TIDMCBG
RNS Number : 6056N
Close Brothers Group PLC
26 September 2023
Close Brothers T +44 (0)20 7655
Group plc 3100
10 Crown Place E enquiries@closebrothers.com
London EC2A 4FT W www.closebrothers.com
Registered in England
No. 520241
Preliminary Results for the year ended 31 July 2023
26 September 2023
Adrian Sainsbury, Chief Executive, said:
"We have performed well in the second half, with an acceleration
of loan book growth, strong margins and a stable credit performance
in our Banking business. We continued to attract new client assets
in CBAM, with strong net inflows, although Winterflood's
performance remains impacted by subdued trading activity. Despite
the second half momentum, our financial results for the full year
were significantly impacted by provisions in relation to Novitas
announced in our Half Year 2023 results in March.
Our through-the-cycle business model and financial strength mean
we can support customers even during these uncertain times. By
leveraging our long-term relationships, the deep expertise of our
people and our customer-centric approach we can deliver disciplined
growth and are well positioned to resume our long-term track record
of earnings growth and returns, building on the second half's
momentum and a good start to the 2024 financial year."
Financial performance in the year
-- Statutory operating profit before tax decreased to GBP112.0
million (2022: GBP232.8 million), including GBP114.6 million of
provisions in relation to Novitas already reported in the first
half. Excluding Novitas, adjusted operating profit decreased to
GBP220.1 million (2022: GBP274.1 million) reflecting
forward-looking impairment provisions and lower income from
Winterflood
-- We achieved 3% income growth in Banking reflecting good loan
book growth and a strong net interest margin of 7.7% (2022: 7.8%).
Pre-provisions, adjusted operating profit in Banking decreased 2%
(up 2% excluding Novitas) to GBP324.1 million as income growth was
offset by inflationary pressures and continued investment in the
business
-- Whilst we have not seen a significant impact from the
external environment on credit performance, this uncertainty is
reflected in higher forward-looking impairments. As a result, the
bad debt ratio (excluding Novitas) was 0.9% (2022: 0.5%), slightly
below our long-term average. The bad debt ratio including Novitas
increased to 2.2% (2022: 1.2%)
-- The loan book grew 5% to GBP9.5 billion (31 July 2022: GBP9.1
billion), with growth of 8% excluding our businesses in run-off, as
we remained committed to lending consistently to customers in all
market conditions
-- We accelerated our growth strategy in Close Brothers Asset
Management ("CBAM") and delivered strong net inflows of 9%, with a
significant contribution from new hires
-- Winterflood's performance was impacted by a continued
slowdown in trading activity and challenging market conditions, but
it remains well positioned to benefit when market conditions
improve
-- Total funding increased 7% to GBP12.4 billion (31 July 2022:
GBP11.6 billion), as we sought to grow our retail deposit base and
optimise our funding mix
-- Our Common Equity Tier 1 ("CET1") ratio was 13.3% at 31 July
2023 (31 July 2022: 14.6%), significantly above our minimum
regulatory requirement of 9.5%
-- We propose a final dividend of 45.0p per share, resulting in
a full-year dividend per share of 67.5p (2022: 66.0p). This
reflects our underlying performance and the Board's confidence in
the group's outlook
Moving forward on the delivery of our strategic priorities
-- Our growth initiatives are delivering a significant
contribution to loan book growth. We lent GBP164 million in the
first year against our ambition to provide GBP1 billion of funding
for battery electric vehicles by 2027. Our initiatives in the
Commercial business are progressing well, with the recently hired
specialist lending teams having written healthy levels of new
business and building strong pipelines. We saw good demand for new
offerings in Property Finance, including our specialist buy-to-let
proposition to existing bridging finance customers
-- In CBAM, our hiring strategy is proving successful with a
strong pipeline and new bespoke investment managers significantly
contributing to net inflows. Winterflood Business Services ("WBS")
continued to grow with total assets under administration ("AuA") up
79% to GBP12.9 billion, above the previous GBP10 billion target
-- We have a number of strategic cost management initiatives in
progress and are evaluating further opportunities to improve
efficiency. We remain focused on achieving positive operating
leverage over the medium term
-- We remain committed to optimising further our capital
structure, targeting a CET1 capital ratio range of 12% to 13% over
the medium term, in line with our capital management framework. The
Board will assess the potential for further distributions to
shareholders based on future opportunities
Outlook
We are making the most of opportunities and are encouraged by
the momentum generated in Banking in the second half. We have seen
a good start to the 2024 financial year and our underlying business
is well positioned to maintain stable returns this year, as we
sustain growth momentum and pricing discipline, with a resilient
credit performance, despite the near-term cost pressure.
Our proven model and financial strength leave us well placed to
resume our track record of earnings growth and returns by focusing
on disciplined growth, cost efficiency and capital
optimisation.
Key Financials (1)
Full year Full year Change
2023 2022 %
------------------------------------------ --------- --------- ------
Adjusted operating profit (2) GBP113.5m GBP234.8m (52)
------------------------------------------ --------- --------- ------
Adjusted operating profit, pre provisions GBP317.6m GBP338.1m (6)
------------------------------------------ --------- --------- ------
Statutory operating profit before tax GBP112.0m GBP232.8m (52)
------------------------------------------ --------- --------- ------
Adjusted basic earnings per share (3) 55.1p 111.5p (51)
------------------------------------------ --------- --------- ------
Basic earnings per share (3) 54.3p 110.4p (51)
------------------------------------------ --------- --------- ------
Ordinary dividend per share 67.5p 66.0p 2
------------------------------------------ --------- --------- ------
Return on opening equity 5.0% 10.6%
------------------------------------------ --------- --------- ------
Return on average tangible equity 5.9% 12.2%
------------------------------------------ --------- --------- ------
Net interest margin 7.7% 7.8%
------------------------------------------ --------- --------- ------
Bad debt ratio 2.2% 1.2%
------------------------------------------ --------- --------- ------
31 July 31 July Change
2023 2022 %
------------------------------------------ --------- --------- ------
Loan book GBP9.5bn GBP9.1bn 5
------------------------------------------ --------- --------- ------
Total client assets GBP17.3bn GBP16.6bn 5
------------------------------------------ --------- --------- ------
CET1 capital ratio (transitional) 13.3% 14.6%
------------------------------------------ --------- --------- ------
Total capital ratio (transitional) 15.3% 16.6%
------------------------------------------ --------- --------- ------
Key Financials (Excluding Novitas)
Full year Full year Change
2023 2022 %
------------------------------------------ --------- --------- ------
Adjusted operating profit GBP220.1m GBP274.1m (20)
------------------------------------------ --------- --------- ------
Adjusted operating profit, pre provisions GBP307.4m GBP316.7m (3)
------------------------------------------ --------- --------- ------
Net interest margin 7.6% 7.5%
------------------------------------------ --------- --------- ------
Bad debt ratio 0.9% 0.5%
------------------------------------------ --------- --------- ------
31 July 31 July Change
2023 2022 %
------------------------------------------ --------- --------- ------
Loan book GBP9.5bn GBP8.9bn 6
------------------------------------------ --------- --------- ------
1. Please refer to definitions on pages 22 to 24.
2. Adjusted operating profit is stated before amortisation and
impairment of intangible assets on acquisition, goodwill
impairment, exceptional item and tax.
3. Refer to note 4 for the calculation of basic and adjusted
earnings per share.
Enquiries
Sophie Gillingham Close Brothers Group plc 020 3857 6574
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Camila Sugimura Close Brothers Group plc 020 3857 6577
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Kimberley Taylor Close Brothers Group plc 020 3857 6233
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Ingrid Diaz Close Brothers Group plc 020 3857 6088
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Sam Cartwright Maitland 07827 254 561
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A virtual presentation to analysts and investors will be held
today at 9.30 am BST followed by a Q&A session. A webcast and
dial-in facility will be available by registering at
https://webcasts.closebrothers.com/results/PrelimResults2023 .
Basis of Presentation
Results are presented both on a statutory and an adjusted basis
to aid comparability between periods. Adjusted measures are
presented on a basis consistent with prior periods and exclude
amortisation of intangible assets on acquisition, to present the
performance of the group's acquired businesses consistent with its
other businesses; and any exceptional and other adjusting items
which do not reflect underlying trading performance. Please refer
to note 2 for further details on items excluded from the adjusted
performance metrics.
Financial Calendar (Provisional)
The enclosed provisional financial calendar below is updated on
a regular basis throughout the year. Please refer to our website
www.closebrothers.com for up-to-date details. Going forward, the
group has decided to discontinue the issuance of pre-close trading
updates in order to align more closely with prevailing market and
industry practice.
Event Date
---------------------------- ---------------
First quarter trading update November 2023
---------------------------- ---------------
16 November
Annual General Meeting 2023
---------------------------- ---------------
24 November
Final dividend payment 2023
---------------------------- ---------------
Half year end 31 January 2024
---------------------------- ---------------
Interim results March 2024
---------------------------- ---------------
Third quarter trading update May 2024
---------------------------- ---------------
Financial year end 31 July 2024
---------------------------- ---------------
Preliminary results September 2024
---------------------------- ---------------
About Close Brothers
Close Brothers is a leading UK merchant banking group providing
lending, deposit taking, wealth management services and securities
trading. We employ approximately 4,000 people, principally in the
United Kingdom and Ireland. Close Brothers Group plc is listed on
the London Stock Exchange and is a constituent of the FTSE 250.
Chief Executive's Statement
We have performed well in the second half, with an acceleration
of loan book growth, strong margins and a stable credit performance
in our Banking business. We continued to attract new client assets
in CBAM, with strong net inflows, although Winterflood's
performance remains impacted by subdued trading activity. Despite
the second half momentum, our financial results for the full year
were significantly impacted by provisions in relation to Novitas
announced in our Half Year 2023 results in March.
This year has been marked by a challenging market backdrop,
where mixed economic conditions in the UK have created substantial
uncertainty for our consumer and SME customers. Although demand
levels have remained robust, the uncertain external environment led
to higher forward-looking impairment provisions and difficult
conditions for our market-facing businesses, CBAM and
Winterflood.
Whilst headwinds facing SME firms have abated somewhat,
uncertainty and challenges for these firms persist, with interest
rates rises and cost of funds remaining a key concern for many
business owners. We recently published the Close Brothers Asset
Finance Business Sentiment Index, which provides insights about our
core customers' plans for the future. The research shows that SME
business confidence continues to recover, and we are reassured to
see a reversal of 2022's downward trends, with a cautious optimism
continuing to return. Overall, the appetite to invest remained
stable, with three-quarters of the firms aiming to seek funding for
investment in the next 12 months.
We are confident that we have the right model to thrive in this
environment and are confident in the opportunity it creates for us
to lean in and support consumers and SME businesses.
Our through-the-cycle business model and financial strength mean
we can support customers even during these uncertain times. By
leveraging our long-term relationships, the deep expertise of our
people and our customer-centric approach we can deliver disciplined
growth and are well positioned to resume our long-term track record
of earnings growth and returns, building on the second half's
momentum and a good start to the 2024 financial year.
Financial Performance
The financial results were impacted by a significant increase in
provisions in relation to Novitas incurred in the first half, as we
have taken measures to address the issues relating to that
business. As a result, statutory operating profit before tax
decreased to GBP112.0 million (2022: GBP232.8 million). While we
are disappointed with these developments and the impact they have
had on our performance this year, the financial strength of the
group leaves us well placed to move forward on the delivery of our
strategic priorities. We evaluate continuously our businesses and
initiatives against a set of criteria, our "Model Fit Assessment
Framework", to ensure they are aligned with the key attributes of
our model that have and will continue to generate long-term value.
We are confident that there is no read-across from Novitas to other
books in our portfolio and our prudent underwriting continues to be
reflected in the asset quality and performance of the rest of our
loan book.
In Banking, excluding Novitas, profit performance primarily
reflected good loan book growth of 6% and strong net interest
margin of 7.6%, more than offset by higher impairment charges to
take into account the uncertain macroeconomic outlook and increased
costs related to our investment programmes and inflation, including
wage awards. Our Asset Management division delivered strong net
inflows of 9%, although profit reduced, reflecting wider market
conditions and costs related to our successful hiring strategy, as
we accelerated our efforts to grow CBAM. Although performance at
Winterflood reflected the continuation of challenging trading
conditions, we remain confident in the track record of our trading
business and are well positioned to retain our market position and
benefit when investor appetite returns. Winterflood has made good
progress on the diversification of its revenue streams and is
exploring growth opportunities to balance the cyclicality seen in
the trading business.
Our capital, funding and liquidity positions remained strong.
The events impacting the global banking sector earlier this year
highlighted the benefits of our prudent approach to managing
financial resources, with our diverse funding base enabling us to
adapt our position, based on market conditions and demand. Our
funding base was further strengthened by the successful issuance of
a GBP250 million senior unsecured bond in June 2023, and we
maintained our prudent liquidity position, with the 12-month
average liquidity coverage ratio ("LCR") of 1,143% substantially
above regulatory requirements. Our common equity tier 1 ("CET1")
capital ratio was 13.3% at 31 July 2023 (31 July 2022: 14.6%),
significantly above the applicable minimum regulatory requirement
of 9.5%. We remain committed to optimising further our capital
structure, targeting a CET1 capital ratio range of 12% to 13% over
the medium term. This will allow the group to maintain a buffer to
minimum regulatory requirements while also retaining flexibility to
grow the business. We remain encouraged by the available
opportunities to deploy capital to deliver disciplined growth,
which remains a key strategic priority. We will continue to assess
the potential for further distributions to shareholders based on
future opportunities.
We are pleased to propose a final dividend of 45.0p per share,
resulting in a full-year dividend per share of 67.5p (2022: 66.0p).
This reflects our underlying performance and the Board's confidence
in the group's outlook. We remain committed to our dividend policy,
which aims to provide sustainable dividend growth year-on-year,
while maintaining a prudent level of dividend cover.
Well placed to resume our track record of earnings growth and
returns
We have made good progress against our strategic priorities and
remain committed to resuming our track record of earnings growth
and returns.
Our investment programmes are progressing well and enable us to
protect the key attributes of our business model, maintain
regulatory compliance and enhance efficiency, as well as
future-proof our income generation capabilities. We continue to see
tangible benefits from these investments. We advanced our strategic
cost management initiatives, including our technology
transformation programme focused on the rationalisation of IT
infrastructure, as well as making operational enhancements in
Retail. These actions aim to create capacity to accommodate growth,
inflation and investment to support our business. We continue to
evaluate additional opportunities for efficiency with a view to
achieving positive operating leverage over the medium term.
Furthermore, we undertook work across our businesses to ensure
readiness for the implementation of the FCA's Consumer Duty, which
came into force on 31 July, completing product reviews and
enhancing frameworks to incorporate the new requirements.
We remain focused on delivering disciplined growth and continue
to review a range of opportunities in line with our model, with our
growth initiatives delivering a significant contribution to loan
book growth in the year. Our recently hired agricultural equipment
and materials handling teams in Asset Finance have written healthy
levels of new business and are building strong pipelines. In
Invoice Finance, we participated in our first syndication deal and
the newly hired team, providing bespoke term loan structures to SME
clients, closed their first deal this year. We saw good demand for
the new initiatives in Property Finance, including our specialist
buy-to-let proposition to existing bridging finance customers. We
are delighted to have recently announced our agreement to acquire
Bluestone Motor Finance (Ireland) DAC, which is aligned to our
commitment to Ireland as a strategic market and provides a platform
for us to build our Irish Motor Finance business. Following last
year's announcement of our initial green growth ambition of
providing funding for GBP1.0 billion of battery electric vehicles
by 2027, we are pleased to have funded GBP164 million in the first
year. These achievements are examples of our relationships,
expertise and customer-centric approach being utilised to deliver
disciplined growth.
In CBAM, our hiring strategy is proving successful, with a
strong pipeline of new hires and significant contribution from new
portfolio managers to the inflows. We also continue to build our
pipeline of in-fill acquisitions to support the long-term growth
potential of the business. In addition, WBS exceeded the targeted
GBP10 billion of total AuA and is well positioned for further
growth, both organically and supported by a solid pipeline of
clients. We expect WBS to grow AuA to over GBP20 billion by
2026.
We continued to make progress against the group's sustainability
agenda. We set our group-wide climate commitment, becoming
signatories to the Net Zero Banking Alliance and Net Zero Asset
Managers initiatives in September 2022, and I look forward to
sharing our initial intermediate 2030 targets for the most
carbon-intensive sectors in our loan book over the coming months.
We remain focused on improving the quality of our emissions
reporting, including our financed emissions.
Our people
We consistently focus on employee engagement to support the
wellbeing and needs of our colleagues. I am delighted with the
positive scores achieved in our most recent employee opinion
survey, reflecting our teams' strong sense of belonging and our
distinctive culture. I am particularly impressed that we have
retained our high engagement score of 86%. Our colleagues play a
key role in driving our organisation towards lasting success, and I
would like to extend my gratitude to all our people for their
dedication and resilience, especially in the face of the financial
pressures brought about by higher inflation and the cost of living.
Together, I am confident that we will continue to deliver on our
purpose to help the people and businesses of Britain thrive over
the long term.
Outlook
We are making the most of opportunities and are encouraged by
the momentum generated in Banking in the second half. We have seen
a good start to the 2024 financial year and our underlying business
is well positioned to maintain stable returns this year, as we
sustain growth momentum and pricing discipline, with a resilient
credit performance, despite the near-term cost pressure.
Our proven model and financial strength leave us well placed to
resume our track record of earnings growth and returns by focusing
on disciplined growth, cost efficiency and capital
optimisation.
Overview of Financial Performance
Summary Group Income Statement(1)
2023 2022 Change
GBP million GBP million %
------------------------------------------ ------------ ------------ ------
Operating income 932.6 936.1 -
------------------------------------------ ------------ ------------ ------
Operating expenses (615.0) (598.0) 3
------------------------------------------ ------------ ------------ ------
Impairment losses on financial assets (204.1) (103.3) 98
------------------------------------------ ------------ ------------ ------
Adjusted operating profit 113.5 234.8 (52)
------------------------------------------ ------------ ------------ ------
Banking 120.1 227.2 (47)
------------------------------------------ ------------ ------------ ------
Commercial 15.9 91.0 (83)
------------------------------------------ ------------ ------------ ------
Of which: Novitas (106.6) (39.3) (171)
------------------------------------------ ------------ ------------ ------
Retail 34.7 61.0 (43)
------------------------------------------ ------------ ------------ ------
Property 69.5 75.2 (8)
------------------------------------------ ------------ ------------ ------
Asset Management 15.9 21.7 (27)
------------------------------------------ ------------ ------------ ------
Winterflood 3.5 14.1 (75)
------------------------------------------ ------------ ------------ ------
Group (26.0) (28.2) (8)
------------------------------------------ ------------ ------------ ------
Amortisation and impairment of intangible
assets on acquisition (1.5) (2.0) (25)
------------------------------------------ ------------ ------------ ------
Statutory operating profit before tax 112.0 232.8 (52)
------------------------------------------ ------------ ------------ ------
Tax (30.9) (67.6) (54)
------------------------------------------ ------------ ------------ ------
Profit after tax 81.1 165.2 (51)
------------------------------------------ ------------ ------------ ------
Profit attributable to shareholders 81.1 165.2 (51)
------------------------------------------ ------------ ------------ ------
Adjusted basic earnings per share(2) 55.1p 111.5p (51)
------------------------------------------ ------------ ------------ ------
Basic earnings per share(2) 54.3p 110.4p (51)
------------------------------------------ ------------ ------------ ------
Ordinary dividend per share 67.5p 66.0p (2)
------------------------------------------ ------------ ------------ ------
Return on opening equity 5.0% 10.6%
------------------------------------------ ------------ ------------ ------
Return on average tangible equity 5.9% 12.2%
------------------------------------------ ------------ ------------ ------
1. Adjusted measures are presented on a basis consistent with
prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the
reconciliation between operating and adjusted measures can be found
in note 2.
2. Refer to note 4 for the calculation of basic and adjusted
earnings per share.
Financial Performance
Adjusted operating profit and returns
Statutory operating profit before tax decreased to GBP112.0
million (2022: GBP232.8 million), primarily driven by higher
impairment charges in relation to Novitas, with adjusted operating
profit down 52% to GBP113.5 million (2022: GBP234.8 million).
Excluding Novitas, adjusted operating profit reduced 20% to
GBP220.1 million (2022: GBP274.1 million), mainly reflecting an
increase in impairment charges and a reduction in income in
Winterflood.
Return on average tangible equity ("RoTE") reduced to 5.9%
(2022: 12.2%), with the loss after tax recorded by Novitas reducing
the group's RoTE by 6.1%.
Adjusted operating profit in the Banking division reduced 47% to
GBP120.1 million (2022: GBP227.2 million), primarily reflecting
higher impairment charges related to Novitas. Growth in income,
driven by good loan book growth and a strong net interest margin,
was offset by higher costs as we continue to invest in the business
and to reflect the inflationary environment. In the Asset
Management division, we delivered strong net inflows, although
adjusted operating profit reduced 27% to GBP15.9 million (2022:
GBP21.7 million), driven by a modest decline in income, reflecting
lower income from advice and other services, and higher costs, as
we accelerated our new hiring strategy. Operating profit in
Winterflood decreased by 75% to GBP3.5 million (2022: GBP14.1
million), with performance adversely impacted by the continued
market-wide slowdown in trading activity, particularly in higher
margin sectors, and difficult market conditions. Group net
expenses, which include interest expense from debt issued by the
holding company, as well as costs related to the central functions
such as finance, legal and compliance, risk and human resources,
reduced to GBP26.0 million (2022: GBP28.2 million), mainly
reflecting lower charges from share-based awards and a reduction in
variable compensation.
Operating income
Operating income was broadly stable at GBP932.6 million (2022:
GBP936.1 million), with growth in Banking offset by lower income in
Asset Management and Winterflood. Income in the Banking division
increased by 3%, reflecting good loan book growth and a strong net
interest margin of 7.7% (2022: 7.8%), partly offset by the run-off
of Novitas and the Irish Motor Finance business. In the Asset
Management division, we saw an increase in investment management
income resulting from growth in AuM delivered by our bespoke
investment manager hires. This was more than offset by a decrease
in income from advice and other services, which reflected the
impact of difficult market conditions on client assets, and
managements' strategic shift to focus on higher value clients. As a
result, income in the Asset Management division decreased by 2%.
Income in Winterflood reduced 21%, driven by lower trading revenues
reflecting the continued market-wide slowdown in activity.
Operating expenses
Operating expenses increased 3% to GBP615.0 million (2022:
GBP598.0 million) with higher staff costs and investment in Banking
and CBAM more than offsetting lower variable costs in Winterflood.
In the Banking division, whilst we remained focused on cost
control, expenses rose 7%, mainly driven by salary increases and
continued investment in strategic programmes. Costs increased 2% in
Asset Management as lower variable compensation was more than
offset by higher fixed staff costs in the inflationary environment,
as well as reflecting the onboarding of new hires and technology
spend, driven by the success of the hiring strategy and investment
for future growth. Winterflood's costs fell 11% as the slowdown in
trading activity led to lower staff compensation and settlement
fees.
Overall, the group's expense/income ratio increased to 66%
(2022: 64%), while the group's compensation ratio remained stable
at 37% (2022: 37%) as the reduction in variable compensation across
the group was offset by inflation-related wage increases and new
hires.
Impairment charges and IFRS 9 provisioning
Impairment charges increased significantly to GBP204.1 million
(2022: GBP103.3 million), corresponding to a bad debt ratio of 2.2%
(2022: 1.2%). This increase was driven primarily by impairment
charges of GBP116.8 million taken in relation to Novitas (2022:
GBP60.7 million), of which GBP114.6 million was incurred in the
first half of the year. As a result, there was an increase in
overall provision coverage to 3.9% (31 July 2022: 3.1%).
Excluding Novitas, the increase in impairment charges was
primarily driven by higher provisions as a result of weaker
macroeconomic variables and outlook, as well as an ongoing review
of provisions and coverage across our loan portfolios and an
increase in Motor Finance arrears, which have stabilised since the
first half. The bad debt ratio, excluding Novitas, increased to
0.9% (2022: 0.5%) and the coverage ratio increased marginally to
2.1% (31 July 2022: 1.9%).
Since the previous financial year end, we have updated the
macroeconomic scenarios to reflect the latest available information
regarding the macroeconomic environment and outlook, although the
weightings assigned to them remain unchanged. At 31 July 2023,
there was a 30% weighting to the strong upside, 32.5% weighting to
the baseline, 20% weighting to the mild downside, 10.5% weighting
to the moderate downside and 7% weighting to the severe
downside.
Whilst we have not seen a significant impact on credit
performance at this stage, we continue to monitor closely the
evolving impacts of rising inflation and cost of living on our
customers. We remain confident in the quality of our loan book,
which is predominantly secured or structurally protected, prudently
underwritten, diverse, and supported by the deep expertise of our
people.
Tax expense
The tax expense was GBP30.9 million (2022: GBP67.6 million),
which corresponds to an effective tax rate of 27.6% (2022:
29.0%).
The standard UK corporation tax rate for the financial year is
21.0% (2022: 19.0%). However, an additional headline banking
surcharge of 6.3% (2022: 8.0%) applies to banking company profits
as defined in legislation (and only above a threshold amount),
resulting in a c.5.5% surcharge impact. The effective tax rate is
above the UK corporation tax rate primarily due to the surcharge
applying to most of the group's profits.
Earnings per share
Profit attributable to shareholders reduced 51% to GBP81.1
million (2022: GBP165.2 million). As a result, adjusted basic
earnings per share ("EPS") reduced to 55.1p (2022: 111.5p) and
basic EPS reduced to 54.3p (2022: 110.4p). The loss after tax
recorded by Novitas reduced the group's adjusted basic EPS by
56.4p.
Dividend
The board is proposing a final dividend of 45.0p per share,
resulting in a full-year dividend per share of 67.5p (2022: 66.0p).
Although the proposed level of dividend cover for 2023 is below our
historical range, driven primarily by the adverse impact of
increased provisions in relation to Novitas on our profitability,
the proposed dividend reflects our underlying performance and the
board's confidence in the group's outlook.
We remain committed to our dividend policy, which aims to
provide sustainable dividend growth year-on-year, while maintaining
a prudent level of dividend cover.
Subject to approval at the Annual General Meeting, the final
dividend will be paid on 24 November 2023 to shareholders on the
register at 20 October 2023.
Summary Group Balance Sheet
31 July 31 July
2023 2022
GBP million GBP million
---------------------------------------------------- ------------ ------------
Loans and advances to customers and operating lease
assets(1) 9,526.2 9,098.9
---------------------------------------------------- ------------ ------------
Treasury assets(2) 2,229.4 1,855.1
---------------------------------------------------- ------------ ------------
Market-making assets(3) 787.6 887.2
---------------------------------------------------- ------------ ------------
Other assets 1,007.1 837.1
---------------------------------------------------- ------------ ------------
Total assets 13,550.3 12,678.3
---------------------------------------------------- ------------ ------------
Deposits by customers 7,724.5 6,770.4
---------------------------------------------------- ------------ ------------
Borrowings(4) 2,839.4 2,870.1
---------------------------------------------------- ------------ ------------
Market-making liabilities(3) 700.7 796.1
---------------------------------------------------- ------------ ------------
Other liabilities 640.8 584.2
---------------------------------------------------- ------------ ------------
Total liabilities 11,905.4 11,020.8
---------------------------------------------------- ------------ ------------
Equity 1,644.9 1,657.5
---------------------------------------------------- ------------ ------------
Total liabilities and equity 13,550.3 12,678.3
---------------------------------------------------- ------------ ------------
1. Includes operating lease assets of GBP223.4 million (31 July
2022: GBP185.4 million) that relate to Asset Finance and GBP47.8
million (31 July 2022: GBP54.6 million) to Invoice and Speciality
Finance.
2. Treasury assets comprise cash and balances at central banks
and debt securities held to support the Banking division.
3. Market-making assets and liabilities comprise settlement
balances, long and short trading positions and loans to or from
money brokers.
4. Borrowings comprise debt securities in issue, loans and
overdrafts from banks and subordinated loan capital.
The group maintained a strong balance sheet and prudent approach
to managing its financial resources. The fundamental structure of
the balance sheet remains unchanged, with most of the assets and
liabilities relating to our Banking activities. Customer 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 7% to GBP13.6 billion (31 July 2022:
GBP12.7 billion), reflecting growth in the loan book, higher
treasury assets due to an increased cash balance, an increase in
other assets as higher collateral was held due to swap movements,
and a reduction in market-making assets. Total liabilities were
also 8% higher at GBP11.9 billion (31 July 2022: GBP11.0 billion),
driven primarily by higher customer deposits, partly offset by a
reduction in market-making liabilities.
Total equity reduced 1% to GBP1.6 billion (31 July 2022: GBP1.7
billion), with profit in the year more than offset by dividend
payments of GBP99.1 million (31 July 2022: GBP95.5 million). The
group's return on assets decreased to 0.6% (2022: 1.3%).
Group Capital
31 July 31 July
2023 2022
GBP million GBP million
----------------------------------------------------- ------------ ------------
Common equity tier 1 capital 1,310.8 1,396.7
----------------------------------------------------- ------------ ------------
Total capital 1,510.8 1,596.7
----------------------------------------------------- ------------ ------------
Risk weighted assets 9,847.6 9,591.3
----------------------------------------------------- ------------ ------------
Common equity tier 1 capital ratio (transitional)(1) 13.3% 14.6%
----------------------------------------------------- ------------ ------------
Tier 1 capital ratio (transitional) 13.3% 14.6%
----------------------------------------------------- ------------ ------------
Total capital ratio (transitional) 15.3% 16.6%
----------------------------------------------------- ------------ ------------
Leverage ratio(2) 11.4% 12.0%
----------------------------------------------------- ------------ ------------
1. The impact of Novitas on the CET1 capital ratio at 31 July
2023 was -c.115bps, of which -c.85bps relates to retained earnings,
-c.40bps relates to the IFRS 9 transitional arrangements and
c.10bps relates to RWAs.
2. The leverage ratio is calculated as tier 1 capital as a
percentage of total balance sheet assets excluding central bank
claims, adjusting for certain capital deductions, including
intangible assets, and off-balance sheet exposures, in line with
the UK leverage framework under the UK Capital Requirements
Regulation.
Movements in Capital and Other Regulatory Metrics
The CET1 capital ratio reduced from 14.6% to 13.3%, mainly
driven by loan book growth in the year (-c.80bps), a decrease in
IFRS 9 transitional arrangements (-c.45bps) and deduction of
dividends paid and foreseen (-c.105bps), partly offset by capital
generation through profit (c.85bps) and a decrease in risk weighted
assets ("RWAs") associated with derivatives and credit valuation
adjustment ("CVA") (c.30bps). The impact of Novitas on the CET1
capital ratio was -c.115bps and consists of impact on retained
earnings (c.85bps) and IFRS 9 transitional arrangements (c.40bps),
offset by a reduction in loan book RWAs (c.10bps).
CET1 capital decreased 6% to GBP1,310.8 million (31 July 2022:
GBP1,396.7 million), reflecting a decrease in the transitional IFRS
9 add-back to capital of GBP51.1 million, the regulatory deduction
of dividends paid and foreseen of GBP100.5 million and an increase
in the intangible assets deducted from capital of GBP12.1 million.
This was partially offset by the capital generation through profit
of GBP81.1 million. Total capital decreased 5% to GBP1,510.8
million (31 July 2022: GBP1,596.7 million).
RWAs increased by 3% to GBP9.8 billion (31 July 2022: GBP9.6
billion), mainly driven by growth in the Commercial and Property
loan books, partly offset by a decrease in RWAs associated with
derivatives and CVA following changes to the derivatives
calculation to recognise netting agreements and to implement the
standardised approach to counterparty credit risk.
As a result, CET1, tier 1 and total capital ratios were 13.3%
(31 July 2022: 14.6%), 13.3% (31 July 2022: 14.6%) and 15.3% (31
July 2022: 16.6%), respectively.
During the 2023 financial year higher countercyclical buffer
rates for our UK and Irish exposures have come into force,
increasing the group's applicable countercyclical buffer by
c.190bps to 1.9%. At 31 July 2023, the applicable minimum CET1,
tier 1 and total capital ratio requirements, excluding any
applicable Prudential Regulation Authority ("PRA") buffer, were
9.5%, 11.2% and 13.4%, respectively. Accordingly, we continue to
have headroom significantly above the applicable minimum regulatory
requirements of c.380bps in the CET1 capital ratio, c.210bps in the
tier 1 capital ratio and c.190bps in the total capital ratio.
The group applies IFRS 9 regulatory transitional arrangements
which allow banks to add back to their capital base a proportion of
the IFRS 9 impairment charges during the transitional period. Our
capital ratios are presented on a transitional basis after the
application of these arrangements. On a fully loaded basis, without
their application, the CET1, tier 1 and total capital ratios would
be 13.0%, 13.0% and 15.1%, respectively.
The leverage ratio, which is a transparent measure of capital
strength not affected by risk weightings, remained strong at 11.4%
(31 July 2022: 12.0%).
The PRA Consultation Paper 16/22 on Basel 3.1 standards was
published in November 2022, with changes expected to be implemented
or phased in from 2025-2030. As highlighted at the Half Year 2023
results, following initial analysis, we estimate that if
implemented in its current form, it would represent an increase of
up to c.10% in the group's RWAs calculated under the standardised
approach. This is primarily as a result of the proposed removal of
the SME supporting factor and the proposed approach to the
classification of Retail SMEs and associated risk weights.
We continue to make positive progress in our preparations for a
transition to the Internal Ratings Based ("IRB") approach.
Following the submission of our initial application to the PRA in
December 2020, our application has successfully transitioned to
Phase 2 of the process. Additional documentation has been submitted
to the regulator and engagement continues. Our Motor Finance,
Property Finance and Energy portfolios, where the use of models is
most mature, were submitted with our initial application, with work
on subsequent portfolios in progress.
Capital Management Framework
The prudent management of the group's financial resources is a
core part of our business model. Our primary objective is to deploy
capital to support disciplined loan book growth in Banking and to
make the most of strategic opportunities. These include strategic
initiatives and small acquisitions in existing or adjacent markets
that fit with our business model.
The board remains committed to the group's dividend policy,
which aims to provide sustainable dividend growth year-on-year,
while maintaining a prudent level of dividend cover.
We remain committed to optimising further our capital structure,
including the issuance of debt capital market securities if
appropriate, targeting a CET1 capital ratio range of 12% to 13%
over the medium term. This will allow the group to maintain a
buffer to minimum regulatory requirements while also retaining the
flexibility to grow the business. We remain encouraged by the
available opportunities to deploy capital to deliver disciplined
growth, which remains one of our key strategic priorities. The
board will assess the potential for further distributions to
shareholders based on future opportunities.
Group Funding(1)
31 July 31 July
2023 2022
GBP million GBP million
------------------------------------------------------ ------------ ------------
Customer deposits 7,724.5 6,770.4
------------------------------------------------------ ------------ ------------
Secured funding 1,676.6 1,598.7
------------------------------------------------------ ------------ ------------
Unsecured funding(2) 1,308.6 1,544.3
------------------------------------------------------ ------------ ------------
Equity 1,644.9 1,657.5
------------------------------------------------------ ------------ ------------
Total available funding(3) 12,354.6 11,570.9
------------------------------------------------------ ------------ ------------
Total funding as % of loan book(4) 130% 127%
------------------------------------------------------ ------------ ------------
Average maturity of funding allocated to loan book(5) 21 months 21 months
------------------------------------------------------ ------------ ------------
1. Numbers relate to core funding and exclude working capital
facilities at the business level.
2. Unsecured funding excludes GBP44.3 million (31 July 2022:
GBP22.1 million) of non-facility overdrafts included in borrowings
and includes GBP190.0 million (31 July 2022: GBP295.0 million) of
undrawn facilities.
3. Includes GBP250 million of funds raised via a senior
unsecured bond with a five-year tenor by Close Brothers Group plc,
the group's holding company, in June 2023, with proceeds currently
held for general corporate purposes.
4. Total funding as a % of loan book includes GBP271.2 million
(31 July 2022: GBP240.0 million) of operating lease assets in the
loan book figure, as per the definition of "total funding as a % of
loan book including operating lease assets" revised in the 2022
financial year.
5. Average maturity of total available funding, excluding equity
and funding held for liquidity purposes.
Our Treasury function is focused on managing funding and
liquidity to support the Banking businesses, as well as interest
rate risk. This incorporates our Savings business, which provides
simple and straightforward savings products to both individuals and
businesses, whilst being committed to providing the highest level
of customer service.
The volatile backdrop over the year, resulting in the failure of
several domestic US banks and the sale of Credit Suisse, with a
consequential impact on the availability of wholesale funding
markets for significant periods, did not adversely affect the group
due to our diverse funding sources, enabling us to adapt our
position to changing market conditions and demand.
Our conservative approach to funding is based on the principle
of "borrow long, lend short", with a spread of maturities over the
medium and longer term, comfortably ahead of a shorter average loan
book maturity. Our funding draws on a wide range of wholesale and
deposit markets including several public debt securities at both
group and operating company level, as well as public and private
secured funding programmes and a diverse mix of customer
deposits.
We increased total funding in the year by 7% to GBP12.4 billion
(31 July 2022: GBP11.6 billion) which accounted for 130% (31 July
2022: 127%) of the loan book at the balance sheet date. Although
the average cost of funding in Banking increased to 3.2% (2022:
1.2%) due to rapidly rising interest rates, we took actions to
mitigate this pressure by optimising the group's liability mix
based on funding needs, customer demand and market pricing. While
we are well positioned to continue benefiting from our diverse
funding base, we expect cost of funds to further increase in the
next financial year as a result of higher interest rates and
customer deposit pricing pressure, particularly in notice
accounts.
Customer deposits increased 14% to GBP7.7 billion (31 July 2022:
GBP6.8 billion) with non-retail deposits decreasing 5% to GBP3.5
billion (31 July 2022: GBP3.7 billion) and retail deposits
increasing by 35% to GBP4.2 billion (31 July 2022: GBP3.1 billion),
as we actively sought to grow our retail deposit base and optimise
our funding mix in light of market conditions. Our retail deposits
are predominantly term, with approximately 85% protected by the
Financial Services Compensation Scheme. We remain focused on
delivering fair outcomes for our customers and are on track for the
implementation of the FCA's Consumer Duty, with our focus now on
continuing to embed our compliance.
We continue to realise benefits from the investment made in the
customer deposit platform. In May 2023, we expanded our product
offering with the introduction of easy access accounts,
complementing our fixed rate cash ISA and notice account range. We
are focused on identifying opportunities to continue to expand our
product range, which will support us in growing and diversifying
our retail deposit base and further optimise our cost of funding
and maturity profile.
Secured funding increased 5% to GBP1.7 billion (31 July 2022:
GBP1.6 billion) as we renewed and extended our Premium Finance
warehouse securitisation to GBP650 million (31 July 2022: GBP500
million). We maintained our current drawings under the Term Funding
Scheme for Small and Medium-sized Enterprises ("TFSME") at GBP600
million (31 July 2022: GBP600 million). Over the next 12 months,
GBP228 million of TFSME will mature, which we expect to replace in
line with our diverse funding profile, dependent on market
conditions and demand.
Unsecured funding, which includes senior unsecured and
subordinated bonds and undrawn committed revolving facilities,
reduced to GBP1.3 billion (31 July 2022: GBP1.5 billion) as we
adapted our funding mix in light of market conditions. In June
2023, Close Brothers Group plc successfully issued a GBP250 million
senior unsecured bond at an interest rate of 7.75% with the net
proceeds to be used for general corporate purposes.
We have maintained a prudent maturity profile. The average
maturity of funding allocated to the loan book was 21 months (31
July 2022: 21 months), ahead of the average loan book maturity at
16 months (31 July 2022: 17 months). This is in line with our
"borrow long, lend short" principle, reflecting the timing and mix
of funding raised over the year.
Our credit ratings remain strong, reflecting the group's
profitability, capital position, diversified business model and
consistent risk appetite. Moody's Investors Services ("Moody's")
reaffirmed their rating for Close Brothers Group as "A2/P1" and
Close Brothers Limited as "Aa3/P1", whilst upgrading the outlook
from "negative" to "stable" for both in November 2022. Fitch
Ratings ("Fitch") reaffirmed their rating for both Close Brothers
Group and Close Brothers Limited as "A-/F2", whilst downgrading the
outlook from "stable" to "negative" in March 2023.
Group Liquidity
31 July 31 July
2023 2022
GBP million GBP million
----------------------------------- ------------ ------------
Cash and balances at central banks 1,937.0 1,254.7
----------------------------------- ------------ ------------
Sovereign and central bank debt(1) 186.1 415.4
----------------------------------- ------------ ------------
Covered bonds(1) 106.3
----------------------------------- ------------ ------------
Certificates of deposit - 185.0
----------------------------------- ------------ ------------
Treasury assets 2,229.4 1,855.1
----------------------------------- ------------ ------------
1. There was GBPnil encumbered sovereign debt, central bank debt
and covered bonds at 31 July 2023 (31 July 2022: GBP216.9
million).
The group continues to adopt a conservative stance on liquidity,
ensuring it is comfortably ahead of both internal risk appetite and
regulatory requirements.
We continued to maintain higher liquidity relative to the
pre-Covid-19 position to provide additional flexibility given the
uncertain UK economic outlook, whilst enabling us to maximise any
opportunities available. Over the year, treasury assets increased
20% to GBP2.2 billion (31 July 2022: GBP1.9 billion) and were
predominantly held on deposit with the Bank of England.
We regularly assess and stress test the group's liquidity
requirements and continue to meet the liquidity coverage ratio
regulatory requirements, with a 12-month average LCR to 31 July
2023 of 1,143% (31 July 2022: 924%). In addition to internal
measures, we monitor funding risk based on the UK Capital
Requirements Regulation ("CRR") rules for the net stable funding
ratio ("NSFR") which became effective on 1 January 2022. The
four-quarter average NSFR to 31 July 2023 was 126.0% (point in time
at 31 July 2022: 118.3%).
Business Review
Banking
Key Financials(1)
2023 2022 Change
GBP million GBP million %
--------------------------------------------- ------------ ------------ ------
Operating income 713.8 693.1 3
--------------------------------------------- ------------ ------------ ------
Adjusted operating expenses (389.7) (362.6) 7
--------------------------------------------- ------------ ------------ ------
Impairment losses on financial assets (204.0) (103.3) 97
--------------------------------------------- ------------ ------------ ------
Adjusted operating profit 120.1 227.2 (47)
--------------------------------------------- ------------ ------------ ------
Adjusted operating profit, pre provisions 324.1 330.5 (2)
--------------------------------------------- ------------ ------------ ------
Net interest margin 7.7% 7.8%
--------------------------------------------- ------------ ------------ ------
Expense/income ratio 54.6% 52.3%
--------------------------------------------- ------------ ------------ ------
Bad debt ratio 2.2% 1.2%
--------------------------------------------- ------------ ------------ ------
Return on net loan book 1.3% 2.6%
--------------------------------------------- ------------ ------------ ------
Return on opening equity 6.6% 12.5%
--------------------------------------------- ------------ ------------ ------
Closing loan book and operating lease assets 9,526.2 9,098.9 5
--------------------------------------------- ------------ ------------ ------
Key Financials (Excluding Novitas)
2023 2022 Change
GBP million GBP million %
--------------------------------------------- ------------ ------------ ------
Operating income 694.9 657.1 6
--------------------------------------------- ------------ ------------ ------
Adjusted operating expenses (381.0) (348.0) 9
--------------------------------------------- ------------ ------------ ------
Impairment losses on financial assets (87.2) (42.6) 105
--------------------------------------------- ------------ ------------ ------
Adjusted operating profit 226.7 266.5 (15)
--------------------------------------------- ------------ ------------ ------
Adjusted operating profit, pre provisions 313.9 309.1 2
--------------------------------------------- ------------ ------------ ------
Net interest margin 7.6% 7.5%
--------------------------------------------- ------------ ------------ ------
Expense/income ratio 54.8% 53.0%
--------------------------------------------- ------------ ------------ ------
Bad debt ratio 0.9% 0.5%
--------------------------------------------- ------------ ------------ ------
Closing loan book and operating lease assets 9,466.3 8,939.5 6
--------------------------------------------- ------------ ------------ ------
1. Adjusted measures are presented on a basis consistent with
prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the
reconciliation between statutory and adjusted measures can be found
in note 2.
Continued demand and loan book growth, as we maintained our
pricing discipline and margin in an uncertain market
environment
This year has seen a heightened level of uncertainty in the
market backdrop from a combination of factors, including the
ongoing conflict in Ukraine, UK inflation reaching its highest
level in more than 40 years and the Bank of England base rate
rising to 5% in June 2023, which have all created challenges for
our individual and SME customers. The deterioration in the external
environment has also adversely impacted the economic variables our
businesses are sensitive to, which has been reflected in higher
forward-looking impairment provisions. Notwithstanding the economic
uncertainty, we continued to support our customers and lend
throughout the cycle on responsible terms, consistently applying
our prudent underwriting and pricing discipline. We are confident
that we have the right model to thrive in this environment and are
confident in the opportunity it creates for us to lean in and
support consumers and SME businesses.
Banking adjusted operating profit reduced 47% to GBP120.1
million (2022: GBP227.2 million), primarily reflecting higher
impairment charges related to Novitas. On a pre-provision basis,
adjusted operating profit reduced 2% to GBP324.1 million (2022:
GBP330.5 million) as growth in income, driven by good loan book
growth and a strong net interest margin, was offset by an increase
in costs. Statutory operating profit decreased to GBP120.1 million
(2022: GBP227.1 million).
Excluding Novitas, Banking adjusted operating profit decreased
15% to GBP226.7 million (2022: GBP266.5 million), primarily driven
by higher impairment charges to reflect the uncertain macroeconomic
outlook and increased costs, which more than offset income
growth.
The loan book increased 5% over the year to GBP9.5 billion (31
July 2022: GBP9.1 billion), driven by strong demand in our
Commercial businesses and high drawdowns in Property, partly offset
by the reduction in the Novitas net loan book. Growth in our
Premium Finance and UK Motor Finance books was more than offset by
the run-off of the Republic of Ireland Motor Finance loan book. We
saw an acceleration of growth in the second half of the year to 5%,
following a 1% decline in the loan book in the first half of
2023.
Excluding our businesses in run-off, Novitas and the Republic of
Ireland Motor Finance, the loan book grew 8% to GBP9.3 billion (31
July 2022: GBP8.6 billion).
Operating income increased 3% to GBP713.8 million (2022:
GBP693.1 million), reflecting the loan book growth and strong net
interest margin, partially offset by the run-off of Novitas and the
Irish Motor Finance business. Excluding Novitas, operating income
grew 6%.
The net interest margin decreased marginally to 7.7% (2022:
7.8%) principally due to reduced income from Novitas. Excluding
Novitas, the net interest margin was stable at 7.6% (2022: 7.5%),
reflecting both pricing discipline on new lending and actions taken
to optimise the group's liability mix and funding costs in a rising
rate environment. We are well positioned to maintain a strong net
interest margin and pass on increases in cost of funds as we remain
focused on asset pricing.
Adjusted operating expenses increased 7% to GBP389.7 million
(2022: GBP362.6 million) as we continued to invest in strategic
programmes. 57% (GBP15.4 million) of the increase related to higher
staff costs, driven mainly by inflation-related salary rises and
growth-driven hires. This was partly offset by lower
performance-linked compensation due to the reduction in profit for
the year. The expense/income ratio increased to 55% (2022: 52%) and
the compensation ratio increased marginally to 30% (2022: 29%).
Business-as-usual ("BAU") costs rose 6% to GBP303.1 million
(2022: GBP284.8 million), with over half of the increase driven by
salary increases, as well as an uplift in property running costs to
reflect the current inflationary environment(1) . Costs related to
Novitas reduced to GBP8.7 million (2022: GBP14.6 million) as we
continue to wind down the business.
Investment costs rose 23% to GBP77.9 million (2022: GBP63.2
million), of which GBP40.0 million (2022: GBP29.4 million) was
driven mainly by spend on our strategic cost management
initiatives, growth initiatives and operational resilience.
Depreciation charges related to our investment projects rose to
GBP37.9 million (2022: GBP33.8 million).
We see investment through the cycle as vital in protecting our
model, enhancing efficiency and future-proofing our income
generation capabilities. Our investments in cyber and data centres
are part of a programme to continually enhance our business and
operational resilience.
We have implemented a programme directly aligned to the
requirements of the FCA's Consumer Duty, with workstreams including
fair value assessments, enhanced product reviews and enhancing
customer communications. Our focus is now on continuing to embed
our compliance and implementing Consumer Duty changes for books of
business not open to new customers.
1. Related ongoing costs resulting from investment projects are
recategorised from investment costs to BAU costs after one year.
For comparison purposes, GBP6.5 million has been recategorised from
investment costs to BAU costs in the 2022 financial year to adjust
for investment projects' ongoing costs that commenced prior to the
2023 financial year.
Across our businesses, we have been investing in our digital
capabilities to support our relationship-based model and make our
experts even more valuable. Our Asset Finance transformation
programme will introduce a single platform, adding new
functionality, improved customer insights and increased efficiency.
In Motor Finance we have seen a significant increase in new
business proposals through our digital channels and in Premium
Finance, we are using technology to reduce the time taken to make
credit underwriting decisions for large business applications and
have introduced a digital payment link for customers in arrears.
Our previous investment in our Customer Deposit platform has
enabled us to grow our Savings proposition, introduce new offerings
and increase customer numbers, whilst achieving good customer
satisfaction scores.
We have intensified our focus on cost efficiency, particularly
in light of recent inflationary pressures. We have a number of
strategic cost management initiatives in progress, which aim to
create capacity to accommodate growth, inflation and investment to
support our business, and are evaluating additional opportunities
for efficiency. Our multi-year technology transformation programme
focused on strategic IT services is well under way. As part of
this, we are moving to a new operating model, making use of
third-party providers to reduce our cost base and create
efficiencies. The programme will enhance the service we provide to
our customers and increase our operational resilience and
flexibility. Our Retail simplification programme is focused on
transforming operations and reducing the cost of running the
business, whilst enhancing the operational risk and control
environment. The programme also aims to increase broker, customer
and colleague satisfaction and loyalty. A new customer relationship
platform has been introduced in Premium Finance, as well as case
management and automation tools, which are leading to reduced case
handling and credit decisioning times.
Whilst we remain focused on achieving positive operating
leverage over the medium term, we expect costs for the 2024
financial year to increase between c.8-10%, primarily as a result
of higher average salary awards at the end of the 2023 financial
year and a normalisation of performance-linked compensation. As we
progress our strategic cost management initiatives, investment
costs and related depreciation are expected to increase and will be
partly offset by efficiency savings.
In the 2025 financial year, we expect cost growth to more
closely align with income growth, reflecting volume and
activity-related expenses, a projected stabilisation of
inflationary pressures, as well as further benefits from efficiency
gains resulting from our strategic cost management initiatives.
Investment spend is expected to stabilise, with depreciation costs
related to our existing investment programmes peaking in the 2025
financial year.
Impairment charges increased significantly to GBP204.0 million
(2022: GBP103.3 million), corresponding to a bad debt ratio of 2.2%
(2022: 1.2%). This was driven primarily by increased provisions in
relation to Novitas of GBP116.8 million (2022: GBP60.7 million), of
which GBP114.6 million was incurred in the first half of the
year.
Additionally, a further GBP87.2 million of impairment charges
were recognised to take into account weaker macroeconomic variables
and outlook, as well as higher arrears in the Motor Finance
business as a result of cost of living pressures on customers. They
also reflect an ongoing review of provisions and coverage across
our loan portfolios and model refinements. Excluding Novitas, the
bad debt ratio increased to 0.9% (2022: 0.5%), although remains
slightly below our long-term bad debt ratio of 1.2%, and the
coverage ratio increased marginally to 2.1% (31 July 2022: 1.9%).
There was also an increase in overall provision coverage to 3.9%
(31 July 2022: 3.1%).
Whilst we have not seen a significant impact on credit
performance, we continue to monitor closely the evolving impacts of
rising inflation and cost of living on our customers. We remain
confident in the quality of our loan book, which is predominantly
secured or structurally protected, prudently underwritten, diverse,
and supported by the deep expertise of our people. We expect the
bad debt ratio in the 2024 financial year to remain below our
long-term average, based on current market conditions.
Accelerating our efforts to resolve issues relating to
Novitas
The decision to wind down Novitas, a provider of finance for the
legal sector we acquired in 2017, and to withdraw from the legal
services financing market, followed a strategic review in July 2021
which concluded that the business was not aligned with the Close
Brothers model. Some of the key attributes of our model such as
in-house lending expertise, a strong track record of performance
and underlying security of the loans, have proven not to be evident
in Novitas.
The business continues to work with solicitors and insurers, to
support existing customers and manage the existing book to ensure
good customer outcomes. As announced in January 2023, we have
accelerated our efforts to resolve the issues surrounding Novitas.
We initiated formal legal action against one of the After the Event
("ATE") insurers regarding the potential recoverability of funds in
relation to failed cases and we are considering our position in
respect of other insurers. As a result, an increased provision to
reflect the expectation of a longer time frame to recovery for
related loans was included in the GBP24.8 million of provisions
taken in the first five months of the 2023 financial year. We have
since entered into a settlement with another smaller ATE
insurer.
In the first half of the year, we also undertook a review of
certain cases being funded which had limited prospects of
successfully progressing through the courts. As a result of this
review, an additional provision of GBP89.8 million was recognised,
which assumed a material increase in the Probability of Default
("PD") and Loss Given Default ("LGD") assumptions and a longer time
frame to recovery across the majority of the portfolio. It also
assumed reassessed estimates for recoverability of interest on the
relevant loans, in line with accounting requirements.
Consequently, we recognised provisions of GBP114.6 million in
relation to Novitas in the first half. While we will continue to
review provisioning levels in light of future developments,
including the experienced credit performance of the book and the
outcome of the group's initiated legal action, we believe the
provisions adequately reflect the remaining risk of credit losses
for the Novitas loan book (GBP59.9 million net loan book at 31 July
2023).
In addition, in line with IFRS 9 requirements, a proportion of
the expected credit loss is expected to unwind, over the estimated
time to recovery period, to interest income. The group remains
focused on maximising the recovery of remaining loan balances,
either through successful outcome of cases or recourse to the
customers' ATE insurers, whilst complying with its regulatory
obligations and always focusing on ensuring good customer
outcomes.
We expect net income related to Novitas to reduce from GBP18.9
million in 2023 to c.GBP9 million in 2024. Further disclosure on
the impact of Novitas can be found in note six.
Continued focus on delivering disciplined growth
We remain focused on delivering disciplined growth whilst
prioritising our margins and credit quality, with our growth
initiatives delivering a significant contribution of loan book
growth. We continue to actively work to identify incremental and
new opportunities in line with our business model and overall
remain confident in the growth outlook for the loan book over both
the short and medium term. We are confident that we have the right
model to thrive in this environment and are confident in the
opportunity it creates for us to lean in and support consumers and
SME businesses.
As the UK aligns towards a net zero economy, we recognise a
significant opportunity for delivering disciplined growth. Our
specialist energy team has provided finance for over 1,600MW of
installed generation and storage capacity to date and we continue
to broaden our expertise in green and transition assets. In line
with our ambition to provide funding for GBP1.0 billion of battery
electric vehicles by the end of the 2027 financial year, we have
lent GBP164 million over the last year.
The Asset Finance business remains well positioned to capitalise
on continued demand for finance from SMEs. Our new initiatives are
proving successful, with the recently hired agricultural equipment
and materials handling teams both having written healthy levels of
new business over the year and building strong pipelines, as we
continue to expand our coverage into adjacent asset classes and
markets.
In Invoice Finance, we continue to focus on taking advantage of
opportunities in the asset-based lending ("ABL") space, building on
the success we have seen this year with our first syndication deal
and our expansion to cover larger loan sizes. We have also expanded
our offering with our new bespoke lending team, which offers loan
structures to SMEs requiring growth and investment capital, and
closed its first deal earlier this year.
The Motor Finance transformation programme, which has now
concluded, has created the digital capabilities for us to enhance
our proposition for dealers, partners and customers. We are
currently rolling out a new dealer partner onboarding process and
our partnership with iVendi has driven an uplift in proposal
volumes. Our partnership with AutoTrader, providing dealers with
data and insights to effectively manage their forecourts, continues
to prove successful and we are leveraging the investment made in
our commercial partner programme to support additional routes to
market. In addition, we have expanded our credit policy to provide
broader coverage of Alternatively Fuelled Vehicles ("AFVs") as they
become more prevalent in the second hand car market. In September
2023, we announced our agreement to acquire Bluestone Motor Finance
(Ireland) DAC, which will provide a platform for us to build our
Motor Finance business in Ireland.
In Premium Finance, we continue to focus on our digital, data
and insight capabilities to enhance our offering, with our
Foresight model helping to support brokers' decisioning by
providing unique customer behaviour insights. We are expanding our
new business capabilities through the use of a customer
relationship management platform and the launch of a programme to
support commercial lines brokers with the promotion and sale of
premium finance.
In Property, following the successful piloting of a specialist
buy-to-let extension to our existing bridging finance customers, we
are continuing to offer this product and wrote a healthy level of
business during the year. We are seeing good demand for initiatives
including our enhanced loan-to-value product for select customers,
alongside our continued focus on growing our regional loan book. We
are also looking to expand further our partnership with Travis
Perkins, which enables SME housebuilders to access discounted
building supplies and materials directly via a credit facility.
Although the economic uncertainty is expected to continue to impact
activity in the property market, our pipeline of undrawn
commitments remains strong.
Loan Book Analysis
31 July 31 July
2023 2022 Change
GBP million GBP million %
------------------------------------------------ ----------- ----------- ------
Commercial 4,821.3 4,561.4 6
------------------------------------------------ ----------- ----------- ------
Commercial - Excluding Novitas 4,761.4 4,402.0 8
------------------------------------------------ ----------- ----------- ------
Asset Finance(1) 3,387.1 3,217.4 5
------------------------------------------------ ----------- ----------- ------
Invoice and Speciality Finance(1) 1,434.2 1,344.0 7
------------------------------------------------ ----------- ----------- ------
Invoice and Speciality Finance - Excluding
Novitas(1) 1,374.3 1,184.6 16
------------------------------------------------ ----------- ----------- ------
Retail 3,001.8 3,064.0 (2)
------------------------------------------------ ----------- ----------- ------
Motor Finance(2) 1,948.4 2,051.2 (5)
------------------------------------------------
Premium Finance 1,053.4 1,012.8 4
------------------------------------------------ ----------- ----------- ------
Property 1,703.1 1,473.5 16
------------------------------------------------ ----------- ----------- ------
Closing loan book and operating lease assets(3) 9,526.2 9,098.9 5
------------------------------------------------ ----------- ----------- ------
Closing loan book and operating lease assets
- Excluding Novitas 9,466.3 8,939.5 6
------------------------------------------------ ----------- ----------- ------
1. The Asset Finance and Invoice and Speciality Finance loan
books have been re-presented for 31 July 2022 to reflect the
recategorisation of Close Brothers Vehicle Hire ("CBVH") from
Invoice and Speciality Finance to Asset Finance.
2. The Motor Finance loan book includes GBP206.7 million (31
July 2022: GBP367.2 million) relating to the Republic of Ireland
Motor Finance business, which is in run-off following the cessation
of our previous partnership in the Republic of Ireland from 30 June
2022.
3. Includes operating lease assets of GBP223.4 million (31 July
2022: GBP185.4 million) that relate to Asset Finance and GBP47.8
million (31 July 2022: GBP54.6 million) to Invoice and Speciality
Finance.
Continued demand across our Banking businesses with good loan
book growth
The Commercial loan book grew 6% to GBP4.8 billion (31 July
2022: GBP4.6 billion), despite the roll-off of government supported
lending under schemes such as the Coronavirus Business Interruption
Loan Scheme ("CBILS"), supported by strong demand and growth
initiatives. Excluding Novitas, the Commercial book increased 8% to
GBP4.8 billion (31 July 2022: GBP4.4 billion). The net loan book of
government supported lending over the pandemic period (covering
lending under the CBILS, Coronavirus Large Business Interruption
Loan Scheme and Bounce Back Loan Scheme) stood at GBP456 million at
31 July 2023 (31 July 2022: GBP748 million).
Asset Finance grew 5% as we saw strong new business volumes in
our Leasing business, particularly from our Contract Hire and
Energy portfolios, and good demand for our new initiatives
including our agriculture offering. Invoice and Speciality Finance
grew 7%, notwithstanding the reduction in the Novitas net loan
book, as we saw strong new business and higher utilisation in
Invoice Finance and good growth in our Irish business. The Invoice
Finance business also completed its first syndication deal during
the year. Excluding Novitas, the Invoice and Speciality Finance
loan book increased 16%.
The Retail loan book contracted 2% to GBP3.0 billion (31 July
2022: GBP3.1 billion), driven mainly by the decline in the Republic
of Ireland loan book. Motor Finance decreased 5% as the run-off of
the Irish book more than offset 3% growth in the UK Motor book as
we enhanced our proposition and focused on new routes to market
through our commercial partners. Premium Finance grew 4%
year-on-year, driven by an increase in new business volumes from
individuals and larger premium sizes reflecting inflation.
The Republic of Ireland Motor Finance business accounted for 11%
of the Motor Finance loan book (31 July 2022: 18%) and 2% of the
Banking loan book (31 July 2022: 4%). As announced in September
2023, we have reached an agreement to acquire Bluestone Motor
Finance (Ireland), with the acquisition expected to complete in the
fourth quarter of calendar year 2023. This will provide a platform
for us to build our Motor Finance business in Ireland, following
the cessation of our previous partnership in that country last
year.
The Property loan book grew 16%, despite uncertainty in the
housing market, as we saw strong drawdowns from our healthy
pipeline and normalising repayments from the elevated levels seen
in the prior year, as the buoyant UK property market had resulted
in heightened unit sales by developers. We are seeing good demand
for initiatives including our specialist buy-to-let extension and
our enhanced loan-to-value product for select customers, alongside
our continued focus on growing our regional loan book.
Banking: Commercial(1)
2023 2022 Change
GBP million GBP million %
------------------------------------------------ ------------ ------------ ------
Operating income 347.8 343.4 1
------------------------------------------------ ------------ ------------ ------
Adjusted operating expenses (194.4) (180.0) 8
------------------------------------------------ ------------ ------------ ------
Impairment losses on financial assets (137.5) (72.4) 90
------------------------------------------------ ------------ ------------ ------
Adjusted operating profit 15.9 91.0 (83)
------------------------------------------------ ------------ ------------ ------
Adjusted operating profit, pre provisions 153.4 163.4 (6)
------------------------------------------------ ------------ ------------ ------
Net interest margin 7.4% 7.8%
------------------------------------------------ ------------ ------------ ------
Expense/income ratio 56% 52%
------------------------------------------------ ------------ ------------ ------
Bad debt ratio 2.9% 1.7%
------------------------------------------------ ------------ ------------ ------
Closing loan book and operating lease assets(2) 4,821.3 4,561.4 6
------------------------------------------------ ------------ ------------ ------
Commercial key metrics excluding Novitas(1)
2023 2022 Change
GBP million GBP million %
------------------------------------------------ ------------ ------------ ------
Operating income 328.9 307.4 7
------------------------------------------------ ------------ ------------ ------
Adjusted operating expenses (185.7) (165.4) 12
------------------------------------------------ ------------ ------------ ------
Impairment losses on financial assets (20.7) (11.7) 77
------------------------------------------------ ------------ ------------ ------
Adjusted operating profit 122.5 130.3 (6)
------------------------------------------------ ------------ ------------ ------
Adjusted operating profit, pre provisions 143.2 142.0 1
------------------------------------------------ ------------ ------------ ------
Net interest margin 7.2% 7.3%
------------------------------------------------ ------------ ------------ ------
Expense/income ratio 56% 54%
------------------------------------------------ ------------ ------------ ------
Bad debt ratio 0.5% 0.3%
------------------------------------------------ ------------ ------------ ------
Closing loan book and operating lease assets(2) 4,761.4 4,402.0 8
------------------------------------------------ ------------ ------------ ------
1. Adjusted measures are presented on a basis consistent with
prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the
reconciliation between operating and adjusted measures can be found
in note 2.
2. Operating lease assets of GBP223.4 million (31 July 2022:
GBP185.4 million) relate to Asset Finance and GBP47.8 million (31
July 2022: GBP54.6 million) to Invoice and Speciality Finance.
Strong demand in Commercial as we continue to support our SME
customers
The Commercial businesses provide specialist, predominantly
secured lending principally to the SME market and include Asset
Finance and Invoice and Speciality Finance. We finance a diverse
range of sectors, with Asset Finance offering commercial asset
financing, hire purchase and leasing solutions across a broad range
of assets including commercial vehicles, machine tools,
contractors' plant, printing equipment, company car fleets, energy
project finance, and aircraft and marine vessels, as well as our
Vehicle Hire business. The Invoice and Speciality Finance business
provides debt factoring, invoice discounting and asset-based
lending, as well as covering two of our specialist businesses,
Brewery Rentals and Novitas. As previously announced, Novitas
ceased lending to new customers in July 2021.
Despite the market uncertainty, our Commercial businesses saw
good customer demand over the year, with Invoice Finance
experiencing strong new business levels and an uptick in
utilisation. We have focused on asset pricing discipline in line
with our model, actively choosing to pass through higher rates on
new lending where appropriate notwithstanding the competitive
market. Our new initiatives have proven successful, with our
agriculture and materials handling teams writing healthy levels of
new business over the year and our first syndication deal
completed.
Adjusted operating profit for Commercial declined significantly
to GBP15.9 million (2022: GBP91.0 million), driven primarily by a
significant increase in impairment charges related to Novitas.
Statutory operating profit reduced to GBP15.8 million (2022:
GBP90.9 million).
On a pre-provision basis, adjusted operating profit decreased 6%
to GBP153.4 million (2022: GBP163.4 million) as an increase in
costs more than offset income growth.
Excluding Novitas, adjusted operating profit decreased 6% to
GBP122.5 million (2022: GBP130.3 million) as income growth was more
than offset by higher costs.
Operating income increased 1% to GBP347.8 million (2022:
GBP343.4 million), reflecting good loan book growth and higher
average volumes in Invoice and Speciality Finance. The net interest
margin decreased to 7.4% (2022: 7.8%), driven mainly by the
reduction in Novitas income. Excluding Novitas, the net interest
margin decreased marginally to 7.2% (2022: 7.3%), primarily
reflecting the timing delay in passing through higher interest
rates to customers compared to increased funding costs, partly
offset by increased activity-driven fees and benefits of central
funding mix actions taken in light of the rising interest rate
environment.
Adjusted operating expenses grew 8% to GBP194.4 million (2022:
GBP180.0 million), driven by investment spend in relation to the
Asset Finance transformation programme and strategic growth
initiatives, as well as higher staff costs to reflect the
inflationary environment. This was partly offset by lower advisory
costs in relation to Novitas. The expense/income ratio increased to
56% (2022: 52%) as higher costs more than offset the growth in
income.
Impairment charges rose significantly to GBP137.5 million (2022:
GBP72.4 million), with GBP116.8 million incurred in relation to
Novitas, GBP114.6 million of which were recognised in the first
half of the year. As a result, there was an increase in provision
coverage to 5.2% (31 July 2022: 4.0%).
Excluding Novitas, impairment charges increased to GBP20.7
million (2022: GBP11.7 million), corresponding to a bad debt ratio
of 0.5% (2022: 0.3%). This increase primarily reflected additional
provisions to take into account weaker macroeconomic variables and
outlook. The coverage ratio reduced marginally to 1.4% (31 July
2022: 1.6%).
Banking: Retail
2023 2022 Change
GBP million GBP million %
-------------------------------------- ------------ ------------ ------
Operating income 248.1 237.0 5
-------------------------------------- ------------ ------------ ------
Operating expenses (164.4) (151.6) 8
-------------------------------------- ------------ ------------ ------
Impairment losses on financial assets (49.0) (24.4) 101
-------------------------------------- ------------ ------------ ------
Operating profit 34.7 61.0 (43)
-------------------------------------- ------------ ------------ ------
Operating profit, pre provisions 83.7 85.4 (2)
-------------------------------------- ------------ ------------ ------
Net interest margin 8.2% 7.8%
-------------------------------------- ------------ ------------ ------
Expense/income ratio 66% 64%
-------------------------------------- ------------ ------------ ------
Bad debt ratio 1.6% 0.8%
-------------------------------------- ------------ ------------ ------
Closing loan book(1) 3,001.8 3,064.0 (2)
-------------------------------------- ------------ ------------ ------
1. The Motor Finance loan book includes GBP206.7 million (31
July 2022: GBP367.2 million) relating to the Republic of Ireland
Motor Finance business, which is in run-off following the cessation
of our previous partnership in the Republic of Ireland from 30 June
2022.
Remained focused on prioritising our margins and underwriting
discipline
The Retail businesses provide intermediated finance, principally
to individuals and small businesses, through motor dealers and
insurance brokers.
We have seen a solid performance in our Retail businesses this
year despite the challenging market backdrop. In Motor Finance, we
have focused on prioritising our margin and pricing discipline in
line with our model, passing through higher rates on new lending.
As reported at the half year 2023 results and in line with
comparable trends observed across the wider industry, we have seen
arrears increase and then stabilise at a higher level in our Motor
Finance loan book, reflecting cost of living pressures on our
customers. Nonetheless, we remain comfortable with the quality of
our portfolio, underpinned by our underwriting discipline and
prudent level of provisions. In Premium Finance, volumes in our
consumer business have increased year-on-year, benefiting from
premium inflation in the second half of the year, with growth in
average loan sizes.
Operating profit for Retail reduced to GBP34.7 million (2022:
GBP61.0 million), as income growth was more than offset by higher
costs and increased impairment charges.
Operating income rose 5% to GBP248.1 million (2022: GBP237.0
million), driven by growth in the UK Motor Finance loan book and an
increase in the net interest margin to 8.2% (2022: 7.8%) despite
higher funding costs, as we continued to focus on pricing
discipline and benefited from central funding mix actions taken in
light of the rising interest rate environment.
Operating expenses increased 8% to GBP164.4 million (2022:
GBP151.6 million), primarily driven by investment in the Retail
businesses to create efficiencies whilst delivering customer and
control benefits, including depreciation costs related to these
investments, as well as higher staff costs, particularly in legal
and compliance. In Premium Finance, we have continued to invest in
further enhancing our processes in line with regulatory
requirements. As a result, the expense/income ratio increased to
66% (2022: 64%).
Following the FCA's Motor Market review in 2019, the group
continues to receive a number of complaints, some of which are with
the Financial Ombudsman Service, and is subject to a number of
claims through the courts regarding historical commission
arrangements with intermediaries on its Motor Finance products.
Whilst the review of these complaints and claims is ongoing, any
potential financial impact remains uncertain.
Impairment charges rose to GBP49.0 million (2022: GBP24.4
million), corresponding to a bad debt ratio of 1.6% (2022: 0.8%).
This was driven by the uncertain macroeconomic outlook and
increased arrears and forbearance levels in Motor Finance, as well
as an ongoing review of provisions and coverage. As a result, the
provision coverage ratio increased to 2.9% (31 July 2022:
2.2%).
We remain confident in the credit quality of the Retail loan
book. The Motor Finance loan book is predominantly secured on
second hand vehicles which are less exposed to depreciation or
significant declines in value than new cars. Our core Motor Finance
product remains hire-purchase contracts, with less exposure to
residual value risk associated with Personal Contract Plans
("PCP"), which accounted for c.9% of the Motor Finance loan book at
31 July 2023 (c.11% at 31 July 2022). The Premium Finance loan book
benefits from various forms of structural protection including
premium refundability and, in most cases, broker recourse for the
personal lines product.
Banking: Property
2023 2022 Change
GBP million GBP million %
-------------------------------------- ------------ ------------ ------
Operating income 117.9 112.7 5
-------------------------------------- ------------ ------------ ------
Operating expenses (30.9) (31.0) 0
-------------------------------------- ------------ ------------ ------
Impairment losses on financial assets (17.5) (6.5) 169
-------------------------------------- ------------ ------------ ------
Operating profit 69.5 75.2 (8)
-------------------------------------- ------------ ------------ ------
Operating profit, pre provisions 87.0 81.7 6
-------------------------------------- ------------ ------------ ------
Net interest margin 7.4% 7.6%
-------------------------------------- ------------ ------------ ------
Expense/income ratio 26% 28%
-------------------------------------- ------------ ------------ ------
Bad debt ratio 1.1% 0.4%
-------------------------------------- ------------ ------------ ------
Closing loan book 1,703.1 1,473.5 16
-------------------------------------- ------------ ------------ ------
Strong loan book growth driven by drawdowns from our healthy
pipeline
Property comprises Property Finance and Commercial Acceptances.
The Property Finance business is focused on specialist residential
development finance to established professional developers in the
UK. Commercial Acceptances provides bridging loans and loans for
refurbishment projects.
This year has seen a slowdown across the UK property market
following a period of heightened activity, with rising interest
rates negatively impacting buyer sentiment. Whilst we have seen a
fall in housebuilding levels and some contraction in house prices,
we have delivered a strong performance, with record drawdowns,
growth in active customer numbers and our pipeline remaining
healthy at over GBP1 billion. We have also focused on retaining our
margin and pricing discipline as we adhere to our through-the-cycle
lending approach.
Operating profit in Property declined 8% to GBP69.5 million
(2022: GBP75.2 million), as an increase in impairment charges more
than offset income growth. On a pre-provision basis, operating
profit grew 6% to GBP87.0 million (2022: GBP81.7 million) as we
achieved positive operating leverage in the business.
Operating income increased 5% to GBP117.9 million (2022:
GBP112.7 million), driven by strong loan book growth and higher fee
income. The net interest margin decreased to 7.4% (2022: 7.6%),
reflecting higher cost of funds and the benefit of interest rate
floors in the prior year.
Operating expenses were stable at GBP30.9 million (2022: GBP31.0
million) as we maintained our strict focus on cost discipline. As a
result, the expense/income ratio reduced to 26% (2022: 28%).
Impairment charges increased to GBP17.5 million (2022: GBP6.5
million), resulting in a bad debt ratio of 1.1% (2022: 0.4%), as we
recognised additional provisions to reflect weakening macroeconomic
variables and outlook, in particular lower projected house prices,
and an ongoing review of provisions and coverage. The provision
coverage ratio remained stable at 2.4% (31 July 2022: 2.4%).
The Property loan book is conservatively underwritten, with
typical LTVs below standard market levels. We work with
experienced, professional developers, with a focus on mid-priced
family housing, and have minimal exposure to the prime central
London market, with our regional loan book making up over 50% of
the Property Finance portfolio. Our long track record, expertise
and quality of service ensure the business remains resilient to
competition and continues to generate high levels of repeat
business.
Asset Management
Key Financials(1)
2023 2022 Change
GBP million GBP million %
-------------------------------------- ------------ ------------ ------
Investment management 113.3 110.4 3
-------------------------------------- ------------ ------------ ------
Advice and other services(2) 29.9 36.1 (17)
-------------------------------------- ------------ ------------ ------
Other income(3) 1.6 1.5 7
-------------------------------------- ------------ ------------ ------
Operating income 144.8 148.0 (2)
-------------------------------------- ------------ ------------ ------
Adjusted operating expenses (128.8) (126.3) 2
-------------------------------------- ------------ ------------ ------
Impairment losses on financial assets (0.1) - n/a
-------------------------------------- ------------ ------------ ------
Adjusted operating profit 15.9 21.7 (27)
-------------------------------------- ------------ ------------ ------
Revenue margin (bps) 84 87
-------------------------------------- ------------ ------------ ------
Operating margin 11% 15%
-------------------------------------- ------------ ------------ ------
Return on opening equity 15.5% 28.6%
-------------------------------------- ------------ ------------ ------
1. Adjusted measures are presented on a basis consistent with
prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the
reconciliation between operating and adjusted measures can be found
in note 2.
2. Income from advice and self-directed services, excluding
investment management income.
3. Other income includes net interest income and expense, income
on principal investments and other income.
Acceleration of growth strategy, building on long-term track
record and driving strong net inflows
Close Brothers Asset Management provides personal financial
advice and investment management services to private clients in the
UK, including full bespoke management, managed portfolios and
funds, distributed both directly via our advisers and investment
managers, and through third-party financial advisers.
Adjusted operating profit in CBAM reduced 27% to GBP15.9 million
(2022: GBP21.7 million), driven by a modest decline in income,
reflecting lower income from advice and other services, and higher
costs as we accelerated our hiring strategy. The operating margin
reduced to 11% (2022: 15%). Statutory operating profit before tax
was GBP14.4 million (2022: GBP19.8 million).
We saw an increase in investment management income resulting
from growth in AuM delivered by our bespoke investment manager
hires. This was more than offset by a decrease in income from
advice and other services, which reflected the impact of difficult
market conditions on client assets, and managements' strategic
shift to focus on more higher value clients. As a result, income in
the Asset Management division decreased by 2%. The revenue margin
reduced to 84bps (2022: 87bps) due primarily to flows into lower
margin investment management and non-advised products.
Adjusted operating expenses rose 2% as we exercised disciplined
cost control whilst accelerating our growth strategy. We increased
our rate of hiring, recruiting 15 bespoke investment managers
during the year (2022: 10) and opened offices in Birmingham and
Cheltenham to support new teams, whilst also implementing
inflationary-driven salary increases and incurring spend on
technology, which was partly offset by lower variable compensation.
The expense/income ratio increased to 89% (2022: 85%), with the
compensation ratio also increasing to 59% (2022: 56%). The
acceleration of our hiring strategy will continue to be reflected
in the cost trajectory going forward.
CBAM has achieved substantive compliance with the FCA's Consumer
Duty requirements. In preparation for the implementation of the
FCA's Consumer Duty, we completed a number of workstreams focused
on mapping client journeys and enhancing our data collection and
client communications, with Consumer Duty embedded into the CBAM
strategy.
Strong net inflows notwithstanding market uncertainty
Continued uncertainty over the economic outlook has led to
volatility in returns from equity markets over the year, negatively
impacting investor sentiment. Nevertheless, we saw strong net
inflows of GBP1.3 billion (2022: GBP844 million) and delivered a
net inflow rate of 9% (2022: 5%). Our hiring strategy is proving
successful, with a strong pipeline and the new bespoke investment
managers contributing significantly to the overall inflow rate. We
continue to invest in supporting the long-term growth potential of
CBAM through both new hires and building our acquisition
pipeline.
Total managed assets grew 7% to GBP16.4 billion (31 July 2022:
GBP15.3 billion), driven by strong net inflows, partly offset by
negative market performance. Total client assets, which includes
both advised and managed assets, increased 5% to GBP17.3 billion
(31 July 2022: GBP16.6 billion).
The integration of PMN Financial Management into CBAM has
outperformed initial expectations, with the business having now
been fully integrated and the migration of assets expected to be
completed by July 2024.
Movement in Client Assets
31 July 31 July
2023 2022
GBP million GBP million
----------------------------------------- ------------ ------------
Opening managed assets 15,302 15,588
----------------------------------------- ------------ ------------
Inflows 2,729 2,330
----------------------------------------- ------------ ------------
Outflows (1,411) (1,486)
----------------------------------------- ------------ ------------
Net inflows 1,318 844
----------------------------------------- ------------ ------------
Market movements (201) (1,130)
----------------------------------------- ------------ ------------
Total managed assets 16,419 15,302
----------------------------------------- ------------ ------------
Advised only assets 907 1,272
----------------------------------------- ------------ ------------
Total client assets(1) 17,326 16,574
----------------------------------------- ------------ ------------
Net flows as % of opening managed assets 9% 5%
----------------------------------------- ------------ ------------
1. Total client assets include GBP4.9 billion of assets (31 July
2022: GBP5.1 billion) that are both advised and managed.
Fund Performance
Our funds and segregated bespoke portfolios are designed to
provide attractive risk-adjusted returns for our clients,
consistent with their long-term goals and investment objectives.
Fund performance has been mixed, reflecting volatile markets across
asset classes which has been the case throughout the year. As a
result, we have seen some of our funds outperform their peer group,
with others underperforming, mainly reflecting their exposure to
exchange rate movements.
Our Sustainable Funds and Net Zero Commitment
In March 2023, we created the Sustainable Select Fixed Income
fund through merging our existing Select Fixed Income fund and
Sustainable Bond fund. This new fund utilises an updated
sustainable investment methodology, making use of CBAM's experience
and understanding of sustainable investment strategies gained over
recent years to target a reduction in CO2 emissions intensity
versus its benchmark.
Our Sustainable Select Fixed Income fund has seen good traction
so far and we are exploring options for enhancing further our
sustainable offering.
In line with our commitment to actively contribute towards the
UK government's net zero climate goals, CBAM is a signatory of the
Net Zero Asset Managers initiative and is on track to disclose its
net zero targets by the end of September 2023.
Well Positioned for Future Growth
We remain confident that our vertically integrated,
multi-channel business model positions us well for ongoing demand
for our services and the structural growth opportunity presented by
the wealth management industry.
Our focus remains on providing excellent service, building on
the strength of our client relationships, whilst investing in new
hires and building our pipeline of acquisitions to support the
long-term growth potential of our business. While CBAM is sensitive
to financial market conditions, we remain committed to driving
growth both organically and through in-fill acquisitions.
Winterflood
Key Financials
2023 2022 Change
GBP million GBP million %
-------------------------------- ------------ ------------ ------
Operating income 75.3 95.2 (21)
-------------------------------- ------------ ------------ ------
Operating expenses (71.8) (81.1) (11)
-------------------------------- ------------ ------------ ------
Operating profit 3.5 14.1 (75)
-------------------------------- ------------ ------------ ------
Average bargains per day ('000) 60 81
-------------------------------- ------------ ------------ ------
Operating margin 5% 15%
-------------------------------- ------------ ------------ ------
Return on opening equity 2.6% 10.5%
-------------------------------- ------------ ------------ ------
Loss days 1 8
-------------------------------- ------------ ------------ ------
Performance impacted by continued slowdown in trading activity
but well positioned to benefit when market conditions improve
Winterflood is a leading UK market maker, delivering
high-quality execution services to execution platforms,
stockbrokers, wealth managers and institutional investors, as well
as providing corporate advisory services to investment trusts and
outsourced dealing and custody services via Winterflood Business
Services ("WBS").
We have seen significant macroeconomic uncertainty over the
year, with geopolitical and economic events, particularly the
ongoing war in Ukraine and continual rises in the cost of debt,
causing substantial market challenges. Interest rates are at their
highest since the 2008 financial crisis and, collectively, this has
negatively impacted investor confidence and appetite. Against this
backdrop, the domestically focused UK indices have suffered
sustained market declines, with the FTSE 250 and AIM All-Share
index declining 5% and 17% respectively this year.
This year has seen subdued retail trading activity, particularly
in higher margin sectors (AIM and Smaller Companies) as investors
turned to safer and better performing sectors such as Fixed Income
and Exchange-Traded Funds or withdrew from the market as they await
more certainty in the macroeconomic environment. This sentiment
inevitably led to reduced retail-driven trading situations and our
volumes have fallen as a result. Average daily bargains reduced 26%
to 60k (2022: 81k), although trading volumes remain marginally
above pre-pandemic levels (2019: 56k) and we have maintained our
market-leading position, trading over 280 billion shares in the
year(1) .
Trading income reduced to GBP58.6 million (2022: GBP80.7
million) as diversification in trading sectors and the expertise of
our traders, evidenced by only one loss day (2022: eight loss
days), helped mitigate the difficult market environment.
Operating income decreased to GBP75.3 million (2022: GBP95.2
million), primarily driven by lower trading revenues. All trading
sectors reported a decline on the prior year except Fixed Income,
which benefited from volatility in bond markets following the
fallout from the UK mini-budget and changes in investor risk
appetite. We also saw a reduction in fee income generated by our
Investment Trusts Corporate team as corporate activity slowed
market-wide as the risk-off market sentiment impacted issuance and
transaction volumes, with just one IPO launched this year. Our
Investment Trusts Corporate business, which is corporate broker to
over 50 investment trusts, delivered revenue of GBP2.5 million
(2022: GBP3.9 million), largely representing retainer fee
income.
We are at the forefront of initiatives to simplify participation
in equity, debt and private markets for UK retail investors through
our collaborations with PrimaryBid and JP Jenkins, and our
proprietary solution, Winterflood Retail Access Platform
("WRAP").
WBS has continued its positive trajectory, growing AuA to
GBP12.9 billion (2022: GBP7.2 billion) despite sustained equity
market declines. Net inflows were GBP5.5 billion (2022: GBP1.3
billion) following the successful completion of the planned
migration of custody assets of Fidelity International in the first
quarter of 2023. WBS grew income 45% to GBP14.8 million (2022:
GBP10.2 million), with recurring income up 38% to GBP14.1 million.
We are confident that WBS is well positioned for further growth,
both organically and supported by a solid pipeline of clients, and
expect WBS to grow AuA to over GBP20 billion by 2026.
Operating expenses reduced 11% to GBP71.8 million (2022: GBP81.1
million) due to decreased variable costs as the slowdown in
activity led to lower staff compensation and settlement fees. The
reduction in income was not fully offset by lower expenses,
reflecting operational gearing in the business. Looking ahead,
Winterflood's variable cost base is expected to reflect a recovery
in income as investor confidence returns.
Operating profit decreased 75% to GBP3.5 million (2022: GBP14.1
million) against a backdrop of difficult conditions and sustained
market declines.
Winterflood has a long track record of trading profitably
through a range of conditions and we remain well positioned to
retain our market position and benefit when investor appetite
returns. We continue to diversify our revenue streams and explore
growth opportunities to balance the cyclicality in the trading
business.
1. Bloomberg data covering 1 August 2022 to 31 July 2023.
Definitions
Adjusted: Adjusted measures are presented on a basis consistent
with prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired
businesses consistent with its other businesses; and any
exceptional and other adjusting items which do not reflect
underlying trading performance
Assets under administration: Total assets for which Winterflood
Business Services provide custody and administrative services
Bad debt ratio: Impairment losses in the year as a percentage of
average net loans and advances to customers and operating lease
assets
Bargains per day: Average daily number of Winterflood's trades
with third parties
Business as usual ("BAU") costs: Operating expenses excluding
depreciation and other costs related to investments
Bounce Back Loan Scheme ("BBLS"): UK government business lending
scheme that helped small and medium-sized businesses to borrow
between GBP2,000 and GBP50,000 (up to a maximum of 25% of their
turnover)
Capital Requirements Regulation ("CRR"): Capital Requirements
Regulation as implemented in the PRA Rulebook CRR Instrument and
the PRA Rulebook CRR Firms: Leverage Instrument (collectively known
as "CRR")
CET1 capital ratio: Measure of the group's CET1 capital as a
percentage of risk weighted assets, as required by CRR
Common equity tier 1 ("CET1") capital: Measure of capital as
defined by the CRR. CET1 capital consists of the highest quality
capital including ordinary shares, share premium account, retained
earnings and other reserves, less goodwill and certain intangible
assets and other regulatory adjustments
Compensation ratio: Total staff costs as a percentage of
adjusted operating income
Coronavirus Business Interruption Loan Scheme ("CBILS"): UK
government business lending scheme that helped small and
medium-sized businesses access loans and other kinds of finance up
to GBP5 million
Coronavirus Large Business Interruption Loan Scheme ("CLBILS"):
UK government business lending scheme that helped medium and
large-sized businesses access loans and other kinds of finance up
to GBP200 million
Cost of funds: Interest expense incurred to support the lending
activities divided by the average net loans and advances to
customers and operating lease assets
Credit impaired: Where one or more events that have a
detrimental impact on the estimated future cash flows of a loan
have occurred. Credit impaired events are more severe than SICR
triggers. Accounts which are credit impaired will be allocated
to
Stage 3
Discounting: The process of determining the present value of
future payments
Dividend per share ("DPS"): Comprises the final dividend
proposed for the respective year, together with the interim
dividend declared and paid in the year
Earnings per share ("EPS"): Profit attributable to shareholders
divided by number of basic shares
Effective interest rate ("EIR"): The interest rate at which
revenue is recognised on loans and discounted to their carrying
value over the life of the financial asset
Effective tax rate ("ETR"): Tax on operating profit/(loss) as a
percentage of operating profit/(loss) on ordinary activities before
tax
Expected credit loss ("ECL"): The unbiased probability-weighted
average credit loss determined by evaluating a range of possible
outcomes and future economic conditions
Expense/income ratio: Total adjusted operating expenses divided
by operating income
Exposure at default ("EAD"): The capital outstanding at the
point of default
Financial Conduct Authority ("FCA"): A financial regulatory body
in the UK, regulating financial firms and maintaining integrity of
the UK's financial market
Forbearance: Forbearance occurs when a customer is experiencing
financial 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
Funding allocated to loan book: Total available funding,
excluding equity and funding held for liquidity purposes
Gross carrying amount: Loan book before expected credit loss
provision
High quality liquid assets ("HQLAs"): Assets which qualify for
regulatory liquidity purposes, including Bank of England deposits
and sovereign and central bank debt
HM Revenue & Customs ("HMRC"): The UK's tax, payments and
customs authority
Independent financial adviser ("IFA"): Professional offering
independent, whole of market advice to clients including
investments, pensions, protection and mortgages
Internal ratings based ("IRB") approach: A supervisor-approved
method using internal models, rather than standardised risk
weightings, to calculate regulatory capital requirements for credit
risk
International Financial Reporting Standards ("IFRS"): Globally
accepted accounting standards issued by the IFRS Foundation and the
International Accounting Standards Board
Investment costs: Includes depreciation and other costs related
to investment in multi-year projects, new business initiatives and
pilots and cyber resilience. Excludes IFRS 16 depreciation
Leverage ratio: Tier 1 capital as a percentage of total balance
sheet assets, adjusted for certain capital deductions, including
intangible assets, and off-balance sheet exposures
Liquidity coverage ratio ("LCR"): Measure of the group's HQLAs
as a percentage of expected net cash outflows over the next
30 days in a stressed scenario
Loan to value ("LTV") ratio: For a secured or structurally
protected loan, the loan balance as a percentage of the total value
of the asset
Loss day: Where aggregate gross trading book revenues are
negative at the end of a trading day
Loss given default ("LGD"): The amount lost on a loan if a
customer defaults
Managed assets or assets under management ("AuM"): Total market
value of assets which are managed by Close Brothers Asset
Management in one of our investment solutions
Modelled expected credit loss provision: ECL = PD x LGD x
EAD
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
Probability of default ("PD"): Probability that a customer will
default on their loan
Prudential Regulation Authority ("PRA"): A financial regulatory
body, responsible for regulating and supervising banks and other
financial institutions in the UK
Recovery Loan Scheme: Launched in April 2021 as a replacement to
CBILS. Under the terms of the scheme, businesses of any size that
have been adversely impacted by the Covid-19 pandemic can apply to
borrow up to GBP10 million, with accredited lenders receiving a
government-backed guarantee of 80% on losses that may arise
Return on assets: Adjusted operating profit attributable to
shareholders divided by total closing assets at the balance sheet
date
Return on average tangible equity: Adjusted operating profit
attributable to shareholders divided by average total shareholder's
equity, excluding intangible assets
Return on net loan book ("RoNLB"): Adjusted operating profit
from lending activities divided by average net loans and advances
to customers and operating lease assets
Return on opening equity ("RoE"): Adjusted operating profit
attributable to shareholders divided by opening equity, excluding
non-controlling interests
Revenue margin: Income from advice, investment management and
related services divided by average total client assets. Average
total client assets calculated as a two-point average
Risk weighted assets ("RWAs"): A measure of the amount of a
bank's assets, adjusted for risk in line with the CRR. It is used
in determining the capital requirement for a financial
institution
Scope 1, 2 and 3 emissions: Categorisation of greenhouse gas
emissions, as defined by the Greenhouse Gas (GHG) Protocol, into
direct emissions from owned or controlled sources (Scope 1),
indirect emissions from the generation of purchased electricity,
heating and cooling consumed by the reporting company (Scope 2),
and all other indirect emissions that occur in a company's value
chain (Scope 3)
Secured debt: Debt backed or secured by collateral
Senior debt: Represents the type of debt that takes priority
over other unsecured or more junior debt owed by the issuer. Senior
debt is first to be repaid ahead of other lenders or creditors
Significant increase in credit risk ("SICR"): An assessment of
whether credit risk has increased significantly since initial
recognition of a loan using a range of triggers. Accounts which
have experienced a significant increase in credit risk will be
allocated to Stage 2
Standardised approach: Generic term for regulator-defined
approaches for calculating credit, operational and market risk
capital requirements as set out in the CRR
Subordinated debt: Represents debt that ranks below, and is
repaid after claims of, other secured or senior debt owed by the
issuer
Task Force on Climate-related Financial Disclosures ("TCFD"):
Regulatory framework to improve and increase reporting of
climate-related financial information, including more effective and
consistent disclosure of climate-related risks and
opportunities
Term funding: Funding with a remaining maturity greater than 12
months
Term Funding Scheme ("TFS"): The Bank of England's Term Funding
Scheme
Term Funding Scheme for Small and Medium-sized Enterprises
("TFSME"): The Bank of England's Term Funding Scheme with
additional incentives for SMEs
Tier 2 capital: Additional regulatory capital that along with
Tier 1 capital makes up a bank's total regulatory capital. Includes
qualifying subordinated debt
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
Total funding as % of loan book: Total funding divided by net
loans and advances to customers and operating lease assets
Total shareholder return ("TSR"): Measure of shareholder return
including share price appreciation and dividends, which are assumed
to be re-invested in the company's shares
Watch list: Internal risk management process for heightened
monitoring of exposures that are showing increased credit risk
Consolidated Income Statement
for the year ended 31 July 2023
2023 2022
GBP GBP
Note million million
----------------------------------------------------- ---- -------- --------
Interest income 897.5 690.0
----------------------------------------------------- ---- -------- --------
Interest expense (304.9) (112.0)
----------------------------------------------------- ---- -------- --------
Net interest income 592.6 578.0
----------------------------------------------------- ---- -------- --------
Fee and commission income 262.9 259.5
----------------------------------------------------- ---- -------- --------
Fee and commission expense (17.9) (17.2)
----------------------------------------------------- ---- -------- --------
Gains less losses arising from dealing in securities 58.6 81.6
----------------------------------------------------- ---- -------- --------
Other income 114.2 106.1
----------------------------------------------------- ---- -------- --------
Depreciation of operating lease assets and other
direct costs 10 (77.8) (71.9)
----------------------------------------------------- ---- -------- --------
Non-interest income 340.0 358.1
----------------------------------------------------- ---- -------- --------
Operating income 932.6 936.1
----------------------------------------------------- ---- -------- --------
Administrative expenses (615.0) (598.0)
----------------------------------------------------- ---- -------- --------
Impairment losses on financial assets 6 (204.1) (103.3)
----------------------------------------------------- ---- -------- --------
Total operating expenses before amortisation of
intangible assets on acquisition (819.1) (701.3)
----------------------------------------------------- ---- -------- --------
Operating profit before amortisation of intangible
assets on acquisition 113.5 234.8
----------------------------------------------------- ---- -------- --------
Amortisation of intangible assets on acquisition 9 (1.5) (2.0)
----------------------------------------------------- ---- -------- --------
Operating profit before tax 112.0 232.8
----------------------------------------------------- ---- -------- --------
Tax 3 (30.9) (67.6)
----------------------------------------------------- ---- -------- --------
Profit after tax 81.1 165.2
----------------------------------------------------- ---- -------- --------
Profit attributable to shareholders 81.1 165.2
----------------------------------------------------- ---- -------- --------
Basic earnings per share 4 54.3p 110.4p
----------------------------------------------------- ---- -------- --------
Diluted earnings per share 4 54.2p 109.9p
----------------------------------------------------- ---- -------- --------
Interim dividend per share paid 5 22.5p 22.0p
----------------------------------------------------- ---- -------- --------
Final dividend per share 5 45.0p 44.0p
----------------------------------------------------- ---- -------- --------
Consolidated Statement of Comprehensive Income
for the year ended 31 July 2023
2023 2022
GBP GBP
million million
--------------------------------------------------------- -------- --------
Profit after tax 81.1 165.2
--------------------------------------------------------- -------- --------
Items that may be reclassified to income statement
--------------------------------------------------------- -------- --------
Currency translation gains/(losses) 0.7 (0.5)
--------------------------------------------------------- -------- --------
Gains on cash flow hedging 17.6 30.6
--------------------------------------------------------- -------- --------
Losses on financial instruments classified at fair value
through other comprehensive income (3.9) (1.1)
--------------------------------------------------------- -------- --------
Tax relating to items that may be reclassified (4.3) (7.9)
--------------------------------------------------------- -------- --------
10.1 21.1
--------------------------------------------------------- -------- --------
Items that will not be reclassified to income statement
--------------------------------------------------------- -------- --------
Defined benefit pension scheme losses (5.7) (0.1)
--------------------------------------------------------- -------- --------
Tax relating to items that will not be reclassified 1.6 0.3
--------------------------------------------------------- -------- --------
(4.1) 0.2
--------------------------------------------------------- -------- --------
Other comprehensive income, net of tax 6.0 21.3
--------------------------------------------------------- -------- --------
Total comprehensive income 87.1 186.5
--------------------------------------------------------- -------- --------
Attributable to
--------------------------------------------------------- -------- --------
Shareholders 87.1 186.5
--------------------------------------------------------- -------- --------
Consolidated Balance Sheet
at 31 July 2023
31 July 31 July
2023 2022
GBP GBP
Note million million
------------------------------------------------ ---- -------- --------
Assets
------------------------------------------------ ---- -------- --------
Cash and balances at central banks 1,937.0 1,254.7
------------------------------------------------ ---- -------- --------
Settlement balances 707.0 799.3
------------------------------------------------ ---- -------- --------
Loans and advances to banks 330.3 165.4
------------------------------------------------ ---- -------- --------
Loans and advances to customers 6 9,255.0 8,858.9
------------------------------------------------ ---- -------- --------
Debt securities 7 307.6 612.8
------------------------------------------------ ---- -------- --------
Equity shares 8 29.3 28.4
------------------------------------------------ ---- -------- --------
Loans to money brokers against stock advanced 37.6 48.4
------------------------------------------------ ---- -------- --------
Derivative financial instruments 88.5 71.2
------------------------------------------------ ---- -------- --------
Intangible assets 9 263.7 252.0
------------------------------------------------ ---- -------- --------
Property, plant and equipment 10 357.1 322.5
------------------------------------------------ ---- -------- --------
Current tax assets 42.3 47.0
------------------------------------------------ ---- -------- --------
Deferred tax assets 10.8 32.5
------------------------------------------------ ---- -------- --------
Prepayments, accrued income and other assets 184.1 185.2
------------------------------------------------ ---- -------- --------
Total assets 13,550.3 12,678.3
------------------------------------------------ ---- -------- --------
Liabilities
------------------------------------------------ ---- -------- --------
Settlement balances and short positions 11 695.9 796.1
------------------------------------------------ ---- -------- --------
Deposits from banks 12 141.9 160.5
------------------------------------------------ ---- -------- --------
Deposits from customers 12 7,724.5 6,770.4
------------------------------------------------ ---- -------- --------
Loans and overdrafts from banks 12 651.9 622.7
------------------------------------------------ ---- -------- --------
Debt securities in issue 12 2,012.6 2,060.9
------------------------------------------------ ---- -------- --------
Loans from money brokers against stock advanced 4.8 -
------------------------------------------------ ---- -------- --------
Derivative financial instruments 195.9 89.2
------------------------------------------------ ---- -------- --------
Accruals, deferred income and other liabilities 303.0 334.5
------------------------------------------------ ---- -------- --------
Subordinated loan capital 174.9 186.5
------------------------------------------------ ---- -------- --------
Total liabilities 11,905.4 11,020.8
------------------------------------------------ ---- -------- --------
Equity
------------------------------------------------ ---- -------- --------
Called up share capital 38.0 38.0
------------------------------------------------ ---- -------- --------
Retained earnings 1,608.5 1,628.4
------------------------------------------------ ---- -------- --------
Other reserves (1.6) (8.9)
------------------------------------------------ ---- -------- --------
Total shareholders' equity 1,644.9 1,657.5
------------------------------------------------ ---- -------- --------
Total equity 1,644.9 1,657.5
------------------------------------------------ ---- -------- --------
Total equity and liabilities 13,550.3 12,678.3
------------------------------------------------ ---- -------- --------
Consolidated Statement of Changes in Equity
for the year ended 31 July 2023
Other reserves
----------------------------------------
Share- Cash
Called based Exchange flow Total Non-
up share Retained FVOCI payments movements hedging attributable controlling Total
capital earnings reserve reserve reserve reserve to equity interests equity
GBP GBP GBP GBP GBP GBP holders GBP GBP
million million million million million million GBP million million million
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
At 1 August
2021 38.0 1,555.5 0.8 (22.4) (1.3) (0.3) 1,570.3 (1.0) 1,569.3
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
Profit for the
year - 165.2 - - - - 165.2 - 165.2
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
Other
comprehensive
income/(expense) - 0.2 (0.7) - (0.2) 22.0 21.3 - 21.3
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
Total
comprehensive
income for the
year - 165.4 (0.7) - (0.2) 22.0 186.5 - 186.5
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
Dividends paid
(note 5) - (95.5) - - - - (95.5) - (95.5)
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
Shares purchased - - - (9.5) - - (9.5) - (9.5)
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
Shares released - - - 4.9 - - 4.9 - 4.9
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
Other movements - 4.1 - (2.2) - - 1.9 1.0 2.9
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
Income tax - (1.1) - - - - (1.1) - (1.1)
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
At 31 July 2022 38.0 1,628.4 0.1 (29.2) (1.5) 21.7 1,657.5 - 1,657.5
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
Profit for the
year - 81.1 - - - - 81.1 - 81.1
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
Other
comprehensive
(expense)/income - (4.1) (2.8) - 0.2 12.7 6.0 - 6.0
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
Total
comprehensive
income for the
year - 77.0 (2.8) - 0.2 12.7 87.1 - 87.1
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
Dividends paid
(note 5) - (99.1) - - - - (99.1) - (99.1)
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
Shares purchased - - - (5.0) - - (5.0) - (5.0)
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
Shares released - - - 5.6 - - 5.6 - 5.6
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
Other movements - 2.3 - (3.4) - - (1.1) - (1.1)
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
Income tax - (0.1) - - - - (0.1) - (0.1)
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
At 31 July 2023 38.0 1,608.5 (2.7) (32.0) (1.3) 34.4 1,644.9 - 1,644.9
----------------- --------- --------- -------- --------- --------- -------- ------------ ----------- --------
Consolidated Cash Flow Statement
for the year ended 31 July 2023
2022
2023 GBP
Note GBP million million
---------------------------------------------------- ----- ------------ --------
Net cash inflow from operating activities 16(a) 1,021.4 158.7
---------------------------------------------------- ----- ------------ --------
Net cash (outflow)/inflow from investing activities
---------------------------------------------------- ----- ------------ --------
Purchase of:
---------------------------------------------------- ----- ------------ --------
Property, plant and equipment (8.7) (7.1)
---------------------------------------------------- ----- ------------ --------
Intangible assets - software (53.2) (51.3)
---------------------------------------------------- ----- ------------ --------
Subsidiaries 16(b) (0.5) (0.1)
---------------------------------------------------- ----- ------------ --------
Sale of:
---------------------------------------------------- ----- ------------ --------
Subsidiaries 16(c) - 0.1
---------------------------------------------------- ----- ------------ --------
(62.4) (58.4)
---------------------------------------------------- ----- ------------ --------
Net cash inflow before financing activities 959.0 100.3
---------------------------------------------------- ----- ------------ --------
Financing activities
---------------------------------------------------- ----- ------------ --------
Purchase of own shares for employee share award
schemes (5.0) (9.5)
---------------------------------------------------- ----- ------------ --------
Equity dividends paid (99.1) (95.5)
---------------------------------------------------- ----- ------------ --------
Interest paid on subordinated loan capital and
debt financing (10.9) (10.4)
---------------------------------------------------- ----- ------------ --------
Payment of lease liabilities (16.2) (15.1)
---------------------------------------------------- ----- ------------ --------
Issuance of senior bond 248.5 -
---------------------------------------------------- ----- ------------ --------
Redemption of senior bond (250.0) -
---------------------------------------------------- ----- ------------ --------
Redemption of subordinated loan capital - (23.4)
---------------------------------------------------- ----- ------------ --------
Net increase/(decrease) in cash 826.3 (53.6)
---------------------------------------------------- ----- ------------ --------
Cash and cash equivalents at beginning of year 1,383.0 1,436.6
---------------------------------------------------- ----- ------------ --------
Cash and cash equivalents at end of year 16(d) 2,209.3 1,383.0
---------------------------------------------------- ----- ------------ --------
The Notes
1. Basis of Preparation and Accounting Policies
The financial information contained in this announcement does
not constitute the statutory accounts for the years ended 31 July
2023 or 31 July 2022 within the meaning of section 435 of the
Companies Act 2006, but is derived from those accounts. The
accounting policies used are consistent with those set out in the
Annual Report 2022.
The financial statements are prepared on a going concern basis.
Whilst the financial information has been prepared in accordance
with the recognition and measurement criteria of International
Financial Reporting Standards ("IFRS"), this announcement does not
itself contain sufficient information to comply with IFRS 9.
The financial information for the year ended 31 July 2023 has
been derived from the financial statements of Close Brothers Group
plc for that year. Statutory accounts for 2022 have been delivered
to the Registrar of Companies and those for 2023 will be delivered
following the company's Annual General Meeting. The group's
auditor, PricewaterhouseCoopers LLP, will report on the 2023
accounts: their report is expected to be unqualified, and is not
expected to draw attention to any matters by way of emphasis or
contain statements under Section 498(2) or (3) of the Companies Act
2006.
Finance (No.2) Act 2023 was substantively enacted in June 2023,
and introduced the Pillar Two global minimum tax rate of 15% and a
UK domestic minimum top-up tax with effect from 1 January 2024. The
group has adopted the IAS 12 exception from recognition and
disclosure regarding the impact on deferred tax assets and
liabilities arising from this legislation. The company has adopted
the same exception under FRS 102.
Critical accounting judgements and estimates
The reported results of the group are sensitive to the
judgements, estimates and assumptions that underlie the application
of its accounting policies and preparation of its financial
statements. UK company law and IFRS require the directors, in
preparing the group's financial statements, to select suitable
accounting policies, apply them consistently and make judgements,
estimates and assumptions that are reasonable.
The group's estimates and assumptions are based on historical
experience and reasonable expectations of future events and are
reviewed on an ongoing basis. Actual results in the future may
differ from the amounts estimated due to the inherent
uncertainty.
The group's critical accounting judgements, made in applying its
accounting policies, and the key sources of estimation uncertainty
that may have a significant risk of causing a material adjustment
within the next financial year are set out below.
The impact of climate change on the group's judgements,
estimates and assumptions has been considered in preparing these
financial statements. While no material impact has been identified,
climate risk continues to be monitored on an ongoing basis.
Critical accounting judgements
The critical accounting judgements of the group relate to
expected credit loss provisions calculated under IFRS 9 and are as
follows.
Significant increase in credit risk
Assets are transferred from Stage 1 to Stage 2 when there has
been a significant increase in credit risk since initial
recognition. Typically, the group assesses whether a significant
increase in credit risk has occurred based on a quantitative and
qualitative assessment, with a "30 days past due" backstop.
Due to the diverse nature of the group's lending businesses, the
specific indicators of a significant increase in credit risk vary
by business and may include some or all of the following
factors:
-- quantitative assessment: the lifetime probability of default
("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 each business
to ensure that the increased risk since origination is
appropriately captured;
-- qualitative assessment: events or observed behaviour indicate
credit deterioration. This includes a wide range of information
that is reasonably available including individual credit
assessments of the financial performance of borrowers as
appropriate during routine reviews, plus forbearance and watch list
information; or
-- backstop criteria: the "30 days past due" backstop is met.
Definition of default
The definition of default is an important building block for
expected credit loss models and is considered a key judgement. A
default is considered to have occurred if any unlikeliness to pay
criterion is met or when a financial asset meets a "90 days past
due" backstop. While some criteria are factual (e.g.
administration, insolvency or bankruptcy), others require a
judgemental 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
The key sources of estimation uncertainty of the group relate to
expected credit loss provisions and goodwill and are as
follows:
-- Two key model estimates, being time to recover periods and
recovery rates, underpinning the expected credit loss provision of
Novitas. The key Novitas estimates in the prior year were case
failure rates and recovery rates;
-- Forward-looking macroeconomic information incorporated into
expected credit loss models. This was also a key estimate in the
prior year;
-- Adjustments by management to model calculated expected credit
losses due to limitations in the group's expected credit loss
models or input data, which may be identified through ongoing model
monitoring and validation of models. This is a new key estimate
this year due to an increase in the size of the adjustment; and
-- Estimate of future cash flow forecasts in the calculation of
value in use for the testing of goodwill for impairment in relation
to the Winterflood Securities cash generating unit. This is a new
key estimate this year due to increased market uncertainty.
Novitas loans
Since 31 July 2022, there has been an increase in the expected
credit loss provision in Novitas. The two assumptions requiring the
most significant judgement relate to expected recovery rates and
time to recovery periods in Novitas. During 2021 and 2022, expected
case failure rates were considered a significant judgement. Due to
the migration of loans to Stage 3, as explained below, expected
case failure rates are no longer considered to be a significant
judgement while time to recovery periods have become a significant
judgement.
Case failure rates represent a forward-looking probability
assessment of successful case outcomes through court proceedings or
out of court settlements. Recovery rates represent the level of
interest and capital that is covered by an insurance policy and
expected to be recoverable once a case fails. Time to recovery
periods represent management's view on timing using weighted
probabilities.
Novitas provides funding to individuals who wish to pursue legal
cases. The majority of the Novitas portfolio, and therefore
provision, relates to civil litigation cases. To protect customers
in the event that their case fails, it was a condition of the
Novitas loan agreements that an individual purchased an After the
Event ("ATE") insurance policy which covered the loan.
As previously announced, following a strategic review, in July
2021 the group decided to cease permanently the approval of lending
to new customers across all of the products offered by Novitas and
withdraw from the legal services financing market. Since that time,
the Novitas loan book has been in run-off, and the business has
continued to work with solicitors and insurers, with a focus on
supporting existing customers and managing the existing book to
ensure good customer outcomes, where it is within Novitas' ability
to do so.
In the first half of the financial year under review, management
reviewed and updated its assumptions for expected case failure
rates, expected time to recover periods and expected recovery rates
to reflect experienced credit performance and ongoing dialogue with
customers' insurers. This included initiating formal legal action
against one of the ATE insurers regarding the potential
recoverability of funds in relation to failed cases and considering
its position in respect of other insurers. As a result, a number of
updates were made to the expected credit loss provision calculation
resulting in an increase of GBP70.8 million to GBP184.1 million (31
July 2022: GBP113.3 million). The increase to the expected credit
loss provision is net of write-offs previously provided for and
does not include write-offs and costs taken directly to the income
statement.
Based on the current position, the majority of loans in the
portfolio have been assessed as credit-impaired and have been
migrated to Stage 3, with expected case failure rates increased
accordingly. Expected credit losses for the portfolio have been
calculated by comparing the gross loan balance to expected cash
flows discounted at the original effective interest rate, over an
appropriate time to recovery period. In line with IFRS 9, a
proportion of the expected credit loss is expected to unwind, over
the estimated time to recover period, to interest income, which
reflects the requirement to recognise interest income on Stage 3
loans on a net basis.
Since 31 July 2022, a material increase in the expected case
failure rate assumptions and decrease in the expected recovery rate
assumptions have been recognised and the recoverability of interest
on relevant loans has been reassessed.
Given that the majority of the Novitas portfolio is in Stage 3,
the key sources of estimation uncertainty for the portfolio's
expected credit loss provision are time to recover periods and
recovery rates. On this basis management have assessed and
completed sensitivity analysis when compared to the expected credit
loss provision for Novitas of GBP184.1 million (31 July 2022:
GBP113.3 million). At 31 July 2023, a 10% absolute deterioration or
improvement in recovery rates would increase or decrease the ECL
provision by GBP11.0 million. Separately, a 12-month improvement in
the time to recover period will reduce the ECL provision by GBP12.1
million, while a 12-month delay in the time to recover period will
increase the ECL provision by GBP10.0 million.
Forward-looking information
Determining expected credit losses under IFRS 9 requires the
incorporation of forward-looking macroeconomic information that is
reasonable, supportable and includes assumptions linked to economic
variables that impact losses in each portfolio. The introduction of
macroeconomic information introduces additional volatility to
provisions.
In order to calculate forward-looking provisions, economic
scenarios are sourced from Moody's Analytics. These scenarios cover
a range of plausible economic conditions that are then used to
project potential credit outcomes for each portfolio. An overview
of these scenarios using key macroeconomic indicators is provided
below. Ongoing benchmarking of the scenarios to other economic
providers is carried out monthly to provide management with comfort
on Moody's Analytics scenario paths.
Five different projected economic scenarios are currently
considered to cover a range of possible outcomes. These include a
baseline scenario, which reflects the best view of future economic
events. In addition, one upside scenario and three downside
scenario paths are defined relative to the baseline. Management
assigns the scenarios a probability weighting to reflect the
likelihood of specific scenarios, and therefore loss outcomes,
materialising, using a combination of quantitative analysis and
expert judgement.
The impact of forward-looking information varies across the
group's lending businesses because of the differing sensitivity of
each portfolio to specific macroeconomic variables. This is
reflected through the development of bespoke macroeconomic models
that recognise the specific response of each business to the
macroeconomic environment.
The modelled impact of macroeconomic scenarios and their
respective weightings is reviewed by business experts in relation
to stage allocation and coverage ratios at the individual and
portfolio level, incorporating management's experience and
knowledge of customers, the sectors in which they operate, and the
assets financed.
This includes assessment of the reaction of the ECL in the
context of the prevailing and forecast economic conditions, for
example where currently higher interest rates and inflationary
conditions exist compared to recent periods.
Economic forecasts have evolved over the course of 2023 and
reflect the continued economic challenges and uncertainty.
Forecasts deployed in IFRS 9 macroeconomic models are updated on a
monthly basis. At 31 July 2023, the latest baseline scenario
forecasts GDP growth of 0.5% in calendar year 2023 and an average
base rate of 4.9% across calendar year 2023. CPI is forecast to be
5.2% in calendar year 2023 in the baseline scenario, with 1.5%
forecast in the protracted downside scenario over the same
period.
At 31 July 2022, the scenario weightings were: 30% strong
upside, 32.5% baseline, 20% mild downside, 10.5% moderate downside
and 7% protracted downside. As economic forecasts are considered to
appropriately recognise deterioration in the macroeconomic
environment, no change has been made to the weightings ascribed to
the scenarios since 31 July 2022.
Given the current economic uncertainty, further analysis has
been undertaken to assess the appropriateness of the five scenarios
used. This included benchmarking the baseline scenario to consensus
economic views, as well as consideration of an additional forecast
related to stagflation, which could be considered as an alternative
downside scenario.
Compared to the scenarios in use in the expected credit losses
calculation, the stagflation scenario includes a longer period of
higher interest rates coupled with a shallower but extended impact
on GDP. Due to the relatively short tenor of the portfolios the
stagflation scenario is considered to be of less relevance than
those deployed. This is supported by the fact that, due to the
higher severity of recessionary factors in the existing scenarios,
using the stagflation scenario instead of the moderate or
protracted downside scenario would result in lower expected credit
losses.
The final scenarios deployed reflect overall deterioration in
the UK economic outlook relative to 31 July 2022, and factor in
recent developments including dampened GDP growth for 2024 and 2025
and a Bank of England base rate peak in late 2023 following
persistent high levels of inflation. Under the baseline scenario,
UK headline CPI inflation continues to fall from its peak owing to
sustained base rate increases and eased supply chain pressures.
House price outlook includes contraction across all scenarios;
however, house prices return to growth sooner than previously
anticipated. Unemployment rate forecasts have marginally improved
compared to 31 July 2022.
FY 2023 and FY 2022 scenario forecasts and weights
Baseline Upside (strong) Downside Downside (moderate) Downside (protracted)
(mild)
2023 2024 2023 2024 2023 2024 2023 2024 2023 2024
---------------- ------ ------ --------- ------ ------ ------ ---------- --------- ----------- ----------
At 31 July 2023
---------------- ------ ------ --------- ------ ------ ------ ---------- --------- ----------- ----------
UK GDP Growth 0.5% 0.3% 1.3% 3.0% (0.2%) (2.3%) (0.6%) (4.8%) (0.8%) (6.2%)
---------------- ------ ------ --------- ------ ------ ------ ---------- --------- ----------- ----------
UK Unemployment 4.1% 4.4% 3.9% 3.9% 4.2% 4.8% 4.4% 6.5% 4.5% 7.7%
---------------- ------ ------ --------- ------ ------ ------ ---------- --------- ----------- ----------
UK HPI Growth (6.3%) (1.4%) (0.4%) 8.3% (9.1%) (6.9%) (10.8%) (13.2%) (12.6%) (20.1%)
---------------- ------ ------ --------- ------ ------ ------ ---------- --------- ----------- ----------
BoE Base Rate 4.9% 5.5% 4.9% 5.7% 4.8% 4.8% 4.7% 4.2% 4.5% 3.6%
---------------- ------ ------ --------- ------ ------ ------ ---------- --------- ----------- ----------
Consumer Price
Index 5.2% 2.2% 4.8% 2.2% 3.8% 1.2% 3.0% (0.3%) 1.5% (2.3%)
---------------- ------ ------ --------- ------ ------ ------ ---------- --------- ----------- ----------
Weighting 32.5% 30% 20% 10.5% 7%
---------------- -------------- ----------------- -------------- --------------------- -----------------------
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
2022 2023 2022 2023 2022 2023 2022 2023 2022 2023
---------------- ----- ---- -------- ------- ------- -------- ---------- --------- ---------- -----------
At 31 July 2022
---------------- ----- ---- -------- ------- ------- -------- ---------- --------- ---------- -----------
UK GDP Growth 3.4% 0.8% 4.1% 2.9% 2.7% (1.8%) 2.4% (4.4%) 2.1% (5.9%)
---------------- ----- ---- -------- ------- ------- -------- ---------- --------- ---------- -----------
UK Unemployment 3.8% 4.1% 3.6% 3.6% 4.0% 4.6% 4.1% 6.2% 4.2% 7.4%
---------------- ----- ---- -------- ------- ------- -------- ---------- --------- ---------- -----------
UK HPI Growth 4.3% 2.6% 10.9% 12.7% 1.1% (3.1%) (0.5%) (9.1%) (2.4%) (15.9%)
---------------- ----- ---- -------- ------- ------- -------- ---------- --------- ---------- -----------
BoE Base Rate 1.1% 1.8% 1.1% 1.7% 1.3% 1.0% 1.4% 1.1% 1.5% 1.2%
---------------- ----- ---- -------- ------- ------- -------- ---------- --------- ---------- -----------
Consumer Price
Index 10.7% 2.8% 10.3% 2.8% 12.3% 0.4% 14.2% 0.2% 17.1% (2.2%)
---------------- ----- ---- -------- ------- ------- -------- ---------- --------- ---------- -----------
Weighting 32.5% 30% 20% 10.5% 7%
---------------- ----------- ----------------- ----------------- --------------------- -----------------------
Notes:
UK GDP growth: National Accounts Annual Real Gross Domestic
Product, Seasonally Adjusted - year-on-year change (%)
UK unemployment: ONS Labour Force Survey, Seasonally Adjusted -
Average (%)
UK HPI growth: Average nominal house prices, Land Registry,
Seasonally Adjusted - Q4-to-Q4 change (%)
BoE base rate: Bank of England base rate - Average (%)
Consumer Price Index: ONS, All items, annual inflation -
Q4-to-Q4 change (%)
Five-year average (calendar year 2023 - 2027)
Baseline Upside (strong) Downside (mild) Downside Downside (protracted)
(moderate)
---------------- -------- --------------- --------------- ----------- ---------------------
At 31 July 2023
---------------- -------- --------------- --------------- ----------- ---------------------
UK GDP Growth 0.9% 1.7% 0.5% 0.0% (0.1%)
---------------- -------- --------------- --------------- ----------- ---------------------
UK Unemployment 4.4% 3.9% 4.6% 6.4% 7.3%
---------------- -------- --------------- --------------- ----------- ---------------------
UK HPI Growth 0.5% 2.1% (1.1%) (2.9%) (5.4%)
---------------- -------- --------------- --------------- ----------- ---------------------
BoE Base Rate 3.8% 3.8% 3.5% 2.8% 2.3%
---------------- -------- --------------- --------------- ----------- ---------------------
Consumer Price
Index 2.6% 2.6% 2.1% 1.6% 0.7%
---------------- -------- --------------- --------------- ----------- ---------------------
Weighting 32.5% 30% 20% 10.5% 7%
---------------- -------- --------------- --------------- ----------- ---------------------
Five-year average (calendar year 2022 - 2026)
Baseline Upside (strong) Downside (mild) Downside Downside (protracted)
(moderate)
---------------- -------- --------------- --------------- ----------- ---------------------
At 31 July 2022
---------------- -------- --------------- --------------- ----------- ---------------------
UK GDP Growth 1.2% 1.7% 0.8% 0.2% (0.1%)
---------------- -------- --------------- --------------- ----------- ---------------------
UK Unemployment 4.4% 3.8% 4.6% 6.4% 7.2%
---------------- -------- --------------- --------------- ----------- ---------------------
UK HPI Growth 0.1% 1.8% (1.3%) (2.5%) (4.6%)
---------------- -------- --------------- --------------- ----------- ---------------------
BoE Base Rate 2.0% 2.0% 1.5% 0.9% 0.6%
---------------- -------- --------------- --------------- ----------- ---------------------
Consumer Price
Index 3.8% 3.8% 3.7% 3.6% 3.4%
---------------- -------- --------------- --------------- ----------- ---------------------
Weighting 32.5% 30% 20% 10.5% 7%
---------------- -------- --------------- --------------- ----------- ---------------------
Notes:
UK GDP growth: National Accounts Annual Real Gross Domestic
Product, Seasonally Adjusted - CAGR (%)
UK unemployment: ONS Labour Force Survey, Seasonally Adjusted -
Average (%)
UK HPI growth: Average nominal house prices, Land Registry,
Seasonally Adjusted - CAGR (%)
BoE base rate: Bank of England base rate - Average (%)
Consumer Price Index: ONS, All items, annual inflation - CAGR
(%)
The forecasts represent an economic view at 31 July 2023, after
which the economic uncertainty has continued. These trends,
including the risk of further interest rate rises, and their impact
on scenarios and weightings, are subject to ongoing monitoring by
management.
The tables above shows economic assumptions within each
scenario, and the weighting applied to each at 31 July 2023. The
metrics shown are key UK economic indicators, chosen to describe
the economic scenarios. These are the main metrics used to set
scenario paths, which then influence a wide range of additional
metrics that are used in expected credit loss models. The first
tables show the forecasts of the key metrics for the scenarios
utilised for calendar years 2022 and 2023. The subsequent tables
show averages and peak-to-trough ranges for the same key metrics
over the five-year period from 2023 to 2027.
These periods have been included as they demonstrate the short-,
medium- and long-term outlooks for the key macroeconomic indicators
which form the basis of the scenario forecasts. The portfolio has
an average residual maturity of 16 months, with c.98% of loan value
having a maturity of five years or less.
The tables below provide a summary for the five-year period
(calendar year 2023-2027) of the peak-to-trough range of values of
the key UK economic variables used within the economic scenarios at
31 July 2023 and 31 July 2022:
Five-year period (calendar year 2023 - 2027)
Baseline Upside (strong) Downside Downside Downside
(mild) (moderate) (protracted)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
---------------- ----- ------ ------- -------- ------ ------- ------ ------- ------ -------
At 31 July 2023
---------------- ----- ------ ------- -------- ------ ------- ------ ------- ------ -------
UK GDP Growth 4.6% 0.1% 8.7% 0.1% 2.5% (3.0%) 0.3% (5.9%) 0.3% (8.1%)
---------------- ----- ------ ------- -------- ------ ------- ------ ------- ------ -------
UK Unemployment 4.6% 3.9% 4.1% 3.7% 4.9% 3.9% 7.3% 3.9% 8.5% 3.9%
---------------- ----- ------ ------- -------- ------ ------- ------ ------- ------ -------
UK HPI Growth 2.6% (7.8%) 12.9% (3.1%) (0.5%) (15.4%) (0.5%) (24.0%) (0.5%) (32.1%)
---------------- ----- ------ ------- -------- ------ ------- ------ ------- ------ -------
BoE Base Rate 5.8% 2.3% 5.9% 2.3% 5.4% 2.2% 5.2% 1.3% 5.2% 0.6%
---------------- ----- ------ ------- -------- ------ ------- ------ ------- ------ -------
Consumer Price
Index 10.2% 1.8% 10.2% 1.8% 10.2% 0.8% 10.2% (1.0%) 10.2% (3.8%)
---------------- ----- ------ ------- -------- ------ ------- ------ ------- ------ -------
Weighting 32.5% 30% 20% 10.5% 7%
---------------- ------------- ----------------- --------------- --------------- ---------------
Five-year period (calendar year 2022 - 2026)
Baseline Upside (strong) Downside Downside Downside
(mild) (moderate) (protracted)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
---------------- ----- ------ ------- -------- ----- ------- ----- ------- ------ -------
At 31 July 2022
---------------- ----- ------ ------- -------- ----- ------- ----- ------- ------ -------
UK GDP Growth 6.3% 0.4% 9.0% 0.4% 4.1% (2.6%) 1.0% (5.1%) 0.8% (6.9%)
---------------- ----- ------ ------- -------- ----- ------- ----- ------- ------ -------
UK Unemployment 4.8% 3.7% 4.2% 3.5% 4.8% 3.7% 7.4% 3.7% 8.4% 3.7%
---------------- ----- ------ ------- -------- ----- ------- ----- ------- ------ -------
UK HPI Growth 2.0% (5.0%) 16.7% (1.1%) 2.0% (11.7%) 2.0% (17.9%) 2.0% (26.0%)
---------------- ----- ------ ------- -------- ----- ------- ----- ------- ------ -------
BoE Base Rate 2.5% 0.5% 2.5% 0.5% 2.5% 0.1% 2.4% 0.1% 2.6% 0.1%
---------------- ----- ------ ------- -------- ----- ------- ----- ------- ------ -------
Consumer Price
Index 10.7% 2.0% 10.3% 2.0% 12.3% 0.4% 14.2% 0.1% 17.1% (2.2%)
---------------- ----- ------ ------- -------- ----- ------- ----- ------- ------ -------
Weighting 32.5% 30% 20% 10.5% 7%
---------------- ------------- ----------------- -------------- -------------- ---------------
Notes:
UK GDP growth: Maximum and minimum quarterly GDP as a percentage
change from start of period (%)
UK unemployment: Maximum and minimum unemployment rate (%)
UK HPI growth: Maximum and minimum average nominal house price
as a percentage change from start of period (%)
BoE base rate: Maximum and minimum Bank of England base rate
(%)
Consumer Price Index: Maximum and minimum inflation rate over
the five-year period (%).
The following charts below represent the quarterly forecast data
included in the above tables incorporating actual metrics up to 31
July 2023. The dark blue line shows the baseline scenario, while
the other lines represent the various upside and downside
scenarios.
Scenario sensitivity analysis
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 the portfolios, the modelled expected
credit loss provision has been recalculated under the upside strong
and downside protracted scenarios described above, applying a 100%
weighting to each scenario in turn. The change in provision
requirement is driven by the movement in risk metrics under each
scenario and resulting impact on stage allocation.
-- Expected credit losses based on a simplified approach, which
do not utilise a macroeconomic model and require expert judgement,
are excluded from the sensitivity analysis.
-- In addition to the above, key considerations for the
sensitivity analysis are set out below, by segment:
-- In Commercial, the sensitivity analysis excludes Novitas,
which is subject to a separate approach, as it is deemed more
sensitive to credit factors than macroeconomic factors.
-- In Retail, the sensitivity analysis does not apply further
stress to the expected credit loss provision on loans and advances
to customers in Stage 3, because the measurement of expected credit
losses is considered more sensitive to credit factors specific to
the borrower than macroeconomic scenarios.
-- In Property, the sensitivity analysis excludes individually
assessed provisions, and certain sub-portfolios which are deemed
more sensitive to credit factors than the macroeconomic
scenarios.
Based on the above analysis, at 31 July 2023, application of
100% weighting to the upside strong scenario would decrease the
expected credit loss by GBP18.1 million whilst application of 100%
weighting to the downside protracted scenario would increase the
expected credit loss by GBP32.7 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 July 2023; it does not
incorporate future changes relating to performance, growth or
credit risk. In addition, given the change in the macroeconomic
conditions, underlying modelled provisions and methodology, and
refined approach to adjustments, comparison between the sensitivity
results at 31 July 2023 and 31 July 2022 is not appropriate.
The economic environment remains uncertain and future impairment
charges may be subject to further volatility, including from
changes to macroeconomic variable forecasts impacted by
geopolitical tensions and sustained cost of living pressures.
Use of Adjustments
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 developments where
applicable.
Macroeconomic forecasts continue to react to a range of external
factors including the ongoing conflict in Ukraine, government
attempts to address cost of living and inflationary pressures, and
long-term impacts of the pandemic. In response, our use of
adjustments has evolved. In particular, adjustments have been
applied in the second half of the year in response to improvements
in macroeconomic forecasts that resulted in releases in modelled
provisions. A number of these releases were considered premature or
counterintuitive by management and adjustments have been made as a
result. These adjustments recognise the ongoing uncertainty
associated with the current environment.
The approach to adjustments continues to reflect the use of
expert management judgement which incorporates management's
experience and knowledge of customers, the areas in which they
operate, and the underlying assets financed.
The need for adjustments will continue to be monitored as new
information emerges which might not be recognised in existing
models.
At 31 July 2023, GBP17.0 million (31 July 2022: GBP(2.8)
million) of the expected credit loss provision was attributable to
adjustments.
2. Segmental Analysis
The directors manage the group by class of business and present
the segmental analysis on that basis. The group's activities are
presented in five (2022: five) operating segments: Commercial,
Retail, Property, Asset Management and Securities.
In the segmental reporting information that follows, Group
consists of central functions as well as various non-trading head
office companies and consolidation adjustments and is set out in
order that the information presented reconciles to the consolidated
income statement. The Group balance sheet primarily includes
treasury assets and liabilities comprising cash and balances at
central banks, debt securities, customer deposits and other
borrowings.
Divisions continue to charge market prices for the limited
services rendered to other parts of the group. Funding charges
between segments take into account commercial demands. More than
90% of the group's activities, revenue and assets are located in
the UK.
Summary income statement for the year ended 31 July 2023
Banking
----------------------------------------
Asset
Commercial Retail Property Management Securities Group Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Summary income
statement
for the year ended
31
July 2023
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Net interest
income/(expense) 251.2 218.4 117.1 6.7 0.5 (1.3) 592.6
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Non-interest income 96.6 29.7 0.8 138.1 74.8 - 340.0
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating
income/(expense) 347.8 248.1 117.9 144.8 75.3 (1.3) 932.6
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Administrative
expenses (171.5) (142.8) (26.5) (123.3) (67.5) (22.2) (553.8)
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Depreciation and
amortisation (22.9) (21.6) (4.4) (5.5) (4.3) (2.5) (61.2)
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Impairment losses on
financial assets (137.5) (49.0) (17.5) (0.1) - - (204.1)
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total operating
expenses
before amortisation
of
intangible assets
on
acquisition (331.9) (213.4) (48.4) (128.9) (71.8) (24.7) (819.1)
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Adjusted operating
profit/(loss)(1) 15.9 34.7 69.5 15.9 3.5 (26.0) 113.5
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Amortisation of
intangible
assets on
acquisition - - - (1.5) - - (1.5)
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating
profit/(loss)
before tax 15.9 34.7 69.5 14.4 3.5 (26.0) 112.0
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
External operating
income/(expense) 451.1 308.6 170.3 144.2 75.3 (216.9) 932.6
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Inter segment
operating
(expense)/income (103.3) (60.5) (52.4) 0.6 - 215.6 -
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Segment operating
income/(expense) 347.8 248.1 117.9 144.8 75.3 (1.3) 932.6
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
1. Adjusted operating profit/(loss) is stated before
amortisation of intangible assets on acquisition and tax.
The Commercial operating segment above includes Novitas, which
ceased lending to new customers in July 2021 following a strategic
review. Novitas recorded an operating loss of GBP84.2 million
(2022: loss of GBP39.3 million), driven by impairment losses of
GBP116.8 million (2022: GBP60.7 million).
Novitas' income was GBP18.9 million (2022: GBP36.0 million) and
expenses were GBP8.7 million (2022: GBP14.6 million). In line with
IFRS 9's requirement to recognise interest income on Stage 3 loans
on a net basis, income includes the partial unwinding over time of
the expected credit loss recognised in the year following the
transfer of the majority of loans to Stage 3.
Summary balance sheet information at 31 July 2023
Banking
----------------------------------------
Asset
Commercial Retail Property Management Securities Group(2) Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Summary balance
sheet
information at
31 July 2023
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total assets(1) 4,821.3 3,001.8 1,703.1 177.9 870.5 2,975.7 13,550.3
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total liabilities - - - 64.1 778.1 11,063.2 11,905.4
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
1. Total assets for the Banking operating segments comprise the
loan book and operating lease assets only. The Commercial operating
segment includes the net loan book of Novitas of GBP59.9
million.
2. Balance sheet includes GBP2,977.4 million assets and
GBP11,151.9 million liabilities attributable to the Banking
division primarily comprising the treasury balances described in
the second paragraph of this note.
Equity is allocated across the group as set out below. Banking
division equity, which is managed as a whole rather than on a
segmental basis, reflects loan book and operating lease assets of
GBP9,526.2 million, in addition to assets and liabilities of
GBP2,977.4 million and GBP11,151.9 million respectively primarily
comprising treasury balances which are included within the Group
column above.
Asset
Banking Management Securities Group Total
GBP million GBP million GBP million GBP million GBP million
------- ------------ ------------ ------------ ------------ ------------
Equity 1,351.7 113.8 92.4 87.0 1,644.9
------- ------------ ------------ ------------ ------------ ------------
Other segmental information for the year ended 31 July 2023
Banking
----------------------------
Asset
Commercial Retail Property Management Securities Group Total
------------------------------ ---------- ------ -------- ----------- ---------- ----- -----
Other segmental information
for the year
ended 31 July 2023
------------------------------ ---------- ------ -------- ----------- ---------- ----- -----
Employees (average number)(1) 1,450 1,194 201 814 320 81 4,060
------------------------------ ---------- ------ -------- ----------- ---------- ----- -----
1. Banking segments are inclusive of a central function
headcount allocation.
Summary income statement for the year ended 31 July 2022
Banking
----------------------------------------
Asset
Commercial Retail Property Management Securities Group Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Summary income
statement
for the year ended
31
July 2022
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Net interest
income/(expense) 257.1 210.8 112.1 (0.7) (1.1) (0.2) 578.0
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Non-interest income 86.3 26.2 0.6 148.7 96.3 - 358.1
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating
income/(expense) 343.4 237.0 112.7 148.0 95.2 (0.2) 936.1
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Administrative
expenses (158.3) (131.3) (27.0) (120.7) (77.2) (25.8) (540.3)
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Depreciation and
amortisation (21.7) (20.3) (4.0) (5.6) (3.9) (2.2) (57.7)
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Impairment losses on
financial assets (72.4) (24.4) (6.5) - - - (103.3)
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total operating
expenses
before amortisation
of
intangible assets
on
acquisition (252.4) (176.0) (37.5) (126.3) (81.1) (28.0) (701.3)
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Adjusted operating
profit/(loss)(1) 91.0 61.0 75.2 21.7 14.1 (28.2) 234.8
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Amortisation of
intangible
assets on
acquisition (0.1) - - (1.9) - - (2.0)
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Operating
profit/(loss)
before tax 90.9 61.0 75.2 19.8 14.1 (28.2) 232.8
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
External operating
income/(expense) 391.7 268.3 129.4 148.1 95.2 (96.6) 936.1
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Inter segment
operating
(expense)/income (48.3) (31.3) (16.7) (0.1) - 96.4 -
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Segment operating
income/(expense) 343.4 237.0 112.7 148.0 95.2 (0.2) 936.1
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
1. Adjusted operating profit/(loss) is stated before
amortisation of intangible assets on acquisition and tax.
Summary balance sheet information at 31 July 2022
Banking
----------------------------------------
Asset
Commercial Retail Property Management Securities Group(2) Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Summary balance
sheet
information at 31
July
2022
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total assets(1) 4,561.4 3,064.0 1,473.5 172.8 972.3 2,434.3 12,678.3
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total liabilities - - - 70.5 880.6 10,069.7 11,020.8
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
1. Total assets for the Banking operating segments comprise the
loan book and operating lease assets only. The Commercial operating
segment includes the net loan book of Novitas of GBP159.4
million.
2. Balance sheet includes GBP2,425.0 million assets and
GBP10,181.9 million liabilities attributable to the Banking
division primarily comprising the treasury balances described in
the second paragraph of this note.
Equity is allocated across the group as set out below. Banking
division equity, which is managed as a whole rather than on a
segmental basis, reflects loan book and operating lease assets of
GBP9,098.9 million, in addition to assets and liabilities of
GBP2,425.0 million and GBP10,181.9 million respectively primarily
comprising treasury balances which are included within the Group
column above.
Asset
Banking Management Securities Group Total
GBP million GBP million GBP million GBP million GBP million
------- ------------ ------------ ------------ ------------ ------------
Equity 1,342.0 102.3 91.7 121.5 1,657.5
------- ------------ ------------ ------------ ------------ ------------
Other segmental information for the year ended 31 July 2022
Banking
----------------------------
Asset
Commercial Retail Property Management Securities Group Total
------------------------------ ---------- ------ -------- ----------- ---------- ----- -----
Other segmental information
for the year ended 31
July 2022
------------------------------ ---------- ------ -------- ----------- ---------- ----- -----
Employees (average number)(1) 1,348 1,153 190 722 318 79 3,810
------------------------------ ---------- ------ -------- ----------- ---------- ----- -----
1. Banking segments are inclusive of a central function
headcount allocation.
3. Taxation
2023 2022
GBP million GBP million
------------------------------------------------------------ ------------ ------------
Tax charged/(credited) to the income statement
------------------------------------------------------------ ------------ ------------
Current tax:
------------------------------------------------------------ ------------ ------------
UK corporation tax 18.1 53.7
------------------------------------------------------------ ------------ ------------
Foreign tax 2.3 1.9
------------------------------------------------------------ ------------ ------------
Adjustments in respect of previous years (8.2) (2.8)
------------------------------------------------------------ ------------ ------------
12.2 52.8
------------------------------------------------------------ ------------ ------------
Deferred tax:
------------------------------------------------------------ ------------ ------------
Deferred tax charge for the current year 11.4 11.8
------------------------------------------------------------ ------------ ------------
Adjustments in respect of previous years 7.3 3.0
------------------------------------------------------------ ------------ ------------
30.9 67.6
------------------------------------------------------------ ------------ ------------
Tax on items not (credited)/charged to the income statement
------------------------------------------------------------ ------------ ------------
Current tax relating to:
------------------------------------------------------------ ------------ ------------
Share-based payments (0.2) -
------------------------------------------------------------ ------------ ------------
Deferred tax relating to:
------------------------------------------------------------ ------------ ------------
Cash flow hedging 4.9 8.6
------------------------------------------------------------ ------------ ------------
Defined benefit pension scheme (1.6) (0.3)
------------------------------------------------------------ ------------ ------------
Financial instruments classified as fair value through
other comprehensive income (1.1) (0.4)
------------------------------------------------------------ ------------ ------------
Share-based payments 0.3 1.1
------------------------------------------------------------ ------------ ------------
Currency translation gains/(losses) 0.5 (0.3)
------------------------------------------------------------ ------------ ------------
2.8 8.7
------------------------------------------------------------ ------------ ------------
Reconciliation to tax expense
------------------------------------------------------------ ------------ ------------
UK corporation tax for the year at 21.0% (2022: 19.0%)
on operating profit before tax 23.5 44.2
------------------------------------------------------------ ------------ ------------
Effect of different tax rates in other jurisdictions (0.3) (0.3)
------------------------------------------------------------ ------------ ------------
Disallowable items and other permanent differences 1.6 0.9
------------------------------------------------------------ ------------ ------------
Banking surcharge 6.2 14.9
------------------------------------------------------------ ------------ ------------
Deferred tax impact of decreased tax rates 0.8 7.7
------------------------------------------------------------ ------------ ------------
Prior year tax provision (0.9) 0.2
------------------------------------------------------------ ------------ ------------
30.9 67.6
------------------------------------------------------------ ------------ ------------
The standard UK corporation tax rate for the financial year is
21.0% (2022: 19.0%). However, an additional 6.3% (2022: 8.0%)
surcharge applies to banking company profits as defined in
legislation (and only above a threshold amount). The 6.3% surcharge
rate for the financial year arises due to the reduction in the
surcharge from 8% to 3% from April 2023. The effective tax rate of
27.6% (2022: 29.0%) is above the UK corporation tax rate primarily
due to the surcharge applying to most of the group's profits.
Movements in deferred tax assets and liabilities were as
follows:
Share-based
Capital Pension payments Impairment
allowances scheme and deferred losses Cash flow Intangible
GBP GBP compensation GBP hedging assets Other Total
million million GBP million million GBP million GBP million GBP million GBP million
---------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------- -----------
Group
---------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------- -----------
At 1 August 2021 36.1 (2.2) 15.5 8.8 0.1 (1.7) (0.6) 56.0
---------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------- -----------
(Charge)/credit
to the income
statement (10.9) - (1.5) (3.0) - 0.4 0.2 (14.8)
---------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------- -----------
Credit/(charge)
to other
comprehensive
income 0.3 0.3 - - (8.6) - 0.4 (7.6)
---------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------- -----------
Charge to equity - - (1.1) - - - - (1.1)
---------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------- -----------
At 31 July 2022 25.5 (1.9) 12.9 5.8 (8.5) (1.3) - 32.5
---------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------- -----------
(Charge)/credit
to the income
statement (12.1) - (3.9) 0.1 - 0.4 (3.2) (18.7)
---------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------- -----------
(Charge)/credit
to other
comprehensive
income (0.5) 1.6 - - (4.9) - 1.1 (2.7)
---------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------- -----------
Charge to equity - - (0.3) - - - - (0.3)
---------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------- -----------
At 31 July 2023 12.9 (0.3) 8.7 5.9 (13.4) (0.9) (2.1) 10.8
---------------- ---------- ---------- ------------ ---------- ----------- ----------- ----------- -----------
The group's deferred tax asset comprises GBP0.7 million (31 July
2022: GBP12.5 million) due within one year and GBP10.1 million (31
July 2022: GBP20.0 million) due after more than one year.
As the group has been and is expected to continue to be
consistently profitable, the full deferred tax assets have been
recognised.
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.
2023 2022
-------------------- ----- ------
Basic 54.3p 110.4p
-------------------- ----- ------
Diluted 54.2p 109.9p
-------------------- ----- ------
Adjusted basic(1) 55.1p 111.5p
-------------------- ----- ------
Adjusted diluted(1) 55.0p 111.0p
-------------------- ----- ------
1. Excludes amortisation of intangible assets on acquisition and
tax.
2023 2022
GBP million GBP million
------------------------------------------------- ------------ ------------
Profit attributable to shareholders 81.1 165.2
------------------------------------------------- ------------ ------------
Adjustments:
------------------------------------------------- ------------ ------------
Amortisation of intangible assets on acquisition 1.5 2.0
------------------------------------------------- ------------ ------------
Tax effect of adjustments (0.3) (0.4)
------------------------------------------------- ------------ ------------
Adjusted profit attributable to shareholders 82.3 166.8
------------------------------------------------- ------------ ------------
2023 2022
million million
-------------------------------------------- -------- --------
Average number of shares
-------------------------------------------- -------- --------
Basic weighted 149.4 149.6
-------------------------------------------- -------- --------
Effect of dilutive share options and awards 0.2 0.7
-------------------------------------------- -------- --------
Diluted weighted 149.6 150.3
-------------------------------------------- -------- --------
5. Dividends
2023 2022
GBP million GBP million
------------------------------------------------------------ ------------ ------------
For each ordinary share
------------------------------------------------------------ ------------ ------------
Final dividend for previous financial year paid in November
2022: 44.0p (November 2021: 42.0p) 65.6 62.7
------------------------------------------------------------ ------------ ------------
Interim dividend for current financial year paid in
April 2023: 22.5p (April 2022: 22.0p) 33.5 32.8
------------------------------------------------------------ ------------ ------------
99.1 95.5
------------------------------------------------------------ ------------ ------------
A final dividend relating to the year ended 31 July 2023 of
45.0p, amounting to an estimated GBP67.0 million, is proposed. This
final dividend, which is due to be paid on 24 November 2023 to
shareholders on the register at 20 October 2023, is not reflected
in these financial statements.
6. Loans and Advances to Customers
(a) Maturity analysis of loans and advances to customers
The following table sets out a maturity analysis of loans and
advances to customers. At 31 July 2023 loans and advances to
customers with a maturity of two years or less was GBP7,158.8
million (31 July 2022: GBP6,733.0 million) representing 74.3% (31
July 2022: 73.6%) of total gross loans and advances to
customers:
Total Total
gross net
Between After loans loans
three Between more and and
Within months Between two and than advances advances
three and one one and five five to Impairment to
On demand months year two years years years customers provisions customers
GBP GBP GBP GBP GBP GBP GBP GBP GBP
million million million million million million million million million
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
At 31 July
2023 76.5 2,597.8 2,636.5 1,848.0 2,337.2 139.6 9,635.6 (380.6) 9,255.0
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
At 31 July
2022 141.3 2,354.2 2,369.0 1,868.5 2,235.0 176.5 9,144.5 (285.6) 8,858.9
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(b) Loans and advances to customers and impairment provisions by
stage
Gross loans and advances to customers by stage and the
corresponding impairment provisions and provision coverage ratios
are set out below:
Stage 2
----------------------------------------
Greater
than or
equal
Less than to 30
Stage 30 days days past Stage
1 past due due Total 3 Total
GBP million GBP million GBP million GBP million GBP million GBP million
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
At 31 July 2023
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Gross loans and advances to
customers
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Commercial 3,686.1 750.9 23.2 774.1 339.4 4,799.6
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Of which: Commercial excluding
Novitas 3,685.1 749.6 23.2 772.8 97.7 4,555.6
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Of which: Novitas 1.0 1.3 - 1.3 241.7 244.0
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Retail 2,839.1 159.1 18.4 177.5 74.6 3,091.2
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Property 1,465.0 85.7 24.7 110.4 169.4 1,744.8
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
7,990.2 995.7 66.3 1,062.0 583.4 9,635.6
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Impairment provisions
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Commercial 25.1 13.9 2.4 16.3 208.1 249.5
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Of which: Commercial excluding
Novitas 24.9 13.6 2.4 16.0 24.5 65.4
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Of which: Novitas 0.2 0.3 - 0.3 183.6 184.1
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Retail 27.9 11.6 2.6 14.2 47.3 89.4
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Property 5.1 1.4 0.3 1.7 34.9 41.7
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
58.1 26.9 5.3 32.2 290.3 380.6
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Provision coverage ratio
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Commercial 0.7% 1.9% 10.3% 2.1% 61.3% 5.2%
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Within which: Commercial
excluding
Novitas 0.7% 1.8% 10.3% 2.1% 25.1% 1.4%
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Within which: Novitas 20.0% 23.1% - 23.1% 76.0% 75.5%
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Retail 1.0% 7.3% 14.1% 8.0% 63.4% 2.9%
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Property 0.3% 1.6% 1.2% 1.5% 20.6% 2.4%
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
0.7% 2.7% 8.0% 3.0% 49.8% 3.9%
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Stage 2
----------------------------------------
Greater
than or
equal
Less than to 30
Stage 30 days days past Stage
1 past due due Total 3 Total
GBP million GBP million GBP million GBP million GBP million GBP million
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
At 31 July 2022
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Gross loans and advances to
customers
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Commercial 3,433.1 778.8 119.4 898.2 169.1 4,500.4
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Of which: Commercial excluding
Novitas 3,331.8 776.6 25.6 802.2 93.7 4,227.7
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Of which: Novitas 101.3 2.2 93.8 96.0 75.4 272.7
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Retail 2,937.6 121.4 9.4 130.8 65.5 3,133.9
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Property 1,256.3 83.8 46.1 129.9 124.0 1,510.2
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
7,627.0 984.0 174.9 1,158.9 358.6 9,144.5
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Impairment provisions
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Commercial 25.6 14.3 52.0 66.3 87.1 179.0
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Of which: Commercial excluding
Novitas 16.8 13.3 2.5 15.8 33.1 65.7
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Of which: Novitas 8.8 1.0 49.5 50.5 54.0 113.3
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Retail 22.1 4.9 1.7 6.6 41.2 69.9
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Property 2.6 4.2 1.2 5.4 28.7 36.7
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
50.3 23.4 54.9 78.3 157.0 285.6
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Provision coverage ratio
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Commercial 0.7% 1.8% 43.6% 7.4% 51.5% 4.0%
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Within which: Commercial
excluding
Novitas 0.5% 1.7% 9.8% 2.0% 35.3% 1.6%
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Within which: Novitas 8.7% 45.5% 52.8% 52.6% 71.6% 41.5%
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Retail 0.8% 4.0% 18.1% 5.0% 62.9% 2.2%
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Property 0.2% 5.0% 2.6% 4.2% 23.1% 2.4%
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
0.7% 2.4% 31.4% 6.8% 43.8% 3.1%
---------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
In Commercial, the impairment coverage ratio increased to 5.2%
(31 July 2022: 4.0%), reflecting the impacts of updated Novitas
assumptions. The significant increase in credit provisions against
the Novitas loan book reflects the latest assumptions on case
failure, time to recover and recovery rates. Excluding Novitas, the
Commercial provision coverage ratio decreased to 1.4% (31 July
2022: 1.6%) as additional provisions to take into account weaker
macroeconomic variables and outlook were offset by write-offs on
Stage 3 balances.
In Retail, the provision coverage ratio increased to 2.9% (31
July 2022: 2.2%) reflecting the uncertain macroeconomic outlook and
increased arrears and forbearance levels in Motor Finance business
as a result of continued cost of living pressures on customers.
In Property the provision coverage ratio was stable at 2.4% (31
July 2022: 2.4%), with write-offs on well-provided single names
offset by deteriorating macroeconomic conditions and strong levels
of new business.
(c) Adjustments
By their nature, limitations in the group's expected credit loss
models or input data may be identified through ongoing model
monitoring and validation of models. In certain circumstances,
management make appropriate adjustments to model-calculated
expected credit losses. Adjustments have been identified as a key
source of estimation uncertainty as set out in Note 1.
This year, adjustments have been applied in response to
improvements in macroeconomic forecasts that resulted in releases
in modelled provisions. A number of these releases were considered
premature or counterintuitive by management and adjustments have
been made as a result. These adjustments recognise the ongoing
uncertainty associated with the current environment. At 31 July
2023, GBP17.0 million (31 July 2022: GBP(2.8) million) of the
expected credit loss provision was attributable to adjustments.
(d) Reconciliation of loans and advances to customers and
impairment provisions
Reconciliations of gross loans and advances to customers and
associated impairment provisions are set out below.
New financial assets originate in Stage 1 only, and the amount
presented represents the value at origination.
Subsequently, a loan may transfer between stages, and the
presentation of such transfers is based on a comparison of the loan
at the beginning of the year (or at origination if this occurred
during the year) and the end of the year (or just prior to final
repayment or write off).
Repayments relating to loans which transferred between stages
during the year are presented within the transfers between stages
lines. Such transfers do not represent overnight reclassification
from one stage to another. All other repayments are presented in a
separate line.
ECL model methodologies may be updated or enhanced from time to
time and the impacts of such changes are presented on a separate
line. During the year, a number of enhancements were made to the
models in the Premium business. The enhancements were made to
address known model limitations and to ensure modelled provisions
better reflect future loss emergence.
Enhancements to our model suite are a contributory factor to ECL
movements and such factors have been taken into consideration when
assessing any required adjustments to modelled output and ensuring
appropriate provision coverage levels.
A loan is written off when there is no reasonable expectation of
further recovery following realisation of all associated collateral
and available recovery actions against the customer.
Stage Stage Stage
1 2 3(1) Total
GBP million GBP million GBP million GBP million
----------------------------------------------- ------------ ------------ ------------ ------------
Gross loans and advances to customers
----------------------------------------------- ------------ ------------ ------------ ------------
At 1 August 2022 7,627.0 1,158.9 358.6 9,144.5
----------------------------------------------- ------------ ------------ ------------ ------------
New financial assets originated 6,604.0 - - 6,604.0
----------------------------------------------- ------------ ------------ ------------ ------------
Transfers to Stage 1 276.2 (373.2) (6.8) (103.8)
----------------------------------------------- ------------ ------------ ------------ ------------
Transfers to Stage 2 (1,068.6) 878.6 (16.1) (206.1)
----------------------------------------------- ------------ ------------ ------------ ------------
Transfers to Stage 3 (303.6) (194.4) 421.5 (76.5)
----------------------------------------------- ------------ ------------ ------------ ------------
Net transfers between stages and repayments(2) (1,096.0) 311.0 398.6 (386.4)
----------------------------------------------- ------------ ------------ ------------ ------------
Repayments while stage remained unchanged
and final repayments (5,118.8) (403.5) (100.4) (5,622.7)
----------------------------------------------- ------------ ------------ ------------ ------------
Changes to model methodologies (25.6) (4.0) 29.6 -
----------------------------------------------- ------------ ------------ ------------ ------------
Write offs (0.4) (0.4) (103.0) (103.8)
----------------------------------------------- ------------ ------------ ------------ ------------
At 31 July 2023 7,990.2 1,062.0 583.4 9,635.6
----------------------------------------------- ------------ ------------ ------------ ------------
1. A significant proportion of the Stage 3 movements is driven
by Novitas with GBP174.4 million of transfers to Stage 3 and
GBP37.4 million of write-offs. In addition, GBP49.2 million of
Novitas movements are included within 'Repayments while stage
remained unchanged and final repayments', comprising largely of
accrued interest. The accrued interest is partly offset by ECL
increases included within the adjacent ECL reconciliation, in line
with IFRS 9's requirement to recognise interest income on Stage 3
loans on a net basis.
2. Repayments relate only to financial assets which transferred
between stages during the year. Other repayments are shown in the
line below.
Stage Stage Stage
1 2 3 Total
GBP million GBP million GBP million GBP million
----------------------------------------------- ------------ ------------ ------------ ------------
Gross loans and advances to customers
----------------------------------------------- ------------ ------------ ------------ ------------
At 1 August 2021 7,434.3 960.2 330.4 8,724.9
----------------------------------------------- ------------ ------------ ------------ ------------
New financial assets originated 6,537.4 - - 6,537.4
----------------------------------------------- ------------ ------------ ------------ ------------
Transfers to Stage 1 196.2 (278.6) (5.3) (87.7)
----------------------------------------------- ------------ ------------ ------------ ------------
Transfers to Stage 2 (1,056.3) 959.9 (21.4) (117.8)
----------------------------------------------- ------------ ------------ ------------ ------------
Transfers to Stage 3 (206.9) (137.5) 278.6 (65.8)
----------------------------------------------- ------------ ------------ ------------ ------------
Net transfers between stages and repayments(1) (1,067.0) 543.8 251.9 (271.3)
----------------------------------------------- ------------ ------------ ------------ ------------
Repayments while stage remained unchanged
and final repayments (5,241.7) (354.2) (157.8) (5,753.7)
----------------------------------------------- ------------ ------------ ------------ ------------
Changes to model methodologies (33.3) 31.6 1.8 0.1
----------------------------------------------- ------------ ------------ ------------ ------------
Write offs (2.7) (22.5) (67.7) (92.9)
----------------------------------------------- ------------ ------------ ------------ ------------
At 31 July 2022 7,627.0 1,158.9 358.6 9,144.5
----------------------------------------------- ------------ ------------ ------------ ------------
1. Repayments relate only to financial assets which transferred
between stages during the year. Other repayments are shown in the
line below.
The gross carrying amount before modification of loans and
advances to customers which were modified during the year while in
Stage 2 or 3 was GBP152.3 million (2022: GBP288.3 million). No gain
or loss (2022: GBPnil) was recognised as a result of these
modifications. The gross carrying amount at 31 July 2023 of
modified loans and advances to customers which transferred from
Stage 2 or 3 to Stage 1 during the year was GBP14.8 million (31
July 2022: GBP110.2 million).
Stage Stage Stage
1 2 3(1) Total
GBP million GBP million GBP million GBP million
-------------------------------------------- ------------ ------------ ------------ ------------
Impairment provisions on loans and advances
to customers
-------------------------------------------- ------------ ------------ ------------ ------------
At 1 August 2022 50.3 78.3 157.0 285.6
-------------------------------------------- ------------ ------------ ------------ ------------
New financial assets originated 46.7 - - 46.7
-------------------------------------------- ------------ ------------ ------------ ------------
Transfers to Stage 1 1.2 (7.7) (1.0) (7.5)
-------------------------------------------- ------------ ------------ ------------ ------------
Transfers to Stage 2 (8.7) 27.7 (5.7) 13.3
-------------------------------------------- ------------ ------------ ------------ ------------
Transfers to Stage 3 (11.2) (53.3) 227.2 162.7
-------------------------------------------- ------------ ------------ ------------ ------------
Net remeasurement of expected credit losses
arising from transfers between stages and
repayments(2) (18.7) (33.3) 220.5 168.5
-------------------------------------------- ------------ ------------ ------------ ------------
Repayments and ECL movements while stage
remained unchanged and final repayments (17.8) (10.7) (20.0) (48.5)
-------------------------------------------- ------------ ------------ ------------ ------------
Changes to model methodologies (2.2) (1.9) 2.3 (1.8)
-------------------------------------------- ------------ ------------ ------------ ------------
Charge to the income statement 8.0 (45.9) 202.8 164.9
-------------------------------------------- ------------ ------------ ------------ ------------
Write offs (0.2) (0.2) (69.5) (69.9)
-------------------------------------------- ------------ ------------ ------------ ------------
At 31 July 2023 58.1 32.2 290.3 380.6
-------------------------------------------- ------------ ------------ ------------ ------------
1. A significant proportion of the Stage 3 movements is driven
by Novitas with GBP147.6 million of transfers to Stage 3 and
GBP11.9 million of write-offs.
2. Repayments relate only to financial assets which transferred
between stages during the year. Other repayments are shown in the
line below.
Stage Stage Stage
1 2 3 Total
GBP million GBP million GBP million GBP million
-------------------------------------------- ------------ ------------ ------------ ------------
Impairment provisions on loans and advances
to customers
-------------------------------------------- ------------ ------------ ------------ ------------
At 1 August 2021 80.0 84.2 116.2 280.4
-------------------------------------------- ------------ ------------ ------------ ------------
New financial assets originated 37.7 - - 37.7
-------------------------------------------- ------------ ------------ ------------ ------------
Transfers to Stage 1 1.3 (12.2) (1.7) (12.6)
-------------------------------------------- ------------ ------------ ------------ ------------
Transfers to Stage 2 (17.1) 59.4 (9.9) 32.4
-------------------------------------------- ------------ ------------ ------------ ------------
Transfers to Stage 3 (9.0) (28.8) 123.2 85.4
-------------------------------------------- ------------ ------------ ------------ ------------
Net remeasurement of expected credit losses
arising from transfers between stages and
repayments(1) (24.8) 18.4 111.6 105.2
-------------------------------------------- ------------ ------------ ------------ ------------
Repayments and ECL movements while stage
remained unchanged and final repayments (37.6) (0.7) (9.8) (48.1)
-------------------------------------------- ------------ ------------ ------------ ------------
Changes to model methodologies (2.2) (1.1) 1.9 (1.4)
-------------------------------------------- ------------ ------------ ------------ ------------
Charge to the income statement (26.9) 16.6 103.7 93.4
-------------------------------------------- ------------ ------------ ------------ ------------
Write offs (2.8) (22.5) (62.9) (88.2)
-------------------------------------------- ------------ ------------ ------------ ------------
At 31 July 2022 50.3 78.3 157.0 285.6
-------------------------------------------- ------------ ------------ ------------ ------------
1. Repayments relate only to financial assets which transferred
between stages during the year. Other repayments are shown in the
line below.
2023 2022
GBP million GBP million
------------------------------------------------------ ------------ ------------
Impairment losses relating to loans and advances to
customers:
------------------------------------------------------ ------------ ------------
Charge to income statement arising from movement in
impairment provisions 164.9 93.4
------------------------------------------------------ ------------ ------------
Amounts written off directly to income statement, net
of recoveries and other costs 39.4 8.5
------------------------------------------------------ ------------ ------------
204.3 101.9
------------------------------------------------------ ------------ ------------
Impairment (gains)/losses relating to other financial
assets (0.2) 1.4
------------------------------------------------------ ------------ ------------
Impairment losses on financial assets recognised in
income statement 204.1 103.3
------------------------------------------------------ ------------ ------------
Impairment losses on financial assets of GBP204.1 million (2022:
GBP103.3 million) include GBP116.8 million in relation to Novitas
(2022: GBP60.7 million).
The contractual amount outstanding at 31 July 2023 on financial
assets that were written off during the period and are still
subject to recovery activity is GBP32.3 million (31 July 2022:
GBP17.3 million).
(e) Finance lease and hire purchase agreement receivables
31 July 31 July
2023 2022
GBP million GBP million
--------------------------------------------- ------------ ------------
Net loans and advances to customers comprise
--------------------------------------------- ------------ ------------
Hire purchase agreement receivables 3,671.3 3,725.1
--------------------------------------------- ------------ ------------
Finance lease receivables 803.9 694.4
--------------------------------------------- ------------ ------------
Other loans and advances 4,779.8 4,439.4
--------------------------------------------- ------------ ------------
At 31 July 9,255.0 8,858.9
--------------------------------------------- ------------ ------------
The following table shows a reconciliation between gross
investment in finance lease and hire purchase agreement receivables
included in the net loans and advances to customers table above to
present value of minimum lease and hire purchase payments.
31 July 31 July
2023 2022
GBP million GBP million
----------------------------------------------------------- ------------ ------------
Gross investment in finance leases and hire purchase
agreement receivables due:
----------------------------------------------------------- ------------ ------------
One year or within one year 1,849.3 1,740.2
----------------------------------------------------------- ------------ ------------
>One to two years 2,002.8 1,927.1
----------------------------------------------------------- ------------ ------------
>Two to three years 972.5 943.9
----------------------------------------------------------- ------------ ------------
>Three to four years 438.5 475.1
----------------------------------------------------------- ------------ ------------
>Four to five years 115.5 123.7
----------------------------------------------------------- ------------ ------------
More than five years 41.1 36.2
----------------------------------------------------------- ------------ ------------
5,419.7 5,246.2
----------------------------------------------------------- ------------ ------------
Unearned finance income (820.7) (731.4)
----------------------------------------------------------- ------------ ------------
Present value of minimum lease and hire purchase agreement
payments 4,599.0 4,514.8
----------------------------------------------------------- ------------ ------------
Of which due:
----------------------------------------------------------- ------------ ------------
One year or within one year 1,567.2 1,496.9
----------------------------------------------------------- ------------ ------------
>One to two years 1,691.7 1,654.4
----------------------------------------------------------- ------------ ------------
>Two to three years 830.2 815.7
----------------------------------------------------------- ------------ ------------
>Three to four years 375.3 410.0
----------------------------------------------------------- ------------ ------------
>Four to five years 99.2 106.6
----------------------------------------------------------- ------------ ------------
More than five years 35.4 31.2
----------------------------------------------------------- ------------ ------------
4,599.0 4,514.8
----------------------------------------------------------- ------------ ------------
The aggregate cost of assets acquired for the purpose of letting
under finance leases and hire purchase agreements was GBP7,167.5
million (2022: GBP7,443.8 million). The average effective interest
rate on finance leases approximates to 11.0% (2022: 9.9%). The
present value of minimum lease and hire purchase agreement payments
reflects the fair value of finance lease and hire purchase
agreement receivables before deduction of impairment
provisions.
7. Debt Securities
Fair value
Fair value through
through other
profit comprehensive Amortised
or loss income cost Total
GBP million GBP million GBP million GBP million
------------------------------------------ ------------ -------------- ------------ ------------
Long trading positions in debt securities 15.2 - - 15.2
------------------------------------------ ------------ -------------- ------------ ------------
Certificates of deposit - - - -
------------------------------------------ ------------ -------------- ------------ ------------
Sovereign and central bank debt - 186.1 - 186.1
------------------------------------------ ------------ -------------- ------------ ------------
Covered bonds - 106.3 - 106.3
------------------------------------------ ------------ -------------- ------------ ------------
At 31 July 2023 15.2 292.4 - 307.6
------------------------------------------ ------------ -------------- ------------ ------------
Fair value
Fair value through
through other
profit comprehensive Amortised
or loss income cost Total
GBP million GBP million GBP million GBP million
------------------------------------------ ------------ -------------- ------------ ------------
Long trading positions in debt securities 12.4 - - 12.4
------------------------------------------ ------------ -------------- ------------ ------------
Certificates of deposit - - 185.0 185.0
------------------------------------------ ------------ -------------- ------------ ------------
Sovereign and central bank debt - 415.4 - 415.4
------------------------------------------ ------------ -------------- ------------ ------------
Covered bonds - - - -
------------------------------------------ ------------ -------------- ------------ ------------
At 31 July 2022 12.4 415.4 185.0 612.8
------------------------------------------ ------------ -------------- ------------ ------------
Movements on the book value of sovereign and central bank debt
comprise:
2023 2022
GBP million GBP million
-------------------------------------------- ------------ ------------
Sovereign and central bank debt at 1 August 415.4 192.5
-------------------------------------------- ------------ ------------
Additions 269.7 335.3
-------------------------------------------- ------------ ------------
Redemptions (459.2) (80.0)
-------------------------------------------- ------------ ------------
Currency translation differences (0.3) (1.2)
-------------------------------------------- ------------ ------------
Movement in value (39.5) (31.2)
-------------------------------------------- ------------ ------------
Sovereign and central bank debt at 31 July 186.1 415.4
-------------------------------------------- ------------ ------------
Movements on the book value of covered bonds comprise:
2023 2022
GBP million GBP million
-------------------------- ------------ ------------
Covered bonds at 1 August - -
-------------------------- ------------ ------------
Additions 105.4 -
-------------------------- ------------ ------------
Movement in value 0.9 -
-------------------------- ------------ ------------
Covered bonds at 31 July 106.3 -
-------------------------- ------------ ------------
8. Equity Shares
31 July 31 July
2023 2022
GBP million GBP million
----------------------- ------------ ------------
Long trading positions 27.8 27.1
----------------------- ------------ ------------
Other equity shares 1.5 1.3
----------------------- ------------ ------------
29.3 28.4
----------------------- ------------ ------------
9. Intangible Assets
Intangible
assets
on Group
Goodwill Software acquisition total
GBP million GBP million GBP million GBP million
--------------------------------- ------------ ------------ ------------ ------------
Cost
--------------------------------- ------------ ------------ ------------ ------------
At 1 August 2021 142.9 272.8 51.0 466.7
---------------------------------- ------------ ------------ ------------ ------------
Additions - 56.0 - 56.0
---------------------------------- ------------ ------------ ------------ ------------
Disposals (0.3) (29.3) - (29.6)
---------------------------------- ------------ ------------ ------------ ------------
At 31 July 2022 142.6 299.5 51.0 493.1
---------------------------------- ------------ ------------ ------------ ------------
Additions - 50.5 - 50.5
---------------------------------- ------------ ------------ ------------ ------------
Disposals (0.1) (16.8) - (16.9)
---------------------------------- ------------ ------------ ------------ ------------
At 31 July 2023 142.5 333.2 51.0 526.7
---------------------------------- ------------ ------------ ------------ ------------
Amortisation
--------------------------------- ------------ ------------ ------------ ------------
At 1 August 2021 47.9 142.4 43.8 234.1
---------------------------------- ------------ ------------ ------------ ------------
Amortisation charge for the year - 34.6 2.0 36.6
---------------------------------- ------------ ------------ ------------ ------------
Disposals - (29.6) - (29.6)
---------------------------------- ------------ ------------ ------------ ------------
At 31 July 2022 47.9 147.4 45.8 241.1
---------------------------------- ------------ ------------ ------------ ------------
Amortisation charge for the year - 36.1 1.5 37.6
---------------------------------- ------------ ------------ ------------ ------------
Disposals - (15.7) - (15.7)
---------------------------------- ------------ ------------ ------------ ------------
At 31 July 2023 47.9 167.8 47.3 263.0
---------------------------------- ------------ ------------ ------------ ------------
Net book value at 31 July 2023 94.6 165.4 3.7 263.7
---------------------------------- ------------ ------------ ------------ ------------
Net book value at 31 July 2022 94.7 152.1 5.2 252.0
---------------------------------- ------------ ------------ ------------ ------------
Net book value at 1 August 2021 95.0 130.4 7.2 232.6
---------------------------------- ------------ ------------ ------------ ------------
Software includes assets under development of GBP88.8 million
(31 July 2022: GBP71.1 million).
Intangible assets on acquisition relate to broker and customer
relationships and are amortised over a period of eight to 20
years.
In the 2023 financial year, GBP1.5 million (2022: GBP2.0
million) of the amortisation charge is included in amortisation of
intangible assets on acquisition and GBP36.1 million (2022: GBP34.6
million) of the amortisation charge is included in administrative
expenses shown in the consolidated income statement.
Impairment tests for goodwill
At 31 July 2023, goodwill has been allocated to eight (31 July
2022: eight) individual cash generating units ("CGUs"). Six (31
July 2022: six) are within the Banking division, one is the Asset
Management division and the remaining one is Winterflood in the
Securities division. Goodwill is allocated to the CGU in which the
historical acquisition occurred and hence the goodwill originated.
Further information on the performance of each division can be
found in Note 2 'Segmental Analysis'. Goodwill impairment reviews
are carried out annually by assessing the recoverable amount of the
group's CGUs, which is the higher of fair value less costs to sell
and value in use. The recoverable amounts for all CGUs were
measured based on value in use.
A value in use calculation uses discounted cash flow forecasts
based on the most recent three-year plans to determine the
recoverable amount of each CGU. The key assumptions underlying
management's three-year plans, which are based on past experience
and forecast market conditions, are expected loan book growth rates
and net return on loan book in the Banking CGUs, expected total
client asset growth rate and revenue margin in the Asset Management
CGU and expected market-making conditions in the Winterflood
CGU.
Beyond the group's three-year planning horizon, estimates of
future cash flows in the fourth and fifth years are made by
management with due consideration given to the key assumptions set
out above. After the fifth year, a terminal value is calculated
using an annual growth rate of 2%, which is consistent with the UK
government's long-term inflation target. In the prior year,
management applied a more prudent 0% annual growth rate. The cash
flows are discounted using a pre-tax estimated weighted average
cost of capital. The methodology used to derive the discount rate
for Winterflood was refined during the year. The discount rates
used differ across the CGUs, reflecting the nature of the CGUs'
business and the current market returns appropriate to the CGU that
investors would require for a similar asset.
At 31 July 2023, the results of the review indicate there is no
goodwill impairment. The inputs used in the value in use
calculations are sensitive primarily to changes in the assumptions
for future cash flows, discount rates and long-term growth rates.
Having performed stress tested value in use calculations, the group
believes that any reasonably possible change in the key assumptions
which have been used would not lead to the carrying value of any
CGU to exceed its recoverable amount.
Winterflood recorded lower profits in the year driven by
difficult market conditions. The business has a long track record
of trading profitably in a range of conditions and is well placed
to take advantage when investor confidence recovers. Nevertheless,
future market conditions remain uncertain and as such the value in
use calculation for this CGU has been identified as a key source of
estimation uncertainty as set out in Note 1.
The most significant uncertainty within the Winterflood value in
use calculation relates to the expected future cash flows. A
reduction in the year 4 and 5 cash flows to the level of year 3,
combined with a further 40% reduction in the expected future cash
flows in year 5 and all subsequent years would result in a
recoverable amount that is marginally above the carrying value of
the CGU. This scenario is a demonstration of sensitivity only and
is not considered probable by management.
10. Property, Plant and Equipment
Fixtures, Assets
fittings held under Right
Leasehold and operating Motor of use
property equipment leases vehicles assets(1) Total
GBP million GBP million GBP million GBP million GBP million GBP million
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Group
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Cost
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
At 1 August 2021 25.2 74.8 360.7 0.2 71.7 532.6
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Additions 0.6 4.3 67.8 - 13.6 86.3
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Disposals (4.9) (16.5) (30.3) - (6.8) (58.5)
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
At 31 July 2022 20.9 62.6 398.2 0.2 78.5 560.4
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Additions 1.0 7.5 93.1 0.2 24.7 126.5
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Disposals (0.4) (4.6) (42.2) - (9.2) (56.4)
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
At 31 July 2023 21.5 65.5 449.1 0.4 94.0 630.5
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Depreciation
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
At 1 August 2021 15.7 47.5 137.8 0.1 21.6 222.7
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Depreciation and impairment
charges for the year 2.2 7.6 40.6 0.1 13.2 63.7
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Disposals (4.9) (18.2) (20.2) - (5.2) (48.5)
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
At 31 July 2022 13.0 36.9 158.2 0.2 29.6 237.9
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Depreciation and impairment
charges for the year 2.4 8.3 45.5 - 14.4 70.6
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Disposals (0.4) (4.3) (25.8) - (4.6) (35.1)
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
At 31 July 2023 15.0 40.9 177.9 0.2 39.4 273.4
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Net book value at 31 July 2023 6.5 24.6 271.2 0.2 54.6 357.1
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Net book value at 31 July 2022 7.9 25.7 240.0 - 48.9 322.5
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Net book value at 1 August 2021 9.5 27.3 222.9 0.1 50.1 309.9
-------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
1. Right of use assets primarily relate to the group's leasehold
properties.
There was a gain of GBP3.3 million from the sale of assets held
under operating leases for the year ended 31 July 2023
(2022: GBP3.2 million).
11. Settlement Balances and Short Positions
31 July 31 July
2023 2022
GBP million GBP million
-------------------- ------------ ------------
Settlement balances 686.0 780.7
-------------------- ------------ ------------
Short positions in:
-------------------- ------------ ------------
Debt securities 3.5 7.5
-------------------- ------------ ------------
Equity shares 6.4 7.9
-------------------- ------------ ------------
9.9 15.4
-------------------- ------------ ------------
695.9 796.1
-------------------- ------------ ------------
12. Financial Liabilities
Between
three Between
Within months Between two and After
three and one one and five more than
On 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 10.3 43.6 88.0 - - - 141.9
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Deposits by
customers 175.1 1,836.4 3,745.9 1,305.0 662.1 - 7,724.5
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Loans and overdrafts
from banks 31.8 20.1 228.0 262.0 110.0 - 651.9
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Debt securities in
issue - 30.4 228.7 197.8 1,261.8 293.9 2,012.6
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 31 July 2023 217.2 1,930.5 4,290.6 1,764.8 2,033.9 293.9 10,530.9
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Between After
three more
Within months Between Between than
three and one one and two and five
On demand months year two years five years years Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Deposits by banks 6.1 52.0 102.4 - - - 160.5
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Deposits by
customers 120.9 1,645.2 3,615.6 1,058.8 329.9 - 6,770.4
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Loans and overdrafts
from banks 12.1 10.7 - 228.0 371.9 - 622.7
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
Debt securities in
issue - 26.7 855.3 249.4 567.0 362.5 2,060.9
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 31 July 2022 139.1 1,734.6 4,573.3 1,536.2 1,268.8 362.5 9,614.5
-------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
As outlined below at 31 July 2023 the group accessed GBP600.0
million (31 July 2022: GBP600.0 million) and GBP5.0 million (31
July 2022: GBPnil) cash under the Bank of England's Term Funding
Scheme with Additional Incentives for SMEs and Indexed Long-Term
Repo respectively. Cash from these schemes is included within loans
and overdrafts from banks. Residual maturities of the schemes are
as follows:
Between
three Between
Within months Between two and After
three and one one and five more than
On demand months year two years years five years Total
GBP million GBP million GBP million GBP million GBP million GBP million GBP million
---------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 31 July 2023 - 7.6 228.0 262.0 110.0 - 607.6
---------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 31 July 2022 - 0.6 - 228.0 372.0 - 600.6
---------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
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") and the
Indexed Long-Term Repo ("ILTR").
Under these schemes, asset finance loan receivables of GBP863.4
million (31 July 2022: GBP626.1 million), UK gilts with a market
value of GBPnil (31 July 2022: GBP72.6 million), UK T-Bills with a
market value of GBPnil (31 July 2022: GBP144.3 million) and
retained notes relating to Motor Finance loan receivables of
GBP83.4 million (31 July 2022: GBP24.3 million) were positioned as
collateral with the Bank of England, against which GBP600.0 million
(31 July 2022: GBP600.0 million) of cash was drawn from the TFSME
and GBP5.0 million (31 July 2022: GBPnil) from the ILTR.
The term of the TFSME transactions is four years from the date
of each drawdown but the group may choose to repay earlier at its
discretion. The term of the ILTR transaction is six months and
cannot be repaid earlier. 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
GBP1,436.3 million (31 July 2022: GBP1,626.8 million) of its
insurance premium and motor loan receivables in return for cash and
asset-backed securities in issue of GBP1,187.4 million (31 July
2022: GBP1,156.0 million restated). This includes the GBP83.4
million (31 July 2022: GBP24.3 million) retained notes positioned
as collateral with the Bank of England. As the group has retained
exposure to substantially all the credit risk and rewards of the
residual benefit of the underlying assets it continues to recognise
these assets in loans and advances to customers on its consolidated
balance sheet.
13. Capital - unaudited
31 July 31 July
2023 2022
GBP million GBP million
------------------------------------------------------ ----------- -----------
CET1 capital
Shareholders' equity per balance sheet 1,644.9 1,657.5
Adjustments to CET1 capital
Intangible assets, net of associated deferred
tax liabilities (262.8) (250.7)
Foreseeable dividend(1) (67.0) (65.6)
Investment in own shares (34.4) (21.7)
Pension asset, net of associated deferred tax
liabilities (1.0) (5.3)
Prudent valuation adjustment (0.4) (0.5)
Insufficient coverage for non-performing exposures(2) (0.4) -
IFRS 9 transitional arrangements(3) 31.9 83.0
CET1 capital(4) 1,310.8 1,396.7
------------------------------------------------------ ----------- -----------
Tier 2 capital - subordinated debt 200.0 200.0
------------------------------------------------------ ----------- -----------
Total regulatory capital(4) 1,510.8 1,596.7
------------------------------------------------------ ----------- -----------
RWAs (notional)
Credit and counterparty credit risk 8,655.4 8,389.0
Operational risk(5) 1,084.0 1,085.8
Market risk(5) 108.2 116.5
9,847.6 9,591.3
------------------------------------------------------ ----------- -----------
CET1 capital ratio(4) 13.3% 14.6%
------------------------------------------------------ ----------- -----------
Total capital ratio(4) 15.3% 16.6%
------------------------------------------------------ ----------- -----------
1. Under CRR Article 26, a deduction has been recognised at 31
July 2023 and 31 July 2022 for a foreseeable dividend, being the
proposed final dividend as set out in note 5 to the financial
statements.
2. In line with CRR, effective on 1 January 2022, the CET1
capital includes a regulatory deduction where there is insufficient
coverage for non-performing exposures, amounting to GBP0.4 million
at 31 July 2023 (31 July 2022: GBP0.0 million).
3. The group has elected to apply IFRS 9 transitional
arrangements for 31 July 2023, which allow the capital impact of
expected credit losses to be phased in over the transitional
period.
4. Shown after applying IFRS 9 transitional arrangements and the
CRR transitional and qualifying own funds arrangements in force at
the time. Without their application, at 31 July 2023 the CET1
capital ratio would be 13.0% and total capital ratio 15.1% (31 July
2022: CET1 capital ratio 13.8% and total capital ratio 15.9%).
5. Operational and market risk include an adjustment at 8% in
order to determine notional RWAs.
The following table shows the movement in CET1 capital during
the year:
2023 2022
GBP million GBP million
-------------------------------------------------- ----------- -----------
CET1 capital at 1 August 1,396.7 1,439.3
--------------------------------------------------- ----------- -----------
Profit in the period attributable to shareholders 81.1 165.2
--------------------------------------------------- ----------- -----------
Dividends paid and foreseen (100.5) (98.4)
--------------------------------------------------- ----------- -----------
Change in software assets treatment(1) - (50.2)
--------------------------------------------------- ----------- -----------
IFRS 9 transitional arrangements (51.1) (34.8)
--------------------------------------------------- ----------- -----------
(Increase)/decrease in intangible assets, net of
associated deferred tax liabilities (12.1) (19.7)
--------------------------------------------------- ----------- -----------
Other movements in reserves recognised for CET1
capital (7.3) 0.1
--------------------------------------------------- ----------- -----------
Other movements in adjustments from CET1 capital 4.0 (4.8)
--------------------------------------------------- ----------- -----------
CET1 capital at 31 July 1,310.8 1,396.7
--------------------------------------------------- ----------- -----------
1. Upon implementation of CRR, effective on 1 January 2022, the
CET1 ratio no longer included the benefit related to software
assets which were previously exempt from the deduction requirement
for intangible assets from CET1.
14. Defined Benefit Pension Scheme
During the year, the group's only defined benefit pension scheme
("the scheme") entered into a buy-in transaction with an insurance
company covering all members of the scheme. A buy-in is a bulk
annuity policy that matches the scheme's assets and liabilities. It
represents a significant de-risking of the investment portfolio and
hence a significant reduction in the group's long-term exposure to
pension funding risk. As a result of this transaction, the pension
surplus on the group's balance sheet has fallen to GBP1.3 million
(31 July 2022: GBP7.2 million) relating to the cash held by the
scheme, with the fair value of the insurance policy matched to the
fair value of the scheme's liabilities. The loss of the pension
surplus represents the one-off premium paid for the insurance
policy and is recognised within other comprehensive income.
15. Contingent Liabilities
Motor Finance commission arrangements
The Group has received a number of complaints, some of which are
with the Financial Ombudsman Service, and is subject to a number of
claims through the courts regarding historic commission
arrangements with intermediaries on its Motor Finance products.
This follows the FCA's Motor Market Review in 2019. Depending on
the outcome of the court's rulings and/or regulatory findings on
the matter, these complaints and claims may give rise to a
potential future obligation to compensate customers. It is not
currently possible to estimate the financial impact, if any, or
scope of these or any future related claims.
16. Consolidated Cash Flow Statement Reconciliation
2023 2022
GBP million GBP million
------------------------------------------------------------ ------------ ------------
(a) Reconciliation of operating profit before tax to
net cash inflow from operating activities
------------------------------------------------------------ ------------ ------------
Operating profit before tax 112.0 232.8
------------------------------------------------------------ ------------ ------------
Tax paid (7.4) (63.4)
------------------------------------------------------------ ------------ ------------
Depreciation, amortisation and impairment 108.2 100.3
------------------------------------------------------------ ------------ ------------
Impairment losses on financial assets 204.1 103.3
------------------------------------------------------------ ------------ ------------
(Increase)/decrease in:
------------------------------------------------------------ ------------ ------------
Interest receivable and prepaid expenses (6.8) 19.8
------------------------------------------------------------ ------------ ------------
Net settlement balances and trading positions (11.4) 17.2
------------------------------------------------------------ ------------ ------------
Net loans from money brokers against stock advanced 15.6 2.7
------------------------------------------------------------ ------------ ------------
Decrease in interest payable and accrued expenses (16.5) (32.2)
------------------------------------------------------------ ------------ ------------
Net cash inflow from trading activities 397.8 380.5
------------------------------------------------------------ ------------ ------------
Cash (outflow)/inflow arising from changes in:
------------------------------------------------------------ ------------ ------------
Loans and advances to banks not repayable on demand (21.1) (5.3)
------------------------------------------------------------ ------------ ------------
Loans and advances to customers (584.3) (515.0)
------------------------------------------------------------ ------------ ------------
Assets let under operating leases (73.2) (54.5)
------------------------------------------------------------ ------------ ------------
Certificates of deposit 185.0 79.7
------------------------------------------------------------ ------------ ------------
Sovereign and central bank debt 191.2 (255.3)
------------------------------------------------------------ ------------ ------------
Covered bonds (105.4) -
------------------------------------------------------------ ------------ ------------
Deposits by banks (22.1) 11.8
------------------------------------------------------------ ------------ ------------
Deposits by customers 942.5 142.7
------------------------------------------------------------ ------------ ------------
Loans and overdrafts from banks 29.2 110.0
------------------------------------------------------------ ------------ ------------
Debt securities in issue (net) 14.4 270.5
------------------------------------------------------------ ------------ ------------
Derivative financial instruments (net) 70.4 -
------------------------------------------------------------ ------------ ------------
Other assets less other liabilities (3.0) (6.4)
------------------------------------------------------------ ------------ ------------
Net cash inflow from operating activities 1,021.4 158.7
------------------------------------------------------------ ------------ ------------
(b) Analysis of net cash outflow in respect of the purchase
of subsidiaries and
non-controlling interests
------------------------------------------------------------ ------------ ------------
Cash consideration paid (0.5) (0.1)
------------------------------------------------------------ ------------ ------------
(c) Analysis of net cash inflow in respect of the sale
of subsidiaries
------------------------------------------------------------ ------------ ------------
Cash consideration received - 0.1
------------------------------------------------------------ ------------ ------------
(d) Analysis of cash and cash equivalents(1)
------------------------------------------------------------ ------------ ------------
Cash and balances at central banks 1,918.4 1,236.0
------------------------------------------------------------ ------------ ------------
Loans and advances to banks 290.9 147.0
------------------------------------------------------------ ------------ ------------
At 31 July 2,209.3 1,383.0
------------------------------------------------------------ ------------ ------------
1. Excludes GBP58.0 million (2022: GBP37.1 million) of Bank of
England and other cash reserve accounts.
During the year ended 31 July 2023, the non-cash changes on debt
financing amounted to GBP0.9 million (31 July 2022: GBP9.6 million)
arising largely from interest accretions and fair value hedging
movements.
17. Fair Value of Financial Assets and Liabilities
The fair values of the group's subordinated loan capital and
debt securities in issue are set out below.
31 July 2023 31 July 2022
-------------------------- --------------------------
Carrying Carrying
Fair value value Fair value value
GBP million GBP million GBP million GBP million
-------------------------- ------------ ------------ ------------ ------------
Subordinated loan capital 165.8 174.9 180.0 186.5
-------------------------- ------------ ------------ ------------ ------------
Debt securities in issue 2,008.0 2,012.6 2,071.4 2,060.9
-------------------------- ------------ ------------ ------------ ------------
The fair value of gross loans and advances to customers at 31
July 2023 is estimated to be GBP9,046.2 million (carrying value:
GBP9,255.0 million). The fair value of deposits by customers is
estimated to be GBP7,668.7 million (carrying value: GBP7,724.5
million). These estimates are based on highly simplified
assumptions and inputs and may differ to actual amounts received or
paid. The differences between fair value and carrying value are not
considered to be significant, and are consistent with management's
expectations given the nature of the Banking business and the short
average tenor of the instruments. However, the differences have
increased in comparison to the prior year in line with market
interest rates.
The group holds financial instruments that are measured at fair
value subsequent to initial recognition. Each instrument has been
categorised within one of three levels using a fair value hierarchy
that reflects the significance of the inputs used in making the
measurements. These levels are based on the degree to which the
fair value is observable. The table below shows the classification
of financial instruments held at fair value into the valuation
hierarchy:
Level Level Level
1 2 3 Total
GBP million GBP million GBP million GBP million
------------------------------------------ ------------ ------------ ------------ ------------
At 31 July 2023
------------------------------------------ ------------ ------------ ------------ ------------
Assets
------------------------------------------ ------------ ------------ ------------ ------------
Debt securities:
------------------------------------------ ------------ ------------ ------------ ------------
Long trading positions in debt securities 13.6 1.6 - 15.2
------------------------------------------ ------------ ------------ ------------ ------------
Sovereign and central bank debt 186.1 - - 186.1
------------------------------------------ ------------ ------------ ------------ ------------
Covered bonds 106.3 - - 106.3
------------------------------------------ ------------ ------------ ------------ ------------
Equity shares 3.9 25.1 0.3 29.3
------------------------------------------ ------------ ------------ ------------ ------------
Derivative financial instruments - 77.4 11.1 88.5
------------------------------------------ ------------ ------------ ------------ ------------
Contingent consideration - - 2.0 2.0
------------------------------------------ ------------ ------------ ------------ ------------
309.9 104.1 13.4 427.4
------------------------------------------ ------------ ------------ ------------ ------------
Liabilities
------------------------------------------ ------------ ------------ ------------ ------------
Short positions:
------------------------------------------ ------------ ------------ ------------ ------------
Debt securities 2.3 1.2 - 3.5
------------------------------------------ ------------ ------------ ------------ ------------
Equity shares 1.7 4.6 0.1 6.4
------------------------------------------ ------------ ------------ ------------ ------------
Derivative financial instruments - 184.7 11.2 195.9
------------------------------------------ ------------ ------------ ------------ ------------
Contingent consideration - - 2.8 2.8
------------------------------------------ ------------ ------------ ------------ ------------
4.0 190.5 14.1 208.6
------------------------------------------ ------------ ------------ ------------ ------------
Level Level Level
1 2 3 Total
GBP million GBP million GBP million GBP million
------------------------------------------ ------------ ------------ ------------ ------------
At 31 July 2022
------------------------------------------ ------------ ------------ ------------ ------------
Assets
------------------------------------------ ------------ ------------ ------------ ------------
Debt securities:
------------------------------------------ ------------ ------------ ------------ ------------
Long trading positions in debt securities 11.0 1.4 - 12.4
------------------------------------------ ------------ ------------ ------------ ------------
Sovereign and central bank debt 415.4 - - 415.4
------------------------------------------ ------------ ------------ ------------ ------------
Covered bonds - - - -
------------------------------------------ ------------ ------------ ------------ ------------
Equity shares 4.1 24.0 0.3 28.4
------------------------------------------ ------------ ------------ ------------ ------------
Derivative financial instruments - 71.2 - 71.2
------------------------------------------ ------------ ------------ ------------ ------------
Contingent consideration - - 1.7 1.7
------------------------------------------ ------------ ------------ ------------ ------------
430.5 96.6 2.0 529.1
------------------------------------------ ------------ ------------ ------------ ------------
Liabilities
------------------------------------------ ------------ ------------ ------------ ------------
Short positions:
------------------------------------------ ------------ ------------ ------------ ------------
Debt securities 5.8 1.7 - 7.5
------------------------------------------ ------------ ------------ ------------ ------------
Equity shares 2.2 5.6 0.1 7.9
------------------------------------------ ------------ ------------ ------------ ------------
Derivative financial instruments - 89.2 - 89.2
------------------------------------------ ------------ ------------ ------------ ------------
Contingent consideration - - 3.0 3.0
------------------------------------------ ------------ ------------ ------------ ------------
8.0 96.5 3.1 107.6
------------------------------------------ ------------ ------------ ------------ ------------
There is no significant change to the valuation methodologies
relating to Level 2 and 3 financial instruments disclosed in note
28 "Financial risk management" of the Annual Report 2022.
Instruments classified as Level 3 predominantly comprise
over-the-counter derivatives, which is new this year, and
contingent consideration payable and receivable in relation to the
acquisition and disposal of subsidiaries.
The valuation of Level 3 derivatives is similar to Level 2
derivatives and includes the use of discounted future cash flow
models, with the most significant input into these models being
interest rate yield curves developed from quoted rates. The fair
value of contingent consideration is determined on a discounted
expected cash flow basis. The group believes that there is no
reasonably possible change to inputs used in the valuation of these
positions which would have a material effect on the group's
consolidated income statement.
During the year, GBP1.6 million of derivative financial assets
and GBP1.8 million of derivative financial liabilities were
transferred from Level 2 to 3. There were no other significant
transfers between Level 1, 2 and 3 in 2023 and 2022.
There were no overall gains or losses recognised in the
consolidated income statement relating to level 3 instruments held
at the year end (2022: GBP0.2 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.
The Banking division reports on forborne exposures as either
performing or non-performing in line with regulatory requirements.
A forbearance policy is maintained to ensure the necessary
processes are in place to enable consistently fair treatment of all
customers and that each is managed based on their individual
circumstances. The arrangements agreed with customers will aim to
create a sustainable and affordable financial position, thereby
reducing the likelihood of suffering a credit loss. The forbearance
policy is periodically reviewed to ensure it remains effective.
The Banking division offers 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 LTV or overpayments) and refinancing, which may
incorporate an extension of the loan tenor and capitalisation of
arrears. Furthermore, other forms of forbearance such as
moratorium, covenant waivers and rate concessions are also
offered.
Forbearance analysis
At 31 July 2023 the gross carrying amount of exposures with
forbearance measures was GBP214.6 million (31 July 2022: GBP208.9
million). The key driver of this increase has been movement of
high-value individual exposures in Property and higher volumes of
business-as-usual forbearance in our Motor Finance business
resulting from enduring cost-of-living pressures on customers.
The reduction in volumes across all segments is driven by the
continued run-off of Covid-19 related concessions, lower volumes in
Premium Finance related to short loan tenors and general resilience
across all portfolios.
As the number of customers supported via Covid-19 related
concessions has continued to reduce (noting no new Covid-19
forbearance arrangements have been offered in the period), the low
outstanding volumes have been consolidated into the single
forbearance total in the following analyses.
An analysis of forborne loans is shown in the table below:
Forborne loans
as a percentage
Gross loans of gross loans Provision Number of
and advances Forborne and advances on forborne customers
to customers loans to customers loans supported
GBP million GBP million % GBP million
-------------- --------------- ----------- ---------------- ------------ ----------
31 July 2023 9,635.6 214.6 2.2% 56.1 6,996
-------------- ------ ------- ----------- ---------------- ------------ ----------
31 July 2022 9,144.5 208.9 2.3% 44.3 11,043
-------------- --------------- ----------- ---------------- ------------ ----------
The following is a breakdown of forborne loans by segment:
31 July 31 July
2023 2022
GBP million GBP million
----------- ----------- -----------
Commercial 38.0 62.3
----------- ----------- -----------
Retail 28.8 23.0
----------- ----------- -----------
Property 147.8 123.6
----------- ----------- -----------
214.6 208.9
----------- ----------- -----------
The following is a breakdown of the number of customers
supported by segment:
31 July
2023 31 July
Number of 2022 Number
customers of customers
supported supported
----------- ---------- -------------
Commercial 243 518
----------- ---------- -------------
Retail 6,700 10,467
----------- ---------- -------------
Property 53 58
----------- ---------- -------------
6,996 11,043
----------- ---------- -------------
The following is a breakdown of forborne loans by concession
type:
31 July 31 July
2023 2022
GBP million GBP million
------------------------ ----------- -----------
Extension outside terms 105.8 113.0
------------------------ ----------- -----------
Refinancing 10.4 3.0
------------------------ ----------- -----------
Moratorium 66.1 69.9
------------------------ ----------- -----------
Other modifications 32.3 23.0
------------------------ ----------- -----------
214.6 208.9
------------------------ ----------- -----------
Government lending schemes
Over the pandemic period, following accreditation, customers'
facilities were offered under the UK government-introduced
Coronavirus Business Interruption Loan Scheme ("CBILS"), the
Coronavirus Large Business Interruption Loan Scheme ("CLBILS") and
the Bounce Back Loan Scheme ("BBLS"), thereby enabling the Banking
division to maximise its support to small businesses. At 31 July
2023, there are 4,364 (31 July 2022: 5,445) remaining facilities,
with a residual balance of GBP456.3 million (31 July 2022: GBP747.5
million) following commencement of repayments across the Property,
Asset Finance & Leasing and Invoice & Speciality Finance
businesses.
The Banking division also received accreditation to offer
products under the Recovery Loan Scheme ("RLS"), and schemes in the
Republic of Ireland. Applications for facilities under phase 2 of
the RLS closed in June 2022 and recently facilities have been
offered under the new RLS phase 3. At 31 July 2023, there are 943
(31 July 2022: 560) live facilities, with balances of GBP276.2
million (31 July 2022: GBP166.0 million), and a further 58 (31 July
2022: 73) approved facilities with limits of GBP14.3 million (31
July 2022: GBP15.6 million)
The Banking division maintains a regular reporting cycle of
these facilities to monitor performance. To date, a number of
claims have been made and payments received under the government
guarantee.
19. Interest rate risk
The group recognises three main sources of interest rate risk in
the banking book ("IRRBB") which could adversely impact future
income or the value of the balance sheet:
-- repricing risk - the risk presented by assets and liabilities
that reprice at different times and rates;
-- embedded optionality risk - the risk presented by contract
terms embedded into certain assets and liabilities; and
-- basis risk - the risk presented by a mismatch in the
reference interest rate for assets and liabilities.
IRRBB is assessed and measured by applying key behavioural and
modelling assumptions including, but not limited to, those related
to fixed rate loans subject to prepayment risk, the behaviour of
non-maturity assets and liabilities, the treatment of own equity
and the expectation of embedded interest rate options. This
assessment is performed across a range of regulatory prescribed and
internal interest rate shock scenarios approved by the bank's Asset
and Liability Committee.
Two measures are used for measuring IRRBB, namely Earnings at
Risk ("EaR") and Economic Value ("EV"):
-- EaR measures short-term impacts to earnings, highlighting any
earnings sensitivity should rates change unexpectedly.
-- EV measures longer-term earnings sensitivity due to rate
changes, highlighting the potential future sensitivity of earnings,
and any risk to capital.
No material exposure exists in the other parts of the group, and
accordingly the analysis below relates to the Banking division and
company.
EaR impact
The table below sets out the assessed impact on net interest
income over a 12-month period from interest rate changes. The
results shown are for an instantaneous and parallel change in
interest rates at 31 July 2023:
31 July 31 July
2023 2022
GBP million GBP million
-------------- ----------- -----------
0.5% increase 4.5 4.3
--------------- ----------- -----------
2.5% increase 22.6 22.3
--------------- ----------- -----------
0.5% decrease (4.5) (1.0)
--------------- ----------- -----------
2.5% decrease (22.8) 16.7
--------------- ----------- -----------
EV impact
The table below sets out the assessed impact on our base case
EV, which measures the impact on equity value of an instantaneous
and parallel change in interest rates at 31 July 2023:
31 July 31 July
2023 2022
GBP million GBP million
-------------- ----------- -----------
0.5% increase 4.4 1.5
--------------- ----------- -----------
2.5% increase 21.5 8.4
--------------- ----------- -----------
0.5% decrease (4.4) (1.2)
--------------- ----------- -----------
2.5% decrease (21.9) 3.3
--------------- ----------- -----------
The group's EV at 31 July 2023 reflects its policy to ensure
exposure to interest rate shocks is managed within the group's risk
appetites. In a rising rate environment, the distance to the
interest rate floors increases and so the benefit of the floors on
the group's lending decreases. This explains the movement seen for
the parallel rate up and down 2.5% scenarios. The EV measure is a
combination of our repricing profile, which is positively
correlated to rising rates, offset partially by embedded
optionality to cover interest rate floors within the bank's lending
and borrowing activities. The prior year comparatives have been
restated to include EV risk within the company as compared to Bank
only in prior years.
Cautionary Statement
Certain statements included or incorporated by reference within
this report may constitute "forward-looking statements" in respect
of the group's operations, performance, prospects and/or financial
condition. All statements other than statements of historical fact
are, or may be deemed to be, forward-looking statements.
Forward-looking statements are sometimes, but not always,
identified by their use of a date in the future or such words as
"anticipates", "aims", "due", "could", "may", "will", "should",
"expects", "believes", "intends", "plans", "potential", "targets",
"goal" or "estimates". By their nature, forward-looking statements
involve a number of risks, uncertainties and assumptions and actual
results or events may differ materially from those expressed or
implied by those statements. There are also a number of factors
that could cause actual future operations, performance, financial
conditions, results or developments to differ materially from the
plans, goals and expectations expressed or implied by these
forward-looking statements and forecasts. These factors include,
but are not limited to, those contained in this report.
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
forwardlooking statement resulting from new information, future
events or otherwise. Nothing in this document should be construed
as a profit forecast. Past performance cannot be relied upon as a
guide to future performance and persons needing advice should
consult an independent financial adviser.
This report 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 report reflect the knowledge and
information available at the time of its preparation. Liability
arising from anything in this report shall be governed by English
law. Nothing in this report shall exclude any liability under
applicable laws that cannot be excluded in accordance with such
laws.
This information is provided by RNS, the news service of the
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END
FR UVVUROVUKUUR
(END) Dow Jones Newswires
September 26, 2023 02:00 ET (06:00 GMT)
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