TIDMCBG
RNS Number : 3304S
Close Brothers Group PLC
16 March 2021
Half Year Results for the Six Months to 31 January 2021
Highlights
-- The group delivered a strong performance in the current
environment. Adjusted operating profit increased 2% to GBP128.5
million and increased 12% to GBP181.3 million pre provisions, with
a return on opening equity ("ROE") of 13.2%
-- The group's financial performance reflected high new business
volumes in the lending business, solid net inflows in Asset
Management and a very strong trading performance in Winterflood,
with income growth in all three divisions
-- We continued to support our customers and clients through
this challenging environment, with over 120,000 customer payment
deferrals and other Covid-19 related concessions offered and GBP730
million lent under government support schemes
-- The loan book increased by 4.4% in the first six months of
the year to GBP7.95 billion, reflecting strong demand for loans
issued under CBILS and significant new business volumes in Motor
Finance
-- We remained focused on pricing discipline, with a net interest margin of 7.7%
-- The annualised bad debt ratio of 1.3% was up on the pre
Covid-19 ratio of 0.9% for H1 2020 but down significantly from the
2.3% ratio for the 2020 financial year, reflecting the quality of
our loan book and a stable credit performance
-- Adjusted operating profit in the Banking division was GBP95.1
million, down 18%, reflecting higher impairment charges compared to
H1 2020 and continued investment
-- The Asset Management division generated solid annualised net
inflows of 4%, with managed assets increasing 10% to GBP13.8
billion. Adjusted operating profit remained broadly stable on the
prior year at GBP12.3 million despite the impact of Covid-19 on new
business activity
-- Winterflood delivered a very strong trading performance,
making the most of heightened trading volumes, achieving operating
profit of GBP34.2 million, 223% up, with no loss days
-- The group maintained a strong capital, funding and liquidity
position. Our common equity tier 1 ("CET1") capital ratio of 15.3%
provides significant headroom above the minimum requirement
-- We have declared an 18.0p interim dividend, reflecting the
group's strong performance in the first half and continued
confidence in our business model and financial position
First half First half Change
Key Financials (1) 2021 2020 %
----------------------------------- ------------- ------------- ---------
Adjusted operating profit(2) GBP128.5m GBP125.7m 2
Operating profit before tax GBP127.0m GBP124.1m 2
Adjusted basic earnings per share 64.0p 63.8p -
Basic earnings per share 63.2p 63.0p -
Ordinary dividend per share 18.0p - -
Return on opening equity 13.2% 13.6%
Return on average tangible equity 15.7% 16.0%
Net interest margin 7.7% 7.8%
Bad debt ratio 1.3% 0.9%
31 January 31 July Change
2021 2020 %
----------------------------------- ------------- ------------- ---------
Loan book GBP7.95bn GBP7.62bn 4.4
Total client assets GBP14.9bn GBP13.7bn 9
CET1 capital ratio 15.3% 14.1%
Total capital ratio 17.4% 16.3%
----------------------------------- ------------- ------------- ---------
1 Please refer to definitions on pages 23 to 25.
2 Adjusted operating profit is stated before amortisation of
intangible assets on acquisition of GBP1.5 million (H1 2020:
GBP1.6 million).
Enquiries
Sophie Gillingham Close Brothers Group plc 020 3857 6574
Camila Sugimura Close Brothers Group plc 020 3857 6577
Kimberley Taylor Close Brothers Group plc 020 3857 6233
Andy Donald Maitland 07738 346 460
A pre-recorded presentation to analysts and investors will be
held today at 9.30 am GMT followed by a live Q&A session. A
webcast and dial-in facility will be available by registering at
https://webcasts.closebrothers.com/results/InterimResults2021 .
Basis of Presentation
Results are presented both on a statutory and an adjusted basis
to aid comparability between periods. Adjusted measures are
presented on a basis consistent with prior periods and exclude
amortisation of intangible assets on acquisition, to present the
performance of the group's acquired businesses consistent with its
other businesses; and any exceptional items, which are
non-recurring and do not reflect trading performance.
About Close Brothers
Close Brothers is a leading UK merchant banking group providing
lending, deposit taking, wealth management services and securities
trading. We employ over 3,700 people, principally in the UK. Close
Brothers Group plc is listed on the London Stock Exchange and is a
member of the FTSE 250.
CHIEF EXECUTIVE'S STATEMENT
Overview
We delivered a strong performance in the first half of the year
in the context of current market conditions, with the positive
trends seen at the end of the last financial year continuing,
delivering a return on opening equity of 13.2%. We are navigating a
challenging external environment successfully by supporting our
customers and clients and maintaining the key strengths of our
business model, whilst maximising the opportunities available to
us.
The Board is pleased to declare an interim dividend of 18.0p per
share. This reflects the group's strong performance in the first
half and continued confidence in our business model and financial
position.
The Board recognises the continued significant uncertainty in
the external environment and will make its recommendation on any
final dividend in September 2021 subject to the group's financial
performance and outlook at the time.
Strategic update
Our priority over the last year has been to navigate the
Covid-19 crisis successfully while extending support to our people,
customers and clients. We implemented the playbooks that we
developed in 2019 in preparation for a downturn, enabling us to
adapt our business and maximise the opportunities available in
these changing market conditions.
In September 2020 I introduced Our Responsibility as a core
component of our model. As we continue to navigate the impact of
Covid-19, this responsibility to help address the social, economic
and environmental challenges facing our business, colleagues and
customers remains paramount.
As part of this responsibility we are expanding our charitable
efforts, starting with donations of GBP100,000 each to two
charities facing enormous challenges in the wake of Covid-19; the
children's literacy charity Bookmark, and the foodbank charity The
Trussell Trust. Both charities make a material difference to
children's and families' lives throughout the UK, and these
donations are in support of the vital role they play in helping
some of the most vulnerable in our communities.
Our responsible approach is key to positioning us well for the
long term, whether it be through attracting and bringing out the
very best of our people, being there when it matters for our
customers and clients, or continuing with our efforts towards
reducing our impact on the environment.
Together with the executive team, I have been reviewing how we
build on the core strengths of our successful and differentiated
business model through the next stage of our development. To ensure
that we are best placed to respond to these opportunities and
deliver on our strategy, I have made some changes to our Group and
Banking executive team. These include bringing the leadership of
the Motor Finance and Premium Finance businesses together under our
recently appointed Retail CEO, Rebecca McNeil, as well as
appointing Neil Davies as our Commercial CEO, with responsibility
for Asset Finance and Invoice & Speciality Finance. Rebecca and
Neil, along with Frank Pennal, our Property CEO, have joined our
Group Executive Committee, with all of our businesses now
represented at this level.
The fundamental strengths of our business model have been
evidenced throughout the current crisis and our operational
resilience leaves us well placed to continue helping the people and
businesses of Britain thrive as they emerge from the crisis and
over the long term.
Our strategic approach will, therefore, focus on three
objectives: to protect, grow and sustain our business model.
We will keep our business safe by maintaining and enhancing our
model's key strengths so that it continues to deliver for our
stakeholders in a wide range of market conditions. This will be
achieved by the continued prudent management of our financial
resources, disciplined application of our underwriting and pricing
criteria, as well as continued investment to protect the key
attributes of our high-touch relationship model.
We will deliver disciplined growth by leaning into the current
environment and by maximising future opportunities in existing and
new markets. Loan book growth in the lending business remains an
output of our business model and we will focus on evolving our
offering, improving our operational and digital capabilities and
proactively looking for opportunities that fit with our successful
model across the divisions.
We will secure the long-term future of our business, customers
and the world we operate in by focusing on the needs of our
customers, our people, and our community and environment while
evolving our business to recognise and support the priorities of
each group.
We plan to provide further details about the evolution of our
strategic approach and the opportunities ahead for our businesses
during our Investor Event, scheduled for 15 June 2021.
GROUP AND DIVISIONAL PERFORMANCE
Group performance
The group's financial performance reflected high new business
volumes in the lending business, solid net inflows in Asset
Management and a very strong trading performance in Winterflood,
with income growth in all three divisions. A djusted operating
profit increased 2% to GBP128.5 million (H1 2020: GBP125.7 million)
and increased 12% to GBP181.3 million pre provisions.
Our capital, liquidity and funding position remained strong,
with a Common Equity Tier 1 capital ratio of 15.3% (31 July 2020:
14.1%), significantly above the applicable minimum regulatory
requirement.
Divisional performance
In the Banking division, although income grew in the period,
adjusted operating profit decreased 18% to GBP95.1 million (H1
2020: GBP115.4 million) reflecting higher impairment charges and
continued investment.
The loan book increased by 4.4% to GBP7.95 billion (31 July
2020: GBP7.62 billion), whilst maintaining a strong net interest
margin of 7.7% (H1 2020: 7.8%).
We saw strong demand for loans issued under the Coronavirus
Business Interruption Loan Scheme ("CBILS"), particularly in the
Asset Finance business, and record new business levels in Motor
Finance. Utilisation levels in Invoice Finance have recovered
slightly in the first half but continue to track below pre Covid-19
levels. In Premium Finance, a reduction in the loan book primarily
reflects the impact of Covid-19 restrictions and seasonality. In
the Property business, while construction activity has continued,
the loan book reduced driven by lower drawdowns and higher
repayment levels, which reflects delays in completion of
developments due to Covid-19 restrictions and strong unit
sales.
In January 2021, the loan book declined slightly as we saw a
reduction in customer activity in Premium Finance and Invoice
Finance, due to the impact of the national lockdown, exacerbated by
seasonality.
We continue to make good progress on our preparations for a
transition to the Internal Ratings Based ("IRB") approach and, as
planned, the initial application to the PRA was submitted in
December 2020. We continued to focus on strict cost discipline,
with business as usual ("BAU") costs remaining flat. As a result,
adjusted operating expenses for the Banking division increased
4%.
Impairment charges increased to GBP52.9 million (H1 2020:
GBP36.7 million) with an annualised bad debt ratio of 1.3%, up on
the pre Covid-19 ratio of 0.9% for the first half of 2020. This is
a significant reduction from the 2.3% ratio for the 2020 financial
year, reflecting the quality of our loan book and a stable credit
performance over the first half, supported by the ongoing
government schemes for consumers and SMEs. The impairment charges
in the first half reflect growth in the loan book as well as a
review of staging and coverage for individual loans and portfolios
resulting in higher provisions, particularly in Commercial.
We continue to offer a broad range of concessions to assist
customers who find themselves in difficulty. As of 31 January 2021,
we have offered more than 120,000 payment deferrals and other
Covid-19 concessions to our customers.
The performance of the forborne loan book continues to be
encouraging and we remain confident in the quality of our lending,
which is predominantly secured, prudently underwritten and diverse.
Nevertheless, we will continue to closely monitor the performance
of the loan book as the macroeconomic outlook evolves and
government support schemes for consumers and SMEs end in the coming
months.
In Asset Management , managed assets increased to GBP13.8
billion (31 July 2020: GBP12.6 billion) and total client assets
increased to GBP14.9 billion (31 July 2020: GBP13.7 billion),
reflecting favourable market movements, solid demand for our
integrated wealth and investment management services and inflows
from recent portfolio manager hires. The division generated
annualised net inflows of 4%, despite reduced face-to-face
interaction with clients due to Covid-19.
The Asset Management division delivered an adjusted operating
profit of GBP12.3 million (H1 2020: GBP12.6 million), broadly flat
on the prior year period as operating income grew, despite the
impact of Covid-19 on new business activity, and we continued to
invest to support the long-term growth potential of the
business.
Winterflood delivered a very strong performance, with operating
profit of GBP34.2 million (H1 2020: GBP10.6 million), 223% up on
the first half of 2020. Winterflood was able to successfully
navigate the volatile market conditions and heightened trading
volumes, demonstrating the expertise of our traders and the
operational resilience of the business. There were no loss days in
the period and Winterflood has successfully maintained full
operational capacity since the start of Covid-19.
Outlook
Overall, the group is navigating this unprecedented environment
well and our model is performing as we would expect at this stage
of the cycle.
Despite the national lockdown restrictions and volatile
macroeconomic environment, our credit performance has remained
stable reflecting the quality of our loan book, supported by the
ongoing government schemes for consumers and SMEs. Nevertheless,
the full impact of Covid-19 still remains highly uncertain.
Against this backdrop, we are committed to maintaining the
discipline of our business model, and our readiness to respond to
opportunities and changes in market conditions.
The Banking division remains focused on maximising opportunities
available to us as we emerge from the Covid-19 crisis, whilst
maintaining pricing and underwriting discipline and progressing
strategic investment initiatives.
The Asset Management division will continue to look to increase
client assets through organic new business, selective hiring, and
in-fill acquisitions to support the long-term growth potential of
the business.
Winterflood remains focused on maximising opportunities across
all market conditions, while continuing to build its institutional
sales trading franchise and Winterflood Business Services.
Our proven and resilient model and strong balance sheet,
combined with our deep experience in navigating a wide range of
economic conditions, leave us well placed to continue supporting
our colleagues, customers and clients over the long term.
BOARD CHANGES
After more than nine years' dedicated service on the board,
Geoffrey Howe decided not to seek reappointment at the 2020 Annual
General Meeting and ceased to be a director on 19 November 2020. In
December 2020, the Board was pleased to appoint Mark Pain as a
successor to Geoffrey. Mark joined the board as an independent
non-executive director with effect from 1 January 2021. Mark has
more than 30 years' executive and non-executive experience in
financial services, including in retail banking and insurance, with
strong finance, risk management and commercial credentials. Mark is
a member of the board's Nomination & Governance, Remuneration
and Risk Committees, and the group's Senior Independent Director.
Like the other members of the board, he also became a director of
the group's Banking subsidiary, Close Brothers Limited.
OVERVIEW OF FINANCIAL PERFORMANCE
GROUP INCOME STATEMENT
First half First half Change
2021 2020 %
GBP million GBP million
--------------------------------------- -------------- ------------------ ------------
Operating income 474.0 420.0 13
Adjusted operating expenses (292.7) (257.6) 14
Impairment losses on financial assets (52.8) (36.7) 44
--------------------------------------- -------------- ------------------ ------------
Adjusted operating profit 128.5 125.7 2
--------------------------------------- -------------- ------------------ ------------
Banking 95.1 115.4 (18)
-------------- ------------------ ------------
Commercial 27.4 38.5 (29)
Retail 27.9 34.1 (18)
Property 39.8 42.8 (7)
-------------- ------------------ ------------
Asset Management 12.3 12.6 (2)
Winterflood 34.2 10.6 223
Group (13.1) (12.9) 2
--------------------------------------- -------------- ------------------ ------------
Amortisation of intangible assets
on acquisition (1.5) (1.6) (6)
--------------------------------------- -------------- ------------------ ------------
Operating profit before tax 127.0 124.1 2
--------------------------------------- -------------- ------------------ ------------
Tax (32.2) (29.6) 9
--------------------------------------- -------------- ------------------ ------------
Profit after tax 94.8 94.5 -
--------------------------------------- -------------- ------------------ ------------
Profit attributable to shareholders 94.8 94.5 -
--------------------------------------- -------------- ------------------ ------------
Adjusted basic earnings per share 64.0p 63.8p -
Basic earnings per share 63.2p 63.0p -
Ordinary dividend per share 18.0p - -
Return on opening equity 13.2% 13.6%
Return on average tangible equity 15.7% 16.0%
Operating profit and returns
Adjusted operating profit increased 2% to GBP128.5 million (H1
2020: GBP125.7 million), primarily reflecting higher income in
Winterflood, partially offset by increased variable costs in that
division and higher impairment charges in Banking. Statutory
operating profit before tax increased by 2% to GBP127.0 million (H1
2020: GBP124.1 million). The group delivered a strong return on
opening equity of 13.2% (H1 2020: 13.6%) and return on average
tangible equity was 15.7% (H1 2020: 16.0%).
Adjusted operating profit in the Banking division decreased 18%
to GBP95.1 million (H1 2020: GBP115.4 million) primarily due to
higher impairment charges and continued investment, partially
offset by modest income growth. The Asset Management division
achieved solid net inflows, delivering adjusted operating profit of
GBP12.3 million (H1 2020: GBP12.6 million), broadly flat on the
prior year period as operating income grew, despite the impact of
Covid-19 on new business activity, and we continued to invest to
support the long-term growth potential of the business. Winterflood
delivered a very strong performance, with operating profit of
GBP34.2 million (H1 2020: GBP10.6 million), 223% up. Group net
expenses, which include the central functions such as finance,
legal and compliance, risk and human resources, were broadly in
line with the comparative period at GBP13.1 million (H1 2020:
GBP12.9 million).
Operating income
Operating income increased 13% to GBP474.0 million (H1 2020:
GBP420.0 million), with growth seen in all divisions but primarily
in Winterflood. Income in the Banking division increased by 1%,
reflecting high new business volumes and a broadly stable net
interest margin of 7.7% (H1 2020: 7.8%). Income in the Asset
Management division was up 2%, reflecting higher client assets.
Income in Winterflood increased by 105% as a result of
significantly higher volumes and very strong trading
performance.
Adjusted operating expenses
Adjusted operating expenses increased 14% to GBP292.7 million
(H1 2020: GBP257.6 million) with most of the increase in
Winterflood (up 71%), reflecting higher variable costs. In the
Banking division, costs increased by 4% driven by continued
investment in key strategic programmes and flat BAU costs. Costs
increased 3% in the Asset Management division, driven by continued
hiring of high net worth portfolio managers and investment in
technology. Overall, the group's expense/income ratio was broadly
in line with the prior year period at 62% (H1 2020: 61%) and the
group's compensation ratio increased to 39% (H1 2020: 36%).
Impairment charges and IFRS 9 provisioning
Impairment charges increased to GBP52.8 million (H1 2020:
GBP36.7 million), corresponding to an annualised bad debt ratio of
1.3% (H1 2020: 0.9%), down significantly from the 2.3% ratio for
the 2020 financial year.
Our approach to provisioning continues to reflect the
application of our models overlaid with expert judgement to
determine the appropriate allocation of loan book balances between
stages, to macroeconomic scenario updates and weightings, and to
provision coverage at the individual portfolio level.
We have revised the macroeconomic scenarios and the weightings
assigned to them, with a 40% weighting remaining to the baseline,
and 10% moved to the upside scenario, to reflect reduced Brexit
uncertainty and the Covid-19 vaccination developments. However, the
modelled impact of these changes on impairment provisions has been
mainly offset by judgemental management overlays to reflect the
continued uncertainty in the UK economic outlook.
Overall, impairment provisions increased in the first half to
take into account loan book growth and a review of staging and
provision coverage for individual loans and portfolios. These
factors resulted in an overall increase in provision coverage to
3.3% (31 January 2020: 1.5%, 31 July 2020: 3.0%).
We believe this represents an appropriate level of provision,
reflecting the highly uncertain external environment and the fact
that the full impact of Covid-19 has yet to be reflected in
experienced credit performance. We remain confident in the quality
of our loan book, which is predominantly secured, prudently
underwritten, diverse, and supported by the deep expertise of our
people.
Tax expense
The tax expense in the first half of the year was GBP32.2
million (H1 2020: GBP29.6 million), which corresponds to an
effective tax rate of 25.4% (H1 2020: 23.9%), with the increase
primarily reflecting a higher UK corporation tax rate at 19.0%,
whereas the prior year was 18.3% reflecting an expected rate cut
later reversed.
In line with the Budget 2021 announced on 3 March 2021, the UK
corporation tax rate is expected to increase from 19.0% to 25.0%
from April 2023. This increase is expected to be enacted in the
current financial year and, as a result, will impact the group's
deferred tax asset balance. Had this change been enacted before 31
January 2021, the group's deferred tax asset balance at 31 January
2021 would have increased by up to approximately GBP10 million,
with a corresponding tax benefit recognised in the income statement
and other comprehensive income.
The government has also indicated that it will legislate in
Finance Bill 2021-22 to ensure that the combined rate of tax on
banks' profits, which comprises the standard corporation tax rate
and banking surcharge, does not increase substantially from its
current level. This legislation would partially reverse the
abovementioned deferred tax asset increase, and income statement
benefit, however the precise quantum and timing of such a reversal
remains uncertain.
Earnings per share
Profit attributable to shareholders remained stable at GBP94.8
million (H1 2020: GBP94.5 million). As a result, adjusted basic
earnings per share ("EPS") remained stable at 64.0p (H1 2020:
63.8p) and basic EPS was 63.2p (H1 2020: 63.0p).
Dividend
The interim dividend of 18.0p (H1 2020: GBPnil) reflects the
group's strong performance in the first half and continued
confidence in our business model and financial position. The
interim dividend is due to be paid on 28 April 2021 to shareholders
on the register at 26 March 2021.
The Board recognises the continued significant uncertainty in
the external environment and will make its recommendation on any
final dividend in September 2021, subject to the group's financial
performance and outlook at the time.
GROUP BALANCE SHEET
31 January 2021 31 July 2020
GBP million GBP million
--------------------------------- ------------------------------- -------------------------------
Loans and advances to customers 7,953.5 7,616.7
Treasury assets(1) 2,182.1 1,733.9
Market-making assets(2) 1,114.8 719.1
Other assets 1,071.8 1,001.8
--------------------------------- ------------------------------- -------------------------------
Total assets 12,322.2 11,071.5
--------------------------------- ------------------------------- -------------------------------
Deposits by customers 6,444.8 5,917.7
Borrowings 2,936.6 2,591.2
Market-making liabilities(2) 1,013.9 622.8
Other liabilities 446.5 490.2
--------------------------------- ------------------------------- -------------------------------
Total liabilities 10,841.8 9,621.9
--------------------------------- ------------------------------- -------------------------------
Equity 1,480.4 1,449.6
--------------------------------- ------------------------------- -------------------------------
Total liabilities and equity 12,322.2 11,071.5
--------------------------------- ------------------------------- -------------------------------
1 Treasury assets comprise cash and balances at central banks,
and debt securities held to support lending in the Banking
division.
2 Market-making assets and liabilities comprise settlement
balances, long and short trading positions and loans to or from
money brokers.
The group maintained a strong balance sheet and remains focused
on its prudent approach to managing financial resources.
The structure of the balance sheet remains unchanged, with most
of the assets and liabilities relating to our lending activities.
Loans and advances make up the majority of assets. Other items on
the balance sheet include treasury assets held for liquidity
purposes, and settlement balances in Winterflood. Intangibles,
property, plant and equipment, and prepayments are included as
other assets. Liabilities are predominantly made up of customer
deposits and both secured and unsecured borrowings to fund the loan
book.
Total assets increased by 11% to GBP12.3 billion (31 July 2020:
GBP11.1 billion). This reflects the strong loan book growth and
higher treasury assets as the proceeds from the GBP350 million, 10
year senior unsecured bond issued in December 2020 contributed to
elevated liquidity levels at the end of the period. Total
liabilities were up 13% to GBP10.8 billion (31 July 2020: GBP9.6
billion) driven by a material uplift in customer deposits and the
issue of the senior unsecured bond. Both market-making assets and
liabilities were up due to higher settlement balances reflecting
the higher trading activity in Winterflood.
Shareholders' equity remained stable at GBP1.5 billion (31 July
2020: GBP1.5 billion), with profit in the first half of the year
partially offset by dividend payments of GBP59.8 million (31
January 2020: GBP65.8 million). The group's return on assets
decreased to 1.5%, reflecting higher total assets (H1 2020:
1.8%).
GROUP CAPITAL
31 January 2021 31 July 2020
GBP million GBP million
------------------------------ ---------------- -------------
Common equity tier 1 capital 1,350.2 1,254.0
Total capital 1,531.4 1,441.0
Risk weighted assets 8,826.5 8,863.2
Common equity tier 1 capital
ratio 15.3% 14.1%
Total capital ratio 17.4% 16.3%
Leverage ratio 10.8% 11.2%
------------------------------ ---------------- -------------
The prudent management of capital is a core part of our business
model and has been a key focus since the Covid-19 outbreak to
ensure the group can continue to support customers, clients and
colleagues during these unprecedented times.
The CET1 capital ratio increased to 15.3% (31 July 2020: 14.1%),
primarily due to higher profits and the benefit from regulatory
changes to the treatment of software assets. The total capital
ratio increased to 17.4% (31 July 2020: 16.3%).
The applicable minimum CET1 and total capital ratio
requirements, excluding any applicable Prudential Regulation
Authority ("PRA") buffer, were 7.6% and 11.5% respectively at 31
January 2021. Accordingly, we continue to have a significant
headroom of 770bps in the CET1 capital ratio, and 590bps in the
total capital ratio, leaving us well placed to continue to help our
customers and clients and in a position of strength to respond to
opportunities and challenges ahead.
The group applies IFRS 9 regulatory transitional arrangements
which allows banks to add back to their capital base a proportion
of the IFRS 9 impairment charges during the transitional period.
Our capital ratios are presented on a transitional basis after the
application of these arrangements and the UK onshored provisions of
the Capital Requirements Regulation ("CRR") qualifying own funds
arrangements. Without their application, the CET1 and total capital
ratios would be 14.1% and 16.1%, respectively. In line with the
amended CRR, effective on 23 December 2020, the CET1 capital ratio
at 31 January 2021 includes a c.45bps benefit related to software
assets which are exempt from the deduction requirement for
intangible assets from CET1. The PRA launched a consultation on 12
February 2021 including a proposal to revert to the earlier
position, which if implemented would result in a future reversal of
this benefit and reduction of the CET1 capital ratio.
CET1 capital increased 8% to GBP1,350.2 million (31 July 2020:
GBP1,254.0 million) reflecting strong capital generation through
GBP94.8 million of profit, as well as a GBP45.1 million benefit
from regulatory changes in the treatment of software assets and an
increase in the transitional IFRS 9 capital add-back of GBP18.8
million. This was partially offset by the regulatory deduction of
dividends paid and foreseen of GBP51.2 million and other
deductions.
Risk weighted assets ("RWAs") remained broadly flat at GBP8.8
billion (31 July 2020: GBP8.9 billion) notwithstanding the 4.4%
growth in the loan book, as this was mainly driven by government
guaranteed loans under CBILS which attract a lower risk weighting.
In addition, a reduction in the Property loan book due to higher
levels of repayments contributed to a reduction in credit risk
RWAs.
The leverage ratio, which is a transparent measure of capital
strength, not affected by risk weightings, remains strong at 10.8%
(31 July 2020: 11.2%). The leverage ratio decreased on the position
at the end of the 2020 financial year, whilst the CET1 ratio
increased, reflecting the balance sheet growth during the
period.
We continue to make good progress on our preparations for a
transition to the IRB approach and, as planned, the initial
application to the PRA was submitted in December 2020. We continue
to work with the regulator to support their review of the
application over the coming months.
GROUP FUNDING(1)
31 January 31 July 2020
2021 GBP million
GBP million
--------------------------------------- ------------- -------------
Customer deposits 6,444.8 5,917.7
Secured funding 1,388.9 1,418.2
Unsecured funding(2) 1,796.0 1,460.1
Equity 1,480.4 1,449.6
--------------------------------------- ------------- -------------
Total available funding 11,110.1 10,245.6
--------------------------------------- ------------- -------------
Of which term funding (>1 year) 5,393.3 4,671.6
Total funding as % of loan book 140% 135%
Average maturity of funding allocated
to loan book(3) 24 months 18 months
1 Numbers relate to core funding and exclude working capital
facilities at the business level.
2 Unsecured funding excludes GBP46.7 million (31 July 2020:
GBP7.9 million) of non-facility overdrafts included in borrowings
and includes GBP295.0 million (31 July 2020: GBP295.0 million) of
undrawn facilities.
3 Average maturity of total funding excluding equity and funding
held for liquidity purposes.
The primary purpose of our treasury function is to manage
funding and liquidity to support the lending businesses and manage
interest rate risk. Our conservative approach to funding is based
on the principle of "borrow long, lend short", with a spread of
maturities over the medium and longer term, comfortably ahead of a
shorter average loan book maturity. It is also diverse, drawing on
a wide range of wholesale and deposit markets including several
public debt securities at both group and operating company level as
well as a number of securitisations.
We further increased total funding in the first half of the year
to GBP11.1 billion (31 July 2020: GBP10.2 billion) which accounted
for 140% (31 July 2020: 135%) of the loan book at the balance sheet
date. The average cost of funding reduced to 1.5% (H1 2020: 1.7%)
mainly driven by a reduction in market rates and re-pricing of
deposits.
Unsecured funding, which includes senior unsecured bonds and
undrawn facilities, increased to GBP1.8 billion (31 July 2020:
GBP1.5 billion) as we issued a GBP350 million, 10 year senior
unsecured bond in December 2020.
We transitioned GBP262 million of drawings previously under the
Bank of England's Term Funding Scheme ("TFS") to the Term Funding
Scheme with additional incentives for SMEs ("TFSME") in October
2020, taking the total drawings under TFSME to GBP490 million, and
no longer have any drawings under the TFS.
Following the successful launch of our online savings portal, we
have continued to see a good level of customer take up and positive
feedback, with c.11,000 customers now registered for online access.
The online portal has provided an important channel for new
business during the pandemic. We have continued to expand the
product offering, including the launch of a 35 Day Retail Notice
Account and Fixed Rate Cash Individual Savings Accounts ("ISA")
since the start of the current financial year, which will continue
to grow and diversify our retail deposit base and further optimise
our cost of funding and maturity profile.
Deposits increased 9% overall to GBP6.4 billion (31 July 2020:
GBP5.9 billion) with non-retail deposits increasing by 12% to
GBP3.7 billion (31 July 2020: GBP3.3 billion) and retail deposits
increasing by 5% to GBP2.7 billion (31 July 2020: GBP2.6
billion).
We have maintained a prudent maturity profile. The average
maturity of funding allocated to the loan book remained ahead of
the loan book at 24 months (31 July 2020: 18 months), with the
average loan book maturity at 16 months (31 July 2020: 15
months).
Our strong credit ratings have been affirmed by both Moody's
Investors Services ("Moody's") and Fitch Ratings ("Fitch") during
the period. Moody's rates Close Brothers Group "A3/P2" and Close
Brothers Limited "Aa3/P1" with a "negative" outlook. Fitch rates
both Close Brothers Group and Close Brothers Limited "A-/F2" (from
"A/F1"), with a "negative" outlook.
GROUP LIQUIDITY
31 January 2021 31 July 2020
GBP million GBP million
---------------------------------------- -------------
Cash and balances at central
banks 1,908.5 1,375.8
Sovereign and central bank
debt 94.1 72.2
Certificates of deposit 179.5 285.9
------------------------------- -------- -------------
Treasury assets 2,182.1 1,733.9
------------------------------- -------- -------------
The group continues to adopt a conservative stance on liquidity,
ensuring it is comfortably ahead of both internal risk appetite and
regulatory requirements.
Against a backdrop of a generally weak UK economic outlook
driven by the continued uncertainty over the implications of Brexit
and the Covid-19 crisis, the group continued to deliberately
maintain higher liquidity levels to provide additional flexibility
as uncertainty persists whilst enabling us to maximise any
opportunities available. The proceeds from the senior unsecured
bond issued in December 2020 further contributed to the elevated
liquidity levels at the end of the period. As a result, treasury
assets, predominantly held on deposit with the Bank of England,
increased by 26% to GBP2.2 billion (31 July 2020: GBP1.7
billion).
We regularly assess and stress test the group's liquidity
requirements and continue to comfortably meet the Liquidity
coverage ratio ("LCR") regulatory requirements, with a 6-month
average to 31 January 2021 LCR of 1,049% (12-month average to 31
July 2020: 823%).
BUSINESS REVIEW
BANKING
Key Financials
First half First half Change
2021 2020 %
GBP million GBP million
--------------------------------- ---------------- ---------------- -------
Operating income 309.0 306.4 1
Adjusted operating expenses (161.0) (154.3) 4
Impairment losses on loans and
advances (52.9) (36.7) 44
--------------------------------- ---------------- ---------------- -------
Adjusted operating profit 95.1 115.4 (18)
--------------------------------- ---------------- ---------------- -------
Net interest margin 7.7% 7.8%
Expense/income ratio 52% 50%
Bad debt ratio 1.3% 0.9%
Return on net loan book 2.4% 2.9%
Return on opening equity 11.7% 14.7%
--------------------------------- ---------------- ---------------- -------
Closing loan book 7,953.5 7,619.1 4
--------------------------------- ---------------- ---------------- -------
Average loan book and operating
lease assets 8,004.9 7,862.2 2
--------------------------------- ---------------- ---------------- -------
A strong performance, with loan book growth, in the current
market conditions
Although income grew in the Banking division, adjusted operating
profit decreased 18% to GBP95.1 million (H1 2020: GBP115.4 million)
reflecting higher impairment charges and continued investment
across the division. Statutory operating profit decreased to
GBP94.1 million (H1 2020: GBP114.4 million).
The loan book grew 4.4% in the period to GBP7.95 billion (31
January 2020: GBP7.62 billion, 31 July 2020: GBP7.62 billion), as
we experienced strong demand for loans issued under CBILS,
particularly in Asset Finance, and record new business levels in
Motor Finance.
The return on net loan book, although slightly lower than the
first half of 2020, was solid at 2.4% (H1 2020: 2.9%) and was
significantly above the levels seen in the 2020 financial year (31
July 2020: 1.3%).
Operating income increased 1% to GBP309.0 million (H1 2020:
GBP306.4 million), driven by strong new business volumes and growth
in the loan book.
The net interest margin of 7.7% (H1 2020: 7.8%) was broadly
stable on the first half of 2020 but increased on the 2020
financial year (FY 2020: 7.5%). Excluding the impact of certain
items such as modification gains and losses arising from the onset
of Covid-19 and adjusting for day count, the monthly net interest
margin in the first half remained stable on the 2020 financial year
exit rate at c.7.5%, as we maintained our focus on pricing
discipline. While we have continued to see some impact from lower
fee and other income due to Covid-19, this was partially offset by
a reduction in our cost of funds.
Maintaining our rigorous focus on cost management whilst
investing through the cycle remains a strategic priority for the
group. BAU costs remained flat despite an increase in staff costs
which mainly reflected volume-driven compensation and accrual of
discretionary bonuses. Investment costs increased GBP6.9 million to
GBP31.8 million as we progressed our strategic projects and
incurred related depreciation charges. As a result, adjusted
operating expenses increased 4%, to GBP161.0 million (H1 2020:
GBP154.3 million). As we continue to invest to protect, grow and
sustain our business model, costs are expected to grow ahead of
income in the remainder of the year.
Overall, the compensation ratio increased to 30% (H1 2020: 28%)
and the expense/income ratio increased to 52% (H1 2020: 50%).
Impairment charges increased to GBP52.9 million (H1 2020:
GBP36.7 million) with an annualised bad debt ratio of 1.3% (H1
2020: 0.9%), up on the pre Covid-19 ratio of 0.9% for the first
half of 2020 but significantly lower than the 2.3% ratio for the
2020 financial year.
We have revised the macroeconomic scenarios and the weightings
assigned to them, with a 40% weighting remaining to the baseline,
and 10% moved to the upside scenario, to reflect reduced Brexit
uncertainty and the Covid-19 vaccination developments. However, the
modelled impact of these changes on impairment provisions has been
mainly offset by judgemental management overlays to reflect the
continued uncertainty in the UK economic outlook.
Overall, impairment provisions increased in the first half to
take into account loan book growth and a review of staging and
provision coverage for individual loans and portfolios. These
factors resulted in an overall increase in provision coverage to
3.3% (31 January 2020: 1.5%, 31 July 2020: 3.0%).
We believe this represents an appropriate level of provision,
reflecting the highly uncertain external environment and the fact
that the full impact of Covid-19 has yet to be reflected in
experienced credit performance.
Loan Book Analysis
31 January
2021 31 July 2020 Change
GBP million GBP million %
--------------------------------- ------------ -------------- --------
Commercial 3,509.4 3,048.0 15.1
------------ -------------- --------
Asset Finance 2,551.0 2,167.4 17.7
Invoice and Speciality Finance 958.4 880.6 8.8
------------ -------------- --------
Retail 2,843.8 2,834.5 0.3
------------ -------------- --------
Motor Finance 1,818.6 1,749.4 4.0
Premium Finance 1,025.2 1,085.1 (5.5)
------------ -------------- --------
Property 1,600.3 1,734.2 (7.7)
--------------------------------- ------------ -------------- --------
Closing loan book 7,953.5 7,616.7 4.4
--------------------------------- ------------ -------------- --------
Operating lease assets(1) 217.6 221.9 (1.9)
--------------------------------- ------------ -------------- --------
Closing loan book and operating
lease assets 8,171.1 7,838.6 4.2
--------------------------------- ------------ -------------- --------
1 Operating lease assets of GBP2.4 million (31 July 2020: GBP2.9
million) relate to Asset Finance & Leasing and GBP215.2 million
(31 July 2020: GBP219.0 million) to Invoice and Speciality
Finance.
The loan book grew 4.4% in the period to GBP7.95 billion (31
January 2020: GBP7.62 billion, 31 July 2020: GBP7.62 billion), as
we experienced high levels of new business volumes alongside strong
demand for SME business loans issued under CBILS and record new
business levels in Motor Finance. The national lockdown
restrictions announced in January have resulted in a slowdown in
customer activity in some of our businesses.
We remain confident in the quality of the loan book, which is
predominantly secured, prudently underwritten and diverse. The
group's largest single sector exposure is to residential property
development and construction (c.20%) predominantly through the
Property loan book. Consumer lending represented c.32% of the
group's exposure with Motor Finance and Premium Finance personal
lines comprising c.23% and c.6% respectively. Sector exposures to
retail, hospitality, leisure, air transport, and oil and gas are
minimal.
The Commercial loan book increased to GBP3.5 billion (31 July
2020: GBP3.0 billion), driven by strong new business volumes in
Asset Finance in particular. We experienced strong demand for SME
business loans issued under CBILS, supporting many existing
customers through this scheme.
At 31 January 2021, we had lent GBP730 million under the
government support schemes in the Commercial and Property
businesses, with a further GBP186 million credit approved. The vast
majority of lending is via CBILS, under which we are accredited to
lend up to GBP1.25 billion, with GBP31 million lent via CLBILS and
GBP2.3 million via BBLS. The existing UK government support schemes
for SMEs are due to end on 31 March 2021, to be replaced by the new
Recovery Loan Scheme which launches on 6 April 2021 and will run
until 31 December 2021.
In Invoice Finance, utilisation levels remain subdued and
continue to track below pre Covid-19 levels.
The Retail loan book remained flat at GBP2.8 billion (31 July
2020: GBP2.8 billion) in the first six months, with growth in Motor
Finance largely offset by a reduction in Premium Finance. Record
new business volumes were seen in Motor Finance, reflecting pent up
demand, an increasing use of finance in the second hand car market
and also the benefits from the Motor Finance transformation
programme. In Premium Finance, the loan book reduction primarily
reflected the impact of Covid-19 restrictions, exacerbated by
seasonality.
The Property loan book reduced to GBP1.6 billion (31 July 2020:
GBP1.7 billion), driven by lower drawdowns and higher repayment
levels, which reflect delays in completion of developments due to
Covid-19 restrictions and strong unit sales.
Banking: Commercial
First half First half Change
2021 2020 %
GBP million GBP million
--------------------------------- ------------- ------------- --------------
Operating income 136.6 129.6 5
Adjusted operating expenses (76.2) (72.7) 5
Impairment losses on financial
assets (33.0) (18.4) 79
--------------------------------- ------------- ------------- --------------
Adjusted operating profit 27.4 38.5 (29)
Net interest margin 7.8% 8.0%
Expense/income ratio 56% 56%
Bad debt ratio 1.9% 1.1%
--------------------------------- ------------- ------------- --------------
Closing loan book 3,509.4 3,065.4 14
--------------------------------- ------------- ------------- --------------
Average loan book and operating
lease assets 3,498.5 3,256.2 7
--------------------------------- ------------- ------------- --------------
The Commercial businesses provide specialist, predominantly
secured lending principally to the SME market and include Asset
Finance and Invoice and Speciality Finance.
The Commercial loan book increased to GBP3.5 billion (31 July
2020: GBP3.0 billion), with the Asset Finance book up 18% to GBP2.6
billion (31 July 2020: GBP2.2 billion) reflecting strong new
business volumes and demand under the CBILS lending scheme. Invoice
& Speciality Finance grew by 9% to GBP1.0 billion (31 July
2020: GBP0.9 billion), driven by new business, with good demand
under the government schemes. However, overall utilisation levels
in this business remain subdued versus pre Covid-19 levels.
Adjusted operating profit of GBP27.4 million (H1 2020: GBP38.5
million) was down 29% year-on-year, reflecting an increase in
impairment charges, although was significantly above the full year
2020 adjusted operating profit of GBP4.8 million. Statutory
operating profit was GBP26.5 million (H1 2020: GBP37.6
million).
Operating income of GBP136.6 million (H1 2020: GBP129.6 million)
was 5% higher than the comparative period, driven by the strong
growth in the loan book and operating lease assets. The net
interest margin decreased marginally to 7.8% (H1 2020: 8.0%),
primarily reflecting the impact of Covid-19 on customer activity
and fee income.
Adjusted operating expenses increased 5% to GBP76.2 million (H1
2020: GBP72.7 million), primarily driven by higher volume-driven
compensation and investment in the Asset Finance transformation
programme. This programme is aimed at increased sales effectiveness
through enhanced data capabilities and technology, with the first
phase expected to deliver additional new business volumes over
time. The next phase will focus on optimising our operational
efficiency, with upgraded systems and processes to support the
long-term resilience of the business. The expense/income ratio
remained stable at 56% (H1 2020: 56%) as growth in operating income
balanced the cost growth.
Impairment charges increased to GBP33.0 million (H1 2020:
GBP18.4 million), reflecting loan book growth and a review of
staging and provision coverage for individual loans and portfolios.
This resulted in an annualised bad debt ratio of 1.9% (H1 2020:
1.1%), significantly down from the 3.1% ratio for the 2020
financial year, reflecting a broadly stable credit environment over
the first half. The provision coverage ratio remained stable on the
position at the end of the last financial year at 3.9% (31 January
2020: 1.9%, 31 July 2020: 3.9%) as the increase in provisions was
offset by higher loan book balances as a result of strong new
business volumes.
The Commercial loan book is predominantly secured, with minimal
exposure to higher risk sectors and those impacted most severely
through the recent crisis, such as travel and leisure, hospitality
or oil and gas. Our loans are conservatively underwritten with
prudent LTVs, supported by our specialist expertise in the
underlying assets and long-standing industry relationships.
At 31 January 2021, 20% of the Commercial loan book by value (31
July 2020: 26%) was classified as forborne and subject to Covid-19
forbearance measures, with balances of GBP728.7 million (31 July
2020: GBP832.8 million). These forbearance measures are principally
in the form of payment deferrals with fees and charges waived in
the Asset Finance business, and flexing of repayments percentages
and overpayments on invoice discounting and factoring facilities.
Of those customers classified as forborne at 31 January 2021 and
subject to Covid-19 forbearance measures, 87% (by value) had
resumed payments.
Banking: Retail
First half First half Change
2021 2020 %
GBP million GBP million
----------------------------- ------------- ------------- -------
Operating income 112.1 113.4 (1)
Adjusted operating expenses (67.8) (63.9) 6
Impairment losses on loans
and advances (16.4) (15.4) 6
----------------------------- ------------- ------------- -------
Adjusted operating profit 27.9 34.1 (18)
Net interest margin 7.9% 8.1%
Expense/income ratio 60% 56%
Bad debt ratio 1.2% 1.1%
----------------------------- ------------- ------------- -------
Closing loan book 2,843.8 2,784.1 2
----------------------------- ------------- ------------- -------
Average loan book 2,839.2 2,797.4 1
----------------------------- ------------- ------------- -------
The Retail businesses provide intermediated finance, principally
to individuals and small businesses, through motor dealers and
insurance brokers.
The Retail loan book remained flat at GBP2.8 billion (31 July
2020: GBP2.8 billion), with growth in Motor Finance largely offset
by a reduction in Premium Finance.
The Motor Finance book increased 4% to GBP1.8 billion (31 July
2020: GBP1.7 billion) as we experienced strong new business driven
by pent up demand and an increasing use of finance in the second
hand car market. Investment in our Motor 2020 programme has also
been instrumental in supporting the loan book growth and driving
new business volumes. In September 2020, we experienced our highest
ever monthly volumes, but the national lockdown that commenced in
January 2021 is impacting new business, albeit volumes have
remained largely resilient compared to the first lockdown.
The Premium Finance book declined by 6% to GBP1.0 billion (31
July 2020: GBP1.1 billion) primarily reflecting impact of Covid-19
restrictions, exacerbated by seasonality.
Overall, adjusted operating profit for Retail decreased 18% to
GBP27.9 million (H1 2020: GBP34.1 million), reflecting an increase
in costs and an impairment charge of GBP16.4 million. Statutory
operating profit was GBP27.8 million (H1 2020: GBP34.0
million).
Operating income decreased by 1% on the prior year period to
GBP112.1 million (H1 2020: GBP113.4 million), with a decline in net
interest margin to 7.9% (H1 2020: 8.1%) largely reflecting lower
rates as a result of broker consolidation in the insurance sector
and the waiving of fees due to Covid-19 forbearance in Premium
Finance.
Adjusted operating expenses increased 6% to GBP67.8 million (H1
2020: GBP63.9 million) and the expense/income ratio increased to
60% (H1 2020: 56%), reflecting volume-driven costs and ongoing
investment in Motor Finance. Good progress continues to be made
with the Motor Finance transformation programme which is aimed at
improving the service proposition, enhancing operational
efficiency, improving our credit acceptance process and increasing
sales effectiveness.
Impairment charges increased to GBP16.4 million (H1 2020:
GBP15.4 million) with an annualised bad debt ratio of 1.2% (H1
2020: 1.1%, FY 2020: 2.0%), reflecting a relatively stable credit
environment. The provision coverage ratio increased slightly on the
position at the end of the last financial year to 2.7% (31 January
2020: 1.4%, 31 July 2020: 2.5%) due to movements in staging and
coverage to reflect the performance of the forborne loan book.
We remain confident in the credit quality of the Retail loan
book. The Motor Finance loan book is predominantly secured on
second-hand vehicles which are less exposed to depreciation or
significant declines in value than new cars. Our core Motor Finance
product remains hire-purchase contracts, with less exposure to
residual value risk associated with Personal Contract Plans
("PCP"), which accounted for only c.12% of the Motor Finance loan
book at 31 January 2021. The Premium Finance loan book benefits
from various forms of structural protection including premium
refundability and, in most cases, broker recourse for the personal
lines product.
At 31 January 2021, 6% of the Retail loan book by value (31 July
2020: 9%) was classified as forborne and subject to Covid-19
forbearance measures, principally in the form of payment deferrals,
with balances of GBP165.0 million (31 July 2020: GBP251.0 million).
Of those customers classified as forborne at 31 January 2021 and
subject to Covid-19 forbearance measures, 79% (by value) had
resumed payments.
Banking: Property
First half First half Change
2021 2020 %
GBP million GBP million
----------------------------- ------------- ------------- -------
Operating income 60.3 63.4 (5)
Adjusted operating expenses (17.0) (17.7) (4)
Impairment losses on loans
and advances (3.5) (2.9) 21
----------------------------- ------------- ------------- -------
Operating profit 39.8 42.8 (7)
Net interest margin 7.2% 7.0%
Expense/income ratio 28% 28%
Bad debt ratio 0.4% 0.3%
----------------------------- ------------- ------------- -------
Closing loan book 1,600.3 1,769.6 (10)
----------------------------- ------------- ------------- -------
Average loan book 1,667.3 1,808.6 (8)
----------------------------- ------------- ------------- -------
Property comprises Property Finance and Commercial Acceptances.
The Property Finance business is focused on specialist residential
development finance to established professional developers in the
UK. Commercial Acceptances provides bridging loans and loans for
refurbishment projects. We do not lend to the buy-to-let sector or
provide residential or commercial mortgages.
Our long track record, expertise and quality of service ensure
the business remains resilient to competition and continues to
generate high levels of repeat business. We continue to see success
from our regional initiative, supported by the launch of our
Manchester office in 2019, with the regional loan book now making
up almost 50% of the Property Finance portfolio.
The Property loan book reduced to GBP1.6 billion (31 July 2020:
GBP1.7 billion), driven by lower drawdowns and higher repayment
levels. This reflects delays in completion of developments due to
Covid-19 restrictions and strong unit sales due to the release of
pent up demand and buyers taking advantage of the Stamp Duty
holiday and Help to Buy incentives. New business volumes remain
solid, with undrawn commitments up on the prior year period at
GBP1.0 billion (31 January 2020: GBP0.9 billion).
The business delivered an operating profit of GBP39.8 million
(H1 2020: GBP42.8 million), down 7% year-on-year as a result of
lower income.
Operating income decreased 5% to GBP60.3 million (H1 2020:
GBP63.4 million) reflecting the reduction in the loan book,
although the net interest margin increased to 7.2% (H1 2020: 7.0%),
driven by lower costs of funds and the unwind of modification
losses.
Operating expenses were 4% lower at GBP17.0 million (H1 2020:
GBP17.7 million) as we maintained our rigorous focus on cost
management. The expense/income ratio remained stable at 28% (H1
2020: 28%), with the reduction in income offset by disciplined cost
control.
Impairment charges increased to GBP3.5 million (H1 2020: GBP2.9
million), resulting in an annualised bad debt ratio of 0.4% (H1
2020: 0.3%, FY 2020: 1.5%). The provision coverage ratio increased
on the position at the end of the last financial year to 3.1% (31
January 2020: 0.9%, 31 July 2020: 2.5%) following a review of
coverage across the portfolio.
The Property loan book is conservatively underwritten with a
maximum LTV of 60% at origination on residential development
finance, which accounts for the vast majority of the loan book. We
work with experienced, professional developers, with a focus on
mid-priced family housing, and have minimal exposure to the prime
central London market.
At 31 January 2021, 74 customers (31 July 2020: 187 customers)
accounting for 13% of the Property loan book by value (31 July
2020: 18%) were subject to forbearance measures as a result of
Covid-19, principally in the form of fee-free extensions for
residential development loans where we remain confident in the
quality of the underlying borrower and security.
ASSET MANAGEMENT
Key Financials
First half First half Change
2021 2020 %
GBP million GBP million
------------------------------ ------------- ------------- -------
Investment management 49.3 46.2 7
Advice and other services(1) 17.7 18.7 (5)
Other income(2) 0.1 0.8 (88)
------------------------------ ------------- ------------- -------
Operating income 67.1 65.7 2
Adjusted operating expenses (54.8) (53.1) 3
Adjusted operating profit 12.3 12.6 (2)
------------------------------ ------------- ------------- -------
Revenue margin (bps) 94 95
Operating margin 18% 19%
Return on opening equity 32.5% 35.6%
1 Income from advice and self-directed services, excluding investment management income.
2 Other income includes net interest income and expense, income
on principal investments and other income. Other income in the
first half of 2020 includes a GBP0.5 million gain on disposal of
non-core assets.
Continued growth in a challenging operating environment
The Asset Management division provides financial advice and
investment management services to private clients in the UK,
including full bespoke management, managed portfolios and funds,
distributed both directly via our own advisers and investment
managers, and through third party independent financial advisers
("IFAs").
Adjusted operating profit was broadly flat at GBP12.3 million
(H1 2020: GBP12.6 million) as operating income grew despite the
impact of Covid-19 on new business activity, and we continued to
invest to support the long-term growth potential of the business.
The operating margin was broadly stable at 18% (H1 2020: 19%) and
statutory operating profit before tax was GBP11.8 million (H1 2020:
GBP12.0 million).
Total operating income increased 2% to GBP67.1 million (H1 2020:
GBP65.7 million), driven by higher investment management income
from growth in managed assets. The reduction in income on advice
and other services reflects lower initial advice fees from reduced
levels of new business activity, reflecting the impact of Covid-19
on the ability to meet with clients face-to-face. The revenue
margin was broadly stable at 94 bps (H1 2020: 95 bps) reflecting
lower initial advice fees and a change in the mix of investment
management products.
Adjusted operating expenses increased 3% to GBP54.8 million (H1
2020: GBP53.1 million), and the expense/income ratio increased to
82% (H1 2020: 81%). The growth in expenses was driven by continued
investment in people and new hires, in line with our growth
strategy, as well as our investment in technology. The compensation
ratio increased to 57% (H1 2020: 56%) primarily reflecting
headcount growth.
Solid net inflows
Despite the impact of Covid-19, markets have recovered
significantly since the initial falls seen in 2020. However, the
ongoing economic impact of Covid-19 and resulting lockdown
restrictions have contributed to a slowdown in net inflows. We
achieved net inflows of GBP267 million (H1 2020: GBP672 million),
an annualised net inflow rate of 4% (H1 2020: 12%), reflecting
continued demand for our integrated wealth and investment
management services and good inflows from our recent portfolio
manager hires.
Positive market movements contributed GBP934 million to managed
assets in the first half of the year. The combined impact with
positive net inflows resulted in managed assets increasing 10%
overall to GBP13.8 billion (31 July 2020: GBP12.6 billion).
Total client assets increased 9% overall, to GBP14.9 billion (31
July 2020: GBP13.7 billion).
Movement in Client Assets
Six months 12 months
to to Six months
31 January 31 July to 31 January
2021 2020 2020
GBP million GBP million GBP million
----------------------------------- -------------- -------------- ---------------
Opening managed assets 12,594 11,673 11,673
Inflows 1,029 2,350 1,263
Outflows (762) (1,257) (591)
----------------------------------- -------------- -------------- ---------------
Net inflows 267 1,093 672
Market movements 934 (172) 319
Total managed assets 13,795 12,594 12,664
Advised only assets 1,132 1,118 1,331
----------------------------------- -------------- -------------- ---------------
Total client assets(1) 14,927 13,712 13,995
----------------------------------- -------------- -------------- ---------------
Net flows as % of opening managed
assets(2) 4% 9% 12%
----------------------------------- -------------- -------------- ---------------
1 Total client assets include GBP5.1 billion of assets (31 July
2020: GBP5.1 billion) that are both advised and managed.
2 Net flows as % of opening managed assets calculated on an annualised basis.
Fund performance
Our funds and segregated bespoke portfolios are designed to
provide attractive risk-adjusted returns for our clients,
consistent with their long-term goals and investment objectives.
Fund performance has been mixed over the last year reflecting
volatile equity markets. Over the 12-month period to 31 January
2021, three out of our 14 multi-asset funds outperformed their
relevant peer group average, with ten of the 14 outperforming over
the three-year period to 31 January 2021. Our bespoke strategy
composites continued to perform well, largely outperforming their
respective peer groups over a one, three and five year period,
demonstrating a strong track record.
Well positioned for future growth
Despite the challenges presented by Covid-19, we have remained
committed to providing excellent service to our clients whilst
investing in new hires and technology to support the long-term
growth potential of the business. We have made significant progress
on enhancing and consolidating our technology platform, which will
further improve operating efficiency and strengthen our systems,
creating a more scalable and future proof platform. This investment
in our technology platform will also result in improved onboarding
and enhanced digital functionality.
Sustainable investment strategies remain a key focus area across
the industry and our socially responsible investment proposition
continues to be well received, with the launch of two new
sustainable funds (Close Sustainable Balanced Portfolio Fund and
Close Sustainable Bond Portfolio Fund) which are gaining good
traction.
Our vertically-integrated, multi-channel business model leaves
us well positioned to benefit from continued demand for our
services and the structural growth opportunity presented by the
wealth management industry. We continue to invest to support the
long-term growth potential of the business and remain committed to
driving growth both organically and through the continued selective
hiring of advisers and investment managers, and through in-fill
acquisitions.
WINTERFLOOD
Key Financials
First half First half Change
2021 2020 %
GBP million GBP million
--------------------------------- ------------- ------------- -------
Operating income 98.0 47.9 105
Operating expenses (63.9) (37.3) 71
Impairment losses on financial 0.1 - -
assets
Operating profit 34.2 10.6 223
Average bargains per day ('000) 97 57
Operating margin 35% 22%
Return on opening equity 69.3% 22.2%
Very strong trading performance benefiting from heightened
market activity
Winterflood is a leading UK market maker, focused on delivering
high quality execution services to stockbrokers, wealth managers
and institutional investors.
Winterflood had a very strong first half of the financial year,
benefiting from elevated market activity and demonstrating the
ability of the business to lean into significant trading volumes.
This enabled the business to deliver operating profit of GBP34.2
million (H1 2020: GBP10.6 million), 223% up on the first half of
2020.
Operating income increased 105% to GBP98.0 million (H1 2020:
GBP47.9 million), delivering Winterflood's best start to the
financial year in the last decade.
Strong trading volumes were seen throughout the first half,
compounded by the underlying increase in retail investor activity
since the start of the pandemic, with significant events including
the US presidential election, Covid-19 vaccine approvals and a
post-Brexit trade deal. UK equities performed strongly in November
2020 on the back of positive vaccine news, enabling Winterflood to
deliver its highest ever daily trading volume on record of 227k on
9 November 2020, surpassing the previous high of 186k achieved on 8
June 2020. Average daily bargains in the period increased 72% to
97k (H1 2020: 57k), nearing the levels seen in the second half of
2020 (H2 2020: 108k). We delivered a strong performance across all
business sectors we operate in.
Notwithstanding the substantial trading volumes seen, there were
no loss days in the period (H1 2020: no loss days), demonstrating
the expertise of our traders and their ability to manage risk.
Furthermore, we were able to maintain full operational capacity
throughout, despite the majority of our staff working from home, as
our technology supported us in maximising the market
opportunity.
Operating expenses increased 71% to GBP63.9 million (H1 2020:
GBP37.3 million), driven by the variable nature of Winterflood's
cost base, with the increased revenue performance and trading
volumes leading to higher staff compensation and settlement costs.
The expense/income ratio decreased to 65% (H1 2020: 78%), driven by
the high levels of income, partially offset by the corresponding
increase in variable costs. The compensation ratio remained stable
at 48% (H1 2020: 48%).
Winterflood is continuing to take advantage of market
opportunities, building on the strong momentum seen in 2020.
Positive progress has been made in expanding its institutional
client base and we continue to trade directly with US
counterparties through our relationship with our affiliate licensed
broker dealer. Winterflood Business Services, which provides
outsourced dealing and custody services for asset managers and
platforms, has performed well in the period, generating good levels
of income. Its assets under administration have increased to GBP5.0
billion (H1 2020: GBP4.1 billion).
Winterflood has delivered a very strong first half performance
and has continued to benefit from heightened market activity since
the period end, but as a daily trading business remains sensitive
to changes in the market environment.
DEFINITIONS
Adjusted : Adjusted measures are used to increase comparability
between periods and exclude amortisation of intangible assets on
acquisition, any exceptional items and discontinued operations
Annualised net flows : Net flows as a percentage of opening
managed assets calculated on an annualised basis
Assets under administration : Total assets for which Winterflood
Business Services provide custody and administrative services
Bad debt ratio : Impairment losses as a percentage of average
net loans and advances to customers and operating lease assets
Bargains per day : Daily number of Winterflood's trades with
third parties
Bounce Back Loan Scheme ("BBLS") : UK government business
lending scheme that helps small and medium-sized businesses to
borrow between GBP2,000 and GBP50,000 (up to a maximum of 25% of
their turnover)
Business as usual ("BAU") costs: Operating expenses excluding
depreciation and other costs related to investments
Capital Requirements Regulation ("CRR"): UK onshored provisions
of EU regulation 575/2013
Common equity tier 1 ("CET1") capital : Measure of capital as
defined by the CRR. CET1 capital consists of the highest quality
capital including ordinary shares, share premium account, retained
earnings and other reserves, less goodwill and intangible assets
and certain other regulatory adjustments
CET1 capital ratio : Measure of the group's CET1 capital as a
percentage of risk weighted assets, as required by CRR
Compensation ratio : Total staff costs as a percentage of
operating income
Coronavirus Business Interruption Loan Scheme ("CBILS") : UK
government business lending scheme that helps small and
medium-sized businesses access loans and other kinds of finance up
to GBP5 million
Coronavirus Large Business Interruption Loan Scheme ("CLBILS") :
UK government business lending scheme that helps medium and
large-sized businesses access loans and other kinds of finance up
to GBP200 million
Dividend per share : Comprises the final dividend proposed for
the respective year, together with the interim dividend declared
and paid in the year
Earnings per share ("EPS") : Profit attributable to shareholders
divided by number of shares
Effective tax rate : Tax on operating profit/(loss) as a
percentage of operating profit/(loss) on ordinary activities before
tax
Expected credit loss : The unbiased probability-weighted average
credit loss determined by evaluating a range of possible outcomes
and future economic conditions
Expense/income ratio : Total adjusted operating expenses divided
by operating income
Funding allocated to loan book : Total funding excluding equity
and funding held for liquidity purposes
Funding % loan book : Total funding divided by net loans and
advances to customers
Gross carrying amount : Loan book before expected credit loss
provision
High quality liquid assets ("HQLAs") : Assets which qualify for
regulatory liquidity purposes, including Bank of England deposits
and sovereign and central bank debt
Independent financial adviser ("IFA"): Professional offering
independent, whole of market advice to clients including
investments, pensions, protection and mortgages
Internal ratings based ("IRB") approach: A supervisor-approved
method using internal models, rather than standardised risk
weightings, to calculate regulatory capital requirements for credit
risk
Investment costs: Include depreciation and other costs related
to investment in multi-year projects, new business initiatives and
pilots and cyber resilience. Excludes IFRS16 depreciation
Leverage ratio : Tier 1 capital as a percentage of total balance
sheet assets, adjusted for certain capital deductions, including
intangible assets, and off balance sheet exposures
Liquidity coverage ratio ("LCR") : Measure of the group's HQLAs
as a percentage of expected net cash outflows over the next 30 days
in a stressed scenario
Loan to value ("LTV") ratio : For a secured or structurally
protected loan, the loan balance as a percentage of the total value
of the asset
Managed assets or assets under management: Total market value of
assets which are managed by Close Brothers Asset Management in one
of our investment solutions
Modification losses: Modification losses arise when the
contractual terms of a financial asset are modified. An adjustment
is required to the carrying value of the financial asset to reflect
the present value of modified future cash flows discounted at the
original effective interest rate
Net carrying amount : Loan book value after expected credit loss
provision
Net interest margin : Operating income generated by lending
activities, including interest income net of interest expense, fees
and commissions income net of fees and commissions expense, and
operating lease income net of operating lease expense, less
depreciation on operating lease assets, divided by average loans
and advances to customers (net of impaired loans) and operating
lease assets
Operating margin : Adjusted operating profit divided by
operating income
Personal Contract Plan ("PCP") : PCP is a form of vehicle
finance where the customer defers a significant portion of credit
to the final repayment at the end of the agreement, thereby
lowering the monthly repayments compared to a standard hire
purchase arrangement. At the final repayment date, the customer has
the option to: (a) pay the final payment and take the ownership of
the vehicle; (b) return the vehicle and not pay the final
repayment; or (c) part-exchange the vehicle with any equity being
put towards the cost of a new vehicle
Return on assets : Adjusted profit attributable to shareholders
divided by total closing assets at the balance sheet date
Return on average tangible equity : Adjusted profit attributable
to shareholders from continuing operations divided by average total
shareholder's equity, excluding intangible assets
Return on net loan book : Adjusted operating profit from lending
activities divided by average net loans and advances to customers
and operating lease assets
Return on opening equity : Adjusted profit attributable to
shareholders from continuing operations divided by opening equity,
excluding non-controlling interests
Revenue margin : Income from advice, investment management and
related services divided by average total client assets. Average
total client assets calculated as a two-point average
Risk weighted assets ("RWAs"): A measure of the amount of a
bank's assets, adjusted for risk. It is used in determining the
capital requirement for a financial institution
Term funding : Funding with a remaining maturity greater than 12
months
Term Funding Scheme ("TFS") : The Bank of England's Term Funding
Scheme
Term Funding Scheme for Small and Medium-sized Enterprises
("TFSME") : The Bank of England's Term Funding Scheme with
additional incentives for SMEs
Total client assets ("TCA"): Total market value of all client
assets including both managed assets and assets under advice and/or
administration in the Asset Management division
Principal Risks and Uncertainties
The group faces a number of risks in the normal course of
business. To manage these effectively, a consistent approach is
adopted based on a set of overarching principles, namely:
-- adhering to our established and proven business model;
-- implementing an integrated risk management approach based on
the concept of "three lines of defence"; and
-- setting and operating within clearly defined risk appetites,
monitored with defined metrics and set limits.
While there have been no significant changes to our risk
management approach in the period, we continue to closely monitor
and manage the impacts of the Coronavirus pandemic. This includes
both internal and external impacts, and incorporates wider
macroeconomic ramifications.
Through the crisis, the group has continued to employ
preventative measures to minimise potential risks to colleagues, as
well as business disruption. Business continuity plans have been
updated and remain under constant review with oversight provided by
the Group Executive Committee, which continues to monitor
developments on a day-to-day basis.
The group's principal risks remain unchanged since the year end.
A detailed description of each, including an overview of our risk
management and mitigation approach, is disclosed on pages 53 to 59
of the Annual Report 2020 as part of the 2020 Risk Report. The
Annual Report can be accessed via the Investor Relations home page
on the group's website at www.closebrothers.com .
A summary of the group's principal risks is included below:
Business risk - The group operates in an environment where it is
exposed to an array of independent factors including the broader UK
economic climate, changes in technology, regulation and customer
behaviour, cost movements and competition from traditional and new
players. Changes in these factors may affect the bank's ability to
write loans at its desired risk and return criteria, result in
lower new business volumes in Asset Management or impact levels of
trading activity at Winterflood.
Capital risk - The group is required to hold sufficient
regulatory capital to enable it to operate effectively. This
includes meeting minimum regulatory requirements, operating within
risk appetites set by the board and supporting its strategic
goals.
Conduct risk - Failing to treat customers fairly, to safeguard
client assets or to provide advice and products which are in
clients' best interests, has the potential to damage our reputation
and may lead to legal or regulatory sanctions, litigation or
customer redress.
Credit risk - As a lender to businesses and individuals, the
Banking division is exposed to credit losses if customers are
unable to repay loans and outstanding interest and fees. The group
also has exposure to counterparties with which it places deposits
or trades, and has in place a small number of derivative contracts
to hedge interest rate and foreign exchange exposures.
Funding and liquidity - The Banking division's access to funding
remains key to support our lending activities and the liquidity
requirements of the group.
Market risk - Market volatility impacting equity and fixed
income exposures, and / or changes in interest and exchange rates
have the potential to impact the group's performance.
Operational risk -The group is exposed to various operational
risks through its day-to-day operations, all of which have the
potential to result in financial loss or adverse impact. Legal and
regulatory risks are also considered as part of operational risk.
Failure to comply with existing legal or regulatory requirements,
or to react to changes to these requirements, may have negative
consequences for the group. Similarly, changes to regulation can
impact our financial performance, capital, liquidity and the
markets in which we operate.
Reputational risk - Protection and effective stewardship of the
group's reputation are fundamental to its long-term success.
Detrimental stakeholder perception could lead to impairment of the
group's current business and future goals. This could arise from
any action or inaction of the company, its employees or associated
third parties.
In addition to day-to-day management of its principal risks, the
group utilises an established framework to monitor its portfolio
for emerging risks and consider broader market uncertainties,
supporting organisational readiness for external volatility.
Current group-level emerging risks include economic uncertainty,
economic and political uncertainty as a result of the UK's
withdrawal from the EU, the risk of financial loss resulting from
the physical and transitional impacts of climate change, the
transition from LIBOR, possible disruption occurring from Scottish
independence and legal and regulatory change.
Regarding the impacts of climate change specifically, work to
progress the development of a firm-wide climate risk framework has
continued since the year end, overseen by the Group Chief Risk
Officer and the Board. A delivery plan is now in flight with a view
to ensuring both regulatory compliance, and alignment with TCFD
disclosure recommendations.
Directors' Responsibility Statement
Each of the Directors confirms that, to the best of their
knowledge:
* the interim financial statements have been prepared
in accordance with International Accounting Standard
34 "Interim Financial Reporting";
* the half year report includes a fair review of the
information required by Disclosure and Transparency
Rule 4.2.7R (indication of important events during
the first six months of the financial year and
description of principal risks and uncertainties for
the remaining six months of the financial year); and
* the half year report includes a fair review of the
information required by Disclosure and Transparency
Rule 4.2.8R (disclosure of related parties
transactions that have taken place during the first
six months of the current financial year and that
have materially affected the financial position or
performance of the company, and any changes in the
related parties transactions described in the last
Annual Report that could do so).
The Directors of Close Brothers Group plc as at the date of this
report are as listed on pages 60 and 61 of the company's Annual
Report 2020, subject to the following changes: Geoffrey Howe ceased
to be a director on 19 November 2020; and Mark Pain was appointed
as an independent non-executive director with effect from 1 January
2021. A list of current Directors is maintained on the company's
website www.closebrothers.com .
On behalf of the board
Michael N. Biggs Adrian J. Sainsbury
Chairman Chief Executive
16 March 2021
Independent Review Report to close brothers group plc
Report on the consolidated interim financial statements
Our conclusion
We have reviewed Close Brothers Group plc's consolidated interim
financial statements (the "interim financial statements") in the
Half Year Results of Close Brothers Group plc for the 6 month
period ended 31 January 2021 (the "period").
Based on our review, nothing has come to our attention that
causes us to believe that the interim financial statements are not
prepared, in all material respects, in accordance with
International Accounting Standard 34, 'Interim Financial
Reporting', as adopted by the European Union and the Disclosure
Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
-- the consolidated balance sheet as at 31 January 2021;
-- the consolidated income statement and consolidated statement
of comprehensive income for the period then ended;
-- the consolidated cash flow statement for the period then ended;
-- the consolidated statement of changes in equity for the period then ended; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the Half Year
Results of Close Brothers Group plc have been prepared in
accordance with International Accounting Standard 34, 'Interim
Financial Reporting', as adopted by the European Union and the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority.
As disclosed in note 1 to the interim financial statements, the
financial reporting framework that has been applied in the
preparation of the full annual financial statements of the group is
applicable law and International Financial Reporting Standards
(IFRSs) as adopted by the European Union.
Responsibilities for the interim financial statements and the
review
Our responsibilities and those of the directors
The Half Year Results, including the interim financial
statements, is the responsibility of, and has been approved by the
directors. The directors are responsible for preparing the Half
Year Results in accordance with the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
Our responsibility is to express a conclusion on the interim
financial statements in the Half Year Results based on our review.
This report, including the conclusion, has been prepared for and
only for the company for the purpose of complying with the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We
do not, in giving this conclusion, accept or assume responsibility
for any other purpose or to any other person to whom this report is
shown or into whose hands it may come save where expressly agreed
by our prior consent in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International
Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor
of the Entity' issued by the Auditing Practices Board for use in
the United Kingdom. A review of interim financial information
consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other
review procedures.
A review is substantially less in scope than an audit conducted
in accordance with International Standards on Auditing (UK) and,
consequently, does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the Half Year
Results and considered whether it contains any apparent
misstatements or material inconsistencies with the information in
the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
16 March 2021
Consolidated income statement
for the six months ended 31 January 2021
Six months ended Year ended
31 January 31 July
------------------------
2021 2020 2020
Unaudited Unaudited Audited
Note GBP million GBP million GBP million
------------------------------------------------------ ----------- ----------- -----------
Interest income 326.8 323.5 629.1
(1 35.1
Interest expense (61.2) (69.4) )
----------------------------------------------------- ----------- ----------- -----------
Net interest income 265.6 254.1 494.0
----------------------------------------------------- ----------- ----------- -----------
Fee and commission income 117.5 117.7 2 30.2
Fee and commission expense (8.6) (9.2) (1 7.6 )
Gains less losses arising from dealing in securities 91.2 43.8 142.6
Other income 42.9 44.2 83.4
Depreciation of operating lease assets and other
direct costs (34.6) (30.6) ( 66.5 )
Non-interest income 208.4 165.9 372.1
----------------------------------------------------- ----------- ----------- -----------
Operating income 2 474.0 420.0 8 66.1
----------------------------------------------------- ----------- ----------- -----------
Administrative expenses (292.7) (257.6) (538.4)
Impairment losses on financial assets 6 (52.8) (36.7) (183.7)
----------------------------------------------------- ----------- ----------- -----------
Total operating expenses before amortisation
of intangible assets
on acquisition (345.5) (294.3) (722.1)
----------------------------------------------------- ----------- ----------- -----------
Operating profit before amortisation of intangible
assets on
acquisition 128.5 125.7 144.0
Amortisation of intangible assets on acquisition (1.5) (1.6) ( 3.1 )
----------------------------------------------------- ----------- ----------- -----------
Operating profit before tax 127.0 124.1 140.9
Tax 3 (32.2) (29.6) (31.4)
----------------------------------------------------- ----------- ----------- -----------
Profit after tax 94.8 94.5 109.5
Profit attributable to shareholders 94.8 94.5 109.5
Basic earnings per share 4 63.2p 63.0p 72.8p
Diluted earnings per share 4 62.8p 62.7p 72.5p
----------------------------------------------------- ----------- ----------- -----------
Ordinary dividend per share 5 18.0p - 40.0p
----------------------------------------------------- ----------- ----------- -----------
Consolidated Statement of COMPREHENSIVE INCOME
for the six months ended 31 January 20 21
Six months ended Year ended
31 January 31 July
------------------------
20 21 2020 2020
Unaudited Unaudited Audited
GBP million GBP million GBP million
---------------------------------------------------- ----------- ----------- -----------
Profit after tax 94.8 94.5 109.5
---------------------------------------------------- ----------- ----------- -----------
Other comprehensive (expense)/income that may
be reclassified
to income statement
Currency translation losses (0.4) (1.5) (0.4)
Gains/(losses) on cash flow hedging 2.4 1.3 (1.9)
Gains/(losses) on financial instruments classified
at fair value through other comprehensive income:
Sovereign and central bank debt 0.3 (0.4) (0.6)
Tax relating to items that may be reclassified (0.7) (0.2) 1.0
---------------------------------------------------- ----------- ----------- -----------
1.6 (0.8) (1.9)
---------------------------------------------------- ----------- ----------- -----------
Other comprehensive income/(expense) that will
not be
reclassified to income statement
Defined benefit pension scheme gains/(losses) 0.5 (0.1) 0.9
Tax relating to items that will not be reclassified (0.1) - (0.3)
---------------------------------------------------- ----------- ----------- -----------
0.4 (0.1) 0.6
---------------------------------------------------- ----------- ----------- -----------
Other comprehensive income/(expense) for the
period, net of tax 2.0 (0.9) (1.3)
Total comprehensive income 96.8 93.6 108.2
---------------------------------------------------- ----------- ----------- -----------
Attributable to:
Shareholders 96.8 93.6 108.2
---------------------------------------------------- ----------- ----------- -----------
96.8 93.6 108.2
---------------------------------------------------- ----------- ----------- -----------
Consolidated Balance Sheet
at 31 January 2021
31 January 31 July
2021 2020
Unaudited Audited
Note GBP million GBP million
----------------------------------------------------- ---- ----------- -------------
Assets
Cash and balances at central banks 1,908.5 1,375.8
Settlement balances 1,016.2 619.7
Loans and advances to banks 206.2 125.8
Loans and advances to customers 6 7,953.5 7,616.7
Debt securities 7 301.2 382.5
Equity shares 8 30.6 30.0
Loans to money brokers against stock advanced 41.7 45.8
Derivative financial instruments 29.7 39.9
Intangible assets 9 244.9 240.1
Property, plant and equipment 10 302.0 297.2
Current tax assets 30.2 41.2
Deferred tax assets 48.6 47.3
Prepayments, accrued income and other assets 208.9 209.5
Total assets 12,322.2 11,071.5
Liabilities
Settlement balances and short positions 11 968.5 604.9
Deposits by banks 12 141.7 152.8
Deposits by customers 12 6,444.8 5,917.7
Loans and overdrafts from banks 12 536.7 497.9
Debt securities in issue 12 2,177.2 1,870.3
Loans from money brokers against stock advanced 45.4 17.9
Derivative financial instruments 17.7 20.8
Current tax liabilities - 1.3
Accruals, deferred income and other liabilities 287.1 315.3
Subordinated loan capital 12 222.7 223.0
Total liabilities 10,841.8 9,621.9
----------------------------------------------------- ---- ----------- -------------
Equity
Called up share capital 38.0 38.0
Retained earnings 1,472.0 1,435.0
Other reserves (28.6) (22.4)
Total shareholders' equity 1,481.4 1,450.6
----------------------------------------------------- ---- ----------- -------------
Non-controlling interests (1.0) (1.0)
----------------------------------------------------- ---- ----------- -------------
Total equity 1,480.4 1,449.6
----------------------------------------------------- ---- ----------- -------------
Total liabilities and equity 12,322.2 11,071.5
----------------------------------------------------- ---- ----------- -------------
Consolidated Statement of CHANGES IN EQUITY
for the six months ended 31 January 2021
Other reserves
Share- Cash Total
Called up based Exchange flow attributable
share Retained FVOCI payments movements hedging to equity Non-controlling Total
capital earnings reserve reserve reserve reserve holders interests equity
GBP GBP GBP GBP GBP GBP
GBP million million million million million million GBP million GBP million million
-------------------------- --------- -------- -------- ---------- ------- ------------ ---------------- --------
At 1 August 2019
(audited) 38.0 1,392.5 0.7 (18.2) (1.2) (4.4) 1,407.4 (1.0) 1,406.4
------------------- ----- --------- -------- -------- ---------- ------- ------------ ---------------- --------
Profit for the
period - 94.5 - - - - 94.5 - 94.5
Other comprehensive
(expense)/income
for the period - (0.1) (0.3) - (1.5) 1.0 (0.9) - (0.9)
------------------- ----- --------- -------- -------- ---------- ------- ------------ ---------------- --------
Total comprehensive
income/(expense)
for the period - 94.4 (0.3) - (1.5) 1.0 93.6 - 93.6
Dividends paid - (65.8) - - - - (65.8) - (65.8)
Shares purchased - - - (8.0) - - (8.0) - (8.0)
Shares released - - - 11.0 - - 11.0 - 11.0
Other movements - (3.7) - 0.8 - - (2.9) - (2.9)
Income tax - 0.3 - - - - 0.3 - 0.3
------------------- ----- --------- -------- -------- ---------- ------- ------------ ---------------- --------
At 31 January 2020
(unaudited) 38.0 1,417.7 0.4 (14.4) (2.7) (3.4) 1,435.6 (1.0) 1,434.6
------------------- ----- --------- -------- -------- ---------- ------- ------------ ---------------- --------
Profit for the period - 15.0 - - - - 15.0 - 15.0
Other comprehensive
income/(expense)
for the period - 0.7 (0.2) - 1.4 (2.3) (0.4) - (0.4)
---------------------- ----- -------- ------- ------- ------ ------- -------- ------ --------
Total comprehensive
income/(expense)
for the period - 15.7 (0.2) - 1.4 (2.3) 14.6 - 14.6
Dividends paid - - - - - - - - -
Shares purchased - - - - - - - - -
Shares released - - - 0.9 - - 0.9 - 0.9
Other movements - 1.8 - (2.1) - - (0.3) - (0.3)
Income tax - (0.2) - - - - (0.2) - (0.2)
---------------------- ----- -------- ------- ------- ------ ------- -------- ------ --------
At 31 July 2020
(audited) 38.0 1,435.0 0.2 (15.6) (1.3) (5.7) 1,450.6 (1.0) 1,449.6
---------------------- ----- -------- ------- ------- ------ ------- -------- ------ --------
Profit for the period - 94.8 - - - - 94.8 - 94.8
Other comprehensive
income/(expense)
for the period - 0.4 0.2 - (0.4) 1.8 2.0 - 2.0
---------------------- ----- ------- --- ------ ----- ----- ------- ----- -------
Total comprehensive
income/(expense)
for the period - 95.2 0.2 - (0.4) 1.8 96.8 - 96.8
Dividends paid - (59.8) - - - - (59.8) - (59.8)
Shares purchased - - - (12.0) - - (12.0) - (12.0)
Shares released - - - 7.1 - - 7.1 - 7.1
Other movements - 1.0 - (2.9) - - (1.9) - (1.9)
Income tax - 0.6 - - - - 0.6 - 0.6
---------------------- ----- ------- --- ------ ----- ----- ------- ----- -------
At 31 January 2021
(unaudited) 38.0 1,472.0 0.4 (23.4) (1.7) (3.9) 1,481.4 (1.0) 1,480.4
---------------------- ----- ------- --- ------ ----- ----- ------- ----- -------
Consolidated Cash Flow Statement
for the six months ended 31 January 2021
Six months ended Year ended
31 January 31 July
------------------------
2021 2020 2020
Unaudited Unaudited Audited
Note GBP million GBP million GBP million
-------------------------------------------------- ----------- ----------- ------------
Net cash inflow/(outflow) from operating
activities 16(a) 733.2 (15.8) 429.4
------------------------------------------- ----- ----------- ----------- ------------
Net cash (outflow)/inflow from investing
activities
Purchase of:
Property, plant and equipment (10.6) (2.8) (5.3)
Intangible assets - software (22.2) (23.2) (44.3)
Subsidiaries and equity shares held for
investment 16(b) (0.4) (3.3) (4.6)
Sale of:
Subsidiaries and discontinued operations 16(c) 2.1 0.5 0.5
(31.1) (28.8) (53.7)
------------------------------------------- ----- ----------- ----------- ------------
Net cash inflow/(outflow) before financing
activities 702.1 (44.6) 375.7
------------------------------------------- ----- ----------- ----------- ------------
Financing activities
Purchase of own shares for employee share
award schemes (12.0) (8.0) (8.0)
Equity dividends paid (59.8) (65.8) (65.8)
Interest paid on subordinated loan capital
and debt financing (7.1) (7.1) (14.3)
Payment of lease liabilities (8.4) (7.4) (14.6)
Net increase/(decrease) in cash 614.8 (132.9) 273.0
Cash and cash equivalents at beginning of
period 1,461.3 1,188.3 1,188.3
------------------------------------------- ----- ----------- ----------- ------------
Cash and cash equivalents at end of period 16(d) 2,076.1 1,055.4 1,461.3
------------------------------------------- ----- ----------- ----------- ------------
THE NOTES
1. Basis of preparation and accounting policies
The half year financial information has been prepared in
accordance with the Disclosure Guidance and Transparency Rules of
the Financial Conduct Authority and in accordance with the
International Financial Reporting Standards ("IFRS") endorsed by
the European Union. These include International Accounting Standard
("IAS") 34, Interim Financial Reporting, which specifically
addresses the contents of interim financial statements. The
consolidated financial statements incorporate the individual
financial statements of Close Brothers Group plc and the entities
it controls, using the acquisition method of accounting.
The half year report is unaudited and does not constitute
statutory accounts within the meaning of Section 434 of the
Companies Act 2006. However, the information has been reviewed by
the group's auditor, PricewaterhouseCoopers LLP, and their report
appears above.
The financial information for the year ended 31 July 2020
contained within this half year report does not constitute
statutory accounts as defined in Section 434 of the Companies Act
2006. A copy of those statutory accounts has been delivered to the
Registrar of Companies. PricewaterhouseCoopers LLP has reported on
those accounts. The report of the auditor on those statutory
accounts was unqualified, did not contain an emphasis of matter
paragraph and did not contain a statement under Section 498(2) or
(3) of the Companies Act 2006.
The directors have a reasonable expectation that the company and
the group as a whole have adequate resources to continue in
operational existence for the foreseeable future, a period of not
less than 12 months from the date of this report. For this reason,
they continue to adopt the going concern basis in preparing the
condensed consolidated half year financial statements.
The accounting policies applied are consistent with those set
out on pages 129 to 133 of the Annual Report 2020.
Critical accounting estimates and judgements
The reported results of the group are sensitive to the
accounting policies, assumptions and estimates that underlie the
preparation of its financial statements. The group's estimates and
assumptions are based on historical experience and expectations of
future events and are reviewed on an ongoing basis. There have been
no significant changes in the basis upon which estimates have been
determined compared to that applied at 31 July 2020.
Expected credit losses
At 31 January 2021, the group's expected credit loss provision
was GBP274.9 million (31 January 2020: GBP116.6 million; 31 July
2020: GBP238.7 million). The calculation of the group's expected
credit loss provision under IFRS 9 requires the group to make a
number of judgements, assumptions and estimates. The most
significant are set out below.
Significant increase in credit risk
Assets are transferred from Stage 1 to Stage 2 when there has
been a significant increase in credit risk since initial
recognition. The assessment, which requires judgement, is unbiased,
probability weighted and uses both actual and forward-looking
information.
In general, the group assesses whether a significant increase in
credit risk has occurred based on a quantitative and qualitative
assessment, with a 30 day past due backstop. Due to the diverse
nature of the group's lending businesses, the specific indicators
of a significant increase in credit risk vary by business, and may
include some or all of the following factors. The credit risk of a
financial asset is considered to have significantly increased when
any of the following triggers are met:
-- Quantitative assessment: the lifetime PD has increased by
more than an agreed threshold relative to the equivalent at
origination. Thresholds are based on a fixed number of risk grade
movements which are bespoke to the business to ensure that the
increased risk since origination is appropriately captured;
-- Qualitative assessment: events or observed behaviour indicate
credit distress. This includes a wide range of information that is
reasonably available including individual credit assessments of the
financial performance of borrowers as appropriate during routine
reviews, plus forbearance and watch list information; or
-- Backstop criteria: the 30 days past due backstop is met.
Due to the ongoing impact and complexity of Covid-19, and to
reflect the uncertainty in the external environment, a number of
enhancements were made to the above-mentioned staging approach
during the course of the 2020 financial year, and continue to be in
place, to fully incorporate the effects of Covid-19 into the
significant increase in credit risk assessment:
-- A Covid-19 payment concession or loan extension has not in
itself constituted a significant increase in credit risk (transfer
to Stage 2). Instead Covid-19 related forbearance has been
considered alongside usual indicators of a significant increase in
credit risk, knowledge of recent customer payment history and
whether the customer was up to date with payments at the time of
requesting such a concession.
-- Throughout the Covid-19 pandemic to date, and based on both
initial regulatory guidance combined with observed customer
behaviour, we have applied a distinction between the impact of the
pandemic on consumers and businesses, with the expectation that
businesses will be more materially impacted in the short and medium
term therefore influencing the staging of these loans.
Definition of default
The definition of default is an important building block for
impairment models, and is considered a key judgement. A default is
considered to have occurred if any unlikeliness to pay criteria are
met or when a financial asset meets the 90 days past due backstop.
These include an assessment of whether the borrower has significant
financial difficulties which are expected to have a detrimental
impact on their ability to pay interest or principal on the loan,
and include events such as administration, insolvency, bankruptcy,
distressed restructuring and fraud.
An asset is considered credit impaired when one or more events
occur that have a detrimental impact on the estimated future cash
flows of the financial asset. This comprises assets defined as
defaulted and other individually assessed exposures where imminent
default or actual loss is identified.
Key sources of estimation uncertainty
At the balance sheet date, the directors consider that expected
credit loss provisions are a key source of estimation uncertainty
which, depending on a range of factors, could result in a material
future adjustment to the carrying amounts of assets and liabilities
in the next financial year.
Expected credit losses
The accuracy of the expected credit loss calculation can be
impacted by unpredictable effects or unanticipated changes to model
assumptions, resulting in modelled risk parameters varying from
actual outcomes observed. In addition, forecast errors could occur
due to macroeconomic scenarios or weightings differing from actual
outcomes observed. Regular model monitoring, validations and
provision adequacy reviews are key mechanisms to manage estimation
uncertainty.
In certain circumstances, management make appropriate overlays
to model-calculated expected credit losses. These overlays are
based on management judgements, to ensure the expected credit loss
provision adequately reflects the expected outcome. These overlays
are generally determined by taking into account the attributes or
risks of a financial asset which are not captured by existing
impairment model outputs. Judgemental management overlays are
actively monitored, reviewed and incorporated into future model
development where applicable.
Forward-looking information
Determining expected credit losses under IFRS 9 requires the
incorporation of forward-looking macroeconomic information that is
reasonable and supportable. To capture the effect of changes to the
economic environment, the calculation of expected credit losses
incorporates forward-looking information and assumptions linked to
economic variables that impact losses in each portfolio. The
introduction of macroeconomic information introduces additional
volatility to provisions. In order to calculate forward-looking
provisions, Moody's Baseline and Alternative Scenarios are deployed
and include forecast economic data and scenarios which are used to
project potential credit conditions for each portfolio. Management
exercises judgement in estimating future economic conditions by
determining the suitability of these economic scenarios for
deployment in our models.
Economic scenarios are assigned a probability weighting using a
combination of quantitative analysis and expert judgement. Five
different projected economic scenarios are currently considered to
cover a range of possible outcomes, reflecting upside and downside
relative to the baseline forecast economic conditions. The economic
scenarios are generated to capture a range of possible economic
outcomes to facilitate the calculation of unbiased and expected
credit losses. Non-linearity of losses is considered by management
when assessing provision adequacy at an individual and portfolio
level.
The impact of probability weighted forward-looking information
varies across the group's lending businesses because of the
differing sensitivity of each portfolio to specific macroeconomic
variables. The modelled impact of macroeconomic scenarios and their
respective weightings is overlaid with expert judgement in relation
to stage allocation and coverage ratios at the individual and
portfolio level, incorporating management's experience and
knowledge of customers, the sectors in which they operate, and the
assets financed.
The Credit Risk Management Committee ("CRMC") including the
group finance director, group chief risk officer, and chief credit
risk officer meets at least quarterly to review, and if
appropriate, agree changes to the economic scenarios and
probability weightings assigned thereto. In light of the Covid-19
pandemic, this review has to date been conducted on a monthly
basis.
Refreshed scenario forecasts have been deployed in the IFRS 9
model suite on a monthly basis throughout the Covid-19 pandemic, to
ensure the most relevant outlook is used to calculate expected
credit losses. As at 31 January 2021, the latest baseline scenario
forecasted GDP growth in 2021 of 2.5%, with unemployment of 7.3%.
The baseline Moody's scenario used incorporated the Brexit
Withdrawal Agreement, which became operational on 1 January 2021,
and the third national lockdown.
At 31 July 2020, the scenario weightings reflected the continued
economic challenges and uncertainty, with 40% allocated to the
baseline scenario, and 60% across the three downside scenarios. The
baseline scenario at 31 July 2020 forecasted GDP contraction of
8.5% in 2020, with unemployment of 7.1% and forecasted economic
recovery in Q2 2021, with positive GDP growth and falling
unemployment.
At 31 January 2021, the scenario weightings were revised, with a
40% weighting remaining to the baseline, and 10% moved to the
upside scenario from the downside. The decision to reweight the
scenarios and move 10% to the upside scenario was driven by reduced
Brexit uncertainty following formal separation at the start of the
year, and Covid-19 vaccination developments. The UK entered a third
national lockdown, illustrating a commitment from the government to
deploy measures to reduce the number of cases in the near-term.
Furthermore, success of the vaccine rollout results in a more
positive outlook when compared to the 31 July 2020 position, and
increases optimism regarding the economy partially reopening during
the first half of 2021.
The tables below show the key UK economic assumptions within
each scenario, and the weighting applied to each at 31 January
2021. The numbers shown are the forecasts for 2021, 2022, and an
average over the five-year period from 2021 to 2025. The weightings
ascribed are the point in time weightings applied to each scenario
at 31 January 2021.
These periods have been included as they demonstrate the short,
medium and long-term outlook for the key macroeconomic indicators
which form the fundamental basis of the scenario forecasts. On
average, the loan book has a residual maturity of 16 months, with
c.98% of loan value having a maturity of five years or less.
Baseline Upside (strong) Downside Downside (moderate) Downside (protracted)
(mild)
2021 2022 2021 2022 2021 2022 2021 2022 2021 2022
-------------- ------- ----- ---------- ------ ------- ------- ---------- ---------- ----------- -----------
At 31 January
2021
UK GDP Growth 2.5% 8.3% 5.7% 7.7% (0.3%) 9.1% (2.4%) 9.6% (3.4%) 9.0%
UK
Unemployment 7.3% 7.2% 6.8% 6.1% 8.0% 8.3% 8.3% 9.7% 8.8% 10.6%
HPI Growth (3.6%) 0.3% (0.3%) 5.3% (5.6%) (4.4%) (6.4%) (5.8%) (7.5%) (8.7%)
BoE Base Rate 0.1% 0.2% 0.1% 0.4% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
Weighting 40% 10% 20% 20% 10%
-------------- -------------- ------------------ ---------------- ---------------------- ------------------------
Baseline Upside (strong) Downside Downside (moderate) Downside
(mild) (protracted)
2020 2021 2020 2021 2020 2021 2020 2021 2020 2021
-------------- ------- -------- -------- -------- ------- -------- --------- ---------- -------- -----------
At 31 July
2020
UK GDP Growth (8.5%) 2.8% (7.2%) 4.7% (9.4%) 1.6% (9.5%) 0.3% (10.0%) (0.6%)
UK
Unemployment 7.1% 8.4% 6.8% 6.9% 7.4% 9.3% 7.8% 10.6% 7.9% 11.4%
HPI Growth (6.9%) (12.1%) (5.9%) (6.9%) (7.7%) (16.4%) (8.8%) (21.3%) (9.3%) (24.5%)
BoE Base Rate 0.2% 0.1% 0.3% 0.4% 0.2% 0.1% 0.2% 0.1% 0.2% 0.1%
Weighting 40% 0% 20% 25% 15%
-------------- ----------------- ------------------ ----------------- --------------------- ---------------------
5 year average (2021-2025)
Baseline Upside (strong) Downside Downside (moderate) Downside (protracted)
(mild)
----------------- --------- ---------------- --------- -------------------- -------------------------
At 31 January
2021
UK GDP Growth 3.3% 3.7% 3.2% 2.8% 2.5%
UK Unemployment 6.4% 5.6% 7.2% 8.4% 8.9%
HPI Growth 3.2% 5.3% 2.1% 1.3% 0.1%
BoE Base Rate 0.6% 0.9% 0.1% 0.1% 0.1%
Weighting 40% 10% 20% 20% 10%
----------------- --------- ---------------- --------- -------------------- -------------------------
5 year average (2020-2024)
Baseline Upside (strong) Downside Downside (moderate) Downside (protracted)
(mild)
----------------- --------- ---------------- --------- -------------------- -------------------------
At 31 July 2020
UK GDP Growth 1.2% 1.8% 1.0% 0.7% 0.5%
UK Unemployment 7.5% 6.3% 8.1% 9.4% 10.3%
HPI Growth (0.2%) 1.3% (1.1%) (3.2%) (5.1%)
BoE Base Rate 0.3% 0.8% 0.1% 0.1% 0.1%
Weighting 40% 0% 20% 25% 15%
----------------- --------- ---------------- --------- -------------------- -------------------------
The tables below provide a summary for the subsequent five year
period (31 January 2021 - 31 January 2025) of the peak to trough
range of values of the key UK economic variables used within the
economic scenarios at 31 January 2021 and 31 July 2020:
Baseline Upside (strong) Downside Downside (moderate) Downside (protracted)
(mild)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
-------------- ------ -------- ------- --------- ------ -------- --------- ----------- -------- ------------
At 31 January
2021
UK GDP Growth 19.0% (16.0%) 22.3% (15.1%) 16.3% (17.2%) 12.5% (17.1%) 11.8% (17.6%)
UK
Unemployment 7.8% 5.5% 7.1% 4.8% 8.8% 6.0% 9.9% 6.0% 10.7% 6.2%
HPI Growth 7.5% (7.4%) 10.6% (2.7%) 8.1% (11.2%) 7.4% (12.4%) 7.4% (14.5%)
BoE Base Rate 1.2% 0.1% 1.6% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
Weighting 40% 10% 20% 20% 10%
-------------- ---------------- ------------------ ---------------- ---------------------- ----------------------
Baseline Upside (strong) Downside Downside (moderate) Downside (protracted)
(mild)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
-------------- ------ -------- ------- --------- ------ -------- --------- ----------- -------- ------------
At 31 July
2020
UK GDP Growth 13.2% (12.3%) 17.4% (10.5%) 10.5% (12.4%) 8.9% (13.1%) 7.3% (14.0%)
UK
Unemployment 8.5% 6.4% 8.3% 5.4% 9.4% 6.9% 10.7% 8.4% 11.7% 9.4%
HPI Growth 9.9% (19.3%) 8.3% (14.6%) 11.8% (21.4%) 12.4% (24.6%) 12.4% (28.2%)
BoE Base Rate 0.8% 0.1% 1.4% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%
Weighting 40% 0% 20% 25% 15%
-------------- ---------------- ------------------ ---------------- ---------------------- ----------------------
The expected credit loss provision is sensitive to judgement and
estimations made with regard to the selection and weighting of
multiple economic scenarios. As a result, management has assessed
and considered the sensitivity of the provision as follows:
-- For the majority of our portfolios the expected credit loss
provision has been recalculated under the upside strong and
downside protracted scenarios described above, applying a 100%
weighting to each scenario in turn. The change in provision is
driven by the movement in risk metrics under each scenario and
resulting impact on stage allocation as well as the measurement of
the resulting provision.
-- For some loans within Retail a specific sensitivity approach
has been adopted to assess the response of short tenor loans to
modelled economic forecasts. For these short tenor loans, PD has
been extrapolated from emerging default rates and then
proportionally scaled to reflect a sharp recovery in the upside
scenario and a slower recovery in a downside scenario.
-- All sensitivity analysis excludes expected credit loss
provisions and loans and advances to customers in Stage 3 because
the measurement of expected credit losses in this population is
considered more sensitive to credit factors specific to the
borrower than economic scenarios.
Based on the above analysis, at 31 January 2021, application of
100% weighting to the upside strong scenario would decrease the
expected credit loss by GBP5.9 million whilst application to the
downside protracted scenario would increase the expected credit
loss by GBP9.5 million driven by the aforementioned changes in risk
metrics and stage allocation of the portfolios. Since 31 July 2020
the range of Moody's macro scenarios have narrowed, the resulting
impact is a lower and narrower output to our sensitivity analysis
at 31 January 2021.
When performing sensitivity analysis there is a high degree of
estimation uncertainty. On this basis, 100% weighted expected
credit loss provisions presented for the upside and downside
scenarios should not be taken to represent the lower or upper range
of possible and actual expected credit loss outcomes. The
recalculated expected credit loss provision for each of the
scenarios should be read in the context of the sensitivity analysis
as a whole. The modelled impact presented is based on gross loans
and advances to customers at 31 January 2021; it does not
incorporate future changes relating to performance, growth or
credit risk. In addition, given the change in the macroeconomic
conditions, as well as the underlying modelled provisions,
comparison between the sensitivity results at 31 January 2021 and
31 July 2020 is not appropriate.
The economic environment remains highly uncertain and future
impairment charges may be subject to further volatility (including
from changes to macroeconomic variable forecasts) depending on the
length and severity of the Covid-19 pandemic, as well as the
withdrawal of government support measures.
2. Segmental analysis
The directors manage the group by class of business and we
present the segmental analysis on that basis. The group's
activities are presented in five (2020: five) operating segments:
Commercial, Retail, Property, Asset Management and Securities
(which comprises Winterflood only).
In the segmental reporting information that follows, Group
consists of central functions as well as various non-trading head
office companies and consolidation adjustments and is presented in
order that the information presented reconciles to the consolidated
income statement. The Group balance sheet primarily includes
treasury assets and liabilities comprising cash and balances at
central banks, debt securities, customer deposits and other
borrowings.
Divisions continue to charge market prices for the limited
services rendered to other parts of the group. Funding charges
between segments take into account commercial demands. More than
90% of the group's activities, revenue and assets are located in
the UK.
Summary Income Statement for the six months ended 31 January
2021
Banking
Asset
Commercial Retail Property Management Securities Group Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Net interest
income/(expense) 104.0 101.8 60.5 - (0.6) (0.1) 265.6
Non-interest
income/(expense) 32.6 10.3 (0.2) 67.1 98.6 - 208.4
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating income 136.6 112.1 60.3 67.1 98.0 (0.1) 474.0
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Administrative
expenses (67.7) (58.0) (14.8) (52.1) (62.3) (12.2) (267.1)
Depreciation and
amortisation (8.5) (9.8) (2.2) (2.7) (1.6) (0.8) (25.6)
Impairment losses
on financial
assets (33.0) (16.4) (3.5) - 0.1 - (52.8)
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total operating
expenses (109.2) (84.2) (20.5) (54.8) (63.8) (13.0) (345.5)
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Adjusted
operating
profit/(loss)(1) 27.4 27.9 39.8 12.3 34.2 (13.1) 128.5
Amortisation of
intangible
assets
on acquisition (0.9) (0.1) - (0.5) - - (1.5)
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating
profit/(loss)
before tax 26.5 27.8 39.8 11.8 34.2 (13.1) 127.0
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
External
operating
income/(expense) 164.2 132.7 70.7 67.1 98.0 (58.7) 474.0
Inter segment
operating
(expense)/income (27.6) (20.6) (10.4) - - 58.6 -
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Segment operating
income 136.6 112.1 60.3 67.1 98.0 (0.1) 474.0
------------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1 Adjusted operating profit/(loss) is stated before amortisation
of intangible assets on acquisition, profit from discontinued
operations
and tax.
Balance Sheet Information at 31 January 2021
Banking
Asset
Commercial Retail Property Management Securities Group(2) Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
Total
assets(1) 3,727.0 2,843.8 1,600.3 104.7 1,207.4 2,839.0 12,322.2
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
Total
liabilities - - - 43.7 1,134.5 9,663.6 10,841.8
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
1 Total assets for the Banking operating segments comprise the
loan book and operating lease assets only.
2 Balance sheet includes GBP2,803.7 million assets and
GBP9,737.9 million liabilities attributable to the Banking division
primarily
comprising the treasury balances described in the second
paragraph of this note.
Equity is allocated across the group as shown below. Banking
division equity, which is managed as a whole rather than on a
segmental basis, reflects loan book and operating lease assets of
GBP8,171.1 million, in addition to assets and liabilities of
GBP2,803.7 million and GBP9,737.9 million respectively primarily
comprising treasury balances which are included within the Group
column above.
Banking Asset Management Securities Group Total
GBP million GBP million GBP million GBP million GBP million
-------- ------------ ----------------- ------------- ------------ ------------
Equity 1,236.9 61.0 72.9 109.6 1,480.4
-------- ------------ ----------------- ------------- ------------ ------------
Summary Income Statement for the six months ended 31 January
2020
Banking
Asset
Commercial Retail Property Management Securities Group Total
GBP GBP GBP GBP GBP
GBP million million million million GBP million million million
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
Net interest
income/(expense) 90.8 100.3 63.4 - (0.4) - 254.1
Non-interest
income 38.8 13.1 - 65.7 48.3 - 165.9
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
Operating income 129.6 113.4 63.4 65.7 47.9 - 420.0
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
Administrative
expenses (64.2) (56.3) (14.9) (50.6) (35.7) (12.9) (234.6)
Depreciation and
amortisation (8.5) (7.6) (2.8) (2.5) (1.6) - (23.0)
Impairment losses
on financial
assets (18.4) (15.4) (2.9) - - - (36.7)
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
Total operating
expenses (91.1) (79.3) (20.6) (53.1) (37.3) (12.9) (294.3)
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
Adjusted operating
profit/(loss)(1) 38.5 34.1 42.8 12.6 10.6 (12.9) 125.7
Amortisation of
intangible assets
on acquisition (0.9) (0.1) - (0.6) - - (1.6)
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
Operating
profit/(loss)
before tax 37.6 34.0 42.8 12.0 10.6 (12.9) 124.1
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
External operating
income/(expense) 156.7 134.9 77.5 65.7 47.9 (62.7) 420.0
Inter segment
operating
(expense)/income (27.1) (21.5) (14.1) - - 62.7 -
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
Segment operating
income 129.6 113.4 63.4 65.7 47.9 - 420.0
------------------- ------------ ---------- ----------- ----------- ------------ ----------- -----------
1 Adjusted operating profit/(loss) is stated before amortisation
of intangible assets on acquisition, loss from discontinued
operations
and tax.
Summary Income Statement for the year ended 31 July 2020
Banking
Asset Management
Commercial Retail Property Securities Group Total
GBP million GBP GBP GBP million GBP million GBP GBP
million million million million
-------------------------------- ---------- ---------- ------------------- ------------ ---------- ----------
Net interest
income/(expense) 180.0 194.0 120.9 (0.1) (1.0) 0.2 494.0
Non-interest
income 66.6 24.4 0.1 128.3 152.9 (0.2) 372.1
------------------- ------------ ---------- ---------- ------------------- ------------ ---------- ----------
Operating income 246.6 218.4 121.0 128.2 151.9 - 866.1
------------------- ------------ ---------- ---------- ------------------- ------------ ---------- ----------
Administrative
expenses (126.2) (110.8) (28.2) (102.4) (100.7) (21.7) (490.0)
Depreciation and
amortisation (16.4) (16.1) (5.7) (5.3) (3.1) (1.8) (48.4)
Impairment losses
on
financial assets (99.2) (56.6) (27.6) (0.1) (0.2) - (183.7)
------------------- ------------ ---------- ---------- ------------------- ------------ ---------- ----------
Total operating
expenses (241.8) (183.5) (61.5) (107.8) (104.0) (23.5) (722.1)
------------------- ------------ ---------- ---------- ------------------- ------------ ---------- ----------
Adjusted operating
profit/(loss)(1) 4.8 34.9 59.5 20.4 47.9 (23.5) 144.0
Amortisation of
intangible assets
on
acquisition (1.7) (0.3) - (1.1) - - (3.1)
------------------- ------------ ---------- ---------- ------------------- ------------ ---------- ----------
Operating
profit/(loss)
before tax 3.1 34.6 59.5 19.3 47.9 (23.5) 140.9
------------------- ------------ ---------- ---------- ------------------- ------------ ---------- ----------
External operating
income/(expense) 302.2 261.8 147.0 128.3 151.9 (125.1) 866.1
Inter segment
operating
(expense)/income (55.6) (43.4) (26.0) (0.1) - 125.1 -
------------------- ------------ ---------- ---------- ------------------- ------------ ---------- ----------
Segment operating
income 246.6 218.4 121.0 128.2 151.9 - 866.1
------------------- ------------ ---------- ---------- ------------------- ------------ ---------- ----------
1 Adjusted operating profit/(loss) is stated before amortisation
of intangible assets on acquisition, loss from discontinued
operations
and tax.
Balance Sheet Information at 31 July 2020
Banking
Asset
Commercial Retail Property Management Securities Group(2) Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
Total
assets(1) 3,269.9 2,834.5 1,734.2 115.7 779.7 2,337.5 11,071.5
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
Total
liabilities - - - 54.8 707.6 8,859.5 9,621.9
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
1 Total assets for the Banking operating segments comprise the
loan book and operating lease assets only.
2 Balance sheet includes GBP2,305.7 million assets and
GBP8,930.1 million liabilities attributable to the Banking division
primarily
comprising the treasury balances described in the second
paragraph of this note.
Asset Management
Banking Securities Group Total
GBP million GBP million GBP million GBP million GBP million
------------ ------------ ------------------- ------------- ------------ ------------
Equity (1) 1,214.2 60.9 72.1 102.4 1,449.6
------------ ------------ ------------------- ------------- ------------ ------------
1 Equity of the Banking division reflects loan book and
operating lease assets of GBP7,838.6 million, in addition to assets
and
liabilities of GBP2,305.7 million and GBP8,930.1 million
respectively primarily comprising treasury balances which are
included within the
Group column above.
3. Taxation
Six months ended Year ended
31 January 31 July
--------------------------
2021 2020 2020
GBP million GBP million GBP million
------------------------------------------------------ ------------ ------------ ------------
Tax charged/(credited) to the income statement
Current tax:
UK corporation tax 32.7 26.7 35.4
Foreign tax 0.6 0.6 0.2
Adjustments in respect of previous periods 0.4 - (10.0)
------------------------------------------------------ ------------ ------------ ------------
33.7 27.3 25.6
Deferred tax:
Deferred tax charge for the current period (1.1) 2.3 (3.1)
Adjustments in respect of previous periods (0.4) - 8.9
------------------------------------------------------ ------------ ------------ ------------
32.2 29.6 31.4
------------------------------------------------------ ------------ ------------ ------------
Tax on items not (credited)/charged to the income
statement
Current tax relating to:
Share-based payments - (0.1) (0.1)
Deferred tax relating to:
Cash flow hedging 0.6 0.3 (0.6)
Defined benefit pension scheme 0.1 - 0.3
Financial instruments classified at fair value
through other
comprehensive income 0.1 (0.1) (0.1)
Share-based payments (0.6) (0.2) -
Currency translation gains - - (0.3)
Acquisitions - - (0.2)
0.2 (0.1) (1.0)
------------------------------------------------------ ------------ ------------ ------------
Reconciliation to tax expense
UK corporation tax for the period at 19.0 %
(six months ended
31 January 2020: 18.3%; year ended 31 July
2020: 19.0%)
on operating profit 24.1 22.7 26.8
Effect of different tax rates in other jurisdictions (0.2) (0.1) (0.2)
Disallowable items and other permanent differences 0.5 0.9 1.6
Banking surcharge 7.8 6.2 7.2
Deferred tax impact of increased tax rates - (0.1) (2.9)
Prior year tax provision - - (1.1)
32.2 29.6 31.4
------------------------------------------------------ ------------ ------------ ------------
The effective tax rate for the period is 25.4% (six months ended
31 January 2020: 23.9%; year ended 31 July 2020: 22.3%).
The standard UK corporation tax rate for the financial year is
19.0% (six months ended 31 January 2020: 18.3%; year ended 31 July
2020: 19.0%). However, an additional 8% surcharge applies to
banking company profits as defined in legislation. The effective
tax rate is above the UK corporation tax rate primarily due to the
surcharge applying to the majority of the group's profits.
4. Earnings per share
The calculation of basic earnings per share is based on the
profit attributable to shareholders and the number of basic
weighted average shares. When calculating the diluted earnings per
share, the weighted average number of shares in issue is adjusted
for the effects of all dilutive share options and awards.
Six months ended Year ended
31 January 31 July
------------------
2021 2020 2020
-------------------- -------- -------- ----------
Basic 63.2p 63.0p 72.8p
-------------------- -------- -------- ----------
Diluted 62.8p 62.7p 72.5p
-------------------- -------- -------- ----------
Adjusted basic(1) 64.0p 63.8p 74.5p
-------------------- -------- -------- ----------
Adjusted diluted(1) 63.6p 63.5p 74.2p
-------------------- -------- -------- ----------
1 Excludes amortisation of intangible assets on acquisition and
their tax effects.
Six months ended Year ended
31 January 31 July
------------------------
2021 2020 2020
GBP million GBP million GBP million
------------------------------------------------- ----------- ----------- -----------
Profit attributable to shareholders 94.8 94.5 109.5
Adjustments:
Amortisation of intangible assets on acquisition 1.5 1.6 3.1
Tax effect of adjustment (0.3) (0.3) (0.5)
------------------------------------------------- ----------- ----------- -----------
Adjusted profit attributable to shareholders 96.0 95.8 112.1
------------------------------------------------- ----------- ----------- -----------
Six months ended Year ended
31 January 31 July
------------------------
2021 2020 2020
million million million
------------------------------------------------- ----------- ----------- -----------
Average number of shares
Basic weighted 150.1 150.1 150.4
Effect of dilutive share options and awards 0.8 0.7 0.7
------------------------------------------------- ----------- ----------- -----------
Diluted weighted 150.9 150.8 151.1
------------------------------------------------- ----------- ----------- -----------
5. Dividends
Six months ended Year ended
31 January 31 July
------------------------
2021 2020 2020
GBP million GBP million GBP million
------------------------------------------------ ----------- ----------- -----------
For each ordinary share
Final dividend for previous financial year paid
in November 2020: 40.0p
(November 2019: 44.0p) 59.8 65.8 65.8
59.8 65.8 65.8
------------------------------------------------ ----------- ----------- -----------
An interim dividend relating to the six months ended 31 January
2021 of 18.0p, amounting to an estimated GBP26.8 million, is
declared. This interim dividend, which is due to be paid on 28
April 2021 to shareholders on the register at 26 March 2021, is not
reflected in these condensed half year financial statements.
6. Loans and advances to customers
The following table sets out a maturity analysis of loans and
advances to customers. At 31 January 2021 loans and advances to
customers with a maturity of two years or less was GBP6,102.2
million (31 July 2020: GBP6,031.6 million) representing 74.2% (31
July 2020: 76.8%) of total loans and advances to customers:
Total
Between gross Total net
three Between After loans and loans and
Within months Between two and more than advances advances
On three and one one and five five to Impairment to
demand months year two years years years customers provisions customers
GBP GBP GBP GBP GBP GBP GBP GBP
GBP million million million million million million million million million
------------------- ----------- ---------- ---------- ---------- ---------- ----------- ----------- ----------
At 31
January
2021 79.1 2,175.5 2,393.3 1,454.3 1,950.9 175.3 8,228.4 (274.9) 7,953.5
------------ ----- ----------- ---------- ---------- ---------- ---------- ----------- ----------- ----------
At 31 July
2020 78.1 2,174.0 2,348.2 1,431.3 1,680.5 143.3 7,855.4 (238.7) 7,616.7
------------ ----- ----------- ---------- ---------- ---------- ---------- ----------- ----------- ----------
(a) Loans and advances to customers and impairment provisions by
stage
Gross loans and advances to customers by stage and the
corresponding impairment provisions and provision coverage ratios
are set out below:
Stage 2
-----------------------------------------
Greater
than
Less than or equal
30 days to 30 days Stage
Stage 1 past due past due Total 3 Total
At 31 January 2021 GBP million GBP million GBP million GBP million GBP million GBP million
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Gross loans and
advances to customers
Commercial 2,617.3 848.7 66.3 915.0 121.4 3,653.7
Retail 2,626.4 242.1 9.0 251.1 46.1 2,923.6
Property 1,291.6 100.8 44.4 145.2 214.3 1,651.1
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Total 6,535.3 1,191.6 119.7 1,311.3 381.8 8,228.4
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Impairment provisions
Commercial 35.6 46.6 10.9 57.5 51.2 144.3
Retail 25.3 24.0 2.6 26.6 27.9 79.8
Property 11.3 7.0 0.6 7.6 31.9 50.8
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Total 72.2 77.6 14.1 91.7 111.0 274.9
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Provision coverage
ratio
Commercial 1.4% 5.5% 16.4% 6.3% 42.2% 3.9%
Retail 1.0% 9.9% 28.9% 10.6% 60.5% 2.7%
Property 0.9% 6.9% 1.4% 5.2% 14.9% 3.1%
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Total 1.1% 6.5% 11.8% 7.0% 29.1% 3.3%
------------------------ ------------ ------------ ------------- ------------ ------------ ------------
Stage 2
-----------------------------------------
Greater
than
Less than or equal
30 days to 30 days Stage
Stage 1 past due past due Total 3 Total
At 31 July 2020 GBP million GBP million GBP million GBP million GBP million GBP million
------------------------ --------------- ------------ ------------- ------------ ------------ ------------
Gross loans and
advances to customers
Commercial 1,913.4 1,110.9 21.1 1,132.0 126.4 3,171.8
Retail 2,604.9 208.1 49.4 257.5 43.4 2,905.8
Property 1,388.3 125.3 59.4 184.7 204.8 1,777.8
------------------------ --------------- ------------ ------------- ------------ ------------ ------------
Total 5,906.6 1,444.3 129.9 1,574.2 374.6 7,855.4
------------------------ --------------- ------------ ------------- ------------ ------------ ------------
Impairment provisions
Commercial 18.1 59.9 1.5 61.4 44.3 123.8
Retail 28.4 11.1 7.5 18.6 24.3 71.3
Property 11.1 6.6 0.7 7.3 25.2 43.6
------------------------ --------------- ------------ ------------- ------------ ------------ ------------
Total 57.6 77.6 9.7 87.3 93.8 238.7
------------------------ --------------- ------------ ------------- ------------ ------------ ------------
Provision coverage
ratio
Commercial 0.9% 5.4% 7.1% 5.4% 35.0% 3.9%
Retail 1.1% 5.3% 15.2% 7.2% 56.0% 2.5%
Property 0.8% 5.3% 1.2% 4.0% 12.3% 2.5%
------------------------ --------------- ------------ ------------- ------------ ------------ ------------
Total 1.0% 5.4% 7.5% 5.5% 25.0% 3.0%
------------------------ --------------- ------------ ------------- ------------ ------------ ------------
Overall impairment provisions increased to GBP274.9 million (31
July 2020: GBP238.7 million) to reflect growth in the loan book and
a review of staging and provision coverage for individual loans and
portfolios.
Over the course of the first half of this financial year, we
have revised the macroeconomic scenarios and the weightings
assigned to them, with a 40% weighting remaining to the baseline,
and 10% moved to the upside scenario. However, at the same time, we
have continued to develop our understanding of the profile of
customers impacted by Covid-19 as more granular information has
become available. This enhanced visibility and the continued
uncertainty in the UK economic outlook have impacted judgemental
management overlays and coverage has been reviewed accordingly to
reflect the perceived underlying credit risk, resulting in overall
increase in provision coverage to 3.3% (31 July 2020: 3.0%).
Stage 1 loans and advances to customers have increased during
the first half of the year to GBP6,535.3 million (31 July 2020:
GBP5,906.6 million) as a result of growth in the loan book combined
with a proportion of Stage 2 Covid-19 forborne loans curing and
migrating back to Stage 1. These same factors have driven an
increase in the Stage 1 impairment provisions to GBP72.2 million
(31 July 2020: GBP57.6 million). Overall, the provision coverage
marginally increased to 1.1% (31 July 2020: 1.0%).
Stage 2 loans and advances to customers decreased by GBP262.9
million to GBP1,311.3 million (31 July 2020: GBP1,574.2 million)
across all segments driven by repayments of Stage 2 forborne loans
and a proportion of loans curing and migrating back to Stage 1.
Stage 2 impairment provisions increased to GBP91.7 million (31 July
2020: GBP87.3 million) and resulted in an increase in the provision
coverage ratio to 7.0% (31 July 2020: 5.5%).
Stage 3 loans and advances to customers have increased
marginally to GBP381.8 million (31 July 2020: GBP374.6 million).
Stage 3 impairment provisions increased to GBP111.0 million (31
July 2020: GBP93.8 million) following a review of coverage across
the portfolio, which in turn increased the coverage ratio to 29.1%
(31 July 2020: 25.0%).
(b) Reconciliation of loans and advances to customers and
impairment provisions
Reconciliations of gross loans and advances to customers and
associated impairment provisions are set out below.
New loans originate in Stage 1 only, and the amount presented
represents the value at origination.
Subsequently, a loan may transfer between stages, and the
presentation of such transfers is based on a comparison of the loan
at the beginning of the period (or at origination if this occurred
during the period) and the end of the period (or just prior to
final repayment or write off).
Repayments relating to loans which transferred between stages
during the period are presented within the transfers between stages
lines. All other repayments are presented in a separate line.
ECL model methodologies may be updated or enhanced from time to
time and the impacts of such changes are presented on a separate
line. Enhancements to our model suite during the course of the
financial year are a contributory factor to ECL movements and such
factors, when known, have been taken into consideration when
assessing any required adjustments to modelled output and ensuring
appropriate provision coverage levels.
A loan is written off when there is no reasonable expectation of
further recovery following realisation of all associated collateral
and available recovery actions against the customer.
Stage 1 Stage 2 Stage 3 Total
GBP million GBP million GBP million GBP million
----------------------------------------- ------------ ------------ ------------ ------------
Gross loans and advances to customers
At 1 August 2020 5,906.6 1,574.2 374.6 7,855.4
New financial assets originated 3,395.2 - - 3,395.2
------------ ------------ ------------ ------------
Transfers to Stage 1 270.7 (288.4) (15.5) (33.2)
Transfers to Stage 2 (680.3) 602.7 (3.5) (81.1)
Transfers to Stage 3 (57.8) (76.5) 120.3 (14.0)
----------------------------------------- ------------ ------------ ------------ ------------
Net transfers between stages and
repayments(1) (467.4) 237.8 101.3 (128.3)
Repayments while stage remain unchanged
and final repayments (2,298.7) (501.0) (55.7) (2,855.4)
Changes to model methodologies 1.9 0.9 (2.8) -
Write offs (2.3) (0.6) (35.6) (38.5)
----------------------------------------- ------------ ------------ ------------ ------------
At 31 January 2021 6,535.3 1,311.3 381.8 8,228.4
----------------------------------------- ------------ ------------ ------------ ------------
Stage 1 Stage 2 Stage 3 Total
GBP million GBP million GBP million GBP million
----------------------------------------- ------------ ------------ ------------ ------------
Gross loans and advances to customers
At 1 August 2019 6,864.0 703.7 186.2 7,753.9
New financial assets originated 5,859.1 - - 5,859.1
------------ ------------ ------------ ------------
Transfers to Stage 1 105.4 (164.7) (14.3) (73.6)
Transfers to Stage 2 (2,206.1) 1,670.5 (0.8) (536.4)
Transfers to Stage 3 (303.0) (157.9) 365.9 (95.0)
----------------------------------------- ------------ ------------ ------------ ------------
Net transfers between stages and
repayments(1) (2,403.7) 1,347.9 350.8 (705.0)
Repayments while stage remain unchanged
and final repayments (4,511.7) (386.5) (57.8) (4,956.0)
Changes to model methodologies 100.9 (89.4) (11.5) -
Write offs (2.0) (1.5) (93.1) (96.6)
----------------------------------------- ------------ ------------ ------------ ------------
At 31 July 2020 5,906.6 1,574.2 374.6 7,855.4
----------------------------------------- ------------ ------------ ------------ ------------
1 Repayments relate only to financial assets which transferred
between stages during the year. Other repayments are shown in the
line below.
The gain recognised in the income statement relating to the
modifications of loans and advances to customers was GBP1.9 million
(six months ended 31 January 2020: GBPnil; year ended 31 July 2020:
GBP5.9 million loss). This gain is due to the partial unwinding of
modification losses recognised during the year ended 31 July
2020.
Stage 1 Stage 2 Stage 3 Total
GBP million GBP million GBP million GBP million
------------------------------------------ ------------ ------------ ------------ ------------
Impairment provisions on loans
and
advances to customers
At 1 August 2020 57.6 87.3 93.8 238.7
New financial assets originated 22.7 - - 22.7
------------ ------------ ------------ ------------
Transfers to Stage 1 1.3 (4.4) (0.7) (3.8)
Transfers to Stage 2 (11.3) 32.9 (1.1) 20.5
Transfers to Stage 3 (1.1) (7.0) 37.7 29.6
------------------------------------------ ------------ ------------ ------------ ------------
Net remeasurement of expected credit
losses
arising from transfers between
stages and
repayments(1) (11.1) 21.5 35.9 46.3
Repayments and ECL movements while
stage
remained unchanged and final repayments 2.6 (16.9) (4.0) (18.3)
Changes to model methodologies 0.8 0.2 - 1.0
Charge to the income statement 15.0 4.8 31.9 51.7
Write offs (0.4) (0.4) (14.7) (15.5)
At 31 January 2021 72.2 91.7 111.0 274.9
------------------------------------------ ------------ ------------ ------------ ------------
Stage 1 Stage 2 Stage 3 Total
GBP million GBP million GBP million GBP million
------------------------------------------ ------------ ------------ ------------ ------------
Impairment provisions on loans
and
advances to customers
At 1 August 2019 24.9 27.1 52.3 104.3
New financial assets originated 28.1 - - 28.1
------------ ------------ ------------ ------------
Transfers to Stage 1 0.9 (4.1) (0.1) (3.3)
Transfers to Stage 2 (13.9) 69.1 (0.1) 55.1
Transfers to Stage 3 (2.5) (8.5) 82.9 71.9
------------------------------------------ ------------ ------------ ------------ ------------
Net remeasurement of expected credit
losses
arising from transfers between
stages and
repayments(1) (15.5) 56.5 82.7 123.7
Repayments and ECL movements while
stage
remained unchanged and final repayments 3.6 3.0 (0.3) 6.3
Changes to model methodologies 16.9 1.3 (3.6) 14.6
Charge to the income statement 33.1 60.8 78.8 172.7
Write offs (0.4) (0.6) (37.3) (38.3)
At 31 July 2020 57.6 87.3 93.8 238.7
------------------------------------------ ------------ ------------ ------------ ------------
1 Repayments relate only to financial assets which transferred
between stages during the year. Other repayments are shown in the
line below.
Six months ended 31 January Year ended 31 July
------------------------------
2021 2020 2020
GBP million GBP million GBP million
----------------------------------------------------------------- -------------- -------------- -------------------
Impairment losses relating to loans and advances to customers:
Charge to income statement arising from movement in impairment
provisions 51.7 35.0 172.7
Amounts written off directly to income statement, net of
recoveries
and other costs 0.2 1.2 7.8
51.9 36.2 180.5
Impairment losses relating to other financial assets 0.9 0.5 3.2
Impairment losses on financial assets recognised in income
statement 52.8 36.7 183.7
7. Debt securities
Fair value Fair value
through through other
profit or comprehensive Amortised
loss income cost Total
GBP million GBP million GBP million GBP million
Long trading positions in debt
securities 27.6 - - 27.6
Certificates of deposit - - 179.5 179.5
Sovereign and central bank
debt - 94.1 - 94.1
At 31 January 2021 27.6 94.1 179.5 301.2
Fair value Fair value
through through other
profit or comprehensive Amortised
loss income cost Total
GBP million GBP million GBP million GBP million
Long trading positions in debt
securities 24.4 - - 24.4
Certificates of deposit - - 285.9 285.9
Sovereign and central bank
debt - 72.2 - 72.2
At 31 July 2020 24.4 72.2 285.9 382.5
-------------
Movements in the book value of sovereign and central bank debt
comprise:
Six months
ended Year ended
31 January 31 July
2021 2020
GBP million GBP million
Sovereign and central bank debt at beginning
of period 72.2 48.3
Additions 23.7 22.7
Currency translation difference (2.6) (0.8)
Changes in fair value 0.8 2.0
Sovereign and central bank debt at end of
period 94.1 72.2
-------------
8. Equity shares
31 January 31 July
2021 2020
GBP million GBP million
Long trading positions 29.3 29.2
Other equity shares 1.3 0.8
30.6 30.0
-----------
9. Intangible assets
Intangible
assets on
Goodwill Software acquisition Total
GBP million GBP million GBP million GBP million
------------ ------------
Cost
At 1 August 2019 150.8 201.2 67.5 419.5
Additions - 22.3 - 22.3
Disposals (0.1) (0.3) (0.1) (0.5)
At 31 January 2020 150.7 223.2 67.4 441.3
Additions 2.3 24.6 - 26.9
Disposals - (14.5) 0.1 (14.4)
------------ ------------
At 31 July 2020 153.0 233.3 67.5 453.8
Additions - 20.6 - 20.6
Disposals - (0.6) - (0.6)
------------ ------------
At 31 January 2021 153.0 253.3 67.5 473.8
------------ ------------
Amortisation and impairment
At 1 August 2019 47.9 105.0 47.2 200.1
Amortisation charge for the period - 11.5 1.6 13.1
Disposals - (0.3) (0.1) (0.4)
At 31 January 2020 47.9 116.2 48.7 212.8
Amortisation charge for the period - 13.8 1.5 15.3
Disposals - (14.5) 0.1 (14.4)
At 31 July 2020 47.9 115.5 50.3 213.7
Amortisation charge for the period - 13.7 1.5 15.2
Disposals - - - -
------------ ------------
At 31 January 2021 47.9 129.2 51.8 228.9
------------ ------------
Net book value at 31 January 2021 105.1 124.1 15.7 244.9
------------ ------------
Net book value at 31 July 2020 105.1 117.8 17.2 240.1
------------ ------------
Net book value at 31 January 2020 102.8 107.0 18.7 228.5
------------ ------------
Net book value at 1 August 2019 102.9 96.2 20.3 219.4
------------ ------------
Intangible assets on acquisition relate to broker and customer
relationships and are amortised over a period of eight to 20
years.
In the six months ended 31 January 2021, GBP1.5 million (six
months ended 31 January 2020: GBP1.6 million; year ended 31 July
2020: GBP3.1 million) of the amortisation charge is included in
amortisation of intangible assets on acquisition and GBP13.7
million (six months ended 31 January 2020: GBP11.5 million; year
ended 31 July 2020: GBP25.3 million) of the amortisation charge is
included in administrative expenses shown in the consolidated
income statement.
10 . Property, plant and equipment
Assets
Fixtures, held under
fittings operating Right
Leasehold and leases Motor of use
property equipment vehicles assets Total
GBP million GBP million GBP million GBP million GBP million GBP million
------------ ------------ ------------ ------------ ------------
Cost
At 1 August 2019 27.1 55.5 314.1 0.1 44.8 441.6
Additions 0.1 2.0 38.9 - 12.7 53.7
Disposals (2.9) (3.1) (13.3) - (0.1) (19.4)
At 31 January 2020 24.3 54.4 339.7 0.1 57.4 475.9
Additions 0.6 8.8 15.7 - 3.6 28.7
Disposals 0.6 (3.1) (14.0) - (0.6) (17.1)
------------ ------------ ------------ ------------ ------------
At 31 July 2020 25.5 60.1 341.4 0.1 60.4 487.5
Additions 0.7 11.8 24.1 0.2 8.8 45.6
Disposals - (0.1) (17.9) - (2.5) (20.5)
------------ ------------ ------------ ------------ ------------
At 31 January 2021 26.2 71.8 347.6 0.3 66.7 512.6
------------ ------------ ------------ ------------ ------------
Depreciation
At 1 August 2019 14.6 40.2 93.7 0.1 - 148.6
Depreciation charge for
the period 1.2 4.0 19.8 - 6.3 31.3
Disposals (2.9) (2.9) (9.1) - - (14.9)
At 31 January 2020 12.9 41.3 104.4 0.1 6.3 165.0
Depreciation charge for
the period 1.2 3.5 24.5 - 6.9 36.1
Disposals 0.7 (1.9) (9.4) - (0.2) (10.8)
------------ ------------ ------------ ------------ ------------
At 31 July 2020 14.8 42.9 119.5 0.1 13.0 190.3
Depreciation charge for
the period 1.1 3.3 22.9 - 7.5 34.8
Disposals - (0.3) (12.4) - (1.8) (14.5)
------------ ------------ ------------ ------------ ------------
At 31 January 2021 15.9 45.9 130.0 0.1 18.7 210.6
------------ ------------ ------------ ------------ ------------
Net book value at 31 January
2021 10.3 25.9 217.6 0.2 48.0 302.0
------------ ------------ ------------ ------------ ------------
Net book value at 31 July
2020 10.7 17.2 221.9 - 47.4 297.2
------------ ------------ ------------ ------------ ------------
Net book value at 31 January
2020 11.4 13.1 235.3 - 51.1 310.9
------------ ------------ ------------ ------------ ------------
Net book value at 1 August
2019 12.5 15.3 220.4 - 44.8 293.0
------------ ------------ ------------ ------------ ------------
11. Settlement balances and short positions
31 January 31 July
2021 2020
GBP million GBP million
Settlement balances 951.2 587.5
Short positions held for trading:
Debt securities 10.0 8.3
Equity shares 7.3 9.1
-----------
17.3 17.4
-----------
968.5 604.9
12. Financial liabilities
The contractual maturity of financial liabilities, which largely
relate to treasury funding balances, is set out below.
Between Between
Within three months Between two and After
On three and one one and five more than
demand months year two years years five years Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
Deposits by banks 19.2 75.2 47.3 - - - 141.7
Deposits by customers 116.1 1,334.7 3,379.3 1,121.0 493.7 - 6,444.8
Loans and overdrafts
from banks 26.7 20.0 - - 490.0 - 536.7
Debt securities
in issue 18.1 27.1 498.4 659.7 357.4 616.5 2,177.2
Subordinated loan
capital(1) 1.4 46.5 0.2 - - 174.6 222.7
At 31 January 2021 181.5 1,503.5 3,925.2 1,780.7 1,341.1 791.1 9,523.1
1 Comprises issuances of GBP175 million and GBP45 million with
contractual maturity dates of 2027 and 2026 and optional
prepayment
dates of 2022 and 2021 respectively.
Within Between Between Between After
On demand three three months one and two and more than
months and one two years five years five years Total
year
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
Deposits by banks 25.5 123.3 4.0 - - - 152.8
Deposits by customers 543.3 1,103.9 2,799.2 1,151.8 319.5 - 5,917.7
Loans and overdrafts
from banks 6.9 1.0 - 262.0 228.0 - 497.9
Debt securities
in issue 27.1 37.1 914.9 212.4 407.7 271.1 1,870.3
Subordinated loan
capital(1) 1.9 1.4 0.2 - - 219.5 223.0
At 31 July 2020 604.7 1,266.7 3,718.3 1,626.2 955.2 490.6 8,661.7
1 Comprises issuances of GBP175 million and GBP45 million with
contractual maturity dates of 2027 and 2026 and optional
prepayment
dates of 2022 and 2021 respectively.
At 31 January 2021, the group was a participant of the Bank of
England's Term Funding Scheme with Additional Incentives for SMEs
("TFSME"). At 31 July 2020, in addition to TFSME, the group was
also a participant of the Bank of England's Term Funding Scheme
("TFS"). Under these schemes, asset finance loan receivables of
GBP617.5 million (31 July 2020: GBP758.5 million), UK gilts of
GBP39.0 million (31 July 2020: GBPnil) and retained notes relating
to Motor Finance loan receivables of GBP100.0 million (31 July
2020: GBP109.0 million) were positioned as collateral with the Bank
of England, against which GBP490.0 million of cash was drawn (31
July 2020: GBP228.0 million under TFSME and GBP262.0 million under
TFS).
The term of these transactions is four years from the date of
each drawdown but the group may choose to repay earlier at its
discretion. The risks and rewards of the loan receivables remain
with the group and continue to be recognised in loans and advances
to customers on the consolidated balance sheet.
The group has securitised without recourse and restrictions
GBP1,500.4 million (31 July 2020: GBP1,601.1 million) of its
insurance premium and motor loan receivables in return for cash and
asset-backed securities in issue of GBP799.4 million (31 July 2020:
GBP1,037.1 million). This includes the GBP100.0 million (31 July
2020: GBP109.0 million) retained notes positioned as collateral
with the Bank of England. As the group has retained exposure to
substantially all the credit risk and rewards of the residual
benefit of the underlying assets it continues to recognise these
assets in loans and advances to customers in its consolidated
balance sheet.
13. Capital
The group's individual regulated entities and the group as a
whole complied with all of the externally imposed capital
requirements to which they were subject for the period to 31
January 2021 and the year ended 31 July 2020. The table below
summarises the composition of regulatory capital and Pillar 1 risk
weighted assets at those financial period ends. The information
presented in this note is outside the scope of the independent
review performed by PricewaterhouseCoopers LLP.
31 January 31 July
2021 2020
GBP million GBP million
Common equity tier 1 ("CET1") capital
Called up share capital 38.0 38.0
Retained earnings(1) 1,472.0 1,435.0
Other reserves recognised for CET1 capital 14.0 17.2
Regulatory adjustments to CET1 capital
Intangible assets, net of associated deferred tax liabilities(2) (196.8) (236.9)
Foreseeable dividend(3) (51.2) (59.8)
Investment in own shares (38.7) (33.9)
Pension asset, net of associated deferred tax liabilities (6.0) (5.7)
Prudent valuation adjustment (0.2) (0.2)
IFRS 9 transitional arrangements(4) 119.1 100.3
CET1 capital 1,350.2 1,254.0
Tier 2 capital - subordinated debt 181.2 187.0
Total regulatory capital(5) 1,531.4 1,441.0
Risk weighted assets (notional)(5)
Credit and counterparty risk 7,770.7 7,789.0
Operational risk(6) 945.7 945.7
Market risk(6) 110.1 128.5
8,826.5 8,863.2
CET1 capital ratio(5) 15.3% 14.1%
Total capital ratio(5) 17.4% 16.3%
1 Retained earnings for the period ended 31 January 2021 include
all profits (both verified and unverified) for the six month
period.
2 In line with the amended Capital Requirements Regulation,
effective on 23 December 2020, the CET1 ratio at 31 January
2021
includes a c.45bps benefit related to software assets which are
exempt from the deduction requirement for intangible assets
from
CET1. The PRA launched a consultation on 12 February 2021
including a proposal to revert to the earlier position, which
if implemented would result in a future reversal of this benefit
and reduction of the CET1 capital ratio.
3 Under the Regulatory Technical Standard on own funds, a
deduction has been recognised for a foreseeable dividend. In
accordance with this standard, for 31 January 2021 a foreseeable
dividend has been determined based on the payout ratio
for the previous year applied to the retained earnings for the
period. For 31 July 2020 a foreseeable dividend was
determined as the proposed final dividend.
4 The group has elected to apply IFRS 9 transitional
arrangements, which allow the capital impact of expected credit
losses to be
phased in over the transitional period.
5 Shown after applying IFRS 9 transitional arrangements and the
Capital Requirement Regulations transitional and qualifying own
funds arrangements. At 31 January 2021 the fully loaded CET1
capital ratio is 14.1% (31 July 2020: 13.1%) and total capital
ratio is
16.1% (31 July 2020: 15.1%).
6 Operational and market risks include a notional adjustment at
8% in order to determine notional risk weighted assets.
The following table shows a reconciliation between equity and
CET1 capital after deductions:
31 January 31 July
2021 2020
GBP million GBP million
Equity 1,480.4 1,449.6
Regulatory adjustments to CET1 capital:
Intangible assets, net of associated
deferred tax liabilities (196.8) (236.9)
Foreseeable dividend(1) (51.2) (59.8)
IFRS 9 transitional arrangements 119.1 100.3
Pension asset, net of associated deferred
tax liabilities (6.0) (5.7)
Prudent valuation adjustment (0.2) (0.2)
Other reserves not recognised for CET1
capital:
Cash flow hedging reserve 3.9 5.7
Non-controlling interests 1.0 1.0
CET1 capital 1,350.2 1,254.0
1 Under the Regulatory Technical Standard on own funds, a
deduction has been recognised for a foreseeable dividend. In
accordance with this standard, for 31 January 2021 a foreseeable
dividend has been determined based on the payout
ratio for the previous year applied to the retained earnings for
the period. For 31 July 2020 a foreseeable dividend
was determined as the proposed final dividend.
The following table shows the movement in CET1 capital during
the period:
GBP million
CET1 capital at 31 July 2020 1,254.0
Profit in the period attributable to shareholders 94.8
Dividends paid and foreseen (51.2)
Change in software assets treatment(1) 45.1
IFRS 9 transitional arrangements 18.8
Increase in intangible assets, net of associated deferred
tax liabilities (5.0)
Other movements in reserves recognised for CET1 capital (1.2)
Other movements in deductions from CET1 capital (5.1)
CET1 capital at 31 January 2021 1,350.2
1 In line with the amended Capital Requirements Regulation,
effective on 23 December 2020, the CET1 ratio at 31 January
2021
includes a c.45bps benefit related to software assets which are
exempt from the deduction requirement for intangible assets
from
CET1. The PRA launched a consultation on 12 February 2021
including a proposal to revert to the earlier position, which
if implemented would result in a future reversal of this benefit
and reduction of the CET1 capital ratio.
14. Contingent liabilities
Financial Services Compensation Scheme ("FSCS")
As disclosed in note 23 of the Annual Report 2020, the group is
exposed to the FSCS which provides compensation to customers of
financial institutions in the event that an institution is unable,
or is likely to be unable, to pay claims against it.
Compensation has previously been paid out by the FSCS funded by
loan facilities provided by HM Treasury to FSCS in support of the
FSCS's obligations to the depositors of banks declared in default.
The facilities are expected to be repaid wholly from recoveries
from the failed deposit-takers. In the event of a shortfall, the
FSCS will recover the shortfall by raising levies on the industry.
The amount of future levies payable by the group depends on a
number of factors including the potential recoveries of assets by
the FSCS, the group's participation in the deposit-taking market at
31 December, the level of protected deposits and the population of
FSCS members.
15. Related party transactions
Related party transactions, including salary and benefits
provided to directors and key management, did not have a material
effect on the financial position or performance of the group during
the period. There were no changes to the type and nature of the
related party transactions disclosed in the Annual Report 2020 that
could have a material effect on the financial position and
performance of the group in the six months to 31 January 2021.
16. Consolidated cash flow statement reconciliation
31 January 31 July
2021 2020 2020
GBP million GBP million GBP million
(a) Reconciliation of operating profit before
tax to net cash
inflow from operating activities
Operating profit before tax 127.0 124.1 140.9
Tax paid (24.0) (64.6) (86.6)
Depreciation and amortisation 50.0 44.4 95.8
(Increase)/decrease in:
Interest receivable and prepaid expenses (1.1) (15.5) (14.5)
Net settlement balances and trading positions (36.2) (7.7) (12.9)
Net loans to/from money broker against stock
advanced 31.6 27.3 0.3
(Decrease)/increase in interest payable and
accrued expenses (12.2) (40.5) 15.2
Net cash inflow from trading activities 135.1 67.5 138.2
(Increase)/decrease in:
Loans and advances to banks not repayable on
demand 1.7 (0.3) (13.3)
Loans and advances to customers (385.2) 18.6 (87.8)
Assets held under operating leases (18.1) (34.8) (45.6)
Certificates of deposit 106.4 (60.3) (45.2)
Sovereign and central bank debt (23.7) - (22.7)
Other assets less other liabilities 32.7 33.5 142.6
(Decrease)/increase in:
Deposits by banks (9.4) 77.5 93.4
Deposits by customers 537.1 (75.9) 284.3
Loans and overdrafts from banks 38.8 (9.0) (21.4)
Issuance/(redemption) of debt securities 317.8 (32.6) 6.9
Net cash inflow/(outflow) from operating activities 733.2 (15.8) 429.4
(b) Analysis of net cash outflow in respect of
the purchase of subsidiaries and equity shares
held for investment
Cash consideration paid (0.4) (3.3) (4.6)
(c) Analysis of net cash inflow in respect of
the sale of subsidiaries and discontinued
operations
Cash consideration received 2.1 0.5 0.5
31 January 31 July
2021 2020 2020
GBP million GBP million GBP million
(d) Analysis of cash and cash equivalents(1)
Cash and balances at central banks 1,894.6 903.9 1,362.8
Loans and advances to banks repayable on demand 181.5 151.5 98.5
2,076.1 1,055.4 1,461.3
1 Excludes Bank of England cash reserve account and amounts held
as collateral.
During the period ended 31 January 2021, the non-cash changes on
debt financing amounted to GBP6.5 million (31 January 2020: GBP7.0
million; 31 July 2020: GBP16.2 million) arising from interest
accretion and fair value hedging movements.
17. Fair value of financial assets and liabilities
The main differences between the fair values and the carrying
values of the group's financial assets and financial liabilities
are as follows:
31 January 2021 31 July 2020
Fair value Carrying Fair Carrying
value value value
GBP million GBP million GBP million GBP million
------------ ------------
Subordinated loan capital 226.8 222.7 227.0 223.0
Debt securities in issue 2,211.7 2,177.2 1,885.8 1,870.3
The group holds financial instruments that are measured at fair
value subsequent to initial recognition. Each instrument has been
categorised within one of three levels using a fair value hierarchy
that reflects the significance of the inputs used in making the
measurements. These levels are based on the degree to which the
fair value is observable and are defined in note 28 "Financial risk
management" of the Annual Report 2020. The table below shows the
classification of financial instruments held at fair value into the
valuation hierarchy:
Level 1 Level 2 Level 3 Total
GBP million GBP million GBP million GBP million
At 31 January 2021
Assets
Debt securities:
Long trading positions in debt securities 26.2 1.4 - 27.6
Sovereign and central bank debt 94.1 - - 94.1
Equity shares 6.7 23.5 0.4 30.6
Derivative financial instruments - 29.7 - 29.7
Contingent consideration - - 0.5 0.5
127.0 54.6 0.9 182.5
-----------
Liabilities
Short positions:
Debt securities 8.9 1.1 - 10.0
Equity shares 1.9 5.4 - 7.3
Derivative financial instruments - 17.7 - 17.7
Contingent consideration - - 3.9 3.9
10.8 24.2 3.9 38.9
-----------
Level 1 Level 2 Level 3 Total
GBP million GBP million GBP million GBP million
At 31 July 2020
Assets
Debt securities:
Long trading positions in debt securities 23.1 1.3 - 24.4
Sovereign and central bank debt 72.2 - - 72.2
Equity shares 6.1 23.6 0.3 30.0
Derivative financial instruments - 39.9 - 39.9
Contingent consideration - - 2.7 2.7
101.4 64.8 3.0 169.2
----------- -----------
Liabilities
Short positions:
Debt securities 6.3 2.0 - 8.3
Equity shares 3.1 6.0 - 9.1
Derivative financial instruments - 20.8 - 20.8
Contingent consideration - - 3.5 3.5
9.4 28.8 3.5 41.7
----------- -----------
There is no significant change to the valuation methodologies
relating to Level 2 and 3 financial instruments disclosed in note
28 "Financial risk management" of the Annual Report 2020.
Financial instruments classified as Level 3 predominantly
comprise contingent consideration payable and receivable in
relation to the acquisitions and disposal of subsidiaries. The
valuation of contingent consideration is determined on a discounted
expected cash flow basis. The group believes that there is no
reasonably possible change to the technique or inputs used in the
valuation of these positions which would have a material effect on
the group's consolidated income statement.
There were no significant transfers between Level 1, 2 and 3
during the six months ended 31 January 2021 (six months ended 31
January 2020: none).
There were no significant movements in financial instruments
categorised as Level 3 during the six months ended 31 January 2021
(six months ended 31 January 2020: none).
The losses recognised in the consolidated income statement
relating to financial instruments held at 31 January 2021 amounted
to GBP0.5 million (31 January 2020: GBP0.3 million gain; 31 July
2020: GBP0.4 million loss).
18. Additional support for customers
Forbearance
Forbearance occurs when a customer is experiencing difficulty in
meeting their financial commitments and a concession is granted, by
changing the terms of the financial arrangement, which would not
otherwise be considered. This arrangement can be temporary or
permanent depending on the customer's circumstances.
During the first half, we have continued to offer additional
forbearance measures to those of our customers who find themselves
in difficulty as a result of the ongoing impact from Covid-19.
Concessions granted to customers are varied across our lending
businesses but typically would relate to a form of payment deferral
or the waiving of fees.
In all instances, where further support is required this is
considered on a case by case basis as we seek to assist our
customers during these unpredictable times. The number of customers
supported via Covid-19 concessions offered has fallen to 55,418
from 66,153 at the end of the prior financial year.
A customer will be treated as forborne until a cure period has
been met. Cure periods are subject to expert judgement and are
underpinned by carefully considered assumptions. These are subject
to regular review, and during the course of this financial year,
have been adjusted in some portfolios to reflect the ongoing
implications of Covid-19.
Our cure approach varies by division and ranges from instant
cure when a concession ends (subject to confirmation of no adverse
performance) to a cure period between 3 and 12 months. The latter
applies to Covid-19 forborne exposures in Commercial, which
comprises the majority of forborne loan balances. In some instances
where the loan is of short tenor the exposure may remain forborne
for the residual life of the loan.
Forbearance analysis
At 31 January 2021, the gross carrying amount of loans with
forbearance measures decreased GBP310.2 million to GBP1,286.0
million (31 July 2020: GBP1,596.2 million) driven by an increase in
the proportion of customers resuming repayments but remaining in
cure periods and in loans curing and thus no longer being
considered forborne, partially offset by requests for further
concessions. Requests for support remain significantly below the
peak experienced at the height of the Covid-19 pandemic.
Covid-19 forbearance continues to account for the vast majority
of overall forbearance (31 January 2021: 85.8% of the forborne
book; 31 July 2020: 88.4%). This reflects the proportion of
customers who have sought additional support as a result of the
impacts of the Covid-19 pandemic.
An analysis of forborne loans as at 31 January 2021 is shown in
the table below:
Forborne
loans as
a percentage
of gross
Gross loans loans and Provision Number of
and advances Forborne advances on forborne customers
to customers loans to customers loans supported
GBP million GBP million % GBP million
31 January 2021 8,228.4
Covid-19 forbearance 1,103.7 13.4% 74.1 55,418
Non-Covid-19 forbearance 182.3 2.2% 34.4 1,999
8,228.4 1,286.0 15.6% 108.5 57,417
31 July 2020 7,855.4
Covid-19 forbearance 1,410.4 18.0% 71.9 66,153
Non-Covid-19 forbearance 185.8 2.3% 34.5 3,039
7,855.4 1,596.2 20.3% 106.4 69,192
The following is a breakdown of forborne loans by segment split
by those driven by Covid-19 compared to concessions that have
arisen in the normal course of business:
31 January 2021 31 July 2020
Non-
Covid-19 Non-Covid-19 Total forborne loans Covid-19 Covid-19 Total forborne loans
GBP million GBP million GBP million GBP million GBP million GBP million
Commercial 728.7 23.5 752.2 832.8 50.1 882.9
Retail 165.0 3.1 168.1 251.0 4.1 255.1
Property 210.0 155.7 365.7 326.6 131.6 458.2
1,103.7 182.3 1,286.0 1,410.4 185.8 1,596.2
The following is a breakdown of the number of customers
supported by segment:
31 January 2021 31 July 2020
Total number of customers Non- Total number of customers
Covid-19 Non-Covid-19 supported Covid-19 Covid-19 supported
Commercial 6,816 176 6,992 7,322 284 7,606
Retail 48,528 1,756 50,284 58,644 2,700 61,344
Property 74 67 141 187 55 242
55,418 1,999 57,417 66,153 3,039 69,192
The following is a breakdown of forborne loans by concession
type split by those driven by Covid-19 compared to concessions that
have arisen in the normal course of business:
31 January 2021 31 July 2020
Non- Non-
Covid-19 Covid-19 Forborne loans Covid-19 Covid-19 Forborne loans
Extension outside terms 275.1 143.5 418.6 440.1 138.0 578.1
Refinancing 4.4 8.4 12.8 0.5 15.2 15.7
Moratorium 823.5 14.6 838.1 969.8 28.6 998.4
Other modifications 0.7 15.8 16.5 - 4.0 4.0
1,103.7 182.3 1,286.0 1,410.4 185.8 1,596.2
Government lending schemes
In addition to the Covid-19 specific forbearance measures
covered in this note, as an accredited lender, we have continued to
offer many of our customers facilities under the UK
government-introduced Coronavirus Business Interruption Loan Scheme
("CBILS"), the Coronavirus Large Business Interruption Loan Scheme
("CLBILS") and the Bounce Back Loan Scheme ("BBLS"), thereby
enabling us to maximise our support for small businesses. We have
seen strong demand for loans under these schemes with 4,069 (31
July 2020: 1,430) of these loans approved within our Invoice
Finance, Property Finance, and Asset Finance and Leasing
businesses.
We maintain a regular reporting cycle of the uptake of these
facilities and monitor usage compared to approved overall credit
limits. In addition to facilities already approved and drawn we
have a strong pipeline of applications that are undergoing
eligibility assessment. At 31 January 2021, lending under the CBILS
and associated schemes totalled GBP729.7 million across 3,418 loans
(31 July 2020: GBP193.8 million across 901 loans) with CBILS
constituting the vast majority of such exposures. Additionally, at
31 January 2021, GBP186.0 million across 651 loans (31 July 2020:
GBP159.1 million across 529 loans) had been credit approved and
were awaiting drawdown. Our lending under these
government-supported schemes is well spread across industry sectors
and across the whole of the UK.
19. Post balance sheet event
On 3 March 2021, the Chancellor of the Exchequer confirmed as
part of the Budget 2021 announcement that the corporation tax rate
will increase from 19% to 25% from April 2023. This increase is
expected to be enacted in the year ending 31 July 2021 and is a
non-adjusting post balance sheet event. Had this change been
enacted before 31 January 2021, the group's deferred tax asset
balance at 31 January 2021 would have increased by up to
approximately GBP10 million, with a corresponding tax benefit
recognised in the income statement and other comprehensive
income.
However, the Chancellor also indicated that the government
intends to legislate in Finance Bill 2021-22 to ensure that the
combined rate of tax on banks' profits, which comprises the
standard corporation tax rate and banking surcharge, does not
increase substantially from its current level. This legislation
would have the impact of partially reversing the abovementioned
deferred tax asset increase, and income statement benefit, however
the precise quantum of such a reversal remains uncertain.
Cautionary Statement
Certain statements included or incorporated by reference within
this announcement may constitute "forward-looking statements" in
respect of the group's operations, performance, prospects and/or
financial condition. Forward-looking statements are sometimes, but
not always, identified by their use of a date in the future or such
words as "anticipates", "aims", "due", "could", "may", "will",
"should", "expects", "believes", "intends", "plans", "potential",
"targets", "goal" or "estimates". By their nature, forward-looking
statements involve a number of risks, uncertainties and assumptions
and actual results or events may differ materially from those
expressed or implied by those statements. Accordingly, no assurance
can be given that any particular expectation will be met and
reliance should not be placed on any forward-looking statement.
Additionally, forward-looking statements regarding past trends or
activities should not be taken as a representation that such trends
or activities will continue in the future. Except as may be
required by law or regulation, no
responsibility or obligation is accepted to update or revise any
forward-looking statement resulting from new information, future
events or otherwise. Nothing in this announcement should be
construed as a profit forecast. Past performance is no guide to
future performance and persons needing advice should consult an
independent financial (or other professional) adviser.
This announcement does not constitute or form part of any offer
or invitation to sell, or any solicitation of any offer to
subscribe for or purchase any shares or other securities in the
company or any of its group members, nor shall it or any part of it
or the fact of its distribution form the basis of, or be relied on
in connection with, any contract or commitment or investment
decisions relating thereto, nor does it constitute a recommendation
regarding the shares or other securities of the company or any of
its group members. Statements in this announcement reflect the
knowledge and information available at the time of its preparation.
Liability arising from anything in this announcement shall be
governed by English law. Nothing in this announcement shall exclude
any liability under applicable laws that cannot be excluded in
accordance with such laws.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com 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
IR FFFFIVSIELIL
(END) Dow Jones Newswires
March 16, 2021 03:00 ET (07:00 GMT)
Close Brothers (LSE:CBG)
Historical Stock Chart
From Apr 2024 to May 2024
Close Brothers (LSE:CBG)
Historical Stock Chart
From May 2023 to May 2024