REG - Arbuthnot Banking - Final Results for the year to 31 December 2016 <Origin Href="QuoteRef">ARBB.L</Origin> - Part 4
23/03/2017 07:06
- Part 4: For the preceding part double click ID:nRSW2538Ac
individual loan in that portfolio. This evidence may include observable data indicating
that there has been an adverse change in the payment status of borrowers in a group, or national or local economic
conditions that correlate with defaults on assets in the Group. Management uses estimates based on historical loss
experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the
portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and
timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss
experience.
In assessing collective impairment the Group uses historical trends of the probability of default, the timing of recoveries
and the amount of loss incurred, adjusted for management's judgement as to whether current economic and credit conditions
are such that the actual losses are likely to be significantly different to historic trends. Default rates, loss rates and
the expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure that they remain
appropriate.
(b) Deferred tax on carried forward losses
The Group is subject to direct and indirect taxation in a number of jurisdictions. There may be some transactions and
calculations for which the ultimate tax determination has an element of uncertainty during the ordinary course of business.
The Group recognises liabilities based on estimates of the quantum of taxes that may be due. Deferred tax assets on carried
forward losses are recognised where it is probable that future taxable profits will be available to utilise it. Where the
final tax determination is different from the amounts that were initially recorded, such differences will impact the income
tax and deferred tax expense in the year in which the determination is made.
(c) Effective Interest Rate
Acquired loan books are initially recognised at fair value. Subsequently they are measured under the effective interest
rate method, based on cash flow models which require significant judgement assumptions on the interest rates, prepayment
rates, the probability and timing of defaults and the amount of incurred losses. 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 adjustment to the carrying value of the loan book is recognised in the
Statement of Comprehensive Income.
IAS 39 requires interest earned from lending to be measured under the effective interest rate method. The effective
interest rate is the rate that exactly discounts estimated future cash receipts or payments through the expected life of
the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset.
Management must therefore use judgement to estimate the expected life of each instrument and hence the expected cash flows
relating to it. The accuracy of the effective interest rate would therefore be affected by unexpected market movements
resulting in altered customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect
assumptions.
(d) Impairment of equity securities
A significant or prolonged decline in the fair value of an equity security is objective evidence of impairment. The Group
regards a decline of more than 20 percent in fair value as "significant" and a decline in the quoted market price that
persists for nine months or longer as "prolonged".
(e) Investment property
The valuation that the Group places on its investment property is subject to a degree of uncertainty and is made 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 main lease ends in 2019. The offices will be refurbished and
re-let at prevailing market rents.
The valuation model considers the net present value of net cash flows to be generated from the property, taking into
account expected rental growth rate, void periods, occupancy rate, lease incentive costs such as rent-free periods and
other costs not paid by tenants. The expected net cash flows are discounted using risk-adjusted discount rates. Among other
factors, the discount rate estimation considers the quality of a building and its location, tenant quality and lease terms.
Due to the current sub-market rental achieved and the fact that the future refurbishment works will improve the quality of
the building (in a desirable location), it is expected that the risk-adjusted discount rate will decrease. Management
judgement is required for significant unobservable inputs used in the discounted cash flow model, which have been assessed
as follows:
• refurbishment period: 6 months
• void period after refurbishment: 6 months
• rent free period: 6 months
• estimated refurbishment costs: £2.4m
• risk adjusted discount rate: 3.75%
• expected rental uplift following re-let: 22%
• occupancy rates: 95%
(f) Share option scheme valuation
The valuation of the cash settled Share Option Scheme was determined at 31 December 2016 using a Black-Scholes valuation
model. In the opinion of the directors the terms of the scheme are such that there remain a number of key uncertainties to
be considered when calculating the probability of pay-out, which are set out below. The Directors also considered the
probability of option holder attrition prior to the vesting dates, details of which are also set out below.
Uncertainties in the regulatory environment continue. Any tightening of capital requirements will impact on the ability of
the Company to exploit future market opportunities and furthermore may inhibit its ability to maintain the required growth
in distributions. Taking these into account, the probability of pay-out has been judged as 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 91% attrition rate for the share options vesting in
June 2019 and 85% attrition rate for the share options vesting in June 2021.
4.2 Judgements
(a) 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.
In the instance that fair values of assets and liabilities cannot be reliably measured, they are carried at cost.
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, assist 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 financial instruments 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 2016 £000 £000 £000 £000
ASSETS
Derivative financial instruments - 1,516 - 1,516
Financial investments 133 - 2,012 2,145
Asset 133 1,516 2,012 3,661
LIABILITIES
Derivative financial instruments - 227 - 227
Liability - 227 - 227
Level 1 Level 2 Level 3 Total
At 31 December 2015 £000 £000 £000 £000
ASSETS
Derivative financial instruments - 1,490 - 1,490
Financial investments 137 - 2,548 2,685
Asset 137 1,490 2,548 4,175
LIABILITIES
Derivative financial instruments - 135 - 135
Liability - 135 - 135
There were no transfers between level 1 and level 2 during the year.
The following table reconciles the movement in level 3 financial instruments measured at fair value (financial investments) during the year:
2016 2015
Movement in level 3 £000 £000
At 1 January 2,548 1,106
Consideration received 494 -
Disposals (1,310) (44)
Movements recognised in Other Comprehensive Income 75 1,559
Movements recognised in the Income Statement 205 (73)
At 31 December 2,012 2,548
Visa Inc. investment
On 21 June 2016, Visa Inc. announced that it had completed the acquisition of Visa Europe Limited. This resulted in the
gain which the Group had previously recognised in Other Comprehensive Income being recycled to the Income Statement. As
part of the transaction the Group received preference shares in Visa Inc. These shares have been valued at their future
conversion value into Visa Inc. common stock. The valuation includes a 31 % haircut. This comprises a 25% haircut due to a
contingent liability disclosed in Visa Europe's accounts in relation to litigation, and a 6% haircut based on a liquidity
discount.
Investment in overseas property company
For those financial investments measured at fair value, the Group uses proprietary valuation models which are developed
from recognised valuation techniques. Some or all of the significant inputs into these models may not be observable in the
market. Valuation models that employ significant unobservable inputs require a higher degree of management judgement and
estimation in the determination of fair value.
The Group has established a valuation methodology for measuring level 3 financial investments which are categorised as
available for sale. Unobservable inputs used include: yield of 4.90% (2015: 5.75%) and occupancy rates of 95.3% (2015:
94.2%). These inputs are taken from online real estate reports available from BNP Paribas. The inputs are stressed to
ensure that the fair value is robust. Significant increases in the yield or decreases in annual rental value or occupancy
rate would result in lower fair values. Management analyse and investigate any significant movements in the unobservable
inputs which impact the valuation of level 3 instruments.
The tables below analyses financial instruments not 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 2016 £000 £000 £000 £000
ASSETS
Cash and balances at central banks - 195,752 - 195,752
Loans and advances to banks - 36,951 - 36,951
Debt securities held-to-maturity - 107,300 - 107,300
Loans and advances to customers - 42,691 716,108 758,799
Other assets - - 1,197 1,197
Asset - 382,694 717,305 1,099,999
LIABILITIES
Deposits from banks - 3,200 - 3,200
Deposits from customers - - 997,649 997,649
Other liabilities - - 1,812 1,812
Debt securities in issue - - 12,621 12,621
Liability - 3,200 1,012,082 1,015,282
Level 1 Level 2 Level 3 Total
At 31 December 2015 £000 £000 £000 £000
ASSETS
Cash and balances at central banks - 368,611 - 368,611
Loans and advances to banks - 28,578 - 28,578
Debt securities held-to-maturity - 87,728 - 87,728
Assets classified as held for sale - - 118,456 118,456
Loans and advances to customers - - 1,579,512 1,579,512
Other assets - - 2,625 2,625
Asset - 484,917 1,700,593 2,185,510
LIABILITIES
Deposits from banks - 55,305 - 55,305
Deposits from customers - - 1,929,838 1,929,838
Liabilities relating to assets classified as held for sale - - 8,700 8,700
Other liabilities - - 14,581 14,581
Debt securities in issue - - 10,834 10,834
Liability - 55,305 1,963,953 2,019,258
(b) Associate accounting
An associate is an entity over which the investor has significant influence and that is neither a subsidiary nor an
interest in a joint venture. It is presumed that the investor does not have significant influence if it has less than 20%
of the voting power of the investee, unless proven otherwise. ABG holds 18.64% of the voting power of STB, but has retained
Board representation and as a result the Board believes ABG has significant influence. The interest in STB is therefore
accounted for as an associate.
If significant influence is lost, the shareholding will be accounted for as an available-for-sale financial investment.
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 2016:
Due within one year Due after more than one year Total
At 31 December 2016 £000 £000 £000
ASSETS
Cash 195,752 - 195,752
Loans and advances to banks 36,951 - 36,951
Debt securities held-to-maturity 85,782 21,518 107,300
Derivative financial instruments 85 1,431 1,516
Loans and advances to customers 337,376 421,423 758,799
Other assets 7,708 4,231 11,939
Financial investments - 2,145 2,145
Deferred tax asset - 1,665 1,665
Interests in associates 900 81,674 82,574
Intangible assets - 8,522 8,522
Property, plant and equipment - 4,782 4,782
Investment property - 53,339 53,339
Total assets 664,554 600,730 1,265,284
LIABILITIES
Deposits from banks 3,200 - 3,200
Derivative financial instruments 227 - 227
Deposits from customers 906,083 91,566 997,649
Current tax liability 147 - 147
Other liabilities 17,082 - 17,082
Debt securities in issue - 12,621 12,621
Total liabilities 926,739 104,187 1,030,926
The table below shows the maturity analysis of assets and liabilities of the Group as at 31 December 2015:
Due within one year Due after more than one year Total
At 31 December 2015 £000 £000 £000
ASSETS
Cash 368,611 - 368,611
Loans and advances to banks 28,578 - 28,578
Debt securities held-to-maturity 56,145 31,583 87,728
Assets classified as held for sale 118,456 - 118,456
Derivative financial instruments 59 1,431 1,490
Loans and advances to customers 691,315 888,197 1,579,512
Other assets 16,544 350 16,894
Financial investments - 2,685 2,685
Deferred tax asset - 1,784 1,784
Investment in associate - 943 943
Intangible assets - 10,874 10,874
Property, plant and equipment - 14,004 14,004
Total assets 1,279,708 951,851 2,231,559
LIABILITIES
Deposits from banks 55,305 - 55,305
Derivative financial instruments 135 - 135
Deposits from customers 1,373,297 556,541 1,929,838
Liabilities classified as held for sale 8,700 - 8,700
Current tax liability 3,366 - 3,366
Other liabilities 28,319 3,658 31,977
Debt securities in issue - 10,834 10,834
Total liabilities 1,469,122 571,033 2,040,155
The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2016:
Due within one year Due after more than one year Total
At 31 December 2016 £000 £000 £000
ASSETS
Loans and advances to banks 6 - 6
Loans and advances to banks - due from subsidiary undertakings 89,066 - 89,066
Financial investments - 121 121
Deferred tax asset - 397 397
Property, plant and equipment - 183 183
Other assets 254 633 887
Interests in associates - 5,056 5,056
Interests in subsidiaries 54,602 54,602
Total assets 89,326 60,992 150,318
LIABILITIES
Other liabilities 4,808 - 4,808
Debt securities in issue - 12,621 12,621
Total liabilities 4,808 12,621 17,429
The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2015:
Due within one year Due after more than one year Total
At 31 December 2015 £000 £000 £000
ASSETS
Loans and advances to banks - due from subsidiary undertakings 12,444 - 12,444
Financial investments - 125 125
Deferred tax asset - 418 418
Property, plant and equipment - 204 204
Other assets 641 350 991
Interests in subsidiaries - 46,466 46,466
Total assets 13,085 47,563 60,648
LIABILITIES
Other liabilities 4,235 - 4,235
Debt securities in issue - 10,834 10,834
Total liabilities 4,235 10,834 15,069
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, market and liquidity risks.
(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. Impairment provisions are provided for losses that have been incurred at the balance sheet date.
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 Committees of the banking subsidiaries, with significant exposures also
being approved by the Group Risk Committee.
The Company and Group structure the levels of credit risk it undertakes by placing limits on the amount of risk accepted in
relation to 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 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;
• Personal guarantees; and
• Charges over other chattels
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's maximum exposure to credit risk before collateral held or other credit enhancements is as follows:
2016 2015
£000 £000
Credit risk exposures relating to on-balance sheet assets are as follows:
Cash and balances at central banks 195,752 368,611
Loans and advances to banks 36,951 28,578
Debt securities held-to-maturity 107,300 87,728
Assets classified as held for sale - 118,456
Derivative financial instruments 1,516 1,490
Loans and advances to customers - Arbuthnot Latham 758,799 618,902
Loan and advances to customers - Secure Trust Bank - 960,610
Other assets 1,197 2,625
Financial investments 2,145 2,685
Credit risk exposures relating to off-balance sheet assets are as follows:
Guarantees 274 56
Loan commitments and other credit related liabilities 35,581 178,863
At 31 December 1,139,515 2,368,604
The Company's maximum exposure to credit risk before collateral held or other credit enhancements is as follows:
2016 2015
£000 £000
Credit risk exposures relating to on-balance sheet assets are as follows:
Loans and advances to banks 89,072 12,444
Financial investments 121 125
Other assets 791 891
At 31 December 89,984 13,460
The above tables represent the maximum credit risk exposure (net of impairment) to the Group and Company at 31 December
2016 and 2015 without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet
assets, the exposures are based on the net carrying amounts as reported in the Statement of Financial Position.
The table below represents an analysis of the loan to values of the property book for the Group:
31 December 2016 31 December 2015
Loan Balance Collateral Loan Balance Collateral
Loan to value £000 £000 £000 £000
Less than 60% 438,076 1,219,532 486,256 1,256,642
60% - 80% 167,765 253,550 340,781 507,852
80% - 100% 76,289 88,598 80,762 98,792
Greater than 100% 32,022 21,387 36,486 25,738
Total 714,152 1,583,067 944,285 1,889,024
The table below represents an analysis of the loan commitments compared to the values of the properties for the Group:
31 December 2016 31 December 2015
Committed Collateral Committed Collateral
Loan commitments and other credit related liabilities £000 £000 £000 £000
Less than 60% 26,988 73,659 74,576 171,108
60% - 80% 23,940 42,102 56,702 81,765
80% - 100% - - 2,278 2,848
Total 50,928 115,761 133,556 255,721
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.
As at 31 December 2016, loans for which forbearance measures were undertaken totalled 0.12% (2015: 0.14%) of total loans to
customers for the Bank. All forbearance measures undertaken in the year were within the UK mortgage portfolio. These are
set out in the following table:
2016 2015
Number Loan Balance Number Loan Balance
£000 £000
Transfer to interest only 3 115 6 764
Move historic arrears to capital - - 1 147
Interest temporarily not being charged 1 3,607 - -
Payment holiday 1 78 - -
Total forbearance 5 3,800 7 911
Concentration risk
The Group is well diversified in the UK, being exposed to retail banking and private banking. Management assesses the
potential concentration risk from a number of areas including:
• product concentration
• geographical concentration; and
• high value residential properties
Due to the well diversified nature of the Group and the significant collateral held against the loan book, the Directors do
not consider there to be a potential material exposure arising from concentration risk. The table below show the
concentration in the loan book.
Loans and advances to customers Loan Commitments
2016 2015 2016 2015
£000 £000 £000 £000
Concentration by product
Cash collateralised 5,245 15,987 - -
Commercial Lending
Real estate finance - 367,999 - 109,033
Asset finance - 70,685 35,581 20,081
Commercial finance 71,674 52,222 - 9,277
Residential mortgages 626,751 538,701 - 40,230
Investment portfolio secured 34,014 30,284 - -
Non-Performing 15,953 9,839 - -
Other Collateral 2,103 7,482 - -
Motor - 165,697 - 242
Unsecured
Personal lending 3,059 79,706 - -
Retail - 220,418 - -
Other - 20,492 - -
At 31 December 758,799 1,579,512 35,581 178,863
Concentration by location
East Anglia 2,714 99,340 - 28,091
East Midlands 7,245 49,222 - 1,088
London 422,901 600,254 21,691 79,523
Midlands 3,800 7,811 - -
North East 2,100 29,239 - 564
North West 14,288 90,496 4,541 4,863
Northern Ireland - 8,301 - -
Scotland 13,410 74,635 - 2,000
South East 117,805 245,647 5,597 40,738
South West 89,018 87,429 738 6,204
Wales 7,460 42,436 - 1,427
West Midlands 14,436 69,162 108 4,787
Yorkshire & Humber 6,398 59,210 - 3,033
Overseas 20,136 74,627 - 5,667
Other 37,088 41,703 2,906 878
At 31 December 758,799 1,579,512 35,581 178,863
For unsecured lending, concentration by location is based on the customer's country of domicile and for lending secured by
property it is based on the location of the collateral.
(b) Operational risk (unaudited)
The Group's objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the
Group's reputation with overall cost effectiveness and to avoid control procedures that restrict initiatives and
creativity. Operational risk arises from all of the Group's operations.
The primary responsibility for the development and implementation of controls to address operational risk is assigned to
the senior management within each subsidiary.
Compliance with Group standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results
of the Internal Audit reviews are discussed with senior management, with summaries submitted to the Arbuthnot Banking Group
Audit Committee.
(c) Market risk
Price risk
The Company and Group is exposed to equity securities price risk because of investments held by the Group and classified in
the Consolidated Statement of Financial Position either as available-for-sale or at fair value through the profit and loss.
The Group is not exposed to commodity price risk. To manage its price risk arising from investments in equity securities,
the Group diversifies its portfolio. Diversification of the portfolio is done in accordance with the limits set by the
Group.
Based upon the financial investment exposure in Note 24, a stress test scenario of a 10% (2015: 10%) decline in market
prices, with all other things being equal, would result in a £11,000 (2015: £11,000) decrease in the Group's income and a
decrease of £172,000 (2015: £215,000) in the Group's equity. The Group consider 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 24, a stress test scenario of a 10% (2015: 10%) decline in
market prices, with all other things being equal, would result in a £11,000 (2015: £11,000) decrease in the Company's
income and a decrease of £10,000 (2015: £10,000) 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. 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 2016. Included in the table below are the Group's assets and liabilities at carrying amounts,
categorised by currency.
GBP (£) USD ($) Euro (E) Other Total
At 31 December 2016 £000 £000 £000 £000 £000
ASSETS
Cash and balances at central banks 195,669 35 40 8 195,752
Loans and advances to banks 2,197 24,494 5,062 5,198 36,951
Debt securities held-to-maturity 94,299 13,001 - - 107,300
Derivative financial instruments 1,516 - - - 1,516
Loans and advances to customers 701,165 21,927 35,707 - 758,799
Other assets 1,197 - - - 1,197
Financial investments 120 569 1,456 - 2,145
996,163 60,026 42,265 5,206 1,103,660
LIABILITIES
Deposits from banks 3,198 - - 2 3,200
Derivative financial instruments 227 - - - 227
Deposits from customers 903,687 59,916 28,535 5,511 997,649
Other liabilities 1,812 - - - 1,812
Debt securities in issue - - 12,621 - 12,621
908,924 59,916 41,156 5,513 1,015,509
Net on-balance sheet position 87,239 110 1,109 (307) 88,151
Credit commitments 54,934 - - - 54,934
The table below summarises the Group's exposure to foreign currency exchange risk at 31 December 2015:
GBP (£) USD ($) Euro (E) Other Total
At 31 December 2015 £000 £000 £000 £000 £000
ASSETS
Cash and balances at central banks 365,165 3,405 35 6 368,611
Loans and advances to banks 10,045 14,527 1,925 2,081 28,578
Debt securities held-to-maturity 80,952 6,776 - - 87,728
Assets classified as held for sale 118,456 - - - 118,456
Derivative financial instruments 1,490 - - - 1,490
Loans and advances to customers 1,522,893 17,231 39,344 44 1,579,512
Other assets 2,625 - - - 2,625
Financial investments 172 - 2,513 - 2,685
2,101,798 41,939 43,817 2,131 2,189,685
LIABILITIES
Deposits from banks 54,963 - 342 - 55,305
Derivative financial instruments 135 - - - 135
Deposits from customers 1,865,078 39,220 23,255 2,285 1,929,838
Liabilities relating to assets classified as held for sale 8,700 - - - 8,700
Other liabilities 14,581 - - - 14,581
Debt securities in issue - - 10,834 - 10,834
1,943,457 39,220 34,431 2,285 2,019,393
Net on-balance sheet position 158,341 2,719 9,386 (154) 170,292
Credit commitments 178,919 - - - 178,919
A 10% strengthening of the pound against the US dollar would lead to a £3,000 increase (2015: £3,000 decrease) in Group
profits and equity, while a 10% weakening of the pound against the US dollar would lead to the same decrease in Group
profits and equity. Similarly a 10% strengthening of the pound against the Euro would lead to a £6,000 (2015: £52,000)
increase in Group profits and equity, while a 10% weakening of the pound against the Euro would lead to the same increase
in Group profits and equity. The above results are after taking into account the effect of derivative financial instruments
(see note 20), which cover most of the net exposure in each currency.
The table below summarises the Company's exposure to foreign currency exchange rate risk at 31 December 2016:
GBP (£) Euro (E) Total
At 31 December 2016 £000 £000 £000
ASSETS
Loans and advances to banks 76,037 13,035 89,072
Financial investments
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