REG - Close Bros Grp PLC - Preliminary Results for the year ended 31 July 24
19/09/2024 07:00
For best results when printing this announcement, please click on link below:
http://newsfile.refinitiv.com/getnewsfile/v1/story?guid=urn:newsml:reuters.com:20240919:nRSS8469Ea&default-theme=true
RNS Number : 8469E Close Brothers Group PLC 19 September 2024
Close Brothers Group plc T +44 (0)20 7655 3100
10 Crown Place E enquiries@closebrothers.com (mailto:enquiries@closebrothers.com)
London EC2A 4FT W www.closebrothers.com (http://www.closebrothers.com)
Registered in England No. 520241
This announcement contains inside information
Preliminary Results for the year end to 31 July 2024
19 September 2024
RESILIENT PERFORMANCE IN AN UNCERTAIN ENVIRONMENT
Adrian Sainsbury, Chief Executive, said:
"This year's performance demonstrates the group's resilience. In Banking, we
grew our loan book with strong margins and stable underlying credit quality,
while progressing our cost actions to improve future efficiency. Close
Brothers Asset Management delivered strong net inflows, although Winterflood's
performance remained impacted by unfavourable market conditions.
The FCA's review of historical motor finance commission arrangements announced
in January introduced significant uncertainty for the group. Against this
backdrop, our top priority has been to further strengthen our capital position
and protect our valuable franchise, whilst continuing to support our nearly
three million customers, including c.350,000 SME businesses.
We are making significant progress against the capital actions previously
outlined. The strengths of our model, being our long-term relationships, the
deep expertise of our people and our customer-centric approach, leave us well
placed to navigate the current uncertainty. We continue to be encouraged by
the strength of demand in our Banking business and see good growth prospects
for the group, as we focus on resuming our track record of earnings growth and
attractive returns."
Mike Biggs, Chairman, commented:
"Following a comprehensive strategic review, the board is pleased to announce
the agreed sale of CBAM to Oaktree. The transaction is expected to increase
the group's common equity tier 1 capital ratio by approximately 100 basis
points, marking significant progress towards the plan we outlined in March
2024 to strengthen our capital base. The board has unanimously approved the
transaction and believes that the agreed sale represents competitive value for
our shareholders, allowing us to simplify the group and focus on our core
lending business. CBAM has delivered impressive growth over the past years and
has developed into a strong franchise. Under the new ownership, it will
benefit from additional resources to accelerate its growth trajectory. I would
like to thank our CBAM colleagues for their dedication, professionalism and
exceptional service to our clients."
Key Financials(1)
( ) Full year Full year Change
2024 2023 %
Statutory operating profit before tax £142.0m £112.0m 27
Adjusted operating profit(2) £170.6m £113.5m 50
Adjusted basic earnings per share(3) 76.1p 55.1p 38
Basic earnings per share(3) 59.7p 54.3p 10
Ordinary dividend per share - 67.5p (100)
Return on opening equity 6.9% 5.0%
Return on average tangible equity 8.3% 5.9%
Net interest margin 7.4% 7.7%
Bad debt ratio 1.0% 2.2%
31 July 31 July Change
2024 2023 %
Loan book(4) £10.1bn £9.5bn 6
CBAM total client assets £20.4bn £17.3bn 18
NAV per share £11.1 £11.0 1
TNAV per share £9.3 £9.3 0
CET1 capital ratio (transitional) 12.8% 13.3%
Tier 1 capital ratio (transitional) 14.7% 13.3%
Total capital ratio (transitional) 16.6% 15.3%
Key Financials (Excluding Novitas)
( ) Full year Full year Change
2024 2023 %
Statutory operating profit before tax £142.2m £218.6m (35)
Adjusted operating profit £170.8m £220.1m (22)
Net interest margin 7.3% 7.6%
Bad debt ratio 0.9% 0.9%
31 July 31 July Change
2024 2023 %
Loan book(4) £10.0bn £9.5bn 6
1. Please refer to definitions on pages 31 to 34.
2. 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 "Segmental Analysis".
3. Refer to Note 4 "Earnings per Share" for the calculation of basic and adjusted
earnings per share.
4. Loan book includes operating lease assets.
Financial performance
• Operating income up 1% to £944.2 million (2023: £932.6 million), with growth
in both Banking and Close Brothers Asset Management ("CBAM") more than
offsetting a reduction in Winterflood and higher Group (central functions)
interest expense
• Adjusted operating expenses up 10% primarily reflecting increases in staff
costs and continued investment in Banking
• Statutory operating profit before tax ("PBT") increased 27% to £142.0 million
(2023: £112.0 million), reflecting non-recurrence of prior year impairment
charges of £116.8 million related to Novitas. Statutory PBT included £28.6
million of adjusting items (2023: £1.5 million), primarily driven by
complaints handling expenses and other operational costs associated with the
FCA's review of historical motor finance commission arrangements of £6.9
million; a provision in respect of the Borrowers in Financial Difficulty
("BiFD") review and expected customer compensation of £17.2 million and
restructuring costs of £3.1 million
• Adjusted operating profit increased 50% to £170.6 million (2023: £113.5
million), as the significant decrease in impairment charges and 1% growth in
income more than offset a 10% growth in adjusted operating expenses
• Group return on average tangible equity ("RoTE") increased to 8.3% (2023:
5.9%)
• In Banking, we delivered good loan book growth of 6% to £10.1 billion (31
July 2023: £9.5 billion), reflecting healthy drawdowns in Property and strong
new business in Invoice Finance, as well as continued good demand in Asset
Finance and Motor Finance, partly offset by a decline in Premium Finance. We
delivered a net interest margin of 7.4% (2023: 7.7%) and a stable underlying
credit performance, with a bad debt ratio of 1.0% (2023: 2.2%), 0.9% excluding
Novitas (2023: 0.9%). Adjusted operating expenses grew by 8%, at the lower end
of the 8-10% cost growth guidance range outlined previously. Adjusted
operating profit was £205.4 million (2023: £120.1 million)
• CBAM delivered strong net inflows of 8%, with a significant contribution from
our bespoke investment management business. Total managed assets ("AuM")
increased 18% to £19.3 billion, driven by net inflows and positive market
performance. Adjusted operating profit decreased 23% to £12.2 million (2023:
£15.9 million) as income growth was more than offset by higher costs,
reflecting investment in new hires
• In Winterflood, market conditions have remained unfavourable and the business
delivered an operating loss of £1.7 million (2023: £3.5 million operating
profit); Winterflood Business Services ("WBS") income increased 17% to £17.3
million, with assets under administration ("AuA") up 21% to £15.6 billion
(2023: £12.9 billion)
• Strong balance sheet position with our Common Equity Tier 1 ("CET1") ratio of
12.8% at 31 July 2024 (31 July 2023: 13.3%), significantly above our
applicable requirement of 9.7%
• In line with our previous announcement, no dividend will be paid in respect of
the 2024 financial year
Decisive actions to further strengthen capital position
• There remains significant uncertainty about the outcome of the FCA's review of
historical motor finance commission arrangements at this stage, and the
timing, scope and quantum of any potential financial impact on the group
cannot be reliably estimated at present
• In March 2024, we announced a range of management actions which have the
potential to strengthen the group's available CET1 capital by approximately
£400 million by the end of the 2025 financial year
• We have retained c.£100 million of CET1 capital as a result of the group's
previously announced decision not to pay a dividend for the 2024 financial
year. We are making significant progress against the other identified
management actions. To optimise risk weighted assets, we have been growing our
loan book selectively, with the impact reflected in both the loan book growth
rate delivered this year and the expected trajectory for the 2025 financial
year. We have concluded the work in preparation for a significant risk
transfer of assets in Motor Finance. Subject to market conditions, we are
ready to launch a transaction at the optimal time to maximise the peak capital
benefit, aligned to the revised timetable for the FCA's work in the motor
finance market. We have continued to deliver against the cost management
initiatives previously announced
• Following a comprehensive strategic review, on 19 September 2024, the group
announced that it entered into an agreement to sell CBAM to funds managed by
Oaktree Capital Management, L.P. ("Oaktree"). The transaction is expected to
increase the group's common equity tier 1 capital ratio by approximately 100
basis points on a pro forma basis, marking significant progress towards the
plan we outlined in March 2024 to strengthen our capital base. The transaction
is expected to complete in early 2025 calendar year and is conditional upon
receipt of certain customary regulatory approvals
• The board remains confident that these actions leave the group well positioned
to navigate the current uncertainty
Guidance(1)
In Banking, we are encouraged by the robust performance we delivered
• Currently plan for low single-digit percentage growth in the loan book for the
2025 financial year
• Well positioned to sustain the net interest margin delivered in the second
half of the 2024 financial year of 7.2%
• As announced in March 2024, additional cost management initiatives have been
mobilised, which are expected to generate annualised savings of c.£20
million, reaching the full run rate by the end of the 2025 financial year,
with the total benefit in the 2026 financial year
• Expect income and adjusted operating expenses growth to be aligned in the 2025
financial year and to deliver positive operating leverage in the 2026
financial year
• Expect the bad debt ratio to remain below our long-term average of 1.2% in the
2025 financial year
Close Brothers Asset Management ("CBAM") is well placed to consolidate its
position and maximise opportunities to accelerate profitability
• Continue to target net inflows of 6-10%
In Winterflood, while short-term trading conditions remain challenging, we are
confident that Winterflood remains well positioned to retain its market
position and benefit when investor appetite returns
• Remain focused on diversifying revenue streams
• Expect to grow AuA in WBS to over £20 billion by 2026
We expect Group (central functions) net expenses to be between £55 million
and £60 million in the 2025 financial year, primarily reflecting an elevated
level of professional fees and expenses associated with the potential impact
on the group of the FCA's review of historical motor finance commission
arrangements and its revised timetable, as well as a decline in income with a
reduction in interest rates.
With respect to items recognised as adjusting in the 2024 financial year
• Currently estimate costs associated with complaints handling and other
operational costs associated with the FCA's review of historical motor finance
commission arrangements to be between £10-15 million in the 2025 financial
year
• Expect to incur £5-10 million of restructuring costs in the 2025 financial
year as we continue to implement cost management actions to improve future
efficiency
Subject to the execution of management actions and capital generation, we have
the potential to increase the group's CET1 capital ratio to between 14% and
15% at the end of the 2025 financial year (excluding any potential redress or
provision related to the FCA's review of historical motor finance commission
arrangements). Over the medium term, we remain committed to our previous CET1
capital target range of 12% to 13%
The reinstatement of dividends in 2025 and beyond will be reviewed once the
FCA has concluded its process and any financial consequences for the group
have been assessed
1. Guidance relating to income statement items excludes any financial impact of a
significant risk transfer of assets in Motor Finance. The final impact will be
dependent on the transactions' final terms and timing of execution.
Inside information
This announcement contains information which is deemed by the Company to
constitute inside information within the meaning of the UK version of the
European Union's Market Abuse Regulation ((EU) No. 596/2014). Upon the
publication of this announcement via the Regulatory Information Service, the
inside information is now considered to be in the public domain. The person
responsible for arranging the release of this information on behalf of the
Company is Sarah Peazer-Davies, Company Secretary.
Enquiries
Sophie Gillingham Close Brothers Group plc 020 3857 6574
Camila Sugimura Close Brothers Group plc 020 3857 6577
Kimberley Taylor Close Brothers Group plc 020 3857 6233
Ingrid Diaz Close Brothers Group plc 020 3857 6088
Sam Cartwright H/Advisors Maitland 07827 254 561
A virtual presentation to analysts and investors will be held today at 9.30 am
followed by a Q&A session. A webcast and dial-in facility will be
available by registering at
https://webcasts.closebrothers.com/results/FullYearResults2024.
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 costs associated with complaints
handling and other operational costs associated with the FCA's review of
historical motor finance commission arrangements, provisions in relation to
the Borrowers in Financial Difficulty review, restructuring costs and
amortisation of intangible assets on acquisition, to present the performance
of the group's acquired businesses consistent with its other businesses; and
any exceptional and other adjusting items which do not reflect underlying
trading performance. The adjusting items are presented within administrative
expenses on a statutory basis. Please refer to Note 2 "Segmental Analysis" for
further details on items excluded from the adjusted performance metrics.
Financial Calendar (Provisional)
The enclosed provisional financial calendar below is updated on a regular
basis throughout the year. Please refer to our website www.closebrothers.com
(http://www.closebrothers.com) for up-to-date details.
Event Date
First quarter trading update November 2024
Annual General Meeting 21 November 2024
Half year end 31 January 2025
Interim results March 2025
Third quarter trading update May 2025
Financial year end 31 July 2025
Preliminary results September 2025
About Close Brothers
Close Brothers is a leading UK merchant banking group providing lending,
deposit taking, wealth management services and securities trading. We employ
approximately 4,000 people, principally in the United Kingdom and Ireland.
Close Brothers Group plc is listed on the London Stock Exchange and is a
constituent of the FTSE 250.
Chief Executive's Statement
This year's performance demonstrates the group's resilience. In Banking, we
grew our loan book with strong margins and stable underlying credit quality,
while progressing our cost actions to improve future efficiency. Close
Brothers Asset Management delivered strong net inflows, although Winterflood's
performance remained impacted by unfavourable market conditions.
The FCA's review of historical motor finance commission arrangements announced
in January introduced significant uncertainty for the group. Against this
backdrop, our top priority has been to further strengthen our capital position
and protect our valuable franchise, whilst continuing to support our nearly
three million customers, including c.350,000 SME businesses, by offering them
borrowing capacity to acquire essential assets.
Notwithstanding this uncertainty, we have made significant progress in
enhancing our business and customer offering over the year. We have written
healthy levels of new business as demand from customers has remained strong;
we acquired Close Brothers Motor Finance in Ireland and are re-establishing
our presence in this strategic market; and we have made key strategic hires
across our business franchise, as we further develop our capabilities. We have
also taken this opportunity to review many of our processes and implement ways
we can operate more efficiently in the future. This continued focus on
protecting and sustaining our franchise means we are well positioned to take
advantage of future opportunities.
Financial Performance
Statutory operating profit before tax increased 27% to £142.0 million (2023:
£112.0 million). This was primarily driven by the non-recurrence of the
significant impairment charges related to Novitas in the prior year. On an
adjusted basis, excluding the impact from certain items which do not reflect
the underlying performance of our business, the group's operating profit
increased 50% to £170.6 million, as the significant decrease in impairment
charges and 1% growth in income more than offset a 10% growth in adjusted
operating expenses.
In Banking, adjusted operating profit increased materially to £205.4 million,
driven by loan book growth of 6%, a strong net interest margin of 7.4%, and a
stable credit performance when excluding the non-recurrence of prior year
impairment charges related to Novitas. Banking costs increased by 8%, at the
lower end of the 8-10% cost growth guidance range outlined previously, driven
mainly by inflationary-related increases in staff costs, higher regulatory
compliance and assurance expenses and continued investment, partly offset by
the progress we have made on our tactical and strategic cost management
initiatives. We have made good progress on the delivery of the cost management
initiatives previously announced, such as through our technology
transformation programme, vacating our Wimbledon Bridge House office and
through the review of our workforce. We recognise that there is more we can
achieve in enhancing our future cost efficiency. Our focus remains on
delivering annualised cost savings of c.£20 million, with the full benefit
expected in the 2026 financial year.
CBAM delivered strong net inflows of 8%, although profit reduced, as income
growth was more than offset by costs primarily related to wage inflation and
new hires to support future growth.
Winterflood's performance remained impacted by lower trading income resulting
from continued weakness in investor appetite and market uncertainty, with an
operating loss of £1.7 million after incurring one-off dual-running property
costs of c.£3 million. WBS continued to see good momentum, with income rising
17% to £17.3 million and a 21% increase in AuA to £15.6 billion.
Our capital position was strong, with our CET1 capital ratio at 12.8% (31 July
2023: 13.3%), significantly above our applicable requirement of 9.7%. Total
funding increased 5% to £13.0 billion (31 July 2023: £12.4 billion), with
36% growth in our retail deposit base, demonstrating the strength of our
Savings proposition. We maintained our prudent liquidity position, with our
Liquidity Coverage Ratio over 1,000%, substantially exceeding regulatory
requirements.
Continued Uncertainty Arising from the FCA's Review of the Motor Finance
Industry
With respect to the FCA's review of discretionary commission arrangements in
the motor finance market prior to the 2021 ban on these models, on 30 July
2024, the FCA announced that it now aims to set out next steps by the end of
May 2025, rather than by September 2024 as previously expected. There remains
significant uncertainty for the industry and the group regarding any potential
remedial action as a result of the review. Close Brothers Motor Finance
("CBMF") has operated in the motor finance market for over three decades,
during which we have sought to comply with the relevant regulatory
requirements. There are a range of possible outcomes and we remain focused on
further strengthening the group's capital position, with the priority of
protecting and sustaining our valuable franchise.
We have a strong long-term dividend track record and the decision taken in
February 2024 not to pay a dividend for the 2024 financial year was not made
lightly. The reinstatement of dividends in 2025 and beyond will be reviewed
once the FCA has concluded its process and any financial consequences for the
group have been assessed.
As previously announced, we are implementing management actions which,
combined with the decision not to pay a dividend in the 2024 financial year,
have the potential to strengthen the group's available CET1 capital by
approximately £400 million by the end of the 2025 financial year.
We have made significant progress against these management actions. Whilst the
demand from customers has remained strong, we have been selectively growing
our loan book to optimise risk weighted assets, alongside working diligently
to find alternatives for writing further business with a lower capital
consumption. Whilst we have written c.£8 billion of new business in the 2024
financial year, we estimate that at least c.£570 million in additional loans
meeting our credit and pricing requirements could have been underwritten in
the current environment. Approximately £220 million of these loans would have
been drawn in the year. While this is disappointing, we are confident that we
will be well positioned to capture this demand and accelerate the growth of
our loan book as soon as feasible. Additionally, we have concluded our work in
preparation for a significant risk transfer of assets through motor finance
securitisation and are ready to launch a transaction at the optimal time.
We have continued to deliver against the additional cost management
initiatives previously announced. These initiatives aim to generate annualised
savings of c.£20 million, reaching the full run rate by the end of the 2025
financial year. We are progressing a range of other potential management
actions, as previously outlined, which include potential significant risk
transfer of other portfolios through securitisation and a continued review of
our business portfolios and other tactical actions.
Following a comprehensive strategic review, we are pleased to announce the
agreed sale of CBAM to Oaktree. The transaction is expected to increase the
group's common equity tier 1 capital ratio by approximately 100 basis points
on a pro forma basis, marking significant progress towards the capital plan we
outlined in March 2024. Additionally, the agreed sale represents competitive
value for our shareholders and allows us to simplify the group, focusing on
our core lending business. CBAM has delivered impressive growth over the past
years and has developed into a strong franchise. Under the new ownership, it
will benefit from additional resources to accelerate its growth trajectory. I
would like to thank our CBAM colleagues for their dedication, professionalism
and exceptional service to our clients.
Outlook
We remain committed to executing our strategy and protecting our valuable
franchise. We are making significant progress against the initiatives
previously outlined to further strengthen our capital position.
The strengths of our model, being our long-term relationships, the deep
expertise of our people and our customer-centric approach, leave us well
placed to navigate the current uncertainty. We continue to be encouraged by
the strength of demand in our Banking business and see good growth prospects
for our core business.
Adrian Sainsbury
Chief Executive
FCA's Review of Historical Motor Finance Commission Arrangements
On 11 January 2024, the FCA announced it would use its powers under section
166 of the Financial Services and Markets Act 2000 to review historical motor
finance commission arrangements and sales at several firms, following high
numbers of complaints from customers. The review followed the Financial
Ombudsman Service ("FOS") publication of its first two decisions upholding
customer complaints relating to discretionary commission arrangements ("DCAs")
against two other lenders in the market.
The FCA issued an update to the market on 30 July 2024. In the announcement,
it stated that due to delays in collecting and reviewing historical data, as
well as relevant ongoing litigation, it would not be able to set out the next
steps of its review by 24 September 2024 as it originally planned. The FCA now
aims to set out next steps by the end of May 2025.
Overview of Commission Models Operated(1)
CBMF has operated in the motor finance market for over three decades, during
which we have sought to comply with the relevant regulatory requirements.
Prior to 2016, CBMF operated an Upward Difference in Charges ("DIC") model.
This allowed the dealer or broker full discretion over the customer rate and
the commission earned on point-of-sale finance, subject to a hard cap on the
amount of commission. Under the DIC model, commission, if any, was paid as a
percentage of the total interest paid by the customer.
From 2016, CBMF introduced a Downward Scaled Commission ("DSM") model, which
capped both the interest charged to the customer and commission paid to the
dealer or broker. This meant that CBMF set the headline rate for the customer
and the dealers could only reduce this by decreasing their level of
commission. Under the DSM model, commission, if any, was paid as a percentage
of the loan size.
From 2021 onwards, CBMF introduced a Risk Adjusted Pricing Model which set the
rate for the customer and adjusted the rate according to the customer risk
profile. Dealer discretion was removed entirely. Under the Risk Adjusted
Pricing Model, commission, if any, is paid as a fixed percentage of the loan
size.
All historical models included a "hard cap" on the commission amount paid to
the broker or dealer. Commission disclosures were also reviewed and enhanced,
as required, over time.
1. For simplicity, dates shown above assume transition when substantially
complete.
Impact on Close Brothers
The FCA review is progressing to determine whether there has been
industry-wide failure to comply with regulatory requirements which has caused
customers harm and, if so, whether it needs to take any actions. Based on the
status at the end of the financial year and in accordance with the relevant
accounting standards, the board has concluded that no legal or constructive
obligation exists and it is currently not required or appropriate to recognise
a provision at 31 July 2024 in relation to this matter. The FCA has indicated
there could be a range of outcomes, with one potential outcome being an
industry-wide consumer redress scheme. On 30 July 2024, the FCA indicated
that, while no final decisions have been made, it is more likely than when it
started its review that some kind of redress mechanism may be necessary. The
estimated impact of any redress scheme, if required, is highly dependent on a
number of factors including, for example, the time period covered; the DCA
models impacted (the group operated a number of different models during the
period under review); appropriate reference commission rates set for any
redress; and response rates to any redress scheme. As such, the timing, scope
and quantum of the potential financial impact on the group, if any, remain
uncertain and cannot be reliably estimated at present. In addition, it is not
currently practicable to estimate or disclose any potential financial impact
arising from this issue.
The group is subject to a number of claims through the courts regarding
historical motor finance commission arrangements. One of these, initially
determined in the group's favour, was appealed by the claimant and the case
was heard in early July 2024 by the Court of Appeal together with two separate
claims made against another lender. The Court's decision is now awaited.
As of 31 August 2024, where individual cases were adjudicated in County Court,
the courts found that there was no demonstrable customer harm and hence no
compensation to pay in the majority of decided cases for Close Brothers.
Nevertheless, there have been only a limited number of adjudicated cases at
this time.
There are also a number of complaints that have been referred to the FOS for a
determination. To date, no final FOS decisions have been made upholding
complaints against Close Brothers. On 9 May 2024, the FOS announced that it
would be unlikely to be able to issue final decisions on motor commission
cases for some time due to the potential impact of a judicial review
proceeding started by another lender in relation to one of its January 2024
decisions and also the outstanding Court of Appeal decisions.
Since the announcement by the FCA of its review of historical motor finance
commission arrangements in January 2024, we have seen a further increase in
enquiries and complaints. We have also taken steps to enhance our operational
capabilities to respond to increased complaints volumes and potential changes
such as the implementation of a consumer redress scheme, if required. This
financial year, we have incurred £6.9 million of costs associated with
complaints handling and other operational costs associated with the FCA's
review. This included increased resourcing in our complaints and legal teams,
along with associated investments in data, systems and business processes.
These costs are lower than our previous estimate of c.£10 million as we
remain focused on mitigating the impact on resource expenses through
outsourcing and deployment of automated solutions to assist in triaging new
complaints, improving our processing speed. In the 2025 financial year, we
currently estimate these costs will be between £10-15 million. We continue to
monitor the impact on our current handling of these complaints and are
following the playbooks in place to ensure we have the appropriate resources
to respond effectively.
Further Strengthening our Capital Base to Continue to Support Customers and
Protect our Valuable Franchise
While there is no certainty regarding any potential financial impact as a
result of the FCA's review, the board recognises the need to plan for a range
of possible outcomes. It is a long-standing priority of the group to maintain
a strong balance sheet and prudent approach to managing its financial
resources. To that end, the board considers it prudent for the group to
further strengthen its capital position, balancing this with the need to
continue supporting our customers and protecting our business franchise.
In March 2024, we announced a range of management actions which have the
potential to strengthen the group's available CET1 capital by approximately
£400 million by the end of the 2025 financial year (when compared to the
group's projected CET1 capital ratio for 31 July 2025 at the time of our Half
Year results announcement, prior to any management actions). We are now
providing an update on the progress made since then.
We have retained c.£100 million of CET1 capital in the 2024 financial year as
a result of the group's previously announced decision not to pay a dividend
for the 2024 financial year.
We announced steps to further strengthen the group's capital position by
optimising risk weighted assets ("RWAs"). We plan to reduce RWA growth by
approximately £1 billion through a combination of selective loan book growth,
partnerships and significant risk transfer of assets related to our Motor
Finance business through securitisations. The combination of these actions
could release c.£100 million of CET1 capital by the end of the 2025 financial
year. In the second half, we grew the loan book selectively while maintaining
support for our existing customers, with the impact reflected in the lower
loan book growth of 2% in the six months since 31 January 2024. We currently
plan for low single-digit percentage growth in the loan book in the 2025
financial year, with the associated impact to be reflected in the group's CET1
capital ratio over the course of the 2025 financial year. We have concluded
the work in preparation for a significant risk transfer of assets in Motor
Finance. Subject to market conditions, we are ready to launch a transaction at
the optimal time to maximise the peak capital benefit, aligned to the revised
timetable for the FCA's work in the motor finance market.
We have progressed on the delivery of the additional cost management
initiatives previously announced to generate annualised savings of c.£20
million, reaching the full run rate by the end of the 2025 financial year.
These initiatives include the continued rationalisation of third-party
suppliers and simplification of our property footprint, as well as adjustments
to our workforce to drive increased efficiency. We have partnered with a
leading technology services and consulting company to help us drive our
technology transformation programme, which has led to a headcount reduction of
c.100 as we made increased use of outsourcing and the removal of over 115 IT
applications to date. We have served notice to vacate our Wimbledon Bridge
House office and establish a more suitable London footprint to meet the needs
of the business, resulting in the removal of approximately 800 desks. As a
result of the review of our workforce, we have incurred £3.1 million of
restructuring costs, primarily relating to redundancy and associated costs.
We continue to progress a range of other potential management actions which
include potential risk transfer of other portfolios through securitisation and
a continued review of our business portfolios and other tactical actions. On
19 September 2024, the group announced that it entered into an agreement to
sell CBAM to Oaktree. The transaction is expected to increase the group's
common equity tier 1 capital by approximately £100 million, further
strengthening our capital position.
Additionally, as our business continues to organically generate capital
through 2025, the retention of earnings could potentially strengthen the
group's capital position by a further £100 million, if required.
Subject to the execution of these management actions and capital generation,
we have the potential to increase the group's CET1 capital ratio to between
14% and 15% at the end of the 2025 financial year (excluding any potential
redress or provision related to the FCA's review of historical motor finance
commission arrangements).
While there remains considerable uncertainty regarding the specifics of any
potential redress scheme, if required, as well as its timing, the board is
confident that these actions leave the group well positioned to navigate the
current uncertain environment.
Financial Overview
Summary Group Income Statement(1)
2024 2023 Change
£ million £ million %
Operating income 944.2 932.6 1
Adjusted operating expenses (674.8) (615.0) 10
Impairment losses on financial assets (98.8) (204.1) (52)
Adjusted operating profit 170.6 113.5 50
Banking 205.4 120.1 71
Banking excluding Novitas 205.6 226.7 (9)
Commercial 89.5 15.9 463
Of which: Novitas (0.2) (106.6) (100)
Retail 37.9 34.7 9
Property 78.0 69.5 12
Asset Management 12.2 15.9 (23)
Winterflood (1.7) 3.5 (148)
Group (central functions) (45.3) (26.0) 74
Adjusting items:
Complaints handling and other operational costs associated with the FCA's (6.9) - -
review of historical motor finance commission arrangements
Provision in relation to the BiFD review (17.2) - -
Restructuring costs (3.1) - -
Amortisation of intangible assets on acquisition (1.4) (1.5) (7)
Statutory operating profit before tax 142.0 112.0 27
Tax (41.6) (30.9) 35
Profit after tax 100.4 81.1 24
Profit attributable to shareholders 100.4 81.1 24
Adjusted basic earnings per share(2) 76.1p 55.1p
Basic earnings per share(2) 59.7p 54.3p
Ordinary dividend per share - 67.5p
Return on opening equity 6.9% 5.0%
Return on average tangible equity 8.3% 5.9%
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 "Segmental analysis".
2. Refer to Note 4 "Earnings per Share" for the calculation of basic and adjusted
earnings per share.
Financial Performance
Statutory Operating Profit
Statutory operating profit before tax increased 27% to £142.0 million (2023:
£112.0 million), reflecting higher profitability in the Banking division,
driven primarily by the non-recurrence of the significant impairment charges
incurred in relation to Novitas in the prior year. This was partly offset by
costs associated with the handling of complaints and other operational costs
associated with the FCA's review of historical motor finance commission
arrangements, a provision recognised in relation to the Past Business Review
and expected customer compensation in respect of forbearance related to motor
finance lending following discussions with the FCA in relation to its
market-wide review of Borrowers in Financial Difficulty ("BiFD"), and an
increase in Group (central functions) net expenses.
Adjusted Operating Profit
Adjusted operating profit increased 50% to £170.6 million (2023: £113.5
million), as the significant decrease in impairment charges and 1% growth in
income offset a 10% growth in adjusted operating expenses. Excluding Novitas,
adjusted operating profit decreased to £170.8 million (2023: £220.1
million).
Banking adjusted operating profit increased to £205.4 million (2023: £120.1
million), with the prior year including an impairment charge of £116.8
million taken in relation to Novitas. Excluding Novitas, Banking adjusted
operating profit decreased to £205.6 million (2023: £226.7 million) as
higher income from loan book growth was more than offset by cost growth in
line with guidance. In the Asset Management division, adjusted operating
profit declined by 23% to £12.2 million (2023: £15.9 million) as higher
income was offset by an increase in costs as we invested in new hires in our
bespoke investment management business. Winterflood delivered an operating
loss of £1.7 million (2023: operating profit of £3.5 million), primarily
reflecting lower trading income in a challenging market environment and
one-off dual-running property costs. Group (central functions) net expenses,
which include the central functions such as finance, legal and compliance,
risk and human resources, increased to £45.3 million (H1 2024: £21.0
million, H2 2024: £24.3 million, 2023: £26.0 million), driven primarily by
interest charges of £19.4 million (2023: £2.5 million) incurred on the
group's £250 million senior unsecured bond issued in June 2023 at an interest
rate of 7.75% and an increase in professional fees and expenses associated
with the potential impact on the group of the FCA's review of historical motor
finance commission arrangements.
We expect Group (central functions) net expenses to increase to between £55
million and £60 million in the 2025 financial year, primarily reflecting an
elevated level of professional fees and expenses associated with the potential
impact on the group of the FCA's review of historical motor finance commission
arrangements and its revised timetable, as well as a decline in interest
income received from the proceeds of the group bond being placed on deposit
with the reduction in interest rates.
Return on opening equity increased to 6.9% (2023: 5.0%) and return on average
tangible equity increased to 8.3% (2023: 5.9%).
Operating Income
Operating income increased 1% to £944.2 million (2023: £932.6 million), with
growth in both Asset Management and Banking offsetting a decline in
Winterflood and higher interest expenses from the group senior unsecured bond.
Income in the Banking division increased 2%. This reflected good loan book
growth and strong, albeit reduced, margins as we maintained our focus on
pricing discipline and optimising funding costs in the higher rate
environment, although experienced margin pressures and lower activity-driven
fee income in the Commercial businesses. As previously highlighted, Banking
income in the prior year benefited from one-off items related to movements
through profit and loss from derivatives outside of a hedge accounting
relationship and Novitas income. Excluding the impact of these items, Banking
income grew 4%. Income in Asset Management increased 9%, driven by higher
investment management income, reflecting growth in AuM delivered by our
bespoke investment management business. Income in Winterflood reduced 3% as
the decline in trading income more than offset growth in WBS. Income decreased
in the Group (central functions) to £(11.5) million (2023: £(1.3) million),
driven by interest charges incurred on the group's £250 million senior
unsecured bond issued in June 2023 at an interest rate of 7.75%, partly offset
by interest income received from the proceeds being placed on deposit.
Operating Expenses
Adjusted operating expenses rose 10% to £674.8 million (2023: £615.0
million), primarily driven by increased staff costs across the group, as well
as continued investment in Banking. In the Banking division, costs grew 8%, at
the lower end of the guidance provided, as we incurred inflationary-related
increases in staff costs, higher regulatory compliance and assurance expenses
and continued to invest in our strategic programmes. We also made good
progress on our strategic and tactical cost management initiatives as we
implement measures to deliver annualised cost savings of c.£20 million,
reaching the full run rate by the end of the 2025 financial year, with the
total benefit in the 2026 financial year. Costs rose 13% in Asset Management,
mainly reflecting wage inflation and new hires to support future growth.
Winterflood's costs increased 4%, primarily reflecting one-off costs incurred
by relocating premises. Expenses in the Group (central functions) rose to
£33.8 million (2023: £24.7 million), reflecting an increase in professional
fees and expenses associated with the potential impact on the group of the
FCA's review of historical motor finance commission arrangements, as well as
performance-driven compensation and share-based awards.
Overall, the group's expense/income ratio increased to 71% (2023: 66%), whilst
the compensation ratio increased to 41% (2023: 37%), reflecting
inflation-related wage increases and new hires in CBAM.
Impairment Charges and IFRS 9 Provisioning
Impairment charges decreased significantly to £98.8 million (2023: £204.1
million), corresponding to a bad debt ratio of 1.0% (2023: 2.2%) with the
prior year including a charge of £116.8 million in relation to Novitas.
Overall, provision coverage increased to 4.3% (31 July 2023: 3.9%).
Excluding Novitas, impairment charges rose 6% to £92.4 million (2023: £87.3
million), mainly driven by loan book growth and the ongoing review of
provisions and coverage across our loan portfolios, partly offset by
improvements to the macroeconomic outlook. The bad debt ratio, excluding
Novitas, remained stable at 0.9% (2023: 0.9%) and remains below our long-term
bad debt ratio of 1.2%. The coverage ratio increased slightly to 2.3% (31 July
2023: 2.1%), excluding Novitas.
Since the 2023 financial year end, we have updated the macroeconomic scenarios
to reflect the latest available information regarding the macroeconomic
environment and improved outlook, although the weightings assigned to them
remain unchanged. At 31 July 2024, there was a 30% weighting to the strong
upside, 32.5% weighting to the baseline, 20% weighting to the mild downside,
10.5% weighting to the moderate downside and 7% weighting to the protracted
downside.
Whilst we have not seen a significant impact on credit performance, we
continue to monitor closely the evolving impacts of inflation and cost of
living on our customers. We remain confident in the quality of our loan book,
which is predominantly secured or structurally protected, prudently
underwritten, diverse, and supported by the deep expertise of our people.
Looking forward, we expect the bad debt ratio for the 2025 financial year to
remain below our long-term average of 1.2%.
Adjusting Items
We recognised £28.6 million of adjusting items in the 2024 financial year, of
which £2.9 million were incurred in the first half (consisting of £0.6
million of amortisation of intangible assets on acquisition and £2.3 million
relating to complaints handling expenses and other operational costs
associated with the FCA's review of historical motor finance commission
arrangements, which have been recategorised as an adjusting item).
We incurred £6.9 million of complaints handling expenses and other
operational costs associated with the FCA's review of historical motor finance
commission arrangements.
As highlighted in the Q3 trading update, following discussions with the FCA in
relation to its market-wide review of Borrowers in Financial Difficulty, which
assessed forbearance and related practices, the group has conducted a Past
Business Review of customer forbearance related to its motor finance lending.
This has now concluded and a provision of £17.2 million has been recognised
in respect of the review and expected customer compensation. We have commenced
making compensation payments to customers, with the resulting remediation
programme expected to be materially complete this calendar year. This
provision, which should sufficiently address the outcomes of the review, is
higher than previously estimated, reflecting our decision to both widen the
population of in-scope customers and increase the assumptions for average
distress and inconvenience payments, in line with our commitment to achieving
fair customer outcomes.
In addition, we incurred £3.1 million of restructuring costs in the 2024
financial year primarily relating to redundancy and associated costs. We have
made good progress on streamlining the workforce, which has been achieved
through the consolidation of roles across our businesses and functions, as
well as through the management of vacancies.
Tax Expense
The tax expense was £41.6 million (2023: £30.9 million), which corresponds
to an effective tax rate of 29.3% (2023: 27.6%).
The standard UK corporation tax rate for the financial year is 25.0% (2023:
21.0%). The effective tax rate is above the UK corporation tax rate primarily
due to disallowable expenditure, including expected customer compensation
following the BiFD review, partly offset by tax relief from the Additional
Tier 1 ("AT1") securities coupon payments. An additional banking surcharge of
3% (2023: 6.3%) applies to banking company profits as defined in legislation,
but only above a certain amount, resulting in a nil (2023: 5.5%) surcharge
impact.
Earnings Per Share
Adjusted basic earnings per share ("EPS") increased to 76.1p (2023: 55.1p) and
basic EPS increased to 59.7p (2023: 54.3p). Both the adjusted and basic EPS
calculation include the payment of the coupon related to the Fixed Rate
Resetting AT1 Perpetual Subordinated Contingent Convertible Securities, at an
annual rate of 11.125%, on 29 May 2024. The associated coupon is due on 29 May
and 29 November of each year, with any AT1 coupons paid deducted from retained
earnings, reducing the profit attributable to ordinary shareholders.
Dividend
Given the significant uncertainty regarding the outcome of the FCA's review of
historical motor finance commission arrangements and any potential financial
impact as a result, the board has considered it prudent for the group to
further strengthen its capital position, while supporting our customers and
business franchise. Therefore, as announced on 15 February 2024, the group
will not pay a dividend on its ordinary shares for the 2024 financial year.
The reinstatement of dividends in the 2025 financial year and beyond will be
reviewed once the FCA has concluded its process and any financial consequences
for the group have been assessed.
Summary Group Balance Sheet
31 July 2024 31 July 2023
£ million £ million
Loans and advances to customers and operating lease assets(1) 10,098.7 9,526.2
Treasury assets(2) 2,300.9 2,229.4
Market-making assets(3) 691.8 787.6
Other assets 989.4 1,007.1
Total assets 14,080.8 13,550.3
Deposits by customers 8,693.6 7,724.5
Borrowings(4) 2,339.2 2,839.4
Market-making liabilities(3) 631.6 700.7
Other liabilities 573.9 640.8
Total liabilities 12,238.3 11,905.4
Equity(5) 1,842.5 1,644.9
Total liabilities and equity 14,080.8 13,550.3
1. Includes operating lease assets of £267.9 million (31 July 2023: £271.2
million).
2. Treasury assets comprise cash and balances at central banks and debt
securities held to support the Banking division.
3. Market-making assets and liabilities comprise settlement balances, long and
short trading positions and loans to or from money brokers.
4. Borrowings comprise debt securities in issue, loans and overdrafts from banks
and subordinated loan capital.
5. Equity includes the group's £200.0 million Fixed Rate Reset Perpetual
Subordinated Contingent Convertible Securities (AT1 securities), net of
transaction costs, which are classified as an equity instrument under IAS 32.
The group maintained a strong balance sheet and a prudent approach to managing
its financial resources. The fundamental structure of the balance sheet
remains unchanged, with most of the assets and liabilities relating to our
Banking activities. Loans and advances make up the majority of assets. Other
items on the balance sheet include treasury assets held for liquidity
purposes, and settlement balances in Winterflood. Intangibles, property, plant
and equipment, and prepayments are included as other assets. Liabilities are
predominantly made up of customer deposits and both secured and unsecured
borrowings to fund the loan book.
Total assets increased 4% to £14.1 billion (31 July 2023: £13.6 billion),
mainly reflecting growth in the loan book and higher Treasury assets. Total
liabilities were 3% higher at £12.2 billion (31 July 2023: £11.9 billion),
driven primarily by higher customer deposits, partly offset by a reduction in
borrowings. Both market-making assets and liabilities, which related to
trading activity at Winterflood, were lower due to a decrease in value traded
at the end of the year.
Total equity increased 12% to £1.8 billion (31 July 2023: £1.6 billion),
primarily reflecting the issuance of AT1 securities net of transaction costs
and profit in the year, which was partially offset by dividend payments for
the 2023 financial year of £67.1 million (2023: £99.1 million) and the AT1
coupon payment of £11.1 million (2023: £nil). The group's return on assets
increased to 0.8% (2023: 0.6%).
Group Capital
31 July 2024 31 July 2023
£ million £ million
Common Equity Tier 1 capital 1,374.8 1,310.8
Tier 1 capital 1,574.8 1,310.8
Total capital 1,774.8 1,510.8
Risk weighted assets 10,701.2 9,847.6
Common Equity Tier 1 capital ratio (transitional) 12.8% 13.3%
Tier 1 capital ratio (transitional) 14.7% 13.3%
Total capital ratio (transitional) 16.6% 15.3%
Leverage ratio(1) 12.7% 11.4%
1. The leverage ratio is calculated as tier 1 capital as a percentage of total
balance sheet assets excluding central bank claims, adjusting for certain
capital deductions, including intangible assets, and off-balance sheet
exposures, in line with the UK leverage framework under the UK Capital
Requirements Regulation.
Movements in Capital and Other Regulatory Metrics
The CET1 capital ratio reduced from 13.3% to 12.8%, mainly driven by loan book
growth (-c.100bps), a decrease in IFRS 9 transitional arrangements (-c.20bps),
Bluestone Motor Finance (Ireland) DAC acquisition (-c.20bps) and AT1 coupon
(-c.10bps). This was partly offset by profits for the current financial year
(c.90bps).
CET1 capital increased 5% to £1,374.8 million (31 July 2023: £1,310.8
million), mainly driven by £100.4 million of profits, partly offset by the
dividends paid and foreseen related to the AT1 coupon of £15.0 million and a
decrease in the transitional IFRS 9 add-back to capital of £19.7 million.
Tier 1 capital increased 20% to £1,574.8 million (31 July 2023: £1,310.8
million), driven by the issuance of the group's inaugural AT1 in a £200
million transaction to optimise the capital structure and provide further
flexibility to grow the business. The transaction strengthened the regulatory
capital position and was in line with the group's strategy and capital
management framework.
Total capital increased 17% to £1,774.8 million (31 July 2023: £1,510.8
million), primarily reflecting the AT1 issuance.
RWAs increased 9% to £10.7 billion (31 July 2023: £9.8 billion), driven by
loan book growth (c.£790 million) primarily in Commercial and Property, the
acquisition of Bluestone Motor Finance (Ireland) DAC (c.£120 million), and a
decrease in operational risk RWAs (c.£40 million), reflecting a reduction in
average income in Winterflood partly offset by loan book growth.
As a result, CET1, tier 1 and total capital ratios were 12.8% (31 July 2023:
13.3%), 14.7% (31 July 2023: 13.3%) and 16.6% (31 July 2023: 15.3%),
respectively.
The applicable CET1, tier 1 and total capital ratio requirements, including
Capital Requirements Directive ("CRD") buffers but excluding any applicable
Prudential Regulation Authority ("PRA") buffer, were 9.7%, 11.4% and 13.7%,
respectively, at 31 July 2024. Accordingly, we continue to have headroom
significantly above the applicable requirements of c.310bps in the CET1
capital ratio, c.330bps in the tier 1 capital ratio and c.290bps in the total
capital ratio.
The group applies IFRS 9 regulatory transitional arrangements which allow
banks to add back to their capital base a proportion of the IFRS 9 impairment
charges during the transitional period. Our capital ratios are presented on a
transitional basis after the application of these arrangements. On a fully
loaded basis, without their application, the CET1, tier 1 and total capital
ratios would be 12.7%, 14.6% and 16.5%, respectively.
The leverage ratio, which is a transparent measure of capital strength not
affected by risk weightings, increased to 12.7% (31 July 2023: 11.4%)
primarily due to the increase in tier 1 capital.
The PRA Policy Statement PS 9/24 Implementation of the Basel 3.1 standards
near-final part 2 was published on 12 September 2024, with an implementation
date of 1 January 2026, six months later than previously anticipated. The
majority of rules applicable to the group remain unchanged, including the
proposed removal of the small and medium-sized enterprises ("SME") supporting
factor, new conversion factor for cancellable facilities and new market risk
rules. As a result, we continue to expect implementation to result in an
increase of up to c.10% in the group's RWAs calculated under the standardised
approach. However, the PRA has proposed to apply an SME lending adjustment as
part of Pillar 2a, to ensure that the removal of the SME support factor does
not result in an increase in overall capital requirements for SME lending.
Whilst this adjustment is subject to PRA confirmation and a resulting
restatement of the group's total capital requirements, we would reasonably
expect the UK implementation of Basel 3.1 to have a less significant impact on
the group's capital headroom position than initially anticipated.
As outlined at the Half Year 2024 results, following our application (in
December 2020) to transition to the Internal Ratings Based ("IRB") approach,
the application has successfully moved to Phase 2 of the process and
engagement with the regulator continues. Our Motor Finance, Property Finance
and Energy portfolios, where the use of models is most mature, were submitted
with our initial application.
Further Strengthening our Capital Position
In March 2024, we announced a range of management actions which have the
potential to strengthen the group's available CET1 capital by approximately
£400 million by the end of the 2025 financial year (when compared to the
group's projected CET1 capital ratio for 31 July 2025 at the time of our Half
Year results announcement, prior to any management actions). While there
remains considerable uncertainty regarding the specifics of any potential
redress scheme, if required, as well as its timing, the board is confident
that these actions leave the group well positioned to navigate the current
uncertainty.
Subject to the execution of these management actions and capital generation,
we have the potential to increase the group's CET1 capital ratio to between
14% and 15% at the end of the 2025 financial year (excluding any potential
redress or provision related to the FCA's review of historical motor finance
commission arrangements). Over the medium term, we remain committed to our
previous CET1 capital target range of 12% to 13%.
Group Funding(1)
31 July 2024 31 July 2023
£ million £ million
Customer deposits 8,693.6 7,724.5
Secured funding 1,205.1 1,676.6
Unsecured funding(2) 1,219.1 1,308.6
Equity 1,842.5 1,644.9
Total available funding(3) 12,960.3 12,354.6
Total funding as a percentage of loan book(4) 128% 130%
Average maturity of funding allocated to loan book(5) 20 months 21 months
1. Numbers relate to core funding and exclude working capital facilities at the
business level.
2. Unsecured funding excludes £55.7 million (31 July 2023: £44.3 million) of
non-facility overdrafts included in borrowings and includes £140.0 million
(31 July 2023: £190.0 million) of undrawn facilities.
3. Includes £250 million of funds raised via a senior unsecured bond with a
five-year tenor by Close Brothers Group plc, the group's holding company, in
June 2023, with proceeds currently used for general corporate purposes.
4. Total funding as a percentage of loan book includes £267.9 million (31 July
2023: £271.2 million) of operating lease assets in the loan book figure.
5. Average maturity of total available funding, excluding equity and funding held
for liquidity purposes.
Our Treasury function is focused on managing funding and liquidity to support
the Banking businesses, as well as interest rate risk.
Our conservative approach to funding is based on the principle of "borrow
long, lend short", with a spread of maturities over the medium and longer
term, comfortably ahead of a shorter average loan book maturity. We have
maintained a prudent maturity profile, with the average maturity of funding
allocated to the loan book at 20 months (31 July 2023: 21 months), ahead of
the average loan book maturity at 16 months (31 July 2023: 16 months).
Our funding draws on a wide range of wholesale and deposit markets including
several public debt securities at both group and operating company level, as
well as public and private secured funding programmes and a diverse mix of
customer deposits. This broad funding base reduces concentration risk and
ensures we can adapt our position through the cycle.
Total funding increased by 5% over the year to £13.0 billion (31 July 2023:
£12.4 billion), which accounted for 128% (31 July 2023: 130%) of the loan
book at the balance sheet date, as we actively sought to grow our customer
deposit base over the year. The average cost of funding in Banking increased
to 5.5% (2023: 3.2%) reflecting the stabilisation of interest rates at a
higher level and the corresponding impact on deposit pricing pressure. With
macroeconomic indicators showing improvement in the second half of the
financial year, the Bank of England base rate cut in August 2024 and further
expectations of interest rate reductions, the pressure on cost of funding has
begun to ease in recent months. We are well positioned to continue benefiting
from our diverse funding base.
Customer deposits increased 13% to £8.7 billion (31 July 2023: £7.7
billion). Of this, non-retail deposits decreased 15% to £3.0 billion (31 July
2023: £3.5 billion) and retail deposits increased by 36% to £5.7 billion (31
July 2023: £4.2 billion), as we actively sought to grow our retail deposit
base and product offering. In line with our prudent and conservative approach
to funding, our deposits are predominantly term, with only 8% of total
deposits available on demand and over 65% having at least three months to
maturity. At 31 July 2024, approximately 86% of retail deposits were protected
by the Financial Services Compensation Scheme.
Secured funding decreased 28% to £1.2 billion (31 July 2023: £1.7 billion),
with our fifth public Motor Finance securitisation completed in November 2023
more than offset by a £250 million repayment related to our Motor Finance
warehouse securitisation and the repayment of £490 million of the Term
Funding Scheme for Small and Medium-sized Enterprises ("TFSME") ahead of the
scheduled maturity date. This takes our remaining drawings under the scheme to
£110 million (31 July 2023: £600 million), which will mature in October
2025, and which we expect to replace in line with our diverse funding profile,
dependent on market conditions and demand.
Unsecured funding, which includes senior unsecured and subordinated bonds and
undrawn committed revolving facilities, reduced 7% to £1.2 billion (31 July
2023: £1.3 billion).
The investment in our customer deposit platform continues to deliver tangible
benefits and provide us with scalability. Deposits held through this platform
have now grown to over £6.3 billion and we have continued to expand and
diversify our products, with Easy Access complementing our existing offering
of Notice Accounts and Fixed Rate Cash ISAs. The introduction of Easy Access
provides us access to a large potential deposit pool, with balances of c.£540
million (at 31 July 2024). We have also recently onboarded an additional
depositor aggregator partner, which has provided another avenue for us to
secure fixed retail funding. We remain focused on growing our retail funding
base from a variety of segments, further optimising our cost of funding and
maturity profile.
Our Savings business provides simple and straightforward savings products to
both individuals and businesses, whilst being committed to providing the
highest level of customer service. In the second half of the financial year,
we conducted a review aimed at enhancing operational efficiency and supporting
our retail deposit growth ambitions. As a result, our Savings business has
been integrated into the Retail business. This strategic move will leverage
established shared operations, supporting the continued expansion of the
business.
Our credit ratings continue to reflect the group's inherent financial
strength, diversified business model and consistent risk appetite. Moody's
Investors Services ("Moody's") ratings for CBG and CBL are A3/P2 and A1/P1
respectively (at 14 August 2024) with a negative outlook. Moody's ratings for
Close Brothers Group's senior unsecured and subordinated debt is A3 (at 14
August 2024). Fitch Ratings ("Fitch") Issuer Default Ratings ("IDRs") for CBG
and CBL are BBB+/F2 with a "negative outlook" (at 20 February 2024).
Group Liquidity
31 July 2024 31 July 2023
£ million £ million
Cash and balances at central banks 1,584.0 1,937.0
Sovereign and central bank debt 383.7 186.1
Supranational, sub-sovereigns and agency ("SSA") bonds 145.5 -
Covered bonds 187.7 106.3
Treasury assets 2,300.9 2,229.4
The group continues to adopt a conservative stance on liquidity, ensuring it
is comfortably ahead of both internal risk appetite and regulatory
requirements.
In light of the significant uncertainty regarding the outcome of the FCA's
review of historical motor finance commission arrangements, we have
deliberately maintained a higher level of liquidity. We have continued to
diversify our large, high quality liquid asset portfolio held mainly in cash
and government bonds. Over the year, treasury assets increased 3% to £2.3
billion (31 July 2023: £2.2 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 exceed the liquidity coverage ratio ("LCR") regulatory
requirements, with a 12-month average LCR to 31 July 2024 of 1,034% (31 July
2023: 1,143%). In addition to internal measures, we monitor funding risk based
on the CRR rules for the net stable funding ratio ("NSFR"). The four-quarter
average NSFR to 31 July 2024 was 134.4% (31 July 2023: 126.0%).
Post Balance Sheet Event
Following a comprehensive strategic review, on 19 September 2024 the group
announced that it entered into an agreement to sell CBAM to Oaktree for an
equity value of up to £200 million.
The upfront proceeds would increase the group's common equity tier 1 ("CET1")
capital ratio by approximately 100 basis points on a pro forma basis. This
calculation is based on a net asset value of £121.8 million at 31 July 2024,
a tangible net asset value of £66.1 million, and assumes an immediate
reduction in credit risk weighted assets ("RWAs") associated with the CBAM
business. It does not include any immediate reduction in operational risk RWAs
and excludes any capital impact in respect of the contingent deferred
consideration. This estimate is subject to change before completion.
The transaction is expected to complete in early 2025 calendar year and is
conditional upon receipt of certain customary regulatory approvals.
Further details of the financial impacts of the sale agreement on the group
can be found in Note 23 "Post Balance Sheet Event".
Business Review
Banking
Key Financials
2024 2023 Change
£ million £ million %
Operating income 724.9 713.8 2
Adjusted operating expenses (420.6) (389.7) 8
Impairment losses on financial assets (98.9) (204.0) (52)
Adjusted operating profit 205.4 120.1 71
Adjusted operating profit, pre provisions 304.3 324.1 (6)
Adjusting items:
Complaints handling and other operational costs associated with the FCA's (6.9) - -
review of historical motor finance commission arrangements
Provision in relation to the BiFD review (17.2) - -
Restructuring costs (3.1) - -
Amortisation of intangible assets on acquisition (0.2) (0.1) 100
Statutory operating profit 178.0 120.0 48
Net interest margin 7.4% 7.7%
Expense/income ratio 58.0% 54.6%
Bad debt ratio 1.0% 2.2%
Return on net loan book 2.1% 1.3%
Return on opening equity 10.6% 6.6%
Closing loan book and operating lease assets 10,098.7 9,526.2 6
Key Financials (Excluding Novitas)
2024 2023 Change
£ million £ million %
Operating income 713.9 694.9 3
Adjusted operating expenses (415.8) (381.0) 9
Impairment losses on financial assets (92.5) (87.2) 6
Adjusted operating profit 205.6 226.7 (9)
Adjusted operating profit, pre provisions 298.1 313.9 (5)
Net interest margin 7.3% 7.6%
Expense/income ratio 58.2% 54.8%
Bad debt ratio 0.9% 0.9%
Closing loan book and operating lease assets 10,036.3 9,466.3 6
Robust Profit Performance Reflecting our Focus on Costs and Pricing Discipline
Whilst the market backdrop was mixed in the first half of the year, with the
continued uncertainty testing the resilience of SMEs and consumers, we saw an
overall improvement in sentiment in the second part of the year as inflation
fell and interest rates peaked, with the Bank of England base rate reduced in
August 2024.
In Commercial, we have delivered good loan book growth of 6% and are starting
to benefit from the investment in our Asset Finance transformation programme.
Net interest margin has declined to 6.6%, driven by a combination of pressure
on new business margins in the higher interest rate environment, a reduction
in activity-driven fee income and a higher proportion of growth in some of our
portfolios with larger loan sizes and lower margin. Whilst the Retail business
has faced a challenging regulatory backdrop, we have remained focused on
providing excellent service for our customers and delivered a 9% increase in
adjusted operating profit. Motor Finance has continued to see good customer
demand in the UK and is rebuilding its presence in the Irish market, with the
loan book up 3%. Premium Finance has delivered a strong performance overall,
notwithstanding a 3% decline in the loan book. The Property business has had a
strong year, with profitability up 12% and the loan book at c.£2 billion, as
optimism returns to the UK property market and we continue to build customer
advocacy through our relationship-led model. This resilient performance has
been delivered notwithstanding the challenging regulatory backdrop, as we have
sought to balance supporting our customers whilst protecting our franchise.
Banking adjusted operating profit increased to £205.4 million (2023: £120.1
million), with the prior year including an impairment charge of £116.8
million in relation to Novitas. Excluding Novitas, Banking adjusted operating
profit decreased 9% to £205.6 million (2023: £226.7 million), as growth in
income, driven by good loan book growth and a strong, albeit reduced, net
interest margin, was more than offset by higher costs and an increase in
impairment charges.
On a statutory basis, operating profit increased to £178.0 million (2023:
£120.0 million), notwithstanding £27.4 million of adjusting items which
included £6.9 million of costs associated with the handling of complaints and
other operational costs associated with the FCA's review of historical motor
finance commission arrangements, including increased resourcing in our
complaints and legal teams and £3.1 million of restructuring costs. In
addition, in respect of the FCA's market-wide review of BiFD, which is focused
on providing a stronger framework for firms to protect customers facing
payment difficulties and covers matters such as affordability, forbearance and
vulnerable customers, we have conducted a Past Business Review of customer
forbearance related to motor finance lending. This was a voluntary review
undertaken with oversight from the FCA. A provision of £17.2 million has been
recognised in respect of the review and expected customer compensation. We
have commenced making compensation payments to customers, with the resulting
remediation programme expected to be materially complete this calendar year.
The loan book grew 6% over the year to £10.1 billion (31 July 2023: £9.5
billion), reflecting healthy drawdowns in Property and strong new business in
Invoice Finance, as well as good demand in Motor Finance and in Asset Finance,
driven by the Leasing business. This was partly offset by a decline in Premium
Finance and the run-off of the legacy Republic of Ireland Motor Finance loan
book. Overall, the loan book grew 4% in the first half of the year and slowed
to 2% in the second half, reflecting the selective loan book actions
identified at the Half Year 2024 results.
Excluding the businesses in run-off, Novitas and the legacy Republic of
Ireland Motor Finance business, the loan book grew 7% to £9.9 billion (31
July 2023: £9.3 billion).
Operating income increased 2% to £724.9 million (2023: £713.8 million),
reflecting good loan book growth and strong, albeit reduced, margins. As
previously highlighted, the prior year benefited from Novitas income (£19
million in 2023 versus £11 million in 2024) and movements through profit and
loss from derivatives outside of a hedge accounting relationship (£2 million
benefit in 2023 versus £5 million adverse impact in 2024). Excluding the
impact of Novitas and these movements in derivatives, operating income rose
4%, driven by loan book growth.
Whilst the net interest margin remained strong as we maintained our focus on
pricing discipline and optimising funding costs in the higher rate
environment, it decreased to 7.4% (2023: 7.7%), with c.12bps of margin
reduction reflecting the movements through profit and loss from derivatives
outside of a hedge accounting relationship and Novitas income benefiting the
prior year. Excluding the impact of these items, the net interest margin
decreased by c.16bps, primarily reflecting margin pressures and lower
activity-driven fee income in the Commercial businesses, partly offset by the
pass through of higher rates in Retail. We are well positioned to sustain the
net interest margin delivered in the second half of the 2024 financial year of
7.2%.
Adjusted operating expenses increased 8% to £420.6 million (2023: £389.7
million), driven mainly by inflationary-related increases in staff costs,
higher regulatory compliance and assurance expenses and continued investment,
partly offset by the progress we have made on our tactical and strategic cost
management initiatives. This also included £6.5 million (2023: £0.8 million)
of costs related to the acquisition, integration and running of Close Brothers
Motor Finance in Ireland, which completed in October 2023, and spend of £4.8
million (2023: £8.7 million) related to Novitas as we continue to wind down
the business. The expense/income ratio increased to 58.0% (2023: 54.6%) and
the compensation ratio rose to 32% (2023: 30%), reflecting inflation-related
wage increases.
Overall Banking cost growth was at the lower end of the 8-10% guidance range
provided at the Full Year 2023 results on a like-for-like basis, with an 8%
increase to £421.0 million (2023: £388.9 million), when including £6.9
million (2023: £nil) of costs associated with the handling of complaints and
other operational costs associated with the FCA's review of historical motor
finance commission arrangements and excluding £6.5 million (2023: £0.8
million) related to Close Brothers Motor Finance in Ireland.
Over the year, we have continued to make good progress on our strategic cost
management initiatives. Our technology transformation programme, initiated in
2023, is focused on simplifying and modernising our technology estate,
removing unnecessary cost and increasing our use of strategic partners, whilst
creating a more digitally enabled and agile IT environment that is secure,
resilient and sustainable. We have partnered with Wipro, a leading technology
services and consulting company, to help us drive our transformation. To date,
we have reduced our headcount by c.100, as we made increased use of
outsourcing, and removed over 115 IT applications.
As outlined at the Half Year 2024 results, we have also mobilised additional
cost management initiatives to support the ongoing profitability of the
business, particularly in light of the capital actions and their expected
impact on future income. These initiatives are expected to generate annualised
savings of c.£20 million, reaching the full run rate by the end of the 2025
financial year, with the total benefit in the 2026 financial year. These
include rationalising our third-party suppliers and property footprint and
adjusting our workforce to drive increased efficiency and effectiveness. In
recent months, we have served notice to vacate our Wimbledon Bridge House
office and establish a more suitable London footprint to meet the needs of the
business, resulting in the removal of approximately 800 desks.
We have incurred £3.1 million of restructuring costs, which have been
recognised as an adjusting item in the 2024 financial year, primarily relating
to redundancy and associated costs. We expect to incur £5-10 million of
restructuring costs in the 2025 financial year as we continue to implement
cost management actions to improve future efficiency.
We expect income and adjusted operating expenses growth, excluding the impact
of adjusting items which do not reflect the underlying performance of our
business, to be aligned in the 2025 financial year and to deliver positive
operating leverage in the 2026 financial year.
Impairment charges decreased significantly to £98.9 million (2023: £204.0
million), corresponding to a bad debt ratio of 1.0% (2023: 2.2%) with the
prior year including a charge of £116.8 million in relation to Novitas.
Overall, provision coverage increased to 4.3% (31 July 2023: 3.9%).
Excluding Novitas, impairment charges rose 6% to £92.5 million (2023: £87.2
million), mainly driven by loan book growth and the ongoing review of
provisions and coverage across our loan portfolios, partly offset by
improvements to the macroeconomic outlook. The bad debt ratio, excluding
Novitas, remained stable at 0.9% (2023: 0.9%) and remains below our long-term
bad debt ratio of 1.2%. The coverage ratio increased slightly to 2.3% (31 July
2023: 2.1%), excluding Novitas.
Whilst we have not seen a significant impact on credit performance, we
continue to monitor closely the evolving impacts of inflation and cost of
living on our customers. We remain confident in the quality of our loan book,
which is predominantly secured or structurally protected, prudently
underwritten, diverse, and supported by the deep expertise of our people.
Looking forward, we expect the bad debt ratio for the 2025 financial year to
remain below our long-term average.
Update on Progress Relating to Novitas
The decision was made to wind down Novitas and withdraw from the legal
services financing market following a strategic review in July 2021, which
concluded that the overall risk profile of the business was no longer
compatible with our long-term strategy and risk appetite. As announced in H1
2023, we have accelerated our efforts to resolve the issues surrounding this
business and continue to pursue formal legal action issued against one of the
After the Event ("ATE") insurers in November 2022. We are actively seeking
recovery from a second insurer and entered into a settlement with another
smaller ATE insurer in July 2023.
During the year, we recognised impairment charges of £6.4 million (2023:
£116.8 million) in relation to Novitas, primarily as a result of increased
time to recovery assumptions and legal costs associated with the insurer
disputes. While we will continue to review provisioning levels in light of
future developments, including the experienced credit performance of the book
and the outcome of the group's initiated legal action, we believe the
provisions adequately reflect the remaining risk of credit losses for the
Novitas loan book (c.£62 million net loan book at 31 July 2024).
In addition, in line with IFRS 9 requirements, a proportion of the expected
credit loss is expected to unwind, over the estimated time to recovery period,
to interest income. The group remains focused on maximising the recovery of
remaining loan balances, either through successful outcome of cases or
recourse to the customers' ATE insurers, whilst complying with its regulatory
obligations and always focusing on ensuring good customer outcomes.
Loan Book Analysis
31 July 2024 31 July 2023 Change
£ million £ million %
Commercial 5,101.6 4,821.3 6
Commercial - Excluding Novitas 5,039.2 4,761.4 6
Asset Finance(1) 3,655.4 3,481.3 5
Invoice and Speciality Finance(1) 1,446.2 1,340.0 8
Invoice and Speciality Finance - Excluding Novitas(1) 1,383.8 1,280.1 8
Retail 3,041.9 3,001.8 1
Motor Finance(2) 2,016.0 1,948.4 3
Premium Finance 1,025.9 1,053.4 (3)
Property 1,955.2 1,703.1 15
Closing loan book and operating lease assets(3) 10,098.7 9,526.2 6
Closing loan book and operating lease assets - Excluding Novitas 10,036.3 9,466.3 6
1. The Asset Finance and Invoice and Speciality Finance loan books have been
re-presented for 31 July 2023 to reflect the recategorisation of Close
Brothers Brewery Rentals ("CBBR") from Invoice and Speciality Finance to Asset
Finance.
2. The Motor Finance loan book includes £92.8 million (31 July 2023: £206.7
million) relating to the Republic of Ireland Motor Finance business, which is
in run-off following the cessation of our previous partnership in the Republic
of Ireland from 30 June 2022.
3. Includes operating lease assets of £267.9 million (31 July 2023: £271.2
million).
Good Loan Book Growth from Continued Customer Demand
The loan book grew 6% over the year to £10.1 billion (31 July 2023: £9.5
billion), reflecting healthy drawdowns in Property and strong new business in
Invoice Finance, as well as good demand in Motor Finance and in Asset Finance,
driven by the Leasing business. This was partly offset by a decline in Premium
Finance and the run-off of the legacy Republic of Ireland Motor Finance loan
book. Overall, the loan book grew 4% in the first half of the year and slowed
to 2% in the second half, reflecting the selective loan book actions
identified at the Half Year 2024 results.
Excluding the businesses in run-off, Novitas and the legacy Republic of
Ireland Motor Finance business, the loan book grew 7% to £9.9 billion (31
July 2023: £9.3 billion).
The Commercial loan book grew 6% to £5.1 billion (31 July 2023: £4.8
billion). Asset Finance delivered loan book growth of 5%, reflecting good
demand in the Leasing business particularly from the Contract Hire, Energy and
Materials Handling portfolios, notwithstanding a stabilisation in the second
half of the year. Invoice and Speciality Finance grew 8% over the year,
despite the typical seasonal decline seen in the first half, driven by strong
new business volumes and higher level of utilisations. Excluding Novitas, the
Commercial book increased 6% to £5.0 billion (31 July 2023: £4.8 billion).
The Retail loan book grew 1% to £3.0 billion (31 July 2023: £3.0 billion).
Motor Finance grew 3% as strong new business volumes in the UK Motor Finance
business more than offset the run-off of the legacy Republic of Ireland loan
book. Following the acquisition of Bluestone Motor Finance (Ireland) DAC,
which completed in October 2023, this business has been rebranded as Close
Brothers Motor Finance and had a loan book of £38.8 million at 31 July 2024.
The Premium Finance loan book contracted 3%, reflecting the competitive market
environment and marginally reduced demand from business customers in the
higher interest rate environment.
The legacy Republic of Ireland Motor Finance business accounted for 5% of the
Motor Finance loan book (31 July 2023: 11%) and 1% of the Banking loan book
(31 July 2023: 2%).
The Property loan book grew 15% as we saw healthy drawdowns from our new
business pipeline, as the market benefited from the stabilisation of interest
rates and improving market sentiment.
Whilst we remain focused on delivering disciplined growth over the medium
term, our priority in the short term is to further strengthen our capital
position through identified management actions, including selective loan book
growth. Within Commercial and Property, we are exploring the use of
partnerships and capital efficient government lending schemes. Across our
businesses, we are continuing to prioritise pricing discipline and credit
quality and are centred on optimising the allocation of capital across our
portfolio of businesses. As a result, we currently plan for low single-digit
percentage growth in the loan book for the 2025 financial year.
Banking: Commercial
2024 2023 Change
£ million £ million %
Operating income 329.6 347.8 (5)
Adjusted operating expenses (208.4) (194.4) 7
Impairment losses on financial assets (31.7) (137.5) (77)
Adjusted operating profit 89.5 15.9 463
Adjusted operating profit, pre provisions 121.2 153.4 (21)
Adjusting items:
Provision in relation to the BiFD review (0.6) - -
Restructuring costs (2.2) - -
Amortisation of intangible assets on acquisition - (0.1) (100)
Statutory operating profit 86.7 15.8 449
Net interest margin 6.6% 7.4%
Expense/income ratio 63.2% 55.9%
Bad debt ratio 0.6% 2.9%
Closing loan book and operating lease assets(1) 5,101.6 4,821.3 6
Commercial Key Metrics Excluding Novitas
2024 2023 Change
£ million £ million %
Operating income 318.6 328.9 (3)
Adjusted operating expenses (203.6) (185.7) 10
Impairment losses on financial assets (25.3) (20.7) 22
Adjusted operating profit 89.7 122.5 (27)
Adjusted operating profit, pre provisions 115.0 143.2 (20)
Net interest margin 6.5% 7.2%
Expense/income ratio 63.9% 56.5%
Bad debt ratio 0.5% 0.5%
Closing loan book and operating lease assets(1) 5,039.2 4,761.4 6
1. Operating lease assets of £267.9 million (31 July 2023: £271.2 million).
Continued Demand in Commercial, Reflecting the Diversity of our Offering
The Commercial businesses provide specialist, predominantly secured lending
principally to the SME market and include Asset Finance and Invoice and
Speciality Finance. We finance a diverse range of sectors, with Asset Finance
offering commercial asset financing, hire purchase and leasing solutions
across a broad range of assets including commercial vehicles, machine tools,
contractors' plant, printing equipment, company car fleets, energy project
finance, and aircraft and marine vessels, as well as our Vehicle Hire and
Brewery Rentals businesses. The Invoice and Speciality Finance business
provides debt factoring, invoice discounting and asset-based lending, and also
includes Novitas. As previously announced, Novitas ceased lending to new
customers in July 2021.
Whilst market uncertainty has continued over the year, we have seen the
resilience of SME businesses. Customer demand has remained relatively robust,
notwithstanding the competitive marketplace, reflecting the diversity of our
offering and the strength of our customer relationships. Our growth
initiatives continue to prove successful, with healthy new business volumes
written by both our Materials Handling and Agricultural Equipment teams and
our second syndication deal completed in Invoice Finance. We have also been
approved to lend under the UK government's Growth Guarantee Scheme, launched
in July 2024, and the Irish Growth and Sustainability Loan Scheme, which
launched in August 2024.
During the year, we completed an internal restructure and created a Broker and
Professional Solutions business to simplify and improve our offering to the
broker market.
Adjusted operating profit for Commercial increased to £89.5 million (2023:
£15.9 million), reflecting a significant decrease in impairment charges. On a
pre-provision basis, adjusted operating profit reduced 21% to £121.2 million
(2023: £153.4 million), reflecting both a decline in income and cost growth.
Excluding Novitas, adjusted operating profit decreased 27% to £89.7 million
(2023: £122.5 million).
On a statutory basis, operating profit increased to £86.7 million (2023:
£15.8 million) and includes £2.8 million of adjusting items. These primarily
relate to £2.2 million of restructuring costs and a £0.6 million provision
in relation to the Past Business Review and expected customer compensation in
respect of customer forbearance related to motor finance lending.
Operating income reduced 5% to £329.6 million (2023: £347.8 million) as loan
book growth was more than offset by pressure on new business margins and
activity-driven fee income, as well as reduction in Novitas income. The net
interest margin declined to 6.6% (2023: 7.4%), reflecting both lower fee
income and the need to balance the repricing of new business written in Asset
Finance with our focus on maintaining support to our customers impacted by the
higher interest rate environment, as highlighted in the first half.
Furthermore, we saw a higher proportion of loan book growth in some of our
portfolios with larger loan sizes and lower margin. Excluding Novitas, the net
interest margin decreased to 6.5% (2023: 7.2%).
Adjusted operating expenses grew 7% to £208.4 million (2023: £194.4
million), mainly driven by increased staff costs and investment spend, which
has been partly offset by lower costs in relation to Novitas. As a result, the
Commercial expense/income ratio increased to 63.2% (2023: 55.9%).
During the year, we completed the Asset Finance transformation programme,
which has introduced a single technology platform across the business that has
standardised processes, increased efficiencies and improved customer and
colleague experience.
Impairment charges decreased materially to £31.7 million (2023: £137.5
million), with £116.8 million incurred in relation to Novitas in the prior
year. Provision coverage increased marginally to 5.7% (31 July 2023: 5.2%).
Excluding Novitas, there was an increase in impairment charges to £25.3
million (2023: £20.7 million), reflecting loan book growth and the ongoing
review of provisions and coverage, including a slight uptick in arrears in
Asset Finance as we enter a more normalised credit environment. This
corresponded to a bad debt ratio of 0.5% (2023: 0.5%) and a stable coverage
ratio (excluding Novitas) of 1.4% (31 July 2023: 1.4%).
Banking: Retail
2024 2023 Change
£ million £ million %
Operating income 262.4 248.1 6
Adjusted operating expenses (177.3) (164.4) 8
Impairment losses on financial assets (47.2) (49.0) (4)
Adjusted operating profit 37.9 34.7 9
Adjusted operating profit, pre provisions 85.1 83.7 2
Adjusting items:
Complaints handling and other operational costs associated with the FCA's (6.9) - -
review of historical motor finance commission arrangements
Provision in relation to the BiFD review (16.6) - -
Restructuring costs (0.6) - -
Amortisation of intangible assets on acquisition (0.2) - -
Statutory operating profit 13.6 34.7 (61)
Net interest margin 8.7% 8.2%
Expense/income ratio 67.6% 66.3%
Bad debt ratio 1.6% 1.6%
Closing loan book(1) 3,041.9 3,001.8 1
1. The Motor Finance loan book includes £92.8 million (31 July 2023: £206.7
million) relating to the legacy Republic of Ireland Motor Finance business,
which is in run-off following the cessation of our previous partnership in the
Republic of Ireland from 30 June 2022.
Focus on Maintaining our Margins and Underwriting Discipline in a Challenging
Backdrop
The Retail businesses provide intermediated finance, through motor dealers,
motor finance brokers and insurance brokers. Finance is provided to both
individuals and to a broad spectrum of UK businesses.
Whilst the market backdrop has presented challenges, with significant
uncertainty in relation to the FCA's motor finance work, we have seen good
demand over the year and have remained focused on providing excellent service
to our customers and partners. In Motor Finance, we have seen strong volumes
as we have benefited from expanding our routes to market and our ability to
partner with more finance technology providers, such as iVendi and
AutoConvert, as part of our strategy to be where the consumer chooses finance.
Whilst the Premium Finance business operates in a mature and competitive
market, in which we have continued to deepen and evolve our proposition to
best meet the needs of our customers and to support broker partners in
simplifying premium finance in their businesses. More broadly across our
Retail businesses, we have been focused on monitoring our delivery of good
customer outcomes in respect of Consumer Duty.
We completed the acquisition of Bluestone Motor Finance (Ireland) (DAC) in
October 2023 and have since rebranded the business to Close Brothers Motor
Finance. This year, we have focused on the integration and alignment of our
pricing and underwriting standards and credit risk appetite. Demand has been
healthy and, looking forward, we plan to launch new products and services,
enabling us to take advantage of opportunities in the Irish market.
During the second half of the financial year, we integrated our Savings
business, which provides simple and straightforward savings products to both
individuals and businesses, into Retail. This strategic move will leverage
established shared operations, supporting the continued expansion of our
retail deposit offering. The presentation of the Retail business financial
performance is not impacted by this move.
Adjusted operating profit for Retail rose to £37.9 million (2023: £34.7
million), as growth in income and lower impairment charges were partly offset
by higher costs. On a pre-provision basis, adjusted operating profit increased
2% to £85.1 million (2023: £83.7 million).
On a statutory basis, operating profit decreased to £13.6 million (2023:
£34.7 million) and was driven mainly by £6.9 million of costs associated
with the handling of complaints and other operational costs associated with
the FCA's review of historical motor finance commission arrangements, a £16.6
million provision in relation to the Past Business Review and expected
customer compensation in respect of customer forbearance related to motor
finance lending and £0.6 million of restructuring costs.
Operating income increased 6% to £262.4 million (2023: £248.1 million),
driven by both growth in Retail loan book and a strengthening of the net
interest margin to 8.7% (2023: 8.2%), as we focused on pricing discipline in
the higher rate environment.
Adjusted operating expenses grew 8% to £177.3 million (2023: £164.4
million), driven primarily by the acquisition of Close Brothers Motor Finance
in Ireland, higher staff costs and increased regulatory costs. As a result,
the expense/income ratio increased to 67.6% (2023: 66.3%).
As previously outlined, the FCA is conducting a review of historical motor
finance commission arrangements and sales at several firms, following high
numbers of complaints from customers. The estimated impact of any redress
scheme, if required, is highly dependent on a number of factors and as such,
at this early stage, the timing, scope and quantum of a potential financial
impact on the group, if any, cannot be reliably estimated at present. Since
the announcement by the FCA of its review of historical motor finance
commission arrangements in January 2024, we have seen a further increase in
enquiries and complaints. We have also taken steps to enhance our operational
capabilities to respond to increased complaints volumes and potential changes
such as the implementation of a consumer redress scheme, if required. We
remain focused on mitigating the impact on resource expenses through
outsourcing and deployment of automated solutions to assist in triaging new
complaints, improving our processing speed. We continue to monitor the impact
on our current handling of these complaints and are following the playbooks in
place to ensure we have the appropriate resources to respond effectively.
Impairment charges decreased marginally to £47.2 million (2023: £49.0
million), driven primarily by an improvement in the macroeconomic outlook
compared to the prior year. As previously highlighted, in Motor Finance,
arrears levels have stabilised at a higher level than pre-pandemic, reflecting
the continued cost of living pressures on our customers. The bad debt ratio
remained stable at 1.6% (2023: 1.6%), with the provision coverage ratio
increasing modestly to 3.0% (31 July 2023: 2.9%).
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 conditional sale and hire-purchase
contracts, with less exposure to residual value risk associated with Personal
Contract Purchase ("PCP"), which accounted for c.10% of the Motor Finance loan
book at 31 July 2024 (31 July 2023: c.9%). 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
2024 2023 Change
£ million £ million %
Operating income 132.9 117.9 13
Adjusted operating expenses (34.9) (30.9) 13
Impairment losses on financial assets (20.0) (17.5) 14
Adjusted operating profit 78.0 69.5 12
Adjusted operating profit, pre provisions 98.0 87.0 13
Adjusting items:
Restructuring costs (0.3) - -
Statutory operating profit 77.7 69.5 12
Net interest margin 7.3% 7.4%
Expense/income ratio 26.3% 26.2%
Bad debt ratio 1.1% 1.1%
Closing loan book 1,955.2 1,703.1 15
Healthy Drawdowns Driving Strong Loan Book Growth
Property comprises Property Finance and Commercial Acceptances. The Property
Finance business is focused on specialist residential development finance to
established SME housebuilders and professional developers in the UK. Property
Finance also provides funding for commercial properties, housing associations
and refurbishment and bridging finance. Commercial Acceptances provides
bridging and short-term loans for auction properties, refurbishment projects
and small residential development projects.
Although the backdrop has been mixed over the year, with SME housebuilders
having faced a challenging period, we have seen positive sentiment return to
the UK property market. The economic environment is more stable, housebuilding
is a focus area for the new UK government and the mortgage market remains
competitive. We delivered a strong financial performance, supported by our
relationship-led proposition and excellent customer service. Our focus on
expanding in the regions outside of London and the South East is continuing to
prove successful, and our pipeline remains healthy at c.£850 million (2023:
c.£1 billion). We are also seeing a benefit through our initiatives including
Tomorrow's Developer.
Adjusted operating profit rose 12% to £78.0 million (2023: £69.5 million),
as the business achieved neutral operating leverage. On a pre-provision basis,
operating profit increased 13% to £98.0 million (2023: £87.0 million).
On a statutory basis, operating profit also increased 12% to £77.7 million
(2023: £69.5 million) and included £0.3 million of restructuring costs.
Operating income rose 13% to £132.9 million (2023: £117.9 million), driven
by strong loan book growth, although the net interest margin decreased
marginally to 7.3% (2023: 7.4%), mainly reflecting one-off early redemptions
benefiting the prior year and lower fee yields due to the higher utilisation
of loan facilities.
Adjusted operating expenses also rose 13% to £34.9 million (2023: £30.9
million), reflecting an increase in staff costs and a higher apportionment of
indirect central resources in line with loan book growth. The expense/income
ratio remained stable at 26.3% (2023: 26.2%).
Impairment charges increased to £20.0 million (2023: £17.5 million),
corresponding to a bad debt ratio of 1.1% (2023: 1.1%). This was driven
primarily by loan book growth and an ongoing review of provisions and
coverage, which included increased specific provisions relating to legacy
facilities. The provision coverage ratio increased to 3.0% (31 July 2023:
2.4%).
The Property loan book is conservatively underwritten. We work with
experienced, professional developers, predominantly SMEs with a focus on
delivering mid-priced family housing, and have minimal exposure to the prime
central London market, with our regional loan book making up over 50% of the
Property Finance portfolio. Our long track record, expertise and quality of
service ensure the business remains resilient to competition and continues to
generate high levels of repeat business.
Asset Management
Key Financials(1)
2024 2023 Change
£ million £ million %
Investment management 126.9 113.3 12
Advice and other services 28.4 29.9 (5)
Other income(2) 2.5 1.6 56
Operating income 157.8 144.8 9
Adjusted operating expenses(1) (145.6) (128.8) 13
Impairment losses on financial assets - (0.1) (100)
Adjusted operating profit 12.2 15.9 (23)
Adjusting items:
Amortisation of intangible assets on acquisition (1.2) (1.5) (20)
Statutory operating profit 11.0 14.4 (24)
Revenue margin (bps) 82 84
Operating margin 8% 11%
Return on opening equity(3) 7.3% 12.0%
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 "Segmental analysis".
2. Other income includes net interest income and expense, income on principal
investments and other income.
3. Prior year comparative has been restated following a misstatement. The figure
reported in the prior year was 15.5%.
Building on our Successful Growth Track Record
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.
Total operating income rose 9% to £157.8 million (2023: £144.8 million),
reflecting positive net inflows and market movements, with growth in AuM
delivered by our bespoke investment management business resulting in higher
investment management income. This was partially offset by a decrease in
income from advice and other services due to a shift in product mix and an
increase in higher value clients where an initial fee is typically not
charged. The revenue margin reduced to 82bps (2023: 84bps) primarily due to a
change in the mix of business into more lower margin passive and fixed income
products and a move to larger client size with a typically lower fee margin.
Adjusted operating expenses increased 13% to £145.6 million (2023: £128.8
million), reflecting wage inflation and new hires to support future growth. Of
this, £10.4 million (2023: £4.7 million) of costs related to the hiring of
investment managers and the associated AuM in the bespoke investment
management business. The expense/income ratio grew to 92.3% (2023: 89.0%),
with the compensation ratio also increasing to 64% (2023: 59%).
Adjusted operating profit in CBAM decreased 23% to £12.2 million (2023:
£15.9 million) as income growth was more than offset by higher costs,
reflecting investment in new hires. The operating margin reduced to 8% (2023:
11%), corresponding to 14% (2023: 14%) when excluding the costs related to the
hiring of investment managers and the associated AuM in the bespoke investment
management business. Statutory operating profit before tax was £11.0 million
(2023: £14.4 million).
CBAM has a strong track record of growth, with net inflows delivered through
successfully servicing existing clients and attracting new clients, as well as
through selective in-fill acquisitions. In March, we completed the acquisition
of Bottriell Adams, an IFA business based in Dorset with c.£220 million of
assets, as we expand our regional presence in the South West. During the year,
we also hired 12 bespoke investment managers (H1 2024: nine, H2 2024: three,
2023: 14) and following a period of strong growth in our Bespoke business, our
priority in this channel is to now strengthen our position and maximise
opportunities to accelerate our profitability.
Strong Net Inflows Delivered in a Mixed Macroeconomic Environment
Whilst the backdrop has been fairly mixed and presented challenges over the
year, the general improvement in economic indicators in the second half of the
year has led to a strengthening in equity markets and positive investor
sentiment. Over the year, net inflows remained healthy at £1.3 billion (2023:
£1.3 billion) and delivered a net inflow rate of 8% (2023: 9%), with the
bespoke investment management business contributing significantly to the
overall inflow rate.
Total managed assets increased 18% to £19.3 billion (31 July 2023: £16.4
billion), driven by strong net inflows and positive market performance. Total
client assets, which includes advised and managed assets, also increased by
18% to £20.4 billion (31 July 2023: £17.3 billion) and includes the
associated client assets following the acquisition of Bottriell Adams.
Movement in Client Assets
31 July 31 July
2024 2023
£ million £ million
Opening managed assets 16,419 15,302
Inflows 3,231 2,729
Outflows (1,928) (1,411)
Net inflows 1,303 1,318
Market movements 1,609 (201)
Total managed assets 19,331 16,419
Advised only assets 1,091 907
Total client assets(1) 20,422 17,326
Net flows as percentage of opening managed assets 8% 9%
1. Total client assets include £5.3 billion of assets (31 July 2023: £4.9
billion) that are both advised and managed.
Fund Performance
Our funds and segregated bespoke portfolios are designed to provide attractive
risk-adjusted returns for our clients, consistent with their long-term goals
and investment objectives. Fund performance has been good across asset
classes, with all our funds delivering positive absolute returns during the
period and 13 out of 15 outperforming their peer group and delivering first
and second quartile returns, demonstrating the strength of our investment
team.
Our Sustainable Funds and Net Zero Commitment
At CBAM, we continue to look at how to develop and enhance our sustainable
proposition as more of our clients seek to make a difference with their
investments. Complementing our Socially Responsible Investment Service and the
ethical screening we can offer our Bespoke clients, we are growing our range
of Sustainable Funds. Our Sustainable Select Fixed Income Fund, which utilises
a sustainable investment methodology to target a reduction in CO(2) emissions
intensity versus its benchmark, continues to see healthy net inflows. Over the
last five years to the end of July 2024, the fund returned 16.8% against its
benchmark of 8%.
We became signatories to the Net Zero Asset Managers ("NZAM") initiative in
September 2022 and as part of our initial target disclosure, committed to 18%
of our AuM (as at 31 July 2022) being in line with net zero by 2050. We have
also been developing a stewardship and engagement strategy focused on our NZAM
targets and are developing a climate risk management process to track and
support the achievement of these targets. We also published our first Task
Force on Climate-related Financial Disclosures ("TCFD") aligned entity report
in June 2024, along with product-level disclosures aligned with TCFD
recommendations.
The FCA Sustainability Disclosure Requirements ("SDR") regulations for fund
managers came into force during 2024 which included anti-greenwashing rules
and a name and labelling regime for sustainable investment funds. We are
working through these regulations to align our sustainable funds with the SDR
regulations for the December 2024 implementation date.
Well Placed to Strengthen CBAM's Position
Following a period of strong growth and investment, our focus is to strengthen
our position and maximise opportunities to accelerate profitability through
providing excellent service, building on the strength of our client
relationships. In the Bespoke business, we are shifting our focus to only
selective hiring of investment managers. We continue to target net inflows in
the range of 6-10%.
Sale Agreement with Oaktree
Following a comprehensive strategic review, on 19 September 2024, the group
announced that it entered into an agreement to sell CBAM to Oaktree for an
equity value of up to £200 million.
CBAM is a well-regarded UK wealth management franchise with a strong track
record of growth, healthy net inflows and significant growth potential. To
realise the potential value of the business in the medium-term to the fullest
extent possible, the group would need to continue to invest to accelerate
CBAM's growth strategy in the short and medium term, including via
acquisitions against a consolidating market backdrop.
The transaction marks significant progress towards the plan we outlined in
March 2024 to strengthen our capital base. Additionally, this sale represents
competitive value for the group's shareholders and allows us to simplify the
group, focusing on our core lending business.
The transaction will also enable CBAM to accelerate its growth strategy under
Oaktree's ownership, which recognises CBAM's value and its potential to become
a leading UK wealth manager of scale. In order to achieve this, Oaktree
intends to provide CBAM with the incremental investment required to increase
its profitability and presence in the wealth management sector.
The transaction is expected to complete in early 2025 calendar year and is
conditional upon receipt of certain customary regulatory approvals. The
details regarding the transaction can be found in the relevant announcement
published on 19 September 2024, available on the Investor Relations website.
Further details of the financial impacts of the sale agreement on the group
can be found in Note 23 "Post Balance Sheet Event".
Winterflood
Key Financials
2024 2023 Change
£ million £ million %
Operating income 73.0 75.3 (3)
Operating expenses (74.8) (71.8) 4
Impairment gains on financial assets 0.1 - -
Operating (loss)/profit (1.7) 3.5 (148)
Average bargains per day ('000) 55 60
Operating margin (2)% 5%
Return on opening equity (2.5)% 2.6%
Loss days 3 1
Winterflood Business Services assets under administration (£ billion) 15.6 12.9 21
Uncertain Macroeconomic Outlook Continued to Negatively Affect Trading
Performance
Winterflood is a leading UK liquidity provider, delivering high-quality
execution services to platforms, stockbrokers, wealth managers and
institutional investors, as well as providing corporate advisory services to
investment trusts and outsourced dealing and custody services via Winterflood
Business Services ("WBS").
Over the year, uncertainty in the macroeconomic environment, combined with
geopolitical concerns, have continued to weigh on domestic markets and impact
investor appetite. With investors currently able to achieve equity-like
returns from money markets and debt instruments, which have a lower risk
profile, we have seen a reduction in trading volumes and subdued Investment
Trusts corporate activity. As a result, Winterflood experienced a reduction in
trading income in the year and delivered an operating loss of £1.7 million
(2023: operating profit of £3.5 million), after incurring one-off
dual-running property costs of c.£3 million.
Operating income reduced 3% to £73.0 million (2023: £75.3 million), as lower
trading volumes have driven a decline in trading income, which more than
offset growth in WBS.
Trading income decreased 12% to £51.8 million (2023: £58.6 million)
reflecting the unfavourable market conditions, particularly in the first
quarter where we incurred three loss days (2023: one loss day), as equity and
bond prices declined. Whilst there was an improvement in general market
conditions in the second half of the year, AIM, Small Cap and FTSE 350 trading
sectors recorded a decline against the prior year. Average daily bargains for
the year were 55k, down 8% year-on-year (2023: 60k) and marginally lower than
pre-pandemic levels (2019: 56k).
Notwithstanding low issuance and transaction volumes in the year, income from
the Investments Trusts corporate business increased 60% to £4.0 million
(2023: £2.5 million).
WBS continued to see good momentum, with income rising 17% to £17.3 million
(2023: £14.8 million). AuA increased 21% to £15.6 billion (H1 2024: £13.8
billion, 2023: £12.9 billion), supported by net inflows and positive market
movements as equity markets improved in the second half of the year.
Operating expenses increased 4% to £74.8 million (2023: £71.8 million),
primarily driven by one-off dual-running property costs of c.£3 million
incurred by relocating premises. As highlighted in the Half Year 2024 results,
we have undertaken a cost review during the year to right-size elements of the
business, to ensure we are appropriately and efficiently organised to meet
current business requirements, whilst remaining scalable for future growth.
This cost review will result in annualised fixed cost savings of £4.0 million
from the 2025 financial year onwards, with the impact in 2024 of £0.9
million, helping to offset inflationary pressures.
We continue to explore growth opportunities which are additive to the trading
business, whilst remaining focused on driving efficiencies and optimising
organisational resilience which maintains the strengths of the franchise. WBS
remains focused on developing its client relationships and investing in its
award-winning proprietary technology to provide highly scalable and bespoke
solutions for clients. WBS is well positioned for further growth, both
organically and supported by a healthy pipeline of clients, and expects to
grow AuA to over £20 billion by 2026.
We have also developed Winterflood Retail Access Platform ("WRAP") using
in-house technology and expertise. This is an end-to-end retail distribution
platform that enables retail investors to participate in capital markets
transactions such as initial public offerings and secondary fundraisings
through retail intermediaries, across both equity and fixed income
instruments. Since inception, WRAP has raised over £47 million from retail
investors, across both equity and gilt offerings. In 2024, WRAP has been
mandated on 17 transactions, representing approximately a third of the total
retail platform offers executed in the UK market. WRAP combines the expertise
of Winterflood's whole of retail market reach with comprehensive in-house
delivery across implementation, order aggregation and settlement.
While short-term trading conditions remain challenging, we are confident that
Winterflood remains well positioned to retain its market position and benefit
when investor appetite returns.
Definitions
Additional Tier 1 ("AT1") capital: Additional regulatory capital that along
with CET1 capital makes up a bank's Tier 1 regulatory capital. Includes the
group's perpetual subordinated contingent convertible securities classified as
other equity instruments under IAS 32
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
Adjusted earnings per share ("AEPS"): Adjusted profit attributable to ordinary
shareholders divided by basic weighted average number of ordinary shares in
issue
Applicable requirements: Applicable capital ratio requirements consist of the
Pillar 1 requirement as defined by the CRR, the Pillar 2a requirement set by
the PRA, and the capital conservation buffer and countercyclical buffer as
defined by the CRD. Any applicable PRA buffer is excluded
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
Basic earnings per share ("EPS"): Profit attributable to ordinary shareholders
divided by basic weighted average number of ordinary shares in issue
Bounce Back Loan Scheme ("BBLS"): UK government business lending scheme that
helped small and medium-sized businesses to borrow between £2,000 and
£50,000 (up to a maximum of 25% of their turnover)
Capital Requirements Directive ("CRD"): European Union regulation implementing
the Basel III requirements in Europe, alongside CRR II
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
Effective interest rate ("EIR"): The interest rate at which revenue is
recognised on loans and discounted to their carrying value over the life of
the financial asset
Effective tax rate ("ETR"): Tax on operating profit/(loss) as a percentage of
operating profit/(loss) on ordinary activities before tax
Expected credit loss ("ECL"): The unbiased probability-weighted average credit
loss determined by evaluating a range of possible outcomes and future economic
conditions
Expense/income ratio: Total adjusted operating expenses divided by operating
income
Financial Conduct Authority ("FCA"): A financial regulatory body in the UK,
regulating financial firms and maintaining integrity of the UK's financial
market
Financial Ombudsman Service ("FOS"): The Financial Ombudsman Service settles
complaints between consumers and businesses that provide financial services
Forbearance: Forbearance occurs when a customer is experiencing financial
difficulty in meeting their financial commitments and a concession is granted,
by changing the terms of the financial arrangement, which would not otherwise
be considered
Funding allocated to loan book: Total available funding, excluding equity and
funding held for liquidity purposes
Gross carrying amount: Loan book before expected credit loss provision
Growth Guarantee Scheme ("GGS"): The successor scheme to the Recovery Loan
Scheme, the Growth Guarantee Scheme launched in July 2024 and is designed to
support access to finance for UK small businesses as they look to invest and
grow
High quality liquid assets ("HQLAs"): Assets which qualify for regulatory
liquidity purposes, including Bank of England deposits and sovereign and
central bank debt
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 Accounting Standards ("IAS"): Older set of standards issued by
the International Accounting Standards Council, setting up accounting
principles and rules for preparation of financial statements. IAS are being
superseded by IFRS
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
Long-term bad debt ratio: Long-term bad debt ratio is calculated using IAS 39
until the change to IFRS 9 in FY19. Bad debt ratio excluding Novitas only
disclosed from FY21 onwards. Long-term average bad debt ratio of 1.2% based on
the average bad debt ratio for FY08-FY24, excluding Novitas.
Loss day: Where aggregate gross trading book revenues are negative at the end
of a trading day
Loss given default ("LGD"): The amount lost on a loan if a customer defaults
Managed assets or assets under management ("AuM"): Total market value of
assets which are managed by Close Brothers Asset Management in one of our
investment solutions
Modelled expected credit loss provision: ECL = PD x LGD x EAD
Net asset value ("NAV") per share: Total assets less total liabilities and
other equity instruments, divided by the number of ordinary shares in issue
excluding own shares
Net carrying amount: Loan book value after expected credit loss provision
Net flows: Net flows as a percentage of opening managed assets calculated on
an annualised basis
Net interest margin ("NIM"): Operating income generated by lending activities,
including interest income net of interest expense, fees and commissions income
net of fees and commissions expense, and operating lease income net of
operating lease expense, less depreciation on operating lease assets, divided
by average net loans and advances to customers and operating lease assets
Net stable funding ratio ("NSFR"): Regulatory measure of the group's weighted
funding as a percentage of weighted assets
Net zero: Target of completely negating the amount of greenhouse gases
produced by reducing emissions or implementing methods for their removal
Operating margin: Adjusted operating profit divided by operating income
Personal Contract Plan ("PCP"): PCP is a form of vehicle finance where the
customer defers a significant portion of credit to the final repayment at the
end of the agreement, thereby lowering the monthly repayments compared to a
standard hire-purchase arrangement. At the final repayment date, the customer
has the option to: (a) pay the final payment and take the ownership of the
vehicle; (b) return the vehicle and not pay the final repayment; or (c)
part-exchange the vehicle with any equity being put towards the cost of a new
vehicle
Probability of default ("PD"): Probability that a customer will default on
their loan
Prudential Regulation Authority ("PRA"): A financial regulatory body,
responsible for regulating and supervising banks and other financial
institutions in the UK
Recovery Loan Scheme: Launched in April 2021 as a replacement to CBILS. Under
the terms of the scheme, businesses of any size that have been adversely
impacted by the Covid-19 pandemic can apply to borrow up to £10 million, with
accredited lenders receiving a government-backed guarantee of 80% on losses
that may arise
Return on assets: Adjusted operating profit attributable to ordinary
shareholders divided by total closing assets at the balance sheet date
Return on average tangible equity ("RoTE"): Adjusted operating profit
attributable to ordinary shareholders divided by average total shareholder's
equity, excluding intangible assets and other equity instruments
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
ordinary shareholders divided by opening equity, excluding non-controlling
interests and other equity instruments
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
Secured debt: Debt backed or secured by collateral
Senior debt: Represents the type of debt that takes priority over other
unsecured or more junior debt owed by the issuer. Senior debt is first to be
repaid ahead of other lenders or creditors
Significant increase in credit risk ("SICR"): An assessment of whether credit
risk has increased significantly since initial recognition of a loan using a
range of triggers. Accounts which have experienced a significant increase in
credit risk will be allocated to Stage 2
Standardised approach: Generic term for regulator-defined approaches for
calculating credit, operational and market risk capital requirements as set
out in the CRR
Subordinated debt: Represents debt that ranks below, and is repaid after
claims of, other secured or senior debt owed by the issuer
Tangible net asset value ("TNAV") per share: Total assets less total
liabilities, other equity instruments and intangible assets, divided by the
number of ordinary shares in issue excluding own shares
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 for Small and Medium-sized Enterprises ("TFSME"): The Bank
of England's Term Funding Scheme with additional incentives for SMEs
Tier 2 capital: Additional regulatory capital that along with Tier 1 capital
makes up a bank's total regulatory capital. Includes qualifying subordinated
debt
Total client assets ("TCA"): Total market value of all client assets including
both managed assets and assets under advice and/or administration in the Asset
Management division
Total funding as percentage of loan book: Total funding divided by net loans
and advances to customers and operating lease assets
Watch list: Internal risk management process for heightened monitoring of
exposures that are showing increased credit risk
Consolidated Income Statement
For the year ended 31 July 2024
2024 2023
Note £ million £ million
Interest income 1,156.8 897.5
Interest expense (565.5) (304.9)
Net interest income 591.3 592.6
Fee and commission income 271.2 262.9
Fee and commission expense (22.8) (17.9)
Gains less losses arising from dealing in securities 53.2 58.6
Other income 132.7 114.2
Depreciation of operating lease assets and other direct costs 10 (81.4) (77.8)
Non-interest income 352.9 340.0
Operating income 944.2 932.6
Administrative expenses before amortisation of intangible assets on (674.8) (615.0)
acquisition, provision in relation to the Borrowers in Financial Difficulty
("BiFD") review, restructuring costs and complaints handling and other
operational costs associated with the FCA's review of historical motor finance
commission arrangements
Amortisation of intangible assets on acquisition 9 (1.4) (1.5)
Provision in relation to the BiFD review 16 (17.2) -
Restructuring costs 16 (3.1) -
Complaints handling and other operational costs associated with the FCA's 17 (6.9) -
review of historical motor finance commission arrangements
Total administrative expenses (703.4) (616.5)
Impairment losses on financial assets 6 (98.8) (204.1)
Total operating expenses (802.2) (820.6)
Operating profit before tax 142.0 112.0
Tax 3 (41.6) (30.9)
Profit after tax 100.4 81.1
Attributable to
Shareholders 89.3 81.1
Other equity owners 13 11.1 -
100.4 81.1
Basic earnings per share 4 59.7p 54.3p
Diluted earnings per share 4 59.5p 54.2p
Interim dividend per share paid 5 - 22.5p
Final dividend per share 5 - 45.0p
Consolidated Statement of Comprehensive Income
For the year ended 31 July 2024
2024 2023
£ million £ million
Profit after tax 100.4 81.1
Items that may be reclassified to income statement
Currency translation (losses)/gains (0.5) 0.7
(Losses)/gains on cash flow hedging (29.8) 17.6
Losses on financial instruments classified at fair value through other (3.6) (3.9)
comprehensive income
Tax relating to items that may be reclassified 9.8 (4.3)
(24.1) 10.1
Items that will not be reclassified to income statement
Defined benefit pension scheme losses - (5.7)
Tax relating to items that will not be reclassified - 1.6
- (4.1)
Other comprehensive (expense)/income, net of tax (24.1) 6.0
Total comprehensive income 76.3 87.1
Attributable to
Shareholders 65.2 87.1
Other equity owners 13 11.1 -
76.3 87.1
Consolidated Balance Sheet
At 31 July 2024
31 July 2024 31 July 2023
Note £ million £ million
Assets
Cash and balances at central banks 1,584.0 1,937.0
Settlement balances 627.5 707.0
Loans and advances to banks 293.7 330.3
Loans and advances to customers 6 9,830.8 9,255.0
Debt securities 7 740.5 307.6
Equity shares 8 27.4 29.3
Loans to money brokers against stock advanced 22.5 37.6
Derivative financial instruments 101.4 88.5
Intangible assets 9 266.0 263.7
Property, plant and equipment 10 349.6 357.1
Current tax assets 36.4 42.3
Deferred tax assets 14.3 10.8
Prepayments, accrued income and other assets 186.7 184.1
Total assets 14,080.8 13,550.3
Liabilities
Settlement balances and short positions 11 614.9 695.9
Deposits by banks 12 138.4 141.9
Deposits by customers 12 8,693.6 7,724.5
Loans and overdrafts from banks 12 165.6 651.9
Debt securities in issue 12 1,986.4 2,012.6
Loans from money brokers against stock advanced 16.7 4.8
Derivative financial instruments 129.0 195.9
Accruals, deferred income and other liabilities 306.5 303.0
Subordinated loan capital 187.2 174.9
Total liabilities 12,238.3 11,905.4
Equity
Called up share capital 38.0 38.0
Retained earnings 1,634.4 1,608.5
Other equity instrument 13 197.6 -
Other reserves (27.5) (1.6)
Total shareholders' and other equity owners' equity 1,842.5 1,644.9
Total equity 1,842.5 1,644.9
Total equity and liabilities 14,080.8 13,550.3
Consolidated Statement of Changes in Equity
For the year ended 31 July 2024
Other reserves Total
Share- attributable to
Called up Other based Exchange Cash flow shareholders
share Retained equity FVOCI payments movements hedging and other Total
capital earnings instrument reserve reserve reserve reserve equity owners equity
£ million £ million £ million £ million £ million £ million £ million £ million £ million
At 1 August 2022 38.0 1,628.4 - 0.1 (29.2) (1.5) 21.7 1,657.5 1,657.5
Profit for the year - 81.1 - - - - - 81.1 81.1
Other comprehensive (expense)/income - (4.1) - (2.8) - 0.2 12.7 6.0 6.0
Total comprehensive income for the year - 77.0 - (2.8) - 0.2 12.7 87.1 87.1
Dividends paid (note 5) - (99.1) - - - - - (99.1) (99.1)
Shares purchased - - - - (5.0) - - (5.0) (5.0)
Shares released - - - - 5.6 - - 5.6 5.6
Other movements - 2.3 - - (3.4) - - (1.1) (1.1)
Income tax - (0.1) - - - - - (0.1) (0.1)
At 31 July 2023 38.0 1,608.5 - (2.7) (32.0) (1.3) 34.4 1,644.9 1,644.9
Profit for the year - 100.4 - - - - - 100.4 100.4
Other comprehensive expense - - - (2.6) - (0.1) (21.4) (24.1) (24.1)
Total comprehensive income for the year - 100.4 - (2.6) - (0.1) (21.4) 76.3 76.3
Dividends paid (note 5) - (67.1) - - - - - (67.1) (67.1)
Shares purchased - - - - (3.5) - - (3.5) (3.5)
Shares released - - - - 4.6 - - 4.6 4.6
Other equity instrument issued (note 13) - - 197.6 - - - - 197.6 197.6
Coupon paid on other equity instrument (note 13) - (11.1) - - - - - (11.1) (11.1)
Other movements - 3.7 - - (2.9) - - 0.8 0.8
Income tax - - - - - - - - -
At 31 July 2024 38.0 1,634.4 197.6 (5.3) (33.8) (1.4) 13.0 1,842.5 1,842.5
Consolidated Cash Flow Statement
For the year ended 31 July 2024
2024 2023
Note £ million £ million
Net cash (outflow)/inflow from operating activities 18(a) (382.0) 1,021.4
Net cash (outflow)/inflow from investing activities
Purchase of:
Property, plant and equipment (14.2) (8.7)
Intangible assets - software (30.3) (53.2)
Subsidiaries, net of cash acquired 18(b) (15.4) (0.5)
Sale of:
Equity shares held for investment 0.2 -
Subsidiaries 18(c) 0.9 -
(58.8) (62.4)
Net cash (outflow)/inflow before financing activities (440.8) 959.0
Financing activities
Purchase of own shares for employee share award schemes (3.5) (5.0)
Equity dividends paid (67.1) (99.1)
Interest paid on subordinated loan capital and debt financing (23.4) (10.9)
Payment of lease liabilities (16.5) (16.2)
Issuance of senior bond - 248.5
Redemption of senior bond - (250.0)
Issuance of Additional Tier 1 ("AT1") capital securities 200.0 -
Costs arising on issue of AT1 (2.4) -
AT1 coupon payment (11.1) -
Net (decrease)/increase in cash (364.8) 826.3
Cash and cash equivalents at beginning of year 2,209.3 1,383.0
Cash and cash equivalents at end of year 18(d) 1,844.5 2,209.3
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 2024 or 31 July 2023 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 2023.
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.
The financial information for the year ended 31 July 2024 has been derived
from the financial statements of Close Brothers Group plc for that year.
Statutory accounts for 2023 have been delivered to the Registrar of Companies
and those for 2024 will be delivered following the company's Annual General
Meeting. The group's auditor, PricewaterhouseCoopers LLP, will report on the
2024 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 judgements and estimates
The reported results of the group are sensitive to the judgements, estimates
and assumptions that underlie the application of its accounting policies and
preparation of its financial statements. UK company law and IFRS require the
directors, in preparing the group's financial statements, to select suitable
accounting policies, apply them consistently and make judgements, estimates
and assumptions that are reasonable.
The group's estimates and assumptions are based on historical experience and
reasonable expectations of future events and are reviewed on an ongoing basis.
Actual results in the future may differ from the amounts estimated due to the
inherent uncertainty.
The group's critical accounting judgements, made in applying its accounting
policies, and the key sources of estimation uncertainty that may have a
significant risk of causing a material adjustment within the next financial
year are set out below.
The impact of climate change on the group's judgements, estimates and
assumptions has been considered in preparing these financial statements. While
no material impact has been identified, climate risk continues to be monitored
on an ongoing basis.
Critical accounting judgements
The critical accounting judgements of the group, which relate to expected
credit loss provisions calculated under IFRS 9 and Motor Finance commission
arrangements, are as follows:
• Establishing the criteria for a significant increase in credit risk;
• Determining the appropriate definition of default; and
• Determining whether the criteria for the recognition of a provision under IAS
37 'Provisions, Contingent Liabilities and Contingent Assets' have been met in
relation to Motor Finance commission arrangements.
• Determining the impact of the FCA's motor commissions review and the group's
strategic and capital actions response on the group's goodwill impairment
assessment.
Information on the first two accounting judgements can be found below, while
further information on the third and fourth judgements can be found in Note 17
and Note 16 respectively.
Significant increase in credit risk
Assets are transferred from Stage 1 to Stage 2 when there has been a
significant increase in credit risk since initial recognition. Typically, the
group assesses whether a significant increase in credit risk has occurred
based on a quantitative and qualitative assessment, with a "30 days past due"
backstop.
Due to the diverse nature of the group's lending businesses, the specific
indicators of a significant increase in credit risk vary by business and may
include some or all of the following factors:
• quantitative assessment: the lifetime probability of default ("PD") has
increased by more than an agreed threshold relative to the equivalent at
origination. Thresholds are based on a fixed number of risk grade movements
which are bespoke to each business to ensure that the increased risk since
origination is appropriately captured;
• qualitative assessment: events or observed behaviour indicate credit
deterioration. This includes a wide range of information that is reasonably
available including individual credit assessments of the financial performance
of borrowers as appropriate during routine reviews, plus forbearance and watch
list information; or
• backstop criteria: the "30 days past due" backstop is met.
Definition of default
The definition of default is an important building block for expected credit
loss models and is considered a key judgement. A default is considered to have
occurred if any unlikeliness to pay criterion is met or when a financial asset
meets a "90 days past due" backstop. While some criteria are factual (e.g.
administration, insolvency or bankruptcy), others require a judgemental
assessment of whether the borrower has financial difficulties which are
expected to have a detrimental impact on their ability to meet contractual
obligations. A change in the definition of default may have a material impact
on the expected credit loss provision.
Key sources of estimation uncertainty
The key sources of estimation uncertainty of the group relate to expected
credit loss provisions and goodwill and are as follows:
• Two key model estimates, being time to recover periods and recovery rates,
underpinning the expected credit loss provision of Novitas. These were also
key estimates in the prior year;
• Forward-looking macroeconomic information incorporated into expected credit
loss models. This was also a key estimate in the prior year;
• Adjustments by management to model calculated expected credit losses due to
limitations in the group's expected credit loss models or input data, which
may be identified through ongoing model monitoring and validation of models.
This was also a key estimate in the prior year; and
• Estimate of future cash flow forecasts in the calculation of value in use for
the testing of goodwill for impairment in relation to the Winterflood
Securities and Banking division, in particular Motor Finance, cash generating
units due to more challenging trading conditions expected for both. This was a
key estimate for Winterflood Securities in the prior year and new for Motor
Finance this year. Additional disclosures can be found in Note 9.
Novitas loans
Novitas provided funding to individuals who wished to pursue legal cases. The
majority of the Novitas portfolio, and therefore provision, relates to civil
litigation cases. To protect customers in the event that their case failed, it
was a condition of the Novitas loan agreements that an individual purchased an
After the Event ("ATE") insurance policy which covered the loan.
As previously announced, following a strategic review, in July 2021 the group
decided to cease permanently the approval of lending to new customers across
all of the products offered by Novitas and withdraw from the legal services
financing market. Since that time, the Novitas loan book has been in run-off,
and the business has continued to work with solicitors and insurers, with a
focus on supporting existing customers and managing the existing book to
ensure good customer outcomes, where it is within Novitas' ability to do so.
In the financial year under review, management has maintained its assumptions
for expected case failure rates, and expected recovery rates which continue to
appropriately reflect experienced credit performance and ongoing dialogue with
customers' insurers. Within the 2024 financial year impairment charge for
Novitas of £6.4 million, an adjustment has been made for extended time to
recovery assumptions from insurers. This reflects management's latest
assessment of negotiations with customers' insurers and the current timeline
of litigation proceedings.
Based on the current position, the majority of loans in the portfolio continue
to be assessed as credit-impaired and are considered Stage 3. Expected credit
losses for the portfolio have been calculated by comparing the gross loan
balance to expected cash flows discounted at the original effective interest
rate, over an appropriate time to recovery period. In line with IFRS 9, a
proportion of the expected credit loss is expected to unwind, over the
estimated time to recover period, to interest income, which reflects the
requirement to recognise interest income on Stage 3 loans on a net basis.
Since 31 July 2023, expected credit loss provisions have increased by £36.6
million to £220.7 million (31 July 2023: £184.1 million). This increase is a
primarily a result of interest accrual on civil litigation accounts, for which
a full loss provision is applied, and the update to the time to recover
assumption.
Given that the majority of the Novitas portfolio is in Stage 3, the key
sources of estimation uncertainty for the portfolio's expected credit loss
provision are time to recover periods and recovery rates for the civil
litigation portfolio. On this basis, management assessed and completed
sensitivity analysis when compared to the expected credit loss provision for
Novitas of £220.7 million (31 July 2023: £184.1 million).
At 31 July 2024, a 10% absolute deterioration or improvement in recovery rates
would increase or decrease the ECL provision by £13.4 million. Separately, a
12-month improvement in the time to recover period will reduce the ECL
provision by £13.4 million, while a 12-month delay in the time to recover
period will increase the ECL provision by £11.0 million.
Further detail on the impairment provision is included in Note 6.
Forward-looking information
Determining expected credit losses under IFRS 9 requires the incorporation of
forward-looking macroeconomic information that is reasonable, supportable and
includes assumptions linked to economic variables that impact losses in each
portfolio. The introduction of macroeconomic information introduces additional
volatility to provisions.
In order to calculate forward-looking provisions, economic scenarios are
sourced from Moody's Analytics. These cover a range of plausible economic
paths that are used in conjunction with PD, EAD and LGD parameters for each
portfolio to assess expected credit loss provisions across a range of
conditions. An overview of these scenarios using key macroeconomic indicators
is provided on page 41. Ongoing benchmarking of the scenarios to other
economic providers is carried out monthly to provide management with comfort
on Moody's Analytics scenario paths.
Five different projected economic scenarios are currently considered to cover
a range of possible outcomes. These include a baseline scenario, which
reflects the best view of future economic events. In addition, one upside
scenario and three downside scenario paths are defined relative to the
baseline. Management assigns the scenarios a probability weighting to reflect
the likelihood of specific scenarios, and therefore loss outcomes,
materialising, using a combination of quantitative analysis and expert
judgement.
The impact of forward-looking information varies across the group's lending
businesses because of the differing sensitivity of each portfolio to specific
macroeconomic variables.
This is reflected through the development of bespoke macroeconomic models that
recognise the specific response of each business to the macroeconomic
environment.
The modelled impact of macroeconomic scenarios and their respective weightings
is reviewed by business experts in relation to stage allocation and coverage
ratios at the individual and portfolio level, incorporating management's
experience and knowledge of customers, the sectors in which they operate, and
the assets financed.
This includes assessment of the reaction of the ECL in the context of the
prevailing and forecast economic conditions, for example where currently
higher interest rates and inflationary conditions exist compared to recent
periods.
Economic forecasts have evolved over the course of 2024 and reflect the mixed
external backdrop observed in the year. Forecasts deployed in IFRS 9
macroeconomic models are updated on a monthly basis. At 31 July 2024, the
latest baseline scenario forecasts gross domestic product ("GDP") growth of
1.0% in calendar year 2024 and an average base rate of 5.1% across calendar
year 2024. Consumer Price Index ("CPI") inflation is forecast to be 2.5% in
calendar year 2024 in the baseline scenario, with 0.7% forecast in the
protracted downside scenario over the same period.
At 31 July 2024, the scenario weightings were: 30% strong upside, 32.5%
baseline, 20% mild downside, 10.5% moderate downside and 7% protracted
downside. As economic forecasts are considered to appropriately recognise
developments in the macroeconomic environment, no change has been made to the
weightings ascribed to the scenarios since 31 July 2023.
Given the current economic uncertainty, further analysis has been undertaken
to assess the appropriateness of the five scenarios used. This included
benchmarking the baseline scenario to consensus economic views, as well as
consideration of an additional forecast related to stagflation, which could be
considered as an alternative downside scenario.
Compared to the scenarios in use in the expected credit losses calculation,
the stagflation scenario includes a longer period of higher interest rates
coupled with a shallower but extended impact on GDP. Due to the relatively
short tenor of the portfolios, the stagflation scenario is considered to be of
less relevance than those deployed. This is supported by the fact that, due to
the higher severity of recessionary factors in the existing scenarios, using
the stagflation scenario instead of the moderate or protracted downside
scenario would result in lower expected credit losses.
The final scenarios deployed reflect general improvement in the UK economic
outlook relative to 31 July 2023. Under the baseline scenario, UK headline CPI
inflation is expected to stabilise at current levels as a result of sustained
base rate increases in 2022 and 2023 and eased supply chain pressures. Aligned
to recent reductions in inflation, the Bank of England base rate is forecast
to gradually reduce in all scenarios. House price outlook has improved across
all scenarios, recognising more resilient housing market performance than
previously anticipated. Unemployment rate forecasts have marginally
deteriorated compared to 31 July 2023.
The tables below show economic assumptions within each scenario, and the
weighting applied to each at 31 July 2024. The metrics shown are key UK
economic indicators, chosen to describe the economic scenarios. These are the
main metrics used to set scenario paths, which then influence a wide range of
additional metrics that are used in expected credit loss models. The first
tables show the forecasts of the key metrics for the scenarios utilised for
calendar years 2024 and 2025. The subsequent tables show averages and
peak-to-trough ranges for the same key metrics over the five-year period from
2024 to 2028.
Scenario forecasts and weights
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
2024 2025 2024 2025 2024 2025 2024 2025 2024 2025
At 31 July 2024
UK GDP growth 1.0% 1.2% 1.8% 3.9% 0.3% (1.4)% (0.1)% (3.9)% (0.3)% (5.4)%
UK unemployment 4.4% 4.5% 4.2% 4.0% 4.5% 4.9% 4.7% 6.6% 4.8% 7.8%
UK HPI growth 0.7% 3.2% 7.1% 13.3% (2.3)% (2.6)% (4.1)% (9.2)% (6.0)% (16.4)%
BoE base rate 5.1% 4.2% 5.2% 4.4% 5.0% 3.5% 5.0% 2.9% 4.8% 2.3%
Consumer Price Index 2.5% 2.1% 2.6% 2.2% 1.6% 0.4% 1.1% (0.5)% 0.7% (1.0)%
Weighting 32.5% 30% 20% 10.5% 7%
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
2023 2024 2023 2024 2023 2024 2023 2024 2023 2024
At 31 July 2023
UK GDP growth 0.5% 0.3% 1.3% 3.0% (0.2)% (2.3)% (0.6)% (4.8)% (0.8)% (6.2)%
UK unemployment 4.1% 4.4% 3.9% 3.9% 4.2% 4.8% 4.4% 6.5% 4.5% 7.7%
UK HPI growth (6.3)% (1.4)% (0.4)% 8.3% (9.1)% (6.9)% (10.8)% (13.2)% (12.6)% (20.1)%
BoE base rate 4.9% 5.5% 4.9% 5.7% 4.8% 4.8% 4.7% 4.2% 4.5% 3.6%
Consumer Price Index 5.2% 2.2% 4.8% 2.2% 3.8% 1.2% 3.0% (0.3)% 1.5% (2.3)%
Weighting 32.5% 30% 20% 10.5% 7%
Notes:
UK GDP growth: National Accounts Annual Real Gross Domestic Product,
Seasonally Adjusted - year-on-year change (%)
UK unemployment: ONS Labour Force Survey, Seasonally Adjusted - Average (%)
UK HPI growth: Average nominal house prices, Land Registry, Seasonally
Adjusted - Q4-to-Q4 change (%)
BoE base rate: Bank of England base rate - Average (%)
Consumer Price Index: ONS, All items, annual inflation - Q4-to-Q4 change (%)
Five-year average (calendar years 2024 to 2028)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
At 31 July 2024
UK GDP growth 1.5% 2.3% 1.1% 0.6% 0.4%
UK unemployment 4.6% 4.0% 4.8% 6.6% 7.4%
UK HPI growth 2.5% 4.2% 0.9% (1.0)% (3.5)%
BoE base rate 3.5% 3.6% 3.2% 2.5% 2.0%
Consumer Price Index 2.1% 2.2% 1.5% 1.2% 0.8%
Weighting 32.5% 30% 20% 10.5% 7%
Five-year average (calendar years 2023 to 2027)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
At 31 July 2023
UK GDP growth 0.9% 1.7% 0.5% -% (0.1)%
UK unemployment 4.4% 3.9% 4.6% 6.4% 7.3%
UK HPI growth 0.5% 2.1% (1.1)% (2.9)% (5.4)%
BoE base rate 3.8% 3.8% 3.5% 2.8% 2.3%
Consumer Price Index 2.6% 2.6% 2.1% 1.6% 0.7%
Weighting 32.5% 30% 20% 10.5% 7%
Notes:
UK GDP growth: National Accounts Annual Real Gross Domestic Product,
Seasonally Adjusted - CAGR (%)
UK unemployment: ONS Labour Force Survey, Seasonally Adjusted - Average (%)
UK HPI growth: Average nominal house prices, Land Registry, Seasonally
Adjusted - CAGR (%)
BoE base rate: Bank of England base rate - Average (%)
Consumer Price Index: ONS, All items, annual inflation - CAGR (%)
The forecasts represent an economic view at 31 July 2024, after which there
have been further economic developments, including the Bank of England base
rate cut to 5.0%. These developments, including the potential for further rate
reductions, and their impact on scenarios and weightings, are subject to
ongoing monitoring by management.
These periods have been included as they demonstrate the short, medium and
long-term outlooks for the key macroeconomic indicators which form the basis
of the scenario forecasts. The portfolio has an average residual maturity of
15 months, with 99% of loan value having a maturity of five years or less.
The tables below provide a summary for the five-year period (calendar years
2024 to 2028) of the peak-to-trough range of values of the key UK economic
variables used within the economic scenarios at 31 July 2024 and 31 July 2023.
Five-year period (calendar year 2024 to 2028)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
At 31 July 2024
UK GDP growth 7.7% 0.7% 11.8% 0.7% 5.5% (1.4)% 2.8% (4.2)% 2.2% (6.3)%
UK unemployment 4.8% 4.3% 4.3% 3.7% 4.9% 4.3% 7.4% 4.3% 8.6% 4.3%
UK HPI growth 13.3% 0.7% 27.2% 0.7% 4.4% (5.7)% 0.9% (14.2)% 0.9% (23.4)%
BoE base rate 5.3% 2.5% 5.3% 2.5% 5.3% 2.1% 5.3% 1.1% 5.3% 0.6%
Consumer Price Index 3.6% 2.0% 3.6% 2.0% 3.6% (0.4)% 3.6% (1.1)% 3.6% (2.0)%
Weighting 32.5% 30% 20% 10.5% 7%
Five-year period (calendar year 2023 to 2027)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
At 31 July 2023
UK GDP growth 4.6% 0.1% 8.7% 0.1% 2.5% (3.0)% 0.3% (5.9)% 0.3% (8.1)%
UK unemployment 4.6% 3.9% 4.1% 3.7% 4.9% 3.9% 7.3% 3.9% 8.5% 3.9%
UK HPI growth 2.6% (7.8)% 12.9% (3.1)% (0.5)% (15.4)% (0.5)% (24.0)% (0.5)% (32.1)%
BoE base rate 5.8% 2.3% 5.9% 2.3% 5.4% 2.2% 5.2% 1.3% 5.2% 0.6%
Consumer Price Index 10.2% 1.8% 10.2% 1.8% 10.2% 0.8% 10.2% (1.0)% 10.2% (3.8)%
Weighting 32.5% 30% 20% 10.5% 7%
Notes:
UK GDP growth: Maximum and minimum quarterly GDP as a percentage change from
start of period (%)
UK unemployment: Maximum and minimum unemployment rate (%)
UK HPI growth: Maximum and minimum average nominal house price as a percentage
change from start of period (%)
BoE base rate: Maximum and minimum Bank of England base rate (%)
Consumer Price Index: Maximum and minimum inflation rate over the five-year
period (%)
The following charts below represent the quarterly forecast data included in
the above tables incorporating actual metrics up to 31 July 2024. The dark
blue line shows the baseline scenario, while the other lines represent the
various upside and downside scenarios.
Scenario sensitivity analysis
The expected credit loss provision is sensitive to judgements and estimations
made with regard to the selection and weighting of multiple economic
scenarios. As a result, management has assessed and considered the sensitivity
of the provision as follows:
• For the majority of the portfolios, the modelled expected credit loss
provision has been recalculated under the upside strong and downside
protracted scenarios described above, applying a 100% weighting to each
scenario in turn. The change in provision requirement is driven by the
movement in risk metrics under each scenario and resulting impact on stage
allocation.
• Expected credit losses based on a simplified approach, which do not utilise a
macroeconomic model and require expert judgement, are excluded from the
sensitivity analysis.
• In addition to the above, key considerations for the sensitivity analysis are
set out below, by segment:
- In Commercial, the sensitivity analysis excludes Novitas, which is subject to
a separate approach, as it is deemed more sensitive to credit factors than
macroeconomic factors.
- In Retail, the sensitivity analysis does not apply further stress to the
expected credit loss provision on loans and advances to customers in Stage 3,
because the measurement of expected credit losses is considered more sensitive
to credit factors specific to the borrower than macroeconomic scenarios.
- In Property, the sensitivity analysis excludes individually assessed
provisions, and certain sub-portfolios which are deemed more sensitive to
credit factors than the macroeconomic scenarios.
Based on the above analysis, at 31 July 2024, application of 100% weighting to
the upside strong scenario would decrease the expected credit loss by £21.3
million whilst application of 100% weighting to the downside protracted
scenario would increase the expected credit loss by £40.1 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 disclosures provided in note 6. The modelled
impact presented is based on gross loans and advances to customers at 31 July
2024; 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 2024 and 31
July 2023 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 sustained cost of living pressures, policy
changes resulting from the recent change in government and ongoing
geopolitical tensions.
Use of Adjustments
Limitations in the group's expected credit loss models or input data may be
identified through ongoing model monitoring and validation of models. In
certain circumstances, management make appropriate adjustments to
model-calculated expected credit losses. These adjustments are based on
management judgements or quantitative back-testing to ensure expected credit
loss provisions adequately reflect all known information. These adjustments
are generally determined by considering the attributes or risks of a financial
asset which are not captured by existing expected credit loss model outputs.
Management adjustments are actively monitored, reviewed and incorporated into
future model developments where applicable.
Macroeconomic forecasts continue to react to a range of external factors
including the recent change in government, the ongoing conflict in Ukraine,
policies aimed at addressing cost of living and inflationary pressures, and
long-term impacts of the Covid-19 pandemic. In response, our use of
adjustments has evolved.
In particular, adjustments were applied in the previous financial year in
response to improvements in macroeconomic forecasts that resulted in releases
in modelled provisions. A number of these releases were considered premature
or counterintuitive by management and adjustments were made as a result.
Portfolio performance has been closely monitored during the financial year
under review, over which modelled provisions have increased and external
forecasts have remained broadly stable. As a result, adjustments have
gradually reduced in recognition of the portfolio and models appropriately
reacting to changes in the external environment.
The approach to adjustments continues to reflect the use of expert management
judgement which incorporates management's experience and knowledge of
customers, the areas in which they operate, and the underlying assets
financed.
The need for adjustments will continue to be monitored as new information
emerges which might not be recognised in existing models.
At 31 July 2024, £(1.5) million (31 July 2023: £17.0 million) of the
expected credit loss provision was attributable to adjustments, which reflects
a combination of positive and negative adjustments depending on the adjustment
purpose or model requirement. Adjustments include £2.4 million held to
reflect ongoing economic uncertainty.
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 (2023:
five) operating segments: Commercial, Retail, Property, Asset Management and
Securities.
In the segmental reporting information that follows, Group consists of central
functions as well as various non-trading head office companies and
consolidation adjustments and is set out in order that the information
presented reconciles to the consolidated income statement. The Group balance
sheet primarily includes treasury assets and liabilities comprising cash and
balances at central banks, debt securities, customer deposits and other
borrowings.
Divisions continue to charge market prices for the limited services rendered
to other parts of the group. Funding charges between segments take into
account commercial demands. More than 90% of the group's activities, revenue
and assets are located in the UK.
Banking
Commercial Retail Property Asset Management Securities Group Total
£ million £ million £ million £ million £ million £ million £ million
Summary income statement for year ended 31 July 2024
Net interest income/(expense) 228.8 234.4 129.0 11.0 (0.4) (11.5) 591.3
Non-interest income 100.8 28.0 3.9 146.8 73.4 - 352.9
Operating income/(expense) 329.6 262.4 132.9 157.8 73.0 (11.5) 944.2
Administrative expenses (182.3) (156.6) (30.0) (139.5) (68.9) (31.6) (608.9)
Depreciation and amortisation (26.1) (20.7) (4.9) (6.1) (5.9) (2.2) (65.9)
Impairment losses on financial assets (31.7) (47.2) (20.0) - 0.1 - (98.8)
Total operating expenses before adjusting items (240.1) (224.5) (54.9) (145.6) (74.7) (33.8) (773.6)
Adjusted operating profit/(loss)(1) 89.5 37.9 78.0 12.2 (1.7) (45.3) 170.6
Amortisation of intangible assets on acquisition - (0.2) - (1.2) - - (1.4)
Provision in relation to the BiFD review (0.6) (16.6) - - - - (17.2)
Restructuring costs (2.2) (0.6) (0.3) - - - (3.1)
Complaints handling and other operational costs associated with the FCA's - (6.9) - - - - (6.9)
review of historical motor finance commission arrangements
Operating profit/(loss) before tax 86.7 13.6 77.7 11.0 (1.7) (45.3) 142.0
External operating income/(expense) 517.0 376.7 224.7 156.9 73.0 (404.1) 944.2
Inter segment operating (expense)/income (187.4) (114.3) (91.8) 0.9 - 392.6 -
Segment operating income/(expense) 329.6 262.4 132.9 157.8 73.0 (11.5) 944.2
1. Adjusted operating profit/(loss) is stated before the following adjusting
items and the associated tax effect: amortisation of intangible assets on
acquisition, provision in relation to the BiFD review, restructuring costs and
complaints handling and other operational costs associated with the FCA's
review of historical motor finance commission arrangements. More information
on the adjusting items can be found in Notes 9, 16 and 17.
The Commercial operating segment above includes Novitas, which ceased lending
to new customers in July 2021 following a strategic review. Novitas recorded
an operating loss of £0.1 million (2023: loss of £84.2 million), driven by
impairment losses of £6.4 million (2023: £116.8 million).
Novitas' income was £11.0 million (2023: £18.9 million) and expenses were
£4.8 million (2023: £8.7 million). In line with IFRS 9's requirement to
recognise interest income on Stage 3 loans on a net basis, income includes the
partial unwinding over time of the expected credit loss recognised in the year
following the transfer of the majority of loans to Stage 3.
As set out in Note 23 "Post Balance Sheet Event", the group announced it
entered into an agreement to sell CBAM, one of the group's operating segments
and whose financial results are presented within this note, to Oaktree on 19
September 2024 following a comprehensive strategic review.
Banking
Commercial Retail Property Asset Management Securities Group(2) Total
£ million £ million £ million £ million £ million £ million £ million
Summary balance sheet information at 31 July 2024
Total assets¹ 5,101.6 3,041.9 1,955.2 192.0 825.0 2,965.1 14,080.8
Total liabilities - - - 70.2 734.6 11,433.5 12,238.3
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 £62.4 million.
2. Balance sheet includes £2,970.1 million assets and £11,358.1 million
liabilities attributable to the Banking division primarily comprising the
treasury balances described in the second paragraph of this note.
Equity is allocated across the group as 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 £10,098.7 million, in addition to
assets and liabilities of £2,970.1 million and £11,358.1 million
respectively primarily comprising treasury balances which are included within
the Group column above.
Banking Asset Management Securities Group Total
£ million £ million £ million £ million £ million
Equity 1,710.7 121.8 90.4 (80.4) 1,842.5
Banking
Commercial Retail Property Asset Management Securities Group Total
Other segment information for the year ended 31 July 2024
Employees (average number)¹ 1,461 1,195 199 872 311 87 4,125
1. Banking segments include a central function headcount allocation. The
company's average number of employees is equivalent to the Group number.
Banking
Commercial Retail Property Asset Management Securities Group Total
£ million £ million £ million £ million £ million £ million £ million
Summary income statement for year ended 31 July 2023
Net interest income/(expense) 251.2 218.4 117.1 6.7 0.5 (1.3) 592.6
Non-interest income 96.6 29.7 0.8 138.1 74.8 - 340.0
Operating income/(expense) 347.8 248.1 117.9 144.8 75.3 (1.3) 932.6
Administrative expenses (171.5) (142.8) (26.5) (123.3) (67.5) (22.2) (553.8)
Depreciation and amortisation (22.9) (21.6) (4.4) (5.5) (4.3) (2.5) (61.2)
Impairment losses on financial assets (137.5) (49.0) (17.5) (0.1) - - (204.1)
Total operating expenses before amortisation of intangible assets on (331.9) (213.4) (48.4) (128.9) (71.8) (24.7) (819.1)
acquisition
Adjusted operating profit/(loss)¹ 15.9 34.7 69.5 15.9 3.5 (26.0) 113.5
Amortisation of intangible assets on acquisition - - - (1.5) - - (1.5)
Operating profit/(loss) before tax 15.9 34.7 69.5 14.4 3.5 (26.0) 112.0
External operating income/(expense) 451.1 308.6 170.3 144.2 75.3 (216.9) 932.6
Inter segment operating (expense)/income (103.3) (60.5) (52.4) 0.6 - 215.6 -
Segment operating income/(expense) 347.8 248.1 117.9 144.8 75.3 (1.3) 932.6
1. Adjusted operating profit/(loss) is stated before amortisation of intangible
assets on acquisition and tax.
Banking
Commercial Retail Property Asset Management Securities Group² Total
£ million £ million £ million £ million £ million £ million £ million
Summary balance sheet information at 31 July 2023
Total assets¹ 4,821.3 3,001.8 1,703.1 177.9 870.5 2,975.7 13,550.3
Total liabilities - - - 64.1 778.1 11,063.2 11,905.4
1. Total assets for the Banking operating segments comprise the loan book and
operating lease assets only. The Commercial operating segment includes the net
loan book of Novitas of £59.9 million.
2. Balance sheet includes £2,977.4 million assets and £11,151.9 million
liabilities attributable to the Banking division primarily comprising the
treasury balances described in the second paragraph of this note.
Equity is allocated across the group as set out below. Banking division
equity, which is managed as a whole rather than on a segmental basis, reflects
loan book and operating lease assets of £9,526.2 million, in addition to
assets and liabilities of £2,977.4 million and £11,151.9 million
respectively primarily comprising treasury balances which are included within
the Group column above.
Banking Asset Securities Group Total
Management
£ million £ million £ million £ million £ million
Equity 1,351.7 113.8 92.4 87.0 1,644.9
Banking
Commercial Retail Property Asset Management Securities Group Total
Other segmental information for the year ended 31 July 2023
Employees (average number)¹ 1,450 1,194 201 814 320 81 4,060
1. Banking segments include a central function headcount allocation. The
company's average number of employees is equivalent to the Group number.
3. Taxation
2024 2023
£ million £ million
Tax charged/(credited) to the income statement
Current tax:
UK corporation tax 40.3 18.1
Foreign tax 0.9 2.3
Adjustments in respect of previous years (5.3) (8.2)
35.9 12.2
Deferred tax:
Deferred tax (credit)/charge for the current year (0.6) 11.4
Adjustments in respect of previous years 6.3 7.3
41.6 30.9
Tax on items not (credited)/charged to the income statement
Current tax relating to:
Share-based payments - (0.2)
Acquisitions (0.4) -
Deferred tax relating to:
Cash flow hedging (8.4) 4.9
Defined benefit pension scheme - (1.6)
Financial instruments classified as fair value through other comprehensive (1.0) (1.1)
income
Share-based payments - 0.3
Currency translation (losses)/gains (0.4) 0.5
Acquisitions 0.6 -
(9.6) 2.8
Reconciliation to tax expense
UK corporation tax for the year at 25.0% (2023: 21.0%) on operating profit 35.5 23.5
before tax
Effect of different tax rates in other jurisdictions - (0.3)
Disallowable items and other permanent differences 5.1 1.6
Banking surcharge - 6.2
Deferred tax impact of decreased tax rates - 0.8
Prior year tax provision 1.0 (0.9)
41.6 30.9
The standard UK corporation tax rate for the financial year is 25.0% (2023:
21.0%). An additional 3.0% (2023: 6.3%) surcharge applies to banking company
profits as defined in legislation, but only above a threshold amount which is
not materially exceeded by the current year banking company profits. The
effective tax rate of 29.3% (2023: 27.6%) is above the UK corporation tax rate
primarily due to disallowable expenditure.
The UK government has implemented the Pillar Two global minimum tax rate of
15% and a UK domestic minimum top-up tax with effect from the group's
financial year commencing 1 August 2024. The jurisdictions in relation to
which Pillar Two tax liabilities are expected to potentially arise for the
group are the Republic of Ireland, Jersey and Guernsey, however the impact is
expected to be immaterial. The group has adopted the IAS 12 exemption from
recognition and disclosure regarding the impact on deferred tax assets and
liabilities arising from this legislation.
Movements in deferred tax assets and liabilities were as follows:
Capital allowances Pension scheme Share-based payments and deferred compensation Impairment losses Cash flow hedging Intangible assets Other Total
£ million £ million £ million £ million £ million £ million £ million £ million
Group
At 1 August 2022 25.5 (1.9) 12.9 5.8 (8.5) (1.3) - 32.5
(Charge)/credit to the income statement (12.1) - (3.9) 0.1 - 0.4 (3.2) (18.7)
(Charge)/credit to other comprehensive income (0.5) 1.6 - - (4.9) - 1.1 (2.7)
Charge to equity - - (0.3) - - - - (0.3)
Acquisitions - - - - - - - -
At 31 July 2023 12.9 (0.3) 8.7 5.9 (13.4) (0.9) (2.1) 10.8
(Charge)/credit to the income statement (8.2) 0.1 (1.5) 0.1 - 0.3 3.5 (5.7)
Credit to other comprehensive income 0.4 - - - 8.4 - 1.0 9.8
Charge to equity - - - - - - - -
Acquisitions - - - - - (1.5) 0.9 (0.6)
At 31 July 2024 5.1 (0.2) 7.2 6.0 (5.0) (2.1) 3.3 14.3
The group's deferred tax asset comprises £4.8 million (31 July 2023: £0.7
million) due within one year and £9.5 million (31 July 2023: £10.1 million)
due after more than one year.
As the group has been and is expected to continue to be consistently
profitable, the full deferred tax assets have been recognised.
4. Earnings per Share
The calculation of basic earnings per share is based on the profit
attributable to shareholders and the number of basic weighted average shares.
When calculating the diluted earnings per share, the weighted average number
of shares in issue is adjusted for the effects of all dilutive share options
and awards.
2024 2023
Basic 59.7p 54.3p
Diluted 59.5p 54.2p
Adjusted basic¹ 76.1p 55.1p
Adjusted diluted¹ 75.9p 55.0p
1. Excludes the following adjusting items and the associated tax effect where
appropriate: amortisation of intangible assets on acquisition, provision in
relation to the BiFD review, restructuring costs and complaints handling and
other operational costs associated with the FCA's review of historical motor
finance commission arrangements.
2024 2023
£ million £ million
Profit attributable to shareholders' equity 89.3 81.1
Adjustments:
Amortisation of intangible assets on acquisition 1.4 1.5
Provision in relation to the BiFD review 17.2 -
Restructuring costs 3.1 -
Complaints handling and other operational costs associated with the FCA's 6.9 -
review of historical motor finance commission arrangements
Tax effect of adjustments (4.0) (0.3)
Adjusted profit attributable to shareholders' equity 113.9 82.3
2024 2023
million million
Average number of shares
Basic weighted 149.7 149.4
Effect of dilutive share options and awards 0.3 0.2
Diluted weighted 150.0 149.6
5. Dividends
2024 2023
£ million £ million
For each ordinary share
Final dividend for previous financial year paid in November 2023: 45.0p 67.1 65.6
(November 2022: 44.0p)
Interim dividend for current financial year paid in April 2024: nil (April - 33.5
2023: 22.5p)
67.1 99.1
As disclosed on 15 February 2024 in a trading update and dividend
announcement, the group will not pay any dividends on its ordinary shares for
the financial year ended 31 July 2024.
6. Loans and Advances to Customers
(a) Maturity and classification analysis of loans and advances to
customers
The following tables set out the maturity and IFRS 9 classification analysis
of loans and advances to customers. At 31 July 2024 loans and advances to
customers with a maturity of two years or less was £7,733.6 million (31 July
2023: £7,158.8 million) representing 75.3% (31 July 2023: 74.3%) of total
gross loans and advances to customers:
Between Between Between After Total gross loans Total net loans
Within three three months one and two and more than and advances Impairment and advances
On demand months and one year two years five years five years to customers provisions to customers
£ million £ million £ million £ million £ million £ million £ million £ million £ million
At 31 July 2024 88.5 2,888.2 2,654.9 2,102.0 2,399.1 143.9 10,276.6 (445.8) 9,830.8
At 31 July 2023 76.5 2,597.8 2,636.5 1,848.0 2,337.2 139.6 9,635.6 (380.6) 9,255.0
31 July 2024 31 July 2023
£ million £ million
Gross loans and advances to customers
Held at amortised cost 10,264.8 9,635.6
Held at fair value through profit or loss 11.8 -
10,276.6 9,635.6
(b) Loans and advances to customers held at amortised cost and
impairment provisions by stage
Gross loans and advances to customers held at amortised cost by stage and the
corresponding impairment provisions and provision coverage ratios are set out
below:
Stage 2
Stage 1 Less than 30 days past due Greater than or equal to 30 days past due Total Stage 3 Total
£ million £ million £ million £ million £ million £ million
At 31 July 2024
Gross loans and advances to customers held at amortised cost
Commercial 3,877.8 801.5 33.1 834.6 400.2 5,112.6
Of which: Commercial excluding Novitas 3,877.8 800.5 33.1 833.6 118.1 4,829.5
Of which: Novitas - 1.0 - 1.0 282.1 283.1
Retail 2,815.7 221.2 9.9 231.1 90.0 3,136.8
Property 1,717.0 9.8 53.3 63.1 235.3 2,015.4
8,410.5 1,032.5 96.3 1,128.8 725.5 10,264.8
Impairment provisions
Commercial 20.9 9.6 4.2 13.8 256.0 290.7
Of which: Commercial excluding Novitas 20.9 8.6 4.2 12.8 36.3 70.0
Of which: Novitas - 1.0 - 1.0 219.7 220.7
Retail 27.7 14.8 2.2 17.0 50.2 94.9
Property 3.6 0.2 0.3 0.5 56.1 60.2
52.2 24.6 6.7 31.3 362.3 445.8
Provision coverage ratio
Commercial 0.5% 1.2% 12.7% 1.7% 64.0% 5.7%
Within which: Commercial excluding Novitas 0.5% 1.1% 12.7% 1.5% 30.7% 1.4%
Within which: Novitas - 100.0% - 100.0% 77.9% 78.0%
Retail 1.0% 6.7% 22.2% 7.4% 55.8% 3.0%
Property 0.2% 2.0% 0.6% 0.8% 23.8% 3.0%
0.6% 2.4% 7.0% 2.8% 49.9% 4.3%
Stage 2
Stage 1 Less than 30 days past due Greater than or equal to 30 days past due Total Stage 3 Total
£ million £ million £ million £ million £ million £ million
At 31 July 2023
Gross loans and advances to customers held at amortised cost
Commercial 3,686.1 750.9 23.2 774.1 339.4 4,799.6
Of which: Commercial excluding Novitas 3,685.1 749.6 23.2 772.8 97.7 4,555.6
Of which: Novitas 1.0 1.3 - 1.3 241.7 244.0
Retail 2,839.1 159.1 18.4 177.5 74.6 3,091.2
Property 1,465.0 85.7 24.7 110.4 169.4 1,744.8
7,990.2 995.7 66.3 1,062.0 583.4 9,635.6
Impairment provisions
Commercial 25.1 13.9 2.4 16.3 208.1 249.5
Of which: Commercial excluding Novitas 24.9 13.6 2.4 16.0 24.5 65.4
Of which: Novitas 0.2 0.3 - 0.3 183.6 184.1
Retail 27.9 11.6 2.6 14.2 47.3 89.4
Property 5.1 1.4 0.3 1.7 34.9 41.7
58.1 26.9 5.3 32.2 290.3 380.6
Provision coverage ratio
Commercial 0.7% 1.9% 10.3% 2.1% 61.3% 5.2%
Within which: Commercial excluding Novitas 0.7% 1.8% 10.3% 2.1% 25.1% 1.4%
Within which: Novitas 20.0% 23.1% -% 23.1% 76.0% 75.5%
Retail 1.0% 7.3% 14.1% 8.0% 63.4% 2.9%
Property 0.3% 1.6% 1.2% 1.5% 20.6% 2.4%
0.7% 2.7% 8.0% 3.0% 49.8% 3.9%
In Commercial, the impairment coverage ratio increased to 5.7% (31 July 2023:
5.2%), reflecting the impacts of Novitas Stage 3 interest accrual in line with
the requirement under IFRS 9 to recognise interest on a net basis.
Excluding Novitas, the Commercial provision coverage ratio remained stable at
1.4% (31 July 2023: 1.4%) as strong Stage 1 new business levels offset the
impacts of migrations into Stages 2 and 3 during the financial year.
In Retail, the provision coverage ratio increased to 3.0% (31 July 2023:
2.9%), reflecting resilient portfolio performance in light of sustained
macroeconomic uncertainty and heightened levels of arrears and forbearance in
the Motor Finance business as a result of persistent cost of living pressures
on customers.
In Property, the provision coverage ratio increased to 3.0% (31 July 2023:
2.4%), as a result of migrations to Stage 3 and increased individual
provisions for some existing impaired accounts during the financial year.
(c) Adjustments
By their nature, limitations in the group's expected credit loss models or
input data may be identified through ongoing model monitoring and validation
of models. In certain circumstances, management make appropriate adjustments
to model-calculated expected credit losses. Adjustments have been identified
as a key source of estimation uncertainty as set out in Note 1.
(d) Reconciliation of loans and advances to customers held at amortised
cost and impairment provisions
Reconciliation of gross loans and advances to customers and associated
impairment provisions are set out below.
New financial assets originate in Stage 1 only, and the amount presented
represents the value at origination.
Subsequently, a loan may transfer between stages, and the presentation of such
transfers is based on a comparison of the loan at the beginning of the year
(or at origination if this occurred during the year) and the end of the year
(or just prior to final repayment or write off).
Repayments relating to loans which transferred between stages during the year
are presented within the transfers between stages lines. Such transfers do not
represent overnight reclassification from one stage to another. All other
repayments are presented in a separate line.
ECL model methodologies may be updated or enhanced from time to time and the
impacts of such changes are presented on a separate line. During the year, a
number of enhancements were made to the models in the Premium business. The
enhancements were made to address known model limitations and to ensure
modelled provisions better reflect future loss emergence.
Enhancements to our model suite are a contributory factor to ECL movements and
such factors have been taken into consideration when assessing any required
adjustments to modelled output and ensuring appropriate provision coverage
levels.
A loan is written off when there is no reasonable expectation of further
recovery following realisation of all associated collateral and available
recovery actions against the customer.
Stage 1 Stage 2 Stage 3 Total
£ million £ million £ million £ million
Gross loans and advances to customers held at amortised cost
At 1 August 2023 7,990.2 1,062.0 583.4 9,635.6
New financial assets originated 6,695.5 - - 6,695.5
Transfers to Stage 1 138.2 (205.2) (7.6) (74.6)
Transfers to Stage 2 (1,165.5) 904.8 (8.4) (269.1)
Transfers to Stage 3 (310.2) (130.8) 329.1 (111.9)
Net transfer between stages and repayments¹ (1,337.5) 568.8 313.1 (455.6)
Repayments while stage remained unchanged and final repayments (4,936.3) (501.2) (114.4) (5,551.9)
Changes to model methodologies - - - -
Write offs (1.4) (0.8) (56.6) (58.8)
At 31 July 2024 8,410.5 1,128.8 725.5 10,264.8
1. Repayments relate only to financial assets which transferred between stages
during the year. Other repayments are shown in the line below.
Stage 1 Stage 2 Stage 3¹ Total
£ million £ million £ million £ million
Gross loans and advances to customers held at amortised cost
At 1 August 2022 7,627.0 1,158.9 358.6 9,144.5
New financial assets originated 6,604.0 - - 6,604.0
Transfers to Stage 1 276.2 (373.2) (6.8) (103.8)
Transfers to Stage 2 (1,068.6) 878.6 (16.1) (206.1)
Transfers to Stage 3 (303.6) (194.4) 421.5 (76.5)
Net transfer between stages and repayments² (1,096.0) 311.0 398.6 (386.4)
Repayments while stage remained unchanged and final repayments (5,118.8) (403.5) (100.4) (5,622.7)
Changes to model methodologies (25.6) (4.0) 29.6 -
Write offs (0.4) (0.4) (103.0) (103.8)
At 31 July 2023 7,990.2 1,062.0 583.4 9,635.6
1. A significant proportion of the Stage 3 movements is driven by Novitas with
£174.4 million of transfers to Stage 3 and £37.4 million of write-offs. In
addition, £49.2 million of Novitas movements are included within 'Repayments
while stage remained unchanged and final repayments', comprising largely of
accrued interest. The accrued interest is partly offset by ECL increases
included within the adjacent ECL reconciliation, in line with IFRS 9's
requirement to recognise interest income on Stage 3 loans on a net basis.
2. Repayments relate only to financial assets which transferred between stages
during the year. Other repayments are shown in the line below.
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
£283.1 million (2023: £152.3 million). No gain or loss (2023: £nil) was
recognised as a result of these modifications. The gross carrying amount at
31 July 2024 of modified loans and advances to customers which transferred
from Stage 2 or 3 to Stage 1 during the year was £38.7 million (31 July
2023: £14.8 million).
Stage 1 Stage 2 Stage 3 Total
£ million £ million £ million £ million
Impairment provisions on loans and advances to customers held at amortised
cost
At 1 August 2023 58.1 32.2 290.3 380.6
New financial assets originated 51.7 - - 51.7
Transfers to Stage 1 0.6 (3.9) (0.7) (4.0)
Transfers to Stage 2 (13.4) 31.4 (1.1) 16.9
Transfers to Stage 3 (5.9) (12.0) 98.7 80.8
Net remeasurement of expected credit losses arising from transfer of stages (18.7) 15.5 96.9 93.7
and repayments(1)
Repayments and ECL movements while stage remained unchanged and final (37.7) (15.6) 26.6 (26.7)
repayments
Changes to model methodologies - - - -
Charge to the income statement (4.7) (0.1) 123.5 118.7
Write offs (1.2) (0.8) (51.5) (53.5)
At 31 July 2024 52.2 31.3 362.3 445.8
1. Repayments relate only to financial assets which transferred between stages
during the year. Other repayments are shown in the line below.
Stage 1 Stage 2 Stage 3¹ Total
£ million £ million £ million £ million
Impairment provisions on loans and advances to customers held at amortised
cost
At 1 August 2022 50.3 78.3 157.0 285.6
New financial assets originated 46.7 - - 46.7
Transfers to Stage 1 1.2 (7.7) (1.0) (7.5)
Transfers to Stage 2 (8.7) 27.7 (5.7) 13.3
Transfers to Stage 3 (11.2) (53.3) 227.2 162.7
Net remeasurement of expected credit losses arising from transfer of stages (18.7) (33.3) 220.5 168.5
and repayments²
Repayments and ECL movements while stage remained unchanged and final (17.8) (10.7) (20.0) (48.5)
repayments
Changes to model methodologies (2.2) (1.9) 2.3 (1.8)
Charge to the income statement 8.0 (45.9) 202.8 164.9
Write offs (0.2) (0.2) (69.5) (69.9)
At 31 July 2023 58.1 32.2 290.3 380.6
1. A significant proportion of the Stage 3 movements is driven by Novitas with
£147.6 million of transfers to Stage 3 and £11.9 million of write-offs.
2. Repayments relate only to financial assets which transferred between stages
during the year. Other repayments are shown in the line below.
2024 2023
£ million £ million
Impairment losses relating to loans and advances to customers held at
amortised cost:
Charge to income statement arising from movement in impairment provisions 118.7 164.9
Amounts written off directly to income statement and other costs, net of (21.7) 39.4
discount unwind on Stage 3 loans to interest income, and recoveries
97.0 204.3
Impairment losses/(gains) relating to other financial assets 1.8 (0.2)
Impairment losses on financial assets recognised in income statement 98.8 204.1
Impairment losses on financial assets of £98.8 million (2023: £204.1
million) include £6.4 million in relation to Novitas (2023: £116.8
million).The Novitas impairment relates to an extension of the time to
recovery assumptions from insurers and reflects management's latest assessment
including the current timeline of litigation proceedings.
The contractual amount outstanding at 31 July 2024 on financial assets that
were written off during the period and are still subject to recovery activity
is £22.1 million (31 July 2023: £32.3 million).
(e) Finance lease and hire purchase agreement receivables
31 July 2024 31 July 2023
£ million £ million
Net loans and advances to customers comprise
Hire purchase agreement receivables 3,749.8 3,671.3
Finance lease receivables 896.7 803.9
Other loans and advances 5,184.3 4,779.8
At 31 July 9,830.8 9,255.0
The following table shows a reconciliation between gross investment in finance
lease and hire purchase agreement receivables included in the net loans and
advances to customers table above to present value of minimum lease and hire
purchase payments.
31 July 2024 31 July 2023¹
£ million £ million
Gross investment in finance leases and hire purchase agreement receivables
due:
One year or within one year 1,987.6 1,849.3
>One to two years 1,573.2 1,493.7
>Two to three years 1,168.2 1,175.8
>Three to four years 692.0 652.5
>Four to five years 222.6 205.3
More than five years 46.4 43.1
5,690.0 5,419.7
Unearned finance income (904.5) (820.7)
Present value of minimum lease and hire purchase agreement payments 4,785.5 4,599.0
Of which due:
One year or within one year 1,671.1 1,567.2
>One to two years 1,326.6 1,268.8
>Two to three years 982.6 999.1
>Three to four years 579.4 553.1
>Four to five years 185.9 173.8
More than five years 39.9 37.0
4,785.5 4,599.0
1. Restated following a classification misstatement in the prior year maturity
profiles with no change in the total amounts. Please see below for further
information.
The aggregate cost of assets acquired for the purpose of letting under finance
leases and hire purchase agreements was £7,898.6 million (2023: £7,167.5
million). The average effective interest rate on finance leases approximates
to 12.2% (2023: 11.0%). The present value of minimum lease and hire purchase
agreement payments reflects the fair value of finance lease and hire purchase
agreement receivables before deduction of impairment provisions.
The prior year figures in the table above for finance lease and hire purchase
agreement receivables have been restated following a classification
misstatement. The gross investment in finance leases and hire purchase
agreement receivables due in '>one to two years' have decreased by £509.1
million, while '>two to three years', '>three to four years', '>four
to five years' and 'more than five years' have increased by £203.3 million,
£214.0 million, £89.8 million and £2.0 million respectively with no change
in the total amounts. The present value of minimum lease and hire purchase
agreement payments due in '>one to two years' have decreased by £422.9
million, while '>two to three years', '>three to four years', '>four
to five years' and 'more than five years' have increased by £168.9 million,
£177.8 million, £74.6 million and £1.6 million respectively with no change
in the total amounts.
7. Debt Securities
Fair value through profit or loss Fair value through other comprehensive income Amortised cost Total
£ million £ million £ million £ million
Sovereign and central bank debt - 383.7 - 383.7
Supranational, sub-sovereigns and agency ("SSA") bonds - 145.5 - 145.5
Covered bonds - 187.7 - 187.7
Long trading positions in debt securities 16.0 - - 16.0
Other debt securities 0.8 - 6.8 7.6
At 31 July 2024 16.8 716.9 6.8 740.5
Fair value through profit or loss Fair value through other comprehensive income Amortised cost Total
£ million £ million £ million £ million
Sovereign and central bank debt - 186.1 - 186.1
SSA bonds - - - -
Covered bonds - 106.3 - 106.3
Long trading positions in debt securities 15.2 - - 15.2
Other debt securities - - - -
At 31 July 2023 15.2 292.4 - 307.6
Movements on the book value of sovereign and central bank debt comprise:
2024 2023
£ million £ million
Sovereign and central bank debt at 1 August 186.1 415.4
Additions 194.2 269.7
Redemptions - (459.2)
Currency translation differences (1.5) (0.3)
Movement in value 4.9 (39.5)
Sovereign and central bank debt at 31 July 383.7 186.1
Movements on the book value of SSA bonds comprise:
2024 2023
£ million £ million
SSA bonds at 1 August - -
Additions 155.4 -
Redemptions (15.2) -
Currency translation differences (0.3) -
Movement in value 5.6 -
SSA bonds at 31 July 145.5 -
Movements on the book value of covered bonds comprise:
2024 2023
£ million £ million
Covered bonds 1 August 106.3 -
Additions 139.7 105.4
Redemptions/disposals (59.0) -
Currency translation differences (0.3) -
Movement in value 1.0 0.9
Covered bonds at 31 July 187.7 106.3
8. Equity Shares
31 July 2024 31 July 2023
£ million £ million
Long trading positions 25.8 27.8
Other equity shares 1.6 1.5
27.4 29.3
9. Intangible Assets
Intangible
assets on
Goodwill Software acquisition Total
£ million £ million £ million £ million
Cost
At 1 August 2022 142.6 299.5 51.0 493.1
Additions - 50.5 - 50.5
Disposals (0.1) (16.8) (0.6) (17.5)
At 31 July 2023 142.5 333.2 50.4 526.1
Additions 8.3 28.1 7.3 43.7
Disposals - (12.6) (0.3) (12.9)
At 31 July 2024 150.8 348.7 57.4 556.9
Amortisation
At 1 August 2022 47.9 147.4 45.8 241.1
Amortisation charge for the year - 36.1 1.5 37.6
Disposals - (15.7) (0.6) (16.3)
At 31 July 2023 47.9 167.8 46.7 262.4
Amortisation charge for the year - 38.9 1.4 40.3
Disposals - (11.4) (0.4) (11.8)
At 31 July 2024 47.9 195.3 47.7 290.9
Net book value at 31 July 2024 102.9 153.4 9.7 266.0
Net book value at 31 July 2023 94.6 165.4 3.7 263.7
Net book value at 1 August 2022 94.7 152.1 5.2 252.0
Goodwill additions of £8.3 million (2023: £nil) and intangible assets on
acquisition additions of £7.3 million (2023: £nil) relate to the group's
acquisition of the 100% shareholdings of Bluestone Motor Finance (Ireland) DAC
("Bluestone") (goodwill of £4.7 million and intangible assets on acquisition
of £3.6 million) and Bottriell Adams LLP ("Bottriell Adams") (goodwill of
£3.7 million and intangible assets on acquisition of £3.7 million).
Bluestone, a provider of motor finance in Ireland, was acquired for cash
consideration of €17.2 million on 31 October 2023. Net assets of €7.8
million were acquired, largely comprising loans and advances to customers,
cash, debt securities and borrowings. Bluestone is a well-established brand in
Ireland with industry-leading technology and an established network of over
650 dealer partners and an experienced sales and underwriting team. This
acquisition will allow the Motor Finance business to rebuild its presence in
Ireland. These factors and the expected synergies are reflected in the
goodwill and intangible assets on acquisition recognised by the group.
Following the acquisition, Bluestone has been rebranded to Close Brothers
Motor Finance ("CBMF").
Bottriell Adams, an IFA business based in Dorset, was acquired for total
consideration of £6.6 million comprising an initial cash payment on
acquisition and contingent consideration. The acquisition was completed in
March 2024. Bottriell Adams, with approximately £240 million of client assets
on acquisition, allows the Asset Management division to extend its regional
presence in the South West. The customer relationships are reflected in the
£3.7 million of intangible assets on acquisition.
Software includes assets under development of £35.4 million (31 July 2023:
£88.8 million).
Intangible assets on acquisition relate to broker and customer relationships
and are amortised over a period of eight to 20 years.
In the 2024 financial year, £1.4 million (2023: £1.5 million) of the
amortisation charge is included in amortisation of intangible assets on
acquisition and £38.9 million (2023: £36.1 million) of the amortisation
charge is included in administrative expenses shown in the consolidated income
statement.
Impairment tests for goodwill
Overview
At 31 July 2024, goodwill has been allocated to nine (31 July 2023: eight)
individual cash generating units ("CGUs"). Seven (31 July 2023: six) are
within the Banking division with an additional CGU this year following the
acquisition of Close Brothers Finance DAC, one is the Asset Management
division and the remaining one is Winterflood in the Securities division.
Goodwill is allocated to the CGU in which the historical acquisition occurred
and hence the goodwill originated. Further information on the performance of
each division can be found in Note 2 'Segmental Analysis'. Goodwill impairment
reviews are carried out annually by assessing the recoverable amount of the
group's CGUs, which is the higher of fair value less costs to sell and value
in use. The recoverable amounts for all CGUs were measured based on value in
use.
Methodology
A value in use calculation uses discounted cash flow forecasts based on the
most recent three-year plans to determine the recoverable amount of each CGU.
The most relevant assumptions underlying management's three-year plans, which
are based on past experience and forecast market conditions, are expected loan
book growth rates, net return on loan book and future capital requirements in
the Banking CGUs, expected total client asset growth rate and revenue margin
in the Asset Management CGU and expected trading levels in the Winterflood
CGU. While these assumptions are relevant to management's plans, they may not
all be key assumptions in the goodwill impairment test.
In addition, while CGUs are not individually regulated, for the purposes of an
impairment assessment, theoretical capital requirements have been taken into
consideration in calculating a CGU's value in use and carrying value to ensure
that capital constraints on free cash flows are appropriately reflected and
the carrying value is on a comparable basis.
Beyond the group's three-year planning horizon, estimates of future cash flows
in the fourth and fifth years are made by management with due consideration
given to the relevant assumptions set out above. After the fifth year, a
terminal value is calculated using an annual growth rate of 2%, which is
consistent with the UK government's long-term inflation target.
The cash flows are discounted using a pre-tax estimated weighted average cost
of capital. The methodology used to derive the discount rates was further
updated during the year with valuation experts engaged where appropriate and
refinements to the beta and size premium assumptions in the cost of capital
calculation.
Beta is a measure of systematic risk and a lower beta has been applied to the
Banking CGUs this year following a review by valuation experts. In addition,
an appropriate size premium has been consistently applied to all CGUs based on
the size of the group and not the size of the individual CGUs for the first
time this year. The size premium represents an estimate of the additional risk
premium required by investors where typically a smaller size would require a
larger premium.
The discount rates used differ across the CGUs, reflecting the nature of the
CGUs' business and the current market returns appropriate to the CGU that
investors would require for a similar asset. The discount rates for the
Banking and Winterflood CGUs have decreased while CBAM has increased this year
following the aforementioned methodology refinements.
Assessment
At 31 July 2024, the results of the review indicate there is no goodwill
impairment. The inputs used in the value in use calculations are sensitive
primarily to changes in the assumptions for future cash flows, which include
consideration for future capital requirements and discount rates. Having
performed stress tested value in use calculations, the group believes that any
reasonably possible change in the key assumptions which have been used would
not lead to the carrying value of any CGU to exceed its recoverable amount
except Winterflood and Motor Finance.
Winterflood continued to experience difficult market conditions and recorded a
small loss in the year. The business has a long track record of trading
profitably in a range of conditions and is well placed to take advantage when
investor confidence recovers. Nevertheless, consistent with the prior year,
future market conditions remain uncertain and as such the value in use
calculation for this CGU has been identified as a key source of estimation
uncertainty as set out in Note 1.
The Motor Finance CGU, which includes goodwill of £3.0 million and other
intangible assets of £15.3 million, relates to the UK business and excludes
the recent Close Brothers Finance DAC acquisition. The CGU has seen strong
business volumes over the year but the market and regulatory backdrop is
expected to present some challenges to the future cash flows, therefore this
CGU has been identified as a key source of estimation uncertainty for the
first time this year. The value in use of Motor Finance excludes any potential
redress provision impact of the FCA's discretionary commission arrangements
review since it is considered to be a legacy matter that relates to the excess
capital of the parent and has no impact on the trading forecasts of the CGU
itself.
The most significant uncertainty within the Winterflood value in use
calculation relates to the expected future cash flows and when they return to
normalised levels. The VIU of Winterflood is calculated to be 136% above
carrying value at 31 July 2024 and for the purposes of goodwill modelling,
management have projected that trading will gradually return to normalised
levels over the medium term.
A 33% reduction in the year five cash flows and all subsequent years would
result in a recoverable amount that is equal to the carrying value of the CGU,
that is, the headroom between the two is reduced to nil. In the discounted
cash flows model, delaying all cash flows by one year, which would reduce the
terminal value, would reduce the VIU headroom by 58%. The discount rate is
also an important driver of the value in use calculation and an absolute
increase of 3.1% in the rate would also result in nil headroom.
The most significant uncertainty within the Motor Finance value in use
calculation relates to the expected future cash flows, which include
consideration for the CGU's forecast capital charge, and when they return to
more normalised growth levels. While as noted previously the cash flows
exclude any potential redress provision impact of the FCA's commissions
review, the cash flows are nevertheless impacted by the overall uncertainty
introduced by the FCA's review and the group's strategic and capital actions
response. As described in Note 2, determining the impact on goodwill of the
FCA's review and management's response is a critical accounting judgement. It
also represents a key assumption for the Motor goodwill impairment assessment.
Management's expectations on a return of the cash flows to more normalised
growth levels are based on the review timeline set out by the FCA.
A 21% reduction in the annual cash flows included within the terminal value of
the Motor CGU would result in a recoverable amount that is equal to the
carrying value of the CGU. In the discounted cash flows model, delaying all
cash flows by one year, which would reduce the terminal value, would result in
the full impairment of the goodwill and other intangible assets totalling
£18.3 million in the Motor CGU. However, this outcome reflects the CGU
sensitivity and does not include all possible management actions which may
affect capital and cash flow forecasts for each CGU of the Banking division if
any further response were required due to delays linked to the FCA review.
Separately, an absolute increase of 1.6% in the discount rate would result in
nil headroom.
These scenarios for Winterflood and Motor Finance are a demonstration of
sensitivity only and are not management's base case scenarios.
As set out in Note 23 "Post Balance Sheet Event", following a comprehensive
strategic review, the group announced it entered into an agreement to sell
CBAM to Oaktree on 19 September 2024. The goodwill associated with the CBAM
CGU is £43.5 million. This post balance sheet transaction has no impact on
the conclusion of the goodwill impairment assessment and the recoverable
amount of the CGU remained above its carrying value at 31 July 2024.
10. Property, Plant and Equipment
Assets
Fixtures, held under
Leasehold fittings and operating Motor Right of use
property equipment leases vehicles assets¹ Total
£ million £ million £ million £ million £ million £ million
Group
Cost
At 1 August 2022 20.9 62.6 398.2 0.2 78.5 560.4
Additions 1.0 7.5 93.1 0.2 24.7 126.5
Disposals (0.4) (4.6) (42.2) - (9.2) (56.4)
At 31 July 2023 21.5 65.5 449.1 0.4 94.0 630.5
Additions 1.3 12.9 64.7 - 10.0 88.9
Disposals (0.4) (13.3) (71.9) - (11.1) (96.7)
At 31 July 2024 22.4 65.1 441.9 0.4 92.9 622.7
Depreciation
At 1 August 2022 13.0 36.9 158.2 0.2 29.6 237.9
Depreciation and impairment charges for the year 2.4 8.3 45.5 - 14.4 70.6
Disposals (0.4) (4.3) (25.8) - (4.6) (35.1)
At 31 July 2023 15.0 40.9 177.9 0.2 39.4 273.4
Depreciation and impairment charges for the year 2.3 9.1 44.4 0.1 15.5 71.4
Disposals (0.3) (13.4) (48.3) - (9.7) (71.7)
At 31 July 2024 17.0 36.6 174.0 0.3 45.2 273.1
Net book value at 31 July 2024 5.4 28.5 267.9 0.1 47.7 349.6
Net book value at 31 July 2023 6.5 24.6 271.2 0.2 54.6 357.1
Net book value at 1 August 2022 7.9 25.7 240.0 - 48.9 322.5
1. Right of use assets primarily relate to the group's leasehold properties.
The net book value of assets held under operating leases includes £0.6
million (31 July 2023: £5.9 million) relating to vehicles held in
inventories. There was a gain of £0.4 million from the sale of assets held
under operating leases for the year ended 31 July 2024 (2023: £3.3 million).
11. Settlement Balances and Short Positions
31 July 2024 31 July 2023
£ million £ million
Settlement balances 600.1 686.0
Short positions in:
Debt securities 5.5 3.5
Equity shares 9.3 6.4
14.8 9.9
614.9 695.9
12. Financial Liabilities
Between Between Between After
Within three three months one and two two and five more than
On demand months and one year years years five years Total
£ million £ million £ million £ million £ million £ million £ million
Deposits by banks 0.9 53.0 84.5 - - - 138.4
Deposits by customers 706.6 2,320.7 3,397.9 1,685.2 583.2 - 8,693.6
Loans and overdrafts from banks 46.6 9.0 - 110.0 - - 165.6
Debt securities in issue - 21.9 246.6 799.0 595.3 323.6 1,986.4
At 31 July 2024 754.1 2,404.6 3,729.0 2,594.2 1,178.5 323.6 10,984.0
Between Between Between After
Within three three months one and two two and five more than
On demand months and one year years years five years Total
£ million £ million £ million £ million £ million £ million £ million
Deposits by banks 10.3 43.6 88.0 - - - 141.9
Deposits by customers 175.1 1,836.4 3,745.9 1,305.0 662.1 - 7,724.5
Loans and overdrafts from banks 31.8 20.1 228.0 262.0 110.0 - 651.9
Debt securities in issue - 30.4 228.7 197.8 1,261.8 293.9 2,012.6
At 31 July 2023 217.2 1,930.5 4,290.6 1,764.8 2,033.9 293.9 10,530.9
As outlined below, at 31 July 2024 the group accessed £110.0 million
(31 July 2023: £600.0 million) and £nil (31 July 2023: £5.0 million) cash
under the Bank of England's Term Funding Scheme with Additional Incentives for
SMEs and Indexed Long-Term Repo respectively. Cash from these schemes is
included within loans and overdrafts from banks. Residual maturities of the
schemes are as follows:
Between Between Between After
Within three three months one and two two and five more than
On demand months and one year years years five years Total
£ million £ million £ million £ million £ million £ million £ million
At 31 July 2024 - 0.5 - 110.0 - - 110.5
At 31 July 2023 - 7.6 228.0 262.0 110.0 - 607.6
Assets pledged and received as collateral
The group pledges assets for repurchase agreements and securities borrowing
agreements which are generally conducted under terms that are customary to
standard borrowing contracts.
The group is a participant of the Bank of England's Term Funding Scheme with
Additional Incentives for SMEs ("TFSME") and the Indexed Long-Term Repo
("ILTR").
Under these schemes, asset finance loan receivables of £404.8 million
(31 July 2023: £863.4 million) and retained notes relating to Motor Finance
loan receivables of £34.4 million (31 July 2023: £83.4 million) were
positioned as collateral with the Bank of England, against which £110.0
million (31 July 2023: £600.0 million) of cash was drawn from the TFSME and
£nil (31 July 2023: £5.0 million) from the ILTR. million) from the ILTR.
The term of the TFSME transactions is four years from the date of each
drawdown but the group may choose to repay earlier at its discretion. The term
of the ILTR transaction is six months and cannot be repaid earlier. The risks
and rewards of the loan receivables remain with the group and continue to be
recognised in loans and advances to customers on the consolidated balance
sheet.
The group has securitised without recourse and restrictions £1,657.0 million
(31 July 2023: £1,436.3 million) of its insurance premium and motor loan
receivables in return for cash and asset-backed securities in issue of
£1,453.7 million (31 July 2023: £1,187.4 million). This includes the £34.4
million (31 July 2023: £83.4 million) retained notes positioned as
collateral with the Bank of England. As the group has retained exposure to
substantially all the credit risk and rewards of the residual benefit of the
underlying assets it continues to recognise these assets in loans and advances
to customers on its consolidated balance sheet.
The majority of loans and advances to customers are secured against specific
assets. Consistent and prudent lending criteria are applied across the whole
loan book with emphasis on the quality of the security provided.
As at 31 July 2024, Winterflood had pledged equity and debt securities of
£18.3 million (31 July 2023: £5.2 million) in the normal course of business.
13. Other Equity Instrument
Other equity instrument comprises the group's £200.0 million Fixed Rate Reset
Perpetual Subordinated Contingent Convertible Securities, or Additional Tier 1
capital ("AT1"), issued on 29 November 2023. These AT1 securities are
classified as an equity instrument under IAS 32 'Financial Instruments:
Presentation' with the proceeds recognised in equity net of transaction costs
of £2.4 million.
These securities carry a coupon of 11.125%, payable semi-annually on 29 May
and 29 November of each year and have a first reset date on 29 May 2029. The
first coupon payment of £11.1 million was made on 29 May 2024. The securities
include, among other things, a conversion trigger of 7.0% Common Equity Tier 1
capital ratio and are callable any time in the six-month period prior to and
including the first reset date or on each reset date occurring every five
years thereafter.
14. Capital - unaudited
31 July 2024 31 July 2023
£ million £ million
CET1 capital
Shareholders' equity per balance sheet 1,842.5 1,644.9
Regulatory adjustments to equity
Contingent convertible securities recognised as AT1 capital(1) (197.6) -
Intangible assets, net of associated deferred tax liabilities (264.0) (262.8)
Foreseeable dividend(2) (3.8) (67.0)
Cash flow hedging reserve (13.0) (34.4)
Pension asset, net of associated deferred tax liabilities (0.6) (1.0)
Prudent valuation adjustment (0.8) (0.4)
Insufficient coverage for non-performing exposures(3) - (0.4)
IFRS 9 transitional arrangements(4) 12.1 31.9
CET1 capital(5) 1,374.8 1,310.8
Additional tier 1 capital 200.0 -
Total tier 1 capital(5) 1,574.8 1,310.8
Tier 2 capital - subordinated debt 200.0 200.0
Total regulatory capital(5) 1,774.8 1,510.8
RWAs
Credit and counterparty credit risk 9,548.4 8,655.4
Operational risk(5) 1,044.5 1,084.0
Market risk(5) 108.3 108.2
10,701.2 9,847.6
CET1 capital ratio(5) 12.8% 13.3%
Tier 1 capital ratio(5) 14.7% 13.3%
Total capital ratio(5) 16.6% 15.3%
1. The contingent convertible securities are classified as an equity instrument
for accounting but treated as AT1 for regulatory capital purposes, see note
13.
2. Under CRR Article 26, a deduction for a foreseeable dividend and charges has
been recognised at 31 July 2024 and 31 July 2023. The deduction at 31 July
2024 reflects charges for the coupon on the group's contingent convertible
securities.
3. In line with the amendment to Own Funds Part of the PRA Rulebook confirmed in
PS 14/23, CET1 capital at 31 July 2024 no longer includes a regulatory
deduction for insufficient coverage for non-performing exposures as this is no
longer applicable (31 July 2023: £0.4 million).
4. The group has elected to apply IFRS 9 transitional arrangements for 31 July
2024, 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 2024 the CET1 capital ratio would be 12.7%, Tier 1
capital ratio 14.6% and total capital ratio 16.5% (31 July 2023: CET1 capital
ratio 13.0% and total capital ratio 15.1%).
The following table shows the movement in CET1 capital during the year:
2024 2023
£ million £ million
CET1 capital at 1 August 1,310.8 1,396.7
Profit in the period attributable to shareholders 100.4 81.1
Dividends paid and foreseen (15.0) (100.5)
IFRS 9 transitional arrangements (19.7) (51.1)
Increase in intangible assets, net of associated deferred tax liabilities (1.2) (12.1)
Other movements in reserves recognised for CET1 capital (0.8) (7.3)
Other movements in adjustments from CET1 capital 0.3 4.0
CET1 capital at 31 July 1,374.8 1,310.8
15. Defined Benefit Pension Scheme
During the last financial year, the scheme entered into a buy-in transaction
with an insurance company covering all members of the scheme. A buy-in is a
bulk annuity policy that matches the scheme's assets and liabilities. It
represents a significant de-risking of the investment portfolio and hence a
significant reduction in the group's long-term exposure to pension funding
risk. The pension surplus on the group's balance sheet is £0.8 million
(31 July 2023: £1.3 million) relating to the cash held by the scheme, with
the fair value of the insurance policy matched to the fair value of the
scheme's liabilities, which remains subject to changes in actuarial
valuations.
16. Other Liabilities
Review of Borrowers in Financial Difficulty
Following discussions with the FCA in relation to its market wide review of
Borrowers in Financial Difficulty ("BiFD"), which assessed forbearance and
related practices, the group conducted a Past Business Review of customer
forbearance related to its motor finance lending. This has now concluded and a
provision of £17.2 million has been recognised at 31 July 2024 in relation to
this matter under the category of legal and regulatory in the table above.
As a result of this review, certain customers will be due compensation and the
group is undertaking an exercise to identify and remediate these customers as
appropriate. We have commenced making compensation payments to customers, with
the resulting remediation programme expected to be materially complete this
calendar year.
The provision comprises estimates of the expected customer compensation and
the associated operational costs. The final remediation cost remains uncertain
with data to identify customers who are due remediation being collated.
The £17.2 million provision is based on a probability weighting methodology
taking into account assumptions such as the number of customers in scope of
the exercise, the average payments due to customers, and the expected cost of
remediation for the group.
The provision does not reflect underlying trading performance and therefore
has been presented as a separate adjusting item and excluded from adjusted
operating profit by management.
Restructuring costs
The group incurred £3.1 million of restructuring costs in the 2024 financial
year which includes the recognition of an accrual primarily relating to
redundancy and associated costs of £0.9 million. These costs do not reflect
underlying trading performance and therefore have been presented as a separate
adjusting item and excluded from adjusted operating profit by management.
17. Contingent Liabilities
Motor Finance commission arrangements
FCA review
As disclosed in previous periods, the group continues to receive a high number
of complaints, many of which are now with the Financial Ombudsman Service
("FOS"), and is subject to a number of claims through the courts regarding
historic Discretionary Commission Arrangements ("DCAs") with intermediaries on
its Motor Finance products. This follows the FCA's Motor Market Review in
2019.
On 11 January 2024, the FOS published its first two decisions upholding
customer complaints relating to DCAs against two other lenders in the market
and instructed them to pay compensation to the complainants if they accepted
the outcome. On the same day, recognising that these decisions were likely to
significantly increase the number of complaints to motor finance providers and
the FOS, risking disorderly and inconsistent outcomes as well as market
instability, the FCA released policy statement PS 24/1 which introduced
temporary changes to handling rules for motor finance complaints until at
least September 2024.
This means that firms will not have to resolve these complaints within the
normal time limits. This was to allow the FCA time to carry out diagnostic
work to determine whether or not there has been widespread failure to comply
with regulatory requirements which has caused customers harm and, if so,
whether it needs to take any action. The FCA has indicated that such steps
could include establishing an industry-wide consumer redress scheme and/or
applying to the Financial Markets Test Case Scheme, to help resolve any
contested legal issues of general importance.
In the FCA's 11 January 2024 announcement, it aimed to communicate a decision
on next steps by 24 September 2024. Since then, the FCA further announced on
30 July 2024 that because it has taken longer to collect and review the
historical data, and also due to relevant ongoing litigation, it would not be
able to set out the next steps of its review by 24 September 2024 as it
originally planned and it now aims to set out next steps by the end of May
2025. In addition, the FCA extended the current pause to the 8-week deadline
for firms to respond to complaints involving a DCA to 4 December 2025.
Impact on Close Brothers
The group is subject to a number of claims through the courts regarding
historical Motor Finance commission arrangements. One of these, initially
determined in the group's favour, was appealed by the claimant and the case
was heard in early July 2024 by the Court of Appeal 2024 together with two
separate claims made against another lender. The Court's decision is now
awaited.
As of 31 August 2024, where individual cases were adjudicated in County Court,
the courts found that there was no demonstrable customer harm and hence no
compensation to pay in the majority of the outcomes for Close Brothers.
Nevertheless, there have been only a limited number of adjudicated cases at
this stage.
There are also a number of complaints that have been referred to the FOS for a
determination. To date, no final FOS decisions have been made upholding
complaints against Close Brothers. On 9 May 2024, the FOS announced that it
would be unlikely to be able to issue final decisions on motor commission
cases for some time due to the potential impact of a judicial review
proceeding started by another lender in relation to one of its January 2024
decisions and also the outstanding Court of Appeal decisions.
Consistent with our Half Year 2024 results, there remains significant
uncertainty about the outcome of this matter at this early stage. The FCA has
indicated there could be a range of outcomes, with one potential outcome being
an industry-wide consumer redress scheme. The estimated impact of any redress
scheme, if required, is highly dependent on a number of factors such as: the
time period covered; the DCA models impacted (the group operated a number of
different models during the period under review); appropriate reference
commission rates set for any redress; and response rates to any redress
scheme. As such, at this early stage, the timing, scope and quantum of any
potential financial impact on the group cannot be reliably estimated at
present.
Based on the status at the end of the financial year and in accordance with
the relevant accounting standards, the board has concluded that no legal or
constructive obligation exists and it is currently not required or appropriate
to recognise a provision at 31 July 2024. It is also not practicable at this
early stage to estimate or disclose any potential financial impact arising
from this issue.
During the 2024 financial year, the group incurred costs of £6.9 million in
relation to historic motor commission arrangements. This £6.9 million covered
the costs of the group dealing with complaints (including FOS fees), legal
spend, and investment spend as we prepare for the outcome of the FCA review.
These costs do not reflect underlying trading performance and therefore have
been presented as a separate adjusting item and excluded from adjusted
operating profit by management.
In the normal course of the group's business, there may be other contingent
liabilities relating to complaints, legal proceedings or regulatory reviews.
These cases are not currently expected to have a material impact on the group.
18. Consolidated Cash Flow Statement Reconciliation
2024 2023
£ million £ million
(a) Reconciliation of operating profit before tax to net cash inflow from
operating activities
Operating profit before tax 142.0 112.0
Tax paid (29.6) (7.4)
Depreciation, amortisation and impairment 111.7 108.2
Impairment losses on financial assets 98.8 204.1
Amortisation of de-designated cash flow hedges (27.9) -
Decrease/(increase) in:
Interest receivable and prepaid expenses 5.5 (6.8)
Net settlement balances and trading positions (0.3) (11.4)
Net money broker loans against stock advanced 27.0 15.6
(Decrease)/increase in interest payable and accrued expenses (12.7) (16.5)
Net cash inflow from trading activities 314.5 397.8
Cash (outflow)/inflow arising from changes in:
Loans and advances to banks not repayable on demand 24.0 (21.1)
Loans and advances to customers (699.4) (584.3)
Assets let under operating leases (41.1) (73.2)
Certificates of deposit - 185.0
Sovereign and central bank debt (194.2) 191.2
SSA bonds (140.2) -
Covered bonds (80.7) (105.4)
Deposits by banks (1.3) (22.1)
Deposits by customers 975.1 942.5
Loans and overdrafts from banks (492.2) 29.2
Debt securities in issue (net) (67.6) 14.4
Derivative financial instruments (net) - 70.4
Other assets less other liabilities(1) 21.1 (3.0)
Net cash (outflow)/inflow from operating activities (382.0) 1,021.4
(b) Analysis of net cash outflow in respect of the purchase of subsidiaries
Purchase of subsidiaries, net of cash acquired (15.4) (0.5)
(c) Analysis of net cash inflow in respect of the sale of subsidiaries
Cash consideration received 0.9 -
(d) Analysis of cash and cash equivalents(2)
Cash and balances at central banks 1,584.2 1,918.4
Loans and advances to banks 260.3 290.9
At 31 July 1,844.5 2,209.3
1. Includes a £17.2 million (2023: £nil) provision in relation to the BiFD
review, a non-cash item recognised within administrative expenses.
2. Excludes £33.2 million (2023: £58.0 million) of cash reserve accounts and
cash held in trust.
During the year ended 31 July 2024, the non-cash changes on debt financing
amounted to £35.9 million (31 July 2023: £0.9million) arising largely from
interest accretion and fair value hedging movements.
19. Fair Value of Financial Assets and Liabilities
The fair values of the group's subordinated loan capital and debt securities
in issue are set out below.
31 July 2024 31 July 2023
Fair value Carrying value Fair value Carrying value
£ million £ million £ million £ million
Subordinated loan capital 179.4 187.2 165.8 174.9
Debt securities in issue 1,998.5 1,986.4 2,008.0 2,012.6
The fair value of gross loans and advances to customers at 31 July 2024 is
estimated to be £9,806.4 million (31 July 2023: £9,046.2 million), with a
carrying value of £9,830.8 million (31 July 2023: £9,255.0 million). The
fair value of deposits by customers is estimated to be £8,691.8 million
(31 July 2023: £7,668.7 million), with a carrying value of £8,693.6 million
(31 July 2023: £7,724.5 million). These estimates are based on highly
simplified assumptions and inputs and may differ to actual amounts received or
paid. The differences between fair value and carrying value are not considered
to be significant, and are consistent with management's expectations given the
nature of the Banking business and the short average tenor of the instruments.
However, the differences have decreased in comparison to the prior year in
line with market interest rates.
The group holds financial instruments that are measured at fair value
subsequent to initial recognition. Each instrument has been categorised within
one of three levels using a fair value hierarchy that reflects the
significance of the inputs used in making the measurements. These levels are
based on the degree to which the fair value is observable.
The tables below show 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 2024
Assets
Loans and advances to customers held at FVTPL - - 11.8 11.8
Debt securities:
Sovereign and central bank debt 383.7 - - 383.7
SSA bonds 145.5 - - 145.5
Covered bonds 187.7 - - 187.7
Long trading positions in debt securities 13.8 2.2 - 16.0
Equity shares 5.9 21.4 0.1 27.4
Derivative financial instruments - 95.3 6.1 101.4
Contingent consideration - - 1.2 1.2
Other assets - - 0.8 0.8
736.6 118.9 20.0 875.5
Liabilities
Short positions:
Debt securities 3.3 2.2 - 5.5
Equity shares 2.2 7.1 - 9.3
Derivative financial instruments - 122.6 6.4 129.0
Contingent consideration - - 3.0 3.0
5.5 131.9 9.4 146.8
Level 1 Level 2 Level 3 Total
£ million £ million £ million £ million
At 31 July 2023
Assets
Loans and advances to customers held at FVTPL - - - -
Debt securities:
Sovereign and central bank debt 186.1 - - 186.1
SSA bonds - - - -
Covered bonds 106.3 - - 106.3
Long trading positions in debt securities 13.6 1.6 - 15.2
Equity shares 3.9 25.1 0.3 29.3
Derivative financial instruments - 77.4 11.1 88.5
Contingent consideration - - 2.0 2.0
Other assets - - - -
309.9 104.1 13.4 427.4
Liabilities
Short positions:
Debt securities 2.3 1.2 - 3.5
Equity shares 1.7 4.6 0.1 6.4
Derivative financial instruments - 184.7 11.2 195.9
Contingent consideration - - 2.8 2.8
4.0 190.5 14.1 208.6
There is no significant change to the valuation methodologies relating to
Level 2 and 3 financial instruments disclosed in note 26 "Financial risk
management" of the Annual Report 2023, except for the valuation of Level 3
loans and advances to customers as described below.
Instruments classified as Level 3 predominantly comprise loans and advances to
customers, which is new this year, over-the-counter derivatives and contingent
consideration payable and receivable in relation to the acquisition and
disposal of subsidiaries.
The valuation of Level 3 derivatives is similar to Level 2 derivatives and
includes the use of discounted future cash flow models, with the most
significant input into these models being interest rate yield curves developed
from quoted rates.
The valuation of Level 3 loans and advances to customers is determined on a
discounted expected cash flow basis net of expected credit losses. The
discount rate used in the valuation is the interest rate charged on the loan,
which reflects an arm's length rate chargeable on similar transactions.
The valuation of Level 3 contingent consideration is determined on a
discounted expected cash flow basis.
The group believes that there is no reasonably possible change to the inputs
used in the valuation of these positions which would have a material effect on
the group's consolidated income statement.
During the year, there were no transfers from Level 1, 2 to 3. In 2023, £1.6
million of derivative financial assets and £1.8 million of derivative
financial liabilities were transferred from Level 2 to 3.
Movements in financial instruments categorised as Level 3 were:
Loans and
advances Derivative Derivative
to customers financial financial Contingent Other
held at FVTPL assets liabilities Equity shares consideration assets Total
£ million £ million £ million £ million £ million £ million £ million
At 1 August 2022 - - - 0.2 (1.3) - (1.1)
Total gains/(losses) recognised in the consolidated income statement - 9.5 (9.4) - (0.1) - -
Purchases, issues, originations and transfers in - 1.6 (1.8) - 0.6 - 0.4
Sales, settlements and transfers out - - - - - - -
At 31 July 2023 - 11.1 (11.2) 0.2 (0.8) - (0.7)
Total gains/(losses) recognised in the consolidated income statement - (5.0) 4.8 - 0.4 - 0.2
Purchases, issues, originations and transfers in 11.8 - - - (0.5) 0.8 12.1
Sales, settlements and transfers out - - - (0.1) (0.9) - (1.0)
At 31 July 2024 11.8 6.1 (6.4) 0.1 (1.8) 0.8 10.6
The gains recognised in the consolidated income statement relating to Level 3
instruments held at 31 July 2024 amounted to £0.2 million (2023: £nil).
20. Additional Support for Customers
Forbearance
Forbearance occurs when a customer is experiencing difficulty in meeting their
financial commitments and a concession is granted, by changing the terms of
the financial arrangement, which would not otherwise be considered. This
arrangement can be temporary or permanent, depending on the customer's
circumstances.
The Banking division reports on forborne exposures as either performing or
non-performing in line with regulatory requirements. A forbearance policy is
maintained to ensure the necessary processes are in place to enable
consistently fair treatment of all customers and that each is managed based on
their individual circumstances. The arrangements agreed with customers will
aim to create a sustainable and affordable financial position, thereby
reducing the likelihood of suffering a credit loss. The forbearance policy is
periodically reviewed to ensure it remains effective.
The Banking division offers a range of concessions to support customers which
vary depending on the product and the customer's status. Such concessions
include an extension outside terms (for example, a higher Loan to value
("LTV") or overpayments) and refinancing, which may incorporate an extension
of the loan tenor and capitalisation of arrears. Furthermore, other forms of
forbearance such as moratorium, covenant waivers and rate concessions are also
offered.
Loans are classified as forborne at the time a customer in financial
difficulty is granted a concession and the loan will remain treated and
recorded as forborne until the following exit conditions are met:
• the loan is considered as performing and there is no past-due amount according
to the amended contractual terms;
• a minimum two-year probation period has passed from the date the forborne
exposure was considered as performing, during which time regular and timely
payments have been made; and
• none of the customer's exposures with Close Brothers are more than 30 days
past due at the end of the probation period.
At 31 July 2024, the gross carrying amount of exposures with forbearance
measures was £363.8 million (31 July 2023: £214.6 million). The key driver
of this increase has been higher forbearance in our Asset Finance and Leasing,
Motor Finance and Property Finance businesses reflecting continued
macroeconomic challenges and enduring cost of living pressures on customers.
An analysis of forborne loans is shown in the table below:
31 July 2024 31 July 2023
Gross loans and advances to customers (£ million) 10,276.6 9,635.6
Forborne loans (£ million) 363.8 214.6
Forborne loans as a percentage of gross loans and advances to customers (%) 3.5% 2.2%
Provision on forborne loans (£ million) 89.4 56.1
Number of customers supported 13,166 6,996
The following is a breakdown of forborne loans by segment:
31 July 2024 31 July 2023
£ million £ million
Commercial business 118.5 38.0
Retail business 42.8 28.8
Property business 202.5 147.8
Total 363.8 214.6
The following is a breakdown of the number of customers supported by segment:
31 July 2024 31 July 2023
Number of customers supported Number of customers supported
Commercial business 839 243
Retail business 12,275 6,700
Property business 52 53
Total 13,166 6,996
The following is a breakdown of forborne loans by concession type:
31 July 2024 31 July 2023(1)
£ million £ million
Extension outside terms 101.7 52.6
Refinancing 28.0 10.4
Moratorium 147.0 66.1
Deferring collections/recoveries activities 85.1 82.9
Other modifications 2.0 2.5
Total 363.8 214.6
1 Comparatives have been updated to present deferring collections/recoveries
activity category in a separate line based on categorisation as at 31 July
2024.
Government lending schemes
Over the pandemic period, following accreditation, customers were offered
facilities under the UK government-introduced Coronavirus Business
Interruption Loan Scheme ("CBILS"), the Coronavirus Large Business
Interruption Loan Scheme ("CLBILS") and the Bounce Back Loan Scheme ("BBLS"),
thereby enabling the Banking division to maximise its support to small
businesses. At 31 July 2024, there are 2,887 (31 July 2023: 4,364) remaining
facilities, with a residual balance of £202.3 million (31 July 2023: £456.3
million) following further repayments across the Commercial businesses.
The Banking division also received accreditation to offer products under the
various Recovery Loan Schemes ("RLS"), the recent Growth Guarantee Scheme
("GGS") and schemes in the Republic of Ireland. At 31 July 2024, there are
1,321 (31 July 2023: 943) live facilities, with balances of £340.7 million
(31 July 2023: £276.2 million), and a further 73 (31 July 2023: 58) approved
facilities with limits of £17.7 million (31 July 2023: £14.3 million).
The Banking division maintains a regular reporting cycle of these facilities
to monitor performance. To date, a number of claims have been made and
payments received under the government guarantee.
21. Interest Rate Risk
The group recognises three main sources of interest rate risk in the banking
book ("IRRBB") which could adversely impact future income or the value of the
balance sheet:
• repricing risk - the risk presented by assets and liabilities that reprice at
different times;
• embedded optionality risk - the risk presented by contractual terms embedded
into certain assets and liabilities; and
• basis risk - the risk presented by a mismatch in the reference interest rate
for assets and liabilities.
IRRBB is assessed and measured on a behavioural basis by applying key
behavioural and modelling assumptions including, but not limited to, those
related to fixed rate loans subject to prepayment risk, the behaviour of
non-maturity assets and liabilities, the treatment of own equity, and the
expectation of embedded interest rate options. This assessment is performed
across a range of regulatory prescribed and internal interest rate shock
scenarios approved by the bank's Asset and Liability Committee.
Two measures are used for measuring IRRBB, namely Earnings at Risk ("EaR") and
Economic Value ("EV"):
• EaR measures short-term impacts to earnings, highlighting any earnings
sensitivity, should interest rates change unexpectedly.
• EV measures longer-term earnings sensitivity due to interest rate changes,
highlighting the potential future sensitivity of earnings, and any risk to
capital.
No material exposure exists in the other parts of the group, and accordingly
the analysis below relates to the Banking division and company.
EaR impact
The table below sets out the assessed impact on group net interest income over
a 12-month period from interest rate changes. The results shown are for
an instantaneous and parallel change in interest rates at 31 July 2024:
31 July 2024 31 July 2023
£ million £ million
0.5% increase 0.1 4.5
2.5% increase 0.5 22.6
0.5% decrease (0.1) (4.5)
2.5% decrease (0.8) (22.8)
The group also monitors any potential earning exposure from basis mismatches
between its lending and funding activities on a monthly cadence. To provide a
clearer assessment of the group's exposure to interest rate changes, basis
risk is excluded from the EaR numbers.
The group's EaR at 31 July 2024 reflects its policy to ensure exposure to
interest rate shocks is managed within the group's risk appetites. The EaR
measure is a combination of the group's repricing profile and the embedded
optionality risk, which is negligible in the current interest rate
environment.
The decrease in EaR reflects the bank's strategy to manage and minimise
interest rate risk, to that required to operate efficiently.
EV impact
The table below sets out the assessed impact on group EV, which measures the
potential change in the balance sheet value following an instantaneous and
parallel change in interest rates at 31 July 2024:
31 July 2024 31 July 2023
£ million £ million
0.5% increase 3.5 4.4
2.5% increase 17.2 21.5
0.5% decrease (3.5) (4.4)
2.5% decrease (14.4) (21.9)
The group's EV at 31 July 2024 reflects its policy to ensure exposure to
interest rate shocks is managed within the group's risk appetites. The EV
measure is a combination of our repricing profile and the embedded optionality
to cover interest rate floors within the bank's lending and borrowing
activities.
22. Related Party Transactions
Transactions with key management
Key management personnel are those persons having authority and responsibility
for planning, directing and controlling the activities of an entity; the
group's key management are the members of the group's Executive Committee,
which includes all executive directors, together with its non-executive
directors.
The table below details, on an aggregated basis, key management personnel
emoluments:
2024 2023
£ million £ million
Emoluments
Salaries and fees 6.0 5.7
Benefits and allowances 0.8 0.6
Performance related awards in respect of the current year:
Cash 1.7 1.7
8.5 8.0
Share-based awards 0.7 (0.9)
9.2 7.1
Gains upon exercise of options by key management personnel, expensed to the
income statement in previous years, totalled £1.8 million (2023: £1.4
million).
Key management have banking and asset management relationships with group
entities which are entered into in the normal course of business. Amounts
included in deposits by customers at 31 July 2024 attributable, in aggregate,
to key management were £0.3 million (31 July 2023: £0.4 million).
23. Post Balance Sheet Event
Following a comprehensive strategic review, on 19 September 2024, the group
announced that it entered into an agreement to sell CBAM to Oaktree for an
equity value of up to £200 million. CBAM is a well-regarded UK wealth
management franchise and the transaction will strengthen the group's capital
base and enhance its position to navigate the current uncertain environment.
Under the terms of the transaction, the equity value of up to £200 million
includes £172 million of cash to be paid at or before completion of the
transaction, comprising an upfront cash consideration of £146 million payable
by Oaktree to the group on completion, a dividend of approximately £26
million payable by CBAM to the group on or before completion, subject to
applicable regulatory capital requirements, and £28 million of contingent
deferred consideration in the form of preference shares. The group intends to
retain cash received by completion, expected to amount to approximately £172
million, gross of transaction costs.
As at 31 July 2024, CBAM had balance sheet assets of £192.0 million and
liabilities of £70.2 million, comprised largely of working capital and
intangible assets, with a net asset value of £121.8 million. The net asset
value includes goodwill of £43.5 million and £12.2 million of intangible
assets, resulting in a tangible net asset value of £66.1 million. CBAM is one
of the group's five operating segments with total operating income of £157.8
million and profit after tax of £7.4 million in the 2024 financial year.
Further detail on CBAM can be found within Note 2 "Segmental Analysis",
including CBAM's income statement for the financial years ended 31 July 2024
and 31 July 2023.
The upfront proceeds are expected to increase the group's common equity tier 1
("CET1") capital ratio by approximately 100 basis points on a pro forma basis.
This calculation assumes a reduction in credit RWAs, no immediate reduction in
operational RWAs and does not include any benefit from contingent deferred
consideration. This estimate is subject to change before completion and is
based on upfront proceeds from the transaction of c.£172 million, CBAM's net
asset value of £121.8 million and excludes the deferred consideration.
Therefore, the fair value of the business remains above its carrying value.
During the 2025 financial year, and in line with IFRS 9 "Financial
Instruments" and IFRS 13 "Fair Value Measurement", a full accounting
assessment of the contingent deferred consideration will be undertaken. The
contingent deferred consideration will be in the form of preference shares,
redeemable no later than Oaktree's exit, for an amount of up to £28 million
plus interest at a rate of 8 per cent. per annum, stepping up after five years
to 12 per cent. The deferred consideration is subject to potential deductions,
including in relation to retention of key individuals and certain potential
regulatory costs and separation cost overruns.
This is a non-adjusting event under the requirements of IAS 10 "Events After
the Reporting Period" and as at 31 July 2024 the business did not meet the
'held for sale' criteria under IFRS 5 "Non-current Assets Held for Sale and
Discontinued Operations". A sale was not assessed to be highly probable given
the transaction status at that date, and therefore the held for sale criteria
was not met.
The transaction is expected to complete in early 2025 calendar year. Details
of the transaction can be found on the separate announcement published on 19
September 2024, available on the Investor Relations website.
Cautionary Statement
Certain statements included or incorporated by reference within this
announcement may constitute "forward-looking statements" in respect of the
group's operations, performance, prospects and/or financial condition. All
statements other than statements of historical fact are, or may be deemed to
be, forward-looking statements. Forward-looking statements are sometimes, but
not always, identified by their use of a date in the future or such words as
"anticipates", "aims", "due", "could", "may", "will", "should", "expects",
"believes", "intends", "plans", "potential", "targets", "goal" or "estimates".
By their nature, forward-looking statements involve a number of risks,
uncertainties and assumptions and actual results or events may differ
materially from those expressed or implied by those statements. There are also
a number of factors that could cause actual future operations, performance,
financial conditions, results or developments to differ materially from the
plans, goals and expectations expressed or implied by these forward-looking
statements and forecasts. These factors include, but are not limited to, those
contained in the Group's annual report (available at:
https://www.closebrothers.com/investor-relations). 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
document should be construed as a profit forecast. Past performance cannot be
relied upon as a guide to future performance and persons needing advice should
consult an independent financial adviser.
This announcement does not constitute or form part of any offer or invitation
to sell, or any solicitation of any offer to subscribe for or purchase any
shares or other securities in the company or any of its group members, nor
shall it or any part of it or the fact of its distribution form the basis of,
or be relied on in connection with, any contract or commitment or investment
decisions relating thereto, nor does it constitute a recommendation regarding
the shares or other securities of the company or any of its group members.
Statements in this announcement reflect the knowledge and information
available at the time of its preparation. Liability arising from anything in
this announcement shall be governed by English law. Nothing in this
announcement shall exclude any liability under applicable laws that cannot be
excluded in accordance with such laws.
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact
rns@lseg.com (mailto:rns@lseg.com)
or visit
www.rns.com (http://www.rns.com/)
.
RNS may use your IP address to confirm compliance with the terms and conditions, to analyse how you engage with the information contained in this communication, and to share such analysis on an anonymised basis with others as part of our commercial services. For further information about how RNS and the London Stock Exchange use the personal data you provide us, please see our
Privacy Policy (https://www.lseg.com/privacy-and-cookie-policy)
. END FR GPUQPBUPCUWBRecent news on Close Brothers
See all newsREG - Close Bros Grp PLC - Total Voting Rights
AnnouncementREG - Smarter Web Company - First Day of Dealings, Name Change & Fundraising
AnnouncementREG - Close Bros Grp PLC - Holding(s) in Company
AnnouncementREG - Close Bros Grp PLC - Director/PDMR Shareholding
AnnouncementREG - Close Bros Grp PLC - Director/PDMR Shareholding
Announcement