REG - Close Bros Grp PLC - Final Results
26/09/2023 07:00
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RNS Number : 6056N Close Brothers Group PLC 26 September 2023
Close Brothers Group plc T +44 (0)20 7655 3100
10 Crown Place E enquiries@closebrothers.com (mailto:enquiries@closebrothers.com)
London EC2A 4FT W www.closebrothers.com (http://www.closebrothers.com)
Registered in England No. 520241
Preliminary Results for the year ended 31 July 2023
26 September 2023
Adrian Sainsbury, Chief Executive, said:
"We have performed well in the second half, with an acceleration of loan book
growth, strong margins and a stable credit performance in our Banking
business. We continued to attract new client assets in CBAM, with strong net
inflows, although Winterflood's performance remains impacted by subdued
trading activity. Despite the second half momentum, our financial results for
the full year were significantly impacted by provisions in relation to Novitas
announced in our Half Year 2023 results in March.
Our through-the-cycle business model and financial strength mean we can
support customers even during these uncertain times. By leveraging our
long-term relationships, the deep expertise of our people and our
customer-centric approach we can deliver disciplined growth and are well
positioned to resume our long-term track record of earnings growth and
returns, building on the second half's momentum and a good start to the 2024
financial year."
Financial performance in the year
• Statutory operating profit before tax decreased to £112.0 million
(2022: £232.8 million), including £114.6 million of provisions in relation
to Novitas already reported in the first half. Excluding Novitas, adjusted
operating profit decreased to £220.1 million (2022: £274.1 million)
reflecting forward-looking impairment provisions and lower income from
Winterflood
• We achieved 3% income growth in Banking reflecting good loan book growth
and a strong net interest margin of 7.7% (2022: 7.8%). Pre-provisions,
adjusted operating profit in Banking decreased 2% (up 2% excluding Novitas) to
£324.1 million as income growth was offset by inflationary pressures and
continued investment in the business
• Whilst we have not seen a significant impact from the external
environment on credit performance, this uncertainty is reflected in higher
forward-looking impairments. As a result, the bad debt ratio (excluding
Novitas) was 0.9% (2022: 0.5%), slightly below our long-term average. The bad
debt ratio including Novitas increased to 2.2% (2022: 1.2%)
• The loan book grew 5% to £9.5 billion (31 July 2022: £9.1 billion),
with growth of 8% excluding our businesses in run-off, as we remained
committed to lending consistently to customers in all market conditions
• We accelerated our growth strategy in Close Brothers Asset Management
("CBAM") and delivered strong net inflows of 9%, with a significant
contribution from new hires
• Winterflood's performance was impacted by a continued slowdown in
trading activity and challenging market conditions, but it remains well
positioned to benefit when market conditions improve
• Total funding increased 7% to £12.4 billion (31 July 2022: £11.6
billion), as we sought to grow our retail deposit base and optimise our
funding mix
• Our Common Equity Tier 1 ("CET1") ratio was 13.3% at 31 July 2023 (31
July 2022: 14.6%), significantly above our minimum regulatory requirement of
9.5%
• We propose a final dividend of 45.0p per share, resulting in a full-year
dividend per share of 67.5p (2022: 66.0p). This reflects our underlying
performance and the Board's confidence in the group's outlook
Moving forward on the delivery of our strategic priorities
• Our growth initiatives are delivering a significant contribution to loan
book growth. We lent £164 million in the first year against our ambition to
provide £1 billion of funding for battery electric vehicles by 2027. Our
initiatives in the Commercial business are progressing well, with the recently
hired specialist lending teams having written healthy levels of new business
and building strong pipelines. We saw good demand for new offerings in
Property Finance, including our specialist buy-to-let proposition to existing
bridging finance customers
• In CBAM, our hiring strategy is proving successful with a strong
pipeline and new bespoke investment managers significantly contributing to net
inflows. Winterflood Business Services ("WBS") continued to grow with total
assets under administration ("AuA") up 79% to £12.9 billion, above the
previous £10 billion target
• We have a number of strategic cost management initiatives in progress
and are evaluating further opportunities to improve efficiency. We remain
focused on achieving positive operating leverage over the medium term
• We remain committed to optimising further our capital structure,
targeting a CET1 capital ratio range of 12% to 13% over the medium term, in
line with our capital management framework. The Board will assess the
potential for further distributions to shareholders based on future
opportunities
Outlook
We are making the most of opportunities and are encouraged by the momentum
generated in Banking in the second half. We have seen a good start to the 2024
financial year and our underlying business is well positioned to maintain
stable returns this year, as we sustain growth momentum and pricing
discipline, with a resilient credit performance, despite the near-term cost
pressure.
Our proven model and financial strength leave us well placed to resume our
track record of earnings growth and returns by focusing on disciplined growth,
cost efficiency and capital optimisation.
Key Financials(1)
( ) Full year Full year Change
2023 2022 %
Adjusted operating profit(2) £113.5m £234.8m (52)
Adjusted operating profit, pre provisions £317.6m £338.1m (6)
Statutory operating profit before tax £112.0m £232.8m (52)
Adjusted basic earnings per share(3) 55.1p 111.5p (51)
Basic earnings per share(3) 54.3p 110.4p (51)
Ordinary dividend per share 67.5p 66.0p 2
Return on opening equity 5.0% 10.6%
Return on average tangible equity 5.9% 12.2%
Net interest margin 7.7% 7.8%
Bad debt ratio 2.2% 1.2%
31 July 31 July Change
2023 2022 %
Loan book £9.5bn £9.1bn 5
Total client assets £17.3bn £16.6bn 5
CET1 capital ratio (transitional) 13.3% 14.6%
Total capital ratio (transitional) 15.3% 16.6%
Key Financials (Excluding Novitas)
( ) Full year Full year Change
2023 2022 %
Adjusted operating profit £220.1m £274.1m (20)
Adjusted operating profit, pre provisions £307.4m £316.7m (3)
Net interest margin 7.6% 7.5%
Bad debt ratio 0.9% 0.5%
31 July 31 July Change
2023 2022 %
Loan book £9.5bn £8.9bn 6
1. Please refer to definitions on pages 22 to 24.
2. Adjusted operating profit is stated before amortisation and impairment of
intangible assets on acquisition, goodwill impairment, exceptional item
and tax.
3. Refer to note 4 for the calculation of basic and adjusted earnings per
share.
Enquiries
Sophie Gillingham Close Brothers Group plc 020 3857 6574
Camila Sugimura Close Brothers Group plc 020 3857 6577
Kimberley Taylor Close Brothers Group plc 020 3857 6233
Ingrid Diaz Close Brothers Group plc 020 3857 6088
Sam Cartwright Maitland 07827 254 561
A virtual presentation to analysts and investors will be held today at 9.30 am
BST followed by a Q&A session. A webcast and dial-in facility will be
available by registering at
https://webcasts.closebrothers.com/results/PrelimResults2023
(https://webcasts.closebrothers.com/results/PrelimResults2023) .
Basis of Presentation
Results are presented both on a statutory and an adjusted basis to aid
comparability between periods. Adjusted measures are presented on a basis
consistent with prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired businesses
consistent with its other businesses; and any exceptional and other adjusting
items which do not reflect underlying trading performance. Please refer to
note 2 for further details on items excluded from the adjusted performance
metrics.
Financial Calendar (Provisional)
The enclosed provisional financial calendar below is updated on a regular
basis throughout the year. Please refer to our website www.closebrothers.com
(http://www.closebrothers.com) for up-to-date details. Going forward, the
group has decided to discontinue the issuance of pre-close trading updates in
order to align more closely with prevailing market and industry practice.
Event Date
First quarter trading update November 2023
Annual General Meeting 16 November 2023
Final dividend payment 24 November 2023
Half year end 31 January 2024
Interim results March 2024
Third quarter trading update May 2024
Financial year end 31 July 2024
Preliminary results September 2024
About Close Brothers
Close Brothers is a leading UK merchant banking group providing lending,
deposit taking, wealth management services and securities trading. We employ
approximately 4,000 people, principally in the United Kingdom and Ireland.
Close Brothers Group plc is listed on the London Stock Exchange and is a
constituent of the FTSE 250.
Chief Executive's Statement
We have performed well in the second half, with an acceleration of loan book
growth, strong margins and a stable credit performance in our Banking
business. We continued to attract new client assets in CBAM, with strong net
inflows, although Winterflood's performance remains impacted by subdued
trading activity. Despite the second half momentum, our financial results for
the full year were significantly impacted by provisions in relation to Novitas
announced in our Half Year 2023 results in March.
This year has been marked by a challenging market backdrop, where mixed
economic conditions in the UK have created substantial uncertainty for our
consumer and SME customers. Although demand levels have remained robust, the
uncertain external environment led to higher forward-looking impairment
provisions and difficult conditions for our market-facing businesses, CBAM and
Winterflood.
Whilst headwinds facing SME firms have abated somewhat, uncertainty and
challenges for these firms persist, with interest rates rises and cost of
funds remaining a key concern for many business owners. We recently published
the Close Brothers Asset Finance Business Sentiment Index, which provides
insights about our core customers' plans for the future. The research shows
that SME business confidence continues to recover, and we are reassured to see
a reversal of 2022's downward trends, with a cautious optimism continuing to
return. Overall, the appetite to invest remained stable, with three-quarters
of the firms aiming to seek funding for investment in the next 12 months.
We are confident that we have the right model to thrive in this environment
and are confident in the opportunity it creates for us to lean in and support
consumers and SME businesses.
Our through-the-cycle business model and financial strength mean we can
support customers even during these uncertain times. By leveraging our
long-term relationships, the deep expertise of our people and our
customer-centric approach we can deliver disciplined growth and are well
positioned to resume our long-term track record of earnings growth and
returns, building on the second half's momentum and a good start to the 2024
financial year.
Financial Performance
The financial results were impacted by a significant increase in provisions in
relation to Novitas incurred in the first half, as we have taken measures to
address the issues relating to that business. As a result, statutory operating
profit before tax decreased to £112.0 million (2022: £232.8 million). While
we are disappointed with these developments and the impact they have had on
our performance this year, the financial strength of the group leaves us well
placed to move forward on the delivery of our strategic priorities. We
evaluate continuously our businesses and initiatives against a set of
criteria, our "Model Fit Assessment Framework", to ensure they are aligned
with the key attributes of our model that have and will continue to generate
long-term value. We are confident that there is no read-across from Novitas to
other books in our portfolio and our prudent underwriting continues to be
reflected in the asset quality and performance of the rest of our loan book.
In Banking, excluding Novitas, profit performance primarily reflected good
loan book growth of 6% and strong net interest margin of 7.6%, more than
offset by higher impairment charges to take into account the uncertain
macroeconomic outlook and increased costs related to our investment programmes
and inflation, including wage awards. Our Asset Management division delivered
strong net inflows of 9%, although profit reduced, reflecting wider market
conditions and costs related to our successful hiring strategy, as we
accelerated our efforts to grow CBAM. Although performance at Winterflood
reflected the continuation of challenging trading conditions, we remain
confident in the track record of our trading business and are well positioned
to retain our market position and benefit when investor appetite returns.
Winterflood has made good progress on the diversification of its revenue
streams and is exploring growth opportunities to balance the cyclicality seen
in the trading business.
Our capital, funding and liquidity positions remained strong. The events
impacting the global banking sector earlier this year highlighted the benefits
of our prudent approach to managing financial resources, with our diverse
funding base enabling us to adapt our position, based on market conditions and
demand. Our funding base was further strengthened by the successful issuance
of a £250 million senior unsecured bond in June 2023, and we maintained our
prudent liquidity position, with the 12-month average liquidity coverage ratio
("LCR") of 1,143% substantially above regulatory requirements. Our common
equity tier 1 ("CET1") capital ratio was 13.3% at 31 July 2023 (31 July 2022:
14.6%), significantly above the applicable minimum regulatory requirement of
9.5%. We remain committed to optimising further our capital structure,
targeting a CET1 capital ratio range of 12% to 13% over the medium term. This
will allow the group to maintain a buffer to minimum regulatory requirements
while also retaining flexibility to grow the business. We remain encouraged by
the available opportunities to deploy capital to deliver disciplined growth,
which remains a key strategic priority. We will continue to assess the
potential for further distributions to shareholders based on future
opportunities.
We are pleased to propose a final dividend of 45.0p per share, resulting in a
full-year dividend per share of 67.5p (2022: 66.0p). This reflects our
underlying performance and the Board's confidence in the group's outlook. We
remain committed to our dividend policy, which aims to provide sustainable
dividend growth year-on-year, while maintaining a prudent level of
dividend cover.
Well placed to resume our track record of earnings growth and returns
We have made good progress against our strategic priorities and remain
committed to resuming our track record of earnings growth and returns.
Our investment programmes are progressing well and enable us to protect the
key attributes of our business model, maintain regulatory compliance and
enhance efficiency, as well as future-proof our income generation
capabilities. We continue to see tangible benefits from these investments. We
advanced our strategic cost management initiatives, including our technology
transformation programme focused on the rationalisation of IT infrastructure,
as well as making operational enhancements in Retail. These actions aim to
create capacity to accommodate growth, inflation and investment to support our
business. We continue to evaluate additional opportunities for efficiency with
a view to achieving positive operating leverage over the medium term.
Furthermore, we undertook work across our businesses to ensure readiness for
the implementation of the FCA's Consumer Duty, which came into force on 31
July, completing product reviews and enhancing frameworks to incorporate the
new requirements.
We remain focused on delivering disciplined growth and continue to review a
range of opportunities in line with our model, with our growth initiatives
delivering a significant contribution to loan book growth in the year. Our
recently hired agricultural equipment and materials handling teams in Asset
Finance have written healthy levels of new business and are building strong
pipelines. In Invoice Finance, we participated in our first syndication deal
and the newly hired team, providing bespoke term loan structures to SME
clients, closed their first deal this year. We saw good demand for the new
initiatives in Property Finance, including our specialist buy-to-let
proposition to existing bridging finance customers. We are delighted to have
recently announced our agreement to acquire Bluestone Motor Finance (Ireland)
DAC, which is aligned to our commitment to Ireland as a strategic market and
provides a platform for us to build our Irish Motor Finance business.
Following last year's announcement of our initial green growth ambition of
providing funding for £1.0 billion of battery electric vehicles by 2027, we
are pleased to have funded £164 million in the first year. These achievements
are examples of our relationships, expertise and customer-centric approach
being utilised to deliver disciplined growth.
In CBAM, our hiring strategy is proving successful, with a strong pipeline of
new hires and significant contribution from new portfolio managers to the
inflows. We also continue to build our pipeline of in-fill acquisitions to
support the long-term growth potential of the business. In addition, WBS
exceeded the targeted £10 billion of total AuA and is well positioned for
further growth, both organically and supported by a solid pipeline of clients.
We expect WBS to grow AuA to over £20 billion by 2026.
We continued to make progress against the group's sustainability agenda. We
set our group-wide climate commitment, becoming signatories to the Net Zero
Banking Alliance and Net Zero Asset Managers initiatives in September 2022,
and I look forward to sharing our initial intermediate 2030 targets for the
most carbon-intensive sectors in our loan book over the coming months. We
remain focused on improving the quality of our emissions reporting, including
our financed emissions.
Our people
We consistently focus on employee engagement to support the wellbeing and
needs of our colleagues. I am delighted with the positive scores achieved in
our most recent employee opinion survey, reflecting our teams' strong sense of
belonging and our distinctive culture. I am particularly impressed that we
have retained our high engagement score of 86%. Our colleagues play a key role
in driving our organisation towards lasting success, and I would like to
extend my gratitude to all our people for their dedication and resilience,
especially in the face of the financial pressures brought about by higher
inflation and the cost of living. Together, I am confident that we will
continue to deliver on our purpose to help the people and businesses of
Britain thrive over the long term.
Outlook
We are making the most of opportunities and are encouraged by the momentum
generated in Banking in the second half. We have seen a good start to the 2024
financial year and our underlying business is well positioned to maintain
stable returns this year, as we sustain growth momentum and pricing
discipline, with a resilient credit performance, despite the near-term cost
pressure.
Our proven model and financial strength leave us well placed to resume our
track record of earnings growth and returns by focusing on disciplined growth,
cost efficiency and capital optimisation.
Overview of Financial Performance
Summary Group Income Statement(1)
2023 2022 Change
£ million £ million %
Operating income 932.6 936.1 -
Operating expenses (615.0) (598.0) 3
Impairment losses on financial assets (204.1) (103.3) 98
Adjusted operating profit 113.5 234.8 (52)
Banking 120.1 227.2 (47)
Commercial 15.9 91.0 (83)
Of which: Novitas (106.6) (39.3) (171)
Retail 34.7 61.0 (43)
Property 69.5 75.2 (8)
Asset Management 15.9 21.7 (27)
Winterflood 3.5 14.1 (75)
Group (26.0) (28.2) (8)
Amortisation and impairment of intangible assets on acquisition (1.5) (2.0) (25)
Statutory operating profit before tax 112.0 232.8 (52)
Tax (30.9) (67.6) (54)
Profit after tax 81.1 165.2 (51)
Profit attributable to shareholders 81.1 165.2 (51)
Adjusted basic earnings per share(2) 55.1p 111.5p (51)
Basic earnings per share(2) 54.3p 110.4p (51)
Ordinary dividend per share 67.5p 66.0p (2)
Return on opening equity 5.0% 10.6%
Return on average tangible equity 5.9% 12.2%
1. Adjusted measures are presented on a basis consistent with prior periods
and exclude amortisation of intangible assets on acquisition, to present the
performance of the group's acquired businesses consistent with its other
businesses; and any exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the reconciliation between
operating and adjusted measures can be found in note 2.
2. Refer to note 4 for the calculation of basic and adjusted earnings per
share.
Financial Performance
Adjusted operating profit and returns
Statutory operating profit before tax decreased to £112.0 million (2022:
£232.8 million), primarily driven by higher impairment charges in relation to
Novitas, with adjusted operating profit down 52% to £113.5 million (2022:
£234.8 million). Excluding Novitas, adjusted operating profit reduced 20% to
£220.1 million (2022: £274.1 million), mainly reflecting an increase in
impairment charges and a reduction in income in Winterflood.
Return on average tangible equity ("RoTE") reduced to 5.9% (2022: 12.2%), with
the loss after tax recorded by Novitas reducing the group's RoTE by 6.1%.
Adjusted operating profit in the Banking division reduced 47% to £120.1
million (2022: £227.2 million), primarily reflecting higher impairment
charges related to Novitas. Growth in income, driven by good loan book growth
and a strong net interest margin, was offset by higher costs as we continue to
invest in the business and to reflect the inflationary environment. In the
Asset Management division, we delivered strong net inflows, although adjusted
operating profit reduced 27% to £15.9 million (2022: £21.7 million), driven
by a modest decline in income, reflecting lower income from advice and other
services, and higher costs, as we accelerated our new hiring strategy.
Operating profit in Winterflood decreased by 75% to £3.5 million (2022:
£14.1 million), with performance adversely impacted by the continued
market-wide slowdown in trading activity, particularly in higher margin
sectors, and difficult market conditions. Group net expenses, which include
interest expense from debt issued by the holding company, as well as costs
related to the central functions such as finance, legal and compliance, risk
and human resources, reduced to £26.0 million (2022: £28.2 million), mainly
reflecting lower charges from share-based awards and a reduction in variable
compensation.
Operating income
Operating income was broadly stable at £932.6 million (2022: £936.1
million), with growth in Banking offset by lower income in Asset Management
and Winterflood. Income in the Banking division increased by 3%, reflecting
good loan book growth and a strong net interest margin of 7.7% (2022: 7.8%),
partly offset by the run-off of Novitas and the Irish Motor Finance business.
In the Asset Management division, we saw an increase in investment management
income resulting from growth in AuM delivered by our bespoke investment
manager hires. This was more than offset by a decrease in income from advice
and other services, which reflected the impact of difficult market conditions
on client assets, and managements' strategic shift to focus on higher value
clients. As a result, income in the Asset Management division decreased by 2%.
Income in Winterflood reduced 21%, driven by lower trading revenues reflecting
the continued market-wide slowdown in activity.
Operating expenses
Operating expenses increased 3% to £615.0 million (2022: £598.0 million)
with higher staff costs and investment in Banking and CBAM more than
offsetting lower variable costs in Winterflood. In the Banking division,
whilst we remained focused on cost control, expenses rose 7%, mainly driven by
salary increases and continued investment in strategic programmes. Costs
increased 2% in Asset Management as lower variable compensation was more than
offset by higher fixed staff costs in the inflationary environment, as well as
reflecting the onboarding of new hires and technology spend, driven by the
success of the hiring strategy and investment for future growth. Winterflood's
costs fell 11% as the slowdown in trading activity led to lower staff
compensation and settlement fees.
Overall, the group's expense/income ratio increased to 66% (2022: 64%), while
the group's compensation ratio remained stable at 37% (2022: 37%) as the
reduction in variable compensation across the group was offset by
inflation-related wage increases and new hires.
Impairment charges and IFRS 9 provisioning
Impairment charges increased significantly to £204.1 million (2022: £103.3
million), corresponding to a bad debt ratio of 2.2% (2022: 1.2%). This
increase was driven primarily by impairment charges of £116.8 million taken
in relation to Novitas (2022: £60.7 million), of which £114.6 million was
incurred in the first half of the year. As a result, there was an increase in
overall provision coverage to 3.9% (31 July 2022: 3.1%).
Excluding Novitas, the increase in impairment charges was primarily driven by
higher provisions as a result of weaker macroeconomic variables and outlook,
as well as an ongoing review of provisions and coverage across our loan
portfolios and an increase in Motor Finance arrears, which have stabilised
since the first half. The bad debt ratio, excluding Novitas, increased to 0.9%
(2022: 0.5%) and the coverage ratio increased marginally to 2.1% (31 July
2022: 1.9%).
Since the previous financial year end, we have updated the macroeconomic
scenarios to reflect the latest available information regarding the
macroeconomic environment and outlook, although the weightings assigned to
them remain unchanged. At 31 July 2023, there was a 30% weighting to the
strong upside, 32.5% weighting to the baseline, 20% weighting to the mild
downside, 10.5% weighting to the moderate downside and 7% weighting to the
severe downside.
Whilst we have not seen a significant impact on credit performance at this
stage, we continue to monitor closely the evolving impacts of rising inflation
and cost of living on our customers. We remain confident in the quality of our
loan book, which is predominantly secured or structurally protected, prudently
underwritten, diverse, and supported by the deep expertise of our people.
Tax expense
The tax expense was £30.9 million (2022: £67.6 million), which corresponds
to an effective tax rate of 27.6% (2022: 29.0%).
The standard UK corporation tax rate for the financial year is 21.0% (2022:
19.0%). However, an additional headline banking surcharge of 6.3% (2022: 8.0%)
applies to banking company profits as defined in legislation (and only above a
threshold amount), resulting in a c.5.5% surcharge impact. The effective tax
rate is above the UK corporation tax rate primarily due to the surcharge
applying to most of the group's profits.
Earnings per share
Profit attributable to shareholders reduced 51% to £81.1 million (2022:
£165.2 million). As a result, adjusted basic earnings per share ("EPS")
reduced to 55.1p (2022: 111.5p) and basic EPS reduced to 54.3p (2022: 110.4p).
The loss after tax recorded by Novitas reduced the group's adjusted basic EPS
by 56.4p.
Dividend
The board is proposing a final dividend of 45.0p per share, resulting in a
full-year dividend per share of 67.5p (2022: 66.0p). Although the proposed
level of dividend cover for 2023 is below our historical range, driven
primarily by the adverse impact of increased provisions in relation to Novitas
on our profitability, the proposed dividend reflects our underlying
performance and the board's confidence in the group's outlook.
We remain committed to our dividend policy, which aims to provide sustainable
dividend growth year-on-year, while maintaining a prudent level of dividend
cover.
Subject to approval at the Annual General Meeting, the final dividend will be
paid on 24 November 2023 to shareholders on the register at 20 October 2023.
Summary Group Balance Sheet
31 July 2023 31 July 2022
£ million £ million
Loans and advances to customers and operating lease assets(1) 9,526.2 9,098.9
Treasury assets(2) 2,229.4 1,855.1
Market-making assets(3) 787.6 887.2
Other assets 1,007.1 837.1
Total assets 13,550.3 12,678.3
Deposits by customers 7,724.5 6,770.4
Borrowings(4) 2,839.4 2,870.1
Market-making liabilities(3) 700.7 796.1
Other liabilities 640.8 584.2
Total liabilities 11,905.4 11,020.8
Equity 1,644.9 1,657.5
Total liabilities and equity 13,550.3 12,678.3
1. Includes operating lease assets of £223.4 million (31 July 2022: £185.4
million) that relate to Asset Finance and £47.8 million (31 July 2022: £54.6
million) to Invoice and Speciality Finance.
2. Treasury assets comprise cash and balances at central banks and debt
securities held to support the Banking division.
3. Market-making assets and liabilities comprise settlement balances, long and
short trading positions and loans to or from money brokers.
4. Borrowings comprise debt securities in issue, loans and overdrafts from
banks and subordinated loan capital.
The group maintained a strong balance sheet and prudent approach to managing
its financial resources. The fundamental structure of the balance sheet
remains unchanged, with most of the assets and liabilities relating to our
Banking activities. Customer loans and advances make up the majority of
assets. Other items on the balance sheet include treasury assets held for
liquidity purposes, and settlement balances in Winterflood. Intangibles,
property, plant and equipment, and prepayments are included as other assets.
Liabilities are predominantly made up of customer deposits and both secured
and unsecured borrowings to fund the loan book.
Total assets increased 7% to £13.6 billion (31 July 2022: £12.7 billion),
reflecting growth in the loan book, higher treasury assets due to an increased
cash balance, an increase in other assets as higher collateral was held due to
swap movements, and a reduction in market-making assets. Total liabilities
were also 8% higher at £11.9 billion (31 July 2022: £11.0 billion), driven
primarily by higher customer deposits, partly offset by a reduction in
market-making liabilities.
Total equity reduced 1% to £1.6 billion (31 July 2022: £1.7 billion), with
profit in the year more than offset by dividend payments of £99.1 million (31
July 2022: £95.5 million). The group's return on assets decreased to 0.6%
(2022: 1.3%).
Group Capital
31 July 2023 31 July 2022
£ million £ million
Common equity tier 1 capital 1,310.8 1,396.7
Total capital 1,510.8 1,596.7
Risk weighted assets 9,847.6 9,591.3
Common equity tier 1 capital ratio (transitional)(1) 13.3% 14.6%
Tier 1 capital ratio (transitional) 13.3% 14.6%
Total capital ratio (transitional) 15.3% 16.6%
Leverage ratio(2) 11.4% 12.0%
1. The impact of Novitas on the CET1 capital ratio at 31 July 2023 was
-c.115bps, of which -c.85bps relates to retained earnings, -c.40bps relates to
the IFRS 9 transitional arrangements and c.10bps relates to RWAs.
2. The leverage ratio is calculated as tier 1 capital as a percentage of total
balance sheet assets excluding central bank claims, adjusting for certain
capital deductions, including intangible assets, and off-balance sheet
exposures, in line with the UK leverage framework under the UK Capital
Requirements Regulation.
Movements in Capital and Other Regulatory Metrics
The CET1 capital ratio reduced from 14.6% to 13.3%, mainly driven by loan book
growth in the year (-c.80bps), a decrease in IFRS 9 transitional arrangements
(-c.45bps) and deduction of dividends paid and foreseen (-c.105bps), partly
offset by capital generation through profit (c.85bps) and a decrease in risk
weighted assets ("RWAs") associated with derivatives and credit valuation
adjustment ("CVA") (c.30bps). The impact of Novitas on the CET1 capital ratio
was -c.115bps and consists of impact on retained earnings (c.85bps) and IFRS 9
transitional arrangements (c.40bps), offset by a reduction in loan book RWAs
(c.10bps).
CET1 capital decreased 6% to £1,310.8 million (31 July 2022: £1,396.7
million), reflecting a decrease in the transitional IFRS 9 add-back to capital
of £51.1 million, the regulatory deduction of dividends paid and foreseen of
£100.5 million and an increase in the intangible assets deducted from capital
of £12.1 million. This was partially offset by the capital generation through
profit of £81.1 million. Total capital decreased 5% to £1,510.8 million (31
July 2022: £1,596.7 million).
RWAs increased by 3% to £9.8 billion (31 July 2022: £9.6 billion), mainly
driven by growth in the Commercial and Property loan books, partly offset by a
decrease in RWAs associated with derivatives and CVA following changes to the
derivatives calculation to recognise netting agreements and to implement the
standardised approach to counterparty credit risk.
As a result, CET1, tier 1 and total capital ratios were 13.3% (31 July 2022:
14.6%), 13.3% (31 July 2022: 14.6%) and 15.3% (31 July 2022: 16.6%),
respectively.
During the 2023 financial year higher countercyclical buffer rates for our UK
and Irish exposures have come into force, increasing the group's applicable
countercyclical buffer by c.190bps to 1.9%. At 31 July 2023, the applicable
minimum CET1, tier 1 and total capital ratio requirements, excluding any
applicable Prudential Regulation Authority ("PRA") buffer, were 9.5%, 11.2%
and 13.4%, respectively. Accordingly, we continue to have headroom
significantly above the applicable minimum regulatory requirements of c.380bps
in the CET1 capital ratio, c.210bps in the tier 1 capital ratio and c.190bps
in the total capital ratio.
The group applies IFRS 9 regulatory transitional arrangements which allow
banks to add back to their capital base a proportion of the IFRS 9 impairment
charges during the transitional period. Our capital ratios are presented on a
transitional basis after the application of these arrangements. On a fully
loaded basis, without their application, the CET1, tier 1 and total capital
ratios would be 13.0%, 13.0% and 15.1%, respectively.
The leverage ratio, which is a transparent measure of capital strength not
affected by risk weightings, remained strong at 11.4% (31 July 2022: 12.0%).
The PRA Consultation Paper 16/22 on Basel 3.1 standards was published in
November 2022, with changes expected to be implemented or phased in from
2025-2030. As highlighted at the Half Year 2023 results, following initial
analysis, we estimate that if implemented in its current form, it would
represent an increase of up to c.10% in the group's RWAs calculated under the
standardised approach. This is primarily as a result of the proposed removal
of the SME supporting factor and the proposed approach to the classification
of Retail SMEs and associated risk weights.
We continue to make positive progress in our preparations for a transition to
the Internal Ratings Based ("IRB") approach. Following the submission of our
initial application to the PRA in December 2020, our application has
successfully transitioned to Phase 2 of the process. Additional documentation
has been submitted to the regulator and engagement continues. Our Motor
Finance, Property Finance and Energy portfolios, where the use of models is
most mature, were submitted with our initial application, with work on
subsequent portfolios in progress.
Capital Management Framework
The prudent management of the group's financial resources is a core part of
our business model. Our primary objective is to deploy capital to support
disciplined loan book growth in Banking and to make the most of strategic
opportunities. These include strategic initiatives and small acquisitions in
existing or adjacent markets that fit with our business model.
The board remains committed to the group's dividend policy, which aims to
provide sustainable dividend growth year-on-year, while maintaining a prudent
level of dividend cover.
We remain committed to optimising further our capital structure, including the
issuance of debt capital market securities if appropriate, targeting a CET1
capital ratio range of 12% to 13% over the medium term. This will allow the
group to maintain a buffer to minimum regulatory requirements while also
retaining the flexibility to grow the business. We remain encouraged by the
available opportunities to deploy capital to deliver disciplined growth, which
remains one of our key strategic priorities. The board will assess the
potential for further distributions to shareholders based on future
opportunities.
Group Funding(1)
31 July 2023 31 July 2022
£ million £ million
Customer deposits 7,724.5 6,770.4
Secured funding 1,676.6 1,598.7
Unsecured funding(2) 1,308.6 1,544.3
Equity 1,644.9 1,657.5
Total available funding(3) 12,354.6 11,570.9
Total funding as % of loan book(4) 130% 127%
Average maturity of funding allocated to loan book(5) 21 months 21 months
1. Numbers relate to core funding and exclude working capital facilities at
the business level.
2. Unsecured funding excludes £44.3 million (31 July 2022: £22.1 million) of
non-facility overdrafts included in borrowings and includes £190.0 million
(31 July 2022: £295.0 million) of undrawn facilities.
3. Includes £250 million of funds raised via a senior unsecured bond with a
five-year tenor by Close Brothers Group plc, the group's holding company, in
June 2023, with proceeds currently held for general corporate purposes.
4. Total funding as a % of loan book includes £271.2 million (31 July 2022:
£240.0 million) of operating lease assets in the loan book figure, as per the
definition of "total funding as a % of loan book including operating lease
assets" revised in the 2022 financial year.
5. Average maturity of total available funding, excluding equity and funding
held for liquidity purposes.
Our Treasury function is focused on managing funding and liquidity to support
the Banking businesses, as well as interest rate risk. This incorporates our
Savings business, which provides simple and straightforward savings products
to both individuals and businesses, whilst being committed to providing the
highest level of customer service.
The volatile backdrop over the year, resulting in the failure of several
domestic US banks and the sale of Credit Suisse, with a consequential impact
on the availability of wholesale funding markets for significant periods, did
not adversely affect the group due to our diverse funding sources, enabling us
to adapt our position to changing market conditions and demand.
Our conservative approach to funding is based on the principle of "borrow
long, lend short", with a spread of maturities over the medium and longer
term, comfortably ahead of a shorter average loan book maturity. Our funding
draws on a wide range of wholesale and deposit markets including several
public debt securities at both group and operating company level, as well as
public and private secured funding programmes and a diverse mix of customer
deposits.
We increased total funding in the year by 7% to £12.4 billion (31 July 2022:
£11.6 billion) which accounted for 130% (31 July 2022: 127%) of the loan book
at the balance sheet date. Although the average cost of funding in Banking
increased to 3.2% (2022: 1.2%) due to rapidly rising interest rates, we took
actions to mitigate this pressure by optimising the group's liability mix
based on funding needs, customer demand and market pricing. While we are well
positioned to continue benefiting from our diverse funding base, we expect
cost of funds to further increase in the next financial year as a result of
higher interest rates and customer deposit pricing pressure, particularly in
notice accounts.
Customer deposits increased 14% to £7.7 billion (31 July 2022: £6.8 billion)
with non-retail deposits decreasing 5% to £3.5 billion (31 July 2022: £3.7
billion) and retail deposits increasing by 35% to £4.2 billion (31 July 2022:
£3.1 billion), as we actively sought to grow our retail deposit base and
optimise our funding mix in light of market conditions. Our retail deposits
are predominantly term, with approximately 85% protected by the Financial
Services Compensation Scheme. We remain focused on delivering fair outcomes
for our customers and are on track for the implementation of the FCA's
Consumer Duty, with our focus now on continuing to embed our compliance.
We continue to realise benefits from the investment made in the customer
deposit platform. In May 2023, we expanded our product offering with the
introduction of easy access accounts, complementing our fixed rate cash ISA
and notice account range. We are focused on identifying opportunities to
continue to expand our product range, which will support us in growing and
diversifying our retail deposit base and further optimise our cost of funding
and maturity profile.
Secured funding increased 5% to £1.7 billion (31 July 2022: £1.6 billion) as
we renewed and extended our Premium Finance warehouse securitisation to £650
million (31 July 2022: £500 million). We maintained our current drawings
under the Term Funding Scheme for Small and Medium-sized Enterprises ("TFSME")
at £600 million (31 July 2022: £600 million). Over the next 12 months, £228
million of TFSME will mature, which we expect to replace in line with our
diverse funding profile, dependent on market conditions and demand.
Unsecured funding, which includes senior unsecured and subordinated bonds and
undrawn committed revolving facilities, reduced to £1.3 billion (31 July
2022: £1.5 billion) as we adapted our funding mix in light of market
conditions. In June 2023, Close Brothers Group plc successfully issued a £250
million senior unsecured bond at an interest rate of 7.75% with the net
proceeds to be used for general corporate purposes.
We have maintained a prudent maturity profile. The average maturity of funding
allocated to the loan book was 21 months (31 July 2022: 21 months), ahead of
the average loan book maturity at 16 months (31 July 2022: 17 months). This is
in line with our "borrow long, lend short" principle, reflecting the timing
and mix of funding raised over the year.
Our credit ratings remain strong, reflecting the group's profitability,
capital position, diversified business model and consistent risk appetite.
Moody's Investors Services ("Moody's") reaffirmed their rating for Close
Brothers Group as "A2/P1" and Close Brothers Limited as "Aa3/P1", whilst
upgrading the outlook from "negative" to "stable" for both in November 2022.
Fitch Ratings ("Fitch") reaffirmed their rating for both Close Brothers Group
and Close Brothers Limited as ''A-/F2'', whilst downgrading the outlook from
''stable'' to "negative" in March 2023.
Group Liquidity
31 July 2023 31 July 2022
£ million £ million
Cash and balances at central banks 1,937.0 1,254.7
Sovereign and central bank debt(1) 186.1 415.4
Covered bonds(1) 106.3
Certificates of deposit - 185.0
Treasury assets 2,229.4 1,855.1
1. There was £nil encumbered sovereign debt, central bank debt and covered
bonds at 31 July 2023 (31 July 2022: £216.9 million).
The group continues to adopt a conservative stance on liquidity, ensuring it
is comfortably ahead of both internal risk appetite and regulatory
requirements.
We continued to maintain higher liquidity relative to the pre-Covid-19
position to provide additional flexibility given the uncertain UK economic
outlook, whilst enabling us to maximise any opportunities available. Over the
year, treasury assets increased 20% to £2.2 billion (31 July 2022: £1.9
billion) and were predominantly held on deposit with the Bank of England.
We regularly assess and stress test the group's liquidity requirements and
continue to meet the liquidity coverage ratio regulatory requirements, with a
12-month average LCR to 31 July 2023 of 1,143% (31 July 2022: 924%). In
addition to internal measures, we monitor funding risk based on the UK Capital
Requirements Regulation ("CRR") rules for the net stable funding ratio
("NSFR") which became effective on 1 January 2022. The four-quarter average
NSFR to 31 July 2023 was 126.0% (point in time at 31 July 2022: 118.3%).
Business Review
Banking
Key Financials(1)
2023 2022 Change
£ million £ million %
Operating income 713.8 693.1 3
Adjusted operating expenses (389.7) (362.6) 7
Impairment losses on financial assets (204.0) (103.3) 97
Adjusted operating profit 120.1 227.2 (47)
Adjusted operating profit, pre provisions 324.1 330.5 (2)
Net interest margin 7.7% 7.8%
Expense/income ratio 54.6% 52.3%
Bad debt ratio 2.2% 1.2%
Return on net loan book 1.3% 2.6%
Return on opening equity 6.6% 12.5%
Closing loan book and operating lease assets 9,526.2 9,098.9 5
Key Financials (Excluding Novitas)
2023 2022 Change
£ million £ million %
Operating income 694.9 657.1 6
Adjusted operating expenses (381.0) (348.0) 9
Impairment losses on financial assets (87.2) (42.6) 105
Adjusted operating profit 226.7 266.5 (15)
Adjusted operating profit, pre provisions 313.9 309.1 2
Net interest margin 7.6% 7.5%
Expense/income ratio 54.8% 53.0%
Bad debt ratio 0.9% 0.5%
Closing loan book and operating lease assets 9,466.3 8,939.5 6
1. Adjusted measures are presented on a basis consistent with prior periods
and exclude amortisation of intangible assets on acquisition, to present the
performance of the group's acquired businesses consistent with its other
businesses; and any exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the reconciliation between
statutory and adjusted measures can be found in note 2.
Continued demand and loan book growth, as we maintained our pricing discipline
and margin in an uncertain market environment
This year has seen a heightened level of uncertainty in the market backdrop
from a combination of factors, including the ongoing conflict in Ukraine, UK
inflation reaching its highest level in more than 40 years and the Bank of
England base rate rising to 5% in June 2023, which have all created challenges
for our individual and SME customers. The deterioration in the external
environment has also adversely impacted the economic variables our businesses
are sensitive to, which has been reflected in higher forward-looking
impairment provisions. Notwithstanding the economic uncertainty, we continued
to support our customers and lend throughout the cycle on responsible terms,
consistently applying our prudent underwriting and pricing discipline. We are
confident that we have the right model to thrive in this environment and are
confident in the opportunity it creates for us to lean in and support
consumers and SME businesses.
Banking adjusted operating profit reduced 47% to £120.1 million (2022:
£227.2 million), primarily reflecting higher impairment charges related to
Novitas. On a pre-provision basis, adjusted operating profit reduced 2% to
£324.1 million (2022: £330.5 million) as growth in income, driven by good
loan book growth and a strong net interest margin, was offset by an increase
in costs. Statutory operating profit decreased to £120.1 million (2022:
£227.1 million).
Excluding Novitas, Banking adjusted operating profit decreased 15% to £226.7
million (2022: £266.5 million), primarily driven by higher impairment charges
to reflect the uncertain macroeconomic outlook and increased costs, which more
than offset income growth.
The loan book increased 5% over the year to £9.5 billion (31 July 2022: £9.1
billion), driven by strong demand in our Commercial businesses and high
drawdowns in Property, partly offset by the reduction in the Novitas net loan
book. Growth in our Premium Finance and UK Motor Finance books was more than
offset by the run-off of the Republic of Ireland Motor Finance loan book. We
saw an acceleration of growth in the second half of the year to 5%, following
a 1% decline in the loan book in the first half of 2023.
Excluding our businesses in run-off, Novitas and the Republic of Ireland Motor
Finance, the loan book grew 8% to £9.3 billion (31 July 2022: £8.6 billion).
Operating income increased 3% to £713.8 million (2022: £693.1 million),
reflecting the loan book growth and strong net interest margin, partially
offset by the run-off of Novitas and the Irish Motor Finance business.
Excluding Novitas, operating income grew 6%.
The net interest margin decreased marginally to 7.7% (2022: 7.8%) principally
due to reduced income from Novitas. Excluding Novitas, the net interest margin
was stable at 7.6% (2022: 7.5%), reflecting both pricing discipline on new
lending and actions taken to optimise the group's liability mix and funding
costs in a rising rate environment. We are well positioned to maintain a
strong net interest margin and pass on increases in cost of funds as we remain
focused on asset pricing.
Adjusted operating expenses increased 7% to £389.7 million (2022: £362.6
million) as we continued to invest in strategic programmes. 57% (£15.4
million) of the increase related to higher staff costs, driven mainly by
inflation-related salary rises and growth-driven hires. This was partly offset
by lower performance-linked compensation due to the reduction in profit for
the year. The expense/income ratio increased to 55% (2022: 52%) and the
compensation ratio increased marginally to 30% (2022: 29%).
Business-as-usual ("BAU") costs rose 6% to £303.1 million (2022: £284.8
million), with over half of the increase driven by salary increases, as well
as an uplift in property running costs to reflect the current inflationary
environment(1). Costs related to Novitas reduced to £8.7 million (2022:
£14.6 million) as we continue to wind down the business.
Investment costs rose 23% to £77.9 million (2022: £63.2 million), of which
£40.0 million (2022: £29.4 million) was driven mainly by spend on our
strategic cost management initiatives, growth initiatives and operational
resilience. Depreciation charges related to our investment projects rose to
£37.9 million (2022: £33.8 million).
We see investment through the cycle as vital in protecting our model,
enhancing efficiency and future-proofing our income generation capabilities.
Our investments in cyber and data centres are part of a programme to
continually enhance our business and operational resilience.
We have implemented a programme directly aligned to the requirements of the
FCA's Consumer Duty, with workstreams including fair value assessments,
enhanced product reviews and enhancing customer communications. Our focus is
now on continuing to embed our compliance and implementing Consumer Duty
changes for books of business not open to new customers.
1. Related ongoing costs resulting from investment projects are recategorised
from investment costs to BAU costs after one year. For comparison purposes,
£6.5 million has been recategorised from investment costs to BAU costs in the
2022 financial year to adjust for investment projects' ongoing costs that
commenced prior to the 2023 financial year.
Across our businesses, we have been investing in our digital capabilities to
support our relationship-based model and make our experts even more valuable.
Our Asset Finance transformation programme will introduce a single platform,
adding new functionality, improved customer insights and increased efficiency.
In Motor Finance we have seen a significant increase in new business proposals
through our digital channels and in Premium Finance, we are using technology
to reduce the time taken to make credit underwriting decisions for large
business applications and have introduced a digital payment link for customers
in arrears. Our previous investment in our Customer Deposit platform has
enabled us to grow our Savings proposition, introduce new offerings and
increase customer numbers, whilst achieving good customer satisfaction scores.
We have intensified our focus on cost efficiency, particularly in light of
recent inflationary pressures. We have a number of strategic cost management
initiatives in progress, which aim to create capacity to accommodate growth,
inflation and investment to support our business, and are evaluating
additional opportunities for efficiency. Our multi-year technology
transformation programme focused on strategic IT services is well under way.
As part of this, we are moving to a new operating model, making use of
third-party providers to reduce our cost base and create efficiencies. The
programme will enhance the service we provide to our customers and increase
our operational resilience and flexibility. Our Retail simplification
programme is focused on transforming operations and reducing the cost of
running the business, whilst enhancing the operational risk and control
environment. The programme also aims to increase broker, customer and
colleague satisfaction and loyalty. A new customer relationship platform has
been introduced in Premium Finance, as well as case management and automation
tools, which are leading to reduced case handling and credit decisioning
times.
Whilst we remain focused on achieving positive operating leverage over the
medium term, we expect costs for the 2024 financial year to increase between
c.8-10%, primarily as a result of higher average salary awards at the end of
the 2023 financial year and a normalisation of performance-linked
compensation. As we progress our strategic cost management initiatives,
investment costs and related depreciation are expected to increase and will be
partly offset by efficiency savings.
In the 2025 financial year, we expect cost growth to more closely align with
income growth, reflecting volume and activity-related expenses, a projected
stabilisation of inflationary pressures, as well as further benefits from
efficiency gains resulting from our strategic cost management initiatives.
Investment spend is expected to stabilise, with depreciation costs related to
our existing investment programmes peaking in the 2025 financial year.
Impairment charges increased significantly to £204.0 million (2022: £103.3
million), corresponding to a bad debt ratio of 2.2% (2022: 1.2%). This was
driven primarily by increased provisions in relation to Novitas of £116.8
million (2022: £60.7 million), of which £114.6 million was incurred in the
first half of the year.
Additionally, a further £87.2 million of impairment charges were recognised
to take into account weaker macroeconomic variables and outlook, as well as
higher arrears in the Motor Finance business as a result of cost of living
pressures on customers. They also reflect an ongoing review of provisions and
coverage across our loan portfolios and model refinements. Excluding Novitas,
the bad debt ratio increased to 0.9% (2022: 0.5%), although remains slightly
below our long-term bad debt ratio of 1.2%, and the coverage ratio increased
marginally to 2.1% (31 July 2022: 1.9%). There was also an increase in overall
provision coverage to 3.9% (31 July 2022: 3.1%).
Whilst we have not seen a significant impact on credit performance, we
continue to monitor closely the evolving impacts of rising inflation and cost
of living on our customers. We remain confident in the quality of our loan
book, which is predominantly secured or structurally protected, prudently
underwritten, diverse, and supported by the deep expertise of our people. We
expect the bad debt ratio in the 2024 financial year to remain below our
long-term average, based on current market conditions.
Accelerating our efforts to resolve issues relating to Novitas
The decision to wind down Novitas, a provider of finance for the legal sector
we acquired in 2017, and to withdraw from the legal services financing market,
followed a strategic review in July 2021 which concluded that the business was
not aligned with the Close Brothers model. Some of the key attributes of our
model such as in-house lending expertise, a strong track record of performance
and underlying security of the loans, have proven not to be evident in
Novitas.
The business continues to work with solicitors and insurers, to support
existing customers and manage the existing book to ensure good customer
outcomes. As announced in January 2023, we have accelerated our efforts to
resolve the issues surrounding Novitas. We initiated formal legal action
against one of the After the Event ("ATE") insurers regarding the potential
recoverability of funds in relation to failed cases and we are considering our
position in respect of other insurers. As a result, an increased provision to
reflect the expectation of a longer time frame to recovery for related loans
was included in the £24.8 million of provisions taken in the first five
months of the 2023 financial year. We have since entered into a settlement
with another smaller ATE insurer.
In the first half of the year, we also undertook a review of certain cases
being funded which had limited prospects of successfully progressing through
the courts. As a result of this review, an additional provision of £89.8
million was recognised, which assumed a material increase in the Probability
of Default ("PD") and Loss Given Default ("LGD") assumptions and a longer time
frame to recovery across the majority of the portfolio. It also assumed
reassessed estimates for recoverability of interest on the relevant loans, in
line with accounting requirements.
Consequently, we recognised provisions of £114.6 million in relation to
Novitas in the first half. While we will continue to review provisioning
levels in light of future developments, including the experienced credit
performance of the book and the outcome of the group's initiated legal action,
we believe the provisions adequately reflect the remaining risk of credit
losses for the Novitas loan book (£59.9 million net loan book at 31 July
2023).
In addition, in line with IFRS 9 requirements, a proportion of the expected
credit loss is expected to unwind, over the estimated time to recovery period,
to interest income. The group remains focused on maximising the recovery of
remaining loan balances, either through successful outcome of cases or
recourse to the customers' ATE insurers, whilst complying with its regulatory
obligations and always focusing on ensuring good customer outcomes.
We expect net income related to Novitas to reduce from £18.9 million in 2023
to c.£9 million in 2024. Further disclosure on the impact of Novitas can be
found in note six.
Continued focus on delivering disciplined growth
We remain focused on delivering disciplined growth whilst prioritising our
margins and credit quality, with our growth initiatives delivering a
significant contribution of loan book growth. We continue to actively work to
identify incremental and new opportunities in line with our business model and
overall remain confident in the growth outlook for the loan book over both the
short and medium term. We are confident that we have the right model to thrive
in this environment and are confident in the opportunity it creates for us to
lean in and support consumers and SME businesses.
As the UK aligns towards a net zero economy, we recognise a significant
opportunity for delivering disciplined growth. Our specialist energy team has
provided finance for over 1,600MW of installed generation and storage capacity
to date and we continue to broaden our expertise in green and transition
assets. In line with our ambition to provide funding for £1.0 billion of
battery electric vehicles by the end of the 2027 financial year, we have lent
£164 million over the last year.
The Asset Finance business remains well positioned to capitalise on continued
demand for finance from SMEs. Our new initiatives are proving successful, with
the recently hired agricultural equipment and materials handling teams both
having written healthy levels of new business over the year and building
strong pipelines, as we continue to expand our coverage into adjacent asset
classes and markets.
In Invoice Finance, we continue to focus on taking advantage of opportunities
in the asset-based lending ("ABL") space, building on the success we have seen
this year with our first syndication deal and our expansion to cover larger
loan sizes. We have also expanded our offering with our new bespoke lending
team, which offers loan structures to SMEs requiring growth and investment
capital, and closed its first deal earlier this year.
The Motor Finance transformation programme, which has now concluded, has
created the digital capabilities for us to enhance our proposition for
dealers, partners and customers. We are currently rolling out a new dealer
partner onboarding process and our partnership with iVendi has driven an
uplift in proposal volumes. Our partnership with AutoTrader, providing dealers
with data and insights to effectively manage their forecourts, continues to
prove successful and we are leveraging the investment made in our commercial
partner programme to support additional routes to market. In addition, we have
expanded our credit policy to provide broader coverage of Alternatively
Fuelled Vehicles ("AFVs") as they become more prevalent in the second hand car
market. In September 2023, we announced our agreement to acquire Bluestone
Motor Finance (Ireland) DAC, which will provide a platform for us to build our
Motor Finance business in Ireland.
In Premium Finance, we continue to focus on our digital, data and insight
capabilities to enhance our offering, with our Foresight model helping to
support brokers' decisioning by providing unique customer behaviour insights.
We are expanding our new business capabilities through the use of a customer
relationship management platform and the launch of a programme to support
commercial lines brokers with the promotion and sale of premium finance.
In Property, following the successful piloting of a specialist buy-to-let
extension to our existing bridging finance customers, we are continuing to
offer this product and wrote a healthy level of business during the year. We
are seeing good demand for initiatives including our enhanced loan-to-value
product for select customers, alongside our continued focus on growing our
regional loan book. We are also looking to expand further our partnership with
Travis Perkins, which enables SME housebuilders to access discounted building
supplies and materials directly via a credit facility. Although the economic
uncertainty is expected to continue to impact activity in the property market,
our pipeline of undrawn commitments remains strong.
Loan Book Analysis
31 July 2023 31 July 2022 Change
£ million £ million %
Commercial 4,821.3 4,561.4 6
Commercial - Excluding Novitas 4,761.4 4,402.0 8
Asset Finance(1) 3,387.1 3,217.4 5
Invoice and Speciality Finance(1) 1,434.2 1,344.0 7
Invoice and Speciality Finance - Excluding Novitas(1) 1,374.3 1,184.6 16
Retail 3,001.8 3,064.0 (2)
Motor Finance(2) 1,948.4 2,051.2 (5)
Premium Finance 1,053.4 1,012.8 4
Property 1,703.1 1,473.5 16
Closing loan book and operating lease assets(3) 9,526.2 9,098.9 5
Closing loan book and operating lease assets - Excluding Novitas 9,466.3 8,939.5 6
1. The Asset Finance and Invoice and Speciality Finance loan books have been
re-presented for 31 July 2022 to reflect the recategorisation of Close
Brothers Vehicle Hire ("CBVH") from Invoice and Speciality Finance to Asset
Finance.
2. The Motor Finance loan book includes £206.7 million (31 July 2022: £367.2
million) relating to the Republic of Ireland Motor Finance business, which is
in run-off following the cessation of our previous partnership in the Republic
of Ireland from 30 June 2022.
3. Includes operating lease assets of £223.4 million (31 July 2022: £185.4
million) that relate to Asset Finance and £47.8 million (31 July 2022: £54.6
million) to Invoice and Speciality Finance.
Continued demand across our Banking businesses with good loan book growth
The Commercial loan book grew 6% to £4.8 billion (31 July 2022: £4.6
billion), despite the roll-off of government supported lending under schemes
such as the Coronavirus Business Interruption Loan Scheme ("CBILS"), supported
by strong demand and growth initiatives. Excluding Novitas, the Commercial
book increased 8% to £4.8 billion (31 July 2022: £4.4 billion). The net loan
book of government supported lending over the pandemic period (covering
lending under the CBILS, Coronavirus Large Business Interruption Loan Scheme
and Bounce Back Loan Scheme) stood at £456 million at 31 July 2023 (31 July
2022: £748 million).
Asset Finance grew 5% as we saw strong new business volumes in our Leasing
business, particularly from our Contract Hire and Energy portfolios, and good
demand for our new initiatives including our agriculture offering. Invoice and
Speciality Finance grew 7%, notwithstanding the reduction in the Novitas net
loan book, as we saw strong new business and higher utilisation in Invoice
Finance and good growth in our Irish business. The Invoice Finance business
also completed its first syndication deal during the year. Excluding Novitas,
the Invoice and Speciality Finance loan book increased 16%.
The Retail loan book contracted 2% to £3.0 billion (31 July 2022: £3.1
billion), driven mainly by the decline in the Republic of Ireland loan book.
Motor Finance decreased 5% as the run-off of the Irish book more than offset
3% growth in the UK Motor book as we enhanced our proposition and focused on
new routes to market through our commercial partners. Premium Finance grew 4%
year-on-year, driven by an increase in new business volumes from individuals
and larger premium sizes reflecting inflation.
The Republic of Ireland Motor Finance business accounted for 11% of the Motor
Finance loan book (31 July 2022: 18%) and 2% of the Banking loan book (31 July
2022: 4%). As announced in September 2023, we have reached an agreement to
acquire Bluestone Motor Finance (Ireland), with the acquisition expected to
complete in the fourth quarter of calendar year 2023. This will provide a
platform for us to build our Motor Finance business in Ireland, following the
cessation of our previous partnership in that country last year.
The Property loan book grew 16%, despite uncertainty in the housing market, as
we saw strong drawdowns from our healthy pipeline and normalising repayments
from the elevated levels seen in the prior year, as the buoyant UK property
market had resulted in heightened unit sales by developers. We are seeing good
demand for initiatives including our specialist buy-to-let extension and our
enhanced loan-to-value product for select customers, alongside our continued
focus on growing our regional loan book.
Banking: Commercial(1)
2023 2022 Change
£ million £ million %
Operating income 347.8 343.4 1
Adjusted operating expenses (194.4) (180.0) 8
Impairment losses on financial assets (137.5) (72.4) 90
Adjusted operating profit 15.9 91.0 (83)
Adjusted operating profit, pre provisions 153.4 163.4 (6)
Net interest margin 7.4% 7.8%
Expense/income ratio 56% 52%
Bad debt ratio 2.9% 1.7%
Closing loan book and operating lease assets(2) 4,821.3 4,561.4 6
Commercial key metrics excluding Novitas(1)
2023 2022 Change
£ million £ million %
Operating income 328.9 307.4 7
Adjusted operating expenses (185.7) (165.4) 12
Impairment losses on financial assets (20.7) (11.7) 77
Adjusted operating profit 122.5 130.3 (6)
Adjusted operating profit, pre provisions 143.2 142.0 1
Net interest margin 7.2% 7.3%
Expense/income ratio 56% 54%
Bad debt ratio 0.5% 0.3%
Closing loan book and operating lease assets(2) 4,761.4 4,402.0 8
1. Adjusted measures are presented on a basis consistent with prior periods
and exclude amortisation of intangible assets on acquisition, to present the
performance of the group's acquired businesses consistent with its other
businesses; and any exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the reconciliation between
operating and adjusted measures can be found in note 2.
2. Operating lease assets of £223.4 million (31 July 2022: £185.4 million)
relate to Asset Finance and £47.8 million (31 July 2022: £54.6 million) to
Invoice and Speciality Finance.
Strong demand in Commercial as we continue to support our SME customers
The Commercial businesses provide specialist, predominantly secured lending
principally to the SME market and include Asset Finance and Invoice and
Speciality Finance. We finance a diverse range of sectors, with Asset Finance
offering commercial asset financing, hire purchase and leasing solutions
across a broad range of assets including commercial vehicles, machine tools,
contractors' plant, printing equipment, company car fleets, energy project
finance, and aircraft and marine vessels, as well as our Vehicle Hire
business. The Invoice and Speciality Finance business provides debt factoring,
invoice discounting and asset-based lending, as well as covering two of our
specialist businesses, Brewery Rentals and Novitas. As previously announced,
Novitas ceased lending to new customers in July 2021.
Despite the market uncertainty, our Commercial businesses saw good customer
demand over the year, with Invoice Finance experiencing strong new business
levels and an uptick in utilisation. We have focused on asset pricing
discipline in line with our model, actively choosing to pass through higher
rates on new lending where appropriate notwithstanding the competitive market.
Our new initiatives have proven successful, with our agriculture and materials
handling teams writing healthy levels of new business over the year and our
first syndication deal completed.
Adjusted operating profit for Commercial declined significantly to £15.9
million (2022: £91.0 million), driven primarily by a significant increase in
impairment charges related to Novitas. Statutory operating profit reduced to
£15.8 million (2022: £90.9 million).
On a pre-provision basis, adjusted operating profit decreased 6% to £153.4
million (2022: £163.4 million) as an increase in costs more than offset
income growth.
Excluding Novitas, adjusted operating profit decreased 6% to £122.5 million
(2022: £130.3 million) as income growth was more than offset by higher costs.
Operating income increased 1% to £347.8 million (2022: £343.4 million),
reflecting good loan book growth and higher average volumes in Invoice and
Speciality Finance. The net interest margin decreased to 7.4% (2022: 7.8%),
driven mainly by the reduction in Novitas income. Excluding Novitas, the net
interest margin decreased marginally to 7.2% (2022: 7.3%), primarily
reflecting the timing delay in passing through higher interest rates to
customers compared to increased funding costs, partly offset by increased
activity-driven fees and benefits of central funding mix actions taken in
light of the rising interest rate environment.
Adjusted operating expenses grew 8% to £194.4 million (2022: £180.0
million), driven by investment spend in relation to the Asset Finance
transformation programme and strategic growth initiatives, as well as higher
staff costs to reflect the inflationary environment. This was partly offset by
lower advisory costs in relation to Novitas. The expense/income ratio
increased to 56% (2022: 52%) as higher costs more than offset the growth in
income.
Impairment charges rose significantly to £137.5 million (2022: £72.4
million), with £116.8 million incurred in relation to Novitas, £114.6
million of which were recognised in the first half of the year. As a result,
there was an increase in provision coverage to 5.2% (31 July 2022: 4.0%).
Excluding Novitas, impairment charges increased to £20.7 million (2022:
£11.7 million), corresponding to a bad debt ratio of 0.5% (2022: 0.3%). This
increase primarily reflected additional provisions to take into account weaker
macroeconomic variables and outlook. The coverage ratio reduced marginally to
1.4% (31 July 2022: 1.6%).
Banking: Retail
2023 2022 Change
£ million £ million %
Operating income 248.1 237.0 5
Operating expenses (164.4) (151.6) 8
Impairment losses on financial assets (49.0) (24.4) 101
Operating profit 34.7 61.0 (43)
Operating profit, pre provisions 83.7 85.4 (2)
Net interest margin 8.2% 7.8%
Expense/income ratio 66% 64%
Bad debt ratio 1.6% 0.8%
Closing loan book(1) 3,001.8 3,064.0 (2)
1. The Motor Finance loan book includes £206.7 million (31 July 2022: £367.2
million) relating to the Republic of Ireland Motor Finance business, which is
in run-off following the cessation of our previous partnership in the Republic
of Ireland from 30 June 2022.
Remained focused on prioritising our margins and underwriting discipline
The Retail businesses provide intermediated finance, principally to
individuals and small businesses, through motor dealers and insurance brokers.
We have seen a solid performance in our Retail businesses this year despite
the challenging market backdrop. In Motor Finance, we have focused on
prioritising our margin and pricing discipline in line with our model, passing
through higher rates on new lending. As reported at the half year 2023 results
and in line with comparable trends observed across the wider industry, we have
seen arrears increase and then stabilise at a higher level in our Motor
Finance loan book, reflecting cost of living pressures on our customers.
Nonetheless, we remain comfortable with the quality of our portfolio,
underpinned by our underwriting discipline and prudent level of provisions. In
Premium Finance, volumes in our consumer business have increased year-on-year,
benefiting from premium inflation in the second half of the year, with growth
in average loan sizes.
Operating profit for Retail reduced to £34.7 million (2022: £61.0 million),
as income growth was more than offset by higher costs and increased impairment
charges.
Operating income rose 5% to £248.1 million (2022: £237.0 million), driven by
growth in the UK Motor Finance loan book and an increase in the net interest
margin to 8.2% (2022: 7.8%) despite higher funding costs, as we continued to
focus on pricing discipline and benefited from central funding mix actions
taken in light of the rising interest rate environment.
Operating expenses increased 8% to £164.4 million (2022: £151.6 million),
primarily driven by investment in the Retail businesses to create efficiencies
whilst delivering customer and control benefits, including depreciation costs
related to these investments, as well as higher staff costs, particularly in
legal and compliance. In Premium Finance, we have continued to invest in
further enhancing our processes in line with regulatory requirements. As a
result, the expense/income ratio increased to 66% (2022: 64%).
Following the FCA's Motor Market review in 2019, the group continues to
receive a number of complaints, some of which are with the Financial Ombudsman
Service, and is subject to a number of claims through the courts regarding
historical commission arrangements with intermediaries on its Motor Finance
products. Whilst the review of these complaints and claims is ongoing, any
potential financial impact remains uncertain.
Impairment charges rose to £49.0 million (2022: £24.4 million),
corresponding to a bad debt ratio of 1.6% (2022: 0.8%). This was driven by
the uncertain macroeconomic outlook and increased arrears and forbearance
levels in Motor Finance, as well as an ongoing review of provisions and
coverage. As a result, the provision coverage ratio increased to 2.9% (31 July
2022: 2.2%).
We remain confident in the credit quality of the Retail loan book. The Motor
Finance loan book is predominantly secured on second hand vehicles which are
less exposed to depreciation or significant declines in value than new cars.
Our core Motor Finance product remains hire-purchase contracts, with less
exposure to residual value risk associated with Personal Contract Plans
("PCP"), which accounted for c.9% of the Motor Finance loan book at 31 July
2023 (c.11% at 31 July 2022). The Premium Finance loan book benefits from
various forms of structural protection including premium refundability and, in
most cases, broker recourse for the personal lines product.
Banking: Property
2023 2022 Change
£ million £ million %
Operating income 117.9 112.7 5
Operating expenses (30.9) (31.0) 0
Impairment losses on financial assets (17.5) (6.5) 169
Operating profit 69.5 75.2 (8)
Operating profit, pre provisions 87.0 81.7 6
Net interest margin 7.4% 7.6%
Expense/income ratio 26% 28%
Bad debt ratio 1.1% 0.4%
Closing loan book 1,703.1 1,473.5 16
Strong loan book growth driven by drawdowns from our healthy pipeline
Property comprises Property Finance and Commercial Acceptances. The Property
Finance business is focused on specialist residential development finance to
established professional developers in the UK. Commercial Acceptances provides
bridging loans and loans for refurbishment projects.
This year has seen a slowdown across the UK property market following a period
of heightened activity, with rising interest rates negatively impacting buyer
sentiment. Whilst we have seen a fall in housebuilding levels and some
contraction in house prices, we have delivered a strong performance, with
record drawdowns, growth in active customer numbers and our pipeline remaining
healthy at over £1 billion. We have also focused on retaining our margin and
pricing discipline as we adhere to our through-the-cycle lending approach.
Operating profit in Property declined 8% to £69.5 million (2022: £75.2
million), as an increase in impairment charges more than offset income growth.
On a pre-provision basis, operating profit grew 6% to £87.0 million (2022:
£81.7 million) as we achieved positive operating leverage in the business.
Operating income increased 5% to £117.9 million (2022: £112.7 million),
driven by strong loan book growth and higher fee income. The net interest
margin decreased to 7.4% (2022: 7.6%), reflecting higher cost of funds and the
benefit of interest rate floors in the prior year.
Operating expenses were stable at £30.9 million (2022: £31.0 million) as we
maintained our strict focus on cost discipline. As a result, the
expense/income ratio reduced to 26% (2022: 28%).
Impairment charges increased to £17.5 million (2022: £6.5 million),
resulting in a bad debt ratio of 1.1% (2022: 0.4%), as we recognised
additional provisions to reflect weakening macroeconomic variables and
outlook, in particular lower projected house prices, and an ongoing review of
provisions and coverage. The provision coverage ratio remained stable at 2.4%
(31 July 2022: 2.4%).
The Property loan book is conservatively underwritten, with typical LTVs below
standard market levels. We work with experienced, professional developers,
with a focus on mid-priced family housing, and have minimal exposure to the
prime central London market, with our regional loan book making up over 50% of
the Property Finance portfolio. Our long track record, expertise and quality
of service ensure the business remains resilient to competition and continues
to generate high levels of repeat business.
Asset Management
Key Financials(1)
2023 2022 Change
£ million £ million %
Investment management 113.3 110.4 3
Advice and other services(2) 29.9 36.1 (17)
Other income(3) 1.6 1.5 7
Operating income 144.8 148.0 (2)
Adjusted operating expenses (128.8) (126.3) 2
Impairment losses on financial assets (0.1) - n/a
Adjusted operating profit 15.9 21.7 (27)
Revenue margin (bps) 84 87
Operating margin 11% 15%
Return on opening equity 15.5% 28.6%
1. Adjusted measures are presented on a basis consistent with prior periods
and exclude amortisation of intangible assets on acquisition, to present the
performance of the group's acquired businesses consistent with its other
businesses; and any exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the reconciliation between
operating and adjusted measures can be found in note 2.
2. Income from advice and self-directed services, excluding investment
management income.
3. Other income includes net interest income and expense, income on principal
investments and other income.
Acceleration of growth strategy, building on long-term track record and
driving strong net inflows
Close Brothers Asset Management provides personal financial advice and
investment management services to private clients in the UK, including full
bespoke management, managed portfolios and funds, distributed both directly
via our advisers and investment managers, and through third-party financial
advisers.
Adjusted operating profit in CBAM reduced 27% to £15.9 million (2022: £21.7
million), driven by a modest decline in income, reflecting lower income from
advice and other services, and higher costs as we accelerated our hiring
strategy. The operating margin reduced to 11% (2022: 15%). Statutory operating
profit before tax was £14.4 million (2022: £19.8 million).
We saw an increase in investment management income resulting from growth in
AuM delivered by our bespoke investment manager hires. This was more than
offset by a decrease in income from advice and other services, which reflected
the impact of difficult market conditions on client assets, and managements'
strategic shift to focus on more higher value clients. As a result, income in
the Asset Management division decreased by 2%. The revenue margin reduced to
84bps (2022: 87bps) due primarily to flows into lower margin investment
management and non-advised products.
Adjusted operating expenses rose 2% as we exercised disciplined cost control
whilst accelerating our growth strategy. We increased our rate of hiring,
recruiting 15 bespoke investment managers during the year (2022: 10) and
opened offices in Birmingham and Cheltenham to support new teams, whilst also
implementing inflationary-driven salary increases and incurring spend on
technology, which was partly offset by lower variable compensation. The
expense/income ratio increased to 89% (2022: 85%), with the compensation ratio
also increasing to 59% (2022: 56%). The acceleration of our hiring strategy
will continue to be reflected in the cost trajectory going forward.
CBAM has achieved substantive compliance with the FCA's Consumer Duty
requirements. In preparation for the implementation of the FCA's Consumer
Duty, we completed a number of workstreams focused on mapping client journeys
and enhancing our data collection and client communications, with Consumer
Duty embedded into the CBAM strategy.
Strong net inflows notwithstanding market uncertainty
Continued uncertainty over the economic outlook has led to volatility in
returns from equity markets over the year, negatively impacting investor
sentiment. Nevertheless, we saw strong net inflows of £1.3 billion (2022:
£844 million) and delivered a net inflow rate of 9% (2022: 5%). Our hiring
strategy is proving successful, with a strong pipeline and the new bespoke
investment managers contributing significantly to the overall inflow rate. We
continue to invest in supporting the long-term growth potential of CBAM
through both new hires and building our acquisition pipeline.
Total managed assets grew 7% to £16.4 billion (31 July 2022: £15.3 billion),
driven by strong net inflows, partly offset by negative market performance.
Total client assets, which includes both advised and managed assets, increased
5% to £17.3 billion (31 July 2022: £16.6 billion).
The integration of PMN Financial Management into CBAM has outperformed initial
expectations, with the business having now been fully integrated and the
migration of assets expected to be completed by July 2024.
Movement in Client Assets
31 July 31 July
2023 2022
£ million £ million
Opening managed assets 15,302 15,588
Inflows 2,729 2,330
Outflows (1,411) (1,486)
Net inflows 1,318 844
Market movements (201) (1,130)
Total managed assets 16,419 15,302
Advised only assets 907 1,272
Total client assets(1) 17,326 16,574
Net flows as % of opening managed assets 9% 5%
1. Total client assets include £4.9 billion of assets (31 July 2022: £5.1
billion) that are both advised and managed.
Fund Performance
Our funds and segregated bespoke portfolios are designed to provide attractive
risk-adjusted returns for our clients, consistent with their long-term goals
and investment objectives. Fund performance has been mixed, reflecting
volatile markets across asset classes which has been the case throughout the
year. As a result, we have seen some of our funds outperform their peer group,
with others underperforming, mainly reflecting their exposure to exchange rate
movements.
Our Sustainable Funds and Net Zero Commitment
In March 2023, we created the Sustainable Select Fixed Income fund through
merging our existing Select Fixed Income fund and Sustainable Bond fund. This
new fund utilises an updated sustainable investment methodology, making use of
CBAM's experience and understanding of sustainable investment strategies
gained over recent years to target a reduction in CO2 emissions intensity
versus its benchmark.
Our Sustainable Select Fixed Income fund has seen good traction so far and we
are exploring options for enhancing further our sustainable offering.
In line with our commitment to actively contribute towards the UK government's
net zero climate goals, CBAM is a signatory of the Net Zero Asset Managers
initiative and is on track to disclose its net zero targets by the end of
September 2023.
Well Positioned for Future Growth
We remain confident that our vertically integrated, multi-channel business
model positions us well for ongoing demand for our services and the structural
growth opportunity presented by the wealth management industry.
Our focus remains on providing excellent service, building on the strength of
our client relationships, whilst investing in new hires and building our
pipeline of acquisitions to support the long-term growth potential of our
business. While CBAM is sensitive to financial market conditions, we remain
committed to driving growth both organically and through in-fill acquisitions.
Winterflood
Key Financials
2023 2022 Change
£ million £ million %
Operating income 75.3 95.2 (21)
Operating expenses (71.8) (81.1) (11)
Operating profit 3.5 14.1 (75)
Average bargains per day ('000) 60 81
Operating margin 5% 15%
Return on opening equity 2.6% 10.5%
Loss days 1 8
Performance impacted by continued slowdown in trading activity but well
positioned to benefit when market conditions improve
Winterflood is a leading UK market maker, delivering high-quality execution
services to execution platforms, stockbrokers, wealth managers and
institutional investors, as well as providing corporate advisory services to
investment trusts and outsourced dealing and custody services via Winterflood
Business Services ("WBS").
We have seen significant macroeconomic uncertainty over the year, with
geopolitical and economic events, particularly the ongoing war in Ukraine and
continual rises in the cost of debt, causing substantial market challenges.
Interest rates are at their highest since the 2008 financial crisis and,
collectively, this has negatively impacted investor confidence and appetite.
Against this backdrop, the domestically focused UK indices have suffered
sustained market declines, with the FTSE 250 and AIM All-Share index declining
5% and 17% respectively this year.
This year has seen subdued retail trading activity, particularly in higher
margin sectors (AIM and Smaller Companies) as investors turned to safer and
better performing sectors such as Fixed Income and Exchange-Traded Funds or
withdrew from the market as they await more certainty in the macroeconomic
environment. This sentiment inevitably led to reduced retail-driven trading
situations and our volumes have fallen as a result. Average daily bargains
reduced 26% to 60k (2022: 81k), although trading volumes remain marginally
above pre-pandemic levels (2019: 56k) and we have maintained our
market-leading position, trading over 280 billion shares in the year(1).
Trading income reduced to £58.6 million (2022: £80.7 million) as
diversification in trading sectors and the expertise of our traders, evidenced
by only one loss day (2022: eight loss days), helped mitigate the difficult
market environment.
Operating income decreased to £75.3 million (2022: £95.2 million), primarily
driven by lower trading revenues. All trading sectors reported a decline on
the prior year except Fixed Income, which benefited from volatility in bond
markets following the fallout from the UK mini-budget and changes in investor
risk appetite. We also saw a reduction in fee income generated by our
Investment Trusts Corporate team as corporate activity slowed market-wide as
the risk-off market sentiment impacted issuance and transaction volumes, with
just one IPO launched this year. Our Investment Trusts Corporate business,
which is corporate broker to over 50 investment trusts, delivered revenue of
£2.5 million (2022: £3.9 million), largely representing retainer fee income.
We are at the forefront of initiatives to simplify participation in equity,
debt and private markets for UK retail investors through our collaborations
with PrimaryBid and JP Jenkins, and our proprietary solution, Winterflood
Retail Access Platform ("WRAP").
WBS has continued its positive trajectory, growing AuA to £12.9 billion
(2022: £7.2 billion) despite sustained equity market declines. Net inflows
were £5.5 billion (2022: £1.3 billion) following the successful completion
of the planned migration of custody assets of Fidelity International in the
first quarter of 2023. WBS grew income 45% to £14.8 million (2022: £10.2
million), with recurring income up 38% to £14.1 million. We are confident
that WBS is well positioned for further growth, both organically and supported
by a solid pipeline of clients, and expect WBS to grow AuA to over £20
billion by 2026.
Operating expenses reduced 11% to £71.8 million (2022: £81.1 million) due to
decreased variable costs as the slowdown in activity led to lower staff
compensation and settlement fees. The reduction in income was not fully offset
by lower expenses, reflecting operational gearing in the business. Looking
ahead, Winterflood's variable cost base is expected to reflect a recovery in
income as investor confidence returns.
Operating profit decreased 75% to £3.5 million (2022: £14.1 million) against
a backdrop of difficult conditions and sustained market declines.
Winterflood has a long track record of trading profitably through a range of
conditions and we remain well positioned to retain our market position and
benefit when investor appetite returns. We continue to diversify our revenue
streams and explore growth opportunities to balance the cyclicality in the
trading business.
1. Bloomberg data covering 1 August 2022 to 31 July 2023.
Definitions
Adjusted: Adjusted measures are presented on a basis consistent with prior
periods and exclude amortisation of intangible assets on acquisition, to
present the performance of the group's acquired businesses consistent with its
other businesses; and any exceptional and other adjusting items which do not
reflect underlying trading performance
Assets under administration: Total assets for which Winterflood Business
Services provide custody and administrative services
Bad debt ratio: Impairment losses in the year as a percentage of average net
loans and advances to customers and operating lease assets
Bargains per day: Average daily number of Winterflood's trades with third
parties
Business as usual ("BAU") costs: Operating expenses excluding depreciation and
other costs related to investments
Bounce Back Loan Scheme ("BBLS"): UK government business lending scheme that
helped small and medium-sized businesses to borrow between £2,000 and
£50,000 (up to a maximum of 25% of their turnover)
Capital Requirements Regulation ("CRR"): Capital Requirements Regulation as
implemented in the PRA Rulebook CRR Instrument and the PRA Rulebook CRR Firms:
Leverage Instrument (collectively known as "CRR")
CET1 capital ratio: Measure of the group's CET1 capital as a percentage of
risk weighted assets, as required by CRR
Common equity tier 1 ("CET1") capital: Measure of capital as defined by the
CRR. CET1 capital consists of the highest quality capital including ordinary
shares, share premium account, retained earnings and other reserves, less
goodwill and certain intangible assets and other regulatory adjustments
Compensation ratio: Total staff costs as a percentage of adjusted operating
income
Coronavirus Business Interruption Loan Scheme ("CBILS"): UK government
business lending scheme that helped small and medium-sized businesses access
loans and other kinds of finance up to £5 million
Coronavirus Large Business Interruption Loan Scheme ("CLBILS"): UK government
business lending scheme that helped medium and large-sized businesses access
loans and other kinds of finance up to £200 million
Cost of funds: Interest expense incurred to support the lending activities
divided by the average net loans and advances to customers and operating lease
assets
Credit impaired: Where one or more events that have a detrimental impact on
the estimated future cash flows of a loan have occurred. Credit impaired
events are more severe than SICR triggers. Accounts which are credit impaired
will be allocated to
Stage 3
Discounting: The process of determining the present value of future payments
Dividend per share ("DPS"): Comprises the final dividend proposed for the
respective year, together with the interim dividend declared and paid in the
year
Earnings per share ("EPS"): Profit attributable to shareholders divided by
number of basic shares
Effective interest rate ("EIR"): The interest rate at which revenue is
recognised on loans and discounted to their carrying value over the life of
the financial asset
Effective tax rate ("ETR"): Tax on operating profit/(loss) as a percentage of
operating profit/(loss) on ordinary activities before tax
Expected credit loss ("ECL"): The unbiased probability-weighted average credit
loss determined by evaluating a range of possible outcomes and future economic
conditions
Expense/income ratio: Total adjusted operating expenses divided by operating
income
Exposure at default ("EAD"): The capital outstanding at the point of default
Financial Conduct Authority ("FCA"): A financial regulatory body in the UK,
regulating financial firms and maintaining integrity of the UK's financial
market
Forbearance: Forbearance occurs when a customer is experiencing financial
difficulty in meeting their financial commitments and a concession is granted,
by changing the terms of the financial arrangement, which would not otherwise
be considered
Funding allocated to loan book: Total available funding, excluding equity and
funding held for liquidity purposes
Gross carrying amount: Loan book before expected credit loss provision
High quality liquid assets ("HQLAs"): Assets which qualify for regulatory
liquidity purposes, including Bank of England deposits and sovereign and
central bank debt
HM Revenue & Customs ("HMRC"): The UK's tax, payments and customs
authority
Independent financial adviser ("IFA"): Professional offering independent,
whole of market advice to clients including investments, pensions, protection
and mortgages
Internal ratings based ("IRB") approach: A supervisor-approved method using
internal models, rather than standardised risk weightings, to calculate
regulatory capital requirements for credit risk
International Financial Reporting Standards ("IFRS"): Globally accepted
accounting standards issued by the IFRS Foundation and the International
Accounting Standards Board
Investment costs: Includes depreciation and other costs related to investment
in multi-year projects, new business initiatives and pilots and cyber
resilience. Excludes IFRS 16 depreciation
Leverage ratio: Tier 1 capital as a percentage of total balance sheet assets,
adjusted for certain capital deductions, including intangible assets, and
off-balance sheet exposures
Liquidity coverage ratio ("LCR"): Measure of the group's HQLAs as a percentage
of expected net cash outflows over the next
30 days in a stressed scenario
Loan to value ("LTV") ratio: For a secured or structurally protected loan, the
loan balance as a percentage of the total value of the asset
Loss day: Where aggregate gross trading book revenues are negative at the end
of a trading day
Loss given default ("LGD"): The amount lost on a loan if a customer defaults
Managed assets or assets under management ("AuM"): Total market value of
assets which are managed by Close Brothers Asset Management in one of our
investment solutions
Modelled expected credit loss provision: ECL = PD x LGD x EAD
Net carrying amount: Loan book value after expected credit loss provision
Net flows: Net flows as a percentage of opening managed assets calculated on
an annualised basis
Net interest margin ("NIM"): Operating income generated by lending activities,
including interest income net of interest expense, fees and commissions income
net of fees and commissions expense, and operating lease income net of
operating lease expense, less depreciation on operating lease assets, divided
by average net loans and advances to customers and operating lease assets
Net stable funding ratio ("NSFR"): Regulatory measure of the group's weighted
funding as a percentage of weighted assets
Net zero: Target of completely negating the amount of greenhouse gases
produced by reducing emissions or implementing methods for their removal
Operating margin: Adjusted operating profit divided by operating income
Personal Contract Plan ("PCP"): PCP is a form of vehicle finance where the
customer defers a significant portion of credit to the final repayment at the
end of the agreement, thereby lowering the monthly repayments compared to a
standard hire-purchase arrangement. At the final repayment date, the customer
has the option to: (a) pay the final payment and take the ownership of the
vehicle; (b) return the vehicle and not pay the final repayment; or (c)
part-exchange the vehicle with any equity being put towards the cost of a new
vehicle
Probability of default ("PD"): Probability that a customer will default on
their loan
Prudential Regulation Authority ("PRA"): A financial regulatory body,
responsible for regulating and supervising banks and other financial
institutions in the UK
Recovery Loan Scheme: Launched in April 2021 as a replacement to CBILS. Under
the terms of the scheme, businesses of any size that have been adversely
impacted by the Covid-19 pandemic can apply to borrow up to £10 million, with
accredited lenders receiving a government-backed guarantee of 80% on losses
that may arise
Return on assets: Adjusted operating profit attributable to shareholders
divided by total closing assets at the balance sheet date
Return on average tangible equity: Adjusted operating profit attributable to
shareholders divided by average total shareholder's equity, excluding
intangible assets
Return on net loan book ("RoNLB"): Adjusted operating profit from lending
activities divided by average net loans and advances to customers and
operating lease assets
Return on opening equity ("RoE"): Adjusted operating profit attributable to
shareholders divided by opening equity, excluding non-controlling interests
Revenue margin: Income from advice, investment management and related services
divided by average total client assets. Average total client assets calculated
as a two-point average
Risk weighted assets ("RWAs"): A measure of the amount of a bank's assets,
adjusted for risk in line with the CRR. It is used in determining the capital
requirement for a financial institution
Scope 1, 2 and 3 emissions: Categorisation of greenhouse gas emissions, as
defined by the Greenhouse Gas (GHG) Protocol, into direct emissions from owned
or controlled sources (Scope 1), indirect emissions from the generation of
purchased electricity, heating and cooling consumed by the reporting company
(Scope 2), and all other indirect emissions that occur in a company's value
chain (Scope 3)
Secured debt: Debt backed or secured by collateral
Senior debt: Represents the type of debt that takes priority over other
unsecured or more junior debt owed by the issuer. Senior debt is first to be
repaid ahead of other lenders or creditors
Significant increase in credit risk ("SICR"): An assessment of whether credit
risk has increased significantly since initial recognition of a loan using a
range of triggers. Accounts which have experienced a significant increase in
credit risk will be allocated to Stage 2
Standardised approach: Generic term for regulator-defined approaches for
calculating credit, operational and market risk capital requirements as set
out in the CRR
Subordinated debt: Represents debt that ranks below, and is repaid after
claims of, other secured or senior debt owed by the issuer
Task Force on Climate-related Financial Disclosures ("TCFD"): Regulatory
framework to improve and increase reporting of climate-related financial
information, including more effective and consistent disclosure of
climate-related risks and opportunities
Term funding: Funding with a remaining maturity greater than 12 months
Term Funding Scheme ("TFS"): The Bank of England's Term Funding Scheme
Term Funding Scheme for Small and Medium-sized Enterprises ("TFSME"): The Bank
of England's Term Funding Scheme with additional incentives for SMEs
Tier 2 capital: Additional regulatory capital that along with Tier 1 capital
makes up a bank's total regulatory capital. Includes qualifying subordinated
debt
Total client assets ("TCA"): Total market value of all client assets including
both managed assets and assets under advice and/or administration in the Asset
Management division
Total funding as % of loan book: Total funding divided by net loans and
advances to customers and operating lease assets
Total shareholder return ("TSR"): Measure of shareholder return including
share price appreciation and dividends, which are assumed to be re-invested in
the company's shares
Watch list: Internal risk management process for heightened monitoring of
exposures that are showing increased credit risk
Consolidated Income Statement
for the year ended 31 July 2023
Note 2023 2022
£ million
£ million
Interest income 897.5 690.0
Interest expense (304.9) (112.0)
Net interest income 592.6 578.0
Fee and commission income 262.9 259.5
Fee and commission expense (17.9) (17.2)
Gains less losses arising from dealing in securities 58.6 81.6
Other income 114.2 106.1
Depreciation of operating lease assets and other direct costs 10 (77.8) (71.9)
Non-interest income 340.0 358.1
Operating income 932.6 936.1
Administrative expenses (615.0) (598.0)
Impairment losses on financial assets 6 (204.1) (103.3)
Total operating expenses before amortisation of intangible assets on (819.1) (701.3)
acquisition
Operating profit before amortisation of intangible assets on acquisition 113.5 234.8
Amortisation of intangible assets on acquisition 9 (1.5) (2.0)
Operating profit before tax 112.0 232.8
Tax 3 (30.9) (67.6)
Profit after tax 81.1 165.2
Profit attributable to shareholders 81.1 165.2
Basic earnings per share 4 54.3p 110.4p
Diluted earnings per share 4 54.2p 109.9p
Interim dividend per share paid 5 22.5p 22.0p
Final dividend per share 5 45.0p 44.0p
Consolidated Statement of Comprehensive Income
for the year ended 31 July 2023
2023 2022
£ million
£ million
Profit after tax 81.1 165.2
Items that may be reclassified to income statement
Currency translation gains/(losses) 0.7 (0.5)
Gains on cash flow hedging 17.6 30.6
Losses on financial instruments classified at fair value through other (3.9) (1.1)
comprehensive income
Tax relating to items that may be reclassified (4.3) (7.9)
10.1 21.1
Items that will not be reclassified to income statement
Defined benefit pension scheme losses (5.7) (0.1)
Tax relating to items that will not be reclassified 1.6 0.3
(4.1) 0.2
Other comprehensive income, net of tax 6.0 21.3
Total comprehensive income 87.1 186.5
Attributable to
Shareholders 87.1 186.5
Consolidated Balance Sheet
at 31 July 2023
Note 31 July 31 July
2022
2023
£ million
£ million
Assets
Cash and balances at central banks 1,937.0 1,254.7
Settlement balances 707.0 799.3
Loans and advances to banks 330.3 165.4
Loans and advances to customers 6 9,255.0 8,858.9
Debt securities 7 307.6 612.8
Equity shares 8 29.3 28.4
Loans to money brokers against stock advanced 37.6 48.4
Derivative financial instruments 88.5 71.2
Intangible assets 9 263.7 252.0
Property, plant and equipment 10 357.1 322.5
Current tax assets 42.3 47.0
Deferred tax assets 10.8 32.5
Prepayments, accrued income and other assets 184.1 185.2
Total assets 13,550.3 12,678.3
Liabilities
Settlement balances and short positions 11 695.9 796.1
Deposits from banks 12 141.9 160.5
Deposits from customers 12 7,724.5 6,770.4
Loans and overdrafts from banks 12 651.9 622.7
Debt securities in issue 12 2,012.6 2,060.9
Loans from money brokers against stock advanced 4.8 -
Derivative financial instruments 195.9 89.2
Accruals, deferred income and other liabilities 303.0 334.5
Subordinated loan capital 174.9 186.5
Total liabilities 11,905.4 11,020.8
Equity
Called up share capital 38.0 38.0
Retained earnings 1,608.5 1,628.4
Other reserves (1.6) (8.9)
Total shareholders' equity 1,644.9 1,657.5
Total equity 1,644.9 1,657.5
Total equity and liabilities 13,550.3 12,678.3
Consolidated Statement of Changes in Equity
for the year ended 31 July 2023
Other reserves
Called up share capital Retained earnings FVOCI reserve Share- Exchange movements reserve Cash flow hedging reserve Total attributable to equity holders Non- Total
£ million
£ million
£ million
based payments reserve £ million
£ million
£ million
£ million
controlling interests
equity
£ million
£ million
At 1 August 2021 38.0 1,555.5 0.8 (22.4) (1.3) (0.3) 1,570.3 (1.0) 1,569.3
Profit for the year - 165.2 - - - - 165.2 - 165.2
Other comprehensive income/(expense) - 0.2 (0.7) - (0.2) 22.0 21.3 - 21.3
Total comprehensive income for the year - 165.4 (0.7) - (0.2) 22.0 186.5 - 186.5
Dividends paid (note 5) - (95.5) - - - - (95.5) - (95.5)
Shares purchased - - - (9.5) - - (9.5) - (9.5)
Shares released - - - 4.9 - - 4.9 - 4.9
Other movements - 4.1 - (2.2) - - 1.9 1.0 2.9
Income tax - (1.1) - - - - (1.1) - (1.1)
At 31 July 2022 38.0 1,628.4 0.1 (29.2) (1.5) 21.7 1,657.5 - 1,657.5
Profit for the year - 81.1 - - - - 81.1 - 81.1
Other comprehensive (expense)/income - (4.1) (2.8) - 0.2 12.7 6.0 - 6.0
Total comprehensive income for the year - 77.0 (2.8) - 0.2 12.7 87.1 - 87.1
Dividends paid (note 5) - (99.1) - - - - (99.1) - (99.1)
Shares purchased - - - (5.0) - - (5.0) - (5.0)
Shares released - - - 5.6 - - 5.6 - 5.6
Other movements - 2.3 - (3.4) - - (1.1) - (1.1)
Income tax - (0.1) - - - - (0.1) - (0.1)
At 31 July 2023 38.0 1,608.5 (2.7) (32.0) (1.3) 34.4 1,644.9 - 1,644.9
Consolidated Cash Flow Statement
for the year ended 31 July 2023
Note 2023 2022
£ million
£ million
Net cash inflow from operating activities 16(a) 1,021.4 158.7
Net cash (outflow)/inflow from investing activities
Purchase of:
Property, plant and equipment (8.7) (7.1)
Intangible assets - software (53.2) (51.3)
Subsidiaries 16(b) (0.5) (0.1)
Sale of:
Subsidiaries 16(c) - 0.1
(62.4) (58.4)
Net cash inflow before financing activities 959.0 100.3
Financing activities
Purchase of own shares for employee share award schemes (5.0) (9.5)
Equity dividends paid (99.1) (95.5)
Interest paid on subordinated loan capital and debt financing (10.9) (10.4)
Payment of lease liabilities (16.2) (15.1)
Issuance of senior bond 248.5 -
Redemption of senior bond (250.0) -
Redemption of subordinated loan capital - (23.4)
Net increase/(decrease) in cash 826.3 (53.6)
Cash and cash equivalents at beginning of year 1,383.0 1,436.6
Cash and cash equivalents at end of year 16(d) 2,209.3 1,383.0
The Notes
1. Basis of Preparation and Accounting Policies
The financial information contained in this announcement does not constitute
the statutory accounts for the years ended 31 July 2023 or 31 July 2022 within
the meaning of section 435 of the Companies Act 2006, but is derived from
those accounts. The accounting policies used are consistent with those set out
in the Annual Report 2022.
The financial statements are prepared on a going concern basis. Whilst the
financial information has been prepared in accordance with the recognition and
measurement criteria of International Financial Reporting Standards ("IFRS"),
this announcement does not itself contain sufficient information to comply
with IFRS 9.
The financial information for the year ended 31 July 2023 has been derived
from the financial statements of Close Brothers Group plc for that year.
Statutory accounts for 2022 have been delivered to the Registrar of Companies
and those for 2023 will be delivered following the company's Annual General
Meeting. The group's auditor, PricewaterhouseCoopers LLP, will report on the
2023 accounts: their report is expected to be unqualified, and is not expected
to draw attention to any matters by way of emphasis or contain statements
under Section 498(2) or (3) of the Companies Act 2006.
Finance (No.2) Act 2023 was substantively enacted in June 2023, and introduced
the Pillar Two global minimum tax rate of 15% and a UK domestic minimum top-up
tax with effect from 1 January 2024. The group has adopted the IAS 12
exception from recognition and disclosure regarding the impact on deferred tax
assets and liabilities arising from this legislation. The company has adopted
the same exception under FRS 102.
Critical accounting judgements and estimates
The reported results of the group are sensitive to the judgements, estimates
and assumptions that underlie the application of its accounting policies and
preparation of its financial statements. UK company law and IFRS require the
directors, in preparing the group's financial statements, to select suitable
accounting policies, apply them consistently and make judgements, estimates
and assumptions that are reasonable.
The group's estimates and assumptions are based on historical experience and
reasonable expectations of future events and are reviewed on an ongoing basis.
Actual results in the future may differ from the amounts estimated due to the
inherent uncertainty.
The group's critical accounting judgements, made in applying its accounting
policies, and the key sources of estimation uncertainty that may have a
significant risk of causing a material adjustment within the next financial
year are set out below.
The impact of climate change on the group's judgements, estimates and
assumptions has been considered in preparing these financial statements. While
no material impact has been identified, climate risk continues to be monitored
on an ongoing basis.
Critical accounting judgements
The critical accounting judgements of the group relate to expected credit loss
provisions calculated under IFRS 9 and are as follows.
Significant increase in credit risk
Assets are transferred from Stage 1 to Stage 2 when there has been a
significant increase in credit risk since initial recognition. Typically, the
group assesses whether a significant increase in credit risk has occurred
based on a quantitative and qualitative assessment, with a "30 days past due"
backstop.
Due to the diverse nature of the group's lending businesses, the specific
indicators of a significant increase in credit risk vary by business and may
include some or all of the following factors:
• quantitative assessment: the lifetime probability of default
("PD") has increased by more than an agreed threshold relative to the
equivalent at origination. Thresholds are based on a fixed number of risk
grade movements which are bespoke to each business to ensure that the
increased risk since origination is appropriately captured;
• qualitative assessment: events or observed behaviour indicate
credit deterioration. This includes a wide range of information that is
reasonably available including individual credit assessments of the financial
performance of borrowers as appropriate during routine reviews, plus
forbearance and watch list information; or
• backstop criteria: the "30 days past due" backstop is met.
Definition of default
The definition of default is an important building block for expected credit
loss models and is considered a key judgement. A default is considered to have
occurred if any unlikeliness to pay criterion is met or when a financial asset
meets a "90 days past due" backstop. While some criteria are factual (e.g.
administration, insolvency or bankruptcy), others require a judgemental
assessment of whether the borrower has financial difficulties which are
expected to have a detrimental impact on their ability to meet contractual
obligations. A change in the definition of default may have a material impact
on the expected credit loss provision.
Key sources of estimation uncertainty
The key sources of estimation uncertainty of the group relate to expected
credit loss provisions and goodwill and are as follows:
• Two key model estimates, being time to recover periods and
recovery rates, underpinning the expected credit loss provision of Novitas.
The key Novitas estimates in the prior year were case failure rates and
recovery rates;
• Forward-looking macroeconomic information incorporated into
expected credit loss models. This was also a key estimate in the prior year;
• Adjustments by management to model calculated expected credit
losses due to limitations in the group's expected credit loss models or input
data, which may be identified through ongoing model monitoring and validation
of models. This is a new key estimate this year due to an increase in the size
of the adjustment; and
• Estimate of future cash flow forecasts in the calculation of
value in use for the testing of goodwill for impairment in relation to the
Winterflood Securities cash generating unit. This is a new key estimate this
year due to increased market uncertainty.
Novitas loans
Since 31 July 2022, there has been an increase in the expected credit loss
provision in Novitas. The two assumptions requiring the most significant
judgement relate to expected recovery rates and time to recovery periods in
Novitas. During 2021 and 2022, expected case failure rates were considered a
significant judgement. Due to the migration of loans to Stage 3, as explained
below, expected case failure rates are no longer considered to be a
significant judgement while time to recovery periods have become a significant
judgement.
Case failure rates represent a forward-looking probability assessment of
successful case outcomes through court proceedings or out of court
settlements. Recovery rates represent the level of interest and capital that
is covered by an insurance policy and expected to be recoverable once a case
fails. Time to recovery periods represent management's view on timing using
weighted probabilities.
Novitas provides funding to individuals who wish to pursue legal cases. The
majority of the Novitas portfolio, and therefore provision, relates to civil
litigation cases. To protect customers in the event that their case fails, it
was a condition of the Novitas loan agreements that an individual purchased an
After the Event ("ATE") insurance policy which covered the loan.
As previously announced, following a strategic review, in July 2021 the group
decided to cease permanently the approval of lending to new customers across
all of the products offered by Novitas and withdraw from the legal services
financing market. Since that time, the Novitas loan book has been in run-off,
and the business has continued to work with solicitors and insurers, with a
focus on supporting existing customers and managing the existing book to
ensure good customer outcomes, where it is within Novitas' ability to do so.
In the first half of the financial year under review, management reviewed and
updated its assumptions for expected case failure rates, expected time to
recover periods and expected recovery rates to reflect experienced credit
performance and ongoing dialogue with customers' insurers. This included
initiating formal legal action against one of the ATE insurers regarding the
potential recoverability of funds in relation to failed cases and considering
its position in respect of other insurers. As a result, a number of updates
were made to the expected credit loss provision calculation resulting in an
increase of £70.8 million to £184.1 million (31 July 2022: £113.3 million).
The increase to the expected credit loss provision is net of write-offs
previously provided for and does not include write-offs and costs taken
directly to the income statement.
Based on the current position, the majority of loans in the portfolio have
been assessed as credit-impaired and have been migrated to Stage 3, with
expected case failure rates increased accordingly. Expected credit losses for
the portfolio have been calculated by comparing the gross loan balance to
expected cash flows discounted at the original effective interest rate, over
an appropriate time to recovery period. In line with IFRS 9, a proportion of
the expected credit loss is expected to unwind, over the estimated time to
recover period, to interest income, which reflects the requirement to
recognise interest income on Stage 3 loans on a net basis.
Since 31 July 2022, a material increase in the expected case failure rate
assumptions and decrease in the expected recovery rate assumptions have been
recognised and the recoverability of interest on relevant loans has been
reassessed.
Given that the majority of the Novitas portfolio is in Stage 3, the key
sources of estimation uncertainty for the portfolio's expected credit loss
provision are time to recover periods and recovery rates. On this basis
management have assessed and completed sensitivity analysis when compared to
the expected credit loss provision for Novitas of £184.1 million (31 July
2022: £113.3 million). At 31 July 2023, a 10% absolute deterioration or
improvement in recovery rates would increase or decrease the ECL provision by
£11.0 million. Separately, a 12-month improvement in the time to recover
period will reduce the ECL provision by £12.1 million, while a 12-month delay
in the time to recover period will increase the ECL provision by £10.0
million.
Forward-looking information
Determining expected credit losses under IFRS 9 requires the incorporation of
forward-looking macroeconomic information that is reasonable, supportable and
includes assumptions linked to economic variables that impact losses in each
portfolio. The introduction of macroeconomic information introduces additional
volatility to provisions.
In order to calculate forward-looking provisions, economic scenarios are
sourced from Moody's Analytics. These scenarios cover a range of plausible
economic conditions that are then used to project potential credit outcomes
for each portfolio. An overview of these scenarios using key macroeconomic
indicators is provided below. Ongoing benchmarking of the scenarios to other
economic providers is carried out monthly to provide management with comfort
on Moody's Analytics scenario paths.
Five different projected economic scenarios are currently considered to cover
a range of possible outcomes. These include a baseline scenario, which
reflects the best view of future economic events. In addition, one upside
scenario and three downside scenario paths are defined relative to the
baseline. Management assigns the scenarios a probability weighting to reflect
the likelihood of specific scenarios, and therefore loss outcomes,
materialising, using a combination of quantitative analysis and expert
judgement.
The impact of forward-looking information varies across the group's lending
businesses because of the differing sensitivity of each portfolio to specific
macroeconomic variables. This is reflected through the development of bespoke
macroeconomic models that recognise the specific response of each business to
the macroeconomic environment.
The modelled impact of macroeconomic scenarios and their respective weightings
is reviewed by business experts in relation to stage allocation and coverage
ratios at the individual and portfolio level, incorporating management's
experience and knowledge of customers, the sectors in which they operate, and
the assets financed.
This includes assessment of the reaction of the ECL in the context of the
prevailing and forecast economic conditions, for example where currently
higher interest rates and inflationary conditions exist compared to recent
periods.
Economic forecasts have evolved over the course of 2023 and reflect the
continued economic challenges and uncertainty. Forecasts deployed in IFRS 9
macroeconomic models are updated on a monthly basis. At 31 July 2023, the
latest baseline scenario forecasts GDP growth of 0.5% in calendar year 2023
and an average base rate of 4.9% across calendar year 2023. CPI is forecast to
be 5.2% in calendar year 2023 in the baseline scenario, with 1.5% forecast in
the protracted downside scenario over the same period.
At 31 July 2022, the scenario weightings were: 30% strong upside, 32.5%
baseline, 20% mild downside, 10.5% moderate downside and 7% protracted
downside. As economic forecasts are considered to appropriately recognise
deterioration in the macroeconomic environment, no change has been made to the
weightings ascribed to the scenarios since 31 July 2022.
Given the current economic uncertainty, further analysis has been undertaken
to assess the appropriateness of the five scenarios used. This included
benchmarking the baseline scenario to consensus economic views, as well as
consideration of an additional forecast related to stagflation, which could be
considered as an alternative downside scenario.
Compared to the scenarios in use in the expected credit losses calculation,
the stagflation scenario includes a longer period of higher interest rates
coupled with a shallower but extended impact on GDP. Due to the relatively
short tenor of the portfolios the stagflation scenario is considered to be of
less relevance than those deployed. This is supported by the fact that, due to
the higher severity of recessionary factors in the existing scenarios, using
the stagflation scenario instead of the moderate or protracted downside
scenario would result in lower expected credit losses.
The final scenarios deployed reflect overall deterioration in the UK economic
outlook relative to 31 July 2022, and factor in recent developments including
dampened GDP growth for 2024 and 2025 and a Bank of England base rate peak in
late 2023 following persistent high levels of inflation. Under the baseline
scenario, UK headline CPI inflation continues to fall from its peak owing to
sustained base rate increases and eased supply chain pressures. House price
outlook includes contraction across all scenarios; however, house prices
return to growth sooner than previously anticipated. Unemployment rate
forecasts have marginally improved compared to 31 July 2022.
FY 2023 and FY 2022 scenario forecasts and weights
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
2023 2024 2023 2024 2023 2024 2023 2024 2023 2024
At 31 July 2023
UK GDP Growth 0.5% 0.3% 1.3% 3.0% (0.2%) (2.3%) (0.6%) (4.8%) (0.8%) (6.2%)
UK Unemployment 4.1% 4.4% 3.9% 3.9% 4.2% 4.8% 4.4% 6.5% 4.5% 7.7%
UK HPI Growth (6.3%) (1.4%) (0.4%) 8.3% (9.1%) (6.9%) (10.8%) (13.2%) (12.6%) (20.1%)
BoE Base Rate 4.9% 5.5% 4.9% 5.7% 4.8% 4.8% 4.7% 4.2% 4.5% 3.6%
Consumer Price Index 5.2% 2.2% 4.8% 2.2% 3.8% 1.2% 3.0% (0.3%) 1.5% (2.3%)
Weighting 32.5% 30% 20% 10.5% 7%
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
2022 2023 2022 2023 2022 2023 2022 2023 2022 2023
At 31 July 2022
UK GDP Growth 3.4% 0.8% 4.1% 2.9% 2.7% (1.8%) 2.4% (4.4%) 2.1% (5.9%)
UK Unemployment 3.8% 4.1% 3.6% 3.6% 4.0% 4.6% 4.1% 6.2% 4.2% 7.4%
UK HPI Growth 4.3% 2.6% 10.9% 12.7% 1.1% (3.1%) (0.5%) (9.1%) (2.4%) (15.9%)
BoE Base Rate 1.1% 1.8% 1.1% 1.7% 1.3% 1.0% 1.4% 1.1% 1.5% 1.2%
Consumer Price Index 10.7% 2.8% 10.3% 2.8% 12.3% 0.4% 14.2% 0.2% 17.1% (2.2%)
Weighting 32.5% 30% 20% 10.5% 7%
Notes:
UK GDP growth: National Accounts Annual Real Gross Domestic Product,
Seasonally Adjusted - year-on-year change (%)
UK unemployment: ONS Labour Force Survey, Seasonally Adjusted - Average (%)
UK HPI growth: Average nominal house prices, Land Registry, Seasonally
Adjusted - Q4-to-Q4 change (%)
BoE base rate: Bank of England base rate - Average (%)
Consumer Price Index: ONS, All items, annual inflation - Q4-to-Q4 change (%)
Five-year average (calendar year 2023 - 2027)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
At 31 July 2023
UK GDP Growth 0.9% 1.7% 0.5% 0.0% (0.1%)
UK Unemployment 4.4% 3.9% 4.6% 6.4% 7.3%
UK HPI Growth 0.5% 2.1% (1.1%) (2.9%) (5.4%)
BoE Base Rate 3.8% 3.8% 3.5% 2.8% 2.3%
Consumer Price Index 2.6% 2.6% 2.1% 1.6% 0.7%
Weighting 32.5% 30% 20% 10.5% 7%
Five-year average (calendar year 2022 - 2026)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
At 31 July 2022
UK GDP Growth 1.2% 1.7% 0.8% 0.2% (0.1%)
UK Unemployment 4.4% 3.8% 4.6% 6.4% 7.2%
UK HPI Growth 0.1% 1.8% (1.3%) (2.5%) (4.6%)
BoE Base Rate 2.0% 2.0% 1.5% 0.9% 0.6%
Consumer Price Index 3.8% 3.8% 3.7% 3.6% 3.4%
Weighting 32.5% 30% 20% 10.5% 7%
Notes:
UK GDP growth: National Accounts Annual Real Gross Domestic Product,
Seasonally Adjusted - CAGR (%)
UK unemployment: ONS Labour Force Survey, Seasonally Adjusted - Average (%)
UK HPI growth: Average nominal house prices, Land Registry, Seasonally
Adjusted - CAGR (%)
BoE base rate: Bank of England base rate - Average (%)
Consumer Price Index: ONS, All items, annual inflation - CAGR (%)
The forecasts represent an economic view at 31 July 2023, after which the
economic uncertainty has continued. These trends, including the risk of
further interest rate rises, and their impact on scenarios and weightings, are
subject to ongoing monitoring by management.
The tables above shows economic assumptions within each scenario, and the
weighting applied to each at 31 July 2023. The metrics shown are key UK
economic indicators, chosen to describe the economic scenarios. These are the
main metrics used to set scenario paths, which then influence a wide range of
additional metrics that are used in expected credit loss models. The first
tables show the forecasts of the key metrics for the scenarios utilised for
calendar years 2022 and 2023. The subsequent tables show averages and
peak-to-trough ranges for the same key metrics over the five-year period from
2023 to 2027.
These periods have been included as they demonstrate the short-, medium- and
long-term outlooks for the key macroeconomic indicators which form the basis
of the scenario forecasts. The portfolio has an average residual maturity of
16 months, with c.98% of loan value having a maturity of five years or less.
The tables below provide a summary for the five-year period (calendar year
2023-2027) of the peak-to-trough range of values of the key UK economic
variables used within the economic scenarios at 31 July 2023 and 31 July 2022:
Five-year period (calendar year 2023 - 2027)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
At 31 July 2023
UK GDP Growth 4.6% 0.1% 8.7% 0.1% 2.5% (3.0%) 0.3% (5.9%) 0.3% (8.1%)
UK Unemployment 4.6% 3.9% 4.1% 3.7% 4.9% 3.9% 7.3% 3.9% 8.5% 3.9%
UK HPI Growth 2.6% (7.8%) 12.9% (3.1%) (0.5%) (15.4%) (0.5%) (24.0%) (0.5%) (32.1%)
BoE Base Rate 5.8% 2.3% 5.9% 2.3% 5.4% 2.2% 5.2% 1.3% 5.2% 0.6%
Consumer Price Index 10.2% 1.8% 10.2% 1.8% 10.2% 0.8% 10.2% (1.0%) 10.2% (3.8%)
Weighting 32.5% 30% 20% 10.5% 7%
Five-year period (calendar year 2022 - 2026)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
At 31 July 2022
UK GDP Growth 6.3% 0.4% 9.0% 0.4% 4.1% (2.6%) 1.0% (5.1%) 0.8% (6.9%)
UK Unemployment 4.8% 3.7% 4.2% 3.5% 4.8% 3.7% 7.4% 3.7% 8.4% 3.7%
UK HPI Growth 2.0% (5.0%) 16.7% (1.1%) 2.0% (11.7%) 2.0% (17.9%) 2.0% (26.0%)
BoE Base Rate 2.5% 0.5% 2.5% 0.5% 2.5% 0.1% 2.4% 0.1% 2.6% 0.1%
Consumer Price Index 10.7% 2.0% 10.3% 2.0% 12.3% 0.4% 14.2% 0.1% 17.1% (2.2%)
Weighting 32.5% 30% 20% 10.5% 7%
Notes:
UK GDP growth: Maximum and minimum quarterly GDP as a percentage change from
start of period (%)
UK unemployment: Maximum and minimum unemployment rate (%)
UK HPI growth: Maximum and minimum average nominal house price as a percentage
change from start of period (%)
BoE base rate: Maximum and minimum Bank of England base rate (%)
Consumer Price Index: Maximum and minimum inflation rate over the five-year
period (%).
The following charts below represent the quarterly forecast data included in
the above tables incorporating actual metrics up to 31 July 2023. The dark
blue line shows the baseline scenario, while the other lines represent the
various upside and downside scenarios.
Scenario sensitivity analysis
The expected credit loss provision is sensitive to judgement and estimations
made with regard to the selection and weighting of multiple economic
scenarios. As a result, management has assessed and considered the sensitivity
of the provision as follows:
• For the majority of the portfolios, the modelled expected
credit loss provision has been recalculated under the upside strong and
downside protracted scenarios described above, applying a 100% weighting to
each scenario in turn. The change in provision requirement is driven by the
movement in risk metrics under each scenario and resulting impact on stage
allocation.
• Expected credit losses based on a simplified approach, which
do not utilise a macroeconomic model and require expert judgement, are
excluded from the sensitivity analysis.
• In addition to the above, key considerations for the
sensitivity analysis are set out below, by segment:
• In Commercial, the sensitivity analysis excludes Novitas, which
is subject to a separate approach, as it is deemed more sensitive to credit
factors than macroeconomic factors.
• In Retail, the sensitivity analysis does not apply further
stress to the expected credit loss provision on loans and advances to
customers in Stage 3, because the measurement of expected credit losses is
considered more sensitive to credit factors specific to the borrower than
macroeconomic scenarios.
• In Property, the sensitivity analysis excludes individually
assessed provisions, and certain sub-portfolios which are deemed more
sensitive to credit factors than the macroeconomic scenarios.
Based on the above analysis, at 31 July 2023, application of 100% weighting to
the upside strong scenario would decrease the expected credit loss by £18.1
million whilst application of 100% weighting to the downside protracted
scenario would increase the expected credit loss by £32.7 million, driven by
the aforementioned changes in risk metrics and stage allocation of the
portfolios.
When performing sensitivity analysis there is a high degree of estimation
uncertainty. On this basis, 100% weighted expected credit loss provisions
presented for the upside and downside scenarios should not be taken to
represent the lower or upper range of possible and actual expected credit loss
outcomes. The recalculated expected credit loss provision for each of the
scenarios should be read in the context of the sensitivity analysis as a whole
and in conjunction with the narrative disclosures provided in note 6. The
modelled impact presented is based on gross loans and advances to customers at
31 July 2023; it does not incorporate future changes relating to performance,
growth or credit risk. In addition, given the change in the macroeconomic
conditions, underlying modelled provisions and methodology, and refined
approach to adjustments, comparison between the sensitivity results at 31 July
2023 and 31 July 2022 is not appropriate.
The economic environment remains uncertain and future impairment charges may
be subject to further volatility, including from changes to macroeconomic
variable forecasts impacted by geopolitical tensions and sustained cost of
living pressures.
Use of Adjustments
Limitations in the group's expected credit loss models or input data may be
identified through ongoing model monitoring and validation of models. In
certain circumstances, management make appropriate adjustments to
model-calculated expected credit losses. These adjustments are based on
management judgements or quantitative back-testing to ensure expected credit
loss provisions adequately reflect all known information. These adjustments
are generally determined by considering the attributes or risks of a financial
asset which are not captured by existing expected credit loss model outputs.
Management adjustments are actively monitored, reviewed, and incorporated into
future model developments where applicable.
Macroeconomic forecasts continue to react to a range of external factors
including the ongoing conflict in Ukraine, government attempts to address cost
of living and inflationary pressures, and long-term impacts of the pandemic.
In response, our use of adjustments has evolved. In particular, adjustments
have been applied in the second half of the year in response to improvements
in macroeconomic forecasts that resulted in releases in modelled provisions. A
number of these releases were considered premature or counterintuitive by
management and adjustments have been made as a result. These adjustments
recognise the ongoing uncertainty associated with the current environment.
The approach to adjustments continues to reflect the use of expert management
judgement which incorporates management's experience and knowledge of
customers, the areas in which they operate, and the underlying assets
financed.
The need for adjustments will continue to be monitored as new information
emerges which might not be recognised in existing models.
At 31 July 2023, £17.0 million (31 July 2022: £(2.8) million) of the
expected credit loss provision was attributable to adjustments.
2. Segmental Analysis
The directors manage the group by class of business and present the segmental
analysis on that basis. The group's activities are presented in five (2022:
five) operating segments: Commercial, Retail, Property, Asset Management and
Securities.
In the segmental reporting information that follows, Group consists of central
functions as well as various non-trading head office companies and
consolidation adjustments and is set out in order that the information
presented reconciles to the consolidated income statement. The Group balance
sheet primarily includes treasury assets and liabilities comprising cash and
balances at central banks, debt securities, customer deposits and other
borrowings.
Divisions continue to charge market prices for the limited services rendered
to other parts of the group. Funding charges between segments take into
account commercial demands. More than 90% of the group's activities, revenue
and assets are located in the UK.
Summary income statement for the year ended 31 July 2023
Banking
Commercial Retail Property Asset Securities Group Total
£ million
£ million
£ million
Management
£ million
£ million
£ million
£ million
Summary income statement
for the year ended 31 July 2023
Net interest income/(expense) 251.2 218.4 117.1 6.7 0.5 (1.3) 592.6
Non-interest income 96.6 29.7 0.8 138.1 74.8 - 340.0
Operating income/(expense) 347.8 248.1 117.9 144.8 75.3 (1.3) 932.6
Administrative expenses (171.5) (142.8) (26.5) (123.3) (67.5) (22.2) (553.8)
Depreciation and amortisation (22.9) (21.6) (4.4) (5.5) (4.3) (2.5) (61.2)
Impairment losses on financial assets (137.5) (49.0) (17.5) (0.1) - - (204.1)
Total operating expenses before amortisation of intangible assets on (331.9) (213.4) (48.4) (128.9) (71.8) (24.7) (819.1)
acquisition
Adjusted operating profit/(loss)(1) 15.9 34.7 69.5 15.9 3.5 (26.0) 113.5
Amortisation of intangible assets on acquisition - - - (1.5) - - (1.5)
Operating profit/(loss) before tax 15.9 34.7 69.5 14.4 3.5 (26.0) 112.0
External operating income/(expense) 451.1 308.6 170.3 144.2 75.3 (216.9) 932.6
Inter segment operating (expense)/income (103.3) (60.5) (52.4) 0.6 - 215.6 -
Segment operating income/(expense) 347.8 248.1 117.9 144.8 75.3 (1.3) 932.6
1. Adjusted operating profit/(loss) is stated before amortisation of
intangible assets on acquisition and tax.
The Commercial operating segment above includes Novitas, which ceased lending
to new customers in July 2021 following a strategic review. Novitas recorded
an operating loss of £84.2 million (2022: loss of £39.3 million), driven by
impairment losses of £116.8 million (2022: £60.7 million).
Novitas' income was £18.9 million (2022: £36.0 million) and expenses were
£8.7 million (2022: £14.6 million). In line with IFRS 9's requirement to
recognise interest income on Stage 3 loans on a net basis, income includes the
partial unwinding over time of the expected credit loss recognised in the year
following the transfer of the majority of loans to Stage 3.
Summary balance sheet information at 31 July 2023
Banking
Commercial Retail Property Asset Management Securities Group(2) Total
£ million
£ million
£ million
£ million
£ million
£ million £ million
Summary balance sheet information at
31 July 2023
Total assets(1) 4,821.3 3,001.8 1,703.1 177.9 870.5 2,975.7 13,550.3
Total liabilities - - - 64.1 778.1 11,063.2 11,905.4
1. Total assets for the Banking operating segments comprise the loan book
and operating lease assets only. The Commercial operating segment includes the
net loan book of Novitas of £59.9 million.
2. Balance sheet includes £2,977.4 million assets and £11,151.9 million
liabilities attributable to the Banking division primarily comprising the
treasury balances described in the second paragraph of this note.
Equity is allocated across the group as set out below. Banking division
equity, which is managed as a whole rather than on a segmental basis, reflects
loan book and operating lease assets of £9,526.2 million, in addition to
assets and liabilities of £2,977.4 million and £11,151.9 million
respectively primarily comprising treasury balances which are included within
the Group column above.
Banking Asset Securities Group Total
£ million Management £ million £ million £ million
£ million
Equity 1,351.7 113.8 92.4 87.0 1,644.9
Other segmental information for the year ended 31 July 2023
Banking
Commercial Retail Property Asset Securities Group Total
Management
Other segmental information for the year
ended 31 July 2023
Employees (average number)(1) 1,450 1,194 201 814 320 81 4,060
1. Banking segments are inclusive of a central function headcount
allocation.
Summary income statement for the year ended 31 July 2022
Banking
Commercial Retail Property Asset Securities Group Total
£ million
£ million
£ million
£ million
Management £ million £ million
£ million
Summary income statement
for the year ended 31 July 2022
Net interest income/(expense) 257.1 210.8 112.1 (0.7) (1.1) (0.2) 578.0
Non-interest income 86.3 26.2 0.6 148.7 96.3 - 358.1
Operating income/(expense) 343.4 237.0 112.7 148.0 95.2 (0.2) 936.1
Administrative expenses (158.3) (131.3) (27.0) (120.7) (77.2) (25.8) (540.3)
Depreciation and amortisation (21.7) (20.3) (4.0) (5.6) (3.9) (2.2) (57.7)
Impairment losses on financial assets (72.4) (24.4) (6.5) - - - (103.3)
Total operating expenses before amortisation of intangible assets on (252.4) (176.0) (37.5) (126.3) (81.1) (28.0) (701.3)
acquisition
Adjusted operating profit/(loss)(1) 91.0 61.0 75.2 21.7 14.1 (28.2) 234.8
Amortisation of intangible assets on acquisition (0.1) - - (1.9) - - (2.0)
Operating profit/(loss) before tax 90.9 61.0 75.2 19.8 14.1 (28.2) 232.8
External operating income/(expense) 391.7 268.3 129.4 148.1 95.2 (96.6) 936.1
Inter segment operating (expense)/income (48.3) (31.3) (16.7) (0.1) - 96.4 -
Segment operating income/(expense) 343.4 237.0 112.7 148.0 95.2 (0.2) 936.1
1. Adjusted operating profit/(loss) is stated before amortisation of
intangible assets on acquisition and tax.
Summary balance sheet information at 31 July 2022
Banking
Commercial Retail Property Asset Securities Group(2) Total
£ million
£ million
£ million
Management
£ million £ million £ million £ million
Summary balance sheet information at 31 July 2022
Total assets(1) 4,561.4 3,064.0 1,473.5 172.8 972.3 2,434.3 12,678.3
Total liabilities - - - 70.5 880.6 10,069.7 11,020.8
1. Total assets for the Banking operating segments comprise the loan book
and operating lease assets only. The Commercial operating segment includes the
net loan book of Novitas of £159.4 million.
2. Balance sheet includes £2,425.0 million assets and £10,181.9 million
liabilities attributable to the Banking division primarily comprising the
treasury balances described in the second paragraph of this note.
Equity is allocated across the group as set out below. Banking division
equity, which is managed as a whole rather than on a segmental basis, reflects
loan book and operating lease assets of £9,098.9 million, in addition to
assets and liabilities of £2,425.0 million and £10,181.9 million
respectively primarily comprising treasury balances which are included within
the Group column above.
Banking Asset Securities Group Total
Management
£ million
£ million £ million £ million
£ million
Equity 1,342.0 102.3 91.7 121.5 1,657.5
Other segmental information for the year ended 31 July 2022
Banking
Commercial Retail Property Asset Management Securities Group Total
Other segmental information
for the year ended 31 July 2022
Employees (average number)(1) 1,348 1,153 190 722 318 79 3,810
1. Banking segments are inclusive of a central function headcount
allocation.
3. Taxation
2023 2022
£ million
£ million
Tax charged/(credited) to the income statement
Current tax:
UK corporation tax 18.1 53.7
Foreign tax 2.3 1.9
Adjustments in respect of previous years (8.2) (2.8)
12.2 52.8
Deferred tax:
Deferred tax charge for the current year 11.4 11.8
Adjustments in respect of previous years 7.3 3.0
30.9 67.6
Tax on items not (credited)/charged to the income statement
Current tax relating to:
Share-based payments (0.2) -
Deferred tax relating to:
Cash flow hedging 4.9 8.6
Defined benefit pension scheme (1.6) (0.3)
Financial instruments classified as fair value through other comprehensive (1.1) (0.4)
income
Share-based payments 0.3 1.1
Currency translation gains/(losses) 0.5 (0.3)
2.8 8.7
Reconciliation to tax expense
UK corporation tax for the year at 21.0% (2022: 19.0%) on operating profit 23.5 44.2
before tax
Effect of different tax rates in other jurisdictions (0.3) (0.3)
Disallowable items and other permanent differences 1.6 0.9
Banking surcharge 6.2 14.9
Deferred tax impact of decreased tax rates 0.8 7.7
Prior year tax provision (0.9) 0.2
30.9 67.6
The standard UK corporation tax rate for the financial year is 21.0% (2022:
19.0%). However, an additional 6.3% (2022: 8.0%) surcharge applies to banking
company profits as defined in legislation (and only above a threshold amount).
The 6.3% surcharge rate for the financial year arises due to the reduction in
the surcharge from 8% to 3% from April 2023. The effective tax rate of 27.6%
(2022: 29.0%) is above the UK corporation tax rate primarily due to the
surcharge applying to most of the group's profits.
Movements in deferred tax assets and liabilities were as follows:
Capital allowances Pension scheme Share-based payments and deferred compensation Impairment Cash flow hedging Intangible assets Other Total
£ million
£ million
£ million
£ million
£ million
£ million
£ million
losses
£ million
Group
At 1 August 2021 36.1 (2.2) 15.5 8.8 0.1 (1.7) (0.6) 56.0
(Charge)/credit to the income statement (10.9) - (1.5) (3.0) - 0.4 0.2 (14.8)
Credit/(charge) to other comprehensive income 0.3 0.3 - - (8.6) - 0.4 (7.6)
Charge to equity - - (1.1) - - - - (1.1)
At 31 July 2022 25.5 (1.9) 12.9 5.8 (8.5) (1.3) - 32.5
(Charge)/credit to the income statement (12.1) - (3.9) 0.1 - 0.4 (3.2) (18.7)
(Charge)/credit to other comprehensive income (0.5) 1.6 - - (4.9) - 1.1 (2.7)
Charge to equity - - (0.3) - - - - (0.3)
At 31 July 2023 12.9 (0.3) 8.7 5.9 (13.4) (0.9) (2.1) 10.8
The group's deferred tax asset comprises £0.7 million (31 July 2022: £12.5
million) due within one year and £10.1 million (31 July 2022: £20.0 million)
due after more than one year.
As the group has been and is expected to continue to be consistently
profitable, the full deferred tax assets have been recognised.
4. Earnings per Share
The calculation of basic earnings per share is based on the profit
attributable to shareholders and the number of basic weighted average shares.
When calculating the diluted earnings per share, the weighted average number
of shares in issue is adjusted for the effects of all dilutive share options
and awards.
2023 2022
Basic 54.3p 110.4p
Diluted 54.2p 109.9p
Adjusted basic(1) 55.1p 111.5p
Adjusted diluted(1) 55.0p 111.0p
1. Excludes amortisation of intangible assets on acquisition and tax.
2023 2022
£ million
£ million
Profit attributable to shareholders 81.1 165.2
Adjustments:
Amortisation of intangible assets on acquisition 1.5 2.0
Tax effect of adjustments (0.3) (0.4)
Adjusted profit attributable to shareholders 82.3 166.8
2023 2022
million million
Average number of shares
Basic weighted 149.4 149.6
Effect of dilutive share options and awards 0.2 0.7
Diluted weighted 149.6 150.3
5. Dividends
2023 2022
£ million £ million
For each ordinary share
Final dividend for previous financial year paid in November 2022: 44.0p 65.6 62.7
(November 2021: 42.0p)
Interim dividend for current financial year paid in April 2023: 22.5p (April 33.5 32.8
2022: 22.0p)
99.1 95.5
A final dividend relating to the year ended 31 July 2023 of 45.0p, amounting
to an estimated £67.0 million, is proposed. This final dividend, which is due
to be paid on 24 November 2023 to shareholders on the register at 20 October
2023, is not reflected in these financial statements.
6. Loans and Advances to Customers
(a) Maturity analysis of loans and advances to customers
The following table sets out a maturity analysis of loans and advances to
customers. At 31 July 2023 loans and advances to customers with a maturity of
two years or less was £7,158.8 million (31 July 2022: £6,733.0 million)
representing 74.3% (31 July 2022: 73.6%) of total gross loans and advances to
customers:
On demand Within three months Between three months and one year Between Between After Total gross Impairment provisions Total net
more than five years
£ million £ million £ million one and two and
loans and £ million loans and
£ million
two years five years advances to advances to
£ million £ million customers customers
£ million £ million
At 31 July 2023 76.5 2,597.8 2,636.5 1,848.0 2,337.2 139.6 9,635.6 (380.6) 9,255.0
At 31 July 2022 141.3 2,354.2 2,369.0 1,868.5 2,235.0 176.5 9,144.5 (285.6) 8,858.9
(b) Loans and advances to customers and impairment provisions by stage
Gross loans and advances to customers by stage and the corresponding
impairment provisions and provision coverage ratios are set out below:
Stage 2
Stage 1 Less than 30 days past due Greater than or equal to 30 days past due Total Stage 3 Total
£ million
£ million
£ million
£ million
£ million £ million
At 31 July 2023
Gross loans and advances to customers
Commercial 3,686.1 750.9 23.2 774.1 339.4 4,799.6
Of which: Commercial excluding Novitas 3,685.1 749.6 23.2 772.8 97.7 4,555.6
Of which: Novitas 1.0 1.3 - 1.3 241.7 244.0
Retail 2,839.1 159.1 18.4 177.5 74.6 3,091.2
Property 1,465.0 85.7 24.7 110.4 169.4 1,744.8
7,990.2 995.7 66.3 1,062.0 583.4 9,635.6
Impairment provisions
Commercial 25.1 13.9 2.4 16.3 208.1 249.5
Of which: Commercial excluding Novitas 24.9 13.6 2.4 16.0 24.5 65.4
Of which: Novitas 0.2 0.3 - 0.3 183.6 184.1
Retail 27.9 11.6 2.6 14.2 47.3 89.4
Property 5.1 1.4 0.3 1.7 34.9 41.7
58.1 26.9 5.3 32.2 290.3 380.6
Provision coverage ratio
Commercial 0.7% 1.9% 10.3% 2.1% 61.3% 5.2%
Within which: Commercial excluding Novitas 0.7% 1.8% 10.3% 2.1% 25.1% 1.4%
Within which: Novitas 20.0% 23.1% - 23.1% 76.0% 75.5%
Retail 1.0% 7.3% 14.1% 8.0% 63.4% 2.9%
Property 0.3% 1.6% 1.2% 1.5% 20.6% 2.4%
0.7% 2.7% 8.0% 3.0% 49.8% 3.9%
Stage 2
Stage 1 Less than 30 days past due Greater than or equal to 30 days past due Total Stage 3 Total
£ million
£ million
£ million
£ million
£ million £ million
At 31 July 2022
Gross loans and advances to customers
Commercial 3,433.1 778.8 119.4 898.2 169.1 4,500.4
Of which: Commercial excluding Novitas 3,331.8 776.6 25.6 802.2 93.7 4,227.7
Of which: Novitas 101.3 2.2 93.8 96.0 75.4 272.7
Retail 2,937.6 121.4 9.4 130.8 65.5 3,133.9
Property 1,256.3 83.8 46.1 129.9 124.0 1,510.2
7,627.0 984.0 174.9 1,158.9 358.6 9,144.5
Impairment provisions
Commercial 25.6 14.3 52.0 66.3 87.1 179.0
Of which: Commercial excluding Novitas 16.8 13.3 2.5 15.8 33.1 65.7
Of which: Novitas 8.8 1.0 49.5 50.5 54.0 113.3
Retail 22.1 4.9 1.7 6.6 41.2 69.9
Property 2.6 4.2 1.2 5.4 28.7 36.7
50.3 23.4 54.9 78.3 157.0 285.6
Provision coverage ratio
Commercial 0.7% 1.8% 43.6% 7.4% 51.5% 4.0%
Within which: Commercial excluding Novitas 0.5% 1.7% 9.8% 2.0% 35.3% 1.6%
Within which: Novitas 8.7% 45.5% 52.8% 52.6% 71.6% 41.5%
Retail 0.8% 4.0% 18.1% 5.0% 62.9% 2.2%
Property 0.2% 5.0% 2.6% 4.2% 23.1% 2.4%
0.7% 2.4% 31.4% 6.8% 43.8% 3.1%
In Commercial, the impairment coverage ratio increased to 5.2% (31 July 2022:
4.0%), reflecting the impacts of updated Novitas assumptions. The significant
increase in credit provisions against the Novitas loan book reflects the
latest assumptions on case failure, time to recover and recovery rates.
Excluding Novitas, the Commercial provision coverage ratio decreased to 1.4%
(31 July 2022: 1.6%) as additional provisions to take into account weaker
macroeconomic variables and outlook were offset by write-offs on Stage 3
balances.
In Retail, the provision coverage ratio increased to 2.9% (31 July 2022: 2.2%)
reflecting the uncertain macroeconomic outlook and increased arrears and
forbearance levels in Motor Finance business as a result of continued cost of
living pressures on customers.
In Property the provision coverage ratio was stable at 2.4% (31 July 2022:
2.4%), with write-offs on well-provided single names offset by deteriorating
macroeconomic conditions and strong levels of new business.
(c) Adjustments
By their nature, limitations in the group's expected credit loss models or
input data may be identified through ongoing model monitoring and validation
of models. In certain circumstances, management make appropriate adjustments
to model-calculated expected credit losses. Adjustments have been identified
as a key source of estimation uncertainty as set out in Note 1.
This year, adjustments have been applied in response to improvements in
macroeconomic forecasts that resulted in releases in modelled provisions. A
number of these releases were considered premature or counterintuitive by
management and adjustments have been made as a result. These adjustments
recognise the ongoing uncertainty associated with the current environment. At
31 July 2023, £17.0 million (31 July 2022: £(2.8) million) of the expected
credit loss provision was attributable to adjustments.
(d) Reconciliation of loans and advances to customers and impairment
provisions
Reconciliations of gross loans and advances to customers and associated
impairment provisions are set out below.
New financial assets originate in Stage 1 only, and the amount presented
represents the value at origination.
Subsequently, a loan may transfer between stages, and the presentation of such
transfers is based on a comparison of the loan at the beginning of the year
(or at origination if this occurred during the year) and the end of the year
(or just prior to final repayment or write off).
Repayments relating to loans which transferred between stages during the year
are presented within the transfers between stages lines. Such transfers do not
represent overnight reclassification from one stage to another. All other
repayments are presented in a separate line.
ECL model methodologies may be updated or enhanced from time to time and the
impacts of such changes are presented on a separate line. During the year, a
number of enhancements were made to the models in the Premium business. The
enhancements were made to address known model limitations and to ensure
modelled provisions better reflect future loss emergence.
Enhancements to our model suite are a contributory factor to ECL movements and
such factors have been taken into consideration when assessing any required
adjustments to modelled output and ensuring appropriate provision coverage
levels.
A loan is written off when there is no reasonable expectation of further
recovery following realisation of all associated collateral and available
recovery actions against the customer.
Stage 1 Stage 2 Stage 3(1) Total
£ million
£ million
£ million £ million
Gross loans and advances to customers
At 1 August 2022 7,627.0 1,158.9 358.6 9,144.5
New financial assets originated 6,604.0 - - 6,604.0
Transfers to Stage 1 276.2 (373.2) (6.8) (103.8)
Transfers to Stage 2 (1,068.6) 878.6 (16.1) (206.1)
Transfers to Stage 3 (303.6) (194.4) 421.5 (76.5)
Net transfers between stages and repayments(2) (1,096.0) 311.0 398.6 (386.4)
Repayments while stage remained unchanged and final repayments (5,118.8) (403.5) (100.4) (5,622.7)
Changes to model methodologies (25.6) (4.0) 29.6 -
Write offs (0.4) (0.4) (103.0) (103.8)
At 31 July 2023 7,990.2 1,062.0 583.4 9,635.6
1. A significant proportion of the Stage 3 movements is driven by Novitas
with £174.4 million of transfers to Stage 3 and £37.4 million of write-offs.
In addition, £49.2 million of Novitas movements are included within
'Repayments while stage remained unchanged and final repayments', comprising
largely of accrued interest. The accrued interest is partly offset by ECL
increases included within the adjacent ECL reconciliation, in line with IFRS
9's requirement to recognise interest income on Stage 3 loans on a net basis.
2. Repayments relate only to financial assets which transferred between
stages during the year. Other repayments are shown in the line below.
Stage 1 Stage 2 Stage 3 Total
£ million
£ million
£ million £ million
Gross loans and advances to customers
At 1 August 2021 7,434.3 960.2 330.4 8,724.9
New financial assets originated 6,537.4 - - 6,537.4
Transfers to Stage 1 196.2 (278.6) (5.3) (87.7)
Transfers to Stage 2 (1,056.3) 959.9 (21.4) (117.8)
Transfers to Stage 3 (206.9) (137.5) 278.6 (65.8)
Net transfers between stages and repayments(1) (1,067.0) 543.8 251.9 (271.3)
Repayments while stage remained unchanged and final repayments (5,241.7) (354.2) (157.8) (5,753.7)
Changes to model methodologies (33.3) 31.6 1.8 0.1
Write offs (2.7) (22.5) (67.7) (92.9)
At 31 July 2022 7,627.0 1,158.9 358.6 9,144.5
1. Repayments relate only to financial assets which transferred between
stages during the year. Other repayments are shown in the line below.
The gross carrying amount before modification of loans and advances to
customers which were modified during the year while in Stage 2 or 3 was
£152.3 million (2022: £288.3 million). No gain or loss (2022: £nil) was
recognised as a result of these modifications. The gross carrying amount at 31
July 2023 of modified loans and advances to customers which transferred from
Stage 2 or 3 to Stage 1 during the year was £14.8 million (31 July 2022:
£110.2 million).
Stage 1 Stage 2 Stage 3(1) Total
£ million
£ million
£ million £ million
Impairment provisions on loans and advances to customers
At 1 August 2022 50.3 78.3 157.0 285.6
New financial assets originated 46.7 - - 46.7
Transfers to Stage 1 1.2 (7.7) (1.0) (7.5)
Transfers to Stage 2 (8.7) 27.7 (5.7) 13.3
Transfers to Stage 3 (11.2) (53.3) 227.2 162.7
Net remeasurement of expected credit losses arising from transfers between (18.7) 220.5 168.5
stages and repayments(2)
(33.3)
Repayments and ECL movements while stage remained unchanged and final (17.8) (10.7) (20.0) (48.5)
repayments
Changes to model methodologies (2.2) (1.9) 2.3 (1.8)
Charge to the income statement 8.0 (45.9) 202.8 164.9
Write offs (0.2) (0.2) (69.5) (69.9)
At 31 July 2023 58.1 32.2 290.3 380.6
1. A significant proportion of the Stage 3 movements is driven by Novitas
with £147.6 million of transfers to Stage 3 and £11.9 million of write-offs.
2. Repayments relate only to financial assets which transferred between
stages during the year. Other repayments are shown in the line below.
Stage 1 Stage 2 Stage 3 Total
£ million
£ million
£ million £ million
Impairment provisions on loans and advances to customers
At 1 August 2021 80.0 84.2 116.2 280.4
New financial assets originated 37.7 - - 37.7
Transfers to Stage 1 1.3 (12.2) (1.7) (12.6)
Transfers to Stage 2 (17.1) 59.4 (9.9) 32.4
Transfers to Stage 3 (9.0) (28.8) 123.2 85.4
Net remeasurement of expected credit losses arising from transfers between (24.8) 18.4 111.6 105.2
stages and repayments(1)
Repayments and ECL movements while stage remained unchanged and final (37.6) (0.7) (9.8) (48.1)
repayments
Changes to model methodologies (2.2) (1.1) 1.9 (1.4)
Charge to the income statement (26.9) 16.6 103.7 93.4
Write offs (2.8) (22.5) (62.9) (88.2)
At 31 July 2022 50.3 78.3 157.0 285.6
1. Repayments relate only to financial assets which transferred between
stages during the year. Other repayments are shown in the line below.
2023 2022
£ million £ million
Impairment losses relating to loans and advances to customers:
Charge to income statement arising from movement in impairment provisions 164.9 93.4
Amounts written off directly to income statement, net of recoveries and other 39.4 8.5
costs
204.3 101.9
Impairment (gains)/losses relating to other financial assets (0.2) 1.4
Impairment losses on financial assets recognised in income statement 204.1 103.3
Impairment losses on financial assets of £204.1 million (2022: £103.3
million) include £116.8 million in relation to Novitas (2022: £60.7
million).
The contractual amount outstanding at 31 July 2023 on financial assets that
were written off during the period and are still subject to recovery activity
is £32.3 million (31 July 2022: £17.3 million).
(e) Finance lease and hire purchase agreement receivables
31 July 2023 31 July 2022
£ million £ million
Net loans and advances to customers comprise
Hire purchase agreement receivables 3,671.3 3,725.1
Finance lease receivables 803.9 694.4
Other loans and advances 4,779.8 4,439.4
At 31 July 9,255.0 8,858.9
The following table shows a reconciliation between gross investment in finance
lease and hire purchase agreement receivables included in the net loans and
advances to customers table above to present value of minimum lease and hire
purchase payments.
31 July 2023 31 July 2022
£ million £ million
Gross investment in finance leases and hire purchase agreement receivables
due:
One year or within one year 1,849.3 1,740.2
>One to two years 2,002.8 1,927.1
>Two to three years 972.5 943.9
>Three to four years 438.5 475.1
>Four to five years 115.5 123.7
More than five years 41.1 36.2
5,419.7 5,246.2
Unearned finance income (820.7) (731.4)
Present value of minimum lease and hire purchase agreement payments 4,599.0 4,514.8
Of which due:
One year or within one year 1,567.2 1,496.9
>One to two years 1,691.7 1,654.4
>Two to three years 830.2 815.7
>Three to four years 375.3 410.0
>Four to five years 99.2 106.6
More than five years 35.4 31.2
4,599.0 4,514.8
The aggregate cost of assets acquired for the purpose of letting under finance
leases and hire purchase agreements was £7,167.5 million (2022: £7,443.8
million). The average effective interest rate on finance leases approximates
to 11.0% (2022: 9.9%). The present value of minimum lease and hire purchase
agreement payments reflects the fair value of finance lease and hire purchase
agreement receivables before deduction of impairment provisions.
7. Debt Securities
Fair value through profit or loss Fair value through other comprehensive Amortised cost Total
income
£ million
£ million £ million
£ million
Long trading positions in debt securities 15.2 - - 15.2
Certificates of deposit - - - -
Sovereign and central bank debt - 186.1 - 186.1
Covered bonds - 106.3 - 106.3
At 31 July 2023 15.2 292.4 - 307.6
Fair value Fair value Amortised Total
through profit
through other
cost
or loss
£ million
comprehensive income £ million
£ million
£ million
Long trading positions in debt securities 12.4 - - 12.4
Certificates of deposit - - 185.0 185.0
Sovereign and central bank debt - 415.4 - 415.4
Covered bonds - - - -
At 31 July 2022 12.4 415.4 185.0 612.8
Movements on the book value of sovereign and central bank debt comprise:
2023 2022
£ million £ million
Sovereign and central bank debt at 1 August 415.4 192.5
Additions 269.7 335.3
Redemptions (459.2) (80.0)
Currency translation differences (0.3) (1.2)
Movement in value (39.5) (31.2)
Sovereign and central bank debt at 31 July 186.1 415.4
Movements on the book value of covered bonds comprise:
2023 2022
£ million £ million
Covered bonds at 1 August - -
Additions 105.4 -
Movement in value 0.9 -
Covered bonds at 31 July 106.3 -
8. Equity Shares
31 July 31 July
2023 2022
£ million £ million
Long trading positions 27.8 27.1
Other equity shares 1.5 1.3
29.3 28.4
9. Intangible Assets
Goodwill Software Intangible Group total
£ million £ million assets on £ million
acquisition
£ million
Cost
At 1 August 2021 142.9 272.8 51.0 466.7
Additions - 56.0 - 56.0
Disposals (0.3) (29.3) - (29.6)
At 31 July 2022 142.6 299.5 51.0 493.1
Additions - 50.5 - 50.5
Disposals (0.1) (16.8) - (16.9)
At 31 July 2023 142.5 333.2 51.0 526.7
Amortisation
At 1 August 2021 47.9 142.4 43.8 234.1
Amortisation charge for the year - 34.6 2.0 36.6
Disposals - (29.6) - (29.6)
At 31 July 2022 47.9 147.4 45.8 241.1
Amortisation charge for the year - 36.1 1.5 37.6
Disposals - (15.7) - (15.7)
At 31 July 2023 47.9 167.8 47.3 263.0
Net book value at 31 July 2023 94.6 165.4 3.7 263.7
Net book value at 31 July 2022 94.7 152.1 5.2 252.0
Net book value at 1 August 2021 95.0 130.4 7.2 232.6
Software includes assets under development of £88.8 million (31 July 2022:
£71.1 million).
Intangible assets on acquisition relate to broker and customer relationships
and are amortised over a period of eight to 20 years.
In the 2023 financial year, £1.5 million (2022: £2.0 million) of the
amortisation charge is included in amortisation of intangible assets on
acquisition and £36.1 million (2022: £34.6 million) of the amortisation
charge is included in administrative expenses shown in the consolidated income
statement.
Impairment tests for goodwill
At 31 July 2023, goodwill has been allocated to eight (31 July 2022: eight)
individual cash generating units ("CGUs"). Six (31 July 2022: six) are within
the Banking division, one is the Asset Management division and the remaining
one is Winterflood in the Securities division. Goodwill is allocated to the
CGU in which the historical acquisition occurred and hence the goodwill
originated. Further information on the performance of each division can be
found in Note 2 'Segmental Analysis'. Goodwill impairment reviews are carried
out annually by assessing the recoverable amount of the group's CGUs, which is
the higher of fair value less costs to sell and value in use. The recoverable
amounts for all CGUs were measured based on value in use.
A value in use calculation uses discounted cash flow forecasts based on the
most recent three-year plans to determine the recoverable amount of each CGU.
The key assumptions underlying management's three-year plans, which are based
on past experience and forecast market conditions, are expected loan book
growth rates and net return on loan book in the Banking CGUs, expected total
client asset growth rate and revenue margin in the Asset Management CGU and
expected market-making conditions in the Winterflood CGU.
Beyond the group's three-year planning horizon, estimates of future cash flows
in the fourth and fifth years are made by management with due consideration
given to the key assumptions set out above. After the fifth year, a terminal
value is calculated using an annual growth rate of 2%, which is consistent
with the UK government's long-term inflation target. In the prior year,
management applied a more prudent 0% annual growth rate. The cash flows are
discounted using a pre-tax estimated weighted average cost of capital. The
methodology used to derive the discount rate for Winterflood was refined
during the year. The discount rates used differ across the CGUs, reflecting
the nature of the CGUs' business and the current market returns appropriate to
the CGU that investors would require for a similar asset.
At 31 July 2023, the results of the review indicate there is no goodwill
impairment. The inputs used in the value in use calculations are sensitive
primarily to changes in the assumptions for future cash flows, discount rates
and long-term growth rates. Having performed stress tested value in use
calculations, the group believes that any reasonably possible change in the
key assumptions which have been used would not lead to the carrying value of
any CGU to exceed its recoverable amount.
Winterflood recorded lower profits in the year driven by difficult market
conditions. The business has a long track record of trading profitably in a
range of conditions and is well placed to take advantage when investor
confidence recovers. Nevertheless, future market conditions remain uncertain
and as such the value in use calculation for this CGU has been identified as a
key source of estimation uncertainty as set out in Note 1.
The most significant uncertainty within the Winterflood value in use
calculation relates to the expected future cash flows. A reduction in the year
4 and 5 cash flows to the level of year 3, combined with a further 40%
reduction in the expected future cash flows in year 5 and all subsequent years
would result in a recoverable amount that is marginally above the carrying
value of the CGU. This scenario is a demonstration of sensitivity only and is
not considered probable by management.
10. Property, Plant and Equipment
Leasehold property Fixtures, Assets Motor Right of use Total
£ million fittings and held under vehicles assets(1) £ million
equipment operating £ million £ million
£ million leases
£ million
Group
Cost
At 1 August 2021 25.2 74.8 360.7 0.2 71.7 532.6
Additions 0.6 4.3 67.8 - 13.6 86.3
Disposals (4.9) (16.5) (30.3) - (6.8) (58.5)
At 31 July 2022 20.9 62.6 398.2 0.2 78.5 560.4
Additions 1.0 7.5 93.1 0.2 24.7 126.5
Disposals (0.4) (4.6) (42.2) - (9.2) (56.4)
At 31 July 2023 21.5 65.5 449.1 0.4 94.0 630.5
Depreciation
At 1 August 2021 15.7 47.5 137.8 0.1 21.6 222.7
Depreciation and impairment charges for the year 2.2 7.6 40.6 0.1 13.2 63.7
Disposals (4.9) (18.2) (20.2) - (5.2) (48.5)
At 31 July 2022 13.0 36.9 158.2 0.2 29.6 237.9
Depreciation and impairment charges for the year 2.4 8.3 45.5 - 14.4 70.6
Disposals (0.4) (4.3) (25.8) - (4.6) (35.1)
At 31 July 2023 15.0 40.9 177.9 0.2 39.4 273.4
Net book value at 31 July 2023 6.5 24.6 271.2 0.2 54.6 357.1
Net book value at 31 July 2022 7.9 25.7 240.0 - 48.9 322.5
Net book value at 1 August 2021 9.5 27.3 222.9 0.1 50.1 309.9
1. Right of use assets primarily relate to the group's leasehold properties.
There was a gain of £3.3 million from the sale of assets held under operating
leases for the year ended 31 July 2023
(2022: £3.2 million).
11. Settlement Balances and Short Positions
31 July 31 July
2023 2022
£ million
£ million
Settlement balances 686.0 780.7
Short positions in:
Debt securities 3.5 7.5
Equity shares 6.4 7.9
9.9 15.4
695.9 796.1
12. Financial Liabilities
On demand Within three Between Between Between After Total
£ million months three months and one year one and two and more than £ million
two years
five years
£ million £ million
five years
£ million £ million
£ million
Deposits by banks 10.3 43.6 88.0 - - - 141.9
Deposits by customers 175.1 1,836.4 3,745.9 1,305.0 662.1 - 7,724.5
Loans and overdrafts from banks 31.8 20.1 228.0 262.0 110.0 - 651.9
Debt securities in issue - 30.4 228.7 197.8 1,261.8 293.9 2,012.6
At 31 July 2023 217.2 1,930.5 4,290.6 1,764.8 2,033.9 293.9 10,530.9
On demand Within three months Between Between Between two and five years After Total
three months and one year
one and
more than
£ million £ million
two years £ million
five years £ million
£ million
£ million £ million
Deposits by banks 6.1 52.0 102.4 - - - 160.5
Deposits by customers 120.9 1,645.2 3,615.6 1,058.8 329.9 - 6,770.4
Loans and overdrafts from banks 12.1 10.7 - 228.0 371.9 - 622.7
Debt securities in issue - 26.7 855.3 249.4 567.0 362.5 2,060.9
At 31 July 2022 139.1 1,734.6 4,573.3 1,536.2 1,268.8 362.5 9,614.5
As outlined below at 31 July 2023 the group accessed £600.0 million (31 July
2022: £600.0 million) and £5.0 million (31 July 2022: £nil) cash under the
Bank of England's Term Funding Scheme with Additional Incentives for SMEs and
Indexed Long-Term Repo respectively. Cash from these schemes is included
within loans and overdrafts from banks. Residual maturities of the schemes are
as follows:
On demand Within Between Between Between After Total
three
£ million
three months one and two and more than £ million
months
five years
and one year two years
five years
£ million
£ million
£ million £ million £ million
At 31 July 2023 - 7.6 228.0 262.0 110.0 - 607.6
At 31 July 2022 - 0.6 - 228.0 372.0 - 600.6
Assets pledged and received as collateral
The group pledges assets for repurchase agreements and securities borrowing
agreements which are generally conducted under terms that are customary to
standard borrowing contracts.
The group is a participant of the Bank of England's Term Funding Scheme with
Additional Incentives for SMEs ("TFSME") and the Indexed Long-Term Repo
("ILTR").
Under these schemes, asset finance loan receivables of £863.4 million (31
July 2022: £626.1 million), UK gilts with a market value of £nil (31 July
2022: £72.6 million), UK T-Bills with a market value of £nil (31 July 2022:
£144.3 million) and retained notes relating to Motor Finance loan receivables
of £83.4 million (31 July 2022: £24.3 million) were positioned as collateral
with the Bank of England, against which £600.0 million (31 July 2022: £600.0
million) of cash was drawn from the TFSME and £5.0 million (31 July 2022:
£nil) from the ILTR.
The term of the TFSME transactions is four years from the date of each
drawdown but the group may choose to repay earlier at its discretion. The term
of the ILTR transaction is six months and cannot be repaid earlier. The risks
and rewards of the loan receivables remain with the group and continue to be
recognised in loans and advances to customers on the consolidated balance
sheet.
The group has securitised without recourse and restrictions £1,436.3 million
(31 July 2022: £1,626.8 million) of its insurance premium and motor loan
receivables in return for cash and asset-backed securities in issue of
£1,187.4 million (31 July 2022: £1,156.0 million restated). This includes
the £83.4 million (31 July 2022: £24.3 million) retained notes positioned as
collateral with the Bank of England. As the group has retained exposure to
substantially all the credit risk and rewards of the residual benefit of the
underlying assets it continues to recognise these assets in loans and advances
to customers on its consolidated balance sheet.
13. Capital - unaudited
31 July 31 July
2023 2022
£ million £ million
CET1 capital
Shareholders' equity per balance sheet 1,644.9 1,657.5
Adjustments to CET1 capital
Intangible assets, net of associated deferred tax liabilities (262.8) (250.7)
Foreseeable dividend(1) (67.0) (65.6)
Investment in own shares (34.4) (21.7)
Pension asset, net of associated deferred tax liabilities (1.0) (5.3)
Prudent valuation adjustment (0.4) (0.5)
Insufficient coverage for non-performing exposures(2) (0.4) -
IFRS 9 transitional arrangements(3) 31.9 83.0
CET1 capital(4) 1,310.8 1,396.7
Tier 2 capital - subordinated debt 200.0 200.0
Total regulatory capital(4) 1,510.8 1,596.7
RWAs (notional)
Credit and counterparty credit risk 8,655.4 8,389.0
Operational risk(5) 1,084.0 1,085.8
Market risk(5) 108.2 116.5
9,847.6 9,591.3
CET1 capital ratio(4) 13.3% 14.6%
Total capital ratio(4) 15.3% 16.6%
1. Under CRR Article 26, a deduction has been recognised at 31 July 2023 and
31 July 2022 for a foreseeable dividend, being the proposed final dividend as
set out in note 5 to the financial statements.
2. In line with CRR, effective on 1 January 2022, the CET1 capital includes
a regulatory deduction where there is insufficient coverage for non-performing
exposures, amounting to £0.4 million at 31 July 2023 (31 July 2022: £0.0
million).
3. The group has elected to apply IFRS 9 transitional arrangements for 31
July 2023, which allow the capital impact of expected credit losses to be
phased in over the transitional period.
4. Shown after applying IFRS 9 transitional arrangements and the CRR
transitional and qualifying own funds arrangements in force at the time.
Without their application, at 31 July 2023 the CET1 capital ratio would be
13.0% and total capital ratio 15.1% (31 July 2022: CET1 capital ratio 13.8%
and total capital ratio 15.9%).
5. Operational and market risk include an adjustment at 8% in order to
determine notional RWAs.
The following table shows the movement in CET1 capital during the year:
2023 2022
£ million £ million
CET1 capital at 1 August 1,396.7 1,439.3
Profit in the period attributable to shareholders 81.1 165.2
Dividends paid and foreseen (100.5) (98.4)
Change in software assets treatment(1) - (50.2)
IFRS 9 transitional arrangements (51.1) (34.8)
(Increase)/decrease in intangible assets, net of associated deferred tax (12.1) (19.7)
liabilities
Other movements in reserves recognised for CET1 capital (7.3) 0.1
Other movements in adjustments from CET1 capital 4.0 (4.8)
CET1 capital at 31 July 1,310.8 1,396.7
1. Upon implementation of CRR, effective on 1 January 2022, the CET1 ratio
no longer included the benefit related to software assets which were
previously exempt from the deduction requirement for intangible assets from
CET1.
14. Defined Benefit Pension Scheme
During the year, the group's only defined benefit pension scheme ("the
scheme") entered into a buy-in transaction with an insurance company covering
all members of the scheme. A buy-in is a bulk annuity policy that matches the
scheme's assets and liabilities. It represents a significant de-risking of the
investment portfolio and hence a significant reduction in the group's
long-term exposure to pension funding risk. As a result of this transaction,
the pension surplus on the group's balance sheet has fallen to £1.3 million
(31 July 2022: £7.2 million) relating to the cash held by the scheme, with
the fair value of the insurance policy matched to the fair value of the
scheme's liabilities. The loss of the pension surplus represents the one-off
premium paid for the insurance policy and is recognised within other
comprehensive income.
15. Contingent Liabilities
Motor Finance commission arrangements
The Group has received a number of complaints, some of which are with the
Financial Ombudsman Service, and is subject to a number of claims through the
courts regarding historic commission arrangements with intermediaries on its
Motor Finance products. This follows the FCA's Motor Market Review in 2019.
Depending on the outcome of the court's rulings and/or regulatory findings on
the matter, these complaints and claims may give rise to a potential future
obligation to compensate customers. It is not currently possible to estimate
the financial impact, if any, or scope of these or any future related claims.
16. Consolidated Cash Flow Statement Reconciliation
2023 2022
£ million
£ million
(a) Reconciliation of operating profit before tax to net cash inflow from
operating activities
Operating profit before tax 112.0 232.8
Tax paid (7.4) (63.4)
Depreciation, amortisation and impairment 108.2 100.3
Impairment losses on financial assets 204.1 103.3
(Increase)/decrease in:
Interest receivable and prepaid expenses (6.8) 19.8
Net settlement balances and trading positions (11.4) 17.2
Net loans from money brokers against stock advanced 15.6 2.7
Decrease in interest payable and accrued expenses (16.5) (32.2)
Net cash inflow from trading activities 397.8 380.5
Cash (outflow)/inflow arising from changes in:
Loans and advances to banks not repayable on demand (21.1) (5.3)
Loans and advances to customers (584.3) (515.0)
Assets let under operating leases (73.2) (54.5)
Certificates of deposit 185.0 79.7
Sovereign and central bank debt 191.2 (255.3)
Covered bonds (105.4) -
Deposits by banks (22.1) 11.8
Deposits by customers 942.5 142.7
Loans and overdrafts from banks 29.2 110.0
Debt securities in issue (net) 14.4 270.5
Derivative financial instruments (net) 70.4 -
Other assets less other liabilities (3.0) (6.4)
Net cash inflow from operating activities 1,021.4 158.7
(b) Analysis of net cash outflow in respect of the purchase of subsidiaries
and
non-controlling interests
Cash consideration paid (0.5) (0.1)
(c) Analysis of net cash inflow in respect of the sale of subsidiaries
Cash consideration received - 0.1
(d) Analysis of cash and cash equivalents(1)
Cash and balances at central banks 1,918.4 1,236.0
Loans and advances to banks 290.9 147.0
At 31 July 2,209.3 1,383.0
1. Excludes £58.0 million (2022: £37.1 million) of Bank of England and
other cash reserve accounts.
During the year ended 31 July 2023, the non-cash changes on debt financing
amounted to £0.9 million (31 July 2022: £9.6 million) arising largely from
interest accretions and fair value hedging movements.
17. Fair Value of Financial Assets and Liabilities
The fair values of the group's subordinated loan capital and debt securities
in issue are set out below.
31 July 2023 31 July 2022
Fair value Carrying value Fair value Carrying value
£ million
£ million
£ million
£ million
Subordinated loan capital 165.8 174.9 180.0 186.5
Debt securities in issue 2,008.0 2,012.6 2,071.4 2,060.9
The fair value of gross loans and advances to customers at 31 July 2023 is
estimated to be £9,046.2 million (carrying value: £9,255.0 million). The
fair value of deposits by customers is estimated to be £7,668.7 million
(carrying value: £7,724.5 million). These estimates are based on highly
simplified assumptions and inputs and may differ to actual amounts received or
paid. The differences between fair value and carrying value are not considered
to be significant, and are consistent with management's expectations given the
nature of the Banking business and the short average tenor of the instruments.
However, the differences have increased in comparison to the prior year in
line with market interest rates.
The group holds financial instruments that are measured at fair value
subsequent to initial recognition. Each instrument has been categorised within
one of three levels using a fair value hierarchy that reflects the
significance of the inputs used in making the measurements. These levels are
based on the degree to which the fair value is observable. The table below
shows the classification of financial instruments held at fair value into the
valuation hierarchy:
Level 1 Level 2 Level 3 Total
£ million
£ million
£ million
£ million
At 31 July 2023
Assets
Debt securities:
Long trading positions in debt securities 13.6 1.6 - 15.2
Sovereign and central bank debt 186.1 - - 186.1
Covered bonds 106.3 - - 106.3
Equity shares 3.9 25.1 0.3 29.3
Derivative financial instruments - 77.4 11.1 88.5
Contingent consideration - - 2.0 2.0
309.9 104.1 13.4 427.4
Liabilities
Short positions:
Debt securities 2.3 1.2 - 3.5
Equity shares 1.7 4.6 0.1 6.4
Derivative financial instruments - 184.7 11.2 195.9
Contingent consideration - - 2.8 2.8
4.0 190.5 14.1 208.6
Level 1 Level 2 Level 3 Total
£ million
£ million
£ million
£ million
At 31 July 2022
Assets
Debt securities:
Long trading positions in debt securities 11.0 1.4 - 12.4
Sovereign and central bank debt 415.4 - - 415.4
Covered bonds - - - -
Equity shares 4.1 24.0 0.3 28.4
Derivative financial instruments - 71.2 - 71.2
Contingent consideration - - 1.7 1.7
430.5 96.6 2.0 529.1
Liabilities
Short positions:
Debt securities 5.8 1.7 - 7.5
Equity shares 2.2 5.6 0.1 7.9
Derivative financial instruments - 89.2 - 89.2
Contingent consideration - - 3.0 3.0
8.0 96.5 3.1 107.6
There is no significant change to the valuation methodologies relating to
Level 2 and 3 financial instruments disclosed in note 28 "Financial risk
management" of the Annual Report 2022.
Instruments classified as Level 3 predominantly comprise over-the-counter
derivatives, which is new this year, and contingent consideration payable and
receivable in relation to the acquisition and disposal of subsidiaries.
The valuation of Level 3 derivatives is similar to Level 2 derivatives and
includes the use of discounted future cash flow models, with the most
significant input into these models being interest rate yield curves developed
from quoted rates. The fair value of contingent consideration is determined on
a discounted expected cash flow basis. The group believes that there is no
reasonably possible change to inputs used in the valuation of these positions
which would have a material effect on the group's consolidated income
statement.
During the year, £1.6 million of derivative financial assets and £1.8
million of derivative financial liabilities were transferred from Level 2 to
3. There were no other significant transfers between Level 1, 2 and 3 in 2023
and 2022.
There were no overall gains or losses recognised in the consolidated income
statement relating to level 3 instruments held at the year end (2022:
£0.2 million loss).
18. Additional support for customers
Forbearance
Forbearance occurs when a customer is experiencing difficulty in meeting their
financial commitments and a concession is granted, by changing the terms of
the financial arrangement, which would not otherwise be considered. This
arrangement can be temporary or permanent depending on the customer's
circumstances.
The Banking division reports on forborne exposures as either performing or
non-performing in line with regulatory requirements. A forbearance policy is
maintained to ensure the necessary processes are in place to enable
consistently fair treatment of all customers and that each is managed based on
their individual circumstances. The arrangements agreed with customers will
aim to create a sustainable and affordable financial position, thereby
reducing the likelihood of suffering a credit loss. The forbearance policy is
periodically reviewed to ensure it remains effective.
The Banking division offers a range of concessions to support customers which
vary depending on the product and the customer's status. Such concessions
include an extension outside terms (for example a higher LTV or overpayments)
and refinancing, which may incorporate an extension of the loan tenor and
capitalisation of arrears. Furthermore, other forms of forbearance such as
moratorium, covenant waivers and rate concessions are also offered.
Forbearance analysis
At 31 July 2023 the gross carrying amount of exposures with forbearance
measures was £214.6 million (31 July 2022: £208.9 million). The key driver
of this increase has been movement of high-value individual exposures in
Property and higher volumes of business-as-usual forbearance in our Motor
Finance business resulting from enduring cost-of-living pressures on
customers.
The reduction in volumes across all segments is driven by the continued
run-off of Covid-19 related concessions, lower volumes in Premium Finance
related to short loan tenors and general resilience across all portfolios.
As the number of customers supported via Covid-19 related concessions has
continued to reduce (noting no new Covid-19 forbearance arrangements have been
offered in the period), the low outstanding volumes have been consolidated
into the single forbearance total in the following analyses.
An analysis of forborne loans is shown in the table below:
Gross loans and advances to customers Forborne loans Forborne loans as a percentage of gross loans and advances to customers Provision on forborne loans Number of customers supported
£ million £ million % £ million
31 July 2023 9,635.6 214.6 2.2% 56.1 6,996
31 July 2022 9,144.5 208.9 2.3% 44.3 11,043
The following is a breakdown of forborne loans by segment:
31 July 31 July
2023 2022
£ million £ million
Commercial 38.0 62.3
Retail 28.8 23.0
Property 147.8 123.6
214.6 208.9
The following is a breakdown of the number of customers supported by segment:
31 July 31 July
2023 2022 Number of customers supported
Number of customers supported
Commercial 243 518
Retail 6,700 10,467
Property 53 58
6,996 11,043
The following is a breakdown of forborne loans by concession type:
31 July 31 July
2023 2022
£ million £ million
Extension outside terms 105.8 113.0
Refinancing 10.4 3.0
Moratorium 66.1 69.9
Other modifications 32.3 23.0
214.6 208.9
Government lending schemes
Over the pandemic period, following accreditation, customers' facilities were
offered under the UK government-introduced Coronavirus Business Interruption
Loan Scheme ("CBILS"), the Coronavirus Large Business Interruption Loan Scheme
("CLBILS") and the Bounce Back Loan Scheme ("BBLS"), thereby enabling the
Banking division to maximise its support to small businesses. At 31 July 2023,
there are 4,364 (31 July 2022: 5,445) remaining facilities, with a residual
balance of £456.3 million (31 July 2022: £747.5 million) following
commencement of repayments across the Property, Asset Finance & Leasing
and Invoice & Speciality Finance businesses.
The Banking division also received accreditation to offer products under the
Recovery Loan Scheme ("RLS"), and schemes in the Republic of Ireland.
Applications for facilities under phase 2 of the RLS closed in June 2022 and
recently facilities have been offered under the new RLS phase 3. At 31 July
2023, there are 943 (31 July 2022: 560) live facilities, with balances of
£276.2 million (31 July 2022: £166.0 million), and a further 58 (31 July
2022: 73) approved facilities with limits of £14.3 million (31 July 2022:
£15.6 million)
The Banking division maintains a regular reporting cycle of these facilities
to monitor performance. To date, a number of claims have been made and
payments received under the government guarantee.
19. Interest rate risk
The group recognises three main sources of interest rate risk in the banking
book ("IRRBB") which could adversely impact future income or the value of the
balance sheet:
• repricing risk - the risk presented by assets and liabilities
that reprice at different times and rates;
• embedded optionality risk - the risk presented by contract
terms embedded into certain assets and liabilities; and
• basis risk - the risk presented by a mismatch in the reference
interest rate for assets and liabilities.
IRRBB is assessed and measured by applying key behavioural and modelling
assumptions including, but not limited to, those related to fixed rate loans
subject to prepayment risk, the behaviour of non-maturity assets and
liabilities, the treatment of own equity and the expectation of embedded
interest rate options. This assessment is performed across a range of
regulatory prescribed and internal interest rate shock scenarios approved by
the bank's Asset and Liability Committee.
Two measures are used for measuring IRRBB, namely Earnings at Risk ("EaR") and
Economic Value ("EV"):
• EaR measures short-term impacts to earnings, highlighting any
earnings sensitivity should rates change unexpectedly.
• EV measures longer-term earnings sensitivity due to rate
changes, highlighting the potential future sensitivity of earnings, and any
risk to capital.
No material exposure exists in the other parts of the group, and accordingly
the analysis below relates to the Banking division and company.
EaR impact
The table below sets out the assessed impact on net interest income over a
12-month period from interest rate changes. The results shown are for an
instantaneous and parallel change in interest rates at 31 July 2023:
31 July 31 July
2023 2022
£ million £ million
0.5% increase 4.5 4.3
2.5% increase 22.6 22.3
0.5% decrease (4.5) (1.0)
2.5% decrease (22.8) 16.7
EV impact
The table below sets out the assessed impact on our base case EV, which
measures the impact on equity value of an instantaneous and parallel change in
interest rates at 31 July 2023:
31 July 31 July
2023 2022
£ million £ million
0.5% increase 4.4 1.5
2.5% increase 21.5 8.4
0.5% decrease (4.4) (1.2)
2.5% decrease (21.9) 3.3
The group's EV at 31 July 2023 reflects its policy to ensure exposure to
interest rate shocks is managed within the group's risk appetites. In a rising
rate environment, the distance to the interest rate floors increases and so
the benefit of the floors on the group's lending decreases. This explains the
movement seen for the parallel rate up and down 2.5% scenarios. The EV measure
is a combination of our repricing profile, which is positively correlated to
rising rates, offset partially by embedded optionality to cover interest rate
floors within the bank's lending and borrowing activities. The prior year
comparatives have been restated to include EV risk within the company as
compared to Bank only in prior years.
Cautionary Statement
Certain statements included or incorporated by reference within this report
may constitute "forward-looking statements" in respect of the group's
operations, performance, prospects and/or financial condition. All statements
other than statements of historical fact are, or may be deemed to be,
forward-looking statements. Forward-looking statements are sometimes, but not
always, identified by their use of a date in the future or such words as
"anticipates", "aims", "due", "could", "may", "will", "should", "expects",
"believes", "intends", "plans", "potential", "targets", "goal" or "estimates".
By their nature, forward-looking statements involve a number of risks,
uncertainties and assumptions and actual results or events may differ
materially from those expressed or implied by those statements. There are also
a number of factors that could cause actual future operations, performance,
financial conditions, results or developments to differ materially from the
plans, goals and expectations expressed or implied by these forward-looking
statements and forecasts. These factors include, but are not limited to, those
contained in this report. Accordingly, no assurance can be given that any
particular expectation will be met and reliance should not be placed on any
forward-looking statement. Additionally, forward-looking statements regarding
past trends or activities should not be taken as a representation that such
trends or activities will continue in the future.
Except as may be required by law or regulation, no responsibility or
obligation is accepted to update or revise any forwardlooking statement
resulting from new information, future events or otherwise. Nothing in this
document should be construed as a profit forecast. Past performance cannot be
relied upon as a guide to future performance and persons needing advice should
consult an independent financial adviser.
This report does not constitute or form part of any offer or invitation to
sell, or any solicitation of any offer to subscribe for or purchase any shares
or other securities in the company or any of its group members, nor shall it
or any part of it or the fact of its distribution form the basis of, or be
relied on in connection with, any contract or commitment or investment
decisions relating thereto, nor does it constitute a recommendation regarding
the shares or other securities of the company or any of its group members.
Statements in this report reflect the knowledge and information available at
the time of its preparation. Liability arising from anything in this report
shall be governed by English law. Nothing in this report shall exclude any
liability under applicable laws that cannot be excluded in accordance with
such laws.
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