REG - Arbuthnot BankingSecure Trust Bank - Final Results for the year to 31 December 2015 <Origin Href="QuoteRef">ARBB.L</Origin> <Origin Href="QuoteRef">STBS.L</Origin> - Part 4
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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.
To the extent that the default rates differ from that estimated by 10%, the allowance for impairment on loans and advances
would change by an estimated £5.1m (2014: £3.2m).
4.2 Goodwill impairment
The accounting policy for goodwill is described in note 3.14 (a). The Company reviews the goodwill for impairment at least
annually or when events or changes in economic circumstances indicate that impairment may have taken place. Significant
management judgements are made in estimations, to evaluate whether an impairment of goodwill is necessary. Impairment
testing is done 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 do 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 three CGU's (2014: three) with goodwill attached; the core Arbuthnot Latham CGU (£1.7m), the Music Finance
CGU (£0.3m) and the V12 Group CGU (£0.7m; subsidiary of Secure Trust Bank).
Management considers the value in use for the core Arbuthnot Latham CGU to be the discounted cash flows over 5 years with a
terminal value (2014: 5 years with a terminal value). The 5 year discounted cash flows with a terminal value is 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 2018 as
per the approved 3 year plan. A growth rate of 19% (2014: 10%) was used for income and 16% (2014: 10%) for expenditure from
2016 to 2018 (these rates were the best estimate of future forecasted performance), while a 3% (2014: 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 three year
plan.
Management considers the value in use for the Music Finance CGU and V12 Group CGU to be the discounted cash flows over 5
years (2014: 5 years). Income and expenditure were kept flat (2014: 0%) over the 5 year period.
Cash flows were discounted at a pre-tax rate of 12% (2014: 12%) to their net present value. The discount rate of 12% 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 far exceeds the carrying value and as
such no sensitivity analysis was done.
At the time of the impairment testing, if the future expected cash flows decline and/or the cost of capital has increased,
then the recoverable amount will reduce.
4.3 Taxation
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.
4.4 Acquisition of loan book
Acquired loan books are initially recognised at fair value. Significant judgement is exercised in calculating their
effective interest rate ("EIR") using cash flow models which include assumptions on the likely macroeconomic environment,
including HPI, unemployment levels and interest rates, as well as loan level and portfolio attributes and history used to
derive prepayment rates, the probability and timing of defaults and the amount of incurred losses.
4.5 Effective Interest Rate
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.
4.6 Share option scheme valuation
The valuation of the Secure Trust Bank equity-settled share option scheme was determined at the original grant date of 2
November 2011 using Black-Scholes valuation models. 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% for the remaining share
options (SOS2) which vest on 2 November 2016.
Although one participant in the Share Option Scheme left the Company during 2012 and was consequently withdrawn from the
Scheme, the directors consider that there is no further uncertainty surrounding whether the remaining participants will all
still be in situ and eligible at the vesting date. Therefore the directors have assumed no attrition rate for the remaining
share options over the scheme period.
The valuation of the cash settled Share Option Scheme was determined at 31 December 2015 using Black-Scholes valuation
models. In the opinion of the directors the terms of the scheme are such that there remains a number of key uncertainties
to be considered when calculating the probability of pay-out, which are considered to be similar to those set out above.
4.7 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".
4.8 PPI provisions
The Group provides for its best estimate of redress payable in respect of historical sales of PPI, by considering the
likely future uphold rate for claims, in the context of confirmed issues and historical experience. The likelihood of
potential new claims is projected forward to 2018, as management believe this to be an appropriate time horizon,
recognising the significant decline in recent claims experience and the increasing subjectivity beyond that. The accuracy
of these estimates would be affected, were there to be a significant change in either the number of future claims or, the
incidence of claims upheld by the Financial Ombudsman. The amounts are included within accruals.
4.9 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).
Visa Europe Limited investment
Following the public announcement on 2 November 2015 of the proposed sale of Visa Europe Ltd ("Visa Europe") to Visa Inc.,
the fair value of the Company's equity interest in Visa Europe has been established by reference to the consideration being
offered by Visa Inc. A gain has being recognised in other comprehensive income for the revised valuation.
The deal values Visa Europe at up to E21.2bn, payable as E11.5bn in cash and E5bn in Visa Inc. preferred stock, plus a
potential future earn-out of up to E4.7bn. The valuation of the Company's investment includes a haircut on the preference
share element to take account of contingent legal liabilities of Visa Europe and uncertainty over the transferability of
these shares. No value has been attributed to the contingent earn-out due to uncertainty as its nature, valuation, and the
Company's share.
Other level 3 financial investments
For other financial investments measured at fair value, the Group uses proprietary valuation models which are developed
from recognised valuation techniques. Management judgement is usually required for the selection of the appropriate
valuation model to be used. 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 (5.75%), annual rental value (E265/m2) and occupancy rate
(94.2%). 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 to the unobservable inputs which impact the
valuation of level 3 instruments.
The tables below analyses 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 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
Level 1 Level 2 Level 3 Total
At 31 December 2014 £000 £000 £000 £000
ASSETS
Derivative financial instruments - 2,707 - 2,707
Financial investments 171 - 1,106 1,277
Asset 171 2,707 1,106 3,984
LIABILITIES
Derivative financial instruments - 1,067 - 1,067
Liability - 1,067 - 1,067
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:
2015 2014
Movement in level 3 £000 £000
At 1 January 1,106 1,796
Disposals (44) (243)
Movements recognised in other comprehensive income 1,559 -
Movements recognised in the profit and loss (73) (447)
At 31 December 2,548 1,106
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 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
Level 1 Level 2 Level 3 Total
At 31 December 2014 £000 £000 £000 £000
ASSETS
Cash and balances at central banks - 115,938 - 115,938
Loans and advances to banks - 31,844 - 31,844
Debt securities held-to-maturity - 91,683 - 91,683
Loans and advances to customers - 106,285 1,052,698 1,158,983
Other assets - - 5,522 5,522
Asset - 345,750 1,058,220 1,403,970
LIABILITIES
Deposits from banks - 27,657 - 27,657
Deposits from customers - - 1,194,285 1,194,285
Other liabilities - - 12,024 12,024
Debt securities in issue - - 11,448 11,448
Liability - 27,657 1,217,757 1,245,414
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 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 Group as at 31 December 2014:
Due within one year Due after more than one year Total
At 31 December 2014 £000 £000 £000
ASSETS
Cash 115,938 - 115,938
Loans and advances to banks 31,844 - 31,844
Debt securities held-to-maturity 62,839 28,844 91,683
Derivative financial instruments 1,209 1,498 2,707
Loans and advances to customers 444,594 714,389 1,158,983
Other assets 16,516 350 16,866
Financial investments - 1,277 1,277
Deferred tax asset 992 1,596 2,588
Investment in associate - 943 943
Intangible assets - 11,318 11,318
Property, plant and equipment - 12,475 12,475
Total assets 673,932 772,690 1,446,622
LIABILITIES
Deposits from banks 27,657 - 27,657
Derivative financial instruments 1,067 - 1,067
Deposits from customers 911,579 282,706 1,194,285
Current tax liability 3,612 - 3,612
Other liabilities 30,679 4,305 34,984
Debt securities in issue - 11,448 11,448
Total liabilities 974,594 298,459 1,273,053
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
Due from subsidiary undertakings - bank balances 12,444 - 12,444
Financial investments - 125 125
Deferred tax asset - 418 418
Property, plant and equipment - 204 204
Other assets 641 350 991
Shares in subsidiary undertakings - 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
The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2014:
Due within one year Due after more than one year Total
At 31 December 2014 £000 £000 £000
ASSETS
Due from subsidiary undertakings - bank balances 19,244 - 19,244
Financial investments - 158 158
Deferred tax asset - 406 406
Intangible assets - 4 4
Property, plant and equipment - 127 127
Other assets 622 4,850 5,472
Shares in subsidiary undertakings - 39,966 39,966
Total assets 19,866 45,511 65,377
LIABILITIES
Other liabilities 4,132 - 4,132
Debt securities in issue - 11,448 11,448
Total liabilities 4,132 11,448 15,580
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:
2015 2014
£000 £000
Credit risk exposures relating to on-balance sheet assets are as follows:
Cash and balances at central banks 368,611 115,938
Loans and advances to banks 28,578 31,844
Debt securities held-to-maturity 87,728 91,683
Assets classified as held for sale 118,456 -
Derivative financial instruments 1,490 2,707
Loans and advances to customers - Arbuthnot Latham 618,902 536,488
Loan and advances to customers - Secure Trust Bank 960,610 622,495
Other assets 2,625 5,522
Financial investments 2,685 1,277
Credit risk exposures relating to off-balance sheet assets are as follows:
Guarantees 56 714
Loan commitments and other credit related liabilities 178,863 139,423
At 31 December 2,368,604 1,548,091
The Company's maximum exposure to credit risk before collateral held or other credit enhancements is as follows:
2015 2014
£000 £000
Credit risk exposures relating to on-balance sheet assets are as follows:
Due from subsidiary undertakings - bank balances 12,444 19,244
Financial investments 125 158
Other assets 891 5,365
Credit risk exposures relating to off-balance sheet assets are as follows:
At 31 December 13,460 24,767
The above tables represents the maximum credit risk exposure (net of impairment) to the Group and Company at 31 December
2015 and 2014 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 2015 31 December 2014
Loan Balance Collateral Loan Balance Collateral
Loan to value £000 £000 £000 £000
Less than 60% 486,256 1,256,642 300,384 824,044
60% - 80% 340,781 507,852 179,527 269,673
80% - 100% 80,762 98,792 28,176 29,899
Greater than 100% 36,486 25,738 23,497 18,382
Total 944,285 1,889,024 531,584 1,141,998
The table below represents an analysis of the loan commitments compared to the values of the properties for the Group:
31 December 2015 31 December 2014
Committed Collateral Committed Collateral
Loan commitments and other credit related liabilities £000 £000 £000 £000
Less than 60% 74,576 171,108 71,575 172,804
60% - 80% 56,702 81,765 57,223 79,899
80% - 100% 2,278 2,848 - -
Total 133,556 255,721 128,798 252,703
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.
No forbearance measures were undertaken for Arbuthnot Latham & Co., Ltd in 2014. As at 31 December 2015, loans for which
forbearance measures were undertaken totalled 0.14% of total loans to customers for the Bank. Six loans with a total
balance of £764,000 were transferred to interest only, while historic arrears on one loan of £147,000, were moved to
capital.
Secure Trust Bank ("STB") does not reschedule contractual arrangements where customers default on their repayments. Under
its Treating Customers Fairly ("TCF") policies, however, STB may offer the customer the option to reduce or defer payments
for a short period. If the request is granted, the account continues to be monitored in accordance with the Group's
impairment provisioning policy. Such debts retain the customer's normal contractual payment due dates and will be treated
the same as any other defaulting cases for impairment purposes. Arrears tracking will continue on the account with any
impairment charge being based on the original contractual due dates for all products.
The policy on forbearance for Everyday Loans is that a customer's account may be modified to assist customers who are in
or, have recently overcome, financial difficulties and have demonstrated both the ability and willingness to meet the
current or modified loan contractual payments. These may be modified by way of a reschedule or deferment of repayments.
Rescheduling of debts retains the customers' contractual due dates, whilst the deferment of repayments extends the payment
schedule up to a maximum of four payments in a twelve month period. As at 31 December 2015 the gross balance of rescheduled
loans included in the Consolidated Statement of Financial Position was £14.9m, with an allowance for impairment on these
loans of £1.0m. The gross balance of deferred loans was £3.4m with an allowance for impairment on these of £0.6m. (31
December 2014: the gross balance of rescheduled loans was £14.7m, with an allowance for impairment of £1.0m. The gross
balance of deferred loans was £3.0m with an allowance for impairment of £0.4m).
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
2015 2014 2015 2014
£000 £000 £000 £000
Concentration by product
Cash collateralised 15,987 19,934 - -
Commercial Lending
Real estate finance 367,999 133,738 109,033 95,790
Asset finance 70,685 4,541 20,081 -
Commercial finance 52,222 25,875 9,277 -
Residential mortgages 521,256 451,645 40,230 43,428
Non-Performing 9,839 11,940 - -
Other Collateral 55,211 32,587 - -
Unsecured
Personal lending 79,706 192,638 - -
Motor 165,697 137,853 242 205
Retail 220,418 116,734 - -
Other 20,492 31,498 - -
At 31 December 1,579,512 1,158,983 178,863 139,423
Concentration by location
East Anglia 99,340 44,359 28,091 7,195
East Midlands 49,222 44,869 1,088 -
London 600,254 463,333 79,523 64,329
Midlands 7,811 13,208 - -
North East 29,239 39,292 564 17,638
North West 90,496 76,349 4,863 -
Northern Ireland 8,301 8,622 - -
Scotland 74,635 53,177 2,000 -
South East 245,647 174,912 40,738 17,845
South West 87,429 58,627 6,204 10,825
Wales 42,436 32,799 1,427 -
West Midlands 69,162 44,146 4,787 1,262
Yorkshire & Humber 59,210 38,176 3,033 -
Overseas 74,627 28,849 5,667 -
Other 41,703 38,265 878 20,329
At 31 December 1,579,512 1,158,983 178,863 139,423
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 23, a stress test scenario of a 10% (2014: 10%) decline in market
prices, with all other things being equal, would result in a £11,000 (2014: £127,000) decrease in the Group's income and a
decrease of £215,000 (2014: £103,000) 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 23, a stress test scenario of a 10% (2014: 10%) decline in
market prices, with all other things being equal, would result in a £11,000 (2014: £15,000) decrease in the Company's
income and a decrease of £10,000 (2014: £13,000) 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 2015. Included in the table below are the Group's assets and liabilities at carrying amounts,
categorised by currency.
GBP (£) USD ($) Euro (E) Other Total
At 31 December 2015 £000 £000 £000 £000 £000
ASSETS
Cash and balances at central banks 365,165 3,405 35 6 368,611
Loans and advances to banks 10,045 14,527 1,925 2,081 28,578
Debt securities held-to-maturity 80,952 6,776 - - 87,728
Assets classified as held for sale 118,456 - - - 118,456
Derivative financial instruments 1,490 - - - 1,490
Loans and advances to customers 1,522,893 17,231 39,344 44 1,579,512
Other assets 2,625 - - - 2,625
Financial investments 172 - 2,513 - 2,685
2,101,798 41,939 43,817 2,131 2,189,685
LIABILITIES
Deposits from banks 54,963 - 342 - 55,305
Derivative financial instruments 135 - - - 135
Deposits from customers 1,865,078 39,220 23,255 2,285 1,929,838
Liabilities relating to assets classified as held for sale 8,700 - - - 8,700
Other liabilities 14,581 - - - 14,581
Debt securities in issue - - 10,834 - 10,834
1,943,457 39,220 34,431 2,285 2,019,393
Net on-balance sheet position 158,341 2,719 9,386 (154) 170,292
Credit commitments 178,919 - - - 178,919
The table below summarises the Group's exposure to foreign currency exchange risk at 31 December 2014:
GBP (£) USD ($) Euro (E) Other Total
At 31 December 2014 £000 £000 £000 £000 £000
ASSETS
Cash and balances at central banks 115,891 17 28 2 115,938
Loans and advances to banks 22,381 5,428 3,099 936 31,844
Debt securities held-to-maturity 76,124 15,559 - - 91,683
Derivative financial instruments 2,707 - - - 2,707
Loans and advances to customers 1,107,440 8,437 43,106 - 1,158,983
Other assets
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