REG - Arbuthnot Banking - Unaudited results for the six months to 30/06/2024
23/07/2024 07:00
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RNS Number : 3685X Arbuthnot Banking Group PLC 23 July 2024
23 July 2024
For immediate release
ARBUTHNOT BANKING GROUP PLC ("Arbuthnot", "the Company", "the Group" or "ABG")
Unaudited results for the six months to 30 June 2024
Arbuthnot Banking Group PLC today announces a half yearly profit before tax of
£20.8m.
Arbuthnot Banking Group PLC is the holding company for Arbuthnot Latham &
Co., Limited.
FINANCIAL HIGHLIGHTS
● Profit before tax of £20.8m for the six months to 30 June 2024 (30 June 2023:
£26.4m), as expected, as existing fixed rate deposits have continued to
reprice onto higher terms as they are renewed.
● Underlying profit before tax of £20.8m (30 June 2023: £29.3m)*.
● Earnings per share of 94.6p (30 June 2023: 129.4p; 31 December 2023: 222.8p).
● CET1 capital ratio of 11.6% (30 June 2023: 12.2%; 31 December 2023: 13.0%) and
total capital ratio of 13.6% (30 June 2023: 14.5%; 31 December 2023: 15.2%).
● Interim dividend of 20p per share previously announced and already paid in
June (30 June 2023: 19p per share).
● Special dividend of 20p per share previously announced and already paid in
June.
● Net assets per share at 30 June 2024 of £15.75 (30 June 2023: £14.70; 31
December 2023: £15.47).
OPERATIONAL HIGHLIGHTS
● Customer loans (including leased assets) increased by 3% to £2.40bn (30 June
2023: £2.25bn; 31 December 2023: £2.33bn) increased by 3% in the first half
of the year, representing a 7% increase year on year.
● Specialist Lending Divisions' loan balances grew by 12% in the first half of
the year, and 29% year on year to £861.1m (30 June 2023: £669.0m; 31
December 2023: £768.5m).
● Customer deposits of £3.9bn (30 June 2023: £3.3bn; 31 December 2023:
£3.8bn), a 3% increase since the year end and a 19% increase year on year.
● Lower cost Commercial transactional deposits saw annualised growth of 19% to
£1.14bn (30 June 2023: £0.96bn; 31 December 2023: £1.05bn), as the Group's
strategy to grow these balances gathered momentum.
● Funds under management and administration of £1.96bn at 30 June 2024 (30 June
2023: £1.38bn; 31 December 2023: £1.71bn), a 15% increase against 31
December 2023 and an increase of 43% year on year, with net inflows showing a
four-fold increase on the first six months of 2023.
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,
again delivering strong profits in an evolving interest rate environment.
The balance sheet evolution and growth achieved in the period demonstrates the
ongoing success of our 'Future State 2' strategic plan, with its focus on
diversifying the loan book whilst continuing to enhance our value proposition
to relationship clients.
While an expected fall in interest rates in the second half will have a
short-term impact on profit growth, the Group is well positioned to take
advantage of the market opportunities we anticipate over the near, medium and
long term."
Notes
*Details of the calculation of underlying profit before tax can be found in
note 6
The Directors of the Company accept responsibility for the contents of this
announcement.
The information contained within this announcement is deemed to constitute
inside information as stipulated under the retained EU law version of the
Market Abuse Regulation (EU) No. 596/2014 (the "UK MAR") which is part of UK
law by virtue of the European Union (Withdrawal) Act 2018. The information is
disclosed in accordance with the Company's obligations under Article 17 of the
UK MAR. Upon the publication of this announcement, this inside information is
now considered to be in the public domain.
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
Ciara Donnelly
Shore Capital 020 7408 4090
(Broker)
Daniel Bush
David Coaten
Tom Knibbs
Maitland/AMO (Financial PR) 020 7379 5151
Neil Bennett
Sam Cartwright
Chairman's Statement
I am pleased to report that the Group has recorded a profit before tax for the
first six months of the year of £20.8m, compared to £26.4m in the same
period last year.
The reported profit is lower, as expected, due to the previously explained
time lag between rises in the Bank of England base rate and the ageing of the
existing fixed rate deposits. It takes 12 months for the cost of our deposits
to rise to their resting rate.
This has been the case during the first half of 2024 with the average cost of
deposits being 3.19% compared to 1.92% in the same period in the prior year.
This increase when applied to customer deposit balances in excess of £3bn,
has increased the cost to the Group by £35.2m, being the main reason for the
reduction in profits in the first half of 2024. This trend will continue into
the second half.
As previously set out in the strategic plan "Future State 2", the Group is
focussed on diversifying the loan books by increasing the proportion
represented by the specialist lending divisions.
This continued with success in the first half, with the specialist divisions
reaching £861.1m of lending balances, which is growth of 12% during 2024 and
29% in the last 12 months. This now represents 36% of the total lending
portfolio compared to 30% in June 2023.
The success the Bank had in growing relationship deposits continued into 2024.
As expected, we saw the usual seasonal outflow of balances as tax payments
were made by clients. We also encouraged non-relationship, expensive fixed
term deposits to mature away from the Bank, without competing on price to
retain these balances. Finally, we marketed an investment opportunity for our
Private Banking clients to earn higher returns through a gilt investment
product. In combination, the impact of these three factors resulted in a
reduction in deposits of £235m.
However, despite this, total deposit balances have increased by £103.6m or by
3% since the start of the year and by 19% since June 2023. As part of the
strategy to grow our deposit base, we have been focussing on the underserved
SME current account market, where we have found that private bank style client
service resonates well with the finance professionals of our commercial
clients. So much so that the transactional SME deposits grew by £121m in the
first half of 2024, an increase of 9% and nearly 20% from the prior year.
I would also like to draw attention to the performance of our Wealth
Management division. Many wealth managers across the sector are struggling to
grow organically, but we continue to make great strides, growing our Funds
Under Management and Administration in the first half by £256m, an increase
of 15% and 43% since the prior year.
As previously indicated, I was pleased that we were able to complete the
renewal of our subordinated loan with P Capital Partners at the beginning of
June. This will ensure that the diversity and strength of our regulatory
capital base remains robust. We are delighted that our relationship with P
Capital Partners has been extended and value that they share the vision we
have for the prospects of the Group.
Reflecting on the success that the Group has enjoyed over the past 18 to 24
months, the Board of directors considered that our shareholders should be
rewarded for their loyalty by declaring a further special dividend of 20p per
share, which was paid on 20 June.
At the same time, the Board announced the interim dividend for the year, which
was also 20p per share, an increase of 1p per share over the prior year
interim dividend. This was paid on the same day as the special dividend.
On 2 July we announced Richard Gabbertas was joining the Board of ABG, having
already served for over three and a half years on the Board of our bank,
Arbuthnot Latham, where he was previously the Chair of the audit committee and
had recently become the Chair of the risk committee. I am delighted to welcome
him to our Board and wish him well for his future tenure.
Banking
Net client growth across Private and Commercial Banking has increased year on
year following the investment into new segments over the last 12 to 18 months.
Total deposits grew 3% from the year end and 19% over the previous twelve
months to finish the period at £3.9bn.
Private Banking deposits seasonally reduced in the first quarter due to client
tax payments. However, client growth and acquisition has led to balances being
largely replenished over the second quarter to finish the half year at
£0.95bn.
The strategy continues to focus on low-cost relationship deposits. Commercial
Banking deposits increased across a wide spread of target segments with growth
of 30% over a twelve-month period. Conversely, non-relationship balances have
reduced as these were more expensive to maintain.
The Banking loan book finished the half year with loans of £1.54bn, flat
compared to the previous twelve months and year end. Lower than expected
repayments over and above contractual repayments, coupled with on-plan gross
lending, has led to higher lending balances generating higher interest income
throughout the period, which has only been partially offset by a higher
interest expense.
Loan book quality remains strong given the macroeconomic environment. The
Bank's cautious underwriting approach with low LTVs is resulting in new
defaults being exited with little or no loss.
Wealth Management
Funds Under Management and Administration at the end of June were £1.96bn, up
15% from the start of the year and growth of 43% year on year (30 June 2023:
£1.38bn).
Year to date gross inflows were £247m compared to £116m over the same period
last year, of which a third were from existing clients and two thirds from new
clients. Net flows for the period were £170m, representing a four-fold
increase versus the same period in 2023. Additionally, the Direct Gilt
Service, launched in February 2024, has raised £82m across twenty-one
portfolios.
Arbuthnot Commercial Asset Based Lending ("ACABL")
ACABL reported a profit of £4.4m (30 June 2023: £4.0m) and finished the
first half with a loan book of £263.8m, compared to £241.1m for the same
period in the prior year and £239.8m at the year end.
ACABL has continued to support existing clients with renewals, additional
facilities and acquisitions, particularly where clients have a buy and build
strategy. However, macro-economic inflationary pressures, and the higher
interest rate environment along with ongoing supply chain challenges have
resulted in a reduction in the number of event-driven transactions and fewer
Private Equity backed buy-outs in early 2024. However, at the half the year,
the business is seeing signs of improving market conditions with falling
inflation and the prospect of lower interest rates on the horizon.
The business continues to observe a higher number of watch cases compared to
prior years. However, the loss rate remains very low due to the high quality,
liquid assets, as well as close monitoring of the collateral.
Renaissance Asset Finance ("RAF")
RAF reported a profit of £2.2m (30 June 2023: £0.7m) and finished the first
half with a loan book of £234.3m, equating to annual growth of 49% when
compared to £156.7m for the same period in the prior year and 18% up from the
year end (31 December 2023: £198.8m). In the month of June the business
generated profit before tax in excess of £0.5m for the first time.
The business continued to broaden its offerings in the wholesale funding
sector whilst developing a specialist finance portfolio, securing new and
additional funding through block discounting facilities and revolving credit
facilities to businesses with successful track records, with Block Discounting
balances of £30.9m following the launch of the business in late 2021.
Asset Alliance Group ("AAG")
AAG reported a profit before tax of £25k (30 June 2023: £2.5m loss). Whilst
the business has only just achieved break even, this is partly caused by the
stage of development of the business, whereby since acquisition we have more
than doubled the size of the fleet in a short period of time. The benefit of
this will mainly be felt as the portfolio matures.
As at 30 June 2024 the business had assets available for lease and finance
leases totalling £363.1m (30 June 2023: £258.8m) with growth of 11% since
the year end and 40% over the previous 12 months.
Despite the current economic headwinds, AAG has generated a strong flow of
originations in the 6 months to 30 June 2024. Yields, whilst under pressure in
certain areas, have improved in others, with an average yield on new business
of 8.2% for the first half of the year.
All new assets delivered for the new Bus Rental Division are being fully
utilised with current yields in excess of 10%. The Commercial Vehicle sector
is experiencing high levels of customer uncertainty coupled with significant
pricing pressure from competitors; however, larger, stronger fleets confirm to
be targetting annual fleet replacements.
Trading for used truck sales remains challenging. Margins have tended to be
maintained, although demand and stock turnover has yet to fully recover from
the post-Covid lull.
Operations
The Bank has continued to see good momentum in pursuing its strategy for
client growth in its target markets. Net new client growth was 3% compared
to the year end with a trend towards larger and more complex commercial
clients.
Total number of card app users is 25% higher than the same period for the
previous year and the total number of transactions through Apple Pay and
Google Pay increased by 131% year on year.
The Bank continues to develop its digital roadmap to improve the customer
experience and organisational efficiency, including progress in upgrading and
transforming the Bank's online and mobile banking offering.
Outlook
We now have a new Labour government, and we await to hear how its plans will
be implemented. While the outlook for this remains uncertain, we believe there
will be opportunities that we remain well positioned to benefit from.
It is expected that interest rates will start to fall from their current
highs, and as disclosed, this will inevitably have a short-term impact on our
profits. However, we remain focussed on implementing our growth strategy and
we are fortunate to have more than sufficient market opportunities to continue
to deliver on this.
Consolidated Statement of Comprehensive Income
Six months ended 30 June Six months ended 30 June
2024 2023
Note £000 £000
Income from banking activities
Interest income 129,565 100,320
Interest expense (67,509) (31,950)
Net interest income 62,056 68,370
Fee and commission income 12,769 11,275
Fee and commission expense (403) (105)
Net fee and commission income 12,366 11,170
Operating income from banking activities 74,422 79,540
Income from leasing activities
Revenue 53,178 49,895
Cost of goods sold (40,457) (41,821)
Gross profit from leasing activities 12,721 8,074
Total group operating income 87,143 87,614
Net impairment loss on financial assets (1,053) (2,453)
Other income 7 704 2,326
Operating expenses (65,958) (61,079)
Profit before income tax 20,836 26,408
Income tax expense (5,399) (6,440)
Profit for the period 15,437 19,968
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 72 174
comprehensive income
Tax on other comprehensive income (18) (43)
Other comprehensive income for the period, net of tax 54 131
Total comprehensive income for the period 15,491 20,099
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 94.6 129.4
Diluted earnings per share 8 94.6 129.4
Consolidated Statement of Financial Position
At 30 June At 30 June At 31 December
2024 2023 2023
£000 £000 £000
ASSETS
Cash and balances at central banks 553,095 646,016 826,559
Loans and advances to banks 121,977 148,970 79,381
Debt securities at amortised cost 1,196,110 597,473 942,437
Assets classified as held for sale 3,203 3,232 3,281
Derivative financial instruments 4,356 7,427 4,214
Loans and advances to customers 2,116,043 2,034,897 2,064,217
Other assets 48,482 66,267 57,150
Financial investments 4,156 3,684 3,942
Deferred tax asset - 1,706 -
Intangible assets 29,188 30,535 29,587
Property, plant and equipment 313,336 220,539 274,306
Right-of-use assets 49,918 7,314 52,816
Investment properties 5,950 6,550 5,950
Total assets 4,445,814 3,774,610 4,343,840
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital and share premium 167 167 167
Share premium account 11,606 11,606 11,606
Retained earnings 245,158 228,250 240,606
Other reserves 69 (82) 61
Total equity 257,000 239,941 252,440
LIABILITIES
Deposits from banks 193,758 197,384 193,410
Derivative financial instruments 535 58 1,032
Deposits from customers 3,863,155 3,253,890 3,759,567
Current tax liability 1,194 6,059 294
Other liabilities 33,245 32,573 40,700
Deferred tax liability 4,881 - 4,910
Lease liabilities 53,790 7,415 53,761
Debt securities in issue 38,256 37,290 37,726
Total liabilities 4,188,814 3,534,669 4,091,400
Total equity and liabilities 4,445,814 3,774,610 4,343,840
Consolidated Statement of Changes in Equity
Attributable to equity holders of the Group
Share capital Share capital premium Capital redemption reserve Fair value reserve Treasury shares Retained earnings Total
£000 £000 £000 £000 £000 £000 £000
Balance at 1 January 2024 167 11,606 19 1,341 (1,299) 240,606 252,440
Total comprehensive income for the period
Profit for the six months ended 30 June 2024 - - - - - 15,437 15,437
Other comprehensive income, net of income tax
Changes in the fair value of financial assets at FVOCI - - - 72 - - 72
Sale of financial assets carried at FVOCI - - (46) 46 -
Tax on other comprehensive income - - - (18) - - (18)
Total other comprehensive income - - - 8 - 46 54
Total comprehensive income for the period - - - 8 - 15,483 15,491
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Final dividend relating to 2023 - - - - - (4,406) (4,406)
Interim dividend relating to 2024 - - - - - (3,264) (3,264)
Special dividend relating to 2024 - - - - - (3,264) (3,264)
Total contributions by and distributions to owners - - - - - (10,934) (10,934)
Balance at 30 June 2024 167 11,606 19 1,349 (1,299) 245,158 257,000
Attributable to equity holders of the Group
Share capital Share premium Capital redemption reserve Fair value reserve Treasury shares Retained earnings Total
£000 £000 £000 £000 £000 £000 £000
Balance at 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 13 11,606 - - - - 11,619
Final dividend relating to 2022 - - - - - (3,755) (3,755)
Total contributions by and distributions to owners 13 11,606 - - - (3,755) 7,864
Balance at 30 June 2023 167 11,606 19 1,198 (1,299) 228,250 239,941
Consolidated Statement of Cash Flows
Six months ended 30 June Six months ended 30 June
2024 2023
£000 £000
Cash flows from operating activities
Profit before tax 20,836 26,408
Adjustments for:
- Depreciation and amortisation 5,353 5,489
- Impairment loss on loans and advances 594 (667)
- Net interest income 233 72
- Elimination of exchange differences on debt securities 39 8,064
- Other non-cash or non-operating items included in profit before tax 35 (57)
- Tax expense (5,399) (6,440)
Cash flows from operating profits before changes in operating assets and 21,691 32,869
liabilities
Changes in operating assets and liabilities:
- net increase in derivative financial instruments (639) (1,182)
- net (increase)/decrease in loans and advances to customers (52,420) 1,847
- net increase in assets held for leasing (19,634) (44,758)
- net decrease/(increase) in other operating assets 8,564 (13,316)
- net increase in amounts due to customers 103,588 161,341
- net increase / (decrease) in other operating liabilities (6,584) 10,741
Net cash inflow from operating activities 54,566 147,542
Cash flows from investing activities
Acquisition of financial investments (222) (106)
Purchase of computer software (1,173) (418)
Purchase of property, plant and equipment (20,097) (2,067)
Purchases of debt securities (850,812) (654,605)
Proceeds from redemption of debt securities 596,496 488,459
Net cash outflow from investing activities (275,808) (168,737)
Cash flows from financing activities
Issue of new ordinary shares - 11,619
Decrease in borrowings 1,288 (38,643)
Repayment of principal portions of lease liabilities 22 (1,555)
Dividends paid (10,936) (3,756)
Net cash used in financing activities (9,626) (32,335)
Net (decrease)/increase in cash and cash equivalents (230,868) (53,530)
Cash and cash equivalents at 1 January 905,940 848,516
Cash and cash equivalents at 30 June 675,072 794,986
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 2023 statutory accounts as amended by
UK-adopted standards and interpretations effective during 2024 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 22 July 2024 and are
unaudited. The interim financial statements will be available on the Group
website (www.arbuthnotgroup.com) from 23 July 2024.
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, climate change, strategic, credit,
market, liquidity, operational, cyber, residual value, conduct, financial
crime and, regulatory and capital.
Reputational risk
Reputational risk is the risk to the Group from a failure to meet reasonable
stakeholder expectations as a result of any event, behaviour, action or
inaction by ABG itself, its employees or those with whom it is associated.
This includes the associated risk to earnings, capital or liquidity.
ABG seeks to ensure that all of its businesses act consistently with the seven
corporate principles as laid out on page 3 of the Annual Report and Accounts.
This is achieved through a central Risk Management framework and supporting
policies, the application of a three lines of defence model across the Group
and oversight by various committees. Employees are supported in training,
studies and other ways and encouraged to live out the cultural values within
the Group of integrity, energy and drive, respect, collaboration and
empowerment. In applying the seven corporate principles, the risk of
reputational damage is minimised as the Group serves its shareholders,
customers and employees with integrity and high ethical standards.
Macroeconomic and competitive environment
The Group is exposed to indirect risk that may arise for the macroeconomic and
competitive environment.
In recent years there have been a number of global and domestic events which
have had significant implications on the Group's operating environment,
namely: Russia's War in Ukraine, the Israel-Hamas war in Gaza, Coronavirus and
Brexit. The culmination of these events has led to significant turmoil in both
global and domestic markets. The most significant economic effect from these
events includes record inflation, leading to sharp and significant increases
in the cost of borrowing. It is expected that interest rates will start to
fall from their current highs, however geo-political volatility and
uncertainty remains high with the potential to adversely affect the UK
economy, as well as the Group's customers and assets.
Climate change
Climate change presents financial and reputational risks for the banking
industry. The Board consider climate change a material risk as per the Board
approved risk appetite framework which provides a structured approach to risk
taking within agreed boundaries. The assessment is proportional at present but
will develop over time as industry consensus emerges. The assessment is
maintained by the Chief Risk Officer and has been informed by the ICAAP review
and workshops for employees.
Whilst it is difficult to assess how climate change will unfold, the Group is
continually assessing various risk exposures. The UK has a legally binding
target to cut its greenhouse gas emissions to "net zero" by 2050. There is
growing consensus that an orderly transition to a low-carbon economy will
bring substantial adjustments to the global economy which will have financial
implications while bringing risks and opportunities.
The risk assessment process has been integrated into existing risk frameworks
and will be governed through the various risk governance structures including
review and recommendations by the Arbuthnot Latham Risk Committee. Arbuthnot
Latham has been assessed against the Task Force on Climate-related Financial
Disclosures' ("TCFD") recommended disclosures and where appropriate the
FCA/PRA guidance as per the Supervisory Statements.
In accordance with the requirements of the PRA's Supervisory Statement
'Enhancing banks' and insurers' approaches to managing the financial risks
from climate change', the Group has allocated responsibility for identifying
and managing the risks from climate change to the relevant existing Senior
Management Function. The Bank is continuously developing a suitable strategic
approach to climate change and the unique challenges it poses.
The FCA have issued 'Climate Change and Green Finance: summary of responses
and next steps'. In addition to the modelling of various scenarios and various
governance reviews, the Group will continue to monitor requirements through
the relationship with UK Finance.
Strategic risk
Strategic risk is the risk that the Group's ability to achieve its corporate
and strategic objectives may be compromised. This risk is particularly
important to the Group as it continues its growth strategy. However, the Group
seeks to mitigate strategic risk by focusing on a sustainable business model
which is aligned to the Group's business strategy. Also, the Directors
normally meet once a year outside a formal Board setting to ensure that the
Group's strategy is appropriate for the market and economy.
Credit risk
Credit risk is the risk that a counterparty (borrower) will be unable to pay
amounts in full when due. This risk exists in Arbuthnot Latham, which
currently has a loan book of £2.2bn (30 June 2023: £2.2bn). The lending
portfolio in Arbuthnot Latham is extended to clients, the majority of which is
secured against cash, property or other high quality assets. Credit risk is
managed through the Credit Committee of Arbuthnot Latham.
Market risk
Market risk arises in relation to movements in interest rates, currencies,
property and equity markets.
Interest rate and currency risk
The Group's treasury function operates mainly to provide a service to clients
and does not take significant unmatched positions in any market for its own
account. As a result, the Group's exposure to adverse movements in interest
rates and currencies is limited to interest earnings on its free cash and
interest rate re-pricing mismatches. The Group actively monitors its exposure
to future changes in interest rates. However, at the current time the Group
does not hedge the earnings from the free cash which currently totals £553m.
The cost of hedging is prohibitive. Cash is held at the BOE and with the
general consensus in the market that rates are expected to fall, the Group has
shifted its focus to longer term fixed rate lending products and also started
to invest some of the excess liquidity into high quality short dated fixed
income assets, such as gilts.
Property and equity market risk
The Group is exposed to changes in the market value of its properties. The
current carrying value of Investment Property is £6.0m (31 December 2023:
£6.0m), property held for sale £3.2m (31 December 2023: £3.3m) and
properties classified as inventory are carried at £14.8m (31 December 2023:
£14.7m). Any changes in the market value of the property will be accounted
for in the Income Statement for the Investment Property and could also impact
the carrying value of inventory, which is at the lower of cost and net
realisable value. As a result, it could have a significant impact on the
profit or loss of the Group. The Group is also exposed to changes in the value
of equity investments. The current carrying value of financial investments is
£4.2m (31 December 2023: £3.9m). Any changes in the value of financial
investments will be accounted for in Other Comprehensive Income.
Liquidity risk
Liquidity risk is the risk that the Group, although solvent, either does not
have sufficient financial resources to enable it to meet its obligations as
they fall due, or can only secure such resources at an excessive cost. The
Group takes a conservative approach to managing its liquidity profile. Retail
client deposits, together with drawings from the Bank of England Term Funding
Scheme and capital fund the Bank. The loan to deposit ratio is maintained at a
prudent level, and consequently the Group maintains a high level of liquidity.
The Arbuthnot Latham Board annually approves the Internal Liquidity Adequacy
Assessment Process ("ILAAP"). The Directors model various stress scenarios and
assess the resultant cash flows in order to evaluate the Group's potential
liquidity requirements. The Directors firmly believe that sufficient liquid
assets are held to enable the Group to meet its liabilities in a stressed
environment.
Operational risk
Operational risk is the risk that the Group may be exposed to financial losses
from conducting its business. The Group's exposures to operational risk
include its Information Technology ("IT") and Operations platforms. There are
additional internal controls in these processes that are designed to protect
the Group from these risks. The Group's overall approach to managing internal
control and financial reporting is described in the Corporate Governance
section of the Annual Report.
In line with guidance issued by the Regulator, the Bank has continued to focus
on ensuring that the design of systems and operational plans are robust to
maintain operational resilience in the face of unexpected incidents.
Cyber risk
Cyber risk is an increasing risk for the Group within its operational
processes. It is the risk that the Group is subject to some form of disruption
arising from an interruption to its IT and data infrastructure. The Group
regularly tests the infrastructure to ensure that it remains robust to a range
of threats and has continuity of business plans in place including a disaster
recovery plan.
Residual value risk
Residual value risk equals the difference in the residual value of a leased
asset set at lease inception and the lower salvage value realised upon its
disposal or re-lease at the end of the lease term. The Group is exposed to
residual value risk in its AAG business. Normal residual value risk is managed
through the process set out below, and it should be noted that the transition
to greener technology may further impact residual values in two ways. Firstly,
residual values could decrease due to assets becoming obsolete; climate
related regulations might change, which could result in legal restrictions on
the use of assets or technological advances could lead to preferred
environmental technologies. Secondly, the lack of historical information on
green vehicles could lead to inaccurate measurement of residual values at
inception of leases.
The AAG business manage Residual Value setting through its Residual Value
Committee that comprises representatives from its Asset Management,
Procurement, Sales and Leasing divisions and is chaired by the Residual Value
Manager. Assets are valued using either an approved Residual Value matrix or
individually, dependent upon the nature of the asset and current market
conditions. The strategy for Residual Value setting and oversight of the
Residual Value Committee is conducted by the AAG Residual Risk Committee,
which in turn reports into Asset Alliance Group Holdings Limited board. The
Residual Risk Committee, chaired by the AAG Group Risk Director, includes AAG
CEO, AL Group Risk Director, AAG Managing Director, AAG Finance Director and
heads of Asset Management, Sales and Leasing divisions in AAG.
Conduct risk
As a financial services provider the Group faces conduct risk, including
selling products to customers which do not meet their needs, failing to deal
with clients' complaints effectively, not meeting clients' expectations, and
exhibiting behaviours which do not meet market or regulatory standards.
The Group adopts a low risk appetite for any unfair customer outcomes. It
maintains clear compliance guidelines and provides ongoing training to all
employees. Periodic spot checks, compliance monitoring and internal audits are
performed to ensure these guidelines are followed. The Group also has
insurance policies in place to provide some cover for any claims that may
arise.
Financial Crime
The Group is exposed to risk due to financial crime including money
laundering, sanctions evasion, bribery and corruption, market abuse, tax
evasion and fraud. The Group operates policies and controls which are
designed to ensure that financial crime risks are identified, appropriately
mitigated and managed.
Regulatory and capital risk
Regulatory and capital risk includes the risk that the Group will have
insufficient capital resources to support the business and/or does not comply
with regulatory requirements. The Group adopts a conservative approach to
managing its capital. The Board of Arbuthnot Latham approves an ICAAP
annually, which includes the performance of stringent stress tests to ensure
that capital resources are adequate over a three year horizon. Capital and
liquidity ratios are regularly monitored against the Board's approved risk
appetite as part of the risk management framework.
Regulatory change also exists as a risk to the Group's business.
Notwithstanding the assessments carried out by the Group to manage regulatory
risk, it is not possible to predict how regulatory and legislative changes may
alter and impact the business. Significant and unforeseen regulatory changes
may reduce the Group's competitive situation and lower its profitability.
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 2023. 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-24 Dec-23
Economic Scenarios
Baseline 42.0% 46.0%
Upside 21.0% 16.0%
Downside 1 19.0% 18.0%
Downside 2 11.0% 12.0%
Extreme downside 7.0% 8.0%
The tables below show the five-year forecasted average for property prices
growth, UK unemployment rate and UK real GDP growth:
30 June 2024
Base Upside Downside 1 Downside 2 Extreme downside
Five-year summary
UK House price index - average growth 1.9% 4.8% (0.1%) (2.1%) (4.2%)
UK Commercial real estate price - average growth 0.9% 4.2% (1.0%) (3.0%) (4.9%)
UK Unemployment rate - average 4.4% 3.8% 5.4% 6.3% 7.3%
UK GDP - average growth 1.3% 1.9% 0.9% 0.4% 0.0%
31 December 2023
Base Upside Downside 1 Downside 2 Extreme downside
Five-year summary
UK House price index - average growth 1.5% 5.8% (0.4%) (2.3%) (4.2%)
UK Commercial real estate price - average growth 1.5% 3.6% (0.7%) (2.8%) (4.9%)
UK Unemployment rate - average 4.9% 3.9% 5.7% 6.5% 7.3%
UK GDP - average growth 1.3% 2.1% 0.9% 0.4% 0.0%
The tables below list the macroeconomic assumptions at 30 June 2024 used in
the base, upside and downside scenarios over the five-year forecast period.
The assumptions represent the absolute percentage unemployment rates and
year-on-year percentage change for GDP and property prices.
UK House price index - four quarter growth
Year Baseline Upside Downside 1 Downside 2 Extreme downside
2024 (1.8%) 3.0% (4.9%) (7.9%) (11.0%)
2025 1.6% 5.0% (4.6%) (10.7%) (16.9%)
2026 2.4% 4.8% (0.7%) (3.7%) (6.8%)
2027 3.8% 4.8% 4.9% 6.0% 7.2%
2028 3.7% 6.2% 4.7% 5.6% 6.6%
5 year average 1.9% 4.8% (0.1%) (2.1%) (4.2%)
UK Commercial real estate price - four quarter growth
Year Baseline Upside Downside 1 Downside 2 Extreme downside
2024 (0.1%) 10.9% (10.1%) (20.0%) (30.0%)
2025 1.4% 3.7% (5.3%) (11.9%) (18.6%)
2026 1.0% 3.0% 3.0% 5.0% 7.0%
2027 1.4% 2.1% 3.7% 6.1% 8.5%
2028 0.8% 1.3% 3.4% 6.0% 8.6%
5 year average 0.9% 4.2% (1.0%) (3.0%) (4.9%)
UK Unemployment rate - annual average
Year Baseline Upside Downside 1 Downside 2 Extreme downside
2024 4.4% 3.9% 4.9% 5.4% 6.0%
2025 4.4% 3.9% 5.7% 7.1% 8.4%
2026 4.6% 3.8% 5.7% 6.8% 8.0%
2027 4.6% 3.7% 5.5% 6.4% 7.4%
2028 4.0% 3.7% 4.9% 5.8% 6.7%
5 year average 4.4% 3.8% 5.4% 6.3% 7.3%
UK GDP - annual growth
Year Baseline Upside Downside 1 Downside 2 Extreme downside
2024 0.6% 1.2% (1.3%) (3.2%) (5.0%)
2025 1.2% 2.0% 1.2% 1.3% 1.2%
2026 1.6% 2.4% 1.5% 1.3% 1.2%
2027 1.6% 2.0% 1.5% 1.3% 1.2%
2028 1.5% 1.8% 1.4% 1.3% 1.2%
5 year average 1.3% 1.9% 0.9% 0.4% (0.0%)
The graphs below plot the historical data for HPI, Commercial real estate
price, unemployment rate and GDP growth rate in the UK as well as the
forecasted data under each of the five scenarios.
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 2024 Dec 2023
Impact of 100% scenario probability £m £m
Baseline 0.5 0.8
Upside 1.2 1.6
Downside 1 (1.0) (1.7)
Downside 2 (7.0) (8.1)
Extreme downside (22.5) (24.0)
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 2024
Group Banking RAF ACABL AAG All Other Divisions Total
Credit risk exposures (all stage 1, unless otherwise stated) £000 £000 £000 £000 £000 £000
On-balance sheet:
Cash and balances at central banks - - - - 552,876 552,876
Loans and advances to banks - - - - 121,977 121,977
Debt securities at amortised cost - - - - 1,196,110 1,196,110
Derivative financial instruments - - - - 4,356 4,356
Loans and advances to customers (Gross of ECL) 1,546,013 236,078 264,055 76,165 1,135 2,123,446
Stage 1 - Gross amount outstanding 1,382,850 229,618 253,603 76,165 - 1,942,236
Stage 2 - Gross amount outstanding 79,114 2,559 9,816 - - 91,489
Stage 3 - Gross amount outstanding 84,049 3,901 636 - 1,135 89,721
Other assets - - - - 6,910 6,910
Financial investments - - - - 4,156 4,156
Off-balance sheet:
Guarantees 2,251 - - - - 2,251
Loan commitments 174,459 - 280,579 - - 455,038
At 30 June 2024 1,722,723 236,078 544,634 76,165 1,887,520 4,467,120
30 June 2023
Group Banking RAF ACABL ASFL AAG All Other Divisions Total
Credit risk exposures (all stage 1, unless otherwise stated) £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) 1,586,688 157,972 241,255 12,472 42,444 - 2,040,831
Stage 1 - Gross amount outstanding 1,473,480 152,553 226,484 11,472 42,444 - 1,906,433
Stage 2 - Gross amount outstanding 65,082 2,531 12,654 1,000 - - 81,267
Stage 3 - Gross amount outstanding 48,126 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 1,814,430 157,972 525,545 13,137 42,444 1,428,526 3,982,054
31 December 2023
Group Banking RAF ACABL ASFL AAG All Other Divisions Total
Credit risk exposures (all stage 1, unless otherwise stated) £000 £000 £000 £000 £000 £000 £000
On-balance sheet:
Cash and balances at central banks - - - - - 826,397 826,397
Loans and advances to banks - - - - - 79,381 79,381
Debt securities at amortised cost - - - - - 942,437 942,437
Assets classified as held for sale - - - - - 3,281 3,281
Derivative financial instruments - - - - - 4,214 4,214
Loans and advances to customers (Gross of ECL) 1,567,732 200,606 240,178 3,113 59,396 - 2,071,025
Stage 1 - Gross amount outstanding 1,428,237 194,571 223,912 3,113 59,109 - 1,908,942
Stage 2 - Gross amount outstanding 69,765 2,267 10,432 - 287 - 82,751
Stage 3 - Gross amount outstanding 69,730 3,768 5,834 - - - 79,332
Other assets - - - - - 22,361 22,361
Financial investments - - - - - 3,942 3,942
Off-balance sheet:
Guarantees 2,051 - - - - - 2,051
Loan commitments 156,027 - 294,399 113 - - 450,539
At 31 December 2023 1,725,810 200,606 534,577 3,226 59,396 1,882,013 4,405,628
The table below shows the Group's expected credit loss (ECL), by segment and
stage:
30 June 2024
Group Banking RAF ACABL ASFL AAG All Other Divisions Total
ECL provisions £000 £000 £000 £000 £000 £000 £000
Stage 1 (237) (109) (50) - (277) - (673)
Stage 2 (216) (60) (71) - - - (347)
Stage 3 (4,510) (1,617) (156) - - (100) (6,383)
At 30 June 2024 (4,963) (1,786) (277) - (277) (100) (7,403)
30 June 2023
Group Banking RAF ACABL ASFL AAG All Other Divisions Total
ECL provisions £000 £000 £000 £000 £000 £000 £000
Stage 1 (581) (223) (121) (96) (108) - (1,129)
Stage 2 (33) (45) (14) - - - (92)
Stage 3 (3,707) (956) (50) - - - (4,713)
At 30 June 2023 (4,321) (1,224) (185) (96) (108) - (5,934)
31 December 2023
Group Banking RAF ACABL ASFL AAG All Other Divisions Total
ECL provisions £000 £000 £000 £000 £000 £000 £000
Stage 1 (483) (148) (62) (35) (186) - (914)
Stage 2 (231) (121) (84) - - - (436)
Stage 3 (3,655) (1,547) (256) - - - (5,458)
At 31 December 2023 (4,369) (1,816) (402) (35) (186) - (6,808)
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% (30 June 2023: 8.32%; 31 December 2023: 8.32%), while the
CET1 capital ratio is 11.6% (30 June 2023: 12.2%; 31 December 2023: 13.0%) and
the total capital ratio is 13.6% (30 June 2023: 14.5%; 31 December 2023:
15.2%).
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 2024 £000 £000 £000 £000
ASSETS
Derivative financial instruments - 4,356 - 4,356
Financial investments - - 4,156 4,156
- 4,356 4,156 8,512
LIABILITIES
Derivative financial instruments - 535 - 535
- 535 - 535
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
- 7,427 3,684 11,111
LIABILITIES
Derivative financial instruments - 58 - 58
- 58 - 58
Level 1 Level 2 Level 3 Total
At 31 December 2023 £000 £000 £000 £000
ASSETS
Derivative financial instruments - 4,214 - 4,214
Financial investments - - 3,942 3,942
- 4,214 3,942 8,156
LIABILITIES
Derivative financial instruments - 1,032 - 1,032
- 1,032 - 1,032
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
2024 2023 2023
Movement in level 3 £000 £000 £000
At 1 January 3,942 3,404 3,404
Acquisitions 223 106 177
Disposals (84) - (51)
Movements recognised in Other Comprehensive Income 75 174 412
At 30 June / 31 December 4,156 3,684 3,942
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 2024 £000 £000 £000 £000
ASSETS
Cash and balances at central banks - 553,095 - 553,095
Loans and advances to banks - 121,977 - 121,977
Debt securities at amortised cost - 1,195,965 - 1,195,965
Loans and advances to customers - - 2,110,029 2,110,029
Other assets - - 6,910 6,910
- 1,871,037 2,116,939 3,987,976
LIABILITIES
Deposits from banks - 193,758 - 193,758
Deposits from customers - 3,863,155 - 3,863,155
Other liabilities - - 33,245 33,245
Debt securities in issue - - 38,256 38,256
- 4,056,913 71,501 4,128,414
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 31 December 2023 £000 £000 £000 £000
ASSETS
Cash and balances at central banks - 826,559 - 826,559
Loans and advances to banks - 79,381 - 79,381
Debt securities at amortised cost - 943,231 - 943,231
Loans and advances to customers - - 2,058,780 2,058,780
Other assets - - 22,361 22,361
- 1,849,171 2,081,141 3,930,312
LIABILITIES
Deposits from banks - 193,410 - 193,410
Deposits from customers - 3,759,567 - 3,759,567
Other liabilities - - 18,542 18,542
Debt securities in issue - - 37,726 37,726
- 3,952,977 56,268 4,009,245
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 seven 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. The acquired mortgage portfolio is also
included in Banking.
2) Wealth Management - Offering financial planning and investment management
services.
3) RAF - Specialist asset finance lender mainly in high value cars but also
business assets.
4) ACABL - Provides finance secured on either invoices, assets or stock of the
borrower.
5) AAG - Provides vehicle finance and related services, predominantly in the
truck & trailer and bus & coach markets.
6) All Other Divisions - All other smaller divisions and central costs in
Arbuthnot Latham & Co., Ltd (Investment property and
Central costs).
7) 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 RAF ACABL AAG All Other Divisions Group Centre Total
Six months ended 30 June 2024 £000 £000 £000 £000 £000 £000 £000 £000
Interest revenue 59,610 - 8,815 11,979 2,357 46,804 - 129,565
Interest revenue from external customers 59,610 - 8,815 11,979 2,357 46,804 - 129,565
Fee and commission income 1,721 6,599 104 3,564 - 781 - 12,769
Revenue - - - - 53,178 - - 53,178
Revenue from external customers 61,331 6,599 8,919 15,543 55,535 47,585 - 195,512
Interest expense (13,431) - (3,017) (7,478) (7,584) (33,861) (2,138) (67,509)
Cost of goods sold - - - - (40,457) - - (40,457)
Fee and commission expense (367) (32) (7) - (9) 12 - (403)
Segment operating income 47,533 6,567 5,895 8,065 7,485 13,736 (2,138) 87,143
Impairment losses (582) - (351) 3 (62) (61) - (1,053)
Other income - - - - 53 612 39 704
Operating expenses (33,380) (9,060) (3,321) (3,682) (7,451) (4,061) (5,003) (65,958)
Segment profit / (loss) before tax 13,571 (2,493) 2,223 4,386 25 10,226 (7,102) 20,836
Income tax (expense) / income - - (269) (576) (605) (2,630) (1,319) (5,399)
Segment profit / (loss) after tax 13,571 (2,493) 1,954 3,810 (580) 7,596 (8,421) 15,437
Loans and advances to customers 1,541,087 - 234,292 263,778 75,888 998 - 2,116,043
Assets available for lease - - - - 287,184 - - 287,184
Other assets - - - - - 2,050,765 (8,178) 2,042,587
Segment total assets 1,541,087 - 234,292 263,778 363,072 2,051,763 (8,178) 4,445,814
Customer deposits 3,863,155 - - - - - - 3,863,155
Other liabilities - - - - - 324,573 1,086 325,659
Segment total liabilities 3,863,155 - - - - 324,573 1,086 4,188,814
Other segment items:
Capital expenditure - - - - (56,606) (19,979) (118) (76,703)
Depreciation and amortisation - - - - (27,966) (689) (12) (28,667)
The "Group Centre" segment above includes the parent entity and all
intercompany eliminations.
Banking* Wealth Management 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
Interest revenue 56,652 - 5,500 11,253 661 778 25,476 3 100,323
Inter-segment revenue - - - - - - - (3) (3)
Interest revenue from external customers 56,652 - 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 58,123 5,579 5,518 14,584 672 50,673 26,341 - 161,490
Interest expense 1,184 - (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 59,287 5,579 3,521 7,374 457 4,628 8,866 (2,098) 87,614
Impairment losses (2,005) - (303) (17) (15) (113) - - (2,453)
Other income 65 - 108 - - 12 2,141 - 2,326
Operating expenses (26,257) (7,515) (2,666) (3,333) (972) (7,011) (8,171) (5,154) (61,079)
Segment profit / (loss) before tax 31,090 (1,936) 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 31,090 (1,936) 501 3,074 (397) (2,704) (1,089) (8,571) 19,968
Loans and advances to customers 1,582,366 - 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 1,582,366 - 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)
Segment profit is shown prior to any intra-group eliminations.
* Banking numbers have been represented to include the Mortgage Portfolio.
6. Underlying Profit
The Group has reported a profit before tax of £20.8m (2023 H1: £26.4m). The
underlying profit before tax was £20.8m (2023 H1: profit of £29.3m).
30 June 2024 30 June 2023
Underlying profit reconciliation £000 £000
Profit before tax and group recharges 20,836 26,408
Profits earned on sale of trucks included in bargain purchase - 2,940
Underlying profit 20,836 29,348
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 in the
prior period was £2.9m, which was required from the acquisition accounting in
2021. The fair value adjustments to individual assets at acquisition were
reversed through profit or loss at the point of sale.
7. Other income
Other income includes rental income from the investment property of £0.4m (H1
2023: £0.2m). The prior period also included £0.9m recognised on a
non-refundable deposit from a property owned by the Group and £0.4m in
relation to a professional indemnity claim.
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 16,319,926 (2023: 15,431,170) 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 (2023: nil).
Six months ended 30 June Six months ended 30 June
2024 2023
Profit attributable £000 £000
Total profit after tax attributable to equity holders of the Company 15,437 19,968
Six months ended 30 June Six months ended 30 June
2024 2023
Basic Earnings per share p p
Total Basic Earnings per share 94.6 129.4
9. Share capital and share premium
30 Jun 2024 30 Jun 2023
£000 £000
Share capital 167 167
Share premium 11,606 11,606
Share capital and share premium 11,773 11,773
Ordinary share capital
Number of Share
shares Capital
£000
At 1 January 2024 16,576,619 166
At 30 June 2024 16,576,619 166
Ordinary non-voting share capital
Number of Share
shares Capital
£000
At 1 January 2024 152,621 1
At 30 June 2024 152,621 1
Total share capital
Number of Share
shares Capital
£000
At 1 January 2024 16,729,240 167
At 30 June 2024 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 (2023: 1p per share). At
30 June 2024 the Company held 409,314 shares (2023: 409,314) in treasury. This
includes 390,274 (2023: 390,274) Ordinary shares and 19,040 (2023: 19,040)
Ordinary Non-Voting shares.
10. Events after the balance sheet date
There were no material post balance sheet events to report.
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