TIDMARBB
RNS Number : 4186T
Arbuthnot Banking Group PLC
25 March 2021
25 March 2021
For immediate release
ARBUTHNOT BANKING GROUP ("Arbuthnot", "the Group" or "ABG")
Audited Final Results for the year to 31 December 2020
Strong financial resources have allowed the Group to accelerate
strategy via acquisition.
Arbuthnot Banking Group today announces its audited results for
the year ended 31 December 2020.
Arbuthnot Banking Group PLC is the holding company for Arbuthnot
Latham & Co., Limited.
FINANCIAL HIGHLIGHTS
-- (Loss)/Profit Before Tax (GBP1.1m) (2019: GBP7.0m) -
excluding acquisition costs, the business broke even in 2020*
-- Operating income steady at GBP72.5m (2019: GBP72.5m)
-- Earnings per share negative 8.9p (2019: 41.2p)
-- No dividend declared for 2020**
-- Net assets GBP194m (2019: GBP208m)
-- Net assets per share 1270p (2019: 1364p)
-- Total capital ratio 18.7% (2019: 17.3%)
OPERATIONAL HIGHLIGHTS
Arbuthnot Latham
-- Profit before tax and group recharges of GBP8.3m (2019: GBP16.2m), a decrease of 49%
-- Average net margin at 4.1% (2019: 4.5%)
-- Customer loans decreased 1% to GBP1,588m (2019: GBP1,599m)
-- Customer deposits increased 13% to GBP2,365m (2019: GBP2,085m)
-- Assets under management increased 4% to GBP1,147m (2019:
GBP1,107m) driven by both strong net inflows and investment
performance
-- Arbuthnot Commercial Asset Based Lending profit has paid back
start-up losses incurred; a strong year of progress saw it grow
customers by 60%, drawn balances by 50% and facility limits by 82%
in 2020
-- All employees successfully worked remotely as the Bank operated well during the pandemic
-- Installed new CRM system, linked to upgraded website in
support of digital marketing initiatives
-- Agreed acquisition of commercial truck leasing business,
Asset Alliance, which incurred GBP1m of transaction costs accounted
for in 2020***
During First Quarter 2021
-- Completed sale of GBP55m residential mortgage portfolio generating a gain of GBP2.2m
-- Took the decision to close Dubai representative office.
Relationships will be managed from London
-- Declared special dividend of 21p, paid on 19 March 2021, in
respect of the withdrawn 2019 final dividend
Commenting on the results, Sir Henry Angest, Chairman and Chief
Executive of Arbuthnot, said: "In a year in which the pandemic and
associated lockdowns impacted businesses, Arbuthnot delivered a
resilient performance and continued to make good operational
progress. After a positive start to 2020, growth in lending
balances and profits paused from the onset of the lockdown, as
historically low base rates and a prudent reduction in the Bank's
credit appetite took their toll. It was however pleasing to see
that whilst our growth may have paused, the bank did not. Our
technology enabled us to serve clients remotely, whilst we also
relaunched our website linked to a newly-developed CRM system, and
delivered a well-received evolution of the Arbuthnot Latham
brand.
We also had considerable success in growing our client base,
with the Bank opening a significant number of new accounts in 2020,
which in turn contributed to the good growth in deposits. This
progress, together with growing demand for lending and the
increased diversity of our business following the acquisition of
Asset Alliance, leaves us well placed to resume our growth."
Note: * The results include GBP1m of transaction costs related
to acquisition of Asset Alliance.
** On 18 February 2021 the Board declared a special dividend of
21p in lieu of the final dividend for 2019 that had been withdrawn
after guidance from the Regulators.
*** Clearance was received from the FCA on 2 March 2021 and the
acquisition is expected to complete on 31 March
2021.
The Directors of the Company accept responsibility for the
contents of this announcement.
ENQUIRIES:
0207 012
Arbuthnot Banking Group 2400
Sir Henry Angest, Chairman and Chief Executive
Andrew Salmon, Group Chief Operating Officer
James Cobb, Group Finance Director
Grant Thornton UK LLP (Nominated Adviser and AQSE Exchange 0207 383
Corporate Adviser) 5100
Colin Aaronson
Samantha Harrison
Seamus Fricker
0207 260
Numis Securities Ltd (Joint Broker) 1000
Stephen Westgate
0207 408
Shore Capital Stockbrokers Ltd (Joint Broker) 4090
Hugh Morgan
Daniel Bush
0207 379
Maitland/AMO (Financial PR) 5151
Neil Bennett
Sam Cartwright
The 2020 Annual Report and Notice of Meeting will be available
on the Arbuthnot Banking Group website
http://www.arbuthnotgroup.com on or before 16 April 2021. Copies
will then be available from the Company Secretary, Arbuthnot
Banking Group PLC, Arbuthnot House, 7 Wilson Street, London, EC2M
2SN, when practicable.
Consolidated statement of comprehensive income
Year ended 31
December
2020 2019
Note GBP000 GBP000
------------------------------------------------------- ----- --------- ---------
Interest income 8 75,082 76,870
Interest expense (17,024) (18,233)
------------------------------------------------------- ----- --------- ---------
Net interest income 58,058 58,637
------------------------------------------------------- ----- --------- ---------
Fee and commission income 9 14,735 13,935
Fee and commission expense (293) (107)
------------------------------------------------------- ----- --------- ---------
Net fee and commission income 14,442 13,828
------------------------------------------------------- ----- --------- ---------
Operating income 72,500 72,465
------------------------------------------------------- ----- --------- ---------
Net impairment loss on financial assets 10 (2,849) (867)
Other income 11 678 5,599
Operating expenses 12 (71,419) (70,186)
------------------------------------------------------- ----- --------- ---------
(Loss) / profit before tax (1,090) 7,011
Income tax expense 13 (242) (835)
------------------------------------------------------- ----- --------- ---------
(Loss) / profit after tax (1,332) 6,176
------------------------------------------------------- ----- --------- ---------
Other comprehensive income
Items that will not be reclassified to profit or loss
Changes in fair value of equity investments at fair value
through other comprehensive income (12,826) 10,707
Tax on other comprehensive income (69) (77)
------------------------------------------------------- ----- --------- ---------
Other comprehensive (loss) / income for the period,
net of tax (12,895) 10,630
------------------------------------------------------- ----- --------- ---------
Total comprehensive (loss) / income for the period (14,227) 16,806
------------------------------------------------------- ----- --------- ---------
Earnings per share for profit attributable to the equity
holders of the Company during the year
(expressed in pence per share):
------------------------------------------------------- ----- --------- ---------
Basic earnings per share 15 (8.9) 41.2
------------------------------------------------------- ----- --------- ---------
Diluted earnings per share 15 (8.9) 41.2
------------------------------------------------------- ----- --------- ---------
Consolidated statement of financial position
At 31 December
2020 2019
Note GBP000 GBP000
ASSETS
Cash and balances at central banks 16 636,799 325,908
Loans and advances to banks 17 110,267 46,258
Debt securities at amortised cost 18 344,692 442,960
Assets classified as held for sale 19 3,285 7,617
Derivative financial instruments 20 1,843 1,804
Loans and advances to customers 21 1,587,849 1,599,053
Current tax asset 205 -
Other assets 23 96,288 86,443
Financial investments 24 18,495 30,919
Deferred tax asset 25 1,009 1,815
Intangible assets 26 23,646 20,082
Property, plant and equipment 27 4,905 5,813
Right-of-use assets 28 17,703 19,944
Investment property 29 6,550 6,763
--------------------------------------------- ----- ---------- ----------
Total assets 2,853,536 2,595,379
--------------------------------------------- ----- ---------- ----------
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital 36 154 154
Retained earnings 37 207,839 209,171
Other reserves 37 (13,970) (990)
--------------------------------------------- ----- ---------- ----------
Total equity 194,023 208,335
--------------------------------------------- ----- ---------- ----------
LIABILITIES
Deposits from banks 30 230,090 230,421
Derivative financial instruments 20 649 319
Deposits from customers 31 2,365,207 2,084,903
Current tax liability - 633
Other liabilities 32 7,606 13,500
Lease liabilities 33 18,305 20,431
Debt securities in issue 34 37,656 36,837
--------------------------------------------- ----- ---------- ----------
Total liabilities 2,659,513 2,387,044
--------------------------------------------- ----- ---------- ----------
Total equity and liabilities 2,853,536 2,595,379
--------------------------------------------- ----- ---------- ----------
Chairman's statement
Arbuthnot Banking Group ("ABG" or "The Group") has reported a
loss before tax of GBP1.1m in a year that has been like no other in
living memory. The Group had started the year on the front foot,
with businesses enjoying the "Boris Bounce" after his emphatic
General Election victory in late 2019. Lending balances increased
by GBP62m from the prior year end - and then the pandemic
struck.
The base rate reduction on its own caused a decline in revenues
of GBP10.3m and further growth opportunities were lost as the Group
tightened its lending criteria. This was both a precautionary
measure, to limit the risks of the pandemic and to conserve capital
for opportunities that we believed might arise. This caused
customer loan balances to fall over the remainder of the year, to
end at approximately the same level as the prior year. Thus, the
Group has in fact missed a year of growth and its associated
increased revenue. The pandemic's immediate impact on revenue has
been in part offset by not awarding bonus payments to
employees.
In my Chairman's report of 2019, I noted that the Group was well
placed in terms of capital and liquidity to take advantage of any
opportunities that the turmoil would present. I said this after
noting that the Group prospered significantly following the
financial crisis at the end of the previous decade. The Group was
at that time able to successfully complete several acquisitions, at
values that reflected the dislocation in the market, caused by the
withdrawal of liquidity by the major banks to the non-bank lending
market. Most notable of these was the acquisition of Everyday Loans
that the Group purchased for GBP1 and subsequently sold for a gain
of GBP117m three and a half years later. Therefore, I was pleased
that we were able to exchange contracts in December of 2020, to
acquire the entire share capital of Asset Alliance Group Holdings
Limited ("Asset Alliance"). I expect this acquisition to complete
on 31 March 2021 as we have recently received approval from the
regulatory bodies regarding our change of control application.
I am delighted that Willie Patterson, the CEO of Asset Alliance,
and his Senior Management team will join the Group soon and I look
forward to working with them to grow the business, now that it will
no longer be constrained by its previous funding limits.
Asset Alliance is a market leading provider of leasing solutions
mainly in the commercial truck sector. This acquisition will
continue our strategy of diversification of Arbuthnot Latham &
Co., Limited ("Arbuthnot Latham" or "the Bank"), while remaining
true to our core values that are embedded in our Private Bank.
Asset Alliance provides us another niche within the specialist
Commercial Banking markets that we have been developing to
complement the Commercial Bank, Renaissance Asset Finance,
Arbuthnot Commercial Asset Based Lending and Arbuthnot Specialist
Finance. These all combine to bring together the "Future State"
vision that we are working towards, led by the core bank which will
maintain access to low-cost retail deposits that can be deployed
through our higher yielding lending businesses.
Highlights
Despite the decline in profitability caused by the pandemic, I
would like to note a number of highlights and also the continued
progress made by the Group during the year.
From the moment that the lockdown was declared the entire bank
moved to remote working without missing a beat. Clients continued
to receive their bespoke personal service, payments continued to be
transacted and investment decisions remained clear and decisive.
Meanwhile, fraud protection and second line monitoring maintained
the safety and soundness of the operations of the Group. Throughout
the whole of this time the Group has played its role within
society, not taking advantage of any of the Government's schemes
and paying all of its liabilities, including all tax related items,
on time. The Group was quickly accredited to the Government
sponsored lending schemes and extended GBP21m of Coronavirus
Business Interruption Loans ("CBILs") and GBP12m Bounce Back Loans
("BBLs") to our clients to help them navigate their way through the
cash flow issues that lockdowns bring. We also assisted our clients
with payment holidays. We have supported employees and avoided
using any of the furlough schemes. Their morale and dedication to
servicing our clients has remained at the highest level, despite
the long days working remotely and alone.
The fact that all our employees were working remotely was not an
impediment that was going to prevent our IT and change teams from
continuing to deliver on our ambitious programme of enhancing the
Bank's infrastructure and service propositions. In August, we moved
over to the newly implemented CRM systems provided by SalesForce.
This Bank-wide effort now gives our services teams the ability to
view all our clients' balances in one single place.
Finally, in December we switched our faster payment provider
from Lloyds to NatWest, while at the same time extending our
proposition to allow clients to instruct and make payments at any
hour of any day that they so choose. This was the last significant
enhancement needed to make our transactional banking capabilities
equivalent of other market leading brands.
From the onset of the pandemic the business focused on
maintaining its growth of deposits. While the recession was largely
in the real economy, we feared that it might quickly spread to the
financial sector and create a liquidity squeeze. I have often
commented that the strength of a bank should not only be judged on
its capital or quality of its loan book but by the solidity and
diversity of its deposit base. Thus, I have noted the creditable
performance of the Bank in gathering deposits during the 2020. The
end of the year deposit balance showed growth of 13%, while at the
same time the average cost of these deposits fell from 66bps to
54bps, which shows the Bank has not chased deposits at any cost.
This strength and diversification of the deposit base will enable
us to continue our growth trajectory once activity levels
return.
Given the turmoil in the investment markets and uncertainty in
the real economy I feel that the performance of our Investment
Management division should also be noted. The FTSE 100 index fell
by 14% during 2020, however, our balance of Assets Under Management
increased by 4% suggesting that the investment performance
outperformed the market even when excluding the net flow of
funds.
Brexit and Regulation
In my Chairman's report for 2019 I noted that business activity
had been reduced in the lead up to the General Election and the
implications that had for the conditions of the UK's withdrawal
from the European Union. It has always been clear to me that
businesses are mainly weighed down by a lack of clarity of the
future when making investment decisions. The political situation
had created much uncertainty in the UK and across Europe. So I am
now pleased that this uncertainty has been removed and it appears
that the UK has struck a good trade deal.
However, Brexit will only be successful if the Government is
bold and takes full advantage of the freedoms gained. For a start,
it must substantially reduce the stifling bureaucracy and plethora
of regulation that the UK has been forced to adopt over the
years.
The Civil Service must also play their part in bringing about
such transformation, a once in a lifetime opportunity. Out must go
the bad habit of gold plating every rule and every new regulation
must be tested against a rigorous impact assessment and should have
a sunset clause. Furthermore, we should introduce a "one in, one
out" principle to contain this proliferation of rules.
Board Changes and Personnel
During the year there were no changes to the Board. I would like
to thank my colleagues on the Board for their continued helpful and
committed collaboration despite only being able to meet
virtually.
As always, and especially this year, the progress of the Group
reflects the hard work and commitment of all the members of staff.
I believe that all our employees have responded particularly well
in these difficult circumstances in continuing to provide high
quality client service and in ensuring that their colleagues'
wellbeing was prioritised. On behalf of the Board I extend our
thanks to all of them for their dedicated efforts in 2020.
Dividend
The Board announced on 18 February 2021 that it intended to pay
a special dividend of 21p in-lieu of the dividend relating to 2019
that was cancelled following strong guidance from the PRA. This
dividend has already been paid and you should all be in receipt of
the monies.
Given the impact the pandemic has had on the Group's earnings,
the Board is not recommending a final dividend for the year of
2020, but will assess the dividend strategy of the Group, as
profitability is restored, in 2021.
Outlook
The macro economic outlook is currently uncertain, the rollout
of the vaccine in the UK appears to be powering ahead like a
"speedboat" and soon all adults should have been offered the
opportunity to protect themselves from the virus. The Government
recently published a roadmap out of the lockdown, but the emergence
of new variants could change the data and put this at risk.
Any further delay will push back the recovery, which appears to
be poised for a potentially strong rebound. However, in the
meantime, the Government appears committed to supporting the
economy and, so far, the valuations and demand in our sectors of
business have held up.
The acquisition of Asset Alliance, a growing demand in our
lending pipelines and the diversity of the Group places us in a
good position to deliver strong growth and results once the
restrictions on the economy are lifted.
Strategic Report
Business Review
Arbuthnot Latham & Co., Ltd
2020 2019
Operating income GBP75.1m GBP74.2m
Other income GBP1.5m GBP5.0m
Operating expenses GBP65.5m GBP62.2m
Profit before tax (before Group recharges) GBP8.3m GBP16.2m
Customer loans GBP1,587.8m GBP1,599.1m
Customer deposits GBP2,365.2m GBP2,084.9m
Total assets GBP2,855.0m GBP2,584.7m
Assets under management GBP1,147.5m GBP1,107.3m
Average net margin 4.1% 4.5%
Loan to deposit ratio 67.1% 76.7%
Arbuthnot Latham
Arbuthnot Latham & Co., Limited has reported a profit before
tax and Group recharges of GBP8.3m (2019: GBP16.2m profit).
The decline in profit against the prior year can largely be
attributed to two factors. Firstly, the fall in the Bank of England
Base Rate from 0.75% to a historic low of 0.1% in March resulted in
a reduction of interest generated from the loan book of GBP6.7m as
loans for the majority of the portfolio repriced to lower rates.
Secondly, this was compounded further by Arbuthnot Latham's
cautious approach to liquidity; by maintaining high levels of cash
reserves at the Bank of England as opposed to placing them in the
higher yielding wholesale money markets or operating at higher loan
to deposit ratios. This strategy cost the Bank a further GBP3.6m.
Whilst this cautious approach means that we may forgo a small
amount of potential revenues, it has protected the bank during
periods of economic uncertainty and we continue to favour
maintaining strong capital and liquidity positions to generate and
protect value over the long-term. Additionally, in response to the
emergence of the pandemic the Bank significantly reduced its credit
appetite due to uncertainty in the global economy. In the third
quarter the Bank re-instated its credit appetite to pre-pandemic
levels and re-entered the lending markets, underwriting deals with
strong fundamentals and where it could place certainty on
valuations. As a result of the fall in profitability, management
has responded by not awarding any discretionary bonus payments to
employees.
Other Income reduced by GBP3m from the prior year. In 2020 the
Group started a significant refurbishment programme on one of its
properties carried as inventory, King Street, which is expected to
complete in the middle of 2021. This resulted in reduced rental
income of GBP1.5m compared to the prior year. The prior year also
included GBP1.5m for the adjustment of the RAF management earn out
liability.
Despite the reduced lending activity, the Bank grew its deposit
balances by 13% in the year. A strong deposit base with balances in
excess of GBP2bn was maintained throughout 2020 with the Commercial
business exceeding GBP1bn in deposits for the first time during the
year. Assets Under Management ("AUM") also increased by 4% in the
year.
The average net margin for the Bank fell by 40bps from 4.5% to
4.1%. This was as a result of reduced yields from lending linked to
BOE base rate, somewhat offset by the average cost of deposits
falling from 0.66% to 0.54%.
In support of the Government's unprecedented financial
assistance package in response to the global pandemic, Arbuthnot
Latham and Arbuthnot Commercial Asset Based Lending ("ACABL")
became accredited lenders for the British Business Bank's CBIL and
BBL schemes. A total of GBP20.8m of CBIL and GBP12.3m of BBL loans
were issued across the Group during 2020 to 301 existing and new to
bank SME clients.
Credit provisions increased to GBP2.8m for the year (2019:
GBP0.9m). GBP1.2m of the charge was in Renaissance Asset Finance
("RAF") mainly as a result of its exposure to the London Taxi
market, which has experienced significant slow-down from the
pandemic. In response to wider economic uncertainty, the Bank also
revised its future economic scenarios as part of its IFRS9 expected
credit losses assessment. The Bank has applied an average net
decline of 5.5% compared to 1.8% in 2019 for its UK property-based
lending, which resulted in an increase in provisions of
GBP0.3m.
The Bank's strategy to maintain strong levels of capital and
liquidity allowed it to take advantage of the opportunity to
acquire Asset Alliance, a business based in Wolverhampton that
specialises in leasing commercial trucks, buses and coaches across
various sectors, with a current portfolio of around 4,000 vehicles.
The Bank has received all necessary regulatory approval and the
acquisition is planned to complete on 31 March 2021.
During the year, the Bank also launched its rebranded website
and observed internet traffic of up to 20,000 visitors a month. The
brand evolution and the current digital marketing campaign have
been shown to boost the Bank in the search rankings and is
generating more client introductions to the business.
Banking
During the year the Group changed the way it manages and reports
the Banking sector, combining the Private Banking and Commercial
Banking sector into a single Banking sector. This is the level at
which management decisions are made and how the Group will manage
the overall business sectors going forward with the anticipated
growth in subsidiary businesses.
The Private Bank's loan book returned to growth in 2020
reporting a modest increase of 1.3% to finish the year at GBP576m.
The Bank continued to develop its strategy for a relationship-led
service for clients who value the proposition. It continued to
deepen existing relationships, as well as acquiring new criteria
clients, with the latter continuing at the same pace as
pre-pandemic levels. The Bank refused to compromise on its pricing
models to attract new or retain existing lending, as well as taking
a conservative stance on credit decisions given the economic
uncertainty.
Private Banking deposits increased 4% to GBP1,080m. Following
the base rate reduction in 2020, the business deployed a strategy
to effectively manage the cost of deposits down whilst growing
overall balances from existing and new clients.
The Commercial Bank loan book increased by 6% to GBP557m. This
was against the backdrop of the pandemic and strategically moving
the emphasis away from commercial real estate towards professional
buy to let landlords. At the outset of the pandemic the immediate
focus of the relationship teams was to support existing clients
with payment deferrals or additional finance, to support them
during short-term difficulties . As part of its accreditation to
the Government's Coronavirus Business Support Schemes the business
issued 278 BBL loans totalling GBP12.3m.
Commercial Banking deposits increased by GBP255m in 2020 to
exceed GBP1bn and finish the year with balances totalling
GBP1,079m. The cost of deposits was closely managed by growing
existing relationships as well as attracting new criteria clients
to the Commercial Bank.
Wealth Management
Assets under Management ("AUM") increased by 4% during 2020 in
part due to record gross inflows nearly 10% higher than the prior
year and representing 14% of AUM at the start of the year.
Despite volatility in global equity markets, Wealth Management
continued to attract new criteria clients requiring Wealth Planning
and Investment Management services. The Investment Management
division saw net inflows of client assets (excluding market
movement) increase AUM to close the year at a record GBP1.15bn.
Wealth planning fees were GBP0.8m supporting GBP54m of gross AUM
inflows. The business completed its first full year providing event
based financial planning with clients paying for each piece of
specific advice on a transactional basis with no ongoing advice
fees attached.
The business continued to offer bespoke advice with client
services delivered through virtual client meetings. The online
client experience has been well received and clients have responded
positively with over 600 client consultations taking place in the
year.
Investment returns for 2020 recovered steadily from the March
lows, with strong gains in the final quarter. All investment
services recorded positive absolute returns for the calendar
year.
The business also launched its Investor Visa Service in the
fourth quarter, which comprised a series of risk managed
discretionary portfolios specifically designed to comply with the
Home Office's requirements for Tier 1 Investor Visas.
The number of Banking clients grew in 2020, with 789 new clients
which was approximately the same level as seen in 2019. Similarly,
the number of Investment Management clients grew by 5.6% in the
year.
Dubai
Following a strategic review of its international
representation, the Bank concluded that in the current market the
Dubai office no longer fitted with its future growth plans and so
consequently took the decision to close the Dubai office.
The business has generated a good volume of client relationships
for the Bank. However, its contribution versus its high cost base
makes it unviable for the Bank's future growth aspirations.
Existing client assets have always been held in London and clients
will now be serviced from the London office. The office is
scheduled to close at the end of May 2021.
Mortgage Portfolios
The Santiago mortgage portfolio acquired in August 2019
performed as expected, generating a gross yield of 3.5% consistent
with the prior year (2019: 3.8%). Customers taking advantage of
payment holidays as a result of the pandemic peaked at 27% during
the year, falling to 1.7% at the year end.
After being approached by Charter Court Financial Services
Limited (a subsidiary of OneSavings Bank), who provide the third
party servicing of the portfolio, the Bank decided to sell the Tay
portfolio as the yield had declined and it was becoming
uneconomical to service. The sale completed on 26 February 2021 and
generated a net gain of GBP2.2m for the 2021 financial year.
Renaissance Asset Finance ("RAF")
Renaissance Asset finance reported a profit of GBP2.1m (2019:
GBP1.9m). The combined effects of a decline in vehicle and capital
equipment demand from the SME sector, together with a tightened
approach to risk resulted in customer loan balances falling to
GBP91.9m (2019: GBP102.2m) as amortisation of the existing loans
exceeded new lending. It is expected that the decline will
stabilise and then reverse as increased levels of new business
activity return and as business sectors such as those involved in
food distribution, internet delivery, the essential services and IT
sectors experience an increased demand for asset finance
facilities.
At the peak of the pandemic RAF saw 71% of its loan balances
under forbearance measures. This fell to 16.7% at the year end. It
is apparent that business sectors such as the London taxi market,
which alone accounts for 86% of loan balances under forbearance,
along with hospitality and media have been more impacted than
others and are taking a longer time to recover. As a consequence,
credit provisions have increased to GBP1.2m for the year compared
to GBP0.7m for the previous year due to increased IFRS 9 Stage 2
provisions.
Despite the reduction in loan book and additional provisions
required under IFRS 9 the business remained profitable. Lead
indicators have continued to show good performance with no erosion
of margin on new business written, remaining stable at 8% (2019:
8%). Credit quality of new originations has improved due to a
revised credit appetite and reduced competition from other asset
finance providers - especially those independent non-bank owned
funders.
Arbuthnot Commercial Asset Based Lending ("ACABL")
ACABL continued to generate monthly profits throughout 2020 and
during the year recovered all start-up costs incurred since its
establishment in 2019.
The business completed 21 new transactions with facilities
totalling GBP92m. In addition, following the accreditation by the
British Business Bank in June to provide CBILs, the business wrote
23 CBIL loans totalling GBP20.8m to both existing clients and as
part of financing structures to attract new clients.
The client base at the year end stood at 55, representing a 60%
increase on 2019, with total facility limits of GBP244m, an 87%
increase against the prior year. Since inception, the business has
generated clients from 29 different sectors, underlining the spread
and diverse nature of the book.
At the year end, the business reported drawn balances of
GBP87.3m with a further GBP60.4m available for draw down. This is
an increase of 50% from GBP103.4m at the end of 2019.
During the year, the business made 5,500 payments to clients
totalling GBP750m, a 66% increase.
Maintaining a low client to portfolio manager ratio has enabled
the team to support clients effectively throughout the pandemic,
responding quickly to individual circumstances and challenges,
while ensuring prudent risk management. This personal,
service-driven approach is supported by an advanced technology-led
front end system that has allowed clients to provide data from
their accounting systems daily, enabling them to view their
available funds and draw down remotely, throughout the
lockdown.
Arbuthnot Specialist Finance Limited ("ASFL")
ASFL was only established in 2019 and then due to the economic
environment resulting from the pandemic, ASFLs credit appetite was
severely curtailed, which significantly supressed new lending
volumes.
The business restored its credit appetite early in the fourth
quarter and received a strong level of new business enquiries month
on month, which converted into a pipeline of business expected to
draw in early 2021.
Operations & Technology
As a result of the pandemic, the Bank responded with a rapid
move to remote working in March 2020. Due to a number of years of
continuing investment in IT systems, with a focus on ensuring
strong levels of resilience and the ability to respond quickly to
incidents, the Bank was able to move quickly to all employees
working remotely.
The Bank continued to invest in new IT systems and upgrading the
underlying IT infrastructure and networks. In July 2020 a new
Salesforce CRM platform was launched, providing employees with
easier access to client information and providing automated case
management for a large number of the operational processes used to
fulfil clients' requests.
Despite the extended period of people working remotely, a high
level of operational performance over the year continued to be
maintained, with an effective control environment and a strong
focus on supporting clients through the significant period of
disruption.
Non card payments increased by 13.1% and, as a result, the Bank
processed nearly 390,000 transactions, which is attributed to
changes in customer behaviour as a result of the pandemic. Over 85%
of these transactions were instructed via the online banking
system. Unsurprisingly, due to the more limited access to high
street retailers, there were 126,796 fewer card transactions made
in 2020 when compared to 2019 and spending levels on cards still
show little sign of returning to pre-pandemic levels. To support
card holders, a new card app was launched in the Spring of 2020,
providing clients with functionality to manage their cards
online.
To improve the client experience when using online and mobile
banking, an upgrade to the Mobile Banking App was delivered in the
Autumn of 2020 and in December the Bank upgraded its payment
systems, enabling clients to send and receive faster payments at
all times, having previously only offered this service within
traditional banking business hours. To support this, access to
client support teams was extended beyond standard banking
hours.
Strategic Report - Financial Review
Arbuthnot Banking Group adopts a pragmatic approach to risk
taking and seeks to maximise long term revenues and returns. Given
its relative size, it is nimble and able to remain entrepreneurial
and capable of taking advantage of favourable market opportunities
when they arise.
The Group provides a range of financial services to clients and
customers in its chosen markets of Banking, Wealth Management,
Asset Finance, Asset Based Lending and Specialist Finance. The
Group's revenues are derived from a combination of net interest
income from lending, deposit taking and treasury activities, fees
for services provided and commission earned on assets under
management. The Group also earns rental income on its properties
and receives dividends from financial investments.
Highlights
2020 2019
Summarised Income Statement GBP000 GBP000
----------------------------------------------------- --------- ---------
Net interest income 58,058 58,637
Net fee and commission income 14,442 13,828
----------------------------------------------------- --------- ---------
Operating income 72,500 72,465
Other income 678 5,599
Operating expenses (71,419) (70,186)
Impairment losses - loans and advances to customers (2,849) (867)
----------------------------------------------------- --------- ---------
(Loss) / profit before tax (1,090) 7,011
Income tax expense (242) (835)
----------------------------------------------------- --------- ---------
(Loss) / profit after tax (1,332) 6,176
----------------------------------------------------- --------- ---------
Basic earnings per share (pence) (8.9) 41.2
----------------------------------------------------- --------- ---------
Arbuthnot Arbuthnot
Latham Group Banking
Underlying profit/(loss) reconciliation & Co. Centre Group
31 December 2020 GBP000 GBP000 GBP000
----------------------------------------------------- ---------- -------- ----------
Profit before tax and group recharges 8,316 (9,406) (1,090)
Exceptional reduction in BoE Base Rate 10,335 - 10,335
Suspension of discretionary bonus payments (4,498) (1,611) (6,109)
Loss of STB dividend 168 1,360 1,528
Cost of establishing new ventures 1,012 - 1,012
Loss of rental income during refurbishment work 1,494 - 1,494
Costs relating to the acquisition of Asset Alliance 991 - 991
----------------------------------------------------- ---------- -------- ----------
Underlying profit 17,818 (9,657) 8,161
----------------------------------------------------- ---------- -------- ----------
Underlying basic earnings per share (pence) 57.2
----------------------------------------------------- ---------- -------- ----------
Arbuthnot Arbuthnot
Latham Group Banking
Underlying profit reconciliation & Co. Centre Group
31 December 2019 GBP000 GBP000 GBP000
------------------------------------------------------ ---------- --------- ----------
Profit before tax and group recharges 16,156 (9,145) 7,011
Cost of establishing new ventures 1,208 - 1,208
RAF deferred consideration adjustment (1,495) - (1,495)
Subordinated debt charge as if applicable from 1
January 2019* - (924) (924)
------------------------------------------------------ ---------- --------- ----------
Underlying profit 15,869 (10,069) 5,800
------------------------------------------------------ ---------- --------- ----------
Underlying basic earnings per share (pence) 32.8
------------------------------------------------------ ---------- --------- ----------
* - Subordinated debt charge accounted for as if
from 1 January, rather than 3 June (date of issue).
The Group has reported a loss before tax of GBP1.1m (2019:
profit of GBP7.0m). The underlying profit before tax was GBP8.2m
(2019: profit of GBP5.8m).
The results for the year were overshadowed by the impact of
COVID-19, which negatively impacted the Group in four ways.
Firstly, the Bank of England Base Rate reduction from 0.75% to
historical lows of 0.1% cost the Group an estimated GBP10.3m. The
majority of loans to customers repriced to lower rates reducing
interest income by GBP6.7m. At the same time the Group continued
its cautious approach to liquidity, maintaining low loan to deposit
ratios and keeping high levels of cash reserves at the Bank of
England. At the start of the pandemic, the Group made the conscious
decision to further increase liquidity while economic uncertainty
remains. Surplus liquidity resources above the minimum Regulatory
requirement increased from GBP300m at the end of March to in excess
of GBP600m at the end of December, which in turn exacerbated the
impact of the reduction in the Bank of England Base Rate. The
reduced income on excess liquidity resources made up the remaining
GBP3.6m of lost revenue.
Secondly, in response to the emergence of the pandemic, in the
second quarter, the Bank significantly reduced its credit appetite
due to uncertainty in the global economy. As a result, the loan
book remained flat from 2019 at GBP1.6bn.
Thirdly, credit provisions required under IFRS 9 increased by
GBP2m from the prior year. GBP1.1m of the charge was recorded in
Renaissance Asset Finance, mainly as a result of its exposure to
the London taxi market, as the sector experienced significant
slow-down due to the pandemic. Due to wider economic uncertainty
caused by the COVID-19 outbreak, the probability weighting of the
future economic scenarios modelled in the IFRS 9 expected credit
loss assessment were revised. This resulted in an average net
decline in property prices of 5.5% compared to 1.8% in 2019,
increasing provisions by GBP0.3m.
Lastly, following the PRA's statement in 2020, Secure Trust Bank
did not pay a dividend in 2020, reducing income on our financial
investment by GBP1.5m compared to 2019.
As highlighted in the Interim Report, the Group has prudently
implemented cost control measures to offset the lost revenue caused
by the pandemic, which included the cancellation of discretionary
employee bonuses for 2020. However, no employees have been placed
on furlough or been made redundant in 2020.
Other than the impacts from COVID-19 on the Group listed above,
there were also one-off items included that need further
explanation to understand the movement in the underlying
results.
Further investment into ASFL lowered the reported profits by
GBP1.0m (2019: GBP1.2m). The pandemic also significantly reduced
credit appetite in this business unit and as a result lending
volumes were subdued and customer balances reduced by GBP1.4m from
2019. In the fourth quarter credit appetite returned with strong
levels of new business enquiries received, which converted into
pipeline business expected to draw in early 2021.
In 2020 the Group started a significant refurbishment programme
on one of its properties carried as inventory, King Street, which
is expected to complete in the middle of 2021. This resulted in
reduced rental income of GBP1.5m compared to the prior year.
Strong levels of capital and liquidity allowed the Group to take
advantage of the opportunity to acquire Asset Alliance Group
Holdings Limited, which is expected to complete on 31 March 2021.
This business is expected to significantly contribute to Group
profitability. The current year results include GBP1m of costs
relating to the acquisition.
Finally, the prior year underlying profit reconciliation
includes GBP1.5m relating to the adjustment of the RAF management
earn out liability and also a GBP0.9m reduction in profit to
reflect the full year impact of the interest payable on the
subordinated debt issued on 3 June 2019.
The Group's Basic Earnings per share ("EPS") was negative 8.9p
(2019: positive 41.2p) or on an underlying basis the EPS was 57.2p
(2019: 32.8p).
Total operating income earned by the Group remained flat at
GBP72.5m. The average net margin on lending was 4.1%, down from the
4.5% recorded in 2019. This was as a result of reduced yields on
lending linked to the BoE base rate, partly offset by the cost of
deposits falling from 0.66% to 0.54%. Fees and commissions
increased by GBP0.6m to GBP14.4m, due to growth in ACABL. During
the course of the year Assets Under Management ("AUM") increased
GBP40m to GBP1.15bn (2019: GBP1.11bn).
The Group's operating expenses increased by GBP1.2m or 2% from
2019. This is largely as a result of the full year impact from 2019
employee hires and 2020 employee hires, together with the
acquisition costs of GBP1m associated with Asset Alliance Group
Holdings Limited.
Overall the return on equity for the Group was negative 0.6%
(2019: positive 3.0%). The target return on equity remains in the
mid-teen range when the surplus capital has been deployed, the cost
income ratio is reduced as the benefits of scale are realised by
the additional lending, and once the exceptional Base Rate cut is
reversed.
Balance Sheet Strength
2020 2019
Summarised Balance Sheet GBP000 GBP000
--------------------------------- ---------- ----------
Assets
Loans and advances to customers 1,587,849 1,599,053
Liquid assets 1,091,758 815,126
Other assets 173,929 181,200
--------------------------------- ---------- ----------
Total assets 2,853,536 2,595,379
--------------------------------- ---------- ----------
Liabilities
Customer deposits 2,365,207 2,084,903
Other liabilities 294,306 302,141
--------------------------------- ---------- ----------
Total liabilities 2,659,513 2,387,044
Equity 194,023 208,335
--------------------------------- ---------- ----------
Total equity and liabilities 2,853,536 2,595,379
--------------------------------- ---------- ----------
Total assets increased to GBP2.9bn (2019: GBP2.6bn), which was
mainly as a result of the growth of customer deposits with the
resultant excess funds placed on deposit at the Bank of England.
The Group maintained its conservative funding policy of relying
only on retail deposits and targeting a loan to deposit ratio of
between 65-80%. Included in other assets is the Group's investment
property, which is held at fair value of GBP6.6m (2019: GBP6.8m).
Also included in other assets are GBP88m of properties classified
as inventory (2019: GBP75.2m). These properties are being
refurbished with a view to sell. Other assets and other liabilities
also include GBP17.7m (2019: GBP19.4m) and GBP18.3m (2019:
GBP19.8m) respectively relating to right-of-use assets and lease
liabilities. This is as the result of the implementation of IFRS 16
(leases) in 2019.
The net assets of the Group now stand at GBP12.70 per share
(2019: GBP13.64). The decrease is mainly attributable to the
GBP13.2m fall in the value of the Secure Trust Bank ("STB") shares
(held as a financial investment) recorded through Other
Comprehensive Income.
Segmental Analysis
The segmental analysis is shown in more detail in Note 43. The
Group is organised into seven operating segments as disclosed
below:
1) Banking - Includes Private and Commercial Banking. Private
Banking - Provides traditional private banking services as well as
offering financial planning and investment management services and
includes services provided in the Dubai branch. Commercial Banking
- Provides bespoke commercial banking services and tailored secured
lending against property investments and other assets.
2) Mortgage Portfolios - Acquired mortgage portfolios.
3) RAF - Specialist asset finance lender mainly in high value cars but also business assets.
4) ACABL - Provides finance secured on either invoices, assets or stock of the borrower.
5) ASFL - Provides short term secured lending solutions to
professional and entrepreneurial property investors.
6) All Other Divisions - All other smaller divisions and central
costs in Arbuthnot Latham & Co., Ltd (Investment property and
Central unallocated items)
7) Group Centre - ABG Group management.
During the year the Group changed the way it manages and reports
the Banking sector, combining the Private Banking and Commercial
Banking sector into a single Banking sector. This is the level at
which management decisions are made and how the Group will manage
the overall business sectors going forward with the anticipated
growth in subsidiary businesses. The comparative numbers for the
Banking division have therefore been restated to include Private
and Commercial Banking.
The analysis presented below, and in the business review, is
before any consolidation adjustments to reverse the impact of the
intergroup operating activities and also intergroup recharges and
is a fair reflection of the way the Directors manage the Group.
Banking
2020 2019
Summarised Income Statement GBP000 GBP000
----------------------------------------------------- --------- ---------
Net interest income 42,039 45,258
Net fee and commission income 11,369 11,801
----------------------------------------------------- --------- ---------
Operating income 53,408 57,059
Operating expenses - direct costs (18,839) (21,910)
Operating expenses - indirect costs (30,668) (24,775)
Impairment losses - loans and advances to customers (1,576) (165)
----------------------------------------------------- --------- ---------
Profit before tax 2,325 10,209
----------------------------------------------------- --------- ---------
Banking reported a profit before tax of GBP2.3m (2019:
GBP10.2m). This is a decrease of GBP7.9m or 77%. This decrease is
largely due to lower interest income earned on lending balances and
excess customer deposits placed at the Bank of England, due to the
reduction in the Bank of England Base Rate.
AUM remained flat at GBP1.1bn and as a result, fee and
commission income remained fairly flat year on year at GBP11.4m
(2019: GBP11.8m).
An increase in indirect costs of GBP5.9m was partially offset by
a decrease in direct costs as a result of the suspension of bonus
payments of GBP2.4m. Indirect costs from support departments
increased due to the full year impact of 2019 and 2020 staff hires
and the costs associated with various IT projects. The average
customer yield was 4.1% (2019: 4.5%).
The customer loan balances increased by GBP27m to GBP1,134m and
customer deposits also increased to GBP1,904m (2019: GBP1,863m).
The average loan to value was 53.4% (2019: 54%).
The Dubai office is scheduled to close at the end of May
following a strategic review. The business introduced a good number
of new client relationships to the Bank, but it was decided that
the high cost base could be applied more effectively in other areas
of the Group to contribute towards the future growth plans.
Mortgage Portfolios
2020 2019
Summarised Income Statement GBP000 GBP000
----------------------------------------------------- -------- -------
Net interest income 5,951 4,113
Operating income 5,951 4,113
Operating expenses - direct costs (1,624) (807)
Impairment losses - loans and advances to customers (115) -
----------------------------------------------------- -------- -------
Profit before tax 4,212 3,306
----------------------------------------------------- -------- -------
The Mortgage Portfolios reported a profit of GBP4.2m (2019:
GBP3.3m). This is an increase on the prior year of 27%, mainly as a
result of the full year impact of the Santiago mortgage portfolio
acquired in August 2019. The Santiago mortgage portfolio performed
as expected generating a gross yield of 3.5% (2019: 3.8%).
Customers taking advantage of payment holidays as a result of
COVID-19 peaked at 27% in the year and closed the year at 1.7%.
On 26 February 2021, the Group agreed terms to sell the Tay
mortgage portfolio to a subsidiary of OneSavings Bank. The
portfolio was reaching the point of becoming subscale in terms of
servicing and the yield had declined. The sale generated a net gain
of GBP2.2m, although future revenues will be forgone.
RAF
2020 2019
Summarised Income Statement GBP000 GBP000
---------------------------------------- -------- --------
Net interest income 6,021 5,873
Net fee and commission income 130 207
---------------------------------------- -------- --------
Operating income 6,151 6,080
Other income 73 64
Operating expenses - direct costs (2,975) (3,577)
Impairment losses - loans and advances (1,154) (708)
---------------------------------------- -------- --------
Profit before tax 2,095 1,859
---------------------------------------- -------- --------
Renaissance Asset Finance recorded a profit before tax of
GBP2.1m (2019: GBP1.9m), which is an increase of 13% from the
previous year and includes a number of early redemption fees as
loans were settled early as borrowers switched to the government
lending schemes to lower their cost of funding.
Net interest income increased by GBP0.1m while costs decreased
by GBP0.6m. Impairments increased from GBP0.7m to GBP1.2m due to
increased IFRS 9 provisions, mainly as a result of the exposure to
the London taxi market. Due to the pandemic loan balances under
forbearance measures peaked at 71% during the year and closed at
17% at year-end.
The customer loan balances decreased by 11% to close the year at
GBP91.9m (2019: GBP102.9m) and the average yield for 2020 was 8.9%,
compared to 9.1% for 2019. The reduction in customer loan balances
was the combined result of lower demand from the SME sector
together with revised credit appetite as a result of the pandemic.
Reduced competition from other asset finance providers, the return
of business activity in affected sectors as well as new business
activity from business sectors experiencing growth, for example
food distribution, internet delivery, the essential services and IT
sectors, are all expected to stabilise and contribute to future
growth of the loan book.
Arbuthnot Commercial Asset Based Lending ("ACABL")
2020 2019
Summarised Income Statement GBP000 GBP000
----------------------------------------------------- -------- --------
Net interest income 2,732 1,345
Net fee and commission income 2,403 1,377
----------------------------------------------------- -------- --------
Operating income 5,135 2,722
Operating expenses - direct costs (3,130) (2,708)
Impairment losses - loans and advances to customers - 10
----------------------------------------------------- -------- --------
Profit / (loss) before tax 2,005 24
----------------------------------------------------- -------- --------
ACABL recorded a GBP2m profit before tax (2019: GBP24k) and also
during the year achieved positive cumulative reserves.
Customer loan balances increased to GBP87.3m (2019: GBP75.9m) at
the end of the year, with issued facilities increasing to GBP243.8m
from GBP130.1m in 2019.
Arbuthnot Specialist Finance ("ASFL")
2020 2019
Summarised Income Statement GBP000 GBP000
----------------------------------------------------- -------- --------
Net interest income 536 71
Net fee and commission income 3 -
----------------------------------------------------- -------- --------
Operating income 539 71
Operating expenses - direct costs (1,547) (1,275)
Impairment losses - loans and advances to customers (4) (4)
----------------------------------------------------- -------- --------
Loss before tax (1,012) (1,208)
----------------------------------------------------- -------- --------
ASFL recorded a loss before tax of GBP1.0m (2019: loss of
GBP1.2m), as the Group continues to fund the start-up costs for
this business.
Customer loan balances closed the year at GBP6.0m (2019:
GBP7.4m). Higher interest income from the full year impact of 2019
drawn balances, was partly offset by increased costs. Reduced
credit appetite due to the pandemic resulted in lower than expected
customer balances, but revised appetite in Q4 has led to increased
business enquiries, which are expected to draw down in early
2021.
Other Divisions
2020 2019
Summarised Income Statement GBP000 GBP000
----------------------------------- -------- --------
Net interest income 3,389 3,738
Net fee and commission income 537 443
----------------------------------- -------- --------
Operating income 3,926 4,181
Other income 1,445 4,955
Operating expenses - direct costs (6,680) (7,170)
(Loss) / Profit before tax (1,309) 1,966
----------------------------------- -------- --------
The aggregated loss before tax of other divisions was GBP1.3m
(2019: profit of GBP2.0m).
Reported within the other divisions in other income was rental
income on our Property portfolio of GBP0.5m (2019: GBP2.1m).
GBP1.5m of the reduction in rental income from the prior year is
due to the King Street property being vacant while extensive
refurbishment works are carried out. In the prior year other income
also included a GBP1.5m adjustment to the RAF management earn out
liability.
Group Centre
2020 2019
Summarised Income Statement GBP000 GBP000
---------------------------------- -------- --------
Net interest income (146) (141)
Subordinated loan stock interest (2,464) (1,620)
---------------------------------- -------- --------
Operating income (2,610) (1,761)
Other income - 1,420
Operating expenses (6,796) (8,804)
Loss before tax (9,406) (9,145)
---------------------------------- -------- --------
The Group costs increased to GBP9.4m (2019: GBP9.1m). The full
year impact of the subordinated loan issued in 2019, increased
costs by GBP0.8m.
No dividends were received from STB during the year due to the
ongoing pandemic, which reduced other income by GBP1.4m.
The increased costs and loss of other income was partially
offset by the suspension of bonuses, which reduced operating
expenses by GBP1.5m.
Capital
The Group's capital management policy is focused on optimising
shareholder value over the long term. There is a clear focus on
delivering organic growth and ensuring capital resources are
sufficient to support planned levels of growth. The Board regularly
reviews the capital position.
The Group and the individual banking operation, are authorised
by the Prudential Regulation Authority ("PRA") and regulated by the
Financial Conduct Authority and the Prudential Regulation Authority
and are subject to EU Capital Requirement Regulation (EU
No.575/2013) ("CRR") which forms part of the retained EU
legislation (EU legislation which applied in the UK before 11.00
p.m. on 31 December 2020 has been retained in UK law as a form of
domestic legislation known as 'retained EU legislation') and the
PRA Rulebook for CRR firms. One of the requirements for the Group
and the individual banking operation is that capital resources must
be in excess of capital requirements at all times.
In accordance with the parameters set out in the PRA Rulebook,
the Internal Capital Adequacy Assessment Process ("ICAAP") is
embedded in the risk management framework of the Group. The ICAAP
identifies and assesses the risks to the Group, considers how these
risks can be mitigated and demonstrates that the Group has
sufficient resources, after mitigating actions, to withstand all
reasonable scenarios.
Not all material risks can be mitigated by capital, but where
capital is appropriate the Board has adopted a "Pillar 1 plus"
approach to determine the level of capital the Group needs to hold.
This method takes the Pillar 1 capital requirement for credit,
market and operational risk as a starting point, and then considers
whether each of the calculations delivers a sufficient amount of
capital to cover risks to which the Group is, or could be, exposed.
Where the Board considers that the Pillar 1 calculations do not
adequately cover the risks, an additional Pillar 2A capital
requirement is applied. The PRA will set a Pillar 2A capital
requirement in light of the calculations included within the ICAAP.
The Group's Total Capital Requirement, as issued by the PRA, is the
sum of the minimum capital requirements under the CRR (Pillar 1)
and the Pillar 2A requirement.
The ICAAP document will be updated at least annually, or more
frequently if changes in the business, strategy, nature or scale of
the Group's activities or operational environment suggest that the
current level of capital resources are no longer adequate. The
ICAAP brings together the management framework (i.e. the policies,
procedures, strategies, and systems that the Group has implemented
to identify, manage and mitigate its risks) and the financial
disciplines of business planning and capital management. The
Group's regulated entity is also the principal trading subsidiary
as detailed in Note 42.
The Group's regulatory capital is divided into two tiers:
-- Common equity Tier 1 ("CET1"), which comprises shareholder
funds less regulatory deductions for intangible assets, including
goodwill, deferred tax assets that do not arise from temporary
differences, and, if in excess of the CRR thresholds, a portion of
the Group's non-significant investment in a financial institution,
Secure Trust Bank ("STB").
-- Tier 2 comprises qualifying subordinated loans.
Capital ratios are reviewed on a monthly basis to ensure that
external requirements are adhered to. All regulated trading
entities have complied with all of the externally imposed capital
requirements to which they are subject.
2020 2019
Capital ratios GBP000 GBP000
------------------------------------------------------- --------- ---------
CET1 Capital Instruments* 195,979 219,627
Deductions (15,393) (41,983)
------------------------------------------------------- --------- ---------
CET1 Capital after Deductions 180,586 177,644
Tier 2 Capital 37,656 36,837
------------------------------------------------------- --------- ---------
Own Funds 218,242 214,481
------------------------------------------------------- --------- ---------
CET1 Capital Ratio (CET1 Capital/Total Risk Exposure) 15.4% 14.4%
------------------------------------------------------- --------- ---------
Total Capital Ratio (Own Funds/Total Risk Exposure) 18.7% 17.3%
------------------------------------------------------- --------- ---------
* Includes year-end audited result.
Risks and Uncertainties
The Group regards the monitoring and controlling of risks and
uncertainties as a fundamental part of the management process.
Consequently, senior management are involved in the development of
risk management policies and in monitoring their application. A
detailed description of the risk management framework and
associated policies is set out in note 6.
The principal risks inherent in the Group's business are
reputational, macroeconomic and competitive environment, strategic,
credit, market, liquidity, operational, cyber, conduct and,
regulatory and capital.
Reputational risk
Reputational risk is the risk to the Group from a failure to
meet reasonable stakeholder expectations as a result of any event,
behaviour, action or inaction by ABG itself, its employees or those
with whom it is associated. This includes the associated risk to
earnings, capital or liquidity.
ABG seeks to ensure that all of it businesses act consistently
with the seven corporate principles as laid out on page 1 of the
Annual Report and Accounts. This is achieved through a central Risk
Management framework and supporting policies, the application of a
three-lines of defence model across the Group and oversight by
various committees. Employees are supported in training, studies
and other ways and encouraged to live out the cultural values
within the Group of integrity, energy and drive, respect,
collaboration and empowerment. In applying the seven corporate
principles, the risk of reputational damage is minimised as the
Group serves its shareholders, customers and employees with
integrity and high ethical standards.
Macroeconomic and competitive environment
The Group is exposed to indirect risks that may arise from the
macroeconomic and competitive environment.
Coronavirus
The COVID-19 pandemic has had, and continues to have, a material
impact on all businesses around the world and the markets in which
they operate. There are a number of factors associated with the
pandemic and its impact on global economies that could have a
material adverse effect on (among other things) the profitability,
capital and liquidity of financial institutions.
To ensure an appropriate response to the pandemic, management
scrutinised key risks emerging from the crisis and their impact on
the Group's risk profile. The Board's discussions focused on
operational resilience, liquidity and funding considerations,
customer vulnerability, and the impact of material increases in
forbearance requests on the Group's credit portfolios and on its
operational capacity.
The pandemic has caused disruption to the Group's clients,
suppliers and employees globally. The markets in which the Group
operates have implemented severe restrictions on the movement of
their respective populations, with a resultant significant impact
on economic activity. These restrictions are being determined by
the governments of individual jurisdictions (including through the
implementation of emergency powers) and impacts (including the
timing of implementation and any subsequent lifting of
restrictions) may vary from jurisdiction to jurisdiction.
Schemes have been initiated by the Bank of England, national
governments and regulators to provide financial support to parts of
the economy most impacted by the COVID-19 pandemic. These schemes
have been designed and implemented at pace, which has allowed the
Group to continue meeting clients' requirements with employees
monitoring operational issues which may arise in their
implementation.
Furthermore, the Group relies on models to support a broad range
of business and risk management activities, including informing
business decisions and strategies, measuring and limiting risk,
valuing exposures (including the calculation of impairment),
conducting stress testing and assessing capital adequacy.
Management regularly meet to discuss the impact of COVID-19 and
review data to mitigate any potential negative effects.
The details of how these schemes will impact the Group's clients
in the long term remains uncertain at this stage. However, certain
actions (such as the introduction of payment holidays for certain
lending products or the cancellation or waiver of fees associated
with certain products) may impact the effective interest rate
earned on certain of the Group's portfolios and fee income being
earned on certain products.
The significant business risks that may arise from the economic
shock in addition to the reduction in interest rates as detailed in
the Strategic Report are:
a) Increased credit risk as borrowers are unable to continue to
meet their interest obligations as they fall due. It is also
currently unclear precisely how the withdrawal of the Government's
announced package of measures will affect this clear risk.
b) The uncertainty in the economy could result in a significant
fall in the collateral values of our security held against the
loans. At the beginning of the pandemic the Royal Institute of
Charter Surveyors ("RICS") issued a statement suggesting that any
valuations they may produce in the current environment would be
subject to a warning that the values vary significantly. However,
property prices have held up and transaction volumes and other
relevant evidence is starting to return to levels adequate to base
valuation opinions on. Also, the average loan to value of our
property backed lending book is 53.4%, so to have a material
impact, this fall in collateral values would have to be severe and
prolonged.
c) A prolonged reduction in business activity will affect our
ability to generate new business opportunities, in which case
repayments in our current lending portfolios will be greater than
new originations, which will lead to an overall fall in the Group's
customer lending balances and the associated revenue that this
generates. At the start of the pandemic the Group significantly
reduced its credit appetite due to uncertainty in the global
economy, which resulted in the loan book remaining flat from the
prior year. However, since re-instating credit appetite to
pre-pandemic levels in the third quarter, the Group has generated a
significant pipeline of business.
d) The economic shock could also lead to a fall in valuations in
the Groups investment properties and those properties held in
inventory. As mentioned under point (b) above, transaction volumes
are starting to return and property prices have held up since the
start of the pandemic more than a year ago.
e) As the revenues earned by the Group's Investment Management
business are directly linked to the balances managed on behalf of
our clients, any reduction in these values due to market movements
will have a corresponding impact on these revenues. AUM initially
reduced to close the first half 3% down from what was reported at
31 December 2019, however, despite market volatility, the Wealth
Management team continued to attract criteria clients and AUMs
closed the year 4% ahead of the prior year.
Brexit
The Brexit transition period came to an end on 31 December 2020
and the EU and UK agreed the Trade and Cooperation Agreement on 24
December 2020, which is provisionally applicable from 1 January
2021. There is still some uncertainty around the long term
consequences of Brexit. The Group's only overseas operation in
Dubai is in the process of being closed, so the vast majority of
the Group's income and expenditure is based in the UK. The Group
will continue to monitor the implications of Brexit on the wider
economy as the future relationship with the EU develops.
Climate change
Climate change presents financial and reputational risks for the
banking industry. The Board consider Climate change a material risk
as per the Board approved risk appetite framework which provides a
structured approach to risk taking within agreed boundaries. The
assessment is proportional at present but will develop over time as
the Group generates further resources and industry consensus
emerges. The assessment is maintained by the Chief Risk officer and
has been informed by the ICAAP review and workshops for
employees.
Whilst it is difficult to assess how climate change will unfold,
the Group is continually assessing various risk exposures. The UK
has a legally binding target to cut its greenhouse gas emissions to
"net-zero" by 2050. There is growing consensus that an orderly
transition to a low-carbon economy will bring substantial
adjustments to the global economy which will have financial
implications while bringing risks and opportunities.
The risk assessment process has been integrated into existing
risk frameworks and will be governed through the various risk
governance structures including review and recommendations by the
Arbuthnot Latham Risk Committee. Arbuthnot Latham has been assessed
against the Task Force on Climate-related Financial Disclosures'
("TCFD") recommended disclosures and where appropriate the FCA/PRA
guidance as per the Supervisory Statements.
In accordance with the requirements of the PRA's Supervisory
Statement 'Enhancing banks' and insurers' approaches to managing
the financial risks from climate change', the Group has allocated
responsibility for identifying and managing the risks from climate
change to the relevant existing Senior Management Function. The
Bank is continuously developing a suitable strategic approach to
climate change and the unique challenges it poses.
The FCA have issued 'Climate Change and Green Finance: summary
of responses and next steps'. In addition to the modelling of
various scenarios and various governance reviews, the Group will
continue to monitor requirements through the relationship with UK
Finance.
Strategic risk
Strategic risk is the risk that the Group's ability to achieve
its corporate and strategic objectives may be compromised. This
risk is particularly important to the Group as it continues its
growth strategy. However, the Group seeks to mitigate strategic
risk by focusing on a sustainable business model which is aligned
to the Group's business strategy. Also, the Board of Directors
usually meets once a year to hold a two day board meeting to ensure
that the Group's strategy is appropriate for the market and
economy.
Credit risk
Credit risk is the risk that a counterparty (borrower) will be
unable to pay amounts in full when due. This risk exists in
Arbuthnot Latham, which currently has a loan book of GBP1,588m
(2019: GBP1,599m). The lending portfolio in Arbuthnot Latham is
extended to clients, the majority of which is secured against cash,
property or other high quality assets. Credit risk is managed
through the Credit Committee of Arbuthnot Latham.
Market risk
Market risk arises in relation to movements in interest rates,
currencies, property and equity markets. The Group's treasury
function operates mainly to provide a service to clients and does
not take significant unmatched positions in any market for its own
account. As a result, the Group's exposure to adverse movements in
interest rates and currencies is limited to interest earnings on
its free cash and interest rate re-pricing mismatches. The Group
actively monitors its exposure to future changes in interest
rates.
The Group is exposed to changes in the market value of its
properties. The current carrying value of Investment Property is
GBP6.6m and properties classified as inventory are carried at
GBP88m. Any changes in the market value of the property will be
accounted for in the Income Statement for the Investment Property
and could also impact the carrying value of inventory, which is at
the lower of cost and net realisable value. As a result, it could
have a significant impact on the profit or loss of the Group.
The Group has a 9.76% interest in Secure Trust Bank. This is
currently recorded in the Group's balance sheet as a Financial
Investment. The carrying value is adjusted to market value at each
balance sheet date, according to the share price of Secure Trust
Bank. Any gains or losses that arise are recorded in Other
Comprehensive Income.
Liquidity risk
Liquidity risk is the risk that the Group, although solvent,
either does not have sufficient financial resources to enable it to
meet its obligations as they fall due, or can only secure such
resources at an excessive cost. The Group takes a conservative
approach to managing its liquidity profile. Retail client deposits
and drawings from the Bank of England Term Funding Scheme fund the
Group. The loan to deposit ratio is maintained at a prudent level,
and consequently the Group maintains a high level of liquidity. The
Arbuthnot Latham Board annually approves the Internal Liquidity
Adequacy Assessment Process ("ILAAP"). The Directors model various
stress scenarios and assess the resultant cash flows in order to
evaluate the Group's potential liquidity requirements. The
Directors firmly believe that sufficient liquid assets are held to
enable the Group to meet its liabilities in a stressed
environment.
Operational risk
Operational risk is the risk that the Group may be exposed to
financial losses from conducting its business. The Group's
exposures to operational risk include its Information Technology
("IT") and Operations platforms. There are additional internal
controls in these processes that are designed to protect the Group
from these risks. The Group's overall approach to managing internal
control and financial reporting is described in the Corporate
Governance section of the Annual Report.
During the year there was significant focus on the potential
operational risks arising from the change in working practices due
to the pandemic, particularly the move to home-working in order to
protect employees and support clients through the crisis.
Management attention also focused heavily on operational resilience
to ensure that planning, controls and operational activities
remained robust and appropriate. The Bank ensured that all
employees had access to equipment to complete their work with all
employees working from home for the majority of the year.
The Group's control environment was continually monitored to
ensure that the challenges posed by adapting to the impact of
COVID-19 were safely addressed. There was also continued oversight
of the Group's preparations for the end of the transition period,
following the UK's exit from the EU, to ensure that processes and
systems are appropriate to ensure continuity of service for
customers.
Cyber risk
Cyber risk is an increasing risk for the Group within its
operational processes. It is the risk that the Group is subject to
some form of disruption arising from an interruption to its IT and
data infrastructure. The Group regularly tests the infrastructure
to ensure that it remains robust to a range of threats, and has
continuity of business plans in place including a disaster recovery
plan.
Conduct risk
As a financial services provider we face conduct risk, including
selling products to customers which do not meet their needs,
failing to deal with clients' complaints effectively, not meeting
clients' expectations, and exhibiting behaviours which do not meet
market or regulatory standards.
The Group adopts a low risk appetite for any unfair customer
outcomes. It maintains clear compliance guidelines and provides
ongoing training to all employees. Periodic spot checks, compliance
monitoring and internal audits are performed to ensure these
guidelines are followed. The Group also has insurance policies in
place to provide some cover for any claims that may arise.
Regulatory and capital risk
Regulatory and capital risk includes the risk that the Group
will have insufficient capital resources to support the business
and/or does not comply with regulatory requirements. The Group
adopts a conservative approach to managing its capital. The Board
of Arbuthnot Latham approves an ICAAP annually, which includes the
performance of stringent stress tests to ensure that capital
resources are adequate over a three year horizon. Capital and
liquidity ratios are regularly monitored against the Board's
approved risk appetite as part of the risk management
framework.
Regulatory change also exists as a risk to the Group's business.
Notwithstanding the assessments carried out by the Group to manage
the regulatory risk, it is not possible to predict how regulatory
and legislative changes may alter and impact the business.
Significant and unforeseen regulatory changes may reduce the
Group's competitive situation and lower its profitability.
Stakeholder Engagement and S. 172 (1) Statement
This section of the Strategic Report describes how the Directors
have had regard to the matters set out in section 172 (1) (a) to
(f) of the Companies Act 2006 when making decisions. It forms the
Directors' statement required by Arbuthnot Banking Group as a
large-sized company under section 414CZA of the Act.
The Directors have acted in a way that they considered, in good
faith, to be most likely to promote the success of the Company for
the benefit of its members as a whole, and in doing so had regard,
amongst other matters, to:
-- the likely consequences of any decision in the long term;
-- the interests of the Company's employees;
-- the need to foster the Company's business relationships with
suppliers, customers and others;
-- the impact of the Company's operations on the community and the environment;
-- the desirability of the Company maintaining a reputation for
high standards of business conduct; and
-- the need to act fairly as between members of the Company.
The stakeholders we consider in this regard are our
shareholders, employees, customers, suppliers, regulators and the
environment in which we operate.
The Arbuthnot Principles and Values set out on page 1 explain
the Board's approach to its stakeholders. Details of how the
Directors had regard to the interests of its key stakeholders
during the year are set out below, in the Group Directors Report on
page 25 and in the Corporate Governance Report on page 32.
Likely consequences of any decision in the long term
The Directors make their decisions to ensure that long-term
prospects are not sacrificed for short term gain, reflecting the
values and support of Sir Henry Angest, Chairman and Chief
Executive and majority shareholder, which have proved successful in
creating and maintaining value for all shareholders for over 40
years. This was demonstrated in the year by a number of Board
decisions.
In November 2020, notwithstanding the uncertainties arising from
the pandemic and Brexit, the Board approved the acquisition of
Asset Alliance Group Holdings. It judged this to be complementary
to the Group's strategy to diversify its income stream with higher
yielding assets, whilst not affecting its risk profile. It was also
seen as a typical Arbuthnot opportunistic moment to buy a good
business, constrained by external uncertainties and by funding
which the Bank is able to supply.
Secondly the Board reaffirmed its decision, taken as part of the
annual budget, to maintain significant investment in modern
technology in order to grow the Group's businesses, principally the
new integrated Client Relationship Management (CRM) platform
introduced in July. Investment in technology continued with the
roll out ahead of the first national lockdown of Microsoft 365,
including Teams for meetings, which enabled efficient remote
working. Amortisation of this investment began at a time of
pressure on the Group's profitability due to the shortfall in
income resulting from the impact on margins of the Bank of England
base rate cuts in March 2020. Income was further reduced by the
absence of growth in lending as a result of the decision to tighten
credit appetites which was relaxed in September once the impact of
the unprecedented extent of Government intervention in the economy
became known. This typically cautious long-term approach led to a
slower recovery from the damaging impact of the base rate cuts than
would have otherwise occurred, whilst also limiting the extent of
bad debts.
A further illustration of the balancing of the interests of our
stakeholders in their long-term interest was the decision to
withdraw the dividend declared in March 2020 in response to the
statement by the PRA on deposit takers' approach to dividends.
Following the relaxation of this position by the PRA in December
2020, advising that it is for bank boards to determine the
appropriate level of distributions, the Board decided in February
2021 to pay the withdrawn dividend which related to 2019 profits
and also not to recommend a final dividend for 2020. The Board will
continue to consider any future dividends to shareholders in a
prudent manner, ensuring they are properly planned in line with
business growth and potential bad debt experience.
Interests of the Company's employees
The Company has fewer than 20 employees, all of whom have direct
access to Board members. As such, it has not been deemed necessary
to appoint an employee representative to the Board, nor a formal
workforce advisory panel, nor a designated non-executive Director.
As explained in the section 172 (1) Statement of Arbuthnot Latham,
the Company's operating subsidiary, one of that company's
non-executive directors and its Whistleblowing Champion, has been
designated by its board as the director to engage with the Group's
workforce. Employees are able to raise concerns in confidence with
the HR Team, with grievances followed up in line with a specified
process which satisfies all legal requirements. There is also
protection for employees deriving from the Public Interest
Disclosure Act 1998. Any material whistleblowing events are
notified to the Board and to the applicable regulator.
The Board receives an update on human resource matters at each
of its meetings. Early on in the pandemic, the decision was taken
to prioritise job retention and not to furlough any employees,
whilst awarding no bonuses for 2020, in order to protect the
business. There were regular communications during the year
including two Employee Surveys undertaken in order to support
employees, reassure them over job security and to seek their views
on the eventual return to office working. Each survey showed high
engagement and positive responses, reflecting the efforts made to
reassure employees by communicating the decisions made to look
after them during the period of remote working. In the first survey
in April, 94% of employees responded with 90% satisfied. 89% per
cent of employees agreed that they had been provided with the
necessary IT support to work remotely, within a reasonable
timeframe. From the comments received, there was a strong sense
that communication had been clear, regular and consistent and had a
strong focus on employee wellbeing. There were similarly good
responses to the second survey in September which included
questions on interest in remote working in future with 92% of
employees proud to work for the Group, up from 83% in 2019.
Company's business relationships with suppliers, customers and
others
The Directors attach great importance to good relations with
customers and business partners. In particular, our clients are
integral to our business and forging and maintaining client
relationships are core to Arbuthnot Latham's business and crucial
for client retention. Regular contact was maintained with clients
during the year providing support where possible, mainly by
telephone following the closure of offices and some via Microsoft
Teams. In the summer months, our bankers were able to meet some
clients in their gardens. It was decided that the Bank should apply
for approval into the Government Loan Schemes (BBLs and CBILs),
administered by the British Business Bank, as this was important in
being able to meet client expectations.
As their needs and expectations change, clients now demand
access to their bank and relationship managers through a variety of
channels and expect efficient and streamlined processes supported
by state of the art technology. Hence the decision in 2019 to
invest in the adoption of modern and integrated CRM technology with
the potential to improve significantly front-office operations and
help support existing and new clients better. This project was
delivered during 2020 with all the training material both created
and consumed remotely.
In July the Board of Arbuthnot Latham approved a new
relationship with a clearing bank as part of the move to an
Extended Hours Service which was launched in December whereby
customers are now able to send and receive faster payments 24 hours
a day, seven days a week, with the Banking Support team on hand for
longer to assist with online banking-related queries.
The Company is committed to following agreed supplier payment
terms. There is a Supplier Management Framework in place covering
governance around the Company's procurement and supplier management
activities. For due diligence and compliance purposes, suppliers
are assessed through an external registration system. The Modern
Slavery Statement, approved by the Board each March as part of its
annual review of the Company's stance and approach to the Modern
Slavery Act, explains the risk-based approach that the Company has
taken to give assurance that slavery and human trafficking are not
taking place in its supply chains or any part of its business.
Other stakeholders include the Company's Regulators, the PRA and
the FCA, with whom open and regular dialogue is maintained
including regular fortnightly calls by the Group Finance Director
and Arbuthnot Latham's Chief Risk Officer with the PRA Supervisory
team throughout the pandemic.
Impact of the Company's operations on the community and the
environment
As a financial services company our impact on the environment is
limited. Nevertheless, there is growing consensus that an orderly
transition to a low-carbon economy will bring structural
adjustments to the global economy which will have financial
implications, bringing both risks and opportunities. Accordingly,
in September, the Board of Arbuthnot Latham considered a report on
the Strategic Review of Climate Change Opportunities Report
produced, following consideration by its executive directors of the
Group's strategic response to climate change as part of the annual
strategy and budget process. This year, the Board has approved a
new energy and carbon report meeting the requirements of the
Streamlined Energy and Carbon Reporting standards, as set out on
pages 26 and 27 of the Directors Report.
Desirability of the Company maintaining a reputation for high
standards of business conduct
The Directors believe that the Arbuthnot culture set out in the
Arbuthnot Principles and Values on page 1 manifests itself at Board
level and in the external view of the Group as a whole. The
importance of the Group's reputation is considered at each Board
meeting. During the year these Principles were encapsulated in five
Group values, embedded into day-to-day activities. These values are
integrity, respect, empowerment, energy and drive, and
collaboration.
Acting fairly as between members of the Company
The majority shareholder, Sir Henry Angest, is the Company's
Chairman and Chief Executive. There is continuing engagement with
other major shareholders and the Directors make their decisions on
behalf of all shareholders. In June, the Company made contact with
five institutional shareholders in order to understand why they had
voted against the resolution at the AGM authorising the making of
political donations and incurring of political expenditure, as
explained on page 32 of the Corporate Governance Report. The Board
continues to believe that it is in the interests of shareholders
that it has the flexibility to make political donations in light of
prevailing political circumstances over the next few years. It was
encouraged by the continued support of its major shareholders. It
welcomes engagement with them and will continue to maintain
communications via one-to-one meetings as appropriate.
Group Directors' Report
The Directors present their report for the year ended 31
December 2020.
Business Activities
The principal activities of the Group are banking and financial
services. The business review and information about future
developments, key performance indicators and principal risks are
contained in the Strategic Report on pages 4 to 22.
Corporate Governance
The Corporate Governance report on pages 29 to 36 contains
information about the Group's corporate governance arrangements,
including in relation to the Board's application of the UK
Corporate Governance Code.
Results and Dividends
The results for the year are shown on page 47 of the financial
statements. The loss after tax for the year of GBP1.3m (2019:
profit of GBP6.2m) is included in reserves. The Directors do not
recommend the payment of a final dividend (2019: Nil). Since no
interim dividend (2019: 16p) was paid in the year, this makes a
total dividend per share for the year of Nil (2019: 16p). The
second interim dividend of 21p declared by the Directors in last
year's Annual Report was withdrawn on 2 April 2020, prior to the
finalisation of the resolutions in last year's Notice of Meeting,
following the publication by the Prudential Regulation Authority
("PRA") of a statement on deposit takers' approach to dividends.
This dividend of 21p per share was paid as a special interim
dividend on 19 March, 2021, following the PRA statement in December
2020, advising that it is for bank boards to determine the
appropriate level of distributions and removing its request not to
make shareholder distributions.
Directors
The names of the Directors of the Company at the date of this
report, together with biographical details, are given on page
##GBOARD of this Annual Report. All the Directors listed on those
pages were directors of the Company throughout the year.
Mr. J.R. Cobb and Mr. I.A. Dewar being eligible, offer
themselves for re-election under Article 78 of the Articles of
Association. Mr. Cobb has a service agreement terminable on twelve
months' notice. Mr. Dewar, an independent non-executive director,
has a letter of appointment terminable on three months' notice.
Viability Statement
In accordance with the UK Corporate Governance Code, the
Directors confirm that there is a reasonable expectation that the
Group will continue to operate and meet its liabilities, as they
fall due, for the three-year period up to 31 December 2023. A
period of three years has been chosen because it is the period
covered by the Group's strategic planning cycle and also
incorporated in the Individual Capital Adequacy Assessment Process
("ICAAP"), which forecasts key capital requirements, expected
changes in capital resources and applies stress testing over that
period.
The Directors' assessment has been made with reference to:
-- the Group's current position and prospects - please see the
Financial Review on pages 10 to 22;
-- the Group's key principles - please see Corporate Philosophy on page 1; and
-- the Group's risk management framework and associated policies, as explained in Note 6.
The Group's strategy and three-year plan are evaluated and
approved by the Directors annually. The plan considers the Group's
future projections of profitability, cash flows, capital
requirements and resources, and other key financial and regulatory
ratios over the period. The ICAAP is embedded in the risk
management framework of the Group and is subject to ongoing updates
and revisions when necessary. The ICAAP process is used to stress
the capital position of the Group over the three-year planning
period. It is updated at least annually as part of the business
planning process.
Going Concern
After making appropriate enquiries which assessed strategy,
profitability, funding, risk management (see Note 6 to the
financial statements) and capital resources (see Note 7), the
directors are satisfied that the Company and the Group have
adequate resources to continue in operation for the foreseeable
future. The financial statements are therefore prepared on the
going concern basis.
Share Capital
The Company has in issue two classes of shares, Ordinary shares
and Ordinary Non-Voting shares. The Non-Voting shares rank pari
passu with the Ordinary shares, including the right to receive the
same dividends as the Ordinary shares, except that they do not have
the right to vote in shareholder meetings.
Authority to Purchase Shares
Shareholders will be asked to approve a Special Resolution
renewing the authority of the Directors to make market purchases of
shares not exceeding 10% of the issued Ordinary and Ordinary
Non-Voting share capital. The Directors will keep the position
under review in order to maximise the Company's resources in the
best interests of shareholders. Details of the resolution renewing
this authority are included in the Notice of Meeting on page
##NOAGM. During the year the Company purchased 7,730 Ordinary
Non-Voting shares to be held in Treasury. The maximum number of
Treasury shares held at any time during the year was 390,274
Ordinary shares and 19,040 Ordinary Non-Voting shares of 1p
each.
Financial Risk Management
Details of how the Group manages risk are set out in in the
Strategic Report and in Note 6 to the financial statements.
Directors' Interests
The interests of current Directors and their families in the
shares of the Company at the dates shown, together with the
percentage of the current issued share capital held (excluding
treasury shares), were as follows:
Beneficial Interests - Ordinary 1 January 31 December 24 March
shares 2020 2020 2021 %
--------------------------------- ---------- ------------ ---------- -----
Sir Henry Angest 8,351,401 8,351,401 8,351,401 56.1
N.P.G. Boardman - 7,270 11,348 0.1
J.R. Cobb 6,000 6,000 6,000 -
A.A. Salmon 51,699 51,699 51,699 0.3
Beneficial Interests - Ordinary 1 January 31 December 24 March
Non-Voting shares 2020 2020 2021 %
--------------------------------- ---------- ------------ ---------- -----
Sir Henry Angest 83,513 83,513 86,674 64.9
J.R. Cobb 60 60 60 -
A.A. Salmon 516 516 516 0.4
Substantial Shareholders
The Company was aware at 8 March 2021 of the following
substantial holdings in the Ordinary shares of the Company, other
than those held by one director shown above:
Ordinary
Holder Shares %
---------------------------- ---------- ----
Liontrust Asset Management 1,464,851 9.8
Slater Investments 585,638 3.9
Mr. R Paston 529,130 3.6
Unicorn Asset Management 484,522 3.3
M&G Investment Management 482,010 3.2
Significant Contracts
No Director, either during or at the end of the financial year,
was materially interested in any contract with the Company or any
of its subsidiaries, which was significant in relation to the
Group's business. At 31 December 2020, one Director had a loan from
Arbuthnot Latham & Co., Limited amounting to GBP501k (2019:
GBP503k) and four directors had deposits with Arbuthnot Latham
amounting to GBP3,928k (2019: GBP3,065k), all on normal commercial
terms as disclosed in Note 41 of the financial statements.
Directors' Indemnities
The Company's Articles of Association provide that, subject to
the provisions of the Companies Act 2006, the Company may indemnify
any Director or former Director in respect of liabilities (and
associated costs and expenses) incurred in connection with the
performance of their duties as a Director of the Company or any
subsidiary and may purchase and maintain insurance against any such
liability. The Company maintained directors and officers liability
insurance throughout the year.
Employee Engagement
The Company gives due consideration to the employment of
disabled persons and is an equal opportunities employer. It also
regularly provides employees with information on matters of concern
to them, consults on decisions likely to affect their interests and
encourages their involvement in the performance of the Company
through regular communications and in other ways. Further
information on employee engagement is given in the Strategic Report
on page 21.
Engagement with Suppliers, Customers and Others
Information on engagement with suppliers, customers and other
stakeholders is given in the Strategic Report on pages 21 and 22
under the S. 172 statement.
Streamlined Energy & Carbon Reporting
From 2020 large unquoted companies that have consumed more than
certain amounts of energy in the reporting period are required to
include energy and carbon information. This requirement is due to
the Companies (Directors' Report) and Limited Liability
Partnerships (Energy and Carbon Report) Regulations 2018. These
Regulations implement the Government's policy on Streamlined Energy
and Carbon Reporting (SECR) to support businesses in understanding
their Carbon emissions and to help them establish plans to become
Net Zero by 2050.
The Company has worked with a specialist energy management
consultancy, Carbon Decoded, to gather the information to be
reported:
-- All energy in line with Greenhouse Gas Reporting (GHG): Scope
One - gas and owned transport, Scope Two - electricity and Scope
Three - non-owned transport used for business.
-- An intensity metric to enable year on year improvements to be tracked.
-- A brief methodology explaining information sources and calculations used.
-- The energy saving actions taken in the year to help the Group
reduce its environmental impact.
Reporting Methodology
-- Data has been collected for electricity, gas and transport.
-- GHG Protocol Corporate Accounting and Reporting Standard has been followed where relevant.
-- Data was collected specifically for the purpose of SECR reporting.
-- The 2019 and 2020 Government conversion factors for company
reporting were used for all calculations of carbon emissions.
-- Data was estimated where landlords do not provide separate
energy data. This was based on floor areas and industry
benchmarks.
The baseline year for comparison purposes to show improvements
in emissions has been chosen as 2019 due to COVID-19 disruptions to
the business in 2020.
2020 Baseline 2019
-------------------------------- --------------------------------
Carbon Carbon
Tonnes Intensity Tonnes Intensity
Scope One kWh tCO2e Ratio kWh tCO2e Ratio
------------------------------ ---------- -------- ---------- ---------- -------- ----------
Gas - Intensity Ratio kWh/m2 355,415 65 61.5 359,672 66 62.2
Company Vehicles 27,314 7 1.0 88,810 22 1.0
------------------------------ ---------- -------- ---------- ---------- -------- ----------
Total 382,729 72 448,482 88
------------------------------ ---------- -------- ---------- ---------- -------- ----------
Scope Two
Electricity kWh/m2 1,027,760 240 134.8 1,443,054 369 189.3
------------------------------ ---------- -------- ---------- ---------- -------- ----------
Total 1,027,760 240 1,443,054 369
------------------------------ ---------- -------- ---------- ---------- -------- ----------
Scope Three
Grey Fleet Vehicles 59,196 14 1.4 168,093 41 1.3
------------------------------ ---------- -------- ---------- ---------- -------- ----------
Total 59,196 14 168,093 41
------------------------------ ---------- -------- ---------- ---------- -------- ----------
Notes:
The reported 2020 figures are not representative of normal
business energy use and the reductions compared to the 2019 figures
do not reflect actual energy savings, but are as a result of
suspending work in office buildings to protect employees during the
COVID-19 pandemic and the further decarbonisation of the UK
electricity grid.
The figures reported have been calculated and independently
verified by Carbon Decoded a specialist energy management
consultancy.
Intensity Ratio
The standard for office energy use is kilowatt-hour per square
metre (kWh/m(2)). These results were compared to Action Energy's
Energy Consumption Guide Benchmarks. Transport has been set at
kilowatt-hour per mile (kWh/mile).
Energy Efficiency Actions
Progress was made in 2020 to understand where energy is
specifically used and to increase the number of LED lights, though
assessing energy use has proved challenging, given that employees
have been working remotely since March 2020. The Head Office in
Wilson Street contributes 70% electricity emissions or 167 tonnes
of carbon and this is the area that will be the focus in 2021.
Political Donations
The Company made political donations of GBP10,000 to the
Conservative Party during the year (2019: GBP77,000).
Branches outside of the UK
During the year Arbuthnot Latham & Co., Limited operated a
branch in Dubai which is regulated by the Dubai Financial Services
Authority. This office is closing on 31 May 2021.
Events after the Balance Sheet Date
In addition to the special interim dividend payment set out
above, details of other material post balance sheet events are
given in Note 46.
Annual General Meeting ("AGM")
The Company's AGM will be held on Wednesday 26 May 2021 at which
Ordinary Shareholders will be asked to vote on a number of
resolutions. Given the continuing restrictions due to the COVID-19
pandemic, the Board is proposing to hold the Meeting with the
minimum attendance required to form a quorum and with the format of
the meeting being purely functional. It is assumed that it will not
be possible for shareholders to attend in person. Shareholders are
requested therefore to submit their votes in respect of the
business to be discussed via proxy, appointing the Chairman of the
meeting as their proxy. The resolutions, together with explanatory
notes about voting arrangements, are set out on pages 139 to
142.
Auditor
A resolution for the re-appointment of Mazars LLP as auditor
will be proposed at the forthcoming AGM in accordance with section
489 of the Companies Act 2006.
Disclosure of Information to the Auditor
Each of the persons who are Directors at the date of approval of
this Annual Report confirm that:
-- so far as each director is aware, there is no relevant audit
information of which the Company's auditor is unaware; and
-- they have taken all the steps they ought to have taken as a
director to make themselves aware of any relevant audit
information and to establish that the Company's auditor is aware
of that information.
This confirmation is given and should be interpreted in
accordance with the provisions of section 418 of the Companies Act
2006.
Statement of Directors' Responsibilities in Respect of the
Strategic Report and the Directors' Report and the Financial
Statements
The Directors are responsible for preparing the Strategic
Report, the Directors' Report and the Financial Statements in
accordance with applicable law and regulations. Company Law
requires the Directors to prepare Group and Parent Company
Financial Statements for each financial year. As required by the
AIM Rules for Companies and in accordance with the Rules of the
AQSE Growth Market, they are required to prepare the Group
Financial Statements in accordance with International Financial
Reporting Standards ("IFRSs") in conformity with the requirements
of the Companies Act 2006 and have elected to prepare the Parent
Company Financial Statements on the same basis.
Financial Statements
Under Company Law the Directors must not approve the Financial
Statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and the Company and of
the Group profit or loss for that period. In preparing each of the
Group and Parent Company Financial Statements, the Directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and estimates that are reasonable, relevant and reliable;
-- state whether they have been prepared in accordance with
IFRSs in conformity with the requirements of the Companies Act
2006;
-- assess the Group and Parent Company's ability to continue as
a going concern, disclosing, as applicable, matters related to
going concern; and
-- use the going concern basis of accounting unless they intend
either to liquidate the Group or the Parent Company or to cease
operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Parent
Company's transactions and disclose with reasonable accuracy at any
time the financial position of the Parent Company and enable them
to ensure that its Financial Statements comply with the Companies
Act 2006. They are responsible for such internal control as they
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to
fraud or error, and have general responsibility for taking such
steps as are reasonably open to them to safeguard the assets of the
Company and to prevent and detect fraud and other
irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website. Legislation in the UK governing the preparation
and dissemination of Financial Statements may differ from
legislation in other jurisdictions.
The Directors confirm that the Annual Report and financial
statements, taken as a whole, are fair, balanced and understandable
and provide the information necessary for shareholders to assess
the Group and Parent Company's position, performance, business
model and strategy.
By order of the Board
N D Jennings
Secretary
24 March 2021
Corporate Governance
Introduction and Overview
Arbuthnot Banking Group has a strong and effective corporate
governance framework. The Board endorses the principles of
openness, integrity and accountability which underlie good
governance and takes into account the provisions of the UK
Corporate Governance Code, published by the Financial Reporting
Council in July 2018 ("the FRC Code"), in so far as they are
considered applicable to and appropriate for it, given its size and
circumstances, and the role and overall shareholding of its
majority shareholder. The Group's banking subsidiary, Arbuthnot
Latham & Co., Limited, is authorised by the Prudential
Regulatory Authority (the "PRA") and regulated by the Financial
Conduct Authority ("FCA") and by the PRA and its Dubai Branch is
regulated by the Dubai Financial Services Authority. One of its
subsidiaries, Renaissance Asset Finance Limited, is regulated by
the FCA. Accordingly, the Group operates to the high standards of
corporate accountability and regulatory compliance appropriate for
such a business.
The Board has decided to report against the FRC Code. This
decision was made in light of the requirement in the AIM Rules for
Companies that AIM listed companies state which corporate
governance code they have decided to apply, how the company
complies with that code, and where it departs from its chosen code
an explanation of the reasons for doing so. The Rules of the AQSE
Growth Market also require the Company to adopt, as far as
possible, the principles and standards set down in a recognised UK
corporate governance code. This information is published on the
Company's website and the Company reviews it each year as part of
its annual reporting cycle. This section of the Annual Report
summarises how the Company applies the FRC Code and in broad terms
how it has complied with its provisions throughout the year, giving
explanations where it has chosen not to do so.
The Company is led by the Board which comprises seven members:
the executive Chairman, two other executive directors, Andrew
Salmon and James Cobb, and four independent non-executive directors
who thereby constitute at least half of the Board in line with the
Code. The Board sets the long-term focus and customer-oriented
culture of the Group. The responsibilities of Sir Henry Angest as
Chairman include leading the Board, ensuring its effectiveness in
all aspects of its role, ensuring effective communication with
shareholders, setting the Board's agenda and ensuring that all
Directors are encouraged to participate fully in the activities and
decision-making process of the Board.
Since 2016, when an independent Board Effectiveness Review was
carried out by an external consultant, the annual Board
Effectiveness Review has been conducted internally. The 2020
evaluation took the form of a confidential questionnaire which
assessed the performance of the Board and its Committees. The
questions were set to explore the themes developed over recent
years, including Board effectiveness, Board composition, Board
dynamics, alignment of the Board and executive team, interaction
with major shareholders, induction, performance and training, Board
Committees and the Secretariat. The feedback was collated by the
Company Secretary and discussed by the Board in November 2020 and
proposed actions arising were considered in February 2021. The
responses were positive, confirming that the Board was of the view
that it receives the correct level of insight into and oversight of
the Company, both directly to it and in terms of management
information and oral updates provided during meetings. Directors
also agreed that the Arbuthnot culture set out in the Arbuthnot
Principles and Values manifests itself at Board level and in the
external view of the Group as a whole.
Leadership and Purpose
The Board has for many years led a company which focuses on
sustainability and growth over the longer-term with a culture to
match. Investment in resources has been strong and has continued
where and as appropriate (including during the COVID-19 pandemic
for example), with the focus on the benefit this will bring to bear
for stakeholders over time. The aim continues to be for a culture
of openness among the workforce which combines with the prudent and
effective technological and individual controls in place across the
business to ensure strong risk management in the Company's
continued long-term success.
The Group's cultural values were embedded during the year
through a brand values document linking the Arbuthnot Principles to
the Group's culture as a way of communicating culture across the
business. This followed a formal rebranding process whereby these
cultural Principles are now encapsulated in five Group values,
themselves embedded into day-to-day activities. These are
integrity, respect, empowerment, energy and drive, and
collaboration.
The Board
A number of key decisions are reserved for the Board. The
Schedule of Matters Reserved to the Board is reviewed annually and
is published on the Company's website at
http://www.arbuthnotgroup.com/corporate_governance.html . The Board
met regularly throughout the year, including since March 2020 via
video conference. It held six scheduled meetings as well as three
ad-hoc meetings respectively to withdraw the second interim
dividend, to approve the Notice of AGM and jointly with the Board
of Arbuthnot Latham to approve the acquisition of Asset Alliance
Group Holdings Limited. It decided not to hold a separate off-site
strategy meeting because of its impracticability during the
pandemic. Substantive agenda items have briefing papers, which are
circulated in a timely manner before each meeting. The Board
ensures that it is supplied with all the information that it
requires and requests in a form and of a quality to fulfil its
duties. Since February 2021, the Directors have participated in
regular Board meetings of Arbuthnot Latham as attendees.
The Board was kept fully informed of the arrangements made by
management to run the business during the pandemic. In March 2020
the executive directors considered interim support and succession
arrangements relating to Arbuthnot Latham directors and designated
holders of PRA/FCA approved Senior Management Functions during the
COVID-19 outbreak, in anticipation of the likelihood that travel
would be restricted and that the Group would need to be managed and
run remotely for an unspecified period of time. It was determined
to continue with the overall succession plan and at the peak of the
first lockdown Arbuthnot Latham's executive directors held a daily
call so that all would be fully appraised of the matters under
consideration by the others within the executive team. This was to
ensure that had there been individual illness all relevant work
could continue, calling on the services of other key staff within
the business. The Chairman and Chief Executive continued to be kept
fully informed of all material matters through regular discussions
with senior management during the continuing period of remote
working.
In addition to overseeing the management of the Group, the Board
has determined certain items which are reserved for decision by
itself. These matters include approval of the Group's long-term
objectives and commercial strategy, ensuring a sound system of
internal control, risk management strategy, approval of major
investments, acquisitions and disposals, any changes to the capital
structure and the overall review of corporate governance.
The Company Secretary is responsible for ensuring that the Board
processes and procedures are appropriately followed and support
effective decision making. All directors have access to the Company
Secretary's advice and services. There is an agreed procedure for
directors to obtain independent professional advice in the course
of their duties, if necessary, at the Company's expense.
New directors receive induction training upon joining the Board,
with individual listed company training provided by the Company's
AIM Nominated Adviser and AQSE Corporate Adviser. Regulatory and
compliance training is provided by the Group Head of Compliance or
by an external firm of lawyers. Risk management training is
provided (including that in relation to the ICAAP and ILAAP) by the
Arbuthnot Latham Chief Risk Officer with an overview of credit and
its associated risks and mitigation by the Arbuthnot Latham Chief
Credit Officer.
Overview of Compliance with the FRC Code, together with
Exceptions
The Board focuses not only on the provisions of the Code but its
principles, ensuring as follows:
-- The Company's purpose, values and strategy as a prudently
managed organisation align with its culture, with a focus on
fairness and long-term shareholder returns.
-- The Board has an appropriate combination of executive and
non-executive directors, who have both requisite knowledge and
understanding of the business and the time to commit to their
specific roles.
-- The Board comprises directors with the necessary combination
of skills to ensure the effective discharge of its obligations,
with an annual evaluation of the capability and effectiveness of
each director as well as the Board as a composite whole;
appropriate succession plans are also in place and reviewed
annually, or more frequently if appropriate.
-- The Board and Audit Committee monitor the procedures in place
to ensure the independence and effectiveness of both external and
internal auditors, and the risk governance framework of the
Company, with all material matters highlighted to the relevant
forum (Board/Committee).
-- Remuneration policies and practices are designed to support
strategy and promote long-term sustainable success, with a
Remuneration Committee in place to oversee director and senior
management pay.
In respect of the Code's specific provisions, an annual review
is carried out, comparing the Company's governance arrangements and
practices against them. Any divergences are noted, with relevant
rationale considered carefully to determine whether it is
appropriate. Consideration is also given to guidance issued, which
may require a review of the relevant reasoning intra-year.
In line with the FRC's Guidance on Board Effectiveness, the
Board additionally takes into account its suggestions of good
practice when applying the Code focusing on the five key principles
specified in the Code.
Where the Company's governance does not completely align with
the Code, it is generally as a result of the role of its overall
majority shareholder, itself adding a level of protection to
long-term shareholder interests, and it has had no negative impact
on the Company.
All divergences from the Code, with an explanation of the
reasons for doing so are set out below:
Provision 5 - The Board has regard to the interests of all its
key stakeholders in its decision making. The Company has fewer than
20 employees, all of whom have direct access to Board members. As
such, it has not been deemed necessary to appoint an employee
representative to the Board, nor a formal workforce advisory panel,
nor a designated non-executive Director. As stated in the s.172
Statement on page 21, one of the non-executive directors of
Arbuthnot Latham and its Whistleblowing Champion, has been
designated by its board as the director to engage with the Group's
workforce.
Provision 9 - Sir Henry Angest carries out the role of Chairman
and Chief Executive, given his long-term interest as majority
shareholder, itself aligning with the interests of other
shareholders. The Group Chief Operating Officer and the Group
Finance Director provide a strong, independent counterbalance,
ensuring challenge and independence from a business perspective,
against the stakeholder focus of the Chairman carrying out his
Chairman's role. The Company follows the US model that is very
successful in ensuring commercial success with strong corporate
governance and stakeholder awareness, having a shared Chairman and
CEO, with a separate, empowered, Chief Operating Officer.
Provision 10 -- The Board considers Sir Christopher Meyer to be
independent, notwithstanding his serving more than nine years,
since his views and any challenge to executive management remain
firmly independent.
Provision 12 - The Board has not appointed a Senior Independent
Director, as major shareholders talk openly with the Chairman, the
Group Chief Operating Officer and the Group Finance Director on
request.
Provision 14 - Attendance at meetings is not reported since,
should a Director be unable to attend a meeting, that Director
receives relevant papers in the normal manner and relays any
comments in advance of the meeting to the Chairman. The same
process applies in respect of the Board Committees.
Provision 18 - For the purposes of stability and continuity, the
Company continues to offer Directors for re-election on a
three-year rolling basis in accordance with the Company's Articles
of Association and company law. The Directors seeking re-election
at the 2020 AGM are James Cobb and Ian Dewar, who have served on
the Board for 12 years and 5 1/2 years respectively. The
contribution of Mr. Cobb as the Group Financial Director has been
invaluable in managing the capital and liquidity requirements of
the Group. He has also played a pivotal role in sourcing and
delivering the acquisitions that have shaped the strategy of the
Group. Mr. Dewar, with a wealth of experience as a partner in a
major accounting firm, has successfully chaired the Audit
Committee. Accordingly, the Board fully supports the resolutions
for their reappointment.
Provision 19 - Sir Henry Angest's role as Chairman has extended
over nine years and is expected to continue indefinitely, given his
key role as majority shareholder both in protecting the stability
of his and other shareholder interests and in overseeing a balanced
and risk-managed approach to growing the business with a view to
the longer-term. For this reason he is surrounded by a strong team
of non-executives who ensure the protection of all shareholders'
interests.
Provision 32 - Sir Henry Angest is Chairman of the Remuneration
Committee, as is appropriate in the context of his majority
shareholding.
Internal Control and Financial Reporting
The Board of directors has overall responsibility for the
Group's system of internal control and for reviewing its
effectiveness. Such a system is designed to manage rather than
eliminate risk of failure to achieve business objectives and can
only provide reasonable, but not absolute, assurance against the
risk of material misstatement or loss.
The Directors and senior management of the Group review and
approve the Group's Risk Management Policy and Risk Appetite
framework. The Risk Management Policy describes and articulates the
risk management and risk governance framework, methodologies,
processes and infrastructure required to ensure due attention to
all material risks for Arbuthnot Latham, including compliance with
relevant regulatory requirements.
The Risk Appetite framework sets out the Board's risk attitude
for the principal risks through a series of qualitative statements
and quantitative risk tolerance metrics. These guide
decision-making at all levels of the organisation and form the
basis of risk reporting. The key business risks and emerging risks
are continuously identified, evaluated and managed by means of
limits and controls at an operational level by Arbuthnot Latham
management, and are governed through Arbuthnot Latham committees.
In November 2020, the Board received a report from the Arbuthnot
Latham Chief Risk Officer enabling it to carry out its annual
review of the effectiveness of the Group's risk management and
internal control systems. The report explained the Risk Management
Policy, together with principal risks, risk appetite, policies,
three lines of defence, systems, processes, procedures and controls
and a new risk board dashboard.
Significant risks identified in connection with the development
of new activities are subject to consideration by the Board. There
are well-established budgeting procedures in place and reports are
presented regularly to the Board detailing the results, in relation
to Arbuthnot Latham, of each principal business unit, variances
against budget and prior year, and other performance data. The
Board receives regular reports on any risk matters that need to be
brought to its attention, enabling it to assess the Group's
emerging and principal risks.
Shareholder Communications
The majority shareholder is Sir Henry Angest, Chairman and Chief
Executive. The Company maintains communications with its major
external shareholders via one to one meetings, as appropriate, by
the Chairman and Chief Executive, the Group Chief Operating Officer
or the Group Finance Director on governance and other matters. When
practicable it also makes use of the AGM to communicate with
shareholders in person. The Company aims to present a balanced and
understandable assessment in all its reports to shareholders, its
regulators, other stakeholders and the wider public. Key
announcements and other information can be found at
www.arbuthnotgroup.com.
In accordance with the FRC Code, the Company made contact with
five institutional shareholders in order to understand why they
voted against the resolution at the AGM held in June 2020
authorising the making of political donations and incurring of
political expenditure. The total votes received in favour of this
resolution were 74.6% and the five institutional shareholders
comprised almost all of the significant minority of votes of those
which it identified as not supporting the resolution. This
resolution provided that, in the four years beginning on 17 June
2020, the individual and aggregate amount donated or expended would
not exceed GBP250,000. In 2019, the Company made political
donations of GBP77,000 to the Conservative Party in view of the
significant adverse impact that a Labour government would have had
on the Group's clients and business.
Two institutional shareholders did not take up the offer of a
meeting with the Directors, one of which explained that their
policy on corporate governance is not to support resolutions in
respect of political donations. Of the three shareholders with
which the Company engaged successfully, each of the respective fund
managers expressed their support for the Company, but explained
that they generally follow the advice of their proxy voting
advisers in respect of corporate governance matters and which, on
this occasion, recommended that they voted against the resolution.
One institution, whilst understanding of the reasoning behind the
proposal of the resolution, indicated their own reluctance to
support it due to their generally not liking companies in which
they invest to make political donations. Another suggested that, if
given more of an explanation as to why the resolution was being
proposed, they believed that a proxy voting adviser might recommend
support in which case they would likely vote in favour. In summary
the response to the consultation with the Company's major
institutional shareholders was that, given their commitment to
follow "best practice" in relation to corporate governance, they
are reluctant unless there are special circumstances to go against
their corporate governance/proxy voting adviser's recommendation as
to how they vote. This was announced to the wider market in
accordance with the FRC Code.
The Board continues to believe that it is in the interests of
shareholders that it has the flexibility to make political
donations in accordance with the Companies Act 2016, in light of
prevailing political circumstances over the next few years. Going
forward it will seek to provide a more detailed explanation in
relation to specific shareholder resolutions which corporate
governance advisers are likely to regard as non-conforming or
outside best practice. The Board was encouraged by the continued
support of its major shareholders. It welcomes engagement with them
and will continue to maintain communications via one-to-one
meetings as appropriate.
Board Committees
The Board has Audit, Nomination, Remuneration, Donations and
Policy Committees, each with formally delegated duties and
responsibilities and with written terms of reference, which require
consideration of the committee's effectiveness. The Board keeps the
governance arrangements under review. Further information in
relation to these committees is set out below and the terms of
reference of the Audit, Nomination and Remuneration Committees are
published on the Company's website. The Board maintains direct
responsibility for issues of Risk without the need for its own Risk
Committee, since responsibility for large lending proposals is a
direct responsibility of its subsidiary, Arbuthnot Latham.
Audit Committee
Membership and meetings
Membership of the Audit Committee is restricted to non-executive
Directors and comprises Ian Dewar (as Chairman), Sir Christopher
Meyer and Sir Alan Yarrow. Mr. Dewar has recent and relevant
financial experience and the Committee as a whole has competence
relevant to the financial sector in which the Company operates. The
Company Secretary acts as its Secretary. The Committee met four
times during the year.
The Audit Committee oversees, on behalf of the Board, financial
reporting, the appropriateness and effectiveness of systems and
controls, the work of Internal Audit and the arrangements for and
effectiveness of the external audit. The ultimate responsibility
for reviewing and approving the Annual Report and Accounts and the
Interim Report lies with the Board. The Audit Committee also
reviews whistleblowing arrangements for employees to raise concerns
in confidence.
External Audit
The external auditors, Mazars LLP, have held office since their
appointment in 2019 following a competitive tender. The Committee
assesses the independence and objectivity, quali cations and
effectiveness of the external auditors on an annual basis as well
as making a recommendation to the Board on their reappointment. The
Committee received a report showing the level of non-audit services
provided by the external auditors during the year and members were
satisfied that the extent and nature of these did not compromise
auditor independence. The Committee has concluded that Mazars are
independent and that their audit is effective.
Activity in 2020
Internal Audit
On behalf of the Board, the Audit Committee monitors the
effectiveness of systems and controls. To this end, Internal Audit
provides the Audit Committee and the Board with detailed
independent and objective assurance on the effectiveness of
governance, risk management and internal controls. Since Arbuthnot
Latham, the Company's operating subsidiary, has its own Audit
Committee, the role of the Group Audit Committee is mainly
supervisory in relation to internal audit matters, though it
receives items of material note deriving from Arbuthnot Latham's
internal audits, including an assessment of culture which forms
part of every internal audit.
The Audit Committee approves the Internal Audit risk-based
programme of work and monitors progress against the annual plan.
The Committee reviews Internal Audit resources and the arrangements
that: ensure Internal Audit faces no restrictions or limitations to
conducting its work; that it continues to have unrestricted access
to all personnel and information; and that Internal Audit remains
objective and independent from business management.
The Head of Internal Audit provides reports on the outcomes of
Internal Audit work directly to the Committee and the Committee
monitors progress against actions identified in these reports.
The Committee received a self-assessment report on Internal
Audit from the Head of Internal Audit in September 2020 and it is
satisfied with Internal Audit arrangements during 2020.
Integrity of Financial Statements and oversight of external
audit
The Committee:
-- Received and agreed the Audit Plan prepared by the external auditors;
-- Considered and formed a conclusion on the critical judgements
underpinning the Financial Statements, as presented in papers
prepared by management. In respect of all of these critical
judgements, the Committee concluded that the treatment in the
Financial Statements was appropriate.
-- Received reports from the external auditors on the matters
arising from their work, the key issues and conclusions they had
reached;
-- Monitored arrangements put in place to ensure all the
necessary work on the Financial Statements could be undertaken
remotely in light of the Government guidance to work from home;
-- In addition the Committee reviewed closely the detailed work
carried out by management in respect of Going Concern and Viability
in light of the impact on the business of the continued
pandemic.
The reports from the external auditors include details of
internal control matters that they have identified as part of the
annual statutory financial statements audit. Certain aspects of the
system of internal control are also subject to regulatory
supervision, the results of which are monitored closely by the
Committee and the Board. In addition, the Committee receives by
exception reports on the ICAAP and ILAAP which are key control
documents that receive detailed consideration by the board of
Arbuthnot Latham.
The Committee approved the terms of engagement and made a
recommendation to the Board on the remuneration to be paid to the
external auditors in respect of their audit services.
Significant areas of judgement and estimation
The Audit Committee considered the following significant issues
and accounting judgements and estimates in relation to the
Financial Statements:
Impairment of loans and advances to customers
The Committee reviewed presentations from management detailing
the provisioning methodology across the Group as part of the full
year results process. The Committee considered and challenged the
provisioning methodology applied by management, including timing of
cash flows, valuation and recoverability of supporting collateral
on impaired assets. For those loans in default, where collateral
valuations provide the greatest sensitivity it was assured that,
where reliance is placed on the collateral, all assumptions are
supported by recent professional valuations. It focused particular
attention on RAF's exposure to the London Purpose Built Taxi sector
where many clients have obtained payment holidays. It also
discussed the different economic scenarios under which expected
credit losses had been estimated, including the assumptions of
falls in property values which compared with an overall market that
had grown. The Committee concluded that the impairment provisions,
including management's judgements and estimates, were
appropriate.
The charge for impaired loans and advances totalled GBP2.8m for
the year ended 31 December 2020. The disclosures relating to
impairment provisions are set out in Note 4.1(a) to the financial
statements.
Property Portfolio
The Group owns three commercial office properties and four
repossessed properties, two of which were taken on in the year. Of
these properties, five are held as inventory, one is held for sale
and one as an investment property. The properties held as inventory
and for sale are held at the lower of cost and net realisable value
on the basis of internal discounted cash flow models. The
investment property is held at fair value on the basis of an
internal discounted cash flow valuation, using yields, rental
income and refurbishment costs. The Committee discussed the bases
of valuation with management and with the auditors who had engaged
an outside expert to review management's valuations.
As at 31 December 2020, Arbuthnot Latham's total property
portfolio totalled GBP94.6m. The disclosures relating to the
carrying value of the investment property and the properties held
as inventory and for sale are set out in Notes 4.1(c), 4.1(d), 19,
23 and 29 to the financial statements.
Effective Interest rate
Interest earned on loans and receivables is recognised using the
Effective Interest Rate ("EIR") method. The EIR is calculated on
the initial recognition of a loan through a discounted cash flow
model that incorporates fees, costs and other premiums or
discounts. There have been no changes to the EIR accounting
policies during the year.
The Committee considered and challenged the EIR methodology
applied by management and specifically in relation to acquired loan
portfolios. The Committee considered management assumptions
including expected future customer behaviours and concluded that
the EIR methodology was appropriate as at 31 December 2020.
The disclosures relating to EIR are set out in Note 4.1(b) to
the financial statements.
Going Concern and Viability Statement
The financial statements are prepared on the basis that the
Group and Company are each a going concern. The Audit Committee
reviewed management's assessment, which incorporated analysis of
the ICAAP and ILAAP approved by the Board of Arbuthnot Latham and
of relevant metrics, focusing on liquidity, capital, and the stress
scenarios in the light of the economic impact of the pandemic. It
is satisfied that the going concern basis and assessment of the
Group's longer-term viability is appropriate.
Other Committee activities
In November 2020, Committee members contributed to the review of
the Committee's effectiveness as part of its evaluation by the
Board. There were no issues or concerns raised by them in regard to
discharging their responsibilities.
On behalf of the Board, the Committee reviewed the financial
statements as a whole in order to assess whether they were fair,
balanced and understandable. The Committee discussed and challenged
the balance and fairness of the overall report with the executive
directors and also considered the views of the external auditor.
The Committee was satisfied that the Annual Report could be
regarded as fair, balanced and understandable and that it provides
the information necessary for shareholders to assess the Company's
position and performance, business model and strategy. It proposed
that the Board approve the Annual Report in that respect.
Nomination Committee
Membership and meetings
The Nomination Committee is chaired by Sir Henry Angest and its
other members are Sir Christopher Meyer and Sir Alan Yarrow. The
Group General Counsel acts as its Secretary. The Committee meets
once a year and otherwise as required.
The Nomination Committee assists the Board in discharging its
responsibilities relating to the composition of the Board. The
Nomination Committee is responsible for and evaluates on a regular
basis the balance of skills, experience, independence and knowledge
on the Board, its size, structure and composition, retirements and
appointments of additional and replacement directors and will make
appropriate recommendations to the Board on such matters. The
Nomination Committee also considers succession planning, taking
into account the skills and expertise that will be needed on and
beneficial to the Board in the future.
Activity in 2020
The Committee met once during the year when it was involved in
the identification, assessment and appointment of an additional
independent non-executive director of Arbuthnot Latham to serve as
Chairman of its Audit Committee.
The Committee assessed and confirmed the collective and
individual suitability of Board members. The contribution of Sir
Henry Angest remains invaluable in the successful development of
the Company. As regards the non-executive Directors' skill sets,
Nigel Boardman's credibility, knowledge and reputation to the Board
has been a real benefit both in terms of collective and individual
suitability and when third parties are considering dealings with
the wider group. Ian Dewar, with a wealth of experience as a
partner in a major accounting firm, has successfully chaired the
Audit Committee. Sir Christopher Meyer's wide-ranging experience
including as a diplomat at the highest level has provided an
important independent measure of challenge to executive management.
The Board has benefitted from Sir Alan Yarrow's wise counsel,
challenge to management and many years' banking experience in the
City of London.
In terms of individual performance, the Chairman confirmed that
his assessment of all Directors was that they were performing well,
with the Executive Directors additionally being formally reviewed
in the context of the Senior Managers' Regime applicable to
Arbuthnot Latham which confirmed continued strong performance. The
Committee agreed with this assessment individually in relation to
all members of the Board. Collectively, it was agreed that the
Board had operated effectively with a wide range of experience and
knowledge. The Executive had performed notably well in the context
of COVID-19 and, as noted, in the responses to the Board
Effectiveness Questionnaire, Non-Executives had provided
appropriate challenge and guidance.
In terms of the performance of the Company's Board generally,
the Committee noted that it takes into account the provisions of
the Board Diversity Policy and the Board Suitability Policy. It
reviewed the summary of training carried out by each Director
during 2020 and noted that, notwithstanding COVID-19, Directors had
been able to carry out sufficient training.
In November 2020, the Committee confirmed that the Board's
current composition provides the Company with a balanced,
knowledgeable, diverse and informed group of directors, bringing
strategic acumen, foresight and challenge to the executive,
commensurate with the size of the business. The Committee reviewed
succession planning and agreed that a sensible and strong plan
remained in place. It also agreed that it continued to operate
effectively and, as such, no changes to its membership, composition
or activities were proposed to the Board.
Remuneration Committee
Membership and meetings
Membership is detailed in the Remuneration Report on page 37.
The Committee meets once a year and otherwise as required.
The Remuneration Committee assists the Board in determining its
responsibilities in relation to remuneration including, inter alia,
in relation to the Company's policy on executive remuneration
determining, the individual remuneration and benefits package of
each of the Executive Directors and the fees for Non-Executive
Directors.
The Committee also deals with remuneration-related issues under
the Prudential Regulation Authority's Remuneration Code applicable
to the Company. The Remuneration Report on pages 37 and 38 gives
further information and details of each Director's
remuneration.
Donations Committee
Membership and meetings
The Donations Committee is chaired by Sir Henry Angest and its
other members are Sir Christopher Meyer and Sir Alan Yarrow. The
Committee considers any political donation or expenditure as
defined within sections 366 and 367 of the Companies Act 2006. It
meets as necessary.
Activity in 2020
The Committee met once during the year. It agreed that the
Committee was constituted and continued to operate efficiently with
its overall performance and the performance of its individual
members effective throughout the year. As such, no changes to its
membership or activities were proposed to the Board. It further
agreed, in the context of the AGM voting and the subsequent
shareholder consultation thereon, that it would be appropriate to
hold a review of the Committee's constitution and effectiveness on
an annual basis.
Policy Committee
Membership and meetings
The Policy Committee is chaired by Andrew Salmon and its other
members are James Cobb and Nicole Smith, General Counsel who also
acts as its Secretary. It normally meets four times a year. Amongst
its responsibilities, the Committee reviews the content of policy
documentation to ensure that it meets legal and regulatory
requirements and approves it on behalf of the Board.
Remuneration Report
Remuneration Committee
Membership of the Remuneration Committee is limited to
non-executive directors together with Sir Henry Angest as Chairman.
The members of the Committee are Sir Henry Angest, Sir Christopher
Meyer and Sir Alan Yarrow. The General Counsel acts as its
Secretary. The Committee met twice during the year.
The Committee has responsibility for producing recommendations
on the overall remuneration policy for directors for review by the
Board and for setting the remuneration of individual directors.
Members of the Committee do not vote on their own remuneration.
Remuneration Policy
The Remuneration Committee determines the remuneration of
individual directors having regard to the size and nature of the
business; the importance of attracting, retaining and motivating
management of the appropriate calibre without paying more than is
necessary for this purpose; remuneration data for comparable
positions, in particular the rising remuneration packages at
challenger banks; the need to align the interests of executives
with those of shareholders; and an appropriate balance between
current remuneration and longer-term performance-related rewards.
The remuneration package can comprise a combination of basic annual
salary and benefits (including pension), a discretionary annual
bonus award related to the Committee's assessment of the
contribution made by the executive during the year and longer-term
incentives, including executive share options. Pension benefits
take the form of annual contributions paid by the Company to
individuals in the form of cash allowances. The Remuneration
Committee reviews salary levels each year based on the performance
of the Group during the preceding financial period. This review
does not necessarily lead to increases in salary levels. For the
purposes of the FCA Remuneration Code, all the provisions of which
have been implemented, the Group and its subsidiaries are all
considered to be Tier 3 institutions.
Activity in 2020
The Remuneration Committee met once during the year, undertaking
its regular activities including reviewing the operation of the
Remuneration Policy, having regard to the performance of the
Company during the year.
In relation to executive directors' pay reviews, the Committee
approved a proposal that variable remuneration would not be awarded
to them in 2020, due to the decision to protect profitability
during the pandemic, in line with the approach for all staff. As
regards their salaries, these were unchanged in 2020, following
consideration of comparable market rates and the low rate of
increase in annual inflation. No decision was taken by the
Committee on salary increases for 2021, but any pay rises for all
staff in the current year will only be awarded where an
individual's pay is out of line with the market rate for the role
or due to career promotion to new and more responsible jobs.
The Committee decided not to change the fees for non-executive
directors, reflecting the appropriate level of fee to continue to
secure the services of a high level non-executive director.
Directors' Service Contracts
Sir Henry Angest, Mr. Salmon and Mr. Cobb each have service
contracts terminable at any time on 12 months' notice in writing by
either party.
Long Term Incentive Schemes
Grants were made to Messrs Salmon and Cobb on 14 June 2016 under
Phantom Option Scheme introduced on that date, to acquire ordinary
1p shares in the Company at 1591p exercisable in respect of 50% on
or after 15 June 2019 and in respect of the remaining 50% on or
after 15 June 2021 when a cash payment would be made equal to any
increase in market value.
Under this Scheme, Mr. Salmon and Mr. Cobb were granted a
phantom option to acquire 200,000 and 100,000 ordinary 1p shares
respectively in the Company. The fair value of these options at the
grant date was GBP1m. The second tranche of the share options will
remain unvested as the performance conditions have not been met,
due to the non payment of dividends. The first tranche of share
options remained outstanding at 31 December 2020. The fair value of
the options as at 31 December 2020 was GBP0.1m (2019: GBP0.3m).
Directors' Emoluments
2020 2019
GBP000 GBP000
---------------------------------------------- ------- -------
Fees (including benefits in kind) 265 240
Salary payments (including benefits in kind) 3,172 4,334
Pension contributions 70 70
3,507 4,644
---------------------------------------------- ------- -------
Total Total
Salary Bonus Benefits Pension Fees 2020 2019
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------- ------- ------- --------- -------- ------- ------- -------
Sir Henry Angest 1,200 - 81 - - 1,281 1,293
NPG Boardman - - - - 60 60 35
JR Cobb 650 - 17 35 - 702 1,252
IA Dewar - - - - 75 75 75
Sir Christopher Meyer - - - - 60 60 60
AA Salmon 1,200 - 24 35 - 1,259 1,859
Sir Alan Yarrow - - - - 70 70 70
3,050 - 122 70 265 3,507 4,644
----------------------- ------- ------- --------- -------- ------- ------- -------
Details of any shares or options held by directors are presented
on page 37 and 127.
The emoluments of the Chairman were GBP1,281,000 (2019:
GBP1,293,000). The emoluments of the highest paid director were
GBP1,281,000 (2019: GBP1,859,000) including pension contributions
of GBPnil (2019: GBP35,000).
Retirement benefits are accruing under money purchase schemes
for two directors who served during 2020 (2019: two directors).
Independent Auditor's Report
Opinion
We have audited the financial statements of Arbuthnot Banking
Group PLC (the 'Parent Company') and its subsidiaries (the 'Group')
for the year ended 31st December 2020 which comprise: Consolidated
Statement of Comprehensive Income; Consolidated Statement of
Financial Position; Company Statement of Financial Position;
Consolidated Statement of Changes in Equity; Company Statement of
Changes in Equity; Consolidated Statement of Cash Flows; Company
Statement of Cash Flows; and notes to the financial statements,
including a summary of significant accounting policies. The
financial reporting framework that has been applied in their
preparation is applicable law and international accounting
standards in conformity with the requirements of the Companies Act
2006.
In our opinion, the financial statements have been prepared in
accordance with the requirements of the Companies Act 2006 and:
-- give a true and fair view of the state of the Group's and of
the Parent Company's affairs as at 31 December 2020 and of the
Group's loss for the year then ended; and
-- have been properly prepared in accordance with international
accounting standards in conformity with the requirements of the
Companies Act 2006 and, as regards the Parent Company financial
statements, as applied in accordance with the provisions of the
Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the
Auditor's responsibilities for the audit of the financial
statements section of our report. We are independent of the Group
and the Parent Company in accordance with the ethical requirements
that are relevant to our audit of the financial statements in the
UK, including the FRC's Ethical Standard, as applied to listed
entities and public interest entities and we have fulfilled our
other ethical responsibilities in accordance with these
requirements. We believe that the audit evidence we have obtained
is sufficient and appropriate to provide a basis for our
opinion.
Conclusions relating to going concern
In auditing the Financial Statements, we have concluded that the
Directors' use of the going concern basis of accounting in the
preparation of the Financial Statements is appropriate. Our audit
procedures to evaluate the directors' assessment of the Group's and
the Parent Company's ability to continue to adopt the going concern
basis of accounting included but were not limited to:
-- Undertaking an initial assessment at the planning stage of
the audit to identify events or conditions that may cast
significant doubt on the Group's and the Parent Company's ability
to continue as a going concern;
-- Making enquiries of the directors to understand the period of
assessment considered by them, the assumptions they considered and
the implication of those when assessing the Group's future
financial performance;
-- Evaluating management's Going Concern assessment of the Group and Parent Company;
-- Evaluating stress tests applied to the main subsidiary's liquidity and regulatory capital;
-- Evaluating the Group's Recovery and Resolution Plan which
includes possible cost saving measures that could be taken in the
event circumstances prevent forecast results from being
achieved;
-- Assessing and challenging key assumptions and mitigating
actions put in place in response to COVID-19;
-- Considering the consistency of the directors' forecasts with
other areas of the Financial Statements and our audit; and
-- Evaluating the appropriateness of the directors' disclosures
in the Financial Statements on going concern.
Based on the work we have performed, we have not identified any
material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the
Parent Company and Group's ability to continue as a going concern
for a period of at least twelve months from when the Financial
Statements are authorised for issue.
In relation to the Group's and the Parent Company's reporting on
how it has applied the UK Corporate Governance Code, we have
nothing material to add or draw attention to in relation to the
directors' statement in the financial statements about whether the
director's considered it appropriate to adopt the going concern
basis of accounting.
Our responsibilities and the responsibilities of the directors
with respect to going concern are described in the relevant
sections of this report.
Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) we identified, including those which had the greatest effect
on: the overall audit strategy; the allocation of resources in the
audit; and, directing the efforts of the engagement team. These
matters were addressed in the context of our audit of the financial
statements as a whole, and in forming our opinion thereon, and we
do not provide a separate opinion on these matters.
We summarise below the key audit matters in forming our audit
opinion above, together with an overview of the principal audit
procedures performed to address each matter and, where relevant,
key observations arising from those procedures.
These matters, together with our findings, were communicated to
those charged with governance through our Audit Completion
Report.
Loan Loss Provisions
Group - GBP4.6m; 2019: GBP4.8m (See note 22)
Risk
The determination of expected credit loss ('ECL') under IFRS 9
is an inherently judgmental area due to the use of subjective
assumptions and a high degree of estimation. ECL relating to the
Group's loan portfolio requires the Directors to make judgements
over the ability of the Groups' customers to make future loan
repayments.
The most significant risk relates to loans and advances to
customers where the bank is exposed to secured and unsecured
lending to private and commercial customers.
As set out in note 3.4, ECL is measured based on a three-stage
model. For loans with no signification deterioration in credit risk
since origination (stage 1), ECL is determined through the use of a
model.
The model used by the Group to determine expected losses
requires judgement to the input parameters and assumptions. In
particular, the ongoing economic impact of COVID-19 has increased
uncertainty around macro-economic assumptions.
For loans that have experienced a significant deterioration in
credit risk since origination (stage 2) or have defaulted (stage 3)
the ECL is determined based on probability of default ('PD') and
the present value of future cash flows arising primarily from the
sale or repossession of security which determines the loss given
default ('LGD').
The most significant areas where we identified greater levels of
management judgement and estimate are:
-- staging of loans and the identification of significant
increase in credit risk including assessment of the impact of COVID
driven actions such as payment holidays;
-- key assumptions in the model including PD and LGD including
the present value of future cash flows from collateral;
-- use of macro-economic variables reflecting a range of future scenarios.
Our response
Planning
We have performed a risk assessment over the Group's loan
portfolio to identify areas of heightened risk, with consideration
for the impact of COVID-19.
We have assessed the methodology of identifying significant
increase in credit risk.
Controls testing
We have tested the design and operating effectiveness of the key
controls operating across the Group in relation to credit processes
(including underwriting, monitoring, collections and provisioning).
This also included attendance at a Potential & Problem Debt
Management Committee meeting, missed payments monitoring, credit
reviews at origination and annual review, watch list movements
through the year, and revaluation controls.
Test of detail
We have reviewed credit files in order to verify data used in
the determination of PD and LGD assumptions. This was performed for
all loans in Stage 3 and Stage 2 and for a sample of loans in Stage
1 with characteristics of heightened credit risk (e.g. high
Loan-to-Value secured exposures and unsecured exposures).
Expected credit loss models
We have assessed the models used by management to determine
expected loss calculations. We have:
-- considered the methodology used by management;
-- tested the data inputs used in applying the methodology
adopted and assessed for reasonableness;
-- tested the completeness of the loan portfolio applied to the model;
-- tested the process in place to allocate loans to the respective risk categories (staging);
-- reviewed the key assumptions applied to determine probability
of default and loss given default;
-- we have included in-house credit risk specialists and
economists in the assessment of model approach and assumptions,
including macro-economic scenarios and the impact on house
prices.
Disclosures
We evaluated whether the disclosures are a clear, true and fair
reflection of managements approach to classification and
measurement under IFRS 9 and key assumptions made.
Conclusion
We found the approach taken in respect of loan loss provisions
to be consistent with the requirements of IFRS 9 and judgements
made were reasonable. Disclosures were appropriate.
Revenue recognition - effective interest rate
Group - GBP75.1m; 2019: GBP76.9m (See note 8)
Risk
The financial reporting fraud risk over revenue recognition
specifically relates to income recognised on an effect interest
method (EIR) on Loans and Advances to Customers including
originated and acquired loan portfolios.
The EIR takes into account cash flows that are an integral part
of the instrument's yield including: premiums, discounts and
acquisition costs which are spread over the expected life of the
loan.
Models used to calculate EIR are prepared manually and therefore
have an increased risk of error or fraud.
Judgement is required to determine whether fees are recognised
as EIR or recognised when a service has been performed.
The most significant areas where we identified greater levels of
management estimation are:
-- unwinding of the discount on acquired portfolios where
estimations are made with respect to future cash flows;
-- assumptions over the timing of cash flows used in revenue
recognition of originated exposures.
Our response
Acquired portfolios
We have assessed the basis for recognising revenue of acquired
portfolios against the requirements of IFRS 9. This included
assessing the allocation and unwind of the discount.
We have assessed key judgements over expected future cash flows
including estimated economic life.
We have performed tests of detail relating to loan information
and security valuations on a sample of exposures in the acquired
portfolios.
We have assessed the data inputs into models relating to
acquired portfolios.
Originated portfolios
We confirmed that the methodology applied in the EIR model was
consistent with the prior year.
We have re-performed model data inputs to identify instances of
error. Over a sample of loans we have verified details to
underlying agreements.
We have assessed the EIR model calculation for compliance with
IFRS 9. Where approximations have been adopted in the EIR model we
have assessed the impact.
Conclusion
We found the approach taken in respect of EIR to be consistent
with the requirements of IFRS 9 and judgements made were
reasonable.
Property valuations and classification
Group:
Inventory: GBP84.7m (2019: GBP75.2m) (note 23)
Investment properties: GBP6.6m (2019: GBP6.8m) (note 29)
Assets classified as held for sale: GBP3.3m (2019: GBP7.6m)
(note 19)
Risk
The Group recognises commercial property as either investment
property under IAS 40 or, where commercial property is being
developed for future sale, as inventory under IAS 2.
The Parent Company may come into ownership of property
originally designated as security by borrowers under lending
arrangements. These are recognised by the Parent Company as either
inventory under IAS 2, where the property is being developed for
future sale, or under IFRS 5 when held for sale criteria is
met.
The Group has an accounting policy to hold investment properties
at fair value and other property held as inventory or for sale at
cost and net realisable value.
Management engage third party experts to provide observations
and market data e.g. property rental yields. This data is included
in models built in-house to determine fair value or recoverable
amount.
The outcome of the model is highly sensitive to assumptions
made.
Our response
Planning
We have assessed the accounting classification of all commercial
property, held as either investment property or within inventory of
all property security repossessed by the Group during workout of
defaulted loans, held either within inventory or as held for
sale.
We have held meetings property developers and legal
representatives engaged by the Group in relation to repossessed
property security.
Controls testing
We have tested the design of controls around valuation models
prepared by management.
Valuation models
We have engaged with external property valuation specialists as
audit experts to assist us in our review of the valuation approach
and assumptions. We have compared property valuations determined by
management against our own independent valuation ranges.
We have tested data inputs and the sources of management
assumptions within the valuation models, including but not limited
to:
-- contractual rental income and incentives;
-- yield rates;
-- forecast maintenance and development costs; and
-- fees and contingencies.
Conclusion
We found the approach taken in respect property valuations to be
consistent with the requirements of the relevant accounting
standards and judgements made were reasonable.
Our application of materiality and an overview of the scope of
our audit
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for
materiality. These, together with qualitative considerations,
helped us to determine the scope of our audit and the nature,
timing and extent of our audit procedures on the individual
financial statement line items and disclosures and in evaluating
the effect of misstatements, both individually and on the financial
statements as a whole. Based on our professional judgement, we
determined materiality for the financial statements as a whole as
follows:
Overall materiality Group: GBP547,000 (2019: GBP1,042,000)
Parent: GBP273,500 (2019: GBP800,000)
How we determined Based on 0.5% of net assets. However, this has been capped
it at materiality levels applied to the main component to
recognise its relative significance in the Group. Parent
Company materiality has also been reduced to aggregate
component materiality below permitted thresholds.
Rationale for We have selected a net assets benchmark because the principal
benchmark applied activity of the Group and Parent Company is the investment
of Capital.
Performance materiality Group: GBP328,000
Parent Company: GBP164,000
Reporting threshold We agreed with the Directors that we would report to
them misstatements identified during our audit above
GBP16,000 (Group) and GBP8,000 (Parent Company) as well
as misstatements below that amount that, in our view,
warranted reporting for qualitative reasons.
As part of designing our audit, we assessed the risk of material
misstatement in the financial statements, whether due to fraud or
error, and then designed and performed audit procedures responsive
to those risks. In particular, we looked at where the Directors
made subjective judgements such as making assumptions on
significant accounting estimates. We tailored the scope of our
audit to ensure that we performed sufficient work to be able to
give an opinion on the financial statements as a whole. We used the
outputs of a risk assessment, our understanding of the Group and
the Parent Company, its environment, controls and critical business
processes, to consider qualitative factors in order to ensure that
we obtained sufficient coverage across all financial statement line
items.
We performed a full scope audit on all entities within the Group
which is consistent with the prior year. All audits were performed
directly by the Group audit team and executed at levels of
materiality applicable to each individual entity which were lower
than Group materiality and ranged from GBP0.04million to
GBP0.5million (2019: GBP0.1million to GBP1.4million). These account
for 100% (2019: 100%) of the Group's net interest income. 100%
(2019: 100%) of the Group's profit before tax, 100% (2019: 100%) of
the Group's net assets, and 100% (2019: 100%) of the Group's total
assets. At the Parent Company entity level we have also performed
testing over the consolidation process of Group entities.
Other information
The other information comprises the information included in the
annual report other than the financial statements and our auditor's
report thereon. The Directors are responsible for the other
information. Our opinion on the financial statements does not cover
the other information and, except to the extent otherwise
explicitly stated in our report, we do not express any form of
assurance conclusion thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained during
audit or otherwise appears to be materially misstated. If we
identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a
material misstatement in the financial statements or a material
misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement
of this other information, we are required to report that fact.
We have nothing to report in this regard.
Opinions on other matters prescribed by the Companies Act
2006
In our opinion, based on the work undertaken during the
audit:
-- the information given in the Strategic Report and the
Directors' Report for the financial year for which the financial
statements are prepared is consistent with the financial
statements; and
-- the Strategic Report and the Directors' Report have been
prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In light of the knowledge and understanding of the Group and the
Parent Company and its environment obtained during the audit, we
have not identified material misstatements in the Strategic Report
or the Directors' Report.
We have nothing to report in respect of the following matters in
relation to which the Companies Act 2006 requires us to report to
you if, in our opinion:
-- adequate accounting records have not been kept by the Parent
Company, or returns adequate for our audit have not been received
from branches not visited by us; or
-- the Parent Company financial statements are not in agreement
with the accounting records and returns; or
-- certain disclosures of Directors' remuneration specified by law are not made; or
-- we have not received all the information and explanations we require for our audit.
We are required to review the directors' statement in relation
to going concern, longer-term viability and that part of the
Corporate Governance Statement relating to the Group's compliance
with the provisions of the UK Corporate Governance Statement
specified for our review.
Corporate Governance Statement
Based on the work undertaken as part of our audit, we have
concluded that each of the following elements of the Corporate
Governance Statement is materially consistent with the financial
statements or our knowledge obtained during the audit:
-- directors' statement with regards the appropriateness of
adopting the going concern basis of accounting and any material
uncertainties identified as set out on page 24;
-- directors' explanation as to its assessment of the entity's
prospects, the period this assessment covers and why they period is
appropriate as set out on page 24.
-- directors' statement on fair, balanced and understandable as set out on page 28;
-- board's confirmation that it has carried out a robust
assessment of the emerging and principal risks as set out on page
24;
-- the section of the annual report that describes the review of
effectiveness of risk management and internal control systems as
set out on page 32; and;
-- the section describing the work of the audit committee as set out on page 32.
Responsibilities of Directors
As explained more fully in the Directors' Responsibilities
statement set out on page 27, the Directors are responsible for the
preparation of the financial statements and for being satisfied
that they give a true and fair view, and for such internal control
as the Directors determine is necessary to enable the preparation
of financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, the Directors are
responsible for assessing the Group's and the Parent Company'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 the Parent Company or to cease operations, or have no
realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
Irregularities, including fraud, are instances of non-compliance
with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements
in respect of irregularities, including fraud. The extent to which
our procedures are capable of detecting irregularities, including
fraud is detailed below.
Based on our understanding of the Group and the Parent Company
and its industry, we identified that the principal risks of
non-compliance relate to regulations and supervisory requirements
of the Prudential Regulation Authority (PRA) and the Financial
Conduct Authority (FCA), laws and regulations, such as the
Companies Act 2006, that have a direct impact on the preparation of
the financial statements, and UK tax legislation.
In identifying and assessing risks of material misstatement in
respect to irregularities including non-compliance with laws and
regulations, our procedures included but were not limited to:
-- at the planning stage of our audit, gaining an understanding
of the legal and regulatory framework applicable to the Group and
the Parent Company, the structure of the Group, the industry in
which they operate and considered the risk of acts by the Group and
the Parent Company which were contrary to the applicable laws and
regulations;
-- discussing with the Directors and management the policies and
procedures in place regarding compliance with laws and
regulations;
-- inclusion of audit specialists and experts in the risk
assessment of complex audit areas such as financial models and the
IT infrastructure;
-- discussing amongst the engagement team, who have extensive
experience of working with banks, the risks of fraud such as
opportunities for fraudulent manipulation of financial statements,
and determined that the principal risks were related to posting
manual journal entries to manipulate financial performance,
management bias through judgements and assumptions in significant
accounting estimates, in particular in relation to Expected Credit
Loss models and provisioning for defaulted loans (see 'Loan Loss
Provisions' Key Audit Matter above) and Effective Interest Rate
recognition (see 'Revenue Recognition' Key Audit Matter above), and
remaining alert to any indications of non-compliance; and
-- assessing the design of controls to consider: the ethical
cultural framework set by senior management, status of control
functions, lines of reporting control deficiencies and suspicions
of misdoings, segregation of duties, and IT controls to prevent
fraudulent access and manipulation of data.
Our procedures in relation to fraud included but were not
limited to:
-- making enquiries of the Directors and management on whether
they had knowledge of any actual, suspected or alleged fraud,
including independent inspection of complaints logs;
-- inspection of the Parent Company's and Group's regulatory and
legal correspondence and review of minutes of Directors' meetings
in the year;
-- testing effectiveness of controls designed to prevent or detect fraudulent activity;
-- comparing certain balances to external sources;
-- being sceptical to the potential of management bias in key judgements and assumptions;
-- introducing elements of unpredictability in to our audit testing; and
-- addressing the risks of fraud through management override of
controls by performing journal entry testing.
The primary responsibility for the prevention and detection of
irregularities including fraud rests with both the Directors and
management. As with any audit, there remained a risk of
non-detection of irregularities, as these may involve collusion,
forgery, intentional omissions, misrepresentations or the override
of internal controls.
The risks of material misstatement that had the greatest effect
on our audit, including fraud, are discussed under "key audit
matters" within this report.
A further description of our responsibilities is available on
the Financial Reporting Council's website at
www.frc.org.uk/auditorsresponsibilities
Other matters which we are required to address
Following the recommendation of the audit committee, we were
appointed by the Board of Directors on 6 December 2019 to audit the
financial statements for the year ending 31 December 2019 and
subsequent financial periods. The period of total uninterrupted
engagement is 2 years, covering the years ending 31 December 2019
to 31 December 2020.
The non-audit services prohibited by the FRC's Ethical Standard
were not provided to the Group or the Parent Company and we remain
independent of the Group and the Parent Company in conducting our
audit.
Our audit opinion is consistent with the additional report to
the audit committee.
Use of the audit report
This report is made solely to the Parent Company's members as a
body in accordance with Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so that we might state to
the Parent Company's members those matters we are required to state
to them in an auditor's report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Parent Company and the
Parent Company's members as a body for our audit work, for this
report, or for the opinions we have formed.
Greg Simpson
(Senior Statutory Auditor)
for and on behalf of Mazars LLP
Chartered Accountants and Statutory Auditor
Tower Bridge House, St Katharine's Way
London, E1W 1DD
24 March 2021
Company statement of financial position
At 31 December
2020 2019
Note GBP000 GBP000
--------------------------------------------- ------ ----------- ----------
ASSETS
Loans and advances to banks 17 15,162 15,316
Debt securities at amortised cost 18 24,308 24,239
Financial investments 24 14,171 25,913
Current tax asset 438 -
Deferred tax asset 25 395 391
Intangible assets 26 4 5
Property, plant and equipment 27 161 184
Other assets 23 103 115
Interests in subsidiaries 42 133,904 134,004
--------------------------------------------- ------ ----------- ----------
Total assets 188,646 200,167
--------------------------------------------- ------ ----------- ----------
EQUITY AND LIABILITIES
Equity
Share capital 36 154 154
Other reserves 37 (13,444) (1,618)
Retained earnings 37 160,721 161,556
--------------------------------------------- ------ ----------- ----------
Total equity 147,431 160,092
--------------------------------------------- ------ ----------- ----------
LIABILITIES
Current tax liability - 175
Other liabilities 32 3,559 3,063
Debt securities in issue 34 37,656 36,837
--------------------------------------------- ------ ----------- ----------
Total liabilities 41,215 40,075
--------------------------------------------- ------ ----------- ----------
Total equity and liabilities 188,646 200,167
--------------------------------------------- ------ ----------- ----------
The Company has elected to take the exemption under section 408 of the
Companies Act 2006 not to present the Parent Company profit and loss
account. The profit for the Parent Company for the year is presented
in the Statement of Changes in Equity.
Consolidated statement of changes in equity
Attributable to equity
holders of the Group
---------------------------------------------------------
Capital Fair
Share redemption value Treasury Retained
capital reserve reserve shares earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------------------------- --------- ------------ --------- --------- ---------- ---------
Balance at 31 December 2019 154 19 205 (1,214) 209,171 208,335
Total comprehensive income for the period
Loss for 2020 - - - - (1,332) (1,332)
Other comprehensive income, net of tax
Changes in fair value of equity investments
at fair value through other comprehensive
income* - - (12,825) - - (12,825)
Tax on other comprehensive income - - (70) - - (70)
--------------------------------------------- --------- ------------ --------- --------- ---------- ---------
Total other comprehensive income - - (12,895) - - (12,895)
--------------------------------------------- --------- ------------ --------- --------- ---------- ---------
Total comprehensive income for the period - - (12,895) - (1,332) (14,227)
--------------------------------------------- --------- ------------ --------- --------- ---------- ---------
Transactions with owners, recorded directly
in equity
Contributions by and distributions to
owners
Purchase of own shares - - - (85) - (85)
Total contributions by and distributions
to owners - - - (85) - (85)
--------------------------------------------- --------- ------------ --------- --------- ---------- ---------
Balance at 31 December 2020 154 19 (12,690) (1,299) 207,839 194,023
--------------------------------------------- --------- ------------ --------- --------- ---------- ---------
* Mainly relate to movement in STB share price. There is currently no
tax implications to the movement as the shareholding still qualifies
for significant shareholding exemption.
Attributable to equity
holders of the Group
---------------------------------------------------------
Capital Fair
Share redemption value Treasury Retained
capital reserve reserve shares earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------------------------- --------- ------------ --------- --------- ---------- --------
Balance at 31 December 2018 153 20 (12,169) (1,131) 209,083 195,956
Total comprehensive income for the period
Profit for 2019 - - - - 6,176 6,176
Other comprehensive income, net of tax
Changes in fair value of equity investments
at fair value through other comprehensive
income* - - 10,707 - - 10,707
Tax on other comprehensive income - - (77) - - (77)
--------------------------------------------- --------- ------------ --------- --------- ---------- --------
Total other comprehensive income - - 10,630 - - 10,630
--------------------------------------------- --------- ------------ --------- --------- ---------- --------
Total comprehensive income for the period - - 10,630 - 6,176 16,806
--------------------------------------------- --------- ------------ --------- --------- ---------- --------
Transactions with owners, recorded directly
in equity
Contributions by and distributions to
owners
Unwind Employee Trust - - - - 1,083 1,083
Sale of Secure Trust Bank shares - - 1,744 - (1,744) -
Issue non-voting shares 1 (1) - - (44) (44)
Purchase of own shares - - - (83) - (83)
Final dividend relating to 2018 - - - - (2,978) (2,978)
Interim dividend relating to 2019 - - - - (2,405) (2,405)
--------------------------------------------- --------- ------------ --------- --------- ---------- --------
Total contributions by and distributions
to owners 1 (1) 1,744 (83) (6,088) (4,427)
--------------------------------------------- --------- ------------ --------- --------- ---------- --------
Balance at 31 December 2019 154 19 205 (1,214) 209,171 208,335
--------------------------------------------- --------- ------------ --------- --------- ---------- --------
* Mainly relate to movement in STB share price. There is currently no
tax implications to the movement as the shareholding still qualifies
for significant shareholding exemption.
Company statement of changes in equity
Attributable to equity holders
of the Company
---------------------------------------------------------
Capital Fair
Share redemption value Treasury Retained
capital reserve reserve shares earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------------------------- --------- ------------ --------- --------- ---------- ---------
Balance at 1 January 2019 153 20 (7,022) (1,131) 162,729 154,749
Total comprehensive income for the
period
Profit for 2019 - - - - 3,170 3,170
Other comprehensive income, net of
income tax - - - - - -
Changes in fair value of equity investments
at fair value through other comprehensive
income* - - 6,599 - - 6,599
--------------------------------------------- --------- ------------ --------- --------- ---------- ---------
Total other comprehensive income - - 6,599 - - 6,599
--------------------------------------------- --------- ------------ --------- --------- ---------- ---------
Total comprehensive income for the
period - - 6,599 - 3,170 9,769
--------------------------------------------- --------- ------------ --------- --------- ---------- ---------
Transactions with owners, recorded
directly in equity
Contributions by and distributions
to owners
Unwind Employee Trust - - - - 1,083 1,083
Issue of non-voting shares 1 (1) - - (43) (43)
Purchase of own shares - - - (83) - (83)
Final dividend relating to 2018 - - - - (2,978) (2,978)
Interim dividend relating to 2019 - - - - (2,405) (2,405)
--------------------------------------------- --------- ------------ --------- --------- ---------- ---------
Total contributions by and distributions
to owners 1 (1) - (83) (4,343) (4,426)
--------------------------------------------- --------- ------------ --------- --------- ---------- ---------
Balance at 31 December 2019 154 19 (423) (1,214) 161,556 160,092
--------------------------------------------- --------- ------------ --------- --------- ---------- ---------
Total comprehensive income for the
period
Loss for 2020 - - - - (835) (835)
Other comprehensive income, net of
income tax - - - - - -
Changes in fair value of equity investments
at fair value through other comprehensive
income* - - (11,741) - - (11,741)
--------------------------------------------- --------- ------------ --------- --------- ---------- ---------
Total other comprehensive income - - (11,741) - - (11,741)
--------------------------------------------- --------- ------------ --------- --------- ---------- ---------
Total comprehensive income for the
period - - (11,741) - (835) (12,576)
--------------------------------------------- --------- ------------ --------- --------- ---------- ---------
Transactions with owners, recorded
directly in equity
Contributions by and distributions
to owners
Purchase of own shares - - - (85) - (85)
Total contributions by and distributions
to owners - - - (85) - (85)
--------------------------------------------- --------- ------------ --------- --------- ---------- ---------
Balance at 31 December 2020 154 19 (12,164) (1,299) 160,721 147,431
--------------------------------------------- --------- ------------ --------- --------- ---------- ---------
* Mainly relate to movement in STB share price. There is currently no
tax implications to the movement as the shareholding still qualifies
for significant shareholding exemption.
Consolidated statement of cash flows
Year Year
ended ended
31 December 31 December
2020 2019
Note GBP000 GBP000
------------------------------------------------------ ----- ------------- -------------
Cash flows from operating activities
Interest received 99,308 63,500
Interest paid (19,264) (15,088)
Fees and commissions received 14,685 13,757
Other income 678 5,599
Cash payments to employees and suppliers (88,564) (63,887)
Taxation paid (237) (841)
------------------------------------------------------ ----- ------------- -------------
Cash flows from operating profits before changes
in operating assets and liabilities 6,606 3,040
Changes in operating assets and liabilities:
- net decrease in derivative financial instruments 291 173
- net decrease/(increase) in loans and advances
to customers 11,366 (372,612)
- net increase in other assets (5,513) (10,123)
- net increase in amounts due to customers 280,304 370,617
- net decrease in other liabilities (5,894) (5,049)
------------------------------------------------------ ----- ------------- -------------
Net cash inflow/(outflow) from operating activities 287,160 (13,954)
------------------------------------------------------ ----- ------------- -------------
Cash flows from investing activities
Acquisition of financial investments (420) (182)
Disposal of financial investments - 15,330
Purchase of computer software 26 (6,392) (5,552)
Purchase of property, plant and equipment 27 (683) (1,950)
Proceeds from sale of property, plant and equipment 27 23 -
Purchase of investment property 29 - (2,901)
Purchase of debt securities (695,614) (815,223)
Proceeds from redemption of debt securities 791,242 719,737
------------------------------------------------------ ----- ------------- -------------
Net cash inflow/(outflow) from investing activities 88,156 (90,741)
------------------------------------------------------ ----- ------------- -------------
Cash flows from financing activities
Purchase of treasury shares (85) -
Issue subordinated debt - 25,000
Decrease in borrowings (331) (2,254)
Dividends paid - (5,383)
------------------------------------------------------ ----- ------------- -------------
Net cash (outflow)/inflow from financing activities (416) 17,363
------------------------------------------------------ ----- ------------- -------------
Net increase/(decrease) in cash and cash equivalents 374,900 (87,332)
Cash and cash equivalents at 1 January 372,166 459,498
------------------------------------------------------ ----- ------------- -------------
Cash and cash equivalents at 31 December 40 747,066 372,166
------------------------------------------------------ ----- ------------- -------------
Company statement of cash flows
Year Year
ended ended
31 December 31 December
2020 2019
Note GBP000 GBP000
-------------------------------------------------------- ----- ------------- -------------
Cash flows from operating activities
Dividends received from subsidiaries 385 3,766
Interest received 51 65
Interest paid (2,664) (1,829)
Other income 9,537 10,605
Cash payments to employees and suppliers (7,965) (8,129)
Taxation paid (21) (370)
-------------------------------------------------------- ----- ------------- -------------
Cash flows from operating (loss)/profit before changes
in operating assets and liabilities (677) 4,108
Changes in operating assets and liabilities:
- net decrease/(increase) in group company balances 2,087 (742)
- net decrease/(increase) in other assets 12 (73)
- net (decrease)/increase in other liabilities (1,591) 481
-------------------------------------------------------- ----- ------------- -------------
Net cash (outflow)/inflow from operating activities (169) 3,774
-------------------------------------------------------- ----- ------------- -------------
Cash flows from investing activities
Receipt on dissolution of insurance cell 42 100 -
Issue of subordinated debt to Arbuthnot Latham - (25,000)
Net cash inflow from investing activities 100 (25,000)
-------------------------------------------------------- ----- ------------- -------------
Cash flows from financing activities
Purchase of treasury shares (85) (83)
Issue subordinated debt - 25,000
Dividends paid - (5,383)
Net cash used in financing activities (85) 19,534
-------------------------------------------------------- ----- ------------- -------------
Net decrease in cash and cash equivalents (154) (1,692)
Cash and cash equivalents at 1 January 15,316 17,008
-------------------------------------------------------- ----- ------------- -------------
Cash and cash equivalents at 31 December 40 15,162 15,316
-------------------------------------------------------- ----- ------------- -------------
Notes to the Consolidated Financial Statements
1. Reporting entity
Arbuthnot Banking Group PLC is a company domiciled in the United
Kingdom. The registered address of Arbuthnot Banking Group PLC is 7
Wilson Street, London, EC2M 2SN. The consolidated financial
statements of Arbuthnot Banking Group PLC as at and for the year
ended 31 December 2020 comprise Arbuthnot Banking Group PLC and its
subsidiaries (together referred to as the "Group" and individually
as "subsidiaries"). The Company is the holding company of a group
primarily involved in banking and financial services.
2. Basis of preparation
(a) Statement of compliance
The Group's consolidated financial statements and the Company's
financial statements have been prepared in accordance with
international accounting standards in conformity with the
requirements of the Companies Act 2006.
The consolidated financial statements were authorised for issue
by the Board of Directors on 24 March 2021.
(b) Basis of measurement
The consolidated and company financial statements have been
prepared under the historical cost convention, as modified by
investment property and derivatives, financial assets and financial
liabilities at fair value through profit or loss or other
comprehensive income.
(c) Functional and presentational currency
Items included in the financial statements of each of the
Group's entities are measured using the currency of the primary
economic environment in which the entity operates ("the functional
currency"). The consolidated financial statements are presented in
Pounds Sterling, which is the Company's functional and the Group's
presentational currency.
(d) Use of estimates and judgements
The preparation of financial statements in conformity with IFRS
requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of
applying the Group's accounting policies. The areas involving a
higher degree of judgement or complexity, or areas where
assumptions and estimates are significant to the consolidated
financial statements are disclosed in Note 4.
(e) Going concern
After making appropriate enquiries which assessed strategy,
profitability, funding, risk management (see Note 6) and capital
resources (see Note 7), the directors are satisfied that the
Company and the Group have adequate resources to continue in
operation for the foreseeable future. The Group reported a loss
before tax of GBP1.1m in 2020, however, this result included a
number of short-term items as highlighted in the Strategic Report.
The Directors expect that the Group will return to profitability in
2021, with strong pipeline business as a result of re-instating
credit appetite and the acquisition of the Asset Alliance Group
contributing towards future earnings. The Audit Committee reviewed
management's assessment, which incorporated analysis of the ICAAP
and ILAAP approved by the Board of AL and of relevant metrics,
focusing on liquidity, capital, and the stress scenarios in the
light of the economic impact of the pandemic. It is satisfied that
the going concern basis and assessment of the Group's longer-term
viability is appropriate. The financial statements are therefore
prepared on the going concern basis.
(f) Accounting developments
The accounting policies adopted are consistent with those of the
previous financial year, except for the following:
COVID-19 amendments on lease modifications - Amendments to IFRS
16 - Leases (IFRS 16)
The IASB published 'amendments to IFRS 16 covering
COVID-19-Related Rent Concessions'. These provide lessees with an
exemption from assessing whether a COVID-19 related rent concession
is a lease modification. The amendment is effective for annual
reporting periods beginning on or after 1 June 2020. The effect of
the amendment on the Group's financial statements is immaterial and
will be adopted from 1 January 2021. There will be no adjustment to
retained earnings as of 1 January 2020 since the amendments only
apply to rent concessions granted in 2020.
3. Significant accounting policies
The accounting policies applied in the preparation of these
consolidated financial statements are set out below. These policies
have been consistently applied to all the years presented, unless
otherwise stated.
3.1. Consolidation
(a) Subsidiaries
Subsidiaries are all investees (including special purpose
entities) controlled by the Group. The Group controls an investee
when it is exposed, or has rights, to variable returns from its
involvement with the investee and has the ability to affect those
returns through its power over the investee. Subsidiaries are fully
consolidated from the date on which control is transferred to the
Group. They are de-consolidated from the date that control
ceases.
The acquisition method of accounting is used to account for the
acquisition of subsidiaries by the Group. The cost of an
acquisition is measured as the fair value of the assets given,
equity instruments issued and liabilities incurred or assumed at
the date of exchange. Identifiable assets acquired, liabilities and
contingent liabilities assumed in a business combination are
measured initially at their fair values at the acquisition date,
irrespective of the extent of any non-controlling interest. The
excess of the cost of acquisition over the fair value of the
Group's shares of the identifiable net assets acquired is recorded
as goodwill. If the cost of acquisition is less than the fair value
of the net assets of the subsidiary acquired, the difference is
recognised directly in the Statement of Comprehensive Income as a
gain on bargain purchase. Contingent consideration related to an
acquisition is initially recognised at the date of acquisition as
part of the consideration transferred, measured at its acquisition
date fair value and recognised as a liability. The fair value of a
contingent consideration liability recognised on acquisition is
remeasured at key reporting dates until it is settled, changes in
fair value are recognised in the profit or loss.
The Company's investments in subsidiaries are recorded at cost
less, where appropriate, provisions for impairment in value.
Inter-company transactions, balances and unrealised gains on
transactions between Group companies are eliminated. Unrealised
losses are also eliminated. Accounting policies of subsidiaries
have been changed where necessary to ensure consistency with the
policies adopted by the Group.
(b) Special purpose entities
Special purpose entities ("SPEs") are entities that are created
to accomplish a narrow and well-defined objective such as the
securitisation of particular assets or the execution of a specific
borrowing or lending transaction. SPEs are consolidated when the
investor controls the investee. The investor would only control the
investee if it had all of the following:
-- power over the investee;
-- exposure, or rights, to variable returns from its involvement with the investee; and
-- the ability to use its power over the investee to affect the
amount of the investor's returns.
The assessment of whether the Group has control over an SPE is
carried out at inception and the initial assessment is only
reconsidered at a later date if there were any changes to the
structure or terms of the SPE, or there were additional
transactions between the Group and the SPE.
3.2. Foreign currency translation
Foreign currency transactions are translated into the functional
currency using the spot exchange rates prevailing at the dates of
the transactions or valuation where items are remeasured. Foreign
exchange gains and losses resulting from the settlement of such
transactions and from the translation at year end exchange rates of
monetary assets and liabilities denominated in foreign currencies
are recognised in the Statement of Comprehensive Income. Foreign
exchange differences arising from translation of equity
instruments, where an election has been made to present subsequent
fair value changes in Other Comprehensive Income ("OCI"), will also
be recognised in OCI.
3.3. Financial assets and financial liabilities
IFRS 9 requires financial assets and liabilities to be measured
at amortised cost, fair value through other comprehensive income
("FVOCI") or fair value through the profit and loss ("FVPL").
Liabilities are measured at amortised cost or FVPL. The Group
classifies financial assets and financial liabilities in the
following categories: financial assets and financial liabilities at
FVPL; FVOCI, financial assets and liabilities at amortised cost and
other financial liabilities. Management determines the
classification of its financial instruments at initial
recognition.
A financial asset or financial liability is measured initially
at fair value plus, transaction costs that are directly
attributable to its acquisition or issue with the exception of
financial assets at FVPL where these costs are debited to the
income statement.
(a) Financial assets measured at amortised cost
Financial assets that are held to collect contractual cash flows
where those cash flows represent solely payments of principal and
interest are measured at amortised cost. A basic lending
arrangement results in contractual cash flows that are solely
payments of principal and interest ("SPPI") on the principal amount
outstanding. Financial assets measured at amortised cost are
predominantly loans and advances and debt securities.
Loans and advances
Loans and advances are non-derivative financial assets with
fixed or determinable payments that are not quoted in an active
market. They arise when the Group provides money, goods or services
directly to a debtor with no intention of trading the receivable
and the SPPI criteria are met. Loans are recognised when cash is
advanced to the borrowers inclusive of transaction costs. Loans and
advances, other than those relating to assets leased to customers,
are carried at amortised cost using the effective interest rate
method.
Debt securities at amortised cost
Debt securities at amortised cost are non-derivative financial
assets with fixed or determinable payments and fixed maturities
that the Group has determined meets the SPPI criteria. Debt
security investments are carried at amortised cost using the
effective interest rate method, less any impairment loss.
(b) Financial assets and financial liabilities at FVPL
Financial assets and liabilities are classified at FVPL where
they do not meet the criteria to be measured at amortised cost or
FVOCI or where financial assets are designated at FVPL to reduce an
accounting mismatch. They are measured at fair value in the
statement of financial position, with fair value gains/losses
recognised in the income statement.
Financial assets that are held for trading or managed within a
business model that is evaluated on a fair value basis are measured
at FVPL, because the business objective is neither hold-to-collect
contractual cash flows nor hold-to-collect-and-sell contractual
cash flows.
This category comprises derivative financial instruments and
financial investments. Derivative financial instruments utilised by
the Group include structured notes and derivatives used for hedging
purposes.
Financial assets and liabilities at FVPL are initially
recognised on the date from which the Group becomes a party to the
contractual provisions of the instrument, including any acquisition
costs. Subsequent measurement of financial assets and financial
liabilities held in this category are carried at FVPL until the
investment is sold.
(c) Financial assets at FVOCI
These include investments in special purpose vehicles and equity
investments. They may be sold in response to liquidity
requirements, interest rate, exchange rate or equity price
movements. Financial investments are initially recognised at cost,
which is considered as the fair value of the investment including
any acquisition costs. The securities are subsequently measured at
fair value in the statement of financial position.
Fair value changes in the securities are recognised directly in
equity (OCI).
A debt instrument is measured at fair value through other
comprehensive income if it meets both of the following
conditions:
-- the asset is held within a business model whose objective is
achieved by collecting contractual cash flows and selling financial
assets; and
-- the contractual terms of the financial asset meet the SPPI criterion.
There is a rebuttable presumption that all equity investments
are FVPL, however on initial recognition the Group may make an
irrevocable election to present the fair value movement of equity
investments that are not held for trading within OCI. The election
can be made on an instrument by instrument basis.
For debt instruments, changes in fair value are recognised in
OCI. The assets are subject to impairment testing under IFRS 9 and
a loss allowance provision is recognised for such assets. The
portion of changes in fair value which reflect ECL are taken to the
profit or loss.
For equity instruments, there are no reclassifications of gains
and losses to the profit or loss statement on derecognition and no
impairment recognised in the profit or loss. Equity fair value
movements are not reclassified from OCI under any
circumstances.
(d) Financial guarantees and loan commitments
Financial guarantees represent undertakings that the Group will
meet a customer's obligation to third parties if the customer fails
to do so. Commitments to extend credit represent unused portions of
authorisations to extend credit in the form of loans, guarantees or
letters of credit. The Group is exposed to loss in an amount equal
to the total guarantees or unused commitments, however, the likely
amount of loss is expected to be significantly less; most
commitments to extend credit are contingent upon customers
maintaining specific credit standards, where the amount of loss
exceeds the total unused commitments an ECL is recognised.
Liabilities under financial guarantee contracts are initially
recorded at their fair value, and the initial fair value is
amortised over the life of the financial guarantee. Subsequently,
the financial guarantee liabilities are measured at the higher of
the initial fair value, less cumulative amortisation, and the ECL
of the obligations.
(e) Financial liabilities at amortised cost
Financial liabilities at amortised cost are non-derivative
financial liabilities with fixed or determinable payments. These
liabilities are recognised when cash is received from the
depositors and carried at amortised cost using the effective
interest rate method. The fair value of these liabilities repayable
on demand is assumed to be the amount payable on demand at the
Statement of Financial Position date.
Basis of measurement for financial assets and liabilities
Amortised cost measurement
The amortised cost of a financial asset or financial liability
is the amount at which the financial asset or financial liability
is measured at initial recognition, minus principal payments, plus
or minus the cumulative amortisation using the effective interest
rate method of any difference between the initial amount recognised
and the maturity amount, less any reduction for impairment.
Fair value measurement
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.
When available, the Group measures the fair value of an
instrument using quoted prices in an active market for that
instrument. A market is regarded as active if quoted prices are
readily and regularly available and represent actual and regularly
occurring market transactions on an arm's length basis.
If a market for a financial instrument is not active, the Group
establishes fair value using a valuation technique. These include
the use of recent arm's length transactions, reference to other
instruments that are substantially the same for which market
observable prices exist, net present value and discounted cash flow
analysis.
Derecognition
Financial assets are derecognised when the rights to receive
cash flows from the financial assets have expired or when the Group
has transferred substantially all risks and rewards of ownership.
Any interest in transferred financial assets that qualify for
derecognition that is created or retained by the Group is
recognised as a separate asset or liability in the Statement of
Financial Position. In transactions in which the Group neither
retains nor transfers substantially all the risks and rewards of
ownership of a financial asset and it retains control over the
asset, the Group continues to recognise the asset to the extent of
its continuing involvement, determined by the extent to which it is
exposed to changes in the value of the transferred asset. There
have not been any instances where assets have only been partially
derecognised.
The Group derecognises a financial liability when its
contractual obligations are discharged, cancelled, expire, are
modified or exchanged.
Offsetting
Financial assets and financial liabilities are offset and the
net amount presented in the statement of financial position when,
and only when, the Group currently has a legally enforceable right
to set off the amounts and it intends either to settle them on a
net basis or to realise the asset and settle the liability
simultaneously.
Income and expenses are presented on a net basis only when
permitted under IFRS, or for gains and losses arising from a group
of similar transactions such as the Group's trading activity.
3.4 Impairment for financial assets and liabilities
IFRS 9 impairment model adopts a three stage expected credit
loss approach ("ECL") based on the extent of credit deterioration
since origination.
The three stages under IFRS 9 are as follows:
-- Stage 1 - if, at the reporting date, the credit risk on a
financial instrument has not increased significantly since initial
recognition, an entity shall measure the loss allowance for that
financial instrument at an amount equal to 12-month expected credit
losses.
-- Stage 2 - a lifetime loss allowance is held for financial
assets where a significant increase in credit risk has been
identified since initial recognition for financial assets that are
not credit impaired. The assessment of whether credit risk has
increased significantly since initial recognition is performed for
each reporting period for the life of the loan.
-- Stage 3 - a lifetime ECL allowance is required for financial
assets that are credit impaired at the reporting date.
Measurement of ECL
The assessment of credit risk and the estimation of ECL are
unbiased and probability weighted. ECL is measured on either a 12
month (Stage 1) or lifetime (Stage 2) basis depending on whether a
significant increase in credit risk has occurred since initial
recognition or where an account meets the Group's definition of
default (Stage 3).
The ECL calculation is a product of an individual loan's
probability of default ('PD'), exposure at default ('EAD') and loss
given default ('LGD') discounted at the effective interest rate
('EIR').
Significant increase in credit risk ("SICR") (movement to Stage
2)
The Group's transfer criteria determines what constitutes a
significant increase in credit risk, which results in a financial
asset being moved from Stage 1 to Stage 2. The Group has determined
that a significant increase in credit risk arises when an
individual borrower is more than 30 days past due or if forbearance
measures have been put in place.
Use of COVID-19 relief mechanisms (for example, payment
holidays, CBILS and BBLS) will not automatically merit
identification of SICR and trigger a Stage 2 classification in
isolation. Where, an individual borrower received COVID-19 relief,
which were primarily in the form of payment holidays. The
individual borrower was assessed to be a significant increase in
credit risk where they were considered to have suffered long term
financial difficulty. An individual borrower was considered to have
suffered long term financial difficulty based on individual
circumstances or where they had received more than two payment
holidays or where a payment holiday given was in excess of 6
months.
The Group monitors the ongoing appropriateness of the transfer
criteria, where any proposed amendments will be reviewed and
approved by the Groups Credit Committees at least annually and more
frequently if required.
A borrower will move back into Stage 1 conditional upon a period
of good account conduct and the improvement of the Client's
situation to the extent that the probability of default has receded
sufficiently and a full repayment of the loan, without recourse to
the collateral, is likely.
Definition of default (movement to Stage 3)
The Group uses a number of qualitative and quantitative criteria
to determine whether an account meets the definition of default and
as a result moves into Stage 3. The criteria are as follows:
-- The rebuttable assumption that more than 90 days past due is
an indicator of default. The Group therefore deems more than 90
days past due as an indicator of default except for cases where the
customer is already within forbearance. This will ensure that the
policy is aligned with the Basel/Regulatory definition of
default.
-- The Group has also deemed it appropriate to classify accounts
where there has been a breach in agreed forbearance arrangements,
recovery action is in hand or bankruptcy proceedings have been
initiated or similar insolvency process of a client, or director of
a company.
A borrower will move out of Stage 3 when their credit risk
improves such that they are no longer past due and remain up to
date with a period of good conduct and the improvement in the
borrower's situation to the extent that credit risk has receded
sufficiently and a full repayment of the loan, without recourse to
the collateral, is likely.
Forward looking macroeconomic scenarios
IFRS 9 requires the entity to consider the risk of default and
impairment loss taking into account expectations of economic
changes that are reasonable.
COVID-19 has already had a significant impact on the
forward-looking economic information used by the IFRS 9 models in
calculating ECL. While the central scenario used previously implied
the most significant macroeconomic factor related to property
prices, the central scenarios assumed now forecast deterioration in
conditions on a magnitude typically observed for severe stresses
but with the deterioration and subsequent recovery compressed into
a much shorter time frame than typical economic cycles.
To account for these limitations caused by the uncertainty of
the pandemic, a number of refinements and changes have been applied
to the respective model components to ensure that the ECL outcome
is reasonable and with regard to the timing in which deteriorating
economics translate into default and loss outcomes.
The Group uses a bespoke macroeconomic models to determine the
most significant factors which may influence the likelihood of an
exposure defaulting in the future. At present, the most significant
macroeconomic factor relates to property prices. The Group
currently consider five probability weighted scenarios. The model
adopts five probability weighted scenarios no change, severe
decline, moderate decline, decline and growth. The Group has
derived an approach for factoring probability weighted
macroeconomic forecasts into ECL calculations, adjusting PD and LGD
estimates.
Expected life
IFRS 9 requires lifetime expected credit losses to be measured
over the expected life. Currently the Group considers the loans'
expected life is equal to the contractual loan term. This approach
will continue to be monitored and enhanced if and when deemed
appropriate.
Government guarantees
During March and April 2020, the UK government launched a series
of temporary schemes designed to support businesses deal with the
impact of COVID-19. The BBLs, CBILs and CLBILs lending products are
originated by the Group but are covered by government guarantees.
These are to be set against the outstanding balance of a defaulted
facility after the proceeds of the business assets have been
applied. The government guarantee is 80% for CBILs and CLBILs and
100% for BBLs. Arbuthnot Latham recognises lower LGDs for these
lending products as a result, with 0% applied to the government
guaranteed part of the exposure.
3.5. Impairment of non-financial assets
The carrying amounts of the Group's non-financial assets, other
than inventories and deferred tax assets, are reviewed at each
reporting date to determine whether there is any indication of
impairment. If any such indication exists, then the asset's
recoverable amount is estimated. Impairment for goodwill is
discussed in more detail under note 3.15(a).
3.6. Fiduciary activities
The Group commonly acts as trustee and in other fiduciary
capacities that result in the holding or placing of assets on
behalf of individuals, trusts, retirement benefit plans and other
institutions. These assets and income arising thereon are excluded
from these financial statements, as they are not assets of the
Group.
3.7. New standards and interpretations not yet adopted
There are no standards, interpretations or amendments to
existing standards that have been published and are mandatory for
the Group's accounting periods beginning on or after 1 January 2021
or later periods, that will have any material impact on the Group's
financial statements.
4. Critical accounting estimates and judgements in applying
accounting policies
The Group makes estimates and assumptions that affect the
reported amounts of assets and liabilities within the next
financial year. Estimates and judgements are continually evaluated
and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable
under the circumstances.
4.1 Estimation uncertainty
(a) Expected credit losses ("ECL") on financial assets
The Group reviews its loan portfolios and debt security
investments to assess impairment at least on a quarterly basis. The
basis for evaluating impairment losses is described in note 10. The
measurement of ECL required by IFRS 9, necessitates a number of
significant judgements. Specifically judgements and estimation
uncertainties relate to assessment of whether credit risk on the
financial asset has increased significantly since initial
recognition, incorporation of forward-looking information ("FLI")
in the measurement of ECLs and key assumptions used in estimating
recoverable cash flows. These estimates are driven by a number of
factors that are subject to change which may result in different
levels of ECL allowances.
The Group incorporates FLI into the assessment of whether there
has been a significant increase in credit risk. Forecasts for key
macroeconomic variables that most closely correlate with the Bank's
portfolio are used to produce five economic scenarios, comprising
of a no change, upside case, downside case, moderate decline and
severe decline, and the impacts of these scenarios are then
probability weighted. The estimation and application of this FLI
will require significant judgement supported by the use of external
information.
12-month ECLs on loans and advances (loans within Stage 1) are
calculated using a statistical model on a collective basis, grouped
together by product and geographical location. The key assumptions
are the probability of default, the economic scenarios and loss
given default ("LGD") having consideration for collateral. Lifetime
ECLs on loans and advances (loans within Stage 2 and 3) are
calculated based on an individual valuation of the underlying asset
and other expected cash flows.
For financial assets in Stage 2 and 3, ECL is calculated on an
individual basis and all relevant factors that have a bearing on
the expected future cash flows are taken into account. These
factors can be subjective and can include the individual
circumstances of the borrower, the realisable value of collateral,
the Group's position relative to other claimants, and the likely
cost to sell and duration of the time to collect. The level of ECL
is the difference between the value of the recoverable amount
(which is equal to the expected future cash flows discounted at the
loan's original effective interest rate), and its carrying
amount.
Management considered a range of variables in determining the
level of future ECL. The two of the key judgements were in relation
to "time to collect" and "collateral valuations". Sensitivity
analysis was carried out based on what was considered reasonably
possible in the current market conditions.
If time to collect increased by six months across all client
exposures, this would lead to a negative GBP0.7m (2019: negative
GBP0.6m) impact through the Profit or Loss. A six month reduction
in time to collect would lead to a GBP0.3m favourable (2019:
GBP0.1m favourable) impact on Profit or Loss.
If the collateral valuations increased by 10% across client
exposures, this would lead to a positive GBP1m (2019: positive
GBP1.4m) impact through Profit or Loss. If the collateral
valuations decreased by 10% across all client exposures, this would
lead to a GBP1.8m adverse (2019: GBP2.1m adverse) impact on Profit
or Loss.
Five economic scenarios were modelled. A probability was
assigned to each scenario to arrive at an overall weighted impact
on ECL. Management judgment is required in the application of the
probability weighting for each scenario.
The Group considered the impact of various assumptions on the
calculation of ECL (changes in GDP, unemployment rates, inflation,
exchange rates, equity prices, wages and collateral values/property
prices) and concluded that only collateral values/property prices
have a material impact on ECL.
The five macroeconomic scenarios modelled on future property
prices and asset values were as follows:
-- Severe decline
-- Moderate decline
-- Decline
-- No change
-- Growth
Other than collateral/property prices for Arbuthnot Latham and
collateral/asset values for its subsidiary Renaissance Asset
Finance, no other assumptions were assessed to have a material
impact on ECL. The tables below therefore reflect the expected
changes in collateral/property prices and collateral/asset values
in each of the macroeconomic scenarios and the probability
weighting applied for each scenario.
Another of the key judgements concerns the probability of the
economic scenarios in the measurement of the ECL. The probability
weighting and forward-looking economic scenarios are as follows for
the Arbuthnot Latham and Renaissance Asset Finance:
Arbuthnot Latham
-----------------------------------------------
Change in property
Probability weighting price
2020 2019 2020 2019
------------------------------------- ----------- ----------- ---------- ---------
Economic Scenarios
Severe decline 2.0% 1.0% (40.0%) (40.0%)
Moderate decline 15.0% 3.0% (20.0%) (20.0%)
Decline 70.0% 50.0% (2.5%) (1.5%)
No Change 9.0% 26.0% - -
Growth 4.0% 20.0% 0.5% 0.5%
Weighted average change in property
price (5.5%) (1.8%)
Renaissance Asset Finance
-----------------------------------------------
Change in asset
Probability weighting values
2020 2019 2020 2019
------------------------------------- ----------- ----------- ---------- ---------
Economic Scenarios
(15%) to (10%) to
Severe decline 6.0% 2.0% (60%) (40%)
(7.5%) (5%) to
Moderate decline 20.0% 8.0% to (30%) (20%)
(2.5%)
Decline 40.0% 30.0% to (15%) (2.0%)
No Change 31.0% 30.0% - -
Growth 3.0% 30.0% 2.0% 2.0%
Weighted average change in asset
values (9.6%) (1.9%)
The above tables reflect the 5 year average expected change in
collateral values in each economic scenario for Arbuthnot Latham
and its subsidiary Renaissance Asset Finance, which were applied
over the full term the Group is exposed to credit risk (also an
average of 5 years). The expected change in property prices under
each scenario, were weighted according to the probability of each
scenario, to arrive at a probability weighted change in property
prices for Arbuthnot Latham and asset values for Renaissance Asset
Finance. These adjusted property and asset values are then used to
assess the future expected cash flows, which are considered along
with the loan exposures at default to calculate the expected credit
loss. No other long-term averages are used in the calculation of
ECL, as the above changes are in effect modelled over the full term
of the Group's exposure to credit risk.
The economic scenarios were updated as a result of the impact of
COVID-19 on the economy, at 31 December 2020 the weighted average
change in property price is a 5.5% decline compared to a 1.8%
decline for the Company and weighted average change in asset values
is a 9.6% decline compared to a 1.9% decline for Renaissance Asset
Finance at 31 December 2019. The table below compares the 31
December 2020 ECL provision using the 31 December 2020 economic
scenarios and the 31 December 2020 ECL provision using the 31
December 2019 economic scenarios.
Renaissance Asset
Arbuthnot Latham Finance
------------------- --------------------
Economic scenarios as at
-----------------------------------------
2020 2019 2020 2019
GBP000 GBP000 GBP000 GBP000
----------------------------------------- --------- -------- --------- ---------
ECL Provision
Stage 1 427 259 249 136
Stage 2 180 40 353 123
Stage 3 3,025 2,943 345 335
----------------------------------------- --------- -------- --------- ---------
At 31 December 2020 3,632 3,242 947 594
----------------------------------------- --------- -------- --------- ---------
Additionally, management have assessed the impact of assigning a 100%
probability to each of the economic scenarios, which would have the
following impact on the Profit or Loss of the Group:
Renaissance Asset
Arbuthnot Latham Finance
------------------- --------------------
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
----------------------------------------- --------- -------- --------- ---------
Impact of 100% scenario probability
Severe Decline (46.4) (23.9) (4.6) (2.1)
Moderate Decline (5.1) (5.9) (0.9) (0.3)
Decline 0.3 - 0.1 (0.1)
No Change 0.4 0.3 0.4 (0.1)
Growth 0.5 0.5 0.4 0.1
(b) Effective Interest Rate
Acquired loan books are initially recognised at fair value.
Subsequently, they are measured under the effective interest rate
method. Management review the expected cash flows against actual
cash flows to ensure future assumptions on customer behaviour and
future cash flows remain valid. If the estimates of future cash
flows are revised, the gross carrying value of the financial asset
is recalculated as the present value of the estimated future
contractual cash flows discounted at the original effective
interest rate, or in the case of the acquired books the
credit-adjusted effective interest rate. The adjustment to the
carrying value of the loan book is recognised in the Statement of
Comprehensive Income.
The accuracy of the effective interest rate is affected by
unexpected market movements resulting in altered customer
behaviour, inaccuracies in the models used compared to actual
outcomes and incorrect assumptions.
In 2020 the Group recognised GBP0.1m additional interest income
to reflect a revision in the timing of expected cash flows on the
originated book, reflecting a shortening of the expected life of
originated loan book.
If customer loans repaid 6 months earlier than anticipated on
the originated loan book, interest income would increase by GBP0.5m
(2019: GBP0.4m), due to acceleration of fee income.
In 2020 the Group recognised GBP0.1m reversal of (2019: GBP0.4m
additional) interest income to reflect actual cash flows received
on the acquired mortgage books being less than forecast cash
flows.
The key judgements in relation to calculating the net present
value of the acquired mortgage books relate to the timing of future
cash flows on principal repayments. Management have considered an
early and delayed 6-month sensitivity on the timing of repayment
and a 10% increase and decrease of principal repayments to be to be
reasonably possible.
If the acquired loan books were modelled to accelerate cash
flows by 6 months, it would increase interest income in 2020 by
GBP0.2m (2019: GBP0.3m) while a 10% increase in principal
repayments will increase interest income in 2020 by GBP0.5m (2019:
GBP0.8m) through a cash flow reset adjustment.
(c) Investment property
The valuations that the Group places on its investment
properties are subject to a degree of uncertainty and are
calculated on the basis of assumptions in relation to prevailing
market rents and effective yields. These assumptions may not prove
to be accurate, particularly in periods of market volatility.
Following the uncertainty due to Brexit, which had the effect of
reducing the activity in the property market in 2019, the impact of
COVID-19 combined with the ongoing complexities of Brexit had the
impact of further significantly reducing the activity in the
property market, particularly during the first half of 2020. There
were signs of the level of activity increasing in the second half
of 2020, though well below the overall levels of 2019. This has in
turn resulted in less market evidence being available for
Management in making its judgement on the key assumptions of
property yield and market rent. The Group currently owns one (2019:
one) investment property, as outlined in note 29.
During 2019, two properties were reclassified to inventory due
to being under development with the intention to sell.
Management valued the investment property utilising externally
sourced market information and property specific knowledge. The
valuations were reviewed by the Group's in-house surveyor.
Crescent Office Park in Bath with value of GBP6.6m (2019:
GBP6.8m)
In December 2017, the office building was acquired with the
intention to be included within a new property fund initiative that
the Group had planned to start-up. The property had tenants in situ
with the Fund recognising rental income.
The property was initially recognised as held for sale under
IFRS 5. In 2018 the launch of the property fund was placed on hold
and as a result it was reclassified as an investment property as
the property no longer met the IFRS 5 criteria. The property
remained occupied as at 31 December 2020 with the Group receiving
rental income.
In accordance with IAS 40, the property is recognised at fair
value, with its carrying value at year end of GBP6.6m equal to its
fair value. A fair value loss of GBP0.2m was recognised during the
year.
The valuation of the property has the following key inputs:
-- yield: 6.50%
-- future rent increases (every five years): 4.00%
Revised fair
value gain
/ (loss)
Variable GBP'm %
--------------------------------------------- --------- ------ -------
Model Yield 6.50%
- Yield 0.25% lower 6.25% 0.3 5.3%
- Yield 0.25% higher 6.75% (0.3) (3.9%)
Model Future Rent Increases (Every 5 Years) 4.00%
- Positive +25% 5.00% 0.2 3.7%
- Negative -25% 3.00% (0.2) (2.4%)
(d) Inventory
The Group owns two commercial properties and four repossessed
properties, classified as inventory. During 2019, the two
commercial properties were reclassified from investment property to
inventory due to being under development with the intention to
sell. The three repossessed properties were initially recognised as
inventory. The commercial properties on reclassification to
inventory were initially recognised at fair value and have been
subsequently measured at the lower of cost and net realisable value
("NRV") less costs to sell. Cost is deemed to be fair value on the
date of transfer or initial recognition. The properties are
assessed at the reporting date for impairment.
The internal valuations that the Group places on its properties
are subject to a degree of uncertainty and are calculated on the
basis of assumptions in relation to prevailing market rents and
effective yields. These assumptions may not prove to be accurate,
particularly in periods of market volatility.
Following the uncertainty due to Brexit, which had the effect of
reducing activity in the property market in 2019, the impact of
COVID-19 combined with the ongoing complexities of Brexit has
resulted in further reductions in activity within the property
market, particularly during the first half of 2020. There have been
signs of the level of activity increasing in the second half of
2020, though well below the overall level of 2019. This has in turn
resulted in less market evidence being available for Management in
making its judgement on the key assumptions of property yield and
market rent.
Management valued the property utilising externally sourced
market information and property specific knowledge. The valuations
were reviewed by the Group's in-house surveyor.
The Group also make use of external valuations on its properties
that are subject to a degree of uncertainty and are calculated on
the basis of assumptions in relation to prevailing market
conditions and subject to comparable properties for sale. These
valuations are therefore susceptible to uncertainty particularly
where there is a limited level of activity in the property
market.
Management have assessed that should the net realisable value
less cost to sell of each of the combined property inventory reduce
by 5% this would impact profit or loss by GBP1.75m (or 2.1% of
cost) and a reduction of 10% would impact profit or loss by GBP6.1m
(or 7.2% of cost).
5. Maturity analysis of assets and liabilities
The table below shows the maturity analysis of assets and liabilities
of the Group as at 31 December 2020:
Due
after
Due more
within than
one one
year year Total
At 31 December 2020 GBP000 GBP000 GBP000
------------------------------------------------ ---------- ---------- ----------
ASSETS
Cash and balances at central banks 636,799 - 636,799
Loans and advances to banks 110,267 - 110,267
Debt securities at amortised cost 199,002 145,690 344,692
Assets classified as held for sale 3,285 - 3,285
Derivative financial instruments 202 1,641 1,843
Current tax asset 205 - 205
Loans and advances to customers 533,856 1,053,993 1,587,849
Other assets 96,180 108 96,288
Financial investments 1,754 16,741 18,495
Deferred tax asset - 1,009 1,009
Intangible assets 13,895 9,751 23,646
Property, plant and equipment 3,113 1,792 4,905
Right-of-use assets 2,793 14,910 17,703
Investment property - 6,550 6,550
------------------------------------------------ ---------- ---------- ----------
1,601,351 1,252,185 2,853,536
------------------------------------------------ ---------- ---------- ----------
LIABILITIES
Deposits from banks 5,090 225,000 230,090
Derivative financial instruments 188 461 649
Deposits from customers 2,170,339 194,868 2,365,207
Other liabilities 7,606 - 7,606
Lease liabilities 2,798 15,507 18,305
Debt securities in issue - 37,656 37,656
------------------------------------------------ ---------- ---------- ----------
2,186,021 473,492 2,659,513
------------------------------------------------ ---------- ---------- ----------
The table below shows the maturity analysis of assets and liabilities
of the Group as at 31 December 2019:
Due
after
Due more
within than
one one
year year Total
At 31 December 2019 GBP000 GBP000 GBP000
--------------------------------------- ----------- ----------- ----------
ASSETS
Cash and balances at central banks 325,908 - 325,908
Loans and advances to banks 46,258 - 46,258
Debt securities at amortised cost 337,807 105,153 442,960
Assets classified as held for sale 7,617 - 7,617
Derivative financial instruments 105 1,699 1,804
Loans and advances to customers 659,176 939,877 1,599,053
Other assets 86,262 181 86,443
Financial investments 3,203 27,716 30,919
Deferred tax asset - 1,815 1,815
Intangible assets 7,037 13,045 20,082
Property, plant and equipment 1,458 4,355 5,813
Right-of-use assets 2,757 17,187 19,944
Investment property - 6,763 6,763
--------------------------------------- ----------- ----------- ----------
1,477,588 1,117,791 2,595,379
--------------------------------------- ----------- ----------- ----------
LIABILITIES
Deposits from banks 5,421 225,000 230,421
Derivative financial instruments 101 218 319
Deposits from customers 1,873,326 211,577 2,084,903
Current tax liability 633 - 633
Other liabilities 13,500 - 13,500
Lease Liabilities 63 20,368 20,431
Debt securities in issue - 36,837 36,837
--------------------------------------- ----------- ----------- ----------
1,893,044 494,000 2,387,044
--------------------------------------- ----------- ----------- ----------
The table below shows the maturity analysis of assets and liabilities
of the Company as at 31 December 2020:
Due
after
Due more
within than
one one
year year Total
At 31 December 2020 GBP000 GBP000 GBP000
--------------------------------------------------- -------- -------- --------
ASSETS
Loans and advances to banks 7 - 7
Loans and advances to banks - due from subsidiary
undertakings 15,155 - 15,155
Debt securities at amortised cost - 24,308 24,308
Financial investments - 14,171 14,171
Current tax asset 438 - 438
Deferred tax asset - 395 395
Intangible assets - 4 4
Property, plant and equipment - 161 161
Other assets 102 - 102
Interests in subsidiaries 133,904 133,904
--------------------------------------------------- -------- -------- --------
15,702 172,943 188,645
--------------------------------------------------- -------- -------- --------
LIABILITIES
Other liabilities 3,559 - 3,559
Debt securities in issue - 37,656 37,656
--------------------------------------------------- -------- -------- --------
3,559 37,656 41,215
--------------------------------------------------- -------- -------- --------
The table below shows the maturity analysis of assets and liabilities
of the Company as at 31 December 2019:
Due
after
Due more
within than
one one
year year Total
At 31 December 2019 GBP000 GBP000 GBP000
--------------------------------------------------- -------- -------- --------
ASSETS
Loans and advances to banks 6 - 6
Loans and advances to banks - due from subsidiary
undertakings 15,310 - 15,310
Debt securities at amortised cost - 24,239 24,239
Financial investments - 25,913 25,913
Deferred tax asset - 391 391
Intangible assets - 5 5
Property, plant and equipment 25 159 184
Other assets 115 - 115
Interests in subsidiaries - 134,004 134,004
--------------------------------------------------- -------- -------- --------
15,456 184,711 200,167
--------------------------------------------------- -------- -------- --------
LIABILITIES
Current tax liability 175 - 175
Other liabilities 3,063 - 3,063
Debt securities in issue - 36,837 36,837
--------------------------------------------------- -------- -------- --------
3,238 36,837 40,075
--------------------------------------------------- -------- -------- --------
6. Financial risk management
Strategy
By their nature, the Group's activities are principally related
to the use of financial instruments. The Directors and senior
management of the Group have formally adopted a Group Risk and
Controls Policy which sets out the Board's attitude to risk and
internal controls. Key risks identified by the Directors are
formally reviewed and assessed at least once a year by the Board,
in addition to which key business risks are identified, evaluated
and managed by operating management on an ongoing basis by means of
procedures such as physical controls, credit and other
authorisation limits and segregation of duties. The Board also
receives regular reports on any risk matters that need to be
brought to its attention. Significant risks identified in
connection with the development of new activities are subject to
consideration by the Board. There are budgeting procedures in place
and reports are presented regularly to the Board detailing the
results of each principal business unit, variances against budget
and prior year, and other performance data.
The principal non-operational risks inherent in the Group's
business are credit, macroeconomic, market, liquidity and
capital.
(a) Credit risk
The Company and Group take on exposure to credit risk, which is
the risk that a counterparty will be unable to pay amounts in full
when due. Significant changes in the economy, or in the health of a
particular industry segment that represents a concentration in the
Company and Group's portfolio, could result in losses that are
different from those provided for at the balance sheet date. Credit
risk is managed through the Credit Committee of the banking
subsidiary.
The Committee regularly reviews the credit risk profile of the
Group, with a clear focus on performance against risk appetite
statements and risk metrics. The Committee considered credit
conditions during the year, and in particular the impact of the
COVID-19 crisis on performance against both credit risk appetite
and a range of key credit risk metrics.
The Company and Group structure the levels of credit risk it
undertakes by placing limits on the amount of risk accepted in
relation to products, and one borrower or groups of borrowers. Such
risks are monitored on a revolving basis and subject to an annual
or more frequent review. The limits are approved periodically by
the Board of Directors and actual exposures against limits are
monitored daily.
Exposure to credit risk is managed through regular analysis of
the ability of borrowers and potential borrowers to meet interest
and capital repayment obligations and by changing these lending
limits where appropriate. Exposure to credit risk is also managed
in part by obtaining collateral, and corporate and personal
guarantees.
The economic environment remains uncertain and future impairment
charges may be subject to further volatility (including from
changes to macroeconomic variable forecasts) depending on the
longevity of the COVID-19 pandemic and related containment
measures, as well as the longer term effectiveness of central bank,
government and other support measures.
COVID-19 has created an unprecedented challenge for ECL
modelling, given the severity of economic shock and associated
uncertainty for the future economic path coupled with the scale of
government and central bank intervention and COVID-19 relief
mechanisms that have altered the relationships between economic
drivers and default.
The Group has attempted to leverage stress test modelling
insights to inform ECL model refinements to enable reasonable
estimates. Management review of modelling approaches and outcomes
continues to inform any necessary adjustments to the ECL estimates
through the form of in-model adjustments, based on expert judgement
including the use of available information. Management
considerations included the potential severity and duration of the
economic shock, including the mitigating effects of government
support actions, as well the potential trajectory of the subsequent
recovery. The Group also considered differential impacts on asset
classes, including pronouncements from regulatory bodies regarding
IFRS 9 application in the context of COVID-19, notably on
significant increase in credit risk (SICR) identification.
The Group employs a range of policies and practices to mitigate
credit risk. The most traditional of these is the taking of
collateral to secure advances, which is common practice. The
principal collateral types for loans and advances include, but are
not limited to:
-- Charges over residential and commercial properties;
-- Charges over business assets such as premises, inventory and accounts receivable;
-- Charges over financial instruments such as debt securities and equities;
-- Charges over other chattels; and
-- Personal guarantees
Upon initial recognition of loans and advances, the fair value
of collateral is based on valuation techniques commonly used for
the corresponding assets. In order to minimise any potential credit
loss the Group will seek additional collateral from the
counterparty as soon as impairment indicators are noticed for the
relevant individual loans and advances. Repossessed collateral, not
readily convertible into cash, is made available for sale in an
orderly fashion, with the proceeds used to reduce or repay the
outstanding indebtedness, or held as inventory where the Group
intends to develop and sell in the future. Where excess funds are
available after the debt has been repaid, they are available either
for other secured lenders with lower priority or are returned to
the customer.
Commitments to extend credit represent unused portions of
authorisations to extend credit in the form of loans, guarantees or
letters of credit. With respect to credit risk on commitments to
extend credit, the Group is potentially exposed to loss in an
amount equal to the total unused commitments. However, the likely
amount of loss is less than the total unused commitments, as most
commitments to extend credit are contingent upon customers
maintaining specific credit standards.
The Group incorporates forward-looking information into both its
assessment of whether the credit risk of an instrument has
increased significantly since its initial recognition and its
measurement of ECL. The key inputs into the measurement of the ECL
are:
-- assessment of significant increase in credit risk
-- future economic scenarios
-- probability of default
-- loss given default
-- exposure at default
The IFRS 9 impairment model adopts a three stage approach based
on the extent of credit deterioration since origination, see note
10.
The Group's maximum exposure to credit risk (net of impairment)
before collateral held or other credit enhancements is as
follows:
2020
All
Mortgage Other
Group Banking Portfolios RAF ABL ASFL Divisions Total
Credit risk exposures (all stage
1, unless otherwise stated) GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------ ---------- ------------ ------- -------- ------- ----------- ----------
On-balance sheet:
Cash and balances at central banks - - - - - 636,631 636,631
Loans and advances to banks - - - - - 110,267 110,267
Debt securities at amortised cost - - - - - 344,692 344,692
Derivative financial instruments - - - - - 1,843 1,843
Loans and advances to customers
(net of ECL) 1,122,299 268,827 91,927 87,331 5,964 11,501 1,587,849
---------- ------------ ------- -------- ------- ----------- ==========
Stage 1 1,019,470 223,800 74,542 87,331 5,964 11,501 1,422,608
Stage 2 72,626 36,794 16,394 - - - 125,814
Stage 3 30,203 8,233 991 - - - 39,427
---------- ------------ ------- -------- ------- ----------- ==========
Other assets - - - - - 5,458 5,458
Financial investments - - - - - 18,495 18,495
Off-balance sheet:
Guarantees 6,248 - - - - - 6,248
Loan commitments and other credit
related liabilities 152,972 - - 155,300 155 - 308,427
------------------------------------ ---------- ------------ ------- -------- ------- ----------- ----------
At 31 December 1,281,519 268,827 91,927 242,631 6,119 1,128,887 3,019,910
------------------------------------ ---------- ------------ ------- -------- ------- ----------- ----------
2019
All
Mortgage Other
Group Banking Portfolios RAF ABL ASFL Divisions Total
Credit risk exposures (all stage
1, unless otherwise stated) GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------ ---------- ------------ -------- -------- ------- ----------- ----------
On-balance sheet:
Cash and balances at central banks - - - - - 325,800 325,800
Loans and advances to banks - - - - - 46,258 46,258
Debt securities at amortised cost - - - - - 442,960 442,960
Derivative financial instruments - - - - - 1,804 1,804
Loans and advances to customers
(net of ECL) 1,095,387 306,044 102,888 75,871 7,352 11,511 1,599,053
---------- ------------ -------- -------- ------- ----------- ----------
Stage 1 1,003,738 306,044 100,981 75,871 7,352 11,511 1,505,497
Stage 2 65,570 - 755 - - - 66,325
Stage 3 26,079 - 1,152 - - - 27,231
---------- ------------ -------- -------- ------- ----------- ----------
Other assets - - - - - 4,625 4,625
Financial investments - - - - - 30,919 30,919
Off-balance sheet:
Guarantees 6,401 - - - - - 6,401
Loan commitments and other credit
related liabilities 135,598 - - 53,494 972 - 190,064
------------------------------------ ---------- ------------ -------- -------- ------- ----------- ----------
At 31 December 1,237,386 306,044 102,888 129,365 8,324 863,877 2,647,884
------------------------------------ ---------- ------------ -------- -------- ------- ----------- ----------
The Company's maximum exposure to credit risk (all stage 1) before
collateral held or other credit enhancements is as follows:
2020 2019
GBP000 GBP000
------------------------------------------------------------- ------- -------
Credit risk exposures relating to on-balance sheet assets
are as follows:
Loans and advances to banks 15,162 15,316
Debt securities at amortised cost 24,308 24,239
Financial investments 14,171 25,913
At 31 December 53,641 65,468
------------------------------------------------------------- ------- -------
The above tables represent the maximum credit risk exposure (net
of impairment) to the Group and Company at 31 December 2020 and
2019 without taking account of any collateral held or other credit
enhancements attached. For financial assets, the balances are based
on gross carrying amounts as reported in the Statement of Financial
Position. For guarantees and loan commitments, the amounts in the
table represent the amounts for which the group is contractually
committed.
The table below represents an analysis of the loan to values of the exposures
secured by property for the Group:
2020
----------------------------------------------------------------------------
Banking Mortgage Portfolios Total
Loan Loan Loan
Balance Collateral Balance Collateral Balance Collateral
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------- ---------- ----------- --------- ----------- ---------- -----------
Less than 60% 691,787 1,445,062 130,773 315,099 822,560 1,760,161
---------- ----------- --------- ----------- ---------- -----------
Stage 1 649,958 1,379,681 108,766 262,939 758,724 1,642,620
Stage 2 27,119 48,259 18,483 42,591 45,602 90,850
Stage 3 14,710 17,122 3,524 9,569 18,234 26,691
---------- ----------- --------- ----------- ---------- -----------
60%-80% 370,629 567,337 96,372 122,956 467,001 690,293
---------- ----------- --------- ----------- ---------- -----------
Stage 1 308,860 480,511 82,443 101,641 391,303 582,152
Stage 2 44,340 60,221 10,659 15,783 54,999 76,004
Stage 3 17,429 26,605 3,270 5,532 20,699 32,137
---------- ----------- --------- ----------- ---------- -----------
80%-100% 8,046 9,425 28,170 34,090 36,216 43,515
---------- ----------- --------- ----------- ---------- -----------
Stage 1 8,046 9,425 24,115 29,003 32,161 38,428
Stage 2 - - 3,572 4,313 3,572 4,313
Stage 3 - - 483 774 483 774
---------- ----------- --------- ----------- ---------- -----------
Greater than 100%* 16,010 12,530 13,694 13,849 29,704 26,379
---------- ----------- --------- ----------- ---------- -----------
Stage 1 16,010 12,530 8,546 8,376 24,556 20,906
Stage 2 - - 4,172 4,163 4,172 4,163
Stage 3 - - 976 1,310 976 1,310
---------- ----------- --------- ----------- ---------- -----------
Total 1,086,472 2,034,354 269,009 485,994 1,355,481 2,520,348
------------------- ---------- ----------- --------- ----------- ---------- -----------
*In addition to property, other security is taken, including
charges over Arbuthnot Latham Investment Management portfolios,
other chattels and personal guarantees. The increase in loan to
values greater than 100% is due to an increase in exposures
collateralised by other assets. Additionally under the government
scheme for BBLs, collateral is not required as the loans are 100%
backed by the government.
Loans in the Banking segment with a loan to value of greater
than 100% have additional collateral of GBP10.0m in the form of
cash deposits and security over Arbuthnot Latham Investment
Management Portfolios and personal guarantees of GBP5.0m.
Non-property collateral reduces loan to value below 100% for all
such exposures in the Banking segment.
The table below represents an analysis of the loan to values of the exposures
secured by property for the Group:
2019
----------------------------------------------------------------------------
Banking Mortgage Portfolios Total
Loan Loan Loan
Balance Collateral Balance Collateral Balance Collateral
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------- ---------- ----------- --------- ----------- ---------- -----------
Less than 60% 594,528 1,312,963 93,454 318,010 687,982 1,630,973
---------- ----------- --------- ----------- ---------- -----------
Stage 1 566,348 1,252,288 93,454 318,010 659,802 1,570,298
Stage 2 18,653 38,270 - - 18,653 38,270
Stage 3 9,527 22,405 - - 9,527 22,405
---------- ----------- --------- ----------- ---------- -----------
60%-80% 402,705 622,889 46,333 67,372 449,038 690,261
---------- ----------- --------- ----------- ---------- -----------
Stage 1 372,559 577,165 46,333 67,372 418,892 644,537
Stage 2 28,488 43,125 - - 28,488 43,125
Stage 3 1,658 2,599 - - 1,658 2,599
---------- ----------- --------- ----------- ---------- -----------
80%-100% 38,508 43,105 56,967 66,421 95,475 109,526
---------- ----------- --------- ----------- ---------- -----------
Stage 1 25,541 28,260 56,967 66,421 82,508 94,681
Stage 2 9,862 11,550 - - 9,862 11,550
Stage 3 3,105 3,295 - - 3,105 3,295
---------- ----------- --------- ----------- ---------- -----------
Greater than 100%* 26,400 13,252 108,276 69,235 134,676 82,487
---------- ----------- --------- ----------- ---------- -----------
Stage 1 6,383 3,150 108,276 69,235 114,659 72,385
Stage 2 4,775 2,000 - - 4,775 2,000
Stage 3 15,242 8,102 - - 15,242 8,102
---------- ----------- --------- ----------- ---------- -----------
Total 1,062,141 1,992,209 305,030 521,038 1,367,171 2,513,247
------------------- ---------- ----------- --------- ----------- ---------- -----------
*In addition to property, other security is taken, including charges over
Arbuthnot Latham Investment Management portfolios, other chattels and
personal guarantees. The increase in loan to values greater than 100%
is due to an increase in exposures collateralised by other assets. Additionally
under the government scheme for BBLs, collateral is not required as the
loans are 100% backed by the government.
The table below represents an analysis of loan commitments compared to
the values of properties for the Group (all Stage 1):
2020
Loan
Balance Collateral
Group GBP000 GBP000
---------------------------------- ----------------- --------------------
Less than 60% 52,990 123,660
60%-80% 62,323 95,602
80%-100% 7,608 9,180
Greater than 100% 5,502 4,758
---------------------------------- ----------------- --------------------
Total 128,423 233,200
---------------------------------- ----------------- --------------------
2019
Loan
Balance Collateral
Group GBP000 GBP000
---------------------------------- ----------------- --------------------
Less than 60% 83,517 379,255
60%-80% 11,629 17,953
80%-100% 1,587 1,623
Greater than 100% 958 827
---------------------------------- ----------------- --------------------
Total 97,691 399,658
---------------------------------- ----------------- --------------------
Renegotiated loans and forbearance
The contractual terms of a loan may be modified due to factors
that are not related to the current or potential credit
deterioration of the customer (changing market conditions, customer
retention, etc.). In such cases, the modified loan may be
derecognised and the renegotiated loan recognised as a new loan at
fair value.
Customers seeking COVID-19 related support, including payment
holidays, who were not subject to any wider SICR triggers and who
are assessed as having the ability in the medium-term, post-crisis
to be viable and meet credit appetite metrics, were not considered
to have been granted forbearance.
When modification results in derecognition, a new loan is
recognised and allocated to Stage 1 (assuming it is not
credit-impaired at that time).
The Group renegotiates loans to customers in financial
difficulties (referred to as 'forbearance') to maximise collection
opportunities and minimise the risk of default. Under the Group's
forbearance policy, loan forbearance is granted on a selective
basis if the debtor is currently in default on its debt, or if
there is a high risk of default, there is evidence that the debtor
made all reasonable efforts to pay under the original contractual
terms and the debtor is expected to be able to meet the revised
terms.
The revised terms can include changing the timing of interest
payments, extending the date of repayment of the loan, transferring
a loan to interest only payments and a payment holiday. Both retail
and corporate loans are subject to the forbearance policy. The
Group Credit Committee regularly reviews reports on
forbearance.
For financial assets modified as part of the Group's forbearance
policy, the estimate of PD reflects whether the modification has
improved or restored the Group's ability to collect interest and
principal and the Group's previous experience of similar
forbearance action. As part of this process, the Group evaluates
the borrower's payment performance against the modified contractual
terms and considers various behavioural indicators. Whilst the
customer is under forbearance, the customer will be classified as
Stage 2 and the Group recognise a lifetime ECL. The customer will
transfer to Stage 1 and revert to a 12 month ECL when they exit
forbearance. This is conditional upon both a period of good account
conduct and the improvement to the client's situation to the extent
the credit risk has receded sufficiently and full repayment of the
loan, without recourse to the collateral, is likely.
Forbearance is a qualitative indicator of a SICR (see notes 3.3
and 3.4)
As at 31 December 2020, loans for which forbearance measures
were in place totalled 5.0% (2019: 3.1%) of total value of loans to
customers for the Group. These are set out in the following
table:
2020
------------------------------------------------------------------------------
Stage 1 Stage 2 Stage 3 Total
------------------ ------------------ ------------------ ------------------
Loan Loan Loan Loan
Number Balance Number Balance Number Balance Number Balance
GBP000 GBP000 GBP000 GBP000
-------------------------- ------- --------- ------- --------- ------- --------- ------- ---------
Interest capitalisation - - 4 564 - - 4 564
Time for asset sale - - 7 10,496 3 11,110 10 21,606
Term extension - - 3 8,084 - - 3 8,084
Switch to interest
only - - 4 519 - - 4 519
Reduced monthly payments - - 10 1,100 - - 10 1,100
Payment holiday 19 507 333 45,954 2 1,193 354 47,654
More than one measure - - 2 12,740 - - 2 12,740
-------------------------- ------- --------- ------- --------- ------- --------- ------- ---------
Total forbearance 19 507 363 79,457 5 12,303 387 92,267
-------------------------- ------- --------- ------- --------- ------- --------- ------- ---------
2019
---------------------------------------------------------------------------------
Stage 1 Stage 2 Stage 3 Total
-------------------- ------------------ ------------------ ------------------
Loan Loan Loan Loan
Number Balance Number Balance Number Balance Number Balance
GBP000 GBP000 GBP000 GBP000
-------------------------- -------- ---------- ------- --------- ------- --------- ------- ---------
Assistance with property
sale - - 4 231 - - 4 231
Move historic arrears
to capital - - 1 1,719 - - 1 1,719
Covenant waived - - 6 7,473 - - 6 7,473
Term extension - - 18 32,780 - - 18 32,780
Payment holiday - - 32 6,795 - - 32 6,795
-------------------------- -------- ----------- ------- --------- ------- --------- ------- ---------
Total forbearance - - 61 48,998 - - 61 48,998
-------------------------- -------- ----------- ------- --------- ------- --------- ------- ---------
Concentration risk
The tables below show the concentration in the loan book based
on the most significant type of collateral held for each loan.
Loans and advances
to customers Loan Commitments
2020 2019 2020 2019
GBP000 GBP000 GBP000 GBP000
-------------------------------- ---------- ---------- --------- --------
Concentration by product
Asset based lending* 87,331 75,871 155,300 53,494
Asset finance 87,529 103,193 155 972
Cash collateralised 13,905 11,526 5,952 1,781
Commercial lending 255,891 269,590 17,484 3,941
Investment portfolio secured 29,051 40,127 781 2,984
Residential mortgages 1,056,022 1,035,395 110,938 93,749
Mixed collateral* 30,442 45,432 4,705 17,282
Unsecured** 27,678 17,919 13,112 15,861
-------------------------------- ---------- ---------- --------- --------
At 31 December 1,587,849 1,599,053 308,427 190,064
-------------------------------- ---------- ---------- --------- --------
Concentration by location
East Anglia 44,304 39,997 2,925 10
London 573,188 554,183 89,796 77,960
Midlands 102,504 108,635 8,117 4,392
North East 37,499 53,294 1,170 641
North West 111,793 111,500 4,017 1,826
Northern Ireland 9,222 9,061 - -
Scotland 25,611 28,197 50 1,064
South East 232,311 224,915 7,370 7,188
South West 171,581 169,343 14,130 4,513
Wales 17,403 18,493 848 98
Overseas 1,000 11,150 - -
Non-property collateral 261,433 270,285 180,004 92,372
-------------------------------- ---------- ---------- --------- --------
At 31 December 1,587,849 1,599,053 308,427 190,064
-------------------------------- ---------- ---------- --------- --------
* Mixed collateral is where there is no single, overall majority collateral type
** Included within unsecured are GBP8.4m of loans which are
backed by the government guarantee scheme for BBLs.
(b) Operational risk (unaudited)
The Group's objective is to manage operational risk so as to
balance the avoidance of financial losses and damage to the Group's
reputation with overall cost effectiveness and to avoid control
procedures that restrict initiatives and creativity. The Group is
exposed to operational risks from its Information Technology and
Operations platforms. There are additional internal controls in
these processes that are designed to protect the Group from these
risks. The Group's overall approach to managing internal control
and financial reporting is described in the Corporate Governance
section of the Annual Report.
During the year there was significant focus on the potential
operational risks arising from the change in working practices due
to the pandemic, particularly the move to home-working in order to
protect staff and support clients through the crisis. Management
attention also focused heavily on operational resilience to ensure
that planning, controls and operational activities remained robust
and appropriate. The Bank ensured that all staff had access to
equipment to complete their work with all staff working from home
for the majority of the year.
The Group's control environment was continually monitored to
ensure that the challenges posed by adapting to the impact of
COVID-19 were safely addressed. There was also continued oversight
of the Group's preparations for the end of the transition period,
following the UK's exit from the EU, to ensure that processes and
systems are appropriate to ensure continuity of service for
customers.
Compliance with Group standards is supported by a programme of
periodic reviews undertaken by Internal Audit. The results of the
Internal Audit reviews are discussed with senior management, with
summaries submitted to the Arbuthnot Banking Group Audit
Committee.
Cyber risk
Cyber risk is an increasing risk that the Group is subject to
within its operational processes. This is the risk that the Group
is subject to some form of disruption arising from an interruption
to its IT and data infrastructure. The Group regularly tests the
infrastructure to ensure that it remains robust to a range of
threats, and has continuity of business plans in place including a
disaster recovery provision.
Conduct risk
As a financial services provider we face conduct risk, including
selling products to customers which do not meet their needs;
failing to deal with customers' complaints effectively; not meeting
customers' expectations; and exhibiting behaviours which do not
meet market or regulatory standards.
The Group adopts a zero risk appetite for any unfair customer
outcomes. It maintains clear compliance guidelines and provides
ongoing training to all staff. Periodic spot checks and internal
audits are performed to ensure these guidelines are being followed.
The Group also has insurance policies in place to provide some
cover for any claims that may arise.
(c) Macroeconomic and competitive environment
COVID-19
The COVID-19 pandemic has had, and continues to have, a material
impact on all businesses around the world and the markets in which
they operate. There are a number of factors associated with the
pandemic and its impact on global economies that could have a
material adverse effect on (among other things) the profitability,
capital and liquidity of financial institutions such as Arbuthnot
Latham.
To ensure an appropriate response to the pandemic, management
scrutinised key risks emerging from the crisis and their impact on
the Group's risk profile. The Board's discussions focused on
operational resilience, liquidity and funding considerations,
customer vulnerability, and the impact of material increases in
forbearance requests on the Group's credit portfolios and on its
operational capacity.
The pandemic has caused disruption to the Group's customers,
suppliers and staff globally. The markets in which the Group
operates have implemented severe restrictions on the movement of
their respective populations, with a resultant significant impact
on economic activity. These restrictions are being determined by
the governments of individual jurisdictions (including through the
implementation of emergency powers) and impacts (including the
timing of implementation and any subsequent lifting of
restrictions) may vary from jurisdiction to jurisdiction.
Schemes have been initiated by the Bank of England, national
governments and regulators to provide financial support to parts of
the economy most impacted by the COVID-19 pandemic. These schemes
have been designed and implemented at pace, which has allowed the
Group to continue meeting clients' requirements with staff
monitoring operational issues which may arise in their
implementation.
Furthermore, the Group relies on models to support a broad range
of business and risk management activities, including informing
business decisions and strategies, measuring and limiting risk,
valuing exposures (including the calculation of impairment),
conducting stress testing and assessing capital adequacy.
Management regularly meet to discuss the impact of COVID-19 and
review data to mitigate any potential negative effects.
The details of how these schemes will impact the Group's clients
in the long term remains uncertain at this stage. However, certain
actions (such as the introduction of payment holidays for certain
consumer lending products or the cancellation or waiver of fees
associated with certain products) may impact the effective interest
rate earned on certain of the Group's portfolios and fee income
being earned on certain products.
The significant business risks that may arise from the economic
shock in addition to the reduction in interest rates as detailed in
the Strategic Report are:
-- Increased credit risk as borrowers are unable to continue to
meet their interest obligations as they fall due. It is also
currently unclear precisely how the withdrawal of the Government's
announced package of measures will affect this clear risk.
-- The uncertainty in the economy could result in a significant
fall in the collateral values of our security held against the
loans. Valuations are likely to vary significantly due to the
inherent uncertainty. However the average loan to value of the
property backed lending book is 53.4%, so to have any material
impact; this fall in collateral would have to be severe and
prolonged.
-- A prolonged reduction in business activity will affect the
Bank's ability to generate new business opportunities and it is
likely that repayments in the lending portfolio will be greater
than new originations, which could lead to an overall fall in the
Group's lending balances and an associated fall in revenue.
-- The economic shock could lead to a fall in valuations in the
Group's investment properties and the properties held in
inventory.
-- As the revenues earned by the Group's Investment Management
business are directly linked to the balances managed on behalf of
our customers, any reduction in these values due to market
movements will have a corresponding impact on these revenues.
Brexit
The Brexit transition period came to an end on 31 December 2020
and the EU and UK agreed the Trade and Cooperation Agreement on 24
December 2020, which is provisionally applicable from 1 January
2021. There is still some uncertainty around the long term
consequences of Brexit. The Group's only overseas operation in
Dubai is in the process of being closed down, so the vast majority
of the Group's income and expenditure is based in the UK. The Group
will continue to monitor the implications of Brexit on the wider
economy as the future relationship with the EU develops.
Climate change
Climate change presents financial and reputational risks for the
banking industry. The Board consider Climate change a material risk
as per the Board approved risk appetite framework which provides a
structured approach to risk taking within agreed boundaries. The
assessment is proportional at present but will develop over time as
the Group generates further resources and industry consensus
emerges. The assessment is maintained by the Chief Risk officer and
has been informed by the ICAAP review and numerous workshops for
staff.
Whilst it is difficult to assess how climate change will unfold,
the Group is continually assessing various risk exposures. The UK
has a legally binding target to cut its greenhouse gas emissions to
"net-zero" by 2050. There is growing consensus that an orderly
transition to a low-carbon economy will bring substantial
adjustments to the global economy which will have financial
implications while bringing risks and opportunities.
The risk assessment process has been integrated into existing
risk frameworks and will be governed through the various risk
governance structures including review and recommendations by the
AL Risk Committee. Arbuthnot Latham governance has been assessed
against the Task Force on Climate-related Financial Disclosures'
(TCFD) recommended governance disclosures and where appropriate the
FCA/PRA guidance as per the Supervisory statements.
In accordance with the requirements of the PRA's Supervisory
Statement 'Enhancing banks' and insurers' approaches to managing
the financial risks from climate change', the Group has allocated
responsibility for identifying and managing the risks from climate
change to the relevant existing Senior Management Function. The
Bank is continuously developing a suitable strategic approach to
climate change and the unique challenges it poses.
The FCA have issued 'Climate Change and Green Finance: summary
of responses and next steps'. In addition to the modelling of
various scenarios and various governance reviews, Arbuthnot Latham
will continue to monitor requirements through the relationship with
UK Finance.
(d) Market risk
Price risk
The Company and Group are exposed to price risk from equity
investments and derivatives held by the Group. The Group is not
exposed to commodity price risk.
Based upon the financial investment exposure in Note 24, a
stress test scenario of a 10% (2019: 10%) decline in market prices,
would result in a GBP14k (2019: GBP16k) decrease in the Group's
income and a decrease of GBP1.8m (2019: GBP3.1m) in the Group's
equity. The Group considers a 10% stress test scenario appropriate
after taking the current values and historic data into account.
Based upon the financial investment exposure given in Note 24, a
stress test scenario of a 10% (2019: 10%) decline in market prices,
would result in a GBPnil (2019: GBPnil) decrease in the Company's
income and a decrease of GBP1.4m (2019: GBP2.6m) in the Company's
equity.
Currency risk
The Company and Group take on exposure to the effects of
fluctuations in the prevailing foreign currency exchange rates on
its financial position and cash flows. This is managed through the
Group entering into forward foreign exchange contracts. The Board
sets limits on the level of exposure for both overnight and
intra-day positions, which are monitored daily. The table below
summarises the Group's exposure to foreign currency exchange rate
risk at 31 December 2020. Included in the table below are the
Group's assets and liabilities at carrying amounts, categorised by
currency.
GBP USD Euro
(GBP) ($) (EUR) Other Total
At 31 December 2020 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------ ---------- -------- --------- -------- ----------
ASSETS
Cash and balances at central banks 636,688 41 64 6 636,799
Loans and advances to banks 46,152 26,005 25,415 12,695 110,267
Debt securities at amortised cost 234,112 110,580 - - 344,692
Derivative financial instruments 1,768 6 - 69 1,843
Loans and advances to customers 1,564,148 1,611 22,192 (102) 1,587,849
Other assets 6,490 - - (1,033) 5,457
Financial investments 15,921 2,436 138 - 18,495
------------------------------------ ---------- -------- --------- -------- ----------
2,505,279 140,679 47,809 11,635 2,705,402
------------------------------------ ---------- -------- --------- -------- ----------
LIABILITIES
Deposits from banks 230,090 - - - 230,090
Derivative financial instruments 581 - - 68 649
Deposits from customers 2,163,484 140,786 50,438 10,499 2,365,207
Other liabilities 2,444 - (495) - 1,949
Debt securities in issue 24,308 - 13,348 - 37,656
------------------------------------ ---------- -------- --------- -------- ----------
2,420,907 140,786 63,291 10,567 2,635,551
------------------------------------ ---------- -------- --------- -------- ----------
Net on-balance sheet position 84,372 (107) (15,482) 1,068 69,851
------------------------------------ ---------- -------- --------- -------- ----------
Credit commitments 308,427 - - - 308,427
------------------------------------ ---------- -------- --------- -------- ----------
The table below summarises the Group's exposure to foreign currency exchange
risk at 31 December 2019:
GBP USD Euro
(GBP) ($) (EUR) Other Total
At 31 December 2019 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------ ---------- -------- --------- ------- ----------
ASSETS
Cash and balances at central banks 325,844 20 41 3 325,908
Loans and advances to banks 5,364 10,028 18,892 11,974 46,258
Debt securities at amortised cost 336,079 106,881 - - 442,960
Derivative financial instruments 1,713 1 3 87 1,804
Loans and advances to customers 1,563,536 7,957 27,574 (14) 1,599,053
Other assets 4,625 - - - 4,625
Financial investments 29,113 1,637 169 - 30,919
------------------------------------ ---------- -------- --------- ------- ----------
2,266,274 126,524 46,679 12,050 2,451,527
------------------------------------ ---------- -------- --------- ------- ----------
LIABILITIES
Deposits from banks 230,421 - - - 230,421
Derivative financial instruments 233 - 2 84 319
Deposits from customers 1,897,857 126,220 49,049 11,777 2,084,903
Other liabilities 2,023 - - - 2,023
Debt securities in issue 24,239 - 12,598 - 36,837
------------------------------------ ---------- -------- --------- ------- ----------
2,154,773 126,220 61,649 11,861 2,354,503
------------------------------------ ---------- -------- --------- ------- ----------
Net on-balance sheet position 111,501 304 (14,970) 189 97,024
------------------------------------ ---------- -------- --------- ------- ----------
Credit commitments 190,064 - - - 190,064
------------------------------------ ---------- -------- --------- ------- ----------
Derivative financial instruments (see note 20) are in place to
mitigate foreign currency risk on net exposures for each currency.
A 10% strengthening of the pound against the US dollar would lead
to a GBP11k increase (2019: GBP30k decrease) in Group profits and
equity, while a 10% weakening of the pound against the US dollar
would lead to the same decrease in Group profits and equity.
Additionally the Group holds GBP3.3m of properties classified as
assets held for sale (2019: GBP7.6m) and GBP12.3m classified as
inventory (2019: GBP7.6m). These properties are located in the EU
and relate to Euro denominated loans where the properties were
repossessed and are either being held for sale or being developed
with a view to sell. Including these Euro assets, the net Euro
exposure is positive GBP125k (2019: GBP431k).
Due to the global nature of the pandemic, the Group's risk
management strategy has not substantially changed due to
COVID-19.
The table below summarises the Company's exposure to foreign currency
exchange rate risk at 31 December 2020:
GBP Euro
(GBP) (EUR) Total
At 31 December 2020 GBP000 GBP000 GBP000
--------------------------------------------------- ---------- ---------- -------
ASSETS
Loans and advances to banks 1,565 13,597 15,162
Debt securities at amortised cost 24,308 - 24,308
Financial investments 14,171 - 14,171
40,044 13,597 53,641
--------------------------------------------------- ---------- ---------- -------
LIABILITIES
Other liabilities 3,132 - 3,132
Debt securities in issue 24,308 13,348 37,656
--------------------------------------------------- ---------- ---------- -------
27,440 13,348 40,788
--------------------------------------------------- ---------- ---------- -------
Net on-balance sheet position 12,604 249 12,853
--------------------------------------------------- ---------- ---------- -------
The table below summarises the Company's exposure to foreign currency
exchange rate risk at 31 December 2019:
GBP Euro
(GBP) (EUR) Total
At 31 December 2019 GBP000 GBP000 GBP000
------------------------------------------------- ----------- ----------- -------
ASSETS
Loans and advances to banks 2,414 12,902 15,316
Financial investments 24,239 - 24,239
Other assets 25,913 - 25,913
------------------------------------------------- ----------- ----------- -------
52,566 12,902 65,468
------------------------------------------------- ----------- ----------- -------
LIABILITIES
Other liabilities 1,113 - 1,113
Debt securities in issue 24,239 12,598 36,837
------------------------------------------------- ----------- ----------- -------
25,352 12,598 37,950
------------------------------------------------- ----------- ----------- -------
Net on-balance sheet position 27,214 304 27,518
------------------------------------------------- ----------- ----------- -------
A 10% strengthening of the pound against the Euro would lead to
GBP31k (2019: GBP11k) decrease in the Company profits and equity,
conversely a 10% weakening of the pound against the Euro would lead
to a GBP37k (2019: GBP13k) increase in the Company profits and
equity.
Interest rate risk
Interest rate risk is the potential adverse impact on the
Company and Group's future cash flows from changes in interest
rates, and arises from the differing interest rate risk
characteristics of the Company and Group's assets and liabilities.
In particular, fixed rate savings and borrowing products expose the
Group to the risk that a change in interest rates could cause
either a reduction in interest income or an increase in interest
expense relative to variable rate interest flows. The Group seeks
to "match" interest rate risk on either side of the Statement of
Financial Position. However, this is not a perfect match and
interest rate risk is present in: Money market transactions of a
fixed rate nature, fixed rate loans, fixed rate savings accounts
and floating rate products dependent on when they re-price at a
future date.
Interest rate risk is measured throughout the maturity bandings
of the book on a parallel shift scenario for a 200 basis points
movement. Interest rate risk is managed to limit value at risk to
be less than GBP0.5m capped at negative 0.1%. The current position
of the balance sheet is such that it results in a favourable impact
on the economic value of equity of GBP2.4m (2019: GBP3.1m) for a
positive 200bps shift and an adverse impact of GBP0.1m (2019:
GBP1.2m) for a negative 200bps movement capped at negative 0.1%.
The Company has no fixed rate exposures, but an upward change of
50bps on variable rates would increase pre-tax profits and equity
by GBP8k (2019: increase pre-tax profits and equity by GBP13k),
while a downward change of 50bps (capped at 10bps) would increase
pre-tax profits and equity by GBP1k.
The following tables summarise the re-pricing periods for the
assets and liabilities in the Company and Group, including
derivative financial instruments which are principally used to
reduce exposure to interest rate risk. Items are allocated to time
bands by reference to the earlier of the next contractual interest
rate re-price and the maturity date.
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
Group 3 months 6 months 1 year 5 years 5 years bearing Total
As at 31 December 2020 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------------- ---------- ---------- ---------- ---------- --------- ---------- ----------
ASSETS
Cash and balances at central
banks 636,799 - - - - - 636,799
Loans and advances to banks 109,936 331 - - - - 110,267
Debt securities at amortised
cost 269,014 41,957 15,677 18,044 - - 344,692
Derivative financial instruments 202 - - 1,641 - - 1,843
Loans and advances to customers 1,343,863 17,463 19,946 193,122 13,455 - 1,587,849
Other assets* - - - - - 160,077 160,077
Financial investments - - - - - 18,495 18,495
---------------------------------- ---------- ---------- ---------- ---------- --------- ---------- ----------
2,359,814 59,751 35,623 212,807 13,455 178,572 2,860,022
---------------------------------- ---------- ---------- ---------- ---------- --------- ---------- ----------
LIABILITIES
Deposits from banks 230,090 - - - - - 230,090
Derivative financial instruments 649 - - - - - 649
Deposits from customers 1,531,104 182,703 249,828 401,562 10 - 2,365,207
Other liabilities** - - - - - 34,215 34,215
Debt securities in issue 37,656 - - - - - 37,656
Equity - - - - - 192,205 192,205
---------------------------------- ---------- ---------- ---------- ---------- --------- ---------- ----------
1,799,499 182,703 249,828 401,562 10 226,420 2,860,022
---------------------------------- ---------- ---------- ---------- ---------- --------- ---------- ----------
Impact of derivative instruments 25,292 - - (25,292) - -
---------------------------------- ---------- ---------- ---------- ---------- --------- ----------
Interest rate sensitivity
gap 585,607 (122,952) (214,205) (214,047) 13,445 (47,848)
---------------------------------- ---------- ---------- ---------- ---------- --------- ----------
Cumulative gap 585,607 462,655 248,450 34,403 47,848 -
---------------------------------- ---------- ---------- ---------- ---------- --------- ----------
* Other assets include all remaining assets in the Statement of Financial
Position, which are not shown separately above.
** Other liabilities include all remaining liabilities in the Statement
of Financial Position, which are not shown separately above.
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
Group 3 months 6 months 1 year 5 years 5 years bearing Total
As at 31 December 2019 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- ----------
ASSETS
Cash and balances at central
banks 325,908 - - - - - 325,908
Loans and advances to banks 45,836 188 234 - - - 46,258
Debt securities held-to-maturity 287,608 151,555 3,797 - - - 442,960
Derivative financial instruments 105 - - 1,699 - - 1,804
Loans and advances to customers 1,351,549 11,101 25,963 209,811 629 - 1,599,053
Other assets - - - - - 148,477 148,477
Financial investments - - - - - 30,919 30,919
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- ----------
2,011,006 162,844 29,994 211,510 629 179,396 2,595,379
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- ----------
LIABILITIES
Deposits from banks 230,421 - - - - - 230,421
Derivative financial instruments 319 - - - - - 319
Deposits from customers 1,403,728 233,716 211,956 235,503 - - 2,084,903
Other liabilities - - - - - 34,564 34,564
Debt securities in issue 36,837 - - - - - 36,837
Equity - - - - - 208,335 208,335
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- ----------
1,671,305 233,716 211,956 235,503 - 242,899 2,595,379
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- ----------
Impact of derivative instruments 25,531 - - (25,531) - -
---------------------------------- ---------- ---------- ---------- --------- --------- ----------
Interest rate sensitivity
gap 365,232 (70,872) (181,962) (49,524) 629 (63,503)
---------------------------------- ---------- ---------- ---------- --------- --------- ----------
Cumulative gap 365,232 294,360 112,398 62,874 63,503 -
---------------------------------- ---------- ---------- ---------- --------- --------- ----------
* Other assets include all remaining assets in the Statement of Financial
Position, which are not shown separately above.
** Other liabilities include all remaining liabilities in the Statement
of Financial Position, which are not shown separately above.
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
Company 3 months 6 months 1 year 5 years 5 years bearing Total
As at 31 December 2020 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
ASSETS
Debt securities at amortised
cost 24,308 - - - - - 24,308
Loans and advances to banks 15,113 - - - - 49 15,162
Other assets* - - - - - 135,005 135,005
Financial investments - - - - - 14,171 14,171
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
39,421 - - - - 149,225 188,646
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
LIABILITIES
Other liabilities** - - - - - 3,559 3,559
Debt securities in issue 37,656 - - - - - 37,656
Equity - - - - - 147,431 147,431
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
37,656 - - - - 150,990 188,646
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
Interest rate sensitivity
gap 1,765 - - - - (1,765)
---------------------------------- ---------- ---------- ---------- --------- --------- ----------
Cumulative gap 1,765 1,765 1,765 1,765 1,765 -
---------------------------------- ---------- ---------- ---------- --------- --------- ----------
* Other assets include all remaining assets in the Statement of Financial
Position, which are not shown separately above.
** Other liabilities include all remaining liabilities in the Statement
of Financial Position, which are not shown separately above.
More More More
than than than
3 months 6 months 1 year
but but but
less less less More Non
Within than than than than interest
Company 3 months 6 months 1 year 5 years 5 years bearing Total
As at 31 December 2019 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
ASSETS
Derivative financial instruments 24,239 - - - - - 24,239
Loans and advances to banks 15,296 - - - - 20 15,316
Other assets* - - - - - 134,699 134,699
Financial investments - - - - - 25,913 25,913
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
39,535 - - - - 160,632 200,167
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
LIABILITIES
Other liabilities** - - - - - 3,238 3,238
Debt securities in issue 36,837 - - - - - 36,837
Equity - - - - - 160,092 160,092
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
36,837 - - - - 163,330 200,167
---------------------------------- ---------- ---------- ---------- --------- --------- ---------- --------
Interest rate sensitivity
gap 2,698 - - - - (2,698)
---------------------------------- ---------- ---------- ---------- --------- --------- ----------
Cumulative gap 2,698 2,698 2,698 2,698 2,698 -
---------------------------------- ---------- ---------- ---------- --------- --------- ----------
* Other assets include all remaining assets in the Statement of Financial
Position, which are not shown separately above.
** Other liabilities include all remaining liabilities in the Statement
of Financial Position, which are not shown separately above.
(e) Liquidity risk
Liquidity risk is the risk that the Group, although solvent,
either does not have sufficient financial resources to enable it to
meet its obligations as they fall due, or can only secure such
resources at excessive cost.
The Group's approach to managing liquidity is to ensure, as far
as possible, that it will always have sufficient liquidity to meet
its liabilities when due, under both normal and stressed
conditions, without incurring unacceptable losses or risking damage
to the Group's reputation. The liquidity requirements of the Group
are met through withdrawing funds from its Bank of England Reserve
Account to cover any short-term fluctuations and longer term
funding to address any structural liquidity requirements.
The Group has formal governance structures in place to manage
and mitigate liquidity risk on a day to day basis. The Board of AL
sets and approves the liquidity risk management strategy. The
Assets and Liabilities Committee ("ALCO"), comprising senior
executives of the Group, monitors liquidity risk. Key liquidity
risk management information is reported by the finance teams and
monitored by the Chief Executive Officer, Finance Director and
Deputy CEO on a daily basis. The ALCO meets monthly to review
liquidity risk against set thresholds and risk indicators including
early warning indicators, liquidity risk tolerance levels and
Internal Liquidity Adequacy Assessment Process ("ILAAP")
metrics.
The PRA requires the Board to ensure that the Group has adequate
levels of liquidity resources and a prudent funding profile, and
that it comprehensively manages and controls liquidity and funding
risks. The Group maintains deposits placed at the Bank of England
and highly liquid unencumbered assets that can be called upon to
create sufficient liquidity to meet liabilities on demand,
particularly in a period of liquidity stress.
Arbuthnot Latham & Co., Limited ("AL") has a Board approved
ILAAP, and maintains liquidity buffers in excess of the minimum
requirements. The ILAAP is embedded in the risk management
framework of the Group and is subject to ongoing updates and
revisions when necessary. At a minimum, the ILAAP is updated
annually. The Liquidity Coverage Ratio ("LCR") regime has applied
to the Group from 1 October 2015, requiring management of net 30
day cash outflows as a proportion of high quality liquid assets.
The LCR has exceeded the regulatory minimum of 100% throughout the
year. Following the steps taken by the Group to respond to possible
future liquidity constraints arising from the COVID-19 pandemic,
there has been an increase in deposits of 13%, which has
accordingly improved the Bank's liquidity.
The Group is exposed to daily calls on its available cash
resources from current accounts, maturing deposits and loan
draw-downs. The Group maintains significant cash resources to meet
all of these needs as they fall due. The matching and controlled
mismatching of the maturities and interest rates of assets and
liabilities is fundamental to the management of the Group. It is
unusual for banks to be completely matched, as transacted business
is often of uncertain term and of different types.
The maturities of assets and liabilities and the ability to
replace, at an acceptable cost, interest bearing liabilities as
they mature are important factors in assessing the liquidity of the
Group and its exposure to changes in interest rates.
The tables below show the undiscounted contractual cash flows of the Group's
financial liabilities and assets as at 31 December 2020:
More More
than than
3 months 1 year
Gross but but
nominal Not more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2020 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------------- ---------- ------------ ------------ ---------- ---------- ---------
Financial liability by type
Non-derivative liabilities
Deposits from banks 230,090 (230,090) (230,090) - - -
Deposits from customers 2,365,207 (2,414,329) (1,547,262) (560,425) (306,642) -
Other liabilities 1,949 (1,949) (3,268) - - 1,319
Debt securities in issue 37,656 (62,222) (629) (1,816) (11,601) (48,176)
Issued financial guarantee contracts - (6,248) (6,248) - - -
Unrecognised loan commitments - (308,427) (308,427) - - -
-------------------------------------- ---------- ------------ ------------ ---------- ---------- ---------
2,634,902 (3,023,265) (2,095,923) (562,241) (318,243) (46,857)
-------------------------------------- ---------- ------------ ------------ ---------- ---------- ---------
Derivative liabilities
Risk management: 649
- Outflows - (649) (649) - - -
-------------------------------------- ---------- ------------ ------------ ---------- ---------- ---------
649 (649) (649) - - -
-------------------------------------- ---------- ------------ ------------ ---------- ---------- ---------
More More
than than
3 months 1 year
Gross but but
nominal Not more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2020 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------------- ---------- ------------ ------------ ---------- ---------- ---------
Financial asset by type
Non-derivative assets
Cash and balances at central banks 636,799 636,799 636,799 - - -
Loans and advances to banks 110,267 110,268 109,937 331 - -
Debt securities at amortised cost 344,692 349,718 104,854 96,830 148,034 -
Loans and advances to customers 1,587,849 1,783,559 306,330 178,534 1,195,396 103,299
Other assets 5,457 5,457 5,457 - - -
Financial investments 18,495 18,495 4,324 - 14,171 -
-------------------------------------- ---------- ------------ ------------ ---------- ---------- ---------
2,703,559 2,904,296 1,167,701 275,695 1,357,601 103,299
-------------------------------------- ---------- ------------ ------------ ---------- ---------- ---------
Derivative assets
Risk management: 1,843
- Inflows - 1,843 - - - 1,843
1,843 1,843 - - - 1,843
-------------------------------------- ---------- ------------ ------------ ---------- ---------- ---------
The tables below show the undiscounted contractual cash flows of the
Group's financial liabilities and assets as at 31 December 2019:
More More
than than
3 months 1 year
Gross but but
nominal Not more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2019 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------------- ---------- ------------ ------------ ---------- ---------- ---------
Financial liability by type
Non-derivative liabilities
Deposits from banks 230,421 (230,421) (230,421) - - -
Deposits from customers 2,084,903 (2,105,676) (1,243,332) (550,128) (312,216) -
Other liabilities 2,023 (2,023) (2,023) - - -
Debt securities in issue 36,837 (63,292) (626) (1,893) (12,325) (48,448)
Issued financial guarantee contracts - (6,401) (6,401) - - -
Unrecognised loan commitments - (190,064) (190,064) - - -
-------------------------------------- ---------- ------------ ------------ ---------- ---------- ---------
2,354,184 (2,597,877) (1,672,867) (552,021) (324,541) (48,448)
-------------------------------------- ---------- ------------ ------------ ---------- ---------- ---------
Derivative liabilities
Risk management: 319
- Outflows - (319) (319) - - -
-------------------------------------- ---------- ------------ ------------ ---------- ---------- ---------
319 (319) (319) - - -
-------------------------------------- ---------- ------------ ------------ ---------- ---------- ---------
More More
than than
3 months 1 year
Gross but but
nominal Not more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2019 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------------- ---------- ------------ ------------ ---------- ---------- ---------
Financial asset by type
Non-derivative assets
Cash and balances at central banks 325,908 325,908 325,908 - - -
Loans and advances to banks 46,258 46,270 45,844 426 - -
Debt securities held-to-maturity 442,960 447,424 141,897 197,811 107,716 -
Loans and advances to customers 1,599,053 1,764,491 337,215 168,224 1,117,246 141,807
Other assets 4,624 4,624 4,624 - - -
Financial investments 30,919 30,919 5,007 - 25,912 -
-------------------------------------- ---------- ------------ ------------ ---------- ---------- ---------
2,449,722 2,619,637 860,495 366,461 1,250,874 141,807
-------------------------------------- ---------- ------------ ------------ ---------- ---------- ---------
Derivative assets
Risk management: 1,804
- Inflows - 1,804 - - - 1,804
1,804 1,804 - - - 1,804
-------------------------------------- ---------- ------------ ------------ ---------- ---------- ---------
The table below sets out the components of the Group's liquidity reserves:
31 December 31 December
2020 2019
Fair Fair
Amount value Amount value
Liquidity reserves GBP000 GBP000 GBP000 GBP000
-------------------------------------- ----------- ----------- -------- --------
Cash and balances at central banks 636,799 636,799 325,908 325,908
Loans and advances to banks 110,267 110,267 46,258 46,258
Debt securities at amortised cost 344,692 346,660 442,960 442,926
1,091,758 1,093,726 815,126 815,092
-------------------------------------- ----------- ----------- -------- --------
Assets pledged as collateral or encumbered
The total financial assets recognised in the statement of
financial position that had been pledged as collateral for
liabilities at 31 December 2020 were GBP288m (2019: GBP259m).
Assets are encumbered due to the Term Funding Scheme (note 30).
Financial assets can be pledged as collateral as part of
repurchases transactions under terms that are usual and customary
for such activities.
The table below analyses the contractual cash flows of the Company's
financial liabilities and assets as at 31 December 2020:
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2020 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------------------- --------- ----------- ---------- ---------- --------- ---------
Financial liability by type
Non-derivative liabilities
Other liabilities 3,132 (3,132) (1,542) - - (1,590)
Debt securities in issue 37,656 (62,222) (629) (1,816) (11,601) (48,176)
40,788 (65,354) (2,171) (1,816) (11,601) (49,766)
----------------------------------- --------- ----------- ---------- ---------- --------- ---------
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2020 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------------------- --------- ----------- ---------- ---------- --------- ---------
Financial asset by type
Non-derivative assets
Loans and advances to banks 15,162 15,162 15,162 - - -
Debt securities at amortised cost 24,308 43,860 545 1,566 10,264 31,485
Financial investments 14,171 14,171 - - 14,171 -
53,641 73,193 15,707 1,566 24,435 31,485
----------------------------------- --------- ----------- ---------- ---------- --------- ---------
The table below analyses the contractual cash flows of the Company's
financial liabilities and assets as at 31 December 2019:
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2019 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------------------- --------- ----------- ---------- ---------- --------- ---------
Financial liability by type
Non-derivative liabilities
Other liabilities 1,113 (1,113) 477 - - (1,590)
Debt securities in issue 36,837 (63,292) (626) (1,893) (12,325) (48,448)
37,950 (64,405) (149) (1,893) (12,325) (50,038)
----------------------------------- --------- ----------- ---------- ---------- --------- ---------
More More
than than
3 months 1 year
Gross Not but but
nominal more less less More
Carrying inflow/ than than than than
amount (outflow) 3 months 1 year 5 years 5 years
At 31 December 2019 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
----------------------------------- --------- ----------- ---------- ---------- --------- ---------
Financial asset by type
Non-derivative assets
Loans and advances to banks 15,316 15,316 15,316 - - -
Debt securities at amortised cost 24,239 45,068 544 1,644 11,001 31,879
Financial investments 25,913 25,913 - - 25,913 -
65,468 86,297 15,860 1,644 36,914 31,879
----------------------------------- --------- ----------- ---------- ---------- --------- ---------
The maturities of assets and liabilities and the ability to
replace, at an acceptable cost, interest-bearing liabilities as
they mature are important factors in assessing the liquidity of the
Group and its exposure to changes in interest rates and exchange
rates.
Fiduciary activities
The Group provides investment management and advisory services
to third parties, which involve the Group making allocation and
purchase and sale decisions in relation to a wide range of
financial instruments. Those assets that are held in a fiduciary
capacity are not included in these financial statements. These
services give rise to the risk that the Group may be accused of
maladministration or underperformance. At the balance sheet date,
the Group had investment management accounts amounting to
approximately GBP1,147m (2019: GBP1,107m). Additionally, the Group
provides investment advisory services.
(f) Financial assets
and liabilities
The tables below set out the Group's financial assets and financial liabilities
into their respective classifications:
Total
Amortised carrying Fair
FVPL FVOCI cost amount value
At 31 December 2020 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------------- -------- -------- ----------- ----------- ----------
ASSETS
Cash and balances at
central banks - - 636,799 636,799 636,799
Loans and advances to
banks - - 110,267 110,267 110,267
Debt securities at amortised
cost - - 344,692 344,692 346,660
Derivative financial
instruments 1,843 - - 1,843 1,843
Loans and advances to
customers - - 1,587,849 1,587,849 1,552,622
Other assets - - 5,457 5,457 5,457
Financial investments 165 18,330 - 18,495 18,495
------------------------------------- -------- -------- ----------- ----------- ----------
2,008 18,330 2,685,064 2,705,402 2,672,143
--------------------------------- -------- -------- ----------- ----------- ----------
LIABILITIES
Deposits from banks - - 230,090 230,090 230,090
Derivative financial
instruments 649 - - 649 649
Deposits from customers - - 2,365,207 2,365,207 2,365,207
Other liabilities - - 1,949 1,949 1,949
Debt securities in issue - - 37,656 37,656 37,656
------------------------------------- -------- -------- ----------- ----------- ----------
649 - 2,634,902 2,635,551 2,635,551
--------------------------------- -------- -------- ----------- ----------- ----------
Total
Amortised carrying Fair
FVPL FVOCI cost amount value
At 31 December 2019 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------------- -------- -------- ----------- ----------- ----------
ASSETS
Cash and balances at
central banks - - 325,908 325,908 325,908
Loans and advances to
banks - - 46,258 46,258 46,258
Debt securities at amortised
cost - - 442,960 442,960 442,926
Derivative financial
instruments 1,804 - - 1,804 1,804
Loans and advances to
customers - - 1,599,053 1,599,053 1,566,715
Other assets - - 4,625 4,625 4,625
Financial investments 165 30,754 - 30,919 30,919
------------------------------------- -------- -------- ----------- ----------- ----------
1,969 30,754 2,418,804 2,451,527 2,419,155
--------------------------------- -------- -------- ----------- ----------- ----------
LIABILITIES
Deposits from banks - - 230,421 230,421 230,421
Derivative financial
instruments 319 - - 319 319
Deposits from customers - - 2,084,903 2,084,903 2,084,903
Other liabilities - - 2,023 2,023 2,023
Debt securities in issue - - 36,837 36,837 36,837
------------------------------------- -------- -------- ----------- ----------- ----------
319 - 2,354,184 2,354,503 2,354,503
--------------------------------- -------- -------- ----------- ----------- ----------
Valuation of financial instruments
The Group measures the fair value of an instrument using quoted
prices in an active market for that instrument. A market is
regarded as active if quoted prices are readily and regularly
available and represent actual and regularly occurring market
transactions. If a market for a financial instrument is not active,
the Group establishes fair value using a valuation technique. These
include the use of recent arm's length transactions, reference to
other instruments that are substantially the same for which market
observable prices exist, net present value and discounted cash flow
analysis. The objective of valuation techniques is to determine the
fair value of the financial instrument at the reporting date as the
price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. In
the event that fair values of assets and liabilities cannot be
reliably measured, they are carried at cost.
The Group measures fair value using the following fair value
hierarchy that reflects the significance of the inputs used in
making measurements:
-- Level 1: Quoted prices in active markets for identical assets or liabilities.
-- Level 2: Inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices).
This category includes instruments valued using: quoted market
prices in active markets for similar instruments; quoted prices for
identical or similar instruments in markets that are considered
less than active; or other valuation techniques in which all
significant inputs are directly or indirectly observable from
market data.
-- Level 3: Inputs that are unobservable. This category includes
all instruments for which the valuation technique includes inputs
not based on observable data and the unobservable inputs have a
significant effect on the instrument's valuation. This category
includes instruments that are valued based on quoted prices for
similar instruments for which significant unobservable adjustments
or assumptions are required to reflect differences between the
instruments.
The consideration of factors such as the magnitude and frequency
of trading activity, the availability of prices and the size of
bid/offer spreads assists in the judgement as to whether a market
is active. If, in the opinion of management, a significant
proportion of the instrument's carrying amount is driven by
unobservable inputs, the instrument in its entirety is classified
as valued using significant unobservable inputs. 'Unobservable' in
this context means that there is little or no current market data
available from which to determine the level at which an arm's
length transaction would be likely to occur. It generally does not
mean that there is no market data available at all upon which to
base a determination of fair value (consensus pricing data may, for
example, be used).
The tables below analyse assets and liabilities measured at fair
value by the level in the fair value hierarchy into which the
measurement is categorised:
Level Level Level
1 2 3 Total
At 31 December 2020 GBP000 GBP000 GBP000 GBP000
---------------------------------- ------- ------- ------- -------
ASSETS
Derivative financial instruments - 1,843 - 1,843
Financial investments 15,925 - 2,570 18,495
Investment property - - 6,550 6,550
---------------------------------- ------- ------- ------- -------
15,925 1,843 9,120 26,888
---------------------------------- ------- ------- ------- -------
LIABILITIES
Derivative financial instruments - 649 - 649
---------------------------------- ------- ------- ------- -------
- 649 - 649
---------------------------------- ------- ------- ------- -------
Level Level Level
1 2 3 Total
At 31 December 2019 GBP000 GBP000 GBP000 GBP000
---------------------------------- ------- ------- ------- -------
ASSETS
Derivative financial instruments - 1,804 - 1,804
Financial investments 29,117 - 1,802 30,919
Investment property - - 6,763 6,763
---------------------------------- ------- ------- ------- -------
29,117 1,804 8,565 39,486
---------------------------------- ------- ------- ------- -------
LIABILITIES
Derivative financial instruments - 319 - 319
---------------------------------- ------- ------- ------- -------
- 319 - 319
---------------------------------- ------- ------- ------- -------
There were no transfers between level 1 and level 2 during
the year.
The following table reconciles the movement in level 3 financial instruments
measured at fair value during the year:
2020 2019
Movement in level 3 GBP000 GBP000
-------------------------------------------------------------- ------- ---------
At 1 January 8,565 68,209
Consideration received 419 3,083
Transfer to inventory - (63,219)
Movements recognised in Other Comprehensive
Income 366 502
Movements recognised in the Income Statement (19) (10)
---------------------------------------------------------------- ------- ---------
At 31 December 9,331 8,565
---------------------------------------------------------------- ------- ---------
Secure Trust bank investment
The Group currently holds equity shares in Secure Trust Bank
plc, valued at GBP15.9m (2019: GBP29.1m). The shares are recognised
at fair value using quoted prices on the London Stock Exchange.
Visa Inc. investment
Arbuthnot Latham currently holds preference shares in Visa Inc.,
valued at GBP1.6m (2019: GBP1.2m) as at 31 December 2020. These
shares have been valued at their future conversion value into Visa
Inc. common stock.
During the year, as part of the fourth anniversary of the
closing of the Visa Europe transaction, an assessment was performed
of the ongoing risk of liability to Visa. As part of the
adjustment, Visa awarded the Group 59 preference shares with a
carrying value of GBP920k. These can be automatically converted
into freely tradeable Class A common stock.
There is a haircut of 31% on the original shares comprising 25%
due to a contingent liability disclosed in Visa Europe's accounts
in relation to litigation and 6% based on a liquidity discount.
Investment in overseas property company
Arbuthnot Latham currently holds a debt and equity investment
classified as FVPL in a property company which owns an office
building through its 100% owned subsidiary. During 2018 the
subsidiary company was sold. Under the terms of the sale agreement
the buyer agreed to purchase 100% of the share capital and
reimburse all outstanding loans. The proceeds of the sale have been
distributed to the investors, except for the amount withheld for
the general and specific warranties (which will be released in
three instalments at 18 month intervals) included as a condition of
the sale agreement. A loss of GBP14k (2019: GBP8k) has been
recognised in profit or loss during the year. The investment has
been valued at GBP138k (2019: GBP156k) based on the discounted
consideration outstanding less 11% haircut for the warranties.
Hetz Ventures, L.P.
Arbuthnot Latham currently holds an equity investment in Hetz
Ventures, L.P. which was launched in January 2018. The primary
objective was to generate attractive risk-adjusted returns for its
Partners, principally through long-term capital appreciation, by
making, holding and disposing of equity and equity-related
investments in early stage revenue generating Israeli technology
companies, primarily in cyber, fin-tech and the disruptive software
sectors. The company has committed to a capital contribution of USD
$1.0m of the total closing fund capital of USD$55.0m. At 31
December 2020 the company had made capital contributions into the
Fund of $933k (2019: $394k).
The investment is classified as FVOCI and is valued at fair
value by Hetz Ventures, L.P. at GBP0.8m (2019: GBP0.5m). As at year
end the fair value is deemed to be the Group's share of the fund
based on what a third party would pay for the underlying
investments.
During the year a second fund was opened, Hetz II, which the
Group remains subscribed to.
The tables below show the fair value of financial instruments
carried at cost by the level in the fair value hierarchy:
Level Level Level
Group 1 2 3 Total
At 31 December 2020 GBP000 GBP000 GBP000 GBP000
------------------------------------ -------- ---------- -------- ----------
ASSETS
Cash and balances at central banks - 636,799 - 636,799
Loans and advances to banks - 110,267 - 110,267
Debt securities at amortised cost - 344,692 - 344,692
Loans and advances to customers - 1,300,824 287,025 1,587,849
Other assets - - 5,457 5,457
------------------------------------ -------- ---------- -------- ----------
- 2,392,582 292,482 2,685,064
--------------------------------------------- ---------- -------- ----------
LIABILITIES
Deposits from banks - 230,090 - 230,090
Deposits from customers - 2,365,207 - 2,365,207
Other liabilities - - 1,949 1,949
Debt securities in issue - - 37,656 37,656
------------------------------------ -------- ---------- -------- ----------
- 2,595,297 39,605 2,634,902
--------------------------------------------- ---------- -------- ----------
Level Level Level
Group 1 2 3 Total
At 31 December 2019 GBP000 GBP000 GBP000 GBP000
------------------------------------ -------- ---------- -------- ----------
ASSETS
Cash and balances at central banks - 325,908 - 325,908
Loans and advances to banks - 46,258 - 46,258
Debt securities at amortised cost - 442,960 - 442,960
Loans and advances to customers - 1,296,427 302,626 1,599,053
Other assets - - 4,625 4,625
------------------------------------ -------- ---------- -------- ----------
- 2,111,553 307,251 2,418,804
--------------------------------------------- ---------- -------- ----------
LIABILITIES
Deposits from banks - 230,421 - 230,421
Deposits from customers - 2,084,903 - 2,084,903
Other liabilities - - 2,023 2,023
Debt securities in issue - - 36,837 36,837
------------------------------------ -------- ---------- -------- ----------
- 2,315,324 38,860 2,354,184
--------------------------------------------- ---------- -------- ----------
Level Level Level
Company 1 2 3 Total
At 31 December 2020 GBP000 GBP000 GBP000 GBP000
---------------------------------- -------- ------- ------- -------
ASSETS
Loans and advances to banks - 7 15,155 15,162
Debt securities held-to-maturity - - 24,308 24,308
- 7 39,463 39,470
------------------------------------------- ------- ------- -------
LIABILITIES
Other liabilities - - 3,132 3,132
Debt securities in issue - - 37,656 37,656
---------------------------------- -------- ------- ------- -------
- - 40,788 40,788
------------------------------------------- ------- ------- -------
Level Level Level
Company 1 2 3 Total
At 31 December 2019 GBP000 GBP000 GBP000 GBP000
---------------------------------- -------- ------- ------- -------
ASSETS
Loans and advances to banks - 6 15,310 15,316
Debt securities held-to-maturity - - 24,239 24,239
- 6 39,549 39,555
------------------------------------------- ------- ------- -------
LIABILITIES
Other liabilities - - 1,113 1,113
Debt securities in issue - - 36,837 36,837
---------------------------------- -------- ------- ------- -------
- - 37,950 37,950
------------------------------------------- ------- ------- -------
7. Capital management (unaudited)
The Group's capital management policy is focused on optimising
shareholder value. There is a clear focus on delivering organic
growth and ensuring capital resources are sufficient to support
planned levels of growth. The Board regularly reviews the capital
position.
The Group and the individual banking operation, are authorised
by the Prudential Regulation Authority ("PRA") and regulated by the
Financial Conduct Authority and the Prudential Regulation Authority
and are subject to EU Capital Requirement Regulation (EU
No.575/2013) ("CRR") which forms part of the retained EU
legislation (EU legislation which applied in the UK before 11.00
p.m. on 31 December 2020 has been retained in UK law as a form of
domestic legislation known as 'retained EU legislation') and the
PRA Rulebook for CRR firms. One of the requirements for the Group
and the individual banking operation is that capital resources must
be in excess of capital requirements at all times.
In accordance with the parameters set out in the PRA Rulebook,
the Internal Capital Adequacy Assessment Process ("ICAAP") is
embedded in the risk management framework of the Group. The ICAAP
identifies and assesses the risks to the Group, considers how these
risks can be mitigated and demonstrates that the Group has
sufficient resources, after mitigating actions, to withstand all
reasonable scenarios.
Not all material risks can be mitigated by capital, but where
capital is appropriate the Board has adopted a "Pillar 1 plus"
approach to determine the level of capital the Group needs to hold.
This method takes the Pillar 1 capital requirement for credit,
market and operational risk as a starting point, and then considers
whether each of the calculations delivers a sufficient amount of
capital to cover risks to which the Group is, or could be, exposed.
Where the Board considers that the Pillar 1 calculations do not
adequately cover the risks, an additional Pillar 2A capital
requirement is applied. The PRA will set a Pillar 2A capital
requirement in light of the calculations included within the ICAAP.
The Group's Total Capital Requirement, as issued by the PRA, is the
sum of the minimum capital requirements under the CRR (Pillar 1)
and the Pillar 2A requirement. The current TCR of the Group is
8.71%.
The Group's regulatory capital is divided into two tiers:
-- Common equity Tier 1 which comprises shareholder funds less
regulatory deductions for intangible assets, including goodwill,
deferred tax assets that do not arise from temporary differences,
and, if in excess of the CRR thresholds, a portion of the Group's
non-significant investment in a financial institution, Secure Trust
Bank ("STB").
-- Tier 2 comprises qualifying subordinated loans.
The following table shows the regulatory capital resources
as managed by the Group:
2020 2019
GBP000 GBP000
------------------------------------------------------------ --------- ---------
CET1 Capital
Share capital 154 154
Capital redemption reserve 19 19
Treasury shares (1,299) (1,214)
Retained earnings* 207,839 209,171
IFRS 9 - Transitional add back 1,956 1,109
Fair value reserve (12,690) 205
Deduction for goodwill (5,202) (5,202)
Deduction for other intangibles (8,745) (14,880)
Deduction for deferred tax asset that do not arise from
temporary differences (1,425) (1,502)
Deduction for non-significant investment - (10,183)
Deduction for Prudent valuation (21) (33)
------------------------------------------------------------ --------- ---------
CET1 capital resources 180,586 177,644
------------------------------------------------------------ --------- ---------
Tier 2 Capital
Debt securities in issue 37,656 36,837
------------------------------------------------------------ --------- ---------
Total Tier 2 capital resources 37,656 36,837
------------------------------------------------------------ --------- ---------
Own Funds (sum of Tier 1 and Tier 2) 218,242 214,481
------------------------------------------------------------ --------- ---------
CET1 Capital Ratio (CET1 Capital/Total Risk Exposure)* 15.4% 14.4%
------------------------------------------------------------ --------- ---------
Total Capital Ratio (Own Funds/Total Risk Exposure)* 18.7% 17.3%
------------------------------------------------------------ --------- ---------
* Includes current year audited profit.
The ICAAP includes a summary of the capital required to mitigate
the identified risks in the Group's regulated entities and the
amount of capital that the Group has available. The PRA sets a
Pillar 2A capital requirement in light of the calculations included
within the ICAAP. The Group's Total Capital Requirement, as issued
by the PRA, is the sum of the minimum capital requirements under
the CRR (Pillar 1) and the Pillar 2A requirement.
Capital ratios are reviewed on a monthly basis to ensure that
external requirements are adhered to. During the period all
regulated entities have complied with all of the externally imposed
capital requirements to which they are subject.
Pillar 3 complements the minimum capital requirements (Pillar 1)
and the supervisory review process (Pillar 2). Its aim is to
encourage market discipline by developing a set of disclosure
requirements which will allow market participants to assess key
pieces of information on a firm's capital, risk exposures and risk
assessment processes. Our Pillar 3 disclosures for the year ended
31 December 2020 are published as a separate document on the Group
website under Investor Relations (Announcements & Shareholder
Info).
8. Net interest income
Interest income and expense are recognised in the Statement of
Comprehensive Income for all instruments measured at amortised cost
using the effective interest rate ("EIR") method.
The effective interest rate is the rate that exactly discounts
estimated future cash payments or receipts through the expected
life of the financial instrument to:
-- the gross carrying amount of the financial asset; or
-- the amortised cost of the financial liability.
The 'gross carrying amount of a financial asset' is the
amortised cost of a financial asset before adjusting for any
expected credit loss allowance. When calculating the effective
interest rate, the Group takes into account all contractual terms
of the financial instrument but does not consider expected credit
losses.
The calculation includes all fees paid or received between
parties to the contract that are an integral part of the effective
interest rate, transaction costs and all other premiums or
discounts. The carrying amount of the financial asset or financial
liability is adjusted if the Group revises its estimates of
payments or receipts. The adjusted carrying amount is calculated
based on the original effective interest rate and the change in
carrying amount is recorded as interest income or expense.
For financial assets that have become credit impaired following
initial recognition, interest income is calculated by applying the
effective interest rate to the amortised cost of the financial
asset. If the asset is no longer credit impaired, then the
calculation of interest income reverts to the gross basis.
The Group monitors the actual cash flows for each acquired book
and where they diverge significantly from expectation, the future
cash flows are reset. Expectation may diverge due to factors such
as one-off payments or expected credit losses. In assessing whether
to adjust future cash flows on an acquired portfolio, the Group
considers the cash variance on an absolute and percentage basis.
The Group also considers the total variance across all acquired
portfolios. Where cash flows for an acquired portfolio are reset,
they are discounted at the EIR to derive a new carrying value, with
changes taken to the Statement of Comprehensive Income as interest
income. The EIR rate is adjusted for events where there is a change
to the reference interest rate (e.g. Bank of England base rate)
affecting portfolios with a variable interest rate which will
impact future cash flows. The revised EIR is the rate which exactly
discounts the revised cash flows to the net carrying value of the
loan portfolio.
2020 2019
GBP000 GBP000
------------------------------------------------ ------------ -----------
Cash and balances at central banks 807 3,112
Loans and advances to banks (143) 418
Debt securities at amortised cost* 2,942 5,265
Loans and advances to customers 71,476 68,075
-------------------------------------------------- ------------ -----------
75,082 76,870
------------------------------------------------ ------------ -----------
Deposits from banks (513) (1,687)
Deposits from customers (12,856) (13,516)
Debt securities in issue (2,775) (2,054)
Interest on lease assets (880) (976)
-------------------------------------------------- ------------ -----------
Interest expense (17,024) (18,233)
-------------------------------------------------- ------------ -----------
Net interest income 58,058 58,637
-------------------------------------------------- ------------ -----------
* Decrease is due to the fluctuation of interest rates which has led
to an increased cost on variable leg of interest rate swap, which is
reported in interest income.
9. Fee and commission income
Fee and commission income which is integral to the EIR of a
financial asset are included in the effective interest rate (see
note 8).
All other fee and commission income is recognised as the related
services are performed, under IFRS 15, revenues from Contracts with
Customers. Fee and commission income is reported in the below
segments.
Types of fee Description
--------------------------- ------------------------------------------
Banking commissions - Banking Tariffs are charged monthly
for services provided.
Investment management fees - Annual asset management fees relate
to a single performance
obligation that is continuously provided
over an extended period
of time.
Wealth planning fees - Provision of bespoke, independent
Wealth Planning solutions to
Arbuthnot Latham's clients. Fees are
recognised as the service is
performed.
Foreign exchange fees - Provides foreign currencies for our
clients to purchase/sell.
--------------------------- ------------------------------------------
The principles in applying IFRS 15 to fee and commission use the
following 5 step model:
-- identify the contract(s) with a customer;
-- identify the performance obligations in the contract;
-- determine the transaction price;
-- allocate the transaction price to the performance obligations in the contract; and
-- recognise revenue when or as the Group satisfies its performance obligations.
Asset and other management, advisory and service fees are
recognised, under IFRS 15, as the related services are performed.
The same principle is applied for wealth planning services that are
continuously provided over an extended period of time.
The Group includes the transaction price of variable
consideration only when it is highly probable that a significant
reversal in the amount recognised will not occur or when the
variable element becomes certain.
Fee and commission income is disaggregated below and includes a total
for fees in scope of IFRS 15:
All
Private Commercial other
Group Banking Banking RAF ABL ASFL divisions Total
At 31 December 2020 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------- --------- ----------- ------- ------- ------- ----------- -------
Banking commissions 729 871 131 2,443 4 5 4,183
Foreign exchange fees 508 295 - - - 526 1,329
Investment management fees 8,862 - - - - - 8,862
Wealth planning fees 355 - - - - 6 361
---------------------------- --------- ----------- ------- ------- ------- ----------- -------
Total fee and commission
income 10,454 1,166 131 2,443 4 537 14,735
---------------------------- --------- ----------- ------- ------- ------- ----------- -------
All
Private Commercial other
Group Banking Banking RAF ABL ASFL divisions Total
At 31 December 2019 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------------------- --------- ----------- ------- ------- ------- ----------- -------
Banking and services fees 716 820 219 1,380 1 - 3,136
Foreign exchange fees 494 342 - - - 444 1,280
Investment management fees 8,474 - - - - - 8,474
Wealth planning fees 1,043 - - - - 2 1,045
---------------------------- --------- ----------- ------- ------- ------- ----------- -------
Total fee and commission
income 10,727 1,162 219 1,380 1 446 13,935
---------------------------- --------- ----------- ------- ------- ------- ----------- -------
10. Net impairment loss on financial assets
(a) Assets carried at amortised cost
The Group recognises loss allowances on an expected credit loss
basis for all financial assets measured at amortised cost,
including loans and advances, debt securities and loan
commitments.
Credit loss allowances are measured as an amount equal to
lifetime ECL, except for the following assets, for which they are
measured as 12 month ECL:
-- Financial assets determined to have a low credit risk at the
reporting date. The assets, to which the low credit risk exemption
applies, include cash and balances at central banks (note 16),
loans and advances to banks (note 17) and debt securities at
amortised cost (note 18). These assets are all considered
investment grade.
-- Financial assets which have not experienced a significant
increase in credit risk since their initial recognition.
Impairment model
The IFRS 9 impairment model adopts a three stage approach based
on the extent of credit deterioration since origination:
-- Stage 1: 12--month ECL applies to all financial assets that
have not experienced a significant increase in credit risk ("SICR")
since origination and are not credit impaired. The ECL will be
computed based on the probability of default events occurring over
the next 12 months. Stage 1 includes the current performing loans
(up to date and in arrears of less than 10 days) and those within
Heightened Business Monitoring ("HBM"). Accounts requiring HBM are
classified as a short-term deterioration in financial circumstances
and are tightly monitored with additional proactive client
engagement, but not deemed SICR.
-- Stage 2: When a financial asset experiences a SICR subsequent
to origination, but is not in default, it is considered to be in
Stage 2. This requires the computation of ECL based on the
probability of all possible default events occurring over the
remaining life of the financial asset. Provisions are higher in
this stage (except where the value of charge against the financial
asset is sufficient to enable recovery in full) because of an
increase in credit risk and the impact of a longer time horizon
being considered (compared to 12 months in Stage 1).
Evidence that a financial asset has experienced a SICR includes
the following considerations:
-- A loan is in arrears between 31 and 90 days;
-- Forbearance action has been undertaken;
-- Stage 3: Financial assets that are credit impaired are
included in this stage. Similar to Stage 2, the allowance for
credit losses will continue to capture the lifetime expected credit
losses. At each reporting date, the Group will assess whether
financial assets carried at amortised cost are in default. A
financial asset will be considered to be in default when an
event(s) that has a detrimental impact on estimated future cash
flows have occurred.
Evidence that a financial asset is within Stage 3 includes the
following data:
-- A loan is in arrears in excess of 90 days;
-- Breach of terms of forbearance;
-- Recovery action is in hand; or
-- Bankruptcy proceedings or similar insolvency process of a client, or director of a company.
A borrower will move back into Stage 1 conditional upon both a
period of good account conduct and the improvement of the Client's
situation to the extent that the credit risk has receded
sufficiently and a full repayment of the loan, without recourse to
the collateral, is likely.
Presentation of allowance for ECL in the statement of financial
position
For financial assets measured at amortised cost, these are
presented as the gross carrying amount of the assets minus a
deduction for the ECL.
Write-off
Loans and debt securities are written off (either partially or
in full) when there is no realistic prospect of recovery. This is
the case when the Group determines that the borrower does not have
assets or sources of income that could generate sufficient cash
flows to repay the outstanding amount due.
(b) Renegotiated loans
Loans that are not individually significant, and whose terms
have been renegotiated, are no longer considered to be past due and
are treated as new loans.
(c) Forbearance
Under certain circumstances, the Group may use forbearance
measures to assist borrowers who are experiencing significant
financial hardship. Any forbearance support is assessed on a case
by case basis in line with best practice and subject to regular
monitoring and review. The Group seeks to ensure that any
forbearance results in a fair outcome for both the customer and the
Group.
(d) Assets classified as financial investments
Equity instruments at fair value through other comprehensive
income
Equity investments are not subject to impairment charges
recognised in the income statement. Any fair value gains and losses
are recognised in OCI which are not subject to reclassification to
the income statement on derecognition.
Debt instruments at FVOCI
Changes in fair value are recognised in OCI, the loss allowance
will be recognised in OCI and shall not reduce the carrying amount
of the financial asset in the statement of financial position.
Impairment costs will be recognised in the profit or loss with a
corresponding entry to OCI. On derecognition, cumulative gains and
losses in OCI are reclassified to the profit or loss.
2020 2019
GBP000 GBP000
------------------------------------------------------------ ------- --------
Net Impairment losses on loans and advances to customers 2,849 867
Of which:
Stage 1 525 (1,099)
Stage 2 134 (37)
Stage 3 2,190 1,929
2,849 867
------------------------------------------------------------ ------- --------
During the year, the Group recovered GBP7k (2019: GBP103k) of loans which
had previously been written off.
11. Other income
Other income includes an adjustment of GBP0.1m (2019: GBP1.5m),
to the contingent consideration for the acquisition of Renaissance
Asset Finance Ltd. The adjustment is based on management's
assessment of the underlying performance of the business and
reflects a reduction in the estimated future liability payable
under the sale and purchase agreement.
Other items reflected in other income include rental income from
the investment properties (see Note 29) of GBP0.5m (2019: GBP2.1m),
premises recharges of GBPnil (2019: GBP0.2m) to STB for office
space occupied and dividends received on the shares held in STB of
GBPnil (2019: GBP1.5m).
The Group holds a number of properties on which it receives
rental income in its capacity as a lessor. GBP1.5m of the reduction
in rental income from the prior year is due to the King Street
property being vacant while extensive refurbishment works are
carried out. Rental income has also decreased in the year due to
COVID-19 as payment holidays have been awarded to specific tenants
with revenue derecognised when appropriate.
Accounting for rental income
Rental income is recognised on a straight line basis over the
term of the lease. Lease incentives granted are recognised as an
integral part of the total rental income over the term of the
lease.
12. Operating expenses
2020 2019
Operating expenses comprise: GBP000 GBP000
----------------------------------------------------- ------- -------
Staff costs, including Directors:
Wages, salaries and bonuses 36,228 39,169
Social security costs 4,010 4,313
Pension costs 2,251 1,980
Share based payment transactions (note 38) 142 249
Amortisation of intangibles (note 26) 2,828 2,008
Depreciation (note 27) 1,569 1,441
Financial Services Compensation Scheme Levy 309 228
Expenses relating to short-term leases 413 368
Other administrative expenses 23,669 20,430
----------------------------------------------------- ------- -------
Total operating expenses from continuing operations 71,419 70,186
----------------------------------------------------- ------- -------
Details on Directors remuneration are disclosed in the
Remuneration Report on page ##RREP.
2020 2019
Remuneration of the auditor and its associates, excluding
VAT, was as follows: GBP000 GBP000
----------------------------------------------------------- ------- -------
Fees payable to the Company's auditor for the audit of
the Company's annual accounts 110 105
Fees payable to the Company's auditor and its associates
for other services:
Audit of the accounts of subsidiaries 395 285
Audit related assurance services 103 100
Total fees payable 608 490
----------------------------------------------------------- ------- -------
13. Income tax expense
Current income tax which is payable on taxable profits is
recognised as an expense in the period in which the profits arise.
Income tax recoverable on tax allowable losses is recognised as an
asset only to the extent that it is regarded as recoverable by
offset against current or future taxable profits.
2020 2019
United Kingdom corporation tax at 19% (2019: 19%) GBP000 GBP000
---------------------------------------------------------- -------- -------
Current taxation
Corporation tax charge - current year - 1,000
Corporation tax charge - adjustments in respect of prior
years 179 148
---------------------------------------------------------- -------- -------
179 1,148
---------------------------------------------------------- -------- -------
Deferred taxation
Origination and reversal of temporary differences 89 (105)
Adjustments in respect of prior years (26) (208)
---------------------------------------------------------- -------- -------
63 (313)
---------------------------------------------------------- -------- -------
Income tax expense 242 835
---------------------------------------------------------- -------- -------
Tax reconciliation
(Loss)/profit before tax (1,090) 7,011
Tax at 19% (2019: 19%) (207) 1,332
Other permanent differences 296 (437)
Prior period adjustments 153 (60)
---------------------------------------------------------- -------- -------
Corporation tax charge for the year 242 835
---------------------------------------------------------- -------- -------
The 2020 permanent difference mainly relate to professional fees
of a capital nature, relating to the acquisition of the Asset
Alliance Group. In 2019 permanent differences mainly relate to
deferred consideration adjustments for RAF and dividends received
from STB.
The UK corporation tax rate for 2020 was enacted on 17 March
2020, remaining at 19%, rather than reducing to the previously
enacted 17%. In the Budget speech on 3 March 2021, the Chancellor
of the Exchequer, announced the increase of corporation tax from
19% to 25% from 1 April 2023. It is expected that the change in
corporation tax will be enacted early in 2021. This will increase
the deferred tax asset and reduce the tax charge in 2021
accordingly.
14. Average number of employees
2020 2019
--------------------------------- ----- -----
Banking 202 191
RAF 31 31
ACABL 18 14
ASFL 11 8
All Other Divisions 232 207
Group Centre 20 19
--------------------------------- ----- -----
514 470
--------------------------------- ----- -----
The Group did not take advantage of the government furlough
scheme and all staff were redeployed to working from home
arrangements when the consequences of the COVID-19 pandemic became
apparent.
Accounting for employee benefits
(a) Post-retirement obligations
The Group contributes to a defined contribution scheme and to
individual defined contribution schemes for the benefit of certain
employees. The schemes are funded through payments to insurance
companies or trustee-administered funds at the contribution rates
agreed with individual employees.
The Group has no further payment obligations once the
contributions have been paid. The contributions are recognised as
an employee benefit expense when they are due. Prepaid
contributions are recognised as an asset to the extent that a cash
refund or a reduction in the future payments is available.
There are no post-retirement benefits other than pensions.
(b) Share-based compensation - cash settled
The Group adopts a Black-Scholes valuation model in calculating
the fair value of the share options as adjusted for an attrition
rate for members of the scheme and a probability of pay-out
reflecting the risk of not meeting the terms of the scheme over the
vesting period. The number of share options that are expected to
vest are reviewed at least annually.
The fair value of cash settled share-based payments is
recognised as personnel expenses in the profit or loss with a
corresponding increase in liabilities over the vesting period. The
liability is remeasured at each reporting date and at settlement
date based on the fair value of the options granted, with a
corresponding adjustment to personnel expenses.
(c) Deferred cash bonus scheme
The Bank has a deferred cash bonus scheme for senior employees.
The cost of the award is recognised to the income statement over
the period to which the performance relates.
(d) Short-term incentive plan
The Group has a short-term incentive plan payable to employees
of one of its subsidiary companies. The award of a profit share is
based on a percentage of the net profit of a Group subsidiary.
15. Earnings per ordinary share
Basic
Basic earnings per ordinary share are calculated by dividing the
profit after tax attributable to equity holders of the Company by
the weighted average number of ordinary shares 15,024,514 (2019:
14,979,812) in issue during the year (this includes Ordinary shares
and Ordinary Non-Voting shares). On 17 May 2019 the Company issued
152,621 Ordinary Non-Voting shares, of which 3,902 were allocated
to treasury shares. On 10 September 2019 and 31 March 2020 the
Company purchased another 7,408 and 7,730 Ordinary Non-Voting
shares into treasury.
Diluted
Diluted earnings per ordinary share are calculated by dividing
the dilutive profit after tax attributable to equity holders of the
Company by the weighted average number of ordinary shares in issue
during the year, as well as the number of dilutive share options in
issue during the year. The number of dilutive share options in
issue at the year end was nil (2019: nil).
2020 2019
Profit & dilutive profit attributable GBP000 GBP000
---------------------------------------------------------- -------- -------
(Loss) / profit after tax attributable to equity holders
of the Company (1,332) 6,176
---------------------------------------------------------- -------- -------
2020 2019
Basic & Diluted Earnings per share p p
---------------------------------------------------------- -------- -------
Basic Earnings per share (8.9) 41.2
---------------------------------------------------------- -------- -------
16. Cash and balances at central banks
2020 2019
Group GBP000 GBP000
---------------------------------------- --------- --------
Cash and balances at central banks 636,799 325,908
---------------------------------------- --------- --------
ECL has been assessed to be insignificant.
Surplus funds are mainly held in the Bank of England reserve
account, with the remainder held in certificates of deposit, fixed
and floating rate notes and money market deposits in investment
grade banks.
17. Loans and advances to banks
2020 2019
Group GBP000 GBP000
----------------------------------------------------------------- -------- -------
Placements with banks included in cash and cash equivalents
(note 40) 110,267 46,258
----------------------------------------------------------------- -------- -------
The table below presents an analysis of loans and advances to banks by
rating agency designation as at 31 December, based on Moody's short and
long term ratings:
2020 2019
Group GBP000 GBP000
----------------------------------------------------------------- -------- -------
Aa3 341 30,834
A1 100,748 306
A2 10 13,961
A3 3,956 20
Baa1 5,204 393
Baa2 - 736
Unrated 8 8
----------------------------------------------------------------- -------- -------
110,267 46,258
----------------------------------------------------------------- -------- -------
None of the loans and advances to banks are past due (2019: nil). ECL
has been assessed as insignificant.
2020 2019
Company GBP000 GBP000
----------------------------------------------------------------- -------- -------
Placements with banks included in cash and cash equivalents
(note 40) 15,162 15,316
----------------------------------------------------------------- -------- -------
Loans and advances to banks include bank balances of GBP15.2m (2019: GBP15.3m)
with Arbuthnot Latham & Co., Ltd. ECL has been assessed as insignificant.
18. Debt securities at amortised cost
Debt securities represent certificates of deposit.
The movement in debt securities may be summarised as follows:
2020 2019
Group GBP000 GBP000
--------------------------------------------------------------- ---------- ----------
At 1 January 442,960 342,691
Exchange difference (2,640) (27,372)
Additions 695,614 847,378
Redemptions (791,242) (719,737)
--------------------------------------------------------------- ---------- ----------
At 31 December 344,692 442,960
--------------------------------------------------------------- ---------- ----------
The table below presents an analysis of debt securities by rating agency
designation at 31 December, based on Moody's long term ratings:
2020 2019
Group GBP000 GBP000
-------------------------------------------------------------- --------- --------
Aaa 61,715 163,788
Aa1 29,315 11,390
Aa2 14,657 205,812
Aa3 41,986 50,238
A1 197,019 11,732
344,692 442,960
-------------------------------------------------------------- --------- --------
None of the debt securities are past due (2019: nil). ECL has been assessed
as immaterial.
The movement in debt securities for the Company may be
summarised as follows:
2020 2019
Company GBP000 GBP000
-------------------------------------------------------------- --------- --------
At 1 January 24,239 -
Additions - 25,000
Interest 2,111 1,264
Redemptions (2,042) (2,025)
-------------------------------------------------------------- --------- --------
At 31 December 24,308 24,239
-------------------------------------------------------------- --------- --------
The exposure relates to Arbuthnot Latham & Co., Limited, which is unrated.
The subordinated loan notes were issued on 3 June 2019 and are denominated
in Pound Sterling. The principal amount outstanding at 31 December 2020
was GBP25m (2019: GBP25m). The notes carry interest at 7.75% over the
three month LIBOR rate and are repayable at par in June 2029 unless redeemed
or repurchased earlier by the Arbuthnot Latham & Co., Limited. ECL has
been assessed as immaterial.
19. Assets classified as held for sale
Assets, or disposal groups comprising assets and liabilities,
that are expected to be recovered primarily through sale rather
than through continuing use, are classified as held for sale.
The criteria that the Group uses to determine whether an asset
is held for sale under IFRS 5 include, but are not limited to the
following:
-- Management is committed to a plan to sell
-- The asset is available for immediate sale
-- An active programme to locate a buyer is initiated
-- The sale is highly probable, within 12 months of classification as held for sale
-- The asset is being actively marketed for sale at a sales
price reasonable in relation to its fair value
Non-current assets held for sale are measured at the lower of
their carrying amount and fair value less costs to sell in
accordance with IFRS 5. Where investments that have initially been
recognised as non-current assets held for sale, because the Group
has been deemed to hold a controlling stake, are subsequently
disposed of or diluted such that the Group's holding is no longer
deemed a controlling stake, the investment will subsequently be
reclassified as fair value through profit or loss or fair value
through other comprehensive income investments in accordance with
IFRS 9. Subsequent movements will be recognised in accordance with
the Group's accounting policy for the newly adopted
classification.
Once classified as held for sale, intangible assets and
property, plant and equipment are no longer amortised or
depreciated.
Group
----------------
2020 2019
GBP000 GBP000
------------------------------------ ------- -------
Repossessed property held for sale 3,285 7,617
------------------------------------ ------- -------
3,285 7,617
------------------------------------ ------- -------
Repossessed property held for sale
In 2017 a property in Spain held as collateral on a loan was
repossessed. At the time of repossession, it was expected that the
property would be sold in 12 months and so it was recognised as
held for sale. A sale was not possible within during the year, due
to factors outside of the Group's control, however, the Group is
still pursuing a sale and therefore the property remains held for
sale.
In 2018 a further property in Spain held as collateral on a loan
was repossessed. The Group's policy was to pursue timely
realisation of the collateral in an orderly manner and the property
was recognised as an asset held for sale. It was sold in 2020 at
market value to a third party.
The remaining repossessed property is expected to be sold within
12 months and can therefore be recognised as held for sale under
IFRS 5.
20. Derivative financial instruments
All derivatives are recognised at their fair value. Fair values
are obtained using recent arm's length transactions or calculated
using valuation techniques such as discounted cash flow models at
the prevailing interest rates, and for structured notes classified
as financial instruments fair values are obtained from quoted
market prices in active markets. Derivatives are shown in the
Statement of Financial Position as assets when their fair value is
positive and as liabilities when their fair value is negative.
2020 2019
----------------------------------- -----------------------------------
Contract/ Fair Fair Contract/ Fair Fair
notional value value notional value value
amount assets liabilities amount assets liabilities
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------- ---------- -------- ------------- ---------- -------- -------------
Currency swaps 17,338 202 188 8,671 105 101
Interest rate swaps 25,292 - 461 25,530 - 218
Structured notes 1,644 1,641 - 1,644 1,699 -
--------------------- ---------- -------- ------------- ---------- -------- -------------
44,274 1,843 649 35,845 1,804 319
--------------------- ---------- -------- ------------- ---------- -------- -------------
The principal derivatives used by the Group are over the counter
exchange rate contracts. Exchange rate related contracts include
currency swaps and interest rate swaps.
A forward foreign exchange contract is an agreement to buy or
sell a specified amount of foreign currency on a specified future
date at an agreed rate. Currency swaps generally involve the
exchange of interest payment obligations denominated in different
currencies; exchange of principal can be notional or actual. The
currency swaps are settled net and therefore the fair value is
small in comparison to the contract/notional amount. Interest rate
swaps are used to hedge against the Profit or Loss impact resulting
from the movement in interest rates, due to some exposures having
fixed rate terms.
Also included in derivative financial instruments are structured
notes. The Group invested in the structured notes, which are
maturing in 2021.
The Group only uses investment graded banks as counterparties
for derivative financial instruments.
The table below presents an analysis of derivative financial instruments
contract/notional amounts by rating agency designation of
counterparty bank at 31 December, based on Moody's long
term ratings:
2020 2019
Group GBP000 GBP000
------------------------------------------------------------ ------- -------
Aa1 12,126 -
A1 32,148 35,837
A2 - 8
44,274 35,845
------------------------------------------------------------ ------- -------
21. Loans and advances to customers
Analyses of loans and advances to customers:
2020
Stage Stage Stage
1 2 3 Total
Group GBP000 GBP000 GBP000 GBP000
----------------------------------------- ---------- --------- --------- ----------
Gross loans and advances at 1 January
2020 1,506,024 66,372 31,447 1,603,843
------------------------------------------ ---------- --------- --------- ----------
Originations and repayments 4,941 (4,045) (8,982) (8,086)
Write-offs - - (3,280) (3,280)
Transfer to Stage 1 20,951 (20,951) - -
Transfer to Stage 2 (99,683) 99,683 - -
Transfer to Stage 3 (8,901) (14,712) 23,613 -
------------------------------------------ ---------- --------- --------- ----------
Gross loans and advances at 31 December
2020 1,423,332 126,347 42,798 1,592,477
------------------------------------------ ---------- --------- --------- ----------
Less allowances for ECLs (see Note 22) (725) (533) (3,370) (4,628)
Net loans and advances at 31 December
2020 1,422,607 125,814 39,428 1,587,849
------------------------------------------ ---------- --------- --------- ----------
2019
Stage Stage Stage
1 2 3 Total
Group GBP000 GBP000 GBP000 GBP000
----------------------------------------- ---------- --------- --------- ----------
Gross loans and advances at 1 January
2019 1,161,124 32,700 37,407 1,231,231
------------------------------------------ ---------- --------- --------- ----------
Originations 147,411 (12,845) (11,134) 123,432
Repayments and write-offs (49) - (2,927) (2,976)
Acquired portfolio 252,156 - - 252,156
Transfer to Stage 1 3,659 (3,659) - -
Transfer to Stage 2 (50,489) 50,489 - -
Transfer to Stage 3 (7,788) (313) 8,101 -
------------------------------------------ ---------- --------- --------- ----------
Gross loans and advances at 31 December
2019 1,506,024 66,372 31,447 1,603,843
------------------------------------------ ---------- --------- --------- ----------
Less allowances for ECLs (see Note 22) (526) (47) (4,217) (4,790)
Net loans and advances at 31 December
2019 1,505,498 66,325 27,230 1,599,053
------------------------------------------ ---------- --------- --------- ----------
For a maturity profile of loans and advances to customers, refer
to note 6.
Loans and advances to customers by division (net of ECL):
All
Mortgage Other
Banking Portfolios RAF ABL ASFL Divisions Total
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------- ---------- ------------ -------- ------- ------- ----------- ----------
Stage 1 1,030,970 223,800 74,541 87,331 5,965 - 1,422,607
Stage 2 72,626 36,794 16,394 - - - 125,814
Stage 3 30,204 8,233 991 - - - 39,428
--------------------- ---------- ------------ -------- ------- ------- ----------- ----------
At 31 December 2020 1,133,800 268,827 91,926 87,331 5,965 - 1,587,849
--------------------- ---------- ------------ -------- ------- ------- ----------- ----------
All
Mortgage Other
Banking Portfolios RAF ABL ASFL Divisions Total
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
--------------------- ---------- ------------ -------- ------- ------- ----------- ----------
Stage 1 1,003,739 306,044 100,981 75,871 7,352 11,511 1,505,498
Stage 2 65,570 - 755 - - - 66,325
Stage 3 26,078 - 1,152 - - - 27,230
--------------------- ---------- ------------ -------- ------- ------- ----------- ----------
At 31 December 2019 1,095,387 306,044 102,888 75,871 7,352 11,511 1,599,053
--------------------- ---------- ------------ -------- ------- ------- ----------- ----------
Analyses of past due loans and advances to customers by division:
2020
All
Mortgage Other
Banking Portfolios RAF ABL ASFL Divisions Total
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------- -------- ------------ ------- ------- ------- ----------- --------
Up to 30 days 10,554 6,354 1,928 - - - 18,836
-------- ------------ ------- ------- ------- ----------- --------
Stage 1 9,902 5,948 1,468 - - - 17,318
Stage 2 652 406 346 - - - 1,404
Stage 3 - - 114 - - - 114
-------- ------------ ------- ------- ------- ----------- --------
30 - 60 days 9 4,187 274 - - - 4,470
-------- ------------ ------- ------- ------- ----------- --------
Stage 1 9 - - - - - 9
Stage 2 - 4,187 209 - - - 4,396
Stage 3 - - 65 - - - 65
-------- ------------ ------- ------- ------- ----------- --------
60 - 90 days 9,467 1,788 475 - - - 11,730
-------- ------------ ------- ------- ------- ----------- --------
Stage 1 - - 58 - - - 58
Stage 2 9,467 1,788 104 - - - 11,359
Stage 3 - - 313 - - - 313
-------- ------------ ------- ------- ------- ----------- --------
Over 90 days 65,226 7,125 1,096 - - - 73,447
-------- ------------ ------- ------- ------- ----------- --------
Stage 2 29,871 - 276 - - - 30,147
Stage 3 35,355 7,125 820 - - - 43,300
-------- ------------ ------- ------- ------- ----------- --------
At 31 December 85,256 19,454 3,773 - - - 108,483
---------------- -------- ------------ ------- ------- ------- ----------- --------
Analyses of past due loans and advances to customers by division:
2019
All
Mortgage Other
Banking Portfolios RAF ABL ASFL Divisions Total
Group GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
---------------- -------- ------------ ------- ------- ------- ----------- --------
Up to 30 days 32,783 5,196 1,608 - - - 39,587
-------- ------------ ------- ------- ------- ----------- --------
Stage 1 29,389 5,196 1,395 - - - 35,980
Stage 2 3,394 - 1 - - - 3,395
Stage 3 - - 212 - - - 212
-------- ------------ ------- ------- ------- ----------- --------
30 - 60 days 1,934 2,404 526 - - - 4,864
-------- ------------ ------- ------- ------- ----------- --------
Stage 1 35 2,404 151 - - - 2,590
Stage 2 1,899 - 203 - - - 2,102
Stage 3 - - 172 - - - 172
-------- ------------ ------- ------- ------- ----------- --------
60 - 90 days 70 1,688 342 - - - 2,100
-------- ------------ ------- ------- ------- ----------- --------
Stage 1 - 1,688 110 - - - 1,798
Stage 2 70 - 128 - - - 198
Stage 3 - - 104 - - - 104
-------- ------------ ------- ------- ------- ----------- --------
Over 90 days 61,873 21,516 1,333 - - - 84,722
-------- ------------ ------- ------- ------- ----------- --------
Stage 1 - 21,516 69 - - - 21,585
Stage 2 28,664 - 258 - - - 28,922
Stage 3 33,209 - 1,006 - - - 34,215
-------- ------------ ------- ------- ------- ----------- --------
At 31 December 96,660 30,804 3,809 - - - 131,273
---------------- -------- ------------ ------- ------- ------- ----------- --------
Loans and advances to customers include finance lease receivables
as follows:
2020 2019
Group GBP000 GBP000
------------------------------------------------------------------- --------- ---------
Gross investment in finance lease receivables:
- No later than 1 year 12,894 40,696
- Later than 1 year and no later than 5 years 97,062 78,013
- Later than 5 years 1,679 676
------------------------------------------------------------------- --------- ---------
111,635 119,385
Unearned future finance income on finance leases (19,708) (16,497)
------------------------------------------------------------------- --------- ---------
Net investment in finance leases 91,927 102,888
------------------------------------------------------------------- --------- ---------
The net investment in finance leases may be analysed as
follows:
- No later than 1 year 30,770 32,818
- Later than 1 year and no later than 5 years 60,824 69,441
- Later than 5 years 333 629
------------------------------------------------------------------- --------- ---------
91,927 102,888
------------------------------------------------------------------- --------- ---------
(b) Loans and advances renegotiated
Restructuring activities include external payment arrangements,
modification and deferral of payments. Following restructuring, a
previously overdue customer account is reset to a normal status and
managed together with other similar accounts. Restructuring
policies and practices are based on indicators or criteria which,
in the judgement of management, indicate that payment will most
likely continue. These policies are kept under continuous review.
Renegotiated loans that would otherwise be past due or impaired
totalled GBPnil (2019: GBPnil).
The Bank has continued to support clients that have suffered
financial difficulty as a result of the pandemic. The use of
COVID-19 relief mechanisms will not automatically merit
identification of SICR and trigger a Stage 2 classification in
isolation, where an individual borrower received COVID-19 relief,
which were primarily in the form of payment holidays.
An individual borrower was assessed to have a significant
increase in credit risk where they were considered to have suffered
long term financial difficulty. They were considered to have
suffered long term financial difficulty based on individual
circumstances or where they had received more than two payment
holidays or where a payment holiday given was in excess of 6
months. Where an individual borrower is considered to have suffered
long term financial difficulty they were transferred to Stage
2.
(c) Collateral held
Collateral is measured at fair value less costs to sell. Most of
the loans are secured by property. The fair value of the collateral
held against loans and advances in Stage 3 is GBP60.6m (2019:
GBP38.6m), against loans of GBP41.5m (2019: GBP29.9m). The weighted
average loan-to-value of loans and advances in Stage 3 is 73%
(2019: 75%).
22. Allowances for impairment of loans
and advances
An analysis of movements in the allowance
for ECLs (2020):
Stage Stage Stage
1 2 3 Total
Group GBP000 GBP000 GBP000 GBP000
------------------------------------------------- -------- ------- -------- --------
At 1 January 2020 527 47 4,216 4,790
-------------------------------------------------- -------- ------- -------- --------
Transfer to Stage 1 5 (5) - -
Transfer to Stage 2 (17) 17 - -
Current year charge 139 145 1,613 1,897
Adjustment due to variation in expected
future cash flows (96) - 700 604
Change in assumptions 308 371 90 769
Financial assets that have been derecognised - - (596) (596)
Repayments and write-offs (141) (42) (2,653) (2,836)
-------------------------------------------------- -------- ------- -------- --------
At 31 December 2020 725 533 3,370 4,628
-------------------------------------------------- -------- ------- -------- --------
The ECL requirement increased significantly, primarily in Stage 1 and Stage
2 exposures, in anticipation of credit deterioration, reflecting the severity
of the economic impact arising from COVID-19. The impact of the COVID-19
scenarios and weighting adjustments has resulted in a GBP769k increase
in ECL from the pre COVID-19 scenarios, primarily driven by forecasts for
a prolonged period of UK unemployment.
Estimated effects from the significant support measures provided by the
Group, central banks and governments across the
Group's key markets as a result of the COVID-19 pandemic have been factored
into the calculation of the Group's loan
impairment charge.
An analysis of movements in the allowance
for ECLs (2019):
Stage Stage Stage
1 2 3 Total
Group GBP000 GBP000 GBP000 GBP000
---------------------------------------------- -------- ------- -------- --------
At 1 January 2019 1,606 8 4,961 6,575
----------------------------------------------- -------- ------- -------- --------
Transfer to Stage 2 (2) 2 - -
Transfer to Stage 3 (5) (1) 5 (1)
Current year charge 281 42 903 1,226
Adjustment due to variation in expected
future cash flows - - 134 134
Change in assumptions (1,353) - 223 (1,130)
Financial assets that have been derecognised - - (853) (853)
Repayments and write-offs - (4) (1,157) (1,161)
----------------------------------------------- -------- ------- -------- --------
At 31 December 2019 527 47 4,216 4,790
----------------------------------------------- -------- ------- -------- --------
23. Other assets
2020 2019
Group GBP000 GBP000
-------------------------------- ------- -------
Trade receivables 5,458 4,625
Inventory 84,722 75,221
Prepayments and accrued income 6,108 6,597
-------------------------------- ------- -------
96,288 86,443
-------------------------------- ------- -------
Inventory
Inventory is measured at the lower of cost or net realisable
value. The cost of inventories comprises all costs of purchase,
costs of conversion and other costs incurred in bringing the
inventories to their present location and condition. Net realisable
value is the estimated selling price in the ordinary course of
business less the estimated costs of completion and the estimated
costs necessary to make the sale.
Pinnacle Universal is a special purpose vehicle, 100% owned by
the Bank, which owns land that is currently in the process of being
redeveloped with a view to selling off as individual residential
plots. The proceeds from the sale of these plots will be used to
repay the outstanding loans.
Land acquired through repossession of collateral which is
subsequently held in the ordinary course of business with a view to
develop and sell is accounted for as inventory.
In 2019 a property in Spain and in 2020 a property in France,
held as collateral on loans, were repossessed. The Group's
intention is to develop and sell the properties and have therefore
been recognised as inventory. The value of inventory for
repossessed collateral at 31 December is GBP17.5m (2019:
GBP12.0m).
In 2019 two properties were reclassified from investment
property to inventory due to being under development with a view to
sell, at 31 December 2020 they were valued at cost of GBP67.2m
(2019: GBP63.2m).
2020 2019
Company GBP000 GBP000
-------------------------------- ------- -------
Prepayments and accrued income 103 115
-------------------------------- ------- -------
103 115
-------------------------------- ------- -------
24. Financial investments
2020 2019
Group GBP000 GBP000
------------------------------------------------------------- ------- -------
Designated at fair value through profit and loss
- Debt securities 138 156
Designated at fair value through other comprehensive income
- Listed securities 15,925 29,116
- Unlisted securities 2,432 1,647
------------------------------------------------------------- ------- -------
Total financial investments 18,495 30,919
------------------------------------------------------------- ------- -------
Listed securities
The Group holds investments in listed securities which are
valued based on quoted prices.
On 8 August 2018, ABG lost significant influence over STB. At
this date the interest in associate was de-recognised and the
shares held in STB were marked to market and disclosed as a
financial investment. Since then the shareholding was reduced from
15.53% to 9.76%. The carrying value at year end is GBP15.9m (2019:
GBP29.1m) and GBPnil (2019: GBP1.5m) of dividends were received in
the year.
The shares were designated as FVOCI for strategic reasons. The
shares are measured at fair value in the Statement of Financial
Position with fair value gains/losses recognised in OCI.
Debt securities
The Group has made an investment in an unlisted special purpose
vehicle, set up to acquire and enhance the value of a commercial
property through its 100% owned subsidiary. During 2018 the
subsidiary company was sold and under the terms of the sale
agreement the buyer agreed to purchase 100% of the share capital
and reimburse all outstanding loans. The proceeds of the sale have
been distributed to the investors, except for the amount withheld
for the general and specific warranties (which will be released in
three instalments at 18 month intervals included as a condition of
the sale agreement). A distribution of GBP8k (2019: GBPnil) was
received and a loss of GBP14k (2019: loss of GBP9k) recognised in
profit or loss during the year. The investment has been valued at
GBP138k (2019: GBP156k). These securities are designated at FVPL.
They are measured at fair value in the Statement of Financial
Position with fair value gains/losses recognised in the profit or
loss.
Unlisted securities
On 23 June 2016 Arbuthnot Latham received EUR1.3m cash
consideration following Visa Inc.'s completion of the acquisition
of Visa Europe. As part of the deal Arbuthnot Latham also received
preference shares in Visa Inc., these have been valued at their
future conversion value into Visa Inc. common stock.
During the year, as part of the fourth anniversary of the
closing of the Visa Europe transaction, an assessment was performed
of the ongoing risk of liability to Visa. As part of the
adjustment, Visa awarded the Group 59 preference shares with a
carrying value of GBP920k. These can be automatically converted
into freely tradeable Class A common stock.
Management have assessed the sum of the fair value of the
Group's investment as GBP1.6m (2019: GBP1.2m). This valuation
includes a 31% haircut on the original preference shares.
The Group has designated its investment in the security as
FVOCI. Dividends received during the year amounted to GBP17k (2019:
GBP7k).
A further investment in an unlisted investment vehicle was made
in 2020. The carrying value at year end is GBP0.8m (2019: GBP0.5m)
and no dividends were received in the year. The increase in value
is due to additional contributions to the fund and the successful
performance of the underlying investments.
All unlisted securities have been designated as FVOCI as they
are held for strategic reasons. These securities are measured at
fair value in the Statement of Financial Position with fair value
gains/losses recognised in OCI.
2020 2019
Company GBP000 GBP000
-------------------------------------------------- ------- -------
Financial investments comprise:
- Listed securities (at fair value through OCI) 14,171 25,913
Total financial investments 14,171 25,913
-------------------------------------------------- ------- -------
25. Deferred taxation
Deferred tax is provided in full on temporary differences
arising between the tax bases of assets and liabilities and their
carrying amounts in the consolidated financial statements. However,
deferred tax is not accounted for if it arises from the initial
recognition of goodwill, the initial recognition of an asset or
liability in a transaction other than a business combination that
at the time of the transaction affects neither accounting nor
taxable profit or loss, and differences relating to investments in
subsidiaries to the extent that they probably will not reverse in
the foreseeable future. Deferred tax is determined using tax rates
(and laws) that have been enacted or substantively enacted by the
Statement of Financial Position date and are expected to apply when
the related deferred tax asset is realised or the deferred tax
liability is settled.
Deferred tax assets and liabilities are offset if there is a
legally enforceable right to offset current tax liabilities and
assets, and they relate to taxes levied by the same tax authority
on the same taxable entity, or on different tax entities, when they
intend to settle current tax liabilities and assets on a net basis
or the tax assets and liabilities will be realised
simultaneously.
Deferred tax assets are recognised where it is probable that
future taxable profits will be available against which the
temporary differences can be utilised.
The deferred tax asset comprises:
2020 2019
Group GBP000 GBP000
------------------------------------------------------------ ------- -------
Accelerated capital allowances and other short-term timing
differences (579) (269)
Movement in fair value of financial investments FVOCI (117) (48)
Unutilised tax losses 1,425 1,740
IFRS 9 adjustment* 280 392
------------------------------------------------------------ ------- -------
Deferred tax asset 1,009 1,815
------------------------------------------------------------ ------- -------
At 1 January 1,815 1,490
Other Comprehensive Income - FVOCI (69) 18
Profit and loss account - accelerated capital allowances
and other short-term timing differences (310) (202)
Profit and loss account - tax losses (315) 729
IFRS 9 adjustment* (112) (220)
------------------------------------------------------------ ------- -------
Deferred tax asset at 31 December 1,009 1,815
------------------------------------------------------------ ------- -------
* This relates to the timing difference on the adoption
of IFRS 9.
2020 2019
Company GBP000 GBP000
------------------------------------------------------------ ------- -------
Accelerated capital allowances and other short-term timing
differences 5 1
Movement in faie value of financial investments 112 112
Unutilised tax losses 278 278
------------------------------------------------------------ ------- -------
Deferred tax asset 395 391
------------------------------------------------------------ ------- -------
At 1 January 391 113
Profit and loss account - accelerated capital allowances
and other short-term timing differences 4 111
Profit and loss account - tax losses - 167
------------------------------------------------------------ ------- -------
Deferred tax asset at 31 December 395 391
------------------------------------------------------------ ------- -------
Deferred tax assets are recognised for tax losses to the extent
that the realisation of the related tax benefit through future
taxable profits is probable.
26. Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of an acquisition
over the fair value of the Group's share of the net identifiable
assets of the acquired subsidiary at the date of acquisition.
Goodwill on acquisitions of subsidiaries is included in 'intangible
assets'. Gains and losses on the disposal of an entity include the
carrying amount of goodwill relating to the entity sold.
The Group reviews the goodwill for impairment at least annually
or more frequently when events or changes in economic circumstances
indicate that impairment may have taken place and carries goodwill
at cost less accumulated impairment losses. Assets are grouped
together in the smallest group of assets that generates cash
inflows from continuing use that are largely independent of the
cash inflows of other assets or groups of assets (the
"cash-generating unit" or "CGU"). For impairment testing purposes
goodwill cannot be allocated to a CGU that is greater than a
reported operating segment. CGUs to which goodwill has been
allocated are aggregated so that the level at which impairment is
tested reflects the lowest level at which goodwill is monitored for
internal reporting purposes. Goodwill acquired in a business
combination is allocated to groups of CGUs that are expected to
benefit from the synergies of the combination. The test for
impairment involves comparing the carrying value of goodwill with
the present value of pre-tax cash flows, discounted at a rate of
interest that reflects the inherent risks of the CGU to which the
goodwill relates, or the CGU's fair value if this is higher.
(b) Computer software
Acquired computer software licences are capitalised on the basis
of the costs incurred to acquire and bring to use the specific
software. These costs are amortised on a straight line basis over
the expected useful lives (three to fifteen years).
Costs associated with maintaining computer software programs are
recognised as an expense as incurred.
Costs associated with developing computer software which are
assets in the course of construction, which management has assessed
to not be available for use, are not amortised.
During the year the company developed software for customer
relationship management. Relevant costs have been capitalised
accordingly and will be amortised across its useful economic
life.
(c) Other intangibles
Other intangibles include trademarks, customer relationships,
broker relationships, technology and banking licences acquired.
These costs are amortised on a straight line basis over the
expected useful lives (three to fourteen years).
Computer Other
Goodwill software intangibles Total
Group GBP000 GBP000 GBP000 GBP000
-------------------------- --------- ---------- ------------- --------
Cost
At 1 January 2019 5,202 13,442 2,562 21,206
Additions - 5,552 - 5,552
At 31 December 2019 5,202 18,994 2,562 26,758
-------------------------- --------- ---------- ------------- --------
Additions - 6,392 - 6,392
At 31 December 2020 5,202 25,386 2,562 33,150
-------------------------- --------- ---------- ------------- --------
Accumulated amortisation
At 1 January 2019 - (4,045) (623) (4,668)
Amortisation charge - (1,761) (247) (2,008)
-------------------------- --------- ---------- ------------- --------
At 31 December 2019 - (5,806) (870) (6,676)
-------------------------- --------- ---------- ------------- --------
Amortisation charge - (2,582) (246) (2,828)
At 31 December 2020 - (8,388) (1,116) (9,504)
-------------------------- --------- ---------- ------------- --------
Net book amount
-------------------------- --------- ---------- ------------- --------
At 31 December 2019 5,202 13,188 1,692 20,082
-------------------------- --------- ---------- ------------- --------
At 31 December 2020 5,202 16,998 1,446 23,646
-------------------------- --------- ---------- ------------- --------
Significant management judgements are made in estimations, to
evaluate whether an impairment of goodwill is necessary. Impairment
testing is performed at CGU level and the following two items, with
judgements surrounding them, have a significant impact on the
estimations used in determining the necessity of an impairment
charge:
-- Future cash flows - Cash flow forecasts reflect management's
view of future business forecasts at the time of the assessment. A
detailed three year budget is done every year and management also
uses judgement in applying a growth rate. The accuracy of future
cash flows is subject to a high degree of uncertainty in volatile
market conditions. During such conditions, management would perform
impairment testing more frequently than annually to ensure that the
assumptions applied are still valid in the current market
conditions.
-- Discount rate - Management also apply judgement in
determining the discount rate used to discount future expected cash
flows. The discount rate is derived from the cost of capital for
each CGU.
The recoverable amount of an asset or CGU is the greater of its
value in use and its fair value less costs to sell. There are
currently two CGUs (2019: two) with goodwill attached; the core
Arbuthnot Latham CGU (GBP1.7m) and RAF CGU (GBP3.5m).
Management considers the value in use for the Arbuthnot Latham
CGU to be the discounted cash flows over 3 years with a terminal
value (2019: 3 years with a terminal value). The 3 year discounted
cash flows with a terminal value are considered to be appropriate
as the goodwill relates to an ongoing well established business and
not underlying assets with finite lives. The terminal value is
calculated by applying a discounted perpetual growth model to the
profit expected in 2023 as per the approved 3 year plan. A growth
rate of 6.2% (2019: 8.1%) was used for income and 7.1% (2019:
10.8%) for expenditure from 2021 to 2023 (these rates were the best
estimate of future forecasted performance), while a 3% (2019: 3%)
percent growth rate for income and expenditure (a more conservative
approach was taken for latter years as these were not budgeted for
in detail as per the three year plan approved by the Board of
Directors) was used for cash flows after the approved 3 year
plan.
Management considers the value in use for the RAF CGU to be the
discounted cash flows over 3 years with a terminal value. The 3
year discounted cash flows with a terminal value are considered to
be appropriate as the goodwill relates to an ongoing, well
established, business and not underlying assets with finite lives.
The terminal value is calculated by applying a discounted perpetual
growth model to the profit expected in 2023 as per the approved
budget. A growth rate of 3% (2019: 3%) was used (this rate was the
best estimate of future forecasted performance).
The growth rates used are conservative and below the forecast UK
growth rate of 5%. The uncertainty of the COVID-19 pandemic has
significantly reduced economic growth in 2020. However, the
country's general return to economic stability should ensure that
the Bank's current growth strategy supported by capital available
at parent level will allow the Group to achieve reasonable economic
growth.
Cash flows were discounted at a pre-tax rate of 12% (2019: 12%)
to their net present value. The discount rate of 12% is considered
to be appropriate after evaluating current market assessments of
the time value of money and the risks specific to the assets or
CGUs.
Currently, the value in use and fair value less costs to sell of
both CGUs exceed the carrying values of the associated goodwill and
as a result no sensitivity analysis was performed.
Computer
software
Company GBP000
-------------------------- ----------
Cost
At 1 January 2019 7
At 31 December 2019 7
-------------------------- ----------
At 31 December 2020 7
-------------------------- ----------
Accumulated amortisation
At 1 January 2019 (1)
Amortisation charge (1)
At 31 December 2019 (2)
-------------------------- ----------
Amortisation charge (1)
At 31 December 2020 (3)
-------------------------- ----------
Net book amount
-------------------------- ----------
At 31 December 2019 5
-------------------------- ----------
At 31 December 2020 4
-------------------------- ----------
27. Property, plant and equipment
Land and buildings comprise mainly branches and offices and are
stated at the latest valuation with subsequent additions at cost
less depreciation. Plant and equipment is stated at historical cost
less depreciation. Historical cost includes expenditure that is
directly attributable to the acquisition of the items.
Land is not depreciated. Depreciation on other assets is
calculated using the straight-line method to allocate their cost to
their residual values over their estimated useful lives, applying
the following annual rates, which are subject to regular
review:
Leasehold improvements 3 to 20 years
Office equipment 3 to 10 years
Computer equipment 3 to 5 years
Motor vehicles 4 years
Leasehold improvements are depreciated over the term of the
lease (until the first break clause). Gains and losses on disposals
are determined by deducting carrying amount from proceeds. These
are included in the Statement of Comprehensive Income.
Computer
and
Leasehold other Motor
improvements equipment Vehicles Total
Group GBP000 GBP000 GBP000
--------------------- -------------- ----------- ---------- --------
Cost or valuation
At 1 January 2019 6,779 3,668 91 10,538
Additions 609 1,341 - 1,950
At 31 December 2019 7,388 5,009 91 12,488
---------------------- -------------- ----------- ---------- --------
Additions 65 618 - 683
Disposals (20) (77) - (97)
At 31 December 2020 7,433 5,550 91 13,074
---------------------- -------------- ----------- ---------- --------
At 1 January 2019 (3,000) (2,219) (15) (5,234)
Depreciation charge (778) (640) (23) (1,441)
At 31 December 2019 (3,778) (2,859) (38) (6,675)
---------------------- -------------- ----------- ---------- --------
Depreciation charge (704) (842) (22) (1,568)
Disposals 20 54 - 74
At 31 December 2020 (4,462) (3,647) (60) (8,169)
---------------------- -------------- ----------- ---------- --------
Net book amount
--------------------- -------------- ----------- ---------- --------
At 31 December 2019 3,610 2,150 53 5,813
---------------------- -------------- ----------- ---------- --------
At 31 December 2020 2,971 1,903 31 4,905
---------------------- -------------- ----------- ---------- --------
Computer
and
other Motor
equipment Vehicles Total
Company GBP000 GBP000 GBP000
-------------------------- ----------- ---------- -------
Cost or valuation
At 1 January 2019 217 91 308
At 31 December 2019 217 91 308
-------------------------- ----------- ---------- -------
At 31 December 2020 217 91 308
-------------------------- ----------- ---------- -------
Accumulated depreciation
At 1 January 2019 (85) (15) (100)
Depreciation charge (1) (23) (24)
At 31 December 2019 (86) (38) (124)
-------------------------- ----------- ---------- -------
Depreciation charge (1) (22) (23)
At 31 December 2020 (87) (60) (147)
-------------------------- ----------- ---------- -------
Net book amount
-------------------------- ----------- ---------- -------
At 31 December 2019 131 53 184
-------------------------- ----------- ---------- -------
At 31 December 2020 130 31 161
-------------------------- ----------- ---------- -------
28. Right-of-use assets
At inception or on reassessment of a contract, the Group
assesses whether a contract is, or contains, a lease. A contract
is, or contains a lease if the contract conveys the right to
control the use of an identified asset for a period of time in
exchange for consideration. To assess whether a contract conveys
the right to control the use of an identified asset, the Group
assesses whether:
-- the contract involves the use of an identified asset. This
may be specified explicitly or implicitly, and should be physically
distinct or represent substantially all of the capacity of a
physically distinct asset. If the supplier has a substantive
substitution right, then the asset is not identified;
-- the Group has the right to obtain substantially all of the
economic benefits from use of the asset throughout the period of
use; and
-- the Group has the right to direct the use of the asset. The
Group has this right when it has the decision-making rights that
are most relevant to changing how and for what purpose the asset is
used.
At inception or on reassessment of a contract that contains a
lease component, the Group allocates the consideration in the
contract to each lease component on the basis of their relative
stand-alone prices.
(a) As a lessee
The Group recognises a right-of-use asset and a lease liability
at the lease commencement date. The right-of-use asset is initially
measured at cost, which comprises the initial amount of the lease
liability adjusted for any lease payments made at or before the
commencement date, plus any initial direct costs incurred and an
estimate of costs to dismantle and remove the underlying asset or
to restore it or its site, less any lease incentives received.
The right-of-use asset is subsequently depreciated using the
straight-line method from the commencement date to the earlier of
the end of the useful life of the right-of-use asset or the end of
the lease term. The estimated useful lives of right-of-use assets
are determined on the same basis as those of property and
equipment. In addition, the right-of-use asset is periodically
reduced by impairment losses, if any, and adjusted for certain
remeasurements of the lease liability.
Practical exemptions
The Group has elected not to recognise right-of-use assets and
lease liabilities for short-term leases of machinery that have a
lease term of 12 months or less and leases of low value assets. The
Group recognises the lease payments associated with these leases as
an expense on a straight-line basis over the lease term.
(b) As a lessor
Assets leased to customers under agreements which transfer
substantially all the risks and rewards of ownership, with or
without ultimate legal title, are classified as finance leases.
When assets are held subject to finance leases, the present value
of the lease payments is recognised as a receivable. The difference
between the gross receivable and the present value of the
receivable is recognised as unearned finance income. Lease income
is recognised over the term of the lease using the net investment
method, which reflects a constant periodic rate of return.
Assets leased to customers under agreements which do not
transfer substantially all the risks and rewards of ownership are
classified as operating leases. When assets are held subject to
operating leases, the underlying assets are held at cost less
accumulated depreciation. The assets are depreciated down to their
estimated residual values on a straight-line basis over the lease
term. Lease rental income is recognised on a straight line basis
over the lease term.
Breakdown of right-of-use assets:
Investment
property Properties Equipment Total
Group GBP000 GBP000 GBP000 GBP000
-------------------------- -------------- -------------- ------------ ---------
At 1 January 2019 8,108 14,036 - 22,144
Additions - - 543 543
Amortisation - (2,654) (89) (2,743)
Transfers* (8,108) 8,108 - -
-------------------------- -------------- -------------- ------------ ---------
At 31 December 2019 - 19,490 454 19,944
-------------------------- -------------- -------------- ------------ ---------
Additions - 346 - 346
Amortisation - (2,406) (181) (2,587)
At 31 December 2020 - 17,430 273 17,703
-------------------------- -------------- -------------- ------------ ---------
*The leasehold investment properties were transferred to inventory during
2019 and as a result have been reclassified to properties within the
table above.
In the year, the Group received GBP0.5m (2019: GBP2.1m) of rental income
from subleasing right-of-use assets through operating leases.
The Group recognised GBP851k (2019: GBP976k) of interest expense related
to lease liabilities. The Group also recognised GBP413k (2019: GBP439k)
of expense in relation to leases with a duration of less than 12 months.
29. Investment property
Investment property is initially measured at cost. Transaction
costs are included in the initial measurement. Subsequently,
investment property is measured at fair value, with any change
therein recognised in profit and loss within other income.
2020 2019
Group GBP000 GBP000
----------------------- ------- ---------
Opening balance 6,763 67,081
Additions - 2,901
Transfer - (63,219)
Fair value adjustment (213) -
----------------------- ------- ---------
At 31 December 2020 6,550 6,763
----------------------- ------- ---------
In 2019 two properties were reclassified from investment
property to inventory due to being under development with a view to
sell. At 31 December 2019 they were valued at cost of GBP63.2m.
GBP2.9m of additions in 2019 related to development costs of the St
Philips Place property, which was one of the properties
reclassified to inventory.
Crescent Office Park, Bath
In November 2017, a Property Fund, based in Jersey and owned by
the Group, acquired a freehold office building in Bath. The
property comprises 25,528 square ft. over ground and two upper
floors with parking spaces. The property was acquired for GBP6.35m.
On the date of acquisition, the property was being multi-let to
tenants and was at full capacity.
In 2017, the Fund was recognised as an asset held for sale under
IFRS 5 and therefore not consolidated in the financial statements.
At 31 December 2019 it was consolidated into the Group as it no
longer met the IFRS 5 criteria and is recognised as an investment
property. The Group has elected to apply the fair value model.
The Group recognised GBP0.4m (2019: GBP0.5m) rental income
during the year. The property remained tenanted during 2020.
30. Deposits from banks
2020 2019
Group GBP000 GBP000
------------------------------------------------- -------------- --------------
Deposits from other banks 230,090 230,421
------------------------------------------------- -------------- --------------
The Term Funding Scheme ("TFS") was announced by the Bank of England on
4 August 2016 and became effective from 19 September 2016. The scheme
is now closed. The TFS allows participants to borrow central bank reserves
in exchange for eligible collateral. Deposits from banks include GBP225m
(2019: GBP225m) obtained through TFS. For a maturity profile of deposits
from banks, refer to Note 6.
31. Deposits from customers
2020 2019
Group GBP000 GBP000
----------------------------- ---------- ----------
Current/demand accounts 1,496,483 1,134,021
Notice accounts 157,934 102,567
Term deposits 710,790 848,315
----------------------------- ---------- ----------
2,365,207 2,084,903
----------------------------- ---------- ----------
Included in customer accounts are deposits of GBP16.4m (2019:
GBP33.2m) held as collateral for loans and advances. The fair value
of these deposits approximates their carrying value.
For a maturity profile of deposits from customers, refer to Note
6.
32. Other liabilities
2020 2019
Group GBP000 GBP000
------------------------------ ------- -------
Trade payables 1,949 2,023
Accruals and deferred income 5,657 11,477
------------------------------ ------- -------
7,606 13,500
------------------------------ ------- -------
2020 2019
Company GBP000 GBP000
-------------------------------- ------- -------
Trade payables 221 289
Due to subsidiary undertakings 2,911 824
Accruals and deferred income 427 1,950
-------------------------------- ------- -------
3,559 3,063
-------------------------------- ------- -------
33. Lease liabilities
The lease liability is initially measured at the present value
of the lease payments that are not paid at the commencement date,
discounted using the interest rate implicit in the lease or, if
that rate cannot be readily determined, the Group's incremental
borrowing rate. Primarily, the Group uses its incremental borrowing
rate as the discount rate.
Lease payments included in the measurement of the lease
liability comprise the following:
-- fixed payments, including in-substance payments;
-- variable lease payments that depend on an index or a rate,
initially measured using the index or rates as at the commencement
date;
-- amounts expected to be payable under a residual value guarantee.
The lease liability is measured at amortised cost using the
effective interest method. It is remeasured when there is a change
in future lease payments arising from a change in index or rate, if
there is a change in the Group's estimate of the amount expected to
be payable under a residual value guarantee.
When the lease liability is remeasured in this way, a
corresponding adjustment is made to the carrying amount of the
right-of-use asset, or is recorded in the statement of
comprehensive income if the carrying amount of the right-of-use
asset has been reduced to zero.
Properties Equipment Total
Group GBP000 GBP000 GBP000
--------------------------------------------- ----------- ---------- --------
At 1 January 2019 22,732 - 22,732
Additions - 539 539
Interest expense 965 11 976
Lease payments (3,677) (139) (3,816)
---------------------------------------------- ----------- ---------- --------
At 31 December 2019 20,020 411 20,431
---------------------------------------------- ----------- ---------- --------
Additions 508 - 508
Interest expense 864 17 881
Lease payments (3,322) (193) (3,515)
---------------------------------------------- ----------- ---------- --------
At 31 December 2020 18,070 235 18,305
---------------------------------------------- ----------- ---------- --------
Maturity analysis
2020 2019
Group GBP000 GBP000
--------------------------------------------- ----------- ---------- --------
Less than one year 3,551 3,571
One to five years 8,830 12,617
More than five years 58,317 58,806
---------------------------------------------- ----------- ---------- --------
Total undiscounted lease liabilities at 31
December 70,698 74,994
---------------------------------------------- ----------- ---------- --------
Lease liabilities included in the statement
of financial position at 31 December 18,305 20,431
---------------------------------------------- ----------- ---------- --------
Current 2,766 2,610
Non-current 15,539 17,821
---------------------------------------------- ----------- ---------- --------
34. Issued debt securities
Issued financial instruments or their components are classified
as liabilities where the contractual arrangement results in the
Group having a present obligation to either deliver cash or another
financial asset to the holder, to exchange financial instruments on
terms that are potentially unfavourable.
Financial liabilities, other than trading liabilities at fair
value, are carried at amortised cost using the effective interest
rate method as set out in the policy in Note 8.
2020 2019
Group and Company GBP000 GBP000
------------------------- ------- -------
Subordinated loan notes 37,656 36,837
------------------------- ------- -------
Euro subordinated loan notes
The subordinated loan notes were issued on 7 November 2005 and
are denominated in Euros. The principal amount outstanding at 31
December 2020 was EUR15,000,000 (2019: EUR15,000,000). The notes
carry interest at 3% over the interbank rate for three month
deposits in euros and are repayable at par in August 2035 unless
redeemed or repurchased earlier by the Company.
The contractual undiscounted amount that will be required to be
paid at maturity of the above debt securities is EUR15,000,000.
Given the fact that the Group has never been subject to a
published credit rating by any of the relevant agencies and the
notes in issue are not quoted, it is not considered possible to
estimate a fair value for these notes.
Subordinated loan notes
The subordinated loan notes were issued on 3 June 2019 and are
denominated in Pound Sterling. The principal amount outstanding at
31 December 2020 was GBP25m (2019: GBP25m). The notes carry
interest at 7.75% over the three month LIBOR rate and are repayable
at par in June 2029 unless redeemed or repurchased earlier by the
Company.
The contractual undiscounted amount that will be required to be
paid at maturity of the above debt securities is GBP25m.
Given the fact that the Group has never been subject to a
published credit rating by any of the relevant agencies and the
notes in issue are not quoted, it is not considered possible to
estimate a fair value for these notes.
35. Contingent liabilities and commitments
Financial guarantees and loan commitments policy
Financial guarantees represent undertakings that the Group will
meet a customer's obligation to third parties if the customer fails
to do so. Commitments to extend credit represent unused portions of
authorisations to extend credit in the form of loans, guarantees or
letters of credit. The Group is theoretically exposed to loss in an
amount equal to the total guarantees or unused commitments.
However, the likely amount of loss is expected to be significantly
less; most commitments to extend credit are contingent upon
customers maintaining specific credit standards. Liabilities under
financial guarantee contracts are initially recorded at their fair
value, and the initial fair value is amortised over the life of the
financial guarantee. Subsequently, the financial guarantee
liabilities are measured at the higher of the initial fair value,
less cumulative amortisation, and the best estimate of the
expenditure to settle obligations.
Provisions and contingent liabilities policy
Provisions are recognised when the Group has a present legal or
constructive obligation as a result of a past event, it is probable
that an outflow of economic resources will be required from the
Group and amounts can be reliably measured.
Onerous contract provisions are recognised for losses on
contracts where the forecast costs of fulfilling the contract
throughout the contract period exceed the forecast income
receivable. In assessing the amount of the loss to provide on any
contract, account is taken of the Group's forecast results which
the contract is servicing. The provision is calculated based on
discounted cash flows to the end of the contract.
Contingent liabilities are disclosed when the Group has a
present obligation as a result of a past event, but the probability
that it will be required to settle that obligation is more than
remote, but not probable.
Contingent liabilities
The Group is subject to extensive regulation in the conduct of
its business. A failure to comply with applicable regulations could
result in regulatory investigations, fines and restrictions on some
of the Group's business activities or other sanctions. The Group
seeks to minimise this risk through the adoption and compliance
with policies and procedures, continuing to refine controls over
business practices and behaviour, employee training, the use of
appropriate documentation, and the involvement of outside legal
counsel where appropriate.
Capital commitments
At 31 December 2020, the Group had capital commitments of GBP50k
(2019: GBP460k) in respect of a contribution in an equity
investment.
Credit commitments
The contractual amounts of the Group's off-balance sheet
financial instruments that commit it to extend credit to customers
are as follows:
2020 2019
Group GBP000 GBP000
-------------------------------------------------- -------- --------
Guarantees and other contingent liabilities 6,248 6,401
Commitments to extend credit:
- Original term to maturity of one year or less 308,427 190,064
-------------------------------------------------- -------- --------
314,675 196,465
-------------------------------------------------- -------- --------
36. Share capital
Ordinary share capital
Number Share Share
of shares Capital premium
Group and Company GBP000 GBP000
----------------------------------- ----------- --------- ---------
At 1 January 2019 15,279,322 153 -
At 31 December 2019 & 2020 15,279,322 153 -
----------------------------------- ----------- --------- ---------
Ordinary non-voting share capital
Number Share Share
of shares Capital premium
Group and Company GBP000 GBP000
----------------------------------- ----------- --------- ---------
At 1 January 2019 - - -
Issue of shares 152,621 1 -
----------------------------------- ----------- --------- ---------
At 31 December 2019 & 2020 152,621 1 -
----------------------------------- ----------- --------- ---------
Total share capital
Number Share Share
of shares Capital premium
Group and Company GBP000 GBP000
----------------------------------- ----------- --------- ---------
At 1 January 2019 15,279,322 153 -
Issue of shares 152,621 1 -
----------------------------------- ----------- --------- ---------
At 31 December 2019 & 2020 15,431,943 154 -
----------------------------------- ----------- --------- ---------
(a) Share issue costs
Incremental costs directly attributable to the issue of new
shares or options by Company are shown in equity as a deduction,
net of tax, from the proceeds.
(b) Dividends on ordinary shares
Dividends on ordinary shares are recognised in equity in the
period in which they are approved.
(c) Share buybacks
Where any Group company purchases the Company's equity share
capital (treasury shares), the consideration paid, including any
directly attributable incremental costs (net of income taxes) is
deducted from equity attributable to the Company's equity holders
until the shares are cancelled or reissued.
The Ordinary shares have a par value of 1p per share (2019: 1p
per share). At 31 December 2020 the Company held 409,314 shares
(2019: 401,584) in treasury. This includes 390,274 (2019: 390,274)
Ordinary shares and 19,040 (2019: 11,310) Ordinary Non-Voting
shares.
37. Reserves and retained earnings
2020 2019
Group GBP000 GBP000
------------------------------------ --------- --------
Capital redemption reserve 19 19
Fair value reserve (12,690) 205
Treasury shares (1,299) (1,214)
Retained earnings 207,839 209,171
------------------------------------ --------- --------
Total reserves at 31 December 193,869 208,181
------------------------------------ --------- --------
The capital redemption reserve represents a reserve created
after the Company purchased its own shares which resulted in a
reduction of share capital.
2020 2019
Company GBP000 GBP000
------------------------------- --------- --------
Capital redemption reserve 19 19
Fair value reserve (12,164) 3,179
Treasury shares (1,299) (1,214)
Retained earnings 160,721 157,954
------------------------------- --------- --------
Total reserves as 31 December 147,277 159,938
------------------------------- --------- --------
38. Share-based payment options
Company - cash settled
Grants were made to Messrs Salmon and Cobb on 14 June 2016 under
Phantom Option Scheme introduced on that date, to acquire ordinary
1p shares in the Company at 1591p exercisable in respect of 50% on
or after 15 June 2019 and in respect of the remaining 50% on or
after 15 June 2021 when a cash payment would be made equal to any
increase in market value.
Under this Scheme, Mr. Salmon and Mr. Cobb were granted a
phantom option to acquire 200,000 and 100,000 ordinary 1p shares
respectively in the Company. The fair value of these options at the
grant date was GBP1m. The second tranche of the share options will
not vest as the performance conditions have not been met, due to
the non payment of dividends. The first tranche of share options
remained outstanding at 31 December 2020. The fair value of the
options as at 31 December 2020 was GBP0.1m (2019: GBP0.3m).
The performance conditions of the Scheme are that for the
duration of the vesting period, the dividends paid by ABG must have
increased in percentage terms when compared to an assumed dividend
of 29p per share in respect of the financial year ending 31
December 2016, by a minimum of the increase in the Retail Prices
Index during that period.
Also from the grant date to the date the Option is exercised,
there must be no public criticism by any regulatory authority on
the operation of ABG or any of its subsidiaries which has a
material impact on the business of ABG.
Options are forfeited if they remain unexercised after a period
of more than 7 years from the date of grant. If the participant
ceases to be employed by the Group by reason of injury, disability,
ill-health or redundancy; or because his employing company ceases
to be a shareholder of the Group; or because his employing business
is being transferred out of the Group, his option may be exercised
within 6 months after such cessation. In the event of the death of
a participant, the personal representatives of a participant may
exercise an option, to the extent exercisable at the date of death,
within 6 months after the death of the participant.
On cessation of employment for any other reason (or when a
participant serves, or has been served with, notice of termination
of such employment), the option will lapse although the
Remuneration Committee has discretion to allow the exercise of the
option for a period not exceeding 6 months from the date of such
cessation.
In such circumstances, the performance conditions may be
modified or waived as the Remuneration Committee, acting fairly and
reasonably and taking due consideration of the circumstances,
thinks fit. The number of Ordinary Shares which can be acquired on
exercise will be pro-rated on a time elapsed basis, unless the
Remuneration Committee, acting fairly and reasonably and taking due
consideration of the circumstances, decides otherwise. In
determining whether to exercise its discretion in these respects,
the Remuneration Committee must satisfy itself that the early
exercise of an option does not constitute a reward for failure.
The probability of payout has been assigned based on the
likelihood of meeting the performance criteria, which is 100%. The
Directors consider that there is some uncertainty surrounding
whether the participants will all still be in situ and eligible at
the vesting date. Therefore the directors have assumed a 15%
attrition rate for the share options vesting in June 2021. The
attrition rate will increase by 3% per year until the vesting date.
ABG had a GBP0.1m write back in relation to share based payments
during 2020 (2019: GBP0.2m expense), as disclosed in Note 12.
Measurement inputs and assumptions used in the Black-Scholes model are
as follows:
2020 2019
------------------------------------------------------ --------- ---------
Expected Stock Price Volatility 42.7% 21.8%
Expected Dividend Yield 0.0% 2.9%
Risk Free Interest Rate 0.0% 0.7%
Average Expected Life (in years) - 1.46
39. Dividends per share
The Directors do not recommend the payment of a final dividend
(2019: Nil). Since no interim dividend (2019: 16p) was paid in the
year, this makes a total dividend per share for the year of Nil
(2019: 16p). The second interim dividend of 21p declared by the
Directors in last year's Annual Report was withdrawn on 2 April
2020, prior to the finalisation of the resolutions in last year's
Notice of Meeting, following the publication by the Prudential
Regulation Authority ("PRA") of a statement on deposit takers'
approach to dividends. This dividend of 21p per share was paid as a
special interim dividend on 19 March, 2021, following the PRA
statement in December 2020, advising that it is for bank boards to
determine the appropriate level of distributions and removing its
request not to make shareholder distributions.
40. Cash and cash equivalents
For the purposes of the Statement of Cash Flows, cash and cash
equivalents comprises cash on hand and demand deposits, and cash
equivalents are deemed highly liquid investments that are
convertible into cash with an insignificant risk of changes in
value with a maturity of three months or less at the date of
acquisition.
2020 2019
Group GBP000 GBP000
---------------------------------------------- -------- --------
Cash and balances at central banks (Note 16) 636,799 325,908
Loans and advances to banks (Note 17) 110,267 46,258
---------------------------------------------- -------- --------
747,066 372,166
---------------------------------------------- -------- --------
2020 2019
Company GBP000 GBP000
---------------------------------------------- -------- --------
Loans and advances to banks 15,162 15,316
---------------------------------------------- -------- --------
41. Related party transactions
Related parties of the Company and Group include subsidiaries,
directors, Key Management Personnel, close family members of Key
Management Personnel and entities which are controlled, jointly
controlled or significantly influenced, or for which significant
voting power is held, by Key Management Personnel or their close
family members.
A number of banking transactions are entered into with related
parties in the normal course of business on normal commercial
terms. These include loans and deposits. Directors and Key
Management includes solely Executive and Non-Executive
Directors.
2020 2019
Group - Directors GBP000 GBP000
-------------------------------------- ------- -------
Loans
Loans outstanding at 1 January 503 515
Loans advanced during the year 51 137
Loan repayments during the year - (144)
Transfer to deposits during the year (52) (5)
-------------------------------------- ------- -------
Loans outstanding at 31 December 502 503
-------------------------------------- ------- -------
Interest income earned 15 17
-------------------------------------- ------- -------
The loans to directors are mainly secured on property, shares or
cash and bear interest at rates linked to base rate. No provisions
have been recognised in respect of loans given to related parties
(2019 : GBPnil).
2020 2019
Group - Directors GBP000 GBP000
----------------------------------- -------- --------
Deposits
Deposits at 1 January 3,065 1,884
Deposits placed during the year 2,676 4,529
Deposits repaid during the year (1,761) (3,342)
Transfer to loans during the year (52) (6)
----------------------------------- -------- --------
Deposits at 31 December 3,928 3,065
----------------------------------- -------- --------
Interest expense on deposits 5 6
----------------------------------- -------- --------
Details of directors' remuneration are given in the Remuneration
Report on pages 37 and 38. The Directors do not believe that there
were any other transactions with key management or their close
family members that require disclosure.
Details of principal subsidiaries are given in Note 42. Transactions
and balances with subsidiaries are shown below:
2020 2019
Highest Balance Highest Balance
balance at 31 balance at 31
during December during December
the year the year
GBP000 GBP000 GBP000 GBP000
------------------------------------------ ---------- ---------- ---------- ----------
ASSETS
Due from subsidiary undertakings - Loans
and advances to banks 15,319 15,155 16,094 15,310
Due from subsidiary undertakings - Debt
securities at amortised cost 24,785 24,308 24,741 24,239
Shares in subsidiary undertakings 134,004 133,904 134,614 134,004
------------------------------------------ ---------- ---------- ---------- ----------
174,108 173,367 175,449 173,553
------------------------------------------ ---------- ---------- ---------- ----------
LIABILITIES
Due to subsidiary undertakings 2,911 2,911 1,039 824
------------------------------------------ ---------- ---------- ---------- ----------
2,911 2,911 1,039 824
------------------------------------------ ---------- ---------- ---------- ----------
The disclosure of the year end balance and the highest balance
during the year is considered the most meaningful information to
represent the transactions during the year. The above transactions
arose during the normal course of business and are on substantially
the same terms as for comparable transactions with third
parties.
The Company undertook the following transactions with other companies
in the Group during the year:
2020 2019
GBP000 GBP000
------------------------------------------------------------- -------- --------
Arbuthnot Latham & Co., Ltd - Recharge of property and
IT costs 930 930
Arbuthnot Latham & Co., Ltd - Recharge for costs paid
on the Company's behalf 3,668 1,890
Arbuthnot Latham & Co., Ltd - Recharge of costs paid
on behalf of Arbuthnot Latham & Co., Ltd (3,820) (1,226)
Arbuthnot Latham & Co., Ltd - Group recharges for shared
services (4,633) (5,219)
Arbuthnot Latham & Co., Ltd - Group recharges for liquidity (4,904) (5,326)
------------------------------------------------------------- -------- --------
Total (8,759) (8,951)
------------------------------------------------------------- -------- --------
42. Interests in subsidiaries
Investment Impairment
at cost provisions Net
Company GBP000 GBP000 GBP000
------------------------------------------------------ ----------- ------------ --------
At 1 January 2019 137,178 (2,564) 134,614
Receipt on dissolution of West Yorkshire Insurance
Company Limited (3,174) 2,564 (610)
------------------------------------------------------ ----------- ------------ --------
At 31 December 2019 134,004 - 134,004
------------------------------------------------------ ----------- ------------ --------
Receipt on dissolution of Windward Insurance Company
PCC Limited (100) - (100)
------------------------------------------------------ ----------- ------------ --------
At 31 December 2020 133,904 - 133,904
------------------------------------------------------ ----------- ------------ --------
2020 2019
Company GBP000 GBP000
-------------------------- -------- --------
Subsidiary undertakings:
Bank 132,314 132,314
Other 1,590 1,690
-------------------------- -------- --------
Total 133,904 134,004
-------------------------- -------- --------
(a) List of subsidiaries
Arbuthnot Latham & Co., Limited is the only significant
subsidiary of Arbuthnot Banking Group. Arbuthnot Latham is
incorporated in the United Kingdom, has a principal activity of
Private and Commercial Banking and is 100% owned by the Group.
The table below provides details of other subsidiaries of Arbuthnot Banking
Group PLC at 31 December:
Country
% shareholding of incorporation Principal activity
-------------------------------------- --------------- ------------------ ---------------------
Direct shareholding
Arbuthnot Fund Managers Limited 100.0% UK Dormant
Arbuthnot Investments Limited 100.0% UK Dormant
Arbuthnot Limited 100.0% UK Dormant
Arbuthnot Properties Limited 100.0% UK Dormant
Arbuthnot Unit Trust Management 100.0% UK
Limited Dormant
Gilliat Financial Solutions Limited 100.0% UK Dormant
Peoples Trust and Savings Plc 100.0% UK Dormant
Indirect shareholding via intermediate holding
companies
Arbuthnot Commercial Asset Based 100.0% UK
Lending Limited Asset Finance
Arbuthnot Latham (Nominees) Limited 100.0% UK Dormant
Arbuthnot Latham Real Estate Holdco 100.0% Jersey
Limited Property Investment
Arbuthnot Latham Real Estate Holdings 100.0% UK
Limited Property Investment
Arbuthnot Latham Real Estate PropCo 100.0% Jersey
Limited Property Investment
Arbuthnot Real Estate Capital Limited 100.0% Jersey Property Investment
Arbuthnot Real Estate Capital GP 100.0% Jersey
1 Limited Property Investment
Arbuthnot Real Estate Capital Fund 100.0% Jersey
1 Limited Property Investment
Arbuthnot Securities Limited 100.0% UK Dormant
Arbuthnot Specialist Finance Limited 100.0% UK Specialist Finance
John K Gilliat & Co., Limited 100.0% UK Dormant
Pinnacle Universal Limited 100.0% BVI Property Development
Pinnacle Universal Limited 100.0% UK Property Development
Renaissance Asset Finance Limited 100.0% UK Asset Finance
-------------------------------------- --------------- ------------------ -----------------------
All the subsidiary and related undertakings above are unlisted
and none are banking institutions. All entities are included in the
consolidated financial statements and have an accounting reference
date of 31 December. On 16 January 2018, Artillery Nominees Limited
was dissolved.
All Jersey entities have their registered office as 26 New
Street, St Helier, Jersey, JE2 3RA. Pinnacle Universal Limited's
(BVI) registered office is 9 Columbus Centre, Pelican Drive, Road
Town, Tortola, BVI. All other entities listed above have their
registered office as 7 Wilson Street, London, EC2M 2SN.
(b) Non-controlling interests in subsidiaries
There were no non-controlling interests at the end of 2020 or
2019.
(c) Significant restrictions
The Group does not have significant restrictions on its ability
to access or use its assets and settle its liabilities other than
those resulting from the supervisory frameworks within which
banking subsidiaries operate. The supervisory frameworks require
banking subsidiaries to keep certain levels of regulatory capital
and liquid assets, limit their exposure to other parts of the Group
and comply with other ratios. The carrying amounts of the banking
subsidiary's assets and liabilities are GBP2,855m and GBP2,672m
respectively (2019: GBP2,584m and GBP2,400m respectively).
(d) Risks associated with interests
During the year Arbuthnot Banking Group PLC made GBPnil (2019:
GBPnil) capital contributions to Arbuthnot Latham & Co., Ltd.
The contributions were made to assist the Bank during a period of
growth to ensure that all regulatory capital requirements were
met.
43. Operating segments
The Group is organised into seven operating segments as
disclosed below:
1) Banking - Includes Private and Commercial Banking. Private
Banking - Provides traditional private banking services as well as
offering financial planning and investment management services and
includes services provided in the Dubai branch. Commercial Banking
- Provides bespoke commercial banking services and tailored secured
lending against property investments and other assets.
2) Mortgage Portfolios - Acquired mortgage portfolios.
3) RAF - Specialist asset finance lender mainly in high value cars but also business assets.
4) ACABL - Provides finance secured on either invoices, assets or stock of the borrower.
5) ASFL - Provides short term secured lending solutions to
professional and entrepreneurial property investors.
6) All Other Divisions - All other smaller divisions and central
costs in Arbuthnot Latham & Co., Ltd (Investment property and
Central costs)
7) Group Centre - ABG Group management.
During the year the Group changed the way it manages and reports
the Banking sector, combining the Private Banking and Commercial
Banking sector into a single Banking sector. This is the level at
which management decisions are made and how the Group will manage
the overall business sectors going forward with the anticipated
growth in subsidiary businesses. The comparative numbers for the
Banking division has therefore been restated to include Private and
Commercial Banking.
Transactions between the operating segments are on normal
commercial terms. Centrally incurred expenses are charged to
operating segments on an appropriate pro-rata basis. Segment assets
and liabilities comprise loans and advances to customers and
customer deposits, being the majority of the balance sheet.
All
Mortgage Other Group
Banking Portfolios RAF ABL ASFL Divisions Centre Total
Year ended 31 December GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
2020
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Interest revenue 44,837 10,353 8,687 4,316 782 6,107 54 75,136
Inter-segment revenue - - - - - - (54) (54)
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Interest revenue from
external
customers 44,837 10,353 8,687 4,316 782 6,107 - 75,082
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Fee and commission income 11,620 - 131 2,443 4 537 - 14,735
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Revenue from external
customers 56,457 10,353 8,818 6,759 786 6,644 - 89,817
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Interest expense (2,798) (4,402) (2,666) (1,584) (246) (2,718) (200) (14,614)
Add back inter-segment
revenue - - - - - - 54 54
Subordinated loan note
interest - (2,464) (2,464)
Fee and commission
expense (251) - (1) (40) (1) - - (293)
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Segment operating income 53,408 5,951 6,151 5,135 539 3,926 (2,610) 72,500
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Impairment losses (1,576) (115) (1,154) - (4) - - (2,849)
Other income - - 73 - - 1,445 (840) 678
Operating expenses (49,507) (1,624) (2,975) (3,130) (1,547) (6,680) (5,956) (71,419)
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Segment profit / (loss)
before
tax 2,325 4,212 2,095 2,005 (1,012) (1,309) (9,406) (1,090)
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Income tax (expense) /
income - - (441) - - 1,420 (1,221) (242)
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Segment profit / (loss)
after
tax 2,325 4,212 1,654 2,005 (1,012) 111 (10,627) (1,332)
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Loans and advances to
customers 1,133,799 268,827 91,927 87,331 5,964 11,501 (11,500) 1,587,849
Other assets - - - - - 1,255,689 9,998 1,265,687
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Segment total assets 1,133,799 268,827 91,927 87,331 5,964 1,267,190 (1,502) 2,853,536
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Customer deposits 2,159,160 - - - - 232,701 (26,654) 2,365,207
Other liabilities - - - - - 280,533 13,773 294,306
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Segment total liabilities 2,159,160 - - - - 513,234 (12,881) 2,659,513
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Other segment items:
Capital expenditure - - - - - (7,075) - (7,075)
Depreciation and
amortisation - - - - - (4,372) (24) (4,396)
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
The "Group Centre" segment above includes the parent entity and all intercompany
eliminations.
All
Mortgage Other Group
Banking Portfolios RAF ABL ASFL Divisions Centre Total
Year ended 31 December GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
2019
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Interest revenue 50,325 6,647 8,659 2,703 102 8,434 68 76,938
Inter-segment revenue - - - - - - (68) (68)
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Interest revenue from
external
customers 50,325 6,647 8,659 2,703 102 8,434 - 76,870
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Fee and commission income 11,892 - 219 1,380 1 443 - 13,935
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Revenue from external
customers 62,217 6,647 8,878 4,083 103 8,877 - 90,805
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Interest expense (5,067) (2,534) (2,786) (1,358) (31) (4,696) (209) (16,681)
Add back inter-segment
revenue - - - - - - 68 68
Subordinated loan note
interest - - - - - - (1,620) (1,620)
Fee and commission
expense (91) - (12) (3) (1) - - (107)
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Segment operating income 57,059 4,113 6,080 2,722 71 4,181 (1,761) 72,465
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Impairment losses (165) - (708) 10 (4) - - (867)
Other income - - 64 - - 4,955 580 5,599
Operating expenses (46,685) (807) (3,577) (2,708) (1,275) (7,170) (7,964) (70,186)
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Segment profit / (loss)
before
tax 10,209 3,306 1,859 24 (1,208) 1,966 (9,145) 7,011
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Income tax (expense) /
income - - (371) - - 133 (597) (835)
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Segment profit / (loss)
after
tax 10,209 3,306 1,488 24 (1,208) 2,099 (9,742) 6,176
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Loans and advances to
customers 1,106,887 306,044 102,888 75,871 7,352 11,511 (11,500) 1,599,053
Other assets - - - - - 974,241 22,085 996,326
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Segment total assets 1,106,887 306,044 102,888 75,871 7,352 985,752 10,585 2,595,379
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Customer deposits 1,863,232 - - - - 248,965 (27,294) 2,084,903
Other liabilities - - - - - 288,790 13,351 302,141
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Segment total liabilities 1,863,232 - - - - 537,755 (13,943) 2,387,044
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Other segment items:
Capital expenditure - - - - - (7,503) - (7,503)
Depreciation and
amortisation - - - - - (3,424) (25) (3,449)
-------------------------- ---------- ------------ -------- -------- -------- ----------- --------- ----------
Segment profit is shown prior to any intra-group
eliminations.
Prior year numbers have been represented (combining Private
Banking and Commercial Banking) according to the 2019 operating
segments reported to management. The UK private bank has a branch
in Dubai, which generated GBP4.1m (2019: GBP4.5m) of income and had
direct operating costs of GBP2.5m (2019: GBP2.8m). All Dubai branch
income is booked in the UK. Other than the Dubai branch, all
operations of the Group are conducted wholly within the United
Kingdom and geographical information is therefore not
presented.
44. Country by Country Reporting
Article 89 of the EU Directive 2013/36/EU otherwise known as the
Capital Requirements Directive IV ('CRD IV') was implemented into
UK domestic legislation through statutory instrument 2013 No. 3118,
the Capital Requirements (Country-by-Country Reporting) Regulations
2013 (the Regulations), which were laid before the UK Parliament on
10 December 2013 and which came into force on 1 January 2014.
Article 89 requires credit institutions and investment firms in
the EU to disclose annually, specifying, by Member State and by
third country in which it has an establishment, the following
information on a consolidated basis for the financial year: name,
nature of activities, geographical location, turnover, number of
employees, profit or loss before tax, tax on profit or loss and
public subsidies received.
FTE Profit/(loss)
31 December 2020 Turnover employees before Tax paid
tax
Location GBPm Number GBPm GBPm
----------------------- ------------ ------------- ----------------- -----------
UK 72.5 500 (0.5) 0.3
Dubai - 14 (0.6) -
FTE Profit/(loss)
31 December 2019 Turnover employees before Tax paid
tax
Location GBPm Number GBPm GBPm
----------------------- ------------ ------------- ----------------- -----------
UK 72.5 487 9.8 0.8
Dubai - 13 (2.8) -
The Dubai branch income is booked through the UK, hence the turnover
is nil in the above analysis. Offsetting this income against Dubai branch
costs would result in a GBP1.7m profit (2019: GBP1.6m). After indirect
cost allocation it results in a loss of GBP0.6m (2019: loss of GBP0.3m).
No public subsidies were received during 2020 or 2019.
Following a strategic review of the Group's operations, the Dubai branch
will close on 31 May 2021.
45. Ultimate controlling party
The Company regards Sir Henry Angest, the Group Chairman and
Chief Executive Officer, who has a beneficial interest in 56.1% of
the issued share capital of the Company, as the ultimate
controlling party. Details of his remuneration are given in the
Remuneration Report and Note 41 of the consolidated financial
statements includes related party transactions with Sir Henry
Angest.
46. Non-adjusting events after the balance sheet date
Asset Alliance Group Holdings Limited
On 10 December 2020 the Bank announced it had agreed to purchase
the entire share capital of Asset Alliance Group Holdings
Limited.
Asset Alliance provides vehicle finance and related services,
predominantly in the truck & trailer and bus & coach
markets. Operating from five locations, it is the UK's leading
independent end-to-end specialist in commercial vehicle financing
and has over 4000 vehicles under management. As at 31 August 2020
Asset Alliance had assets for lease with a net book value of
approximately GBP150m.
The consideration is based on an agreed discount to the tangible
net assets of Asset Alliance at completion, after adjusting for the
fair value of the assets available for lease. The consideration is
expected to be approximately GBP4.1m. The Bank has received all
necessary regulatory approvals and the acquisition is expected to
complete on 31 March 2021.
Tay loan portfolio
After being approached by Charter Court Financial Services
Limited (a subsidiary of One Savings Bank), who provide the
third-party servicing of the portfolio, the Bank decided to sell
the portfolio as the yield declined and it was becoming
uneconomical to service. The sale completed on 26 February 2021 and
generated a net gain of GBP2.2m for the 2021 financial year.
Dubai branch
Following a strategic review of its international
representation, the Bank concluded that in the current market the
Dubai office no longer fitted with its future growth plans and so
consequently took the decision to close the office.
The business has generated a good volume of client relationships
for the Bank, however, its contribution versus its high cost base
makes it unviable for the Bank's future growth aspirations.
Existing client assets have always been held in London and will now
be serviced from the London office. The office is scheduled to
close at the end of May 2021.
Dividend
The second interim dividend of 21p declared by the Directors in
last year's Annual Report was withdrawn on 2 April 2020, prior to
the finalisation of the resolutions in last year's Notice of
Meeting, following the publication by the Prudential Regulation
Authority ("PRA") of a statement on deposit takers' approach to
dividends. This dividend of 21p per share was paid as a special
interim dividend on 19 March, 2021, following the PRA statement in
December 2020, advising that it is for bank boards to determine the
appropriate level of distributions and removing its request not to
make shareholder distributions.
Five Year Summary
2016 2017 2018 2019 2020
GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- ------------------ -------- -------- --------- -------- --------
Profit / (loss) for the year after
tax 227,569 6,523 (20,033) 6,176 (1,332)
(Loss) / profit before tax from continuing
operations* (1,966) 2,534 6,780 7,011 (1,090)
Total Earnings per share
Basic (p) 1,127.2 43.9 (134.5) 41.2 (8.9)
Earnings per share from continuing
operations*
Basic (p) (18.2) 14.0 38.0 41.2 (8.9)
Dividends per
share (p) - ordinary 31.0 33.0 35.0 37.0 -
- special 325.0 - - - -
Other KPI:
2016 2017 2018 2019 2020
GBP000 GBP000 GBP000 GBP000 GBP000
--------------------------- ------------------ -------- -------- --------- -------- --------
Net asset value
per share (p) 1,533.8 1,547.0 1,282.5 1,363.5 1,269.8
* - Prior year numbers have been restated for continuing
operations.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
RNS may use your IP address to confirm compliance with the terms
and conditions, to analyse how you engage with the information
contained in this communication, and to share such analysis on an
anonymised basis with others as part of our commercial services.
For further information about how RNS and the London Stock Exchange
use the personal data you provide us, please see our Privacy
Policy.
END
FR DKQBNNBKBONB
(END) Dow Jones Newswires
March 25, 2021 03:00 ET (07:00 GMT)
Arbuthnot Banking (LSE:ARBB)
Historical Stock Chart
From Mar 2024 to Apr 2024
Arbuthnot Banking (LSE:ARBB)
Historical Stock Chart
From Apr 2023 to Apr 2024
