REG - Arbuthnot Banking - Unaudited results for the 6 months to 30 June 2023
18/07/2023 07:00
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RNS Number : 2930G Arbuthnot Banking Group PLC 18 July 2023
18 July 2023
For immediate release
ARBUTHNOT BANKING GROUP PLC ("Arbuthnot", "the Company", "the Group" or "ABG")
Unaudited results for the six months to 30 June 2023
Arbuthnot Banking Group PLC today announces a half yearly profit before tax of
£26.4m.
Arbuthnot Banking Group PLC is the holding company for Arbuthnot Latham &
Co., Limited.
FINANCIAL HIGHLIGHTS
• Profit before tax increased to £26.4m for the six months to 30
June 2023 (30 June 2022: £3.4m).
• Underlying profit before tax of £29.3m (30 June 2022:
£10.7m)*.
• Interim dividend declared of 19p per share (30 June 2022: 17p
per share).
• CET1 capital ratio of 12.2% (30 June 2022: 11.4%; 31 December
2022: 11.6%) and total capital ratio of 14.5% (30 June 2022: 14.0%; 31
December 2022: 14.0%).
• Earnings per share of 129.4p (30 June 2022: 17.8p).
• Net assets per share of 1470p (30 June 2022: 1300p; 31 December
2022: 1411p).
OPERATIONAL HIGHLIGHTS
• Customer loans (including leased assets) of £2.3bn (30 June
2022: £2.1bn; 31 December 2022: £2.2bn) increased by 2% in the first half of
the year, and 7% year on year despite a tighter credit appetite.
• Customer deposits of £3.3bn (30 June 2022: £2.8bn; 31 December
2022: £3.1bn), a 5% increase since the year end and a 16% increase year on
year.
• Assets under management of £1.4bn (30 June 2022: £1.3bn; 31
December 2022: £1.3bn), a 4% increase against 31 December 2022 and an
increase of 6% year on year, driven by net inflows in the period.
SUMMARY AND OUTLOOK
• The Group continues to benefit from the business model it has
established over many years, whereby the return to a more normalised Bank of
England ("BoE") Base Rate brings increased revenue on both its lending and
excess liquidity, which has contributed, alongside the execution of the
Group's strategy, to a significant increase in profitability.
• Interest rates paid on client deposits have been increased to
reflect Base Rate increases. As previously guided, the total cost of funding
is expected to increase in the second half of 2023 due to cheaper maturing
deposits being replaced with deposits at higher rates.
• Whilst the outlook for the economy looks increasingly uncertain
and Arbuthnot remains alert to potential increases in credit risk, the
improved profitability, and robust financial strength, means the Group remains
well positioned.
Commenting on the results, Sir Henry Angest, Chairman and Chief Executive of
Arbuthnot, said: "The Group made good progress in the first half of the year,
with a substantial increase in profitability as the business model we have
invested in over many years, focused on relationship-based banking and
diversified lending to higher margin specialist sectors, continues to deliver
for the Group."
Notes
*Details of the calculation of underlying profit before tax can be found in
note 6
ENQUIRIES:
Arbuthnot Banking Group 020 7012 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) 020 7383 5100
Colin Aaronson
Samantha Harrison
George Grainger
Ciara Donnelly
Shore Capital 020 7408 4090
(Broker)
Daniel Bush
David Coaten
Tom Knibbs
H/Advisors Maitland (Financial PR) 020 7379 5151
Neil Bennett
Sam Cartwright
Chairman's Statement
I am pleased to report that the Group continues to make good progress. The
profit before tax for the first six months of the year is £26.4m compared to
£3.4m in the same period last year.
The Group remains focused on delivering the strategic aims in the new "future
state 2" presented earlier this year along with the 2022 full year results.
With greater diversity in the lending balances being provided by the
specialist divisions, the overall profitability has benefited from the upward
moves in the Bank of England Base Rate.
As previously noted, the upward shifts in the base rate create a lag effect in
the Group's net interest margins, as it takes time for the cost of customer
deposits to reprice to current market levels as they mature. Thus, we expect
net interest margins to narrow as this repricing of deposits takes place.
The deposit market continues to remain extremely competitive, with many offers
for term deposits of one year now well in excess of the base rate. Our bank,
Arbuthnot Latham has been swift to adjust its rates in these markets, offering
new and existing customers attractive rates.
However, with the strength of our deposit base, which is diversified between
transactional and term accounts, the average cost of deposits stood at 2.2%
for the month of June and averaged 1.9% for the first six months of the year.
If base rates remains unchanged for the next 12 - 18 months, the cost of
deposits is expected to rise to a peak of 2.9% over time.
I have previously explained that I believe that the strength of a bank should
be measured against the quality of its deposit base rather than only capital
or lending based measures. This I feel was never more clearly demonstrated
than during the recent period of market uncertainty caused by the collapse of
Silicon Valley Bank. I was pleased to note that the relationship banking model
that we have established proved to be powerful and we saw the confidence that
our clients have in us, demonstrated by the fact that we had net inflows of
deposits during that time.
I was also pleased that during the first half of the year, Arbuthnot Banking
Group carried out a successful capital raise. With the demand for the new
equity being heavily oversubscribed, we were able to raise £12m rather than
the initial target of £10m to help to satisfy this demand. This equity raise
was designed to allow the lending businesses to continue to build their
pipelines of new lending opportunities while at the same time having
sufficient capital to allow for the second tranche of the Countercyclical
Capital Buffer and to position us to be able to take advantage of
opportunities that are expected to arise given the current market conditions.
This expectation proved correct as our specialist lending business, Asset
Alliance was able to acquire a £42m portfolio of operating leases at a
discount in May.
Given the rapid rise in interest rates, we are aware that the outlook for
credit risk has worsened. At this time we have not yet seen a significant
deterioration in our lending portfolios, however there is early evidence of
pressure on affordability to cover interest payments becoming problematic as
it takes time for the rental market to reprice. In response we have tightened
our credit appetite, with LTVs on residential investment lending now being
targeted at around 50% rather the previous 60%.
The specialist lending divisions continue to monitor their portfolios closely
but as yet they continue to perform well.
Given its confidence in the prospects of the Group, the Board proposes an
interim dividend of 19p, being an increase of 2p over the interim dividend
paid in 2022. This interim dividend will be paid on 22 September 2023 to
shareholders on the register on 25 August 2023.
Banking
The Banking division reported a profit before tax of £31.1m for the first six
months (30 June 2022: £6.6m), with lending balances totalling £1.45bn and
deposits of £3.25bn (30 June 2022: lending of £1.46bn; deposits of
£2.61bn).
Against the backdrop of ongoing economic uncertainty, the Bank has continued
to stay focused on client service, which has led to net growth in client
acquisition. The Bank's long term approach and cautious banking model
resonates well with criteria clients looking for a bank where they can build a
long term relationship.
Deposits grew by £165.8m in the first half of 2023 despite a number of high
profile banking failures and turbulence across the banking sector. The
Bank's strategy to hold high levels of liquidity, with no reliance on
wholesale funding meant that the Bank operated with a consistently strong
liquidity position in the period, reassuring clients of the Bank's robustness
and resilience.
The Bank has continued to pursue its strategy to focus on more capital
efficient lending and allowing capital intensive lending to mature and
refinance away in addition to tightening its credit criteria. The loan book
fell marginally by 1% in the six months to finish the half year at £1.45bn.
The impact of the changing macroeconomic environment is resulting in some
signs of stress in the loan book, however given the Bank's cautious
underwriting approach with low LTV ratios, the Bank is well positioned to exit
any defaults with little or no loss.
Wealth Management
Assets Under Management ("AUM") closed the half-year mark at £1.38bn with
positive net funds flow for the first half of 2023. The rising interest rate
environment has resulted in an increase in client withdrawals compared to
prior periods, where clients are opting to pay down their debt.
Arbuthnot Commercial Asset Based Lending ("ACABL")
ACABL has reported a profit before tax of £4.0m (30 June 2022: £2.9m) an
increase of 38% for the same period in the prior year. The loan book was
£241.1m as at the half year compared to £238.8m in the prior year and
£268.8m at the previous year end.
In early May, ACABL celebrated its 5th year anniversary. Since launch, the
business has grown its loan book with facility limits in excess of £500m and
built a team of 31 highly experienced staff.
The business has continued to onboard new clients and support the growth of
existing clients, however demand for transactional funding was seen to reduce
towards the end of 2022 following the 'mini budget' and this has carried over
into early 2023. This has resulted in a higher level of refinance
opportunities that have and are being carefully considered in light of the
market challenges. This has impacted the level of funds in use when compared
to the previous year end, which also takes into account some expected client
attrition given the book's maturity.
It is expected activity from Private Equity sponsors and the wider Corporate
Finance community will result in an increase in transactional flow in the
second half. Given the opportunities that will come from more realistic
enterprise values, ACABL is well placed to fund these future transactions.
In the first quarter ACABL, renewed its accreditation to provide loans under
the Recovery Loan Scheme as a continued additional source of funding for deal
structures where appropriate.
Renaissance Asset Finance ("RAF")
RAF has reported a profit before tax of £0.7m (30 June 2022: £0.2m), with
customer loan balances of £156.7m (30 June 2022: £102.6m).
New business levels have remained positive and the balance sheet continues to
grow in line with the Group's Future State plan, with improved margins
achieved on new business despite the current economic environment.
Whilst some pressure is expected, particularly in the SME customer base, the
book continues to perform in the current economic climate with problem debts
marginally lower than expected.
Asset Alliance Group ("AAG")
AAG continues to trade well with leased assets and hire purchase loans
totalling £258.8m at the end of June 2023 compared to £128.6m as at 30 June
2022, equating to year-on-year growth of 101%, and 37% year to date. Included
in the result is £42m of operating leases which AAG acquired at a discount to
face value, to provide buses for contracted operations in London.
Despite the portfolio acquisition, supply chain issues continue, however with
signs of improvement beginning to appear. Where in prior periods, supply chain
issues have led to a buoyant used truck market, the business expects this
market to weaken, but margins currently remain stronger than expected.
Mortgage Portfolios
The Group's acquired mortgage portfolio is currently operating in line with
expectations with a carrying value of £135.0m compared to £166.2m as at 30
June 2022 and £148.5m as at 31 December 2022.
Operations
The Bank continues to see significant growth in client activity with non-card
related payment volumes increasing by 15% year on year, with over 500,000
payments processed in the first half of 2023. Card transactions have also seen
significant growth with volumes in the first six months of 2023, approximately
45% higher than the same period last year.
Having completed the core banking platform upgrade at the end of 2022, the
Bank has commenced a review of its future digital strategy that will focus on
further developing the client digital channels and streamlining a number of
operational processes. The outputs of this review will underpin the roadmap
for further technology investment over the coming 2-3 years with delivery
expected to commence later in 2023.
Outlook
The continued stubbornness of inflation has led to increased interest rate
rises which has had a positive effect on the profitability of the Group. The
outlook for the economy looks increasingly uncertain and we remain alert to
potential increases in credit risk that may result from an economic downturn.
However, given the improved profitability and robust financial strength, the
Group remains well positioned.
Consolidated Statement of Comprehensive Income
Six months ended 30 June Six months ended 30 June
2023 2022
Note £000 £000
Income from banking activities
Interest income 100,320 49,088
Interest expense (31,950) (6,552)
Net interest income 68,370 42,536
Fee and commission income 11,275 10,099
Fee and commission expense (105) (59)
Net fee and commission income 11,170 10,040
Operating income from banking activities 79,540 52,576
Income from leasing activities
Revenue 49,895 48,851
Cost of goods sold (41,821) (40,538)
Gross profit from leasing activities 8,074 8,313
Total group operating income 87,614 60,889
Net impairment loss on financial assets (2,453) (1,201)
Other income 7 2,326 610
Operating expenses (61,079) (56,923)
Profit before income tax 26,408 3,375
Income tax expense (6,440) (705)
Profit for the period 19,968 2,670
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 174 462
comprehensive income
Tax on other comprehensive income (43) (88)
Other comprehensive income for the period, net of tax 131 374
Total comprehensive income for the period 20,099 3,044
Earnings per share for profit attributable to the equity holders of the
Company during the period (expressed in pence per share):
Basic earnings per share 8 129.4 17.8
Diluted earnings per share 8 129.4 17.8
Consolidated Statement of Financial Position
At 30 June At 30 June At 31 December
2023 2022 2022
£000 £000 £000
ASSETS
Cash and balances at central banks 646,016 512,837 732,729
Loans and advances to banks 148,970 125,839 115,787
Debt securities at amortised cost 597,473 386,880 439,753
Assets classified as held for sale 3,232 3,220 3,279
Derivative financial instruments 7,427 4,165 6,322
Loans and advances to customers 2,034,897 1,989,867 2,036,077
Other assets 66,267 110,188 52,185
Financial investments 3,684 2,970 3,404
Deferred tax asset 1,706 3,233 2,425
Intangible assets 30,535 30,853 32,549
Property, plant and equipment 220,539 118,551 175,273
Right-of-use assets 7,314 14,663 7,714
Investment properties 6,550 6,550 6,550
Total assets 3,774,610 3,309,816 3,614,047
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital and share premium 11,773 154 154
Retained earnings 228,250 200,785 212,037
Other reserves (82) (321) (213)
Total equity 239,941 200,618 211,978
LIABILITIES
Deposits from banks 197,384 230,110 236,027
Derivative financial instruments 58 162 135
Deposits from customers 3,253,890 2,801,530 3,092,549
Current tax liability 6,059 1,877 1,748
Other liabilities 32,573 23,092 26,144
Lease liabilities 7,415 15,269 7,872
Debt securities in issue 37,290 37,158 37,594
Total liabilities 3,534,669 3,109,198 3,402,069
Total equity and liabilities 3,774,610 3,309,816 3,614,047
Consolidated Statement of Changes in Equity
Attributable to equity holders of the Group
Share capital and share premium Capital redemption reserve Fair value reserve Treasury shares Retained earnings Total
£000 £000 £000 £000 £000 £000
Balance at 1 January 2023 154 19 1,067 (1,299) 212,037 211,978
Total comprehensive income for the period
Profit for the six months ended 30 June 2023 - - - - 19,968 19,968
Other comprehensive income, net of income tax
Changes in the fair value of financial assets at FVOCI - - 174 - - 174
Tax on other comprehensive income - - (43) - - (43)
Total other comprehensive income - - 131 - - 131
Total comprehensive income for the period - - 131 - 19,968 20,099
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Issue of new ordinary shares 11,619 - - - - 11,619
Final dividend relating to 2022 - - - - (3,755) (3,755)
Total contributions by and distributions to owners 11,619 - - - (3,755) 7,864
Balance at 30 June 2023 11,773 19 1,198 (1,299) 228,250 239,941
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 1 January 2022 154 19 979 (1,299) 201,026 200,879
Total comprehensive income for the period
Profit for the six months ended 30 June 2022 - - - - 2,670 2,670
Other comprehensive income, net of income tax
Changes in the fair value of financial assets at FVOCI - - 462 - - 462
Tax on other comprehensive income - - (88) - - (88)
Total other comprehensive income - - 374 - - 374
Total comprehensive income for the period - - 374 - 2,670 3,044
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Sale of financial assets carried at FVOCI - - (394) - 394 -
Final dividend relating to 2021 - - - - (3,305) (3,305)
Total contributions by and distributions to owners - - (394) - (2,911) (3,305)
Balance at 30 June 2022 154 19 959 (1,299) 200,785 200,618
Consolidated Statement of Cash Flows
Six months ended 30 June Six months ended 30 June
2023 2022*
£000 £000
Cash flows from operating activities
Profit before tax 26,408 3,375
Adjustments for:
- Depreciation and amortisation 5,489 3,764
- Impairment loss on loans and advances (667) (3,749)
- Net interest income 72 73
- Elimination of exchange differences on debt securities 8,064 (9,812)
- Other non-cash or non-operating items included in profit before tax (57) 475
- Tax expense (6,440) (705)
Cash flows from operating (losses)/profits before changes in operating assets 32,869 (6,579)
and liabilities
Changes in operating assets and liabilities:
- net increase in derivative financial instruments (1,182) (2,421)
- net increase in loans and advances to customers 1,847 (115,156)
- net (increase)/decrease in assets held for leasing (44,758) 6,674
- net increase in other assets (13,316) (824)
- net increase/(decrease) in amounts due to customers 161,341 (36,339)
- net (decrease) / increase in other liabilities 10,741 (1,660)
Net cash inflow/(outflow) from operating activities 147,542 (156,305)
Cash flows from investing activities
Acquisition of financial investments (106) (4)
Disposal of financial investments - 536
Purchase of computer software (418) (2,840)
Purchase of property, plant and equipment (2,067) (171)
Purchases of debt securities (654,605) (286,424)
Proceeds from redemption of debt securities 488,459 210,408
Net cash outflow from investing activities (168,737) (78,495)
Cash flows from financing activities
Issue of new ordinary shares 11,619 -
Decrease in borrowings (38,643) (9,949)
Lease payments (1,555) (1,406)
Dividends paid (3,756) (3,305)
Net cash used in financing activities (32,335) (14,660)
Net (decrease)/increase in cash and cash equivalents (53,530) (249,460)
Cash and cash equivalents at 1 January 848,516 888,136
Cash and cash equivalents at 30 June 794,986 638,676
*Prior year values have been represented using the indirect method in
accordance with IAS 7.
Notes to the Consolidated Financial Statements
1. Basis of preparation
The interim financial statements have been prepared on the basis of accounting
policies set out in the Group's 2022 statutory accounts as amended by
UK-adopted standards and interpretations effective during 2023 as set out
below and in accordance with IAS 34 "Interim Financial Reporting" as adopted
for use in the UK. The directors do not consider the fair value of the assets
and liabilities presented in these financial statements to be materially
different from their carrying value.
The statements were approved by the Board of Directors on 17 July 2023 and are
unaudited. The interim financial statements will be available on the Group
website (www.arbuthnotgroup.com) from 19 July 2023.
2. 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 4.
The principal risks inherent in the Group's business are reputational,
macroeconomic and competitive environment, strategic, credit, market,
liquidity, operational, cyber, conduct and, regulatory and capital.
Reputational risk
Reputational risk is the risk to the Group from a failure to meet reasonable
stakeholder expectations as a result of any event, behaviour, action or
inaction by ABG itself, its employees or those with whom it is associated.
This includes the associated risk to earnings, capital or liquidity.
ABG seeks to ensure that all of it businesses act consistently with the seven
corporate principles as laid out on page 3 of the Annual Report and Accounts.
This is achieved through a central Risk Management framework and supporting
policies, the application of a three-lines of defence model across the Group
and oversight by various committees. Employees are supported in training,
studies and other ways and encouraged to live out the cultural values within
the Group of integrity, energy and drive, respect, collaboration and
empowerment. In applying the seven corporate principles, the risk of
reputational damage is minimised as the Group serves its shareholders,
customers and employees with integrity and high ethical standards.
Macroeconomic and competitive environment
The Group is exposed to indirect risk that may arise for the macroeconomic and
competitive environment.
In recent years there have been a number of global and domestic events which
have had significant implications on the Group's operating environment,
namely: Russia's War in the Ukraine, Coronavirus and Brexit. The culmination
of these events has led to significant turmoil in both global and domestic
markets. The most significant economic effect from these events includes
record inflation driven by high fuel costs, leading to sharp and significant
increases in the cost of borrowing. Conditions have improved since the year
end however there still remains significant uncertainty around the recovery of
the UK economy which may have an impact on the group's customers and assets.
Climate change
Climate change presents financial and reputational risks for the banking
industry. The Board consider Climate change a material risk as per the Board
approved risk appetite framework which provides a structured approach to risk
taking within agreed boundaries. The assessment is proportional at present but
will develop over time as the Group generates further resources and industry
consensus emerges. The assessment is maintained by the Chief Risk officer and
has been informed by the ICAAP review and numerous workshops for staff.
Whilst it is difficult to assess how climate change will unfold, the Group is
continually assessing various risk exposures. The UK has a legally binding
target to cut its greenhouse gas emissions to "net-zero" by 2050. There is
growing consensus that an orderly transition to a low-carbon economy will
bring substantial adjustments to the global economy which will have financial
implications while bringing risks and opportunities.
The risk assessment process has been integrated into existing risk frameworks
and will be governed through the various risk governance structures including
review and recommendations by the AL Risk Committee. Arbuthnot Latham
governance has been assessed against the Task Force on Climate-related
Financial Disclosures' ("TCFD") recommended governance disclosures and where
appropriate the FCA/PRA guidance as per the Supervisory statements.
In accordance with the requirements of the PRA's Supervisory Statement
'Enhancing banks' and insurers' approaches to managing the financial risks
from climate change', the Group has allocated responsibility for identifying
and managing the risks from climate change to the relevant existing Senior
Management Function. The Bank is continuously developing a suitable strategic
approach to climate change and the unique challenges it poses.
The FCA have issued 'Climate Change and Green Finance: summary of responses
and next steps'. In addition to the modelling of various scenarios and various
governance reviews, Arbuthnot Latham will continue to monitor requirements
through the relationship with UK Finance.
Strategic risk
Strategic risk is the risk that the Group's ability to achieve its corporate
and strategic objectives may be compromised. This risk is particularly
important to the Group as it continues its growth strategy. However, the Group
seeks to mitigate strategic risk by focusing on a sustainable business model
which is aligned to the Group's business strategy. Also, the Directors
normally meet once a year outside a formal Board setting to ensure that the
Group's strategy is appropriate for the market and economy.
Credit risk
Credit risk is the risk that a counterparty (borrower) will be unable to pay
amounts in full when due. This risk exists in Arbuthnot Latham, which
currently has a loan book of £2.2bn (30 June 2022: £2.1bn). The lending
portfolio in Arbuthnot Latham is extended to clients, the majority of which is
secured against cash, property or other high quality assets. Credit risk is
managed through the Credit Committee of Arbuthnot Latham.
Market risk
Market risk arises in relation to movements in interest rates, currencies,
property and equity markets. The Group's treasury function operates mainly to
provide a service to clients and does not take significant unmatched positions
in any market for its own account. As a result, the Group's exposure to
adverse movements in interest rates and currencies is limited to interest
earnings on its free cash and interest rate re-pricing mismatches. The Group
actively monitors its exposure to future changes in interest rates.
The Group is exposed to changes in the market value of its properties. The
current carrying value of Investment Property is £6.6m (31 December 2022:
£6.6m) and properties classified as inventory are carried at £10.5m (31
December 2022: £19.6m). Any changes in the market value of the property will
be accounted for in the Income Statement for the Investment Property and could
also impact the carrying value of inventory, which is at the lower of cost and
net realisable value. As a result, it could have a significant impact on the
profit or loss of the Group.
Liquidity risk
Liquidity risk is the risk that the Group, although solvent, either does not
have sufficient financial resources to enable it to meet its obligations as
they fall due, or can only secure such resources at an excessive cost. The
Group takes a conservative approach to managing its liquidity profile. Retail
client deposits and drawings from the Bank of England Term Funding Scheme fund
the Bank. The loan to deposit ratio is maintained at a prudent level, and
consequently the Group maintains a high level of liquidity. The Arbuthnot
Latham Board annually approves the Internal Liquidity Adequacy Assessment
Process ("ILAAP"). The Directors model various stress scenarios and assess the
resultant cash flows in order to evaluate the Group's potential liquidity
requirements. The Directors firmly believe that sufficient liquid assets are
held to enable the Group to meet its liabilities in a stressed environment.
Operational risk
Operational risk is the risk that the Group may be exposed to financial losses
from conducting its business. The Group's exposures to operational risk
include its Information Technology ("IT") and Operations platforms. There are
additional internal controls in these processes that are designed to protect
the Group from these risks. The Group's overall approach to managing internal
control and financial reporting is described in the Corporate Governance
section of the Annual Report.
In line with further guidance issued by the Regulator, the Bank has continued
to focus on ensuring that the design of systems and operational plans are
robust to maintain operational resilience in the face of unexpected incidents.
Cyber risk
Cyber risk is an increasing risk for the Group within its operational
processes. It is the risk that the Group is subject to some form of disruption
arising from an interruption to its IT and data infrastructure. The Group
regularly tests the infrastructure to ensure that it remains robust to a range
of threats and has continuity of business plans in place including a disaster
recovery plan.
Conduct risk
As a financial services provider we face conduct risk, including selling
products to customers which do not meet their needs, failing to deal with
clients' complaints effectively, not meeting clients' expectations, and
exhibiting behaviours which do not meet market or regulatory standards.
The Group adopts a low risk appetite for any unfair customer outcomes. It
maintains clear compliance guidelines and provides ongoing training to all
employees. Periodic spot checks, compliance monitoring and internal audits
are performed to ensure these guidelines are followed. The Group also has
insurance policies in place to provide some cover for any claims that may
arise.
Regulatory and capital risk
Regulatory and capital risk includes the risk that the Group will have
insufficient capital resources to support the business and/or does not comply
with regulatory requirements. The Group adopts a conservative approach to
managing its capital. The Board of Arbuthnot Latham approves an ICAAP
annually, which includes the performance of stringent stress tests to ensure
that capital resources are adequate over a three year horizon. Capital and
liquidity ratios are regularly monitored against the Board's approved risk
appetite as part of the risk management framework.
Regulatory change also exists as a risk to the Group's business.
Notwithstanding the assessments carried out by the Group to manage regulatory
risk, it is not possible to predict how regulatory and legislative changes may
alter and impact the business. Significant and unforeseen regulatory changes
may reduce the Group's competitive situation and lower its profitability.
3. 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. For a full list of critical
accounting estimates and judgements, please refer back to the Annual Report
and Accounts for 2022. Assumptions surrounding credit losses are discussed in
more detail below, while other critical accounting estimates and judgements
have remained unchanged from what was previously reported.
Estimation uncertainty - 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 measurement of ECL required by
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 Baseline, which is the central scenario,
developed internally based on public consensus forecasts, 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 ("LGD") having consideration for
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.
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.
The five macroeconomic scenarios modelled on future property prices 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
Jun-23 Dec-22
Economic Scenarios
Baseline 42.0% 53.0%
Upside 21.0% 13.0%
Downside 1 18.0% 12.0%
Downside 2 12.0% 11.0%
Extreme downside 7.0% 11.0%
The tables below show the five-year forecasted average for property prices
growth, UK unemployment rate and UK real GDP growth:
30 June 2023
Base Upside Downside 1 Downside 2 Extreme downside
Five-year summary
UK House price index - average growth 0.3% 4.0% (1.6%) (3.5%) (5.5%)
UK Commercial real estate price - average growth (0.8%) 2.4% (2.8%) (4.8%) (6.8%)
UK Unemployment rate - average 4.2% 2.8% 5.1% 6.1% 7.0%
UK GDP - average growth 1.4% 2.0% 0.9% 0.4% (0.1%)
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 30 June 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
2023 (6.2%) (3.9%) (7.0%) (7.8%) (8.6%)
2024 (2.0%) 5.2% (6.0%) (10.0%) (13.9%)
2025 1.1% 4.0% (3.2%) (7.5%) (11.8%)
2026 3.4% 4.9% 2.3% 1.3% 0.2%
2027 5.2% 9.6% 5.8% 6.3% 6.9%
5 year average 0.3% 4.0% (1.6%) (3.5%) (5.5%)
UK Commercial real estate price - four quarter growth
Year Baseline Upside Downside 1 Downside 2 Extreme downside
2023 (10.3%) 2.0% (13.6%) (16.9%) (20.1%)
2024 0.5% 2.6% (7.8%) (16.0%) (24.3%)
2025 1.8% 2.6% (0.7%) (3.2%) (5.8%)
2026 1.9% 2.7% 3.8% 5.8% 7.8%
2027 2.1% 1.9% 4.3% 6.4% 8.6%
5 year average (0.8%) 2.4% (2.8%) (4.8%) (6.8%)
UK Unemployment rate - annual average
Year Baseline Upside Downside 1 Downside 2 Extreme downside
2023 4.1% 3.2% 4.4% 4.7% 5.0%
2024 4.2% 2.8% 5.2% 6.2% 7.2%
2025 4.2% 2.8% 5.5% 6.9% 8.2%
2026 4.2% 2.5% 5.4% 6.5% 7.7%
2027 4.2% 2.5% 5.1% 6.1% 7.0%
5 year average 4.2% 2.8% 5.1% 6.1% 7.0%
UK GDP - annual growth
Year Baseline Upside Downside 1 Downside 2 Extreme downside
2023 0.3% 0.6% (0.6%) (1.5%) (2.4%)
2024 1.0% 2.0% - (0.9%) (1.9%)
2025 1.7% 2.3% 1.5% 1.4% 1.2%
2026 1.9% 2.5% 1.7% 1.4% 1.2%
2027 1.9% 2.5% 1.7% 1.4% 1.2%
5 year average 1.4% 2.0% 0.9% 0.4% (0.1%)
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.
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:
Arbuthnot Latham
Jun 2023 Dec 2022
Impact of 100% scenario probability £m £m
Baseline 0.6 0.7
Upside 0.9 1.0
Downside 1 (2.4) (2.0)
Downside 2 (8.3) (7.5)
Extreme downside (20.6) (19.1)
4. 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.
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 period.
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 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.
The Group's maximum exposure to credit risk before collateral held or other
credit enhancements is as follows:
30 June 2023
Group Banking Mortgage Portfolios RAF ACABL 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 - - - - - - 645,854 645,854
Loans and advances to banks - - - - - - 148,970 148,970
Debt securities at amortised cost - - - - - - 597,473 597,473
Derivative financial instruments - - - - - - 7,427 7,427
Loans and advances to customers (Gross of ECL) 1,450,674 136,014 157,972 241,255 12,472 42,444 - 2,040,831
Stage 1 - Gross amount outstanding 1,361,491 111,989 152,553 226,484 11,472 42,444 - 1,906,433
Stage 2 - Gross amount outstanding 54,071 11,011 2,531 12,654 1,000 - - 81,267
Stage 3 - Gross amount outstanding 35,112 13,014 2,888 2,117 - - - 53,131
Other assets - - - - - - 25,118 25,118
Financial investments - - - - - - 3,684 3,684
Off-balance sheet:
Guarantees 1,841 - - - - - - 1,841
Loan commitments 225,901 - - 284,290 665 - - 510,856
At 30 June 2023 1,678,416 136,014 157,972 525,545 13,137 42,444 1,428,526 3,982,054
30 June 2022
Group Banking Mortgage Portfolios RAF ACABL 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 - - - - - - 512,663 512,663
Loans and advances to banks - - - - - - 125,839 125,839
Debt securities at amortised cost - - - - - - 386,880 386,880
Derivative financial instruments - - - - - - 4,165 4,165
Loans and advances to customers (Gross of ECL*) 1,450,415 166,263 103,309 238,980 9,736 13,473 - 1,982,176
Stage 1 - Gross amount outstanding 1,359,839 140,170 87,420 238,980 9,053 13,473 - 1,848,935
Stage 2 - Gross amount outstanding 60,041 21,279 12,318 - - - - 93,638
Stage 3 - Gross amount outstanding 30,535 4,814 3,571 - 683 - - 39,603
Loans and advances to customers at fair value through profit or loss 10,330 10,330
Other assets - - - - - - 12,763 12,763
Financial investments - - - - - - 2,970 2,970
Off-balance sheet:
Guarantees 3,427 - - - - - - 3,427
Loan commitments 282,901 - - 68,880 1,844 - - 353,625
At 30 June 2022 1,736,743 166,263 103,309 307,860 11,580 13,473 1,055,610 3,394,838
* Prior year loans and advances to customers have been represented from net to
gross of expected credit losses (ECL) in order to align the presentation to
the annual report.
31 December 2022
Group Banking Mortgage Portfolios RAF ACABL 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 - Gross amount outstanding 1,363,572 126,726 128,807 267,962 13,756 17,066 - 1,917,889
Stage 2 - Gross amount outstanding 59,904 10,777 2,454 - 1,001 376 - 74,512
Stage 3 - Gross amount outstanding 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 219,490 - - 250,276 1,312 - - 471,078
At 31 December 2022 1,677,688 148,957 134,724 521,275 16,262 18,104 1,311,940 3,828,950
* Prior year loans and advances to customers have been represented from net to
gross of expected credit losses (ECL) in order to align the presentation to
the annual report.
The table below shows the Group's expected credit loss (ECL), by segment and
stage:
30 June 2023
Group Banking Mortgage Portfolios RAF ACABL ASFL AAG All Other Divisions Total
ECL provisions £000 £000 £000 £000 £000 £000 £000 £000
Stage 1 (574) (7) (223) (121) (96) (108) - (1,129)
Stage 2 (12) (21) (45) (14) - - - (91)
Stage 3 (2,712) (995) (956) (50) - - - (4,714)
At 30 June 2023 (3,298) (1,023) (1,224) (185) (96) (108) - (5,934)
30 June 2022
Group Banking Mortgage Portfolios RAF ACABL ASFL AAG All Other Divisions Total
ECL provisions £000 £000 £000 £000 £000 £000 £000 £000
Stage 1 (229) (15) (90) (137) (42) - - (513)
Stage 2 (4) (10) (114) - - - - (128)
Stage 3 (1,331) (70) (493) - (104) - - (1,998)
At 30 June 2022 (1,564) (95) (697) (137) (146) - - (2,639)
31 December 2022
Group Banking Mortgage Portfolios RAF ACABL ASFL AAG All Other Divisions Total
ECL provisions £000 £000 £000 £000 £000 £000 £000 £000
Stage 1 (622) (13) (214) (167) (81) (50) - (1,146)
Stage 2 (60) (10) (60) - - - - (130)
Stage 3 (2,276) (417) (625) (2,007) - - - (5,325)
At 31 December 2022 (2,958) (440) (899) (2,174) (81) (50) - (6,601)
Capital management
During the period all regulated entities have complied with all of the
externally imposed capital requirements to which they are subject. The capital
position of the Group remains strong. The Total Capital Requirement Ratio
("TCR") is 8.32% (31 December 2022: 8.32%), while the CET1 capital ratio is
12.2% (31 December 2022: 11.6%) and the total capital ratio is 14.5% (31
December 2022: 14.0%).
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 event 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 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 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 30 June 2023 £000 £000 £000 £000
ASSETS
Derivative financial instruments - 7,427 - 7,427
Financial investments - - 3,684 3,684
Investment properties - - 6,550 6,550
- 7,427 10,234 17,661
LIABILITIES
Derivative financial instruments - 58 - 58
- 58 - 58
Level 1 Level 2 Level 3 Total
At 30 June 2022 £000 £000 £000 £000
ASSETS
Derivative financial instruments - 4,165 - 4,165
Loans and advances to customers at fair value through profit or loss - - 10,330 10,330
Financial investments - - 2,970 2,970
Investment properties - - 6,550 6,550
- 4,165 19,850 24,015
LIABILITIES
Derivative financial instruments - 162 - 162
- 162 - 162
Level 1 Level 2 Level 3 Total
At 31 December 2022 £000 £000 £000 £000
ASSETS
Derivative financial instruments - 6,322 - 6,322
Financial investments - - 3,404 3,404
Investment properties - - 6,550 6,550
- 6,322 9,954 16,276
LIABILITIES
Derivative financial instruments - 135 - 135
- 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:
At 30 June At 30 June At 31 December
2023 2022 2022
Movement in level 3 £000 £000 £000
At 1 January 9,954 9,719 9,719
Acquisitions 106 10,334 53
Disposals - (536) (640)
Movements recognised in Other Comprehensive Income 174 333 822
At 30 June / 31 December 10,234 19,850 9,954
The tables below show the fair value of financial instruments carried at
amortised cost by the level in the fair value hierarchy:
Level 1 Level 2 Level 3 Total
At 30 June 2023 £000 £000 £000 £000
ASSETS
Cash and balances at central banks - 646,016 - 646,016
Loans and advances to banks - 148,970 - 148,970
Debt securities at amortised cost - 597,294 - 597,294
Loans and advances to customers - - 1,995,048 1,995,048
Other assets - - 25,118 25,118
- 1,392,280 2,020,166 3,412,446
LIABILITIES
Deposits from banks - 197,384 - 197,384
Deposits from customers - 3,253,890 - 3,253,890
Other liabilities - - 32,573 32,573
Debt securities in issue - - 37,290 37,290
- 3,451,274 69,863 3,521,137
Level 1 Level 2 Level 3 Total
At 30 June 2022 £000 £000 £000 £000
ASSETS
Cash and balances at central banks - 512,837 - 512,837
Loans and advances to banks - 125,839 - 125,839
Debt securities at amortised cost - 386,706 - 386,706
Loans and advances to customers - - 1,947,478 1,947,478
Other assets - - 12,989 12,989
- 1,025,382 1,960,467 2,985,849
LIABILITIES
Deposits from banks - 230,110 - 230,110
Deposits from customers - 2,801,530 - 2,801,530
Other liabilities - - 24,634 24,634
Debt securities in issue - - 37,158 37,158
- 3,031,640 61,792 3,093,432
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
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
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.
Subordinated liabilities
The fair value of subordinated liabilities was calculated based upon the
present value of the expected future principal cash flows.
5. Operating segments
The Group is organised into eight 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
Six months ended 30 June 2023 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Interest revenue 51,527 - 5,125 5,500 11,253 661 778 25,476 3 100,323
Inter-segment revenue - - - - - - - - (3) (3)
Interest revenue from external customers 51,527 - 5,125 5,500 11,253 661 778 25,476 - 100,320
Fee and commission income 1,471 5,579 - 18 3,331 11 - 865 - 11,275
Revenue - - - - - - 49,895 - - 49,895
Revenue from external customers 52,998 5,579 5,125 5,518 14,584 672 50,673 26,341 - 161,490
Interest expense 5,350 - (4,166) (1,997) (7,125) (215) (4,224) (17,475) (2,101) (31,953)
Cost of goods sold - - - - - - (41,821) - - (41,821)
Add back inter-segment revenue - - - - - - - - 3 3
Fee and commission expense (20) - - - (85) - - - - (105)
Segment operating income 58,328 5,579 959 3,521 7,374 457 4,628 8,866 (2,098) 87,614
Impairment losses (1,375) - (630) (303) (17) (15) (113) - - (2,453)
Other income 65 - - 108 - - 12 2,141 - 2,326
Operating expenses (25,879) (7,515) (378) (2,666) (3,333) (972) (7,011) (8,171) (5,154) (61,079)
Segment profit / (loss) before tax 31,139 (1,936) (49) 660 4,024 (530) (2,484) 2,836 (7,252) 26,408
Income tax (expense) / income - - - (159) (950) 133 (220) (3,925) (1,319) (6,440)
Segment profit / (loss) after tax 31,139 (1,936) (49) 501 3,074 (397) (2,704) (1,089) (8,571) 19,968
Loans and advances to customers 1,447,375 - 134,991 156,748 241,071 12,376 42,336 - - 2,034,897
Assets available for lease - - - - - - 216,496 - - 216,496
Other assets - - - - - - - 1,526,231 (3,014) 1,523,217
Segment total assets 1,447,375 - 134,991 156,748 241,071 12,376 258,832 1,526,231 (3,014) 3,774,610
Customer deposits 3,254,761 - - - - - - - (871) 3,253,890
Other liabilities - - - - - - - 277,663 3,116 280,779
Segment total liabilities 3,254,761 - - - - - - 277,663 2,245 3,534,669
Other segment items:
Capital expenditure - - - (5) - - (97,066) (1,941) - (99,012)
Depreciation and amortisation - - - (1) - (296) (18,429) (3,230) - (21,956)
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
Six months ended 30 June 2022 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Interest revenue 29,635 - 3,250 4,086 5,818 463 253 5,583 2 49,090
Inter-segment revenue - - - - - - - - (2) (2)
Interest revenue from external customers 29,635 - 3,250 4,086 5,818 463 253 5,583 - 49,088
Fee and commission income 1,564 5,332 - 138 2,670 5 - 390 - 10,099
Revenue - - - - - - 48,851 - - 48,851
Revenue from external customers 31,199 5,332 3,250 4,224 8,488 468 49,104 5,973 - 108,038
Interest expense (1,613) - (882) (1,547) (2,696) (170) (1,994) 3,746 (1,398) (6,554)
Cost of goods sold - - - - - - (40,538) - - (40,538)
Add back inter-segment revenue - - - - - - - - 2 2
Fee and commission expense 14 - - - (73) - - - - (59)
Segment operating income 29,600 5,332 2,368 2,677 5,719 298 6,572 9,719 (1,396) 60,889
Impairment losses (221) - (49) (465) (46) (117) (303) - - (1,201)
Other income - - - 69 - - (182) 723 - 610
Operating expenses (22,804) (7,171) (481) (2,124) (2,790) (751) (7,155) (9,198) (4,449) (56,923)
Segment profit / (loss) before tax 6,575 (1,839) 1,838 157 2,883 (570) (1,068) 1,244 (5,845) 3,375
Income tax (expense) / income - - - - - - - 624 (1,329) (705)
Segment profit / (loss) after tax 6,575 (1,839) 1,838 157 2,883 (570) (1,068) 1,868 (7,174) 2,670
Loans and advances to customers 1,459,182 - 166,168 102,612 238,843 9,590 13,473 11,500 (11,501) 1,989,867
Assets available for lease - - - - - - 115,133 - - 115,133
Other assets - - - - - - - 1,206,288 (1,472) 1,204,816
Segment total assets 1,459,182 - 166,168 102,612 238,843 9,590 128,606 1,217,788 (12,973) 3,309,816
Customer deposits 2,611,542 - - - - - - 207,735 (17,747) 2,801,530
Other liabilities - - - - - - - 292,414 15,254 307,668
Segment total liabilities 2,611,542 - - - - - - 500,149 (2,493) 3,109,198
Other segment items:
Capital expenditure - - - (5) - - (35,612) (205) - (35,822)
Depreciation and amortisation - - - (3) - (25) (15,015) (2,480) (8) (17,531)
Segment profit is shown prior to any intra-group eliminations.
6. Underlying Profit
The Group has reported a profit before tax of £26.4m (2022 H1: £3.4m). The
underlying profit before tax was £29.3m (2022 H1: profit of £10.7m). There
are a number of specific one-off items which are included in the results that
should be noted. These are detailed in the table below.
30 June 2023 30 June 2022
Underlying profit reconciliation £000 £000
Profit before tax and group recharges 26,408 3,375
Profits earned on sale of trucks included in bargain purchase 2,940 3,328
Write down of King Street property - 3,977
Underlying profit 29,348 10,680
During 2021 the Group acquired Asset Alliance Group Holdings Limited, which
completed on 1 April 2021. The business was acquired at a discount to its fair
valued net assets resulting in a bargain purchase of £8.7m in the first half
of 2021.
The forgone profit on the sale of trucks generated by Asset Alliance was
£2.9m in the period (30 June 2022: £3.3m), which is required from the
acquisition accounting in 2021. The fair value adjustments to individual
assets at acquisition are reversed through profit or loss at the point of
sale.
In 2022 the net realisable value of the property in King Street was reduced by
£4.0m, resulting from the agreement to sell it.
7. 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 £0.2m (H1 2022: £0.7m).
8. 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 15,431,170 (2022: 15,022,629) in issue during the
period.
Diluted
Diluted earnings per ordinary share are calculated by dividing the dilutive
profit after tax attributable to equity holders of the Company by the weighted
average number of ordinary shares in issue during the period, as well as the
number of dilutive share options in issue during the period. There were no
dilutive share options in issue at the end of June (2022: nil).
Six months ended 30 June Six months ended 30 June
2023 2022
Profit attributable £000 £000
Total profit after tax attributable to equity holders of the Company 19,968 2,670
Six months ended 30 June Six months ended 30 June
2023 2022
Basic Earnings per share p p
Total Basic Earnings per share 129.4 17.8
9. Share capital and share premium
30 Jun 2023 30 Jun 2022
£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
£000
At 1 January 2023 15,279,322 153
Issue of shares 1,297,297 13
At 30 June 2023 16,576,619 166
Ordinary non-voting share capital
Number of Share
shares Capital
£000
At 1 January 2023 152,621 1
At 30 June 2023 152,621 1
Total share capital
Number of Share
shares Capital
£000
At 1 January 2023 15,431,943 154
Issue of shares 1,297,297 13
At 30 June 2023 16,729,240 167
(a) Share issue costs
Incremental costs directly attributable to the issue of new shares or options
by the 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
30 June 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.
(d) Share premium
On 14 April 2023 the Group announced an oversubscribed conditional placing of
and subscription for new voting ordinary shares in the Company at a price of
925 pence per share, raising approximately £12.0 million (before expenses).
The Resolutions put to Shareholders at the General Meeting held at 4 May 2023
were duly passed. The Group received share premium of £11.6 million as a
result of the share issuance.
10. Events after the balance sheet date
There were no material post balance sheet events to report.
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