REG - Close Bros Grp PLC - Preliminary Results for the year ended 31 July 22
27/09/2022 07:00
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RNS Number : 7165A Close Brothers Group PLC 27 September 2022
Preliminary Results for the year ended 31 July 2022
Adrian Sainsbury, Chief Executive, said:
"Against a backdrop of continued market uncertainty, we have delivered a solid
performance. The Banking division has performed well as we continued to see
good demand across our lending businesses and strong margins. CBAM was
affected by falling markets but continued to attract client assets.
Winterflood faced declining markets and reduced trading activity, in sharp
contrast to the exceptionally strong conditions in the prior year. Although we
are aware of the pressures that the rising inflation and interest rates will
have on our customers and colleagues, I am confident that our proven and
resilient business model, strong financial position and deep expertise leave
us well positioned to continue to support them now and into the future."
Highlights
· The group delivered a solid performance with strong income growth in
Banking, while our market-facing businesses were impacted by volatility and
falling markets. Group adjusted operating profit reduced 13% to £234.8
million (2021: £270.7 million)
· Adjusted operating profit in the Banking division increased 7% to
£227.2 million, reflecting a strong net interest margin of 7.8% (2021: 7.7%)
and loan book growth of 5.0% year-on-year. In the second half, we saw loan
book growth of 3.0% as momentum picked up
· The bad debt ratio was broadly stable at 1.2% (2021: 1.1%). Excluding
Novitas, the bad debt ratio was 0.5% (2021: 0.2%)
· Close Brothers Asset Management ("CBAM") continued to attract client
assets and generated net inflows of 5%
· Cyclicality seen in the trading business impacted Winterflood's
performance, with a market wide slowdown in trading activity and periods of
volatility in falling markets
· Winterflood Business Services ("WBS") delivered another strong
performance, with assets under administration up 16% to £7.2 billion (31 July
2021: £6.2 billion)
· The group maintained strong capital, funding and liquidity positions,
with our common equity tier 1 ("CET1") capital ratio of 14.6% (31 July 2021:
15.8%) significantly above the applicable minimum regulatory requirements
· We are considering the further optimisation of 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
· The Board is proposing a final dividend of 44.0p per share, resulting
in a full-year dividend per share of 66.0p (2021: 60.0p), up 10% and marking a
return to our pre-pandemic dividend level
· The group achieved a return on opening equity ("ROE") of 10.6% (2021:
14.5%), reflecting the reduction in Winterflood's profit and continued growth
in the equity base. The return on average tangible equity ("ROTE") was 12.2%
(2021: 16.5%)
Key Financials(1) Change
Full year Full year %
2022 2021
Adjusted operating profit(2) £234.8m £270.7m (13)
Operating profit before tax £232.8m £265.2m (12)
Banking £227.2m £212.5 7
Asset Management £21.7m £23.7m (8)
Winterflood £14.1m £60.9m (77)
Group £(28.2)m £(26.4)m 7
Adjusted basic earnings per share 111.5p 140.4p (21)
Basic earnings per share 110.4p 134.8p (18)
Ordinary dividend per share 66.0p 60.0p 10
Return on opening equity 10.6% 14.5%
Return on average tangible equity 12.2% 16.5%
Net interest margin 7.8% 7.7%
Bad debt ratio 1.2% 1.1%
31 July 31 July Change
2022 2021 %
Loan book and operating lease assets(3) £9.1bn £8.7bn 5
Total client assets £16.6bn £17.0bn (3)
CET1 capital ratio 14.6% 15.8%
Total capital ratio 16.6% 18.3%
1 Please refer to definitions below.
2 Adjusted operating profit is stated before amortisation and impairment of
intangible assets on acquisition, goodwill impairment, exceptional item and
tax.
3 Loan book re-presented to incorporate closing loans and advances to
customers and operating lease assets, previously shown separately. Includes
loans and advances to customers and operating lease assets of £8,858.9
million and £240.0 million at 31 July 2022. Includes loans and advances to
customers and operating lease assets of £8,444.5 million and £222.9 million
at 31 July 2021.
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
BST followed by a Q&A session. A webcast and dial-in facility will be
available by registering at
https://webcasts.closebrothers.com/PrelimResults2022
(https://webcasts.closebrothers.com/PrelimResults2022) .
Basis of Presentation
Results are presented both on a statutory and an adjusted basis to aid
comparability between periods. Adjusted measures are presented on a basis
consistent with prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired businesses
consistent with its other businesses; and any exceptional and other adjusting
items which do not reflect underlying trading performance. Please refer to
later text for further details on items excluded from the adjusted performance
metrics. The loan book figure was re-presented to incorporate closing loans
and advances to customers and operating lease assets, previously shown
separately.
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
We have delivered a solid performance this year. The Banking division has
performed well as we continued to see good demand across our lending
businesses and strong margins. CBAM was affected by falling markets but
continued to attract client assets. Winterflood faced declining markets and
reduced trading activity, in sharp contrast to the exceptionally strong
conditions in the prior year.
Although we are aware of the pressures that the rising inflation and interest
rates will have on our customers and colleagues, I am confident that our
proven and resilient business model, strong financial position and deep
expertise leave us well positioned to continue to support them now and into
the future.
Financial Performance
The group's income reduced 2% to £936.1 million (2021: £952.6 million). The
Banking division achieved a 10% increase in income, reflecting a strong net
interest margin of 7.8% (2021: 7.7%) and 5.0% year-on-year loan book growth.
In the second half, we saw loan book growth of 3.0% as momentum picked up.
Income grew 6% in Asset Management as we continued to attract client assets
despite the impact of volatile market conditions on wider client sentiment,
with net inflows of 5% (2021: 7%). Winterflood saw a 48% reduction in income,
reflecting a market-wide slowdown in trading activity from elevated levels
during the pandemic and a change in the mix of trading volumes, exacerbated by
periods of volatility in falling markets.
Adjusted operating expenses were broadly stable as a significant reduction in
variable costs in Winterflood was offset by continued investment, as well as
higher staff costs primarily reflecting the current inflationary environment,
across the Banking and Asset Management divisions.
The bad debt ratio(1) of 1.2% (2021: 1.1%) remained broadly stable.
Excluding Novitas, the bad debt ratio was 0.5% (2021: 0.2%) and reflected
the release of Covid-19 provisions and the ongoing review of provisions and
coverage across our loan portfolios. Whilst we are not yet seeing a
significant impact from rising inflation and interest rates and their effect
on customers on our credit performance, we are alert to the highly uncertain
macroeconomic environment and continue to monitor closely the performance of
the book.
As a result, adjusted operating profit was down 13% to £234.8 million (2021:
£270.7 million), and we delivered a return on opening equity of 10.6% (2021:
14.5%), reflecting the reduction in Winterflood's profit and continued growth
in the equity base. The return on average tangible equity was 12.2% (2021:
16.5%).
Following the group's solid financial performance in the year and strong
capital position, and to reflect our continued confidence in the business
model, the board is proposing a final dividend of 44.0p per share. This will
result in a full-year dividend per share of 66.0p (2021: 60.0p), returning to
the pre-pandemic level.
The group maintained strong capital, funding and liquidity positions, with our
common equity tier 1 ("CET1") capital ratio of 14.6% (31 July 2021: 15.8%)
significantly above the applicable minimum regulatory requirements.
1 Bad debt ratio represents impairment losses in the year as a percentage of
average net loans and advances to customers and operating lease assets.
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.
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 are considering the further optimisation of 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
the short term, we would expect to operate above the 12% to 13% CET1 capital
ratio target range, in light of the heightened macroeconomic uncertainty and
potential growth opportunities available to us.
Protecting our Business Model and Maximising Future Income Generation
We continue to deliver against our strategic priorities to "Protect", "Grow"
and "Sustain" our business model.
Our multi-year investment programmes are progressing well and enable us to
protect our business, as well as enhance efficiency and future-proof our
income generation capabilities. We are seeing tangible benefits from these
investments. In our Savings franchise, investment in the customer deposit
platform allowed us to broaden our product offering and drove significant
growth in our retail deposits, up more than 50% since the launch of the
platform in December 2018. The total balance of Fixed Rate ISAs now stands at
c.£350 million, supporting lower cost of funds and funding diversification.
We continued to invest in our technology and digital capabilities to make our
experts even more valuable, empowering them with key data insights and
automated processes. In Motor Finance, our investment in digital and
technology has allowed us to make the most of opportunities in the second hand
car market. Through our partnership with AutoTrader, we are providing our
dealers with real-time insights on vehicle demand and pricing, a unique
proposition that has won the Innovation Award at the Car Finance Awards 2022.
We have also developed Application Programming Interfaces ("APIs") that enable
us to connect seamlessly into strategic partners and provide our finance
offering at various points of the customer journey. In CBAM, we have
undertaken a major re-platforming project to rationalise legacy systems and
improve efficiency, while adding a digital portal to improve functionality and
customer experience. We are also delivering a new customer portal in Asset
Finance and are automating elements of our processes to enhance customer
experience.
Focus on Maximising Disciplined Growth
We remain focused on maximising disciplined growth in our existing and
adjacent markets. This year, we have conducted a further review of potential
growth opportunities and have a strong pipeline of identified target areas
that are aligned with our business model.
We recognise a significant opportunity in broadening our sustainable finance
offering as the UK heads towards a net zero carbon economy. Our current
lending already spans a diverse array of assets including wind and solar
generation, battery electric vehicles and grid infrastructure. Over the coming
years, we will continue to build further our expertise in green and transition
assets, cementing our reputation for specialist knowledge. We are a
through-the-cycle lender and will continue to support our customers as they
look for financing of green and transition assets. In particular, we are
seeing growth across a range of battery electric vehicles, predominantly
through our Commercial business, as the UK's economy moves to electrify all
forms of transport. As we develop our green growth strategy, we have set
ourselves an initial green finance ambition. We aim to provide £1.0 billion
of funding for battery electric vehicles over the next five years.
In addition, we are piloting a specialist buy-to-let extension to our existing
Property bridging finance customers. We have also extended our sector coverage
in Asset Finance with the addition of specialist materials handling and
agricultural equipment teams. In Invoice Finance, we continue to pursue
opportunities in the Asset-Based Lending ("ABL") space, including identifying
syndication opportunities, partnering with other lenders.
Our Asset Management business is well aligned with the long-term trends in the
wealth management space and we will continue to invest to support its growth
potential. We remain committed to building on our excellent track record of
increasing client assets organically, through the continued selective hiring
of wealth management professionals, as well as through in-fill acquisitions.
Winterflood Business Services ("WBS") has delivered another strong
performance, with income up 12% from £9.1 million to £10.2 million and
assets under administration up 16% from £6.2 billion to £7.2 billion. Our
award-winning proprietary technology is highly scalable and we see significant
growth potential in this business, with a solid pipeline of clients expected
to increase assets under administration in excess of £10 billion in the 2023
financial year.
Our Role in Supporting the Transition to a Sustainable Future
We have an important role to play in helping people and businesses transition
to a lower carbon future and this responsibility is at the forefront of our
minds. I am pleased with the significant progress we have made in developing
our climate strategy, covering not just our operational impacts, but also
understanding the implications across our financed activities.
This year, we have carried out an assessment of our indirect Scope 3 emissions
across all categories of operational emissions as well as a first assessment
of our financed emissions, initially focused on our loan book. Initial
findings will soon be available in our inaugural Task Force on Climate-related
Financial Disclosures ("TCFD") report. There we set out our progress this year
and areas of future focus with regard to
the integration of climate risk into our governance infrastructure,
business strategy and risk management framework. Notwithstanding the efforts
already made, we remain at the start of a long journey and recognise there is
more to do to develop our own transition plans, targets and metrics. This also
includes our ability to address challenges around data and modelling as we
continue to work across industry and alongside our customers, to enhance both
understanding and our capabilities.
As a group we are supportive of the goals of the Paris Agreement to achieve
net zero emissions by 2050. Having previously set ambitious short-term net
zero targets for our Scope 1 and 2 operational emissions, we are now setting
ourselves a wider and longer-term ambition to align all of our operational and
attributable greenhouse gas ("GHG") emissions from our lending and investment
portfolios on a path to net zero by 2050. To this end, I am pleased to report
that we have recently joined 116 banks globally as a signatory to the Net Zero
Banking Alliance.
In CBAM, we have mobilised a Sustainability Programme with dedicated
initiatives to embed the Principles for Responsible Investment ("PRI") and
stewardship across all facets of our business, and as part of this, have
recently become a signatory to the UK Stewardship Code.
Outlook
We have delivered a solid performance this year and we start the 2023
financial year against a highly uncertain external environment. Although we
are alert to the impact of rising inflation and interest rates on our
customers and wider financial market conditions, we remain well placed to
continue delivering on our long track record of profitability and disciplined
growth.
In Banking, we are focused on maximising opportunities in the current cycle
and delivering continued growth at strong margins. We are confident in the
long-term growth prospects of our businesses and will continue to assess
opportunities to deliver disciplined growth.
In Asset Management, we continue to invest to support the long-term growth
potential of the business. Whilst the business is sensitive to financial
market conditions, we remain committed to driving growth both organically and
through the continued selective hiring of advisers and investment managers,
and through in-fill acquisitions.
As a daily trading business, Winterflood is highly sensitive to changes in the
market environment, but remains well positioned to continue trading
profitably, taking advantage of returning investor appetite. We see
significant growth potential in WBS, with a solid pipeline of clients expected
to increase assets under administration in excess of £10 billion in the 2023
financial year.
Our proven and resilient model and strong balance sheet, combined with our
deep experience in navigating a wide range of economic conditions, leave us
well placed to continue supporting our colleagues, customers and clients over
the long term.
Adrian Sainsbury
Chief Executive
27 September 2022
BOARD CHANGES
During the year, we were pleased to welcome Patricia Halliday and Tracey
Graham as independent non-executive directors with effect from 1 August 2021
and 22 March 2022, respectively.
Patricia has over 30 years' experience in risk management across the
investment, corporate and retail banking sectors, both in the UK and
internationally, with a deep understanding of the regulatory, risk and
governance environment in which the group operates. On joining the board on 1
August 2021, she was appointed as a member of the board's Risk and Audit
Committees.
Tracey is an experienced non-executive director, having served on a number of
listed companies and mutual boards. She was appointed as a member of the
board's Remuneration and Risk Committees and brings significant commercial,
operational and customer service expertise gained across a range of sectors,
including from executive and non-executive roles in financial services and
other customer-facing businesses.
After nine years' dedicated service on the board, Lesley Jones and Bridget
Macaskill will retire from the board at the conclusion of the Annual General
Meeting ("AGM"). We would like to thank both Lesley and Bridget for their huge
contribution to the group over that time.
Patricia will assume the role of chair of the Risk Committee from the date of
the AGM.
OVERVIEW OF FINANCIAL PERFORMANCE
SUMMARY GROUP INCOME STATEMENT(1)
2022 2021 Change
£ million £ million %
Operating income 936.1 952.6 (2)
Adjusted operating expenses (598.0) (592.1) 1
Impairment losses on financial assets (103.3) (89.8) 15
Adjusted operating profit 234.8 270.7 (13)
Banking 227.2 212.5 7
Commercial 91.0 52.8 72
Retail 61.0 71.9 (15)
Property 75.2 87.8 (14)
Asset Management 21.7 23.7 (8)
Winterflood 14.1 60.9 (77)
Group (28.2) (26.4) 7
Amortisation and impairment of intangible assets on acquisition (2.0) (14.2) (86)
Goodwill impairment - (12.1) n/a
Exceptional item: HMRC VAT refund - 20.8 n/a
Operating profit before tax 232.8 265.2 (12)
Tax (67.6) (63.1) 7
Profit after tax 165.2 202.1 (18)
Profit attributable to shareholders 165.2 202.1 (18)
Adjusted basic earnings per share(2) 111.5p 140.4p (21)
Basic earnings per share(2) 110.4p 134.8p (18)
Ordinary dividend per share 66.0p 60.0p 10
Return on opening equity 10.6% 14.5%
Return on average tangible equity 12.2% 16.5%
1 Adjusted measures are presented on a basis consistent with prior periods and
exclude amortisation of intangible assets on acquisition, to present the
performance of the group's acquired businesses consistent with its other
businesses; and any exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the reconciliation between
operating and adjusted measures can be found in note 2.
2 Refer to note 5 for the calculation of basic and adjusted earnings per
share.
Adjusted Operating Profit and Returns
Adjusted operating profit reduced 13% to £234.8 million (2021: £270.7
million), primarily reflecting a reduction in income in Winterflood and an
increase in impairment charges. After adjusting items, statutory operating
profit before tax decreased by 12% to £232.8 million (2021: £265.2 million).
The group delivered a return on opening equity of 10.6% (2021: 14.5%),
reflecting the reduction in Winterflood's profit and continued growth in the
equity base, and return on average tangible equity of 12.2% (2021: 16.5%).
Adjusted operating profit in the Banking division increased by 7% to £227.2
million (2021: £212.5 million), reflecting strong income growth, partially
offset by higher costs and impairment charges. In the Asset Management
division, adjusted operating profit declined 8% to £21.7 million (2021:
£23.7 million) as growth in income was more than offset by increased staff
costs. Winterflood saw reduced trading opportunities in higher margin sectors
and periods of volatility in falling markets. Following the exceptionally
strong trading performance and elevated market activity experienced in the
prior year, operating profit was down 77% to £14.1 million (2021: £60.9
million). Group net expenses, which include the central functions such as
finance, legal and compliance, risk and human resources, increased 7% on the
prior year to £28.2 million (2021: £26.4 million), mainly reflecting third
party spend in relation to the assessment of potential growth opportunities.
Operating Income
Operating income reduced 2% to £936.1 million (2021: £952.6 million), with
growth in Banking and Asset Management offset by a reduction in trading income
in Winterflood. Income in the Banking division increased by 10%, reflecting
good loan book growth and a strong net interest margin of 7.8% (2021: 7.7%).
Although income in the Asset Management division was up 6%, with continued net
inflows and positive market performance in the first half of the year, income
was more subdued in the second half of the year due to falling markets and
their impact on wider client sentiment. Income in Winterflood reduced by
48%, driven by a market-wide slowdown in trading activity from elevated levels
during the pandemic and a change in the mix of trading volumes, exacerbated by
falling markets.
Adjusted Operating Expenses
Adjusted operating expenses were broadly stable at £598.0 million (2021:
£592.1 million), reflecting a significant reduction in variable costs in
Winterflood, offset by higher investment spend and salary increases in Banking
and higher staff costs in Asset Management. In the Banking division, costs
were up 10%, as we continued to invest in our key strategic programmes and
incurred higher business-as-usual ("BAU") spend following salary increases to
reflect inflation and performance-driven compensation. Expenses increased 9%
in the Asset Management division, mainly driven by higher staff costs in the
current inflationary environment and new hires, as we continue to invest to
grow the business. Winterflood's operating expenses decreased 33%, reflecting
lower variable compensation and settlement costs. Overall, the group's
expense/income ratio increased on the prior year period to 64% (2021: 62%),
whilst the group's compensation ratio decreased to 37% (2021: 38%). Statutory
operating expenses increased to £600.0 million (2021: £597.6 million).
Impairment Charges and IFRS 9 Provisioning
Impairment charges increased to £103.3 million (2021: £89.8 million),
corresponding to a bad debt ratio of 1.2% (2021: 1.1%). This included the
impact of updated assumptions for the Novitas loan book, informed by
experience of credit performance, which resulted in £60.7 million (2021:
£73.2 million) of impairment charges related to this business.
Excluding Novitas, the bad debt ratio was 0.5% (2021: 0.2%), reflecting the
release of Covid-19 provisions, partially offset by the ongoing review of
provisions and coverage across our loan portfolios, including certain
individual exposures in the Commercial business, as well as higher IFRS 9
provisions to take into account the outlook for the external environment.
There was a marginal decrease in provision coverage to 3.1% (31 July 2021:
3.2%). Excluding provisions related to the Novitas loan book, the coverage
ratio reduced to 1.9% (31 July 2021: 2.3%), primarily reflecting provision
releases, mainly driven by reduced Covid-19 forborne balances. This coverage
level appropriately reflects the elevated uncertainty in the external
environment in the range of modelled outcomes.
Economic forecasts have evolved over the course of the 2022 financial year. At
31 July 2021, the scenario weightings reflected the continued economic
challenges and uncertainty associated with the pandemic, with 40% allocated to
the baseline scenario, 20% to the upside scenario and 40% across the three
downside scenarios. The level of economic uncertainty associated with the
pandemic reduced up to 31 January 2022 and 10% weight was moved from the three
downside scenarios to the upside scenario. In the second half of 2022, 7.5%
weight has moved from the baseline scenario to the three downside scenarios,
resulting in final weights that are considered consistent with the economic
uncertainty at 31 July 2022 as follows: 30% strong upside, 32.5% baseline, 20%
mild downside, 10.5% moderate downside and 7% severe downside.
Whilst we are not yet seeing a significant impact from rising inflation and
interest rates and their effect on customers on our credit performance, we are
alert to the highly uncertain macroeconomic environment and continue to
monitor closely the performance of the book. We remain confident in the
quality of our loan book, which is predominantly secured, prudently
underwritten and diverse. Approximately 99% of our loan book exposure is to
the UK, Republic of Ireland and Channel Islands, with the remaining exposure
to Western European countries.
Exceptional and Other Adjusting Items
Amortisation and impairment of intangible assets on acquisition was down
significantly to £2.0 million (2021: £14.2 million). The prior year charge
included a £10.1 million impairment of intangible assets recognised on
acquisition in relation to Novitas, following the decision to cease
permanently the approval of lending to new customers across all of the
products offered by this business.
Following this decision, we also recognised an adjusting item in relation to
the full write down of goodwill allocated to Novitas in the prior year of
£12.1 million.
There were no exceptional items recorded in the 2022 financial year (2021:
£20.8 million). In 2021, we recognised an exceptional gain of £20.8 million,
reflecting a VAT refund from HMRC in relation to hire purchase agreements in
the Motor Finance and Asset Finance businesses.
Tax Expense
The tax expense was £67.6 million (2021: £63.1 million), which corresponds
to an effective tax rate of 29.0% (2021: 23.8%). The increase in the effective
tax rate primarily reflected a write-down in the group's deferred tax assets
as a result of the legislated reduction in the rate of banking surcharge from
8% to 3% which was due to apply from April 2023, and the non-recurrence of the
prior year write-up in the group's deferred tax assets as a result of
legislation that year increasing the mainstream corporate tax rate from 19% to
25% (also due to apply from April 2023).
The group's underlying effective tax rate for the year ended 31 July 2022,
excluding the impact of the deferred tax asset write-down, would be 25.7%,
reflecting the UK corporate tax rate of 19% and headline banking surcharge of
8% (which applied to a proportion of the group's profits, resulting in c.6%
banking surcharge).
On 23 September 2022, the Chancellor of the Exchequer announced as part of his
Growth Plan that the corporation tax rate increase from 19% to 25% from April
2023 will be cancelled, and that the banking surcharge rate will remain at 8%.
The relevant legislation is expected to be enacted in the year ending 31 July
2023 and is a non-adjusting post balance sheet event. Had this change been
enacted before 31 July 2022, the group's deferred tax asset balance at 31 July
2022 would have decreased by approximately £1.5 million, with a corresponding
tax charge recognised in the income statement, net of a smaller credit to
other comprehensive income.
Earnings per Share
Profit attributable to shareholders reduced 18% on the prior year to £165.2
million (2021: £202.1 million), reflecting a reduction in adjusted operating
profit and the impact from revaluations of deferred tax assets on the
effective tax rate in the 2022 and 2021 financial years. As a result, adjusted
basic earnings per share ("EPS") was 111.5p (2021: 140.4p) and basic EPS was
110.4p (2021: 134.8p).
Dividend
The board is proposing a final dividend of 44.0p per share, resulting in a
full-year dividend per share of 66.0p (2021: 60.0p), up 10% on the prior year.
This reflects the group's solid performance in the year and strong capital
position, as well as our continued confidence in the business model. We remain
committed to our dividend policy, which aims to provide sustainable dividend
growth year-on-year, while maintaining a prudent level of dividend cover.
Subject to approval at the Annual General Meeting, the final dividend will be
paid on 22 November 2022 to shareholders on the register at 14 October 2022.
SUMMARY GROUP BALANCE SHEET
31 July 2022 31 July 2021(1)
£ million £ million
Loans and advances to customers and operating lease assets(2) 9,098.9 8,667.4
Treasury assets(3) 1,855.1 1,788.2
Market-making assets(4) 887.2 801.6
Other assets 837.1 777.3
Total assets 12,678.3 12,034.5
Deposits by customers 6,770.4 6,634.8
Borrowings 2,870.1 2,600.9
Market-making liabilities(4) 796.1 690.6
Other liabilities 584.2 538.9
Total liabilities 11,020.8 10,465.2
Equity 1,657.5 1,569.3
Total liabilities and equity 12,678.3 12,034.5
1 Loans and advances to customers has been re-presented for 31 July 2021 to
include £222.9 million of operating lease assets, with a corresponding
reduction to other assets.
2 Includes operating lease assets of £0.5 million (31 July 2021: £1.3
million) that relate to Asset Finance and £239.5 million (31 July 2021:
£221.6 million) to Invoice and Speciality Finance.
3 Treasury assets comprise cash and balances at central banks and debt
securities held to support the Banking division.
4 Market-making assets and liabilities comprise settlement balances, long and
short trading positions and loans to or from money brokers.
The group maintained a strong balance sheet and a prudent approach to managing
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 5% to £12.7 billion (31 July 2021: £12.0 billion),
mainly reflecting growth in the loan book, an increase in non-trading debt
securities and higher market-making assets. Total liabilities were up 5% to
£11.0 billion (31 July 2021: £10.5 billion), driven primarily by higher
customer deposits and an increase in secured borrowings. Both market-making
assets and liabilities, related to trading activity at Winterflood, were up
year-on-year due to an increase in value traded at the end of the period when
settlement balances are calculated.
Total equity increased 6% to £1.7 billion (31 July 2021: £1.6 billion),
primarily reflecting the profit in the year, partially offset by dividend
payments of £95.5 million (2021: £86.6 million). The group's return on
assets marginally decreased to 1.3% (2021: 1.7%).
GROUP CAPITAL(1)
31 July 2022(1) 31 July 2021
£ million £ million
Common equity tier 1 capital 1,396.7 1,439.3
Total capital 1,596.7 1,662.7
Risk weighted assets 9,591.3 9,105.3
Common equity tier 1 capital ratio (transitional) 14.6% 15.8%
Tier 1 capital ratio (transitional) 14.6% 15.8%
Total capital ratio (transitional) 16.6% 18.3%
Leverage ratio(2) 12.0% 11.8%
1 In line with CRR, effective on 1 January 2022, the CET1, tier 1 and total
capital ratios no longer include the benefit related to software assets which
were previously exempt from the deduction requirement for intangible assets
from CET1.
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. At 31 July 2021,
the leverage ratio was calculated under the EU CRR and included central bank
claims.
Movements in Capital and Other Regulatory Metrics
The CET1 capital ratio reduced from 15.8% to 14.6%, mainly driven by a change
in the regulatory treatment of software assets (c.45bps), the impact of the
transitional IFRS 9 add-back (c.30bps) and an increase in risk weighted assets
("RWAs") (c.80bps), partly offset by retained earnings (c.75bps).
CET1 capital decreased 3% to £1,396.7 million (31 July 2021: £1,439.3
million), reflecting the regulatory change in the treatment of software
assets, which increased the intangible assets deducted from CET1 capital by
£50.2 million, a decrease in the transitional IFRS 9 add-back to capital of
£34.8 million and the regulatory deduction of dividends paid and foreseen of
£98.4 million. This was partially offset by the capital generation through
profit of £165.2 million.
Total capital decreased 4% to £1,596.7 million (31 July 2021: £1,662.7
million), also reflecting the regulatory change in the treatment of software
assets and a small repayment of our subordinated debt.
RWAs increased 5% to £9.6 billion (31 July 2021: £9.1 billion), mainly
driven by an increase in the loan book and risk weighted assets related to
derivatives held for hedging purposes, partly offset by the regulatory change
in treatment of software assets.
As a result, CET1, tier 1 and total capital ratios were 14.6% (31 July 2021:
15.8%), 14.6% (31 July 2021: 15.8%) and 16.6% (31 July 2021: 18.3%),
respectively.
At 31 July 2022, the applicable minimum CET1, tier 1 and total capital ratio
requirements, excluding any applicable Prudential Regulation Authority ("PRA")
buffer, were 7.6%, 9.3% and 11.5%, respectively. Accordingly, we continue to
have headroom significantly above the applicable minimum regulatory
requirements of 700bps in the CET1 capital ratio, 530bps in the tier 1 capital
ratio and 510bps 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 13.8%, 13.8% and 15.9%, respectively.
The leverage ratio, which is a transparent measure of capital strength not
affected by risk weightings, remains strong at 12.0% (31 July 2021: 11.8%).
The ratio at 31 July 2022 reflects a change in calculation under the UK
leverage framework to exclude central bank reserves.
We continue to make good progress on our preparations for a transition to the
IRB approach. Following the submission of our initial application to the PRA
in December 2020, we have received confirmation that our application has
successfully transitioned to Phase 2. The next phase of formal review will
commence in October 2022 and we are well positioned to respond promptly,
although the timetable remains under the direction of the PRA. Our Motor
Finance, Property Finance and Energy portfolios, where the use of models is
most mature, have been submitted with our initial application, with other
businesses to follow in future years.
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 are considering the further optimisation of 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
would allow the group to maintain a buffer to minimum regulatory requirements
while also retaining the flexibility for growth.
In the short term, we would expect to operate above the 12% to 13% CET1
capital ratio target range, in light of the heightened macroeconomic
uncertainty and potential growth opportunities available to us.
GROUP FUNDING(1)
31 July 2022 31 July 2021
£ million £ million
Customer deposits 6,770.4 6,634.8
Secured funding 1,598.7 1,333.7
Unsecured funding(2) 1,544.3 1,539.5
Equity 1,657.5 1,569.3
Total available funding 11,570.9 11,077.3
Total funding as % of loan book(3) 127% 128%
Average maturity of funding allocated to loan book(4) 21 months 24 months
1 Numbers relate to core funding and exclude working capital facilities at the
business level.
2 Unsecured funding excludes £22.1 million (31 July 2021: £22.7 million) of
non-facility overdrafts included in borrowings and includes £295.0 million
(31 July 2021: £295.0 million) of undrawn facilities.
3 Total funding as a % of loan book has been re-presented to include £240.0
million (31 July 2021: £222.9 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.
The primary purpose of our Treasury and Savings business is to manage funding
and liquidity to support the Banking businesses and manage interest rate risk.
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. It is also
diverse, 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 a number of securitisations.
We increased total funding in the year by 4% to £11.6 billion (31 July 2021:
£11.1 billion) which accounted for 127% (31 July 2021: 128%) of the loan book
at the balance sheet date. The average cost of funding reduced to 1.3% (2021:
1.4%), an increase from 1.1% in the first half of the 2022 financial year due
to the increased cost of customer deposits.
Customer deposits increased 2% to £6.8 billion (31 July 2021: £6.6 billion)
with non-retail deposits reducing by 7% to £3.7 billion (31 July 2021: £3.9
billion) and retail deposits increasing by 16% to £3.1 billion (31 July 2021:
£2.7 billion).
The previous investment in our customer deposit platform continues to generate
benefits and has enabled us to enhance our Savings proposition. Balances in
our Fixed Rate Cash Individual Savings Accounts ("ISAs") have grown to c.£350
million (31 July 2021: £160 million) since their launch in December 2020. We
remain focused on continuing to extend the deposit product range, which will
support us in growing and diversifying our retail deposit base and further
optimise our cost of funding and maturity profile.
Secured funding increased 20% to £1.6 billion (31 July 2021: £1.3 billion)
as we completed our fourth public Motor Finance securitisation in April 2022
and increased our current drawings under the Term Funding Scheme for Small and
Medium-sized Enterprises ("TFSME") to £600 million (31 July 2021: £490
million).
Unsecured funding, which includes senior unsecured and subordinated bonds and
undrawn committed revolving facilities, remained stable at £1.5 billion (31
July 2021: £1.5 billion).
We have maintained a prudent maturity profile. The average maturity of funding
allocated to the loan book remained ahead of the loan book at 21 months (31
July 2021: 24 months), with the average loan book maturity at 17 months (31
July 2021: 17 months), in line with our "borrow long, lend short" principle.
Our strong credit ratings remain unchanged, with Moody's Investors Services
("Moody's") reaffirming their rating for Close Brothers Group as ''A2/P1'' and
Close Brothers Limited as ''Aa3/P1'' with a ''negative'' outlook for both in
July 2022, and Fitch Ratings ("Fitch") reaffirming their rating for both Close
Brothers Group and Close Brothers Limited as ''A-/F2'', with a ''stable''
outlook in May 2022. This reflects the group's profitability, capital
position, diversified business model and consistent risk appetite.
GROUP LIQUIDITY
31 July 2022 31 July 2021
£ million £ million
Cash and balances at central banks 1,254.7 1,331.0
Sovereign and central bank debt(1) 415.4 192.5
Certificates of deposit 185.0 264.7
Treasury assets 1,855.1 1,788.2
1 Included in sovereign and central bank debt is £216.9 million encumbered UK
Government debt (31 July 2021: £90.2 million).
The group continues to adopt a conservative stance on liquidity, ensuring it
is comfortably ahead of both internal risk appetite and regulatory
requirements.
We continued to maintain higher liquidity relative to the pre-Covid-19
position to provide additional flexibility given the uncertain UK economic
outlook, whilst enabling us to maximise any opportunities available. Over the
year, treasury assets increased 4% to £1.9 billion (31 July 2021: £1.8
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 comfortably meet the liquidity coverage ratio ("LCR") regulatory
requirements, with a 12-month average to 31 July 2022 LCR of 924% (2021:
1,003%). 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 July 2022 was 118.3% (31 January 2022:
117.3%).
BUSINESS REVIEW
BANKING
Key Financials(1)
2022 2021 Change
£ million £ million %
Operating income 693.1 631.7 10
Adjusted operating expenses(2) (362.6) (329.1) 10
Impairment losses on financial assets (103.3) (90.1) 15
Adjusted operating profit 227.2 212.5 7
Net interest margin 7.8% 7.7%
Expense/income ratio 52% 52%
Bad debt ratio 1.2% 1.1%
Return on net loan book 2.6% 2.6%
Return on opening equity 12.5% 13.7%
Closing loan book and operating lease assets(3) 9,098.9 8,667.4 5
1 Adjusted measures are presented on a basis consistent with prior periods and
exclude amortisation of intangible assets on acquisition, to present the
performance of the group's acquired businesses consistent with its other
businesses; and any exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the reconciliation between
operating and adjusted measures can be found in note 2.
2 Related ongoing costs resulting from investment projects are recategorised
from investment costs to BAU costs after one year. For comparison purposes,
£5.2 million has been recategorised from investment costs to BAU costs in the
2021 financial year to adjust for investment projects' ongoing costs that
commenced prior to the 2022 financial year.
3 Commercial, Asset Finance and Invoice and Speciality Finance loan books have
been re-presented for 31 July 2021 to include £222.9 million of operating
lease assets (£1.3 million in Asset Finance and £221.6 million in Invoice
and Speciality Finance).
Good Loan Book Growth and Strong Margins
Banking adjusted operating profit increased 7% to £227.2 million (2021:
£212.5 million), reflecting good loan book growth and a strong net interest
margin. Statutory operating profit increased to £227.1 million (2021: £207.2
million).
The loan book grew 5.0% over the year to £9.1 billion (31 July 2021: £8.7
billion) driven by healthy new business volumes in our Commercial businesses
and high demand in Motor Finance, partly offset by a contraction in the
Premium Finance and Property loan books. Momentum picked up over the course of
the year, as the 1.9% loan book growth in the first half of the year was
supplemented by 3.0% growth in the second half of the year. The return on net
loan book remained stable on the prior year at 2.6% (2021: 2.6%).
The net interest margin of 7.8% increased marginally on the 2021 financial
year (2021: 7.7%), primarily driven by lower cost of funds. We continue to
adopt a disciplined approach to pricing and our specialist,
relationship-driven model positions us well to maintain a strong net interest
margin, although the trajectory will depend upon our ability to pass on
further rate increases onto our customers.
As a result, operating income increased 10% to £693.1 million (2021: £631.7
million), reflecting the good loan book growth and a strong net interest
margin.
Adjusted operating expenses increased 10% to £362.6 million (2021: £329.1
million) as we progressed our key investment programmes and continued to
exercise rigorous control of our costs, whilst recognising the current
inflationary environment. BAU costs increased by 7% to £278.8 million (2021:
£260.3 million), primarily driven by higher staff costs reflecting salary
increases in the current inflationary environment and increased
performance-driven compensation.
Investment costs rose 22% to £83.8 million (2021: £68.8 million), reflecting
spend on our multi-year strategic investment projects and related depreciation
charges.
Our investment projects align with our strategic priorities of protecting,
growing and sustaining the business and continue to deliver tangible benefits.
Our IRB spend has driven enhancements in our risk management framework, whilst
investment in our customer deposit platform has enabled the expansion of the
Savings product offering, supporting a lower cost of funds. In Asset Finance,
investment in our systems has added new functionality and improved customer
insights. Our Retail businesses are benefiting from digital investment, with
Motor Finance utilising API links to connect to strategic partners and offer
our finance at various points of the customer journey and Premium Finance have
launched insight tools to support brokers.
Whilst we remain mindful of inflationary pressures, we continue to exercise
cost discipline. We expect costs related to existing investment programmes to
stabilise over the next financial years, although depreciation charges related
to these programmes will continue to increase.
The compensation ratio was flat on the prior year at 29% (2021: 29%) and the
expense/income ratio also remained stable at 52% (2021: 52%).
Impairment charges increased to £103.3 million (2021: £90.1 million),
corresponding to a bad debt ratio of 1.2% (2021: 1.1%). Excluding Novitas, the
bad debt ratio was 0.5% (2021: 0.2%), reflecting the release of Covid-19
provisions, partially offset by the ongoing review of provisions and coverage
across our loan portfolios, including certain individual exposures in the
Commercial business, as well as higher IFRS 9 provisions to take into account
the outlook for the external environment.
Overall, there was a marginal decrease in provision coverage to 3.1% (31 July
2021: 3.2%). Excluding provisions related to the Novitas loan book, the
coverage ratio reduced slightly to 1.9% (31 July 2021: 2.3%), primarily
reflecting provision releases, mainly driven by reduced Covid-19 forborne
balances.
Whilst we are not yet seeing a significant impact from rising inflation and
interest rates and their effect on customers on our credit performance, we are
alert to the highly uncertain macroeconomic environment and continue to
closely monitor the performance of the book. 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.
Return on opening equity in the Banking division reduced to 12.5% (2021:
13.7%).
Loan Book Analysis
31 July 2022 31 July 2021(1) Change
£ million £ million %
Commercial 4,561.4 4,191.0 9
Asset Finance 3,032.5 2,845.9 7
Invoice and Speciality Finance 1,528.9 1,345.1 14
Retail 3,064.0 2,974.3 3
Motor Finance 2,051.2 1,924.4 7
Premium Finance 1,012.8 1,049.9 (4)
Property 1,473.5 1,502.1 (2)
Closing loan book and operating lease assets(2) 9,098.9 8,667.4 5
1 Commercial, Asset Finance and Invoice and Speciality Finance loan books
have been re-presented for 31 July 2021 to include £222.9 million of
operating lease assets (£1.3 million in Asset Finance and £221.6 million in
Invoice and Speciality Finance).
2 Operating lease assets of £0.5 million (31 July 2021: £1.3 million)
relate to Asset Finance and £239.5 million (31 July 2021: £221.6 million) to
Invoice and Speciality Finance.
The loan book increased 5.0% year-on-year to £9.1 billion (31 July 2021:
£8.7 billion), reflecting strong growth in our Commercial and Motor Finance
businesses, partly offset by a contraction in the Premium Finance and Property
businesses. Momentum picked up over the course of the year, as the 1.9% loan
book growth in the first half of the year was supplemented by 3.0% growth in
the second half of the year.
The Commercial loan book increased 9% to £4.6 billion (31 July 2021: £4.2
billion), driven by 7% growth in Asset Finance, reflecting strong new business
volumes in the Transport, Broker, Contract Hire and Energy businesses in
particular, as we saw good demand from customers. Invoice and Speciality
Finance grew 14%, reflecting strong sales volumes and increased utilisation.
The core Invoice Finance loan book increased 29% as we grew SME customer
numbers.
The Retail loan book increased 3% to £3.1 billion (31 July 2021: £3.0
billion), with 7% growth in Motor Finance as we saw strong new business
levels, reflecting continued demand in the used car market and the benefits
from investment in the Motor Finance transformation programme. This was partly
offset by a 4% decline in the Premium Finance book as a result of lower demand
for the funding of insurance policies from consumers, following previous
Covid-19 restrictions.
The Property loan book contracted 2%, despite the growth seen in the second
half of the year. This reflected high repayment levels, which more than offset
drawdowns, given we continued to see heightened unit sales by developers as a
result of the buoyant UK property market. Our new business volumes remained
strong and our pipeline stands at over £1 billion.
The Republic of Ireland makes up approximately 7% of our total loan book (31
July 2021: 8%), with an offering from both our Commercial and Retail
businesses. The Republic of Ireland Motor Finance business accounted for 18%
of the Motor Finance loan book (31 July 2021: 21%) and 4% of the Banking loan
book (31 July 2021: 5%). As previously announced, from 30 June 2022, we ceased
writing new business under our previous partnership in the Republic of
Ireland. We remain committed to the Irish market and are considering our
long-term options.
Well Positioned to Deliver Disciplined Growth
Loan book growth continues to be an output of our business model, as we focus
on delivering disciplined growth whilst continuing to prioritise our margins
and credit quality. As outlined at the Investor Event in June 2021, we
continue to actively work to identify incremental and new opportunities in
both our existing and adjacent markets.
Across our businesses, we recognise a significant opportunity in broadening
our financing of green and transition assets, as the UK aligns towards a net
zero economy. Our current lending already spans a diverse array of green
assets including wind and solar generation, battery electric vehicles and grid
infrastructure, including battery electric storage systems.
We have seen strong growth in battery electric vehicles in our Commercial
business. Our Wholesale Fleet division provides finance for company car fleets
and over one third of its loan book is now fully battery electric. As an
initial green finance ambition, we have set ourselves the aim to provide
funding for £1.0 billion of battery electric vehicles in the next five years.
Over the coming years, we will continue to build further our expertise in
green and transition assets, cementing our reputation for specialist
knowledge, financing and maximising commercial opportunities arising in the
space, for example through the financing of battery electric storage systems
and charging infrastructure across the UK.
The Asset Finance business is well positioned to capitalise on continued
demand for asset financing. During the year, we have expanded our sector
coverage, hiring agricultural equipment and materials handling teams who have
both completed their first deals, and have increased our focus on the
financing of green and transition assets.
In Invoice Finance, we expect the growth trajectory to follow the economic
conditions. We continue to pursue opportunities in the ABL space, including
identifying syndication opportunities, partnering with other lenders. Our
Brewery Rentals business has delivered a record year and our direct-to-outlet
container rental product, EkegPlus, continues to see strong demand.
Our investment in the Motor Finance transformation programme has enabled us to
further broaden our offering in this market and take advantage of heightened
demand for used cars. The programme has improved efficiency and the
introduction of e-sign functionality has delivered sustainability benefits. We
have developed a unique proposition to provide dealers with real-time data and
market insights, in partnership with AutoTrader, which has supported an
increase in dealer numbers and reducing vehicle sales times. We have also
developed a set of APIs that enable us to connect seamlessly into strategic
partners including AutoTrader and iVendi and provide our finance offering at
various points of the customer journey. Alongside this, we continue to explore
opportunities for growth over the longer term through the shift to
Alternatively Fuelled Vehicles ("AFVs"), as they become more prevalent in the
second hand car market. AFVs currently make up a low proportion of our Motor
Finance loan book, in line with penetration in the wider second hand car
market. We have expanded our credit policy to capture such vehicles and are
currently piloting new AFV-suited offerings in selected markets.
For Premium Finance, we have launched new insight tools, Foresight and Focus
360, to enhance our offering and support brokers' decisioning. We anticipate
demand for the funding of insurance policies could increase given the
uncertain macroeconomic conditions.
In Property, we continue to make good progress expanding our regional
presence, which now contributes over 50% of our loan book, as well as building
out our bridging finance offering. In partnership with Travis Perkins, we have
established a new facility, allowing SME housebuilders to access discounted
building supplies and materials directly via a credit facility, without the
need to demonstrate any trading or credit history, where a relationship with
the client already exists and funding has previously been agreed. We are also
piloting a specialist buy-to-let extension to our existing Property bridging
finance clients, which is a natural evolution of our expertise in Property
Finance and well aligned with our business model and risk appetite. Our
pipeline of undrawn commitments remains strong at above £1 billion, although
the heightened economic uncertainty is expected to continue to impact activity
in the property market.
Overall, we remain confident in the growth outlook for the loan book over both
the short and medium term.
Banking: Commercial(1)
2022 2021(2) Change
£ million £ million %
Operating income 343.4 288.9 19
Adjusted operating expenses (180.0) (158.2) 14
Impairment losses on financial assets (72.4) (77.9) (7)
Adjusted operating profit 91.0 52.8 72
Net interest margin 7.8% 7.7%
Expense/income ratio 52% 55%
Bad debt ratio 1.7% 2.1%
Closing loan book and operating lease assets(3) 4,561.4 4,191.0 9
1 Adjusted measures are presented on a basis consistent with prior periods and
exclude amortisation of intangible assets on acquisition, to present the
performance of the group's acquired businesses consistent with its other
businesses; and any exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the reconciliation between
operating and adjusted measures can be found in note 2.
2 Commercial, Asset Finance and Invoice and Speciality Finance loan books have
been re-presented for 31 July 2021 to include £222.9 million of operating
lease assets (£1.3 million in Asset Finance and £221.6 million in Invoice
and Speciality Finance).
3 Operating lease assets of £0.5 million (31 July 2021: £1.3 million) relate
to Asset Finance and £239.5 million (31 July 2021: £221.6 million) to
Invoice and Speciality Finance.
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. 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, Vehicle
Hire and Novitas.
Adjusted operating profit in Commercial rose 72% to £91.0 million (2021:
£52.8 million) as the business achieved positive operating leverage and saw a
decrease in impairment charges. Statutory operating profit was £90.9 million
(2021: £35.9 million).
Operating income increased 19% to £343.4 million (2021: £288.9 million),
reflecting strong loan book growth in both Asset Finance and Invoice Finance.
The net interest margin increased marginally to 7.8% (2021: 7.7%), mainly
driven by a lower cost of funds.
Adjusted operating expenses of £180.0 million (2021: £158.2 million) were
14% higher than the prior year, reflecting higher staff costs to reflect
business growth and the inflationary environment, as well as costs in relation
to the group's withdrawal from the legal services financing market. In
addition, investment spend in the Asset Finance transformation programme
continued. The expense/income ratio decreased to 52% (2021: 55%) as the growth
in operating income more than offset the cost increase.
Impairment charges decreased 7% to £72.4 million (2021: £77.9 million),
corresponding to a reduced bad debt ratio of 1.7% (2021: 2.1%), reflecting the
reduction in the Covid-19 forborne book and a lower charge in the year
relating to Novitas, partly offset by an increase in provisions against
certain individual exposures. A significant portion of the impairment charges
reported in Commercial related to credit provisions against the Novitas loan
book (2022: £60.7 million, 2021: £73.2 million), which reflect the latest
assumptions on the case failure and recovery rates in this business.
The provision coverage reduced marginally to 4.0% (31 July 2021: 4.2%)
reflecting reduced Covid-19 forbearance, partly offset by provisions against
the Novitas loan book to take into account updated assumptions on case failure
rates. Excluding Novitas, the provision coverage ratio reduced to 1.6% (31
July 2021: 2.1%).
The Commercial loan book increased 9% to £4.6 billion (31 July 2021: £4.2
billion). The Asset Finance book grew 7% to £3.0 billion (31 July 2021: £2.8
billion), reflecting strong new business volumes. The Invoice and Speciality
Finance loan book increased 14% to £1.5 billion (31 July 2021: £1.3
billion), driven by high sales volumes, supported by the Recovery Loan Scheme,
and improved utilisation, albeit this continues to remain slightly below
pre-Covid-19 levels.
Banking: Retail(1)
2022 2021 Change
£ million £ million %
Operating income 237.0 219.8 8
Adjusted operating expenses (151.6) (138.0) 10
Impairment losses on financial assets (24.4) (9.9) 146
Adjusted operating profit 61.0 71.9 (15)
Net interest margin 7.8% 7.6%
Expense/income ratio 64% 63%
Bad debt ratio 0.8% 0.3%
Closing loan book 3,064.0 2,974.3 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
operating and adjusted measures can be found in note 2.
The Retail businesses provide intermediated finance, principally to
individuals and small businesses, through motor dealers and insurance brokers.
Operating profit for Retail reduced 15% to £61.0 million (2021: £71.9
million), driven by higher impairment charges and increased operating
expenses, which more than offset income growth.
Operating income increased 8% to £237.0 million (2021: £219.8 million),
reflecting loan book growth and an increase in the net interest margin to 7.8%
(2021: 7.6%), mainly driven by higher fee income in Premium Finance and a
lower cost of funds.
Operating expenses rose 10% to £151.6 million (2021: £138.0 million), driven
by higher staff costs and the cost of responding to ongoing regulatory change.
In addition, ongoing investment in the Retail businesses, alongside related
depreciation, continued. The expense/income ratio increased marginally to 64%
(2021: 63%).
Impairment charges increased to £24.4 million (2021: £9.9 million), with a
bad debt ratio of 0.8% (2021: 0.3%) which reflected a more normalised level of
cancellations in the consumer portfolio in Premium Finance following the
strong credit performance in the prior year and a rise in arrears in the Motor
Finance business as a result of the impact on customers from the cessation of
the UK government's Covid-19 job retention scheme and the increase in
inflation.
The provision coverage ratio remained stable at 2.2% (31 July 2021: 2.2%),
mainly driven by the release of model-driven adjustments, partly offset by
expected credit losses increasing to reflect loan book growth.
The Retail loan book increased 3% to £3.1 billion (31 July 2021: £3.0
billion). The Motor Finance book grew 7% to £2.1 billion (31 July 2021: £1.9
billion), as high new business levels reflected continued demand, and strong
prices continued in the used car market.
The Premium Finance book declined 4% to £1.0 billion (31 July 2021: £1.0
billion) primarily as a result of lower demand for the funding of insurance
policies from consumers. This was partially offset by strong new business
volumes as customers look to ease cash flow pressures in the commercial
market.
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.11% of the Motor Finance loan book at 31 July
2022. The Premium Finance loan book benefits from various forms of structural
protection including premium refundability and, in most cases, broker recourse
for the personal lines product.
Banking: Property
2022 2021 Change
£ million £ million %
Operating income 112.7 123.0 (8)
Operating expenses (31.0) (32.9) (6)
Impairment losses on financial assets (6.5) (2.3) 183
Operating profit 75.2 87.8 (14)
Net interest margin 7.6% 7.6%
Expense/income ratio 28% 27%
Bad debt ratio 0.4% 0.1%
Closing loan book 1,473.5 1,502.1 (2)
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.
Operating profit decreased 14% to £75.2 million (2021: £87.8 million)
primarily reflecting a reduction in income, as well as an increase in
impairment charges on the prior year.
Operating income was down 8% to £112.7 million (2021: £123.0 million)
reflecting the reduction in the loan book. The net interest margin was stable
at 7.6% (2021: 7.6%), mainly driven by lower cost of funds, partly offset by
the negative impact of rising rates in the last few months of the financial
year on the interest rate floors, which were set at 1%. With the UK base rate
now above 1%, we expect no further impact in respect of these floors as a
result of future rate rises.
Operating expenses were 6% lower at £31.0 million (2021: £32.9 million) as
we maintained our rigorous focus on cost discipline. The expense/income ratio
remained broadly stable on the prior year at 28% (2021: 27%).
Impairment charges increased to £6.5 million (2021: £2.3 million) following
the ongoing review of provisions and the prior year benefiting from the
release of Covid-19 related provisions, resulting in a bad debt ratio of 0.4%
(2021: 0.1%). The provision coverage ratio decreased marginally to 2.4% (31
July 2021: 2.6%).
In spite of strong new business volumes, the Property loan book reduced £29
million to £1.5 billion (31 July 2021: £1.5 billion), as high repayment
levels more than offset drawdowns, with the buoyant UK property market
resulting in heightened unit sales by developers. Our pipeline of undrawn
commitments remains strong at £1.0 billion (31 July 2021: £0.9 billion) and
we continue to see success from regional expansion, with the regional loan
book making up over 50% of the Property Finance portfolio.
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. 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)
2022 2021 Change
£ million £ million %
Investment management 110.4 102.9 7
Advice and other services(2) 36.1 36.4 (1)
Other income(3) 1.5 0.1 n/a
Operating income 148.0 139.4 6
Adjusted operating expenses (126.3) (115.9) 9
Impairment gains on financial assets - 0.2 n/a
Adjusted operating profit 21.7 23.7 (8)
Revenue margin (bps) 87 91
Operating margin 15% 17%
Return on opening equity 28.6% 31.7%
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
operating and adjusted measures can be found in note 2.
2 Income from advice and self-directed services, excluding investment
management income.
3 Other income includes £1.4 million gain on disposal of an advised client
book.
Continuing to Build on a Long 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 8% to £21.7 million (2021: £23.7
million), driven by negative market movements which adversely impacted revenue
in the second half of the year and higher staff costs. The operating margin
reduced to 15% (2021: 17%). Statutory operating profit before tax was £19.8
million (2021: £22.4 million).
Total operating income grew 6% to £148.0 million (2021: £139.4 million),
reflecting positive net inflows and market movements in the first half of the
year, despite falling markets and their impact on wider client sentiment in
the second half of the year. The revenue margin reduced to 87bps (2021: 91bps)
reflecting lower investment management margins as flows have included a higher
proportion of lower margin products.
Adjusted operating expenses increased 9% to £126.3 million (2021: £115.9
million), driven by higher staff costs, primarily reflecting the current
inflationary environment and new hires, as we continue to invest to grow the
business. As a result, expense/income ratio grew to 85% (2021: 83%) with the
compensation ratio remaining in line with the prior year at 56% (2021: 56%).
We have been investing in technology in the business and recently completed a
major re-platforming project to rationalise legacy systems and increase
efficiency, while adding a digital portal to improve functionality and
customer experience. Our technology projects have been focused on increasing
efficiency and operational resilience, improving client experience by using
best-of-breed applications, digital technology and selective in-house
development.
Continued Positive Net Inflows, Despite Volatile Market Conditions
Equity markets have experienced a mixed performance during the financial year.
In the second half of the year, a global equity market sell-off led to largely
unfavourable conditions, with some major indices suffering near-unprecedented
declines. Although concerns over continued inflation and geopolitical
uncertainty continue to weigh on markets and adversely impact investor
sentiment, we saw net inflows of £844 million for the year, delivering a net
inflow rate of 5% (2021: 7%).
Total managed assets decreased 2% to £15.3 billion (2021: £15.6 billion), as
negative market movements of £1.1 billion more than offset net inflows. Total
client assets, which includes advised and managed assets, reduced by 3%
overall to £16.6 billion (2021: £17.0 billion).
Movement in Client Assets
31 July 31 July
2022 2021
£ million £ million
Opening managed assets 15,588 12,594
Inflows 2,330 2,284
Outflows (1,486) (1,367)
Net inflows 844 917
Market movements (1,130) 2,077
Total managed assets 15,302 15,588
Advised only assets 1,272 1,435
Total client assets(1) 16,574 17,023
Net flows as % of opening managed assets 5% 7%
1 Total client assets include £5.9 billion of assets (31 July 2021: £6.0
billion) that are both advised and managed.
Fund Performance
Our funds and segregated bespoke portfolios are designed to provide attractive
risk-adjusted returns for our clients, consistent with their long-term goals
and investment objectives. Fund performance over the 12 months since 31 July
2021 has been mixed, reflecting volatile markets across asset classes since
the start of 2022. As a result, all our funds have delivered negative
absolute returns over this period. In relative terms, eight of our 15 funds
have outperformed their relevant peer group averages. Our bespoke strategy
composites have outperformed their respective peer groups in a falling market
environment, except for the Equity Risk strategy, which was the most impacted
by the 2022 market falls.
Our Approach to ESG and Sustainability
ESG integration in our investment research and stewardship remains a key area
of focus and we continue to expand our Responsible Investment team.
Our sustainable funds (Close Sustainable Balanced Portfolio Fund and Close
Sustainable Bond Portfolio Fund), launched in 2020 to complement the existing
SRI discretionary service, are gaining traction and we continue to develop our
sustainable proposition as more of our clients look to how they can make a
difference with their investments.
We have mobilised a Sustainability Programme with dedicated initiatives to
embed the Principles for Responsible Investment ("PRI") and stewardship across
all facets of our business, and as part of this, have recently become a
signatory to the UK Stewardship Code.
CBAM will be making a commitment to actively contribute towards the UK
government's net zero climate goals, through the Net Zero Asset Managers
initiative. In line with our regulatory reporting obligations and desire to be
transparent in fulfilling our commitments, we are also working towards
aligning our disclosures with the TCFD recommendations by 2024.
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 the continued
selective hiring of advisers and investment managers, and through in-fill
acquisitions.
As previously announced, Eddy Reynolds took over the leadership of the Asset
Management division from Martin Andrew in March 2022. Eddy has over 30 years'
experience in the fund and wealth management industries and has brought with
him outstanding experience and knowledge to lead our talented team at CBAM.
WINTERFLOOD
Key Financials
2022 2021 Change
£ million £ million %
Operating income 95.2 182.0 (48)
Operating expenses (81.1) (121.2) (33)
Impairment gains on financial assets - 0.1 n/a
Operating profit 14.1 60.9 (77)
Average bargains per day ('000) 81 101
Operating margin 15% 33%
Return on opening equity(1) 10.5% 63.5%
1 Reflecting increase in capital base in financial year 2021.
Cyclicality in the Trading Business Impacted Performance; Well Placed for When
Investor Appetite Returns
Winterflood is a leading UK market maker, delivering high quality execution
services to 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").
Global geopolitical events, in particular the ongoing conflict in Ukraine,
energy and commodity price rises, supply chain issues, new Covid variants and
the resulting restrictions, have all negatively impacted market conditions in
the 2022 calendar year. Tightening monetary policy to combat inflation and
concerns over slowing economic growth have also resulted in a risk-off
sentiment for markets, further subduing investor risk appetite.
Cyclicality seen in the trading business negatively impacted Winterflood's
performance, with a significant reduction in trading opportunities,
exacerbated by periods of volatility in falling markets. Following the
exceptionally strong trading performance and elevated market activity
experienced during the prior year, operating profit was down 77% to £14.1
million (2021: £60.9 million).
Operating income decreased 48% to £95.2 million (2021: £182.0 million),
primarily driven by a market-wide slowdown in trading activity and a change in
the mix of trading volumes, exacerbated by falling markets. We also saw a
decline in fees generated from corporate activity, although WBS continued to
generate increased levels of income, up 12% to £10.2 million on the prior
year.
Trading volumes have reduced, with average daily bargains at 81k (2021: 101k),
but they remain elevated on pre-Covid levels (2019: 56k). However, there has
also been a change in the composition of trading volumes, with volumes in the
higher-margin markets of AIM and Small Cap both down on the prior year, as
retail investor appetite has fallen, and retail-driven trading opportunities
have reduced. As a result, trading income has declined to £80.7 million for
the year (2021: £164.1 million).
Global equity markets have experienced substantial volatility in the past six
months and indices have suffered, with US stocks recording their worst first
half in more than 50 years, the FTSE 250 losing 14% and the AIM index down 24%
this year. We have navigated the volatile intraday trading well, benefiting
from the expertise of our traders and our strong focus on risk management,
which has resulted in eight loss days for the year (2021: one loss day), of
which seven occurred in the second half of the year.
Operating expenses decreased 33% to £81.1 million (2021: £121.2 million)
driven by the variable nature of Winterflood's cost base, as the reduced
revenue performance and trading volumes led to lower staff compensation and
settlement costs. The expense/income ratio increased to 85% (2021: 67%) as the
reduction in income was not fully offset by the corresponding decrease in
variable costs. The compensation ratio fell to 47% (2021: 48%).
WBS, which provides outsourced dealing and custody services, has delivered
another strong performance, generating £10.2 million of income (2021: £9.1
million) and growing its assets under administration to £7.2 billion (31 July
2021: £6.2 billion). Net inflows over the period were £1.3 billion (2021:
£1.2 billion). We see significant growth potential in this business, with a
solid pipeline of clients expected to increase assets under administration in
excess of £10 billion in the 2023 financial year.
As a daily trading business, Winterflood is sensitive to changes in the market
environment but remains well positioned to continue trading profitably, taking
advantage when investor appetite returns. Winterflood continues to diversify
its revenue streams and explore growth opportunities, balancing the
cyclicality seen in the trading business. Our recently appointed new chief
executive, Bradley Dyer, will be well placed to lead Winterflood in the next
stage of its growth and development. We would like to thank Philip Yarrow for
his significant contribution to the group and to Winterflood following his
decision to retire as chief executive.
DEFINITIONS
Adjusted: Adjusted measures are presented on a basis consistent with prior
periods and exclude amortisation of intangible assets on acquisition, to
present the performance of the group's acquired businesses consistent with its
other businesses; and any exceptional and other adjusting items which do not
reflect underlying trading performance
Assets under administration: Total assets for which Winterflood Business
Services provide custody and administrative services
Bad debt ratio: Impairment losses in the year as a percentage of average net
loans and advances to customers and operating lease assets
Bargains per day: Average daily number of Winterflood's trades with third
parties
Business as usual ("BAU") costs: Operating expenses excluding depreciation and
other costs related to investments
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
High quality liquid assets ("HQLAs"): Assets which qualify for regulatory
liquidity purposes, including Bank of England deposits and sovereign and
central bank debt
HM Revenue & Customs ("HMRC"): The UK's tax, payments and customs
authority
Independent financial adviser ("IFA"): Professional offering independent,
whole of market advice to clients including investments, pensions, protection
and mortgages
Internal ratings based ("IRB") approach: A supervisor-approved method using
internal models, rather than standardised risk weightings, to calculate
regulatory capital requirements for credit risk
International Financial Reporting Standards ("IFRS"): Globally accepted
accounting standards issued by the IFRS Foundation and the International
Accounting Standards Board
Investment costs: Includes depreciation and other costs related to investment
in multi-year projects, new business initiatives and pilots and cyber
resilience. Excludes IFRS 16 depreciation
Leverage ratio: Tier 1 capital as a percentage of total balance sheet assets,
adjusted for certain capital deductions, including intangible assets, and
off-balance sheet exposures
Liquidity coverage ratio ("LCR"): Measure of the group's HQLAs as a percentage
of expected net cash outflows over the next 30 days in a stressed scenario
Loan to value ("LTV") ratio: For a secured or structurally protected loan, the
loan balance as a percentage of the total value of the asset
Loss day: Where aggregate gross trading book revenues are negative at the end
of a trading day
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 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
Scope 1, 2 and 3 emissions: Categorisation of greenhouse gas emissions, as
defined by the Greenhouse Gas (GHG) Protocol, into direct emissions from owned
or controlled sources (Scope 1), indirect emissions from the generation of
purchased electricity, heating and cooling consumed by the reporting company
(Scope 2), and all other indirect emissions that occur in a company's value
chain (Scope 3)
Subordinated debt: Represents debt that ranks below, and is repaid after
claims of, other secured or senior debt owed by the issuer
Task Force on Climate-related Financial Disclosures ("TCFD"): Regulatory
framework to improve and increase reporting of climate-related financial
information, including more effective and consistent disclosure of
climate-related risks and opportunities
Term funding: Funding with a remaining maturity greater than 12 months
Term Funding Scheme ("TFS"): The Bank of England's Term Funding Scheme
Term Funding Scheme for Small and Medium-sized Enterprises ("TFSME"): The Bank
of England's Term Funding Scheme with additional incentives for SMEs
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
Consolidated Income Statement
for the year ended 31 July 2022
2022 2021
£ million £ million
Note
Interest income 690.0 656.8
Interest expense (112.0) (119.3)
Net interest income 578.0 537.5
Fee and commission income 259.5 246.1
Fee and commission expense (17.2) (16.1)
Gains less losses arising from dealing in securities 81.6 165.2
Other income 106.1 89.4
Depreciation of operating lease assets and other direct costs 11 (71.9) (69.5)
Non-interest income 358.1 415.1
Operating income 936.1 952.6
Administrative expenses (598.0) (592.1)
Impairment losses on financial assets 7 (103.3) (89.8)
Total operating expenses before amortisation and impairment of intangible
assets on acquisition, goodwill impairment and exceptional
item
(701.3) (681.9)
Operating profit before amortisation and impairment of intangible assets
on acquisition, goodwill impairment and exceptional item
234.8 270.7
Amortisation and impairment of intangible assets on acquisition 10 (2.0) (14.2)
Goodwill impairment 10 - (12.1)
Exceptional item: HMRC VAT refund 3 - 20.8
Operating profit before tax 232.8 265.2
Tax 4 (67.6) (63.1)
Profit after tax 165.2 202.1
Profit attributable to shareholders 165.2 202.1
Basic earnings per share 5 110.4p 134.8p
Diluted earnings per share 5 109.9p 133.6p
Interim dividend per share paid 6 22.0p 18.0p
Final dividend per share 6 44.0p 42.0p
Consolidated Statement of COMPREHENSIVE INCOME
for the year ended 31 July 2022
2022 2021
£ million £ million
Profit after tax 165.2 202.1
Items that may be reclassified to income statement
Currency translation losses (0.5) (1.1)
Gains on cash flow hedging 30.6 7.4
(Losses)/gains on financial instruments classified at fair value through
other comprehensive income:
Sovereign and central bank debt (1.1) 0.9
Tax relating to items that may be reclassified (7.9) (1.2)
21.1 6.0
Items that will not be reclassified to income statement
Defined benefit pension scheme (losses)/gains (0.1) 0.5
Tax relating to items that will not be reclassified 0.3 (0.6)
0.2 (0.1)
Other comprehensive income, net of tax 21.3 5.9
Total comprehensive income 186.5 208.0
Attributable to
Shareholders 186.5 208.0
Consolidated Balance Sheet
at 31 July 2022
31 July 31 July
2022 2021
Note £ million £ million
Assets
Cash and balances at central banks 1,254.7 1,331.0
Settlement balances 799.3 699.6
Loans and advances to banks 165.4 136.3
Loans and advances to customers 7 8,858.9 8,444.5
Debt securities 8 612.8 477.3
Equity shares 9 28.4 31.9
Loans to money brokers against stock advanced 48.4 51.1
Derivative financial instruments 71.2 18.3
Intangible assets 10 252.0 232.6
Property, plant and equipment 11 322.5 309.9
Current tax assets 47.0 36.4
Deferred tax assets 32.5 56.0
Prepayments, accrued income and other assets 185.2 209.6
Total assets 12,678.3 12,034.5
Liabilities
Settlement balances and short positions 12 796.1 690.6
Deposits from banks 13 160.5 150.6
Deposits from customers 13 6,770.4 6,634.8
Loans and overdrafts from banks 13 622.7 512.7
Debt securities in issue 13 2,060.9 1,865.5
Derivative financial instruments 89.2 21.3
Accruals, deferred income and other liabilities 334.5 367.0
Subordinated loan capital 186.5 222.7
Total liabilities 11,020.8 10,465.2
Equity
Called up share capital 38.0 38.0
Retained earnings 1,628.4 1,555.5
Other reserves (8.9) (23.2)
Total shareholders' equity 1,657.5 1,570.3
Non-controlling interests - (1.0)
Total equity 1,657.5 1,569.3
Total equity and liabilities 12,678.3 12,034.5
COnsolidated Statement of CHANGES IN EQUITY
for the year ended 31 July 2022
Other reserves
Share-based Cash Total attributable to equity holders
Called up payments Exchange movements reserve flow hedging reserve Non-controlling interests
share Retained earnings FVOCI reserve Total
capital reserve equity
£ million £ million £ million £ million £ million £ million £ million £ million £ million
At 1 August 2020 38.0 1,435.0 0.2 (15.6) (1.3) (5.7) 1,450.6 (1.0) 1,449.6
Profit for the year - 202.1 - - - - 202.1 - 202.1
Other comprehensive (expense)/income
- (0.1) 0.6 - - 5.4 5.9 - 5.9
Total comprehensive income for the year
- 202.0 0.6 - - 5.4 208.0 - 208.0
Dividends paid (note 6) - (86.6) - - - - (86.6) - (86.6)
Shares purchased - - - (12.1) - - (12.1) - (12.1)
Shares released - - - 10.0 - - 10.0 - 10.0
Other movements - 3.7 - (4.7) - - (1.0) - (1.0)
Income tax - 1.4 - - - - 1.4 - 1.4
At 31 July 2021 38.0 1,555.5 0.8 (22.4) (1.3) (0.3) 1,570.3 (1.0) 1,569.3
Profit for the year - 165.2 - - - - 165.2 - 165.2
Other comprehensive (expense)/income
- 0.2 (0.7) - (0.2) 22.0 21.3 - 21.3
Total comprehensive income for the year
- 165.4 (0.7) - (0.2) 22.0 186.5 - 186.5
Dividends paid (note 6) - (95.5) - - - - (95.5) - (95.5)
Shares purchased - - - (9.5) - - (9.5) - (9.5)
Shares released - - - 4.9 - - 4.9 - 4.9
Other movements - 4.1 - (2.2) - - 1.9 1.0 2.9
Income tax - (1.1) - - - - (1.1) - (1.1)
At 31 July 2022 38.0 1,628.4 0.1 (29.2) (1.5) 21.7 1,657.5 - 1,657.5
Consolidated Cash Flow Statement
for the year ended 31 July 2022
2022 2021
Note £ million £ million
Net cash inflow from operating activities 15(a) 158.7 119.1
Net cash (outflow)/inflow from investing activities
Purchase of:
Property, plant and equipment (7.1) (8.9)
Intangible assets - software (51.3) (47.9)
Subsidiaries 15(b) (0.1) (2.9)
Sale of:
Subsidiaries 15(c) 0.1 2.3
(58.4) (57.4)
Net cash inflow before financing activities 100.3 61.7
Financing activities
Purchase of own shares for employee share award schemes (9.5) (12.1)
Equity dividends paid (95.5) (86.6)
Interest paid on subordinated loan capital and debt financing (10.4) (13.6)
Payment of lease liabilities (15.1) (14.7)
Net (redemption)/issuance of subordinated loan capital (23.4) 40.6
Net decrease in cash (53.6) (24.7)
Cash and cash equivalents at beginning of year 1,436.6 1,461.3
Cash and cash equivalents at end of year 15(d) 1,383.0 1,436.6
THE NOTES
1. Basis of Preparation and Accounting Policies
The financial information contained in this announcement does not constitute
the statutory accounts for the years ended 31 July 2022 or 31 July 2021 within
the meaning of section 435 of the Companies Act 2006, but is derived from
those accounts. The accounting policies used are consistent with those set out
in the Annual Report 2021.
The financial statements are prepared on a going concern basis. Whilst the
financial information has been prepared in accordance with the recognition and
measurement criteria of International Financial Reporting Standards ("IFRS"),
this announcement does not itself contain sufficient information to comply
with IFRS 9.
The financial information for the year ended 31 July 2022 has been derived
from the financial statements of Close Brothers Group plc for that year.
Statutory accounts for 2021 have been delivered to the Registrar of Companies
and those for 2022 will be delivered following the company's Annual General
Meeting. The group's auditor, PricewaterhouseCoopers LLP, will report on the
2022 accounts: their report is expected to be unqualified, and is not expected
to draw attention to any matters by way of emphasis or contain statements
under Section 498(2) or (3) of the Companies Act 2006.
Critical accounting estimates and judgements
The reported results of the group are sensitive to the accounting policies,
assumptions and estimates used in the preparation of its financial statements.
UK company law and IFRS require the directors, in preparing the group's
financial statements, to select suitable accounting policies, apply them
consistently and make judgements, estimates and assumptions that are
reasonable. The group's estimates and assumptions are based on historical
experience and reasonable expectations of future events and are reviewed on an
ongoing basis.
While the impact of climate change represents a source of uncertainty, the
group does not consider climate related risks to be a critical accounting
judgement or estimate.
Critical accounting judgements
In the application of the group's accounting policies, judgements that are
considered by the board to have the most significant effect on the amounts in
the financial statements are as follows.
Expected credit losses
At 31 July 2022 the group's expected credit loss provision was £285.6 million
(31 July 2021: £280.4 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. 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. The assessment,
which requires judgement, is probability weighted and uses historical, current
and forward-looking information.
Typically, the group assesses whether a significant increase in credit risk
has occurred based on a quantitative and qualitative assessment, with a 30
days past due backstop. Due to the diverse nature of the group's lending
businesses, the specific indicators of a significant increase in credit risk
vary by business and may include some or all of the following factors.
• Quantitative assessment: the lifetime 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 the increased risk since origination is appropriately
captured;
• Qualitative assessment: events or observed behaviour indicate credit
deterioration. This includes a wide range of information that is reasonably
available including individual credit assessments of the financial performance
of borrowers as appropriate during routine reviews, plus forbearance and watch
list information; or
• Backstop criteria: the 30 days past due backstop is met.
Definition of default
The definition of default is an important building block for expected credit
loss models and is considered a key judgement. A default is considered to have
occurred if any unlikeliness to pay criteria is met or when a financial asset
meets a 90 days past due backstop. While some criteria are factual (e.g.
administration, insolvency, or bankruptcy), others require a 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 actual outcomes observed. Regular model
monitoring, validations and provision adequacy reviews are key mechanisms to
manage estimation uncertainty across model estimates.
We continue to monitor and evaluate the impact of climate risk on our expected
credit loss provisions. As at 31 July 2022 we do not consider climate risk to
have a material impact on our credit losses.
A representation of the core drivers of the macroeconomic scenarios that are
deployed in our models are outlined below. In some instances, our underlying
business expected credit loss models use a range of other macroeconomic
metrics and assumptions which are linked to the underlying characteristics of
the business.
Model estimates
Across the Banking Division, 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 case
failure rates and recovery rates in Novitas.
Novitas provides funding via intermediaries to individuals who wish to pursue
legal cases. Over the course of this financial year, experience of credit
performance has required the group to update a number of assumptions in the
calculation of the expected credit loss provision for Novitas. A significant
portion of the expected credit loss provision reported in Commercial relates
to the Novitas loan book.
The majority of the Novitas portfolio, and therefore provision, relates to
civil litigation cases. To help protect customers in the event that their case
fails, a standard loan condition is that an individual purchases an insurance
policy which covers loan capital and varying levels of interest. Across the
portfolio there are insurance policies from a number of well-rated insurers.
The key sources of estimation uncertainty for the portfolio's expected credit
loss provision are case failure rates and recovery rates. Case failure rates
represent a forward-looking probability assessment of successful case
outcomes, where a claimant is awarded settlement either prior to or following
a court process, informed by actual case failure rates, where a claim is
unsuccessful and expected to be repaid with proceeds from an insurance policy.
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. In
addition, an assessment is also undertaken reflecting potential insurer
insolvency risk with resultant expected credit losses held for this.
Assumptions are informed by experience of credit performance, with management
judgement applied to reflect expected outcomes and uncertainties. In addition,
the provision is informed by sensitivity analysis to reflect the level of
uncertainty. More detailed credit performance data continues to develop as the
portfolio matures, which over time will reduce the level of estimation
uncertainty.
Based on this methodology, and using the latest information available, there
has been an uplift in the expected credit loss provision in Novitas,
reflecting the latest assumptions on case failure and recovery rates. Further
details on provisions are included in note 7b.
Given these assumptions represent sources of estimation uncertainty,
management has assessed and completed sensitivity analysis when compared to
the expected credit loss provision for Novitas of £113.3 million (31 July
2021: £89.3 million). At 31 July 2022, a 5% absolute improvement in case
failure rates would decrease the ECL provision by £5.8 million (31 July 2021:
£8.2 million), while a 5% absolute deterioration would increase it by £4.7
million (31 July 2021: £8.2 million). Separately, a 10% absolute
deterioration or improvement in recovery rates would increase or decrease the
ECL provision by £13.7 million (31 July 2021: £8.4 million).
Forward-looking information
Determining expected credit losses under IFRS 9 requires the incorporation of
forward-looking macroeconomic information that is reasonable, supportable and
includes assumptions linked to economic variables that impact losses in each
portfolio. The introduction of macroeconomic information introduces additional
volatility to provisions.
In order to calculate forward-looking provisions, economic scenarios are
sourced from Moody's Analytics, which are then used to project potential
credit conditions for each portfolio. Benchmarking to other economic providers
is carried out to provide management comfort on Moody's Analytics scenario
paths.
Five different projected economic scenarios are currently considered to cover
a range of possible outcomes. These include a baseline scenario, which
reflects the best view of future economic events. In addition, one upside
scenario and three downside scenario paths are defined relative to the
baseline. Management assigns the scenarios a probability weighting to reflect
the likelihood of specific scenarios and therefore loss outcomes
materialising, using a combination of quantitative analysis and expert
judgement.
The impact of forward-looking information varies across the group's lending
businesses because of the differing sensitivity of each portfolio to specific
macroeconomic variables. 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.
Economic forecasts have evolved over the course of 2022. At 31 July 2021, the
scenario weightings reflected the continued economic challenges and
uncertainty associated with the pandemic, with 40% allocated to the baseline
scenario, 20% to the upside scenario and 40% across the three downside
scenarios. The level of economic uncertainty associated with the pandemic
reduced up to 31 January 2022 and 10% weight was moved from the 3 downside
scenarios to the upside scenario. In the second half of 2022, 7.5% weight has
moved from the baseline scenario to the 3 downside scenarios, resulting in
final weights that are considered consistent with the economic uncertainty at
31 July 2022, as follows: 30% strong upside, 32.5% baseline, 20% mild
downside, 10.5% moderate downside and7% severe downside.
Scenario forecasts deployed in IFRS 9 macroeconomic models are updated on a
monthly basis. As at 31 July 2022, the latest baseline scenario forecasts GDP
growth of 3.4% in calendar year 2022 and an average Base Rate of 1.1% across
calendar year 2022. CPI is forecast to be 10.7% in calendar year 2022 in the
baseline scenario, with 17.1% forecast in the protracted downside scenario
over the same period.
Given the current economic uncertainty, we have undertaken further analysis to
assess the appropriateness of the five scenarios used. This included
benchmarking these scenarios to consensus economic views, as well as
consideration of an additional forecast related to stagflation, which could be
considered as an alternative downside scenario. When compared to the three
downside scenarios, the stagflation scenario included a smaller initial
reduction in GDP, coupled with higher interest rates and economic contraction
over a more sustained period. Given the short tenor of our credit portfolio,
using this forecast instead of the moderate or protracted downside scenario
would result in lower expected credit losses.
The final scenarios deployed reflect the UK economic outlook deteriorating
following Russia's invasion of Ukraine and the resulting increase in energy
and food commodity prices, as well as the exacerbation of global supply-chain
disruptions after the pandemic. The forecasts include a subdued rate of growth
for the remainder of the year. Under the baseline scenario, UK headline CPI
inflation continues to increase in 2022 owing to higher energy, food and
manufactured goods prices. Higher wages and strong demand for services
continue to add to the price pressures, ensuring inflation remains well above
the Bank of England target throughout 2022. To prevent inflation pressures
becoming embedded in the economy, the Bank of England continues to tighten
monetary policy.
The forecasts represent an economic view as at 31 July 2022, after which the
economic uncertainty has continued. These trends, including the risk of
further interest rate rises, and their impact on scenarios and weightings are
subject to ongoing monitoring by management.
The table below shows economic assumptions within each scenario, and the
weighting applied to each at 31 July 2022. The metrics below are key UK
economic indicators, chosen to describe the economic scenarios. These are the
main metrics used to set scenario paths which then influence a wide range of
additional metrics that are used in expected credit loss models. The first
tables show the forecasts of the key metrics for the scenarios utilised for
calendar years 2022 and 2023. The subsequent tables show averages and peak to
trough ranges for the same key metrics over the five-year period from 2022 to
2026.
These periods have been included as they demonstrate the short, medium and
long-term outlook for the key macroeconomic indicators which form the basis of
the scenario forecasts. The portfolio has an average residual maturity of 17
months, with c.98% of loan value having a maturity of five years or less.
FY22 and FY21 scenario forecasts and weights
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
2022 2023 2022 2023 2022 2023 2022 2023 2022 2023
At 31 July 2022
UK GDP Growth 3.4% 0.8% 4.1% 2.9% 2.7% (1.8%) 2.4% (4.4%) 2.1% (5.9%)
UK Unemployment 3.8% 4.1% 3.6% 3.6% 4.0% 4.6% 4.1% 6.2% 4.2% 7.4%
UK HPI Growth 4.3% 2.6% 10.9% 12.7% 1.1% (3.1%) (0.5%) (9.1%) (2.4%) (15.9%)
BoE Base Rate 1.1% 1.8% 1.1% 1.7% 1.3% 1.0% 1.4% 1.1% 1.5% 1.2%
Consumer Price Index 10.7% 2.8% 10.3% 2.8% 12.3% 0.4% 14.2% 0.2% 17.1% (2.2%)
Weighting 32.5% 30% 20% 10.5% 7%
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
2021 2022 2021 2022 2021 2022 2021 2022 2021 2022
At 31 July 2021
UK GDP Growth(1) 6.1% 6.3% 7.3% 8.7% 5.2% 4.0% 4.5% 2.0% 4.1% 0.8%
UK Unemployment 5.6% 6.3% 5.5% 5.4% 5.8% 7.3% 5.8% 8.0% 5.9% 8.9%
UK HPI Growth(1) (1.4%) 3.1% 3.8% 10.2% (2.5%) (1.6%) (5.3%) (9.0%) (8.2%) (14.2%)
BoE Base Rate 0.1% 0.2% 0.1% 0.3% 0.1% 0.1% 0.1% 0.1% 0.0% (0.1%)
Consumer Price Index 2.7% 2.9% 2.8% 3.0% 2.6% 1.1% 2.5% 0.0% 2.4% (0.5%)
Weighting 40% 20% 15% 15% 10%
Notes:
UK GDP HPI 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 2022 - 2026)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
At 31 July 2022
UK GDP Growth 1.2% 1.7% 0.8% 0.2% (0.1%)
UK Unemployment 4.4% 3.8% 4.6% 6.4% 7.2%
UK HPI Growth 0.1% 1.8% (1.3%) (2.5%) (4.6%)
BoE Base Rate 2.0% 2.0% 1.5% 0.9% 0.6%
Consumer Price Index 3.8% 3.8% 3.7% 3.6% 3.4%
Weighting 32.5% 20% 10.5% 7%
30%
Five-year average (calendar year 2021 - 2025)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
At 31 July 2021
UK GDP Growth(1) 3.2% 3.6% 3.0% 2.8% 2.4%
UK Unemployment 5.5% 4.8% 6.3% 7.1% 7.7%
UK HPI Growth(1) 1.6% 3.0% 0.8% (1.2%) (2.6%)
BoE Base Rate 0.6% 0.8% 0.2% 0.1% 0.0%
Consumer Price Index 2.6% 3.2% 1.9% 1.3% 0.8%
Weighting 40% 20% 15% 15% 10%
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
2022 - 2026) of the peak to trough range of values of the key UK economic
variables used within the economic scenarios at 31 July 2022 and 31 July 2021:
Five-year period (calendar year 2022 - 2026)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
At 31 July 2022
UK GDP Growth 6.3% 0.4% 9.0% 0.4% 4.1% (2.6%) 1.0% (5.1%) 0.8% (6.9%)
UK Unemployment 4.8% 3.7% 4.2% 3.5% 4.8% 3.7% 7.4% 3.7% 8.4% 3.7%
UK HPI Growth 2.0% (5.0%) 16.7% (1.1%) 2.0% (11.7%) 2.0% (17.9%) 2.0% (26.0%)
BoE Base Rate 2.5% 0.5% 2.5% 0.5% 2.5% 0.1% 2.4% 0.1% 2.6% 0.1%
Consumer Price Index 10.7% 2.0% 10.3% 2.0% 12.3% 0.4% 14.2% 0.1% 17.1% (2.2%)
Weighting 32.5% 30% 20% 10.5% 7%
Five-year period (calendar year 2021 - 2025)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
At 31 July 2021
UK GDP Growth(1) 17.0% (1.6%) 19.4% (1.6%) 15.7% (1.6%) 14.7% (1.6%) 12.4% (1.6%)
UK Unemployment(1) 6.6% 4.8% 6.3% 4.2% 7.5% 4.8% 8.2% 4.8% 9.1% 4.8%
UK HPI Growth(1) 8.0% (4.1%) 15.7% 0.5% 4.1% (6.9%) 1.9% (15.3%) 1.9% (22.1%)
BoE Base Rate(1) 1.6% 0.1% 1.9% 0.1% 0.5% 0.1% 0.1% 0.1% 0.1% (0.1%)
Consumer Price Index 3.2% 0.6% 3.9% 0.6% 2.6% 0.6% 2.5% 0.0% 2.4% (0.9%)
Weighting 40% 20% 15% 15% 10%
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: Maximum and minimum over the 5-year period (%)
1 Note that the presentation of the macroeconomic outlook above has been
amended from the FY21 ARA, with the FY22 figures presented on the same basis.
This has been undertaken to enhance presentation to the users of the financial
statements by ensuring the macroeconomic variables are displayed in line with
common practice. This amendment has no impact on ECL. These changes impact the
way GDP and HPI are presented for the annual forecast, the five-year forecast
and the peak to trough values. The annual forecast was previously presented as
the average of the growth in each of the last four quarters and is now
presented as the growth in the calendar year. The five-year forecast is now
presented as the compound annual growth rate instead of the average annual
growth rate used previously. Lastly, the presentation of the peak to trough
values now uses the start of the macroeconomic forecast as a reference point,
rather than peaks and troughs in annual growth rates over the period. In
addition, we have also made a presentational change for unemployment and base
rate peaks and troughs from the FY21 ARA, which are now based on quarterly
forecasts over calendar years 2021-2025, rather than monthly forecasts over
financial years 2021-2025.
The expected credit loss provision is sensitive to judgement and estimations
made with regard to the selection and weighting of multiple economic
scenarios. As a result, management has assessed and considered the sensitivity
of the provision as follows:
• For the majority of 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 excludes expected credit loss provisions 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.
- For some loans, a specific sensitivity approach has been adopted to assess
short tenor loans' response to modelled economic forecasts. For these
short-tenor loans, PD has been extrapolated from emerging default rates and
then proportionally scaled to reflect a sharp recovery in the upside scenario
and a slower recovery in a downside scenario.
• In Property, the sensitivity analysis excludes individually
assessed provisions, and certain sub portfolios which are deemed more
sensitive to credit factors than the macroeconomic scenarios.
Based on the above analysis, at 31 July 2022, application of 100% weighting to
the upside strong scenario would decrease the expected credit loss by £15.4
million whilst application to the downside protracted scenario would increase
the expected credit loss by £31.8 million driven by the aforementioned
changes in risk metrics and stage allocation of the portfolios.
When performing sensitivity analysis there is a high degree of estimation
uncertainty. On this basis, 100% weighted expected credit loss provisions
presented for the upside and downside scenarios should not be taken to
represent the lower or upper range of possible and actual expected credit loss
outcomes. The recalculated expected credit loss provision for each of the
scenarios should be read in the context of the sensitivity analysis as a whole
and in conjunction with the narrative disclosures provided in note 7. The
modelled impact presented is based on gross loans and advances to customers at
31 July 2022; it does not incorporate future changes relating to performance,
growth or credit risk. In addition, given the change in the macroeconomic
conditions, underlying modelled provisions and methodology, and refined
approach to adjustments, comparison between the sensitivity results at 31 July
2022 and 31 July 2021 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 present the segmental
analysis on that basis. The group's activities are presented in five (2021:
five) operating segments: Commercial, Retail, Property, Asset Management and
Securities.
In the segmental reporting information that follows, Group consists of central
functions as well as various non-trading head office companies and
consolidation adjustments and is 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 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 operating expenses before amortisation and impairment of intangible
assets on acquisition, goodwill impairment and exceptional item
(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 and impairment of intangible assets on acquisition
(0.1) - - (1.9) - - (2.0)
Goodwill impairment - - - - - - -
Exceptional item: HMRC VAT refund
- - - - - - -
Operating profit/(loss) before tax
90.9 61.0 75.2 19.8 14.1 (28.2) 232.8
External operating income/(expense)
391.7 268.3 129.4 148.1 95.2 (96.6) 936.1
Inter segment operating (expense)/income
(48.3) (31.3) (16.7) (0.1) - 96.4 -
Segment operating income/(expense)
343.4 237.0 112.7 148.0 95.2 (0.2) 936.1
1 Adjusted operating profit/(loss) is stated before amortisation and
impairment of intangible assets on acquisition, goodwill impairment,
exceptional item and tax.
The Commercial operating segment above includes the group's Novitas business.
Novitas ceased lending to new customers in July 2021 following a strategic
review. In the year ended 31 July 2022, Novitas recorded impairment losses of
£60.7 million (2021: £73.2 million).
Summary 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 of £159.4 million.
2 Balance sheet includes £2,425.0 million assets and £10,181.9 million
liabilities attributable to the Banking division primarily comprising the
treasury balances described in the second paragraph of this note.
Equity is allocated across the group as set out below. Banking division equity
which is managed as a whole rather than on a segmental basis, reflects loan
book and operating lease assets of £9,098.9 million, in addition to assets
and liabilities of £2,425.0 million and £10,181.9 million respectively
primarily comprising treasury balances which are included within the Group
column above.
Banking
Asset Management
Securities Group Total
£ £ £ £ million £ million
million million million
Equity 1,342.0 102.3 91.7 121.5 1,657.5
Other segmental information for the year ended 31 July 2022
Banking
Asset Management
Commercial Retail Property Securities Group Total
Employees 1,348 1,153 190 722 318 79 3,810
(average number)(1)
1 Banking segments are inclusive of a central function headcount
allocation.
Summary income statement for the year ended 31 July 2021
Banking
Asset Management
Commercial Retail Property Securities Group Total
£ £ million £ £ £ £ million £
million million million million million
Net interest income/(expense)
218.1 198.8 122.6 (0.1) (1.4) (0.5) 537.5
Non-interest income 70.8 21.0 0.4 139.5 183.4 - 415.1
Operating income/(expense)
288.9 219.8 123.0 139.4 182.0 (0.5) 952.6
Administrative expenses (139.1) (118.6) (29.1) (110.8) (118.1) (24.1) (539.8)
Depreciation and amortisation
(19.1) (19.4) (3.8) (5.1) (3.1) (1.8) (52.3)
Impairment (losses)/gains on financial assets
(77.9) (9.9) (2.3) 0.2 0.1 - (89.8)
Total operating expenses before amortisation and impairment of intangible
assets on acquisition, goodwill impairment and exceptional item
(236.1) (147.9) (35.2) (115.7) (121.1) (25.9) (681.9)
Adjusted operating profit/(loss)(1)
52.8 71.9 87.8 23.7 60.9 (26.4) 270.7
Amortisation of intangible assets on acquisition
(12.2) (0.7) - (1.3) - - (14.2)
Goodwill impairment (12.1) - - - - - (12.1)
Exceptional item: HMRC VAT refund
7.4 12.3 - - - 1.1 20.8
Operating profit/(loss) before tax
35.9 83.5 87.8 22.4 60.9 (25.3) 265.2
External operating income/(expense)
343.1 258.7 142.3 139.4 182.0 (112.9) 952.6
Inter segment operating (expense)/income
(54.2) (38.9) (19.3) - - 112.4 -
Segment operating income/(expense)
288.9 219.8 123.0 139.4 182.0 (0.5) 952.6
1 Adjusted operating profit/(loss) is stated before amortisation and
impairment of intangible assets on acquisition, goodwill impairment,
exceptional item and tax.
Summary balance sheet information at 31 July 2021
Banking
Asset Management
Commercial Retail Property Securities Group(2) Total
£ £ million £ £ £ £ million £
million million million million million
Total assets(1) 4,191.0 2,974.3 1,502.1 139.7 897.9 2,329.5 12,034.5
Total liabilities - - - 78.1 806.5 9,580.6 10,465.2
1 Total assets for the Banking operating segments comprise the loan book
and operating lease assets only. The Commercial operating segment includes the
net loan book of Novitas of £181.5 million.
2 Balance sheet includes £2,299.0 million assets and £9,677.8 million
liabilities attributable to the Banking division primarily comprising the
treasury balances described in the second paragraph of this note.
Equity is allocated across the group as set out below. Banking division
equity, which is managed as a whole rather than on a segmental basis, reflects
loan book and operating lease assets of £8,667.4 million, in addition to
assets and liabilities of £2,299.0 million and £9,677.8 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 1,288.6 61.6 91.4 127.7 1,569.3
Other segmental information for the year ended 31 July 2021
Banking
Asset Management
Commercial Retail Property Securities Group Total
Employees
(average number)(1) 1,276 1,163 187 706 300 77 3,709
1 Banking segments are inclusive of a central function headcount
allocation.
3. Exceptional Item
In the prior year ended 31 July 2021, the group recorded an exceptional gain
of £20.8 million, reflecting a VAT refund from HMRC in relation to hire
purchase agreements in the Motor Finance and Asset Finance businesses. This
follows HMRC's policy in Revenue and Customs Brief 8 (2020) published in June
2020. The Brief advised businesses who supply goods by way of hire purchase
agreements of HMRC's suggested method for apportionment of VAT incurred on
overheads (and so the reclaimable portion of such VAT). This follows the Court
of Justice of the European Union's judgement regarding Volkswagen Financial
Services (UK) Ltd.
The group submitted refund claims in respect of the period from 2009 to 2020.
HMRC agreed the claims and repayment was made to the group in June 2021. In
line with the group's accounting policy set out in Note 1, this has been
presented as an exceptional item as it is material by size and nature and
non-recurring.
4. Taxation
2022 2021
£ million £ million
Tax charged/(credited) to the income statement
Current tax:
UK corporation tax 53.7 75.1
Foreign tax 1.9 1.5
Adjustments in respect of previous years (2.8) (3.4)
52.8 73.2
Deferred tax:
Deferred tax charge/(credit) for the current year 11.8 (13.6)
Adjustments in respect of previous years 3.0 3.5
67.6 63.1
Tax on items not charged/(credited) to the income statement
Deferred tax relating to:
Cash flow hedging 8.6 2.0
Defined benefit pension scheme (0.3) 0.6
Financial instruments classified as fair value through other comprehensive
income
(0.4) 0.3
Share-based payments 1.1 (1.4)
Currency translation losses (0.3) (1.1)
Acquisitions - 1.0
8.7 1.4
Reconciliation to tax expense
UK corporation tax for the year at 19.0% (2021: 19.0%) on operating profit 44.2 50.4
before tax
Effect of different tax rates in other jurisdictions (0.3) (0.3)
Disallowable items and other permanent differences 0.9 2.9
Banking surcharge 14.9 19.8
Deferred tax impact of decreased/(increased) tax rates 7.7 (9.8)
Prior year tax provision 0.2 0.1
67.6 63.1
The standard UK corporation tax rate for the financial year is 19.0% (2021:
19.0%). However, an additional 8% surcharge applies to banking company profits
as defined in legislation. The effective tax rate of 29.0% (2021: 23.8%) is
above the UK corporation tax rate primarily due to the surcharge applying to
most of the group's profits and to a write-down in deferred tax assets
reflecting a reduction in the banking surcharge applying from April 2023 from
8% to 3% passed into law in the year.
On 23 September 2022, the Chancellor of the Exchequer announced as part of his
Growth Plan that the corporation tax rate increase from 19% to 25% from April
2023 will be cancelled, and that the banking surcharge rate will remain at 8%.
The relevant legislation is expected to be enacted in the year ending 31 July
2023 and is a non-adjusting post balance sheet event. Had this change been
enacted before 31 July 2022, the group's deferred tax asset balance at 31 July
2022 would have decreased by approximately £1.5 million, with a corresponding
tax charge recognised in the income statement, net of a smaller credit to
other comprehensive income.
Movements in deferred tax assets and liabilities were as follows:
Share-based payments and deferred compensation
Impair-ment losses Cash flow hedging
Capital Pension scheme Intangible assets
allowances Other Total
£ £ £ £ million £ £ £ million £ million
million million million million million
Group
At 1 August 2020 31.5 (1.7) 8.9 9.5 2.1 (3.2) 0.2 47.3
Credit/(charge) to the income statement
3.5 0.1 5.2 (0.7) - 2.5 (0.5) 10.1
Credit/(charge) to other comprehensive income
1.1 (0.6) - - (2.0) - (0.3) (1.8)
Credit to equity - - 1.4 - - - - 1.4
Acquisitions - - - - - (1.0) - (1.0)
At 31 July 2021 36.1 (2.2) 15.5 8.8 0.1 (1.7) (0.6) 56.0
(Charge)/credit to the income statement
(10.9) - (1.5) (3.0) - 0.4 0.2 (14.8)
Credit/(charge) to other comprehensive income
0.3 0.3 - - (8.6) - 0.4 (7.6)
Charge to equity - - (1.1) - - - - (1.1)
Acquisitions - - - - - - - -
At 31 July 2022 25.5 (1.9) 12.9 5.8 (8.5) (1.3) - 32.5
As the group has been and is expected to continue to be consistently
profitable, the full deferred tax assets have been recognised.
5. 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.
2022 2021
Basic 110.4p 134.8p
Diluted 109.9p 133.6p
Adjusted basic(1) 111.5p 140.4p
Adjusted diluted(1) 111.0p 139.1p
1 Excludes amortisation and impairment of intangible assets on
acquisition, goodwill impairment, exceptional item and their tax effects.
2022 2021
£ million £ million
Profit attributable to shareholders 165.2 202.1
Adjustments:
Amortisation of intangible assets on acquisition 2.0 14.2
Goodwill impairment - 12.1
Exceptional item: HMRC VAT refund - (20.8)
Tax effect of adjustments and exceptional item (0.4) 2.9
Adjusted profit attributable to shareholders 166.8 210.5
2022 2021
Million million
Average number of shares
Basic weighted 149.6 149.9
Effect of dilutive share options and awards 0.7 1.4
Diluted weighted 150.3 151.3
6. Dividends
2022 2021
£ million £ million
For each ordinary share
Final dividend for previous financial year paid in November 2021: 42.0p
(November 2020: 40.0p) 62.7 59.8
Interim dividend for current financial year paid in April 2022: 22.0p
(April 2021: 18.0p) 32.8 26.8
95.5 86.6
A final dividend relating to the year ended 31 July 2022 of 44.0p, amounting
to an estimated £65.6 million, is proposed. This final dividend, which is due
to be paid on 22 November 2022 to shareholders on the register at 14 October
2022, is not reflected in these financial statements.
7. Loans and Advances to Customers
(a) Maturity analysis of loans and advances to customers
The following table sets out a maturity analysis of loans and advances to
customers. At 31 July 2022 loans and advances to customers with a maturity of
two years or less was £6,733.0 million (31 July 2021: £6,326.6 million)
representing 73.6% (31 July 2021: 72.5%) of total loans and advances to
customers:
Between three Total gross loans and advances to customers
months and After more than five years Total net loans and advances to customers
Within three months one year Between one and two years Between two and five years
On Impairment provisions
demand
£ £ million £ £ £ £ million £ £ £
million million million million million million million
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
At 31 July 2021 71.8 2,276.6 2,289.1 1,689.1 2,242.8 155.5 8,724.9 (280.4) 8,444.5
(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 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
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
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%
Of which: Novitas 8.7% 45.5% 52.8% 52.6% 71.6% 41.5%
Retail 0.8% 4.0% 18.1% 5.0% 62.9% 2.2%
Property 0.2% 5.0% 2.6% 4.2% 23.1% 2.4%
0.7% 2.4% 31.4% 6.8% 43.8% 3.1%
Stage 2
Less than 30 days Greater than or equal to 30 days past due
Stage 1 past due
Total Stage 3 Total
At 31 July 2021 £ million £ million £ million £ million £ million £ million
Gross loans and advances to customers
Commercial 3,417.2 549.4 74.0 623.4 99.9 4,140.5
Of which: Novitas 185.8 3.6 55.8 59.4 25.6 270.8
Retail 2,817.0 175.3 6.4 181.7 43.2 3,041.9
Property 1,200.1 100.5 54.6 155.1 187.3 1,542.5
7,434.3 825.2 135.0 960.2 330.4 8,724.9
Impairment provisions
Commercial 55.6 30.3 33.6 63.9 52.9 172.4
Of which: Novitas 31.4 2.1 30.6 32.7 25.2 89.3
Retail 22.1 13.3 1.9 15.2 30.3 67.6
Property 2.3 5.0 0.1 5.1 33.0 40.4
80.0 48.6 35.6 84.2 116.2 280.4
Provision coverage ratio
Commercial 1.6% 5.5% 45.4% 10.3% 53.0% 4.2%
Of which: Novitas 16.9% 58.3% 54.8% 55.1% 98.4% 33.0%
Retail 0.8% 7.6% 29.7% 8.4% 70.1% 2.2%
Property 0.2% 5.0% 0.2% 3.3% 17.6% 2.6%
1.1% 5.9% 26.4% 8.8% 35.2% 3.2%
Stage allocation of loans and advances to customers has been applied in line
with the group's definitions.
During the year the staging profile of loans and advances to customers has
remained broadly stable. At 31 July 2022, 83.4% (31 July 2021: 85.2%) of loans
and advances to customers were Stage 1. Stage 2 loans and advances to
customers increased slightly to 12.7% (31 July 2021: 11.0%) as falling
Covid-19 forborne exposure has been more than offset by migrations into Stage
2 associated with a significant increase in credit risk. The remaining 3.9%
(31 July 2021: 3.8%) of loans and advances to customers was deemed to be
credit impaired and classified as Stage 3.
At the same time, overall impairment provisions increased to £285.6 million
(31 July 2021: £280.4 million), following regular reviews of staging and
provision coverage for individual loans and portfolios. The movement in
impairment provisions is driven by Novitas, which reflects the case failure
and recovery rate assumptions used. This increase was partially offset by
reducing impairment provisions across the remainder of the Bank, following a
reduction in adjustments driven by the encouraging performance of our forborne
book.
As a result, there has been a marginal decrease in provision coverage to 3.1%
(31 July 2021: 3.2%).
Provision Coverage Analysis by Business
In Commercial, the impairment coverage ratio decreased to 4.0% (31 July 2021:
4.2%) reflecting strong new business volumes and positive performance of the
Covid-19 forborne loan book. Excluding Novitas, the Commercial impairment
coverage ratio decreased to 1.6% (31 July 2021: 2.1%) following the release of
Covid-19 related adjustments. The significant increase in credit provisions
against the Novitas loan book reflects the latest assumptions on case failure
and recovery rates.
In Retail, at 31 July 2022, the impairment coverage ratio remained stable at
2.2% (31 July 2021: 2.2%) reflecting the performance of the forborne loan book
and strong new business volumes.
In Property, the impairment coverage ratio reduced to 2.4% (31 July 2021:
2.6%) reflecting the write off of a well provided individually assessed case,
partially offset by the deteriorating macroeconomic forecasts.
(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 expected credit
loss provisions adequately reflect all known information. These adjustments
are generally determined by considering the attributes or risks of a financial
asset which are not captured by existing expected credit loss model outputs.
Management adjustments are actively monitored, reviewed, and incorporated into
future model development where applicable.
As the UK economy has emerged from all pandemic related restrictions, and
government support measures have unwound, the use of adjustments has also
evolved. In particular, previous adjustments to reflect the guarantee under
government lending schemes have now been incorporated into modelled LGD
estimates. The remaining adjustments reflect the application of expert
management judgement to incorporate management's experience and knowledge of
customers, the sectors in which they operate, and the assets financed. We will
continue to monitor the need for adjustments as new information emerges.
At 31 July 2022, £(2.8) million of the expected credit loss provision was
attributable to adjustments (31 July 2021: £38.9 million). The reduction in
this value is driven by incorporation of a number of adjustments into model
calculations, as well as the lower volume of Covid-19 forborne exposures and
reduced macroeconomic uncertainty related to the pandemic. The remaining value
is driven by a small number of adjustments primarily made to ensure models are
reflective of economic conditions.
(d) Reconciliation of loans and advances to customers and impairment
provisions
Reconciliations of gross loans and advances to customers and associated
impairment provisions are set out below.
New financial assets originate in Stage 1 only, and the amount presented
represents the value at origination.
Subsequently, a loan may transfer between stages, and the presentation of such
transfers is based on a comparison of the loan at the beginning of the year
(or at origination if this occurred during the year) and the end of the year
(or just prior to final repayment or write off).
Repayments relating to loans which transferred between stages during the year
are presented within the transfers between stages lines. Such transfers do not
represent overnight reclassification from one stage to another. All other
repayments are presented in a separate line.
ECL model methodologies may be updated or enhanced from time to time and the
impacts of such changes are presented on a separate line. Enhancements to our
model suite during the course of the financial year are a contributory factor
to ECL movements and such factors have been taken into consideration when
assessing any required adjustments to modelled output and ensuring appropriate
provision coverage levels.
A loan is written off when there is no reasonable expectation of further
recovery following realisation of all associated collateral and available
recovery actions against the customer.
Stage 1 Stage 2 Stage 3 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
Stage 1 Stage 2 Stage 3 Total
£ million £ million £ million £ million
Gross loans and advances to customers
At 1 August 2020 5,906.6 1,574.2 374.6 7,855.4
New financial assets originated 6,980.2 - - 6,980.2
Transfers to Stage 1 640.0 (639.6) (11.2) (10.8)
Transfers to Stage 2 (1,054.5) 912.4 (15.0) (157.1)
Transfers to Stage 3 (133.3) (113.4) 178.6 (68.1)
Net transfers between stages and repayments(1) (547.8) 159.4 152.4 (236.0)
Repayments while stage remained unchanged and final repayments
(4,907.6) (781.4) (106.5) (5,795.5)
Changes to model methodologies 6.3 9.8 (16.0) 0.1
Write offs (3.4) (1.8) (74.1) (79.3)
At 31 July 2021 7,434.3 960.2 330.4 8,724.9
1 Repayments relate only to financial assets which transferred between
stages during the year. Other repayments are shown in the line below.
The gross carrying amount before modification of loans and advances to
customers which were modified during the year while in Stage 2 or 3 was
£288.3 million (2021: £293.9 million). No gain or loss (2021: £0.8 million
loss) was recognised as a result of these modifications. The gross carrying
amount at 31 July 2022 of modified loans and advances to customers which
transferred from Stage 2 or 3 to Stage 1 during the year was £110.2 million
(31 July 2021: £237.9 million).
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
Stage 1 Stage 2 Stage 3 Total
£ million £ million £ million £ million
Impairment provisions on loans and advances to customers
At 31 August 2020 57.6 87.3 93.8 238.7
New financial assets originated 45.0 - - 45.0
Transfers to Stage 1 4.0 (15.7) (1.0) (12.7)
Transfers to Stage 2 (15.7) 63.4 (2.4) 45.3
Transfers to Stage 3 (2.2) (13.3) 67.6 52.1
Net remeasurement of expected credit losses arising from transfers between
stages and repayments(1)
(13.9) 34.4 64.2 84.7
Repayments and ECL movements while stage remained unchanged and final
repayments
(9.0) (35.9) (5.0) (49.9)
Changes to model methodologies 0.9 (0.2) (2.8) (2.1)
Charge to the income statement 23.0 (1.7) 56.4 77.7
Write offs (0.6) (1.4) (34.0) (36.0)
At 31 July 2021 80.0 84.2 116.2 280.4
1 Repayments relate only to financial assets which transferred between
stages during the year. Other repayments are shown in the line below.
2022 2021
£ million £
million
Impairment losses relating to loans and advances to customers:
Charge to income statement arising from movement in impairment provisions 93.4 77.7
Amounts written off directly to income statement, net of recoveries and other 8.5 10.2
costs
101.9 87.9
Impairment losses relating to other financial assets 1.4 1.9
Impairment losses on financial assets recognised in income statement 103.3 89.8
Impairment losses on financial assets of £103.3 million (2021: £89.8
million) include £60.7 million in relation to Novitas (2021: £73.2 million).
The contractual amount outstanding at 31 July 2022 on financial assets that
were written off during the period and are still subject to recovery activity
is £17.3 million (31 July 2021: £19.0 million).
(e) Finance lease and hire purchase agreement receivables
31 July 31 July
2022 2021
£ million £ million
Loans and advances to customers comprise
Hire purchase agreement receivables 3,725.1 3,554.6
Finance lease receivables 694.4 567.1
Other loans and advances 4,439.4 4,322.8
At 31 July 8,858.9 8,444.5
8. Debt Securities
Fair value through profit or loss Fair value through other comprehensive income
Amortised 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
Fair value through Fair value through other comprehensive income
profit or
loss Amortised cost
Total
£ million £ £ £
million million million
Long trading positions in debt securities 20.1 - - 20.1
Certificates of deposit - - 264.7 264.7
Sovereign and central bank debt - 192.5 - 192.5
At 31 July 2021 20.1 192.5 264.7 477.3
Movements on the book value of sovereign and central bank debt comprise:
2022 2021
£ million £ million
Sovereign and central bank debt at 1 August 192.5 72.2
Additions 335.3 313.7
Redemptions (80.0) (191.0)
Currency translation differences (1.2) (5.2)
Movement in value (31.2) 2.8
Sovereign and central bank debt at 31 July 415.4 192.5
9. Equity Shares
31 July 31 July
2022 2021
£ million £ million
Long trading positions 27.1 30.8
Other equity shares 1.3 1.1
28.4 31.9
10. Intangible Assets
Intangible assets on acquisition Group total
Goodwill Software
£ million £ million £ million £ million
Cost
At 1 August 2020 153.0 233.3 67.5 453.8
Additions 2.0 46.2 4.2 52.4
Disposals (12.1) (6.7) (20.7) (39.5)
At 31 July 2021 142.9 272.8 51.0 466.7
Additions - 56.0 - 56.0
Disposals (0.3) (29.3) - (29.6)
At 31 July 2022 142.6 299.5 51.0 493.1
Amortisation and impairment
At 1 August 2020 47.9 115.5 50.3 213.7
Amortisation charge for the year - 29.4 3.0 32.4
Impairment charge for the year 12.1 - 11.2 23.3
Disposals (12.1) (2.5) (20.7) (35.3)
At 31 July 2021 47.9 142.4 43.8 234.1
Amortisation charge for the year - 34.6 2.0 36.6
Impairment charge for the year - - - -
Disposals - (29.6) - (29.6)
At 31 July 2022 47.9 147.4 45.8 241.1
Net book value at 31 July 2022 94.7 152.1 5.2 252.0
Net book value at 31 July 2021 95.0 130.4 7.2 232.6
Net book value at 1 August 2020 105.1 117.8 17.2 240.1
Software includes assets under development of £71.1 million (31 July 2021:
£60.1 million).
Intangible assets on acquisition relate to broker and customer relationships
and are amortised over a period of eight to 20 years.
In the 2022 financial year, £2.0 million (2021: £3.0 million) of the
amortisation charge is included in amortisation of intangible assets on
acquisition and £34.6 million (2021: £29.4 million) of the amortisation
charge is included in administrative expenses shown in the consolidated income
statement. In the prior financial year, an impairment charge of £11.2 million
relating to intangible assets on acquisition was excluded from administrative
expenses shown in the consolidated income statement.
11. Property, Plant and Equipment
Assets
Fixtures, held under
fittings and operating Right of use assets(1)
Leasehold equipment leases Motor
property vehicles Total
£ £ £ £ £ million £ million
million million million million
Group
Cost
At 1 August 2020 25.5 60.1 341.4 0.1 60.4 487.5
Additions 1.1 17.2 60.6 0.1 17.6 96.6
Disposals (1.4) (2.5) (41.3) - (6.3) (51.5)
At 31 July 2021 25.2 74.8 360.7 0.2 71.7 532.6
Additions 0.6 4.3 67.8 - 13.6 86.3
Disposals (4.9) (16.5) (30.3) - (6.8) (58.5)
At 31 July 2022 20.9 62.6 398.2 0.2 78.5 560.4
Depreciation
At 1 August 2020 14.8 42.9 119.5 0.1 13.0 190.3
Depreciation and impairment charges for the year
2.3 6.8 44.8 - 13.8 67.7
Disposals (1.4) (2.2) (26.5) - (5.2) (35.3)
At 31 July 2021 15.7 47.5 137.8 0.1 21.6 222.7
Depreciation and impairment charges for the year
2.2 7.6 40.6 0.1 13.2 63.7
Disposals (4.9) (18.2) (20.2) - (5.2) (48.5)
At 31 July 2022 13.0 36.9 158.2 0.2 29.6 237.9
Net book value at 31 July 2022 7.9 25.7 240.0 - 48.9 322.5
Net book value at 31 July 2021 9.5 27.3 222.9 0.1 50.1 309.9
Net book value at 1 August 2020 10.7 17.2 221.9 - 47.4 297.2
1 Right of use assets primarily relate to the group's leasehold
properties.
There was a gain of £3.2 million from the sale of assets held under operating
leases for the year ended 31 July 2022 (2021: £2.6 million).
12. Settlement Balances and Short Positions
31 July 31 July
2022 2021
£ million £ million
Settlement balances 780.7 674.2
Short positions in:
Debt securities 7.5 7.0
Equity shares 7.9 9.4
15.4 16.4
796.1 690.6
13. Financial Liabilities
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
At 31 July 2022 139.1 1,734.6 4,573.3 1,536.2 1,268.8 362.5 9,614.5
Within three Between Between Between After
On demand months three months and one year one and two and more than
two years five years five years Total
£ million £ million £ million £ million £ million £ million £ million
Deposits by banks 2.1 37.7 110.8 - - - 150.6
Deposits by customers 576.3 1,547.9 3,343.6 729.8 437.2 - 6,634.8
Loans and overdrafts from banks
22.7 - - - 490.0 - 512.7
Debt securities in
Issue(1) (0.6) 57.0 161.2 655.2 327.5 665.2 1,865.5
At 31 July 2021 600.5 1,642.6 3,615.6 1,385.0 1,254.7 665.2 9,163.6
1 Debt securities in issue of £(0.6) million due on demand include
an adjustment relating to the group's fair value hedges.
At 31 July 2022, the parent company held £251.5 million (31 July 2021:
£251.1 million) debt securities in issue.
The group accessed £600.0 million cash under the Bank of England's Term
Funding Scheme with Additional Incentives for SMEs (31 July 2021: £490.0
million under the Term Funding Scheme with Additional Incentives for SMEs).
Cash from the schemes and repurchase agreements is included within loans and
overdrafts from banks. Residual maturities of the schemes and repurchase
agreements are as follows:
Within three Between Between Between After
On demand months three months and one year one and two and more than
two years five years five years Total
£ million £ million £ million £ million £ million £ million £ million
At 31 July 2022 - 0.6 - 228.0 372.0 - 600.6
At 31 July 2021 - - - - 490.0 - 490.0
14. Capital - unaudited
At 31 July 2022, the group's CET1 capital ratio was 14.6% (31 July 2021:
15.8%). CET1 capital decreased to £1,396.7 million (31 July 2021: £1,439.3
million) primarily due to regulatory changes to the treatment of software
assets, which are now fully deducted from capital, and a decrease in IFRS 9
transitional arrangements.
RWAs, calculated using the standardised approaches, increased to £9,591.3
million (31 July 2021: £9,105.3 million) driven by growth in the Commercial
division loan book, and in derivative exposures, increasing counterparty
credit risk and credit valuation adjustments.
31 July 31 July
2022 2021
£ million £ million
CET1 capital
Called up share capital 38.0 38.0
Retained earnings 1,628.4 1,555.5
Other reserves recognised for CET1 capital 10.0 13.1
Adjustments to CET1 capital
Intangible assets, net of associated deferred tax liabilities(1) (250.7) (180.7)
Foreseeable dividend(2) (65.6) (62.7)
Investment in own shares (40.6) (36.0)
Pension asset, net of associated deferred tax liabilities (5.3) (5.4)
Prudent valuation adjustment (0.5) (0.3)
Insufficient coverage for non-performing exposures(3) - -
IFRS 9 transitional arrangements(4) 83.0 117.8
CET1 capital(5) 1,396.7 1,439.3
Tier 2 capital(6) - subordinated debt 200.0 223.4
Total regulatory capital(5) 1,596.7 1,662.7
RWAs (notional)(7)
Credit and counterparty credit risk 8,389.0 7,945.8
Operational risk(7) 1,085.8 1,038.5
Market risk(7) 116.5 121.0
9,591.3 9,105.3
CET1 capital ratio(5) 14.6% 15.8%
Total capital ratio(5) 16.6% 18.3%
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.
2 Under the Regulatory Technical Standard on own funds, a deduction has
been recognised at 31 July 2022 and 31 July 2021 for a foreseeable dividend,
being the proposed final dividend as set out in note 6.
3 In line with CRR, effective on 1 January 2022, the CET1 capital
includes a regulatory deduction where there is insufficient coverage for
non-performing exposures, amounting to £0.03 million at 31 July 2022.
4 The group has elected to apply IFRS 9 transitional arrangements
for 31 July 2022, which allow the capital impact of expected credit losses to
be phased in over the transitional period.
5 Shown after applying IFRS 9 transitional arrangements and the CRR
transitional and qualifying own funds arrangements in force at the time.
Without their application, at 31 July 2022 the CET1 capital ratio would be
13.8% and total capital ratio 15.9% (31 July 2021: CET1 capital ratio 14.7%
and total capital ratio 17.2%, which includes the benefit related to the
previous treatment of software assets).
6 Tier 2 capital decrease represents the redemption on call date of
a prior Tier 2 security, most of which had previously been redeemed as part of
a tender offer.
7 Operational and market risk include an adjustment at 8% in order
to determine notional RWAs.
The following table shows a reconciliation between equity and CET1 capital
after adjustments:
31 July 31 July
2022 2021
£ million £ million
Equity 1,657.5 1,569.3
Regulatory adjustments to equity:
Intangible assets, net of associated deferred tax liabilities (250.7) (180.7)
Foreseeable dividend(1) (65.6) (62.7)
IFRS 9 transitional arrangements(2) 83.0 117.8
Pension asset, net of associated deferred tax liabilities (5.3) (5.4)
Prudent valuation adjustment (0.5) (0.3)
Insufficient coverage for non-performing exposures(3) - -
Other reserves not recognised for CET1 capital:
Cash flow hedging reserve (21.7) 0.3
Non-controlling interests - 1.0
CET1 capital 1,396.7 1,439.3
1 Under the Regulatory Technical Standard on own funds, a deduction has
been recognised at 31 July 2022 and 31 July 2021 for a foreseeable dividend,
being the proposed final dividend as set out in note 6.
2 The group has elected to apply IFRS 9 transitional arrangements for 31
July 2022, which allow the capital impact of expected credit losses to be
phased in over the transitional period.
3 In line with CRR, effective on 1 January 2022, the CET1 capital
includes a regulatory deduction where there is insufficient coverage for
non-performing exposures, amounting to £0.03 million at 31 July 2022.
The following table shows the movement in CET1 capital during the year:
2022 2021
£ million £ million
CET1 capital at 1 August 1,439.3 1,254.0
Profit in the period attributable to shareholders 165.2 202.1
Dividends paid and foreseen (98.4) (89.5)
Change in software assets treatment(1) (50.2) 50.2
IFRS 9 transitional arrangements (34.8) 17.5
(Increase)/decrease in intangible assets, net of associated deferred tax
liabilities
(19.7) 6.0
Other movements in reserves recognised for CET1 capital 0.1 0.9
Other movements in adjustments from CET1 capital (4.8) (1.9)
CET1 capital at 31 July 1,396.7 1,439.3
1 In line with CRR, effective on 1 January 2022, the CET1 ratio no
longer includes the benefit related to software assets which were previously
exempt from the deduction requirement for intangible assets from CET1.
15. Consolidated Cash Flow Statement Reconciliation
2022 2021(1)
£ million £ million
(a) Reconciliation of operating profit before tax to net cash inflow from
operating activities
Operating profit before tax 232.8 265.2
Tax paid (63.4) (69.7)
Depreciation, amortisation and impairment 100.3 123.4
Impairment losses on financial assets 103.3 89.8
Decrease/(increase) in:
Interest receivable and prepaid expenses 19.8 4.6
Net settlement balances and trading positions 17.2 8.5
Net loans from money brokers against stock advanced 2.7 (23.2)
Increase/(decrease) in interest payable and accrued expenses (32.2) 27.2
Net cash inflow from trading activities 380.5 425.8
Decrease/(increase) in:
Loans and advances to banks not repayable on demand (5.3) 9.6
Loans and advances to customers (515.0) (951.2)
Assets let under operating leases (54.5) (43.9)
Certificates of deposit 79.7 21.2
Sovereign and central bank debt (255.3) (126.6)
Other assets less other liabilities (6.4) 29.6
Increase/(decrease) in:
Deposits by banks 11.8 3.9
Deposits by customers 142.7 745.1
Loans and overdrafts from banks 110.0 14.8
Net (redemption)/issuance of debt securities 270.5 (9.2)
Net cash inflow from operating activities 158.7 119.1
(b) Analysis of net cash outflow in respect of the purchase of subsidiaries and
non-controlling interests
Cash consideration paid (0.1) (2.9)
(c) Analysis of net cash inflow in respect of the sale of subsidiaries
Cash consideration received 0.1 2.3
(d) Analysis of cash and cash equivalents(2)
Cash and balances at central banks 1,236.0 1,314.7
Loans and advances to banks 147.0 121.9
At 31 July 1,383.0 1,436.6
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 £37.1 million (2021: £30.7 million) of Bank of England
and other cash reserve accounts.
During the year ended 31 July 2022, the non-cash changes on debt financing
amounted to £9.6 million (31 July 2021: £18.2 million) arising largely from
interest accretions and fair value hedging movements.
16. 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 main differences are as
follows:
31 July 2022 31 July 2021
Fair value Carrying value Fair value Carrying value
£ million £ million £ million £ million
Subordinated loan capital 180.0 186.5 226.5 222.7
Debt securities in issue 2,071.4 2,060.9 1,908.9 1,865.5
The group holds financial instruments that are measured at fair value
subsequent to initial recognition. Each instrument has been categorised within
one of three levels using a fair value hierarchy that reflects the
significance of the inputs used in making the measurements. These levels are
based on the degree to which the fair value is observable. The table below
shows the classification of financial instruments held at fair value into the
valuation hierarchy:
Level 1 Level 2 Level 3 Total
£ million £ million £ million £ million
At 31 July 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
Level 1 Level 2 Level 3 Total
£ million £ million £ million £ million
At 31 July 2021
Assets
Debt securities:
Long trading positions in debt securities 19.0 1.1 - 20.1
Sovereign and central bank debt 192.5 - - 192.5
Equity shares 6.2 25.4 0.3 31.9
Derivative financial instruments - 18.3 - 18.3
Contingent consideration - - 0.1 0.1
217.7 44.8 0.4 262.9
Liabilities
Short positions:
Debt securities 5.7 1.3 - 7.0
Equity shares 3.2 6.2 - 9.4
Derivative financial instruments - 21.3 - 21.3
Contingent consideration - - 3.0 3.0
8.9 28.8 3.0 40.7
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 2021.
Instruments classified as Level 3 predominantly comprise contingent
consideration payable and receivable in relation to the acquisitions and
disposal of subsidiaries. The fair value of contingent consideration is
determined on a discounted expected cash flow basis. The group believes that
there is no reasonably possible change to inputs used in the valuation of
these positions which would have a material effect on the group's consolidated
income statement.
There were no significant transfers between Level 1, 2 and 3 in 2022 and
2021.
The losses recognised in the consolidated income statement relating to
instruments held at the year end amounted to £0.2 million (2021: £0.1
million).
17. Government Lending Schemes and Forbearance
Government lending schemes
In addition to the Covid-19 specific forbearance measures covered below,
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 July 2022, 5,445 facilities were drawn, with a
residual balance of £747.5 million (31 July 2021: £983.9 million) following
commencement of repayments across our Property, Asset Finance & Leasing
and Invoice Finance businesses.
We have also received accreditation to offer products under the Recovery Loan
Scheme, and schemes in the Republic of Ireland. As at 31 July 2022, there are
633 live and approved loans, with limits of £181.6 million.
Forbearance
Forbearance occurs when a customer is experiencing difficulty in meeting their
financial commitments and a concession is granted, by changing the terms of
the financial arrangement, which would not otherwise be considered. This
arrangement can be temporary or permanent depending on the customer's
circumstances.
The Banking division reports on forborne exposures as either performing or
non-performing in line with regulatory requirements. A forbearance policy is
maintained to ensure the necessary processes are in place to enable
consistently fair treatment of each customer and that they are managed based
on their individual circumstances. The arrangements agreed with customers will
aim to create a sustainable and affordable financial position, thereby
reducing the likelihood of suffering a credit loss. The forbearance policy is
periodically reviewed to ensure it remains effective.
Forbearance analysis
At 31 July 2022 the gross carrying amount of exposures with forbearance
measures was £208.9 million (31 July 2021: £615.0 million). The key driver
of this decrease has been repayment and curing of Covid-19 related
forbearance, the total of which amounts to £40.8 million at 31 July 2022 (31
July 2021: £454.8 million).
An analysis of forborne loans is shown in the table below:
Gross loans and advances to customers Forborne loans Forborne loans as a percentage of gross loans and advances to customers Provision on forborne loans
Number of customers supported
£ million £ million % £ million
31 July 2022 9,144.5
Covid-19 forbearance 40.8 0.4% 1.4 770
Non-Covid-19 forbearance 168.1 1.8% 42.9 10,273
9,144.5 208.9 2.3% 44.3 11,043
31 July 2021 8,724.9
Covid-19 forbearance 454.8 5.2% 47.3 17,674
Non-Covid-19 forbearance 160.2 1.8% 35.5 12,679
8,724.9 615.0 7.0% 82.8 30,353
The following is a breakdown of forborne loans by segment split by those
driven by Covid-19 compared to concessions that have arisen in the normal
course of business:
31 July 2022 31 July 2021
Covid-19 Non- Total forborne loans Covid-19 Non- Total forborne loans
Covid-19 Covid-19
£ million £ million £ million £ million £ million £ million
Commercial 34.2 28.1 62.3 287.4 19.8 307.2
Retail 1.8 21.2 23.0 49.2 9.2 58.4
Property 4.8 118.8 123.6 118.2 131.2 249.4
40.8 168.1 208.9 454.8 160.2 615.0
The following is a breakdown of the number of customers supported by segment:
31 July 2022 31 July 2021
Covid-19 Non-Covid-19 Total number of customers Covid-19 Non- Total number of customers
supported Covid-19 supported
Commercial 404 114 518 2,291 136 2,427
Retail 365 10,102 10,467 15,333 12,485 27,818
Property 1 57 58 50 58 108
770 10,273 11,043 17,674 12,679 30,353
The following is a breakdown of forborne loans by concession type split by
those driven by Covid-19 compared to concessions that have arisen in the
normal course of business:
31 July 2022 31 July 2021
Covid-19 Non- Forborne loans Covid-19 Non- Forborne loans
Covid-19 Covid-19
£ million £ million £ million £ million £ million £ million
Extension outside terms 5.4 107.6 113.0 123.5 121.9 245.4
Refinancing - 3.0 3.0 1.2 5.3 6.5
Moratorium 35.4 34.5 69.9 329.7 16.1 345.8
Other modifications - 23.0 23.0 0.4 16.9 17.3
40.8 168.1 208.9 454.8 160.2 615.0
18. Interest Rate Risk
The group's exposure to interest rate risk arises in the Banking division and,
accordingly, the remainder of this section relates to the Banking division.
Interest rate risk in the group's other divisions is considered to be
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 186 of the Annual Report 2021.
The table below sets out the assessed impact on our Earnings at Risk ("EaR")
due to a parallel shift in interest rates at 31 July:
2022 2021
£ million £ million
0.5% increase 2.1 (11.6)
0.5% decrease (1.9) 8.3
The table below sets out the assessed impact on our base case Economic Value
("EV") due to a shift in interest rates at 31 July:
2022 2021
£ million £ million
0.5% increase 1.1 (4.2)
0.5% decrease (0.8) 4.3
The impact above is on a comparable 0.5% increase and decrease basis. The Bank
of England Base Rate had increased base rate to 1.25% by 31 July 2022, from
0.1% at 31 July 2021. This has resulted in a reduction in embedded optionality
risk as floors embedded in some variable rate loans are no longer generating
additional earnings. The reduction in embedded optionality risk is responsible
for most of the movement in the EaR and EV metrics in the year. The major
driver for EaR and EV is now Repricing Risk with increasing rates driving
positive EaR and EV and modest rate reductions resulting in negative EV and
EaR.
Cautionary Statement
Certain statements included or incorporated by reference within this
preliminary results announcement may constitute "forward-looking statements"
in respect of the group's operations, performance, prospects and/or financial
condition. 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. 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
preliminary results announcement should be construed as a profit forecast.
Past performance is no guide to future performance and persons needing advice
should consult an independent financial (or other professional) adviser.
This preliminary results 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 preliminary results announcement
reflect the knowledge and information available at the time of its
preparation. Liability arising from anything in this preliminary results
announcement shall be governed by English law. Nothing in this preliminary
results announcement shall exclude any liability under applicable laws that
cannot be excluded in accordance with such laws.
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