TIDMCBG
RNS Number : 8183S
Close Brothers Group PLC
14 March 2023
Half Year Results for the Six Months to 31 January 2023
14 March 2023
Adrian Sainsbury, Chief Executive, said:
"It has been a challenging six months, with our half year
results significantly impacted by the increased provisions in
relation to Novitas, as announced previously in January 2023. While
this is clearly disappointing, our underlying business remains
resilient, enabling us to support almost three million customers,
including over 360 thousand SMEs, as we continue to lend
consistently through this period of uncertainty.
We are encouraged by the good demand and strong margins seen in
Banking, as well as the underlying credit quality of our loan book.
We continued to attract new client assets in CBAM, with healthy net
inflows, and although trading activity remained subdued at
Winterflood, WBS sustained its positive momentum. We are pleased to
declare an increased interim dividend of 22.5p per share,
reflecting our underlying performance and the Board's confidence in
the group's outlook.
Our financial strength leaves us well placed to move forward and
resume our track record of earnings growth and returns."
Financial performance in the first six months
-- As previously announced, we have taken steps to resolve the
issues surrounding Novitas, resulting in an additional provision of
GBP89.8 million, with the total provisions in relation to Novitas
taken in H1 2023 at GBP114.6 million. As a result, statutory
operating profit before tax decreased to GBP11.7 million (H1 2022:
GBP128.9 million). Excluding Novitas, adjusted operating profit
decreased to GBP117.5 million (H1 2022: GBP160.5 million)
-- We achieved 5% income growth in Banking with a strong net
interest margin of 8.0% (H1 2022: 7.9%) and good levels of customer
demand, particularly in Commercial. As a result, pre-provisions,
adjusted operating profit in Banking increased 5% to GBP177.2
million (H1 2022: GBP168.5 million)
-- Although underlying credit performance remains resilient, the
increased uncertainty in the economic outlook has been reflected in
higher forward-looking impairment provisions and a rise in arrears
in Motor Finance. As a result, the annualised bad debt ratio
(excluding Novitas) was 1.1% (H1 2022: 0.2%)
-- The loan book excluding Novitas was GBP9.0 billion (31 July
2022: GBP8.9 billion), as we remain committed to lending
consistently to our customers under responsible terms in all market
conditions
-- We delivered healthy net inflows of 6%, with a strong
contribution from new hires, as we continued to focus on growing
Close Brothers Asset Management ("CBAM")
-- Winterflood's performance continued to reflect challenging market conditions
-- Total funding increased 3% to GBP11.9 billion (31 July 2022:
GBP11.6 billion), as the diversity of our funding sources helped us
optimise funding costs in an environment of rapid interest rate
rises
-- Our Common Equity Tier 1 ("CET1") ratio was 14.0% at 31 January 2023 (31 July 2022: 14.6%), significantly above the applicable minimum regulatory requirement of 8.5% and the group's medium-term CET1 capital ratio target range of 12-13%
-- We are pleased to declare an interim dividend of 22.5p per
share (H1 2022: 22.0p), reflecting our underlying performance and
the Board's confidence in the group's outlook
Well placed to move forward on the delivery of our strategic
priorities
-- We are continuing to focus on our strategic growth agenda,
with over GBP90 million lent in the first half towards our ambition
to provide GBP1 billion of funding for battery electric vehicles
over five years and the successful piloting of a specialist
buy-to-let extension to our existing Property bridging finance
clients. In CBAM, we continued to attract new hires and we were
pleased to announce that Winterflood Business Services ("WBS")
exceeded the targeted GBP10 billion of total assets under
administration ("AuA")
-- We have intensified our focus on cost discipline and
efficiency, especially in light of recent inflationary pressures.
We have a number of strategic cost management initiatives in
progress and are evaluating additional opportunities for efficiency
with a view to achieving positive operating leverage over the
medium term
-- We remain committed to optimising further our capital
structure, including the issuance of debt capital market securities
if appropriate , targeting a CET1 capital ratio range of 12% to 13%
over the medium term in line with our capital management
framework
Outlook
-- Although we are alert to the impact of rising inflation and
interest rates on our customers and wider financial market
conditions, we are well placed to move forward on the delivery of
our strategic priorities. We are confident we can resume our track
record of earnings growth and returns by focusing on disciplined
growth, cost efficiency and capital optimisation
First half First half Change
Key Financials (1) 2023 2022 %
-------------------------------------- ------------- ------------- ---------
Adjusted operating profit(2) GBP12.6m GBP129.8m (90)
Adjusted operating profit, pre
provision GBP174.8m GBP178.1m (2)
Operating profit before tax GBP11.7m GBP128.9m (91)
Adjusted basic earnings per share(3) 6.1p 64.0p -
Basic earnings per share(3) 5.6p 63.5p -
Ordinary dividend per share 22.5p 22.0p 2
Return on opening equity 1.1% 12.2%
Return on average tangible equity 1.3% 14.2%
Net interest margin(4) 8.0% 7.9%
Bad debt ratio(4) 3.6% 1.1%
31 January 31 July Change
2023 2022 %
-------------------------------------- ------------- ------------- ---------
Loan book GBP9.0bn GBP9.1bn (1)
Total client assets GBP16.9bn GBP16.6bn 2
CET1 capital ratio (transitional) 14.0% 14.6%
Total capital ratio (transitional) 16.1% 16.6%
-------------------------------------- ------------- ------------- ---------
First half First half Change
Key Financials (Excluding Novitas) 2023 2022 %
------------------------------------ ------------- ------------- ---------
Adjusted operating profit GBP117.5m GBP160.5m (27)
Adjusted operating profit, pre
provision GBP165.1m GBP169.6m (3)
Net interest margin(4) 7.8% 7.6%
Bad debt ratio(4) 1.1% 0.2%
31 January 31 July Change
2023 2022 %
------------------------------------ ------------- ------------- ---------
Loan book GBP9.0bn GBP8.9bn -
1 Please refer to definitions below.
2 Adjusted operating profit is stated before amortisation of
intangible assets on acquisition of GBP0.9 million (H1 2022: GBP0.9
million).
3 Refer to Note 4 for the calculation of basic and adjusted
earnings per share.
4 Net interest margin and bad debt ratio calculated on an
annualised basis.
Enquiries
Sophie Gillingham Close Brothers Group plc 020 3857 6574
Camila Sugimura Close Brothers Group plc 020 3857 6577
Kimberley Taylor Close Brothers Group plc 020 3857 6233
Irene Galvan Close Brothers Group plc 020 3857 6217
Sam Cartwright Maitland 07827 254 561
A virtual presentation to analysts and investors will be held
today at 9.30 am GMT followed by a Q&A session. A webcast and
dial-in facility will be available by registering at
https://webcasts.closebrothers.com/results/HalfYearResults2023
.
Basis of Presentation
Results are presented both on a statutory and an adjusted basis
to aid comparability between periods. Adjusted measures are
presented on a basis consistent with prior periods and exclude
amortisation of intangible assets on acquisition, to present the
performance of the group's acquired businesses consistent with its
other businesses; and any exceptional and other adjusting items
which do not reflect underlying trading performance. The loan book
figure was re-presented for 31 January 2022 to incorporate closing
loans and advances to customers and operating lease assets,
previously shown separately. The Asset Finance and Invoice and
Speciality Finance loan books have also been re-presented for 31
July 2022 to reflect the recategorisation of Close Brothers Vehicle
Hire ("CBVH") from Invoice and Speciality Finance to Asset Finance.
The condensed consolidated interim financial statements from page
34 to 70 are not impacted by these re-presentations.
About Close Brothers
Close Brothers is a leading UK merchant banking group providing
lending, deposit taking, wealth management services and securities
trading. We employ approximately 4,000 people, principally in the
United Kingdom and Ireland. Close Brothers Group plc is listed on
the London Stock Exchange and is a member of the FTSE 250.
CHIEF EXECUTIVE'S STATEMENT
It has been a challenging six months but our underlying business
remains resilient, enabling us to support almost three million
customers, including over 360 thousand small and medium-sized
enterprises ("SMEs"), as we continue to lend consistently through
this period of uncertainty. We are encouraged by the good demand
and strong margins seen in Banking, as well as the underlying
credit quality of our loan book. We continued to attract new client
assets in CBAM, with healthy net inflows, though trading activity
remained subdued at Winterflood.
We are pleased to declare an increased interim dividend of 22.5p
per share (H1 2022: 22.0p per share), reflecting our underlying
performance and the Board's confidence in the group's outlook. We
remain committed to the group's dividend policy, which aims to
provide sustainable dividend growth year-on-year, while maintaining
a prudent level of dividend cover.
While developments at Novitas are disappointing, we are
confident that the group is in a strong position to navigate the
current environment and make the most of available opportunities.
We remain well placed to continue to leverage our long-term
relationships, the deep expertise of our people and our commitment
to excellent customer service. Alongside the fundamental strengths
of our model, which have been evidenced through many cycles, we are
well positioned to move forward on the delivery of our strategic
priorities, with a focus on delivering disciplined growth, cost
efficiency and optimisation of our capital structure. I am
confident that we are well placed to resume our track record of
earnings growth and returns.
Financial performance
This period has seen a challenging market backdrop, with the
weaker UK macroeconomic outlook creating significant uncertainty
for both our individual and SME customers. Although we continued to
see good levels of customer demand and a resilient underlying
credit performance, the volatile external environment has been
reflected in higher forward-looking impairment provisions and
challenging market conditions in CBAM and Winterflood. Against this
backdrop, we have maintained our through-the-cycle approach,
retaining our pricing discipline whilst lending consistently to our
customers. Our diverse funding model has also benefited us,
allowing the group to optimise its funding mix and cost of funding
in an environment of rapid interest rate rises.
The financial results were impacted by a significant increase in
provisions in relation to the Novitas loan book, as we have taken
steps to resolve the issues surrounding that business. As a result,
statutory operating profit before tax decreased to GBP11.7 million
(H1 2022: GBP128.9 million).
In Banking, excluding Novitas, performance reflected growth in
income, offset by higher forward-looking provisions to take into
account the weaker macroeconomic outlook and a rise in arrears in
Motor Finance. CBAM delivered healthy net inflows although profit
reduced year-on-year reflecting wider market conditions and
performance at Winterflood reflected the continuation of
challenging trading conditions.
We have maintained our strong capital, funding and liquidity
position, in line with our prudent and conservative approach. Our
Common Equity Tier 1 ("CET1") ratio was 14.0% at 31 January 2023
(31 July 2022: 14.6%), significantly above the applicable minimum
regulatory requirement of 8.5% and the group's medium-term CET1
capital ratio target range of 12-13%.
Novitas
The decision to wind down Novitas, a provider of finance for the
legal sector we acquired in 2017, and to withdraw from the legal
services financing market, followed a strategic review in July 2021
which concluded that the business was not aligned with the Close
Brothers model. Some of the key attributes of our model such as
in-house lending expertise, a strong track record of performance
and underlying security of the loans have proven not to be evident
in Novitas.
The business continues to work with solicitors and insurers, to
support existing customers and manage the existing book to ensure
good customer outcomes. As announced in January 2023, we have
accelerated our efforts to resolve the issues surrounding this
business, including the initiation of formal legal action against
one of the After the Event ("ATE") insurers, and are considering
our position in respect of other insurers. We have recognised
additional provisions of GBP114.6 million in the first half, taking
the overall credit provisions against Novitas to GBP183.2 million.
We are confident that this level of provisions adequately reflects
the remaining risk of credit losses for the Novitas loan book and
are focused on maximising the recovery of remaining loan
balances.
We evaluate continuously our businesses and initiatives against
a set of criteria, our "Model Fit Assessment Framework", to ensure
they are aligned with the key attributes of our model that have and
will continue to generate long-term value. We are confident that
there is no read-across from Novitas to other books in our
portfolio and our prudent underwriting continues to be reflected in
the asset quality and performance of the rest of our loan book. The
financial strength of the group leaves us well placed to move
forward on the delivery of our strategic priorities.
Protecting, Growing and Sustaining our business model
We have made good progress against our strategic priorities and
remain dedicated to resuming our track record of returns. Our
approach to investing through the cycle continues to provide
tangible benefits and protect our strong margins. I am pleased to
announce the conclusion of the Motor Finance transformation
programme, which enabled us to make the most of growth
opportunities in the second hand car market, enhance our digital
capabilities and evolve our compelling dealer and customer
proposition.
While investment to maintain the strengths of our high-touch
model in Banking is critical, we have intensified our focus on cost
discipline and efficiency, especially in light of recent
inflationary pressures. We have a number of strategic cost
management initiatives in progress, including the rationalisation
of IT infrastructure and operational enhancements in Retail, which
aim to create capacity to accommodate growth, inflation and
investment to support our business. We continue to evaluate
additional opportunities for efficiency with a view to achieving
positive operating leverage over the medium term.
We remain committed to optimising further our capital structure,
including the issuance of debt capital market securities if
appropriate. In line with the group's Capital Management framework,
we are targeting a CET1 capital ratio range of 12% to 13% over the
medium term, which will allow the group to maintain a buffer to
minimum regulatory requirements while also retaining the
flexibility for growth.
We are focused on delivering disciplined growth and continue to
actively review a range of opportunities in line with our model. In
the first half, our recently hired specialist lending teams in
Asset Finance executed new deals and have a healthy pipeline for
the remainder of the year. Following the announcement last year of
our first green growth ambition of providing funding for GBP1.0
billion of battery electric vehicles over five years, we are
pleased to have funded over GBP90 million in the first six months.
In addition, Winterflood Business Services exceeded the targeted
GBP10 billion of total AuA following the onboarding of Fidelity
International as a new client.
I am encouraged by the ongoing progress of our sustainability
strategy. Earlier this year we set our group wide climate
commitment, becoming signatories to the Net Zero Banking Alliance
and Net Zero Asset Managers initiative. We are focused on improving
the quality, granularity and accuracy of the data utilised across
our emissions reporting, including our financed emissions. Our
drive towards a net zero company car fleet by 2025 has continued,
with over 40% of our car fleet now being fully electric.
Outlook
Although we are alert to the impact of rising inflation and
interest rates on our customers and wider financial market
conditions, we are well placed to move forward on the delivery of
our strategic priorities. We are confident we can resume our track
record of earnings growth and returns by focusing on disciplined
growth, cost efficiency and capital optimisation.
OVERVIEW OF FINANCIAL PERFORMANCE
SUMMARY GROUP INCOME STATEMENT(1)
First half First half Change
2023 2022 %
GBP million GBP million
--------------------------------------- -------------- ------------------ ---------
Operating income 474.3 471.6 1
Adjusted operating expenses (299.5) (293.5) 2
Impairment losses on financial assets (162.2) (48.3) 236
--------------------------------------- -------------- ------------------ ---------
Adjusted operating profit 12.6 129.8 (90)
--------------------------------------- -------------- ------------------ ---------
Banking 15.0 120.2 (88)
-------------- ------------------ ---------
Commercial (33.1) 37.7 (188)
Of which: Novitas (104.9) (30.7) 242
Retail 14.7 42.5 (65)
Property 33.4 40.0 (17)
-------------- ------------------ ---------
Asset Management 8.6 14.5 (41)
Winterflood 2.4 8.8 (73)
Group (13.4) (13.7) (2)
--------------------------------------- -------------- ------------------ ---------
Amortisation of intangible assets
on acquisition (0.9) (0.9) -
--------------------------------------- -------------- ------------------ ---------
Operating profit before tax 11.7 128.9 (91)
--------------------------------------- -------------- ------------------ ---------
Tax (3.3) (33.8) (90)
--------------------------------------- -------------- ------------------ ---------
Profit after tax 8.4 95.1 (91)
--------------------------------------- -------------- ------------------ ---------
Profit attributable to shareholders 8.4 95.1 (91)
--------------------------------------- -------------- ------------------ ---------
Adjusted basic earnings per share(2) 6.1p 64.0p (90)
Basic earnings per share(2) 5.6p 63.5p (91)
Ordinary dividend per share 22.5p 22.0p 2
Return on opening equity 1.1% 12.2%
Return on average tangible equity 1.3% 14.2%
1 Adjusted measures are presented on a basis consistent with
prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired
businesses consistent with its other businesses. Further detail on
the reconciliation between statutory and adjusted measures can be
found in Note 2.
2 Refer to Note 4 for the calculation of basic and adjusted
earnings per share.
FINANCIAL PERFORMANCE
Operating profit and returns
Adjusted operating profit decreased 90% to GBP12.6 million (H1
2022: GBP129.8 million), mainly driven by higher impairment charges
in relation to Novitas. Excluding Novitas, adjusted operating
profit reduced 27% to GBP117.5 million (H1 2022: GBP160.5 million),
primarily reflecting an increase in impairment charges and a
reduction in income in Winterflood.
Statutory operating profit before tax decreased to GBP11.7
million (H1 2022: GBP128.9 million). Return on opening equity
reduced to 1.1% (H1 2022: 12.2%) and return on average tangible
equity was 1.3% (H1 2022: 14.2%). The loss after tax recorded by
Novitas in the first half reduced the group's RoTE by 11.2%.
Adjusted operating profit in the Banking division decreased by
88% to GBP15.0 million (H1 2022: GBP120.2 million), primarily
reflecting higher impairment charges related to Novitas, with
income growth partially offset by increased costs. In the Asset
Management division, adjusted operating profit declined by 41% to
GBP8.6 million (H1 2022: GBP14.5 million) as stable costs were more
than offset by the reduction in income. Winterflood saw a 73%
reduction in operating profit to GBP2.4 million (H1 2022: GBP8.8
million), with performance adversely impacted by the continued
market-wide slowdown in trading activity in higher margin sectors
and difficult market conditions. Group net expenses, which include
the central functions such as finance, legal and compliance, risk
and human resources, were broadly stable on the prior year period
at GBP13.4 million (H1 2022: GBP13.7 million).
Operating income
Operating income increased 1% to GBP474.3 million (H1 2022:
GBP471.6 million), with growth in Banking offsetting a reduction in
income in Asset Management and Winterflood. Income in the Banking
division increased by 5%, reflecting a strong net interest margin
of 8.0% (H1 2022: 7.9%) and continued loan book growth
year-on-year. Income in the Asset Management division reduced 7%,
mainly due to negative market movements and lower client activity.
Income in Winterflood reduced by 21%, primarily driven by lower
trading revenues following a market-wide slowdown in activity.
Operating expenses
Operating expenses rose 2% to GBP299.5 million (H1 2022:
GBP293.5 million) as increased investment and higher staff costs in
Banking more than offset lower variable costs in Asset Management
and Winterflood.
In Banking, costs increased 5% as we progressed our key
investment programmes and continued to exercise rigorous control of
our costs, notwithstanding the current inflationary environment.
Costs were broadly stable in Asset Management as lower variable
compensation offset higher fixed staff costs, new hires and
technology spend. Winterflood's costs fell by 10% primarily driven
by lower variable staff costs accrued in the period to reflect the
reduction in income.
Overall, the group's expense/income ratio increased marginally
on the prior year period to 63% (H1 2022: 62%), whilst the group's
compensation ratio reduced marginally to 36% (H1 2022: 37%).
Statutory operating expenses increased to GBP299.5 million (H1
2022: GBP293.5 million).
Impairment charges and IFRS 9 provisioning
Impairment charges increased significantly to GBP162.2 million
(H1 2022: GBP48.3 million), corresponding to an annualised bad debt
ratio of 3.6% (H1 2022: 1.1% annualised). This increase primarily
reflected provisions of GBP114.6 million taken in relation to
Novitas (H1 2022: GBP39.2 million), in line with the announcement
in January 2023. As a result, there was an increase in provision
coverage to 4.3% (31 July 2022: 3.1%).
Excluding Novitas, the increase in impairment charges was
primarily driven by higher provisions as a result of weaker
macroeconomic variables and outlook and a rise in arrears in Motor
Finance, as well as an ongoing review of provisions and coverage
across our loan portfolios and model refinements. The bad debt
ratio, excluding Novitas, increased to 1.1% annualised (H1 2022:
0.2%) and the coverage ratio increased to 2.3% (31 July 2022:
1.9%).
Since the previous financial year end, we have updated the
macroeconomic scenarios to reflect the weaker macroeconomic
environment and outlook, although the weightings assigned to them
remain unchanged. At 31 January 2023, there was a 30% strong
upside, 32.5% baseline, 20% mild downside, 10.5% moderate downside
and 7% severe downside.
Whilst we have not seen a significant impact on credit
performance at this stage, with actual realised losses, excluding
Novitas, equivalent to c.GBP10 million in the period, we continue
to monitor closely the evolving impacts of rising inflation and
cost of living on our customers. We remain confident in the quality
of our loan book, which is predominantly secured, prudently
underwritten, diverse, and supported by the deep expertise of our
people.
Tax expense
The tax expense in the first half of the year was GBP3.3 million
(H1 2022: GBP33.8 million), which corresponds to an effective tax
rate of 28.2% (H1 2022: 26.2%) for the period, representing the
best estimate of the annual effective tax rate expected for the
full year.
The standard UK corporation tax rate for the financial year is
21.0% (six months ended 31 January 2022: 19.0%; year ended 31 July
2022: 19.0%). However, an additional 6.3% surcharge applies to the
profits of banking companies as defined in legislation (and only
above a threshold amount). The effective tax rate is above the UK
corporation tax rate primarily due to the surcharge applying to the
majority of the group's profits.
Earnings per share
Adjusted basic earnings per share ("EPS") was 6.1p (H1 2022:
64.0p) and basic EPS was 5.6p (H1 2022: 63.5p). The loss after tax
recorded by Novitas in the first half reduced both the group's
adjusted and basic EPS by 52.9p.
Dividend
We are pleased to declare an interim dividend of 22.5p (H1 2022:
22.0p), reflecting our underlying performance and the Board's
confidence in the group's outlook. We remain committed to our
dividend policy, which aims to provide sustainable dividend growth
year-on-year, while maintaining a prudent level of dividend cover.
The interim dividend is due to be paid on 26 April 2023 to
shareholders on the register at 24 March 2023.
SUMMARY GROUP BALANCE SHEET
31 January 2023 31 July 2022
GBP million GBP million
------------------------------ ----------------------------------- -----------------------------
Loans and advances to customers
and operating lease assets(1) 9,041.0 9,098.9
Treasury assets(2) 2,128.3 1,855.1
Market-making assets(3) 730.0 887.2
Other assets 993.7 837.1
------------------------------------ ----------------------------- -----------------------------
Total assets 12,893.0 12,678.3
------------------------------------ ----------------------------- -----------------------------
Deposits by customers 7,253.7 6,770.4
Borrowings(4) 2,827.5 2,870.1
Market-making liabilities(3) 629.8 796.1
Other liabilities 575.9 584.2
------------------------------------ ----------------------------- -----------------------------
Total liabilities 11,286.9 11,020.8
------------------------------------ ----------------------------- -----------------------------
Equity 1,606.1 1,657.5
------------------------------------ ----------------------------- -----------------------------
Total liabilities and equity 12,893.0 12,678.3
------------------------------------ ----------------------------- -----------------------------
1 Includes operating lease assets of GBP199.6 million (31 July
2022: GBP185.4 million) that relate to Asset Finance and GBP56.7
million (31 July 2022: GBP54.6 million) to Invoice and Speciality
Finance.
2 Treasury assets comprise cash and balances at central banks,
certificates of deposit and sovereign and central bank debt.
3 Market-making assets and liabilities comprise settlement
balances, long and short trading positions and loans to or from
money brokers.
4 Borrowings comprise debt securities in issue, loans and
overdrafts from banks and subordinated loan capital.
The group maintained a strong balance sheet and a prudent
approach to managing its financial resources. The fundamental
structure of the balance sheet remains unchanged, with most of the
assets and liabilities relating to our Banking activities. Loans
and advances make up the majority of assets. Other items on the
balance sheet include treasury assets held for liquidity purposes,
and settlement balances in Winterflood. Intangibles, property,
plant and equipment, and prepayments are included as other assets.
Liabilities are predominantly made up of customer deposits and both
secured and unsecured borrowings to fund the loan book.
Total assets increased 2% to GBP12.9 billion (31 July 2022:
GBP12.7 billion), mainly reflecting higher Treasury assets due to
an increased cash balance, an increase in other assets driven by
market movements due to higher interest rates, and a reduction in
market-making assets. Total liabilities were also 2% higher at
GBP11.3 billion (31 July 2022: GBP11.0 billion), driven primarily
by higher customer deposits, partly offset by a reduction in
market-making liabilities.
Total equity reduced 3% to GBP1.6 billion (31 July 2022: GBP1.7
billion), with profit in the first half more than offset by
dividend payments of GBP65.6 million (31 January 2022: GBP62.7
million). The group's return on assets decreased to 0.1% (H1 2022:
1.5%).
GROUP CAPITAL(1)
31 January 2023 31 July 2022
GBP million GBP million
------------------------------------- ---------------- -------------
CET1 capital 1,310.7 1,396.7
Total capital 1,510.7 1,596.7
Risk weighted assets ("RWAs") 9,383.3 9,591.3
------------------------------------- ---------------- -------------
CET1 capital ratio (transitional) 14.0% 14.6%
Tier 1 capital ratio (transitional) 14.0% 14.6%
Total capital ratio (transitional) 16.1% 16.6%
Leverage ratio(2) 12.0% 12.0%
------------------------------------- ---------------- -------------
1 The impact of Novitas on the CET1 capital ratio was -c.125bps,
of which -c.90bps relates to retained earnings, -c.45bps relates to
the IFRS 9 transitional arrangements and c.10bps relates to
RWAs.
2 The leverage ratio is calculated as tier 1 capital as a
percentage of total balance sheet assets excluding central bank
claims, adjusting for certain capital deductions, including
intangible assets, and off-balance sheet exposures, in line with
the UK leverage framework under CRR.
Movements in capital and other regulatory metrics
The CET1 capital ratio reduced from 14.6% to 14.0%, mainly
driven by the impact of the IFRS 9 transitional arrangements
(-c.45bps) and profits net of dividends paid and foreseen
(-c.35bps), partly offset by a decrease in risk weighted assets
(c.30bps). The impact of Novitas on the CET1 capital ratio was
-c.125bps, of which -c.75bps related to the increased provision
against Novitas taken in January.
CET1 capital decreased 6% to GBP1,310.7 million (31 July 2022:
GBP1,396.7 million), reflecting a decrease in the transitional IFRS
9 add-back to capital of GBP49.0 million, the regulatory deduction
of dividends paid and foreseen of GBP33.5 million and an increase
in the intangible assets deducted from capital of GBP8.4 million.
This was partially offset by the capital generation through profit
of GBP8.4 million.
Total capital decreased 5% to GBP1,510.7 million (31 July 2022:
GBP1,596.7 million).
RWAs fell by 2% to GBP9.4 billion (31 July 2022: GBP9.6
billion), mainly driven by a reduction in risk weighted assets
related to derivatives held for hedging purposes and the IFRS 9
transitional adjustment, partly offset by an increase in the loan
book.
As a result, CET1, tier 1 and total capital ratios were 14.0%
(31 July 2022: 14.6%), 14.0% (31 July 2022: 14.6%) and 16.1% (31
July 2022: 16.6%), respectively.
At 31 January 2023, the applicable minimum CET1, tier 1 and
total capital ratio requirements, excluding any applicable
Prudential Regulation Authority ("PRA") buffer, were 8.5%, 10.2%
and 12.4%, respectively. Accordingly, we continue to have headroom
significantly above the applicable minimum regulatory requirements
of 550bps in the CET1 capital ratio, 380bps in the tier 1 capital
ratio and 365bps in the total capital ratio.
The group applies IFRS 9 regulatory transitional arrangements
which allows banks to add back to their capital base a proportion
of the IFRS 9 impairment charges during the transitional period.
Our capital ratios are presented on a transitional basis after the
application of these arrangements. On a fully loaded basis, without
their application, the CET1, tier 1 and total capital ratios would
be 13.7%, 13.7% and 15.8%, respectively.
The leverage ratio, which is a transparent measure of capital
strength not affected by risk weightings, remains strong at 12.0%
(31 July 2022: 12.0%).
The PRA Consultation Paper 16/22 on Basel 3.1 standards was
published in November, with changes expected to be implemented or
phased in from 2025-2030. Following initial analysis, we estimate
that if implemented in its current form, it would represent an
increase of up to c.10% in the group's RWAs calculated under the
standardised approach. This is primarily as a result of the
proposed removal of the SME supporting factor and the proposed
approach to the classification of Retail SMEs and associated risk
weights.
We continue to make positive progress in our preparations for a
transition to the Internal Ratings Based ("IRB") approach.
Following the submission of our initial application to the PRA in
December 2020, our application has successfully transitioned to
Phase 2 of the process. Additional documentation has been submitted
to the regulator and engagement continues. Our Motor Finance,
Property Finance and Energy portfolios, where the use of models is
most mature, were submitted with our initial application, with work
on subsequent portfolios in progress.
Capital management framework
The prudent management of the group's financial resources is a
core part of our business model. Our primary objective is to deploy
capital to support disciplined loan book growth in Banking and to
make the most of strategic opportunities. These include strategic
initiatives and small acquisitions in existing or adjacent markets
that fit with our business model.
The Board remains committed to the group's dividend policy,
which aims to provide sustainable dividend growth year-on-year,
while maintaining a prudent level of dividend cover. Further
capital distributions to shareholders will be considered depending
on future opportunities.
We remain committed to optimising further our capital structure,
including the issuance of debt capital market securities if
appropriate, targeting a CET1 capital ratio range of 12% to 13%
over the medium term. This will allow the group to maintain a
buffer to minimum regulatory requirements while also retaining the
flexibility for growth.
GROUP FUNDING(1)
31 January 2023 31 July 2022
GBP million GBP million
--------------------------------------- ---------------- -------------
Customer deposits 7,253.7 6,770.4
Secured funding 1,570.9 1,598.7
Unsecured funding(2) 1,500.1 1,544.3
Equity 1,606.1 1,657.5
--------------------------------------- ---------------- -------------
Total available funding 11,930.8 11,570.9
--------------------------------------- ---------------- -------------
Total funding as % of loan book(3) 132% 127%
Average maturity of funding allocated
to loan book(4) 18 months 21 months
1 Numbers relate to core funding and exclude working capital
facilities at the business level.
2 Unsecured funding excludes GBP31.0 million (31 July 2022:
GBP22.1 million) of non-facility overdrafts included in borrowings
and includes GBP274.7 million (31 July 2022: GBP295.0 million) of
undrawn facilities.
3 Total funding as a % of loan book has been re-presented to
include GBP256.3 million (31 July 2022: GBP240.0 million) of
operating lease assets in the loan book figure. The revised
definition is total funding as a % of loan book including operating
lease assets.
4 Average maturity of total funding excluding equity and funding
held for liquidity purposes.
Our Treasury function is focused on managing funding and
liquidity to support the Banking businesses, as well as interest
rate risk. This incorporates our Savings business, which provides
simple and straightforward savings products to both individuals and
businesses at consistently competitive rates, whilst being
committed to providing the highest level of customer service.
Our diverse funding sources enable us to adapt our position
through the cycle, based on market conditions and demand.
Our conservative approach to funding is based on the principle
of "borrow long, lend short", with a spread of maturities over the
medium and longer term, comfortably ahead of a shorter average loan
book maturity. We do this through drawing on a wide range of
wholesale and deposit markets including several public debt
securities at both group and operating company level, as well as
public and private secured funding programmes and a diverse mix of
customer deposits.
We increased total funding in the first half by 3% to GBP11.9
billion (31 July 2022: GBP11.6 billion) which accounted for 132%
(31 July 2022: 127%) of the loan book at the balance sheet date.
Although the average cost of funding increased to 2.6% (2022: 1.3%)
due to rapidly rising interest rates, we took actions to mitigate
this pressure by optimising the group's liability mix based on
funding needs, customer demand and market pricing. While we are
well positioned to continue benefiting from our diverse funding
base, we expect cost of funds to remain elevated in the next
financial year as a result of higher interest rates and customer
deposit pricing pressure, particularly in notice accounts.
Customer deposits increased 7% to GBP7.3 billion (31 July 2022:
GBP6.8 billion) with non-retail deposits broadly stable at GBP3.7
billion (31 July 2022: GBP3.7 billion) and retail deposits
increasing by 14% to GBP3.5 billion (31 July 2022: GBP3.1 billion),
as we actively sought to grow our retail deposit base and optimise
our funding mix in light of market conditions.
The Savings business continues to benefit from the investment
made in our customer deposit platform, with the scalable platform
and broadened proposition enabling us to adapt our offering and
pricing. The new Notice Account range launched for our retail,
corporate, pension and SME customers has gained good traction, with
balances currently at c.GBP900 million. We are focused on
identifying further opportunities to expand our product range,
which will support us in growing and diversifying our retail
deposit base and further optimise our cost of funding and maturity
profile.
Secured funding remained broadly stable at GBP1.6 billion (31
July 2022: GBP1.6 billion) as we maintained our current drawings
under the Term Funding Scheme for Small and Medium-sized
Enterprises ("TFSME") at GBP600 million (31 July 2022: GBP600
million).
Unsecured funding, which includes senior unsecured and
subordinated bonds and undrawn committed revolving facilities,
remained broadly stable at GBP1.5 billion (31 July 2022: GBP1.5
billion).
We have maintained a prudent maturity profile. The average
maturity of funding allocated to the loan book was 18 months (31
July 2022: 21 months), ahead of the average loan book maturity at
16 months (31 July 2022: 17 months). This is in line with our
"borrow long, lend short" principle, reflecting the timing and mix
of funding raised in the period.
Our credit ratings remain strong, reflecting the group's
profitability, capital position, diversified business model and
consistent risk appetite. Moody's Investors Services ("Moody's")
reaffirmed their rating for Close Brothers Group as "A2/P1" and
Close Brothers Limited as "Aa3/P1", whilst upgrading the outlook
from "negative" to "stable" for both in November 2022. Fitch
Ratings ("Fitch") reaffirmed their rating for both Close Brothers
Group and Close Brothers Limited as "A-/F2", whilst downgrading the
outlook from "stable" to "negative" in March 2023.
GROUP LIQUIDITY
31 January 2023 31 July 2022
GBP million GBP million
------------------------------ ------------------ -------------------
Cash and balances at central
banks 1,876.6 1,254.7
Sovereign and central bank
debt(1) 201.1 415.4
Certificates of deposit 50.6 185.0
------------------------------- ----------------- -------------------
Treasury assets 2,128.3 1,855.1
------------------------------- ----------------- -------------------
1 There was GBPnil million encumbered sovereign and central bank
debt at 31 January 2023 (31 July 2022: GBP216.9 million).
The group continues to adopt a conservative stance on liquidity,
ensuring it is comfortably ahead of both internal risk appetite and
regulatory requirements.
We continued to maintain higher liquidity relative to the
pre-Covid-19 position to provide additional flexibility given the
uncertain UK economic outlook, whilst enabling us to maximise any
opportunities available. In the first half, treasury assets
increased 15% to GBP2.1 billion (31 July 2022: GBP1.9 billion) and
were predominantly held on deposit with the Bank of England.
We regularly assess and stress test the group's liquidity
requirements and continue to meet the liquidity coverage ratio
("LCR") regulatory requirements, with a 12-month average to 31
January 2023 LCR of 1034% (31 July 2022: 924%). In addition to
internal measures, we monitor funding risk based on the CRR rules
for the net stable funding ratio ("NSFR") which became effective on
1 January 2022. The NSFR at 31 January 2023 was 124.4% (31 July
2022: 118.1%).
BUSINESS REVIEW
BANKING
Key Financials(1)
First half First half Change
2023 2022 %
GBP million GBP million
--------------------------------- ---------------- ---------------- -------
Operating income 363.9 345.7 5
Adjusted operating expenses(2) (186.7) (177.2) 5
Impairment losses on loans and
advances (162.2) (48.3) n/a
--------------------------------- ---------------- ---------------- -------
Adjusted operating profit 15.0 120.2 (88)
--------------------------------- ---------------- ---------------- -------
Adjusted operating profit, pre
provisions 177.2 168.5 5
--------------------------------- ---------------- ---------------- -------
Net interest margin 8.0% 7.9%
Expense/income ratio 51% 51%
Bad debt ratio 3.6% 1.1%
Return on net loan book 0.3% 2.7%
Return on opening equity 1.1% 13.6%
--------------------------------- ---------------- ---------------- -------
Closing loan book and operating
lease assets 9,041.0 8,835.8 2
--------------------------------- ---------------- ---------------- -------
Key Financials (Excluding Novitas)(1)
First half First half Change
2023 2022 %
GBP million GBP million
--------------------------------- ---------------- ---------------- -------
Operating income 349.9 327.8 7
Adjusted operating expenses(2) (182.4) (167.8) 9
Impairment losses on loans and
advances (47.6) (9.1) n/a
--------------------------------- ---------------- ---------------- -------
Adjusted operating profit 119.9 150.9 (21)
--------------------------------- ---------------- ---------------- -------
Adjusted operating profit, pre
provisions 167.5 160.0 5
--------------------------------- ---------------- ---------------- -------
Net interest margin 7.8% 7.6%
Bad debt ratio 1.1% 0.2%
Closing loan book and operating
lease assets 8,979.1 8,673.7 4
--------------------------------- ---------------- ---------------- -------
1 Adjusted measures are presented on a basis consistent with
prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the
reconciliation between statutory and adjusted measures can be found
in note 2.
2 Related ongoing costs resulting from investment projects are
recategorised from investment costs to BAU costs after one year.
For comparison purposes, GBP4.1 million has been recategorised from
investment costs to BAU costs in the 2022 financial year to adjust
for investment projects' ongoing costs that commenced prior to the
2023 financial year. Costs related to Novitas were GBP4.3 million
in H1 2023 (H1 2022: GBP9.5 million).
Performance reflected significant increase in impairments
related to Novitas
This period has seen a challenging market backdrop, with rising
inflation and interest rates in particular, creating significant
uncertainty for both our individual and SME customers. The
deterioration in the external environment has also adversely
impacted the economic variables our businesses are sensitive to,
which has been reflected in higher forward-looking impairment
provisions. Nevertheless, we have maintained our through-the-cycle
approach, retaining our pricing discipline whilst continuing to
support our customers.
Banking adjusted operating profit reduced 88% to GBP15.0 million
(H1 2022: GBP120.2 million), primarily reflecting higher impairment
charges, which more than offset income growth. Nevertheless, we
maintained our strong margin and pricing discipline, saw a
resilient underlying credit performance overall and made progress
in delivering our investment programmes. Statutory operating profit
decreased to GBP14.9 million (H1 2022: GBP120.1 million) and return
on opening equity decreased to 1.1% (H1 2022: 13.6%).
On a pre-provision basis, adjusted operating profit increased 5%
to GBP177.2 million (H1 2022: GBP168.5 million), reflecting good
income growth and cost discipline.
Excluding Novitas, Banking adjusted operating profit reduced 21%
to GBP119.9 million (H1 2022: GBP150.9 million), primarily driven
by higher impairment charges, particularly in the Retail business,
and increased costs, which more than offset income growth.
The loan book declined 1% in the six months to 31 January 2023
to GBP9.0 billion (31 July 2022: GBP9.1 billion) and grew 2%
year-on-year to GBP9.0 billion (31 January 2022: GBP8.8 billion),
primarily driven by continued good demand in the Commercial
businesses and growth in the Property Finance book. This was offset
by a seasonal decline in Premium Finance and a reduction in the
Motor Finance loan book as the Republic of Ireland business runs
off, as well as the reduction in the Novitas net loan book.
Excluding Novitas, the loan book increased marginally in the
first half and 4% year-on-year to GBP9.0 billion (31 July 2022:
GBP8.9 billion, 31 January 2022: GBP8.7 billion).
The net interest margin increased on the prior year period to
8.0% (H1 2022: 7.9%). This reflected both pricing discipline on new
lending and actions taken to optimise the group's liability mix and
funding costs in a rising rate environment. In addition, our net
interest margin was supported by 14bps of one-off benefits from
mark-to-market swaps resulting from higher interest rates. While we
are well positioned to maintain a strong net interest margin, we
expect cost of funds to remain elevated in the next financial
year.
Excluding Novitas, the net interest margin increased on the
prior year period to 7.8% (H1 2022: 7.6%)
Operating income increased 5%, to GBP363.9 million (H1 2022:
GBP345.7 million), reflecting the strong net interest margin and
year-on-year loan book growth. Excluding Novitas, operating income
grew 7%.
Adjusted operating expenses grew in line with income, increasing
5% to GBP186.7 million (H1 2022: GBP177.2 million) as we progressed
our key investment programmes and continued to exercise rigorous
control of our costs, notwithstanding the inflationary pressures.
As we kept the growth in our cost base commensurate with income
growth, the expense/income ratio was stable at 51% (H1 2022: 51%).
The compensation ratio was also flat on the prior year period at
29% (H1 2022: 29%).
Business-as-Usual ("BAU") costs increased by 5% to GBP147.6
million (H1 2022: GBP140.1 million), primarily driven by salary
increases in the current inflationary environment and new hires
focused on compliance, regulation, and IT security. Costs related
to Novitas reduced to GBP4.3 million in the first half (H1 2022:
GBP9.5 million) as we continue to wind down the business.
Investment costs rose 26% to GBP34.8 million (H1 2022: GBP27.6
million) and included spend on our multi-year investment projects,
strategic initiatives and operational resilience of GBP16.5 million
(H1 2022: GBP10.8 million) and related depreciation charges of
GBP18.3 million (H1 2022: GBP16.8 million). We expect costs related
to our existing investment programmes to stabilise over the next
financial years, with depreciation charges related to these
programmes continuing to increase.
We continue to see investment through the cycle as vital in
protecting our model, enhancing efficiency and future-proofing our
income generation capabilities. Our investments in cyber and data
centres are part of a programme to enhance continually our business
and operational resilience, and preparations for the upcoming
implementation of the FCA's new Consumer Duty regime continue. We
have recently concluded our Motor Finance transformation programme
and our investment in Asset Finance systems has added new
functionality and improved customer insights. Our previous
investment in our Customer Deposit platform has enabled us to grow
our Savings proposition and achieve good customer satisfaction
scores, whilst also supporting growth in our retail deposits.
We have intensified our focus on cost efficiency, particularly
in light of recent inflationary pressures. We have a number of
strategic cost management initiatives in progress, with more in the
pipeline, which aim to create capacity to accommodate growth,
inflation and investment to support our business. These include a
multi-year technology transformation programme focused on strategic
IT services, and a Retail operations simplification programme that
will create efficiencies whilst delivering customer and control
benefits. We continue to evaluate additional opportunities for
efficiency with a view to achieving positive operating leverage
over the medium term.
Impairment charges increased significantly to GBP162.2 million
(H1 2022: GBP48.3 million), equating to an annualised bad debt
ratio of 3.6% (H1 2022: 1.1%). This includes a charge in relation
to Novitas of GBP114.6 million (H1 2022: GBP39.2 million). As a
result, there was an increase in overall provision coverage to 4.3%
(31 July 2022: 3.1%).
A further GBP47.6 million of impairment charges were recognised
to take into account weaker macroeconomic variables and outlook,
which have impacted the Retail business' provisioning models in
particular, as well as a rise in arrears in the Motor Finance
business as a result of cost of living pressures on customers. They
also reflect an ongoing review of provisions and coverage across
our loan portfolios and model refinements. Excluding Novitas, the
bad debt ratio increased to 1.1% annualised (H1 2022: 0.2%) and the
coverage ratio increased to 2.3% (31 July 2022: 1.9%).
Whilst we have not seen a significant impact on credit
performance, with actual realised losses, excluding Novitas,
equivalent to c.GBP10 million in the period, we continue to monitor
closely the evolving impacts of rising inflation and cost of living
on our customers. We remain confident in the quality of our loan
book, which is predominantly secured, prudently underwritten,
diverse, and supported by the deep expertise of our people.
Accelerating our efforts to resolve issues surrounding
Novitas
As announced at the pre-close trading update in January 2023,
the group has initiated formal legal action against one of the
After the Event ("ATE") insurers regarding the potential
recoverability of funds in relation to failed cases and is
considering its position in respect of other insurers. As a result,
an increased provision to reflect the expectation of a longer time
frame to recovery for related loans was included in the GBP24.8
million of provisions taken in the first five months of the 2023
financial year.
Furthermore, an additional provision of GBP89.8 million has been
recognised following a review of certain cases being funded which
now have limited prospects of successfully progressing through the
courts. This assumes a material increase in the Probability of
Default ("PD") and Loss Given Default ("LGD") assumptions and a
longer time frame to recovery across the majority of the portfolio.
It also assumes reassessed estimates for recoverability of interest
on the relevant loans, in line with accounting requirements.
While we will continue to review provisioning levels in light of
future developments, including the experienced credit performance
of the book and the outcome of the group's initiated legal action,
we believe the anticipated additional provisions adequately reflect
the remaining risk of credit losses for the Novitas loan book
(c.GBP62 million net loan book at 31 January 2023). In addition, in
line with IFRS 9 requirements, a proportion of the expected credit
loss is expected to unwind, over the estimated time to recovery
period, to interest income. The group remains focused on maximising
the recovery of remaining loan balances, either through successful
outcome of cases or recourse to the customers' ATE insurers, whilst
complying with its regulatory obligations and always focusing on
ensuring good customer outcomes.
As outlined previously, we expect net income related to Novitas
to reduce from c.GBP36 million in FY 2022 to c.GBP8 million in FY
2024.
Continued focus on disciplined growth
Loan book growth continues to be an output of our business
model, as we focus on delivering disciplined growth whilst
prioritising our margins and credit quality. We continue to
actively work to identify incremental and new opportunities in both
our existing and adjacent markets and overall, we remain confident
in the growth outlook for the loan book over both the short and
medium term.
As highlighted at our 2022 full year results, we recognise a
significant opportunity in broadening our financing of green and
transition assets, as the UK aligns towards a net zero economy, and
we will continue to build our expertise in green and transition
assets. We remain committed to our ambition of providing funding
for GBP1.0 billion of battery electric vehicles over five years and
have lent over GBP90 million in the first half.
The Asset Finance business remains well positioned to capitalise
on continued demand for finance from SMEs. The recently hired
agricultural equipment and materials handling teams have both built
healthy pipelines and executed a number of deals, as we expand our
coverage into adjacent asset classes and markets.
In Invoice Finance, we expect the growth trajectory to follow
the economic conditions. We remain focused on taking advantage of
opportunities in the asset-based lending ("ABL") space, including
via syndication partnerships and larger loans. We have also hired a
new team providing bespoke term loan structures to SMEs requiring
growth and investment capital, which complements our existing
Invoice Finance and ABL offerings.
The Motor Finance transformation programme, which is now
complete, has created the digital capabilities for us to enhance
our proposition for dealers, partners and customers. Our
partnership with AutoTrader provides dealers with data and insights
to effectively manage their forecourts and we will evolve further
our forecourt offering over the coming months. Our partnership with
iVendi has driven an uplift in proposal volumes as we offer our
finance at various points of the customer journey. In addition, we
have expanded our credit policy to provide broader coverage of
Alternatively Fuelled Vehicles ("AFVs") as they become more
prevalent in the second hand car market.
In Premium Finance, we continue to focus on our digital, data
and insight capabilities to enhance our offering, with our
Foresight model helping to support brokers' decisioning by
providing unique customer behaviour insights. We anticipate demand
for the funding of insurance policies could increase given the
uncertain macroeconomic conditions.
In Property, we have successfully piloted a specialist
buy-to-let extension to our existing bridging finance customers,
and continue to offer this product. We are also looking to expand
further our partnership with Travis Perkins, which enables SME
housebuilders to access discounted building supplies and materials
directly via a credit facility. In addition, we continue to build
out our bridging finance proposition by offering term funding
against rental investment properties to existing high quality
clients. Although the economic uncertainty is expected to continue
to impact activity in the property market, our pipeline of undrawn
commitments remains strong.
Loan Book Analysis
31 January
2023 31 July 2022 Change
GBP million GBP million %
------------------------------------ ------------ -------------- --------
Commercial 4,550.3 4,561.4 -
Commercial - Excluding Novitas 4,488.4 4,402.0 2
------------ -------------- --------
Asset Finance(1) 3,310.0 3,217.4 3
Invoice and Speciality Finance(1) 1,240.3 1,344.0 (8)
Invoice and Speciality Finance
-
Excluding Novitas (1) 1,178.4 1,184.6 (1)
------------ -------------- --------
Retail 2,970.3 3,064.0 (3)
------------ -------------- --------
Motor Finance (2) 1,980.2 2,051.2 (3)
Premium Finance 990.1 1,012.8 (2)
------------ -------------- --------
Property 1,520.4 1,473.5 3
------------------------------------ ------------ -------------- --------
Closing loan book and operating
lease assets(3) 9,041.0 9,098.9 (1)
------------------------------------ ------------ -------------- --------
Closing loan book and operating
lease assets - Excluding Novitas 8,979.1 8,939.5 -
------------------------------------ ------------ -------------- --------
1 The Asset Finance and Invoice and Speciality Finance loan
books have been re-presented for 31 July 2022 to reflect the
recategorisation of Close Brothers Vehicle Hire ("CBVH") from
Invoice and Speciality Finance to Asset Finance.
2 The Motor Finance loan book includes GBP293 million (31 July
2022: GBP367 million) relating to the Republic of Ireland Motor
Finance business, which is in run-off following the cessation of
our previous partnership in the Republic of Ireland from 30 June
2022.
3 Operating lease assets of GBP199.6 million (31 July 2022:
GBP185.4 million) relate to Asset Finance and GBP56.7 million (31
July 2022: GBP54.6 million) to Invoice and Speciality Finance.
Ongoing demand across our Banking businesses with continued loan
book growth
The loan book declined 1% in the six months since 31 July 2022
to GBP9.0 billion (31 July 2022: GBP9.1 billion). This reflected
continued demand in the Commercial businesses and growth in the
Property loan book, offset by the typical seasonal declines seen in
the Premium and Invoice Finance businesses, the reduction in the
Novitas net loan book and the run-off of the Republic of Ireland
Motor Finance loan book.
Excluding Novitas, the loan book increased marginally in the
first half to GBP9.0 billion (31 January 2022: GBP8.7 billion, 31
July 2022: GBP8.9 billion).
The Commercial loan book was broadly stable at GBP4.6 billion
(31 July 2022: GBP4.6 billion), despite the roll-off of government
supported lending under schemes such as the Coronavirus Business
Interruption Loan Scheme ("CBILS"). We saw steady new business
volumes across the businesses, which were offset by seasonality in
Invoice Finance and the reduction in the Novitas net loan book.
Excluding Novitas, the Commercial book increased 2% to GBP4.5
billion (31 July 2022: GBP4.4 billion).
Asset Finance grew 3% as we continued to see good demand from
customers. Invoice and Speciality Finance contracted by 8% as
higher provisions against Novitas led to a reduction in the net
loan book. Excluding Novitas, the Invoice and Speciality Finance
loan book reduced by 1%, with a seasonal decline in the first half
more than offsetting growth in the Irish business.
The Retail loan book contracted 3% to GBP3.0 billion (31 July
2022: GBP3.1 billion), driven in part by a 4% reduction in Motor
Finance, with the decline in the Republic of Ireland loan book
following the cessation of our previous partnership, offsetting a
stable UK book. We also saw a 2% reduction in the Premium Finance
book, in part reflecting first half seasonality. The Republic of
Ireland Motor Finance business accounted for 15% of the Motor
Finance loan book (31 July 2022: 18%) and 7% of the Banking loan
book (31 July 2022: 7%). As previously announced, from 30 June
2022, we ceased writing new business in Motor Finance under our
previous partnership in that country. We remain committed to the
Irish market and are considering our long-term options.
The Property loan book grew 3% as we saw strong drawdowns from
our healthy pipeline and repayment levels began to normalise, as
the buoyant UK property market in the prior year period had
resulted in heightened unit sales by developers and therefore
higher repayments.
Banking: Commercial(1)
First First half Change
half 2022 %
2023 GBP million
GBP million
--------------------------------- ------------- ------------- -------
Operating income 182.3 167.8 9
Adjusted operating expenses (92.9) (89.1) 4
Impairment losses on financial
assets (122.5) (41.0) n/a
--------------------------------- ------------- ------------- -------
Adjusted operating profit (33.1) 37.7 (188)
------------- ------------- -------
Adjusted operating profit, pre
provisions 89.4 78.7 14
------------- ------------- -------
Net interest margin 8.0% 7.9%
Expense/income ratio 51% 53%
Bad debt ratio 5.4% 1.9%
--------------------------------- ------------- ------------- -------
Closing loan book and operating
lease assets (2,3) 4,550.3 4,358.3 4
--------------------------------- ------------- ------------- -------
Commercial key metrics excluding Novitas(1)
First First half Change
half 2022 %
2023 GBP million
GBP million
--------------------------------- ------------- ------------- -------
Operating income 168.3 149.9 12
Adjusted operating expenses (88.6) (79.7) 11
Impairment losses on financial
assets (7.9) (1.8) n/a
--------------------------------- ------------- ------------- -------
Adjusted operating profit 71.8 68.4 5
Adjusted operating profit, pre
provisions 79.7 70.2 14
Net interest margin 7.6% 7.3%
Expense/income ratio 53% 53%
Bad debt ratio 0.4% 0.1%
--------------------------------- ------------- ------------- -------
Closing loan book and operating
lease assets (2,3) 4,488.4 4,196.2 7
--------------------------------- ------------- ------------- -------
1 Adjusted measures are presented on a basis consistent with
prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the
reconciliation between statutory and adjusted measures can be found
in note 2.
2 Commercial, Asset Finance and Invoice and Speciality Finance
loan books have been re-presented for 31 January 2022 to include
GBP229.9 million of operating lease assets (GBP178.4 million in
Asset Finance and GBP51.5 million in Invoice and Speciality
Finance).
3 Operating lease assets of GBP199.6 million (31 January 2022:
GBP178.4 million) relate to Asset Finance and GBP56.7 million (31
January 2022: GBP51.5 million) to Invoice and Speciality
Finance.
Good demand in Commercial, as we continue to support our SME
customers
The Commercial businesses provide specialist, predominantly
secured lending principally to the SME market and include Asset
Finance and Invoice and Speciality Finance. We finance a diverse
range of sectors, with Asset Finance offering commercial asset
financing, hire purchase and leasing solutions across a broad range
of assets including commercial vehicles, machine tools,
contractors' plant, printing equipment, company car fleets, energy
project finance, and aircraft and marine vessels, as well as our
Vehicle Hire business. The Invoice and Speciality Finance business
provides debt factoring, invoice discounting and asset-based
lending, as well as covering our specialist businesses such as
Brewery Rentals and Novitas. As previously announced, Novitas
ceased lending to new customers in July 2021.
Despite the economic uncertainty during the period, we have seen
continued good customer demand, with increased new business volumes
and utilisation levels in Invoice Finance remaining steady at
c.55%. However, supply chain issues continue to impact certain
sectors of the market. We have focused on asset pricing discipline,
actively choosing to pass through higher rates on new lending where
appropriate.
A significant increase in impairment charges related to Novitas
was the main driver for an adjusted operating loss in Commercial of
GBP(33.1) million (H1 2022: profit of GBP37.7 million), despite the
business achieving positive operating leverage. The statutory
operating loss was GBP(33.2) million (H1 2022: profit of GBP37.6
million).
On a pre-provision basis, adjusted operating profit increased
14% to GBP89.4 million (H1 2022: GBP78.7 million), reflecting
continued customer demand and positive operating leverage.
Excluding Novitas, adjusted operating profit increased 5% to
GBP71.8 million (H1 2022: GBP68.4 million) as strong income growth
more than offset higher costs and impairment charges.
Operating income increased 9% to GBP182.3 million (H1 2022:
GBP167.8 million), reflecting good loan book growth and increased
activity-driven income in Asset Finance. The net interest margin
increased to 8.0% (H1 2022: 7.9%) as we continued to focus on asset
pricing discipline, generated higher fees in the Asset Finance
business and benefited from central funding mix actions taken in
light of the rising interest rate environment.
Excluding Novitas, the net interest margin increased to 7.6% (H1
2022: 7.3%).
Adjusted operating expenses grew 4% to GBP92.9 million (H1 2022:
GBP89.1 million), reflecting higher staff costs to reflect the
inflationary environment, as well as investment spend in relation
to the Asset Finance transformation programme. This was partly
offset by lower advisory costs in relation to Novitas. The
expense/income ratio reduced to 51% (H1 2022: 53%) as the strong
income growth more than offset higher costs.
Impairment charges rose significantly to GBP122.5 million (H1
2022: GBP41.0 million), with GBP114.6 million incurred in relation
to Novitas, in line with the update provided in January 2023. As a
result, there was an increase in provision coverage to 5.6% (31
July 2022: 4.0%).
Excluding Novitas, impairment charges rose to GBP7.9 million (H1
2022: GBP1.8 million), corresponding to a bad debt ratio of 0.4%
annualised (H1 2022: 0.1%). This increase primarily reflected
additional provisions to take into account weaker macroeconomic
variables and outlook. The coverage ratio remained broadly stable
at 1.7% (31 July 2022: 1.6%), excluding Novitas.
Banking: Retail
First First half Change
half 2022 %
2023 GBP million
GBP million
---------------------------------- ------------- ------------- -------
Operating income 123.2 119.7 3
Operating expenses (79.1) (71.9) 10
Impairment losses on financial
assets (29.4) (5.3) n/a
---------------------------------- ------------- ------------- -------
Operating profit 14.7 42.5 (65)
Operating profit, pre provisions 44.1 47.8 (8)
Net interest margin 8.2% 8.0%
Expense/income ratio 64% 60%
Bad debt ratio 1.9% 0.4%
---------------------------------- ------------- ------------- -------
Closing loan book(1) 2,970.3 3,026.5 (2)
---------------------------------- ------------- ------------- -------
1 The Motor Finance loan book includes GBP293 million (31 July
2022: GBP367 million) relating to the Republic of Ireland Motor
Finance business, which is in run-off following the cessation of
our previous partnership in the Republic of Ireland from 30 June
2022.
Remain focused on prioritising our margins and underwriting
discipline
The Retail businesses provide intermediated finance, principally
to individuals and small businesses, through motor dealers and
insurance brokers.
Although consumers have faced significant uncertainty in the
period from rising inflation and interest rates, we have continued
to see a solid market backdrop. In Motor Finance, we are adhering
to our model of pricing discipline, passing through higher rates on
new lending. As expected in the current environment and in line
with comparable trends observed across the wider industry, we have
seen an increase in arrears in our Motor Finance loan book
reflecting cost of living pressures on our customers. Nonetheless,
we remain comfortable with the quality of our portfolio,
underpinned by our underwriting discipline and prudent level of
provisions. Volumes and credit performance have remained solid in
Premium Finance in the period, although we anticipate the demand
from customers seeking funding for insurance policies may increase
as the cost of living pressures continue.
Operating profit for Retail reduced to GBP14.7 million (H1 2022:
GBP42.5 million), as income growth was more than offset by higher
costs and increased impairment charges to reflect a deterioration
in the macroeconomic outlook and a rise in arrears. Statutory
operating profit also reduced to GBP14.7 million (H1 2022: GBP42.5
million).
Operating income increased 3% to GBP123.2 million (H1 2022:
GBP119.7 million), reflecting growth in the UK Motor Finance loan
book year-on-year and an increase in the net interest margin to
8.2% (H1 2022: 8.0%) despite higher funding costs, as we continued
to focus on pricing discipline and benefited from central funding
mix actions taken in light of the rising interest rate
environment.
Operating expenses rose 10% to GBP79.1 million (H1 2022: GBP71.9
million), driven mainly by ongoing investment in the Retail
businesses to create efficiencies whilst delivering customer and
control benefits , including depreciation related to our
investments, as well as higher staff costs, particularly in legal
and compliance. In Premium Finance, we have continued to invest in
further enhancing our processes in line with regulatory
requirements. As a result, the expense/income ratio increased to
64% (H1 2022: 60%).
Impairment charges increased to GBP29.4 million (H1 2022: GBP5.3
million), resulting in an annualised bad debt ratio of 1.9% (H1
2022: 0.4%). This was driven by the weakening macroeconomic outlook
and the rise in Motor Finance arrears, as well as an ongoing review
of provisions and coverage and model refinements. As a result, the
provision coverage ratio increased to 3.0% (31 July 2022:
2.2%).
We remain confident in the credit quality of the Retail loan
book. The Motor Finance loan book is predominantly secured on
second hand vehicles which are less exposed to depreciation or
significant declines in value than new cars. Our core Motor Finance
product remains hire-purchase contracts, with less exposure to
residual value risk associated with Personal Contract Plans
("PCP"), which accounted for c.10% of the Motor Finance loan book
at 31 January 2023. The Premium Finance loan book benefits from
various forms of structural protection including premium
refundability and, in most cases, broker recourse for the personal
lines product.
Banking: Property
First half First half Change
2023 2022 %
GBP million GBP million
---------------------------------- ------------- ------------- -------
Operating income 58.4 58.2 -
Operating expenses (14.7) (16.2) (9)
Impairment losses on financial
assets (10.3) (2.0) n/a
---------------------------------- ------------- ------------- -------
Operating profit 33.4 40.0 (17)
Operating profit, pre provisions 43.7 42.0 4
Net interest margin 7.8% 7.9%
Expense/income ratio 25% 28%
Bad debt ratio 1.4% 0.3%
---------------------------------- ------------- ------------- -------
Closing loan book 1,520.4 1,451.0 5
---------------------------------- ------------- ------------- -------
Strong drawdowns from our healthy pipeline driving loan book
growth
Property comprises Property Finance and Commercial Acceptances.
The Property Finance business is focused on specialist residential
development finance to established professional developers in the
UK. Commercial Acceptances provides bridging loans and loans for
refurbishment projects.
This half has seen a slowdown across the UK property market
following a period of heightened activity and strong unit sales.
Housebuilding levels are falling, and house prices are starting to
contract, with home buyers impacted by rising interest rates.
Nevertheless, we have maintained our healthy pipeline at c.GBP1.0
billion and seen strong drawdowns from clients, whilst retaining
our margin and pricing discipline.
Operating profit decreased 17% to GBP33.4 million (H1 2022:
GBP40.0 million), as higher impairment charges more than offset a
reduction in operating expenses. On a pre-provision basis, adjusted
operating profit increased 4% to GBP43.7 million (H1 2022: GBP42.0
million), as we achieved positive operating leverage.
Operating income was stable at GBP58.4 million (H1 2022: GBP58.2
million) as we saw good fee income in the period, although the net
interest margin decreased marginally to 7.8% (H1 2022: 7.9%),
reflecting higher cost of funds and the benefit of interest rate
floors in the prior year period.
Operating expenses reduced 9% to GBP14.7 million (H1 2022:
GBP16.2 million) as we maintained our rigorous focus on cost
discipline. As a result, the expense/income ratio reduced to 25%
(H1 2022: 28%).
Impairment charges increased to GBP10.3 million (H1 2022: GBP2.0
million), resulting in an annualised bad debt ratio of 1.4% (H1
2022: 0.3%), as we recognised additional provisions to reflect
weakening macroeconomic variables and outlook, in particular lower
projected house prices, and an ongoing review of provisions and
coverage. As a result, the provision coverage ratio increased to
3.0% (31 July 2022: 2.4%).
The Property loan book is conservatively underwritten, with
typical LTVs below standard market levels. We work with
experienced, professional developers, with a focus on mid-priced
family housing, and have minimal exposure to the prime central
London market, with our regional loan book making up over 50% of
the Property Finance portfolio. Our long track record, expertise
and quality of service ensure the business remains resilient to
competition and continues to generate high levels of repeat
business.
ASSET MANAGEMENT
Key Financials (1)
First half First half Change
2023 2022 %
GBP million GBP million
------------------------------ ------------- ------------- -------
Investment management 54.2 57.4 (6)
Advice and other services(2) 15.7 19.0 (17)
Other income(3) 1.1 0.2 n/a
------------------------------ ------------- ------------- -------
Operating income 71.0 76.6 (7)
Adjusted operating expenses (62.4) (62.1) -
Adjusted operating profit 8.6 14.5 (41)
------------------------------ ------------- ------------- -------
Revenue margin (bps) 83 89
Operating margin 12% 19%
Return on opening equity 13.1% 38.3%
1 Adjusted measures are presented on a basis consistent with
prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the
reconciliation between statutory and adjusted measures can be found
in note 2.
2 Income from advice and self-directed services, excluding
investment management income.
3 Other income includes net interest income and expense, income
on principal investments and other income.
Well placed to continue our long-term track record of growth
Close Brothers Asset Management provides personal financial
advice and investment management services to private clients in the
UK, including full bespoke management, managed portfolios and
funds, distributed both directly via our advisers and investment
managers, and through third party financial advisers.
Adjusted operating profit in CBAM decreased 41% to GBP8.6
million (H1 2022: GBP14.5 million), as stable costs were more than
offset by the reduction in income. The operating margin reduced to
12% (H1 2022: 19%). Statutory operating profit before tax was
GBP7.8 million (H1 2022: GBP13.7 million).
Total operating income declined by 7% to GBP71.0 million (H1
2022: GBP76.6 million), reflecting a lower average AuM due to
markets and lower client activity. The revenue margin reduced to
83bps (H1 2022: 89bps) primarily due to flows into lower margin
investment management products.
Adjusted operating expenses were broadly flat at GBP62.4 million
(H1 2022: GBP62.1 million), despite the current inflationary
environment, as lower variable compensation offset higher fixed
staff costs, new hires and technology spend. However, the
expense/income ratio grew to 88% (H1 2022: 81%) with the
compensation ratio also increasing to 58% versus the prior year (H1
2022: 56%), reflecting the reduction in income.
Our technology projects continue to focus on increasing
efficiency and operational resilience, improving client experience
by using best-of-breed applications, digital technology and
selective in-house development. We have also recently completed a
major adviser re-platforming project to rationalise legacy systems
and increase efficiency.
Healthy net inflows despite challenging market conditions
Equity markets have experienced a mixed performance during the
first half of the year. Although ongoing uncertainty continued to
impact investor sentiment, we saw net inflows of GBP474 million (H1
2022: GBP634 million) and delivered a net inflow rate of 6% (H1
2022: 8%) with a strong contribution from new hires. During the
first half, we recruited five new client facing colleagues, as we
continue to invest in new hires to support the long-term growth
potential of CBAM.
Total managed assets increased 3% to GBP15.7 billion (31 July
2022: GBP15.3 billion), driven by positive net inflows, slightly
offset by negative market performance. Total client assets, which
includes advised and managed assets, increased by 2% overall to
GBP16.9 billion (31 July 2022: GBP16.6 billion).
Movement in Client Assets
Six months 12 months
to to Six months
31 January 31 July to 31 January
2023 2022 2022
GBP million GBP million GBP million
----------------------------------- -------------- -------------- ---------------
Opening managed assets 15,302 15,588 15,588
Inflows 1,155 2,330 1,201
Outflows (681) (1,486) (567)
----------------------------------- -------------- -------------- ---------------
Net inflows 474 844 634
Market movements (61) (1,130) (412)
Total managed assets 15,715 15,302 15,810
Advised only assets 1,196 1,272 1,403
----------------------------------- -------------- -------------- ---------------
Total client assets(1) 16,911 16,574 17,213
----------------------------------- -------------- -------------- ---------------
Net flows as % of opening managed
assets(2) 6% 5% 8%
----------------------------------- -------------- -------------- ---------------
1 Total client assets include GBP5.8 billion of assets (31 July
2022: GBP5.9 billion) that are both advised and managed.
2 Net flows as % of opening managed assets calculated on an
annualised basis.
Fund performance
Our funds and segregated bespoke portfolios are designed to
provide attractive risk-adjusted returns for our clients,
consistent with their long-term goals and investment objectives.
Fund performance over the six months period has been mixed,
reflecting volatile markets across asset classes which has been the
case throughout the holding period.
Our approach to ESG and sustainability
ESG integration in our investment research and stewardship
remains a key area of focus. Our Sustainable Balanced fund, which
launched in 2020, continues to attract inflows and in March 2023,
we are merging our existing Select Fixed Income fund and
Sustainable Bond fund to create the Sustainable Select Fixed Income
fund.
This new fund utilises an updated Sustainable Investment
methodology, which makes use of CBAM's experience and understanding
of sustainable investment strategies gained over recent years to
target an active reduction in CO(2) emissions. This is made
explicit by a commitment to have the fund portfolio at less than
50% of the CO(2) emissions of its 2019 benchmark by 2030 and always
under the benchmark in the period.
In line with our commitment to actively contribute towards the
UK government's net zero climate goals, CBAM is now a signatory of
the Net Zero Asset Managers initiative.
Well positioned for future growth
We remain confident that our vertically integrated,
multi-channel business model positions us well for ongoing demand
for our services and the structural growth opportunity presented by
the wealth management industry.
Our focus remains on providing excellent service to our clients
whilst investing in new hires to support the long-term growth
potential of our business. While CBAM is sensitive to financial
market conditions, we remain committed to driving growth both
organically and through in-fill acquisitions.
WINTERFLOOD
Key Financials
First half First half
2023 2022 %
GBP million GBP million Change
--------------------------------- ------------- ------------- ---------
Operating income 39.0 49.5 (21)
Operating expenses (36.6) (40.7) (10)
Impairment losses on financial - - -
assets
Operating profit 2.4 8.8 (73)
Average bargains per day ('000) 61 83
Operating margin 6% 18%
Return on opening equity 3.9% 14.0%
Loss days 1 1
Performance impacted by continued slowdown in trading
activity
Winterflood is a leading UK market maker, delivering high
quality execution services to platforms, stockbrokers, wealth
managers and institutional investors, as well as providing
corporate advisory services to investment trusts and outsourced
dealing and custody services via Winterflood Business Services
("WBS").
We experienced difficult market conditions as recession
concerns, inflationary pressures, an elevated UK interest rate
environment, economic policy instability and global geopolitical
issues all had an adverse impact on market sentiment and investor
appetite.
Operating income decreased to GBP39.0 million (H1 2022: GBP49.5
million), primarily driven by lower trading revenues, with all
sectors reporting a decline against the prior year, with the
exception of Fixed Income which benefitted from volatility in bond
markets.
Low investor confidence, compounded by macroeconomic
uncertainty, interest rates at a 14 year high and inflationary
pressures, led to reduced retail trading volumes, with average
daily bargains at 61k in the period, a decline from H1 2022 levels
(83k) and marginally above pre-pandemic levels (2019: 56k). In
particular, we saw a significant reduction in total bargains in our
higher margin sectors, AIM and Small Cap. As a result, trading
income declined to GBP31.7 million for the period (H1 2022: GBP42.7
million).
Nevertheless, we benefited from the expertise of our traders and
our strong focus on risk management, which resulted in only one
loss day in the period (H1 2022: one loss day). The diversification
of our trading desk enabled us to take advantage of the increased
retail investor interest in Fixed Income markets.
Our Investment Trusts Corporate team, who are corporate broker
to over 50 Investment Trusts and generate additional fees through
corporate finance activity, delivered revenue of GBP1.3 million (H1
2022: GBP1.2 million). This was largely driven by retainer fee
income, as the risk-off market sentiment impacted capital markets
activity, with no Investment Trust IPOs launched across the market
in 2022. Nonetheless, we are well placed for when market activity
returns.
WBS has had a positive start to the year, growing AuA to GBP12.4
billion (H1 2022: GBP6.8 billion) despite declining equity markets.
Net inflows were GBP4.8 billion (H1 2022: GBP0.7 billion) including
the successful planned migration of custody assets for Fidelity
International in Q1. Against this backdrop WBS generated income of
GBP6.3 million which represents an increase of 24% (H1 2022: GBP5.1
million). We see significant further growth potential with WBS
supported by a solid pipeline of clients.
Operating expenses fell by 10% to GBP36.6 million (H1 2022:
GBP40.7 million) primarily driven by lower variable staff costs
accrued in the period to reflect the reduction in income.
Operating profit decreased by 73% to GBP2.4 million (H1 2022:
GBP8.8 million). Against a backdrop of sustained market declines in
the period, this represents a resilient performance in difficult
market conditions.
Winterflood has a long track record of trading profitably in a
range of conditions and remains well positioned to retain our
market position, taking advantage when investor confidence recovers
from the low levels seen in the past 12 months. We continue to
diversify our revenue streams and explore growth opportunities,
such as through WBS, balancing the cyclicality seen in the trading
business.
DEFINITIONS
Adjusted : Adjusted measures are presented on a basis consistent
with prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reflect
underlying trading performance
Assets under administration : Total assets for which Winterflood
Business Services provide custody and administrative services
Bad debt ratio : Impairment losses in the year as a percentage
of average net loans and advances to customers and operating lease
assets
Bargains per day : Average daily number of Winterflood's trades
with third parties
Business as usual ("BAU") costs: Operating expenses excluding
depreciation and costs related to strategic initiatives or
investment programmes
Capital Requirements Regulation ("CRR"): Capital Requirements
Regulation as implemented in the PRA Rulebook CRR Instrument and
the PRA Rulebook CRR Firms: Leverage Instrument (collectively known
as "CRR")
CET1 capital ratio : Measure of the group's CET1 capital as a
percentage of risk weighted assets, as required by CRR
Common equity tier 1 ("CET1") capital : Measure of capital as
defined by the CRR. CET1 capital consists of the highest quality
capital including ordinary shares, share premium account, retained
earnings and other reserves, less goodwill and certain intangible
assets and other regulatory adjustments
Compensation ratio : Total staff costs as a percentage of
adjusted operating income
Cost of funds: Interest expense incurred to support the lending
activities divided by the average net loans and advances to
customers and operating lease assets
Credit impaired : Where one or more events that have a
detrimental impact on the estimated future cash flows of a loan
have occurred. Credit impaired events are more severe than SICR
triggers. Accounts which are credit impaired will be allocated to
Stage 3
Discounting : The process of determining the present value of
future payments
Dividend per share ("DPS") : Comprises the final dividend
proposed for the respective year, together with the interim
dividend declared and paid in the year
Earnings per share ("EPS") : Profit attributable to shareholders
divided by number of basic shares
Effective tax rate ("ETR") : Tax on operating profit/(loss) as a
percentage of operating profit/(loss) on ordinary activities before
tax
Expected credit loss ("ECL") : The unbiased probability-weighted
average credit loss determined by evaluating a range of possible
outcomes and future economic conditions
Expense/income ratio : Total adjusted operating expenses divided
by operating income
Funding allocated to loan book : Total funding excluding equity
and funding held for liquidity purposes
Funding as % loan book : Total funding divided by net loans and
advances to customers and operating lease assets
Gross carrying amount : Loan book before expected credit loss
provision
Independent financial adviser ("IFA") : Professional offering
independent, whole of market advice to clients including
investments, pensions, protection and mortgages
Internal ratings based ("IRB") approach : A supervisor-approved
method using internal models, rather than standardised risk
weightings, to calculate regulatory capital requirements for credit
risk
International Financial Reporting Standards ("IFRS"): Globally
accepted accounting standards issued by the IFRS Foundation and the
International Accounting Standards Board
Investment costs : Includes all depreciation and other costs
related to investments (including multi-year projects), strategic
initiatives, pilots and cyber resilience. Excludes IFRS 16
depreciation and long term BAU license depreciation
Leverage ratio : Tier 1 capital as a percentage of total balance
sheet assets, adjusted for certain capital deductions, including
intangible assets, and off-balance sheet exposures
Liquidity coverage ratio ("LCR") : Measure of the group's HQLAs
as a percentage of expected net cash outflows over the next 30 days
in a stressed scenario
Loan to value ("LTV") ratio : For a secured or structurally
protected loan, the loan balance as a percentage of the total value
of the asset
Loss day: Where aggregate gross trading book revenues are
negative at the end of a trading day
Managed assets or assets under management ("AUM") : Total market
value of assets which are managed by Close Brothers Asset
Management in one of our investment solutions
Net carrying amount : Loan book value after expected credit loss
provision
Net flows : Net flows as a percentage of opening managed assets
calculated on an annualised basis
Net interest margin ("NIM") : Operating income generated by
lending activities, including interest income net of interest
expense, fees and commissions income net of fees and commissions
expense, and operating lease income net of operating lease expense,
less depreciation on operating lease assets, divided by average net
loans and advances to customers and operating lease assets
Net stable funding ratio ("NSFR") : Regulatory measure of the
group's weighted funding as a percentage of weighted assets
Net zero : Target of completely negating the amount of
greenhouse gases produced by reducing emissions or implementing
methods for their removal
Operating leverage : Operating income percentage growth less
adjusted operating expenses percentage growth
Operating margin : Adjusted operating profit divided by
operating income
Personal Contract Plan ("PCP") : PCP is a form of vehicle
finance where the customer defers a significant portion of credit
to the final repayment at the end of the agreement, thereby
lowering the monthly repayments compared to a standard
hire-purchase arrangement. At the final repayment date, the
customer has the option to: (a) pay the final payment and take the
ownership of the vehicle; (b) return the vehicle and not pay the
final repayment; or (c) part-exchange the vehicle with any equity
being put towards the cost of a new vehicle
Prudential Regulation Authority ("PRA") : A financial regulatory
body, responsible for regulating and supervising banks and other
financial institutions in the UK
Recovery Loan Scheme : Launched in April 2021 as a replacement
to CBILS. Under the terms of the scheme, businesses of any size
that have been adversely impacted by the Covid-19 pandemic can
apply to borrow up to 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
Strategic initiatives : Acquisitions or ventures into
existing/adjacent markets that are anticipated to support business
growth, or initiatives where a strategic decision has been made to
exit the business or market
Subordinated debt : Represents debt that ranks below, and is
repaid after claims of, other secured or senior debt owed by the
issuer
Term funding : Funding with a remaining maturity greater than 12
months
Term Funding Scheme ("TFS") : The Bank of England's Term Funding
Scheme
Term Funding Scheme for Small and Medium-sized Enterprises
("TFSME") : The Bank of England's Term Funding Scheme with
additional incentives for SMEs
Total client assets ("TCA") : Total market value of all client
assets including both managed assets and assets under advice and/or
administration in the Asset Management division
Principal Risks and Uncertainties
The group faces a number of risks in the normal course of
business. To manage these effectively, a consistent approach is
adopted based on a set of overarching principles, namely:
-- adhering to our established and proven business model;
-- implementing an integrated risk management approach based on
the concept of "three lines of defence"; and
-- setting and operating within clearly defined risk appetites,
monitored with defined metrics, and set limits.
Whilst we have not seen a marked deterioration in credit
performance, we continue to monitor closely the evolving impacts of
rising inflation and cost of living on our customers. We remain
confident in the quality of our loan book, which is predominantly
secured, prudently underwritten, diverse, and supported by the deep
expertise of our people.
The group's principal risks remain unchanged since the last
reporting period. A detailed description of each, including an
overview of our risk management and mitigation approach, is
disclosed on pages 74 to 92 of the 2022 Annual Report. The Annual
Report can be accessed via the Investor Relations home page on the
group's website at www.closebrothers.com .
A summary of the group's principal risks is detailed below:
Business risk - The group operates in an environment where it is
exposed to an array of independent factors. Its profitability is
impacted by the broader UK economic climate, changes in technology,
regulation and customer behaviour, cost movements and competition
from traditional and new participants, varying in both nature and
extent across its divisions. Changes in these factors may affect
the bank's ability to write loans within desired risk and return
criteria, result in lower new business volumes in Asset Management,
impact levels of trading activity at Winterflood or result in
additional investment requirements/higher costs of operation.
Capital risk - The group is required to hold sufficient
regulatory capital (including equity and other loss-absorbing debt
instruments) to enable it to operate effectively. This includes
meeting minimum regulatory requirements, operating within risk
appetites set by the board and supporting its strategic goals.
Conduct risk - The group's behaviours, or those of its
colleagues, whether intentional or unintentional, could result in
poor outcomes for our customers or the markets in which we operate.
Our relationship-focused model enables the group to put customers
at the heart of our business to minimise this risk. This is
achieved by acting in good faith towards customers, taking steps to
proactively avoid causing foreseeable harm and supporting customers
to pursue their financial objectives. This approach is founded in
customers being central to our purpose and this ethos is embedded
within our culture. Reporting on, and monitoring of, conduct risk
continues to further evolve with the introduction of new regulatory
requirements for the Financial Conduct Authority's ("FCA") Consumer
Duty. Implementation activities for Consumer Duty are underway and
will be incorporated into the Conduct Risk Framework.
Credit risk - As a lender to businesses and individuals, the
bank is primarily exposed to credit losses if customers are unable
to repay loans and outstanding interest and fees. The group also
has exposure to counterparties including those with which it places
deposits or trades, and a small number of derivative contracts to
hedge interest rate and foreign exchange exposures.
Funding and liquidity - The Banking division's access to funding
remains key to support our lending activities and the liquidity
requirements of the group.
Market risk - Market volatility impacting equity and fixed
income exposures, and / or changes in interest and exchange rates
has the potential to impact the group's performance.
Operational risk - The group is exposed to various operational
risks through its day-to-day operations, all of which have the
potential to result in financial loss or adverse impact. Losses
typically crystallise as a result of inadequate or failed internal
processes, people, technology, data, models and systems, or as a
result of external factors, including but not limited to Cyber and
Information Security. Impacts to the business, customers, third
parties and the markets in which we operate are considered within a
maturing framework for resilient delivery of important business
services.
Legal and regulatory risks are also considered as part of
operational risk. Failure to comply with existing legal or
regulatory requirements, or to adapt to changes in these
requirements in a timely fashion, may have negative consequences
for the group. Similarly, changes to regulation can impact our
financial performance, capital, liquidity, and the markets in which
we operate.
Reputational risk - Protection and effective stewardship of the
group's reputation are fundamental to its long-term success.
Detrimental stakeholder perception could lead to impairment of the
group's current business and future goals. This could arise in the
course of the groups usual activities, such as through employee,
supplier or intermediary conduct, the provision of products and
services, crystallisation of another risk type, or as a result of
changes outside of its influence.
In addition to day-to-day management of its principal risks, the
group utilises an established framework to monitor its portfolio
for emerging risks, consider broader market uncertainties, and
support its organisational readiness to respond.
Current group level emerging risks include economic and
geopolitical uncertainty, the risk of financial loss or disruption
resulting from the impacts of climate change, legal and regulatory
change, the risk of technological change and new business models,
evolving working practices, supply chain risks and the ability to
respond to future pandemics.
The group continues to mature the embedding of its climate risk
management framework to ensure continued alignment with regulation
and market expectations and its net zero commitments. Initial
climate disclosures are disclosed on pages 42 to 57 of the 2022
Annual Report, in line with the recommendations of the Taskforce
for Climate-related Financial Disclosures ("TCFD").
DIRECTORS' RESPONSIBILITY STATEMENT
Each of the Directors confirms that, to the best of their
knowledge:
* the condensed consolidated interim financial
statements ("interim financial statements") have been
prepared in accordance with International Accounting
Standard 34 "Interim Financial Reporting" as
contained in UK-adopted IFRS;
* the half year results include a fair review of the
information required by Disclosure and Transparency
Rule 4.2.7R (indication of important events during
the first six months of the financial year and their
impact on the interim financial statements, and a
description of principal risks and uncertainties for
the remaining six months of the financial year); and
* the half year results include a fair review of the
information required by Disclosure and Transparency
Rule 4.2.8R (disclosure of related parties
transactions that have taken place during the first
six months of the current financial year and that
have materially affected the financial position or
performance of the company, and any changes in the
related parties transactions described in the last
Annual Report that could do so).
The Directors of Close Brothers Group plc as at the date of this
report are as listed on pages 95 to 97 of the company's Annual
Report 2022, subject to the following changes: both Lesley Jones
and Bridget Macaskill ceased to be a director on 17 November 2022.
A list of current Directors is maintained on the company's website
www.closebrothers.com .
On behalf of the board
Michael N. Biggs Adrian J. Sainsbury
Chairman Chief Executive
14 March 2023
Independent Review Report to close brothers group plc
Report on the condensed consolidated interim financial
statements
Our conclusion
We have reviewed Close Brothers Group plc's condensed
consolidated interim financial statements (the "interim financial
statements") in the Half Year Results of Close Brothers Group plc
for the 6 month period ended 31 January 2023 (the "period").
Based on our review, nothing has come to our attention that
causes us to believe that the interim financial statements are not
prepared, in all material respects, in accordance with UK adopted
International Accounting Standard 34, 'Interim Financial Reporting'
and the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority.
The interim financial statements comprise:
-- the consolidated balance sheet as at 31 January 2023;
-- the consolidated income statement and consolidated statement
of comprehensive income for the period then ended;
-- the consolidated cash flow statement for the period then ended;
-- the consolidated statement of changes in equity for the period then ended; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the Half Year
Results of Close Brothers Group plc have been prepared in
accordance with UK adopted International Accounting Standard 34,
'Interim Financial Reporting' and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
Basis for conclusion
We conducted our review in accordance with International
Standard on Review Engagements (UK) 2410, 'Review of Interim
Financial Information Performed by the Independent Auditor of the
Entity' issued by the Financial Reporting Council for use in the
United Kingdom ("ISRE (UK) 2410"). A review of interim financial
information consists of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying
analytical and other review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the Half Year
Results and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than
those performed in an audit as described in the Basis for
conclusion section of this report, nothing has come to our
attention to suggest that the directors have inappropriately
adopted the going concern basis of accounting or that the directors
have identified material uncertainties relating to going concern
that are not appropriately disclosed. This conclusion is based on
the review procedures performed in accordance with ISRE (UK) 2410.
However, future events or conditions may cause the group to cease
to continue as a going concern.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The Half Year Results, including the interim financial
statements, is the responsibility of, and has been approved by the
directors. The directors are responsible for preparing the Half
Year Results in accordance with the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority. In preparing the Half Year Results, including
the interim financial statements, the directors are responsible for
assessing the group's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern and
using the going concern basis of accounting unless the directors
either intend to liquidate the group or to cease operations, or
have no realistic alternative but to do so.
Our responsibility is to express a conclusion on the interim
financial statements in the Half Year Results based on our review.
Our conclusion, including our Conclusions relating to going
concern, is based on procedures that are less extensive than audit
procedures, as described in the Basis for conclusion paragraph of
this report. This report, including the conclusion, has been
prepared for and only for the company for the purpose of complying
with the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority and for no other
purpose. We do not, in giving this conclusion, accept or assume
responsibility for any other purpose or to any other person to whom
this report is shown or into whose hands it may come save where
expressly agreed by our prior consent in writing.
PricewaterhouseCoopers LLP
Chartered Accountants
London
14 March 2023
Consolidated income statement
for the six months ended 31 January 2023
Six months ended Year ended
31 January 31 July
------------------------
2023 2022 2022
Unaudited Unaudited Audited
Note GBP million GBP million GBP million
------------------------------------------------------ ----------- ----------- -----------
Interest income 414.4 341.1 690.0
Interest expense (117.0) (49.3) (112.0)
----------------------------------------------------- ----------- ----------- -----------
Net interest income 297.4 291.8 578.0
----------------------------------------------------- ----------- ----------- -----------
Fee and commission income 130.1 128.6 259.5
Fee and commission expense (8.7) (8.0) (17.2)
Gains less losses arising from dealing in securities 31.9 43.3 81.6
Operating lease assets rental and other income 61.8 51.6 106.1
Depreciation of operating lease assets and other
direct costs (38.2) (35.7) (71.9)
Non-interest income 176.9 179.8 358.1
----------------------------------------------------- ----------- ----------- -----------
Operating income 2 474.3 471.6 936.1
----------------------------------------------------- ----------- ----------- -----------
Administrative expenses (299.5) (293.5) (598.0)
Impairment losses on financial assets 6 (162.2) (48.3) (103.3)
----------------------------------------------------- ----------- ----------- -----------
Total operating expenses before amortisation
of
intangible assets on acquisition (461.7) (341.8) (701.3)
----------------------------------------------------- ----------- ----------- -----------
Operating profit before amortisation of intangible
assets
on acquisition 12.6 129.8 234.8
Amortisation of intangible assets on acquisition (0.9) (0.9) (2.0)
----------------------------------------------------- ----------- ----------- -----------
Operating profit before tax 11.7 128.9 232.8
Tax 3 (3.3) (33.8) (67.6)
----------------------------------------------------- ----------- ----------- -----------
Profit after tax 8.4 95.1 165.2
Profit attributable to shareholders 8.4 95.1 165.2
Basic earnings per share 4 5.6p 63.5p 110.4p
Diluted earnings per share 4 5.6p 63.0p 109.9p
----------------------------------------------------- ----------- ----------- -----------
Ordinary dividend per share 5 22.5p 22.0p 66.0p
----------------------------------------------------- ----------- ----------- -----------
Consolidated Statement of COMPREHENSIVE INCOME
for the six months ended 31 January 20 23
Six months ended Year ended
31 January 31 July
------------------------
20 23 2022 2022
Unaudited Unaudited Audited
GBP million GBP million GBP million
---------------------------------------------------- ----------- ----------- -----------
Profit after tax 8.4 95.1 165.2
---------------------------------------------------- ----------- ----------- -----------
Items that may be reclassified to income statement
Currency translation gains/(losses) 1.0 (0.6) (0.5)
Gains on cash flow hedging 18.7 16.4 30.6
Losses on financial instruments classified at
fair value through other comprehensive income:
Sovereign and central bank debt (4.7) (1.0) (1.1)
Tax relating to items that may be reclassified (3.9) (5.1) (7.9)
---------------------------------------------------- ----------- ----------- -----------
11.1 9.7 21.1
---------------------------------------------------- ----------- ----------- -----------
Items that will not be reclassified to income
statement
Defined benefit pension scheme (losses)/gains
(Note 14) (5.5) 1.9 (0.1)
Tax relating to items that will not be reclassified 1.5 (0.5) 0.3
---------------------------------------------------- ----------- ----------- -----------
(4.0) 1.4 0.2
---------------------------------------------------- ----------- ----------- -----------
Other comprehensive income for the period, net
of tax 7.1 11.1 21.3
Total comprehensive income 15.5 106.2 186.5
---------------------------------------------------- ----------- ----------- -----------
Attributable to:
Shareholders 15.5 106.2 186.5
---------------------------------------------------- ----------- ----------- -----------
Consolidated Balance Sheet
at 31 January 2023
31 January 31 July
2023 2022
Unaudited Audited
Note GBP million GBP million
----------------------------------------------------- ------- ----------- -----------
Assets
Cash and balances at central banks 1,876.6 1,254.7
Settlement balances 655.8 799.3
Loans and advances to banks 271.5 165.4
Loans and advances to customers 6 8,784.7 8,858.9
Debt securities 7 262.7 612.8
Equity shares 8 27.3 28.4
Loans to money brokers against stock advanced 37.2 48.4
Derivative financial instruments 116.7 71.2
Goodwill and other intangible assets 9 260.2 252.0
Property, plant and equipment 10 336.0 322.5
Current tax assets 46.2 47.0
Deferred tax assets 25.2 32.5
Prepayments, accrued income and other assets 192.9 185.2
Total assets 12,893.0 12,678.3
Liabilities
Settlement balances and short positions 11 619.0 796.1
Deposits by banks 12 159.6 160.5
Deposits by customers 12 7,253.7 6,770.4
Loans and overdrafts from banks 12 653.2 622.7
Debt securities in issue 12 1,994.9 2,060.9
Loans from money brokers against stock advanced 10.8 -
Derivative financial instruments 161.9 89.2
Accruals, deferred income and other liabilities 254.4 334.5
Subordinated loan capital 12 179.4 186.5
Total liabilities 11,286.9 11,020.8
----------------------------------------------------- ------- ----------- -----------
Equity
Called up share capital 38.0 38.0
Retained earnings 1,568.1 1,628.4
Other reserves - (8.9)
Total shareholders' equity 1,606.1 1,657.5
----------------------------------------------------- ------- ----------- -----------
Total equity 1,606.1 1,657.5
----------------------------------------------------- ------- ----------- -----------
Total liabilities and equity 12,893.0 12,678.3
----------------------------------------------------- ------- ----------- -----------
Consolidated Statement of CHANGES IN EQUITY
for the six months ended 31 January 2023
Other reserves
Share- Cash Total
Called up based Exchange flow attributable
share Retained FVOCI payments movements hedging to equity Non-controlling Total
capital earnings reserve reserve reserve reserve holders interests equity
GBP GBP GBP GBP GBP GBP
GBP million million million million million million GBP million GBP million million
----------------------------- --------- -------- -------- ---------- ------- ------------ ---------------- --------
At 1 August 2021
(audited) 38.0 1,555.5 0.8 (22.4) (1.3) (0.3) 1,570.3 (1.0) 1,569.3
---------------------- ----- --------- -------- -------- ---------- ------- ------------ ---------------- --------
Profit for the period - 95.1 - - - - 95.1 - 95.1
Other comprehensive
income/(expense)
for the period - 1.4 (0.7) - (0.6) 11.0 11.1 - 11.1
---------------------- ----- --------- -------- -------- ---------- ------- ------------ ---------------- --------
Total comprehensive
income/(expense)
for the period - 96.5 (0.7) - (0.6) 11.0 106.2 - 106.2
Dividends paid - (62.7) - - - - (62.7) - (62.7)
Shares purchased - - - (9.6) - - (9.6) - (9.6)
Shares released - - - 4.0 - - 4.0 - 4.0
Other movements - (0.9) - 1.4 - - 0.5 1.0 1.5
Income tax - (0.5) - - - - (0.5) - (0.5)
---------------------- ----- --------- -------- -------- ---------- ------- ------------ ---------------- --------
At 31 January 2022
(unaudited) 38.0 1,587.9 0.1 (26.6) (1.9) 10.7 1,608.2 - 1,608.2
---------------------- ----- --------- -------- -------- ---------- ------- ------------ ---------------- --------
Profit for the
period - 70.1 - - - - 70.1 - 70.1
Other comprehensive
(expense)/income
for the period - (1.2) - - 0.4 11.0 10.2 - 10.2
---------------------- ----- --------- -------- -------- ---------- ------- ------------ ---------------- --------
Total comprehensive
income for
the period - 68.9 - - 0.4 11.0 80.3 - 80.3
Dividends paid - (32.8) - - - - (32.8) - (32.8)
Shares purchased - - - 0.1 - - 0.1 - 0.1
Shares released - - - 0.9 - - 0.9 - 0.9
Other movements - 5.0 - (3.6) - - 1.4 - 1.4
Income tax - (0.6) - - - - (0.6) - (0.6)
---------------------- ----- --------- -------- -------- ---------- ------- ------------ ---------------- --------
At 31 July 2022
(audited) 38.0 1,628.4 0.1 (29.2) (1.5) 21.7 1,657.5 - 1,657.5
---------------------- ----- --------- -------- -------- ---------- ------- ------------ ---------------- --------
Profit for the period - 8.4 - - - - 8.4 - 8.4
Other comprehensive
(expense)/income
for the period - (4.0) (3.4) - 1.0 13.5 7.1 - 7.1
---------------------- ------ -------- ------ ------- ------- ----- -------- ------- --------
Total comprehensive
income/(expense)
for the period - 4.4 (3.4) - 1.0 13.5 15.5 - 15.5
Dividends paid - (65.6) - - - - (65.6) - (65.6)
Shares purchased - - - (5.1) - - (5.1) - (5.1)
Shares released - - - 3.8 - - 3.8 - 3.8
Other movements - 1.2 - (0.9) - - 0.3 - 0.3
Income tax - (0.3) - - - - (0.3) - (0.3)
---------------------- ------ -------- ------ ------- ------- ----- -------- ------- --------
At 31 January 2023
(unaudited) 38.0 1,568.1 (3.3) (31.4) (0.5) 35.2 1,606.1 - 1,606.1
---------------------- ------ -------- ------ ------- ------- ----- -------- ------- --------
Consolidated Cash Flow Statement
for the six months ended 31 January 2023
Six months ended Year ended
31 January 31 July
------------------------
2023 2022 2022
Unaudited Unaudited Audited
Note GBP million GBP million GBP million
----------------------------------------------------- ----------- ----------- ------------
Net cash inflow from operating activities 17(a) 833.1 170.8 158.7
-------------------------------------------- ------- ----------- ----------- ------------
Net cash (outflow)/inflow from investing
activities
Purchase of:
Property, plant and equipment (5.1) (3.4) (7.1)
Intangible assets - software (27.0) (20.6) (51.3)
Subsidiaries 17(b) (0.5) - (0.1)
Sale of:
Subsidiaries 17(c) 0.5 0.1 0.1
(32.1) (23.9) (58.4)
-------------------------------------------- ------- ----------- ----------- ------------
Net cash inflow before financing activities 801.0 146.9 100.3
-------------------------------------------- ------- ----------- ----------- ------------
Financing activities
Purchase of own shares for employee share
award schemes (5.1) (9.6) (9.5)
Equity dividends paid (65.6) (62.7) (95.5)
Interest paid on subordinated loan capital
and debt financing (5.4) (4.9) (10.4)
Repayment of subordinated loan capital - (23.4) (23.4)
Payment of lease liabilities (7.6) (6.9) (15.1)
Net increase/(decrease) in cash 717.3 39.4 (53.6)
Cash and cash equivalents at beginning of
period 1,383.0 1,436.6 1,436.6
-------------------------------------------- ------- ----------- ----------- ------------
Cash and cash equivalents at end of period 17(d) 2,100.3 1,476.0 1,383.0
-------------------------------------------- ------- ----------- ----------- ------------
THE NOTES
1. Basis of preparation and accounting policies
The half year results have been prepared in accordance with the
Disclosure Guidance and Transparency Rules of the Financial Conduct
Authority and the condensed consolidated interim financial
statements ("interim financial statements") have been prepared in
accordance with the International Financial Reporting Standards
("IFRS") in conformity with the requirements of the Companies Act
2006. These include International Accounting Standard ("IAS") 34,
Interim Financial Reporting, which specifically addresses the
contents of interim financial statements. The interim financial
statements incorporate the individual financial statements of Close
Brothers Group plc and the entities it controls, using the
acquisition method of accounting.
The half year results are unaudited and do not constitute
statutory accounts within the meaning of Section 434 of the
Companies Act 2006. However, the information has been reviewed by
the group's auditor, PricewaterhouseCoopers LLP, and their report
appears above.
The financial information for the year ended 31 July 2022
contained within this half year report does not constitute
statutory accounts as defined in Section 434 of the Companies Act
2006. A copy of those statutory accounts, which have been prepared
in accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006, has been delivered
to the Registrar of Companies. PricewaterhouseCoopers LLP has
reported on those accounts. The report of the auditor on those
statutory accounts was unqualified, did not contain an emphasis of
matter paragraph and did not contain a statement under Section
498(2) or (3) of the Companies Act 2006.
The directors have a reasonable expectation that the company and
the group as a whole have adequate resources to continue in
operational existence for the foreseeable future, a period of not
less than 12 months from the date of this report. For this reason,
they continue to adopt the going concern basis in preparing the
condensed consolidated half year financial statements.
The accounting policies applied are consistent with those set
out on pages 158 to 162 of the Annual Report 2022.
Critical accounting judgements and estimates
The reported results of the group are sensitive to the
accounting policies, assumptions and estimates that underlie the
preparation of its financial statements. The group's estimates and
assumptions are based on historical experience and expectations of
future events and are reviewed on an ongoing basis. The group's
critical accounting judgements and estimates, set out below, are
unchanged from those identified in the Annual Report 2022, with the
exception of the changes in critical estimates relating to Novitas
as set out under the 'Model estimates' section below.
Critical accounting judgements
Expected credit losses
At 31 January 2023, the group's expected credit loss provision
was GBP392.2 million (31 July 2022: GBP285.6 million). The
calculation of the group's expected credit loss provision under
IFRS 9 requires the group to make a number of judgements,
assumptions and estimates, which have a material impact on the
accounts . The assessment, which requires judgement, is unbiased,
probability weighted and uses historical, current and
forward-looking information. The most significant are set out
below.
Significant increase in credit risk
Assets are transferred from Stage 1 to Stage 2 when there has
been a significant increase in credit risk since initial
recognition.
Typically, the group assesses whether a significant increase in
credit risk has occurred based on a quantitative and qualitative
assessment, with a 30 day past due backstop. Due to the diverse
nature of the group's lending businesses, the specific indicators
of a significant increase in credit risk vary by business, and may
include some or all of the following factors:
-- Quantitative assessment: the lifetime PD has increased by
more than an agreed threshold relative to the equivalent at
origination. Thresholds are based on a fixed number of risk grade
movements which are bespoke to the business to ensure that
increased risk since origination is appropriately captured;
-- Qualitative assessment: events or observed behaviour indicate
credit deterioration. This includes a wide range of information
that is reasonably available including individual credit
assessments of the financial performance of borrowers as
appropriate during routine reviews, plus forbearance and watch list
information; or
-- Backstop criteria: the 30 days past due backstop is met.
Definition of default
The definition of default is an important building block for
expected credit loss models and is considered a key judgement. A
default is considered to have occurred if any unlikeliness to pay
criteria are met or when a financial asset meets the 90 days past
due backstop. While some criteria are factual (e.g. administration,
insolvency, or bankruptcy), others require a judgmental assessment
of whether the borrower has financial difficulties which are
expected to have a detrimental impact on their ability to meet
contractual obligations. A change in the definition of default may
have a material impact on the expected credit loss provision.
Key sources of estimation uncertainty
At the balance sheet date, the directors consider that expected
credit loss provisions are a key source of estimation uncertainty
which, depending on a wide range of factors, could result in a
material adjustment to the carrying amounts of assets and
liabilities in the next financial year.
The accuracy of the expected credit loss provision can be
impacted by unpredictable effects or unanticipated changes to model
estimates. In addition, forecasting errors could also occur due to
macroeconomic scenarios or weightings differing from the actual
outcomes observed. Regular model monitoring, validations and
provision adequacy reviews are key mechanisms to manage estimation
uncertainty across model estimates.
A representation of the core drivers of the macroeconomic
scenarios that are deployed in our models are outlined in this
note. In some instances, expected credit loss models use a range of
additional macroeconomic metrics and assumptions which are linked
to the underlying characteristics of the business.
We continue to monitor and evaluate the impact of climate risk
on our expected credit loss provision. As at 31 January 2023 we do
not consider climate risk to have a material impact on our credit
losses.
Model estimates
Across the Bank, expected credit loss provisions are outputs of
models which are based on a number of assumptions. The assumptions
applied involve judgement and as a result are regularly
assessed.
The two assumptions requiring the most significant judgement
relate to expected recovery rates and time to recovery periods in
Novitas. During 2021 and 2022, expected case failure rates were
considered a significant judgement. Due to the migration of loans
to Stage 3, as explained below, expected case failure rates are no
longer considered to be a significant judgement while time to
recovery periods have become a significant judgement.
Case failure rates represent a forward-looking probability
assessment of successful case outcomes through court proceedings or
out of court settlements. Recovery rates represent the level of
interest and capital that is covered by an insurance policy and
expected to be recoverable once a case fails. Time to recovery
periods represent management's view on timing using weighted
probabilities.
Novitas provides funding to individuals who wish to pursue legal
cases. The majority of the Novitas portfolio, and therefore
provision, relates to civil litigation cases. To protect customers
in the event that their case fails, it was a condition of the
Novitas Loan agreements that an individual purchased an After the
Event ("ATE") insurance policy which covered the loan.
As previously announced, following a strategic review, in July
2021 the group decided to cease permanently the approval of lending
to new customers across all of the products offered by Novitas and
withdraw from the legal services financing market. Since that time,
the Novitas loan book has been in run-off, and the business has
continued to work with solicitors and insurers, with a focus on
supporting existing customers and managing the existing book to
ensure good customer outcomes, where it is within Novitas' ability
to do so.
Over the course of the first half of this financial year,
management have reviewed and updated its assumptions for expected
case failure rates, expected recovery rates and time to recovery
periods to reflect experienced credit performance and ongoing
dialogue with customers' insurers. This has included initiating
formal legal action against one of the ATE insurers regarding the
potential recoverability of funds in relation to failed cases and
considering its position in respect of other insurers. As a result,
a number of updates have been made to the expected credit loss
provision calculation resulting in an increase of GBP69.9 million
to GBP183.2 million (31 July 2022: GBP113.3 million). The increase
to the expected credit loss provision is net of write offs
previously provided for and does not include write offs and costs
taken directly to the income statement.
Based on this latest position, the majority of loans in the
portfolio have been assessed as credit impaired and migrated to
Stage 3, with expected case failure rates increased accordingly.
Expected credit losses for the portfolio have been calculated by
comparing the gross loan balance to expected cash flows discounted
at the original effective interest rate, over an appropriate time
to recovery period. In line with IFRS 9, a proportion of the
expected credit loss is expected to unwind, over the estimated time
to recovery period, to interest income, which reflects the
requirement to recognise interest income on Stage 3 loans on a net
basis.
At 31 January 2023, a material increase in the expected case
failure rate assumptions and decrease in the expected recovery rate
assumptions have been recognised and the recoverability of interest
on relevant loans has been reassessed. Further detail on the
impairment provision is included in note 6.
Given the majority of the portfolio is in Stage 3, the key
sources of estimation uncertainty for the portfolio's expected
credit loss provision are recovery rates and time to recovery
periods. On this basis management have assessed and completed
sensitivity analysis when compared to the expected credit loss
provision for Novitas of GBP183.2 million. At 31 January 2023, a 12
month improvement in recovery periods would decrease the expected
credit loss provision by GBP12.5 million, while a 12 month
extension in recovery periods would increase it by GBP10.2 million.
Separately, a 10% absolute deterioration or improvement in recovery
rates would increase or decrease the expected credit loss provision
by GBP12.9 million.
Forward-looking information
Determining expected credit losses under IFRS 9 requires the
incorporation of forward-looking macroeconomic information that is
reasonable, supportable and includes assumptions linked to economic
variables that impact losses in each portfolio. The introduction of
macroeconomic information introduces additional volatility to
provisions.
In order to calculate a forward-looking provision, economic
scenarios are sourced from Moody's Analytics, which are then used
to project potential credit conditions for each portfolio. An
overview of these scenarios using key macroeconomic indicators is
provided on pages 42 to 44. Benchmarking against other economic
providers is carried out to determine that Moody's Analytics
scenarios are reasonable. Where this is not the case, management
judgement is applied through an adjustment.
Five different projected economic scenarios are currently
considered to cover a range of possible outcomes. These include a
baseline scenario, which reflects the best view of future economic
events. In addition, one upside scenario and three downside
scenarios are defined relative to the baseline. Management assigns
the scenarios a probability weighting to reflect the likelihood of
specific scenarios and therefore loss outcomes materialising, using
a combination of quantitative analysis and expert judgement.
The impact of forward-looking information varies across the
group's lending businesses because of the differing sensitivity of
each portfolio to specific macroeconomic variables. The modelled
impact of macroeconomic scenarios and their respective weightings
is reviewed by business experts in relation to stage allocation and
coverage ratios at the individual and portfolio level,
incorporating management's experience and knowledge of customers,
the sectors in which they operate, and the assets financed.
The Credit Risk Management Committee ("CRMC") including the
group finance director and group chief risk officer meets monthly
to review, and if appropriate, agree changes to the economic
scenarios and probability weightings assigned thereto. The decision
is subsequently noted at the Group Risk and Compliance Committee
("GRCC"), which includes the aforementioned roles in addition to
the group chief executive officer.
Scenario forecasts deployed in IFRS 9 macroeconomic models are
updated on a monthly basis. As at 31 January 2023, the latest
baseline scenario forecasts GDP decline by 0.7% in calendar year
2023 and an average Base Rate of 4.4% over the same period. CPI is
forecast to be 5.1% in calendar year 2023 in the baseline scenario,
with 0.2% forecast in the protracted downside scenario over the
same period.
These metrics represent a deterioration across all scenarios
compared to 31 July 2022. This reflects continued inflationary
pressures, the higher interest rate environment and the cost of
living crisis. This also considers the ongoing economic uncertainty
associated with Russia's invasion of Ukraine, the resulting
increase in energy and food commodity prices, and the exacerbation
of global supply-chain disruptions after the pandemic.
Given that the updated forecasts capture the prevailing economic
challenges and uncertainty, at 31 January 2023, the scenario
weightings were unchanged from 31 July 2022, with 32.5% allocated
to the baseline scenario, 30% to the upside scenario and 37.5%
across the three downside scenarios.
The tables below show the economic assumptions within each
scenario, and the weighting applied to each at 31 January 2023. The
metrics below are key UK economic indicators, chosen to describe
the economic scenarios. These are the main metrics used to set
scenarios which then influence a wide range of additional metrics
that are used in expected credit loss models. The first tables show
the forecasts of the key metrics for the scenarios utilised for
calendar years 2023 and 2024. The subsequent tables show averages
and peak to trough ranges for the same key metrics for the
scenarios utilised for the five-year period from 2023 to 2027.
These periods have been included as they demonstrate the short-,
medium- and long-term outlook for the key macroeconomic indicators
which form the fundamental basis of the scenario forecasts. On
average, the loan book has a residual maturity of 16 months, with
c.98% of loan value having a maturity of five years or less.
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
2023 2024 2023 2024 2023 2024 2023 2024 2023 2024
-------------- ------- ----- -------- -------- ---------- ----- ---------- --------- ----------- -----------
At 31 January
2023
UK GDP Growth (0.7%) 0.9% 1.3% 1.7% (3.0%) 0.4% (4.5%) (1.9%) (5.3%) (3.7%)
UK
Unemployment 4.1% 4.4% 3.8% 3.7% 4.5% 4.7% 5.3% 7.0% 5.9% 8.2%
HPI Growth (4.8%) 2.0% 8.6% 5.1% (11.7%) 1.2% (15.3%) (7.4%) (21.1%) (11.3%)
BoE Base Rate 4.4% 3.7% 4.2% 3.6% 4.8% 2.2% 5.1% 3.5% 5.4% 2.8%
Consumer
Price
Index 5.1% 2.7% 4.8% 2.7% 3.7% 2.0% 2.3% 1.4% 0.2% 0.5%
Weighting 32.5% 30% 20% 10.5% 7%
-------------- -------------- ------------------ ----------------- --------------------- ------------------------
Baseline Upside (strong) Downside Downside (moderate) Downside (protracted)
(mild)
2022 2023 2022 2023 2022 2023 2022 2023 2022 2023
---------------- ------ ----- -------- -------- ------ ------- ---------- ---------- ----------- -----------
At 31 July
2022
UK GDP Growth 3.4% 0.8% 4.1% 2.9% 2.7% (1.8%) 2.4% (4.4%) 2.1% (5.9%)
UK Unemployment 3.8% 4.1% 3.6% 3.6% 4.0% 4.6% 4.1% 6.2% 4.2% 7.4%
HPI Growth 4.3% 2.6% 10.9% 12.7% 1.1% (3.1%) (0.5%) (9.1%) (2.4%) (15.9%)
BoE Base Rate 1.1% 1.8% 1.1% 1.7% 1.3% 1.0% 1.4% 1.1% 1.5% 1.2%
Consumer Price
Index 10.7% 2.8% 10.3% 2.8% 12.3% 0.4% 14.2% 0.2% 17.1% (2.2%)
Weighting 32.5% 30% 20% 10.5% 7%
---------------- ------------- ------------------ --------------- ---------------------- ------------------------
Notes:
UK GDP Growth: National Accounts Annual Real Gross Domestic
Product, Seasonally Adjusted - YoY change (%)
UK Unemployment: ONS Labour Force Survey, Seasonally Adjusted -
Average (%)
UK HPI Growth: Average nominal house price, Land Registry,
Seasonally Adjusted - Q4 to Q4 change (%)
BoE Base Rate: Bank of England Base Rate - Average (%)
Consumer Price Index: ONS, EU Harmonised, Annual Inflation - Q4
to Q4 change (%)
Five-year average (calendar year 2023-2027)
Baseline Upside (strong) Downside Downside Downside (protracted)
(mild) (moderate)
----------------- --------- ---------------- ---------- ------------ --------------------------
At 31 January
2023
UK GDP Growth 1.0% 1.5% 0.6% (0.1%) (0.3%)
UK Unemployment 4.4% 3.8% 4.6% 6.6% 7.5%
HPI Growth 1.1% 2.4% (0.6%) (2.1%) (4.6%)
BoE Base Rate 3.0% 2.9% 2.5% 2.2% 1.8%
Consumer Price
Index 2.9% 2.8% 2.5% 2.0% 1.2%
Weighting 32.5% 30% 20% 10.5% 7%
----------------- --------- ---------------- ---------- ------------ --------------------------
Five-year average (calendar year 2022-2026)
Baseline Upside (strong) Downside Downside (moderate) Downside (protracted)
(mild)
----------------- --------- ---------------- ---------- -------------------- --------------------------
At 31 July
2022
UK GDP Growth 1.2% 1.7% 0.8% 0.2% (0.1%)
UK Unemployment 4.4% 3.8% 4.6% 6.4% 7.2%
HPI Growth(1) 3.0% 4.7% 1.4% (0.3%) (2.7%)
BoE Base Rate 2.0% 2.0% 1.5% 0.9% 0.6%
Consumer Price
Index 3.8% 3.8% 3.7% 3.6% 3.4%
Weighting 32.5% 30% 20% 10.5% 7%
----------------- --------- ---------------- ---------- -------------------- --------------------------
Notes:
UK GDP Growth: National Accounts Annual Real Gross Domestic
Product, Seasonally Adjusted - CAGR (%)
UK Unemployment: ONS Labour Force Survey, Seasonally Adjusted -
Average (%)
UK HPI Growth: Average nominal house price, Land Registry,
Seasonally Adjusted - CAGR (%)
BoE Base Rate: Bank of England Base Rate - Average (%)
Consumer Price Index: ONS, EU Harmonised, Annual Inflation -
CAGR (%)
The tables below provide a summary for the five-year period
(calendar year 2023 - 2027) of the peak to trough range of values
of the key UK economic variables used within the economic scenarios
at 31 January 2023 and 31 July 2022:
Upside Downside Downside Downside
Baseline (strong) (mild) (moderate) (protracted)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
----------------- ----- ------- ------ ------- ------- -------- ------- -------- ------- --------
At 31 January
2023
UK GDP Growth 5.0% (0.5%) 7.8% 0.6% 2.8% (3.9%) (0.3%) (6.7%) (1.6%) (8.8%)
UK Unemployment 4.6% 4.0% 4.2% 3.6% 4.8% 4.2% 7.2% 4.2% 8.4% 4.5%
HPI Growth 5.5% (4.8%) 16.5% (0.2%) (2.9%) (12.6%) (3.6%) (21.5%) (4.4%) (29.9%)
BoE Base Rate 4.5% 2.3% 4.3% 2.2% 5.0% 0.9% 5.3% 0.3% 5.5% 0.1%
Consumer Price
Index 9.2% 2.1% 8.9% 2.1% 8.3% 2.0% 8.2% 1.4% 7.9% (0.5%)
Weighting 32.5% 30% 20% 10.5% 7%
----------------- -------------- --------------- ----------------- ----------------- -----------------
Upside Downside Downside Downside
Baseline (strong) (mild) (moderate) (protracted)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
----------------- ------ ------- ------ ------- ------ -------- ------ -------- ------ --------
At 31 July
2022
UK GDP Growth 6.3% 0.4% 9.0% 0.4% 4.1% (2.6%) 1.0% (5.1%) 0.8% (6.9%)
UK Unemployment 4.8% 3.7% 4.2% 3.5% 4.8% 3.7% 7.4% 3.7% 8.4% 3.7%
HPI Growth(1) 16.2% 3.4% 31.1% 3.4% 7.0% (3.0%) 4.1% (10.1%) 4.1% (19.2%)
BoE Base Rate 2.5% 0.5% 2.5% 0.5% 2.5% 0.1% 2.4% 0.1% 2.6% 0.1%
Consumer Price
Index 10.7% 2.0% 10.3% 2.0% 12.3% 0.4% 14.2% 0.1% 17.1% (2.2%)
Weighting 32.5% 30% 20% 10.5% 7%
----------------- --------------- --------------- ---------------- ---------------- ----------------
1 The five-year forecast and the peak to trough values for HPI
have been re-presented on a nominal basis at 31 July 2022.
Notes:
UK GDP Growth: Maximum and minimum quarterly GDP as a percentage
change from start of period (%)
UK Unemployment: Maximum and minimum unemployment rate (%)
UK HPI Growth: Maximum and minimum average nominal house price
as a percentage change from start of period (%)
BoE Base Rate: Maximum and minimum BoE base rate (%)
Consumer Price Index Inflation: ONS, EU Harmonised, Maximum and
minimum of annual inflation over the 5-year period (%)
The below charts represent the quarterly forecast data included
in the above tables incorporating actual metrics up to 31 January
2023. The solid line shows the baseline scenario, while the dashed
lines represent the various upside and downside scenarios.
The expected credit loss provision is sensitive to judgement and
estimations made with regard to the selection and weighting of
multiple economic scenarios. As a result, management has assessed
and considered the sensitivity of provisions as follows:
-- For the majority of our portfolios, the modelled expected
credit loss provision has been recalculated under the upside strong
and downside protracted scenarios described above, applying a 100%
weighting to each scenario in turn. The change in provision
requirement is driven by the movement in risk metrics under each
scenario and resulting impact on stage allocation.
-- Expected credit losses based on a simplified approach, which
do not utilise a macroeconomic model and require expert judgement,
are excluded from the sensitivity analysis.
-- In addition to the above, key considerations for the
sensitivity analysis are set out below, by segment:
- In Commercial, the sensitivity analysis excludes Novitas,
which is subject to a separate approach, as it is deemed more
sensitive to credit factors than macroeconomic factors.
- In Retail, the sensitivity analysis does not apply further
stress to the expected credit loss provision on loans and advances
to customers in Stage 3, because the measurement of expected credit
losses is considered more sensitive to credit factors specific to
the borrower than macroeconomic scenarios.
- In Property, the sensitivity analysis excludes individually
assessed provisions and certain sub portfolios which are deemed
more sensitive to credit factors than the macroeconomic
scenarios.
-- On application of the above considerations, 70% of the Bank's
non-Novitas expected credit loss provisions are in scope of the
sensitivity analysis.
Based on the above analysis, at 31 January 2023, application of
100% weighting to the upside strong scenario would decrease the
expected credit loss by GBP16.4 million whilst application to the
downside protracted scenario would increase the expected credit
loss by GBP34.3 million driven by the aforementioned changes in
risk metrics and stage allocation of the portfolios.
When performing sensitivity analysis there is a high degree of
estimation uncertainty. On this basis, 100% weighted expected
credit loss provision presented for the upside and downside
scenarios should not be taken to represent the lower or upper range
of possible and actual expected credit loss outcomes. The
recalculated expected credit loss provision for each of the
scenarios should be read in the context of the sensitivity analysis
as a whole and in conjunction with the narrative disclosures
provided in note 6. The modelled impact presented is based on gross
loans and advances to customers at 31 January 2023; it does not
incorporate future changes relating to performance, growth or
credit risk. In addition, while sensitivity ranges across periods
do provide an indication of general sensitivity levels, given the
change in the macroeconomic conditions and underlying modelled
provision, direct comparison between the sensitivity results at 31
January 2023 and 31 July 2022 is not appropriate.
The economic environment remains uncertain and future impairment
charges may be subject to further volatility, including from
changes to macroeconomic variable forecasts impacted by
geopolitical tensions and rising inflation.
2. Segmental analysis
The directors manage the group by class of business and we
present the segmental analysis on that basis. The group's
activities are presented in five (2022: five) operating segments:
Commercial, Retail, Property, Asset Management and Securities
(which comprises Winterflood only).
In the segmental reporting information that follows, Group
consists of central functions as well as various non-trading head
office companies and consolidation adjustments and is presented in
order that the information presented reconciles to the consolidated
income statement. The Group balance sheet primarily includes
treasury assets and liabilities comprising cash and balances at
central banks, debt securities, customer deposits and other
borrowings.
Divisions continue to charge market prices for the limited
services rendered to other parts of the group. Funding charges
between segments take into account commercial demands. More than
90% of the group's activities, revenue and assets are located in
the UK.
Summary Income Statement for the six months ended 31 January
2023
Banking
Asset
Commercial Retail Property Management Securities Group Total
GBP GBP GBP GBP GBP
GBP million million million million GBP million million million
---------------------- -------------- --------- ---------- ----------- ------------ --------- ---------
Net interest
income 130.9 107.2 57.3 1.6 - 0.4 297.4
Non-interest
income 51.4 16.0 1.1 69.4 39.0 - 176.9
---------------------- -------------- --------- ---------- ----------- ------------ --------- ---------
Operating income 182.3 123.2 58.4 71.0 39.0 0.4 474.3
---------------------- -------------- --------- ---------- ----------- ------------ --------- ---------
Administrative
expenses (81.8) (68.4) (12.6) (59.8) (34.6) (12.7) (269.9)
Depreciation and
amortisation (11.1) (10.7) (2.1) (2.6) (2.0) (1.1) (29.6)
Impairment losses
on financial assets (122.5) (29.4) (10.3) - - - (162.2)
---------------------- -------------- --------- ---------- ----------- ------------ --------- ---------
Total adjusted
operating
expenses(1) (215.4) (108.5) (25.0) (62.4) (36.6) (13.8) (461.7)
---------------------- -------------- --------- ---------- ----------- ------------ --------- ---------
Adjusted operating
profit/(loss)(1) (33.1) 14.7 33.4 8.6 2.4 (13.4) 12.6
Amortisation of
intangible assets
on acquisition (0.1) - - (0.8) - - (0.9)
---------------------- -------------- --------- ---------- ----------- ------------ --------- ---------
Operating profit/(loss)
before tax (33.2) 14.7 33.4 7.8 2.4 (13.4) 11.7
-------------------------- ---------- --------- ---------- ----------- ------------ --------- ---------
External operating
income/(expense) 221.4 146.7 77.0 70.7 39.0 (80.5) 474.3
Inter segment
operating
(expense)/income (39.1) (23.5) (18.6) 0.3 - 80.9 -
---------------------- -------------- --------- ---------- ----------- ------------ --------- ---------
Segment operating
income 182.3 123.2 58.4 71.0 39.0 0.4 474.3
---------------------- -------------- --------- ---------- ----------- ------------ --------- ---------
1 Adjusted operating expenses and adjusted operating
profit/(loss) are stated before amortisation of intangible assets
on acquisition and tax.
The Commercial operating segment above includes Novitas, which
ceased lending to new customers in July 2021 following a strategic
review. In the period ended 31 January 2023, Novitas recorded an
operating loss of GBP104.9 million (six months ended 31 January
2022: loss of GBP30.7 million; year ended 31 July 2022: loss of
GBP39.3 million), driven by impairment losses of GBP114.6 million
(six months ended 31 January 2022: GBP39.2 million; year ended 31
July 2022: GBP60.7 million). Novitas' income for the period was
GBP14.0 million (six months ended 31 January 2022: GBP17.9 million;
year ended 31 July 2022: GBP36.0 million), and expenses were GBP4.3
million (six months ended 31 January 2022: GBP9.4 million; year
ended 31 July 2022: GBP14.6 million).
Balance Sheet Information at 31 January 2023
Banking
Asset
Commercial Retail Property Management Securities Group(2) Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
Total
assets(1) 4,550.3 2,970.3 1,520.4 167.3 801.1 2,883.6 12,893.0
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
Total
liabilities - - - 58.8 709.0 10,519.1 11,286.9
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
1 Total assets for the Banking operating segments comprise the
loan book and operating lease assets only. The Commercial operating
segment includes the net loan book of Novitas, which was GBP61.9
million at 31 January 2023. See note 6 for more detail on the
Novitas loan book and associated impairment provision.
2 Balance sheet includes GBP2,880.5 million assets and
GBP10,585.1 million liabilities attributable to the Banking
division primarily comprising the treasury balances described in
the second paragraph of this note.
Equity is allocated across the group as shown below. Banking
division equity, which is managed as a whole rather than on a
segmental basis, reflects loan book and operating lease assets of
GBP9,041.0 million, in addition to assets and liabilities of
GBP2,880.5 million and GBP10,585.1 million respectively primarily
comprising treasury balances which are included within the Group
column above.
Banking Asset Management Securities Group Total
GBP million GBP million GBP million GBP million GBP million
-------- ------------ ----------------- ------------- ------------ ------------
Equity 1,336.4 108.5 92.1 69.1 1,606.1
-------- ------------ ----------------- ------------- ------------ ------------
Summary Income Statement for the six months ended 31 January
2022
Banking
Asset
Commercial Retail Property Management Securities Group Total
GBP GBP GBP GBP
GBP million million million GBP million GBP million million million
------------------------ -------------- -------- ---------- --------------- ------------ -------- --------
Net interest
income/(expense) 127.9 106.9 58.0 (0.1) (0.7) (0.2) 291.8
Non-interest
income 39.9 12.8 0.2 76.7 50.2 - 179.8
------------------------ -------------- -------- ---------- --------------- ------------ -------- --------
Operating
income/(expense) 167.8 119.7 58.2 76.6 49.5 (0.2) 471.6
------------------------ -------------- -------- ---------- --------------- ------------ -------- --------
Administrative
expenses (78.0) (61.3) (14.1) (59.8) (38.7) (12.2) (264.1)
Depreciation and
amortisation (11.1) (10.6) (2.1) (2.3) (2.0) (1.3) (29.4)
Impairment
losses
on financial assets (41.0) (5.3) (2.0) - - - (48.3)
------------------------ -------------- -------- ---------- --------------- ------------ -------- --------
Total adjusted
operating
expenses(1) (130.1) (77.2) (18.2) (62.1) (40.7) (13.5) (341.8)
------------------------ -------------- -------- ---------- --------------- ------------ -------- --------
Adjusted operating
profit/(loss)(1) 37.7 42.5 40.0 14.5 8.8 (13.7) 129.8
Amortisation of
intangible assets
on acquisition (0.1) - - (0.8) - - (0.9)
------------------------ -------------- -------- ---------- --------------- ------------ -------- --------
Operating profit/(loss)
before tax 37.6 42.5 40.0 13.7 8.8 (13.7) 128.9
----------------------------- --------- -------- ---------- --------------- ------------ -------- --------
External operating
income/(expense) 190.5 134.5 65.0 76.6 49.5 (44.5) 471.6
Inter segment operating
(expense)/income (22.7) (14.8) (6.8) - - 44.3 -
------------------------ -------------- -------- ---------- --------------- ------------ -------- --------
Segment operating
income/(expense) 167.8 119.7 58.2 76.6 49.5 (0.2) 471.6
------------------------ -------------- -------- ---------- --------------- ------------ -------- --------
1 Adjusted operating expenses and adjusted operating
profit/(loss) are stated before amortisation of intangible assets
on acquisition and tax.
Summary Income Statement for the year ended 31 July 2022
Banking
Asset
Commercial Retail Property Management Securities Group Total
GBP million GBP GBP GBP GBP million GBP GBP
million million million million million
-------------- --------------------- ---------- ---------- ----------- ------------ ---------- ----------
Net interest
income/(expense) 257.1 210.8 112.1 (0.7) (1.1) (0.2) 578.0
Non-interest
income 86.3 26.2 0.6 148.7 96.3 - 358.1
------------------------ ----------- ---------- ---------- ----------- ------------ ---------- ----------
Operating
income/(expense) 343.4 237.0 112.7 148.0 95.2 (0.2) 936.1
------------------------ ----------- ---------- ---------- ----------- ------------ ---------- ----------
Administrative
expenses (158.3) (131.3) (27.0) (120.7) (77.2) (25.8) (540.3)
Depreciation and
amortisation (21.7) (20.3) (4.0) (5.6) (3.9) (2.2) (57.7)
Impairment
losses
on financial assets (72.4) (24.4) (6.5) - - - (103.3)
------------------------ ----------- ---------- ---------- ----------- ------------ ---------- ----------
Total adjusted
operating
expenses(1) (252.4) (176.0) (37.5) (126.3) (81.1) (28.0) (701.3)
------------------------ ----------- ---------- ---------- ----------- ------------ ---------- ----------
Adjusted operating
profit/(loss)(1) 91.0 61.0 75.2 21.7 14.1 (28.2) 234.8
Amortisation of
intangible assets
on acquisition (0.1) - - (1.9) - - (2.0)
------------------------ ----------- ---------- ---------- ----------- ------------ ---------- ----------
Operating profit/(loss)
before tax 90.9 61.0 75.2 19.8 14.1 (28.2) 232.8
------------------------ ----------- ---------- ---------- ----------- ------------ ---------- ----------
External operating
income/(expense) 391.7 268.3 129.4 148.1 95.2 (96.6) 936.1
Inter segment operating
(expense)/income (48.3) (31.3) (16.7) (0.1) - 96.4 -
------------------------ ----------- ---------- ---------- ----------- ------------ ---------- ----------
Segment operating
income/(expense) 343.4 237.0 112.7 148.0 95.2 (0.2) 936.1
------------------------ ----------- ---------- ---------- ----------- ------------ ---------- ----------
1 Adjusted operating expenses and adjusted operating
profit/(loss) are stated before amortisation of intangible assets
on acquisition and tax.
Balance Sheet Information at 31 July 2022
Banking
Asset
Commercial Retail Property Management Securities Group(2) Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
Total
assets(1) 4,561.4 3,064.0 1,473.5 172.8 972.3 2,434.3 12,678.3
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
Total
liabilities - - - 70.5 880.6 10,069.7 11,020.8
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
1 Total assets for the Banking operating segments comprise the
loan book and operating lease assets only. The Commercial operating
segment includes the net loan book of Novitas, which was GBP159.4
million at 31 July 2022. See note 6 for more detail on the Novitas
loan book and associated impairment provision.
2 Balance sheet includes 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.
Asset Management
Banking Securities Group Total
GBP million GBP million GBP million GBP million GBP million
------------ ------------ ------------------- ------------- ------------ ------------
Equity (1) 1,342.0 102.3 91.7 121.5 1,657.5
------------ ------------ ------------------- ------------- ------------ ------------
1 Equity of the Banking division reflects loan book and
operating lease assets of 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.
3. Taxation
Six months ended Year ended
31 January 31 July
--------------------------
2023 2022 2022
GBP million GBP million GBP million
------------------------------------------------------ ------------ ------------ ------------
Tax (credited)/charged to the income statement
Current tax:
UK corporation tax (2.1) 32.1 53.7
Foreign tax 0.8 0.8 1.9
Adjustments in respect of previous periods - 0.1 (2.8)
------------------------------------------------------ ------------ ------------ ------------
(1.3) 33.0 52.8
Deferred tax:
Deferred tax charge for the current period 4.6 0.9 11.8
Adjustments in respect of previous periods - (0.1) 3.0
------------------------------------------------------ ------------ ------------ ------------
3.3 33.8 67.6
------------------------------------------------------ ------------ ------------ ------------
Tax on items not (credited)/charged to the
income statement
Current tax relating to:
Share-based payments - (0.1) -
Deferred tax relating to:
Cash flow hedging 5.2 5.4 8.6
Defined benefit pension scheme (1.5) 0.5 (0.3)
Financial instruments classified at fair value
through other
comprehensive income (1.3) (0.3) (0.4)
Share-based payments 0.3 0.6 1.1
Currency translation losses - - (0.3)
2.7 6.1 8.7
------------------------------------------------------ ------------ ------------ ------------
Reconciliation to tax expense
UK corporation tax for the period at 21.0 %
(six months ended
31 January 2022: 19.0%; year ended 31 July
2022: 19.0%)
on operating profit 2.5 24.5 44.2
Effect of different tax rates in other jurisdictions - (0.2) (0.3)
Disallowable items and other permanent differences 0.2 0.6 0.9
Banking surcharge 0.6 8.8 14.9
Deferred tax impact of decreased tax rates - 0.1 7.7
Prior year tax provision - - 0.2
3.3 33.8 67.6
------------------------------------------------------ ------------ ------------ ------------
The effective tax rate for the period is 28.2% (six months ended
31 January 2022: 26.2%; year ended 31 July 2022: 29.0%),
representing the best estimate of the annual effective tax rate
expected for the full year.
The standard UK corporation tax rate for the financial year is
21.0% (six months ended 31 January 2022: 19.0%; year ended 31 July
2022: 19.0%). However, an additional 6.3% surcharge applies to the
profits of banking companies as defined in legislation (and only
above a threshold amount). The effective tax rate is above the UK
corporation tax rate primarily due to the surcharge applying to the
majority of the group's profits.
4. Earnings per share
The calculation of basic earnings per share is based on the
profit attributable to shareholders and the number of basic
weighted average shares. When calculating the diluted earnings per
share, the weighted average number of shares in issue is adjusted
for the effects of all dilutive share options and awards.
Six months ended Year ended
31 January 31 July
------------------
2023 2022 2022
-------------------- -------- -------- ----------
Basic 5.6p 63.5p 110.4p
-------------------- -------- --------
Diluted 5.6p 63.0p 109.9p
-------------------- -------- --------
Adjusted basic(1) 6.1p 64.0p 111.5p
-------------------- -------- --------
Adjusted diluted(1) 6.1p 63.5p 111.0p
-------------------- -------- --------
1 Excludes amortisation of intangible assets on acquisition and its tax effects.
Six months ended Year ended
31 January 31 July
------------------------
2023 2022 2022
GBP million GBP million GBP million
------------------------------------------------- ----------- ----------- -----------
Profit attributable to shareholders 8.4 95.1 165.2
Adjustments:
Amortisation of intangible assets on acquisition 0.9 0.9 2.0
Tax effect of adjustment (0.2) (0.2) (0.4)
------------------------------------------------- ----------- ----------- -----------
Adjusted profit attributable to shareholders 9.1 95.8 166.8
Six months ended Year ended
31 January 31 July
------------------------
2023 2022 2022
million million million
------------------------------------------------- ----------- ----------- -----------
Average number of shares
Basic weighted 149.4 149.7 149.6
Effect of dilutive share options and awards 0.7 1.2 0.7
------------------------------------------------- ----------- -----------
Diluted weighted 150.1 150.9 150.3
5. Dividends
Six months ended Year ended
31 January 31 July
2023 2022 2022
GBP million GBP million GBP million
For each ordinary share
Interim dividend for previous financial year paid
in April 2022: 22.0p
(April 2021: 18.0p) - - 32.8
Final dividend for previous financial year paid
in November 2022: 44.0p
(November 2021: 42.0p) 65.6 62.7 62.7
An interim dividend relating to the six months ended 31 January
2023 of 22.5p, amounting to an estimated GBP33.5 million, is
declared. This interim dividend, which is due to be paid on 26
April 2023 to shareholders on the register at 24 March 2023, is not
reflected in these condensed consolidated half year financial
statements.
6. Loans and advances to customers
(a) Maturity analysis of loans and advances to customers
The following table sets out the maturity analysis of gross
loans and advances to customers. At 31 January 2023 loans and
advances to customers with a maturity of two years or less was
GBP6,548.6 million (31 July 2022: GBP6,733.0 million) representing
71.4% (31 July 2022: 73.6%) of total loans and advances to
customers:
Total
gross Total net
Between loans and loans and
Within three Between one Between After more advances advances
On three months and and two two and than five to Impairment to
demand months one year years five years years customers provisions customers
GBP GBP GBP GBP GBP
GBP million GBP million million GBP million million million million GBP million million
At 31
January
2023 69.5 2,372.9 2,389.8 1,716.4 2,447.2 181.1 9,176.9 (392.2) 8,784.7
At 31 July
2022 141.3 2,354.2 2,369.0 1,868.5 2,235.0 176.5 9,144.5 (285.6) 8,858.9
(b) Loans and advances to customers and impairment provisions by
stage
Gross loans and advances to customers by stage and the
corresponding impairment provisions and provision coverage ratios
are set out below:
Stage 2
Greater
than
Less than or equal
Stage 30 days to 30 days Stage
1 past due past due Total 3 Total
At 31 January 2023 GBP million GBP million GBP million GBP million GBP million GBP million
------------ ------------ ------------ ------------
Gross loans and
advances to customers
Commercial 3,398.0 788.2 31.0 819.2 331.2 4,548.4
Of which: Novitas 2.0 1.0 - 1.0 242.1 245.1
Retail 2,790.2 183.4 9.9 193.3 78.0 3,061.5
Property 1,291.7 70.0 52.2 122.2 153.1 1,567.0
------------ ------------ ------------ ------------
Total 7,479.9 1,041.6 93.1 1,134.7 562.3 9,176.9
------------ ------------ ------------ ------------
Impairment provisions
Commercial 21.6 15.9 3.3 19.2 213.6 254.4
Of which: Novitas 0.2 0.2 - 0.2 182.8 183.2
Retail 27.3 11.4 2.8 14.2 49.7 91.2
Property 5.9 5.4 0.2 5.6 35.1 46.6
------------ ------------ ------------ ------------
Total 54.8 32.7 6.3 39.0 298.4 392.2
------------ ------------ ------------ ------------
Provision coverage
ratio
Commercial 0.6% 2.0% 10.6% 2.3% 64.5% 5.6%
Within which: Novitas 10.0% 20.0% - 20.0% 75.5% 74.7%
Retail 1.0% 6.2% 28.3% 7.3% 63.7% 3.0%
Property 0.5% 7.7% 0.4% 4.6% 22.9% 3.0%
------------ ------------ ------------ ------------
Total 0.7% 3.1% 6.8% 3.4% 53.1% 4.3%
------------ ------------ ------------ ------------
Stage 2
Greater
than
Less than or equal
30 days to 30 days Stage
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
------------ ------------ ------------ ------------
Total 7,627.0 984.0 174.9 1,158.9 358.6 9,144.5
------------ ------------ ------------ ------------
Impairment provisions
Commercial 25.6 14.3 52.0 66.3 87.1 179.0
Of which: Novitas 8.8 1.0 49.5 50.5 54.0 113.3
Retail 22.1 4.9 1.7 6.6 41.2 69.9
Property 2.6 4.2 1.2 5.4 28.7 36.7
------------ ------------ ------------ ------------
Total 50.3 23.4 54.9 78.3 157.0 285.6
------------ ------------ ------------ ------------
Provision coverage
ratio
Commercial 0.7% 1.8% 43.6% 7.4% 51.5% 4.0%
Within which: Novitas 8.7% 45.5% 52.8% 52.6% 71.6% 41.5%
Retail 0.8% 4.0% 18.1% 5.0% 62.9% 2.2%
Property 0.2% 5.0% 2.6% 4.2% 23.1% 2.4%
------------ ------------ ------------ ------------
Total 0.7% 2.4% 31.4% 6.8% 43.8% 3.1%
------------ ------------ ------------ ------------
Stage allocations of loans and advances to customers were
applied in line with the definitions set out on page 159 of the
Annual Report 2022.
Over the course of the first half of this financial year, the
staging profile of loans and advances to customers has shown modest
deterioration, with some migration from Stage 1 to Stages 2 and 3.
At 31 January 2023, 81.5% (31 July 2022: 83.4%) of loans and
advances to customers were Stage 1, with the decrease primarily as
a result of weaker macroeconomic metrics prompting an increased
volume of accounts to migrate to Stage 2. Stage 2 loans and
advances to customers decreased to 12.4% (31 July 2022: 12.7%),
where migrations to Stage 3 in Novitas offset other Bank-wide
movements out of Stage 1. The remaining 6.1% (31 July 2022: 3.9%)
of loans and advances to customers was deemed to be credit impaired
and classified as Stage 3, with updated Novitas assumptions being
the main driver.
Overall impairment provision increased to GBP392.2 million (31
July 2022: GBP285.6 million), following regular model runs and
reviews of staging and provision coverage for individual loans and
portfolios. The movement in impairment provision primarily
reflected updates in Novitas, including a material increase in the
expected case failure rate assumptions, a decrease in the expected
recovery rate assumptions and the reassessment of the
recoverability of interest on relevant loans. Excluding Novitas,
the increase in impairment provision was primarily driven by weaker
macroeconomic variables and outlook across the Banking division,
and a rise in arrears in Motor Finance.
As a result, there has been an increase in provision coverage to
4.3% (31 July 2022: 3.1%).
Provision Coverage Analysis by Business
In Commercial, the impairment coverage ratio increased to 5.6%
(31 July 2022: 4.0%), primarily driven by increased provision
levels in Novitas. Excluding Novitas, the Commercial impairment
coverage ratio increased to 1.7% (31 July 2022: 1.6%) reflecting
additional provisions to take into account weakening macroeconomic
variables and outlook .
In Retail, the impairment coverage ratio increased to 3.0% (31
July 2022: 2.2%) driven by a rise in arrears in the Motor portfolio
reflecting increased pressure from the current economic conditions
on our customers and in line with comparable trends observed across
the industry, alongside the weakening of macroeconomic variables
and outlook.
In Property the impairment coverage ratio increased to 3.0% (31
July 2022: 2.4%) as we recognised additional provisions to reflect
weakening macroeconomic variables and outlook, in particular lower
projected house prices, in addition to increased individually
assessed provisions on Stage 3 loans.
(c) Adjustments
By their nature, limitations in the group's expected credit loss
models or input data may be identified through ongoing model
monitoring and validation of models. In certain circumstances,
management make appropriate adjustments to model-calculated
expected credit losses. These adjustments are based on management
judgements or quantitative back-testing to ensure the expected
credit loss provision adequately reflects all known information.
These adjustments are generally determined by considering the
attributes or risks of a financial asset which are not captured by
existing expected credit loss model outputs. Management adjustments
are actively monitored, reviewed, and incorporated into future
model developments where applicable.
At 31 January 2023, GBP11.0 million of the expected credit loss
provision was attributable to adjustments (31 July 2022: GBP(2.8)
million).
The level of adjustments has increased during the first half of
the financial year, primarily as a result of applying additional
adjustments to account for macroeconomic risks not fully captured
in forward-looking modelled expected credit losses. Adjustments
have therefore been applied to reflect the current level of
macroeconomic uncertainty more adequately in our expected credit
loss provision.
This approach has incorporated our experience, knowledge of our
customers, the sectors in which they operate, and the assets which
we finance. We will continue to monitor the use of, or need for,
adjustments as new information emerges.
(d) Reconciliation of loans and advances to customers and
impairment provisions
Reconciliations of gross loans and advances to customers and
associated impairment provisions are set out below.
New financial assets originate in Stage 1 only, and the amount
presented represents the value at origination.
Subsequently, a loan may transfer between stages, and the
presentation of such transfers is based on a comparison of the loan
at the beginning of the period (or at origination if this occurred
during the period) and the end of the period (or just prior to
final repayment or write off).
Repayments relating to loans which transferred between stages
during the period are presented within the transfers between stages
lines. All other repayments are presented in a separate line.
Expected credit loss model methodologies may be updated or
enhanced from time to time and the impacts of such changes are
presented on a separate line. Enhancements to our model suite
during the course of the financial year are a contributory factor
to expected credit loss movements and such factors have been taken
into consideration when assessing any required adjustments to
modelled output and ensuring appropriate provision coverage
levels.
A loan is written off when there is no reasonable expectation of
further recovery following realisation of all associated collateral
and available recovery actions against the customer.
Stage 1 Stage 2 Stage 3 Total
GBP million GBP million GBP million GBP million
Gross loans and advances to customers
At 1 August 2022 7,627.0 1,158.9 358.6 9,144.5
New financial assets originated 3,147.3 - - 3,147.3
Transfers to Stage 1 133.7 (163.7) (2.8) (32.8)
Transfers to Stage 2 (661.4) 569.7 (7.4) (99.1)
Transfers to Stage 3 (174.7) (169.0) 315.0 (28.7)
Net transfers between stages and
repayments(1) (702.4) 237.0 304.8 (160.6)
Repayments while stage remained
unchanged
and final repayments (2,567.3) (275.9) (58.1) (2,901.3)
Changes to model methodologies (24.6) 14.9 9.7 -
Write offs (0.1) (0.2) (52.7) (53.0)
At 31 January 2023 7,479.9 1,134.7 562.3 9,176.9
Stage 1 Stage 2 Stage 3 Total
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
1 Repayments relate only to financial assets which transferred
between stages during the year. Other repayments are shown in the
line below.
Stage 1 Stage 2 Stage 3 Total
GBP million GBP million GBP million GBP million
Impairment provisions on loans
and
advances to customers
At 1 August 2022 50.3 78.3 157.0 285.6
New financial assets originated 21.1 - - 21.1
Transfers to Stage 1 0.9 (2.9) (0.5) (2.5)
Transfers to Stage 2 (4.6) 21.6 (4.4) 12.6
Transfers to Stage 3 (10.1) (55.4) 184.9 119.4
Net remeasurement of expected credit
losses
arising from transfers between
stages and
repayments(1) (13.8) (36.7) 180.0 129.5
Repayments and ECL movements while
stage
remained unchanged and final repayments (1.7) (3.0) (14.4) (19.1)
Changes to model methodologies (1.1) 0.5 0.1 (0.5)
Charge to the income statement 4.5 (39.2) 165.7 131.0
Write offs - (0.1) (24.3) (24.4)
At 31 January 2023 54.8 39.0 298.4 392.2
Stage 1 Stage 2 Stage 3 Total
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
1 Repayments relate only to financial assets which transferred
between stages during the year. Other repayments are shown in the
line below.
Six months Year ended 31 July
ended
31 January
2023 2022 2022
GBP million GBP million GBP million
Impairment losses relating to loans and advances to customers:
Charge to income statement arising from movement in impairment
provisions 131.0 36.4 93.4
Amounts written off directly to income statement, net of recoveries
and other costs 31.4 10.7 8.5
162.4 47.1 101.9
Impairment (credit)/losses relating to other financial assets (0.2) 1.2 1.4
Impairment losses on financial assets recognised in income
statement 162.2 48.3 103.3
Impairment losses on financial assets of GBP162.2 million
include GBP114.6 million in relation to Novitas (six months ended
31 January 2022: GBP39.2 million; year ended 31 July 2022: GBP60.7
million).
7. Debt securities
Fair value Fair value
through through other
profit or comprehensive Amortised
loss income cost Total
GBP million GBP million GBP million GBP million
Long trading positions in debt
securities 11.0 - - 11.0
Certificates of deposit - - 50.6 50.6
Sovereign and central bank
debt - 201.1 - 201.1
At 31 January 2023 11.0 201.1 50.6 262.7
Fair value Fair value
through through other
profit or comprehensive Amortised
loss income cost Total
GBP million GBP million GBP million GBP million
Long trading positions in debt
securities 12.4 - - 12.4
Certificates of deposit - - 185.0 185.0
Sovereign and central bank
debt - 415.4 - 415.4
At 31 July 2022 12.4 415.4 185.0 612.8
-------------
Movements in the book value of sovereign and central bank debt
comprise:
Six months
ended Year ended
31 January 31 July
2023 2022
GBP million GBP million
Sovereign and central bank debt at beginning
of period 415.4 192.5
Additions 269.7 335.3
Disposals (169.7) -
Redemptions (305.0) (80.0)
Currency translation difference 2.3 (1.2)
Changes in fair value (11.6) (31.2)
Sovereign and central bank debt at end
of period 201.1 415.4
8. Equity shares
31 January 31 July
2023 2022
GBP million GBP million
Long trading positions 26.0 27.1
Other equity shares 1.3 1.3
27.3 28.4
9. Goodwill and other intangible assets
Intangible
assets on
Goodwill Software acquisition Total
GBP million GBP million GBP million GBP million
------------ ------------
Cost
At 1 August 2021 142.9 272.8 51.0 466.7
Additions - 24.2 - 24.2
Disposals and write offs (0.1) (4.2) - (4.3)
At 31 January 2022 142.8 292.8 51.0 486.6
Additions - 31.8 - 31.8
Disposals and write offs (0.2) (25.1) - (25.3)
------------ ------------
At 31 July 2022 142.6 299.5 51.0 493.1
Additions - 27.1 - 27.1
Disposals and write offs (0.1) (1.7) (0.6) (2.4)
------------ ------------
At 31 January 2023 142.5 324.9 50.4 517.8
------------ ------------
Amortisation and impairment
At 1 August 2021 47.9 142.4 43.8 234.1
Amortisation and impairment charge
for the period - 18.3 0.9 19.2
Disposals and write offs - (4.2) - (4.2)
At 31 January 2022 47.9 156.5 44.7 249.1
Amortisation and impairment charge
for the period - 16.3 1.1 17.4
Disposals and write offs - (25.4) - (25.4)
At 31 July 2022 47.9 147.4 45.8 241.1
Amortisation and impairment charge
for the period - 17.3 0.9 18.2
Disposals and write offs - (1.1) (0.6) (1.7)
------------ ------------
At 31 January 2023 47.9 163.6 46.1 257.6
------------ ------------
Net book value at 31 January 2023 94.6 161.3 4.3 260.2
------------ ------------
Net book value at 31 July 2022 94.7 152.1 5.2 252.0
------------ ------------
Net book value at 31 January 2022 94.9 136.3 6.3 237.5
------------ ------------
Net book value at 1 August 2021 95.0 130.4 7.2 232.6
------------ ------------
Intangible assets on acquisition relate to broker and customer
relationships and are amortised over a period of eight to 20
years.
In the six months ended 31 January 2023, GBP0.9 million (six
months ended 31 January 2022: GBP0.9 million; year ended 31 July
2022: GBP2.0 million) of the amortisation charge is included in
amortisation of intangible assets on acquisition and GBP17.3
million (six months ended 31 January 2022: GBP18.3 million; year
ended 31 July 2022: GBP34.6 million) of the amortisation charge is
included in administrative expenses shown in the consolidated
income statement.
10 . Property, plant and equipment
Assets
Fixtures, held under
fittings operating Right
Leasehold and leases Motor of use
property equipment vehicles assets Total
GBP million GBP million GBP million GBP million GBP million GBP million
------------ ------------ ------------ ------------ ------------
Cost
At 1 August 2021 25.2 74.8 360.7 0.2 71.7 532.6
Additions 0.7 2.9 33.7 - 6.4 43.7
Disposals and write offs (3.9) (4.3) (12.2) - (5.2) (25.6)
At 31 January 2022 22.0 73.4 382.2 0.2 72.9 550.7
Additions (0.1) 1.4 34.1 - 7.2 42.6
Disposals and write offs (1.0) (12.2) (18.1) - (1.6) (32.9)
------------ ------------ ------------ ------------ ------------
At 31 July 2022 20.9 62.6 398.2 0.2 78.5 560.4
Additions - 5.1 41.7 - 5.7 52.5
Disposals and write offs (0.1) (1.2) (11.7) - (3.3) (16.3)
------------ ------------ ------------ ------------ ------------
At 31 January 2023 20.8 66.5 428.2 0.2 80.9 596.6
------------ ------------ ------------ ------------ ------------
Depreciation and impairment
At 1 August 2021 15.7 47.5 137.8 0.1 21.6 222.7
Depreciation and impairment
charge
for the period 1.1 3.6 20.6 0.1 6.3 31.7
Disposals and write offs (3.8) (4.1) (6.1) - (4.0) (18.0)
At 31 January 2022 13.0 47.0 152.3 0.2 23.9 236.4
Depreciation and impairment
charge
for the period 1.1 4.0 20.0 - 6.9 32.0
Disposals and write offs (1.1) (14.1) (14.1) - (1.2) (30.5)
------------ ------------ ------------ ------------ ------------
At 31 July 2022 13.0 36.9 158.2 0.2 29.6 237.9
Depreciation and impairment
charge
for the period 1.0 4.2 21.2 - 7.1 33.5
Disposals and write offs (0.1) (1.4) (7.5) - (1.8) (10.8)
------------ ------------ ------------ ------------ ------------
At 31 January 2023 13.9 39.7 171.9 0.2 34.9 260.6
------------ ------------ ------------ ------------ ------------
Net book value at 31 January
2023 6.9 26.8 256.3 - 46.0 336.0
------------ ------------ ------------ ------------ ------------
Net book value at 31 July
2022 7.9 25.7 240.0 - 48.9 322.5
------------ ------------ ------------ ------------ ------------
Net book value at 31 January
2022 9.0 26.4 229.9 - 49.0 314.3
------------ ------------ ------------ ------------ ------------
Net book value at 1 August
2021 9.5 27.3 222.9 0.1 50.1 309.9
------------ ------------ ------------ ------------ ------------
11. Settlement balances and short positions
31 January 31 July
2023 2022
GBP million GBP million
Settlement balances 608.3 780.7
Short positions held for trading:
Debt securities 4.2 7.5
Equity shares 6.5 7.9
-----------
10.7 15.4
-----------
619.0 796.1
12. Financial liabilities
The contractual maturity of financial liabilities, which largely
relate to treasury funding balances, is set out below.
Between Between
Within three months Between two and After
On three and one one and five more than
demand months year two years years five years Total
GBP
GBP million GBP million GBP million GBP million GBP million GBP million million
Deposits by banks 9.5 55.3 94.8 - - - 159.6
Deposits by customers 134.6 1,678.2 3,771.5 1,168.9 500.5 - 7,253.7
Loans and overdrafts
from banks 8.5 44.7 - 490.0 110.0 - 653.2
Debt securities
in
issue - 269.0 717.8 225.0 472.4 310.7 1,994.9
Subordinated loan
capital(1) - 1.6 - - - 177.8 179.4
At 31 January
2023 152.6 2,048.8 4,584.1 1,883.9 1,082.9 488.5 10,240.8
1 Comprises issuances of GBP200.0 million with a contractual
maturity date of 2031 and optional prepayment date of 2026.
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 6.1 52.0 102.4 - - - 160.5
Deposits by customers 120.9 1,645.2 3,615.6 1,058.8 329.9 - 6,770.4
Loans and overdrafts
from banks 12.1 10.7 - 228.0 371.9 - 622.7
Debt securities
in
issue - 26.7 855.3 249.4 567.0 362.5 2,060.9
Subordinated loan
capital(1) - 1.6 - - - 184.9 186.5
At 31 July 2022 139.1 1,736.2 4,573.3 1,536.2 1,268.8 547.4 9,801.0
1 Comprises issuances of GBP200.0 million with a contractual
maturity date of 2031 and optional prepayment date of 2026.
Assets pledged and received as collateral
The group pledges assets for repurchase agreements and
securities borrowing agreements which are generally conducted under
terms that are customary to standard borrowing contracts.
At 31 January 2023, the group was a participant of the Bank of
England's Term Funding Scheme with Additional Incentives for SMEs
("TFSME"). Under this scheme, asset finance loan receivables of
GBP930.7 million and retained notes relating to Motor Finance loan
receivables of GBP107.8 million were positioned as collateral with
the Bank of England, against which GBP600.0 million of cash was
drawn.
At 31 July 2022, under the same scheme, in addition to asset
finance loan receivables of GBP626.1 million and retained notes
relating to Motor Finance loan receivables of GBP24.3 million, UK
gilts with a market value of GBP72.6 million and UK T-Bills with a
market value of GBP144.3 million were positioned as collateral with
the Bank of England, against which GBP600.0 million of cash was
drawn.
The term of these transactions is four years from the date of
each drawdown but the group may choose to repay earlier at its
discretion. The risks and rewards of the loan receivables remain
with the group and continue to be recognised in loans and advances
to customers on the consolidated balance sheet.
The group has securitised without recourse and restrictions
GBP1,521.1 million (31 July 2022: GBP1,626.8 million) of its
insurance premium and motor loan receivables in return for cash and
asset-backed securities in issue of GBP1,112.0 million (31 July
2022: GBP1,156.0 million restated). This includes the GBP107.8
million (31 July 2022: GBP24.3 million) retained notes positioned
as collateral with the Bank of England. As the group has retained
exposure to substantially all the credit risk and rewards of the
residual benefit of the underlying assets it continues to recognise
these assets in loans and advances to customers in its consolidated
balance sheet.
13. Capital
The table below summarises the composition of regulatory capital
and Pillar 1 risk weighted assets at those financial period ends.
The information presented in this note is outside the scope of the
independent review performed by PricewaterhouseCoopers LLP.
31 January 31 July
2023 2022
GBP million GBP million
Common equity tier 1 ("CET1") capital
Called up share capital 38.0 38.0
Retained earnings(1) 1,568.1 1,628.4
Other reserves recognised for CET1 capital 6.6 10.0
Regulatory adjustments to CET1 capital
Intangible assets, net of associated deferred tax liabilities (259.1) (250.7)
Foreseeable dividend(2) (33.5) (65.6)
Investment in own shares (41.8) (40.6)
Pension asset, net of associated deferred tax liabilities (1.1) (5.3)
Prudent valuation adjustment (0.3) (0.5)
Insufficient coverage for non-performing exposures (0.2) -
IFRS 9 transitional arrangements(3) 34.0 83.0
CET1 capital 1,310.7 1,396.7
Tier 2 capital - subordinated debt 200.0 200.0
Total regulatory capital(4) 1,510.7 1,596.7
Risk weighted assets (notional)(4)
Credit and counterparty risk 8,191.8 8,389.0
Operational risk(5) 1,085.8 1,085.8
Market risk(5) 105.7 116.5
9,383.3 9,591.3
CET1 capital ratio(4) 14.0% 14.6%
Total capital ratio(4) 16.1% 16.6%
1 Retained earnings for the period ended 31 January 2023 include
all profits (both verified and unverified) for the six month
period.
2 For 31 January 2023 the foreseeable dividend was determined as
the proposed interim dividend. For 31 July 2022 a foreseeable
dividend was determined as the proposed final dividend.
3 The group has elected to apply IFRS 9 transitional
arrangements, which allow the capital impact of expected credit
losses to be phased in over the transitional period.
4 Shown after applying IFRS 9 transitional arrangements and the
CRR transitional and qualifying own funds arrangements. At 31
January 2023 the fully loaded CET1 capital ratio is 13.7% (31 July
2022: 13.8%) and total capital ratio is 15.8% (31 July 2022:
15.9%).
5 Operational and market risks include a notional adjustment at
8% in order to determine notional risk weighted assets.
The following table shows a reconciliation between equity and
CET1 capital after deductions:
31 January 31 July
2023 2022
GBP million GBP million
Equity 1,606.1 1,657.5
Regulatory adjustments to CET1 capital:
Intangible assets, net of associated
deferred tax liabilities (259.1) (250.7)
Foreseeable dividend(1) (33.5) (65.6)
IFRS 9 transitional arrangements 34.0 83.0
Pension asset, net of associated deferred
tax liabilities (1.1) (5.3)
Prudent valuation adjustment (0.3) (0.5)
Insufficient coverage for non-performing
exposures (0.2) -
Other reserves not recognised for CET1
capital:
Cash flow hedging reserve (35.2) (21.7)
CET1 capital 1,310.7 1,396.7
1 For 31 January 2023 the foreseeable dividend was determined as
the proposed interim dividend. For 31 July 2022 a foreseeable
dividend was determined as the proposed final dividend.
The following table shows the movement in CET1 capital during
the period:
Year
Six months ended ended
31 January 31 July
2023 2022 2022
GBP million GBP million GBP million
CET1 capital at beginning of period 1,396.7 1,439.3 1,439.3
Profit in the period attributable to shareholders 8.4 95.1 165.2
Dividends paid and foreseen (33.5) (46.2) (98.4)
Change in software assets treatment(1) - (50.2) (50.2)
IFRS 9 transitional arrangements (49.0) (20.5) (34.8)
Increase in intangible assets, net of
associated deferred tax liabilities (8.4) (5.0) (19.7)
Other movements in reserves recognised for CET1
capital (6.5) - 0.1
Other movements in adjustments to CET1 capital 3.0 (6.8) (4.8)
CET1 capital at end of period 1,310.7 1,405.7 1,396.7
1 In line with CRR, effective on 1 January 2022, the CET1
capital ratio no longer includes the benefit related to software
assets which were previously exempt from the deduction requirement
for intangible assets from CET1.
14. Defined benefit pension scheme
During the period ended 31 January 2023, the group's defined
benefit pension scheme ("the scheme") entered into a buy-in
transaction with an insurance company covering all members of the
scheme. A buy-in is a bulk annuity policy that matches the scheme's
assets and liabilities, and represents a significant de-risking of
the investment portfolio. As a result of this transaction, the
pension surplus on the group's balance sheet has fallen to GBP1.5
million (31 July 2022: GBP7.2 million) with the loss recognised
within other comprehensive income.
15. Contingent liabilities
Motor Finance commission arrangements
The Group has received a number of complaints, some of which are
with the Financial Ombudsman Service, and is subject to a number of
claims through the courts regarding historic commission
arrangements with intermediaries on its Motor Finance products.
This follows the FCA's Motor Market Review in 2019. Depending on
the outcome of the court's rulings and/or regulatory findings on
the matter, these complaints and claims may give rise to a
potential future obligation to compensate customers. It is not
currently possible to estimate the financial impact, if any, or
scope of these or any future related claims.
16. Related party transactions
Related party transactions, including salary and benefits
provided to directors and key management, did not have a material
effect on the financial position or performance of the group during
the period. There were no changes to the type and nature of the
related party transactions disclosed in the Annual Report 2022 that
could have a material effect on the financial position and
performance of the group in the six months to 31 January 2023.
17. Consolidated cash flow statement reconciliation
Year
Six months ended ended
31 January 31 July
2023 2022(1) 2022
GBP million GBP million GBP million
(a) Reconciliation of operating profit before
tax to net cash
inflow from operating activities
Operating profit before tax 11.7 128.9 232.8
Tax refunded/(paid) 1.9 (38.2) (63.4)
Depreciation and amortisation 51.7 50.9 100.3
Impairment losses on financial assets 162.2 48.3 103.3
(Increase)/decrease in:
Interest receivable and prepaid expenses (14.7) 1.5 19.8
Net settlement balances and trading positions (31.1) (18.3) 17.2
Net loans to/from money broker against stock
advanced 22.0 27.0 2.7
Decrease in interest payable and accrued expenses (45.2) (62.5) (32.2)
Net cash inflow from trading activities 158.5 137.6 380.5
(Increase)/decrease in:
Loans and advances to banks not repayable on
demand (9.8) (1.8) (5.3)
Loans and advances to customers (54.1) (220.1) (515.0)
Assets held under operating leases (36.8) (26.0) (54.5)
Certificates of deposit 134.4 (34.9) 79.7
Sovereign and central bank debt 205.0 (52.5) (255.3)
Other assets less other liabilities (10.0) (2.6) (6.4)
(Decrease)/increase in:
Deposits by banks (8.3) 8.2 11.8
Deposits by customers 462.4 132.1 142.7
Loans and overdrafts from banks 30.5 159.5 110.0
(Redemption)/issuance of debt securities (38.7) 71.3 270.5
Net cash inflow from operating activities 833.1 170.8 158.7
(b) Analysis of net cash outflow in respect
of the purchase of subsidiaries and equity
shares held for investment
Cash consideration paid (0.5) - (0.1)
(c) Analysis of net cash inflow in respect of
the sale of subsidiaries and discontinued
operations
Cash consideration received 0.5 0.1 0.1
31 January 31 July
2023 2022 2022
GBP million GBP million GBP million
(d) Analysis of cash and cash equivalents(2)
Cash and balances at central banks 1,858.4 1,160.2 1,236.0
Loans and advances to banks repayable on demand 241.9 315.8 147.0
2,100.3 1,476.0 1,383.0
1 Comparatives have been updated to present impairment losses on
financial assets in a separate line with no impact on the net cash
inflow from operating activities figure.
2 Excludes Bank of England cash reserve account and amounts held as collateral.
During the period ended 31 January 2023, the non-cash changes on
debt financing amounted to GBP5.9 million (31 January 2022: GBP3.8
million; 31 July 2022: GBP9.6 million) arising from interest
accretion and fair value hedging movements.
18. Fair value of financial assets and liabilities
The fair values of the group's financial assets and liabilities
are not materially different from their carrying values. The
differences include the following:
31 January 2023 31 July 2022
Fair Carrying Fair Carrying
value value value value
GBP million GBP million GBP million GBP million
------------ ------------
Subordinated loan capital 172.6 179.4 180.0 186.5
Debt securities in issue 1,999.1 1,994.9 2,071.4 2,060.9
The group holds financial instruments that are measured at fair
value subsequent to initial recognition. Each instrument has been
categorised within one of three levels using a fair value hierarchy
that reflects the significance of the inputs used in making the
measurements. These levels are based on the degree to which the
fair value is observable and are defined in note 28 "Financial risk
management" of the Annual Report 2022. The table below shows the
classification of financial instruments held at fair value into the
valuation hierarchy:
Level Level Level
1 2 3 Total
GBP million GBP million GBP million GBP million
At 31 January 2023
Assets
Debt securities:
Long trading positions in debt securities 10.0 1.0 - 11.0
Sovereign and central bank debt 201.1 - - 201.1
Equity shares 2.8 24.2 0.3 27.3
Derivative financial instruments - 107.5 9.2 116.7
Contingent consideration - - 1.9 1.9
213.9 132.7 11.4 358.0
-----------
Liabilities
Short positions:
Debt securities 3.1 1.1 - 4.2
Equity shares 1.5 4.9 0.1 6.5
Derivative financial instruments - 152.7 9.2 161.9
Contingent consideration - - 2.5 2.5
4.6 158.7 11.8 175.1
-----------
Level
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
There is no significant change to the valuation methodologies
relating to Level 2 and 3 financial instruments disclosed in note
28 "Financial risk management" of the Annual Report 2022.
Financial instruments classified as Level 3 predominantly
comprise contingent consideration payable and receivable in
relation to the acquisitions and disposal of subsidiaries. The
valuation of contingent consideration is determined on a discounted
expected cash flow basis. The group believes that there is no
reasonably possible change to the technique or inputs used in the
valuation of these positions which would have a material effect on
the group's consolidated income statement.
There were no significant transfers between Level 1, 2 and 3
during the six months ended 31 January 2023 (six months ended 31
January 2022: none; year ended 31 July 2022: none).
There were no significant movements in financial instruments
categorised as Level 3 during the six months ended 31 January 2023
(six months ended 31 January 2022: none).
The gain recognised in the consolidated income statement
relating to financial instruments held at 31 January 2023 amounted
to GBP0.2 million (31 January 2022: GBPnil; 31 July 2022: GBP0.2
million loss).
19. Additional support for customers
Forbearance
Forbearance occurs when a customer is experiencing difficulty in
meeting their financial commitments and a concession is granted, by
changing the terms of the financial arrangement, which would not
otherwise be considered. This arrangement can be temporary or
permanent depending on the customer's circumstances.
The Banking division has historically offered a range of
concessions to support customers which vary depending on the
product and the customer's status. Such concessions include an
extension outside terms (for example a higher loan to value or
overpayments) and refinancing, which may incorporate an extension
of the loan tenor and capitalisation of arrears. Furthermore, other
forms of forbearance such as a moratorium, covenant waivers, and
rate concessions are also offered.
Loans are classified as forborne at the time a customer in
financial difficulty is granted a concession and the loan will
remain treated and recorded as forborne until the following exit
conditions are met:
1. The loan is considered as performing and there is no past-due
amount according to the amended contractual terms;
2. A minimum two-year probation period has passed from the date
the forborne exposure was considered as performing, during which
time regular and timely payments have been made, and;
3. None of the customer's exposures with Close Brothers are more
than 30 days past due at the end of the probation period.
The forbearance approach, including cure periods and exit
conditions remain consistent with those set out on pages 196 and
197 of the Annual Report 2022.
Forbearance analysis
At 31 January 2023, the gross carrying amount of loans with
forbearance measures increased GBP4.8 million to GBP213.7 million
(31 July 2022: GBP208.9 million).
As the number of customers supported via Covid-19 related
concessions has continued to reduce (noting no new Covid-19
forbearance arrangements have been offered in the period), the low
outstanding volumes have been consolidated into the single
forbearance total in the following analyses.
An analysis of forborne loans as at 31 January 2023 is shown in
the table below:
Forborne
loans as
a percentage
of gross
Gross loans loans and Provision Number of
and advances Forborne advances on forborne customers
to customers loans to customers loans supported
GBP million GBP million % GBP million
31 January 2023 9,176.9 213.7 2.3% 58.5 7,586
31 July 2022 9,144.5 208.9 2.3% 44.3 11,043
The following is a breakdown of forborne loans by segment:
31 January 31 July
2023 2022
GBP million GBP million
Commercial 44.7 62.3
Retail 27.9 23.0
Property 141.1 123.6
213.7 208.9
The following is a breakdown of the number of customers
supported by segment:
31 January 31 July
2023 2022
Commercial 393 518
Retail 7,132 10,467
Property 61 58
7,586 11,043
The following is a breakdown of forborne loans by concession
type:
31 January 31 July
2023 2022
GBP million GBP million
Extension outside
terms 115.6 113.0
Refinancing 9.4 3.0
Moratorium 56.9 69.9
Other modifications 31.8 23.0
213.7 208.9
Government lending schemes
In addition to the Covid-19 specific forbearance measures
covered in this note, following accreditation, customers facilities
were offered under the UK government-introduced Coronavirus
Business Interruption Loan Scheme ("CBILS"), the Coronavirus Large
Business Interruption Loan Scheme ("CLBILS") and the Bounce Back
Loan Scheme ("BBLS"), thereby enabling us to maximise our support
to small businesses. As at 31 January 2023, there are 4,938
remaining facilities, with balances of GBP587.8 million following
commencement of repayments across our Property, Asset Finance &
Leasing and Invoice Finance businesses.
We also received accreditation to offer products under the
Recovery Loan Scheme ("RLS"), and schemes in the Republic of
Ireland. Applications for facilities under phase 2 of the RLS
closed in June 2022. As at 31 January 2023, there are 618 remaining
facilities, with balances totalling GBP186.6 million.
We maintain a regular reporting cycle of these facilities to
monitor performance. To date, a number of claims have been made and
payments received under the government guarantee.
20. Interest rate risk
The group's exposure to interest rate risk predominantly arises
in the Banking division. Interest rate risk in the other business
divisions is considered immaterial. The group has a simple and
transparent balance sheet and a low appetite for interest rate risk
which is limited to that required to operate efficiently.
The group's governance policy and approach in relation to
interest rate risk remains unchanged, from that described on page
202 of the Annual Report 2022, except in relation to the disclosure
of basis risk. In line with PRA guidance, we monitor and assess a
stressed add-on for basis risk. To provide a clearer assessment of
interest rate risk this stressed add-on has been excluded from the
Earnings at Risk ("EaR") numbers disclosed for both the current
year and prior year comparatives.
The table below sets out the assessed impact on our base case
EaR due to a parallel shift in interest rates:
31 January 31 July
2023 2022(1)
GBP million GBP million
0.5% increase 2.6 3.7
0.5% decrease (2.6) (0.3)
The group's EaR at 31 January 2023 reflects its policy to ensure
exposure to interest rate shocks is minimised. The EaR measure is a
combination of the group's repricing profile which is positively
correlated to rising rates and optionality risk which is negligible
in the current higher rate environment.
The table below sets out the assessed impact on our base case
Economic Value ("EV") due to a shift in interest rates:
31 January 31 July
2023 2022(1)
GBP million GBP million
0.5% increase 2.3 1.1
0.5% decrease (2.2) (0.8)
1 Prior year comparatives for EaR and EV relate to the Banking
division only. Interest rate risk in the other divisions was
immaterial. Current year EaR and EV are shown for the group.
The group's EV at 31 January 2023 reflects its policy to ensure
exposure to interest rate shocks is minimised. The EV measure is a
combination of our repricing profile, which is positively
correlated to rising rates, offset by embedded optionality to cover
interest rate floors within the Bank's lending and borrowing
activities.
Cautionary Statement
Certain statements included or incorporated by reference within
this announcement may constitute "forward-looking statements" in
respect of the group's operations, performance, prospects and/or
financial condition. All statements other than statements of
historical fact are, or may be deemed to be, forward-looking
statements. Forward-looking statements are sometimes, but not
always, identified by their use of a date in the future or such
words as "anticipates", "aims", "due", "could", "may", "will",
"should", "expects", "believes", "intends", "plans", "potential",
"targets", "goal" or "estimates". By their nature, forward-looking
statements involve a number of risks, uncertainties and assumptions
and actual results or events may differ materially from those
expressed or implied by those statements. There are also a number
of factors that could cause actual future operations, performance,
financial conditions, results or developments to differ materially
from the plans, goals and expectations expressed or implied by
these forward-looking statements and forecasts. These factors
include, but are not limited to, those contained in the Group's
annual report (available at:
https://www.closebrothers.com/investor-relations ). Accordingly, no
assurance can be given that any particular expectation will be met
and reliance should not be placed on any forward-looking statement.
Additionally, forward-looking statements regarding past trends or
activities should not be taken as a representation that such trends
or activities will continue in the future.
Except as may be required by law or regulation, no
responsibility or obligation is accepted to update or revise any
forward-looking statement resulting from new information, future
events or otherwise. Nothing in this announcement should be
construed as a profit forecast. Past performance cannot be relied
upon as a guide to future performance and persons needing advice
should consult an independent financial adviser.
This announcement does not constitute or form part of any offer
or invitation to sell, or any solicitation of any offer to
subscribe for or purchase any shares or other securities in the
company or any of its group members, nor shall it or any part of it
or the fact of its distribution form the basis of, or be relied on
in connection with, any contract or commitment or investment
decisions relating thereto, nor does it constitute a recommendation
regarding the shares or other securities of the company or any of
its group members. Statements in this announcement reflect the
knowledge and information available at the time of its preparation.
Liability arising from anything in this announcement shall be
governed by English law. Nothing in this announcement shall exclude
any liability under applicable laws that cannot be excluded in
accordance with such laws.
This information is provided by RNS, the news service of the
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END
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March 14, 2023 03:00 ET (07:00 GMT)
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