss by £4.2m. 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 29 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 2023:
Due within one year Due after more than one year Total
At 31 December 2023 £000 £000 £000
ASSETS
Cash and balances at central banks 826,559 - 826,559
Loans and advances to banks 79,381 - 79,381
Debt securities at amortised cost 859,430 83,007 942,437
Assets classified as held for sale 3,281 - 3,281
Derivative financial instruments 4 4,210 4,214
Loans and advances to customers 563,244 1,500,973 2,064,217
Other assets 32,619 24,531 57,150
Financial investments - 3,942 3,942
Intangible assets 6,116 23,471 29,587
Property, plant and equipment 107,600 166,706 274,306
Right-of-use assets 5,987 46,829 52,816
Investment property - 5,950 5,950
2,484,221 1,859,619 4,343,840
LIABILITIES
Deposits from banks 3,410 190,000 193,410
Derivative financial instruments 66 966 1,032
Deposits from customers 3,687,489 72,078 3,759,567
Current tax liability 294 - 294
Other liabilities 40,700 - 40,700
Deferred tax liability - 4,910 4,910
Lease liabilities 2,559 51,202 53,761
Debt securities in issue - 37,726 37,726
3,734,518 356,882 4,091,400
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
Company as at 31 December 2023:
Due within one year Due after more than one year Total
At 31 December 2023 £000 £000 £000
ASSETS
Loans and advances to banks 7 - 7
Loans and advances to banks - due from subsidiary undertakings 616 - 616
Debt securities at amortised cost - 38,129 38,129
Deferred tax asset - 520 520
Property, plant and equipment - 130 130
Other assets 1,449 - 1,449
Interests in subsidiaries - 164,354 164,354
2,072 203,133 205,205
LIABILITIES
Current tax liability 2,641 - 2,641
Other liabilities 5,536 - 5,536
Debt securities in issue - 37,726 37,726
8,177 37,726 45,903
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
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:
2023
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 - - - - - - 826,397 826,397
Loans and advances to banks - - - - - - 79,381 79,381
Debt securities at amortised cost - - - - - - 942,437 942,437
Assets classified as held for sale - - - - - - 3,281 3,281
Derivative financial instruments - - - - - - 4,214 4,214
Loans and advances to customers (Gross of ECL) 1,442,827 124,905 200,606 240,178 3,113 59,396 - 2,071,025
Stage 1 1,333,006 95,231 194,571 223,912 3,113 59,109 - 1,908,942
Stage 2 59,681 10,084 2,267 10,432 - 287 - 82,751
Stage 3 50,140 19,590 3,768 5,834 - - - 79,332
Other assets - - - - - - 22,361 22,361
Financial investments - - - - - - 3,942 3,942
Off-balance sheet:
Guarantees 2,051 - - - - - - 2,051
Loan commitments and other credit related liabilities 156,027 - - 294,399 113 - - 450,539
At 31 December 1,600,905 124,905 200,606 534,577 3,226 59,396 1,882,013 4,405,628
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
The Company's maximum exposure to credit risk (all stage 1) before collateral
held or other credit enhancements is as follows:
2023 2022
£000 £000
Credit risk exposures relating to on-balance sheet assets are as follows:
Loans and advances to banks 623 8,434
Debt securities at amortised cost 38,129 24,437
At 31 December 38,752 32,871
The above tables represent the maximum credit risk exposure (net of
impairment) to the Group and Company at 31 December 2023 and 2022 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:
2023
Banking Mortgage Portfolios Total
Loan Balance Collateral Loan Balance Collateral Loan Balance Collateral
Group £000 £000 £000 £000 £000 £000
Less than 60% 1,029,694 2,374,285 82,690 202,310 1,112,384 2,576,595
Stage 1 961,118 2,225,190 64,514 158,253 1,025,632 2,383,443
Stage 2 48,766 102,890 7,530 18,493 56,296 121,383
Stage 3 19,810 46,205 10,646 25,564 30,456 71,769
60%-80% 332,632 528,678 27,929 43,196 360,561 571,874
Stage 1 308,321 491,617 20,814 32,103 329,135 523,720
Stage 2 8,578 13,530 1,649 2,655 10,227 16,185
Stage 3 15,733 23,531 5,466 8,438 21,199 31,969
80%-100% 23,236 27,603 8,466 10,710 31,702 38,313
Stage 1 23,236 27,603 6,132 7,608 29,368 35,211
Stage 2 - - 350 496 350 496
Stage 3 - - 1,984 2,606 1,984 2,606
Greater than 100%* 20,952 9,843 5,820 6,354 26,772 16,197
Stage 1 3,350 2,583 3,772 3,895 7,122 6,478
Stage 2 1,978 260 554 691 2,532 951
Stage 3 15,624 7,000 1,494 1,768 17,118 8,768
Total 1,406,514 2,940,409 124,905 262,570 1,531,419 3,202,979
*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 £1.0m in the form of cash deposits and security over
Arbuthnot Latham Investment Management Portfolios and personal guarantees of
£7.0m. Non-property collateral reduces loan to value below 100% for all such
exposures in the Banking segment.
The table below represents an analysis of 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 loan commitments compared to the
values of property collateral for the Group (all Stage 1):
2023
Loan commitments Collateral
Group £000 £000
Less than 60% 34,105 178,155
60%-80% 22,261 31,524
Greater than 100% 9,042 2,992
Total 65,408 212,671
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
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 2023, loans for which forbearance measures were in place
totalled 3.45% (2022: 3.0%) of total value of loans to customers for the
Group. These are set out in the following table:
2023
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 - - - - 2 4,157 2 4,157
Term extension - - 11 3,701 2 796 13 4,497
Time for refinance with third party - - - - 1 2,360 1 2,360
Payment holiday - - 13 23,771 3 5,490 16 29,261
Covenant waived - - 1 8,205 - - 1 8,205
Switch to interest only - - 2 1,882 - - 2 1,882
Modification in terms and conditions - - 39 10,212 41 8,868 80 19,080
Restructure - - 2 1,236 3 457 5 1,693
Total forbearance - - 68 49,007 52 22,128 120 71,135
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 term 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
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
2023 2022 2023 2022
£000 £000 £000 £000
Concentration by product
Asset based lending* 239,777 268,825 294,399 250,276
Asset finance 257,547 148,788 113 1,312
Cash collateralised 11,464 14,143 8,500 611
Commercial lending 125,193 156,250 7,660 25,720
Investment portfolio secured 16,697 24,485 1,458 2,086
Residential mortgages 1,302,177 1,339,789 103,643 109,948
Mixed collateral* 92,004 69,433 8,710 44,590
Unsecured** 19,358 14,364 26,056 36,535
At 31 December 2,064,217 2,036,077 450,539 471,078
Concentration by location
East Anglia 24,837 28,668 1,938 2,776
London 754,291 759,584 55,175 178,576
Midlands 102,907 86,442 12,433 4,778
North East 66,039 42,897 8,535 18
North West 84,675 94,341 11,342 3,531
Northern Ireland 3,293 3,593 - -
Scotland 13,555 20,220 50 -
South East 255,597 236,658 18,757 884
South West 181,286 179,034 9,646 5,273
Wales 14,621 15,174 2,007 5,001
Non-property collateral 563,116 569,466 330,656 270,241
At 31 December 2,064,217 2,036,077 450,539 471,078
* Mixed collateral is where there is no single, overall majority
collateral type
** Included within unsecured are £7.8m (2022: £9.0m) 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.
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.
(c) Macroeconomic and competitive environment
The Group is exposed to risks that may arise from 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 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 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.
(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 26, a stress test
scenario of a 10% (2022: 10%) decline in market prices, would result in a
£Nil (2022: £Nil) decrease in the Group's income and a decrease of £0.4m
(2022: £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 26, a stress test
scenario of a 10% (2022: 10%) decline in market prices, would result in a
£Nil (2022: £Nil) decrease in the Company's income and a decrease of £Nil
(2022: £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 2023. Included in the table below are the Group's assets and
liabilities at carrying amounts, categorised by currency.
GBP (£) USD ($) Euro (€) Other Total
At 31 December 2023 £000 £000 £000 £000 £000
ASSETS
Cash and balances at central banks 826,132 133 - 294 826,559
Loans and advances to banks 13,622 27,832 30,845 7,082 79,381
Debt securities at amortised cost 697,902 161,991 82,543 1 942,437
Assets classified as held for sale - - 3,281 - 3,281
Derivative financial instruments 4,213 1 - - 4,214
Loans and advances to customers 2,060,235 (139) 3,210 911 2,064,217
Other assets 19,129 - 3,232 - 22,361
Financial investments - 3,942 - - 3,942
3,621,233 193,760 123,111 8,288 3,946,392
LIABILITIES
Deposits from banks 193,410 - - - 193,410
Derivative financial instruments 1,020 1 - 11 1,032
Deposits from customers 3,453,720 190,052 108,053 7,742 3,759,567
Other liabilities 18,303 - 239 - 18,542
Debt securities in issue 24,720 - 13,006 - 37,726
3,691,173 190,053 121,298 7,753 4,010,277
Net on-balance sheet position (69,940) 3,707 1,813 535 (63,885)
Credit commitments 450,539 - - - 450,539
The table below summarises the Group's exposure to foreign currency exchange
risk at 31 December 2022:
GBP (£) USD ($) 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
Derivative financial instruments (see Note 21) 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 £11k increase (2022: £35k
decrease) in Group profits and equity, while a 10% weakening of the pound
against the US dollar would lead to the same decrease (2022: increase) in
Group profits and equity. Additionally, the Group holds a property classified
as asset held for sale and measured at £3.3m (2022: £3.3m). The property is
located in the EU and relates to a Euro denominated loan where the property
was repossessed and is being held for sale. Including this Euro asset, the net
Euro exposure is positive £2.9m (2022: £3.3m).
The table below summarises the Company's exposure to foreign currency exchange
rate risk at 31 December 2023:
GBP (£) Euro (€) Total
At 31 December 2023 £000 £000 £000
ASSETS
Loans and advances to banks 623 - 623
Debt securities at amortised cost 24,989 13,140 38,129
Other assets 1,391 - 1,391
27,003 13,140 40,143
LIABILITIES
Other liabilities 1,796 - 1,796
Debt securities in issue 24,720 13,006 37,726
26,517 13,006 39,522
Net on-balance sheet position 487 134 621
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)
A 10% strengthening of the pound against the Euro would lead to £12k increase
(2022: £9k increase) in the Company profits and equity, conversely a 10%
weakening of the pound against the Euro would lead to a £15k decrease (2022:
£8k decrease) 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 both assets and liabilities. 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. The current
position of the balance sheet is such that it results in an favourable impact
on the economic value of equity of £2.8m (2022: adverse impact of £0.3m) for
a positive 200bps shift and an adverse impact of £3.3m (2022: favourable
impact of £0.3m) for a negative 200bps movement.
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 2023 £000 £000 £000 £000 £000 £000 £000
ASSETS
Cash and balances at central banks 826,559 - - - - - 826,559
Loans and advances to banks 79,381 - - - - - 79,381
Debt securities at amortised cost 352,617 220,504 286,309 83,007 - - 942,437
Derivative financial instruments 4,214 - - - - - 4,214
Loans and advances to customers 1,717,677 19,485 50,758 256,348 7,120 12,829 2,064,217
Other assets* - - - - - 423,090 423,090
Financial investments - - - - - 3,942 3,942
2,980,448 239,989 337,067 339,355 7,120 439,861 4,343,840
LIABILITIES AND EQUITY
Deposits from banks 193,410 - - - - - 193,410
Derivative financial instruments 1,032 - - - - - 1,032
Deposits from customers 2,789,024 420,826 477,639 66,328 5,750 - 3,759,567
Other liabilities** - - - - - 99,665 99,665
Debt securities in issue 37,726 - - - - - 37,726
Equity 50,236 8,609 12,275 121,802 15,051 44,467 252,440
3,071,428 429,435 489,914 188,130 20,801 144,132 4,343,840
Impact of derivative instruments 61,220 - - (61,220) - -
Interest rate sensitivity gap (29,760) (189,446) (152,847) 90,005 (13,681) 295,729
Cumulative gap (29,760) (219,206) (372,053) (282,048) (295,729) -
* 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 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 AND EQUITY
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.
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 2023 £000 £000 £000 £000 £000 £000 £000
ASSETS
Loans and advances to banks 7 - - - - - 7
Loans and advances to banks - due from subsidiary 580 - - - - 36 616
Debt securities at amortised cost 38,129 - - - - - 38,129
Other assets* - - - - - 166,453 166,453
38,716 - - - - 166,489 205,205
LIABILITIES AND EQUITY
Other liabilities** - - - - - 8,176 8,176
Debt securities in issue 37,726 - - - - - 37,726
Equity - - - - - 159,303 159,303
37,726 - - - - 167,479 205,205
Interest rate sensitivity gap 990 - - - - (990)
Cumulative gap 990 990 990 990 990 -
* 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
Loans and advances to banks - due from subsidiary 8,377 - - - - 50 8,427
Debt securities at amortised cost 24,437 - - - - - 24,437
Other assets* - - - - - 160,081 160,081
32,820 - - - - 160,131 192,951
LIABILITIES AND EQUITY
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.
(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. 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 2023:
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 2023 £000 £000 £000 £000 £000 £000
Financial liability by type
Non-derivative liabilities
Deposits from banks 193,410 (212,267) (5,904) (7,481) (198,882) -
Deposits from customers 3,759,567 (3,831,717) (2,877,406) (879,887) (68,351) (6,073)
Other liabilities 18,542 (20,085) (18,542) - - (1,543)
Debt securities in issue 37,726 (50,223) (1,077) (26,238) (3,575) (19,333)
Issued financial guarantee contracts - (2,051) (2,051) - - -
Unrecognised loan commitments - (450,539) (450,539) - - -
4,009,245 (4,566,882) (3,355,519) (913,606) (270,808) (26,949)
Derivative liabilities
Risk management:
- Outflows 1,032 (1,032) (66) - (966) -
1,032 (1,032) (66) - (966) -
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 2023 £000 £000 £000 £000 £000 £000
Financial asset by type
Non-derivative assets
Cash and balances at central banks 826,559 826,559 826,559 - - -
Loans and advances to banks 79,381 79,381 79,381 - - -
Debt securities at amortised cost 942,437 954,382 356,957 513,922 83,503 -
Assets classified as held for sale 3,281 3,281 - 3,281 - -
Loans and advances to customers 2,064,217 2,497,314 477,308 281,451 1,595,366 143,189
Other assets 22,361 22,361 22,361 - - -
Financial investments 3,942 3,942 3,942 - - -
3,942,178 4,387,220 1,766,508 798,654 1,678,869 143,189
Derivative assets
Risk management:
- Inflows 4,214 4,214 4 - 4,210 -
4,214 4,214 4 - 4,210 -
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) (11,027) - (225,000) -
Deposits from customers* 3,092,549 (3,164,453) (2,329,095) (758,870) (76,488) -
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) (2,820,091) (761,589) (316,028) (46,758)
Derivative liabilities
Risk management:
- Outflows 135 (135) (135) - - -
135 (135) (135) - - -
* Prior year figures have been restated to present cash flows on the same
basis as maturity analysis in Note 5.
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:
- Inflows 6,322 6,322 113 - 6,209 -
6,322 6,322 113 - 6,209 -
The table below sets out the components of the Group's liquidity reserves:
31 December 2023 31 December 2022
Amount Fair value Amount Fair value
Liquidity reserves £000 £000 £000 £000
Cash and balances at central banks 826,559 826,559 732,729 732,729
Loans and advances to banks 79,381 79,381 115,787 115,787
Debt securities at amortised cost 942,437 943,231 439,753 439,389
1,848,377 1,849,171 1,288,269 1,287,905
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 2023 were
£253m (2022: £225m). Assets are encumbered due to the Term Funding Scheme
(Note 32).
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 2023:
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 2023 £000 £000 £000 £000 £000 £000
Financial liability by type
Non-derivative liabilities
Other liabilities 1,796 (1,796) (256) - - (1,540)
Debt securities in issue 37,726 (50,223) (1,077) (26,238) (3,575) (19,333)
39,522 (52,019) (1,333) (26,238) (3,575) (20,873)
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 2023 £000 £000 £000 £000 £000 £000
Financial asset by type
Non-derivative assets
Loans and advances to banks 623 623 623 - - -
Debt securities at amortised cost 38,129 50,356 1,080 26,247 3,632 19,397
38,752 50,979 1,703 26,247 3,632 19,397
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) - - - (470)
Debt securities in issue 37,594 (64,898) (892) (2,719) (14,540) (46,747)
38,064 (65,368) (892) (2,719) (14,540) (47,217)
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 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, because the assets do not meet the recognition criteria. 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 £1.7bn (2022:
£1.3bn). 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 2023 £000 £000 £000 £000 £000
ASSETS
Cash and balances at central banks - - 826,559 826,559 826,559
Loans and advances to banks - - 79,381 79,381 79,381
Debt securities at amortised cost - - 942,437 942,437 943,231
Derivative financial instruments 4,214 - - 4,214 4,214
Loans and advances to customers - - 2,064,217 2,064,217 2,058,780
Other assets - - 22,361 22,361 22,361
Financial investments - 3,942 - 3,942 3,942
4,214 3,942 3,934,955 3,943,111 3,938,468
LIABILITIES
Deposits from banks - - 193,410 193,410 193,410
Derivative financial instruments 1,032 - - 1,032 1,032
Deposits from customers - - 3,759,567 3,759,567 3,759,567
Other liabilities - - 18,542 18,542 18,542
Debt securities in issue - - 37,726 37,726 37,726
1,032 - 4,009,245 4,010,277 4,010,277
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
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 2023 £000 £000 £000 £000 £000
ASSETS
Loans and advances to banks - - 623 623 623
Debt securities at amortised cost - - 38,129 38,129 38,129
Other assets - - 1,391 1,391 1,391
- - 40,143 40,143 40,143
LIABILITIES
Other liabilities - - 1,796 1,796 1,796
Debt securities in issue - - 37,726 37,726 37,726
- - 39,522 39,522 39,522
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
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 2023 £000 £000 £000 £000
ASSETS
Derivative financial instruments - 4,214 - 4,214
Financial investments - - 3,942 3,942
- 4,214 3,942 8,156
LIABILITIES
Derivative financial instruments - 1,032 - 1,032
- 1,032 - 1,032
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
- 6,322 3,404 9,726
LIABILITIES
Derivative financial instruments - 135 - 135
- 135 - 135
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 2023 2022
Movement in level 3 £000 £000
At 1 January 3,404 3,169
Purchases 177 53
Disposals (51) (640)
Movements recognised in Other Comprehensive Income 412 822
At 31 December 3,942 3,404
Visa Inc. investment
Arbuthnot Latham currently holds preference shares in Visa Inc., valued at
£2.4m (2022: £2.0m) as at 31 December 2023. 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.
The haircut is classified as a significant unobservable input. Management have
assessed that should the haircut increase by 5 percentage points this would
impact equity by £46k and an increase of 10 percentage points would impact
equity by £92k.
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 2023 Arbuthnot Latham
& Co., Ltd had made capital contributions into the Fund of USD2.0m (2022:
USD1.8m).
The investment is classified as FVOCI and is valued at fair value by Hetz
Ventures, L.P. at £1.5m (2022: £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.
The fair values provided by the Hetz Ventures funds are classified as
significant unobservable inputs. Management have assessed that should the fund
valuation decrease by 5% this would impact equity by £77k and a reduction of
10% would impact equity by £153k.
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 2023 £000 £000 £000 £000
ASSETS
Cash and balances at central banks - 826,559 - 826,559
Loans and advances to banks - 79,381 - 79,381
Debt securities at amortised cost - 943,231 - 943,231
Loans and advances to customers - - 2,058,780 2,058,780
Other assets - - 22,361 22,361
- 1,849,171 2,081,141 3,930,312
LIABILITIES
Deposits from banks - 193,410 - 193,410
Deposits from customers - 3,759,567 - 3,759,567
Other liabilities - - 18,542 18,542
Debt securities in issue - - 37,726 37,726
- 3,952,977 56,268 4,009,245
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
Company Level 1 Level 2 Level 3 Total
At 31 December 2023 £000 £000 £000 £000
ASSETS
Loans and advances to banks - 7 616 623
Debt securities at amortised cost - 38,129 - 38,129
- 38,136 616 38,752
LIABILITIES
Other liabilities - - 1,796 1,796
Debt securities in issue - - 37,726 37,726
- - 39,522 39,522
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
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 Pillar 1 and the Pillar 2A capital
requirements. The current Total Capital Requirement 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:
2023 2022
£000 £000
CET1 Capital
Share capital 167 154
Share premium 11,606 -
Capital redemption reserve 19 19
Treasury shares (1,299) (1,299)
Retained earnings* 240,606 212,037
IFRS 9 - Transitional add back 265 523
Fair value reserve 1,341 1,067
Deduction for goodwill (5,202) (5,202)
Deduction for other intangibles (24,385) (27,347)
Deduction for deferred tax asset that do not arise from temporary differences (818) (4,567)
Deduction for Prudent valuation (9) (10)
CET1 capital resources 222,291 175,375
Tier 2 Capital
Debt securities in issue 37,726 37,594
Total Tier 2 capital resources 37,726 37,594
Own Funds (sum of Tier 1 and Tier 2) 260,017 212,969
CET1 Capital Ratio (CET1 Capital/Total Risk Exposure)* 13.0% 11.6%
Total Capital Ratio (Own Funds/Total Risk Exposure)* 15.2% 14.0%
* Includes current year audited profit.
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
resources, risk exposures and risk assessment processes. Our Pillar 3
disclosures for the year ended 31 December 2023 are published as a separate
document on the Group's 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.
Net interest income is analysed as follows.
2023 2022
£000 £000
Cash and balances at central banks 34,275 8,681
Loans and advances to banks 4,990 6
Debt securities at amortised cost 29,929 6,374
Loans and advances to customers 162,642 104,952
Total interest income 231,836 120,013
Deposits from banks (9,032) (3,334)
Deposits from customers (80,413) (14,243)
Debt securities in issue (4,506) (2,723)
Interest on lease liabilities (1,266) (632)
Total interest expense (95,217) (20,932)
Net interest income 136,619 99,081
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 2023 £000 £000 £000 £000 £000 £000 £000
Banking commissions 1,621 - 45 6,911 13 1,022 9,612
Foreign exchange fees 1,307 - - - - 886 2,193
Investment management fees - 10,909 - - - - 10,909
Wealth planning fees - 456 - - - - 456
Total fee and commission income 2,928 11,365 45 6,911 13 1,908 23,170
Group Banking Wealth Management RAF ACABL ASFL All other divisions Total
At 31 December 2022 £000 £000 £000 £000 £000 £000 £000
Banking and services fees 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
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 sale 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:
2023 2022
Group £000 £000
Income from lease or rental of commercial vehicles 57,529 42,456
Sale of commercial vehicles 31,440 44,385
Income from service and maintenance contracts 11,244 12,088
Other income 739 438
Revenue 100,952 99,367
Depreciation and rental costs of commercial vehicles held for lease or rent (40,367) (31,218)
Carrying amount of vehicles disposed (29,772) (38,259)
Service & maintenance cost (10,935) (12,632)
Cost of goods sold (81,074) (82,109)
Gross profit from leasing activities 19,878 17,258
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 17), loans and advances to
banks (Note 18) and debt securities at amortised cost (Note 19). 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.
2023 2022
£000 £000
Net Impairment losses / (reversals) on financial assets 3,191 5,503
Of which:
Stage 1 (279) 1,078
Stage 2 299 53
Stage 3 3,301 4,231
Impairment losses / (reversals) on financial investments (130) 142
3,191 5,503
During the year, the Group recovered £24k (2022: £55k) of loans which had
previously been written off.
12. Other income
Included in other income is £0.9m recognised on a non-refundable deposit from
a property owned by the Group and £0.4m in relation to a negligent property
valuation.
Other items reflected in other income include rental income from the
investment property of £0.7m (2022: £0.9m).
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.
13. Operating expenses
2023 2022
Operating expenses comprise: £000 £000
Staff costs, including Directors:
Wages, salaries and bonuses 68,414 61,359
Social security costs 7,960 7,534
Pension costs 3,335 2,861
Share based payment transactions (Note 40) 222 (18)
Amortisation of intangibles (Note 28) 4,924 4,026
Depreciation (Note 29, 30) 4,635 1,772
Profit on disposals of property, plant and equipment (15) (9)
Financial Services Compensation Scheme Levy 240 174
Charitable donations 70 118
Expenses relating to short-term leases 635 550
Write down of repossessed and commercial properties 2,616 647
Other administrative expenses 38,077 30,017
Total operating expenses from continuing operations 131,113 109,031
Details on Directors remuneration are disclosed in the Remuneration Report on
page 56.
2023 2022
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 131 123
accounts
Audit of the accounts of subsidiaries 591 564
Audit related assurance services 121 116
Total fees payable 843 803
14. 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.
2023 2022
United Kingdom corporation tax at 23.5% (2022: 19%) £000 £000
Current taxation
Corporation tax charge - current year 4,650 3,769
Corporation tax charge - adjustments in respect of prior years 25 246
4,675 4,015
Deferred taxation
Origination and reversal of temporary differences 7,152 286
Adjustments in respect of prior years (89) (750)
7,063 (464)
Income tax expense 11,738 3,551
Tax reconciliation
Profit before tax 47,117 20,009
Tax at 23.5% (2022: 19%) 11,073 3,802
Other permanent differences 297 (225)
Tax rate change 433 477
Prior period adjustments (65) (503)
Corporation tax charge for the year 11,738 3,551
Prior year permanent differences predominantly due to the disallowed costs on
the sale of the King Street property and Super Deduction allowances.
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.
15. Average number of employees
2023 2022
Banking 254 251
RAF 47 37
ACABL 31 28
ASFL 1 9
AAG 138 125
All Other Divisions 310 250
Group Centre 18 18
799 718
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.
16. 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 15,879,200 (2022: 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.
2023 2022
£000 £000
Profit after tax attributable to equity holders of the Company 35,379 16,458
2023 2022
p p
Basic Earnings per share 222.8 109.6
17. Cash and balances at central banks
2023 2022
Group £000 £000
Cash and balances at central banks 826,559 732,729
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.
18. Loans and advances to banks
2023 2022
Group £000 £000
Placements with banks included in cash and cash equivalents (Note 42) 79,381 115,787
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:
2023 2022
Group £000 £000
A1 79,381 115,595
A3 - 193
79,381 115,788
None of the loans and advances to banks are past due (2022: nil). ECL has been
assessed as insignificant.
2023 2022
Company £000 £000
Placements with banks included in cash and cash equivalents (Note 42) 623 8,434
Loans and advances to banks include bank balances of £Nil (2022: £11.5m)
with Arbuthnot Latham & Co., Ltd. ECL has been assessed as insignificant.
19. Debt securities at amortised cost
Debt securities represent certificates of deposit.
The movement in debt securities may be summarised as follows:
2023 2022
Group £000 £000
At 1 January 439,753 301,052
Exchange difference (8,973) 9,524
Additions 1,582,889 799,341
Redemptions (1,071,232) (670,164)
At 31 December 942,437 439,753
The table below presents an analysis of debt securities by rating agency
designation at 31 December, based on Moody's long term ratings:
2023 2022
Group £000 £000
Aaa 401,524 41,907
Aa1 76,543 89,805
Aa2 94,759 44,902
Aa3 294,471 50,000
A1 75,140 213,139
942,437 439,753
None of the debt securities are past due (2022: nil). ECL has been assessed as
immaterial.
The movement in debt securities for the Company may be summarised as follows:
2023 2022
Company £000 £000
At 1 January 24,437 24,367
Additions 16,801 2,396
Redemptions (3,109) (2,326)
At 31 December 38,129 24,437
The exposure relates to Arbuthnot Latham & Co., Limited, which is unrated.
The £25m subordinated loan notes were issued on 3 June 2019 and are
denominated in Pound Sterling. The principal amount outstanding at 31 December
2023 was £25m (2022: £25m). The notes carry interest at 7.75% over 3 month
average SONIA and are repayable at par in June 2029 unless redeemed or
repurchased earlier by the Arbuthnot Latham & Co., Limited. On 24 May 2023
an additional €15m subordinated loan notes were issued and denominated in
EURO. The principal amount outstanding at 31 December 2023 was €15m / £13m
(2022: £nil). The notes carry interest at 3% over 3 Month EURIBOR and are
repayable at par in August 2035. ECL has been assessed as immaterial.
20. 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
2023 2022
£000 £000
Repossessed property held for sale 3,281 3,279
3,281 3,279
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.
21. 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.
2023 2022
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 4,670 4 66 3,049 113 135
Interest rate swaps 61,220 4,210 966 51,376 6,209 -
65,890 4,214 1,032 54,425 6,322 135
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:
2023 2022
Group £000 £000
Aa1 - 250
A1 65,890 52,840
Unrated - 1,335
65,890 54,425
22. 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.
2023 2022
Fair value assets Fair value liabilities Fair value assets Fair value liabilities
Group £000 £000 £000 £000
Interest rate - Designated fair value hedges 4,220 976 6,184 -
Total interest rate derivatives 4,220 976 6,184 -
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 2023 and 31 December 2022, the Group held the following
interest rate swaps as hedging instruments in fair value hedges of interest
risk.
Maturity 2023 Maturity 2022
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) - 61,220 - - 48,120 -
Average fixed interest rate - 2.51% - - 1.79% -
The amounts relating to items designated as hedging instruments and hedge
ineffectiveness at 31 December 2023 were as follows:
2023
Nominal amount Carrying amount
Assets Liabilities
Group £000 £000 £000
Interest rate risk
Interest rate swaps - hedge of loans and advances 61,220 4,220 976
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 hedged items at 31 December 2023
were as follows:
2023
Carrying amount
Assets Liabilities
Group £000 £000
Loans and advances 58,323 -
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 -
Group 2023
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 (2,940) (100) Net interest income
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 2023
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 2,840 (3,839) 942
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) -
23. Loans and advances to customers
Analyses of loans and advances to customers:
2023
Stage 1 Stage 2 Stage 3 Total
Group £000 £000 £000 £000
Gross loans and advances at 1 January 2023 1,917,907 74,514 50,258 2,042,679
Originations and repayments 85,665 (42,029) (14,067) 29,569
Write-offs - - (1,223) (1,223)
Transfer to Stage 1 2,420 (2,185) (235) -
Transfer to Stage 2 (66,605) 66,895 (290) -
Transfer to Stage 3 (30,445) (14,443) 44,888 -
Gross loans and advances at 31 December 2023 1,908,942 82,752 79,331 2,071,025
Less allowances for ECLs (see Note 24) (900) (429) (5,479) (6,808)
Net loans and advances at 31 December 2023 1,908,042 82,323 73,852 2,064,217
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 217,525 (36,398) (10,823) 170,304
Repayments and 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 24) (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
*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):
2023
Banking Mortgage Portfolios RAF ACABL ASFL AAG All Other Divisions Total
Group £000 £000 £000 £000 £000 £000 £000 £000
Stage 1 1,332,535 95,218 194,423 223,865 3,078 58,923 - 1,908,042
Stage 2 59,472 10,063 2,146 10,355 - 287 - 82,323
Stage 3 47,607 18,466 2,221 5,558 - - - 73,852
At 31 December 2023 1,439,614 123,747 198,790 239,778 3,078 59,210 - 2,064,217
2022
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
Analyses of past due loans and advances to customers by division:
2023
Banking Mortgage Portfolios RAF ACABL ASFL All Other Divisions Total
Group £000 £000 £000 £000 £000 £000 £000
Up to 30 days 77,211 3,902 1,969 - - - 83,082
Stage 1 56,487 3,476 1,872 - - - 61,835
Stage 2 20,678 261 53 - - - 20,992
Stage 3 46 165 44 - - - 255
30 - 60 days 1,815 4,687 246 - - - 6,748
Stage 2 1,797 4,508 225 - - - 6,530
Stage 3 18 179 21 - - - 218
60 - 90 days 421 3,030 180 - - - 3,631
Stage 2 50 3,030 151 - - - 3,231
Stage 3 371 - 29 - - - 400
Over 90 days 50,258 19,992 3,256 - - - 73,506
Stage 2 3,969 - - - - - 3,969
Stage 3 46,289 19,992 3,256 - - - 69,537
At 31 December 2023 129,705 31,611 5,651 - - - 166,967
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
Loans and advances to customers include finance lease receivables as follows:
2023 2022
Group £000 £000
Gross investment in finance lease receivables:
- No later than 1 year 99,863 54,086
- Later than 1 year and no later than 5 years 195,538 117,179
- Later than 5 years 394 748
295,795 172,013
Unearned future finance income on finance leases (37,795) (20,798)
Net investment in finance leases 258,000 151,215
The net investment in finance leases may be analysed as follows:
- No later than 1 year 78,509 43,537
- Later than 1 year and no later than 5 years 179,108 106,979
- Later than 5 years 383 699
258,000 151,215
(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
(2022: £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 £125.8m (2022: £69.2m), against loans of £79.3m
(2022: £50.3m). The weighted average loan-to-value of loans and advances in
Stage 3 is 63.0% (2022: 73%).
24. Allowances for impairment of loans and advances
An analysis of movements in the allowance for ECLs (2023):
Stage 1 Stage 2 Stage 3 Total
Group £000 £000 £000 £000
At 1 January 2023 1,147 130 5,324 6,601
Transfer to Stage 2 (241) 241 - -
Transfer to Stage 3 (23) (14) 37 -
Current year charge (29) 90 3,510 3,571
Change in assumptions 48 1 (162) (113)
Repayments and write-offs - (21) (3,230) (3,251)
At 31 December 2023 902 427 5,479 6,808
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
25. Other assets
2023 2022
Group £000 £000
Trade receivables 22,361 14,160
Inventory 24,917 29,210
Prepayments and accrued income 9,872 8,815
57,150 52,185
Trade receivables
Gross balance 22,511 14,506
Allowance for bad debts (150) (346)
Net receivables 22,361 14,160
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.
The Group's intention is to develop and sell the property and this has
therefore been recognised as inventory. The value of inventory for repossessed
collateral at 31 December 2023 is £4.8m (2022: £9.4m).
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 2023 the remaining property was
valued at net realisable value less costs to sell of £9.9m (2022: the
remaining property valued at cost of £10.2m).
2023 2022
Company £000 £000
Trade receivables 1,391 -
Prepayments and accrued income 58 74
1,449 74
26. Financial investments
2023 2022
Group £000 £000
Designated at fair value through other comprehensive income
- Unlisted securities 3,942 3,404
Total financial investments 3,942 3,404
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 £2.4m (2022: £2.0m). 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 £12k (2022: £Nil).
A further investment in an unlisted investment vehicle was made in 2023. The
carrying value at year end is £1.5m (2022: £1.4m) and the Group received a
distribution of £0.1m (2022: £0.6m) which included a gain of £0.1m (2022:
£0.5m) 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.
27. 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:
2023 2022
Group £000 £000
Accelerated capital allowances and other short-term timing differences (5,639) (2,196)
Movement in fair value of financial investments FVOCI (300) (209)
Unutilised tax losses 819 4,567
IFRS 9 adjustment* 210 263
Deferred tax (liability)/asset (4,910) 2,425
At 1 January 2,425 2,562
Other Comprehensive Income - FVOCI (91) (57)
Profit and loss account - accelerated capital allowances and other short-term (3,443) (2,233)
timing differences
Profit and loss account - tax losses (3,748) 2,198
IFRS 9 adjustment* (53) (45)
Deferred tax (liability)/asset at 31 December (4,910) 2,425
* This relates to the timing difference on the adoption of IFRS 9 spread over
10 years for tax purposes.
2023 2022
Company £000 £000
Accelerated capital allowances and other short-term timing differences 7 10
Movement in fair value of financial investments 147 147
Unutilised tax losses 366 366
Deferred tax asset 520 523
At 1 January 523 523
Profit and loss account - accelerated capital allowances and other short-term (3)
timing differences
Deferred tax asset at 31 December 520 523
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.
28. 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.
Expenditure on internally developed software is recognised as an asset when
the Group is able to demonstrate: that the product is technically and
commercially feasible, its intention and ability to complete the development
and use the software in a manner that will generate future economic benefits,
and that it can reliably measure the costs to complete the development. The
capitalised costs of internally developed software include all costs directly
attributable to developing the software, and are amortised over its useful
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 2022 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
Additions - 985 888 1,873
Disposals - - (350) (350)
At 31 December 2023 5,202 37,995 6,829 50,026
Accumulated amortisation
At 1 January 2022 - (11,103) (1,699) (12,802)
Amortisation charge - (2,964) (188) (3,152)
At 31 December 2022 - (14,067) (1,887) (15,954)
Amortisation charge - (3,906) (579) (4,485)
At 31 December 2023 - (17,973) (2,466) (20,439)
Net book amount
At 31 December 2022 5,202 22,943 4,404 32,549
At 31 December 2023 5,202 20,022 4,363 29,587
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 (2022:
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 (2022: 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 4.6%
(2022: 3.1%) was used for income and 7.4% (2022: 8.1%) for expenditure from
2023 to 2025 (these rates were the best estimate of future forecasted
performance), while a 3% (2022: 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% (2022: 3%) was used (this rate was the best
estimate of future forecasted performance).
Cash flows were discounted at a pre-tax rate of 14.7% (2022: 14.7%) 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 2022 7
At 31 December 2022 7
At 31 December 2023 7
Accumulated amortisation
At 1 January 2022 (5)
Amortisation charge (1)
At 31 December 2022 (6)
Amortisation charge (1)
At 31 December 2023 (7)
Net book amount
At 31 December 2022 1
At 31 December 2023 -
29. 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 2022 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
Additions 3,979 161,235 4 627 235 166,080
Disposals - (62,181) - - (10) (62,191)
At 31 December 2023 11,727 309,623 17 6,873 848 329,088
Accumulated depreciation
At 1 January 2022 (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)
Depreciation charge (857) (40,219) (3) (680) (121) (41,880)
Disposals - 37,018 - - 6 37,024
At 31 December 2023 (6,644) (42,032) (12) (5,814) (280) (54,782)
Net book amount
At 31 December 2022 1,961 171,738 4 1,112 458 175,273
At 31 December 2023 5,083 267,591 5 1,059 568 274,306
Computer and other equipment Motor Vehicles Total
Company £000 £000 £000
Cost or valuation
At 1 January 2022 217 91 308
Additions 1 - 1
At 31 December 2022 218 91 309
Additions (1) - (1)
At 31 December 2023 217 91 308
Accumulated depreciation
At 1 January 2022 (88) (82) (170)
Depreciation charge - (9) (9)
At 31 December 2022 (88) (91) (179)
Depreciation charge - 1 1
At 31 December 2023 (88) (90) (178)
Net book amount
At 31 December 2022 130 - 130
At 31 December 2023 129 1 130
Minimum lease payments receivable under operating and contract hire leases
fall due as follows:
2023 2022
Group £000 £000
Maturity analysis for operating lease receivables:
- No later than 1 year 55,763 35,848
- Later than 1 year and no later than 5 years 70,225 46,583
- Later than 5 years 5,131 1,095
131,119 83,526
30. 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:
Properties Equipment Total
Group £000 £000 £000
At 1 January 2022 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
Additions 49,228 23 49,251
Amortisation (3,524) (149) (3,673)
Derecognition (476) - (476)
At 31 December 2023 52,637 177 52,816
Additions for 2023 include £48.3m in relation to the 15-year lease on the new
Finsbury Circus office, signed for in September 2023.
In the year, the Group received £Nil (2022: £Nil) of rental income from
subleasing right-of-use assets through operating leases.
The Group recognised £1.3m (2022: £0.7m) of interest expense related to
lease liabilities. The Group also recognised £0.6m (2022: £0.6m) of expense
in relation to leases with a duration of less than 12 months.
31. 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.
2023 2022
Group £000 £000
Opening balance 6,550 6,550
Fair value adjustment (600) -
At 31 December 2023 5,950 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 4.2 (c)). The
fair value of the investment property was determined by an external,
independent property valuer, having appropriate recognised professional
qualifications and recent experience in the location and category of property
being valued.
The fair value measurements for the investment property have been categorised
as Level 3 fair value measurement.
The Group recognised £0.7m (2022: £0.5m) rental income during the year and
incurred £0.7m (2022: £0.07m) of direct operating expenses. The property
remained tenanted during 2023.
32. Deposits from banks
2023 2022
Group £000 £000
193,410 236,027
Deposits from banks include £190m (2022: £225m) obtained through the Bank of
England Term Funding Scheme with additional incentives for small and
medium-sized enterprises ("TFSME"). £177.6m of TFSME is maturing in 2025,
with the remaining £12.4m maturing in 2027.
33. Deposits from customers
2023 2022
Group £000 £000
Current/demand accounts 2,161,285 1,924,035
Notice accounts 180,854 296,400
Term deposits 1,417,428 872,114
3,759,567 3,092,549
Included in customer accounts are deposits of £32.6m (2022: £15.4m) 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.
34. Other liabilities
2023 2022
Group £000 £000
Trade payables 18,542 4,954
Accruals and deferred income 22,158 21,190
40,700 26,144
2023 2022
Company £000 £000
Trade payables 1,796 470
Accruals and deferred income 3,740 3,021
5,536 3,491
35. 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 2022 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
Additions 48,175 23 48,198
Interest expense 1,336 9 1,345
Lease payments (3,496) (158) (3,654)
At 31 December 2023 53,602 159 53,761
Maturity analysis
2023 2022
Group £000 £000
Less than one year 2,734 3,675
One to five years 20,239 3,502
More than five years 67,497 8,560
Total undiscounted lease liabilities at 31 December 90,470 15,737
Lease liabilities included in the statement of financial position at 31 53,761 7,872
December
Current 2,559 3,398
Non-current 51,202 4,474
36. 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.
2023 2022
Group and Company £000 £000
Subordinated loan notes 37,726 37,594
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 2023 was
€15.0m / £13.0m (2022: €15.0m / £13.3m). 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 amount that will be required to be paid at maturity of the
above debt securities is €15.0m.
The fair value of these Euro subordinated loan notes approximates their
carrying value.
Pounds Sterling 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 2023 was
£25.0m (2022: £25.0m). The notes carry interest at 7.75% over three month
average GBP SONIA and are repayable at par in June 2029 unless redeemed or
repurchases earlier by the Company.
The contractual amount that will be required to be paid at maturity of the
above debit securities is £25.0m.
On 19 December 2023 Arbuthnot Banking Group renewed its subordinated loan
notes. The new facility principal was increased to £26.0m and will be used to
redeem the existing facility, expected 3 June 2024 which is the fifth
anniversary of the initial loan. The facility currently remains undrawn. The
notes will carry interest at 7.25% over 3 month average GBP SONIA.
The fair value of these subordinated loan notes approximates their carrying
value.
37. 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 2023, the Group had capital commitments of £0.4m (2022:
£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:
2023 2022
Group £000 £000
Guarantees and other contingent liabilities 2,051 3,253
Commitments to extend credit:
- Original term to maturity of one year or less 450,539 471,078
452,590 474,331
38. Share capital and share premium
31 December 2023 31 December 2022
Group and Company £000 £000
Share capital 167 154
Share premium 11,606 -
Share capital and share premium 11,773 154
Ordinary share capital
Number of Share
shares Capital
Group and Company £000
At 1 January 2023 15,279,322 153
Issue of shares 1,297,297 13
At 31 December 2023 16,576,619 166
Ordinary non-voting share capital
Number of Share
shares Capital
Group and Company £000
At 1 January 2023 152,621 1
At 31 December 2023 152,621 1
Total share capital
Number of Share
shares Capital
Group and Company £000
At 1 January 2023 15,431,943 154
Issue of shares 1,297,297 13
At 31 December 2023 16,729,240 167
(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 (2022: 1p per share). At
31 December 2023 the Company held 409,314 shares (2022: 409,314) in treasury.
This includes 390,274 (2022: 390,274) Ordinary shares and 19,040 (2022:
19,040) Ordinary Non-Voting shares.
During the year the Company's issued share capital increased by 1,297,297
ordinary shares through the allotment and issue of ordinary shares through the
placing of and subscription for new voting Ordinary shares in the Company,
raising approximately £12.0 million in a fundraising. The shares were
allotted and issued on 5 May 2023 at the placing price on a non-pre-emptive
basis pursuant to authorities granted to the directors of the Company at the
general meeting held on 4 May 2023.
39. Reserves and retained earnings
2023 2022
Group £000 £000
Capital redemption reserve 19 19
Fair value reserve 1,341 1,067
Treasury shares (1,299) (1,299)
Retained earnings 240,606 212,037
Total reserves at 31 December 240,667 211,824
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.
2023 2022
Company £000 £000
Capital redemption reserve 19 19
Treasury shares (1,299) (1,299)
Retained earnings 148,809 152,115
Total reserves as 31 December 147,529 150,835
40. 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 had vested but lapsed as not exercised at 1591p before 14
June 2023. The second tranche of the share options had not vested as
performance conditions had not been met, due to the non-payment of dividends,
which was not possible in 2020 due to the regulatory response to the economic
impact of COVID. 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 these
options as at 31 December 2023 was £Nil (2022: £Nil).
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 2024 and the other 50% is exercisable
at any time after 23 July 2026. All share options awarded on 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 2023 was £0.36m (2022: £0.13m).
The performance conditions of the Scheme are that, 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 the Company or any of its
subsidiaries which has a material impact on the business of Group and for the
duration of the vesting period, there has been satisfactory growth in the
dividends paid by the Company.
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 2024 and
July 2026. The attrition rate will increase by 3% per year until the vesting
date. ABG had a cost £0.22m in relation to share based payments during 2023
(2022: £0.02m cost), as disclosed in Note 13.
Measurement inputs and assumptions used in the Black-Scholes model are as
follows:
2023 2022
Expected Stock Price Volatility 31.8% 33.6%
Risk Free Interest Rate 4.2% 2.5%
Average Expected Life (in years) 1.56 1.36
41. Dividends per share
The Directors recommend the payment of a final dividend of 27p (2022: 25p) per
share. This represents total dividends for the year of 46p (2022: 42p). The
final dividend, if approved by members at the 2023 AGM, will be paid on 31 May
2024 to shareholders on the register at close of business on 19 April 2024.
42. 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.
2023 2022
Group £000 £000
Cash and balances at central banks (Note 17) 826,559 732,729
Loans and advances to banks (Note 18) 79,381 115,787
905,940 848,516
2023 2022
Company £000 £000
Loans and advances to banks 623 8,434
43. 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.
2023 2022
Group - Directors and close family members £000 £000
Loans
Loans outstanding at 1 January 1,409 502
Loans advanced during the year 457 1,013
Loan repayments during the year (416) (106)
Loans outstanding at 31 December 1,450 1,409
Interest income earned 38 2
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 (2022: £nil).
2023 2022
Group - Directors and close family members £000 £000
Deposits
Deposits at 1 January 4,422 4,018
Deposits placed during the year 4,118 6,707
Deposits repaid during the year (5,350) (6,303)
Deposits at 31 December 3,190 4,422
Interest expense on deposits 72 2
Details of directors' remuneration are given in the Remuneration Report on
pages 55 and 57. The Directors do not believe that there were any other
transactions with key management or their close family members that require
disclosure, other than the subscription of shares by Sir Henry Angest at a
cost of £6,751,047.75 as reported in the Directors Report on page 43.
Details of principal subsidiaries are given in Note 44. Transactions and
balances with subsidiaries are shown below:
2023 2022
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 12,843 616 8,429 8,427
Due from subsidiary undertakings - Debt securities at amortised cost 38,129 38,129 24,885 24,437
Shares in subsidiary undertakings 164,354 164,354 159,404 159,354
215,326 203,099 192,718 192,218
Interest income 4,198 5
LIABILITIES
Due to subsidiary undertakings 1,339 1,540 776 243
1,339 1,540 776 243
Interest expense 223 369
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:
2023 2022
£000 £000
Arbuthnot Latham & Co., Ltd - Recharge of property and IT costs 896 896
Arbuthnot Latham & Co., Ltd - Recharge for costs paid on the Company's 3,543 1,127
behalf
Arbuthnot Latham & Co., Ltd - Recharge of costs paid on behalf of (2,100) (675)
Arbuthnot Latham & Co., Ltd
Arbuthnot Latham & Co., Ltd - Group recharges for shared services (9,764) (6,993)
Arbuthnot Latham & Co., Ltd - Group recharges for liquidity (5,814) (5,862)
Total (13,239) (11,507)
44. Interests in subsidiaries
Investment at cost Impairment provisions Net
Company £000 £000 £000
At 1 January 2023 159,354 - 159,354
Capital Contribution 5,000 - 5,000
At 31 December 2023 164,354 - 164,354
2023 2022
Company £000 £000
Subsidiary undertakings:
Bank 162,814 157,814
Other 1,540 1,540
Total 164,354 159,354
(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 2023:
% 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
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.
Arbuthnot Specialist Finance Limited is exempt from the requirement to prepare
audited accounts under section 479A of the Companies Act 2006.
(b) Non-controlling interests in subsidiaries
There were no non-controlling interests at the end of 2023 or 2022.
(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 £4.3bn and £4.1bn respectively
(2022: £3.6bn and £3.4bn respectively).
(d) Risks associated with interests
During the year Arbuthnot Banking Group PLC made £5.0m 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.
In 2022 Arbuthnot Banking Group PLC did not make capital contributions to
Arbuthnot Latham & Co., Ltd.
45. 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 2023 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Interest revenue 107,986 - 10,593 12,584 23,300 1,103 2,390 73,880 3 231,839
Inter-segment revenue - - - - - - - - (3) (3)
Interest revenue from external customers 107,986 - 10,593 12,584 23,300 1,103 2,390 73,880 - 231,836
Fee and commission income 3,168 11,417 - 45 6,911 13 - 1,616 - 23,170
Revenue - - - - - - 100,952 - - 100,952
Revenue from external customers 111,154 11,417 10,593 12,629 30,211 1,116 103,342 75,496 - 355,958
Interest expense 6,145 - (6,348) (4,540) (14,658) (352) (10,254) (60,509) (223) (90,739)
Cost of goods sold - - - - - - (81,074) - - (81,074)
Add back inter-segment revenue - - - - - - - - 3 3
Subordinated loan note interest - - - - - - - - (4,481) (4,481)
Fee and commission expense (551) (89) - (11) - - (12) (105) - (768)
Segment operating income 116,748 11,328 4,245 8,078 15,553 764 12,002 14,882 (4,701) 178,899
Impairment losses (1,227) - (821) (982) (234) 46 (98) 125 - (3,191)
Other income - - - 170 - - - 3,191 (839) 2,522
Operating expenses (52,073) (15,584) (833) (5,634) (6,777) (1,507) (15,093) (23,575) (10,037) (131,113)
Segment profit / (loss) before tax 63,448 (4,256) 2,591 1,632 8,542 (697) (3,189) (5,377) (15,577) 47,117
Income tax (expense) / income - - - (391) (2,017) 118 (488) (5,655) (3,305) (11,738)
Segment profit / (loss) after tax 63,448 (4,256) 2,591 1,241 6,525 (579) (3,677) (11,032) (18,882) 35,379
Loans and advances to customers 1,439,655 - 123,747 198,790 239,777 3,078 59,210 - (40) 2,064,217
Assets available for lease - - - - - - 267,591 - - 267,591
Other assets - - - - - - - 2,017,916 (5,884) 2,012,032
Segment total assets 1,439,655 - 123,747 198,790 239,777 3,078 326,801 2,017,916 (5,924) 4,343,840
Customer deposits 3,760,199 - - - - - - - (632) 3,759,567
Other liabilities - - - - - - - 329,879 1,954 331,833
Segment total liabilities 3,760,199 - - - - - - 329,879 1,322 4,091,400
Other segment items:
Capital expenditure - - - - - - - (218,035) 1 (218,034)
Depreciation and amortisation - - - - - - - (46,363) - (46,363)
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 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)
Segment profit is shown prior to any intra-group eliminations.
All operations of the Group are conducted wholly within the United Kingdom and
geographical information is therefore not presented.
46. 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 2023 Turnover employees before tax Tax paid
Location £m Number £m £m
UK 178.9 799 47.1 11.7
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
No public subsidies were received during 2023 or 2022.
47. Ultimate controlling party
The Company regards Sir Henry Angest, the Group Chairman and Chief Executive
Officer, who has a beneficial interest in 57.3% 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 43 of the consolidated financial
statements includes related party transactions with Sir Henry Angest.
48. Events after the balance sheet date
There were no material post balance sheet events to report.
Five Year Summary
2019 2020 2021 2022 2023
£000 £000 £000 £000 £000
Profit / (loss) for the year after tax 6,176 (1,332) 6,786 16,458 35,379
Profit / (loss) before tax from continuing operations 7,011 (1,090) 4,638 20,009 47,117
Total Earnings per share
Basic (p) 41.2 (8.9) 45.2 109.6 222.8
Earnings per share from continuing operations
Basic (p) 41.2 (8.9) 45.2 109.6 222.8
Dividends per share (p) - ordinary 16.0 - 38.0 42.0 46.0
- special - - 21.0 - -
2019 2020 2021 2022 2023
Other KPI:
Net asset value per share (p) 1,363.5 1,291.5 1,337.2 1,411.1 1,546.8
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