REG - Secure Trust BankArbuthnot Banking - Final Results <Origin Href="QuoteRef">ARBB.L</Origin> <Origin Href="QuoteRef">STBS.L</Origin> - Part 2

Arbuthnot BankingAnnouncement

19/03/2015 07:01

- Part 2: For the preceding part double click  ID:nRSS8407Ha 

     £133.7 million  
 
 
2014 performance 
 
The Real Estate Finance business commenced operation in the second half of 2013 and has concluded 47 deals during 2014,
advancing £135.7 million of funds to customers. There is also a significant pipeline of both committed lending and deals
yet to be approved. 
 
Savings 
 
What we do 
 
The Bank's savings accounts consist of notice accounts, fixed term bonds and deposit accounts.  At Secure Trust Bank,
savings accounts offer a simple way to save money. Interest rates offered are competitive and provide value for money. 
 
Deposit accounts can be opened for as little as £1 and withdrawals can be made without notice or loss of interest. 
 
The notice deposit accounts are made available in periods ranging from 60 days to 183 days, with the majority at the 120
day term, depending on the Group's funding requirements. 
 
Fixed Price Deposit Bonds are launched to achieve the desired maturity profiles of the Group. 
 
How we do it 
 
By virtue of a focus on higher margin lending, the absence of large fixed overheads in the form of a branch network and a
policy of not cross-subsidising loss making products with profitable ones, the Bank is able to offer competitive rates and
has been successful in attracting term deposits from a wide range of personal and non-personal customers. This provides a
funding profile which again gives additional financial security to the business. 
 
The Bank is a member of the Financial Services Compensation Scheme (FSCS). 
 
Methods of attracting deposits include product information on price comparison websites (such as Moneysupermarket), best
buy tables and newspaper articles about the deposit accounts offered by the Group. 
 
All savings products are administered in the Group head office in Solihull. 
 
Savings performance vs prior years 
 
 Notice deposits         2012       £212 million  2013       £207 million  2014       £239 million  
 Deposit bonds           2012       £155 million  2013       £193 million  2014       £331 million  
 Current/sight accounts  2012       £32 million   2013       £36 million   2014       £38 million   
 
 
2014 performance 
 
The Bank's customer deposits primarily comprise notice deposits, term deposits and fee-based accounts, being fee-based
current accounts and OneBill accounts.  At 31 December 2014 customer deposits totalled £608.4million. This represents an
increase of £171.8 million since the last year end. 
 
The Bank's notice deposits totalled £239 million at the year-end (December 2013: £207 million). New 120 day notice accounts
were introduced during the year and were successful, raising additional new deposits of £95 million predominantly during
the second half of the year. 
 
During the year, the Bank launched further fixed rate deposit bonds, with two to seven year maturities which enable it to
match broadly the new lending activities. These again were very successful as the Group raised new deposits of over £160
million, achieving its desired funding maturity profile. At the year-end term deposit bond balances totalled £331 million. 
 
Additional services 
 
Debt Collection 
 
What we do 
 
In January 2013 the Bank's subsidiary Debt Managers (Services) Limited (DMS) acquired the trade and certain assets from
Debt Managers Holdings Limited, Debt Managers (AB) Limited and Debt Managers Limited. 
 
DMS collects debts on a contingent collections basis on behalf of a range of clients including banks, retail and utility
companies and the public sector, as well as collecting delinquent debt for the Bank. The business also selectively invests
in purchased debt portfolios. 
 
During the year DMS received interim permission from the Financial Conduct Authority (FCA) to conduct consumer credit
activities, this being a requirement on the transfer of licencing from the Office of Fair Trading to the FCA. 
 
How we do it 
 
DMS has a scalable collections platform and makes use of the latest call centre and customer relationship management
technology, including market leading dialler capability, IVR technology and payment websites. The business has an
experienced management team with significant sector specific knowledge. The business ensures that repayment plans are
affordable by the customer and are therefore sustainable. 
 
DMS also offers business process outsourcing to clients, enabling the outsourcing of call centre activities. 
 
During the year the business has started a field services operation, offering a range of services including reconnection
visits, asset recovery and process serving. 
 
Revenue and lending performance vs prior years 
 
 Debt collection revenue                    2013       £3.9 million  2014       £3.7 million  
 Debt collection portfolios at 31 December  2013       £0.3 million  2014       £3.1 million  
 
 
2014 performance 
 
Income decreased by 5% to £3.7 million when compared to 2013. 
 
During the year, DMS acquired delinquent debt from the Bank, which has contributed to an increase in the value of purchased
debt portfolios to £3.1 million, from £0.3 million in the previous year. 
 
Strategic report                   Financial review 
 
 Summarised income statement           2014      2013      Variance  
                                       £million  £million  £million  
 Interest, fee and commission income   113.8     96.5      17.3      
 Interest, fee and commission expense  (15.9)    (17.5)    1.6       
 Operating income                      97.9      79.0      18.9      
 Impairment losses                     (15.3)    (15.6)    0.3       
 Operating expenses                    (56.5)    (45.8)    (10.7)    
 Acquisition related items             -         (0.5)     0.5       
 Profit before tax                     26.1      17.1      9.0       
 Costs of acquisition                  0.2       0.9                 
 Fair value amortisation               5.3       4.9                 
 Share based incentive scheme          1.5       2.2                 
 Net ABG management recharges          0.2       0.1                 
 Underlying profit before tax          33.3      25.2      8.1       
 Underlying tax                        (7.2)     (6.7)     (0.5)     
 Underlying profit after tax           26.1      18.5      7.6       
                                                                     
 Underlying basic earnings per share   155.8     118.2     37.6      
 
 
Income analysis 
 
Operating income increased by 24% to £97.9 million.  Growth was achieved through increased levels of activity in all
lending sectors as well as the introduction of a full business lending suite. New lending volumes in the personal lending,
motor and retail finance businesses increased in total by £96 million, representing an increase of 31% on 2013. 
 
Real Estate Finance generated income of £2.4 million during the year, from a standing start, whilst the Asset Finance and
Commercial Finance businesses are in their nascent state and will contribute towards the Group's profits during 2015.
Income from retail finance increased by 27%, which was helped through the full integration of the legacy retail finance
business with that of the V12 Finance Group, which was acquired during the preceding year. The Bank intends to create
further diversified and balanced growth in the lending books during 2015. 
 
Income from the current account with a prepaid card remained relatively stable during the year at £4.9 million, whilst the
expected decline in the income from the OneBill product following its closure to new accounts in 2009 continued. 
 
Impairment losses during the year were £15.3 million (2013: £15.6 million). This is a decrease as a percentage of income
despite the inclusion of an increase in the collective provision. Firstly, we believe this is a function of prudent
underwriting and an improving economy and secondly, as a result of a market benchmarking exercise for non-performing loans,
the Company reassessed the recoverable value of charged-off loans resulting in a reduction in the impairment charge of £2.4
million. 
 
Operating expenses have increased, in line with expectations, as significant investments have occurred in the
infrastructure and human capital of the Group. This investment will generate further returns in the future. 
 
Underlying profit before tax was £33.3 million, which is an increase of 32% on the 2013 underlying profit before tax.
Underlying profit removes the effects from the income statement of acquisition costs, fair value amortisation arising from
acquisitions, share option scheme costs and net ABG management recharges. 
 
Taxation 
 
The effective tax rate on profit before tax is 21.5% (2013: 28.1%), which is in line with the weighted average corporate
tax rate during the year. The prior year's tax rate reflected the effects of acquisition adjustments relating to deferred
tax. 
 
Distributions to shareholders 
 
The directors recommend the payment of a final dividend of 52 pence per share which, together with the interim dividend of
16 pence per share paid on 19 September 2014, represents a total dividend for the year of 68 pence per share (2013: 62
pence per share). 
 
Earnings per share 
 
Detailed disclosures of earnings per ordinary share are shown in Note 11 to the financial statements.  Basic earnings per
share increased by 56% to 122.3 pence per share (2013: 78.3p). Whilst the underlying basic earnings per share increased by
32% to 155.8 pence per share (2013: 118.2p per share). 
 
 Summarised balance sheet                                
                                     2014      2013      
                                     £million  £million  
 Assets                                                  
 Cash and balances at central banks  81.2      -         
 Debt securities held-to-maturity    16.3      -         
 Loans and advances to banks         39.8      110.0     
 Loans and advances to customers     622.5     391.0     
 Other assets                        22.5      24.9      
                                     782.3     525.9     
 Liabilities and equity                                  
 Due to banks                        15.9      0.1       
 Deposits from customers             608.4     436.6     
 Other liabilities                   33.1      27.6      
 Total equity                        124.9     61.6      
                                     782.3     525.9     
 
 
The total assets of the Group increased by £256.4 million or 49% primarily due to the continued growth in customer lending.
Real Estate Finance lending balances were £133.7 million at the year end, from a virtual standing start this year, whilst
Asset and Commercial Finance balances, in their nascent stages of lending, had lending balances totalling £9.6 million at
the year end. The consumer lending business sectors of Personal Lending, Motor Finance and Retail Finance had increased
lending balances of £22.2 million, £23.2 million and £41.9 million respectively. During the year the Retail Finance
business increased its portfolio size by 37% to close at £156.3 million, as the group benefits from the synergistic
benefits following the V12 Finance Group acquisition in 2013 as now all retail finance is administered from the V12
offices. Personal lending grew by 14% as the business was able to source new business from online brokers and affinity
partners. Motor finance increased its portfolio size by 20% through a growing number of dealer relationships. 
 
Customer deposits grew by 39% to close at £608.4 million to fund the increased lending balances. The Group also obtained
£15.9 million of wholesale deposits at the year end, following the sale and repurchase agreement of the FLS Treasury Bills,
however the Group continues with its conservative funding policy, ending the year with a loan to deposit ratio of 102%
(2013: 90%). 
 
Principal risks and uncertainties 
 
The Group regards the monitoring and controlling of risks 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.  The
principal risks inherent in the Group's business are credit, market, liquidity, operational and regulatory risks. A
detailed description of the risk management policies in these areas is set out in Note 5 to the financial statements;
however a short description of the risks faced is described below. 
 
Credit risk is the risk that a counterparty will be unable to pay amounts in full, when due.  This risk is managed through
the Group's internal controls and its credit risk policies as well as through the Credit Committee, with significant
exposures also being approved by the Group's Risk Committee. 
 
Market risk as it applies to the Secure Trust Bank Group is primarily limited to interest rate risk. This is managed using
Group resources with support from the treasury function of the Arbuthnot Banking Group. The policy is not to take
significant unmatched own account positions in any market. The Group and the Bank have no exposures to currency
fluctuations. 
 
Liquidity risk is the risk that the Group cannot meet its liabilities as they fall due, due to insufficient liquid assets. 
The Group takes a conservative approach to managing its liquidity profile and is primarily funded by retail customer
deposits, having limited exposure to the wholesale lending markets.  The loan to deposit ratio is typically maintained at a
prudent level below 100%. The Assets and Liabilities Committee (ALCO), comprising executive directors and senior executives
of the Bank and Group, is the formal body that has responsibility for liquidity risk management.  The ALCO meets formally
on a monthly basis to review liquidity risk against set thresholds and risk indicators including early warning indicators,
liquidity risk tolerance levels and Individual Liquidity Adequacy Assessment (ILAA) metrics. 
 
Operational risk is the risk that the Group may be exposed to financial losses from failures of its systems and processes. 
The Group maintains clear compliance guidelines and provides ongoing training to all staff.  The Group's overall approach
to managing internal control and financial reporting is described in the Corporate Governance Statement in the Annual
Report. 
 
Regulatory risk can be split between capital risk and conduct risk. Capital risk is the risk that the Group will have
insufficient capital resources to support the business. The Group adopts a conservative approach to managing its capital
and at least annually assesses the robustness of the capital requirements as part of the Arbuthnot Banking Group's ICAAP,
of which the Group is a major component. Stringent stress tests are performed to ensure that capital resources are adequate
over a future three year horizon. Conduct risk is the risk that the Group does not comply with regulatory requirements
including, for example, the way it conducts its business or treats its customers.  The Group reviews performance against
key customer and conduct risks on a monthly basis and seeks feedback from its customers in all its product types. 
 
Funding for Lending Scheme 
 
During the previous year the Bank was admitted to the Funding for Lending Scheme (FLS). The FLS is a scheme launched by the
Bank of England and HM Treasury, designed initially to incentivise banks and building societies to boost their lending to
UK households and non-financial companies. The FLS does this by facilitating funding to banks and building societies for an
extended period, at below current market rates, with both the price and quantity of funding provided linked to the
institutions' performance in lending to the UK non-financial sector. 
 
The FLS allows participants to borrow UK Treasury Bills from the Bank of England for a period of up to four years in
exchange for eligible collateral during a defined drawdown period. The value of the UK Treasury Bills lent by the Bank of
England is at a discount to the market value of the eligible securities which are lent to the Bank of England in return. 
The amount of discount or "haircut" is determined according to the FLS rules, with the level of "haircut" being greater for
those eligible securities which are perceived as having greater risk. 
 
The price of each institution's borrowing in the FLS will depend on its volume of lending to the real economy during the
reference period.  For banks or building societies maintaining or expanding their lending over that period, the fee is
0.25% pa on the amount borrowed.  As banks increase lending, their overall funding costs falls.  For banks or building
societies whose lending declines, the fee increases linearly, up to a maximum of 1.5% pa where lending decreases by 5% or
more. 
 
Under the applicable International Accounting Standard, IAS 39, if a security is lent under an agreement to return it to
the transferor, as is the case for eligible securities lent by institutions to the Bank of England under the FLS, then the
security is not derecognised because the transferor retains all the risks and rewards of ownership. If the FLS Treasury
Bills are not subject to a repurchase agreement with another institution the UK Treasury Bills borrowed from the Bank of
England under the FLS are not recognised on the Statement of Financial Position of an institution as they will not meet the
criteria for de-recognition by the Bank of England. When the UK Treasury Bills are pledged as part of a sale and repurchase
agreement with a third party, amounts borrowed from the third party are recognised on the Statement of Financial Position. 
 
Strategic report                   Capital, leverage and liquidity 
 
Capital 
 
The Group's capital management policy is focused on optimising shareholder value over the long-term. Processes exist to
ensure that capital is allocated to achieve targeted risk adjusted returns whilst ensuring appropriate surpluses are held
above the minimum regulatory requirements. The Board reviews the capital position at every board meeting. Changes relating
to the implementation of Capital Requirements Directive IV (CRD IV) in 2014 did not have a material impact on the capital
resources of the Group. 
 
In accordance with the EU's Capital Requirements Directive (CRD) and the required parameters set out in the EU's Capital
Requirements Regulation (CRR), the Arbuthnot Banking Group's Internal Capital Adequacy Assessment Process (ICAAP), of which
the Group is a major component, is embedded in the risk management framework of the Group. It is subject to ongoing updates