TIDMCBG
RNS Number : 7514E
Close Brothers Group PLC
15 March 2022
Half Year Results for the Six Months to 31 January 2022
Adrian Sainsbury, group Chief Executive Officer, commented:
"We delivered a good performance in the first half of the 2022
financial year, with strong income growth in the Banking division
and positive momentum in Asset Management, while Winterflood saw
reduced trading opportunities following the exceptional highs
experienced during the Covid-19 period. We are pleased to declare
an interim dividend of 22.0p, returning to the pre-pandemic level
and reflecting the group's strong underlying performance and
continued confidence in our business model.
Looking ahead, we are mindful of the highly uncertain external
environment, including the impact of increasing geopolitical
tensions and rising inflation on our customers and wider financial
market conditions. Nevertheless, we remain well placed to continue
delivering on our long track record of profitability and
disciplined growth."
Highlights
-- Group statutory operating profit increased 1% to GBP128.9
million, with adjusted operating profit also up 1% to GBP129.8
million, reflecting 12% income growth in Banking and 14% in Asset
Management, offset by a reduction in trading income in
Winterflood
-- Adjusted operating profit in the Banking division was up 26%
to GBP120.2 million, reflecting loan book growth of 8.2%
year-on-year (1.9% in the first six months of the 2022 financial
year) at an annualised net interest margin ("NIM") of 7.9% (H1
2021: 7.7%)
-- The annualised bad debt ratio of 1.1% (H1 2021: 1.3%)
primarily reflected the impact of updated loss rate assumptions for
the Novitas loan book. Excluding Novitas, the annualised bad debt
ratio was 0.2% (H1 2021: 0.7%), reflecting the benefit of provision
releases and strong underlying credit performance across our
business
-- The Asset Management division saw positive momentum,
generating annualised net inflows of 8%, with adjusted operating
profit up 18% to GBP14.5 million
-- Winterflood saw reduced trading opportunities following the
exceptional highs experienced during the Covid-19 period, with
operating profit of GBP8.8 million (H1 2021: GBP34.2 million), and
incurred only one loss day, in January, despite extreme market
volatility. Winterflood remains well placed for when investor
appetite returns
-- The group maintained a strong capital, funding and liquidity
position. Our common equity tier 1 ("CET1") capital ratio was 15.1%
(31 July 2021: 15.8%), significantly above the applicable minimum
regulatory requirements
-- The group achieved a return on opening equity ("RoE") of
12.2% (H1 2021: 13.2%) and we have declared a 22.0p interim
dividend, returning to the pre-pandemic level, reflecting the
group's strong underlying performance and continued confidence in
our business model
Key Financials (1)
First half First half Change
2022 2021 %
--------------------------------------- ------------- ------------- ---------
Adjusted operating profit(2) GBP129.8m GBP128.5m 1
Operating profit before tax GBP128.9m GBP127.0m 1
Adjusted basic earnings per share(3) 64.0p 64.0p -
Basic earnings per share(3) 63.5p 63.2p -
Ordinary dividend per share 22.0p 18.0p 22
Return on opening equity 12.2% 13.2%
Return on average tangible equity 14.2% 15.7%
Net interest margin(4) 7.9% 7.7%
Bad debt ratio(4) 1.1% 1.3%
31 January 31 July Change
2022 2021 %
--------------------------------------- ------------- ------------- ---------
Loan book GBP8.6bn GBP8.4bn 1.9
Total client assets GBP17.2bn GBP17.0bn 1.1
CET1 capital ratio (transitional)(5) 15.1% 15.8%
Total capital ratio (transitional)(5) 17.3% 18.3%
--------------------------------------- ------------- ------------- ---------
1 Please refer to definitions on pages 22 to 24.
2 Adjusted operating profit is stated before amortisation of intangible
assets on acquisition of GBP0.9 million (H1 2021: GBP1.5 million).
3 Refer to Note 4 for the calculation of basic and adjusted earnings
per share.
4 Net interest margin and bad debt ratio calculated on an annualised
basis.
5 In line with the amended Capital Requirements Regulation ("CRR
II"), effective on 23 December 2020, both the CET1 capital ratio
and total capital ratio at 31 July 2021 included a c.50bps benefit
related to software assets exempt from the deduction requirement
for intangible assets from CET1. This benefit has been reversed
with a corresponding reduction of the CET1 and total capital ratios
upon implementation of PS17/21 on 1 January 2022.
Enquiries
Sophie Gillingham Close Brothers Group plc 020 3857 6574
Camila Sugimura Close Brothers Group plc 020 3857 6577
Kimberley Taylor Close Brothers Group plc 020 3857 6233
Irene Galvan Close Brothers Group plc 020 3857 6217
Sam Cartwright Maitland 07827 254 561
A virtual presentation to analysts and investors will be held
today at 9.30 am GMT followed by a Q&A session. A webcast and
dial-in facility will be available by registering at
https://webcasts.closebrothers.com/results/HalfYearResults2022
Basis of Presentation
Results are presented both on a statutory and an adjusted basis
to aid comparability between periods. Adjusted measures are
presented on a basis consistent with prior periods and exclude
amortisation of intangible assets on acquisition, to present the
performance of the group's acquired businesses consistent with its
other businesses; and any exceptional and other adjusting items
which do not reflect underlying trading performance.
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
During the first six months of the financial year, as
colleagues, customers and clients continued to navigate
restrictions and disruptions caused by Covid-19, the successful
vaccination programme in the UK saw the economy start to recover.
This meant increased business confidence levels and customer
activity in our lending business, continued growth in Asset
Management ("CBAM"), as well as mixed market conditions and
volatility in the segments where Winterflood operates. Against this
backdrop, we have maintained support for our people and customers
while continuing to make the most of the opportunities arising and
are well positioned to continue to do so as the pandemic
subsides.
While the current external environment is clearly volatile,
directly impacting our market-facing businesses, CBAM and
Winterflood, we are confident in the quality of our lending. Our
Banking loan book is predominantly secured, prudently underwritten
and diverse. Approximately 99% of our loan book exposure is to the
UK, Republic of Ireland and Channel Islands, with the remaining
exposure to Western European countries. We remain encouraged by
both the short and medium-term growth opportunities across the
group.
Financial Performance
We delivered a good performance in the first half, with adjusted
operating profit up 1% to GBP129.8 million (H1 2021: GBP128.5
million), corresponding to a return on opening equity of 12.2% (H1
2021: 13.2%). Our performance benefited from strong income growth
in our lending business and positive momentum in Asset Management,
offset by reduced trading opportunities in Winterflood following
the exceptional highs experienced during the Covid-19 period.
The group's income was broadly stable at GBP471.6 million (H1
2021: GBP474.0 million). The Banking division achieved a 12%
increase in income, reflecting good demand across our lending
businesses, with loan book growth of 8.2% year-on-year, at an
annualised net interest margin of 7.9% (H1 2021: 7.7%). Income grew
14% in Asset Management driven by favourable market conditions and
strong net inflows, with managed assets up to GBP15.8 billion (31
July 2021: GBP15.6 billion). Winterflood saw a 49% reduction in
income reflecting a moderation in retail trading activity and a
change in the mix of trading volumes.
Costs were stable on the prior year period as investment across
the Banking and Asset Management divisions was offset by a
reduction in variable costs in Winterflood. In Banking, we
delivered 2% positive operating leverage as income growth and
rigorous control over business as usual ("BAU") costs more than
offset continued investment to protect, grow and sustain the model.
Asset Management also achieved positive operating leverage, with a
13% increase in costs, primarily reflecting higher staff costs and
new hires to support the long-term growth strategy of the
division.
The annualised bad debt ratio of 1.1% (H1 2021: 1.3%) primarily
reflected impairment charges related to the Novitas Loans
("Novitas") loan book. Excluding those impairment charges, the bad
debt ratio was 0.2% (H1 2021: 0.7%), benefiting from provision
releases and reflecting a strong underlying credit performance
across our business. As previously announced, in July 2021 the
group decided to cease permanently the approval of lending to new
customers across all of the products offered by Novitas and
withdraw from the legal services financing market.
We have a prudent approach to funding and liquidity and
maintained a strong balance sheet. Our business is highly capital
generative and we have a significant headroom above the applicable
minimum regulatory requirements, with a CET1 capital ratio of 15.1%
at 31 January 2022 (31 July 2021: 15.8%, 15.3% excluding c.50bps
benefit from software assets, which has now reversed).
We are pleased to declare an interim dividend of 22.0p per
share, reflecting the group's strong underlying performance and
continued confidence in our business model.
Keeping Our Model Safe While Taking it Forward
At our Investor Event in June 2021, we set out how we plan to
build on the core strengths of our business and take it forward. We
have made good progress against our strategic priorities to
"Protect", "Grow" and "Sustain" our business model and continue to
deliver on our purpose of helping the people and businesses of
Britain thrive over the long term.
The disciplined application of our prudent underwriting and
pricing of our lending is evidenced by our strong underlying credit
performance and net interest margin.
We continued to invest to protect our business model and
maintain our operational and financial resilience. Our multi-year
investment programmes are progressing well and delivering tangible
benefits across our businesses. This includes the successful
extended product offering of our Savings franchise following our
investment in the customer deposit platform. The total balance of
our notice account product range is now at c.GBP1.2 billion, with
Fixed Rate ISAs at c.GBP300 million, supporting lower cost of funds
and funding diversification. I am also pleased with the benefits
from our Motor Transformation programme, which has allowed us to
maximise the opportunities in the second hand car market.
We remain focused on maximising the growth opportunities in each
of our markets. In the first half of the year, we expanded our
offering in Asset Finance with the addition of a specialist
materials handling team. In Motor, we entered a new strategic
partnership with AutoTrader, as we expand our routes to market. We
also continue to grow income and client assets in Winterflood
Business Services ("WBS").
We are also actively working to identify new opportunities to
deliver disciplined growth, in line with the strategy set out at
our Investor Event. I look forward to updating you on our progress
in due course.
We would like to welcome Eddy Reynolds as the recently appointed
chief executive of our Asset Management division. Eddy has over 30
years' experience in the fund and wealth management industries,
bringing with him outstanding experience and knowledge, and will
lead CBAM through the next stage of its development. On behalf of
the executive committee and the board, I would like to thank Martin
Andrew for his significant contribution to the group during his 16
years at CBAM.
Focus on the Long Term
Our long-term approach defines the way we do business. It is
reflected in how we invest for growth and also in how we operate
our business and engage with our stakeholders. It is key to
ensuring we can sustain and future-proof our business.
We have continued to make good progress on helping to address
the social, economic and environmental challenges facing our
business, employees and customers.
In particular, to support our ambition to help people and
businesses transition towards a lower carbon future, we are
currently undertaking an assessment of our indirect Scope 3
emissions, to provide us with a deeper understanding of the
emissions impact of our supply chain and business activity. In the
first half, we completed an initial assessment of the climate
sensitivity of our loan book, incorporating scenario analysis for
those parts of our business where we consider the impact to be most
material and have plans to enhance further as data capabilities
progress. Our risk standards and policies now have climate
considerations embedded, which will be reviewed in line with
business strategy and transition plans.
Outlook
Looking ahead, we are mindful of the highly uncertain external
environment, including the impact of increasing geopolitical
tensions and rising inflation on our customers and wider financial
market conditions. Nevertheless, we remain well placed to continue
delivering on our long track record of profitability and
disciplined growth.
In Banking, we remain focused on maximising opportunities in the
current cycle and delivering continued growth at strong margins. We
remain confident in the long-term growth prospects of our
businesses and will continue to assess opportunities to deliver
disciplined growth.
In Asset Management, we will continue to invest to support the
long-term growth potential of the business. While CBAM is sensitive
to financial market conditions, we remain committed to driving
growth both organically and through the continued selective hiring
of advisers and investment managers, and through in-fill
acquisitions.
As a daily trading business, Winterflood is highly sensitive to
changes in the market environment, but remains well positioned to
continue trading profitably, taking advantage of returning investor
appetite. We remain focused on developing WBS and expect an
accelerating growth trajectory for WBS over the next 12 months.
Our proven and resilient model and strong balance sheet,
combined with our deep experience in navigating a wide range of
economic conditions, leave us well placed to continue supporting
our colleagues, customers and clients over the long term.
Adrian Sainsbury
Chief Executive
15 March 2022
OVERVIEW OF FINANCIAL PERFORMANCE
GROUP INCOME STATEMENT(1)
First half First half Change
2022 2021 %
GBP million GBP million
--------------------------------------- -------------- ------------------ -----------
Operating income 471.6 474.0 (1)
Adjusted operating expenses (293.5) (292.7) -
Impairment losses on financial assets (48.3) (52.8) (9)
--------------------------------------- -------------- ------------------ -----------
Adjusted operating profit 129.8 128.5 1
--------------------------------------- -------------- ------------------ -----------
Banking 120.2 95.1 26
-------------- ------------------ -----------
Commercial 37.7 27.4 38
Retail 42.5 27.9 52
Property 40.0 39.8 1
-------------- ------------------ -----------
Asset Management 14.5 12.3 18
Winterflood 8.8 34.2 (74)
Group (13.7) (13.1) 5
--------------------------------------- -------------- ------------------ -----------
Amortisation of intangible assets
on acquisition (0.9) (1.5) (40)
--------------------------------------- -------------- ------------------ -----------
Operating profit before tax 128.9 127.0 1
--------------------------------------- -------------- ------------------ -----------
Tax (33.8) (32.2) 5
--------------------------------------- -------------- ------------------ -----------
Profit after tax 95.1 94.8 -
--------------------------------------- -------------- ------------------ -----------
Profit attributable to shareholders 95.1 94.8 -
--------------------------------------- -------------- ------------------ -----------
Adjusted basic earnings per share(2) 64.0p 64.0p -
Basic earnings per share(2) 63.5p 63.2p -
Ordinary dividend per share 22.0p 18.0p 22
Return on opening equity 12.2% 13.2%
Return on average tangible equity 14.2% 15.7%
1 Adjusted measures are presented on a basis consistent with
prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired
businesses consistent with its other businesses. Further detail on
the reconciliation between operating and adjusted measures can be
found in Note 2.
2 Refer to Note 4 for the calculation of basic and adjusted
earnings per share.
Operating profit and returns
Adjusted operating profit increased marginally to GBP129.8
million (H1 2021: GBP128.5 million), as higher adjusted operating
profit in Banking and the Asset Management division were offset by
a reduction in Winterflood. Statutory operating profit increased 1%
to GBP128.9 million (H1 2021: GBP127.0 million). The group
delivered a strong return on opening equity of 12.2% (H1 2021:
13.2%) and return on average tangible equity was 14.2% (H1 2021:
15.7%).
Adjusted operating profit in the Banking division increased 26%
to GBP120.2 million (H1 2021: GBP95.1 million) reflecting strong
income growth and reduced impairment charges, which more than
offset higher investment. The Asset Management division achieved
strong net inflows, with adjusted operating profit up 18% to
GBP14.5 million (H1 2021: GBP12.3 million), with higher income more
than offsetting a rise in expenses as we continue to invest to
support the long-term growth potential of the business. Winterflood
saw a reduction in trading income, resulting in a 74% reduction in
operating profit to GBP8.8 million (H1 2021: GBP34.2 million).
Group net expenses, which include the central functions such as
finance, legal and compliance, risk and human resources, increased
5% on the prior year period to GBP13.7 million (H1 2021: GBP13.1
million) mainly reflecting increased staff costs and charges
relating to share-based awards.
Operating income
Operating income reduced 1% to GBP471.6 million (H1 2021:
GBP474.0 million), with strong growth in both Banking and Asset
Management offset by a reduction in trading income in Winterflood.
Income in the Banking division increased 12%, reflecting strong
year-on-year growth of 8.2% in the loan book at a strong margin.
Income in the Asset Management division rose by 14%, reflecting
favourable market conditions and net inflows. Income in Winterflood
reduced by 49%, driven by a moderation in activity and a change in
the mix of trading volumes.
Adjusted operating expenses
Adjusted operating expenses were broadly flat on the prior year
period at GBP293.5 million (H1 2021: GBP292.7 million) as increased
investment across the Banking and Asset Management divisions was
offset by a reduction in variable costs in Winterflood. In Banking,
costs increased 10% as we continued to invest in key strategic
programmes and incurred higher BAU costs, primarily reflecting an
increase in performance-driven compensation and regulatory spend,
as well as headcount growth. Costs increased 13% in Asset
Management primarily reflecting higher staff costs and new hires as
we invest in growing the business. Winterflood costs reduced 36% to
reflect lower variable compensation. Overall, the group's
expense/income ratio was in line with the prior year period at 62%
(H1 2021: 62%) and the group's compensation ratio reduced to 37%
(H1 2021: 39%).
Impairment charges and IFRS 9 provisioning
Impairment charges were GBP48.3 million (H1 2021: GBP52.8
million), corresponding to an annualised bad debt ratio of 1.1% (H1
2021: 1.3%). This primarily reflected the impact of updated
assumptions for the Novitas loan book, informed by experience of
credit performance, which resulted in GBP39.2 million (H1 2021:
GBP24.0 million) of impairment charges related to this business.
Excluding Novitas, the annualised bad debt ratio was 0.2% (H1 2021:
0.7%), reflecting the benefit of provision releases and strong
underlying credit performance across our business.
Overall, there was a marginal increase in provision coverage to
3.4% (31 July 2021: 3.2%). Excluding provisions of GBP116.7 million
(31 July 2021: GBP89.3 million) related to the Novitas loan book,
the coverage ratio reduced slightly to 2.2% (31 July 2021: 2.3%),
primarily reflecting provision releases driven by reduced forborne
balances and improved macroeconomic scenarios and weightings.
Since the previous financial year end, we have updated the
macroeconomic scenarios and the weightings assigned to them. At 31
January 2022, there was a 40% weighting to the baseline scenario,
30% to the upside and 30% to the downside scenarios, reflecting the
improved but still uncertain outlook for the UK economy at the time
(31 July 2021: 40% baseline, 20% upside, 40% downside).
We are mindful of the highly uncertain external environment,
including the impact of increasing geopolitical tensions and rising
inflation on our customers and credit performance. Nevertheless, we
remain confident in the quality of our loan book, which is
predominantly secured, prudently underwritten and diverse.
Approximately 99% of our loan book exposure is to the UK, Republic
of Ireland and Channel Islands, with the remaining exposure to
Western European countries. We remain encouraged by both the short
and medium-term growth opportunities across the group.
Tax expense
The tax expense in the first half of the year was GBP33.8
million (H1 2021: GBP32.2 million), which corresponded to an
effective tax rate of 26.2% (H1 2021: 25.4%), with the increase
primarily reflecting a higher proportion of the group's profits
being subject to the banking surcharge.
This reflects the UK corporate tax rate of 19% and headline
banking surcharge of 8% (which applies to a large proportion of our
group profits, resulting in c.7% banking surcharge) at 31 January
2022.
The UK Government's October 2021 budget announced its intention
to decrease the rate of banking surcharge from 8% to 3% with effect
from 1 April 2023. This rate change was substantively enacted on 2
February 2022 and its impact is therefore not included in these
half year results. Had this change been enacted before 31 January
2022, the group's deferred tax asset balance at 31 January 2022
would have decreased by approximately GBP6 million, with a
corresponding tax expense recognised in the income statement, net
of a smaller credit to other comprehensive income.
Earnings per share
Profit attributable to shareholders was stable on the prior year
period at GBP95.1 million (H1 2021: GBP94.8 million). As a result,
adjusted basic earnings per share ("EPS") was 64.0p (H1 2021:
64.0p) and basic EPS was 63.5p (H1 2021: 63.2p).
Dividend
The interim dividend of 22.0p (H1 2021: 18.0p) returned to the
pre-pandemic level, reflecting the group's strong underlying
performance and continued confidence in our business model. The
interim dividend is due to be paid on 27 April 2022 to shareholders
on the register at 25 March 2022.
While dividend decisions in the 2020 and 2021 financial years
have reflected the unprecedented uncertainty caused by Covid-19, we
aim to return to delivering long-term, progressive and sustainable
dividend growth in the future, in line with our policy.
GROUP BALANCE SHEET
31 January 2022 31 July 2021
GBP million GBP million
--------------------------------- ------------------------------- -------------------------------
Loans and advances to customers 8,605.9 8,444.5
Treasury assets(1) 1,705.4 1,788.2
Market-making assets(2) 1,024.0 801.6
Other assets 1,204.5 1,000.2
--------------------------------- ------------------------------- -------------------------------
Total assets 12,539.8 12,034.5
--------------------------------- ------------------------------- -------------------------------
Deposits by customers 6,755.4 6,634.8
Borrowings 2,758.6 2,600.9
Market-making liabilities(2) 921.7 690.6
Other liabilities 495.9 538.9
--------------------------------- ------------------------------- -------------------------------
Total liabilities 10,931.6 10,465.2
--------------------------------- ------------------------------- -------------------------------
Equity 1,608.2 1,569.3
--------------------------------- ------------------------------- -------------------------------
Total liabilities and equity 12,539.8 12,034.5
--------------------------------- ------------------------------- -------------------------------
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 its prudent
approach to managing financial resources. The fundamental structure
of the balance sheet remains unchanged, with most of the assets and
liabilities relating to our Banking activities. Loans and advances
make up the majority of assets. Other items on the balance sheet
include treasury assets held for liquidity purposes, and settlement
balances in Winterflood. Intangibles, property, plant and
equipment, and prepayments are included as other assets.
Liabilities are predominantly made up of customer deposits and both
secured and unsecured borrowings to fund the loan book.
Total assets increased by 4% to GBP12.5 billion (31 July 2021:
GBP12.0 billion). This reflects growth in the loan book and an
increase in market-making assets. Total liabilities were also up 4%
to GBP10.9 billion (31 July 2021: GBP10.5 billion) driven mainly by
higher customer deposits and increased borrowings under the Term
Funding Scheme with additional incentives for SMEs ("TFSME"). Both
market-making assets and liabilities related to trading activity at
Winterflood were up, reflecting elevated volumes and asset prices
at the end of the period when settlement balances are
calculated.
Total equity increased GBP38.9 million to GBP1.6 billion (31
July 2021: GBP1.6 billion), with profit in the first half of the
year partially offset by dividend payments of GBP62.7 million (31
January 2021: GBP59.8 million). The group's return on assets was
stable at 1.5% (H1 2021: 1.5%).
GROUP CAPITAL
31 January 2022 31 July 2021(1)
GBP million GBP million
------------------------------------- ---------------- ----------------
Common equity tier 1 capital 1,405.7 1,439.3
Total capital 1,605.7 1,662.7
Risk weighted assets 9,306.3 9,105.3
Common equity tier 1 capital ratio
(transitional) 15.1% 15.8%
Tier 1 capital ratio (transitional) 15.1% 15.8%
Total capital ratio (transitional) 17.3% 18.3%
Leverage ratio(2) 12.2% 11.8%
------------------------------------- ---------------- ----------------
1 In line with the amended CRR II, effective on 23 December
2020, both the CET1, tier 1 and total capital ratios at 31 July
2021 included a c.50bps benefit related to software assets exempt
from the deduction requirement for intangible assets from CET1.
This benefit has been reversed with a corresponding reduction of
the CET1 and total capital ratios upon implementation of PS17/21 on
1 January 2022.
2 The leverage ratio is calculated as tier 1 capital as a
percentage of total balance sheet assets excluding central bank
claims, adjusting for certain capital deductions, including
intangible assets, and off balance sheet exposures, in line with
the UK Leverage Framework outlined in PS21/21. At 31 July 2021, the
leverage ratio was calculated under the CRR framework and included
central bank claims.
Strong capital position
The prudent management of capital is a core part of our business
model. During periods of uncertainty, our strong capital position
enables the group to continue supporting customers, clients and
colleagues. Our business is also highly capital generative and our
regulatory capital is significantly above the minimum applicable
requirements.
Movements in capital and other regulatory metrics in the
period
The CET1 capital ratio reduced from 15.8% to 15.1% primarily
reflecting a change in the regulatory treatment of software assets,
as well as the partial unwind of IFRS 9 transitional arrangements.
These regulatory impacts accounted for c.50bps and c.25bps of the
overall impact on the ratios, respectively. Excluding the impact of
the software assets treatment and the transitional arrangements,
the CET1 ratio remained stable in the first half at 14.2% (31 July
2021: 14.2%).
In the first half, CET1 capital decreased 2% to GBP1,405.7
million (31 July 2021: GBP1,439.3 million) primarily reflecting the
regulatory change in the treatment of software assets, which
increased the intangible assets deducted from CET1 capital by
GBP50.2 million, and a decrease in the transitional IFRS 9 add back
to capital of GBP20.5 million. This was partially offset by the
capital generation through profit net of the regulatory deduction
of dividends paid and foreseen of GBP48.9 million. Total capital
decreased 3% to GBP1,605.7 million (31 July 2021: GBP1,662.7
million), also reflecting the regulatory change in the treatment of
software assets and a small repayment of our subordinated debt.
Risk weighted assets ("RWAs") increased 2% to GBP9.3 billion (31
July 2021: GBP9.1 billion), mainly driven by an increase in the
loan book and risk weighted assets related to derivatives held for
hedging purposes, partly offset by the regulatory change in
treatment of software assets.
As a result, CET1, tier 1 and total capital ratios were 15.1% (
31 July 2021: 15.8%) , 15.1% ( 31 July 2021: 15.8%) and 17.3% ( 31
July 2021: 18.3%) , respectively.
At 31 January 2022, the applicable minimum CET1, tier 1 and
total capital ratio requirements, excluding any applicable
Prudential Regulation Authority ("PRA") buffer, were 7.6%, 9.3% and
11.5%, respectively. Accordingly, we continue to have headroom
above the applicable minimum regulatory requirements of 750bps in
the CET1 capital ratio, 580bps in the tier 1 capital ratio and
580bps in the total capital ratio.
In line with the amended CRR II, the CET1, tier 1 and total
capital ratios at 31 July 2021 included a c.50bps benefit related
to software assets exempt from the deduction requirement for
intangible assets from CET1. This benefit has been reversed, with a
corresponding reduction of the group's capital ratios on 1 January
2022.
The group applies IFRS 9 regulatory transitional arrangements
which allows banks to add back to their capital base a proportion
of the IFRS 9 impairment charges during the transitional period.
Our capital ratios are presented on a transitional basis after the
application of these arrangements. On a fully loaded basis, without
their application, the CET1, tier 1 and total capital ratios would
be 14.2%, 14.2% and 16.4%, respectively.
The leverage ratio, which is a transparent measure of capital
strength, not affected by risk weightings, remains strong at 12.2%
(31 July 2021: 11.8%). The leverage ratio increased on the position
at the end of the 2021 financial year, due to a change in
calculation under the UK leverage framework to exclude central
banks reserves, partly offset by an increase in on-balance sheet
assets.
We continue to make good progress on our preparations for a
transition to the IRB approach. Following the submission of our
initial application to the PRA in December 2020, we are progressing
through the first phase of the PRA application process and are
awaiting feedback from the PRA before moving to Phase 2. Our Motor
Finance, Property Finance and Energy portfolios, where the use of
models is most mature, have been submitted with our initial
application, with other businesses to follow in future years.
GROUP FUNDING(1)
31 January 31 July
2022 2021
GBP million GBP million
--------------------------------------- ------------- -------------
Customer deposits 6,755.4 6,634.8
Secured funding 1,441.1 1,333.7
Unsecured funding(2) 1,540.4 1,539.5
Equity 1,608.2 1,569.3
--------------------------------------- ------------- -------------
Total available funding 11,345.1 11,077.3
--------------------------------------- ------------- -------------
Total funding as % of loan book 132% 131%
Average maturity of funding allocated
to loan book(3) 23 months 24 months
1 Numbers relate to core funding and exclude working capital
facilities at the business level.
2 Unsecured funding excludes GBP72.1 million (31 July 2021:
GBP22.7 million) of non-facility overdrafts included in borrowings
and includes GBP295.0 million (31 July 2021: GBP295.0 million) of
undrawn facilities.
3 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 funding of the Banking
businesses and manage interest rate risk. Our conservative approach
to funding is based on the principle of "borrow long, lend short",
with a spread of maturities over the medium and longer term,
comfortably ahead of a shorter average loan book maturity. It is
also diverse, drawing on a wide range of wholesale and deposit
markets including several public debt securities at both group and
operating company level as well as a number of securitisations.
We increased total funding in the first half of the year to
GBP11.3 billion (31 July 2021: GBP11.1 billion) which accounted for
132% (31 July 2021: 131%) of the loan book at the balance sheet
date. The average cost of funding reduced to 1.1% (H1 2021: 1.5%)
mainly driven by a reduction in market rates and re-pricing of
customer deposits.
Customer deposits increased 2% to GBP6.8 billion (31 July 2021:
GBP6.6 billion), with non-retail deposits stable at GBP3.9 billion
(31 July 2021: GBP3.9 billion) and retail deposits increasing 6% to
GBP2.8 billion (31 July 2021: GBP2.7 billion).
The investment in our customer deposit platform continues to
drive benefits as we receive positive customer feedback and broaden
our offering, and we now have around 50% of our retail customer
base registered for our online portal. As part of our enhanced
Savings proposition, our expanded Notice Account product range
continues to see good demand and following the successful launch of
Fixed Rate Cash Individual Savings Accounts ("ISAs") in December
2020, Fixed Rate ISA balances grew to c.GBP300 million. We remain
focused on continuing to extend the deposit product range, which
will support us in growing and diversifying our retail deposit base
and further optimise our cost of funding and maturity profile.
Secured funding increased 8% to GBP1.4 billion (31 July 2021:
GBP1.3 billion) as we increased our current drawings under the
TFSME to GBP600 million (31 July 2021: GBP490 million). Our range
of secured funding also includes securitisation of elements of our
Premium and Motor Finance loan books.
Unsecured funding, which includes senior unsecured and
subordinated bonds and undrawn committed revolving credit
facilities, remained stable at GBP1.5 billion (31 July 2021: GBP1.5
billion).
We have maintained a prudent maturity profile. The average
maturity of funding allocated to the loan book remained ahead of
the loan book at 23 months (31 July 2021: 24 months), with the
average loan book maturity at 17 months (31 July 2021: 17
months).
Our strong credit ratings remain unchanged with Moody's
Investors Services ("Moody's") rating Close Brothers Group "A2/P1"
and Close Brothers Limited "Aa3/P1" with a "negative" outlook, and
Fitch Ratings ("Fitch") rating both Close Brothers Group and Close
Brothers Limited "A-/F2", with a "stable" outlook.
GROUP LIQUIDITY
31 January 2022 31 July 2021
GBP million GBP million
---------------------------------------- -------------
Cash and balances at central
banks 1,178.2 1,331.0
Sovereign and central bank
debt(1) 227.6 192.5
Certificates of deposit 299.6 264.7
------------------------------- -------- -------------
Treasury assets 1,705.4 1,788.2
------------------------------- -------- -------------
1 Included in sovereign and central bank debt is GBP141.9
million encumbered UK Gilts (31 July 2021: GBP90.2 million).
The group continues to adopt a conservative stance on liquidity,
ensuring it is comfortably ahead of both internal risk appetite and
regulatory requirements.
Treasury assets, predominantly held on deposit with the Bank of
England, reduced 5% to GBP1.7 billion (31 July 2021: GBP1.8
billion). Nevertheless, in light of the uncertain UK economic
outlook, our liquidity levels remain elevated on the pre-Covid
position to provide additional flexibility whilst enabling us to
maximise any opportunities available.
We regularly assess and stress test the group's liquidity
requirements and continue to meet the Liquidity coverage ratio
("LCR") regulatory requirements, with a 12-month average to 31
January 2022 LCR of 943% (12-month average to 31 July 2021:
1,003%). In addition to internal measures, we monitor funding risk
based on the CRR II rules for the net stable funding ratio ("NSFR")
which became effective on 1 January 2022. The NSFR as at 31 January
2022 was 117.3%.
BUSINESS REVIEW
BANKING
Key Financials
First half First half Change
2022 2021 %
GBP million GBP million
--------------------------------- ---------------- ---------------- -------
Operating income 345.7 309.0 12
Adjusted operating expenses(1) (177.2) (161.0) 10
Impairment losses on loans and
advances (48.3) (52.9) (9)
--------------------------------- ---------------- ---------------- -------
Adjusted operating profit 120.2 95.1 26
--------------------------------- ---------------- ---------------- -------
Net interest margin 7.9% 7.7%
Expense/income ratio 51% 52%
Bad debt ratio 1.1% 1.3%
Return on net loan book 2.7% 2.4%
Return on opening equity 13.6% 11.7%
--------------------------------- ---------------- ---------------- -------
Closing loan book 8,605.9 7,953.5 8
--------------------------------- ---------------- ---------------- -------
Average loan book and operating
lease assets 8,751.6 8,004.9 9
--------------------------------- ---------------- ---------------- -------
1 Related ongoing costs resulting from investment projects are
recategorised from investment costs to BAU costs after one year.
For comparison purposes, GBP2.1 million has been recategorised from
investment costs to BAU costs in H1 of the 2021 financial year to
adjust for investment projects' ongoing costs that commenced prior
to the 2022 financial year.
Disciplined loan book growth at strong margins
Banking adjusted operating profit increased 26% to GBP120.2
million (H1 2021: GBP95.1 million), reflecting strong income growth
of 12% and lower impairment charges, more than offsetting continued
investment, with the business delivering positive operating
leverage. Statutory operating profit increased 28% to GBP120.1
million (H1 2021: GBP94.1 million).
The loan book grew 8.2% year-on-year to GBP8.6 billion (31
January 2021: GBP8.0 billion, 31 July 2021: GBP8.4 billion) as we
experienced good new business levels in both Asset Finance and
Motor Finance, as well as increased utilisations and sales volumes
in Invoice Finance. This was partly offset by high repayments in
Property, despite strong new business volumes. The return on net
loan book increased to 2.7% (H1 2021: 2.4%).
The net interest margin of 7.9% increased on the prior year
period (H1 2021: 7.7%), reflecting our continued focus on pricing
discipline and a reduction in our cost of funds. Our specialist,
relationship-driven model and consistent, disciplined pricing
approach position us well to maintain a strong net interest margin
for the remainder of the year, although we expect a slight negative
impact from rising interest rates.
Operating income increased 12% to GBP345.7 million (H1 2021:
GBP309.0 million), reflecting loan book growth at an increased net
interest margin.
Adjusted operating expenses in Banking increased 10% to GBP177.2
million (H1 2021: GBP161.0 million) as we continued to invest to
protect, grow and sustain the business model, whilst exercising
rigorous control over our BAU costs. Investment costs increased 39%
to GBP41.2 million (H1 2021: GBP29.7 million) as we progressed our
strategic investment programmes and incurred related depreciation
charges. BAU costs grew 4% to GBP136.0 million (H1 2021: GBP131.3
million), primarily reflecting an increase in performance-driven
compensation and regulatory spend, as well as headcount growth.
We are seeing these programmes deliver tangible benefits across
our businesses including lower cost of funds through our customer
deposit platform and expanded product offering. Following the
deployment of a new underwriting platform in our Motor business, we
have seen an increased customer acceptance rate from 54% to 56%
and, most importantly, at our existing underwriting criteria and
risk appetite.
Although we achieved positive operating leverage in the period,
we expect costs in the second half of the year to be c.5-7% higher
than in the first half, reflecting planned spend on certain
strategic investment programmes and depreciation, as well as wage
inflation. We remain focused on delivering sustainable positive
operating leverage in the medium term.
Overall, the compensation ratio reduced marginally to 29% (H1
2021: 30%) and the expense/income ratio reduced to 51% (H1 2021:
52%).
Impairment charges were GBP48.3 million (H1 2021: GBP52.9
million), corresponding to an annualised bad debt ratio of 1.1% (H1
2021: 1.3%). This primarily reflected the impact of updated
assumptions for the Novitas loan book, informed by experience of
credit performance, which resulted in GBP39.2 million (H1 2021:
GBP24.0 million) of impairment charges related to this business.
Excluding Novitas, the annualised bad debt ratio was 0.2% (H1 2021:
0.7%), substantially below our long-term average bad debt ratio of
1.0%, reflecting the benefit of provision releases and strong
underlying credit performance across our business.
Overall, there was a marginal increase in provision coverage to
3.4% (31 July 2021: 3.2%). Excluding provisions related to the
Novitas loan book, the coverage ratio reduced slightly to 2.2% (31
July 2021: 2.3%), primarily reflecting provision releases, driven
by reduced forborne balances and improved macroeconomic scenarios
and weightings.
Notwithstanding the highly uncertain external environment, we
remain confident in the quality of our loan book, which is
predominantly secured, prudently underwritten, diverse, and
supported by the deep expertise of our people.
Return on opening equity in the Banking division increased to
13.6% (H1 2021: 11.7%).
Loan Book Analysis
31 January 31 July
2022 2021 Change
GBP million GBP million %
------------------------------------ ------------ ------------ --------
Commercial 4,128.4 3,968.1 4.0
------------ ------------ --------
Asset Finance 2,964.2 2,844.6 4.2
Invoice and Speciality Finance(1) 1,164.2 1,123.5 3.6
------------ ------------ --------
Retail 3,026.5 2,974.3 1.8
------------ ------------ --------
Motor Finance 2,001.5 1,924.4 4.0
Premium Finance 1,025.0 1,049.9 (2.4)
------------ ------------ --------
Property 1,451.0 1,502.1 (3.4)
------------------------------------ ------------ ------------ --------
Closing loan book 8,605.9 8,444.5 1.9
------------------------------------ ------------ ------------ --------
Operating lease assets(2) 229.9 222.9 3.1
------------------------------------ ------------ ------------ --------
Closing loan book and operating
lease assets 8,835.8 8,667.4 1.9
------------------------------------ ------------ ------------ --------
1 The Invoice and Speciality Finance loan book includes the
Novitas net loan book, which was GBP162.1 million at 31 January
2022 (31 July 2021: GBP181.5 million).
2 Operating lease assets of GBP1.0 million (31 July 2021: GBP1.3
million) relate to Asset Finance and GBP228.9 million (31 July
2021: GBP221.6 million) to Invoice and Speciality Finance.
The loan book increased 8.2% year-on-year and 1.9% in the first
half to GBP8.6 billion (31 January 2021: GBP8.0 billion, 31 July
2021: GBP8.4 billion), reflecting good growth in our Commercial and
Motor Finance businesses, partly offset by a contraction in the
Premium Finance and Property businesses.
The Commercial loan book increased 4% to GBP4.1 billion (31 July
2021: GBP4.0 billion), driven by 4% growth in Asset Finance,
reflecting good demand and new business volumes, particularly in
our Transport, Contract Hire and Energy businesses. Invoice and
Speciality Finance also grew 4% as we saw strong sales volumes,
increased utilisation and higher SME customer numbers.
The Retail loan book increased 2% to GBP3.0 billion (31 July
2021: GBP3.0 billion), with 4% growth in Motor Finance reflecting
strong new business levels and benefits from investment in the
Motor Finance transformation programme. This was partly offset by a
seasonal decline in the Premium Finance book, as well as continued
subdued demand for the funding of insurance policies from
consumers.
Despite strong new business volumes in Property, the loan book
reduced 3% to GBP1.5 billion (31 July 2021: GBP1.5 billion), with
high repayment levels more than offsetting drawdowns, as the UK
property market remained buoyant with heightened house sales
volumes.
Well positioned to retain market position and deliver
disciplined growth
We remain confident in the growth outlook for the loan book over
both the short and medium term.
The Asset Finance business is well positioned to capitalise on
continued demand for asset financing. Current growth initiatives
include those aligned with the increasing focus on the renewable
energy sector and electric car fleets and we have also recently
hired a specialist materials handling team.
For Invoice Finance, we expect the growth trajectory to follow
the economic recovery. We continue to tap the opportunities in the
Asset Backed Lending ("ABL") space, raising the visibility of our
offering via Private Equity sponsors, and the wider intermediary
community. In Brewery Rentals, our direct-to-outlet container
rental product, EkegPlus, has seen customer numbers doubling in the
last three months, allowing the business to operate in a market
segment previously unavailable to us.
In Motor Finance, we continue to see strong fundamentals in the
second-hand car market and are exploring opportunities for growth
through the shift to Alternatively Fuelled Vehicles. Our investment
in the Motor Finance transformation programme has enabled us to
further develop our proposition, providing unique data insights to
dealers, and take advantage of heightened demand for used cars. We
have also entered a new strategic partnership with AutoTrader as we
expand our routes to market.
For Premium Finance, we would expect demand for the funding of
motor insurance policies to recover following the removal of
Covid-19 restrictions.
In Property, our pipeline of undrawn commitments remains strong,
surpassing GBP1 billion in February. We continue to progress with
our initiatives including a focus on identifying the next
generation of developers, as well as expanding our regional
presence and bridging finance offering.
We are also actively working to identify new growth
opportunities, in line with the strategy set out at our Investor
Event in June 2021.
Loan book growth continues to be an output of our business
model, as we focus on delivering disciplined growth whilst
continuing to prioritise our margins and credit quality.
Banking: Commercial
First half First half Change
2022 2021 %
GBP million GBP million
--------------------------------- ------------- ------------- ---------------
Operating income 167.8 136.6 23
Adjusted operating expenses (89.1) (76.2) 17
Impairment losses on financial
assets (41.0) (33.0) 24
--------------------------------- ------------- ------------- ---------------
Adjusted operating profit 37.7 27.4 38
Net interest margin 7.9% 7.8%
Expense/income ratio 53% 56%
Bad debt ratio 1.9% 1.9%
--------------------------------- ------------- ------------- ---------------
Closing loan book 4,128.4 3,509.4 18
--------------------------------- ------------- ------------- ---------------
Average loan book and operating
lease assets 4,274.7 3,498.5 22
--------------------------------- ------------- ------------- ---------------
The Commercial businesses provide specialist, predominantly
secured lending principally to the SME market and include Asset
Finance and Invoice and Speciality Finance. We finance a diverse
range of sectors, with Asset Finance offering commercial asset
financing, hire purchase and leasing solutions across a broad range
of assets including commercial vehicles, machine tools,
contractors' plant, printing equipment, company car fleets, energy
project finance, and aircraft and marine vessels. The Invoice and
Speciality Finance business provides debt factoring, invoice
discounting and asset-based lending, as well as covering our
specialist businesses such as Brewery Rentals, Vehicle Hire and
Novitas.
Adjusted operating profit in Commercial increased 38% to GBP37.7
million (H1 2021: GBP27.4 million), with higher income more than
offsetting growth in costs and impairment charges. Statutory
operating profit was GBP37.6 million (H1 2021: GBP26.5
million).
Operating income was up 23% to GBP167.8 million (H1 2021:
GBP136.6 million), driven primarily by growth in the loan book,
with the net interest margin increasing marginally to 7.9% (H1
2021: 7.8%) primarily reflecting the lower cost of funds.
Adjusted operating expenses increased 17% to GBP89.1 million (H1
2021: GBP76.2 million), reflecting costs in relation to the group's
withdrawal from the legal services financing market and higher
performance-driven compensation. It also reflected investment in
the Asset Finance transformation programme and associated
depreciation, which has enabled better insight and reporting tools
and enhanced decision making. The expense/income ratio decreased to
53% (H1 2021: 56%) as growth in operating income more than offset
the cost increase.
Impairment charges increased 24% to GBP41.0 million (H1 2021:
GBP33.0 million), corresponding to a stable bad debt ratio of 1.9%
(H1 2021: 1.9%). This primarily reflected a GBP39.2 million
impairment charge related to the Novitas loan book (H1 2021:
GBP24.0 million). Excluding Novitas, impairment charges were GBP1.8
million (H1 2021: GBP9.0 million), equating to a bad debt ratio of
0.1%, which is significantly below historical levels. This
reflected the benefit of provision releases and a strong underlying
credit performance of the Commercial loan book.
The provision coverage ratio increased to 4.5% (31 July 2021:
4.2%) as the increase in provisions against the Novitas loan book
more than offset the reduction in provisions primarily associated
with the reducing forborne balances. Excluding Novitas, the
provision coverage ratio for the Commercial loan book was 1.9% (31
July 2021: 2.1%).
The Commercial loan book increased 4% in the first half of the
year to GBP4.1 billion (31 July 2021: GBP4.0 billion). The Asset
Finance book grew 4% to GBP3.0 billion (31 July 2021: GBP2.8
billion) reflecting good new business volumes across the
businesses. The Invoice and Speciality Finance loan book also
increased 4% to GBP1.2 billion (31 July 2021: GBP1.1 billion),
reflecting strong sales volumes, increased SME customer numbers and
improved utilisation, although this continued to track below
pre-Covid-19 levels.
The Commercial loan book is predominantly secured and our loans
are conservatively underwritten with prudent LTVs, supported by our
specialist expertise in the underlying assets and long-standing
industry relationships.
Banking: Retail
First half First half Change
2022 2021 %
GBP million GBP million
-------------------------------- ------------- ------------- -------
Operating income 119.7 112.1 7
Adjusted operating expenses (71.9) (67.8) 6
Impairment losses on financial
assets (5.3) (16.4) (68)
-------------------------------- ------------- ------------- -------
Adjusted operating profit 42.5 27.9 52
Net interest margin 8.0% 7.9%
Expense/income ratio 60% 60%
Bad debt ratio 0.4% 1.2%
-------------------------------- ------------- ------------- -------
Closing loan book 3,026.5 2,843.8 6
-------------------------------- ------------- ------------- -------
Average loan book 3,000.4 2,839.2 6
-------------------------------- ------------- ------------- -------
The Retail businesses provide intermediated finance, principally
to individuals and small businesses, through motor dealers and
insurance brokers.
Adjusted operating profit for Retail increased 52% to GBP42.5
million (H1 2021: GBP27.9 million), with higher income and a
significant reduction in impairment charges. Statutory operating
profit was up 53% to GBP42.5 million (H1 2021: GBP27.8
million).
Operating income increased 7% to GBP119.7 million (H1 2021:
GBP112.1 million), reflecting an increase in the loan book. The net
interest margin rose marginally to 8.0% (H1 2021: 7.9%) driven by
reduced cost of funds, partly offset by lower margin in Premium
Finance, as a result of broker consolidation in the insurance
sector and a change in mix of product lines, with the lower margin
commercial portfolio growing more strongly.
Adjusted operating expenses increased 6% to GBP71.9 million (H1
2021: GBP67.8 million) mainly driven by ongoing investment
programmes and the associated depreciation, as well as regulatory
compliance costs. The expense/income ratio remained stable at 60%
(H1 2021: 60%).
Impairment charges decreased 68% to GBP5.3 million (H1 2021:
GBP16.4 million) with an annualised bad debt ratio reducing to 0.4%
(H1 2021: 1.2%). This reflected a reduction in provisions
associated with the reducing forborne balances and an improved
macroeconomic outlook, which more than offset the impact of the
cessation of the UK Government's Covid-19 job retention scheme and
rising inflation on credit performance.
The provision coverage ratio remained stable at 2.2% (31 July
2021: 2.2%) reflecting loan book growth and movements in staging
and coverage to reflect the performance of the forborne loan
book.
The Retail loan book increased 2% in the first half of the year
to GBP3.0 billion (31 July 2021: GBP3.0 billion). The Motor Finance
book grew 4% to GBP2.0 billion (31 July 2021: GBP1.9 billion) with
strong new business levels reflecting ongoing demand and rising
prices in the used car market, and benefiting from investment in
the Motor Finance transformation programme. The Republic of Ireland
Motor Finance business accounted for 19% of the Motor Finance loan
book (31 July 2021: 21%) and 4% of the Banking loan book (31 July
2021: 5%). From 30 June 2022, we will no longer write new business
under our current partnership in the Republic of Ireland. We remain
committed to the Irish market and are considering our long-term
options.
The Premium Finance book declined 2% to GBP1.0 billion (31 July
2021: GBP1.0 billion), driven by seasonality in the business, as
well as continued subdued activity in the consumer market. However,
we have seen strong new business volumes as customers look to ease
cash flow in the commercial market.
We remain confident in the credit quality of the Retail loan
book. The Motor Finance loan book is predominantly secured on
second-hand vehicles which are less exposed to depreciation or
significant declines in value than new cars. Our core Motor Finance
product remains hire-purchase contracts, with less exposure to
residual value risk associated with Personal Contract Plans
("PCP"), which accounted for only c.11% of the Motor Finance loan
book at 31 January 2022. The Premium Finance loan book benefits
from various forms of structural protection including premium
refundability and, in most cases, broker recourse for the personal
lines product.
Banking: Property
First half First half Change
2022 2021 %
GBP million GBP million
-------------------------------- ------------- ------------- -------
Operating income 58.2 60.3 (3)
Operating expenses (16.2) (17.0) (5)
Impairment losses on financial
assets (2.0) (3.5) (43)
-------------------------------- ------------- ------------- -------
Operating profit 40.0 39.8 1
Net interest margin 7.9% 7.2%
Expense/income ratio 28% 28%
Bad debt ratio 0.3% 0.4%
-------------------------------- ------------- ------------- -------
Closing loan book 1,451.0 1,600.3 (9)
-------------------------------- ------------- ------------- -------
Average loan book 1,476.6 1,667.3 (11)
-------------------------------- ------------- ------------- -------
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.
Operating profit in Property increased marginally on the prior
year period at GBP40.0 million (H1 2021: GBP39.8 million), as lower
income was offset by reduced costs and impairment charges.
Operating income reduced 3% to GBP58.2 million (H1 2021: GBP60.3
million) reflecting the reduction in the loan book, although the
net interest margin increased to 7.9% (H1 2021: 7.2%), driven by
lower costs of funds and an accounting reclassification.
Operating expenses decreased by 5% to GBP16.2 million (H1 2021:
GBP17.0 million) as we maintained our rigorous focus on cost
management. The expense/income ratio remained stable at 28% (H1
2021: 28%), with the reduction in income offset by lower costs.
Impairment charges reduced to GBP2.0 million (H1 2021: GBP3.5
million), resulting in an annualised bad debt ratio of 0.3% (H1
2021: 0.4%). The provision coverage ratio increased to 2.8% (31
July 2021: 2.6%) following a review of coverage across the
portfolio.
Despite strong new business levels, the Property loan book
reduced by GBP51.1 million to GBP1.5 billion (31 July 2021: GBP1.5
billion), with high repayment levels more than offsetting
drawdowns, as the UK property market remained buoyant following a
period of significant government support, resulting in heightened
sales of units by developers. Our pipeline of undrawn commitments
stood at GBP939 million at 31 January 2022 (31 July 2021: GBP933
million) and surpassed GBP1 billion in February. We also continue
to see success from our regional initiative, with the regional loan
book currently making up around 50% of the Property Finance
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. Our long track record, expertise and quality
of service ensure the business remains resilient to competition and
continues to generate high levels of repeat business.
ASSET MANAGEMENT
Key Financials
First half First half Change
2022 2021 %
GBP million GBP million
------------------------------ ------------- ------------- -------
Investment management 57.4 49.3 16
Advice and other services(1) 19.0 17.7 7
Other income(2) 0.2 0.1 100
------------------------------ ------------- ------------- -------
Operating income 76.6 67.1 14
Adjusted operating expenses (62.1) (54.8) 13
Adjusted operating profit 14.5 12.3 18
------------------------------ ------------- ------------- -------
Revenue margin (bps) 89 94
Operating margin 19% 18%
Return on opening equity 38.3% 32.5%
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.
Continued positive momentum
Close Brothers Asset Management 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 financial advisers.
Adjusted operating profit in CBAM increased 18% to GBP14.5
million (H1 2021: GBP12.3 million), achieving positive operating
leverage as growth in operating income more than offset the cost of
continued investment to support the long-term growth potential of
the business. Operating margin increased marginally to 19% (H1
2021: 18%), mainly driven by higher income from rising markets.
Statutory operating profit before tax also increased to GBP13.7
million (H1 2021: GBP11.8 million).
Total operating income grew 14% to GBP76.6 million (H1 2021:
GBP67.1 million), due to favourable market conditions and higher
investment management income from growth in both managed and
advised assets. The revenue margin reduced to 89bps (H1 2021:
94bps) driven by a higher level of flows into our investment-only
products and lower initial advice and dealing fees.
Adjusted operating expenses increased 13% to GBP62.1 million (H1
2021: GBP54.8 million), primarily reflecting higher staff costs as
we continued to invest in new hires to support the long-term growth
strategy, as well as an increase in performance-related
compensation. The expense/income ratio decreased marginally to 81%
(H1 2021: 82%) and the compensation ratio reduced to 56% (H1 2021:
57%).
As we continue to invest in the business to deliver growth and
scale, the cost trajectory will depend
on the rate of hiring, with investment in technology projects
expected to continue, as well as the impact from rising wage
inflation.
Strong net inflows
Equity markets have experienced a mixed performance during the
first half of the year, with largely favourable conditions seen
until the global equity market sell-off in January. Although the
ongoing impact of Covid-19 continues to weigh on client sentiment
and inflows across the industry, we maintained positive momentum
with net inflows of GBP634 million (H1 2021: GBP267 million),
delivering an annualised net inflow rate of 8% (H1 2021: 4%). This
reflects higher investment-only inflows, including those from our
recent portfolio manager hires and our financial advisers.
Total managed assets increased 1% to GBP15.8 billion (31 July
2021: GBP15.6 billion), as a result of strong net inflows,
partially offset by negative market movements of GBP412 million,
which came primarily during the global equity market declines seen
in January. Total client assets increased 1% overall to GBP17.2
billion (31 July 2021: GBP17.0 billion).
Movement in Client Assets
Six months 12 months Six months
to to to
31 January 31 July 31 January
2022 2021 2021
GBP million GBP million GBP million
----------------------------------- -------------- -------------- -------------
Opening managed assets 15,588 12,594 12,594
Inflows 1,201 2,284 1,029
Outflows (567) (1,367) (762)
----------------------------------- -------------- -------------- -------------
Net inflows 634 917 267
Market movements (412) 2,077 934
Total managed assets 15,810 15,588 13,795
Advised only assets 1,403 1,435 1,132
----------------------------------- -------------- -------------- -------------
Total client assets(1) 17,213 17,023 14,927
----------------------------------- -------------- -------------- -------------
Net flows as % of opening managed
assets(2) 8% 7% 4%
----------------------------------- -------------- -------------- -------------
1 Total client assets include GBP5.9 billion of assets (31 July
2021: GBP6.0 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 three-year period to 31 January
2022, four of our 12 multi-asset funds outperformed the relevant
peer group average, with eight of the 12 funds outperforming over
the five-year period to 31 January 2022. Our bespoke strategy
composites continued to perform well, largely outperforming their
respective peer groups over three and five years, demonstrating a
strong track record.
Our Approach to ESG and Sustainability
Responsible investing remains a key focus and we continue to
broaden our range of sustainable investment propositions. Our
sustainable funds (Close Sustainable Balanced Portfolio Fund and
Close Sustainable Bond Portfolio Fund) are gaining further traction
and we are considering more options for our clients to reflect
their sustainable preferences in our segregated services. We have
also enhanced our ESG research capabilities with the hire of a
dedicated specialist.
Well positioned for future growth
Our focus remains on 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 continued to
make good 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.
We remain confident that our vertically-integrated,
multi-channel business model positions us well for ongoing demand
for our services and the structural growth opportunity presented by
the wealth management industry.
We will continue to invest to support the long-term growth
potential of the business. While CBAM is sensitive to financial
market conditions, we remain committed to driving growth both
organically and through the continued selective hiring of advisers
and investment managers, and through in-fill acquisitions. Our
recently appointed new chief executive, Eddy Reynolds, will lead
CBAM through the next stage of its development.
WINTERFLOOD
Key Financials
First half First half Change
2022 2021 %
GBP million GBP million
--------------------------------- ------------- ------------- -------
Operating income 49.5 98.0 (49)
Operating expenses (40.7) (63.9) (36)
Impairment losses on financial - 0.1 -
assets
Operating profit 8.8 34.2 (74)
Average bargains per day ('000) 83 97
Operating margin 18% 35%
Return on opening equity 14.0% 69.3%
Reduced trading opportunities following the exceptional highs
experienced in the Covid-19 period; well placed for when investor
appetite returns
Winterflood is a leading UK market maker, delivering high
quality execution services to stockbrokers, wealth managers and
institutional investors, as well as providing corporate advisory
services to investment trusts and outsourced dealing and custody
services via Winterflood Business Services ("WBS").
Since the start of the 2022 financial year, concerns in relation
to inflation and interest rates, the emergence of the omicron
variant, as well as global geopolitical events have negatively
impacted market conditions and retail investor sentiment.
Following the exceptional performance delivered by Winterflood
from the start of the pandemic, the moderation in activity seen
towards the end of the 2021 financial year continued into 2022,
with trading performance declining in the first half. As a result,
operating profit reduced 74% to GBP8.8 million (H1 2021: GBP34.2
million).
Operating income decreased 49% to GBP49.5 million (H1 2021:
GBP98.0 million), but remained ahead of pre-pandemic levels (H1
2020: GBP47.9 million). The reduction in income reflected a
moderation in retail trading activity and a change in the mix of
trading volumes, although WBS continued to generate increased
levels of income, up 24% on the prior year period.
Global equity markets have experienced substantial volatility in
recent months, with the AIM index down 12.5% over the first half
and January 2022 being the weakest January performance for the
S&P since 2009, reflecting uncertainty in the external
environment and concerns over slowing economic growth.
Although trading volumes have moderated, with average daily
bargains at 83k (H1 2021: 97k), they remain elevated on pre-Covid
levels (H1 2020: 57k). However, there has also been a change in the
composition of trading volumes, with the higher margin sectors of
AIM and Small Cap both down on the prior year, as investor appetite
was subdued and retail-driven trading situations reduced.
Despite the extreme market volatility seen in the first half of
the year, there was only one loss day, in January 2022 (H1 2021: no
loss days), demonstrating the expertise of our traders and the
strong focus on risk management.
Operating expenses decreased 36% to GBP40.7 million (H1 2021:
GBP63.9 million) reflecting the variable nature of Winterflood's
cost base, as the reduced revenue performance and trading volumes
led to lower staff compensation. The expense/income ratio increased
to 82% (H1 2021: 65%) as the reduction in income was not fully
offset by the corresponding decrease in variable costs. The
compensation ratio remained stable at 48% (H1 2021: 48%).
WBS, which provides outsourced dealing and custody services for
asset managers and platforms, has delivered another strong
performance, generating GBP5.1 million of income (H1 2021: GBP4.1
million, FY21: GBP9.1 million) and growing its assets under
administration to GBP6.8 billion (31 January 2021: GBP5.0 billion,
31 July 2021: GBP6.2 billion). We are confident in accelerating the
growth trajectory of WBS, with a good pipeline of clients expected
to support further significant growth in assets under
administration and income in this business.
As a daily trading business, Winterflood is highly sensitive to
changes in the market environment, but remains well positioned to
continue trading profitably, taking advantage of returning investor
appetite. Winterflood continues to diversify its revenue streams
and explore growth opportunities, balancing the cyclicality seen in
the trading business.
DEFINITIONS
Adjusted : Adjusted measures are presented on a basis consistent
with prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reflect
underlying trading performance
Assets under administration : Total assets for which Winterflood
Business Services provide custody and administrative services
Bad debt ratio : Impairment losses as a percentage of average
net loans and advances to customers and operating lease assets
Bargains per day : Average daily number of Winterflood's trades
with third parties
Business as usual ("BAU") costs: Operating expenses excluding
depreciation and other costs related to investments
Capital Requirements Regulation ("CRR"): UK onshored provisions
of EU regulation 575/2013
CET1 capital ratio : Measure of the group's CET1 capital as a
percentage of risk weighted assets, as required by CRR
Common equity tier 1 ("CET1") capital : Measure of capital as
defined by the CRR. CET1 capital consists of the highest quality
capital including ordinary shares, share premium account, retained
earnings and other reserves, less goodwill and certain intangible
assets and other regulatory adjustments
Compensation ratio : Total staff costs as a percentage of
adjusted operating income
Cost of funds: Interest expense incurred to support the lending
activities divided by the average net loans and advances to
customers and operating lease assets
Dividend per share ("DPS") : Comprises the final dividend
proposed for the respective year, together with the interim
dividend declared and paid in the year
Earnings per share ("EPS") : Profit attributable to shareholders
divided by number of basic shares
Effective tax rate : 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 as % 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 : Includes depreciation and other costs related
to investment in multi-year projects, new business initiatives and
pilots and cyber resilience. Excludes IFRS 16 depreciation
Leverage ratio : Tier 1 capital as a percentage of total balance
sheet assets, adjusted for certain capital deductions, including
intangible assets, and off balance sheet exposures
Liquidity coverage ratio ("LCR") : Measure of the group's HQLAs
as a percentage of expected net cash outflows over the next 30 days
in a stressed scenario
Loan to value ("LTV") ratio : For a secured or structurally
protected loan, the loan balance as a percentage of the total value
of the asset
Loss day: Where aggregate gross trading book revenues are
negative at the end of a trading day
Managed assets or assets under management : 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 flows : Net flows as a percentage of opening managed assets
calculated on an annualised basis
Net interest margin ("NIM") : Operating income generated by
lending activities, including interest income net of interest
expense, fees and commissions income net of fees and commissions
expense, and operating lease income net of operating lease expense,
less depreciation on operating lease assets, divided by average net
loans and advances to customers and operating lease assets
Net stable funding ratio ("NSFR") : Regulatory measure of the
group's weighted funding as a percentage of weighted assets
Net zero : Target of completely negating the amount of
greenhouse gases produced by reducing emissions or implementing
methods for their removal
Operating margin : Adjusted operating profit divided by
operating income
Personal Contract Plan ("PCP") : PCP is a form of vehicle
finance where the customer defers a significant portion of credit
to the final repayment at the end of the agreement, thereby
lowering the monthly repayments compared to a standard
hire-purchase arrangement. At the final repayment date, the
customer has the option to: (a) pay the final payment and take the
ownership of the vehicle; (b) return the vehicle and not pay the
final repayment; or (c) part-exchange the vehicle with any equity
being put towards the cost of a new vehicle
Return on assets : Adjusted operating profit attributable to
shareholders divided by total closing assets at the balance sheet
date
Return on average tangible equity : Adjusted operating profit
attributable to shareholders divided by average total shareholder's
equity, excluding intangible assets
Return on net loan book : Adjusted operating profit from lending
activities divided by average net loans and advances to customers
and operating lease assets
Return on opening equity ("RoE") : Adjusted operating profit
attributable to shareholders divided by opening equity, excluding
non-controlling interests
Revenue margin : Income from advice, investment management and
related services divided by average total client assets. Average
total client assets calculated as a two-point average
Risk weighted assets ("RWAs"): A measure of the amount of a
bank's assets, adjusted for risk in line with the CRR. It is used
in determining the capital requirement for a financial
institution
Scope 1, 2 and 3 emissions : Categorisation of greenhouse gas
emissions, as defined by the Greenhouse Gas (GHG) Protocol, into
direct emissions from owned or controlled sources (Scope 1),
indirect emissions from the generation of purchased electricity,
heating and cooling consumed by the reporting company (Scope 2),
and all other indirect emissions that occur in a company's value
chain (Scope 3)
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, as well as wider macroeconomic
ramifications, including the risks associated with higher
inflation.
The group is also closely monitoring the current conflict in
Ukraine, as well as any secondary impacts arising from it. At this
time, direct risk exposure is not considered to be material.
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 56 to 69
of the 2021 Annual Report. The Annual Report can be accessed via
the Investor Relations home page on the group's website at
www.closebrothers.com .
A summary of the group's principal risks is included below:
Business risk - The group operates in an environment where it is
exposed to an array of independent factors. Its profitability is
impacted by the broader UK economic climate, changes in technology,
regulation and customer behaviour, cost movements and competition
from traditional and new participants, varying in both nature and
extent across its divisions. Changes in these factors may affect
the bank's ability to write loans at its desired risk and return
criteria, result in lower new business volumes in Asset Management,
impact levels of trading activity at Winterflood or result in
additional investment requirements/higher costs of operation.
Capital risk - The group is required to hold sufficient
regulatory capital (including equity and other loss-absorbing debt
instruments) to enable it to operate effectively. This includes
meeting minimum regulatory requirements, operating within risk
appetites set by the board and supporting its strategic goals.
Conduct risk - The group's relationship-focused model amplifies
the importance of exhibiting strong behaviours in order to ensure
positive outcomes for customers. Failing to treat customers fairly,
to safeguard client assets or to provide advice and products which
are in clients' best interests, also have the potential to damage
our reputation and may lead to legal or regulatory sanctions,
litigation or customer redress. This applies to current, past and
future business.
Credit risk - As a lender to businesses and individuals, the
bank 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.
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. Losses
typically crystallise as a result of inadequate or failed internal
processes, people, models and systems, or as a result of external
factors. Impacts to the business, customers, third parties and the
markets in which we operate are considered within a maturing
framework for resilient delivery of important business
services.
Legal and regulatory risks are also considered as part of
operational risk. Failure to comply with existing legal or
regulatory requirements, or to adapt to changes in these
requirements in a timely fashion, may have negative consequences
for the group. Similarly, changes to regulation can impact our
financial performance, capital, liquidity and the markets in which
we operate.
Reputational risk - Protection and effective stewardship of the
group's reputation are fundamental to its long-term success.
Detrimental stakeholder perception could lead to impairment of the
group's current business and future goals. This could arise 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, consider broader market uncertainties, and
support its organisational readiness to respond.
Current group level emerging risks include economic and
geopolitical uncertainty, the risk of financial loss resulting from
the physical or transitional impacts of climate change, legal and
regulatory change, the risk of technological change and new
business models in response to evolving consumer expectations,
evolving working practices and supply chain risks.
Following the successful transition of LIBOR related agreements
to SONIA in 2021, the transition from LIBOR is no longer considered
an emerging risk.
With regards to climate risk specifically, the group is
continuing to enhance its risk management framework to ensure
continued alignment with both new regulation and evolving market
expectations. As part of this we are currently preparing enhanced
climate disclosures in line with the recommendations of the
Taskforce for Climate-related Financial Disclosures ("TCFD"), with
group-level disclosures to be included as part of the 2022 Annual
Report. We continue to closely monitor developments in this area as
well as broader ESG themes which remain a key area of focus across
the firm.
DIRECTORS' RESPONSIBILITY STATEMENT
Each of the Directors confirms that, to the best of their
knowledge:
* the condensed consolidated interim financial
statements ("interim financial statements") have been
prepared in accordance with International Accounting
Standard 34 "Interim Financial Reporting";
* the half year results include a fair review of the
information required by Disclosure and Transparency
Rule 4.2.7R (indication of important events during
the first six months of the financial year and their
impact on the interim financial statements, and a
description of principal risks and uncertainties for
the remaining six months of the financial year); and
* the half year results include a fair review of the
information required by Disclosure and Transparency
Rule 4.2.8R (disclosure of related parties
transactions that have taken place during the first
six months of the current financial year and that
have materially affected the financial position or
performance of the company, and any changes in the
related parties transactions described in the last
Annual Report that could do so).
The Directors of Close Brothers Group plc as at the date of this
report are as listed on pages 68 and 69 of the company's Annual
Report 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
15 March 2022
Independent Review Report to close brothers group plc
Report on the condensed consolidated interim financial
statements
Our conclusion
We have reviewed Close Brothers Group plc's condensed
consolidated interim financial statements (the "interim financial
statements") in the Half Year Results of Close Brothers Group plc
for the 6 month period ended 31 January 2022 (the "period").
Based on our review, nothing has come to our attention that
causes us to believe that the interim financial statements are not
prepared, in all material respects, in accordance with UK adopted
International Accounting Standard 34, 'Interim Financial Reporting'
and the Disclosure Guidance and Transparency Rules sourcebook of
the United Kingdom's Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
-- the consolidated balance sheet as at 31 January 2022;
-- the consolidated income statement and consolidated statement
of comprehensive income for the period then ended;
-- the consolidated cash flow statement for the period then ended;
-- the consolidated statement of changes in equity for the period then ended; and
-- the explanatory notes to the interim financial statements.
The interim financial statements included in the Half Year
Results of Close Brothers Group plc have been prepared in
accordance with UK adopted International Accounting Standard 34,
'Interim Financial Reporting' and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
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
15 March 2022
Consolidated income statement
for the six months ended 31 January 2022
Six months ended Year ended
31 January 31 July
------------------------
2022 2021 2021
Unaudited Unaudited Audited
Note GBP million GBP million GBP million
------------------------------------------------------ ----------- ----------- ------------
Interest income 341.1 326.8 656.8
Interest expense (49.3) (61.2) (119.3)
----------------------------------------------------- ----------- ----------- ------------
Net interest income 291.8 265.6 537.5
----------------------------------------------------- ----------- ----------- ------------
Fee and commission income 128.6 117.5 246.1
Fee and commission expense (8.0) (8.6) (16.1)
Gains less losses arising from dealing in securities 43.3 91.2 165.2
Other income 51.6 42.9 89.4
Depreciation of operating lease assets and other
direct costs (35.7) (34.6) (69.5)
Non-interest income 179.8 208.4 415.1
----------------------------------------------------- ----------- ----------- ------------
Operating income 2 471.6 474.0 952.6
----------------------------------------------------- ----------- ----------- ------------
Administrative expenses (293.5) (292.7) (592.1)
Impairment losses on financial assets 6 (48.3) (52.8) (89.8)
----------------------------------------------------- ----------- ----------- ------------
Total operating expenses before amortisation
and impairment of
intangible assets on acquisition, goodwill
impairment and
exceptional item (341.8) (345.5) (681.9)
----------------------------------------------------- ----------- ----------- ------------
Operating profit before amortisation and impairment
of
intangible assets on acquisition, goodwill
impairment and
exceptional item 129.8 128.5 270.7
Amortisation and impairment of intangible assets
on acquisition (0.9) (1.5) (14.2)
----------------------------------------------------- ----------- ----------- ------------
Goodwill impairment - - (12.1)
----------------------------------------------------- ----------- ----------- ------------
Exceptional item: HMRC VAT refund - - 20.8
----------------------------------------------------- ----------- ----------- ------------
Operating profit before tax 128.9 127.0 265.2
Tax 3 (33.8) (32.2) (63.1)
----------------------------------------------------- ----------- ----------- ------------
Profit after tax 95.1 94.8 202.1
Profit attributable to shareholders 95.1 94.8 202.1
Basic earnings per share 4 63.5p 63.2p 134.8p
Diluted earnings per share 4 63.0p 62.8p 133.6p
----------------------------------------------------- ----------- ----------- ------------
Ordinary dividend per share 5 22.0p 18.0p 60.0p
----------------------------------------------------- ----------- ----------- ------------
Consolidated Statement of COMPREHENSIVE INCOME
for the six months ended 31 January 20 22
Six months ended Year ended
31 January 31 July
------------------------
20 22 2021 2021
Unaudited Unaudited Audited
GBP million GBP million GBP million
---------------------------------------------------- ----------- ----------- -----------
Profit after tax 95.1 94.8 202.1
---------------------------------------------------- ----------- ----------- -----------
Items that may be reclassified to income statement
Currency translation losses (0.6) (0.4) (1.1)
Gains on cash flow hedging 16.4 2.4 7.4
(Losses)/gains on financial instruments classified
at fair value through other comprehensive income:
Sovereign and central bank debt (1.0) 0.3 0.9
Tax relating to items that may be reclassified (5.1) (0.7) (1.2)
---------------------------------------------------- ----------- ----------- -----------
9.7 1.6 6.0
---------------------------------------------------- ----------- ----------- -----------
Items that will not be reclassified to income
statement
Defined benefit pension scheme gains 1.9 0.5 0.5
Tax relating to items that will not be reclassified (0.5) (0.1) (0.6)
---------------------------------------------------- ----------- ----------- -----------
1.4 0.4 (0.1)
---------------------------------------------------- ----------- ----------- -----------
Other comprehensive income for the period, net
of tax 11.1 2.0 5.9
Total comprehensive income 106.2 96.8 208.0
---------------------------------------------------- ----------- ----------- -----------
Attributable to:
Shareholders 106.2 96.8 208.0
---------------------------------------------------- ----------- ----------- -----------
Consolidated Balance Sheet
at 31 January 2022
31 January 31 July
2022 2021
Unaudited Audited
Note GBP million GBP million
----------------------------------------------------- ---- ----------- ------------
Assets
Cash and balances at central banks 1,178.2 1,331.0
Settlement balances 925.2 699.6
Loans and advances to banks 330.2 136.3
Loans and advances to customers 6 8,605.9 8,444.5
Debt securities 7 543.4 477.3
Equity shares 8 35.8 31.9
Loans to money brokers against stock advanced 48.1 51.1
Derivative financial instruments 31.1 18.3
Goodwill and other intangible assets 9 237.5 232.6
Property, plant and equipment 10 314.3 309.9
Current tax assets 40.4 36.4
Deferred tax assets 49.0 56.0
Prepayments, accrued income and other assets 200.7 209.6
Total assets 12,539.8 12,034.5
Liabilities
Settlement balances and short positions 11 897.7 690.6
Deposits by banks 12 155.5 150.6
Deposits by customers 12 6,755.4 6,634.8
Loans and overdrafts from banks 12 672.2 512.7
Debt securities in issue 12 1,894.4 1,865.5
Loans from money brokers against stock advanced 24.0 -
Derivative financial instruments 47.2 21.3
Accruals, deferred income and other liabilities 293.2 367.0
Subordinated loan capital 12 192.0 222.7
Total liabilities 10,931.6 10,465.2
----------------------------------------------------- ---- ----------- ------------
Equity
Called up share capital 38.0 38.0
Retained earnings 1,587.9 1,555.5
Other reserves (17.7) (23.2)
Total shareholders' equity 1,608.2 1,570.3
----------------------------------------------------- ---- ----------- ------------
Non-controlling interests - (1.0)
----------------------------------------------------- ---- ----------- ------------
Total equity 1,608.2 1,569.3
----------------------------------------------------- ---- ----------- ------------
Total liabilities and equity 12,539.8 12,034.5
----------------------------------------------------- ---- ----------- ------------
Consolidated Statement of CHANGES IN EQUITY
for the six months ended 31 January 2022
Other reserves
Share- Cash Total
Called up based Exchange flow attributable
share Retained FVOCI payments movements hedging to equity Non-controlling
capital earnings reserve reserve reserve reserve holders interests Total equity
GBP GBP GBP GBP GBP
GBP million million million million million million GBP million GBP million GBP million
-------------------------- --------- -------- --------- ---------- ------- ------------ ---------------- --------------
At 1 August 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
------------------- ----- --------- -------- --------- ---------- ------- ------------ ---------------- --------------
Profit for the
period - 107.3 - - - - 107.3 - 107.3
Other comprehensive
(expense)/income
for the period - (0.5) 0.4 - 0.4 3.6 3.9 - 3.9
------------------- ----- --------- -------- --------- ---------- ------- ------------ ---------------- --------------
Total comprehensive
income for the
period - 106.8 0.4 - 0.4 3.6 111.2 - 111.2
Dividends paid - (26.8) - - - - (26.8) - (26.8)
Shares purchased - - - (0.1) - - (0.1) - (0.1)
Shares released - - - 2.9 - - 2.9 - 2.9
Other movements - 2.7 - (1.8) - - 0.9 - 0.9
Income tax - 0.8 - - - - 0.8 - 0.8
------------------- ----- --------- -------- --------- ---------- ------- ------------ ---------------- --------------
At 31 July 2021
(audited) 38.0 1,555.5 0.8 (22.4) (1.3) (0.3) 1,570.3 (1.0) 1,569.3
------------------- ----- --------- -------- --------- ---------- ------- ------------ ---------------- --------------
Profit for the period - 95.1 - - - - 95.1 - 95.1
Other comprehensive
income/(expense)
for the period - 1.4 (0.7) - (0.6) 11.0 11.1 - 11.1
---------------------- ---- ------- ----- ------ ----- ---- ------- --- -------
Total comprehensive
income/(expense)
for the period - 96.5 (0.7) - (0.6) 11.0 106.2 - 106.2
Dividends paid - (62.7) - - - - (62.7) - (62.7)
Shares purchased - - - (9.6) - - (9.6) - (9.6)
Shares released - - - 4.0 - - 4.0 - 4.0
Other movements - (0.9) - 1.4 - - 0.5 1.0 1.5
Income tax - (0.5) - - - - (0.5) - (0.5)
---------------------- ---- ------- ----- ------ ----- ---- ------- --- -------
At 31 January 2022
(unaudited) 38.0 1,587.9 0.1 (26.6) (1.9) 10.7 1,608.2 - 1,608.2
---------------------- ---- ------- ----- ------ ----- ---- ------- --- -------
Consolidated Cash Flow Statement
for the six months ended 31 January 2022
Six months ended Year ended
31 January 31 July
---------------------------
2022 2021 2021
Unaudited Unaudited Audited
Note GBP million GBP million GBP million
--------------------------------------------------- ----------- -------------- ------------
Net cash inflow from operating activities 16(a) 170.8 733.2 119.1
-------------------------------------------- ----- ----------- -------------- ------------
Net cash (outflow)/inflow from investing
activities
Purchase of:
Property, plant and equipment (3.4) (10.6) (8.9)
Intangible assets - software (20.6) (22.2) (47.9)
Subsidiaries 16(b) - (0.4) (2.9)
Sale of:
Subsidiaries 16(c) 0.1 2.1 2.3
(23.9) (31.1) (57.4)
-------------------------------------------- ----- ----------- -------------- ------------
Net cash inflow before financing activities 146.9 702.1 61.7
-------------------------------------------- ----- ----------- -------------- ------------
Financing activities
Purchase of own shares for employee share
award schemes (9.6) (12.0) (12.1)
Equity dividends paid (62.7) (59.8) (86.6)
Interest paid on subordinated loan capital
and debt financing (4.9) (7.1) (13.6)
Payment of lease liabilities (6.9) (8.4) (14.7)
Net (repayment)/issuance of subordinated
loan capital (23.4) - 40.6
Net increase/(decrease) in cash 39.4 614.8 (24.7)
Cash and cash equivalents at beginning of
period 1,436.6 1,461.3 1,461.3
-------------------------------------------- ----- ----------- -------------- ------------
Cash and cash equivalents at end of period 16(d) 1,476.0 2,076.1 1,436.6
-------------------------------------------- ----- ----------- -------------- ------------
THE NOTES
1. Basis of preparation and accounting policies
The half year results have been prepared in accordance with the
Disclosure Guidance and Transparency Rules of the Financial Conduct
Authority and the condensed consolidated interim financial
statements ("interim financial statements") have been prepared in
accordance with the International Financial Reporting Standards
("IFRS") in conformity with the requirements of the Companies Act
2006. These include International Accounting Standard ("IAS") 34,
Interim Financial Reporting, which specifically addresses the
contents of interim financial statements. The interim financial
statements incorporate the individual financial statements of Close
Brothers Group plc and the entities it controls, using the
acquisition method of accounting.
The half year results are unaudited and do not constitute
statutory accounts within the meaning of Section 434 of the
Companies Act 2006. However, the information has been reviewed by
the group's auditor, PricewaterhouseCoopers LLP, and their report
appears above.
The financial information for the year ended 31 July 2021
contained within this half year report does not constitute
statutory accounts as defined in Section 434 of the Companies Act
2006. A copy of those statutory accounts, which have been prepared
in accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006 and comply with
IFRSs adopted pursuant to Regulation (EC) No 1606/2002 as it
applies in the EU, 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 141 to 145 of the Annual Report 2021.
Critical accounting judgements and estimates
The reported results of the group are sensitive to the
accounting policies, assumptions and estimates that underlie the
preparation of its financial statements. The group's estimates and
assumptions are based on historical experience and expectations of
future events and are reviewed on an ongoing basis. The group's
critical accounting judgements and estimates, set out below, are
fundamentally unchanged from those identified in the Annual Report
2021.
Critical accounting judgements
Expected credit losses
At 31 January 2022, the group's expected credit loss provision
was GBP304.0 million (31 July 2021: GBP280.4 million). The
calculation of the group's expected credit loss provision under
IFRS 9 requires the group to make a number of judgements,
assumptions and estimates, which have a material impact on the
accounts . The most significant judgements 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 historical 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:
-- Quantitative assessment: the lifetime PD has increased by
more than an agreed threshold relative to the equivalent at
origination. Thresholds are based on a fixed number of risk grade
movements which are bespoke to the business to ensure that
increased risk since origination is appropriately captured;
-- Qualitative assessment: events or observed behaviour indicate
credit 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, forbearance and watch list information, or other factors
affecting the trading performance of our borrower; or
-- Backstop criteria: the 30 days past due backstop is met.
Definition of default
The definition of default is an important building block for
expected credit loss models and is considered a key judgement. A
default is considered to have occurred if any unlikeliness to pay
criteria are met or when a financial asset meets the 90 days past
due backstop. While some criteria are factual (e.g. administration,
insolvency, or bankruptcy), others require a judgmental assessment
of whether the borrower has financial difficulties which are
expected to have a detrimental impact on their ability to meet
contractual obligations. A change in the definition of default may
have a material impact on the expected credit loss provision.
Key sources of estimation uncertainty
At the balance sheet date, the directors consider that expected
credit loss provisions are a key source of estimation uncertainty
which, depending on a wide range of factors, could result in a
material adjustment to the carrying amounts of assets and
liabilities in the next financial year.
The accuracy of the expected credit loss calculation can be
impacted by unpredictable effects or unanticipated changes to model
estimates. In addition, forecasting errors could also occur due to
macroeconomic scenarios or weightings differing from the actual
outcomes observed. Regular model monitoring, validations and
provision adequacy reviews are key mechanisms to manage estimation
uncertainty across model estimates.
A representation of the core drivers of the macroeconomic
scenarios that are deployed in our models are outlined in this
note. In some instances, expected credit loss models use a range of
additional macroeconomic metrics and assumptions which are linked
to the underlying characteristics of the business.
Model estimates
Across the Bank, expected credit loss provisions are outputs of
models which are based on a number of assumptions. The assumptions
applied involve judgement and as a result are regularly
assessed.
The two assumptions requiring the most significant judgement
relate to case failure rates and recovery rates in Novitas.
Novitas provides funding via intermediaries to individuals who
wish to pursue legal cases. Over the course of the first half of
this financial year, experience of credit performance has required
the group to update a number of assumptions in the calculation of
the expected credit loss provision for Novitas. This half year a
significant portion of the expected credit loss provision reported
in Commercial relates to the Novitas loan book.
The majority of the Novitas portfolio, and therefore provision,
relates to civil litigation cases. To help protect customers in the
event that their case fails, a standard loan condition is that an
individual purchases an insurance policy which covers loan capital
and varying levels of interest. Across the portfolio there are
insurance policies from a number of well-rated insurers.
The key sources of estimation uncertainty for the portfolio's
expected credit loss provision are case failure rates and recovery
rates. Case failure rates represent a forward-looking probability
assessment of successful case outcomes informed by actual case
failure rates. Recovery rates represent the level of interest and
capital that is expected to be covered by an insurance policy once
a case fails. In addition, an assessment is also undertaken
reflecting potential insurer insolvency risk with resultant
expected credit losses held for this.
Assumptions are informed by experience of credit performance,
with management judgement applied to reflect expected outcomes and
uncertainties. In addition, the provision is informed by
sensitivity analysis to reflect the level of uncertainty. More
detailed credit performance data continues to develop as the
portfolio matures, which over time will reduce the level of
estimation uncertainty.
Based on this methodology, and using the latest information
available, the expected credit loss provision in Commercial has
seen a significant uplift, reflecting the latest assumptions on
case failure and recovery rates in Novitas. Further details on
provisions are included in note 6.
Given these assumptions represent sources of estimation
uncertainty, management has assessed and completed sensitivity
analysis when compared to the expected credit loss provision for
Novitas of GBP116.7 million. At 31 January 2022, a 5% absolute
deterioration or improvement in case failure rates would increase
or decrease the expected credit loss provision by GBP8.7 million.
Separately, a 5% absolute deterioration or improvement in recovery
rates would increase or decrease the expected credit loss provision
by GBP5.7 million.
Forward-looking information
Determining expected credit losses under IFRS 9 requires the
incorporation of forward-looking macroeconomic information that is
reasonable and supportable and includes assumptions linked to
economic variables that impact losses in each portfolio. The
introduction of macroeconomic information introduces additional
volatility to provisions. In order to calculate forward-looking
provisions, baseline and alternative scenarios are externally
sourced from Moody's and are selected by management for use in
credit models to project potential credit conditions for each
portfolio.
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 expected credit
losses.
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 coverage ratios at the individual and portfolio level,
incorporating management's experience and knowledge of customers,
the sectors in which they operate, and the assets financed.
The Credit Risk Management Committee ("CRMC") including the
group finance director and group chief risk officer meets at least
quarterly to review, and if appropriate, agree changes to the
economic scenarios and probability weightings assigned thereto.
At 31 July 2021, the scenario weightings reflected the continued
economic challenges and uncertainty, with 40% allocated to the
baseline scenario, 20% to the upside scenario and 40% across the
three downside scenarios.
At 31 January 2022, the level of economic uncertainty associated
with Covid-19 continues to reduce following the booster rollout and
lifting of Plan B restrictions. The increased optimism was partly
tempered by the inflationary environment, and anticipated impact on
cost of living. CRMC therefore approved an increase to the upside
weighting, with the resulting weightings being 30% upside, 40%
baseline, 15% downside (mild), 10% downside (moderate) and 5%
downside (protracted).
In line with the approach taken throughout the pandemic,
refreshed scenario forecasts have been deployed in the IFRS 9 model
suite on a monthly basis. As at 31 January 2022, the latest
baseline scenario forecasted GDP growth in 2022 of 5.1%, with
unemployment of 4.8%.
The tables below show the key UK economic assumptions within
each scenario, and the weighting applied to each at 31 January
2022. The numbers shown are the forecasts for 2022, 2023, and an
average over the five-year period from 2022 to 2026. The weightings
ascribed are the point in time weightings applied to each scenario
at 31 January 2022.
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)
2022 2023 2022 2023 2022 2023 2022 2023 2022 2023
---------------- ----- ----- -------- -------- ------- ------- ---------- ---------- ----------- -----------
At 31 January
2022
UK GDP Growth 5.1% 4.0% 8.4% 3.4% 2.3% 4.4% 0.3% 4.3% (0.8)% 3.6%
UK Unemployment 4.8% 4.5% 4.3% 3.4% 5.4% 5.6% 5.7% 6.6% 6.2% 7.6%
HPI Growth 2.1% 4.7% 8.7% 10.8% (1.6)% (2.6)% (5.3)% (10.6)% (7.7)% (13.2)%
BoE Base Rate 0.3% 0.7% 0.4% 0.8% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%
Weighting 40% 30% 15% 10% 5%
---------------- ------------ ------------------ ---------------- ---------------------- ------------------------
Baseline Upside (strong) Downside Downside (moderate) Downside (protracted)
(mild)
2021 2022 2021 2022 2021 2022 2021 2022 2021 2022
---------------- ----- ------- -------- -------- ----- ------- --------- ----------- --------- -------------
At 31 July 2021
UK GDP Growth 6.2% 6.3% 7.4% 8.7% 5.1% 4.2% 4.6% 2.0% 4.1% 0.8%
UK Unemployment 5.8% 6.3% 5.7% 5.4% 5.9% 7.3% 6.0% 8.0% 6.1% 8.9%
HPI Growth 5.3% (1.8)% 7.2% 7.1% 5.0% (5.4)% 4.4% (7.9)% 3.1% (11.6)%
BoE Base Rate 0.1% 0.2% 0.1% 0.3% 0.1% 0.1% 0.1% 0.1% 0.0% (0.1)%
Weighting 40% 20% 15% 15% 10%
---------------- -------------- ------------------ -------------- ---------------------- ------------------------
5 year average (2022-2026)
Baseline Upside (strong) Downside Downside (moderate) Downside (protracted)
(mild)
----------------- --------- ---------------- --------- -------------------- -------------------------
At 31 January
2022
UK GDP Growth 2.6% 3.1% 2.4% 2.3% 1.8%
UK Unemployment 4.5% 3.7% 5.4% 6.3% 7.0%
HPI Growth 4.0% 6.0% 1.1% (2.0)% (3.4)%
BoE Base Rate 1.1% 1.4% 0.6% 0.3% 0.3%
Weighting 40% 30% 15% 10% 5%
----------------- --------- ---------------- --------- -------------------- -------------------------
5 year average (2021-2025)
Baseline Upside (strong) Downside Downside (moderate) Downside (protracted)
(mild)
----------------- --------- ---------------- --------- -------------------- ---------------------------
At 31 July 2021
UK GDP Growth 3.9% 4.4% 3.7% 3.5% 3.1%
UK Unemployment 5.5% 4.8% 6.3% 7.1% 7.7%
HPI Growth 4.0% 6.0% 2.7% 0.4% (1.3)%
BoE Base Rate 0.6% 0.8% 0.2% 0.1% 0.0%
Weighting 40% 20% 15% 15% 10%
----------------- --------- ---------------- --------- -------------------- ---------------------------
The tables below provide a summary for the subsequent five-year
period (Q1 2022 - Q4 2026) of the peak to trough range of values of
the key UK economic variables used within the economic scenarios at
31 January 2022 and 31 July 2021:
Upside Downside Downside Downside
Baseline (strong) (mild) (moderate) (protracted)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
----------------- ----- ------- ------ ------- ----- -------- -------- -------- ------ --------
At 31 January
2022
UK GDP Growth 7.9% 0.9% 9.8% 0.9% 6.9% (0.1)% 6.6% (2.8)% 5.9% (3.9)%
UK Unemployment 4.9% 4.4% 4.6% 3.3% 5.7% 4.9% 6.7% 4.9% 7.7% 5.1%
HPI Growth 6.5% 1.3% 13.3% 0.5% 4.5% (5.0)% 8.1% (12.3)% 7.5% (15.4)%
BoE Base Rate 2.2% 0.3% 2.6% 0.3% 1.5% 0.3% 0.6% 0.3% 0.3% 0.3%
Weighting 40% 30% 15% 10% 5%
----------------- -------------- --------------- --------------- ------------------ ----------------
Upside Downside Downside Downside
Baseline (strong) (mild) (moderate) (protracted)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
----------------- ------ ------- ------ ------- ------ -------- --------- -------- ------ --------
At 31 July 2021
UK GDP Growth 12.2% 0.9% 14.3% 0.9% 11.6% 0.4% 10.6% (0.9)% 10.3% (2.1)%
UK Unemployment 6.6% 4.9% 6.3% 4.2% 7.5% 5.7% 8.2% 5.8% 9.2% 5.9%
HPI Growth 6.9% (5.1)% 10.2% 2.6% 6.7% (8.0)% 6.4% (14.4)% 6.5% (19.9)%
BoE Base Rate 1.4% 0.1% 1.7% 0.1% 0.4% 0.1% 0.1% 0.1% 0.1% (0.1)%
Weighting 40% 20% 15% 15% 10%
----------------- --------------- --------------- ---------------- ------------------- ----------------
The expected credit loss provision is sensitive to judgement and
estimations made with regard to the selection and weighting of
multiple economic scenarios. As a result, management has assessed
and considered the sensitivity of the provision as follows:
-- For the majority of our portfolios, the modelled expected
credit loss provision has been recalculated under the upside strong
and downside protracted scenarios described above, applying a 100%
weighting to each scenario in turn. The change in provision
requirement is driven by the movement in risk metrics under each
scenario and resulting impact on stage allocation.
-- Expected credit losses based on a simplified approach, which
do not utilise a macroeconomic model and require expert judgement,
are excluded from the sensitivity analysis.
-- The approach to adjustments has been refined since 31 July
2021, to provide a more comprehensive sensitivity of the total
expected credit loss; most adjustments are included in the analysis
at 31 January 2022.
-- In addition to the above, key considerations for the
sensitivity analysis are set out below, by segment:
-- In Commercial, the sensitivity analysis excludes Novitas,
which is subject to a separate approach, as it is deemed more
sensitive to credit factors than macroeconomic factors.
-- In Retail:
-- The sensitivity analysis excludes expected credit loss
provisions on loans and advances to customers in Stage 3, because
the measurement of expected credit losses is considered more
sensitive to credit factors specific to the borrower than
macroeconomic scenarios.
-- For some loans, a specific sensitivity approach has been
adopted to assess short tenor loans' response to modelled economic
forecasts. For these short-tenor loans, PD has been extrapolated
from emerging default rates and then proportionally scaled to
reflect a sharp recovery in the upside scenario and a slower
recovery in a downside scenario.
-- In Property, the sensitivity analysis excludes individually
assessed provisions, and certain sub portfolios which are deemed
more sensitive to credit factors than the macroeconomic
scenarios.
Based on the above analysis, at 31 January 2022, application of
100% weighting to the upside strong scenario would decrease the
expected credit loss by GBP11.1 million whilst application to the
downside protracted scenario would increase the expected credit
loss by GBP14.8 million driven by the aforementioned changes in
risk metrics and stage allocation of the portfolios.
When performing sensitivity analysis there is a high degree of
estimation uncertainty. On this basis, 100% weighted expected
credit loss provisions presented for the upside and downside
scenarios should not be taken to represent the lower or upper range
of possible and actual expected credit loss outcomes. The
recalculated expected credit loss provision for each of the
scenarios should be read in the context of the sensitivity analysis
as a whole and in conjunction with the narrative disclosures
provided in note 6. The modelled impact presented is based on gross
loans and advances to customers at 31 January 2022; it does not
incorporate future changes relating to performance, growth or
credit risk. In addition, given the change in the macroeconomic
conditions, underlying modelled provisions and methodology, and
refined approach to adjustments, comparison between the sensitivity
results at 31 January 2022 and 31 July 2021 is not appropriate.
The economic environment remains uncertain and future impairment
charges may be subject to further volatility, including from
changes to macroeconomic variable forecasts impacted by Covid-19,
geopolitical tensions and rising inflation.
2. Segmental analysis
The directors manage the group by class of business and we
present the segmental analysis on that basis. The group's
activities are presented in five (2021: 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
2022
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) 127.9 106.9 58.0 (0.1) (0.7) (0.2) 291.8
Non-interest
income 39.9 12.8 0.2 76.7 50.2 - 179.8
------------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------
Operating income 167.8 119.7 58.2 76.6 49.5 (0.2) 471.6
------------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------
Administrative
expenses (78.0) (61.3) (14.1) (59.8) (38.7) (12.2) (264.1)
Depreciation and
amortisation (11.1) (10.6) (2.1) (2.3) (2.0) (1.3) (29.4)
Impairment losses
on financial
assets (41.0) (5.3) (2.0) - - - (48.3)
------------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------
Total adjusted
operating
expenses(1) (130.1) (77.2) (18.2) (62.1) (40.7) (13.5) (341.8)
------------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------
Adjusted operating
profit/(loss)(1) 37.7 42.5 40.0 14.5 8.8 (13.7) 129.8
Amortisation and
impairment of
intangible assets
on acquisition (0.1) - - (0.8) - - (0.9)
------------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------
Goodwill
impairment - - - - - - -
------------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------
Exceptional item:
HMRC
VAT refund - - - - - - -
------------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------
Operating
profit/(loss)
before tax 37.6 42.5 40.0 13.7 8.8 (13.7) 128.9
------------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------
External operating
income/(expense) 190.5 134.5 65.0 76.6 49.5 (44.5) 471.6
Inter segment
operating
(expense)/income (22.7) (14.8) (6.8) - - 44.3 -
------------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------
Segment operating
income 167.8 119.7 58.2 76.6 49.5 (0.2) 471.6
------------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------
1 Adjusted operating expenses and adjusted operating
profit/(loss) are stated before amortisation and impairment of
intangible assets on acquisition, goodwill impairment, exceptional
item and tax.
The Commercial operating segment above includes the group's
Novitas business. Novitas ceased lending to new customers in July
2021 following a strategic review. In the period ended 31 January
2022, Novitas recorded impairment losses of GBP39.2 million (six
months ended 31 January 2021: GBP24.0 million; year ended 31 July
2021: GBP73.2 million).
Balance Sheet Information at 31 January 2022
Banking
Asset
Commercial Retail Property Management Securities Group(2) Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
Total
assets(1) 4,358.3 3,026.5 1,451.0 165.3 1,115.1 2,423.6 12,539.8
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
Total
liabilities - - - 67.9 1,023.3 9,840.4 10,931.6
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
1 Total assets for the Banking operating segments comprise the
loan book and operating lease assets only. The Commercial operating
segment includes the net loan book of Novitas, which was GBP162.1
million at 31 January 2022 (31 July 2021: GBP181.5 million). See
note 6 for more detail on the Novitas loan book and associated
impairment provision.
2 Balance sheet includes GBP2,388.2 million assets and
GBP9,904.1 million liabilities attributable to the Banking division
primarily comprising the treasury balances described in the second
paragraph of this note.
Equity is allocated across the group as shown below. Banking
division equity, which is managed as a whole rather than on a
segmental basis, reflects loan book and operating lease assets of
GBP8,835.8 million, in addition to assets and liabilities of
GBP2,388.2 million and GBP9,904.1 million respectively primarily
comprising treasury balances which are included within the Group
column above.
Banking Asset Management Securities Group Total
GBP million GBP million GBP million GBP million GBP million
-------- ------------ ----------------- ------------- ------------ ------------
Equity 1,319.9 97.4 91.8 99.1 1,608.2
-------- ------------ ----------------- ------------- ------------ ------------
Summary Income Statement for the six months ended 31 January
2021
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) 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)/gains
on financial assets (33.0) (16.4) (3.5) - 0.1 - (52.8)
---------------------- ------------ ---------- ---------- ----------- ------------ ---------- ----------
Total adjusted
operating
expenses(1) (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 and
impairment of
intangible assets
on acquisition (0.9) (0.1) - (0.5) - - (1.5)
---------------------- ------------ ---------- ---------- ----------- ------------ ---------- ----------
Goodwill impairment - - - - - - -
---------------------- ------------ ---------- ---------- ----------- ------------ ---------- ----------
Exceptional item:
HMRC
VAT refund - - - - - - -
---------------------- ------------ ---------- ---------- ----------- ------------ ---------- ----------
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 expenses and adjusted operating
profit/(loss) are stated before amortisation and impairment of
intangible assets
on acquisition, goodwill impairment, exceptional item and
tax.
Summary Income Statement for the year ended 31 July 2021
Banking
Asset Management
Commercial Retail Property Securities Group Total
GBP million GBP GBP GBP million GBP million GBP million GBP
million million million
----------------------------------- ---------- ---------- -------------------- ------------- ------------ ----------
Net interest
income/(expense) 218.1 198.8 122.6 (0.1) (1.4) (0.5) 537.5
Non-interest
income 70.8 21.0 0.4 139.5 183.4 - 415.1
------------------------ ---------- ---------- ---------- -------------------- ------------- ------------ ----------
Operating income 288.9 219.8 123.0 139.4 182.0 (0.5) 952.6
------------------------ ---------- ---------- ---------- -------------------- ------------- ------------ ----------
Administrative
expenses (139.1) (118.6) (29.1) (110.8) (118.1) (24.1) (539.8)
Depreciation and
amortisation (19.1) (19.4) (3.8) (5.1) (3.1) (1.8) (52.3)
Impairment
(losses)/gains
on financial assets (77.9) (9.9) (2.3) 0.2 0.1 - (89.8)
------------------------ ---------- ---------- ---------- -------------------- ------------- ------------ ----------
Total adjusted
operating
expenses(1) (236.1) (147.9) (35.2) (115.7) (121.1) (25.9) (681.9)
------------------------ ---------- ---------- ---------- -------------------- ------------- ------------ ----------
Adjusted operating
profit/(loss)(1) 52.8 71.9 87.8 23.7 60.9 (26.4) 270.7
Amortisation and
impairment of
intangible assets
on
acquisition (12.2) (0.7) - (1.3) - - (14.2)
------------------------ ---------- ---------- ---------- -------------------- ------------- ------------ ----------
Goodwill impairment (12.1) - - - - - (12.1)
------------------------ ---------- ---------- ---------- -------------------- ------------- ------------ ----------
Exceptional item:
HMRC
VAT refund 7.4 12.3 - - - 1.1 20.8
------------------------ ---------- ---------- ---------- -------------------- ------------- ------------ ----------
Operating profit/(loss)
before tax 35.9 83.5 87.8 22.4 60.9 (25.3) 265.2
------------------------ ---------- ---------- ---------- -------------------- ------------- ------------ ----------
External operating
income/(expense) 343.1 258.7 142.3 139.4 182.0 (112.9) 952.6
Inter segment operating
(expense)/income (54.2) (38.9) (19.3) - - 112.4 -
------------------------ ---------- ---------- ---------- -------------------- ------------- ------------ ----------
Segment operating
income 288.9 219.8 123.0 139.4 182.0 (0.5) 952.6
------------------------ ---------- ---------- ---------- -------------------- ------------- ------------ ----------
1 Adjusted operating expenses and adjusted operating
profit/(loss) are stated before amortisation and impairment of
intangible assets on
acquisition, goodwill impairment, exceptional item and tax.
Balance Sheet Information at 31 July 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) 4,191.0 2,974.3 1,502.1 139.7 897.9 2,329.5 12,034.5
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
Total
liabilities - - - 78.1 806.5 9,580.6 10,465.2
--------------- ------------- ------------ ------------ --------------- ------------- ------------ ------------
1 Total assets for the Banking operating segments comprise the
loan book and operating lease assets only.
2 Balance sheet includes GBP2,299.0 million assets and
GBP9,677.8 million liabilities attributable to the Banking division
primarily comprising the treasury balances described in the second
paragraph of this note.
Asset Management
Banking Securities Group Total
GBP million GBP million GBP million GBP million GBP million
------------ ------------ ------------------- ------------- ------------ ------------
Equity (1) 1,288.6 61.6 91.4 127.7 1,569.3
------------ ------------ ------------------- ------------- ------------ ------------
1 Equity of the Banking division reflects loan book and
operating lease assets of GBP8,667.4 million, in addition to assets
and liabilities of GBP2,299.0 million and GBP9,677.8 million
respectively primarily comprising treasury balances which are
included within the Group column above.
3. Taxation
Six months ended Year ended
31 January 31 July
--------------------------
2022 2021 2021
GBP million GBP million GBP million
------------------------------------------------------ ------------ ------------ ------------
Tax charged/(credited) to the income statement
Current tax:
UK corporation tax 32.1 32.7 75.1
Foreign tax 0.8 0.6 1.5
Adjustments in respect of previous periods 0.1 0.4 (3.4)
------------------------------------------------------ ------------ ------------ ------------
33.0 33.7 73.2
Deferred tax:
Deferred tax charge for the current period 0.9 (1.1) (13.6)
Adjustments in respect of previous periods (0.1) (0.4) 3.5
------------------------------------------------------ ------------ ------------ ------------
33.8 32.2 63.1
------------------------------------------------------ ------------ ------------ ------------
Tax on items not (credited)/charged to the income
statement
Current tax relating to:
Share-based payments (0.1) - -
Deferred tax relating to:
Cash flow hedging 5.4 0.6 2.0
Defined benefit pension scheme 0.5 0.1 0.6
Financial instruments classified at fair value
through other
comprehensive income (0.3) 0.1 0.3
Share-based payments 0.6 (0.6) (1.4)
Currency translation losses - - (1.1)
Acquisitions - - 1.0
6.1 0.2 1.4
------------------------------------------------------ ------------ ------------ ------------
Reconciliation to tax expense
UK corporation tax for the period at 19.0 %
(six months ended
31 January 2021: 19.0%; year ended 31 July
2021: 19.0%)
on operating profit 24.5 24.1 50.4
Effect of different tax rates in other jurisdictions (0.2) (0.2) (0.3)
Disallowable items and other permanent differences 0.6 0.5 2.9
Banking surcharge 8.8 7.8 19.8
Deferred tax impact of increased tax rates 0.1 - (9.8)
Prior year tax provision - - 0.1
33.8 32.2 63.1
------------------------------------------------------ ------------ ------------ ------------
The effective tax rate for the period is 26.2% (six months ended
31 January 2021: 25.4%; year ended 31 July 2021: 23.8%).
The standard UK corporation tax rate for the financial year is
19.0% (six months ended 31 January 2021: 19.0%; year ended 31 July
2021: 19.0%). However, an additional 8% surcharge applies to the
profits of banking companies 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.
The UK Government's October 2021 budget announced its intention
to decrease the rate of banking surcharge from 8% to 3% with effect
from 1 April 2023. This rate change was substantively enacted on 2
February 2022 and its impact is therefore not included in these
half year results. Had this change been enacted before 31 January
2022, the group's deferred tax asset balance at 31 January 2022
would have decreased by approximately GBP6 million, with a
corresponding tax expense recognised in the income statement, net
of a smaller credit to other comprehensive income.
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
------------------
2022 2021 2021
-------------------- -------- -------- ----------
Basic 63.5p 63.2p 134.8p
-------------------- -------- -------- ----------
Diluted 63.0p 62.8p 133.6p
-------------------- -------- -------- ----------
Adjusted basic(1) 64.0p 64.0p 140.4p
-------------------- -------- -------- ----------
Adjusted diluted(1) 63.5p 63.6p 139.1p
-------------------- -------- -------- ----------
1 Excludes amortisation of intangible assets on acquisition,
goodwill impairment, exceptional item and their tax effects.
Six months ended Year ended
31 January 31 July
------------------------
2022 2021 2021
GBP million GBP million GBP million
------------------------------------------------- ----------- ----------- -----------
Profit attributable to shareholders 95.1 94.8 202.1
Adjustments:
Amortisation of intangible assets on acquisition 0.9 1.5 14.2
Goodwill impairment - - 12.1
Exceptional item: HMRC VAT refund - - (20.8)
Tax effect of adjustment (0.2) (0.3) 2.9
------------------------------------------------- ----------- ----------- -----------
Adjusted profit attributable to shareholders 95.8 96.0 210.5
------------------------------------------------- ----------- ----------- -----------
Six months ended Year ended
31 January 31 July
------------------------
2022 2021 2021
million million million
------------------------------------------------- ----------- ----------- -----------
Average number of shares
Basic weighted 149.7 150.1 149.9
Effect of dilutive share options and awards 1.2 0.8 1.4
------------------------------------------------- ----------- ----------- -----------
Diluted weighted 150.9 150.9 151.3
------------------------------------------------- ----------- ----------- -----------
5. Dividends
Six months ended Year ended
31 January 31 July
------------------------
2022 2021 2021
GBP million GBP million GBP million
-------------------------------------------------- ----------- ----------- -----------
For each ordinary share
Interim dividend for previous financial year paid
in April 2021: 18.0p
(April 2020: GBPnil) - - 26.8
Final dividend for previous financial year paid
in November 2021: 42.0p
(November 2020: 40.0p) 62.7 59.8 59.8
An interim dividend relating to the six months ended 31 January
2022 of 22.0p, amounting to an estimated GBP32.8 million, is
declared. This interim dividend, which is due to be paid on 27
April 2022 to shareholders on the register at 25 March 2022, is not
reflected in these condensed half year financial statements.
6. Loans and advances to customers
The following table sets out the maturity analysis of gross
loans and advances to customers. At 31 January 2022 loans and
advances to customers with a maturity of two years or less was
GBP6,518.5 million (31 July 2021: GBP6,326.6 million) representing
73.2% (31 July 2021: 72.5%) of total loans and advances to
customers:
Total
gross Total net
Between loans and loans and
Within three Between one Between After more advances advances
On three months and and two two and than five to Impairment to
demand months one year years five years years customers provisions customers
GBP GBP GBP GBP
GBP million GBP million million GBP million million GBP million million GBP million million
At 31
January
2022 81.4 2,317.0 2,368.0 1,752.1 2,221.6 169.8 8,909.9 (304.0) 8,605.9
At 31 July
2021 71.8 2,276.6 2,289.1 1,689.1 2,242.8 155.5 8,724.9 (280.4) 8,444.5
(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 2022 GBP million GBP million GBP million GBP million GBP million GBP million
------------ ------------ ------------ ------------
Gross loans and
advances to customers
Commercial 3,557.6 493.9 98.8 592.7 173.5 4,323.8
Of which: Novitas 117.3 21.5 78.4 99.9 61.6 278.8
Retail 2,883.4 147.7 8.0 155.7 54.3 3,093.4
Property 1,222.9 49.4 39.5 88.9 180.9 1,492.7
------------ ------------ ------------ ------------
Total 7,663.9 691.0 146.3 837.3 408.7 8,909.9
------------ ------------ ------------ ------------
Impairment provisions
Commercial 31.7 28.0 46.8 74.8 88.9 195.4
Of which: Novitas 12.6 10.9 43.8 54.7 49.4 116.7
Retail 19.1 8.3 2.0 10.3 37.5 66.9
Property 1.6 4.8 0.1 4.9 35.2 41.7
------------ ------------ ------------ ------------
Total 52.4 41.1 48.9 90.0 161.6 304.0
------------ ------------ ------------ ------------
% % % % %%
------------ ------------ ------------ ------------
Provision coverage
ratio
Commercial 0.9% 5.7% 47.4% 12.6% 51.2% 4.5%
Within which: Novitas 10.7% 50.7% 55.9% 54.8% 80.2% 41.9%
Retail 0.7% 5.6% 25.0% 6.6% 69.1% 2.2%
Property 0.1% 9.7% 0.3% 5.5% 19.5% 2.8%
------------ ------------ ------------ ------------
Total 0.7% 5.9% 33.4% 10.7% 39.5% 3.4%
------------ ------------ ------------ ------------
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 2021 GBP million GBP million GBP million GBP million GBP million GBP million
------------ ------------ ------------ ------------
Gross loans and
advances to customers
Commercial 3,417.2 549.4 74.0 623.4 99.9 4,140.5
Of which: Novitas 185.8 3.6 55.8 59.4 25.6 270.8
Retail 2,817.0 175.3 6.4 181.7 43.2 3,041.9
Property 1,200.1 100.5 54.6 155.1 187.3 1,542.5
------------ ------------ ------------ ------------
Total 7,434.3 825.2 135.0 960.2 330.4 8,724.9
------------ ------------ ------------ ------------
Impairment provisions
Commercial 55.6 30.3 33.6 63.9 52.9 172.4
Of which: Novitas 31.4 2.1 30.6 32.7 25.2 89.3
Retail 22.1 13.3 1.9 15.2 30.3 67.6
Property 2.3 5.0 0.1 5.1 33.0 40.4
------------ ------------ ------------ ------------
Total 80.0 48.6 35.6 84.2 116.2 280.4
------------ ------------ ------------ ------------
% % % % %%
------------ ------------ ------------ ------------
Provision coverage
ratio
Commercial 1.6% 5.5% 45.4% 10.3% 53.0% 4.2%
Within which: Novitas 16.9% 58.3% 54.8% 55.1% 98.4% 33.0%
Retail 0.8% 7.6% 29.7% 8.4% 70.1% 2.2%
Property 0.2% 5.0% 0.2% 3.3% 17.6% 2.6%
------------ ------------ ------------ ------------
Total 1.1% 5.9% 26.4% 8.8% 35.2% 3.2%
------------ ------------ ------------ ------------
Stage allocations of loans and advances to customers were
applied in line with the definitions set out on page 142 of the
Annual Report 2021, with adjustments made based on management
judgement.
Over the course of the first half of this financial year, the
staging profile of loans and advances to customers has remained
broadly static, with no material movement in stage allocation. At
31 January 2022, 86.0% (31 July 2021: 85.2%) of loans and advances
to customers were Stage 1, with the increase primarily due to a
combination of new business growth, and continued curing of
forborne loans. As a result, Stage 2 loans and advances to
customers decreased to 9.4% (31 July 2021: 11.0%), reflecting the
ongoing repayment and settlement of Covid-19 forbearance. The
remaining 4.6% (31 July 2021: 3.8%) of loans and advances to
customers was deemed to be credit impaired and classified as Stage
3.
Overall impairment provisions increased to GBP304.0 million (31
July 2021: GBP280.4 million), following regular reviews of staging
and provision coverage for individual loans and portfolios. The
movement in impairment provision was driven by Novitas, following
updated assumptions on case failure and recovery rates. The
increase was partially offset by reduced forborne balances and
improved macroeconomic scenarios and weightings.
As a result, there has been a marginal increase in provision
coverage to 3.4% (31 July 2021: 3.2%).
Provision Coverage Analysis by Business
In Commercial, the provision coverage ratio increased to 4.5%
(31 July 2021: 4.2%), primarily driven by increased provision
levels in Novitas.
In Commercial excluding Novitas, the provision coverage ratio
decreased to 1.9% (31 July 2021: 2.1%) primarily reflecting
provision releases, driven by reduced forborne loan balances, and
improved macroeconomic scenarios and weightings.
In Novitas, the provision coverage ratio increased to 41.9% (31
July 2021: 33.0%), while the loan book remained broadly flat, with
impairment provisions increasing following the updated assumptions
on case failure and recovery rates.
In Retail, the provision coverage ratio remained stable at 2.2%
(31 July 2021: 2.2%) reflecting the stable performance across the
portfolios.
In Property, the provision coverage ratio increased slightly to
2.8% (31 July 2021: 2.6%) reflecting increased individually
assessed provisions on Stage 3 loans, partially offset by the
favourable impact of changes in the macroeconomic forecasts.
(b) Adjustments
By their nature, limitations in the group's expected credit loss
models or input data may be identified through ongoing model
monitoring and validation of models. In certain circumstances,
management make appropriate adjustments to model-calculated
expected credit losses. These adjustments are based on management
judgements or quantitative back-testing to ensure expected credit
loss provisions adequately reflect all known information. These
adjustments are generally determined by considering the attributes
or risks of a financial asset which are not captured by existing
expected credit loss model outputs. Management adjustments are
actively monitored, reviewed, and incorporated into future model
development where applicable.
At 31 January 2022, GBP12.5 million of the expected credit loss
provision was attributable to adjustments (31 July 2021: GBP38.9
million), which can be broadly segmented into three categories:
-- Covid-19: Applied either to cases where the model does not
take into account the change in risk profile of forborne loans, or
at portfolio level, where the model does not factor in the pandemic
environment, necessitating the need for expert judgement
overlay;
-- Government lending schemes: Applied where the model does not
include the benefit of the government guarantee into the expected
credit loss calculation; and
-- Non-Covid-19: Adjustments held whilst model limitations are
addressed.
The level of adjustments has reduced during the first half as
Covid-19 forborne loans continue to be repaid and the economic
outlook stabilises, reducing uncertainty in macroeconomic
forecasts.
This approach has incorporated our experience, knowledge of our
customers, the sectors in which they operate, and the assets which
we finance. We will continue to monitor the use of, or need for,
adjustments as new information emerges.
(c) 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 2021 7,434.3 960.2 330.4 8,724.9
New financial assets originated 3,237.6 - - 3,237.6
Transfers to Stage 1 234.3 (271.1) (3.2) (40.0)
Transfers to Stage 2 (494.1) 473.2 (18.1) (39.0)
Transfers to Stage 3 (94.1) (98.6) 173.8 (18.9)
Net transfers between stages and
repayments(1) (353.9) 103.5 152.5 (97.9)
Repayments while stage remain unchanged
and final repayments (2,620.0) (250.7) (63.5) (2,934.2)
Changes to model methodologies (33.3) 31.6 1.8 0.1
Write offs (0.8) (7.3) (12.5) (20.6)
At 31 January 2022 7,663.9 837.3 408.7 8,909.9
Stage 1 Stage 2 Stage 3 Total
GBP million GBP million GBP million GBP million
Gross loans and advances to customers
At 1 August 2020 5,906.6 1,574.2 374.6 7,855.4
New financial assets originated 6,980.2 - - 6,980.2
Transfers to Stage 1 640.0 (639.6) (11.2) (10.8)
Transfers to Stage 2 (1,054.5) 912.4 (15.0) (157.1)
Transfers to Stage 3 (133.3) (113.4) 178.6 (68.1)
Net transfers between stages and
repayments(1) (547.8) 159.4 152.4 (236.0)
Repayments while stage remain unchanged
and final repayments (4,907.6) (781.4) (106.5) (5,795.5)
Changes to model methodologies 6.3 9.8 (16.0) 0.1
Write offs (3.4) (1.8) (74.1) (79.3)
At 31 July 2021 7,434.3 960.2 330.4 8,724.9
1 Repayments relate only to financial assets which transferred
between stages during the year. Other repayments are shown in the
line below.
Stage 1 Stage 2 Stage 3 Total
GBP million GBP million GBP million GBP million
Impairment provisions on loans
and
advances to customers
At 1 August 2021 80.0 84.2 116.2 280.4
New financial assets originated 18.7 - - 18.7
Transfers to Stage 1 1.6 (12.7) (1.2) (12.3)
Transfers to Stage 2 (14.7) 49.3 (9.3) 25.3
Transfers to Stage 3 (4.5) (20.0) 72.7 48.2
Net remeasurement of expected credit
losses
arising from transfers between
stages and
repayments(1) (17.6) 16.6 62.2 61.2
Repayments and ECL movements while
stage
remained unchanged and final repayments (25.5) (8.5) (8.1) (42.1)
Changes to model methodologies (2.2) (1.1) 1.9 (1.4)
Charge to the income statement (26.6) 7.0 56.0 36.4
Write offs (1.0) (1.2) (10.6) (12.8)
At 31 January 2022 52.4 90.0 161.6 304.0
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 45.0 - - 45.0
Transfers to Stage 1 4.0 (15.7) (1.0) (12.7)
Transfers to Stage 2 (15.7) 63.4 (2.4) 45.3
Transfers to Stage 3 (2.2) (13.3) 67.6 52.1
Net remeasurement of expected credit
losses
arising from transfers between
stages and
repayments(1) (13.9) 34.4 64.2 84.7
Repayments and ECL movements while
stage
remained unchanged and final repayments (9.0) (35.9) (5.0) (49.9)
Changes to model methodologies 0.9 (0.2) (2.8) (2.1)
Charge to the income statement 23.0 (1.7) 56.4 77.7
Write offs (0.6) (1.4) (34.0) (36.0)
At 31 July 2021 80.0 84.2 116.2 280.4
1 Repayments relate only to financial assets which transferred
between stages during the year. Other repayments are shown in the
line below.
Six months ended 31 January Year ended 31 July
2022 2021 2021
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 36.4 51.7 77.7
Amounts written off directly to income statement, net of recoveries
and other costs 10.7 0.2 10.2
47.1 51.9 87.9
Impairment losses relating to other financial assets 1.2 0.9 1.9
Impairment losses on financial assets recognised in income
statement 48.3 52.8 89.8
Impairment losses on financial assets of GBP48.3 million include
GBP39.2 million in relation to Novitas (six months ended 31 January
2021: GBP24.0 million; year ended 31 July 2021: GBP73.2
million).
7. Debt securities
Fair value Fair value
through through other
profit or comprehensive Amortised
loss income cost Total
GBP million GBP million GBP million GBP million
Long trading positions in debt
securities 16.2 - - 16.2
Certificates of deposit - - 299.6 299.6
Sovereign and central bank
debt - 227.6 - 227.6
At 31 January 2022 16.2 227.6 299.6 543.4
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 20.1 - - 20.1
Certificates of deposit - - 264.7 264.7
Sovereign and central bank
debt - 192.5 - 192.5
At 31 July 2021 20.1 192.5 264.7 477.3
-------------
Movements in the book value of sovereign and central bank debt
comprise:
Six months
ended Year ended
31 January 31 July
2022 2021
GBP million GBP million
Sovereign and central bank debt at beginning
of period 192.5 72.2
Additions 60.5 313.7
Redemptions (10.0) (191.0)
Currency translation difference (2.0) (5.2)
Changes in fair value (13.4) 2.8
Sovereign and central bank debt at end of
period 227.6 192.5
8. Equity shares
31 January 31 July
2022 2021
GBP million GBP million
Long trading positions 34.5 30.8
Other equity shares 1.3 1.1
35.8 31.9
9. Goodwill and other intangible assets
Intangible
assets on
Goodwill Software acquisition Total
GBP million GBP million GBP million GBP million
------------ ------------
Cost
At 1 August 2020 153.0 233.3 67.5 453.8
Additions - 20.6 - 20.6
Disposals and write offs - (0.6) - (0.6)
At 31 January 2021 153.0 253.3 67.5 473.8
Additions 2.0 25.6 4.2 31.8
Disposals and write offs (12.1) (6.1) (20.7) (38.9)
------------ ------------
At 31 July 2021 142.9 272.8 51.0 466.7
Additions - 24.2 - 24.2
Disposals and write offs (0.1) (4.2) - (4.3)
------------ ------------
At 31 January 2022 142.8 292.8 51.0 486.6
------------ ------------
Amortisation and impairment
At 1 August 2020 47.9 115.5 50.3 213.7
Amortisation charge for the period - 13.7 1.5 15.2
Disposals and write offs - - - -
At 31 January 2021 47.9 129.2 51.8 228.9
Amortisation charge for the period - 15.7 1.5 17.2
Impairment charge for the period 12.1 - 11.2 23.3
Disposals and write offs (12.1) (2.5) (20.7) (35.3)
At 31 July 2021 47.9 142.4 43.8 234.1
Amortisation charge for the period - 18.3 0.9 19.2
Disposals and write offs - (4.2) - (4.2)
------------ ------------
At 31 January 2022 47.9 156.5 44.7 249.1
------------ ------------
Net book value at 31 January 2022 94.9 136.3 6.3 237.5
------------ ------------
Net book value at 31 July 2021 95.0 130.4 7.2 232.6
------------ ------------
Net book value at 31 January 2021 105.1 124.1 15.7 244.9
------------ ------------
Net book value at 1 August 2020 105.1 117.8 17.2 240.1
------------ ------------
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 2022, GBP0.9 million (six
months ended 31 January 2021: GBP1.5 million; year ended 31 July
2021: GBP3.0 million) of the amortisation charge is included in
amortisation of intangible assets on acquisition and GBP18.3
million (six months ended 31 January 2021: GBP13.7 million; year
ended 31 July 2021: GBP29.4 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 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 and write offs - (0.1) (17.9) - (2.5) (20.5)
At 31 January 2021 26.2 71.8 347.6 0.3 66.7 512.6
Additions 0.4 5.4 36.5 (0.1) 8.8 51.0
Disposals and write offs (1.4) (2.4) (23.4) - (3.8) (31.0)
------------ ------------ ------------ ------------ ------------
At 31 July 2021 25.2 74.8 360.7 0.2 71.7 532.6
Additions 0.7 2.9 33.7 - 6.4 43.7
Disposals and write offs (3.9) (4.3) (12.2) - (5.2) (25.6)
------------ ------------ ------------ ------------ ------------
At 31 January 2022 22.0 73.4 382.2 0.2 72.9 550.7
------------ ------------ ------------ ------------ ------------
Depreciation
At 1 August 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 and write offs - (0.3) (12.4) - (1.8) (14.5)
At 31 January 2021 15.9 45.9 130.0 0.1 18.7 210.6
Depreciation charge for
the period 1.2 3.5 21.9 - 6.3 32.9
Disposals and write offs (1.4) (1.9) (14.1) - (3.4) (20.8)
------------ ------------ ------------ ------------ ------------
At 31 July 2021 15.7 47.5 137.8 0.1 21.6 222.7
Depreciation charge for
the period 1.1 3.6 20.6 0.1 6.3 31.7
Disposals and write offs (3.8) (4.1) (6.1) - (4.0) (18.0)
------------ ------------ ------------ ------------ ------------
At 31 January 2022 13.0 47.0 152.3 0.2 23.9 236.4
------------ ------------ ------------ ------------ ------------
Net book value at 31 January
2022 9.0 26.4 229.9 - 49.0 314.3
------------ ------------ ------------ ------------ ------------
Net book value at 31 July
2021 9.5 27.3 222.9 0.1 50.1 309.9
------------ ------------ ------------ ------------ ------------
Net book value at 31 January
2021 10.3 25.9 217.6 0.2 48.0 302.0
------------ ------------ ------------ ------------ ------------
Net book value at 1 August
2020 10.7 17.2 221.9 - 47.4 297.2
------------ ------------ ------------ ------------ ------------
11. Settlement balances and short positions
31 January 31 July
2022 2021
GBP million GBP million
Settlement balances 880.1 674.2
Short positions held for trading:
Debt securities 6.7 7.0
Equity shares 10.9 9.4
-----------
17.6 16.4
897.7 690.6
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 1.5 50.0 104.0 - - - 155.5
Deposits by customers 126.6 1,623.9 3,497.0 1,165.9 342.0 - 6,755.4
Loans and overdrafts
from banks 57.1 15.1 - - 600.0 - 672.2
Debt securities
in
issue 0.2 31.5 286.6 614.0 577.4 384.7 1,894.4
Subordinated loan
capital(1) - 1.6 - - - 190.4 192.0
At 31 January 2022 185.4 1,722.1 3,887.6 1,779.9 1,519.4 575.1 9,669.5
1 Comprises issuances of GBP200.0 million with contractual
maturity date of 2031 and optional prepayment date of 2026.
Within Between Between Between After
On demand three three months one and two and more than
months and one two years five years five years Total
year
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
Deposits by banks 2.1 37.7 110.8 - - - 150.6
Deposits by customers 576.3 1,547.9 3,343.6 729.8 437.2 - 6,634.8
Loans and overdrafts
from banks 22.7 - - - 490.0 - 512.7
Debt securities
in
issue(1) (0.6) 57.0 161.2 655.2 327.5 665.2 1,865.5
Subordinated loan
capital(2) 0.8 0.6 - - - 221.3 222.7
At 31 July 2021 601.3 1,643.2 3,615.6 1,385.0 1,254.7 886.5 9,386.3
1 Debt securities in issue of GBP(0.6) million due on demand
include an adjustment relating to the group's fair value
hedges.
2 Comprises issuances of GBP175.0 million and GBP45.0 million
with contractual maturity dates of 2027 and 2026 and optional
prepayment
dates of 2022 and 2021 respectively.
Assets pledged and received as collateral
The group pledges assets for repurchase agreements and
securities borrowing agreements which are generally conducted under
terms that are customary to standard borrowing contracts.
The group is a participant of the Bank of England's Term Funding
Scheme with Additional Incentives for SMEs ("TFSME"). Under these
schemes, asset finance loan receivables of GBP563.1 million (31
July 2021: GBP571.3 million), UK gilts with a market value of
GBP290.7 million (31 July 2021: GBP90.2 million) and retained notes
relating to Motor Finance loan receivables of GBP45.6 million (31
July 2021: GBP72.1 million) were positioned as collateral with the
Bank of England, against which GBP600.0 million of cash was drawn
(31 July 2021: GBP490.0 million).
The term of these transactions is four years from the date of
each draw down 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
GBP1,313.1 million (31 July 2021: GBP1,386.0 million) of its
insurance premium and motor loan receivables in return for cash and
asset-backed securities in issue of GBP886.6 million (31 July 2021:
GBP915.7 million). This includes the GBP45.6 million (31 July 2021:
GBP72.1 million) retained notes positioned as collateral with the
Bank of England. As the group has retained exposure to
substantially all the credit risk and rewards of the residual
benefit of the underlying assets it continues to recognise these
assets in loans and advances to customers in its consolidated
balance sheet.
13. Capital
The table below summarises the composition of regulatory capital
and Pillar 1 risk weighted assets at those financial period ends.
The information presented in this note is outside the scope of the
independent review performed by PricewaterhouseCoopers LLP.
31 January 31 July
2022 2021
GBP million GBP million
Common equity tier 1 ("CET1") capital
Called up share capital 38.0 38.0
Retained earnings(1) 1,587.9 1,555.5
Other reserves recognised for CET1 capital 13.1 13.1
Regulatory adjustments to CET1 capital
Intangible assets, net of associated deferred tax liabilities(2) (236.0) (180.7)
Foreseeable dividend(3) (46.2) (62.7)
Investment in own shares (41.5) (36.0)
Pension asset, net of associated deferred tax liabilities (6.6) (5.4)
Prudent valuation adjustment (0.3) (0.3)
IFRS 9 transitional arrangements(4) 97.3 117.8
CET1 capital 1,405.7 1,439.3
Tier 2 capital - subordinated debt 200.0 223.4
Total regulatory capital(5) 1,605.7 1,662.7
Risk weighted assets (notional)(5)
Credit and counterparty risk 8,132.8 7,945.8
Operational risk(6) 1,038.5 1,038.5
Market risk(6) 135.0 121.0
9,306.3 9,105.3
CET1 capital ratio(5) 15.1% 15.8%
Total capital ratio(5) 17.3% 18.3%
1 Retained earnings for the period ended 31 January 2022 include
all profits (both verified and unverified) for the six month
period.
2 In line with the amended Capital Requirements Regulation ("CRR
II"), effective on 23 December 2020, both the CET1 capital ratio
and total capital ratio at 31 July 2021 included a c.50bps benefit
related to software assets exempt from the deduction requirement
for intangible assets from CET1. This benefit has been reversed
with a corresponding reduction of the CET1 and total capital ratio
upon implementation of PS17/21 on 1 January 2022.
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 2022 a foreseeable
dividend has been determined based on the average payout ratio over
the previous three years applied to the retained earnings for the
period. For 31 July 2021 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
CRR transitional and qualifying own funds arrangements. At 31
January 2022 the fully loaded CET1 capital ratio is 14.2% (31 July
2021: 14.2% excluding the benefit from the treatment of software
assets) and total capital ratio is 16.4% (31 July 2021: 16.7%
excluding the benefit from the treatment of software assets).
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
2022 2021
GBP million GBP million
Equity 1,608.2 1,569.3
Regulatory adjustments to CET1 capital:
Intangible assets, net of associated
deferred tax liabilities (236.0) (180.7)
Foreseeable dividend(1) (46.2) (62.7)
IFRS 9 transitional arrangements 97.3 117.8
Pension asset, net of associated deferred
tax liabilities (6.6) (5.4)
Prudent valuation adjustment (0.3) (0.3)
Other reserves not recognised for CET1
capital:
Cash flow hedging reserve (10.7) 0.3
Non-controlling interests - 1.0
CET1 capital 1,405.7 1,439.3
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 2022 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 2021 a foreseeable dividend was determined as the proposed
final dividend.
The following table shows the movement in CET1 capital during
the period:
Year
Six months ended ended
31 January 31 July
2022 2021 2021
GBP million GBP million GBP million
CET1 capital at beginning of period 1,439.3 1,254.0 1,254.0
Profit in the period attributable to shareholders 95.1 94.8 202.1
Dividends paid and foreseen (46.2) (51.2) (89.5)
Change in software assets treatment(1) (50.2) 45.1 50.2
IFRS 9 transitional arrangements (20.5) 18.8 17.5
(Increase)/decrease in intangible assets, net of
associated deferred tax liabilities (5.0) (5.0) 6.0
Other movements in reserves recognised for CET1
capital - (1.2) 0.9
Other movements in adjustments to CET1 capital (6.8) (5.1) (1.9)
CET1 capital at end of period 1,405.7 1,350.2 1,439.3
1 In line with the amended CRR ("CRR II"), effective on 23
December 2020, both the CET1 capital ratio and total capital ratio
at 31 July 2021 included a c.50bps benefit related to software
assets exempt from the deduction requirement for intangible assets
from CET1. This benefit has been reversed with a corresponding
reduction of the CET1 and total capital ratio upon implementation
of PS17/21 on 1 January 2022.
14. Contingent liabilities
Financial Services Compensation Scheme ("FSCS")
As disclosed in note 23 of the Annual Report 2021, 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 repaid 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 2021 that
could have a material effect on the financial position and
performance of the group in the six months to 31 January 2022.
16. Consolidated cash flow statement reconciliation
Year
Six months ended ended
31 January 31 July
2022 2021 2021
GBP million GBP million GBP million
(a) Reconciliation of operating profit before
tax to net cash
inflow from operating activities
Operating profit before tax 128.9 127.0 265.2
Tax paid (38.2) (24.0) (69.7)
Depreciation and amortisation 50.9 50.0 123.4
(Increase)/decrease in:
Interest receivable and prepaid expenses 1.5 (1.1) 4.6
Net settlement balances and trading positions (18.3) (36.2) 8.5
Net loans to/from money broker against stock
advanced 27.0 31.6 (23.2)
(Decrease)/increase in interest payable and
accrued expenses (62.5) (12.2) 27.2
Net cash inflow from trading activities 89.3 135.1 336.0
(Increase)/decrease in:
Loans and advances to banks not repayable on
demand (1.8) 1.7 9.6
Loans and advances to customers (199.6) (385.2) (906.6)
Assets held under operating leases (26.0) (18.1) (43.9)
Certificates of deposit (34.9) 106.4 21.2
Sovereign and central bank debt (52.5) (23.7) (126.6)
Other assets less other liabilities 25.2 32.7 74.8
(Decrease)/increase in:
Deposits by banks 8.2 (9.4) 3.9
Deposits by customers 132.1 537.1 745.1
Loans and overdrafts from banks 159.5 38.8 14.8
Issuance/(redemption) of debt securities 71.3 317.8 (9.2)
Net cash inflow/(outflow) from operating activities 170.8 733.2 119.1
(b) Analysis of net cash outflow in respect of
the purchase of subsidiaries and equity shares
held for investment
Cash consideration paid - (0.4) (2.9)
(c) Analysis of net cash inflow in respect of
the sale of subsidiaries and discontinued
operations
Cash consideration received 0.1 2.1 2.3
31 January 31 July
2022 2021 2021
GBP million GBP million GBP million
(d) Analysis of cash and cash equivalents(1)
Cash and balances at central banks 1,160.2 1,894.6 1,314.7
Loans and advances to banks repayable on demand 315.8 181.5 121.9
1,476.0 2,076.1 1,436.6
1 Excludes Bank of England cash reserve account and amounts held as collateral.
During the period ended 31 January 2022, the non-cash changes on
debt financing amounted to GBP3.8 million (31 January 2021: GBP6.5
million; 31 July 2021: GBP18.2 million) arising from interest
accretion and fair value hedging movements.
17. Fair value of financial assets and liabilities
The fair values of the group's financial assets and liabilities
are not materially different from their carrying values. The main
differences are as follows.
31 January 2022 31 July 2021
Fair value Carrying Fair Carrying
value value value
GBP million GBP million GBP million GBP million
------------ ------------
Subordinated loan capital 194.1 192.0 226.5 222.7
Debt securities in issue 1,879.1 1,894.4 1,908.9 1,865.5
The group holds financial instruments that are measured at fair
value subsequent to initial recognition. Each instrument has been
categorised within one of three levels using a fair value hierarchy
that reflects the significance of the inputs used in making the
measurements. These levels are based on the degree to which the
fair value is observable and are defined in note 28 "Financial risk
management" of the Annual Report 2021. 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 2022
Assets
Debt securities:
Long trading positions in debt securities 14.5 1.7 - 16.2
Sovereign and central bank debt 227.6 - - 227.6
Equity shares 8.0 27.5 0.3 35.8
Derivative financial instruments - 31.1 - 31.1
Contingent consideration - - - -
250.1 60.3 0.3 310.7
-----------
Liabilities
Short positions:
Debt securities 5.8 0.9 - 6.7
Equity shares 4.9 5.9 0.1 10.9
Derivative financial instruments - 47.2 - 47.2
Contingent consideration - - 2.9 2.9
10.7 54.0 3.0 67.7
-----------
Level 1 Level 2 Level 3 Total
GBP million GBP million GBP million GBP million
At 31 July 2021
Assets
Debt securities:
Long trading positions in debt securities 19.0 1.1 - 20.1
Sovereign and central bank debt 192.5 - - 192.5
Equity shares 6.2 25.4 0.3 31.9
Derivative financial instruments - 18.3 - 18.3
Contingent consideration - - 0.1 0.1
217.7 44.8 0.4 262.9
----------- -----------
Liabilities
Short positions:
Debt securities 5.7 1.3 - 7.0
Equity shares 3.2 6.2 - 9.4
Derivative financial instruments - 21.3 - 21.3
Contingent consideration - - 3.0 3.0
8.9 28.8 3.0 40.7
----------- -----------
There is no significant change to the valuation methodologies
relating to Level 2 and 3 financial instruments disclosed in note
28 "Financial risk management" of the Annual Report 2021.
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 2022 (six months ended 31
January 2021: none).
There were no significant movements in financial instruments
categorised as Level 3 during the six months ended 31 January 2022
(six months ended 31 January 2021: none).
There were no gains or losses recognised in the consolidated
income statement relating to Level 3 financial instruments held at
31 January 2022 (31 January 2021: GBP0.5 million loss; 31 July
2021: GBP0.1 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.
Covid-19 related forbearance
Since the onset of the global pandemic the resulting impact on
our customers led to the granting of support by way of concessions
classified as Covid-19-related. Such concessions took varying forms
across our lending businesses, for example payment holidays and fee
concessions. In these circumstances the granting of such a
concession did not in itself constitute a significant increase in
credit risk and expert judgement was applied to our typical staging
criteria, with an approach tailored to each of our lending
businesses accordingly.
The cure periods and approach associated with these concessions
remain consistent with those set out on page 181 of the Annual
Report 2021.
Non-Covid-19 forbearance
The Bank has historically offered a range of concessions to
support customers which vary depending on the product and the
customer's status. Such concessions include an extension outside
terms (for example a higher loan to value or overpayments) and
refinancing, which may incorporate an extension of the loan tenor
and capitalisation of arrears. Furthermore, other forms of
forbearance such as a moratorium, covenant waivers, and rate
concessions are also offered.
Loans are classified as forborne at the time a customer in
financial difficulty is granted a concession and the loan will
remain treated and recorded as forborne until exit conditions are
met.
The forbearance approach, including cure periods and exit
conditions remain consistent with those set out on page 181 of the
Annual Report 2021.
Forbearance analysis
At 31 January 2022, the gross carrying amount of loans with
forbearance measures decreased by GBP266.6 million to GBP348.4
million (31 July 2021: GBP615.0 million) driven by continued
repayment, curing, and settlement of Covid-19 forborne loans. The
Covid-19 population has reduced to GBP179.8 million (31 July 2021:
GBP454.8 million), with Covid-19 concessions no longer offered,
except for a small number of Property loans that drew before or
during the first national lockdown and may have been subject to
construction delays.
Covid-19 forbearance continues to account for the majority of
overall forbearance (31 January 2022: 51.6% of the forborne book;
31 July 2021: 74.0%). The reduction reflects the continued
performance of this cohort, alongside new forbearance requests
being classified as non-Covid-19.
An analysis of forborne loans as at 31 January 2022 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 2022 8,909.9
Covid-19 forbearance 179.8 2.0% 23.1 4,897
Non-Covid-19 forbearance 168.6 1.9% 44.5 15,522
8,909.9 348.4 3.9% 67.6 20,419
31 July 2021 8,724.9
Covid-19 forbearance 454.8 5.2% 47.3 17,674
Non-Covid-19 forbearance 160.2 1.8% 35.5 12,679
8,724.9 615.0 7.0% 82.8 30,353
The following is a breakdown of forborne loans by segment split
by those driven by Covid-19 compared to concessions that have
arisen in the normal course of business:
31 January 2022 31 July 2021
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 86.0 17.4 103.4 287.4 19.8 307.2
Retail 18.8 17.5 36.3 49.2 9.2 58.4
Property 75.0 133.7 208.7 118.2 131.2 249.4
179.8 168.6 348.4 454.8 160.2 615.0
The following is a breakdown of the number of customers
supported by segment:
31 January 2022 31 July 2021
Total number of customers Non- Total number of customers
Covid-19 Non-Covid-19 supported Covid-19 Covid-19 supported
Commercial 876 116 992 2,291 136 2,427
Retail 4,001 15,344 19,345 15,333 12,485 27,818
Property 20 62 82 50 58 108
4,897 15,522 20,419 17,674 12,679 30,353
The following is a breakdown of forborne loans by concession
type split by those driven by Covid-19 compared to concessions that
have arisen in the normal course of business:
31 January 2022 31 July 2021
Non- Total Non- Total
Covid-19 Covid-19 forborne loans Covid-19 Covid-19 forborne loans
Extension outside terms 75.6 117.3 192.9 123.5 121.9 245.4
Refinancing 0.3 4.6 4.9 1.2 5.3 6.5
Moratorium 103.9 26.2 130.1 329.7 16.1 345.8
Other modifications - 20.5 20.5 0.4 16.9 17.3
179.8 168.6 348.4 454.8 160.2 615.0
Government lending schemes
In addition to the Covid-19 specific forbearance measures
covered in this note, as an accredited lender, we offered 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
a small number of facilities under the Bounce Back Loan Scheme
("BBLS"), thereby enabling us to maximise our support for small
businesses. We saw strong demand for these loans with 6,449 loans
totalling GBP1,278.4 million approved. As at 31 January 2022, there
are 5,648 remaining facilities, with balances of GBP911.0
million.
We also have accreditation to offer products under the Recovery
Loan Scheme ("RLS"), and schemes in the Republic of Ireland. To
date, 234 applications totalling GBP115.1 million are live, with a
further 92 applications totalling GBP56.4 million received and
approved.
We maintain a regular reporting cycle of these facilities to
monitor performance. To date, a small number of claims have been
made under the government guarantee.
19. Interest rate risk
The group's exposure to interest rate risk arises in the Banking
division, which this note accordingly relates to. Interest rate
risk in the group's other divisions is considered to be immaterial.
The group has a simple and transparent balance sheet and a low
appetite for interest rate risk which is limited to that required
to operate efficiently.
The group's governance, policy and approach in relation to
interest rate risk remains unchanged from that described on page
186 of the Annual Report 2021.
The table below sets out the assessed impact on our base case
(no stress) Earnings at Risk ("EaR") due to a parallel shift in
interest rates:
31 January 31 July
2022 2021
GBP million GBP million
0.5% increase (9.1) (11.6)
0.5% decrease 10.8 8.3
EaR at 31 January 2022 has reduced to GBP9.1m under a 0.5%
increase in interest rate due to a reduction in basis risk
following the group's IBOR transition and a reduction in
optionality following the base rate rise in December 2021.
The table below sets out the assessed impact on our base case
Economic Value ("EV") due to a shift in interest rates:
31 January 31 July
2022 2021
GBP million GBP million
0.5% increase (2.3) (4.2)
0.5% decrease 4.3 4.3
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.
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March 15, 2022 03:00 ET (07:00 GMT)
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