REG - Close Bros Grp PLC - Half Year Results for six months to 31.1.2023
14/03/2023 07:00
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RNS Number : 8183S Close Brothers Group PLC 14 March 2023
Half Year Results for the Six Months to 31 January 2023
14 March 2023
Adrian Sainsbury, Chief Executive, said:
"It has been a challenging six months, with our half year results
significantly impacted by the increased provisions in relation to Novitas, as
announced previously in January 2023. While this is clearly disappointing, our
underlying business remains resilient, enabling us to support almost three
million customers, including over 360 thousand SMEs, as we continue to lend
consistently through this period of uncertainty.
We are encouraged by the good demand and strong margins seen in Banking, as
well as the underlying credit quality of our loan book. We continued to
attract new client assets in CBAM, with healthy net inflows, and although
trading activity remained subdued at Winterflood, WBS sustained its positive
momentum. We are pleased to declare an increased interim dividend of 22.5p per
share, reflecting our underlying performance and the Board's confidence in the
group's outlook.
Our financial strength leaves us well placed to move forward and resume our
track record of earnings growth and returns."
Financial performance in the first six months
· As previously announced, we have taken steps to resolve the
issues surrounding Novitas, resulting in an additional provision of £89.8
million, with the total provisions in relation to Novitas taken in H1 2023 at
£114.6 million. As a result, statutory operating profit before tax decreased
to £11.7 million (H1 2022: £128.9 million). Excluding Novitas, adjusted
operating profit decreased to £117.5 million (H1 2022: £160.5 million)
· We achieved 5% income growth in Banking with a strong net
interest margin of 8.0% (H1 2022: 7.9%) and good levels of customer demand,
particularly in Commercial. As a result, pre-provisions, adjusted operating
profit in Banking increased 5% to £177.2 million (H1 2022: £168.5 million)
· Although underlying credit performance remains resilient, the
increased uncertainty in the economic outlook has been reflected in higher
forward-looking impairment provisions and a rise in arrears in Motor Finance.
As a result, the annualised bad debt ratio (excluding Novitas) was 1.1% (H1
2022: 0.2%)
· The loan book excluding Novitas was £9.0 billion (31 July 2022:
£8.9 billion), as we remain committed to lending consistently to our
customers under responsible terms in all market conditions
· We delivered healthy net inflows of 6%, with a strong
contribution from new hires, as we continued to focus on growing Close
Brothers Asset Management ("CBAM")
· Winterflood's performance continued to reflect challenging market
conditions
· Total funding increased 3% to £11.9 billion (31 July 2022:
£11.6 billion), as the diversity of our funding sources helped us optimise
funding costs in an environment of rapid interest rate rises
· Our Common Equity Tier 1 ("CET1") ratio was 14.0% at 31 January
2023 (31 July 2022: 14.6%), significantly above the applicable minimum
regulatory requirement of 8.5% and the group's medium-term CET1 capital ratio
target range of 12-13%
· We are pleased to declare an interim dividend of 22.5p per share
(H1 2022: 22.0p), reflecting our underlying performance and the Board's
confidence in the group's outlook
Well placed to move forward on the delivery of our strategic priorities
· We are continuing to focus on our strategic growth agenda, with
over £90 million lent in the first half towards our ambition to provide £1
billion of funding for battery electric vehicles over five years and the
successful piloting of a specialist buy-to-let extension to our existing
Property bridging finance clients. In CBAM, we continued to attract new hires
and we were pleased to announce that Winterflood Business Services ("WBS")
exceeded the targeted £10 billion of total assets under administration
("AuA")
· We have intensified our focus on cost discipline and efficiency,
especially in light of recent inflationary pressures. We have a number of
strategic cost management initiatives in progress and are evaluating
additional opportunities for efficiency with a view to achieving positive
operating leverage over the medium term
· 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 in
line with our capital management framework
Outlook
· Although we are alert to the impact of rising inflation and
interest rates on our customers and wider financial market conditions, we are
well placed to move forward on the delivery of our strategic priorities. We
are confident we can resume our track record of earnings growth and returns by
focusing on disciplined growth, cost efficiency and capital optimisation
Key Financials(1)
First half First half Change
2023 2022 %
Adjusted operating profit(2) £12.6m £129.8m (90)
Adjusted operating profit, pre provision £174.8m £178.1m (2)
Operating profit before tax £11.7m £128.9m (91)
Adjusted basic earnings per share(3) 6.1p 64.0p -
Basic earnings per share(3) 5.6p 63.5p -
Ordinary dividend per share 22.5p 22.0p 2
Return on opening equity 1.1% 12.2%
Return on average tangible equity 1.3% 14.2%
Net interest margin(4) 8.0% 7.9%
Bad debt ratio(4) 3.6% 1.1%
31 January 31 July Change
2023 2022 %
Loan book £9.0bn £9.1bn (1)
Total client assets £16.9bn £16.6bn 2
CET1 capital ratio (transitional) 14.0% 14.6%
Total capital ratio (transitional) 16.1% 16.6%
Key Financials (Excluding Novitas)
First half First half Change
2023 2022 %
Adjusted operating profit £117.5m £160.5m (27)
Adjusted operating profit, pre provision £165.1m £169.6m (3)
Net interest margin(4) 7.8% 7.6%
Bad debt ratio(4) 1.1% 0.2%
31 January 31 July Change
2023 2022 %
Loan book £9.0bn £8.9bn -
1 Please refer to definitions below.
2 Adjusted operating profit is stated before amortisation of intangible assets
on acquisition of £0.9 million (H1 2022: £0.9 million).
3 Refer to Note 4 for the calculation of basic and adjusted earnings per
share.
4 Net interest margin and bad debt ratio calculated on an annualised basis.
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
Irene Galvan Close Brothers Group plc 020 3857 6217
Sam Cartwright Maitland 07827 254 561
A virtual presentation to analysts and investors will be held today at 9.30 am
GMT followed by a Q&A session. A webcast and dial-in facility will be
available by registering at
https://webcasts.closebrothers.com/results/HalfYearResults2023
(https://webcasts.closebrothers.com/results/HalfYearResults2023) .
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. The loan book
figure was re-presented for 31 January 2022 to incorporate closing loans and
advances to customers and operating lease assets, previously shown separately.
The Asset Finance and Invoice and Speciality Finance loan books have also 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. The condensed consolidated interim financial statements from page 34
to 70 are not impacted by these re-presentations.
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
member of the FTSE 250.
CHIEF EXECUTIVE'S STATEMENT
It has been a challenging six months but our underlying business remains
resilient, enabling us to support almost three million customers, including
over 360 thousand small and medium-sized enterprises ("SMEs"), as we continue
to lend consistently through this period of uncertainty. We are encouraged by
the good demand and strong margins seen in Banking, as well as the underlying
credit quality of our loan book. We continued to attract new client assets in
CBAM, with healthy net inflows, though trading activity remained subdued at
Winterflood.
We are pleased to declare an increased interim dividend of 22.5p per share (H1
2022: 22.0p per share), reflecting our underlying performance and the Board's
confidence in the group's outlook. We remain 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.
While developments at Novitas are disappointing, we are confident that the
group is in a strong position to navigate the current environment and make the
most of available opportunities. We remain well placed to continue to leverage
our long-term relationships, the deep expertise of our people and our
commitment to excellent customer service. Alongside the fundamental strengths
of our model, which have been evidenced through many cycles, we are well
positioned to move forward on the delivery of our strategic priorities, with a
focus on delivering disciplined growth, cost efficiency and optimisation of
our capital structure. I am confident that we are well placed to resume our
track record of earnings growth and returns.
Financial performance
This period has seen a challenging market backdrop, with the weaker UK
macroeconomic outlook creating significant uncertainty for both our individual
and SME customers. Although we continued to see good levels of customer demand
and a resilient underlying credit performance, the volatile external
environment has been reflected in higher forward-looking impairment provisions
and challenging market conditions in CBAM and Winterflood. Against this
backdrop, we have maintained our through-the-cycle approach, retaining our
pricing discipline whilst lending consistently to our customers. Our diverse
funding model has also benefited us, allowing the group to optimise its
funding mix and cost of funding in an environment of rapid interest rate
rises.
The financial results were impacted by a significant increase in provisions in
relation to the Novitas loan book, as we have taken steps to resolve the
issues surrounding that business. As a result, statutory operating profit
before tax decreased to £11.7 million (H1 2022: £128.9 million).
In Banking, excluding Novitas, performance reflected growth in income, offset
by higher forward-looking provisions to take into account the weaker
macroeconomic outlook and a rise in arrears in Motor Finance. CBAM delivered
healthy net inflows although profit reduced year-on-year reflecting wider
market conditions and performance at Winterflood reflected the continuation of
challenging trading conditions.
We have maintained our strong capital, funding and liquidity position, in line
with our prudent and conservative approach. Our Common Equity Tier 1 ("CET1")
ratio was 14.0% at 31 January 2023 (31 July 2022: 14.6%), significantly above
the applicable minimum regulatory requirement of 8.5% and the group's
medium-term CET1 capital ratio target range of 12-13%.
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 this business, including the initiation of
formal legal action against one of the After the Event ("ATE") insurers, and
are considering our position in respect of other insurers. We have recognised
additional provisions of £114.6 million in the first half, taking the overall
credit provisions against Novitas to £183.2 million. We are confident that
this level of provisions adequately reflects the remaining risk of credit
losses for the Novitas loan book and are focused on maximising the recovery of
remaining loan balances.
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.
The financial strength of the group leaves us well placed to move forward on
the delivery of our strategic priorities.
Protecting, Growing and Sustaining our business model
We have made good progress against our strategic priorities and remain
dedicated to resuming our track record of returns. Our approach to investing
through the cycle continues to provide tangible benefits and protect our
strong margins. I am pleased to announce the conclusion of the Motor Finance
transformation programme, which enabled us to make the most of growth
opportunities in the second hand car market, enhance our digital capabilities
and evolve our compelling dealer and customer proposition.
While investment to maintain the strengths of our high-touch model in Banking
is critical, we have intensified our focus on cost discipline and efficiency,
especially in light of recent inflationary pressures. We have a number of
strategic cost management initiatives in progress, including the
rationalisation of IT infrastructure and operational enhancements in Retail,
which 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.
We remain committed to optimising further our capital structure, including the
issuance of debt capital market securities if appropriate. In line with the
group's Capital Management framework, we are targeting a CET1 capital ratio
range of 12% to 13% over the medium term, which will allow the group to
maintain a buffer to minimum regulatory requirements while also retaining the
flexibility for growth.
We are focused on delivering disciplined growth and continue to actively
review a range of opportunities in line with our model. In the first half, our
recently hired specialist lending teams in Asset Finance executed new deals
and have a healthy pipeline for the remainder of the year. Following the
announcement last year of our first green growth ambition of providing funding
for £1.0 billion of battery electric vehicles over five years, we are pleased
to have funded over £90 million in the first six months. In addition,
Winterflood Business Services exceeded the targeted £10 billion of total AuA
following the onboarding of Fidelity International as a new client.
I am encouraged by the ongoing progress of our sustainability strategy.
Earlier this year we set our group wide climate commitment, becoming
signatories to the Net Zero Banking Alliance and Net Zero Asset Managers
initiative. We are focused on improving the quality, granularity and accuracy
of the data utilised across our emissions reporting, including our financed
emissions. Our drive towards a net zero company car fleet by 2025 has
continued, with over 40% of our car fleet now being fully electric.
Outlook
Although we are alert to the impact of rising inflation and interest rates on
our customers and wider financial market conditions, we are well placed to
move forward on the delivery of our strategic priorities. We are confident we
can 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)
First half First half Change
2023 2022 %
£ million £ million
Operating income 474.3 471.6 1
Adjusted operating expenses (299.5) (293.5) 2
Impairment losses on financial assets (162.2) (48.3) 236
Adjusted operating profit 12.6 129.8 (90)
Banking 15.0 120.2 (88)
Commercial (33.1) 37.7 (188)
Of which: Novitas (104.9) (30.7) 242
Retail 14.7 42.5 (65)
Property 33.4 40.0 (17)
Asset Management 8.6 14.5 (41)
Winterflood 2.4 8.8 (73)
Group (13.4) (13.7) (2)
Amortisation of intangible assets on acquisition (0.9) (0.9) -
Operating profit before tax 11.7 128.9 (91)
Tax (3.3) (33.8) (90)
Profit after tax 8.4 95.1 (91)
Profit attributable to shareholders 8.4 95.1 (91)
Adjusted basic earnings per share(2) 6.1p 64.0p (90)
Basic earnings per share(2) 5.6p 63.5p (91)
Ordinary dividend per share 22.5p 22.0p 2
Return on opening equity 1.1% 12.2%
Return on average tangible equity 1.3% 14.2%
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. Further detail on the reconciliation between statutory 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
Operating profit and returns
Adjusted operating profit decreased 90% to £12.6 million (H1 2022: £129.8
million), mainly driven by higher impairment charges in relation to Novitas.
Excluding Novitas, adjusted operating profit reduced 27% to £117.5 million
(H1 2022: £160.5 million), primarily reflecting an increase in impairment
charges and a reduction in income in Winterflood.
Statutory operating profit before tax decreased to £11.7 million (H1 2022:
£128.9 million). Return on opening equity reduced to 1.1% (H1 2022: 12.2%)
and return on average tangible equity was 1.3% (H1 2022: 14.2%). The loss
after tax recorded by Novitas in the first half reduced the group's RoTE by
11.2%.
Adjusted operating profit in the Banking division decreased by 88% to £15.0
million (H1 2022: £120.2 million), primarily reflecting higher impairment
charges related to Novitas, with income growth partially offset by increased
costs. In the Asset Management division, adjusted operating profit declined by
41% to £8.6 million (H1 2022: £14.5 million) as stable costs were more than
offset by the reduction in income. Winterflood saw a 73% reduction in
operating profit to £2.4 million (H1 2022: £8.8 million), with performance
adversely impacted by the continued market-wide slowdown in trading activity
in higher margin sectors and difficult market conditions. Group net expenses,
which include the central functions such as finance, legal and compliance,
risk and human resources, were broadly stable on the prior year period at
£13.4 million (H1 2022: £13.7 million).
Operating income
Operating income increased 1% to £474.3 million (H1 2022: £471.6 million),
with growth in Banking offsetting a reduction in income in Asset Management
and Winterflood. Income in the Banking division increased by 5%, reflecting a
strong net interest margin of 8.0% (H1 2022: 7.9%) and continued loan book
growth year-on-year. Income in the Asset Management division reduced 7%,
mainly due to negative market movements and lower client activity. Income in
Winterflood reduced by 21%, primarily driven by lower trading revenues
following a market-wide slowdown in activity.
Operating expenses
Operating expenses rose 2% to £299.5 million (H1 2022: £293.5 million) as
increased investment and higher staff costs in Banking more than offset lower
variable costs in Asset Management and Winterflood.
In Banking, costs increased 5% as we progressed our key investment programmes
and continued to exercise rigorous control of our costs, notwithstanding the
current inflationary environment. Costs were broadly stable in Asset
Management as lower variable compensation offset higher fixed staff costs, new
hires and technology spend. Winterflood's costs fell by 10% primarily driven
by lower variable staff costs accrued in the period to reflect the reduction
in income.
Overall, the group's expense/income ratio increased marginally on the prior
year period to 63% (H1 2022: 62%), whilst the group's compensation ratio
reduced marginally to 36% (H1 2022: 37%).
Statutory operating expenses increased to £299.5 million (H1 2022: £293.5
million).
Impairment charges and IFRS 9 provisioning
Impairment charges increased significantly to £162.2 million (H1 2022: £48.3
million), corresponding to an annualised bad debt ratio of 3.6% (H1 2022: 1.1%
annualised). This increase primarily reflected provisions of £114.6 million
taken in relation to Novitas (H1 2022: £39.2 million), in line with the
announcement in January 2023. As a result, there was an increase in provision
coverage to 4.3% (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
and a rise in arrears in Motor Finance, as well as an ongoing review of
provisions and coverage across our loan portfolios and model refinements. The
bad debt ratio, excluding Novitas, increased to 1.1% annualised (H1 2022:
0.2%) and the coverage ratio increased to 2.3% (31 July 2022: 1.9%).
Since the previous financial year end, we have updated the macroeconomic
scenarios to reflect the weaker macroeconomic environment and outlook,
although the weightings assigned to them remain unchanged. At 31 January 2023,
there was a 30% strong upside, 32.5% baseline, 20% mild downside, 10.5%
moderate downside and 7% severe downside.
Whilst we have not seen a significant impact on credit performance at this
stage, with actual realised losses, excluding Novitas, equivalent to c.£10
million in the period, 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, prudently
underwritten, diverse, and supported by the deep expertise of our people.
Tax expense
The tax expense in the first half of the year was £3.3 million (H1 2022:
£33.8 million), which corresponds to an effective tax rate of 28.2% (H1 2022:
26.2%) for the period, representing the best estimate of the annual effective
tax rate expected for the full year.
The standard UK corporation tax rate for the financial year is 21.0% (six
months ended 31 January 2022: 19.0%; year ended 31 July 2022: 19.0%). However,
an additional 6.3% surcharge applies to the profits of banking companies as
defined in legislation (and only above a threshold amount). The effective tax
rate is above the UK corporation tax rate primarily due to the surcharge
applying to the majority of the group's profits.
Earnings per share
Adjusted basic earnings per share ("EPS") was 6.1p (H1 2022: 64.0p) and basic
EPS was 5.6p (H1 2022: 63.5p). The loss after tax recorded by Novitas in the
first half reduced both the group's adjusted and basic EPS by 52.9p.
Dividend
We are pleased to declare an interim dividend of 22.5p (H1 2022: 22.0p),
reflecting 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. The interim dividend is due to be paid on 26 April
2023 to shareholders on the register at 24 March 2023.
SUMMARY GROUP BALANCE SHEET
31 January 2023 31 July 2022
£ million £ million
Loans and advances to customers and operating lease assets(1) 9,041.0 9,098.9
Treasury assets(2) 2,128.3 1,855.1
Market-making assets(3) 730.0 887.2
Other assets 993.7 837.1
Total assets 12,893.0 12,678.3
Deposits by customers 7,253.7 6,770.4
Borrowings(4) 2,827.5 2,870.1
Market-making liabilities(3) 629.8 796.1
Other liabilities 575.9 584.2
Total liabilities 11,286.9 11,020.8
Equity 1,606.1 1,657.5
Total liabilities and equity 12,893.0 12,678.3
1 Includes operating lease assets of £199.6 million (31 July 2022: £185.4
million) that relate to Asset Finance and £56.7 million (31 July 2022: £54.6
million) to Invoice and Speciality Finance.
2 Treasury assets comprise cash and balances at central banks, certificates of
deposit and sovereign and central bank debt.
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 a 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. 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 2% to £12.9 billion (31 July 2022: £12.7 billion),
mainly reflecting higher Treasury assets due to an increased cash balance, an
increase in other assets driven by market movements due to higher interest
rates, and a reduction in market-making assets. Total liabilities were also 2%
higher at £11.3 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 3% to £1.6 billion (31 July 2022: £1.7 billion), with
profit in the first half more than offset by dividend payments of £65.6
million (31 January 2022: £62.7 million). The group's return on assets
decreased to 0.1% (H1 2022: 1.5%).
GROUP CAPITAL(1)
31 January 2023 31 July 2022
£ million £ million
CET1 capital 1,310.7 1,396.7
Total capital 1,510.7 1,596.7
Risk weighted assets ("RWAs") 9,383.3 9,591.3
CET1 capital ratio (transitional) 14.0% 14.6%
Tier 1 capital ratio (transitional) 14.0% 14.6%
Total capital ratio (transitional) 16.1% 16.6%
Leverage ratio(2) 12.0% 12.0%
1 The impact of Novitas on the CET1 capital ratio was -c.125bps, of which
-c.90bps relates to retained earnings, -c.45bps 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 CRR.
Movements in capital and other regulatory metrics
The CET1 capital ratio reduced from 14.6% to 14.0%, mainly driven by the
impact of the IFRS 9 transitional arrangements (-c.45bps) and profits net of
dividends paid and foreseen (-c.35bps), partly offset by a decrease in risk
weighted assets (c.30bps). The impact of Novitas on the CET1 capital ratio was
-c.125bps, of which -c.75bps related to the increased provision against
Novitas taken in January.
CET1 capital decreased 6% to £1,310.7 million (31 July 2022: £1,396.7
million), reflecting a decrease in the transitional IFRS 9 add-back to capital
of £49.0 million, the regulatory deduction of dividends paid and foreseen of
£33.5 million and an increase in the intangible assets deducted from capital
of £8.4 million. This was partially offset by the capital generation through
profit of £8.4 million.
Total capital decreased 5% to £1,510.7 million (31 July 2022: £1,596.7
million).
RWAs fell by 2% to £9.4 billion (31 July 2022: £9.6 billion), mainly driven
by a reduction in risk weighted assets related to derivatives held for hedging
purposes and the IFRS 9 transitional adjustment, partly offset by an increase
in the loan book.
As a result, CET1, tier 1 and total capital ratios were 14.0% (31 July 2022:
14.6%), 14.0% (31 July 2022: 14.6%) and 16.1% (31 July 2022: 16.6%),
respectively.
At 31 January 2023, the applicable minimum CET1, tier 1 and total capital
ratio requirements, excluding any applicable Prudential Regulation Authority
("PRA") buffer, were 8.5%, 10.2% and 12.4%, respectively. Accordingly, we
continue to have headroom significantly above the applicable minimum
regulatory requirements of 550bps in the CET1 capital ratio, 380bps in the
tier 1 capital ratio and 365bps in the total capital ratio.
The group applies IFRS 9 regulatory transitional arrangements which allows
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 13.7%, 13.7% and 15.8%, respectively.
The leverage ratio, which is a transparent measure of capital strength not
affected by risk weightings, remains strong at 12.0% (31 July 2022: 12.0%).
The PRA Consultation Paper 16/22 on Basel 3.1 standards was published in
November, with changes expected to be implemented or phased in from 2025-2030.
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. Further capital distributions to shareholders will be
considered depending on future opportunities.
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 for growth.
GROUP FUNDING(1)
31 January 2023 31 July 2022
£ million £ million
Customer deposits 7,253.7 6,770.4
Secured funding 1,570.9 1,598.7
Unsecured funding(2) 1,500.1 1,544.3
Equity 1,606.1 1,657.5
Total available funding 11,930.8 11,570.9
Total funding as % of loan book(3) 132% 127%
Average maturity of funding allocated to loan book(4) 18 months 21 months
1 Numbers relate to core funding and exclude working capital facilities at the
business level.
2 Unsecured funding excludes £31.0 million (31 July 2022: £22.1 million) of
non-facility overdrafts included in borrowings and includes £274.7 million
(31 July 2022: £295.0 million) of undrawn facilities.
3 Total funding as a % of loan book has been re-presented to include £256.3
million (31 July 2022: £240.0 million) of operating lease assets in the loan
book figure. The revised definition is total funding as a % of loan book
including operating lease assets.
4 Average maturity of total 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 at consistently competitive rates, whilst
being committed to providing the highest level of customer service.
Our diverse funding sources enable us to adapt our position through the cycle,
based on 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. We do this
through drawing 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 first half by 3% to £11.9 billion (31 July
2022: £11.6 billion) which accounted for 132% (31 July 2022: 127%) of the
loan book at the balance sheet date. Although the average cost of funding
increased to 2.6% (2022: 1.3%) 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 remain elevated in the next financial year as a result of
higher interest rates and customer deposit pricing pressure, particularly in
notice accounts.
Customer deposits increased 7% to £7.3 billion (31 July 2022: £6.8 billion)
with non-retail deposits broadly stable at £3.7 billion (31 July 2022: £3.7
billion) and retail deposits increasing by 14% to £3.5 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.
The Savings business continues to benefit from the investment made in our
customer deposit platform, with the scalable platform and broadened
proposition enabling us to adapt our offering and pricing. The new Notice
Account range launched for our retail, corporate, pension and SME customers
has gained good traction, with balances currently at c.£900 million. We are
focused on identifying further opportunities 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 remained broadly stable at £1.6 billion (31 July 2022: £1.6
billion) as 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).
Unsecured funding, which includes senior unsecured and subordinated bonds and
undrawn committed revolving facilities, remained broadly stable at £1.5
billion (31 July 2022: £1.5 billion).
We have maintained a prudent maturity profile. The average maturity of funding
allocated to the loan book was 18 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 in the period.
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 January 2023 31 July 2022
£ million £ million
Cash and balances at central banks 1,876.6 1,254.7
Sovereign and central bank debt(1) 201.1 415.4
Certificates of deposit 50.6 185.0
Treasury assets 2,128.3 1,855.1
1 There was £nil million encumbered sovereign and central bank debt at 31
January 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. In the
first half, treasury assets increased 15% to £2.1 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 ("LCR") regulatory requirements,
with a 12-month average to 31 January 2023 LCR of 1034% (31 July 2022:
924%). In addition to internal measures, we monitor funding risk based on the
CRR rules for the net stable funding ratio ("NSFR") which became effective on
1 January 2022. The NSFR at 31 January 2023 was 124.4% (31 July 2022:
118.1%).
BUSINESS REVIEW
BANKING
Key Financials(1)
First half First half Change
2023 2022 %
£ million £ million
Operating income 363.9 345.7 5
Adjusted operating expenses(2) (186.7) (177.2) 5
Impairment losses on loans and advances (162.2) (48.3) n/a
Adjusted operating profit 15.0 120.2 (88)
Adjusted operating profit, pre provisions 177.2 168.5 5
Net interest margin 8.0% 7.9%
Expense/income ratio 51% 51%
Bad debt ratio 3.6% 1.1%
Return on net loan book 0.3% 2.7%
Return on opening equity 1.1% 13.6%
Closing loan book and operating lease assets 9,041.0 8,835.8 2
Key Financials (Excluding Novitas)(1)
First half First half Change
2023 2022 %
£ million £ million
Operating income 349.9 327.8 7
Adjusted operating expenses(2) (182.4) (167.8) 9
Impairment losses on loans and advances (47.6) (9.1) n/a
Adjusted operating profit 119.9 150.9 (21)
Adjusted operating profit, pre provisions 167.5 160.0 5
Net interest margin 7.8% 7.6%
Bad debt ratio 1.1% 0.2%
Closing loan book and operating lease assets 8,979.1 8,673.7 4
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.
2 Related ongoing costs resulting from investment projects are recategorised
from investment costs to BAU costs after one year. For comparison purposes,
£4.1 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. Costs related to Novitas were
£4.3 million in H1 2023 (H1 2022: £9.5 million).
Performance reflected significant increase in impairments related to Novitas
This period has seen a challenging market backdrop, with rising inflation and
interest rates in particular, creating significant uncertainty for both 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. Nevertheless, we have maintained our through-the-cycle approach,
retaining our pricing discipline whilst continuing to support our customers.
Banking adjusted operating profit reduced 88% to £15.0 million (H1 2022:
£120.2 million), primarily reflecting higher impairment charges, which more
than offset income growth. Nevertheless, we maintained our strong margin and
pricing discipline, saw a resilient underlying credit performance overall and
made progress in delivering our investment programmes. Statutory operating
profit decreased to £14.9 million (H1 2022: £120.1 million) and return on
opening equity decreased to 1.1% (H1 2022: 13.6%).
On a pre-provision basis, adjusted operating profit increased 5% to £177.2
million (H1 2022: £168.5 million), reflecting good income growth and cost
discipline.
Excluding Novitas, Banking adjusted operating profit reduced 21% to £119.9
million (H1 2022: £150.9 million), primarily driven by higher impairment
charges, particularly in the Retail business, and increased costs, which more
than offset income growth.
The loan book declined 1% in the six months to 31 January 2023 to £9.0
billion (31 July 2022: £9.1 billion) and grew 2% year-on-year to £9.0
billion (31 January 2022: £8.8 billion), primarily driven by continued good
demand in the Commercial businesses and growth in the Property Finance book.
This was offset by a seasonal decline in Premium Finance and a reduction in
the Motor Finance loan book as the Republic of Ireland business runs off, as
well as the reduction in the Novitas net loan book.
Excluding Novitas, the loan book increased marginally in the first half and 4%
year-on-year to £9.0 billion (31 July 2022: £8.9 billion, 31 January 2022:
£8.7 billion).
The net interest margin increased on the prior year period to 8.0% (H1 2022:
7.9%). This reflected both pricing discipline on new lending and actions taken
to optimise the group's liability mix and funding costs in a rising rate
environment. In addition, our net interest margin was supported by 14bps of
one-off benefits from mark-to-market swaps resulting from higher interest
rates. While we are well positioned to maintain a strong net interest margin,
we expect cost of funds to remain elevated in the next financial year.
Excluding Novitas, the net interest margin increased on the prior year period
to 7.8% (H1 2022: 7.6%)
Operating income increased 5%, to £363.9 million (H1 2022: £345.7 million),
reflecting the strong net interest margin and year-on-year loan book growth.
Excluding Novitas, operating income grew 7%.
Adjusted operating expenses grew in line with income, increasing 5% to £186.7
million (H1 2022: £177.2 million) as we progressed our key investment
programmes and continued to exercise rigorous control of our costs,
notwithstanding the inflationary pressures. As we kept the growth in our cost
base commensurate with income growth, the expense/income ratio was stable at
51% (H1 2022: 51%). The compensation ratio was also flat on the prior year
period at 29% (H1 2022: 29%).
Business-as-Usual ("BAU") costs increased by 5% to £147.6 million (H1 2022:
£140.1 million), primarily driven by salary increases in the current
inflationary environment and new hires focused on compliance, regulation, and
IT security. Costs related to Novitas reduced to £4.3 million in the first
half (H1 2022: £9.5 million) as we continue to wind down the business.
Investment costs rose 26% to £34.8 million (H1 2022: £27.6 million) and
included spend on our multi-year investment projects, strategic initiatives
and operational resilience of £16.5 million (H1 2022: £10.8 million) and
related depreciation charges of £18.3 million (H1 2022: £16.8 million). We
expect costs related to our existing investment programmes to stabilise over
the next financial years, with depreciation charges related to these
programmes continuing to increase.
We continue to 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 enhance continually our business and operational resilience, and
preparations for the upcoming implementation of the FCA's new Consumer Duty
regime continue. We have recently concluded our Motor Finance transformation
programme and our investment in Asset Finance systems has added new
functionality and improved customer insights. Our previous investment in our
Customer Deposit platform has enabled us to grow our Savings proposition and
achieve good customer satisfaction scores, whilst also supporting growth in
our retail deposits.
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, with more in the pipeline, which aim to create
capacity to accommodate growth, inflation and investment to support our
business. These include a multi-year technology transformation programme
focused on strategic IT services, and a Retail operations simplification
programme that will create efficiencies whilst delivering customer and control
benefits. We continue to evaluate additional opportunities for efficiency with
a view to achieving positive operating leverage over the medium term.
Impairment charges increased significantly to £162.2 million (H1 2022: £48.3
million), equating to an annualised bad debt ratio of 3.6% (H1 2022: 1.1%).
This includes a charge in relation to Novitas of £114.6 million (H1 2022:
£39.2 million). As a result, there was an increase in overall provision
coverage to 4.3% (31 July 2022: 3.1%).
A further £47.6 million of impairment charges were recognised to take into
account weaker macroeconomic variables and outlook, which have impacted the
Retail business' provisioning models in particular, as well as a rise in
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 1.1% annualised (H1 2022: 0.2%) and the coverage ratio
increased to 2.3% (31 July 2022: 1.9%).
Whilst we have not seen a significant impact on credit performance, with
actual realised losses, excluding Novitas, equivalent to c.£10 million in the
period, 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, prudently
underwritten, diverse, and supported by the deep expertise of our people.
Accelerating our efforts to resolve issues surrounding Novitas
As announced at the pre-close trading update in January 2023, the group has
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 is considering its 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.
Furthermore, an additional provision of £89.8 million has been recognised
following a review of certain cases being funded which now have limited
prospects of successfully progressing through the courts. This assumes 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 assumes reassessed estimates for recoverability of
interest on the relevant loans, in line with accounting requirements.
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 anticipated
additional provisions adequately reflect the remaining risk of credit losses
for the Novitas loan book (c.£62 million net loan book at 31 January 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.
As outlined previously, we expect net income related to Novitas to reduce from
c.£36 million in FY 2022 to c.£8 million in FY 2024.
Continued focus on disciplined growth
Loan book growth continues to be an output of our business model, as we focus
on delivering disciplined growth whilst prioritising our margins and credit
quality. We continue to actively work to identify incremental and new
opportunities in both our existing and adjacent markets and overall, we remain
confident in the growth outlook for the loan book over both the short and
medium term.
As highlighted at our 2022 full year results, we recognise a significant
opportunity in broadening our financing of green and transition assets, as the
UK aligns towards a net zero economy, and we will continue to build our
expertise in green and transition assets. We remain committed to our ambition
of providing funding for £1.0 billion of battery electric vehicles over five
years and have lent over £90 million in the first half.
The Asset Finance business remains well positioned to capitalise on continued
demand for finance from SMEs. The recently hired agricultural equipment and
materials handling teams have both built healthy pipelines and executed a
number of deals, as we expand our coverage into adjacent asset classes and
markets.
In Invoice Finance, we expect the growth trajectory to follow the economic
conditions. We remain focused on taking advantage of opportunities in the
asset-based lending ("ABL") space, including via syndication partnerships and
larger loans. We have also hired a new team providing bespoke term loan
structures to SMEs requiring growth and investment capital, which complements
our existing Invoice Finance and ABL offerings.
The Motor Finance transformation programme, which is now complete, has created
the digital capabilities for us to enhance our proposition for dealers,
partners and customers. Our partnership with AutoTrader provides dealers with
data and insights to effectively manage their forecourts and we will evolve
further our forecourt offering over the coming months. Our partnership with
iVendi has driven an uplift in proposal volumes as we offer our finance at
various points of the customer journey. 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 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 anticipate demand for the funding of insurance policies could increase
given the uncertain macroeconomic conditions.
In Property, we have successfully piloted a specialist buy-to-let extension to
our existing bridging finance customers, and continue to offer this product.
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. In addition, we continue to build
out our bridging finance proposition by offering term funding against rental
investment properties to existing high quality clients. 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 January 2023 31 July 2022 Change
£ million £ million %
Commercial 4,550.3 4,561.4 -
Commercial - Excluding Novitas 4,488.4 4,402.0 2
Asset Finance(1) 3,310.0 3,217.4 3
Invoice and Speciality Finance(1) 1,240.3 1,344.0 (8)
Invoice and Speciality Finance - 1,178.4 1,184.6 (1)
Excluding Novitas(1)
Retail 2,970.3 3,064.0 (3)
Motor Finance(2) 1,980.2 2,051.2 (3)
Premium Finance 990.1 1,012.8 (2)
Property 1,520.4 1,473.5 3
Closing loan book and operating lease assets(3) 9,041.0 9,098.9 (1)
Closing loan book and operating lease assets - Excluding Novitas 8,979.1 8,939.5 -
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 £293 million (31 July 2022: £367
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 Operating lease assets of £199.6 million (31 July 2022: £185.4 million)
relate to Asset Finance and £56.7 million (31 July 2022: £54.6 million) to
Invoice and Speciality Finance.
Ongoing demand across our Banking businesses with continued loan book growth
The loan book declined 1% in the six months since 31 July 2022 to £9.0
billion (31 July 2022: £9.1 billion). This reflected continued demand in the
Commercial businesses and growth in the Property loan book, offset by the
typical seasonal declines seen in the Premium and Invoice Finance businesses,
the reduction in the Novitas net loan book and the run-off of the Republic of
Ireland Motor Finance loan book.
Excluding Novitas, the loan book increased marginally in the first half to
£9.0 billion (31 January 2022: £8.7 billion, 31 July 2022: £8.9 billion).
The Commercial loan book was broadly stable at £4.6 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").
We saw steady new business volumes across the businesses, which were offset by
seasonality in Invoice Finance and the reduction in the Novitas net loan book.
Excluding Novitas, the Commercial book increased 2% to £4.5 billion (31 July
2022: £4.4 billion).
Asset Finance grew 3% as we continued to see good demand from customers.
Invoice and Speciality Finance contracted by 8% as higher provisions against
Novitas led to a reduction in the net loan book. Excluding Novitas, the
Invoice and Speciality Finance loan book reduced by 1%, with a seasonal
decline in the first half more than offsetting growth in the Irish business.
The Retail loan book contracted 3% to £3.0 billion (31 July 2022: £3.1
billion), driven in part by a 4% reduction in Motor Finance, with the decline
in the Republic of Ireland loan book following the cessation of our previous
partnership, offsetting a stable UK book. We also saw a 2% reduction in the
Premium Finance book, in part reflecting first half seasonality. The Republic
of Ireland Motor Finance business accounted for 15% of the Motor Finance loan
book (31 July 2022: 18%) and 7% of the Banking loan book (31 July 2022: 7%).
As previously announced, from 30 June 2022, we ceased writing new business in
Motor Finance under our previous partnership in that country. We remain
committed to the Irish market and are considering our long-term options.
The Property loan book grew 3% as we saw strong drawdowns from our healthy
pipeline and repayment levels began to normalise, as the buoyant UK property
market in the prior year period had resulted in heightened unit sales by
developers and therefore higher repayments.
Banking: Commercial(1)
First half First half Change
2023 2022 %
£ million £ million
Operating income 182.3 167.8 9
Adjusted operating expenses (92.9) (89.1) 4
Impairment losses on financial assets (122.5) (41.0) n/a
Adjusted operating profit (33.1) 37.7 (188)
Adjusted operating profit, pre provisions 89.4 78.7 14
Net interest margin 8.0% 7.9%
Expense/income ratio 51% 53%
Bad debt ratio 5.4% 1.9%
Closing loan book and operating lease assets (2,3) 4,550.3 4,358.3 4
( )
Commercial key metrics excluding Novitas(1)
First half First half Change
2023 2022 %
£ million £ million
Operating income 168.3 149.9 12
Adjusted operating expenses (88.6) (79.7) 11
Impairment losses on financial assets (7.9) (1.8) n/a
Adjusted operating profit 71.8 68.4 5
Adjusted operating profit, pre provisions 79.7 70.2 14
Net interest margin 7.6% 7.3%
Expense/income ratio 53% 53%
Bad debt ratio 0.4% 0.1%
Closing loan book and operating lease assets (2,3) 4,488.4 4,196.2 7
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.
2 Commercial, Asset Finance and Invoice and Speciality Finance loan books have
been re-presented for 31 January 2022 to include £229.9 million of operating
lease assets (£178.4 million in Asset Finance and £51.5 million in Invoice
and Speciality Finance).
3 Operating lease assets of £199.6 million (31 January 2022: £178.4 million)
relate to Asset Finance and £56.7 million (31 January 2022: £51.5 million)
to Invoice and Speciality Finance.
Good 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 our
specialist businesses such as Brewery Rentals and Novitas. As previously
announced, Novitas ceased lending to new customers in July 2021.
Despite the economic uncertainty during the period, we have seen continued
good customer demand, with increased new business volumes and utilisation
levels in Invoice Finance remaining steady at c.55%. However, supply chain
issues continue to impact certain sectors of the market. We have focused on
asset pricing discipline, actively choosing to pass through higher rates on
new lending where appropriate.
A significant increase in impairment charges related to Novitas was the main
driver for an adjusted operating loss in Commercial of £(33.1) million (H1
2022: profit of £37.7 million), despite the business achieving positive
operating leverage. The statutory operating loss was £(33.2) million (H1
2022: profit of £37.6 million).
On a pre-provision basis, adjusted operating profit increased 14% to £89.4
million (H1 2022: £78.7 million), reflecting continued customer demand and
positive operating leverage.
Excluding Novitas, adjusted operating profit increased 5% to £71.8 million
(H1 2022: £68.4 million) as strong income growth more than offset higher
costs and impairment charges.
Operating income increased 9% to £182.3 million (H1 2022: £167.8 million),
reflecting good loan book growth and increased activity-driven income in Asset
Finance. The net interest margin increased to 8.0% (H1 2022: 7.9%) as we
continued to focus on asset pricing discipline, generated higher fees in the
Asset Finance business and benefited from central funding mix actions taken in
light of the rising interest rate environment.
Excluding Novitas, the net interest margin increased to 7.6% (H1 2022: 7.3%).
Adjusted operating expenses grew 4% to £92.9 million (H1 2022: £89.1
million), reflecting higher staff costs to reflect the inflationary
environment, as well as investment spend in relation to the Asset Finance
transformation programme. This was partly offset by lower advisory costs in
relation to Novitas. The expense/income ratio reduced to 51% (H1 2022: 53%) as
the strong income growth more than offset higher costs.
Impairment charges rose significantly to £122.5 million (H1 2022: £41.0
million), with £114.6 million incurred in relation to Novitas, in line with
the update provided in January 2023. As a result, there was an increase in
provision coverage to 5.6% (31 July 2022: 4.0%).
Excluding Novitas, impairment charges rose to £7.9 million (H1 2022: £1.8
million), corresponding to a bad debt ratio of 0.4% annualised (H1 2022:
0.1%). This increase primarily reflected additional provisions to take into
account weaker macroeconomic variables and outlook. The coverage ratio
remained broadly stable at 1.7% (31 July 2022: 1.6%), excluding Novitas.
Banking: Retail
First half First half Change
2023 2022 %
£ million £ million
Operating income 123.2 119.7 3
Operating expenses (79.1) (71.9) 10
Impairment losses on financial assets (29.4) (5.3) n/a
Operating profit 14.7 42.5 (65)
Operating profit, pre provisions 44.1 47.8 (8)
Net interest margin 8.2% 8.0%
Expense/income ratio 64% 60%
Bad debt ratio 1.9% 0.4%
Closing loan book(1) 2,970.3 3,026.5 (2)
1 The Motor Finance loan book includes £293 million (31 July 2022: £367
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.
Remain 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.
Although consumers have faced significant uncertainty in the period from
rising inflation and interest rates, we have continued to see a solid market
backdrop. In Motor Finance, we are adhering to our model of pricing
discipline, passing through higher rates on new lending. As expected in the
current environment and in line with comparable trends observed across the
wider industry, we have seen an increase in arrears 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. Volumes and credit
performance have remained solid in Premium Finance in the period, although we
anticipate the demand from customers seeking funding for insurance policies
may increase as the cost of living pressures continue.
Operating profit for Retail reduced to £14.7 million (H1 2022: £42.5
million), as income growth was more than offset by higher costs and increased
impairment charges to reflect a deterioration in the macroeconomic outlook and
a rise in arrears. Statutory operating profit also reduced to £14.7 million
(H1 2022: £42.5 million).
Operating income increased 3% to £123.2 million (H1 2022: £119.7 million),
reflecting growth in the UK Motor Finance loan book year-on-year and an
increase in the net interest margin to 8.2% (H1 2022: 8.0%) 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 rose 10% to £79.1 million (H1 2022: £71.9 million),
driven mainly by ongoing investment in the Retail businesses to create
efficiencies whilst delivering customer and control benefits, including
depreciation related to our 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 64% (H1 2022:
60%).
Impairment charges increased to £29.4 million (H1 2022: £5.3 million),
resulting in an annualised bad debt ratio of 1.9% (H1 2022: 0.4%). This was
driven by the weakening macroeconomic outlook and the rise in Motor Finance
arrears, as well as an ongoing review of provisions and coverage and model
refinements. As a result, the provision coverage ratio increased to 3.0% (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.10% of the Motor Finance loan book at 31
January 2023. 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
First half First half Change
2023 2022 %
£ million £ million
Operating income 58.4 58.2 -
Operating expenses (14.7) (16.2) (9)
Impairment losses on financial assets (10.3) (2.0) n/a
Operating profit 33.4 40.0 (17)
Operating profit, pre provisions 43.7 42.0 4
Net interest margin 7.8% 7.9%
Expense/income ratio 25% 28%
Bad debt ratio 1.4% 0.3%
Closing loan book 1,520.4 1,451.0 5
Strong drawdowns from our healthy pipeline driving loan book growth
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 half has seen a slowdown across the UK property market following a period
of heightened activity and strong unit sales. Housebuilding levels are
falling, and house prices are starting to contract, with home buyers impacted
by rising interest rates. Nevertheless, we have maintained our healthy
pipeline at c.£1.0 billion and seen strong drawdowns from clients, whilst
retaining our margin and pricing discipline.
Operating profit decreased 17% to £33.4 million (H1 2022: £40.0 million), as
higher impairment charges more than offset a reduction in operating expenses.
On a pre-provision basis, adjusted operating profit increased 4% to £43.7
million (H1 2022: £42.0 million), as we achieved positive operating leverage.
Operating income was stable at £58.4 million (H1 2022: £58.2 million) as we
saw good fee income in the period, although the net interest margin decreased
marginally to 7.8% (H1 2022: 7.9%), reflecting higher cost of funds and the
benefit of interest rate floors in the prior year period.
Operating expenses reduced 9% to £14.7 million (H1 2022: £16.2 million) as
we maintained our rigorous focus on cost discipline. As a result, the
expense/income ratio reduced to 25% (H1 2022: 28%).
Impairment charges increased to £10.3 million (H1 2022: £2.0 million),
resulting in an annualised bad debt ratio of 1.4% (H1 2022: 0.3%), 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. As a result, the provision coverage ratio
increased to 3.0% (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)
First half First half Change
2023 2022 %
£ million £ million
Investment management 54.2 57.4 (6)
Advice and other services(2) 15.7 19.0 (17)
Other income(3) 1.1 0.2 n/a
Operating income 71.0 76.6 (7)
Adjusted operating expenses (62.4) (62.1) -
Adjusted operating profit 8.6 14.5 (41)
Revenue margin (bps) 83 89
Operating margin 12% 19%
Return on opening equity 13.1% 38.3%
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.
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.
Well placed to continue our long-term track record of growth
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 decreased 41% to £8.6 million (H1 2022:
£14.5 million), as stable costs were more than offset by the reduction in
income. The operating margin reduced to 12% (H1 2022: 19%). Statutory
operating profit before tax was £7.8 million (H1 2022: £13.7 million).
Total operating income declined by 7% to £71.0 million (H1 2022: £76.6
million), reflecting a lower average AuM due to markets and lower client
activity. The revenue margin reduced to 83bps (H1 2022: 89bps) primarily due
to flows into lower margin investment management products.
Adjusted operating expenses were broadly flat at £62.4 million (H1 2022:
£62.1 million), despite the current inflationary environment, as lower
variable compensation offset higher fixed staff costs, new hires and
technology spend. However, the expense/income ratio grew to 88% (H1 2022: 81%)
with the compensation ratio also increasing to 58% versus the prior year (H1
2022: 56%), reflecting the reduction in income.
Our technology projects continue to focus on increasing efficiency and
operational resilience, improving client experience by using best-of-breed
applications, digital technology and selective in-house development. We have
also recently completed a major adviser re-platforming project to rationalise
legacy systems and increase efficiency.
Healthy net inflows despite challenging market conditions
Equity markets have experienced a mixed performance during the first half of
the year. Although ongoing uncertainty continued to impact investor sentiment,
we saw net inflows of £474 million (H1 2022: £634 million) and delivered a
net inflow rate of 6% (H1 2022: 8%) with a strong contribution from new hires.
During the first half, we recruited five new client facing colleagues, as we
continue to invest in new hires to support the long-term growth potential of
CBAM.
Total managed assets increased 3% to £15.7 billion (31 July 2022: £15.3
billion), driven by positive net inflows, slightly offset by negative market
performance. Total client assets, which includes advised and managed assets,
increased by 2% overall to £16.9 billion (31 July 2022: £16.6 billion).
Movement in Client Assets Six months to 31 January 2022
Six months to 12 months to £ million
31 January 31 July
2023 2022
£ million £ million
Opening managed assets 15,302 15,588 15,588
Inflows 1,155 2,330 1,201
Outflows (681) (1,486) (567)
Net inflows 474 844 634
Market movements (61) (1,130) (412)
Total managed assets 15,715 15,302 15,810
Advised only assets 1,196 1,272 1,403
Total client assets(1) 16,911 16,574 17,213
Net flows as % of opening managed assets(2) 6% 5% 8%
1 Total client assets include £5.8 billion of assets (31 July 2022: £5.9
billion) that are both advised and managed.
2 Net flows as % of opening managed assets calculated on an annualised basis.
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 over the six months period has
been mixed, reflecting volatile markets across asset classes which has been
the case throughout the holding period.
Our approach to ESG and sustainability
ESG integration in our investment research and stewardship remains a key area
of focus. Our Sustainable Balanced fund, which launched in 2020, continues to
attract inflows and in March 2023, we are merging our existing Select Fixed
Income fund and Sustainable Bond fund to create the Sustainable Select Fixed
Income fund.
This new fund utilises an updated Sustainable Investment methodology, which
makes use of CBAM's experience and understanding of sustainable investment
strategies gained over recent years to target an active reduction in CO(2)
emissions. This is made explicit by a commitment to have the fund portfolio at
less than 50% of the CO(2) emissions of its 2019 benchmark by 2030 and always
under the benchmark in the period.
In line with our commitment to actively contribute towards the UK government's
net zero climate goals, CBAM is now a signatory of the Net Zero Asset Managers
initiative.
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 to our clients whilst
investing in new hires 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
First half First half
2023 2022 %
£ million £ million Change
Operating income 39.0 49.5 (21)
Operating expenses (36.6) (40.7) (10)
Impairment losses on financial assets - - -
Operating profit 2.4 8.8 (73)
Average bargains per day ('000) 61 83
Operating margin 6% 18%
Return on opening equity 3.9% 14.0%
Loss days 1 1
Performance impacted by continued slowdown in trading activity
Winterflood is a leading UK market maker, delivering high quality execution
services to 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 experienced difficult market conditions as recession concerns, inflationary
pressures, an elevated UK interest rate environment, economic policy
instability and global geopolitical issues all had an adverse impact on market
sentiment and investor appetite.
Operating income decreased to £39.0 million (H1 2022: £49.5 million),
primarily driven by lower trading revenues, with all sectors reporting a
decline against the prior year, with the exception of Fixed Income which
benefitted from volatility in bond markets.
Low investor confidence, compounded by macroeconomic uncertainty, interest
rates at a 14 year high and inflationary pressures, led to reduced retail
trading volumes, with average daily bargains at 61k in the period, a decline
from H1 2022 levels (83k) and marginally above pre-pandemic levels (2019:
56k). In particular, we saw a significant reduction in total bargains in our
higher margin sectors, AIM and Small Cap. As a result, trading income declined
to £31.7 million for the period (H1 2022: £42.7 million).
Nevertheless, we benefited from the expertise of our traders and our strong
focus on risk management, which resulted in only one loss day in the period
(H1 2022: one loss day). The diversification of our trading desk enabled us to
take advantage of the increased retail investor interest in Fixed Income
markets.
Our Investment Trusts Corporate team, who are corporate broker to over 50
Investment Trusts and generate additional fees through corporate finance
activity, delivered revenue of £1.3 million (H1 2022: £1.2 million). This
was largely driven by retainer fee income, as the risk-off market sentiment
impacted capital markets activity, with no Investment Trust IPOs launched
across the market in 2022. Nonetheless, we are well placed for when market
activity returns.
WBS has had a positive start to the year, growing AuA to £12.4 billion (H1
2022: £6.8 billion) despite declining equity markets. Net inflows were £4.8
billion (H1 2022: £0.7 billion) including the successful planned migration of
custody assets for Fidelity International in Q1. Against this backdrop WBS
generated income of £6.3 million which represents an increase of 24% (H1
2022: £5.1 million). We see significant further growth potential with WBS
supported by a solid pipeline of clients.
Operating expenses fell by 10% to £36.6 million (H1 2022: £40.7 million)
primarily driven by lower variable staff costs accrued in the period to
reflect the reduction in income.
Operating profit decreased by 73% to £2.4 million (H1 2022: £8.8 million).
Against a backdrop of sustained market declines in the period, this represents
a resilient performance in difficult market conditions.
Winterflood has a long track record of trading profitably in a range of
conditions and remains well positioned to retain our market position, taking
advantage when investor confidence recovers from the low levels seen in the
past 12 months. We continue to diversify our revenue streams and explore
growth opportunities, such as through WBS, balancing the cyclicality seen in
the trading business.
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
costs related to strategic initiatives or investment programmes
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
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 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
Funding allocated to loan book: Total funding excluding equity and funding
held for liquidity purposes
Funding as % loan book: Total funding divided by net loans and advances to
customers and operating lease assets
Gross carrying amount: Loan book before expected credit loss provision
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 all depreciation and other costs related to
investments (including multi-year projects), strategic initiatives, pilots and
cyber resilience. Excludes IFRS 16 depreciation and long term BAU license
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
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
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 leverage: Operating income percentage growth less adjusted operating
expenses percentage growth
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
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
Strategic initiatives: Acquisitions or ventures into existing/adjacent markets
that are anticipated to support business growth, or initiatives where a
strategic decision has been made to exit the business or market
Subordinated debt: Represents debt that ranks below, and is repaid after
claims of, other secured or senior debt owed by the issuer
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
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
Principal Risks and Uncertainties
The group faces a number of risks in the normal course of business. To manage
these effectively, a consistent approach is adopted based on a set of
overarching principles, namely:
· adhering to our established and proven business model;
· implementing an integrated risk management approach based on the
concept of "three lines of defence"; and
· setting and operating within clearly defined risk appetites, monitored
with defined metrics, and set limits.
Whilst we have not seen a marked deterioration in 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, prudently underwritten, diverse, and
supported by the deep expertise of our people.
The group's principal risks remain unchanged since the last reporting period.
A detailed description of each, including an overview of our risk management
and mitigation approach, is disclosed on pages 74 to 92 of the 2022 Annual
Report. The Annual Report can be accessed via the Investor Relations home page
on the group's website at www.closebrothers.com (http://www.closebrothers.com)
.
A summary of the group's principal risks is detailed below:
Business risk - The group operates in an environment where it is exposed to an
array of independent factors. Its profitability is impacted by the broader UK
economic climate, changes in technology, regulation and customer behaviour,
cost movements and competition from traditional and new participants, varying
in both nature and extent across its divisions. Changes in these factors may
affect the bank's ability to write loans within desired risk and return
criteria, result in lower new business volumes in Asset Management, impact
levels of trading activity at Winterflood or result in additional investment
requirements/higher costs of operation.
Capital risk - The group is required to hold sufficient regulatory capital
(including equity and other loss-absorbing debt instruments) to enable it to
operate effectively. This includes meeting minimum regulatory requirements,
operating within risk appetites set by the board and supporting its strategic
goals.
Conduct risk - The group's behaviours, or those of its colleagues, whether
intentional or unintentional, could result in poor outcomes for our customers
or the markets in which we operate. Our relationship-focused model enables the
group to put customers at the heart of our business to minimise this risk.
This is achieved by acting in good faith towards customers, taking steps to
proactively avoid causing foreseeable harm and supporting customers to pursue
their financial objectives. This approach is founded in customers being
central to our purpose and this ethos is embedded within our culture.
Reporting on, and monitoring of, conduct risk continues to further evolve with
the introduction of new regulatory requirements for the Financial Conduct
Authority's ("FCA") Consumer Duty. Implementation activities for Consumer
Duty are underway and will be incorporated into the Conduct Risk Framework.
Credit risk - As a lender to businesses and individuals, the bank is primarily
exposed to credit losses if customers are unable to repay loans and
outstanding interest and fees. The group also has exposure to counterparties
including those with which it places deposits or trades, and a small number of
derivative contracts to hedge interest rate and foreign exchange exposures.
Funding and liquidity - The Banking division's access to funding remains key
to support our lending activities and the liquidity requirements of the group.
Market risk - Market volatility impacting equity and fixed income exposures,
and / or changes in interest and exchange rates has the potential to impact
the group's performance.
Operational risk - The group is exposed to various operational risks through
its day-to-day operations, all of which have the potential to result in
financial loss or adverse impact. Losses typically crystallise as a result of
inadequate or failed internal processes, people, technology, data, models and
systems, or as a result of external factors, including but not limited to
Cyber and Information Security. Impacts to the business, customers, third
parties and the markets in which we operate are considered within a maturing
framework for resilient delivery of important business services.
Legal and regulatory risks are also considered as part of operational risk.
Failure to comply with existing legal or regulatory requirements, or to adapt
to changes in these requirements in a timely fashion, may have negative
consequences for the group. Similarly, changes to regulation can impact our
financial performance, capital, liquidity, and the markets in which we
operate.
Reputational risk - Protection and effective stewardship of the group's
reputation are fundamental to its long-term success. Detrimental stakeholder
perception could lead to impairment of the group's current business and future
goals. This could arise in the course of the groups usual activities, such as
through employee, supplier or intermediary conduct, the provision of products
and services, crystallisation of another risk type, or as a result of changes
outside of its influence.
In addition to day-to-day management of its principal risks, the group
utilises an established framework to monitor its portfolio for emerging risks,
consider broader market uncertainties, and support its organisational
readiness to respond.
Current group level emerging risks include economic and geopolitical
uncertainty, the risk of financial loss or disruption resulting from the
impacts of climate change, legal and regulatory change, the risk of
technological change and new business models, evolving working practices,
supply chain risks and the ability to respond to future pandemics.
The group continues to mature the embedding of its climate risk management
framework to ensure continued alignment with regulation and market
expectations and its net zero commitments. Initial climate disclosures are
disclosed on pages 42 to 57 of the 2022 Annual Report, in line with the
recommendations of the Taskforce for Climate-related Financial Disclosures
("TCFD").
DIRECTORS' RESPONSIBILITY STATEMENT
Each of the Directors confirms that, to the best of their knowledge:
· the condensed consolidated interim financial statements ("interim
financial statements") have been prepared in accordance with International
Accounting Standard 34 "Interim Financial Reporting" as contained in
UK-adopted IFRS;
· the half year results include a fair review of the information
required by Disclosure and Transparency Rule 4.2.7R (indication of important
events during the first six months of the financial year and their impact on
the interim financial statements, and a description of principal risks and
uncertainties for the remaining six months of the financial year); and
· the half year results include a fair review of the information
required by Disclosure and Transparency Rule 4.2.8R (disclosure of related
parties transactions that have taken place during the first six months of the
current financial year and that have materially affected the financial
position or performance of the company, and any changes in the related parties
transactions described in the last Annual Report that could do so).
The Directors of Close Brothers Group plc as at the date of this report are as
listed on pages 95 to 97 of the company's Annual Report 2022, subject to the
following changes: both Lesley Jones and Bridget Macaskill ceased to be a
director on 17 November 2022. A list of current Directors is maintained on the
company's website www.closebrothers.com (http://www.closebrothers.com) .
On behalf of the board
Michael N. Biggs Adrian J. Sainsbury
Chairman Chief Executive
14 March 2023
Independent Review Report to close brothers group plc
Report on the condensed consolidated interim financial statements
Our conclusion
We have reviewed Close Brothers Group plc's condensed consolidated interim
financial statements (the "interim financial statements") in the Half Year
Results of Close Brothers Group plc for the 6 month period ended
31 January 2023 (the "period").
Based on our review, nothing has come to our attention that causes us to
believe that the interim financial statements are not prepared, in all
material respects, in accordance with UK adopted International Accounting
Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
The interim financial statements comprise:
· the consolidated balance sheet as at 31 January 2023;
· the consolidated income statement and consolidated statement of
comprehensive income for the period then ended;
· the consolidated cash flow statement for the period then ended;
· the consolidated statement of changes in equity for the period then
ended; and
· the explanatory notes to the interim financial statements.
The interim financial statements included in the Half Year Results of Close
Brothers Group plc have been prepared in accordance with UK adopted
International Accounting Standard 34, 'Interim Financial Reporting' and the
Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority.
Basis for conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410, 'Review of Interim Financial Information Performed by
the Independent Auditor of the Entity' issued by the Financial Reporting
Council for use in the United Kingdom ("ISRE (UK) 2410"). A review of interim
financial information consists of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and
other review procedures.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and, consequently, does not
enable us to obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do not express
an audit opinion.
We have read the other information contained in the Half Year Results and
considered whether it contains any apparent misstatements or material
inconsistencies with the information in the interim financial statements.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for conclusion section of this report,
nothing has come to our attention to suggest that the directors have
inappropriately adopted the going concern basis of accounting or that the
directors have identified material uncertainties relating to going concern
that are not appropriately disclosed. This conclusion is based on the review
procedures performed in accordance with ISRE (UK) 2410. However, future events
or conditions may cause the group to cease to continue as a going concern.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The Half Year Results, including the interim financial statements, is the
responsibility of, and has been approved by the directors. The directors are
responsible for preparing the Half Year Results in accordance with the
Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority. In preparing the Half Year Results, including the
interim financial statements, the directors are responsible for assessing the
group's ability to continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the group or to
cease operations, or have no realistic alternative but to do so.
Our responsibility is to express a conclusion on the interim financial
statements in the Half Year Results based on our review. Our conclusion,
including our Conclusions relating to going concern, is based on procedures
that are less extensive than audit procedures, as described in the Basis for
conclusion paragraph of this report. This report, including the conclusion,
has been prepared for and only for the company for the purpose of complying
with the Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We do not, in
giving this conclusion, accept or assume responsibility for any other purpose
or to any other person to whom this report is shown or into whose hands it may
come save where expressly agreed by our prior consent in writing.
PricewaterhouseCoopers LLP
Chartered Accountants
London
14 March 2023
Consolidated income statement
for the six months ended 31 January 2023
Six months ended Year ended
31 January 31 July
2023 2022 2022
Unaudited Unaudited Audited
Note £ million £ million £ million
Interest income 414.4 341.1 690.0
Interest expense (117.0) (49.3) (112.0)
Net interest income 297.4 291.8 578.0
Fee and commission income 130.1 128.6 259.5
Fee and commission expense (8.7) (8.0) (17.2)
Gains less losses arising from dealing in securities 31.9 43.3 81.6
Operating lease assets rental and other income 61.8 51.6 106.1
Depreciation of operating lease assets and other direct costs (38.2) (35.7) (71.9)
Non-interest income 176.9 179.8 358.1
Operating income 2 474.3 471.6 936.1
Administrative expenses (299.5) (293.5) (598.0)
Impairment losses on financial assets 6 (162.2) (48.3) (103.3)
Total operating expenses before amortisation of
intangible assets on acquisition (461.7) (341.8) (701.3)
Operating profit before amortisation of intangible assets
on acquisition 12.6 129.8 234.8
Amortisation of intangible assets on acquisition (0.9) (0.9) (2.0)
Operating profit before tax 11.7 128.9 232.8
Tax 3 (3.3) (33.8) (67.6)
Profit after tax 8.4 95.1 165.2
Profit attributable to shareholders 8.4 95.1 165.2
Basic earnings per share 4 5.6p 63.5p 110.4p
Diluted earnings per share 4 5.6p 63.0p 109.9p
Ordinary dividend per share 5 22.5p 22.0p 66.0p
Consolidated Statement of COMPREHENSIVE INCOME
for the six months ended 31 January 2023
Six months ended Year ended
31 January 31 July
2023 2022 2022
Unaudited Unaudited Audited
£ million £ million £ million
Profit after tax 8.4 95.1 165.2
Items that may be reclassified to income statement
Currency translation gains/(losses) 1.0 (0.6) (0.5)
Gains on cash flow hedging 18.7 16.4 30.6
Losses on financial instruments classified at fair value through other
comprehensive income:
Sovereign and central bank debt (4.7) (1.0) (1.1)
Tax relating to items that may be reclassified (3.9) (5.1) (7.9)
11.1 9.7
21.1
Items that will not be reclassified to income statement
Defined benefit pension scheme (losses)/gains (Note 14) (5.5) 1.9 (0.1)
Tax relating to items that will not be reclassified 1.5 (0.5) 0.3
(4.0) 1.4
0.2
Other comprehensive income for the period, net of tax 7.1 11.1 21.3
Total comprehensive income 15.5 106.2 186.5
Attributable to:
Shareholders 15.5 106.2 186.5
Consolidated Balance Sheet
at 31 January 2023
31 January 31 July
2023 2022
Unaudited Audited
Note £ million £ million
Assets
Cash and balances at central banks 1,876.6 1,254.7
Settlement balances 655.8 799.3
Loans and advances to banks 271.5 165.4
Loans and advances to customers 6 8,784.7 8,858.9
Debt securities 7 262.7 612.8
Equity shares 8 27.3 28.4
Loans to money brokers against stock advanced 37.2 48.4
Derivative financial instruments 116.7 71.2
Goodwill and other intangible assets 9 260.2 252.0
Property, plant and equipment 10 336.0 322.5
Current tax assets 46.2 47.0
Deferred tax assets 25.2 32.5
Prepayments, accrued income and other assets 192.9 185.2
Total assets 12,893.0 12,678.3
Liabilities
Settlement balances and short positions 11 619.0 796.1
Deposits by banks 12 159.6 160.5
Deposits by customers 12 7,253.7 6,770.4
Loans and overdrafts from banks 12 653.2 622.7
Debt securities in issue 12 1,994.9 2,060.9
Loans from money brokers against stock advanced 10.8 -
Derivative financial instruments 161.9 89.2
Accruals, deferred income and other liabilities 254.4 334.5
Subordinated loan capital 12 179.4 186.5
Total liabilities 11,286.9 11,020.8
Equity
Called up share capital 38.0 38.0
Retained earnings 1,568.1 1,628.4
Other reserves - (8.9)
Total shareholders' equity 1,606.1 1,657.5
Total equity 1,606.1 1,657.5
Total liabilities and equity 12,893.0 12,678.3
Consolidated Statement of CHANGES IN EQUITY
for the six months ended 31 January 2023
Other reserves
Share- Cash Total attributable to equity holders
Called up based payments reserve Exchange movements reserve flow Non-controlling interests
share Retained earnings FVOCI hedging Total
capital reserve reserve equity
£ million £ million £ million £ million £ million £ million £ million £ million £ million
At 1 August 2021
(audited) 38.0 1,555.5 0.8 (22.4) (1.3) (0.3) 1,570.3 (1.0) 1,569.3
Profit for the period - 95.1 - - - - 95.1 - 95.1
Other comprehensive - 1.4 (0.7) - (0.6) 11.0 11.1 - 11.1
income/(expense)
for the period
Total comprehensive - 96.5 (0.7) - (0.6) 11.0 106.2 - 106.2
income/(expense)
for the period
Dividends paid - (62.7) - - - - (62.7) - (62.7)
Shares purchased - - - (9.6) - - (9.6) - (9.6)
Shares released - - - 4.0 - - 4.0 - 4.0
Other movements - (0.9) - 1.4 - - 0.5 1.0 1.5
Income tax - (0.5) - - - - (0.5) - (0.5)
At 31 January 2022 38.0 1,587.9 0.1 (26.6) (1.9) 10.7 1,608.2 - 1,608.2
(unaudited)
Profit for the period - 70.1 - - - - 70.1 - 70.1
Other comprehensive
(expense)/income
for the period - (1.2) - - 0.4 11.0 10.2 - 10.2
Total comprehensive
income for
the period - 68.9 - - 0.4 11.0 80.3 - 80.3
Dividends paid - (32.8) - - - - (32.8) - (32.8)
Shares purchased - - - 0.1 - - 0.1 - 0.1
Shares released - - - 0.9 - - 0.9 - 0.9
Other movements - 5.0 - (3.6) - - 1.4 - 1.4
Income tax - (0.6) - - - - (0.6) - (0.6)
At 31 July 2022
(audited) 38.0 1,628.4 0.1 (29.2) (1.5) 21.7 1,657.5 - 1,657.5
Profit for the period - 8.4 - - - - 8.4 - 8.4
Other comprehensive (4.0) (3.4) - 1.0 13.5 7.1 - 7.1
(expense)/income
for the period -
Total comprehensive 4.4 (3.4) - 1.0 13.5 15.5 - 15.5
income/(expense) -
for the period
Dividends paid - (65.6) - - - - (65.6) - (65.6)
Shares purchased - - - (5.1) - - (5.1) - (5.1)
Shares released - - - 3.8 - - 3.8 - 3.8
Other movements - 1.2 - (0.9) - - 0.3 - 0.3
Income tax - (0.3) - - - - (0.3) - (0.3)
At 31 January 2023 1,568.1 (3.3) (31.4) (0.5) 35.2 1,606.1 - 1,606.1
(unaudited) 38.0
Consolidated Cash Flow Statement
for the six months ended 31 January 2023
Six months ended Year ended
31 January 31 July
2023 2022 2022
Unaudited Unaudited Audited
Note £ million £ million £ million
Net cash inflow from operating activities 17(a) 833.1 170.8 158.7
Net cash (outflow)/inflow from investing activities
Purchase of:
Property, plant and equipment (5.1) (3.4) (7.1)
Intangible assets - software (27.0) (20.6) (51.3)
Subsidiaries 17(b) (0.5) - (0.1)
Sale of:
Subsidiaries 17(c) 0.5 0.1 0.1
(32.1) (23.9) (58.4)
Net cash inflow before financing activities 801.0 146.9 100.3
Financing activities
Purchase of own shares for employee share award schemes (5.1) (9.6) (9.5)
Equity dividends paid (65.6) (62.7) (95.5)
Interest paid on subordinated loan capital and debt financing (5.4) (4.9) (10.4)
Repayment of subordinated loan capital - (23.4) (23.4)
Payment of lease liabilities (7.6) (6.9) (15.1)
Net increase/(decrease) in cash 717.3 39.4 (53.6)
Cash and cash equivalents at beginning of period 1,383.0 1,436.6 1,436.6
Cash and cash equivalents at end of period 17(d) 2,100.3 1,476.0 1,383.0
THE NOTES
1. Basis of preparation and accounting policies
The half year results have been prepared in accordance with the Disclosure
Guidance and Transparency Rules of the Financial Conduct Authority and the
condensed consolidated interim financial statements ("interim financial
statements") have been prepared in accordance with the International Financial
Reporting Standards ("IFRS") in conformity with the requirements of the
Companies Act 2006. These include International Accounting Standard ("IAS")
34, Interim Financial Reporting, which specifically addresses the contents of
interim financial statements. The interim financial statements incorporate the
individual financial statements of Close Brothers Group plc and the entities
it controls, using the acquisition method of accounting.
The half year results are unaudited and do not constitute statutory accounts
within the meaning of Section 434 of the Companies Act 2006. However, the
information has been reviewed by the group's auditor, PricewaterhouseCoopers
LLP, and their report appears above.
The financial information for the year ended 31 July 2022 contained within
this half year report does not constitute statutory accounts as defined in
Section 434 of the Companies Act 2006. A copy of those statutory accounts,
which have been prepared in accordance with international accounting standards
in conformity with the requirements of the Companies Act 2006, has been
delivered to the Registrar of Companies. PricewaterhouseCoopers LLP has
reported on those accounts. The report of the auditor on those statutory
accounts was unqualified, did not contain an emphasis of matter paragraph and
did not contain a statement under Section 498(2) or (3) of the Companies Act
2006.
The directors have a reasonable expectation that the company and the group as
a whole have adequate resources to continue in operational existence for the
foreseeable future, a period of not less than 12 months from the date of this
report. For this reason, they continue to adopt the going concern basis in
preparing the condensed consolidated half year financial statements.
The accounting policies applied are consistent with those set out on pages 158
to 162 of the Annual Report 2022.
Critical accounting judgements and estimates
The reported results of the group are sensitive to the accounting policies,
assumptions and estimates that underlie the preparation of its financial
statements. The group's estimates and assumptions are based on historical
experience and expectations of future events and are reviewed on an ongoing
basis. The group's critical accounting judgements and estimates, set out
below, are unchanged from those identified in the Annual Report 2022, with the
exception of the changes in critical estimates relating to Novitas as set out
under the 'Model estimates' section below.
Critical accounting judgements
Expected credit losses
At 31 January 2023, the group's expected credit loss provision was £392.2
million (31 July 2022: £285.6 million). The calculation of the group's
expected credit loss provision under IFRS 9 requires the group to make a
number of judgements, assumptions and estimates, which have a material impact
on the accounts. The assessment, which requires judgement, is unbiased,
probability weighted and uses historical, current and forward-looking
information. The most significant are set out below.
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 day
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 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 the
business to ensure that 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 criteria are met or when a financial asset
meets the 90 days past due backstop. While some criteria are factual (e.g.
administration, insolvency, or bankruptcy), others require a judgmental
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
At the balance sheet date, the directors consider that expected credit loss
provisions are a key source of estimation uncertainty which, depending on a
wide range of factors, could result in a material adjustment to the carrying
amounts of assets and liabilities in the next financial year.
The accuracy of the expected credit loss provision can be impacted by
unpredictable effects or unanticipated changes to model estimates. In
addition, forecasting errors could also occur due to macroeconomic scenarios
or weightings differing from the actual outcomes observed. Regular model
monitoring, validations and provision adequacy reviews are key mechanisms to
manage estimation uncertainty across model estimates.
A representation of the core drivers of the macroeconomic scenarios that are
deployed in our models are outlined in this note. In some instances, expected
credit loss models use a range of additional macroeconomic metrics and
assumptions which are linked to the underlying characteristics of the
business.
We continue to monitor and evaluate the impact of climate risk on our expected
credit loss provision. As at 31 January 2023 we do not consider climate risk
to have a material impact on our credit losses.
Model estimates
Across the Bank, expected credit loss provisions are outputs of models which
are based on a number of assumptions. The assumptions applied involve
judgement and as a result are regularly assessed.
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.
Over the course of the first half of this financial year, management have
reviewed and updated its assumptions for expected case failure rates, expected
recovery rates and time to recovery periods to reflect experienced credit
performance and ongoing dialogue with customers' insurers. This has 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
have been made to the expected credit loss provision calculation resulting in
an increase of £69.9 million to £183.2 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 this latest position, the majority of loans in the portfolio have
been assessed as credit impaired and 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 recovery period,
to interest income, which reflects the requirement to recognise interest
income on Stage 3 loans on a net basis.
At 31 January 2023, 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. Further detail on the impairment provision is included in note 6.
Given the majority of the portfolio is in Stage 3, the key sources of
estimation uncertainty for the portfolio's expected credit loss provision are
recovery rates and time to recovery periods. On this basis management have
assessed and completed sensitivity analysis when compared to the expected
credit loss provision for Novitas of £183.2 million. At 31 January 2023, a 12
month improvement in recovery periods would decrease the expected credit loss
provision by £12.5 million, while a 12 month extension in recovery periods
would increase it by £10.2 million. Separately, a 10% absolute deterioration
or improvement in recovery rates would increase or decrease the expected
credit loss provision by £12.9 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 a forward-looking provision, economic scenarios are
sourced from Moody's Analytics, which are then used to project potential
credit conditions for each portfolio. An overview of these scenarios using key
macroeconomic indicators is provided on pages 42 to 44. Benchmarking against
other economic providers is carried out to determine that Moody's Analytics
scenarios are reasonable. Where this is not the case, management judgement is
applied through an adjustment.
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 scenarios 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. 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.
The Credit Risk Management Committee ("CRMC") including the group finance
director and group chief risk officer meets monthly to review, and if
appropriate, agree changes to the economic scenarios and probability
weightings assigned thereto. The decision is subsequently noted at the Group
Risk and Compliance Committee ("GRCC"), which includes the aforementioned
roles in addition to the group chief executive officer.
Scenario forecasts deployed in IFRS 9 macroeconomic models are updated on a
monthly basis. As at 31 January 2023, the latest baseline scenario forecasts
GDP decline by 0.7% in calendar year 2023 and an average Base Rate of 4.4%
over the same period. CPI is forecast to be 5.1% in calendar year 2023 in the
baseline scenario, with 0.2% forecast in the protracted downside scenario over
the same period.
These metrics represent a deterioration across all scenarios compared to 31
July 2022. This reflects continued inflationary pressures, the higher interest
rate environment and the cost of living crisis. This also considers the
ongoing economic uncertainty associated with Russia's invasion of Ukraine, the
resulting increase in energy and food commodity prices, and the exacerbation
of global supply-chain disruptions after the pandemic.
Given that the updated forecasts capture the prevailing economic challenges
and uncertainty, at 31 January 2023, the scenario weightings were unchanged
from 31 July 2022, with 32.5% allocated to the baseline scenario, 30% to the
upside scenario and 37.5% across the three downside scenarios.
The tables below show the economic assumptions within each scenario, and the
weighting applied to each at 31 January 2023. The metrics below are key UK
economic indicators, chosen to describe the economic scenarios. These are the
main metrics used to set scenarios 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 2023 and 2024. The subsequent tables show averages and peak to
trough ranges for the same key metrics for the scenarios utilised for the
five-year period from 2023 to 2027.
These periods have been included as they demonstrate the short-, medium- and
long-term outlook for the key macroeconomic indicators which form the
fundamental basis of the scenario forecasts. On average, the loan book has a
residual maturity of 16 months, with c.98% of loan value having a maturity of
five years or less.
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
2023 2024 2023 2024 2023 2024 2023 2024 2023 2024
At 31 January 2023
UK GDP Growth (0.7%) 0.9% 1.3% 1.7% (3.0%) 0.4% (4.5%) (1.9%) (5.3%) (3.7%)
UK Unemployment 4.1% 4.4% 3.8% 3.7% 4.5% 4.7% 5.3% 7.0% 5.9% 8.2%
HPI Growth (4.8%) 2.0% 8.6% 5.1% (11.7%) 1.2% (15.3%) (7.4%) (21.1%) (11.3%)
BoE Base Rate 4.4% 3.7% 4.2% 3.6% 4.8% 2.2% 5.1% 3.5% 5.4% 2.8%
Consumer Price Index 5.1% 2.7% 4.8% 2.7% 3.7% 2.0% 2.3% 1.4% 0.2% 0.5%
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%
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 - YoY change (%)
UK Unemployment: ONS Labour Force Survey, Seasonally Adjusted - Average (%)
UK HPI Growth: Average nominal house price, Land Registry, Seasonally Adjusted
- Q4 to Q4 change (%)
BoE Base Rate: Bank of England Base Rate - Average (%)
Consumer Price Index: ONS, EU Harmonised, Annual Inflation - Q4 to Q4 change
(%)
Five-year average (calendar year 2023-2027)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
At 31 January 2023
UK GDP Growth 1.0% 1.5% 0.6% (0.1%) (0.3%)
UK Unemployment 4.4% 3.8% 4.6% 6.6% 7.5%
HPI Growth 1.1% 2.4% (0.6%) (2.1%) (4.6%)
BoE Base Rate 3.0% 2.9% 2.5% 2.2% 1.8%
Consumer Price Index 2.9% 2.8% 2.5% 2.0% 1.2%
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%
HPI Growth(1) 3.0% 4.7% 1.4% (0.3%) (2.7%)
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 price, Land Registry, Seasonally Adjusted
- CAGR (%)
BoE Base Rate: Bank of England Base Rate - Average (%)
Consumer Price Index: ONS, EU Harmonised, Annual Inflation - CAGR (%)
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 January 2023 and 31 July
2022:
Upside Downside Downside Downside
Baseline (strong) (mild) (moderate) (protracted)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
At 31 January 2023
UK GDP Growth 5.0% (0.5%) 7.8% 0.6% 2.8% (3.9%) (0.3%) (6.7%) (1.6%) (8.8%)
UK Unemployment 4.6% 4.0% 4.2% 3.6% 4.8% 4.2% 7.2% 4.2% 8.4% 4.5%
HPI Growth 5.5% (4.8%) 16.5% (0.2%) (2.9%) (12.6%) (3.6%) (21.5%) (4.4%) (29.9%)
BoE Base Rate 4.5% 2.3% 4.3% 2.2% 5.0% 0.9% 5.3% 0.3% 5.5% 0.1%
Consumer Price Index 9.2% 2.1% 8.9% 2.1% 8.3% 2.0% 8.2% 1.4% 7.9% (0.5%)
Weighting 32.5% 30% 20% 10.5% 7%
Upside Downside Downside Downside
Baseline (strong) (mild) (moderate) (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%
HPI Growth(1) 16.2% 3.4% 31.1% 3.4% 7.0% (3.0%) 4.1% (10.1%) 4.1% (19.2%)
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%
1 The five-year forecast and the peak to trough values for HPI have
been re-presented on a nominal basis at 31 July 2022.
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 BoE base rate (%)
Consumer Price Index Inflation: ONS, EU Harmonised, Maximum and minimum of
annual inflation over the 5-year period (%)
The below charts represent the quarterly forecast data included in the above
tables incorporating actual metrics up to 31 January 2023. The solid line
shows the baseline scenario, while the dashed lines represent the various
upside and downside scenarios.
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 provisions as follows:
• For the majority of our 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.
• On application of the above considerations, 70% of the Bank's
non-Novitas expected credit loss provisions are in scope of the sensitivity
analysis.
Based on the above analysis, at 31 January 2023, application of 100% weighting
to the upside strong scenario would decrease the expected credit loss by
£16.4 million whilst application to the downside protracted scenario would
increase the expected credit loss by £34.3 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 provision
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 January 2023; it does not incorporate future changes relating to
performance, growth or credit risk. In addition, while sensitivity ranges
across periods do provide an indication of general sensitivity levels, given
the change in the macroeconomic conditions and underlying modelled provision,
direct comparison between the sensitivity results at 31 January 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 rising inflation.
2. Segmental analysis
The directors manage the group by class of business and we 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 (which comprises Winterflood only).
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 presented 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 six months ended 31 January 2023
Banking
Asset Management
Commercial Retail Property Securities Group Total
£ million £ million £ million £ million £ million £ million £ million
Net interest 130.9 107.2 57.3 1.6 - 0.4 297.4
income
Non-interest 51.4 16.0 1.1 69.4 39.0 - 176.9
income
Operating income 182.3 123.2 58.4 71.0 39.0 0.4 474.3
Administrative (81.8) (68.4) (12.6) (59.8) (34.6) (12.7) (269.9)
expenses
Depreciation and (11.1) (10.7) (2.1) (2.6) (2.0) (1.1) (29.6)
amortisation
Impairment losses (122.5) (29.4) (10.3) - - - (162.2)
on financial assets
Total adjusted (215.4) (108.5) (25.0) (62.4) (36.6) (13.8) (461.7)
operating
expenses(1)
Adjusted operating (33.1) 14.7 33.4 8.6 2.4 (13.4) 12.6
profit/(loss)(1)
Amortisation of (0.1) - - (0.8) - - (0.9)
intangible assets
on acquisition
Operating profit/(loss) (33.2) 14.7 33.4 7.8 2.4 (13.4) 11.7
before tax
External operating 221.4 146.7 77.0 70.7 39.0 (80.5) 474.3
income/(expense)
Inter segment operating (39.1) (23.5) (18.6) 0.3 - 80.9 -
(expense)/income
Segment operating 182.3 123.2 58.4 71.0 39.0 0.4 474.3
income
( )
1 Adjusted operating expenses and adjusted operating profit/(loss) are
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. In the period
ended 31 January 2023, Novitas recorded an operating loss of £104.9 million
(six months ended 31 January 2022: loss of £30.7 million; year ended 31 July
2022: loss of £39.3 million), driven by impairment losses of £114.6 million
(six months ended 31 January 2022: £39.2 million; year ended 31 July 2022:
£60.7 million). Novitas' income for the period was £14.0 million (six months
ended 31 January 2022: £17.9 million; year ended 31 July 2022: £36.0
million), and expenses were £4.3 million (six months ended 31 January 2022:
£9.4 million; year ended 31 July 2022: £14.6 million).
Balance Sheet Information at 31 January 2023
Banking
Asset Management
Commercial Retail Property Securities Group(2) Total
£ million £ million £ million £ million £ million £ million £ million
Total assets(1) 4,550.3 2,970.3 1,520.4 167.3 801.1 2,883.6 12,893.0
Total liabilities - - - 58.8 709.0 10,519.1 11,286.9
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, which was £61.9 million at 31 January
2023. See note 6 for more detail on the Novitas loan book and associated
impairment provision.
2 Balance sheet includes £2,880.5 million assets and £10,585.1
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 shown below. Banking division equity,
which is managed as a whole rather than on a segmental basis, reflects loan
book and operating lease assets of £9,041.0 million, in addition to assets
and liabilities of £2,880.5 million and £10,585.1 million respectively
primarily comprising treasury balances which are included within the Group
column above.
Banking Asset Management
Securities Group Total
£ million £ million £ million £ million £ million
Equity 1,336.4 108.5 92.1 69.1 1,606.1
Summary Income Statement for the six months ended 31 January 2022
Banking
Asset Management
Commercial Retail Property Securities Group Total
£ million £ million £ million £ million £ million £ million £ million
Net interest 127.9 106.9 58.0 (0.1) (0.7) (0.2) 291.8
income/(expense)
Non-interest 39.9 12.8 0.2 76.7 50.2 - 179.8
income
Operating income/(expense) 167.8 119.7 58.2 76.6 49.5 (0.2) 471.6
Administrative (78.0) (61.3) (14.1) (59.8) (38.7) (12.2) (264.1)
expenses
Depreciation and (11.1) (10.6) (2.1) (2.3) (2.0) (1.3) (29.4)
amortisation
Impairment (41.0) (5.3) (2.0) - - - (48.3)
losses
on financial assets
Total adjusted (130.1) (77.2) (18.2) (62.1) (40.7) (13.5) (341.8)
operating
expenses(1)
Adjusted operating 37.7 42.5 40.0 14.5 8.8 (13.7) 129.8
profit/(loss)(1)
Amortisation of (0.1) - - (0.8) - - (0.9)
intangible assets
on acquisition
Operating profit/(loss) 37.6 42.5 40.0 13.7 8.8 (13.7) 128.9
before tax
External operating 190.5 134.5 65.0 76.6 49.5 (44.5) 471.6
income/(expense)
Inter segment operating (22.7) (14.8) (6.8) - - 44.3 -
(expense)/income
Segment operating 167.8 119.7 58.2 76.6 49.5 (0.2) 471.6
income/(expense)
( )
1 Adjusted operating expenses and adjusted operating profit/(loss) are
stated before amortisation of intangible assets on acquisition and tax.
Summary Income Statement for the year ended 31 July 2022
Banking
Asset Management
Commercial Retail Property Securities Group Total
£ million £ million £ million £ million £ million £ million £ million
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 adjusted
operating
expenses(1) (252.4) (176.0) (37.5) (126.3) (81.1) (28.0) (701.3)
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 expenses and adjusted operating profit/(loss) are
stated before amortisation of intangible assets on acquisition and tax.
Balance Sheet Information at 31 July 2022
Banking
Asset Management
Commercial Retail Property Securities Group(2) Total
£ million £ million £ million £ million £ million £ million £ million
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, which was £159.4 million at 31 July
2022. See note 6 for more detail on the Novitas loan book and associated
impairment provision.
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.
Banking
Asset Management
Securities Group Total
£ million £ million £ million £ million £ million
Equity(1) 1,342.0 102.3 91.7 121.5 1,657.5
1 Equity of the Banking division 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.
3. Taxation
Six months ended Year ended
31 January 31 July
2023 2022 2022
£ million £ million £ million
Tax (credited)/charged to the income statement
Current tax:
UK corporation tax (2.1) 32.1 53.7
Foreign tax 0.8 0.8 1.9
Adjustments in respect of previous periods - 0.1 (2.8)
(1.3) 33.0 52.8
Deferred tax:
Deferred tax charge for the current period 4.6 0.9 11.8
Adjustments in respect of previous periods - (0.1) 3.0
3.3 33.8 67.6
Tax on items not (credited)/charged to the income statement
Current tax relating to:
Share-based payments - (0.1) -
Deferred tax relating to:
Cash flow hedging 5.2 5.4 8.6
Defined benefit pension scheme (1.5) 0.5 (0.3)
Financial instruments classified at fair value through other (1.3) (0.3)
comprehensive income (0.4)
Share-based payments 0.3 0.6 1.1
Currency translation losses - - (0.3)
2.7 6.1 8.7
Reconciliation to tax expense
UK corporation tax for the period at 21.0% (six months ended 2.5 24.5
31 January 2022: 19.0%; year ended 31 July 2022: 19.0%)
on operating profit 44.2
Effect of different tax rates in other jurisdictions - (0.2) (0.3)
Disallowable items and other permanent differences 0.2 0.6 0.9
Banking surcharge 0.6 8.8 14.9
Deferred tax impact of decreased tax rates - 0.1 7.7
Prior year tax provision - - 0.2
3.3 33.8 67.6
The effective tax rate for the period is 28.2% (six months ended 31 January
2022: 26.2%; year ended 31 July 2022: 29.0%), representing the best estimate
of the annual effective tax rate expected for the full year.
The standard UK corporation tax rate for the financial year is 21.0% (six
months ended 31 January 2022: 19.0%; year ended 31 July 2022: 19.0%). However,
an additional 6.3% surcharge applies to the profits of banking companies as
defined in legislation (and only above a threshold amount). The effective tax
rate is above the UK corporation tax rate primarily due to the surcharge
applying to the majority of the group's profits.
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.
Six months ended Year ended
31 January 31 July
2023 2022 2022
Basic 5.6p 63.5p 110.4p
Diluted 5.6p 63.0p 109.9p
Adjusted basic(1) 6.1p 64.0p 111.5p
Adjusted diluted(1) 6.1p 63.5p 111.0p
1 Excludes amortisation of intangible assets on acquisition and its
tax effects.
Six months ended Year ended
31 January 31 July
2023 2022 2022
£ million £ million £ million
Profit attributable to shareholders 8.4 95.1 165.2
Adjustments:
Amortisation of intangible assets on acquisition 0.9 0.9 2.0
Tax effect of adjustment (0.2) (0.2) (0.4)
Adjusted profit attributable to shareholders 9.1 95.8 166.8
Six months ended Year ended
31 January 31 July
2023 2022 2022
million million million
Average number of shares
Basic weighted 149.4 149.7 149.6
Effect of dilutive share options and awards 0.7 1.2 0.7
Diluted weighted 150.1 150.9 150.3
5. Dividends
Six months ended Year ended
31 January 31 July
2023 2022 2022
£ million £ million £ million
For each ordinary share
Interim dividend for previous financial year paid in April 2022: 22.0p - - 32.8
(April 2021: 18.0p)
Final dividend for previous financial year paid in November 2022: 44.0p 65.6 62.7
(November 2021: 42.0p) 62.7
An interim dividend relating to the six months ended 31 January 2023 of 22.5p,
amounting to an estimated £33.5 million, is declared. This interim dividend,
which is due to be paid on 26 April 2023 to shareholders on the register at 24
March 2023, is not reflected in these condensed consolidated half year
financial statements.
6. Loans and advances to customers
(a) Maturity analysis of loans and advances to customers
The following table sets out the maturity analysis of gross loans and advances
to customers. At 31 January 2023 loans and advances to customers with a
maturity of two years or less was £6,548.6 million (31 July 2022: £6,733.0
million) representing 71.4% (31 July 2022: 73.6%) of total loans and advances
to customers:
On Within three months Between three months and one year Between one and two years Between two and five years After more than five years Impairment provisions Total net loans and advances to customers
demand Total gross loans and advances to customers
£ million £ million £ million £ million £ million £ million £ million £ million £ million
At 31 January 2023 69.5 2,372.9 2,389.8 1,716.4 2,447.2 181.1 9,176.9 (392.2) 8,784.7
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
Less than 30 days Greater than
past due or equal to 30 days past due
Stage 1 Total Stage 3 Total
At 31 January 2023 £ million £ million £ million £ million £ million £ million
Gross loans and
advances to customers
Commercial 3,398.0 788.2 31.0 819.2 331.2 4,548.4
Of which: Novitas 2.0 1.0 - 1.0 242.1 245.1
Retail 2,790.2 183.4 9.9 193.3 78.0 3,061.5
Property 1,291.7 70.0 52.2 122.2 153.1 1,567.0
Total 7,479.9 1,041.6 93.1 1,134.7 562.3 9,176.9
Impairment provisions
Commercial 21.6 15.9 3.3 19.2 213.6 254.4
Of which: Novitas 0.2 0.2 - 0.2 182.8 183.2
Retail 27.3 11.4 2.8 14.2 49.7 91.2
Property 5.9 5.4 0.2 5.6 35.1 46.6
Total 54.8 32.7 6.3 39.0 298.4 392.2
Provision coverage ratio
Commercial 0.6% 2.0% 10.6% 2.3% 64.5% 5.6%
Within which: Novitas 10.0% 20.0% - 20.0% 75.5% 74.7%
Retail 1.0% 6.2% 28.3% 7.3% 63.7% 3.0%
Property 0.5% 7.7% 0.4% 4.6% 22.9% 3.0%
Total 0.7% 3.1% 6.8% 3.4% 53.1% 4.3%
Stage 2
Less than 30 days Greater than
past due or equal to 30 days past due
Stage 1 Total Stage 3 Total
At 31 July 2022 £ million £ million £ million £ million £ million £ million
Gross loans and
advances to customers
Commercial 3,433.1 778.8 119.4 898.2 169.1 4,500.4
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
Total 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: 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
Total 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: 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%
Total 0.7% 2.4% 31.4% 6.8% 43.8% 3.1%
Stage allocations of loans and advances to customers were applied in line with
the definitions set out on page 159 of the Annual Report 2022.
Over the course of the first half of this financial year, the staging profile
of loans and advances to customers has shown modest deterioration, with some
migration from Stage 1 to Stages 2 and 3. At 31 January 2023, 81.5% (31 July
2022: 83.4%) of loans and advances to customers were Stage 1, with the
decrease primarily as a result of weaker macroeconomic metrics prompting an
increased volume of accounts to migrate to Stage 2. Stage 2 loans and advances
to customers decreased to 12.4% (31 July 2022: 12.7%), where migrations to
Stage 3 in Novitas offset other Bank-wide movements out of Stage 1. The
remaining 6.1% (31 July 2022: 3.9%) of loans and advances to customers was
deemed to be credit impaired and classified as Stage 3, with updated Novitas
assumptions being the main driver.
Overall impairment provision increased to £392.2 million (31 July 2022:
£285.6 million), following regular model runs and reviews of staging and
provision coverage for individual loans and portfolios. The movement in
impairment provision primarily reflected updates in Novitas, including a
material increase in the expected case failure rate assumptions, a decrease in
the expected recovery rate assumptions and the reassessment of the
recoverability of interest on relevant loans. Excluding Novitas, the increase
in impairment provision was primarily driven by weaker macroeconomic variables
and outlook across the Banking division, and a rise in arrears in Motor
Finance.
As a result, there has been an increase in provision coverage to 4.3% (31 July
2022: 3.1%).
Provision Coverage Analysis by Business
In Commercial, the impairment coverage ratio increased to 5.6% (31 July 2022:
4.0%), primarily driven by increased provision levels in Novitas. Excluding
Novitas, the Commercial impairment coverage ratio increased to 1.7% (31 July
2022: 1.6%) reflecting additional provisions to take into account weakening
macroeconomic variables and outlook.
In Retail, the impairment coverage ratio increased to 3.0% (31 July 2022:
2.2%) driven by a rise in arrears in the Motor portfolio reflecting increased
pressure from the current economic conditions on our customers and in line
with comparable trends observed across the industry, alongside the weakening
of macroeconomic variables and outlook.
In Property the impairment coverage ratio increased to 3.0% (31 July 2022:
2.4%) as we recognised additional provisions to reflect weakening
macroeconomic variables and outlook, in particular lower projected house
prices, in addition to increased individually assessed provisions on Stage 3
loans.
(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. These adjustments are based on
management judgements or quantitative back-testing to ensure the expected
credit loss provision adequately reflects 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.
At 31 January 2023, £11.0 million of the expected credit loss provision was
attributable to adjustments (31 July 2022: £(2.8) million).
The level of adjustments has increased during the first half of the financial
year, primarily as a result of applying additional adjustments to account for
macroeconomic risks not fully captured in forward-looking modelled expected
credit losses. Adjustments have therefore been applied to reflect the current
level of macroeconomic uncertainty more adequately in our expected credit loss
provision.
This approach has incorporated our experience, knowledge of our customers, the
sectors in which they operate, and the assets which we finance. We will
continue to monitor the use of, or need for, adjustments as new information
emerges.
(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 period
(or at origination if this occurred during the period) and the end of the
period (or just prior to final repayment or write off).
Repayments relating to loans which transferred between stages during the
period are presented within the transfers between stages lines. All other
repayments are presented in a separate line.
Expected credit loss model methodologies may be updated or enhanced from time
to time and the impacts of such changes are presented on a separate line.
Enhancements to our model suite during the course of the financial year are a
contributory factor to expected credit loss 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 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 3,147.3 - - 3,147.3
Transfers to Stage 1 133.7 (163.7) (2.8) (32.8)
Transfers to Stage 2 (661.4) 569.7 (7.4) (99.1)
Transfers to Stage 3 (174.7) (169.0) 315.0 (28.7)
Net transfers between stages and repayments(1) (702.4) 237.0 304.8 (160.6)
Repayments while stage remained unchanged
and final repayments (2,567.3) (275.9) (58.1) (2,901.3)
Changes to model methodologies (24.6) 14.9 9.7 -
Write offs (0.1) (0.2) (52.7) (53.0)
At 31 January 2023 7,479.9 1,134.7 562.3 9,176.9
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.
Stage 1 Stage 2 Stage 3 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 21.1 - - 21.1
Transfers to Stage 1 0.9 (2.9) (0.5) (2.5)
Transfers to Stage 2 (4.6) 21.6 (4.4) 12.6
Transfers to Stage 3 (10.1) (55.4) 184.9 119.4
Net remeasurement of expected credit losses
arising from transfers between stages and
repayments(1) (13.8) (36.7) 180.0 129.5
Repayments and ECL movements while stage
remained unchanged and final repayments (1.7) (3.0) (14.4) (19.1)
Changes to model methodologies (1.1) 0.5 0.1 (0.5)
Charge to the income statement 4.5 (39.2) 165.7 131.0
Write offs - (0.1) (24.3) (24.4)
At 31 January 2023 54.8 39.0 298.4 392.2
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 stages and
repayments(1) (24.8) 18.4 111.6 105.2
Repayments and ECL movements while stage
remained unchanged and final repayments (37.6) (0.7) (9.8) (48.1)
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.
Six months Year ended 31 July
ended
31 January
2023 2022 2022
£ million £ million £ million
Impairment losses relating to loans and advances to customers:
Charge to income statement arising from movement in impairment
provisions 131.0 36.4 93.4
Amounts written off directly to income statement, net of recoveries
and other costs 31.4 10.7 8.5
162.4 47.1 101.9
Impairment (credit)/losses relating to other financial assets (0.2) 1.2 1.4
Impairment losses on financial assets recognised in income
statement 162.2 48.3 103.3
Impairment losses on financial assets of £162.2 million include £114.6
million in relation to Novitas (six months ended 31 January 2022: £39.2
million; year ended 31 July 2022: £60.7 million).
7. Debt securities
Fair value
Fair value through other
through comprehensive Amortised
profit or loss income cost Total
£ million £ million £ million £ million
Long trading positions in debt securities 11.0 - - 11.0
Certificates of deposit - - 50.6 50.6
Sovereign and central bank debt - 201.1 - 201.1
At 31 January 2023 11.0 201.1 50.6 262.7
Fair value
Fair value through other
through comprehensive Amortised
profit or loss income cost Total
£ million £ 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
At 31 July 2022 12.4 415.4 185.0 612.8
Movements in the book value of sovereign and central bank debt comprise:
Six months ended
31 January Year ended 31 July
2023 2022
£ million £ million
Sovereign and central bank debt at beginning of period 415.4 192.5
Additions 269.7 335.3
Disposals (169.7) -
Redemptions (305.0) (80.0)
Currency translation difference 2.3 (1.2)
Changes in fair value (11.6) (31.2)
Sovereign and central bank debt at end of period 201.1 415.4
8. Equity shares
31 January 31 July
2023 2022
£ million £ million
Long trading positions 26.0 27.1
Other equity shares 1.3 1.3
27.3 28.4
9. Goodwill and other intangible assets
Intangible assets on acquisition
Goodwill Software Total
£ million £ million £ million £ million
Cost
At 1 August 2021 142.9 272.8 51.0 466.7
Additions - 24.2 - 24.2
Disposals and write offs (0.1) (4.2) - (4.3)
At 31 January 2022 142.8 292.8 51.0 486.6
Additions - 31.8 - 31.8
Disposals and write offs (0.2) (25.1) - (25.3)
At 31 July 2022 142.6 299.5 51.0 493.1
Additions - 27.1 - 27.1
Disposals and write offs (0.1) (1.7) (0.6) (2.4)
At 31 January 2023 142.5 324.9 50.4 517.8
Amortisation and impairment
At 1 August 2021 47.9 142.4 43.8 234.1
Amortisation and impairment charge for the period - 18.3 0.9 19.2
Disposals and write offs - (4.2) - (4.2)
At 31 January 2022 47.9 156.5 44.7 249.1
Amortisation and impairment charge for the period - 16.3 1.1 17.4
Disposals and write offs - (25.4) - (25.4)
At 31 July 2022 47.9 147.4 45.8 241.1
Amortisation and impairment charge for the period - 17.3 0.9 18.2
Disposals and write offs - (1.1) (0.6) (1.7)
At 31 January 2023 47.9 163.6 46.1 257.6
Net book value at 31 January 2023 94.6 161.3 4.3 260.2
Net book value at 31 July 2022 94.7 152.1 5.2 252.0
Net book value at 31 January 2022 94.9 136.3 6.3 237.5
Net book value at 1 August 2021 95.0 130.4 7.2 232.6
Intangible assets on acquisition relate to broker and customer relationships
and are amortised over a period of eight to 20 years.
In the six months ended 31 January 2023, £0.9 million (six months ended 31
January 2022: £0.9 million; year ended 31 July 2022: £2.0 million) of the
amortisation charge is included in amortisation of intangible assets on
acquisition and £17.3 million (six months ended 31 January 2022: £18.3
million; year ended 31 July 2022: £34.6 million) of the amortisation charge
is included in administrative expenses shown in the consolidated income
statement.
10. Property, plant and equipment
Assets
Fixtures, held under
fittings and operating Right
Leasehold equipment leases Motor of use assets
property vehicles Total
£ million £ million £ million £ million £ million £ million
Cost
At 1 August 2021 25.2 74.8 360.7 0.2 71.7 532.6
Additions 0.7 2.9 33.7 - 6.4 43.7
Disposals and write offs (3.9) (4.3) (12.2) - (5.2) (25.6)
At 31 January 2022 22.0 73.4 382.2 0.2 72.9 550.7
Additions (0.1) 1.4 34.1 - 7.2 42.6
Disposals and write offs (1.0) (12.2) (18.1) - (1.6) (32.9)
At 31 July 2022 20.9 62.6 398.2 0.2 78.5 560.4
Additions - 5.1 41.7 - 5.7 52.5
Disposals and write offs (0.1) (1.2) (11.7) - (3.3) (16.3)
At 31 January 2023 20.8 66.5 428.2 0.2 80.9 596.6
Depreciation and impairment
At 1 August 2021 15.7 47.5 137.8 0.1 21.6 222.7
Depreciation and impairment charge
for the period 1.1 3.6 20.6 0.1 6.3 31.7
Disposals and write offs (3.8) (4.1) (6.1) - (4.0) (18.0)
At 31 January 2022 13.0 47.0 152.3 0.2 23.9 236.4
Depreciation and impairment charge
for the period 1.1 4.0 20.0 - 6.9 32.0
Disposals and write offs (1.1) (14.1) (14.1) - (1.2) (30.5)
At 31 July 2022 13.0 36.9 158.2 0.2 29.6 237.9
Depreciation and impairment charge
for the period 1.0 4.2 21.2 - 7.1 33.5
Disposals and write offs (0.1) (1.4) (7.5) - (1.8) (10.8)
At 31 January 2023 13.9 39.7 171.9 0.2 34.9 260.6
Net book value at 31 January 2023 6.9 26.8 256.3 - 46.0 336.0
Net book value at 31 July 2022 7.9 25.7 240.0 - 48.9 322.5
Net book value at 31 January 2022 9.0 26.4 229.9 - 49.0 314.3
Net book value at 1 August 2021 9.5 27.3 222.9 0.1 50.1 309.9
11. Settlement balances and short positions
31 January 31 July
2023 2022
£ million £ million
Settlement balances 608.3 780.7
Short positions held for trading:
Debt securities 4.2 7.5
Equity shares 6.5 7.9
10.7 15.4
619.0 796.1
12. Financial liabilities
The contractual maturity of financial liabilities, which largely relate to
treasury funding balances, is set out below.
Within Between Between Between After
three
three months
one and
two and
On
months
and one year
two years
five years more than
demand
five years Total
£ million £ million £ million £ million £ million £ million £ million
Deposits by banks 9.5 55.3 94.8 - - - 159.6
Deposits by customers 134.6 1,678.2 3,771.5 1,168.9 500.5 - 7,253.7
Loans and overdrafts 8.5 44.7 - 490.0 110.0 - 653.2
from banks
Debt securities in - 269.0 717.8 225.0 472.4 310.7 1,994.9
issue
Subordinated loan - 1.6 - - - 177.8 179.4
capital(1)
At 31 January 2023 152.6 2,048.8 4,584.1 1,883.9 1,082.9 488.5 10,240.8
1 Comprises issuances of £200.0 million with a contractual maturity
date of 2031 and optional prepayment date of 2026.
Within three Between three months and one year Between Between two and five years After
On demand months one and more than
two years five years Total
£ million £ million £ million £ 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
Subordinated loan - 1.6 - - - 184.9 186.5
capital(1)
At 31 July 2022 139.1 1,736.2 4,573.3 1,536.2 1,268.8 547.4 9,801.0
1 Comprises issuances of £200.0 million with a contractual maturity
date of 2031 and optional prepayment date of 2026.
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.
At 31 January 2023, the group was a participant of the Bank of England's Term
Funding Scheme with Additional Incentives for SMEs ("TFSME"). Under this
scheme, asset finance loan receivables of £930.7 million and retained notes
relating to Motor Finance loan receivables of £107.8 million were positioned
as collateral with the Bank of England, against which £600.0 million of cash
was drawn.
At 31 July 2022, under the same scheme, in addition to asset finance loan
receivables of £626.1 million and retained notes relating to Motor Finance
loan receivables of £24.3 million, UK gilts with a market value of £72.6
million and UK T-Bills with a market value of £144.3 million were positioned
as collateral with the Bank of England, against which £600.0 million of cash
was drawn.
The term of these transactions is four years from the date of each drawdown
but the group may choose to repay earlier at its discretion. 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 £1,521.1 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
£1,112.0 million (31 July 2022: £1,156.0 million restated). This includes
the £107.8 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 in its consolidated balance sheet.
13. Capital
The table below summarises the composition of regulatory capital and Pillar 1
risk weighted assets at those financial period ends. The information presented
in this note is outside the scope of the independent review performed by
PricewaterhouseCoopers LLP.
31 January 31 July
2023 2022
£ million £ million
Common equity tier 1 ("CET1") capital
Called up share capital 38.0 38.0
Retained earnings(1) 1,568.1 1,628.4
Other reserves recognised for CET1 capital 6.6 10.0
Regulatory adjustments to CET1 capital
Intangible assets, net of associated deferred tax liabilities (259.1) (250.7)
Foreseeable dividend(2) (33.5) (65.6)
Investment in own shares (41.8) (40.6)
Pension asset, net of associated deferred tax liabilities (1.1) (5.3)
Prudent valuation adjustment (0.3) (0.5)
Insufficient coverage for non-performing exposures (0.2) -
IFRS 9 transitional arrangements(3) 34.0 83.0
CET1 capital 1,310.7 1,396.7
Tier 2 capital - subordinated debt 200.0 200.0
Total regulatory capital(4) 1,510.7 1,596.7
Risk weighted assets (notional)(4)
Credit and counterparty risk 8,191.8 8,389.0
Operational risk(5) 1,085.8 1,085.8
Market risk(5) 105.7 116.5
9,383.3 9,591.3
CET1 capital ratio(4) 14.0% 14.6%
Total capital ratio(4) 16.1% 16.6%
( )
1 Retained earnings for the period ended 31 January 2023 include all
profits (both verified and unverified) for the six month period.
2 For 31 January 2023 the foreseeable dividend was determined as the
proposed interim dividend. For 31 July 2022 a foreseeable dividend was
determined as the proposed final dividend.
3 The group has elected to apply IFRS 9 transitional arrangements,
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. At 31 January 2023 the
fully loaded CET1 capital ratio is 13.7% (31 July 2022: 13.8%) and total
capital ratio is 15.8% (31 July 2022: 15.9%).
5 Operational and market risks include a notional adjustment at 8% in
order to determine notional risk weighted assets.
The following table shows a reconciliation between equity and CET1 capital
after deductions:
31 January 31 July
2023 2022
£ million £ million
Equity 1,606.1 1,657.5
Regulatory adjustments to CET1 capital:
Intangible assets, net of associated deferred tax liabilities (259.1) (250.7)
Foreseeable dividend(1) (33.5) (65.6)
IFRS 9 transitional arrangements 34.0 83.0
Pension asset, net of associated deferred tax liabilities (1.1) (5.3)
Prudent valuation adjustment (0.3) (0.5)
Insufficient coverage for non-performing exposures (0.2) -
Other reserves not recognised for CET1 capital:
Cash flow hedging reserve (35.2) (21.7)
CET1 capital 1,310.7 1,396.7
1 For 31 January 2023 the foreseeable dividend was determined as the
proposed interim dividend. For 31 July 2022 a foreseeable dividend was
determined as the proposed final dividend.
The following table shows the movement in CET1 capital during the period:
Year
Six months ended ended
31 January 31 July
2023 2022 2022
£ million £ million £ million
CET1 capital at beginning of period 1,396.7 1,439.3 1,439.3
Profit in the period attributable to shareholders 8.4 95.1 165.2
Dividends paid and foreseen (33.5) (46.2) (98.4)
Change in software assets treatment(1) - (50.2) (50.2)
IFRS 9 transitional arrangements (49.0) (20.5) (34.8)
Increase in intangible assets, net of (8.4) (5.0)
associated deferred tax liabilities (19.7)
Other movements in reserves recognised for CET1 (6.5) -
capital 0.1
Other movements in adjustments to CET1 capital 3.0 (6.8) (4.8)
CET1 capital at end of period 1,310.7 1,405.7 1,396.7
1 In line with CRR, effective on 1 January 2022, the CET1 capital
ratio no longer includes 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 period ended 31 January 2023, the group's 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, and represents a significant
de-risking of the investment portfolio. As a result of this transaction, the
pension surplus on the group's balance sheet has fallen to £1.5 million (31
July 2022: £7.2 million) with the loss 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. Related party transactions
Related party transactions, including salary and benefits provided to
directors and key management, did not have a material effect on the financial
position or performance of the group during the period. There were no changes
to the type and nature of the related party transactions disclosed in the
Annual Report 2022 that could have a material effect on the financial position
and performance of the group in the six months to 31 January 2023.
17. Consolidated cash flow statement reconciliation
Six months ended Year
31 January ended
31 July
2023 2022(1) 2022
£ million £ million £ million
(a) Reconciliation of operating profit before tax to net cash
inflow from operating activities
Operating profit before tax 11.7 128.9 232.8
Tax refunded/(paid) 1.9 (38.2) (63.4)
Depreciation and amortisation 51.7 50.9 100.3
Impairment losses on financial assets 162.2 48.3 103.3
(Increase)/decrease in:
Interest receivable and prepaid expenses (14.7) 1.5 19.8
Net settlement balances and trading positions (31.1) (18.3) 17.2
Net loans to/from money broker against stock advanced 22.0 27.0 2.7
Decrease in interest payable and accrued expenses (45.2) (62.5) (32.2)
Net cash inflow from trading activities 158.5 137.6 380.5
(Increase)/decrease in:
Loans and advances to banks not repayable on demand (9.8) (1.8) (5.3)
Loans and advances to customers (54.1) (220.1) (515.0)
Assets held under operating leases (36.8) (26.0) (54.5)
Certificates of deposit 134.4 (34.9) 79.7
Sovereign and central bank debt 205.0 (52.5) (255.3)
Other assets less other liabilities (10.0) (2.6) (6.4)
(Decrease)/increase in:
Deposits by banks (8.3) 8.2 11.8
Deposits by customers 462.4 132.1 142.7
Loans and overdrafts from banks 30.5 159.5 110.0
(Redemption)/issuance of debt securities (38.7) 71.3 270.5
Net cash inflow from operating activities 833.1 170.8 158.7
(b) Analysis of net cash outflow in respect of the purchase of subsidiaries and
equity shares held for investment
Cash consideration paid (0.5) - (0.1)
(c) Analysis of net cash inflow in respect of the sale of subsidiaries and
discontinued operations
Cash consideration received 0.5 0.1 0.1
31 January 31 July
2023 2022 2022
£ million £ million £ million
(d) Analysis of cash and cash equivalents(2)
Cash and balances at central banks 1,858.4 1,160.2 1,236.0
Loans and advances to banks repayable on demand 241.9 315.8 147.0
2,100.3 1,476.0 1,383.0
1 Comparatives have been updated to present impairment losses on
financial assets in a separate line with no impact on the net cash inflow from
operating activities figure.
2 Excludes Bank of England cash reserve account and amounts held as
collateral.
During the period ended 31 January 2023, the non-cash changes on debt
financing amounted to £5.9 million (31 January 2022: £3.8 million; 31 July
2022: £9.6 million) arising from interest accretion and fair value hedging
movements.
18. Fair value of financial assets and liabilities
The fair values of the group's financial assets and liabilities are not
materially different from their carrying values. The differences include the
following:
31 January 2023 31 July 2022
Fair value Carrying value Fair value Carrying value
£ million £ million £ million £ million
Subordinated loan capital 172.6 179.4 180.0 186.5
Debt securities in issue 1,999.1 1,994.9 2,071.4 2,060.9
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 and are defined in
note 28 "Financial risk management" of the Annual Report 2022. 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 January 2023
Assets
Debt securities:
Long trading positions in debt securities 10.0 1.0 - 11.0
Sovereign and central bank debt 201.1 - - 201.1
Equity shares 2.8 24.2 0.3 27.3
Derivative financial instruments - 107.5 9.2 116.7
Contingent consideration - - 1.9 1.9
213.9 132.7 11.4 358.0
Liabilities
Short positions:
Debt securities 3.1 1.1 - 4.2
Equity shares 1.5 4.9 0.1 6.5
Derivative financial instruments - 152.7 9.2 161.9
Contingent consideration - - 2.5 2.5
4.6 158.7 11.8 175.1
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
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.
Financial instruments classified as Level 3 predominantly comprise contingent
consideration payable and receivable in relation to the acquisitions and
disposal of subsidiaries. The valuation of contingent consideration is
determined on a discounted expected cash flow basis. The group believes that
there is no reasonably possible change to the technique or inputs used in the
valuation of these positions which would have a material effect on the group's
consolidated income statement.
There were no significant transfers between Level 1, 2 and 3 during the six
months ended 31 January 2023 (six months ended 31 January 2022: none; year
ended 31 July 2022: none).
There were no significant movements in financial instruments categorised as
Level 3 during the six months ended 31 January 2023 (six months ended 31
January 2022: none).
The gain recognised in the consolidated income statement relating to financial
instruments held at 31 January 2023 amounted to £0.2 million (31 January
2022: £nil; 31 July 2022: £0.2 million loss).
19. 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 has historically offered 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 loan to value or overpayments) and refinancing, which may incorporate
an extension of the loan tenor and capitalisation of arrears. Furthermore,
other forms of forbearance such as a moratorium, covenant waivers, and rate
concessions are also offered.
Loans are classified as forborne at the time a customer in financial
difficulty is granted a concession and the loan will remain treated and
recorded as forborne until the following exit conditions are met:
1. The loan is considered as performing and there is no past-due amount
according to the amended contractual terms;
2. A minimum two-year probation period has passed from the date the
forborne exposure was considered as performing, during which time regular and
timely payments have been made, and;
3. None of the customer's exposures with Close Brothers are more than 30
days past due at the end of the probation period.
The forbearance approach, including cure periods and exit conditions remain
consistent with those set out on pages 196 and 197 of the Annual Report 2022.
Forbearance analysis
At 31 January 2023, the gross carrying amount of loans with forbearance
measures increased £4.8 million to £213.7 million (31 July 2022: £208.9
million).
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 as at 31 January 2023 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 January 2023 9,176.9 213.7 2.3% 58.5 7,586
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 January 31 July
2023 2022
£ million £ million
Commercial 44.7 62.3
Retail 27.9 23.0
Property 141.1 123.6
213.7 208.9
The following is a breakdown of the number of customers supported by segment:
31 January 31 July
2023 2022
Commercial 393 518
Retail 7,132 10,467
Property 61 58
7,586 11,043
The following is a breakdown of forborne loans by concession type:
31 January 31 July
2023 2022
£ million £ million
Extension outside terms 115.6 113.0
Refinancing 9.4 3.0
Moratorium 56.9 69.9
Other modifications 31.8 23.0
213.7 208.9
Government lending schemes
In addition to the Covid-19 specific forbearance measures covered in this
note, 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 us to maximise our support
to small businesses. As at 31 January 2023, there are 4,938 remaining
facilities, with balances of £587.8 million following commencement of
repayments across our Property, Asset Finance & Leasing and Invoice
Finance businesses.
We 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. As at 31 January
2023, there are 618 remaining facilities, with balances totalling £186.6
million.
We maintain 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.
20. Interest rate risk
The group's exposure to interest rate risk predominantly arises in the Banking
division. Interest rate risk in the other business divisions is considered
immaterial. The group has a simple and transparent balance sheet and a low
appetite for interest rate risk which is limited to that required to operate
efficiently.
The group's governance policy and approach in relation to interest rate risk
remains unchanged, from that described on page 202 of the Annual Report 2022,
except in relation to the disclosure of basis risk. In line with PRA guidance,
we monitor and assess a stressed add-on for basis risk. To provide a clearer
assessment of interest rate risk this stressed add-on has been excluded from
the Earnings at Risk ("EaR") numbers disclosed for both the current year and
prior year comparatives.
The table below sets out the assessed impact on our base case EaR due to a
parallel shift in interest rates:
31 January 31 July
2023 2022(1)
£ million £ million
0.5% increase 2.6 3.7
0.5% decrease (2.6) (0.3)
The group's EaR at 31 January 2023 reflects its policy to ensure exposure to
interest rate shocks is minimised. The EaR measure is a combination of the
group's repricing profile which is positively correlated to rising rates and
optionality risk which is negligible in the current higher rate environment.
The table below sets out the assessed impact on our base case Economic Value
("EV") due to a shift in interest rates:
31 January 31 July
2023 2022(1)
£ million £ million
0.5% increase 2.3 1.1
0.5% decrease (2.2) (0.8)
1 Prior year comparatives for EaR and EV relate to the Banking
division only. Interest rate risk in the other divisions was immaterial.
Current year EaR and EV are shown for the group.
The group's EV at 31 January 2023 reflects its policy to ensure exposure to
interest rate shocks is minimised. The EV measure is a combination of our
repricing profile, which is positively correlated to rising rates, offset by
embedded optionality to cover interest rate floors within the Bank's lending
and borrowing activities.
Cautionary Statement
Certain statements included or incorporated by reference within this
announcement 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 the Group's annual report (available at:
https://www.closebrothers.com/investor-relations
(https://www.closebrothers.com/investor-relations) ). 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 forward-looking statement
resulting from new information, future events or otherwise. Nothing in this
announcement 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 announcement 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 announcement reflect the knowledge and information
available at the time of its preparation. Liability arising from anything in
this announcement shall be governed by English law. Nothing in this
announcement shall exclude any liability under applicable laws that cannot be
excluded in accordance with such laws.
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