TIDMCBG
RNS Number : 7165A
Close Brothers Group PLC
27 September 2022
Preliminary Results for the year ended 31 July 2022
Adrian Sainsbury, Chief Executive, said:
"Against a backdrop of continued market uncertainty, we have
delivered a solid performance. The Banking division has performed
well as we continued to see good demand across our lending
businesses and strong margins. CBAM was affected by falling markets
but continued to attract client assets. Winterflood faced declining
markets and reduced trading activity, in sharp contrast to the
exceptionally strong conditions in the prior year. Although we are
aware of the pressures that the rising inflation and interest rates
will have on our customers and colleagues, I am confident that our
proven and resilient business model, strong financial position and
deep expertise leave us well positioned to continue to support them
now and into the future. "
Highlights
-- The group delivered a solid performance with strong income
growth in Banking, while our market-facing businesses were impacted
by volatility and falling markets. Group adjusted operating profit
reduced 13% to GBP234.8 million (2021: GBP270.7 million)
-- Adjusted operating profit in the Banking division increased
7% to GBP227.2 million, reflecting a strong net interest margin of
7.8% (2021: 7.7%) and loan book growth of 5.0% year-on-year. In the
second half, we saw loan book growth of 3.0% as momentum picked
up
-- The bad debt ratio was broadly stable at 1.2% (2021: 1.1%).
Excluding Novitas, the bad debt ratio was 0.5% (2021: 0.2%)
-- Close Brothers Asset Management ("CBAM") continued to attract
client assets and generated net inflows of 5%
-- Cyclicality seen in the trading business impacted
Winterflood's performance, with a market wide slowdown in trading
activity and periods of volatility in falling markets
-- Winterflood Business Services ("WBS") delivered another
strong performance , with assets under administration up 16% to
GBP7.2 billion (31 July 2021: GBP6.2 billion)
-- The group maintained strong capital, funding and liquidity
positions, with our common equity tier 1 ("CET1") capital ratio of
14.6% (31 July 2021: 15.8%) significantly above the applicable
minimum regulatory requirements
-- We are considering the further optimisation of our capital
structure, including the issuance of debt capital market securities
if appropriate, targeting a CET1 capital ratio range of 12% to 13%
over the medium term
-- The Board is proposing a final dividend of 44.0p per share,
resulting in a full-year dividend per share of 66.0p (2021: 60.0p),
up 10% and marking a return to our pre-pandemic dividend level
-- The group achieved a return on opening equity ("ROE") of
10.6% (2021: 14.5%), reflecting the reduction in Winterflood's
profit and continued growth in the equity base. The return on
average tangible equity ("ROTE") was 12.2% (2021: 16.5%)
Full year Full year Change
Key Financials (1) 2022 2021 %
--------------------------------------- -------------- ------------- -------
Adjusted operating profit(2) GBP234.8m GBP270.7m (13)
Operating profit before tax GBP232.8m GBP265.2m (12)
Banking GBP227.2m GBP212.5 7
Asset Management GBP21.7m GBP23.7m (8)
Winterflood GBP14.1m GBP60.9m (77)
Group GBP(28.2)m GBP(26.4)m 7
Adjusted basic earnings per share 111.5p 140.4p (21)
Basic earnings per share 110.4p 134.8p (18)
Ordinary dividend per share 66.0p 60.0p 10
Return on opening equity 10.6% 14.5%
Return on average tangible equity 12.2% 16.5%
Net interest margin 7.8% 7.7%
Bad debt ratio 1.2% 1.1%
31 July 31 July Change
2022 2021 %
--------------------------------------- -------------- ------------- -------
Loan book and operating lease
assets(3) GBP9.1bn GBP8.7bn 5
Total client assets GBP16.6bn GBP17.0bn (3)
CET1 capital ratio 14.6% 15.8%
Total capital ratio 16.6% 18.3%
--------------------------------------- -------------- ------------- -------
1 Please refer to definitions below.
2 Adjusted operating profit is stated before amortisation and
impairment of intangible assets on acquisition, goodwill impairment,
exceptional item and tax.
3 Loan book re-presented to incorporate closing loans and advances
to customers and operating lease assets, previously shown separately.
Includes loans and advances to customers and operating lease
assets of GBP8,858.9 million and GBP240.0 million at 31 July
2022. Includes loans and advances to customers and operating
lease assets of GBP8,444.5 million and GBP222.9 million at 31
July 2021.
Enquiries
Sophie Gillingham Close Brothers Group plc 020 3857 6574
Camila Sugimura Close Brothers Group plc 020 3857 6577
Kimberley Taylor Close Brothers Group plc 020 3857 6233
Irene Galvan Close Brothers Group plc 020 3857 6217
Sam Cartwright Maitland 07827 254 561
A virtual presentation to analysts and investors will be held
today at 9.30 am BST followed by a Q&A session. A webcast and
dial-in facility will be available by registering at
https://webcasts.closebrothers.com/PrelimResults2022 .
Basis of Presentation
Results are presented both on a statutory and an adjusted basis
to aid comparability between periods. Adjusted measures are
presented on a basis consistent with prior periods and exclude
amortisation of intangible assets on acquisition, to present the
performance of the group's acquired businesses consistent with its
other businesses; and any exceptional and other adjusting items
which do not reflect underlying trading performance. Please refer
to later text for further details on items excluded from the
adjusted performance metrics. The loan book figure was re-presented
to incorporate closing loans and advances to customers and
operating lease assets, previously shown separately.
About Close Brothers
Close Brothers is a leading UK merchant banking group providing
lending, deposit taking, wealth management services and securities
trading. We employ approximately 4,000 people, principally in the
United Kingdom and Ireland. Close Brothers Group plc is listed on
the London Stock Exchange and is a member of the FTSE 250.
CHIEF EXECUTIVE'S STATEMENT
We have delivered a solid performance this year. The Banking
division has performed well as we continued to see good demand
across our lending businesses and strong margins. CBAM was affected
by falling markets but continued to attract client assets.
Winterflood faced declining markets and reduced trading activity,
in sharp contrast to the exceptionally strong conditions in the
prior year.
Although we are aware of the pressures that the rising inflation
and interest rates will have on our customers and colleagues, I am
confident that our proven and resilient business model, strong
financial position and deep expertise leave us well positioned to
continue to support them now and into the future.
Financial Performance
The group's income reduced 2% to GBP936.1 million (2021:
GBP952.6 million). The Banking division achieved a 10% increase in
income, reflecting a strong net interest margin of 7.8% (2021:
7.7%) and 5.0% year-on-year loan book growth. In the second half,
we saw loan book growth of 3.0% as momentum picked up. Income grew
6% in Asset Management as we continued to attract client assets
despite the impact of volatile market conditions on wider client
sentiment, with net inflows of 5% (2021: 7%). Winterflood saw a 48%
reduction in income, reflecting a market-wide slowdown in trading
activity from elevated levels during the pandemic and a change in
the mix of trading volumes, exacerbated by periods of volatility in
falling markets.
Adjusted operating expenses were broadly stable as a significant
reduction in variable costs in Winterflood was offset by continued
investment, as well as higher staff costs primarily reflecting the
current inflationary environment, across the Banking and Asset
Management divisions.
The bad debt ratio(1) of 1.2% (2021: 1.1%) remained broadly
stable. Excluding Novitas, the bad debt ratio was 0.5% (2021: 0.2%)
and reflected the release of Covid-19 provisions and the ongoing
review of provisions and coverage across our loan portfolios.
Whilst we are not yet seeing a significant impact from rising
inflation and interest rates and their effect on customers on our
credit performance, we are alert to the highly uncertain
macroeconomic environment and continue to monitor closely the
performance of the book.
As a result, adjusted operating profit was down 13% to GBP234.8
million (2021: GBP270.7 million), and we delivered a return on
opening equity of 10.6% (2021: 14.5%), reflecting the reduction in
Winterflood's profit and continued growth in the equity base. The
return on average tangible equity was 12.2% (2021: 16.5%).
Following the group's solid financial performance in the year
and strong capital position, and to reflect our continued
confidence in the business model, the board is proposing a final
dividend of 44.0p per share. This will result in a full-year
dividend per share of 66.0p (2021: 60.0p), returning to the
pre-pandemic level.
The group maintained strong capital, funding and liquidity
positions, with our common equity tier 1 ("CET1") capital ratio of
14.6% (31 July 2021: 15.8%) significantly above the applicable
minimum regulatory requirements.
1 Bad debt ratio represents impairment losses in the year as a
percentage of average net loans and advances to customers and
operating lease assets.
Capital Management Framework
The prudent management of the group's financial resources is a
core part of our business model. Our primary objective is to deploy
capital to support disciplined loan book growth in Banking and to
make the most of strategic opportunities.
The board remains committed to the group's dividend policy,
which aims to provide sustainable dividend growth year-on-year,
while maintaining a prudent level of dividend cover. Further
capital distributions to shareholders will be considered depending
on future opportunities.
We are considering the further optimisation of our capital
structure, including the issuance of debt capital market securities
if appropriate, targeting a CET1 capital ratio range of 12% to 13%
over the medium term. In the short term, we would expect to operate
above the 12% to 13% CET1 capital ratio target range, in light of
the heightened macroeconomic uncertainty and potential growth
opportunities available to us.
Protecting our Business Model and Maximising Future Income
Generation
We continue to deliver against our strategic priorities to
"Protect", "Grow" and "Sustain" our business model.
Our multi-year investment programmes are progressing well and
enable us to protect our business, as well as enhance efficiency
and future-proof our income generation capabilities. We are seeing
tangible benefits from these investments. In our Savings franchise,
investment in the customer deposit platform allowed us to broaden
our product offering and drove significant growth in our retail
deposits, up more than 50% since the launch of the platform in
December 2018. The total balance of Fixed Rate ISAs now stands at
c.GBP350 million, supporting lower cost of funds and funding
diversification.
We continued to invest in our technology and digital
capabilities to make our experts even more valuable, empowering
them with key data insights and automated processes. In Motor
Finance, our investment in digital and technology has allowed us to
make the most of opportunities in the second hand car market.
Through our partnership with AutoTrader, we are providing our
dealers with real-time insights on vehicle demand and pricing, a
unique proposition that has won the Innovation Award at the Car
Finance Awards 2022. We have also developed Application Programming
Interfaces ("APIs") that enable us to connect seamlessly into
strategic partners and provide our finance offering at various
points of the customer journey. In CBAM, we have undertaken a major
re-platforming project to rationalise legacy systems and improve
efficiency, while adding a digital portal to improve functionality
and customer experience. We are also delivering a new customer
portal in Asset Finance and are automating elements of our
processes to enhance customer experience.
Focus on Maximising Disciplined Growth
We remain focused on maximising disciplined growth in our
existing and adjacent markets. This year, we have conducted a
further review of potential growth opportunities and have a strong
pipeline of identified target areas that are aligned with our
business model.
We recognise a significant opportunity in broadening our
sustainable finance offering as the UK heads towards a net zero
carbon economy. Our current lending already spans a diverse array
of assets including wind and solar generation, battery electric
vehicles and grid infrastructure. Over the coming years, we will
continue to build further our expertise in green and transition
assets, cementing our reputation for specialist knowledge. We are a
through-the-cycle lender and will continue to support our customers
as they look for financing of green and transition assets. In
particular, we are seeing growth across a range of battery electric
vehicles, predominantly through our Commercial business, as the
UK's economy moves to electrify all forms of transport. As we
develop our green growth strategy, we have set ourselves an initial
green finance ambition. We aim to provide GBP1.0 billion of funding
for battery electric vehicles over the next five years.
In addition, we are piloting a specialist buy-to-let extension
to our existing Property bridging finance customers. We have also
extended our sector coverage in Asset Finance with the addition of
specialist materials handling and agricultural equipment teams. In
Invoice Finance, we continue to pursue opportunities in the
Asset-Based Lending ("ABL") space, including identifying
syndication opportunities, partnering with other lenders.
Our Asset Management business is well aligned with the long-term
trends in the wealth management space and we will continue to
invest to support its growth potential. We remain committed to
building on our excellent track record of increasing client assets
organically, through the continued selective hiring of wealth
management professionals, as well as through in-fill
acquisitions.
Winterflood Business Services ("WBS") has delivered another
strong performance, with income up 12% from GBP9.1 million to
GBP10.2 million and assets under administration up 16% from GBP6.2
billion to GBP7.2 billion. Our award-winning proprietary technology
is highly scalable and we see significant growth potential in this
business, with a solid pipeline of clients expected to increase
assets under administration in excess of GBP10 billion in the 2023
financial year.
Our Role in Supporting the Transition to a Sustainable
Future
We have an important role to play in helping people and
businesses transition to a lower carbon future and this
responsibility is at the forefront of our minds. I am pleased with
the significant progress we have made in developing our climate
strategy, covering not just our operational impacts, but also
understanding the implications across our financed activities.
This year, we have carried out an assessment of our indirect
Scope 3 emissions across all categories of operational emissions as
well as a first assessment of our financed emissions, initially
focused on our loan book. Initial findings will soon be available
in our inaugural Task Force on Climate-related Financial
Disclosures ("TCFD") report. There we set out our progress this
year and areas of future focus with regard to the integration of
climate risk into our governance infrastructure, business strategy
and risk management framework. Notwithstanding the efforts already
made, we remain at the start of a long journey and recognise there
is more to do to develop our own transition plans, targets and
metrics. This also includes our ability to address challenges
around data and modelling as we continue to work across industry
and alongside our customers, to enhance both understanding and our
capabilities.
As a group we are supportive of the goals of the Paris Agreement
to achieve net zero emissions by 2050. Having previously set
ambitious short-term net zero targets for our Scope 1 and 2
operational emissions, we are now setting ourselves a wider and
longer-term ambition to align all of our operational and
attributable greenhouse gas ("GHG") emissions from our lending and
investment portfolios on a path to net zero by 2050. To this end, I
am pleased to report that we have recently joined 116 banks
globally as a signatory to the Net Zero Banking Alliance.
In CBAM, we have mobilised a Sustainability Programme with
dedicated initiatives to embed the Principles for Responsible
Investment ("PRI") and stewardship across all facets of our
business, and as part of this, have recently become a signatory to
the UK Stewardship Code.
Outlook
We have delivered a solid performance this year and we start the
2023 financial year against a highly uncertain external
environment. Although we are alert to the impact of rising
inflation and interest rates on our customers and wider financial
market conditions, we remain well placed to continue delivering on
our long track record of profitability and disciplined growth.
In Banking, we are focused on maximising opportunities in the
current cycle and delivering continued growth at strong margins. We
are confident in the long-term growth prospects of our businesses
and will continue to assess opportunities to deliver disciplined
growth.
In Asset Management, we continue to invest to support the
long-term growth potential of the business. Whilst the business is
sensitive to financial market conditions, we remain committed to
driving growth both organically and through the continued selective
hiring of advisers and investment managers, and through in-fill
acquisitions.
As a daily trading business, Winterflood is highly sensitive to
changes in the market environment, but remains well positioned to
continue trading profitably, taking advantage of returning investor
appetite. We see significant growth potential in WBS, with a solid
pipeline of clients expected to increase assets under
administration in excess of GBP10 billion in the 2023 financial
year.
Our proven and resilient model and strong balance sheet,
combined with our deep experience in navigating a wide range of
economic conditions, leave us well placed to continue supporting
our colleagues, customers and clients over the long term.
Adrian Sainsbury
Chief Executive
27 September 2022
BOARD CHANGES
During the year, we were pleased to welcome Patricia Halliday
and Tracey Graham as independent non-executive directors with
effect from 1 August 2021 and 22 March 2022, respectively.
Patricia has over 30 years' experience in risk management across
the investment, corporate and retail banking sectors, both in the
UK and internationally, with a deep understanding of the
regulatory, risk and governance environment in which the group
operates. On joining the board on 1 August 2021, she was appointed
as a member of the board's Risk and Audit Committees.
Tracey is an experienced non-executive director, having served
on a number of listed companies and mutual boards. She was
appointed as a member of the board's Remuneration and Risk
Committees and brings significant commercial, operational and
customer service expertise gained across a range of sectors,
including from executive and non-executive roles in financial
services and other customer-facing businesses.
After nine years' dedicated service on the board, Lesley Jones
and Bridget Macaskill will retire from the board at the conclusion
of the Annual General Meeting ("AGM"). We would like to thank both
Lesley and Bridget for their huge contribution to the group over
that time.
Patricia will assume the role of chair of the Risk Committee
from the date of the AGM.
OVERVIEW OF FINANCIAL PERFORMANCE
SUMMARY GROUP INCOME STATEMENT(1)
2022 2021 Change
GBP million GBP million %
------------------------------------------- -------------- -------------- ---------
Operating income 936.1 952.6 (2)
Adjusted operating expenses (598.0) (592.1) 1
Impairment losses on financial assets (103.3) (89.8) 15
------------------------------------------- -------------- -------------- ---------
Adjusted operating profit 234.8 270.7 (13)
------------------------------------------- -------------- -------------- ---------
Banking 227.2 212.5 7
-------------- -------------- ---------
Commercial 91.0 52.8 72
Retail 61.0 71.9 (15)
Property 75.2 87.8 (14)
-------------- -------------- ---------
Asset Management 21.7 23.7 (8)
Winterflood 14.1 60.9 (77)
Group (28.2) (26.4) 7
------------------------------------------- -------------- -------------- ---------
Amortisation and impairment of intangible
assets on acquisition (2.0) (14.2) (86)
------------------------------------------- -------------- -------------- ---------
Goodwill impairment - (12.1) n/a
------------------------------------------- -------------- -------------- ---------
Exceptional item: HMRC VAT refund - 20.8 n/a
------------------------------------------- -------------- -------------- ---------
Operating profit before tax 232.8 265.2 (12)
------------------------------------------- -------------- -------------- ---------
Tax (67.6) (63.1) 7
------------------------------------------- -------------- -------------- ---------
Profit after tax 165.2 202.1 (18)
------------------------------------------- -------------- -------------- ---------
Profit attributable to shareholders 165.2 202.1 (18)
------------------------------------------- -------------- -------------- ---------
Adjusted basic earnings per share
(2) 111.5p 140.4p (21)
Basic earnings per share(2) 110.4p 134.8p (18)
Ordinary dividend per share 66.0p 60.0p 10
Return on opening equity 10.6% 14.5%
Return on average tangible equity 12.2% 16.5%
1 Adjusted measures are presented on a basis consistent with
prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the
reconciliation between operating and adjusted measures can be found
in note 2.
2 Refer to note 5 for the calculation of basic and adjusted
earnings per share.
Adjusted Operating Profit and Returns
Adjusted operating profit reduced 13% to GBP234.8 million (2021:
GBP270.7 million), primarily reflecting a reduction in income in
Winterflood and an increase in impairment charges. After adjusting
items, statutory operating profit before tax decreased by 12% to
GBP232.8 million (2021: GBP265.2 million). The group delivered a
return on opening equity of 10.6% (2021: 14.5%), reflecting the
reduction in Winterflood's profit and continued growth in the
equity base, and return on average tangible equity of 12.2% (2021:
16.5%).
Adjusted operating profit in the Banking division increased by
7% to GBP227.2 million (2021: GBP212.5 million), reflecting strong
income growth, partially offset by higher costs and impairment
charges. In the Asset Management division, adjusted operating
profit declined 8% to GBP21.7 million (2021: GBP23.7 million) as
growth in income was more than offset by increased staff costs.
Winterflood saw reduced trading opportunities in higher margin
sectors and periods of volatility in falling markets. Following the
exceptionally strong trading performance and elevated market
activity experienced in the prior year, operating profit was down
77% to GBP14.1 million (2021: GBP60.9 million). Group net expenses,
which include the central functions such as finance, legal and
compliance, risk and human resources, increased 7% on the prior
year to GBP28.2 million (2021: GBP26.4 million), mainly reflecting
third party spend in relation to the assessment of potential growth
opportunities.
Operating Income
Operating income reduced 2% to GBP936.1 million (2021: GBP952.6
million), with growth in Banking and Asset Management offset by a
reduction in trading income in Winterflood. Income in the Banking
division increased by 10%, reflecting good loan book growth and a
strong net interest margin of 7.8% (2021: 7.7%). Although income in
the Asset Management division was up 6%, with continued net inflows
and positive market performance in the first half of the year,
income was more subdued in the second half of the year due to
falling markets and their impact on wider client sentiment. Income
in Winterflood reduced by 48%, driven by a market-wide slowdown in
trading activity from elevated levels during the pandemic and a
change in the mix of trading volumes, exacerbated by falling
markets.
Adjusted Operating Expenses
Adjusted operating expenses were broadly stable at GBP598.0
million (2021: GBP592.1 million), reflecting a significant
reduction in variable costs in Winterflood, offset by higher
investment spend and salary increases in Banking and higher staff
costs in Asset Management. In the Banking division, costs were up
10%, as we continued to invest in our key strategic programmes and
incurred higher business-as-usual ("BAU") spend following salary
increases to reflect inflation and performance-driven compensation.
Expenses increased 9% in the Asset Management division, mainly
driven by higher staff costs in the current inflationary
environment and new hires, as we continue to invest to grow the
business. Winterflood's operating expenses decreased 33%,
reflecting lower variable compensation and settlement costs.
Overall, the group's expense/income ratio increased on the prior
year period to 64% (2021: 62%), whilst the group's compensation
ratio decreased to 37% (2021: 38%). Statutory operating expenses
increased to GBP600.0 million (2021: GBP597.6 million).
Impairment Charges and IFRS 9 Provisioning
Impairment charges increased to GBP103.3 million (2021: GBP89.8
million), corresponding to a bad debt ratio of 1.2% (2021: 1.1%).
This included the impact of updated assumptions for the Novitas
loan book, informed by experience of credit performance, which
resulted in GBP60.7 million (2021: GBP73.2 million) of impairment
charges related to this business.
Excluding Novitas, the bad debt ratio was 0.5% (2021: 0.2%),
reflecting the release of Covid-19 provisions, partially offset by
the ongoing review of provisions and coverage across our loan
portfolios, including certain individual exposures in the
Commercial business, as well as higher IFRS 9 provisions to take
into account the outlook for the external environment.
There was a marginal decrease in provision coverage to 3.1% (31
July 2021: 3.2%). Excluding provisions related to the Novitas loan
book, the coverage ratio reduced to 1.9% (31 July 2021: 2.3%),
primarily reflecting provision releases, mainly driven by reduced
Covid-19 forborne balances. This coverage level appropriately
reflects the elevated uncertainty in the external environment in
the range of modelled outcomes.
Economic forecasts have evolved over the course of the 2022
financial year. At 31 July 2021, the scenario weightings reflected
the continued economic challenges and uncertainty associated with
the pandemic, with 40% allocated to the baseline scenario, 20% to
the upside scenario and 40% across the three downside scenarios.
The level of economic uncertainty associated with the pandemic
reduced up to 31 January 2022 and 10% weight was moved from the
three downside scenarios to the upside scenario. In the second half
of 2022, 7.5% weight has moved from the baseline scenario to the
three downside scenarios, resulting in final weights that are
considered consistent with the economic uncertainty at 31 July 2022
as follows: 30% strong upside, 32.5% baseline, 20% mild downside,
10.5% moderate downside and 7% severe downside.
Whilst we are not yet seeing a significant impact from rising
inflation and interest rates and their effect on customers on our
credit performance, we are alert to the highly uncertain
macroeconomic environment and continue to monitor closely the
performance of the book. We remain confident in the quality of our
loan book, which is predominantly secured, prudently underwritten
and diverse. Approximately 99% of our loan book exposure is to the
UK, Republic of Ireland and Channel Islands, with the remaining
exposure to Western European countries.
Exceptional and Other Adjusting Items
Amortisation and impairment of intangible assets on acquisition
was down significantly to GBP2.0 million (2021: GBP14.2 million).
The prior year charge included a GBP10.1 million impairment of
intangible assets recognised on acquisition in relation to Novitas,
following the decision to cease permanently the approval of lending
to new customers across all of the products offered by this
business.
Following this decision, we also recognised an adjusting item in
relation to the full write down of goodwill allocated to Novitas in
the prior year of GBP12.1 million.
There were no exceptional items recorded in the 2022 financial
year (2021: GBP20.8 million). In 2021, we recognised an exceptional
gain of GBP20.8 million, reflecting a VAT refund from HMRC in
relation to hire purchase agreements in the Motor Finance and Asset
Finance businesses.
Tax Expense
The tax expense was GBP67.6 million (2021: GBP63.1 million),
which corresponds to an effective tax rate of 29.0% (2021: 23.8%).
The increase in the effective tax rate primarily reflected a
write-down in the group's deferred tax assets as a result of the
legislated reduction in the rate of banking surcharge from 8% to 3%
which was due to apply from April 2023, and the non-recurrence of
the prior year write-up in the group's deferred tax assets as a
result of legislation that year increasing the mainstream corporate
tax rate from 19% to 25% (also due to apply from April 2023).
The group's underlying effective tax rate for the year ended 31
July 2022, excluding the impact of the deferred tax asset
write-down, would be 25.7%, reflecting the UK corporate tax rate of
19% and headline banking surcharge of 8% (which applied to a
proportion of the group's profits, resulting in c.6% banking
surcharge).
On 23 September 2022, the Chancellor of the Exchequer announced
as part of his Growth Plan that the corporation tax rate increase
from 19% to 25% from April 2023 will be cancelled, and that the
banking surcharge rate will remain at 8%. The relevant legislation
is expected to be enacted in the year ending 31 July 2023 and is a
non-adjusting post balance sheet event. Had this change been
enacted before 31 July 2022, the group's deferred tax asset balance
at 31 July 2022 would have decreased by approximately GBP1.5
million, with a corresponding tax charge recognised in the income
statement, net of a smaller credit to other comprehensive
income.
Earnings per Share
Profit attributable to shareholders reduced 18% on the prior
year to GBP165.2 million (2021: GBP202.1 million), reflecting a
reduction in adjusted operating profit and the impact from
revaluations of deferred tax assets on the effective tax rate in
the 2022 and 2021 financial years. As a result, adjusted basic
earnings per share ("EPS") was 111.5p (2021: 140.4p) and basic EPS
was 110.4p (2021: 134.8p).
Dividend
The board is proposing a final dividend of 44.0p per share,
resulting in a full-year dividend per share of 66.0p (2021: 60.0p),
up 10% on the prior year. This reflects the group's solid
performance in the year and strong capital position, as well as our
continued confidence in the business model. We remain committed to
our dividend policy, which aims to provide sustainable dividend
growth year-on-year, while maintaining a prudent level of dividend
cover.
Subject to approval at the Annual General Meeting, the final
dividend will be paid on 22 November 2022 to shareholders on the
register at 14 October 2022.
SUMMARY GROUP BALANCE SHEET
31 July 2022 31 July 2021(1)
GBP million GBP million
--------------------------------- ------------- ----------------
Loans and advances to customers
and operating lease assets(2) 9,098.9 8,667.4
Treasury assets(3) 1,855.1 1,788.2
Market-making assets(4) 887.2 801.6
Other assets 837.1 777.3
--------------------------------- ------------- ----------------
Total assets 12,678.3 12,034.5
--------------------------------- ------------- ----------------
Deposits by customers 6,770.4 6,634.8
Borrowings 2,870.1 2,600.9
Market-making liabilities(4) 796.1 690.6
Other liabilities 584.2 538.9
--------------------------------- ------------- ----------------
Total liabilities 11,020.8 10,465.2
--------------------------------- ------------- ----------------
Equity 1,657.5 1,569.3
--------------------------------- ------------- ----------------
Total liabilities and equity 12,678.3 12,034.5
--------------------------------- ------------- ----------------
1 Loans and advances to customers has been re-presented for 31
July 2021 to include GBP222.9 million of operating lease assets,
with a corresponding reduction to other assets.
2 Includes operating lease assets of GBP0.5 million (31 July
2021: GBP1.3 million) that relate to Asset Finance and GBP239.5
million (31 July 2021: GBP221.6 million) to Invoice and Speciality
Finance.
3 Treasury assets comprise cash and balances at central banks
and debt securities held to support the Banking division.
4 Market-making assets and liabilities comprise settlement
balances, long and short trading positions and loans to or from
money brokers.
The group maintained a strong balance sheet and a prudent
approach to managing financial resources. The fundamental structure
of the balance sheet remains unchanged, with most of the assets and
liabilities relating to our Banking activities. Loans and advances
make up the majority of assets. Other items on the balance sheet
include treasury assets held for liquidity purposes, and settlement
balances in Winterflood. Intangibles, property, plant and
equipment, and prepayments are included as other assets.
Liabilities are predominantly made up of customer deposits and both
secured and unsecured borrowings to fund the loan book.
Total assets increased 5% to GBP12.7 billion (31 July 2021:
GBP12.0 billion), mainly reflecting growth in the loan book, an
increase in non-trading debt securities and higher market-making
assets. Total liabilities were up 5% to GBP11.0 billion (31 July
2021: GBP10.5 billion), driven primarily by higher customer
deposits and an increase in secured borrowings. Both market-making
assets and liabilities, related to trading activity at Winterflood,
were up year-on-year due to an increase in value traded at the end
of the period when settlement balances are calculated.
Total equity increased 6% to GBP1.7 billion (31 July 2021:
GBP1.6 billion), primarily reflecting the profit in the year,
partially offset by dividend payments of GBP95.5 million (2021:
GBP86.6 million). The group's return on assets marginally decreased
to 1.3% (2021: 1.7%).
GROUP CAPITAL(1)
31 July 2022(1) 31 July 2021
GBP million GBP million
------------------------------------- ---------------- -------------
Common equity tier 1 capital 1,396.7 1,439.3
Total capital 1,596.7 1,662.7
Risk weighted assets 9,591.3 9,105.3
Common equity tier 1 capital
ratio (transitional) 14.6% 15.8%
Tier 1 capital ratio (transitional) 14.6% 15.8%
Total capital ratio (transitional) 16.6% 18.3%
Leverage ratio(2) 12.0% 11.8%
------------------------------------- ---------------- -------------
1 In line with CRR, effective on 1 January 2022, the CET1, tier
1 and total capital ratios no longer include the benefit related to
software assets which were previously exempt from the deduction
requirement for intangible assets from CET1.
2 The leverage ratio is calculated as tier 1 capital as a
percentage of total balance sheet assets excluding central bank
claims, adjusting for certain capital deductions, including
intangible assets, and off-balance sheet exposures, in line with
the UK leverage framework under CRR. At 31 July 2021, the leverage
ratio was calculated under the EU CRR and included central bank
claims.
Movements in Capital and Other Regulatory Metrics
The CET1 capital ratio reduced from 15.8% to 14.6%, mainly
driven by a change in the regulatory treatment of software assets
(c.45bps), the impact of the transitional IFRS 9 add-back (c.30bps)
and an increase in risk weighted assets ("RWAs") (c.80bps), partly
offset by retained earnings (c.75bps).
CET1 capital decreased 3% to GBP1,396.7 million (31 July 2021:
GBP1,439.3 million), reflecting the regulatory change in the
treatment of software assets, which increased the intangible assets
deducted from CET1 capital by GBP50.2 million, a decrease in the
transitional IFRS 9 add-back to capital of GBP34.8 million and the
regulatory deduction of dividends paid and foreseen of GBP98.4
million. This was partially offset by the capital generation
through profit of GBP165.2 million.
Total capital decreased 4% to GBP1,596.7 million (31 July 2021:
GBP1,662.7 million), also reflecting the regulatory change in the
treatment of software assets and a small repayment of our
subordinated debt.
RWAs increased 5% to GBP9.6 billion (31 July 2021: GBP9.1
billion), mainly driven by an increase in the loan book and risk
weighted assets related to derivatives held for hedging purposes,
partly offset by the regulatory change in treatment of software
assets.
As a result, CET1, tier 1 and total capital ratios were 14.6%
(31 July 2021: 15.8%), 14.6% (31 July 2021: 15.8%) and 16.6% (31
July 2021: 18.3%), respectively.
At 31 July 2022, the applicable minimum CET1, tier 1 and total
capital ratio requirements, excluding any applicable Prudential
Regulation Authority ("PRA") buffer, were 7.6%, 9.3% and 11.5%,
respectively. Accordingly, we continue to have headroom
significantly above the applicable minimum regulatory requirements
of 700bps in the CET1 capital ratio, 530bps in the tier 1 capital
ratio and 510bps in the total capital ratio.
The group applies IFRS 9 regulatory transitional arrangements
which allows banks to add back to their capital base a proportion
of the IFRS 9 impairment charges during the transitional period.
Our capital ratios are presented on a transitional basis after the
application of these arrangements. On a fully loaded basis, without
their application, the CET1, tier 1 and total capital ratios would
be 13.8%, 13.8% and 15.9%, respectively.
The leverage ratio, which is a transparent measure of capital
strength not affected by risk weightings, remains strong at 12.0%
(31 July 2021: 11.8%). The ratio at 31 July 2022 reflects a change
in calculation under the UK leverage framework to exclude central
bank reserves.
We continue to make good progress on our preparations for a
transition to the IRB approach. Following the submission of our
initial application to the PRA in December 2020, we have received
confirmation that our application has successfully transitioned to
Phase 2. The next phase of formal review will commence in October
2022 and we are well positioned to respond promptly, although the
timetable remains under the direction of the PRA. Our Motor
Finance, Property Finance and Energy portfolios, where the use of
models is most mature, have been submitted with our initial
application, with other businesses to follow in future years.
Capital Management Framework
The prudent management of the group's financial resources is a
core part of our business model. Our primary objective is to deploy
capital to support disciplined loan book growth in Banking and to
make the most of strategic opportunities. These include strategic
initiatives and small acquisitions in existing or adjacent markets
that fit with our business model.
The board remains committed to the group's dividend policy,
which aims to provide sustainable dividend growth year-on-year,
while maintaining a prudent level of dividend cover. Further
capital distributions to shareholders will be considered depending
on future opportunities.
We are considering the further optimisation of our capital
structure, including the issuance of debt capital market securities
if appropriate, targeting a CET1 capital ratio range of 12% to 13%
over the medium term. This would allow the group to maintain a
buffer to minimum regulatory requirements while also retaining the
flexibility for growth.
In the short term, we would expect to operate above the 12% to
13% CET1 capital ratio target range, in light of the heightened
macroeconomic uncertainty and potential growth opportunities
available to us.
GROUP FUNDING(1)
31 July 2022 31 July 2021
GBP million GBP million
--------------------------------------- ------------- -------------
Customer deposits 6,770.4 6,634.8
Secured funding 1,598.7 1,333.7
Unsecured funding(2) 1,544.3 1,539.5
Equity 1,657.5 1,569.3
--------------------------------------- ------------- -------------
Total available funding 11,570.9 11,077.3
--------------------------------------- ------------- -------------
Total funding as % of loan book(3) 127% 128%
Average maturity of funding allocated
to loan book(4) 21 months 24 months
1 Numbers relate to core funding and exclude working capital
facilities at the business level.
2 Unsecured funding excludes GBP22.1 million (31 July 2021:
GBP22.7 million) of non-facility overdrafts included in borrowings
and includes GBP295.0 million (31 July 2021: GBP295.0 million) of
undrawn facilities.
3 Total funding as a % of loan book has been re-presented to
include GBP240.0 million (31 July 2021: GBP222.9 million) of
operating lease assets in the loan book figure. The revised
definition is total funding as a % of loan book including operating
lease assets.
4 Average maturity of total funding excluding equity and funding
held for liquidity purposes.
The primary purpose of our Treasury and Savings business is to
manage funding and liquidity to support the Banking businesses and
manage interest rate risk. Our conservative approach to funding is
based on the principle of "borrow long, lend short", with a spread
of maturities over the medium and longer term, comfortably ahead of
a shorter average loan book maturity. It is also diverse, drawing
on a wide range of wholesale and deposit markets including several
public debt securities at both group and operating company level,
as well as a number of securitisations.
We increased total funding in the year by 4% to GBP11.6 billion
(31 July 2021: GBP11.1 billion) which accounted for 127% (31 July
2021: 128%) of the loan book at the balance sheet date. The average
cost of funding reduced to 1.3% (2021: 1.4%), an increase from 1.1%
in the first half of the 2022 financial year due to the increased
cost of customer deposits.
Customer deposits increased 2% to GBP6.8 billion (31 July 2021:
GBP6.6 billion) with non-retail deposits reducing by 7% to GBP3.7
billion (31 July 2021: GBP3.9 billion) and retail deposits
increasing by 16% to GBP3.1 billion (31 July 2021: GBP2.7
billion).
The previous investment in our customer deposit platform
continues to generate benefits and has enabled us to enhance our
Savings proposition. Balances in our Fixed Rate Cash Individual
Savings Accounts ("ISAs") have grown to c.GBP350 million (31 July
2021: GBP160 million) since their launch in December 2020. We
remain focused on continuing to extend the deposit product range,
which will support us in growing and diversifying our retail
deposit base and further optimise our cost of funding and maturity
profile.
Secured funding increased 20% to GBP1.6 billion (31 July 2021:
GBP1.3 billion) as we completed our fourth public Motor Finance
securitisation in April 2022 and increased our current drawings
under the Term Funding Scheme for Small and Medium-sized
Enterprises ("TFSME") to GBP600 million (31 July 2021: GBP490
million).
Unsecured funding, which includes senior unsecured and
subordinated bonds and undrawn committed revolving facilities,
remained stable at GBP1.5 billion (31 July 2021: GBP1.5
billion).
We have maintained a prudent maturity profile. The average
maturity of funding allocated to the loan book remained ahead of
the loan book at 21 months (31 July 2021: 24 months), with the
average loan book maturity at 17 months (31 July 2021: 17 months),
in line with our "borrow long, lend short" principle.
Our strong credit ratings remain unchanged, with Moody's
Investors Services ("Moody's") reaffirming their rating for Close
Brothers Group as "A2/P1" and Close Brothers Limited as "Aa3/P1"
with a "negative" outlook for both in July 2022, and Fitch Ratings
("Fitch") reaffirming their rating for both Close Brothers Group
and Close Brothers Limited as "A-/F2", with a "stable" outlook in
May 2022. This reflects the group's profitability, capital
position, diversified business model and consistent risk
appetite.
GROUP LIQUIDITY
31 July 2022 31 July 2021
GBP million GBP million
---------------------------------------- -------------
Cash and balances at central
banks 1,254.7 1,331.0
Sovereign and central bank
debt(1) 415.4 192.5
Certificates of deposit 185.0 264.7
------------------------------- -------- -------------
Treasury assets 1,855.1 1,788.2
------------------------------- -------- -------------
1 Included in sovereign and central bank debt is GBP216.9
million encumbered UK Government debt (31 July 2021: GBP90.2
million).
The group continues to adopt a conservative stance on liquidity,
ensuring it is comfortably ahead of both internal risk appetite and
regulatory requirements.
We continued to maintain higher liquidity relative to the
pre-Covid-19 position to provide additional flexibility given the
uncertain UK economic outlook, whilst enabling us to maximise any
opportunities available. Over the year, treasury assets increased
4% to GBP1.9 billion (31 July 2021: GBP1.8 billion) and were
predominantly held on deposit with the Bank of England.
We regularly assess and stress test the group's liquidity
requirements and continue to comfortably meet the liquidity
coverage ratio ("LCR") regulatory requirements, with a 12-month
average to 31 July 2022 LCR of 924% (2021: 1,003%). In addition to
internal measures, we monitor funding risk based on the CRR rules
for the net stable funding ratio ("NSFR") which became effective on
1 January 2022. The NSFR at 31 July 2022 was 118.3% (31 January
2022: 117.3%).
BUSINESS REVIEW
BANKING
Key Financials(1)
2022 2021 Change
GBP million GBP million %
--------------------------------- ---------------- ---------------- -------
Operating income 693.1 631.7 10
Adjusted operating expenses(2) (362.6) (329.1) 10
Impairment losses on financial
assets (103.3) (90.1) 15
--------------------------------- ---------------- ---------------- -------
Adjusted operating profit 227.2 212.5 7
--------------------------------- ---------------- ---------------- -------
Net interest margin 7.8% 7.7%
Expense/income ratio 52% 52%
Bad debt ratio 1.2% 1.1%
Return on net loan book 2.6% 2.6%
Return on opening equity 12.5% 13.7%
--------------------------------- ---------------- ---------------- -------
Closing loan book and operating
lease assets(3) 9,098.9 8,667.4 5
--------------------------------- ---------------- ---------------- -------
1 Adjusted measures are presented on a basis consistent with
prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the
reconciliation between operating and adjusted measures can be found
in note 2.
2 Related ongoing costs resulting from investment projects are
recategorised from investment costs to BAU costs after one year.
For comparison purposes, GBP5.2 million has been recategorised from
investment costs to BAU costs in the 2021 financial year to adjust
for investment projects' ongoing costs that commenced prior to the
2022 financial year.
3 Commercial, Asset Finance and Invoice and Speciality Finance
loan books have been re-presented for 31 July 2021 to include
GBP222.9 million of operating lease assets (GBP1.3 million in Asset
Finance and GBP221.6 million in Invoice and Speciality
Finance).
Good Loan Book Growth and Strong Margins
Banking adjusted operating profit increased 7% to GBP227.2
million (2021: GBP212.5 million), reflecting good loan book growth
and a strong net interest margin. Statutory operating profit
increased to GBP227.1 million (2021: GBP207.2 million).
The loan book grew 5.0% over the year to GBP9.1 billion (31 July
2021: GBP8.7 billion) driven by healthy new business volumes in our
Commercial businesses and high demand in Motor Finance, partly
offset by a contraction in the Premium Finance and Property loan
books. Momentum picked up over the course of the year, as the 1.9%
loan book growth in the first half of the year was supplemented by
3.0% growth in the second half of the year. The return on net loan
book remained stable on the prior year at 2.6% (2021: 2.6%).
The net interest margin of 7.8% increased marginally on the 2021
financial year (2021: 7.7%), primarily driven by lower cost of
funds. We continue to adopt a disciplined approach to pricing and
our specialist, relationship-driven model positions us well to
maintain a strong net interest margin, although the trajectory will
depend upon our ability to pass on further rate increases onto our
customers.
As a result, operating income increased 10% to GBP693.1 million
(2021: GBP631.7 million), reflecting the good loan book growth and
a strong net interest margin.
Adjusted operating expenses increased 10% to GBP362.6 million
(2021: GBP329.1 million) as we progressed our key investment
programmes and continued to exercise rigorous control of our costs,
whilst recognising the current inflationary environment. BAU costs
increased by 7% to GBP278.8 million (2021: GBP260.3 million),
primarily driven by higher staff costs reflecting salary increases
in the current inflationary environment and increased
performance-driven compensation.
Investment costs rose 22% to GBP83.8 million (2021: GBP68.8
million), reflecting spend on our multi-year strategic investment
projects and related depreciation charges.
Our investment projects align with our strategic priorities of
protecting, growing and sustaining the business and continue to
deliver tangible benefits. Our IRB spend has driven enhancements in
our risk management framework, whilst investment in our customer
deposit platform has enabled the expansion of the Savings product
offering, supporting a lower cost of funds. In Asset Finance,
investment in our systems has added new functionality and improved
customer insights. Our Retail businesses are benefiting from
digital investment, with Motor Finance utilising API links to
connect to strategic partners and offer our finance at various
points of the customer journey and Premium Finance have launched
insight tools to support brokers.
Whilst we remain mindful of inflationary pressures, we continue
to exercise cost discipline. We expect costs related to existing
investment programmes to stabilise over the next financial years,
although depreciation charges related to these programmes will
continue to increase.
The compensation ratio was flat on the prior year at 29% (2021:
29%) and the expense/income ratio also remained stable at 52%
(2021: 52%).
Impairment charges increased to GBP103.3 million (2021: GBP90.1
million), corresponding to a bad debt ratio of 1.2% (2021: 1.1%).
Excluding Novitas, the bad debt ratio was 0.5% (2021: 0.2%),
reflecting the release of Covid-19 provisions, partially offset by
the ongoing review of provisions and coverage across our loan
portfolios, including certain individual exposures in the
Commercial business, as well as higher IFRS 9 provisions to take
into account the outlook for the external environment.
Overall, there was a marginal decrease in provision coverage to
3.1% (31 July 2021: 3.2%). Excluding provisions related to the
Novitas loan book, the coverage ratio reduced slightly to 1.9% (31
July 2021: 2.3%), primarily reflecting provision releases, mainly
driven by reduced Covid-19 forborne balances.
Whilst we are not yet seeing a significant impact from rising
inflation and interest rates and their effect on customers on our
credit performance, we are alert to the highly uncertain
macroeconomic environment and continue to closely monitor the
performance of the book. We remain confident in the quality of our
loan book, which is predominantly secured, prudently underwritten,
diverse, and supported by the deep expertise of our people.
Return on opening equity in the Banking division reduced to
12.5% (2021: 13.7%).
Loan Book Analysis
31 July 2022 31 July 2021(1) Change
GBP million GBP million %
--------------------------------- -------------- ----------------- --------
Commercial 4,561.4 4,191.0 9
-------------- ----------------- --------
Asset Finance 3,032.5 2,845.9 7
Invoice and Speciality Finance 1,528.9 1,345.1 14
-------------- ----------------- --------
Retail 3,064.0 2,974.3 3
-------------- ----------------- --------
Motor Finance 2,051.2 1,924.4 7
Premium Finance 1,012.8 1,049.9 (4)
-------------- ----------------- --------
Property 1,473.5 1,502.1 (2)
--------------------------------- -------------- ----------------- --------
Closing loan book and operating
lease assets(2) 9,098.9 8,667.4 5
--------------------------------- -------------- ----------------- --------
1 Commercial, Asset Finance and Invoice and Speciality Finance
loan books have been re-presented for 31 July 2021 to include
GBP222.9 million of operating lease assets (GBP1.3 million in Asset
Finance and GBP221.6 million in Invoice and Speciality
Finance).
2 Operating lease assets of GBP0.5 million (31 July 2021: GBP1.3
million) relate to Asset Finance and GBP239.5 million (31 July
2021: GBP221.6 million) to Invoice and Speciality Finance.
The loan book increased 5.0% year-on-year to GBP9.1 billion (31
July 2021: GBP8.7 billion), reflecting strong growth in our
Commercial and Motor Finance businesses, partly offset by a
contraction in the Premium Finance and Property businesses.
Momentum picked up over the course of the year, as the 1.9% loan
book growth in the first half of the year was supplemented by 3.0%
growth in the second half of the year.
The Commercial loan book increased 9% to GBP4.6 billion (31 July
2021: GBP4.2 billion), driven by 7% growth in Asset Finance,
reflecting strong new business volumes in the Transport, Broker,
Contract Hire and Energy businesses in particular, as we saw good
demand from customers. Invoice and Speciality Finance grew 14%,
reflecting strong sales volumes and increased utilisation. The core
Invoice Finance loan book increased 29% as we grew SME customer
numbers.
The Retail loan book increased 3% to GBP3.1 billion (31 July
2021: GBP3.0 billion), with 7% growth in Motor Finance as we saw
strong new business levels, reflecting continued demand in the used
car market and the benefits from investment in the Motor Finance
transformation programme. This was partly offset by a 4% decline in
the Premium Finance book as a result of lower demand for the
funding of insurance policies from consumers, following previous
Covid-19 restrictions.
The Property loan book contracted 2%, despite the growth seen in
the second half of the year. This reflected high repayment levels,
which more than offset drawdowns, given we continued to see
heightened unit sales by developers as a result of the buoyant UK
property market. Our new business volumes remained strong and our
pipeline stands at over GBP1 billion.
The Republic of Ireland makes up approximately 7% of our total
loan book (31 July 2021: 8%), with an offering from both our
Commercial and Retail businesses. The Republic of Ireland Motor
Finance business accounted for 18% of the Motor Finance loan book
(31 July 2021: 21%) and 4% of the Banking loan book (31 July 2021:
5%). As previously announced, from 30 June 2022, we ceased writing
new business under our previous partnership in the Republic of
Ireland. We remain committed to the Irish market and are
considering our long-term options.
Well Positioned to Deliver Disciplined Growth
Loan book growth continues to be an output of our business
model, as we focus on delivering disciplined growth whilst
continuing to prioritise our margins and credit quality. As
outlined at the Investor Event in June 2021, we continue to
actively work to identify incremental and new opportunities in both
our existing and adjacent markets.
Across our businesses, we recognise a significant opportunity in
broadening our financing of green and transition assets, as the UK
aligns towards a net zero economy. Our current lending already
spans a diverse array of green assets including wind and solar
generation, battery electric vehicles and grid infrastructure,
including battery electric storage systems.
We have seen strong growth in battery electric vehicles in our
Commercial business. Our Wholesale Fleet division provides finance
for company car fleets and over one third of its loan book is now
fully battery electric. As an initial green finance ambition, we
have set ourselves the aim to provide funding for GBP1.0 billion of
battery electric vehicles in the next five years.
Over the coming years, we will continue to build further our
expertise in green and transition assets, cementing our reputation
for specialist knowledge, financing and maximising commercial
opportunities arising in the space, for example through the
financing of battery electric storage systems and charging
infrastructure across the UK.
The Asset Finance business is well positioned to capitalise on
continued demand for asset financing. During the year, we have
expanded our sector coverage, hiring agricultural equipment and
materials handling teams who have both completed their first deals,
and have increased our focus on the financing of green and
transition assets.
In Invoice Finance, we expect the growth trajectory to follow
the economic conditions. We continue to pursue opportunities in the
ABL space, including identifying syndication opportunities,
partnering with other lenders. Our Brewery Rentals business has
delivered a record year and our direct-to-outlet container rental
product, EkegPlus, continues to see strong demand.
Our investment in the Motor Finance transformation programme has
enabled us to further broaden our offering in this market and take
advantage of heightened demand for used cars. The programme has
improved efficiency and the introduction of e-sign functionality
has delivered sustainability benefits. We have developed a unique
proposition to provide dealers with real-time data and market
insights, in partnership with AutoTrader, which has supported an
increase in dealer numbers and reducing vehicle sales times. We
have also developed a set of APIs that enable us to connect
seamlessly into strategic partners including AutoTrader and iVendi
and provide our finance offering at various points of the customer
journey. Alongside this, we continue to explore opportunities for
growth over the longer term through the shift to Alternatively
Fuelled Vehicles ("AFVs"), as they become more prevalent in the
second hand car market. AFVs currently make up a low proportion of
our Motor Finance loan book, in line with penetration in the wider
second hand car market. We have expanded our credit policy to
capture such vehicles and are currently piloting new AFV-suited
offerings in selected markets.
For Premium Finance, we have launched new insight tools,
Foresight and Focus 360, to enhance our offering and support
brokers' decisioning. We anticipate demand for the funding of
insurance policies could increase given the uncertain macroeconomic
conditions.
In Property, we continue to make good progress expanding our
regional presence, which now contributes over 50% of our loan book,
as well as building out our bridging finance offering. In
partnership with Travis Perkins, we have established a new
facility, allowing SME housebuilders to access discounted building
supplies and materials directly via a credit facility, without the
need to demonstrate any trading or credit history, where a
relationship with the client already exists and funding has
previously been agreed. We are also piloting a specialist
buy-to-let extension to our existing Property bridging finance
clients, which is a natural evolution of our expertise in Property
Finance and well aligned with our business model and risk appetite.
Our pipeline of undrawn commitments remains strong at above GBP1
billion, although the heightened economic uncertainty is expected
to continue to impact activity in the property market.
Overall, we remain confident in the growth outlook for the loan
book over both the short and medium term.
Banking: Commercial(1)
2022 2021(2) Change
GBP million GBP million %
--------------------------------- ------------- ------------- ---------------
Operating income 343.4 288.9 19
Adjusted operating expenses (180.0) (158.2) 14
Impairment losses on financial
assets (72.4) (77.9) (7)
--------------------------------- ------------- ------------- ---------------
Adjusted operating profit 91.0 52.8 72
Net interest margin 7.8% 7.7%
Expense/income ratio 52% 55%
Bad debt ratio 1.7% 2.1%
--------------------------------- ------------- ------------- ---------------
Closing loan book and operating
lease assets(3) 4,561.4 4,191.0 9
--------------------------------- ------------- ------------- ---------------
1 Adjusted measures are presented on a basis consistent with
prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the
reconciliation between operating and adjusted measures can be found
in note 2.
2 Commercial, Asset Finance and Invoice and Speciality Finance
loan books have been re-presented for 31 July 2021 to include
GBP222.9 million of operating lease assets (GBP1.3 million in Asset
Finance and GBP221.6 million in Invoice and Speciality
Finance).
3 Operating lease assets of GBP0.5 million (31 July 2021: GBP1.3
million) relate to Asset Finance and GBP239.5 million (31 July
2021: GBP221.6 million) to Invoice and Speciality Finance.
The Commercial businesses provide specialist, predominantly
secured lending principally to the SME market and include Asset
Finance and Invoice and Speciality Finance. We finance a diverse
range of sectors, with Asset Finance offering commercial asset
financing, hire purchase and leasing solutions across a broad range
of assets including commercial vehicles, machine tools,
contractors' plant, printing equipment, company car fleets, energy
project finance, and aircraft and marine vessels. The Invoice and
Speciality Finance business provides debt factoring, invoice
discounting and asset-based lending, as well as covering our
specialist businesses such as Brewery Rentals, Vehicle Hire and
Novitas.
Adjusted operating profit in Commercial rose 72% to GBP91.0
million (2021: GBP52.8 million) as the business achieved positive
operating leverage and saw a decrease in impairment charges.
Statutory operating profit was GBP90.9 million (2021: GBP35.9
million).
Operating income increased 19% to GBP343.4 million (2021:
GBP288.9 million), reflecting strong loan book growth in both Asset
Finance and Invoice Finance. The net interest margin increased
marginally to 7.8% (2021: 7.7%), mainly driven by a lower cost of
funds.
Adjusted operating expenses of GBP180.0 million (2021: GBP158.2
million) were 14% higher than the prior year, reflecting higher
staff costs to reflect business growth and the inflationary
environment, as well as costs in relation to the group's withdrawal
from the legal services financing market. In addition, investment
spend in the Asset Finance transformation programme continued. The
expense/income ratio decreased to 52% (2021: 55%) as the growth in
operating income more than offset the cost increase.
Impairment charges decreased 7% to GBP72.4 million (2021:
GBP77.9 million), corresponding to a reduced bad debt ratio of 1.7%
(2021: 2.1%), reflecting the reduction in the Covid-19 forborne
book and a lower charge in the year relating to Novitas, partly
offset by an increase in provisions against certain individual
exposures. A significant portion of the impairment charges reported
in Commercial related to credit provisions against the Novitas loan
book (2022: GBP60.7 million, 2021: GBP73.2 million), which reflect
the latest assumptions on the case failure and recovery rates in
this business.
The provision coverage reduced marginally to 4.0% (31 July 2021:
4.2%) reflecting reduced Covid-19 forbearance, partly offset by
provisions against the Novitas loan book to take into account
updated assumptions on case failure rates. Excluding Novitas, the
provision coverage ratio reduced to 1.6% (31 July 2021: 2.1%).
The Commercial loan book increased 9% to GBP4.6 billion (31 July
2021: GBP4.2 billion). The Asset Finance book grew 7% to GBP3.0
billion (31 July 2021: GBP2.8 billion), reflecting strong new
business volumes. The Invoice and Speciality Finance loan book
increased 14% to GBP1.5 billion (31 July 2021: GBP1.3 billion),
driven by high sales volumes, supported by the Recovery Loan
Scheme, and improved utilisation, albeit this continues to remain
slightly below pre-Covid-19 levels.
Banking: Retail(1)
2022 2021 Change
GBP million GBP million %
-------------------------------- ------------- ------------- -------
Operating income 237.0 219.8 8
Adjusted operating expenses (151.6) (138.0) 10
Impairment losses on financial
assets (24.4) (9.9) 146
-------------------------------- ------------- ------------- -------
Adjusted operating profit 61.0 71.9 (15)
Net interest margin 7.8% 7.6%
Expense/income ratio 64% 63%
Bad debt ratio 0.8% 0.3%
-------------------------------- ------------- ------------- -------
Closing loan book 3,064.0 2,974.3 3
-------------------------------- ------------- ------------- -------
1 Adjusted measures are presented on a basis consistent with
prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the
reconciliation between operating and adjusted measures can be found
in note 2.
The Retail businesses provide intermediated finance, principally
to individuals and small businesses, through motor dealers and
insurance brokers.
Operating profit for Retail reduced 15% to GBP61.0 million
(2021: GBP71.9 million), driven by higher impairment charges and
increased operating expenses, which more than offset income
growth.
Operating income increased 8% to GBP237.0 million (2021:
GBP219.8 million), reflecting loan book growth and an increase in
the net interest margin to 7.8% (2021: 7.6%), mainly driven by
higher fee income in Premium Finance and a lower cost of funds.
Operating expenses rose 10% to GBP151.6 million (2021: GBP138.0
million), driven by higher staff costs and the cost of responding
to ongoing regulatory change. In addition, ongoing investment in
the Retail businesses, alongside related depreciation, continued.
The expense/income ratio increased marginally to 64% (2021:
63%).
Impairment charges increased to GBP24.4 million (2021: GBP9.9
million), with a bad debt ratio of 0.8% (2021: 0.3%) which
reflected a more normalised level of cancellations in the consumer
portfolio in Premium Finance following the strong credit
performance in the prior year and a rise in arrears in the Motor
Finance business as a result of the impact on customers from the
cessation of the UK government's Covid-19 job retention scheme and
the increase in inflation.
The provision coverage ratio remained stable at 2.2% (31 July
2021: 2.2%), mainly driven by the release of model-driven
adjustments, partly offset by expected credit losses increasing to
reflect loan book growth.
The Retail loan book increased 3% to GBP3.1 billion (31 July
2021: GBP3.0 billion). The Motor Finance book grew 7% to GBP2.1
billion (31 July 2021: GBP1.9 billion), as high new business levels
reflected continued demand, and strong prices continued in the used
car market.
The Premium Finance book declined 4% to GBP1.0 billion (31 July
2021: GBP1.0 billion) primarily as a result of lower demand for the
funding of insurance policies from consumers. This was partially
offset by strong new business volumes as customers look to ease
cash flow pressures in the commercial market.
We remain confident in the credit quality of the Retail loan
book. The Motor Finance loan book is predominantly secured on
second-hand vehicles which are less exposed to depreciation or
significant declines in value than new cars. Our core Motor Finance
product remains hire-purchase contracts, with less exposure to
residual value risk associated with Personal Contract Plans
("PCP"), which accounted for c.11% of the Motor Finance loan book
at 31 July 2022. The Premium Finance loan book benefits from
various forms of structural protection including premium
refundability and, in most cases, broker recourse for the personal
lines product.
Banking: Property
2022 2021 Change
GBP million GBP million %
-------------------------------- ------------- ------------- -------
Operating income 112.7 123.0 (8)
Operating expenses (31.0) (32.9) (6)
Impairment losses on financial
assets (6.5) (2.3) 183
-------------------------------- ------------- ------------- -------
Operating profit 75.2 87.8 (14)
Net interest margin 7.6% 7.6%
Expense/income ratio 28% 27%
Bad debt ratio 0.4% 0.1%
-------------------------------- ------------- ------------- -------
Closing loan book 1,473.5 1,502.1 (2)
-------------------------------- ------------- ------------- -------
Property comprises Property Finance and Commercial Acceptances.
The Property Finance business is focused on specialist residential
development finance to established professional developers in the
UK. Commercial Acceptances provides bridging loans and loans for
refurbishment projects.
Operating profit decreased 14% to GBP75.2 million (2021: GBP87.8
million) primarily reflecting a reduction in income, as well as an
increase in impairment charges on the prior year.
Operating income was down 8% to GBP112.7 million (2021: GBP123.0
million) reflecting the reduction in the loan book. The net
interest margin was stable at 7.6% (2021: 7.6%), mainly driven by
lower cost of funds, partly offset by the negative impact of rising
rates in the last few months of the financial year on the interest
rate floors, which were set at 1%. With the UK base rate now above
1%, we expect no further impact in respect of these floors as a
result of future rate rises.
Operating expenses were 6% lower at GBP31.0 million (2021:
GBP32.9 million) as we maintained our rigorous focus on cost
discipline. The expense/income ratio remained broadly stable on the
prior year at 28% (2021: 27%).
Impairment charges increased to GBP6.5 million (2021: GBP2.3
million) following the ongoing review of provisions and the prior
year benefiting from the release of Covid-19 related provisions,
resulting in a bad debt ratio of 0.4% (2021: 0.1%). The provision
coverage ratio decreased marginally to 2.4% (31 July 2021:
2.6%).
In spite of strong new business volumes, the Property loan book
reduced GBP29 million to GBP1.5 billion (31 July 2021: GBP1.5
billion), as high repayment levels more than offset drawdowns, with
the buoyant UK property market resulting in heightened unit sales
by developers. Our pipeline of undrawn commitments remains strong
at GBP1.0 billion (31 July 2021: GBP0.9 billion) and we continue to
see success from regional expansion, with the regional loan book
making up over 50% of the Property Finance portfolio.
The Property loan book is conservatively underwritten, with
typical LTVs below standard market levels. We work with
experienced, professional developers, with a focus on mid-priced
family housing, and have minimal exposure to the prime central
London market. Our long track record, expertise and quality of
service ensure the business remains resilient to competition and
continues to generate high levels of repeat business.
ASSET MANAGEMENT
Key Financials (1)
2022 2021 Change
GBP million GBP million %
------------------------------- ------------- ------------- -------
Investment management 110.4 102.9 7
Advice and other services(2) 36.1 36.4 (1)
Other income(3) 1.5 0.1 n/a
------------------------------- ------------- ------------- -------
Operating income 148.0 139.4 6
Adjusted operating expenses (126.3) (115.9) 9
Impairment gains on financial - 0.2 n/a
assets
Adjusted operating profit 21.7 23.7 (8)
------------------------------- ------------- ------------- -------
Revenue margin (bps) 87 91
Operating margin 15% 17%
Return on opening equity 28.6% 31.7%
1 Adjusted measures are presented on a basis consistent with
prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the
reconciliation between operating and adjusted measures can be found
in note 2.
2 Income from advice and self-directed services, excluding
investment management income.
3 Other income includes GBP1.4 million gain on disposal of an
advised client book.
Continuing to Build on a Long Track Record of Growth
Close Brothers Asset Management provides personal financial
advice and investment management services to private clients in the
UK, including full bespoke management, managed portfolios and
funds, distributed both directly via our advisers and investment
managers, and through third party financial advisers.
Adjusted operating profit in CBAM decreased 8% to GBP21.7
million (2021: GBP23.7 million), driven by negative market
movements which adversely impacted revenue in the second half of
the year and higher staff costs. The operating margin reduced to
15% (2021: 17%). Statutory operating profit before tax was GBP19.8
million (2021: GBP22.4 million).
Total operating income grew 6% to GBP148.0 million (2021:
GBP139.4 million), reflecting positive net inflows and market
movements in the first half of the year, despite falling markets
and their impact on wider client sentiment in the second half of
the year. The revenue margin reduced to 87bps (2021: 91bps)
reflecting lower investment management margins as flows have
included a higher proportion of lower margin products.
Adjusted operating expenses increased 9% to GBP126.3 million
(2021: GBP115.9 million), driven by higher staff costs, primarily
reflecting the current inflationary environment and new hires, as
we continue to invest to grow the business. As a result,
expense/income ratio grew to 85% (2021: 83%) with the compensation
ratio remaining in line with the prior year at 56% (2021: 56%).
We have been investing in technology in the business and
recently completed a major re-platforming project to rationalise
legacy systems and increase efficiency, while adding a digital
portal to improve functionality and customer experience. Our
technology projects have been focused on increasing efficiency and
operational resilience, improving client experience by using
best-of-breed applications, digital technology and selective
in-house development.
Continued Positive Net Inflows, Despite Volatile Market
Conditions
Equity markets have experienced a mixed performance during the
financial year. In the second half of the year, a global equity
market sell-off led to largely unfavourable conditions, with some
major indices suffering near-unprecedented declines. Although
concerns over continued inflation and geopolitical uncertainty
continue to weigh on markets and adversely impact investor
sentiment, we saw net inflows of GBP844 million for the year,
delivering a net inflow rate of 5% (2021: 7%).
Total managed assets decreased 2% to GBP15.3 billion (2021:
GBP15.6 billion), as negative market movements of GBP1.1 billion
more than offset net inflows. Total client assets, which includes
advised and managed assets, reduced by 3% overall to GBP16.6
billion (2021: GBP17.0 billion).
Movement in Client Assets
31 July 31 July
2022 2021
GBP million GBP million
----------------------------------- -------------- --------------
Opening managed assets 15,588 12,594
Inflows 2,330 2,284
Outflows (1,486) (1,367)
----------------------------------- -------------- --------------
Net inflows 844 917
Market movements (1,130) 2,077
Total managed assets 15,302 15,588
Advised only assets 1,272 1,435
----------------------------------- -------------- --------------
Total client assets(1) 16,574 17,023
----------------------------------- -------------- --------------
Net flows as % of opening managed
assets 5% 7%
----------------------------------- -------------- --------------
1 Total client assets include GBP5.9 billion of assets (31 July
2021: GBP6.0 billion) that are both advised and managed.
Fund Performance
Our funds and segregated bespoke portfolios are designed to
provide attractive risk-adjusted returns for our clients,
consistent with their long-term goals and investment objectives.
Fund performance over the 12 months since 31 July 2021 has been
mixed, reflecting volatile markets across asset classes since the
start of 2022. As a result, all our funds have delivered negative
absolute returns over this period. In relative terms, eight of our
15 funds have outperformed their relevant peer group averages. Our
bespoke strategy composites have outperformed their respective peer
groups in a falling market environment, except for the Equity Risk
strategy, which was the most impacted by the 2022 market falls.
Our Approach to ESG and Sustainability
ESG integration in our investment research and stewardship
remains a key area of focus and we continue to expand our
Responsible Investment team.
Our sustainable funds (Close Sustainable Balanced Portfolio Fund
and Close Sustainable Bond Portfolio Fund), launched in 2020 to
complement the existing SRI discretionary service, are gaining
traction and we continue to develop our sustainable proposition as
more of our clients look to how they can make a difference with
their investments.
We have mobilised a Sustainability Programme with dedicated
initiatives to embed the Principles for Responsible Investment
("PRI") and stewardship across all facets of our business, and as
part of this, have recently become a signatory to the UK
Stewardship Code.
CBAM will be making a commitment to actively contribute towards
the UK government's net zero climate goals, through the Net Zero
Asset Managers initiative. In line with our regulatory reporting
obligations and desire to be transparent in fulfilling our
commitments, we are also working towards aligning our disclosures
with the TCFD recommendations by 2024.
Well Positioned for Future Growth
We remain confident that our vertically integrated,
multi-channel business model positions us well for ongoing demand
for our services and the structural growth opportunity presented by
the wealth management industry.
Our focus remains on providing excellent service to our clients
whilst investing in new hires to support the long-term growth
potential of our business. While CBAM is sensitive to financial
market conditions, we remain committed to driving growth both
organically and through the continued selective hiring of advisers
and investment managers, and through in-fill acquisitions.
As previously announced, Eddy Reynolds took over the leadership
of the Asset Management division from Martin Andrew in March 2022.
Eddy has over 30 years' experience in the fund and wealth
management industries and has brought with him outstanding
experience and knowledge to lead our talented team at CBAM.
WINTERFLOOD
Key Financials
2022 2021 Change
GBP million GBP million %
--------------------------------- ------------- ------------- -------
Operating income 95.2 182.0 (48)
Operating expenses (81.1) (121.2) (33)
Impairment gains on financial - 0.1 n/a
assets
Operating profit 14.1 60.9 (77)
Average bargains per day ('000) 81 101
Operating margin 15% 33%
Return on opening equity(1) 10.5% 63.5%
1 Reflecting increase in capital base in financial year
2021.
Cyclicality in the Trading Business Impacted Performance; Well
Placed for When Investor Appetite Returns
Winterflood is a leading UK market maker, delivering high
quality execution services to stockbrokers, wealth managers and
institutional investors, as well as providing corporate advisory
services to investment trusts and outsourced dealing and custody
services via Winterflood Business Services ("WBS").
Global geopolitical events, in particular the ongoing conflict
in Ukraine, energy and commodity price rises, supply chain issues,
new Covid variants and the resulting restrictions, have all
negatively impacted market conditions in the 2022 calendar year.
Tightening monetary policy to combat inflation and concerns over
slowing economic growth have also resulted in a risk-off sentiment
for markets, further subduing investor risk appetite.
Cyclicality seen in the trading business negatively impacted
Winterflood's performance, with a significant reduction in trading
opportunities, exacerbated by periods of volatility in falling
markets. Following the exceptionally strong trading performance and
elevated market activity experienced during the prior year,
operating profit was down 77% to GBP14.1 million (2021: GBP60.9
million).
Operating income decreased 48% to GBP95.2 million (2021:
GBP182.0 million), primarily driven by a market-wide slowdown in
trading activity and a change in the mix of trading volumes,
exacerbated by falling markets. We also saw a decline in fees
generated from corporate activity, although WBS continued to
generate increased levels of income, up 12% to GBP10.2 million on
the prior year.
Trading volumes have reduced, with average daily bargains at 81k
(2021: 101k), but they remain elevated on pre-Covid levels (2019:
56k). However, there has also been a change in the composition of
trading volumes, with volumes in the higher-margin markets of AIM
and Small Cap both down on the prior year, as retail investor
appetite has fallen, and retail-driven trading opportunities have
reduced. As a result, trading income has declined to GBP80.7
million for the year (2021: GBP164.1 million).
Global equity markets have experienced substantial volatility in
the past six months and indices have suffered, with US stocks
recording their worst first half in more than 50 years, the FTSE
250 losing 14% and the AIM index down 24% this year. We have
navigated the volatile intraday trading well, benefiting from the
expertise of our traders and our strong focus on risk management,
which has resulted in eight loss days for the year (2021: one loss
day), of which seven occurred in the second half of the year.
Operating expenses decreased 33% to GBP81.1 million (2021:
GBP121.2 million) driven by the variable nature of Winterflood's
cost base, as the reduced revenue performance and trading volumes
led to lower staff compensation and settlement costs. The
expense/income ratio increased to 85% (2021: 67%) as the reduction
in income was not fully offset by the corresponding decrease in
variable costs. The compensation ratio fell to 47% (2021: 48%).
WBS, which provides outsourced dealing and custody services, has
delivered another strong performance, generating GBP10.2 million of
income (2021: GBP9.1 million) and growing its assets under
administration to GBP7.2 billion (31 July 2021: GBP6.2 billion).
Net inflows over the period were GBP1.3 billion (2021: GBP1.2
billion). We see significant growth potential in this business,
with a solid pipeline of clients expected to increase assets under
administration in excess of GBP10 billion in the 2023 financial
year.
As a daily trading business, Winterflood is sensitive to changes
in the market environment but remains well positioned to continue
trading profitably, taking advantage when investor appetite
returns. Winterflood continues to diversify its revenue streams and
explore growth opportunities, balancing the cyclicality seen in the
trading business. Our recently appointed new chief executive,
Bradley Dyer, will be well placed to lead Winterflood in the next
stage of its growth and development. We would like to thank Philip
Yarrow for his significant contribution to the group and to
Winterflood following his decision to retire as chief
executive.
DEFINITIONS
Adjusted : Adjusted measures are presented on a basis consistent
with prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reflect
underlying trading performance
Assets under administration : Total assets for which Winterflood
Business Services provide custody and administrative services
Bad debt ratio : Impairment losses in the year as a percentage
of average net loans and advances to customers and operating lease
assets
Bargains per day : Average daily number of Winterflood's trades
with third parties
Business as usual ("BAU") costs: Operating expenses excluding
depreciation and other costs related to investments
Capital Requirements Regulation ("CRR"): Capital Requirements
Regulation as implemented in the PRA Rulebook CRR Instrument and
the PRA Rulebook CRR Firms: Leverage Instrument (collectively known
as "CRR")
CET1 capital ratio : Measure of the group's CET1 capital as a
percentage of risk weighted assets, as required by CRR
Common equity tier 1 ("CET1") capital : Measure of capital as
defined by the CRR. CET1 capital consists of the highest quality
capital including ordinary shares, share premium account, retained
earnings and other reserves, less goodwill and certain intangible
assets and other regulatory adjustments
Compensation ratio : Total staff costs as a percentage of
adjusted operating income
Cost of funds: Interest expense incurred to support the lending
activities divided by the average net loans and advances to
customers and operating lease assets
Credit impaired : Where one or more events that have a
detrimental impact on the estimated future cash flows of a loan
have occurred. Credit impaired events are more severe than SICR
triggers. Accounts which are credit impaired will be allocated to
Stage 3
Discounting : The process of determining the present value of
future payments
Dividend per share ("DPS") : Comprises the final dividend
proposed for the respective year, together with the interim
dividend declared and paid in the year
Earnings per share ("EPS") : Profit attributable to shareholders
divided by number of basic shares
Effective tax rate ("ETR") : Tax on operating profit/(loss) as a
percentage of operating profit/(loss) on ordinary activities before
tax
Expected credit loss ("ECL") : The unbiased probability-weighted
average credit loss determined by evaluating a range of possible
outcomes and future economic conditions
Expense/income ratio : Total adjusted operating expenses divided
by operating income
Funding allocated to loan book : Total funding excluding equity
and funding held for liquidity purposes
Funding as % loan book : Total funding divided by net loans and
advances to customers and operating lease assets
Gross carrying amount : Loan book before expected credit loss
provision
High quality liquid assets ("HQLAs") : Assets which qualify for
regulatory liquidity purposes, including Bank of England deposits
and sovereign and central bank debt
HM Revenue & Customs ("HMRC") : The UK's tax, payments and
customs authority
Independent financial adviser ("IFA") : Professional offering
independent, whole of market advice to clients including
investments, pensions, protection and mortgages
Internal ratings based ("IRB") approach : A supervisor-approved
method using internal models, rather than standardised risk
weightings, to calculate regulatory capital requirements for credit
risk
International Financial Reporting Standards ("IFRS"): Globally
accepted accounting standards issued by the IFRS Foundation and the
International Accounting Standards Board
Investment costs : Includes depreciation and other costs related
to investment in multi-year projects, new business initiatives and
pilots and cyber resilience. Excludes IFRS 16 depreciation
Leverage ratio : Tier 1 capital as a percentage of total balance
sheet assets, adjusted for certain capital deductions, including
intangible assets, and off-balance sheet exposures
Liquidity coverage ratio ("LCR") : Measure of the group's HQLAs
as a percentage of expected net cash outflows over the next 30 days
in a stressed scenario
Loan to value ("LTV") ratio : For a secured or structurally
protected loan, the loan balance as a percentage of the total value
of the asset
Loss day: Where aggregate gross trading book revenues are
negative at the end of a trading day
Managed assets or assets under management ("AUM") : Total market
value of assets which are managed by Close Brothers Asset
Management in one of our investment solutions
Net carrying amount : Loan book value after expected credit loss
provision
Net flows : Net flows as a percentage of opening managed assets
calculated on an annualised basis
Net interest margin ("NIM") : Operating income generated by
lending activities, including interest income net of interest
expense, fees and commissions income net of fees and commissions
expense, and operating lease income net of operating lease expense,
less depreciation on operating lease assets, divided by average net
loans and advances to customers and operating lease assets
Net stable funding ratio ("NSFR") : Regulatory measure of the
group's weighted funding as a percentage of weighted assets
Net zero : Target of completely negating the amount of
greenhouse gases produced by reducing emissions or implementing
methods for their removal
Operating margin : Adjusted operating profit divided by
operating income
Personal Contract Plan ("PCP") : PCP is a form of vehicle
finance where the customer defers a significant portion of credit
to the final repayment at the end of the agreement, thereby
lowering the monthly repayments compared to a standard
hire-purchase arrangement. At the final repayment date, the
customer has the option to: (a) pay the final payment and take the
ownership of the vehicle; (b) return the vehicle and not pay the
final repayment; or (c) part-exchange the vehicle with any equity
being put towards the cost of a new vehicle
Prudential Regulation Authority ("PRA") : A financial regulatory
body, responsible for regulating and supervising banks and other
financial institutions in the UK
Recovery Loan Scheme : Launched in April 2021 as a replacement
to CBILS. Under the terms of the scheme, businesses of any size
that have been adversely impacted by the Covid-19 pandemic can
apply to borrow up to GBP10 million, with accredited lenders
receiving a government-backed guarantee of 80% on losses that may
arise
Return on assets : Adjusted operating profit attributable to
shareholders divided by total closing assets at the balance sheet
date
Return on average tangible equity : Adjusted operating profit
attributable to shareholders divided by average total shareholder's
equity, excluding intangible assets
Return on net loan book ("RoNLB") : Adjusted operating profit
from lending activities divided by average net loans and advances
to customers and operating lease assets
Return on opening equity ("RoE") : Adjusted operating profit
attributable to shareholders divided by opening equity, excluding
non-controlling interests
Revenue margin : Income from advice, investment management and
related services divided by average total client assets. Average
total client assets calculated as a two-point average
Risk weighted assets ("RWAs") : A measure of the amount of a
bank's assets, adjusted for risk in line with the CRR. It is used
in determining the capital requirement for a financial
institution
Scope 1, 2 and 3 emissions : Categorisation of greenhouse gas
emissions, as defined by the Greenhouse Gas (GHG) Protocol, into
direct emissions from owned or controlled sources (Scope 1),
indirect emissions from the generation of purchased electricity,
heating and cooling consumed by the reporting company (Scope 2),
and all other indirect emissions that occur in a company's value
chain (Scope 3)
Subordinated debt : Represents debt that ranks below, and is
repaid after claims of, other secured or senior debt owed by the
issuer
Task Force on Climate-related Financial Disclosures ("TCFD") :
Regulatory framework to improve and increase reporting of
climate-related financial information, including more effective and
consistent disclosure of climate-related risks and
opportunities
Term funding : Funding with a remaining maturity greater than 12
months
Term Funding Scheme ("TFS") : The Bank of England's Term Funding
Scheme
Term Funding Scheme for Small and Medium-sized Enterprises
("TFSME") : The Bank of England's Term Funding Scheme with
additional incentives for SMEs
Total client assets ("TCA") : Total market value of all client
assets including both managed assets and assets under advice and/or
administration in the Asset Management division
Consolidated Income Statement
for the year ended 31 July 2022
2022 2021
Note GBP million GBP million
---------------------------------------------------------------------------------------------------------------------- ----------- -----------
Interest income 690.0 656.8
Interest expense (112.0) (119.3)
---------------------------------------------------------------------------------------------------- ---------------- ----------- -----------
Net interest income 578.0 537.5
---------------------------------------------------------------------------------------------------- ---------------- ----------- -----------
Fee and commission income 259.5 246.1
Fee and commission expense (17.2) (16.1)
Gains less losses arising from dealing in securities 81.6 165.2
Other income 106.1 89.4
Depreciation of operating lease assets and other
direct costs 11 (71.9) (69.5)
Non-interest income 358.1 415.1
---------------------------------------------------------------------------------------------------- ---------------- ----------- -----------
Operating income 936.1 952.6
---------------------------------------------------------------------------------------------------- ---------------- ----------- -----------
Administrative expenses (598.0) (592.1)
Impairment losses on financial assets 7 (103.3) (89.8)
---------------------------------------------------------------------------------------------------- ---------------- ----------- -----------
Total operating expenses before amortisation and
impairment of intangible assets on acquisition,
goodwill impairment and exceptional
item (701.3) (681.9)
---------------------------------------------------------------------------------------------------- ---------------- ----------- -----------
Operating profit before amortisation and impairment
of intangible assets on acquisition, goodwill impairment
and exceptional item 234.8 270.7
Amortisation and impairment of intangible assets
on acquisition 10 (2.0) (14.2)
Goodwill impairment 10 - (12.1)
Exceptional item: HMRC VAT refund 3 - 20.8
---------------------------------------------------------------------------------------------------- ---------------- ----------- -----------
Operating profit before tax 232.8 265.2
Tax 4 (67.6) (63.1)
---------------------------------------------------------------------------------------------------- ---------------- ----------- -----------
Profit after tax 165.2 202.1
Profit attributable to shareholders 165.2 202.1
---------------------------------------------------------------------------------------------------- ---------------- ----------- -----------
Basic earnings per share 5 110.4p 134.8p
Diluted earnings per share 5 109.9p 133.6p
---------------------------------------------------------------------------------------------------- ---------------- ----------- -----------
Interim dividend per share paid 6 22.0p 18.0p
---------------------------------------------------------------------------------------------------- ---------------- ----------- -----------
Final dividend per share 6 44.0p 42.0p
---------------------------------------------------------------------------------------------------- ---------------- ----------- -----------
Consolidated Statement of COMPREHENSIVE INCOME
for the year ended 31 July 2022
2022 2021
GBP million GBP million
-------------------------------------------------------- ----------- -----------
Profit after tax 165.2 202.1
-------------------------------------------------------- ----------- -----------
Items that may be reclassified to income statement
Currency translation losses (0.5) (1.1)
Gains on cash flow hedging 30.6 7.4
(Losses)/gains on financial instruments classified
at fair value through other comprehensive income:
Sovereign and central bank debt (1.1) 0.9
Tax relating to items that may be reclassified (7.9) (1.2)
-------------------------------------------------------- ----------- -----------
21.1 6.0
-------------------------------------------------------- ----------- -----------
Items that will not be reclassified to income statement
Defined benefit pension scheme (losses)/gains (0.1) 0.5
Tax relating to items that will not be reclassified 0.3 (0.6)
-------------------------------------------------------- ----------- -----------
0.2 (0.1)
-------------------------------------------------------- ----------- -----------
Other comprehensive income, net of tax 21.3 5.9
Total comprehensive income 186.5 208.0
-------------------------------------------------------- ----------- -----------
Attributable to
Shareholders 186.5 208.0
-------------------------------------------------------- ----------- -----------
Consolidated Balance Sheet
at 31 July 2022
31 July 31 July
2022 2021
Note GBP million GBP million
-------------------------------------------- ----------- -----------
Assets
Cash and balances at central banks 1,254.7 1,331.0
Settlement balances 799.3 699.6
Loans and advances to banks 165.4 136.3
Loans and advances to customers 7 8,858.9 8,444.5
Debt securities 8 612.8 477.3
Equity shares 9 28.4 31.9
Loans to money brokers against stock
advanced 48.4 51.1
Derivative financial instruments 71.2 18.3
Intangible assets 10 252.0 232.6
Property, plant and equipment 11 322.5 309.9
Current tax assets 47.0 36.4
Deferred tax assets 32.5 56.0
Prepayments, accrued income and other
assets 185.2 209.6
Total assets 12,678.3 12,034.5
Liabilities
Settlement balances and short positions 12 796.1 690.6
Deposits from banks 13 160.5 150.6
Deposits from customers 13 6,770.4 6,634.8
Loans and overdrafts from banks 13 622.7 512.7
Debt securities in issue 13 2,060.9 1,865.5
Derivative financial instruments 89.2 21.3
Accruals, deferred income and other
liabilities 334.5 367.0
Subordinated loan capital 186.5 222.7
Total liabilities 11,020.8 10,465.2
---------------------------------------- ----------- -----------
Equity
Called up share capital 38.0 38.0
Retained earnings 1,628.4 1,555.5
Other reserves (8.9) (23.2)
---------------------------------------- ----------- -----------
Total shareholders' equity 1,657.5 1,570.3
---------------------------------------- ----------- -----------
Non-controlling interests - (1.0)
---------------------------------------- ----------- -----------
Total equity 1,657.5 1,569.3
---------------------------------------- ----------- -----------
Total equity and liabilities 12,678.3 12,034.5
---------------------------------------- ----------- -----------
COnsolidated Statement of CHANGES IN EQUITY
for the year ended 31 July 2022
Other reserves
-------------------------------------------------------
Share-based Cash Total
Called up payments Exchange flow attributable Non-controlling
share Retained FVOCI reserve movements hedging to equity interests Total
capital earnings reserve reserve reserve holders equity
GBP million GBP GBP GBP million GBP GBP GBP million GBP million GBP
million million million million million
----------------- --------- -------------------- ----------- ---------- -------- ------------ ---------------- ---------
At 1 August
2020 38.0 1,435.0 0.2 (15.6) (1.3) (5.7) 1,450.6 (1.0) 1,449.6
----------------- --------- ----------- ------- ----------- ---------- -------- ------------ ---------------- ---------
Profit for the
year - 202.1 - - - - 202.1 - 202.1
Other
comprehensive
(expense)/income - (0.1) 0.6 - - 5.4 5.9 - 5.9
----------------- --------- ----------- ------- ----------- ---------- -------- ------------ ---------------- ---------
Total
comprehensive
income for the
year - 202.0 0.6 - - 5.4 208.0 - 208.0
Dividends paid
(note 6) - (86.6) - - - - (86.6) - (86.6)
Shares purchased - - - (12.1) - - (12.1) - (12.1)
Shares released - - - 10.0 - - 10.0 - 10.0
Other movements - 3.7 - (4.7) - - (1.0) - (1.0)
Income tax - 1.4 - - - - 1.4 - 1.4
----------------- --------- ----------- ------- ----------- ---------- -------- ------------ ---------------- ---------
At 31 July 2021 38.0 1,555.5 0.8 (22.4) (1.3) (0.3) 1,570.3 (1.0) 1,569.3
----------------- --------- ----------- ------- ----------- ---------- -------- ------------ ---------------- ---------
Profit for the
year - 165.2 - - - - 165.2 - 165.2
Other
comprehensive
(expense)/income - 0.2 (0.7) - (0.2) 22.0 21.3 - 21.3
----------------- --------- ----------- ------- ----------- ---------- -------- ------------ ---------------- ---------
Total
comprehensive
income for the
year - 165.4 (0.7) - (0.2) 22.0 186.5 - 186.5
Dividends paid
(note 6) - (95.5) - - - - (95.5) - (95.5)
Shares purchased - - - (9.5) - - (9.5) - (9.5)
Shares released - - - 4.9 - - 4.9 - 4.9
Other movements - 4.1 - (2.2) - - 1.9 1.0 2.9
Income tax - (1.1) - - - - (1.1) - (1.1)
At 31 July 2022 38.0 1,628.4 0.1 (29.2) (1.5) 21.7 1,657.5 - 1,657.5
----------------- --------- ----------- ------- ----------- ---------- -------- ------------ ---------------- ---------
Consolidated Cash Flow Statement
for the year ended 31 July 2022
2022 2021
Note GBP million GBP million
---------------------------------------------------- ----- ----------- -----------
Net cash inflow from operating activities 15(a) 158.7 119.1
---------------------------------------------------- ----- ----------- -----------
Net cash (outflow)/inflow from investing activities
Purchase of:
Property, plant and equipment (7.1) (8.9)
Intangible assets - software (51.3) (47.9)
Subsidiaries 15(b) (0.1) (2.9)
Sale of:
Subsidiaries 15(c) 0.1 2.3
(58.4) (57.4)
---------------------------------------------------- ----- ----------- -----------
Net cash inflow before financing activities 100.3 61.7
---------------------------------------------------- ----- ----------- -----------
Financing activities
Purchase of own shares for employee share award
schemes (9.5) (12.1)
Equity dividends paid (95.5) (86.6)
Interest paid on subordinated loan capital and
debt financing (10.4) (13.6)
Payment of lease liabilities (15.1) (14.7)
Net (redemption)/issuance of subordinated loan
capital (23.4) 40.6
Net decrease in cash (53.6) (24.7)
Cash and cash equivalents at beginning of year 1,436.6 1,461.3
---------------------------------------------------- ----- ----------- -----------
Cash and cash equivalents at end of year 15(d) 1,383.0 1,436.6
---------------------------------------------------- ----- ----------- -----------
THE NOTES
1. Basis of Preparation and Accounting Policies
The financial information contained in this announcement does
not constitute the statutory accounts for the years ended 31 July
2022 or 31 July 2021 within the meaning of section 435 of the
Companies Act 2006, but is derived from those accounts. The
accounting policies used are consistent with those set out in the
Annual Report 2021.
The financial statements are prepared on a going concern basis.
Whilst the financial information has been prepared in accordance
with the recognition and measurement criteria of International
Financial Reporting Standards ("IFRS"), this announcement does not
itself contain sufficient information to comply with IFRS 9.
The financial information for the year ended 31 July 2022 has
been derived from the financial statements of Close Brothers Group
plc for that year. Statutory accounts for 2021 have been delivered
to the Registrar of Companies and those for 2022 will be delivered
following the company's Annual General Meeting. The group's
auditor, PricewaterhouseCoopers LLP, will report on the 2022
accounts: their report is expected to be unqualified, and is not
expected to draw attention to any matters by way of emphasis or
contain statements under Section 498(2) or (3) of the Companies Act
2006.
Critical accounting estimates and judgements
The reported results of the group are sensitive to the
accounting policies, assumptions and estimates used in the
preparation of its financial statements. UK company law and IFRS
require the directors, in preparing the group's financial
statements, to select suitable accounting policies, apply them
consistently and make judgements, estimates and assumptions that
are reasonable. The group's estimates and assumptions are based on
historical experience and reasonable expectations of future events
and are reviewed on an ongoing basis.
While the impact of climate change represents a source of
uncertainty, the group does not consider climate related risks to
be a critical accounting judgement or estimate.
Critical accounting judgements
In the application of the group's accounting policies,
judgements that are considered by the board to have the most
significant effect on the amounts in the financial statements are
as follows.
Expected credit losses
At 31 July 2022 the group's expected credit loss provision was
GBP285.6 million (31 July 2021: GBP280.4 million). The calculation
of the group's expected credit loss provision under IFRS 9 requires
the group to make a number of judgements, assumptions and
estimates. The most significant are set out below.
Significant increase in credit risk
Assets are transferred from Stage 1 to Stage 2 when there has
been a significant increase in credit risk since initial
recognition. The assessment, which requires judgement, is
probability weighted and uses historical, current and
forward-looking information.
Typically, the group assesses whether a significant increase in
credit risk has occurred based on a quantitative and qualitative
assessment, with a 30 days past due backstop. Due to the diverse
nature of the group's lending businesses, the specific indicators
of a significant increase in credit risk vary by business and may
include some or all of the following factors.
-- Quantitative assessment: the lifetime PD has increased by
more than an agreed threshold relative to the equivalent at
origination. Thresholds are based on a fixed number of risk grade
movements which are bespoke to the business to ensure that the
increased risk since origination is appropriately captured;
-- Qualitative assessment: events or observed behaviour indicate
credit deterioration. This includes a wide range of information
that is reasonably available including individual credit
assessments of the financial performance of borrowers as
appropriate during routine reviews, plus forbearance and watch list
information; or
-- Backstop criteria: the 30 days past due backstop is met.
Definition of default
The definition of default is an important building block for
expected credit loss models and is considered a key judgement. A
default is considered to have occurred if any unlikeliness to pay
criteria is met or when a financial asset meets a 90 days past due
backstop. While some criteria are factual (e.g. administration,
insolvency, or bankruptcy), others require a judgmental assessment
of whether the borrower has financial difficulties which are
expected to have a detrimental impact on their ability to meet
contractual obligations. A change in the definition of default may
have a material impact on the expected credit loss provision.
Key sources of estimation uncertainty
At the balance sheet date, the directors consider that expected
credit loss provisions are a key source of estimation uncertainty
which, depending on a wide range of factors, could result in a
material adjustment to the carrying amounts of assets and
liabilities in the next financial year.
The accuracy of the expected credit loss provision can be
impacted by unpredictable effects or unanticipated changes to model
estimates. In addition, forecasting errors could also occur due to
macroeconomic scenarios or weightings differing from actual
outcomes observed. Regular model monitoring, validations and
provision adequacy reviews are key mechanisms to manage estimation
uncertainty across model estimates.
We continue to monitor and evaluate the impact of climate risk
on our expected credit loss provisions. As at 31 July 2022 we do
not consider climate risk to have a material impact on our credit
losses.
A representation of the core drivers of the macroeconomic
scenarios that are deployed in our models are outlined below. In
some instances, our underlying business expected credit loss models
use a range of other macroeconomic metrics and assumptions which
are linked to the underlying characteristics of the business.
Model estimates
Across the Banking Division, expected credit loss provisions are
outputs of models which are based on a number of assumptions. The
assumptions applied involve judgement and as a result are regularly
assessed.
The two assumptions requiring the most significant judgement
relate to case failure rates and recovery rates in Novitas.
Novitas provides funding via intermediaries to individuals who
wish to pursue legal cases. Over the course of this financial year,
experience of credit performance has required the group to update a
number of assumptions in the calculation of the expected credit
loss provision for Novitas. A significant portion of the expected
credit loss provision reported in Commercial relates to the Novitas
loan book.
The majority of the Novitas portfolio, and therefore provision,
relates to civil litigation cases. To help protect customers in the
event that their case fails, a standard loan condition is that an
individual purchases an insurance policy which covers loan capital
and varying levels of interest. Across the portfolio there are
insurance policies from a number of well-rated insurers.
The key sources of estimation uncertainty for the portfolio's
expected credit loss provision are case failure rates and recovery
rates. Case failure rates represent a forward-looking probability
assessment of successful case outcomes, where a claimant is awarded
settlement either prior to or following a court process, informed
by actual case failure rates, where a claim is unsuccessful and
expected to be repaid with proceeds from an insurance policy.
Recovery rates represent the level of interest and capital that is
covered by an insurance policy and expected to be recoverable once
a case fails. In addition, an assessment is also undertaken
reflecting potential insurer insolvency risk with resultant
expected credit losses held for this.
Assumptions are informed by experience of credit performance,
with management judgement applied to reflect expected outcomes and
uncertainties. In addition, the provision is informed by
sensitivity analysis to reflect the level of uncertainty. More
detailed credit performance data continues to develop as the
portfolio matures, which over time will reduce the level of
estimation uncertainty.
Based on this methodology, and using the latest information
available, there has been an uplift in the expected credit loss
provision in Novitas, reflecting the latest assumptions on case
failure and recovery rates. Further details on provisions are
included in note 7b.
Given these assumptions represent sources of estimation
uncertainty, management has assessed and completed sensitivity
analysis when compared to the expected credit loss provision for
Novitas of GBP113.3 million (31 July 2021: GBP89.3 million). At 31
July 2022, a 5% absolute improvement in case failure rates would
decrease the ECL provision by GBP5.8 million (31 July 2021: GBP8.2
million), while a 5% absolute deterioration would increase it by
GBP4.7 million (31 July 2021: GBP8.2 million). Separately, a 10%
absolute deterioration or improvement in recovery rates would
increase or decrease the ECL provision by GBP13.7 million (31 July
2021: GBP8.4 million).
Forward-looking information
Determining expected credit losses under IFRS 9 requires the
incorporation of forward-looking macroeconomic information that is
reasonable, supportable and includes assumptions linked to economic
variables that impact losses in each portfolio. The introduction of
macroeconomic information introduces additional volatility to
provisions.
In order to calculate forward-looking provisions, economic
scenarios are sourced from Moody's Analytics, which are then used
to project potential credit conditions for each portfolio.
Benchmarking to other economic providers is carried out to provide
management comfort on Moody's Analytics scenario paths.
Five different projected economic scenarios are currently
considered to cover a range of possible outcomes. These include a
baseline scenario, which reflects the best view of future economic
events. In addition, one upside scenario and three downside
scenario paths are defined relative to the baseline. Management
assigns the scenarios a probability weighting to reflect the
likelihood of specific scenarios and therefore loss outcomes
materialising, using a combination of quantitative analysis and
expert judgement.
The impact of forward-looking information varies across the
group's lending businesses because of the differing sensitivity of
each portfolio to specific macroeconomic variables. The modelled
impact of macroeconomic scenarios and their respective weightings
is reviewed by business experts in relation to stage allocation and
coverage ratios at the individual and portfolio level,
incorporating management's experience and knowledge of customers,
the sectors in which they operate, and the assets financed.
The Credit Risk Management Committee ("CRMC") including the
group finance director and group chief risk officer meets monthly,
to review and, if appropriate, agree changes to the economic
scenarios and probability weightings assigned thereto. The decision
is subsequently noted at the Group Risk and Compliance Committee
("GRCC"), which includes the aforementioned roles in addition to
the group chief executive officer.
Economic forecasts have evolved over the course of 2022. At 31
July 2021, the scenario weightings reflected the continued economic
challenges and uncertainty associated with the pandemic, with 40%
allocated to the baseline scenario, 20% to the upside scenario and
40% across the three downside scenarios. The level of economic
uncertainty associated with the pandemic reduced up to 31 January
2022 and 10% weight was moved from the 3 downside scenarios to the
upside scenario. In the second half of 2022, 7.5% weight has moved
from the baseline scenario to the 3 downside scenarios, resulting
in final weights that are considered consistent with the economic
uncertainty at 31 July 2022, as follows: 30% strong upside, 32.5%
baseline, 20% mild downside, 10.5% moderate downside and 7% severe
downside.
Scenario forecasts deployed in IFRS 9 macroeconomic models are
updated on a monthly basis. As at 31 July 2022, the latest baseline
scenario forecasts GDP growth of 3.4% in calendar year 2022 and an
average Base Rate of 1.1% across calendar year 2022. CPI is
forecast to be 10.7% in calendar year 2022 in the baseline
scenario, with 17.1% forecast in the protracted downside scenario
over the same period.
Given the current economic uncertainty, we have undertaken
further analysis to assess the appropriateness of the five
scenarios used. This included benchmarking these scenarios to
consensus economic views, as well as consideration of an additional
forecast related to stagflation, which could be considered as an
alternative downside scenario. When compared to the three downside
scenarios, the stagflation scenario included a smaller initial
reduction in GDP, coupled with higher interest rates and economic
contraction over a more sustained period. Given the short tenor of
our credit portfolio, using this forecast instead of the moderate
or protracted downside scenario would result in lower expected
credit losses.
The final scenarios deployed reflect the UK economic outlook
deteriorating following Russia's invasion of Ukraine and the
resulting increase in energy and food commodity prices, as well as
the exacerbation of global supply-chain disruptions after the
pandemic. The forecasts include a subdued rate of growth for the
remainder of the year. Under the baseline scenario, UK headline CPI
inflation continues to increase in 2022 owing to higher energy,
food and manufactured goods prices. Higher wages and strong demand
for services continue to add to the price pressures, ensuring
inflation remains well above the Bank of England target throughout
2022. To prevent inflation pressures becoming embedded in the
economy, the Bank of England continues to tighten monetary
policy.
The forecasts represent an economic view as at 31 July 2022,
after which the economic uncertainty has continued. These trends,
including the risk of further interest rate rises, and their impact
on scenarios and weightings are subject to ongoing monitoring by
management.
The table below shows economic assumptions within each scenario,
and the weighting applied to each at 31 July 2022. The metrics
below are key UK economic indicators, chosen to describe the
economic scenarios. These are the main metrics used to set scenario
paths which then influence a wide range of additional metrics that
are used in expected credit loss models. The first tables show the
forecasts of the key metrics for the scenarios utilised for
calendar years 2022 and 2023. The subsequent tables show averages
and peak to trough ranges for the same key metrics over the
five-year period from 2022 to 2026.
These periods have been included as they demonstrate the short,
medium and long-term outlook for the key macroeconomic indicators
which form the basis of the scenario forecasts. The portfolio has
an average residual maturity of 17 months, with c.98% of loan value
having a maturity of five years or less.
FY22 and FY21 scenario forecasts and weights
Baseline Upside (strong) Downside Downside Downside (protracted)
(mild) (moderate)
2022 2023 2022 2023 2022 2023 2022 2023 2022 2023
----------------- ------ ----- -------- -------- ------ ------- ------- ------- ----------- -----------
At 31 July
2022
UK GDP Growth 3.4% 0.8% 4.1% 2.9% 2.7% (1.8%) 2.4% (4.4%) 2.1% (5.9%)
UK Unemployment 3.8% 4.1% 3.6% 3.6% 4.0% 4.6% 4.1% 6.2% 4.2% 7.4%
UK HPI Growth 4.3% 2.6% 10.9% 12.7% 1.1% (3.1%) (0.5%) (9.1%) (2.4%) (15.9%)
BoE Base Rate 1.1% 1.8% 1.1% 1.7% 1.3% 1.0% 1.4% 1.1% 1.5% 1.2%
Consumer Price
Index 10.7% 2.8% 10.3% 2.8% 12.3% 0.4% 14.2% 0.2% 17.1% (2.2%)
Weighting 32.5% 30% 20% 10.5% 7%
----------------- ------------- ------------------ --------------- ---------------- ------------------------
Baseline Upside (strong) Downside Downside (moderate) Downside (protracted)
(mild)
2021 2022 2021 2022 2021 2022 2021 2022 2021 2022
-------------- ------- ----- -------- -------- ------- ------- ---------- ---------- ----------- -----------
At 31 July
2021
UK GDP
Growth(1) 6.1% 6.3% 7.3% 8.7% 5.2% 4.0% 4.5% 2.0% 4.1% 0.8%
UK
Unemployment 5.6% 6.3% 5.5% 5.4% 5.8% 7.3% 5.8% 8.0% 5.9% 8.9%
UK HPI
Growth(1) (1.4%) 3.1% 3.8% 10.2% (2.5%) (1.6%) (5.3%) (9.0%) (8.2%) (14.2%)
BoE Base Rate 0.1% 0.2% 0.1% 0.3% 0.1% 0.1% 0.1% 0.1% 0.0% (0.1%)
Consumer
Price
Index 2.7% 2.9% 2.8% 3.0% 2.6% 1.1% 2.5% 0.0% 2.4% (0.5%)
Weighting 40% 20% 15% 15% 10%
-------------- -------------- ------------------ ---------------- ---------------------- ------------------------
Notes:
UK GDP HPI Growth: National Accounts Annual Real Gross Domestic
Product, Seasonally Adjusted - YoY change (%)
UK Unemployment: ONS Labour Force Survey, Seasonally Adjusted -
Average (%)
UK HPI Growth: Average nominal house price, Land Registry,
Seasonally Adjusted - Q4 to Q4 change (%)
BoE Base Rate: Bank of England Base Rate - Average (%)
Consumer Price Index: ONS, EU Harmonised, Annual Inflation - Q4
to Q4 change (%)
Five-year average (calendar year 2022 - 2026)
Baseline Upside (strong) Downside Downside Downside (protracted)
(mild) (moderate)
----------------- ------------ ---------------- ------------ ------------ ------------------------
At 31 July
2022
UK GDP Growth 1.2% 1.7% 0.8% 0.2% (0.1%)
UK Unemployment 4.4% 3.8% 4.6% 6.4% 7.2%
UK HPI Growth 0.1% 1.8% (1.3%) (2.5%) (4.6%)
BoE Base Rate 2.0% 2.0% 1.5% 0.9% 0.6%
Consumer Price
Index 3.8% 3.8% 3.7% 3.6% 3.4%
Weighting 32.5% 30% 20% 10.5% 7%
----------------- ------------ ---------------- ------------ ------------ ------------------------
Five-year average (calendar year 2021 - 2025)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside
(protracted)
----------------- ---------------- ------------------ ---------------------- ---------------------- -------------------
At 31 July
2021
UK GDP Growth(1) 3.2% 3.6% 3.0% 2.8% 2.4%
UK Unemployment 5.5% 4.8% 6.3% 7.1% 7.7%
UK HPI Growth(1) 1.6% 3.0% 0.8% (1.2%) (2.6%)
BoE Base Rate 0.6% 0.8% 0.2% 0.1% 0.0%
Consumer Price
Index 2.6% 3.2% 1.9% 1.3% 0.8%
Weighting 40% 20% 15% 15% 10%
----------------- ---------------- ------------------ ---------------------- ---------------------- -------------------
Notes:
UK GDP Growth: National Accounts Annual Real Gross Domestic
Product, Seasonally Adjusted - CAGR (%)
UK Unemployment: ONS Labour Force Survey, Seasonally Adjusted -
Average (%)
UK HPI Growth: Average nominal house price, Land Registry,
Seasonally Adjusted - CAGR (%)
BoE Base Rate: Bank of England Base Rate - Average (%)
Consumer Price Index: ONS, EU Harmonised, Annual Inflation -
CAGR (%)
The tables below provide a summary for the five-year period
(calendar year 2022 - 2026) of the peak to trough range of values
of the key UK economic variables used within the economic scenarios
at 31 July 2022 and 31 July 2021:
Five-year period (calendar year 2022 - 2026)
Baseline Upside Downside Downside Downside (protracted)
(strong) (mild) (moderate)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
----------------- ------ ------- ------ ------- ------ -------- ------ -------- ---------- ------------
At 31 July
2022
UK GDP Growth 6.3% 0.4% 9.0% 0.4% 4.1% (2.6%) 1.0% (5.1%) 0.8% (6.9%)
UK Unemployment 4.8% 3.7% 4.2% 3.5% 4.8% 3.7% 7.4% 3.7% 8.4% 3.7%
UK HPI Growth 2.0% (5.0%) 16.7% (1.1%) 2.0% (11.7%) 2.0% (17.9%) 2.0% (26.0%)
BoE Base Rate 2.5% 0.5% 2.5% 0.5% 2.5% 0.1% 2.4% 0.1% 2.6% 0.1%
Consumer Price
Index 10.7% 2.0% 10.3% 2.0% 12.3% 0.4% 14.2% 0.1% 17.1% (2.2%)
Weighting 32.5% 30% 20% 10.5% 7%
----------------- --------------- --------------- ---------------- ---------------- ------------------------
Five-year period (calendar year 2021 - 2025)
Baseline Upside (strong) Downside Downside (moderate) Downside (protracted)
(mild)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
----------------- ------ ------- -------- -------- ------ ------- -------- ----------- -------- ------------
At 31 July
2021
UK GDP Growth(1) 17.0% (1.6%) 19.4% (1.6%) 15.7% (1.6%) 14.7% (1.6%) 12.4% (1.6%)
UK
Unemployment(1) 6.6% 4.8% 6.3% 4.2% 7.5% 4.8% 8.2% 4.8% 9.1% 4.8%
UK HPI Growth(1) 8.0% (4.1%) 15.7% 0.5% 4.1% (6.9%) 1.9% (15.3%) 1.9% (22.1%)
BoE Base Rate(1) 1.6% 0.1% 1.9% 0.1% 0.5% 0.1% 0.1% 0.1% 0.1% (0.1%)
Consumer Price
Index 3.2% 0.6% 3.9% 0.6% 2.6% 0.6% 2.5% 0.0% 2.4% (0.9%)
Weighting 40% 20% 15% 15% 10%
----------------- --------------- ------------------ --------------- --------------------- ----------------------
Notes:
UK GDP Growth: Maximum and minimum quarterly GDP as a percentage
change from start of period (%)
UK Unemployment: Maximum and minimum unemployment rate (%)
UK HPI Growth: Maximum and minimum average nominal house price
as a percentage change from start of period (%)
BoE Base Rate: Maximum and minimum BoE base rate (%)
Consumer Price Index Inflation: Maximum and minimum over the
5-year period (%)
1 Note that the presentation of the macroeconomic outlook above
has been amended from the FY21 ARA, with the FY22 figures presented
on the same basis. This has been undertaken to enhance presentation
to the users of the financial statements by ensuring the
macroeconomic variables are displayed in line with common practice.
This amendment has no impact on ECL. These changes impact the way
GDP and HPI are presented for the annual forecast, the five-year
forecast and the peak to trough values. The annual forecast was
previously presented as the average of the growth in each of the
last four quarters and is now presented as the growth in the
calendar year. The five-year forecast is now presented as the
compound annual growth rate instead of the average annual growth
rate used previously. Lastly, the presentation of the peak to
trough values now uses the start of the macroeconomic forecast as a
reference point, rather than peaks and troughs in annual growth
rates over the period. In addition, we have also made a
presentational change for unemployment and base rate peaks and
troughs from the FY21 ARA, which are now based on quarterly
forecasts over calendar years 2021-2025, rather than monthly
forecasts over financial years 2021-2025.
The expected credit loss provision is sensitive to judgement and
estimations made with regard to the selection and weighting of
multiple economic scenarios. As a result, management has assessed
and considered the sensitivity of the provision as follows:
-- For the majority of our portfolios, the modelled expected
credit loss provision has been recalculated under the upside strong
and downside protracted scenarios described above, applying a 100%
weighting to each scenario in turn. The change in provision
requirement is driven by the movement in risk metrics under each
scenario and resulting impact on stage allocation.
-- Expected credit losses based on a simplified approach, which
do not utilise a macroeconomic model and require expert judgement,
are excluded from the sensitivity analysis.
In addition to the above, key considerations for the sensitivity
analysis are set out below, by segment:
-- In Commercial, the sensitivity analysis excludes Novitas,
which is subject to a separate approach, as it is deemed more
sensitive to credit factors than macroeconomic factors.
-- In Retail:
- The sensitivity analysis excludes expected credit loss
provisions on loans and advances to customers in Stage 3, because
the measurement of expected credit losses is considered more
sensitive to credit factors specific to the borrower than
macroeconomic scenarios.
- For some loans, a specific sensitivity approach has been
adopted to assess short tenor loans' response to modelled economic
forecasts. For these short-tenor loans, PD has been extrapolated
from emerging default rates and then proportionally scaled to
reflect a sharp recovery in the upside scenario and a slower
recovery in a downside scenario.
-- In Property, the sensitivity analysis excludes individually
assessed provisions, and certain sub portfolios which are deemed
more sensitive to credit factors than the macroeconomic
scenarios.
Based on the above analysis, at 31 July 2022, application of
100% weighting to the upside strong scenario would decrease the
expected credit loss by GBP15.4 million whilst application to the
downside protracted scenario would increase the expected credit
loss by GBP31.8 million driven by the aforementioned changes in
risk metrics and stage allocation of the portfolios.
When performing sensitivity analysis there is a high degree of
estimation uncertainty. On this basis, 100% weighted expected
credit loss provisions presented for the upside and downside
scenarios should not be taken to represent the lower or upper range
of possible and actual expected credit loss outcomes. The
recalculated expected credit loss provision for each of the
scenarios should be read in the context of the sensitivity analysis
as a whole and in conjunction with the narrative disclosures
provided in note 7. The modelled impact presented is based on gross
loans and advances to customers at 31 July 2022; it does not
incorporate future changes relating to performance, growth or
credit risk. In addition, given the change in the macroeconomic
conditions, underlying modelled provisions and methodology, and
refined approach to adjustments, comparison between the sensitivity
results at 31 July 2022 and 31 July 2021 is not appropriate.
The economic environment remains uncertain and future impairment
charges may be subject to further volatility, including from
changes to macroeconomic variable forecasts impacted by
geopolitical tensions and rising inflation.
2. Segmental Analysis
The directors manage the group by class of business and present
the segmental analysis on that basis. The group's activities are
presented in five (2021: five) operating segments: Commercial,
Retail, Property, Asset Management and Securities.
In the segmental reporting information that follows, Group
consists of central functions as well as various non-trading head
office companies and consolidation adjustments and is presented in
order that the information presented reconciles to the consolidated
income statement. The Group balance sheet primarily includes
treasury assets and liabilities comprising cash and balances at
central banks, debt securities, customer deposits and other
borrowings.
Divisions continue to charge market prices for the limited
services rendered to other parts of the group. Funding charges
between segments take into account commercial demands. More than
90% of the group's activities, revenue and assets are located in
the UK.
Summary income statement for the year ended 31 July 2022
Banking
Asset Management
Commercial Retail Property Securities Group Total
GBP GBP GBP GBP GBP GBP GBP
million million million million million million million
------------------- ------------- ---------- ----------- ----------------- ------------- --------- ----------
Net interest
income/(expense) 257.1 210.8 112.1 (0.7) (1.1) (0.2) 578.0
Non-interest
income 86.3 26.2 0.6 148.7 96.3 - 358.1
------------------- ------------- ---------- ----------- ----------------- ------------- --------- ------------
Operating income/
(expense) 343.4 237.0 112.7 148.0 95.2 (0.2) 936.1
------------------- ------------- ---------- ----------- ----------------- ------------- --------- ------------
Administrative
expenses (158.3) (131.3) (27.0) (120.7) (77.2) (25.8) (540.3)
Depreciation and
amortisation (21.7) (20.3) (4.0) (5.6) (3.9) (2.2) (57.7)
Impairment losses
on financial
assets (72.4) (24.4) (6.5) - - - (103.3)
------------------- ------------- ---------- ----------- ----------------- ------------- --------- ------------
Total operating
expenses before
amortisation and
impairment of
intangible
assets on
acquisition,
goodwill
impairment
and exceptional
item (252.4) (176.0) (37.5) (126.3) (81.1) (28.0) (701.3)
------------------- ------------- ---------- ----------- ----------------- ------------- --------- ------------
Adjusted operating
profit/(loss)(1) 91.0 61.0 75.2 21.7 14.1 (28.2) 234.8
Amortisation and
impairment of
intangible
assets on
acquisition (0.1) - - (1.9) - - (2.0)
------------------- ------------- ---------- ----------- ----------------- ------------- --------- ------------
Goodwill - - - - - - -
impairment
------------------- ------------- ---------- ----------- ----------------- ------------- --------- ------------
Exceptional item:
HMRC VAT refund - - - - - - -
------------------- ------------- ---------- ----------- ----------------- ------------- --------- ------------
Operating
profit/(loss)
before tax 90.9 61.0 75.2 19.8 14.1 (28.2) 232.8
------------------- ------------- ---------- ----------- ----------------- ------------- --------- ------------
External operating
income/(expense) 391.7 268.3 129.4 148.1 95.2 (96.6) 936.1
Inter segment
operating
(expense)/income (48.3) (31.3) (16.7) (0.1) - 96.4 -
------------------- ------------- ---------- ----------- ----------------- ------------- --------- ------------
Segment operating
income/(expense) 343.4 237.0 112.7 148.0 95.2 (0.2) 936.1
------------------- ------------- ---------- ----------- ----------------- ------------- --------- ------------
1 Adjusted operating profit/(loss) is stated before amortisation
and impairment of intangible assets on acquisition, goodwill
impairment, exceptional item and tax.
The Commercial operating segment above includes the group's
Novitas business. Novitas ceased lending to new customers in July
2021 following a strategic review. In the year ended 31 July 2022,
Novitas recorded impairment losses of GBP60.7 million (2021:
GBP73.2 million).
Summary balance sheet information at 31 July 2022
Banking
Asset
Commercial Retail Property Management Securities Group(2) Total
GBP GBP million GBP GBP GBP GBP million GBP million
million million million million
---------------- ------------- ------------ ----------- --------------- ------------- ------------ ------------
Total assets(1) 4,561.4 3,064.0 1,473.5 172.8 972.3 2,434.3 12,678.3
---------------- ------------- ------------ ----------- --------------- ------------- ------------ ------------
Total
liabilities - - - 70.5 880.6 10,069.7 11,020.8
---------------- ------------- ------------ ----------- --------------- ------------- ------------ ------------
1 Total assets for the Banking operating segments comprise the
loan book and operating lease assets only. The Commercial operating
segment includes the net loan book of Novitas of GBP159.4
million.
2 Balance sheet includes GBP2,425.0 million assets and
GBP10,181.9 million liabilities attributable to the Banking
division primarily comprising the treasury balances described in
the second paragraph of this note.
Equity is allocated across the group as set out below. Banking
division equity which is managed as a whole rather than on a
segmental basis, reflects loan book and operating lease assets of
GBP9,098.9 million, in addition to assets and liabilities of
GBP2,425.0 million and GBP10,181.9 million respectively primarily
comprising treasury balances which are included within the Group
column above.
Asset Management
Banking Securities Group Total
GBP GBP GBP GBP million GBP million
million million million
-------- --------- ------------------- ------------- ------------ ------------
Equity 1,342.0 102.3 91.7 121.5 1,657.5
-------- --------- ------------------- ------------- ------------ ------------
Other segmental information for the year ended 31 July 2022
Banking
Asset Management
Commercial Retail Property Securities Group Total
Employees
(average number)(1) 1,348 1,153 190 722 318 79 3,810
---------------------- ------------- --------- ----------- ----------------- ------------- -------- --------
1 Banking segments are inclusive of a central function headcount allocation.
Summary income statement for the year ended 31 July 2021
Banking
Asset
Commercial Retail Property Management Securities Group Total
GBP GBP GBP GBP GBP GBP GBP
million million million million million million million
-------------------- ------------ ----------- ----------- ----------- ------------ ----------- -----------
Net interest
income/(expense) 218.1 198.8 122.6 (0.1) (1.4) (0.5) 537.5
Non-interest income 70.8 21.0 0.4 139.5 183.4 - 415.1
-------------------- ------------ ----------- ----------- ----------- ------------ ----------- -------------
Operating
income/(expense) 288.9 219.8 123.0 139.4 182.0 (0.5) 952.6
-------------------- ------------ ----------- ----------- ----------- ------------ ----------- -------------
Administrative
expenses (139.1) (118.6) (29.1) (110.8) (118.1) (24.1) (539.8)
Depreciation and
amortisation (19.1) (19.4) (3.8) (5.1) (3.1) (1.8) (52.3)
Impairment
(losses)/gains
on financial
assets (77.9) (9.9) (2.3) 0.2 0.1 - (89.8)
-------------------- ------------ ----------- ----------- ----------- ------------ ----------- -------------
Total operating
expenses before
amortisation and
impairment of
intangible assets
on acquisition,
goodwill
impairment
and exceptional
item (236.1) (147.9) (35.2) (115.7) (121.1) (25.9) (681.9)
-------------------- ------------ ----------- ----------- ----------- ------------ ----------- -------------
Adjusted operating
profit/(loss)(1) 52.8 71.9 87.8 23.7 60.9 (26.4) 270.7
Amortisation of
intangible assets
on acquisition (12.2) (0.7) - (1.3) - - (14.2)
-------------------- ------------ ----------- ----------- ----------- ------------ ----------- -------------
Goodwill impairment (12.1) - - - - - (12.1)
-------------------- ------------ ----------- ----------- ----------- ------------ ----------- -------------
Exceptional item:
HMRC VAT refund 7.4 12.3 - - - 1.1 20.8
-------------------- ------------ ----------- ----------- ----------- ------------ ----------- -------------
Operating
profit/(loss)
before tax 35.9 83.5 87.8 22.4 60.9 (25.3) 265.2
-------------------- ------------ ----------- ----------- ----------- ------------ ----------- -------------
External operating
income/(expense) 343.1 258.7 142.3 139.4 182.0 (112.9) 952.6
Inter segment
operating
(expense)/income (54.2) (38.9) (19.3) - - 112.4 -
-------------------- ------------ ----------- ----------- ----------- ------------ ----------- -------------
Segment operating
income/(expense) 288.9 219.8 123.0 139.4 182.0 (0.5) 952.6
-------------------- ------------ ----------- ----------- ----------- ------------ ----------- -------------
1 Adjusted operating profit/(loss) is stated before amortisation
and impairment of intangible assets on acquisition, goodwill
impairment, exceptional item and tax.
Summary balance sheet information at 31 July 2021
Banking
Asset Management Group(2)
Commercial Retail Property Securities Total
GBP GBP million GBP GBP GBP GBP million GBP
million million million million million
----------------- ------------- ------------ ----------- ----------------- ------------- ------------ ---------
Total assets(1) 4,191.0 2,974.3 1,502.1 139.7 897.9 2,329.5 12,034.5
----------------- ------------- ------------ ----------- ----------------- ------------- ------------ ---------
Total
liabilities - - - 78.1 806.5 9,580.6 10,465.2
----------------- ------------- ------------ ----------- ----------------- ------------- ------------ ---------
1 Total assets for the Banking operating segments comprise the
loan book and operating lease assets only. The Commercial operating
segment includes the net loan book of Novitas of GBP181.5
million.
2 Balance sheet includes GBP2,299.0 million assets and
GBP9,677.8 million liabilities attributable to the Banking division
primarily comprising the treasury balances described in the second
paragraph of this note.
Equity is allocated across the group as set out below. Banking
division equity, which is managed as a whole rather than on a
segmental basis, reflects loan book and operating lease assets of
GBP8,667.4 million, in addition to assets and liabilities of
GBP2,299.0 million and GBP9,677.8 million respectively primarily
comprising treasury balances which are included within the Group
column above.
Asset Management
Banking Securities Group Total
GBP million GBP million GBP million GBP million GBP million
-------- ------------ ----------------- ------------- ------------ ------------
Equity 1,288.6 61.6 91.4 127.7 1,569.3
-------- ------------ ----------------- ------------- ------------ ------------
Other segmental information for the year ended 31 July 2021
Banking
Asset Management Group
Commercial Retail Property Securities Total
Employees
(average number)(1) 1,276 1,163 187 706 300 77 3,709
---------------------- ------------- --------- ----------- ----------------- ------------- ------- --------
1 Banking segments are inclusive of a central function headcount allocation.
3. Exceptional Item
In the prior year ended 31 July 2021, the group recorded an
exceptional gain of GBP20.8 million, reflecting a VAT refund from
HMRC in relation to hire purchase agreements in the Motor Finance
and Asset Finance businesses. This follows HMRC's policy in Revenue
and Customs Brief 8 (2020) published in June 2020. The Brief
advised businesses who supply goods by way of hire purchase
agreements of HMRC's suggested method for apportionment of VAT
incurred on overheads (and so the reclaimable portion of such VAT).
This follows the Court of Justice of the European Union's judgement
regarding Volkswagen Financial Services (UK) Ltd.
The group submitted refund claims in respect of the period from
2009 to 2020. HMRC agreed the claims and repayment was made to the
group in June 2021. In line with the group's accounting policy set
out in Note 1, this has been presented as an exceptional item as it
is material by size and nature and non-recurring.
4. Taxation
2022 2021
GBP million GBP million
------------------------------------------------------ ---------------- ------------
Tax charged/(credited) to the income statement
Current tax:
UK corporation tax 53.7 75.1
Foreign tax 1.9 1.5
Adjustments in respect of previous years (2.8) (3.4)
------------------------------------------------------ ---------------- ------------
52.8 73.2
Deferred tax:
Deferred tax charge/(credit) for the current year 11.8 (13.6)
Adjustments in respect of previous years 3.0 3.5
------------------------------------------------------ ---------------- ------------
67.6 63.1
------------------------------------------------------ ---------------- ------------
Tax on items not charged/(credited) to the income
statement
Deferred tax relating to:
Cash flow hedging 8.6 2.0
Defined benefit pension scheme (0.3) 0.6
Financial instruments classified as fair value
through other comprehensive income (0.4) 0.3
Share-based payments 1.1 (1.4)
Currency translation losses (0.3) (1.1)
Acquisitions - 1.0
------------------------------------------------------ ---------------- ------------
8.7 1.4
------------------------------------------------------ ---------------- ------------
Reconciliation to tax expense
UK corporation tax for the year at 19.0% (2021:
19.0%) on operating profit before tax 44.2 50.4
Effect of different tax rates in other jurisdictions (0.3) (0.3)
Disallowable items and other permanent differences 0.9 2.9
Banking surcharge 14.9 19.8
Deferred tax impact of decreased/(increased) tax
rates 7.7 (9.8)
Prior year tax provision 0.2 0.1
------------------------------------------------------ ---------------- ------------
67.6 63.1
------------------------------------------------------ ---------------- ------------
The standard UK corporation tax rate for the financial year is
19.0% (2021: 19.0%). However, an additional 8% surcharge applies to
banking company profits as defined in legislation. The effective
tax rate of 29.0% (2021: 23.8%) is above the UK corporation tax
rate primarily due to the surcharge applying to most of the group's
profits and to a write-down in deferred tax assets reflecting a
reduction in the banking surcharge applying from April 2023 from 8%
to 3% passed into law in the year.
On 23 September 2022, the Chancellor of the Exchequer announced
as part of his Growth Plan that the corporation tax rate increase
from 19% to 25% from April 2023 will be cancelled, and that the
banking surcharge rate will remain at 8%. The relevant legislation
is expected to be enacted in the year ending 31 July 2023 and is a
non-adjusting post balance sheet event. Had this change been
enacted before 31 July 2022, the group's deferred tax asset balance
at 31 July 2022 would have decreased by approximately GBP1.5
million, with a corresponding tax charge recognised in the income
statement, net of a smaller credit to other comprehensive
income.
Movements in deferred tax assets and liabilities were as
follows:
Share-based
payments Impair-ment Cash
Capital Pension and deferred losses flow Intangible
allowances scheme compensation hedging assets Other Total
GBP GBP GBP GBP million GBP GBP GBP GBP
million million million million million million million
---------------------------- --------- ------------- ------------- --------- ------------ --------- ---------
Group
At 1 August
2020 31.5 (1.7) 8.9 9.5 2.1 (3.2) 0.2 47.3
Credit/(charge)
to
the income
statement 3.5 0.1 5.2 (0.7) - 2.5 (0.5) 10.1
Credit/(charge)
to
other
comprehensive
income 1.1 (0.6) - - (2.0) - (0.3) (1.8)
Credit to equity - - 1.4 - - - - 1.4
Acquisitions - - - - - (1.0) - (1.0)
----------------- --------- --------- ------------- ------------- --------- ------------ --------- -----------
At 31 July 2021 36.1 (2.2) 15.5 8.8 0.1 (1.7) (0.6) 56.0
(Charge)/credit
to
the income
statement (10.9) - (1.5) (3.0) - 0.4 0.2 (14.8)
Credit/(charge)
to
other
comprehensive
income 0.3 0.3 - - (8.6) - 0.4 (7.6)
Charge to equity - - (1.1) - - - - (1.1)
Acquisitions - - - - - - - -
----------------- --------- --------- ------------- ------------- --------- ------------ --------- -----------
At 31 July 2022 25.5 (1.9) 12.9 5.8 (8.5) (1.3) - 32.5
----------------- --------- --------- ------------- ------------- --------- ------------ --------- -----------
As the group has been and is expected to continue to be
consistently profitable, the full deferred tax assets have been
recognised.
5 . Earnings per Share
The calculation of basic earnings per share is based on the
profit attributable to shareholders and the number of basic
weighted average shares. When calculating the diluted earnings per
share, the weighted average number of shares in issue is adjusted
for the effects of all dilutive share options and awards.
2022 2021
-------------------- ------ ------
Basic 110.4p 134.8p
-------------------- ------ ------
Diluted 109.9p 133.6p
-------------------- ------ ------
Adjusted basic(1) 111.5p 140.4p
-------------------- ------ ------
Adjusted diluted(1) 111.0p 139.1p
-------------------- ------ ------
1 Excludes amortisation and impairment of intangible assets on
acquisition, goodwill impairment, exceptional item and their tax
effects.
2022 2021
GBP million GBP million
------------------------------------------------- ----------- -----------
Profit attributable to shareholders 165.2 202.1
Adjustments:
Amortisation of intangible assets on acquisition 2.0 14.2
Goodwill impairment - 12.1
Exceptional item: HMRC VAT refund - (20.8)
Tax effect of adjustments and exceptional item (0.4) 2.9
Adjusted profit attributable to shareholders 166.8 210.5
------------------------------------------------- ----------- -----------
2022 2021
Million million
-------------------------------------------- ------- -------
Average number of shares
Basic weighted 149.6 149.9
Effect of dilutive share options and awards 0.7 1.4
-------------------------------------------- ------- -------
Diluted weighted 150.3 151.3
-------------------------------------------- ------- -------
6 . Dividends
2022 2021
GBP million GBP million
--------------------------------------------------- ----------- -----------
For each ordinary share
Final dividend for previous financial year paid in
November 2021: 42.0p
(November 2020: 40.0p) 62.7 59.8
Interim dividend for current financial year paid
in April 2022: 22.0p
(April 2021: 18.0p) 32.8 26.8
--------------------------------------------------- ----------- -----------
95.5 86.6
--------------------------------------------------- ----------- -----------
A final dividend relating to the year ended 31 July 2022 of
44.0p, amounting to an estimated GBP65.6 million, is proposed. This
final dividend, which is due to be paid on 22 November 2022 to
shareholders on the register at 14 October 2022, is not reflected
in these financial statements.
7. Loans and Advances to Customers
(a) Maturity analysis of loans and advances to customers
The following table sets out a maturity analysis of loans and
advances to customers. At 31 July 2022 loans and advances to
customers with a maturity of two years or less was GBP6,733.0
million (31 July 2021: GBP6,326.6 million) representing 73.6% (31
July 2021: 72.5%) of total loans and advances to customers:
Between Total
three After gross Total
Within months Between Between more loans net loans
On three and one and two and than and Impairment and
demand months one year two five five advances provisions advances
years years years to to
customers customers
GBP GBP GBP GBP GBP GBP GBP GBP GBP
million million million million million million million million million
-------------------- --------- ---------- ---------- ---------- ---------- ---------- ------------ -----------
At 31 July
2022 141.3 2,354.2 2,369.0 1,868.5 2,235.0 176.5 9,144.5 (285.6) 8,858.9
------------ ------ --------- ---------- ---------- ---------- ---------- ---------- ------------ -----------
At 31 July
2021 71.8 2,276.6 2,289.1 1,689.1 2,242.8 155.5 8,724.9 (280.4) 8,444.5
------------ ------ --------- ---------- ---------- ---------- ---------- ---------- ------------ -----------
(b) Loans and advances to customers and impairment provisions by
stage
Gross loans and advances to customers by stage and the
corresponding impairment provisions and provision coverage ratios
are set out below:
Stage 2
-----------------------------------------
Greater
than
Less than or equal
Stage 30 days to 30 days Stage
1 past due past due Total 3 Total
At 31 July 2022 GBP million GBP million GBP million GBP million GBP million GBP million
----------------------- ------------ ------------ ------------- ------------ ------------ ------------
Gross loans
and advances
to customers
Commercial 3,433.1 778.8 119.4 898.2 169.1 4,500.4
Of which: Novitas 101.3 2.2 93.8 96.0 75.4 272.7
Retail 2,937.6 121.4 9.4 130.8 65.5 3,133.9
Property 1,256.3 83.8 46.1 129.9 124.0 1,510.2
----------------------- ------------ ------------ ------------- ------------ ------------ ------------
7,627.0 984.0 174.9 1,158.9 358.6 9,144.5
----------------------- ------------ ------------ ------------- ------------ ------------ ------------
Impairment provisions
Commercial 25.6 14.3 52.0 66.3 87.1 179.0
Of which: Novitas 8.8 1.0 49.5 50.5 54.0 113.3
Retail 22.1 4.9 1.7 6.6 41.2 69.9
Property 2.6 4.2 1.2 5.4 28.7 36.7
----------------------- ------------ ------------ ------------- ------------ ------------ ------------
50.3 23.4 54.9 78.3 157.0 285.6
----------------------- ------------ ------------ ------------- ------------ ------------ ------------
Provision coverage
ratio
Commercial 0.7% 1.8% 43.6% 7.4% 51.5% 4.0%
Of which: Novitas 8.7% 45.5% 52.8% 52.6% 71.6% 41.5%
Retail 0.8% 4.0% 18.1% 5.0% 62.9% 2.2%
Property 0.2% 5.0% 2.6% 4.2% 23.1% 2.4%
----------------------- ------------ ------------ ------------- ------------ ------------ ------------
0.7% 2.4% 31.4% 6.8% 43.8% 3.1%
----------------------- ------------ ------------ ------------- ------------ ------------ ------------
Stage 2
----------------------------------------
Greater
than or
Less than equal to
Stage 30 days 30 days
1 past due past due Total Stage 3 Total
At 31 July 2021 GBP million GBP million GBP million GBP million GBP million GBP million
----------------------- ------------ ------------ ------------ ------------ ------------ ------------
Gross loans
and advances
to customers
Commercial 3,417.2 549.4 74.0 623.4 99.9 4,140.5
Of which: Novitas 185.8 3.6 55.8 59.4 25.6 270.8
Retail 2,817.0 175.3 6.4 181.7 43.2 3,041.9
Property 1,200.1 100.5 54.6 155.1 187.3 1,542.5
----------------------- ------------ ------------ ------------ ------------ ------------ ------------
7,434.3 825.2 135.0 960.2 330.4 8,724.9
----------------------- ------------ ------------ ------------ ------------ ------------ ------------
Impairment provisions
Commercial 55.6 30.3 33.6 63.9 52.9 172.4
Of which: Novitas 31.4 2.1 30.6 32.7 25.2 89.3
Retail 22.1 13.3 1.9 15.2 30.3 67.6
Property 2.3 5.0 0.1 5.1 33.0 40.4
----------------------- ------------ ------------ ------------ ------------ ------------ ------------
80.0 48.6 35.6 84.2 116.2 280.4
----------------------- ------------ ------------ ------------ ------------ ------------ ------------
Provision coverage
ratio
Commercial 1.6% 5.5% 45.4% 10.3% 53.0% 4.2%
Of which: Novitas 16.9% 58.3% 54.8% 55.1% 98.4% 33.0%
Retail 0.8% 7.6% 29.7% 8.4% 70.1% 2.2%
Property 0.2% 5.0% 0.2% 3.3% 17.6% 2.6%
----------------------- ------------ ------------ ------------ ------------ ------------ ------------
1.1% 5.9% 26.4% 8.8% 35.2% 3.2%
----------------------- ------------ ------------ ------------ ------------ ------------ ------------
Stage allocation of loans and advances to customers has been
applied in line with the group's definitions.
During the year the staging profile of loans and advances to
customers has remained broadly stable. At 31 July 2022, 83.4% (31
July 2021: 85.2%) of loans and advances to customers were Stage 1.
Stage 2 loans and advances to customers increased slightly to 12.7%
(31 July 2021: 11.0%) as falling Covid-19 forborne exposure has
been more than offset by migrations into Stage 2 associated with a
significant increase in credit risk. The remaining 3.9% (31 July
2021: 3.8%) of loans and advances to customers was deemed to be
credit impaired and classified as Stage 3.
At the same time, overall impairment provisions increased to
GBP285.6 million (31 July 2021: GBP280.4 million), following
regular reviews of staging and provision coverage for individual
loans and portfolios. The movement in impairment provisions is
driven by Novitas, which reflects the case failure and recovery
rate assumptions used. This increase was partially offset by
reducing impairment provisions across the remainder of the Bank,
following a reduction in adjustments driven by the encouraging
performance of our forborne book.
As a result, there has been a marginal decrease in provision
coverage to 3.1% (31 July 2021: 3.2%).
Provision Coverage Analysis by Business
In Commercial, the impairment coverage ratio decreased to 4.0%
(31 July 2021: 4.2%) reflecting strong new business volumes and
positive performance of the Covid-19 forborne loan book. Excluding
Novitas, the Commercial impairment coverage ratio decreased to 1.6%
(31 July 2021: 2.1%) following the release of Covid-19 related
adjustments. The significant increase in credit provisions against
the Novitas loan book reflects the latest assumptions on case
failure and recovery rates.
In Retail, at 31 July 2022, the impairment coverage ratio
remained stable at 2.2% (31 July 2021: 2.2%) reflecting the
performance of the forborne loan book and strong new business
volumes.
In Property, the impairment coverage ratio reduced to 2.4% (31
July 2021: 2.6%) reflecting the write off of a well provided
individually assessed case, partially offset by the deteriorating
macroeconomic forecasts.
(c) Adjustments
By their nature, limitations in the group's expected credit loss
models or input data may be identified through ongoing model
monitoring and validation of models. In certain circumstances,
management make appropriate adjustments to model-calculated
expected credit losses. These adjustments are based on management
judgements or quantitative back-testing to ensure expected credit
loss provisions adequately reflect all known information. These
adjustments are generally determined by considering the attributes
or risks of a financial asset which are not captured by existing
expected credit loss model outputs. Management adjustments are
actively monitored, reviewed, and incorporated into future model
development where applicable.
As the UK economy has emerged from all pandemic related
restrictions, and government support measures have unwound, the use
of adjustments has also evolved. In particular, previous
adjustments to reflect the guarantee under government lending
schemes have now been incorporated into modelled LGD estimates. The
remaining adjustments reflect the application of expert management
judgement to incorporate management's experience and knowledge of
customers, the sectors in which they operate, and the assets
financed. We will continue to monitor the need for adjustments as
new information emerges.
At 31 July 2022, GBP(2.8) million of the expected credit loss
provision was attributable to adjustments (31 July 2021: GBP38.9
million). The reduction in this value is driven by incorporation of
a number of adjustments into model calculations, as well as the
lower volume of Covid-19 forborne exposures and reduced
macroeconomic uncertainty related to the pandemic. The remaining
value is driven by a small number of adjustments primarily made to
ensure models are reflective of economic conditions.
(d) Reconciliation of loans and advances to customers and
impairment provisions
Reconciliations of gross loans and advances to customers and
associated impairment provisions are set out below.
New financial assets originate in Stage 1 only, and the amount
presented represents the value at origination.
Subsequently, a loan may transfer between stages, and the
presentation of such transfers is based on a comparison of the loan
at the beginning of the year (or at origination if this occurred
during the year) and the end of the year (or just prior to final
repayment or write off).
Repayments relating to loans which transferred between stages
during the year are presented within the transfers between stages
lines. Such transfers do not represent overnight reclassification
from one stage to another. All other repayments are presented in a
separate line.
ECL model methodologies may be updated or enhanced from time to
time and the impacts of such changes are presented on a separate
line. Enhancements to our model suite during the course of the
financial year are a contributory factor to ECL movements and such
factors have been taken into consideration when assessing any
required adjustments to modelled output and ensuring appropriate
provision coverage levels.
A loan is written off when there is no reasonable expectation of
further recovery following realisation of all associated collateral
and available recovery actions against the customer.
Stage 1 Stage 2 Stage 3 Total
GBP million GBP million GBP million GBP million
--------------------------------------- ------------ ------------ ------------ ------------
Gross loans and advances to customers
At 1 August 2021 7,434.3 960.2 330.4 8,724.9
New financial assets originated 6,537.4 - - 6,537.4
------------ ------------ ------------ ------------
Transfers to Stage 1 196.2 (278.6) (5.3) (87.7)
Transfers to Stage 2 (1,056.3) 959.9 (21.4) (117.8)
Transfers to Stage 3 (206.9) (137.5) 278.6 (65.8)
--------------------------------------- ------------ ------------ ------------ ------------
Net transfers between stages and
repayments(1) (1,067.0) 543.8 251.9 (271.3)
Repayments while stage remained
unchanged and final repayments (5,241.7) (354.2) (157.8) (5,753.7)
Changes to model methodologies (33.3) 31.6 1.8 0.1
Write offs (2.7) (22.5) (67.7) (92.9)
--------------------------------------- ------------ ------------ ------------ ------------
At 31 July 2022 7,627.0 1,158.9 358.6 9,144.5
--------------------------------------- ------------ ------------ ------------ ------------
Stage 1 Stage 2 Stage 3 Total
GBP million GBP million GBP million GBP million
--------------------------------------- ------------ ------------ ------------ ------------
Gross loans and advances to customers
At 1 August 2020 5,906.6 1,574.2 374.6 7,855.4
New financial assets originated 6,980.2 - - 6,980.2
------------ ------------ ------------ ------------
Transfers to Stage 1 640.0 (639.6) (11.2) (10.8)
Transfers to Stage 2 (1,054.5) 912.4 (15.0) (157.1)
Transfers to Stage 3 (133.3) (113.4) 178.6 (68.1)
--------------------------------------- ------------ ------------ ------------ ------------
Net transfers between stages and
repayments(1) (547.8) 159.4 152.4 (236.0)
Repayments while stage remained
unchanged and final repayments (4,907.6) (781.4) (106.5) (5,795.5)
Changes to model methodologies 6.3 9.8 (16.0) 0.1
Write offs (3.4) (1.8) (74.1) (79.3)
--------------------------------------- ------------ ------------ ------------ ------------
At 31 July 2021 7,434.3 960.2 330.4 8,724.9
--------------------------------------- ------------ ------------ ------------ ------------
1 Repayments relate only to financial assets which transferred
between stages during the year. Other repayments are shown in the
line below.
The gross carrying amount before modification of loans and
advances to customers which were modified during the year while in
Stage 2 or 3 was GBP288.3 million (2021: GBP293.9 million). No gain
or loss (2021: GBP0.8 million loss) was recognised as a result of
these modifications. The gross carrying amount at 31 July 2022 of
modified loans and advances to customers which transferred from
Stage 2 or 3 to Stage 1 during the year was GBP110.2 million (31
July 2021: GBP237.9 million).
Stage 1 Stage 2 Stage 3 Total
GBP million GBP million GBP million GBP million
----------------------------------------- ------------ ------------ ------------ ------------
Impairment provisions on loans
and advances to customers
At 1 August 2021 80.0 84.2 116.2 280.4
New financial assets originated 37.7 - - 37.7
------------ ------------ ------------ ------------
Transfers to Stage 1 1.3 (12.2) (1.7) (12.6)
Transfers to Stage 2 (17.1) 59.4 (9.9) 32.4
Transfers to Stage 3 (9.0) (28.8) 123.2 85.4
----------------------------------------- ------------ ------------ ------------ ------------
Net remeasurement of expected credit
losses arising from transfers between
stages and repayments(1) (24.8) 18.4 111.6 105.2
Repayments and ECL movements while
stage remained unchanged and final
repayments (37.6) (0.7) (9.8) (48.1)
Changes to model methodologies (2.2) (1.1) 1.9 (1.4)
Charge to the income statement (26.9) 16.6 103.7 93.4
Write offs (2.8) (22.5) (62.9) (88.2)
At 31 July 2022 50.3 78.3 157.0 285.6
----------------------------------------- ------------ ------------ ------------ ------------
Stage 1 Stage 2 Stage 3 Total
GBP million GBP million GBP million GBP million
----------------------------------------- ------------ ------------ ------------ ------------
Impairment provisions on loans
and advances to customers
At 31 August 2020 57.6 87.3 93.8 238.7
New financial assets originated 45.0 - - 45.0
------------ ------------ ------------ ------------
Transfers to Stage 1 4.0 (15.7) (1.0) (12.7)
Transfers to Stage 2 (15.7) 63.4 (2.4) 45.3
Transfers to Stage 3 (2.2) (13.3) 67.6 52.1
----------------------------------------- ------------ ------------ ------------ ------------
Net remeasurement of expected credit
losses arising from transfers between
stages and repayments(1) (13.9) 34.4 64.2 84.7
Repayments and ECL movements while
stage remained unchanged and final
repayments (9.0) (35.9) (5.0) (49.9)
Changes to model methodologies 0.9 (0.2) (2.8) (2.1)
Charge to the income statement 23.0 (1.7) 56.4 77.7
Write offs (0.6) (1.4) (34.0) (36.0)
At 31 July 2021 80.0 84.2 116.2 280.4
----------------------------------------- ------------ ------------ ------------ ------------
1 Repayments relate only to financial assets which transferred
between stages during the year. Other repayments are shown in the
line below.
2022 2021
GBP million GBP
million
Impairment losses relating to loans and advances to customers:
Charge to income statement arising from movement in impairment
provisions 93.4 77.7
Amounts written off directly to income statement, net
of recoveries and other costs 8.5 10.2
101.9 87.9
Impairment losses relating to other financial assets 1.4 1.9
Impairment losses on financial assets recognised in
income statement 103.3 89.8
Impairment losses on financial assets of GBP103.3 million (2021:
GBP89.8 million) include GBP60.7 million in relation to Novitas
(2021: GBP73.2 million).
The contractual amount outstanding at 31 July 2022 on financial
assets that were written off during the period and are still
subject to recovery activity is GBP17.3 million (31 July 2021:
GBP19.0 million).
(e) Finance lease and hire purchase agreement receivables
31 July 31 July
2022 2021
GBP million GBP million
Loans and advances to customers comprise
Hire purchase agreement receivables 3,725.1 3,554.6
Finance lease receivables 694.4 567.1
Other loans and advances 4,439.4 4,322.8
At 31 July 8,858.9 8,444.5
8. Debt Securities
Fair value Fair value
through through other
profit or comprehensive Amortised
loss income cost Total
GBP million GBP GBP GBP
million million million
--------------------------------------- ---------------- ------------
Long trading positions in debt
securities 12.4 - - 12.4
Certificates of deposit - - 185.0 185.0
Sovereign and central bank debt - 415.4 - 415.4
---------------- ------------
At 31 July 2022 12.4 415.4 185.0 612.8
------------
Fair value Fair value
through through other
profit or comprehensive Amortised
loss income cost Total
GBP million GBP GBP GBP
million million million
-------------------------------------- ---------------- ------------
Long trading positions in debt
securities 20.1 - - 20.1
Certificates of deposit - - 264.7 264.7
Sovereign and central bank debt - 192.5 - 192.5
---------------- ------------
At 31 July 2021 20.1 192.5 264.7 477.3
------------
Movements on the book value of sovereign and central bank debt
comprise:
2022 2021
GBP million GBP million
Sovereign and central bank debt at 1 August 192.5 72.2
Additions 335.3 313.7
Redemptions (80.0) (191.0)
Currency translation differences (1.2) (5.2)
Movement in value (31.2) 2.8
Sovereign and central bank debt at 31 July 415.4 192.5
9. Equity Shares
31 July 31 July
2022 2021
GBP million GBP million
Long trading positions 27.1 30.8
Other equity shares 1.3 1.1
28.4 31.9
-----------
10. Intangible Assets
Intangible Group total
Goodwill Software assets on acquisition
GBP million GBP million GBP million GBP million
------------
Cost
At 1 August 2020 153.0 233.3 67.5 453.8
Additions 2.0 46.2 4.2 52.4
Disposals (12.1) (6.7) (20.7) (39.5)
At 31 July 2021 142.9 272.8 51.0 466.7
Additions - 56.0 - 56.0
Disposals (0.3) (29.3) - (29.6)
At 31 July 2022 142.6 299.5 51.0 493.1
------------
Amortisation and impairment
At 1 August 2020 47.9 115.5 50.3 213.7
Amortisation charge for the
year - 29.4 3.0 32.4
Impairment charge for the
year 12.1 - 11.2 23.3
Disposals (12.1) (2.5) (20.7) (35.3)
At 31 July 2021 47.9 142.4 43.8 234.1
Amortisation charge for the
year - 34.6 2.0 36.6
Impairment charge for the - - - -
year
Disposals - (29.6) - (29.6)
At 31 July 2022 47.9 147.4 45.8 241.1
------------
Net book value at 31 July
2022 94.7 152.1 5.2 252.0
------------
Net book value at 31 July
2021 95.0 130.4 7.2 232.6
------------
Net book value at 1 August
2020 105.1 117.8 17.2 240.1
------------
Software includes assets under development of GBP71.1 million
(31 July 2021: GBP60.1 million).
Intangible assets on acquisition relate to broker and customer
relationships and are amortised over a period of eight to 20
years.
In the 2022 financial year, GBP2.0 million (2021: GBP3.0
million) of the amortisation charge is included in amortisation of
intangible assets on acquisition and GBP34.6 million (2021: GBP29.4
million) of the amortisation charge is included in administrative
expenses shown in the consolidated income statement. In the prior
financial year, an impairment charge of GBP11.2 million relating to
intangible assets on acquisition was excluded from administrative
expenses shown in the consolidated income statement.
11 . Property, Plant and Equipment
Assets
Fixtures, held under
fittings operating Right
Leasehold and leases Motor of use
property equipment vehicles assets(1) Total
GBP GBP GBP GBP GBP million GBP million
million million million million
Group
Cost
At 1 August 2020 25.5 60.1 341.4 0.1 60.4 487.5
Additions 1.1 17.2 60.6 0.1 17.6 96.6
Disposals (1.4) (2.5) (41.3) - (6.3) (51.5)
At 31 July 2021 25.2 74.8 360.7 0.2 71.7 532.6
Additions 0.6 4.3 67.8 - 13.6 86.3
Disposals (4.9) (16.5) (30.3) - (6.8) (58.5)
At 31 July 2022 20.9 62.6 398.2 0.2 78.5 560.4
Depreciation
At 1 August 2020 14.8 42.9 119.5 0.1 13.0 190.3
Depreciation and impairment
charges for the year 2.3 6.8 44.8 - 13.8 67.7
Disposals (1.4) (2.2) (26.5) - (5.2) (35.3)
At 31 July 2021 15.7 47.5 137.8 0.1 21.6 222.7
Depreciation and impairment
charges for the year 2.2 7.6 40.6 0.1 13.2 63.7
Disposals (4.9) (18.2) (20.2) - (5.2) (48.5)
At 31 July 2022 13.0 36.9 158.2 0.2 29.6 237.9
Net book value at 31
July 2022 7.9 25.7 240.0 - 48.9 322.5
Net book value at 31
July 2021 9.5 27.3 222.9 0.1 50.1 309.9
Net book value at 1 August
2020 10.7 17.2 221.9 - 47.4 297.2
1 Right of use assets primarily relate to the group's leasehold properties.
There was a gain of GBP3.2 million from the sale of assets held
under operating leases for the year ended 31 July 2022 (2021:
GBP2.6 million).
12. Settlement Balances and Short Positions
31 July 31 July
2022 2021
GBP million GBP million
------------
Settlement balances 780.7 674.2
Short positions in:
Debt securities 7.5 7.0
Equity shares 7.9 9.4
------------
15.4 16.4
------------
796.1 690.6
------------
13. Financial Liabilities
Within Between Between Between After
On demand three three months one and two and more
months and one two years five years than Total
year five
years
GBP million GBP GBP GBP GBP GBP GBP
million million million million million million
Deposits by banks 6.1 52.0 102.4 - - - 160.5
Deposits by customers 120.9 1,645.2 3,615.6 1,058.8 329.9 - 6,770.4
Loans and overdrafts
from banks 12.1 10.7 - 228.0 371.9 - 622.7
Debt securities
in issue - 26.7 855.3 249.4 567.0 362.5 2,060.9
At 31 July 2022 139.1 1,734.6 4,573.3 1,536.2 1,268.8 362.5 9,614.5
Within Between Between Between After
On demand three three months one and two and more than
months and one two years five years five years Total
year
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
Deposits by banks 2.1 37.7 110.8 - - - 150.6
Deposits by customers 576.3 1,547.9 3,343.6 729.8 437.2 - 6,634.8
Loans and overdrafts
from banks 22.7 - - - 490.0 - 512.7
Debt securities
in
Issue(1) (0.6) 57.0 161.2 655.2 327.5 665.2 1,865.5
At 31 July 2021 600.5 1,642.6 3,615.6 1,385.0 1,254.7 665.2 9,163.6
1 Debt securities in issue of GBP(0.6) million due on demand
include an adjustment relating to the group's fair value
hedges.
At 31 July 2022, the parent company held GBP251.5 million (31
July 2021: GBP251.1 million) debt securities in issue.
The group accessed GBP600.0 million cash under the Bank of
England's Term Funding Scheme with Additional Incentives for SMEs
(31 July 2021: GBP490.0 million under the Term Funding Scheme with
Additional Incentives for SMEs). Cash from the schemes and
repurchase agreements is included within loans and overdrafts from
banks. Residual maturities of the schemes and repurchase agreements
are as follows:
Within Between Between Between After
On demand three three months one and two and more than
months and one two years five years five years Total
year
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
At 31 July
2022 - 0.6 - 228.0 372.0 - 600.6
At 31 July
2021 - - - - 490.0 - 490.0
14. Capital - unaudited
At 31 July 2022, the group's CET1 capital ratio was 14.6% (31
July 2021: 15.8%). CET1 capital decreased to GBP1,396.7 million (31
July 2021: GBP1,439.3 million) primarily due to regulatory changes
to the treatment of software assets, which are now fully deducted
from capital, and a decrease in IFRS 9 transitional
arrangements.
RWAs, calculated using the standardised approaches, increased to
GBP9,591.3 million (31 July 2021: GBP9,105.3 million) driven by
growth in the Commercial division loan book, and in derivative
exposures, increasing counterparty credit risk and credit valuation
adjustments.
31 July 31 July
2022 2021
GBP million GBP million
------------
CET1 capital
Called up share capital 38.0 38.0
Retained earnings 1,628.4 1,555.5
Other reserves recognised for CET1 capital 10.0 13.1
Adjustments to CET1 capital
Intangible assets, net of associated deferred
tax liabilities(1) (250.7) (180.7)
Foreseeable dividend(2) (65.6) (62.7)
Investment in own shares (40.6) (36.0)
Pension asset, net of associated deferred tax
liabilities (5.3) (5.4)
Prudent valuation adjustment (0.5) (0.3)
Insufficient coverage for non-performing exposures(3) - -
IFRS 9 transitional arrangements(4) 83.0 117.8
CET1 capital(5) 1,396.7 1,439.3
------------
Tier 2 capital(6) - subordinated debt 200.0 223.4
------------
Total regulatory capital(5) 1,596.7 1,662.7
------------
RWAs (notional)(7)
Credit and counterparty credit risk 8,389.0 7,945.8
Operational risk(7) 1,085.8 1,038.5
Market risk(7) 116.5 121.0
9,591.3 9,105.3
------------
CET1 capital ratio(5) 14.6% 15.8%
------------
Total capital ratio(5) 16.6% 18.3%
------------
1 In line with CRR, effective on 1 January 2022, the CET1
capital ratio no longer includes the benefit related to software
assets which were previously exempt from the deduction requirement
for intangible assets from CET1.
2 Under the Regulatory Technical Standard on own funds, a
deduction has been recognised at 31 July 2022 and 31 July 2021 for
a foreseeable dividend, being the proposed final dividend as set
out in note 6.
3 In line with CRR, effective on 1 January 2022, the CET1
capital includes a regulatory deduction where there is insufficient
coverage for non-performing exposures, amounting to GBP0.03 million
at 31 July 2022.
4 The group has elected to apply IFRS 9 transitional
arrangements for 31 July 2022, which allow the capital impact of
expected credit losses to be phased in over the transitional
period.
5 Shown after applying IFRS 9 transitional arrangements and the
CRR transitional and qualifying own funds arrangements in force at
the time. Without their application, at 31 July 2022 the CET1
capital ratio would be 13.8% and total capital ratio 15.9% (31 July
2021: CET1 capital ratio 14.7% and total capital ratio 17.2%, which
includes the benefit related to the previous treatment of software
assets).
6 Tier 2 capital decrease represents the redemption on call date
of a prior Tier 2 security, most of which had previously been
redeemed as part of a tender offer.
7 Operational and market risk include an adjustment at 8% in order to determine notional RWAs.
The following table shows a reconciliation between equity and
CET1 capital after adjustments:
31 July 31 July
2022 2021
GBP million GBP million
Equity 1,657.5 1,569.3
Regulatory adjustments to equity:
Intangible assets, net of associated deferred
tax liabilities (250.7) (180.7)
Foreseeable dividend(1) (65.6) (62.7)
IFRS 9 transitional arrangements(2) 83.0 117.8
Pension asset, net of associated deferred
tax liabilities (5.3) (5.4)
Prudent valuation adjustment (0.5) (0.3)
Insufficient coverage for non-performing exposures(3) - -
Other reserves not recognised for CET1 capital:
Cash flow hedging reserve (21.7) 0.3
Non-controlling interests - 1.0
CET1 capital 1,396.7 1,439.3
1 Under the Regulatory Technical Standard on own funds, a
deduction has been recognised at 31 July 2022 and 31 July 2021 for
a foreseeable dividend, being the proposed final dividend as set
out in note 6.
2 The group has elected to apply IFRS 9 transitional
arrangements for 31 July 2022, which allow the capital impact of
expected credit losses to be phased in over the transitional
period.
3 In line with CRR, effective on 1 January 2022, the CET1
capital includes a regulatory deduction where there is insufficient
coverage for non-performing exposures, amounting to GBP0.03 million
at 31 July 2022.
The following table shows the movement in CET1 capital during
the year:
2022 2021
GBP million GBP million
CET1 capital at 1 August 1,439.3 1,254.0
Profit in the period attributable to shareholders 165.2 202.1
Dividends paid and foreseen (98.4) (89.5)
Change in software assets treatment(1) (50.2) 50.2
IFRS 9 transitional arrangements (34.8) 17.5
(Increase)/decrease in intangible assets, net of
associated deferred tax liabilities (19.7) 6.0
Other movements in reserves recognised for CET1
capital 0.1 0.9
Other movements in adjustments from CET1 capital (4.8) (1.9)
CET1 capital at 31 July 1,396.7 1,439.3
-----------
1 In line with CRR, effective on 1 January 2022, the CET1 ratio
no longer includes the benefit related to software assets which
were previously exempt from the deduction requirement for
intangible assets from CET1.
15. Consolidated Cash Flow Statement Reconciliation
2022 2021(1)
GBP million GBP million
(a) Reconciliation of operating profit before
tax
to net cash inflow from operating
activities
Operating profit before tax 232.8 265.2
Tax paid (63.4) (69.7)
Depreciation, amortisation and impairment 100.3 123.4
Impairment losses on financial assets 103.3 89.8
Decrease/(increase) in:
Interest receivable and prepaid expenses 19.8 4.6
Net settlement balances and trading positions 17.2 8.5
Net loans from money brokers against stock advanced 2.7 (23.2)
Increase/(decrease) in interest payable and accrued
expenses (32.2) 27.2
Net cash inflow from trading activities 380.5 425.8
Decrease/(increase) in:
Loans and advances to banks not repayable on demand (5.3) 9.6
Loans and advances to customers (515.0) (951.2)
Assets let under operating leases (54.5) (43.9)
Certificates of deposit 79.7 21.2
Sovereign and central bank debt (255.3) (126.6)
Other assets less other liabilities (6.4) 29.6
Increase/(decrease) in:
Deposits by banks 11.8 3.9
Deposits by customers 142.7 745.1
Loans and overdrafts from banks 110.0 14.8
Net (redemption)/issuance of debt securities 270.5 (9.2)
Net cash inflow from operating activities 158.7 119.1
(b) Analysis of net cash outflow in respect of
the
purchase of subsidiaries and
non-controlling interests
Cash consideration paid (0.1) (2.9)
(c) Analysis of net cash inflow in respect of
the
sale of subsidiaries
Cash consideration received 0.1 2.3
(d) Analysis of cash and cash equivalents(2)
Cash and balances at central banks 1,236.0 1,314.7
Loans and advances to banks 147.0 121.9
At 31 July 1,383.0 1,436.6
1 Comparatives have been updated to present impairment losses on
financial assets in a separate line with no impact on the net cash
inflow from operating activities figure.
2 Excludes GBP37.1 million (2021: GBP30.7 million) of Bank of
England and other cash reserve accounts.
During the year ended 31 July 2022, the non-cash changes on debt
financing amounted to GBP9.6 million (31 July 2021: GBP18.2
million) arising largely from interest accretions and fair value
hedging movements.
16. Fair Value of Financial Assets and Liabilities
The fair values of the group's financial assets and liabilities
are not materially different from their carrying values. The main
differences are as follows:
31 July 2022 31 July 2021
Fair value Carrying Fair value Carrying
value value
GBP million GBP million GBP million GBP million
------------ ------------ ------------
Subordinated loan capital 180.0 186.5 226.5 222.7
------------
Debt securities in issue 2,071.4 2,060.9 1,908.9 1,865.5
The group holds financial instruments that are measured at fair
value subsequent to initial recognition. Each instrument has been
categorised within one of three levels using a fair value hierarchy
that reflects the significance of the inputs used in making the
measurements. These levels are based on the degree to which the
fair value is observable. The table below shows the classification
of financial instruments held at fair value into the valuation
hierarchy:
Level
Level 1 2 Level 3 Total
GBP million GBP million GBP million GBP million
At 31 July 2022
Assets
Debt securities:
Long trading positions in
debt securities 11.0 1.4 - 12.4
Sovereign and central bank
debt 415.4 - - 415.4
Equity shares 4.1 24.0 0.3 28.4
Derivative financial instruments - 71.2 - 71.2
Contingent consideration - - 1.7 1.7
430.5 96.6 2.0 529.1
Liabilities
Short positions:
Debt securities 5.8 1.7 - 7.5
Equity shares 2.2 5.6 0.1 7.9
Derivative financial instruments - 89.2 - 89.2
Contingent consideration - - 3.0 3.0
8.0 96.5 3.1 107.6
Level 1 Level 2 Level 3 Total
GBP million GBP million GBP million GBP million
At 31 July 2021
Assets
Debt securities:
Long trading positions in
debt securities 19.0 1.1 - 20.1
Sovereign and central bank
debt 192.5 - - 192.5
Equity shares 6.2 25.4 0.3 31.9
Derivative financial instruments - 18.3 - 18.3
Contingent consideration - - 0.1 0.1
217.7 44.8 0.4 262.9
Liabilities
Short positions:
Debt securities 5.7 1.3 - 7.0
Equity shares 3.2 6.2 - 9.4
Derivative financial instruments - 21.3 - 21.3
Contingent consideration - - 3.0 3.0
8.9 28.8 3.0 40.7
There is no significant change to the valuation methodologies
relating to Level 2 and 3 financial instruments disclosed in note
28 "Financial risk management" of the Annual Report 2021.
Instruments classified as Level 3 predominantly comprise
contingent consideration payable and receivable in relation to the
acquisitions and disposal of subsidiaries. The fair value of
contingent consideration is determined on a discounted expected
cash flow basis. The group believes that there is no reasonably
possible change to inputs used in the valuation of these positions
which would have a material effect on the group's consolidated
income statement.
There were no significant transfers between Level 1, 2 and 3 in
2022 and 2021.
The losses recognised in the consolidated income statement
relating to instruments held at the year end amounted to GBP0.2
million (2021: GBP0.1 million).
17. Government Lending Schemes and Forbearance
Government lending schemes
In addition to the Covid-19 specific forbearance measures
covered below, following accreditation, customers facilities were
offered under the UK government-introduced Coronavirus Business
Interruption Loan Scheme ("CBILS"), the Coronavirus Large Business
Interruption Loan Scheme ("CLBILS") and the Bounce Back Loan Scheme
("BBLS"), thereby enabling us to maximise our support to small
businesses. As at 31 July 2022, 5,445 facilities were drawn, with a
residual balance of GBP747.5 million (31 July 2021: GBP983.9
million) following commencement of repayments across our Property,
Asset Finance & Leasing and Invoice Finance businesses.
We have also received accreditation to offer products under the
Recovery Loan Scheme, and schemes in the Republic of Ireland. As at
31 July 2022, there are 633 live and approved loans, with limits of
GBP181.6 million.
Forbearance
Forbearance occurs when a customer is experiencing difficulty in
meeting their financial commitments and a concession is granted, by
changing the terms of the financial arrangement, which would not
otherwise be considered. This arrangement can be temporary or
permanent depending on the customer's circumstances.
The Banking division reports on forborne exposures as either
performing or non-performing in line with regulatory requirements.
A forbearance policy is maintained to ensure the necessary
processes are in place to enable consistently fair treatment of
each customer and that they are managed based on their individual
circumstances. The arrangements agreed with customers will aim to
create a sustainable and affordable financial position, thereby
reducing the likelihood of suffering a credit loss. The forbearance
policy is periodically reviewed to ensure it remains effective.
Forbearance analysis
At 31 July 2022 the gross carrying amount of exposures with
forbearance measures was GBP208.9 million (31 July 2021: GBP615.0
million). The key driver of this decrease has been repayment and
curing of Covid-19 related forbearance, the total of which amounts
to GBP40.8 million at 31 July 2022 (31 July 2021: GBP454.8
million).
An analysis of forborne loans is shown in the table below:
Forborne loans
as a percentage
Gross loans of gross loans Provision Number
and advances Forborne and advances on forborne of customers
to customers loans to customers loans supported
GBP million GBP million % GBP million
31 July 2022 9,144.5
Covid-19 forbearance 40.8 0.4% 1.4 770
Non-Covid-19 forbearance 168.1 1.8% 42.9 10,273
9,144.5 208.9 2.3% 44.3 11,043
31 July 2021 8,724.9
Covid-19 forbearance 454.8 5.2% 47.3 17,674
Non-Covid-19 forbearance 160.2 1.8% 35.5 12,679
8,724.9 615.0 7.0% 82.8 30,353
The following is a breakdown of forborne loans by segment split
by those driven by Covid-19 compared to concessions that have
arisen in the normal course of business:
31 July 2022 31 July 2021
Non- Total forborne Non-
Covid-19 Covid-19 loans Covid-19 Covid-19 Total forborne loans
GBP million GBP million GBP million GBP million GBP million GBP million
Commercial 34.2 28.1 62.3 287.4 19.8 307.2
Retail 1.8 21.2 23.0 49.2 9.2 58.4
Property 4.8 118.8 123.6 118.2 131.2 249.4
40.8 168.1 208.9 454.8 160.2 615.0
The following is a breakdown of the number of customers
supported by segment:
31 July 2022 31 July 2021
Total number of customers Non- Total number of customers
Covid-19 Non-Covid-19 supported Covid-19 Covid-19 supported
Commercial 404 114 518 2,291 136 2,427
Retail 365 10,102 10,467 15,333 12,485 27,818
Property 1 57 58 50 58 108
770 10,273 11,043 17,674 12,679 30,353
The following is a breakdown of forborne loans by concession
type split by those driven by Covid-19 compared to concessions that
have arisen in the normal course of business:
31 July 2022 31 July 2021
Non- Non-
Covid-19 Covid-19 Forborne loans Covid-19 Covid-19 Forborne loans
GBP million GBP million GBP million GBP million GBP million GBP million
Extension outside terms 5.4 107.6 113.0 123.5 121.9 245.4
Refinancing - 3.0 3.0 1.2 5.3 6.5
Moratorium 35.4 34.5 69.9 329.7 16.1 345.8
Other modifications - 23.0 23.0 0.4 16.9 17.3
40.8 168.1 208.9 454.8 160.2 615.0
18. Interest Rate Risk
The group's exposure to interest rate risk arises in the Banking
division and, accordingly, the remainder of this section relates to
the Banking division. Interest rate risk in the group's other
divisions is considered to be immaterial.
The group has a simple and transparent balance sheet and a low
appetite for interest rate risk which is limited to that required
to operate efficiently. The group's governance, policy and approach
in relation to interest rate risk remains unchanged from that
described on page 186 of the Annual Report 2021.
The table below sets out the assessed impact on our Earnings at
Risk ("EaR") due to a parallel shift in interest rates at 31
July:
2022 2021
GBP million GBP million
0.5% increase 2.1 (11.6)
0.5% decrease (1.9) 8.3
The table below sets out the assessed impact on our base case
Economic Value ("EV") due to a shift in interest rates at 31
July:
2022 2021
GBP million GBP million
0.5% increase 1.1 (4.2)
0.5% decrease (0.8) 4.3
The impact above is on a comparable 0.5% increase and decrease
basis. The Bank of England Base Rate had increased base rate to
1.25% by 31 July 2022, from 0.1% at 31 July 2021. This has resulted
in a reduction in embedded optionality risk as floors embedded in
some variable rate loans are no longer generating additional
earnings. The reduction in embedded optionality risk is responsible
for most of the movement in the EaR and EV metrics in the year. The
major driver for EaR and EV is now Repricing Risk with increasing
rates driving positive EaR and EV and modest rate reductions
resulting in negative EV and EaR.
Cautionary Statement
Certain statements included or incorporated by reference within
this preliminary results announcement may constitute
"forward-looking statements" in respect of the group's operations,
performance, prospects and/or financial condition. Forward-looking
statements are sometimes, but not always, identified by their use
of a date in the future or such words as "anticipates", "aims",
"due", "could", "may", "will", "should", "expects", "believes",
"intends", "plans", "potential", "targets", "goal" or "estimates".
By their nature, forward-looking statements involve a number of
risks, uncertainties and assumptions and actual results or events
may differ materially from those expressed or implied by those
statements. Accordingly, no assurance can be given that any
particular expectation will be met and reliance should not be
placed on any forward-looking statement. Additionally,
forward-looking statements regarding past trends or activities
should not be taken as a representation that such trends or
activities will continue in the future. Except as may be required
by law or regulation, no responsibility or obligation is accepted
to update or revise any forward-looking statement resulting from
new information, future events or otherwise. Nothing in this
preliminary results announcement should be construed as a profit
forecast. Past performance is no guide to future performance and
persons needing advice should consult an independent financial (or
other professional) adviser.
This preliminary results announcement does not constitute or
form part of any offer or invitation to sell, or any solicitation
of any offer to subscribe for or purchase any shares or other
securities in the company or any of its group members, nor shall it
or any part of it or the fact of its distribution form the basis
of, or be relied on in connection with, any contract or commitment
or investment decisions relating thereto, nor does it constitute a
recommendation regarding the shares or other securities of the
company or any of its group members. Statements in this preliminary
results announcement reflect the knowledge and information
available at the time of its preparation. Liability arising from
anything in this preliminary results announcement shall be governed
by English law. Nothing in this preliminary results announcement
shall exclude any liability under applicable laws that cannot be
excluded in accordance with such laws.
This information is provided by RNS, the news service of the
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END
FR GZGZLMVKGZZZ
(END) Dow Jones Newswires
September 27, 2022 02:01 ET (06:01 GMT)
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