Half Year Results for the Six
Months to 31 January 2024
19 March 2024
Adrian Sainsbury, Chief Executive, said:
"Performance in the first half of
2024 reflected continued loan book growth across our businesses in
Banking at strong margins, and an improved credit performance. CBAM
delivered strong net inflows and whilst Winterflood's performance
remains affected by weakness in retail trading activity, it remains
well placed for a recovery in investor appetite.
The FCA's review of the motor
finance industry is ongoing and it would be premature to predict
the outcome or estimate the potential impact on the group. The
Board however recognises the paramount importance of preparing the
group for a range of outcomes from this review. As part of this,
the Board is taking a number of decisive actions to strengthen our
capital position materially. These include the difficult decision
taken last month not to pay dividends in respect of the current
financial year. In addition, we are taking steps to optimise our
risk weighted assets and reduce costs.
These steps are being taken whilst
continuing to provide excellent service to all our customers and
protect our valuable franchise. The distinctive strength of our
through-the-cycle business model, our long-term relationships, the
deep expertise of our people and our consistent service endure.
While we are working through a current period of uncertainty, the
Board is taking decisive actions and is confident that the group
will emerge well positioned to take advantage of future
opportunities."
Key
Financials1
|
First half
2024
|
First half
2023
|
Change
%
|
Statutory operating profit before
tax
|
£93.8m
|
£11.7m
|
702
|
Adjusted operating
profit2
|
£94.4m
|
£12.6m
|
649
|
Adjusted basic earnings per
share3
|
46.3p
|
6.1p
|
|
Basic earnings per
share3
|
46.0p
|
5.6p
|
|
|
|
|
|
Ordinary dividend per
share
|
-
|
22.5p
|
|
Return on opening
equity
|
8.4%
|
1.1%
|
|
Return on average tangible
equity
|
10.1%
|
1.3%
|
|
Net interest
margin4
|
7.5%
|
8.0%
|
|
Bad debt
ratio4
|
0.9%
|
3.6%
|
|
|
|
|
|
|
31 January
2024
|
31 July
2023
|
Change
%
|
Loan book5
|
£9.9bn
|
£9.5bn
|
4
|
Total client assets
|
£18.5bn
|
£17.3bn
|
7
|
NAV per share
|
£11.0
|
£11.0
|
|
TNAV per share
|
£9.2
|
£9.3
|
|
CET1 capital ratio
(transitional)
|
13.0%
|
13.3%
|
|
Tier 1 capital ratio
(transitional)
|
15.0%
|
13.3%
|
|
Total capital ratio
(transitional)
|
16.9%
|
15.3%
|
|
Key Financials (Excluding
Novitas)
|
First half
2024
|
First half
2023
|
Change
%
|
Statutory operating profit before
tax
|
£93.6m
|
£116.6m
|
(20)
|
Adjusted operating
profit
|
£94.2m
|
£117.5m
|
(20)
|
|
|
|
|
Net interest
margin4
|
7.5%
|
7.8%
|
|
Bad debt
ratio4
|
0.8%
|
1.1%
|
|
|
|
|
|
|
31 January
2024
|
31 July
2023
|
Change
%
|
Loan book5
|
£9.8bn
|
£9.5bn
|
4
|
1. Please refer to definitions on
pages 25 to 27.
2. Adjusted operating profit is
stated before amortisation of intangible assets on acquisition,
goodwill impairment, exceptional items and tax.
3. Refer to note 4 for the
calculation of basic and adjusted earnings per share.
4. Net interest margin and bad debt
ratio calculated on an annualised basis.
5. Loan book includes operating
lease assets.
Financial performance
• Resilient operating income of £470.8 million (H1 2023: £474.3
million), down 1%, reflecting growth in Banking and Close Brothers
Asset Management, offset by a reduction in Winterflood and higher
Group (central functions) net expenses
|
• Operating expenses up 12% reflecting increases in staff costs
and continued investment in Banking
|
• Statutory operating profit before tax of £93.8 million (H1
2023: £11.7 million), reflecting non-recurrence of prior year
impairment charges of £114.6 million related to Novitas. Excluding
Novitas, adjusted operating profit reduced to £94.2 million (H1
2023: £117.5 million), reflecting cost growth, a reduction in
Winterflood income and higher Group (central functions) net
expenses
|
• Group return on average tangible equity ("RoTE") of 10.1% (H1
2023: 1.3%)
|
• In Banking, we delivered loan
book growth of 4% to £9.9 billion (31 July 2023: £9.5 billion),
driven by strong growth in Property and continued good demand in
Asset Finance and the UK Motor Finance business, partly offset by
the normal seasonal impact seen in the Premium and Invoice Finance
businesses. We delivered a strong net interest margin of 7.5% (H1
2023: 8.0%; 2023: 7.7%). Our credit performance improved, with an
annualised bad debt ratio of 0.9% (H1 2023: 3.6%)
|
• Close Brothers Asset
Management delivered strong net
inflows of 9% annualised, with a significant contribution from our
bespoke investment management business. Total managed assets
("AuM") increased 8% to £17.7 billion, driven by net inflows and
positive market performance
|
• In Winterflood, market
conditions have remained unfavourable; Winterflood Business
Services ("WBS") income was up 24%
to £7.8 million and reflected an 11% year-on-year increase in
assets under administration ("AuA") to £13.8 billion
|
• Strong balance sheet
position with our
Common Equity Tier 1 ("CET1") ratio of 13.0% at
31 January 2024 (31 July 2023: 13.3%), significantly above our applicable
requirement of 9.5%
|
• Decision to suspend dividends in respect of current financial
year announced on 15 February 2024
|
Decisive actions to further strengthen capital
position
• The Board has concluded that no legal or constructive
obligation exists at the half year in relation to the FCA review
and therefore, no provision has been recognised in the period in
accordance with the relevant accounting standards
|
• There is significant uncertainty about the outcome of the
FCA's review at this early stage, and the timing, scope and quantum
of any potential financial impact on the group cannot be reliably
estimated at present
|
• The Board considers it prudent for the group to further
strengthen its capital position. The group has identified actions
which, combined with the decision to not pay any dividend payments
in the current financial year, could strengthen the group's
available CET1 capital by approximately £200 million. These actions
include a combination of significant risk transfer of assets and
selective loan book growth to optimise risk weighted assets,
supported by additional cost management initiatives. We continue to
evaluate a range of other potential management actions which could
enhance available CET1 capital by at least another c.£100
million. Additionally, as our business continues to
organically generate capital through 2025, the retention of
earnings could potentially strengthen the group's capital position
by a further £100 million, if required. In all, these measures
could strengthen the group's available CET1 capital by
approximately £400 million by the end of the 2025 financial year
when compared to the group's projected CET1 capital ratio for 31
July 2025, prior to any management actions. The Board is confident
that these decisive actions will position the group well to
withstand a range of scenarios and potential outcomes
|
Update on guidance
In Banking¸ we are encouraged by the
performance in the first half, notwithstanding the significant
uncertainty in relation to the FCA's review of historical motor
finance commission arrangements
• Expect to broadly sustain underlying loan book growth in the
second half of the 2024 financial year
• Well positioned to maintain a strong net interest margin,
broadly aligned with the reported NIM in the first half
• Continue to expect c.8-10% increase in Banking costs in 2024,
excluding costs related to the recently announced acquisition of
Bluestone Motor Finance (Ireland)
• We have mobilised additional cost management initiatives
which are expected to generate annualised savings of c.£20 million
by the 2026 financial year, partly offsetting the adverse impact on
the group's income as a result of the management actions
• We remain committed to more closely aligning income and cost
growth for the 2025 financial year (excluding any restructuring
costs) and delivering positive operating leverage over the medium
term
• Expect the bad debt ratio to remain below our long-term
average of 1.2% in H2 2024, based on current market
conditions
In Close
Brothers Asset Management ("CBAM"), we are
well placed to consolidate our position and maximise opportunities
to accelerate profitability
• Targeting net inflows of 6-10%
• Expect operating margin to increase from 2025 onwards towards
a longer-term target of above 20%
In Winterflood, we are well placed to
retain our leading market position and benefit when investor
appetite returns
• Remain focused on diversifying revenue streams
• Expect to grow AuA in WBS to over £20 billion by
2026
As noted above, we have identified
and continue to evaluate a number of management actions to continue
to support our customers and protect our valuable franchise. Over
the medium term, we remain committed to our previous CET1 capital
target of 12% to 13% but expect to operate above this range in the
near-term as a result of the identified management
actions.
These actions will leave us well
positioned to withstand a range of scenarios and potential outcomes
and are expected to adversely impact the group's operating profit
in the next financial year. An update on our guidance for the 2025
financial year will be provided at our Full-Year results
announcement.
Enquiries
Sophie Gillingham
|
Close Brothers Group plc
|
020 3857 6574
|
Camila Sugimura
|
Close Brothers Group plc
|
020 3857 6577
|
Kimberley Taylor
|
Close Brothers Group plc
|
020 3857 6233
|
Ingrid Diaz
|
Close Brothers Group plc
|
020 3857 6088
|
Sam Cartwright
|
H/Advisors Maitland
|
07827 254 561
|
A virtual presentation to analysts
and investors will be held today at 9.30 am GMT followed by a
Q&A session. A webcast and dial-in facility will be available
by registering at https://webcasts.closebrothers.com/results/HalfYearResults2024.
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. As announced at the 2023
Preliminary Results, 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
|
Third quarter trading
update
|
22 May 2024
|
Financial year end
|
31 July 2024
|
Preliminary results
|
24 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
Performance in the first half of
2024 reflected continued loan book growth across our businesses in
Banking at strong margins, and an improved credit performance. CBAM
delivered strong net inflows and whilst Winterflood's performance
remains affected by weakness in retail trading activity, it remains
well placed for a recovery in investor appetite.
This first half has seen a mixed
market backdrop. Whilst we have seen some improvement in
macroeconomic indicators, economic headwinds remain as interest
rates have stabilised at higher levels while inflation persists.
Customer demand levels have remained robust in Banking. Our
market-facing businesses continued to encounter a challenging
market environment, although CBAM attracted new client assets and
delivered a good fund performance across asset classes.
Notwithstanding the continued
uncertain macroeconomic environment for individuals and SMEs in the
UK, we continue to support our nearly three million customers,
including c.360,000 SME businesses, through the cycle. In our
Banking division, we employ almost 3,000 colleagues across 40
locations throughout the country. Our primary focus is helping
customers by offering additional borrowing capacity to acquire
essential assets for their personal lives or small
businesses.
Financial Performance
Statutory operating profit before
tax was £93.8 million (H1 2023: £11.7 million). The increase was
mainly driven by the non-recurrence of the prior year impairment
charges related to Novitas. In Banking, excluding Novitas, the
profit performance reflected good loan book growth of 9%
year-on-year, a strong net interest margin of 7.5% and an improved
credit performance, with a bad debt ratio of 0.8%. This was more
than offset by increased costs due to inflation-related salary
rises, new hires and investment in our strategic programmes and
cost efficiency initiatives. Our Asset Management division
delivered strong net inflows of 9% annualised, although profit
reduced, as income growth was more than offset by costs primarily
related to wage inflation and new hires. Winterflood's performance
has been adversely impacted by continued weakness in investor
appetite and market uncertainty, resulting in an operating loss of
£2.6 million. 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. WBS continued
to see good momentum, with income rising 24% to £7.8 million and an
11% year-on-year increase in AuA to £13.8 billion.
We maintained our strong balance
sheet and conservative approach to managing our financial resources
in the first half. Our capital position was strong, with our CET1
capital ratio at 13.0% (31 July 2023: 13.3%), significantly above
our applicable requirement of 9.5%. Total funding increased 3% to
£12.7 billion (31 July 2023: £12.4 billion), with 16% growth in our
retail deposit base, demonstrating the strength of our Savings
proposition. We maintained our prudent liquidity position, with our
Liquidity Coverage Ratio over 1,000%, substantially exceeding
regulatory requirements.
Significant uncertainty arising
from the FCA's review of the motor finance industry
The FCA recently announced that it
is undertaking a review of the motor finance market due to the high
number of complaints coming to the Financial Ombudsman Service
("FOS") from customers regarding discretionary commission
arrangements in effect prior to the 2021 ban on these models. The
FCA aims to communicate a decision on next steps by the end of
September 2024. This has caused significant uncertainty for the
industry and the group regarding any potential remediation action
as a result of the review. Close Brothers Motor Finance ("CBMF")
has operated in the motor finance market for a number of years,
during which we have sought to comply with the relevant regulatory
requirements. There are a range of possible outcomes and therefore,
as announced on 15 February, we are implementing actions to further
strengthen the group's capital position, with the priority of
protecting and sustaining our valuable franchise.
We have a long-term progressive
dividend track record and the decision to not pay any dividends for
this financial year was not made lightly. It reflects our proactive
and prudent approach to managing our financial resources. We have
identified actions which, combined with the decision not to pay a
dividend in the current financial year, are expected to strengthen
the group's available CET1 capital by approximately £200 million.
These actions include a combination of significant risk transfer of
assets and selective loan book growth to optimise risk weighted
assets, supported by additional cost management initiatives which
could enhance available CET1 capital by at least another c.£100
million. Additionally, as our business continues to
organically generate capital through 2025, the retention of
earnings could potentially strengthen the group's capital position
by a further £100 million, if required. In all, these measures
could strengthen the group's available CET1 capital by
approximately £400 million by the end of the 2025 financial year
when compared to the group's projected CET1 capital ratio for 31
July 2025, prior to any management actions. The Board is confident
that these decisive actions will position the group well to
withstand a range of scenarios and potential outcomes.
Continued focus on strengthening
our valuable franchise
Notwithstanding the prevailing
uncertainty, we remain focused on delivering on our strategy and
strengthening our valuable franchise. This means we will continue
to review our portfolio of businesses to ensure they each deliver
attractive returns. We have mobilised additional cost management
initiatives in Banking, which are expected to generate annualised
savings of c.£20 million by the 2026 financial year, to support the
ongoing profitability of our business.
The distinctive strengths of our
through-the-cycle model - our long-term relationships, the deep
expertise of our people and our customer-centric approach - endure.
We are taking decisive actions to navigate through this period of
uncertainty and are confident that the group will emerge well
positioned to take advantage of future opportunities.
Adrian Sainsbury
Chief Executive
19 March 2024
FCA's review of historical motor finance commission
arrangements
On 11 January 2024, the FCA
announced it is using its powers under section 166 of the Financial
Services and Markets Act 2000 to review historical motor finance
commission arrangements and sales at several firms, following high
numbers of complaints from customers. The review follows the FOS
publication of its first two decisions upholding customer
complaints relating to discretionary commission arrangements
("DCAs") against two other lenders in the market. The FCA aims to
communicate a decision on next steps by the end of September
2024.
Overview of commission models
operated1
CBMF has operated in the motor
finance market for a number of years, during which we have sought
to comply with the relevant regulatory requirements.
Prior to 2016, CBMF operated an
Upward Difference in Charges ("DIC") model. This allowed the dealer
or broker full discretion over the customer rate and the commission
earnt on point-of-sale finance, subject to a hard cap on the amount
of commission. Under the DIC model, commission, if any, was paid as
a percentage of the total interest paid by the customer.
From 2016, CBMF introduced a
Downward Scaled Commission ("DSM") model, which capped both the
interest charged to the customer and commission paid to the dealer
or broker. This meant that CBMF set the headline rate for the
customer and the dealers could only reduce this by decreasing their
level of commission. Under the DSM model, commission, if any, was
paid as a percentage of the loan size.
From 2021 onwards, CBMF introduced
a Risk Adjusted Pricing Model which set the rate for the customer
and adjusted the rate according to the customer risk profile.
Dealer discretion was removed entirely. Under the Risk Adjusted
Pricing Model, commission, if any, is paid as a fixed percentage of
the loan size.
All historical models included a
"hard cap" on the commission amount paid to the broker or dealer.
Commission disclosures were also reviewed and enhanced over
time.
1 For simplicity, dates shown
above assume transition when substantially
complete.
Impact on Close
Brothers
The FCA review is progressing to
determine whether there has been industry-wide failure to comply
with regulatory requirements which has caused customers harm and,
if so, whether it needs to take any actions. Based on the status at
the half year and in accordance with the relevant accounting
standards, the Board has concluded that no legal or constructive
obligation exists and it is currently not required or appropriate
to recognise a provision in relation to this matter. The FCA has
indicated there could be a range of outcomes, with one potential
outcome being an industry-wide consumer redress scheme. The
estimated impact of any redress scheme, if required, is highly
dependent on a number of factors including, for example, the time
period covered; the DCA models impacted (the group operated a
number of different models during the period under review);
appropriate reference commission rates set for any redress; and
response rates to any redress scheme. As such, at this early stage,
the timing, scope and quantum of the potential financial impact on
the group, if any, cannot be reliably estimated at present. In
addition, it is not practicable at this stage to estimate any
potential financial impact arising from this issue.
The group is subject to a number
of claims through the courts regarding historical commission
arrangements with intermediaries on its motor finance products. As
of 29 February 2024, where individual cases were adjudicated in
County Court, in the majority of the outcomes for Close Brothers
where the courts found that there was no demonstrable customer harm
and hence no compensation to pay, albeit there have been a limited
number of adjudicated cases at this stage. There are also a number
of complaints that have been referred to FOS for a determination.
To date no final FOS decisions have been made upholding complaints
against Close Brothers.
Since the announcement by the FCA
of its review of historical motor finance commission arrangements,
we have seen a further increase in complaints. We continue to
monitor the impact on our current handling of complaints and are
following the playbooks in place to ensure we have the appropriate
resources to respond effectively.
Further strengthening our capital base to continue to support
customers and protect our valuable franchise
The group has a strong capital,
funding and liquidity position. At 31 January 2024, our CET1 and
Total capital ratios were 13.0% and 16.9% respectively (31 July
2023: 13.3% and 15.3%), providing significant headroom over the
applicable requirements. Our leverage ratio, which is a measure of
capital strength not affected by risk weightings, remained strong
at 12.7%. Our conservative approach to funding is based on the
principle of "borrow long, lend short" and we hold liquidity levels
comfortably ahead of both internal risk appetite and regulatory
requirements, with a Liquidity Coverage Ratio in excess of 1,000%.
As of 29 February 2024, there have been no significant changes in
our deposit base and liquidity metrics.
While there is no certainty
regarding any potential financial impact as a result of the FCA's
review, the Board recognises the need to plan for a range of
possible outcomes. It is a long-standing priority of the group to
maintain a strong balance sheet and prudent approach to managing
its financial resources. To that end, the Board considers it
prudent for the group to further strengthen its capital position,
while supporting our customers and business franchise.
As previously announced, the group
will not pay any dividends on its ordinary shares for the current
financial year, and the reinstatement of dividends in 2025 and
beyond will be reviewed once the FCA has concluded its process and
any financial consequences for the group have been assessed. As a
result, we expect to retain c.£100 million of CET1 capital in the
2024 financial year, of which c.£50 million has been reflected in
the CET1 capital position at 31 January 2024.
The Board is taking steps to
further strengthen the group's capital position by optimising risk
weighted assets ("RWAs"). We plan to reduce RWA growth by
approximately £1 billion through a combination of selective loan
book growth, partnerships and significant risk transfer of assets
related to our Motor Finance business through
securitisations.
We have also mobilised additional
cost management initiatives which are expected to generate
annualised savings of c.£20 million by the 2026 financial year,
partly offsetting the adverse impact on the group's income as a
result of the management actions.
We continue to evaluate a range of
other potential management actions which could strengthen the
group's capital position over and above our ongoing organic capital
generation through 2025. These include potential risk transfer of
other portfolios through securitisation, a continued review of our
business portfolios and other tactical actions. We estimate this
could enhance available CET1 capital by at least another c.£100
million. Additionally, as our business continues to organically
generate capital through 2025, the retention of earnings could
potentially strengthen the group's capital position by a further
£100 million, if required.
Combined with the decision to not
pay any dividends in the current financial year, these measures
could strengthen the group's available CET1 capital by
approximately £400 million by the end of the 2025 financial year
(when compared to the group's projected CET1 capital ratio for 31
July 2025, prior to any management actions). The Board is confident
that these decisive actions position the group well to withstand a
range of scenarios and potential outcomes. Nevertheless, there
remains considerable uncertainty regarding the specifics of any
potential redress scheme, if required, as well as its
timing.
Overview of Financial
Performance
Summary Group Income
Statement1
|
First half
2024
£ million
|
First half
2023
£ million
|
Change
%
|
Operating income
|
470.8
|
474.3
|
(1)
|
Adjusted operating
expenses
|
(334.7)
|
(299.5)
|
12
|
Impairment losses on financial
assets
|
(41.7)
|
(162.2)
|
(74)
|
Adjusted operating
profit
|
94.4
|
12.6
|
649
|
Banking
|
111.7
|
15.0
|
645
|
Commercial
|
50.9
|
(33.1)
|
254
|
Of
which: Novitas
|
0.2
|
(104.9)
|
n/a
|
Retail
|
19.0
|
14.7
|
29
|
Property
|
41.8
|
33.4
|
25
|
Asset Management
|
6.3
|
8.6
|
(27)
|
Winterflood
|
(2.6)
|
2.4
|
(208)
|
Group
|
(21.0)
|
(13.4)
|
57
|
Amortisation of intangible assets
on acquisition
|
(0.6)
|
(0.9)
|
(33)
|
Statutory operating profit before
tax
|
93.8
|
11.7
|
702
|
Tax
|
(25.0)
|
(3.3)
|
658
|
Profit after tax
|
68.8
|
8.4
|
719
|
Profit attributable to
shareholders
|
68.8
|
8.4
|
719
|
|
|
|
|
Adjusted basic earnings per
share2
|
46.3p
|
6.1p
|
|
Basic earnings per
share2
|
46.0p
|
5.6p
|
|
Ordinary dividend per
share
|
-
|
22.5p
|
|
Return on opening
equity
|
8.4%
|
1.1%
|
|
Return on average tangible
equity
|
10.1%
|
1.3%
|
|
1. Adjusted measures are presented
on a basis consistent with prior periods and exclude amortisation
of intangible assets on acquisition, to present the performance of
the group's acquired businesses consistent with its other
businesses; and any exceptional and other adjusting items which do
not reflect underlying trading performance. Further detail on the
reconciliation between 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
Adjusted operating profit
increased to £94.4 million (H1 2023: £12.6 million), driven by the
non-recurrence of the significant impairment charges incurred in
relation to Novitas in the prior year. Excluding Novitas, adjusted
operating profit reduced 20% to £94.2 million (H1 2023: £117.5
million), primarily reflecting cost growth, a reduction in income
in Winterflood and an increase in group (central functions) net
expenses to reflect the interest rate on the Group bond issued in
June 2023, partly offset by lower impairment charges.
Statutory operating profit before
tax increased to £93.8 million (H1 2023: £11.7 million). Return on
opening equity increased to 8.4% (H1 2023: 1.1%) and return on
average tangible equity increased to 10.1% (H1 2023:
1.3%).
Banking adjusted operating profit
increased to £111.7 million (H1 2023: £15.0 million), with the
prior year including an impairment charge of £114.6 million in
relation to Novitas. Excluding Novitas, Banking adjusted operating
profit decreased 7% to £111.5 million (H1 2023: £119.9 million), as
income growth and lower impairment charges were more than offset by
higher costs. In the Asset Management division, adjusted operating
profit declined by 27% to £6.3 million (H1 2023: £8.6 million) as
growth in income was more than offset by higher costs. Winterflood
delivered an operating loss of £2.6 million (H1 2023: operating
profit of £2.4 million), primarily reflecting lower trading income.
Group net expenses, which include the central functions such as
finance, legal and compliance, risk and human resources, increased
to £21.0 million (H1 2023: £13.4 million), driven primarily by the
interest charges incurred on the Group's £250 million senior
unsecured bond issued in June 2023 at an interest rate of
7.75%.
Operating income
Operating income decreased
marginally to £470.8 million (H1 2023: £474.3 million), with growth
in Asset Management and Banking offset by a decline in Winterflood
and net interest expenses from debt issued by the holding company
in June 2023. Income in the Banking division increased marginally,
reflecting loan book growth and strong margins, with the prior year
period benefitting from one-off items related to derivatives
outside of a hedge accounting relationship (mark-to-market swaps)
and Novitas income. Excluding the impact of these swaps and
Novitas, Banking income increased 6%. Income in the Asset
Management division increased 7%, reflecting positive net inflows
and market movements. Income in Winterflood declined 12%, with the
decline in trading income more than offsetting growth in
WBS.
Adjusted operating
expenses
Adjusted operating expenses rose
12% to £334.7 million (H1 2023: £299.5 million) as we saw increased
staff costs across the group, as well as continued investment in
Banking. In Banking, costs increased 13% as we incurred higher
staff costs and continued to invest in our strategic programmes and
cost saving initiatives. Costs rose 12% in Asset Management mainly
reflecting new hires and higher staff costs due to
inflation-related salary increases. Winterflood's costs increased
marginally, primarily driven by inflation-related salary increases
and one-off costs incurred by relocating premises, partly offset by
lower variable compensation and a reduction in settlement
costs.
Overall, the group's
expense/income ratio increased to 71% (H1 2023: 63%), whilst the
compensation ratio increased to 41% (H1 2023: 36%), reflecting
inflation-related wage increases, a normalisation of
performance-driven bonuses and new hires.
Impairment charges and IFRS 9
provisioning
Impairment charges decreased
significantly to £41.7 million (H1 2023: £162.2 million),
corresponding to an annualised bad debt ratio of 0.9% (H1 2023:
3.6% annualised), with the prior year period including a charge of
£114.6 million in relation to Novitas. Overall provision coverage
increased marginally to 4.1% (31 July 2023: 3.9%).
Excluding Novitas, impairment
charges reduced 17% to £39.5 million (H1 2023: £47.6 million),
reflecting the improved macroeconomic outlook compared to the prior
year period, partly offset by loan book growth and the ongoing
review of provisions and coverage across our loan portfolios. The
bad debt ratio, excluding Novitas, reduced to 0.8% annualised (H1
2023: 1.1% annualised) and remains below our long-term bad debt
ratio of 1.2%1. The coverage ratio remained stable at
2.1% (31 July 2023: 2.1%), excluding Novitas.
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 January 2024, 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 protracted downside.
Whilst we have not seen a
significant impact on credit performance, we continue to monitor
closely the evolving impacts of 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 continue to expect the bad debt ratio for H2 2024 to
remain below our long-term average, based on current market
conditions.
Tax expense
The tax expense in the first half
of the year was £25.0 million (H1 2023: £3.3 million), which
corresponds to an effective tax rate of 26.7% (H1 2023: 28.2%) for
the period, representing the best estimate of the annual effective
tax rate expected for the full year.
The standard UK corporation tax
rate for the financial year is 25.0% (six months ended 31 January
2023: 21.0%; year ended 31 July 2023: 21.0%). The effective tax
rate is above the UK corporation tax rate primarily due to
disallowable expenditure.
Earnings per share
Adjusted basic earnings per share
("EPS") was 46.3p (H1 2023: 6.1p) and basic EPS was 46.0p (H1 2023:
5.6p).
We anticipate EPS, return on
opening equity and return on average tangible equity to be impacted
from the second half of 2024 onwards by the payment of the coupon
relating to the Fixed Rate Resetting Additional Tier 1 Perpetual
Subordinated Contingent Convertible ("AT1") Securities, at a rate
of 11.125%, which will be due on 29 May and 29 November each year,
commencing on 29 May 2024. Any AT1 coupons paid will be deducted
from retained earnings, reducing the profit attributable to
ordinary shareholders.
Dividend
As announced on 15 February 2024,
given the significant uncertainty regarding the outcome of the
FCA's review of historical motor finance commissions arrangements
and any potential financial impact as a result, the Board
recognises the need to plan for a range of possible outcomes from
the review. It is a long-standing priority of the group to maintain
a strong balance sheet and prudent approach to managing its
financial resources. To that end, the Board considers it prudent
for the group to further strengthen its capital position, while
supporting our customers and business franchise.
Therefore, the group will not pay
any dividends on its ordinary shares for the current financial
year, and the reinstatement of dividends in the 2025 financial year
and beyond will be reviewed once the FCA has concluded its process
and any financial consequences for the group have been
assessed.
Summary Group Balance
Sheet
|
31 January 2024
£ million
|
31 July 2023
£ million
|
Loans and advances to customers
and operating lease assets1
|
9,893.0
|
9,526.2
|
Treasury assets2
|
2,185.2
|
2,229.4
|
Market-making assets3
|
974.3
|
787.6
|
Other assets
|
985.3
|
1,007.1
|
Total assets
|
14,037.8
|
13,550.3
|
Deposits by customers
|
8,264.0
|
7,724.5
|
Borrowings4
|
2,492.3
|
2,839.4
|
Market-making
liabilities3
|
902.3
|
700.7
|
Other liabilities
|
547.4
|
640.8
|
Total liabilities
|
12,206.0
|
11,905.4
|
Equity5
|
1,831.8
|
1,644.9
|
Total liabilities and
equity
|
14,037.8
|
13,550.3
|
1. Includes operating lease assets
of £282.0 million (31 July 2023: £271.2 million).
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.
5. Equity includes the group's
£200.0 million Fixed Rate Reset Perpetual Subordinated Contingent
Convertible Securities (AT1 securities), net of transaction costs,
which are classified as an equity instrument under IAS
32.
The group maintained a strong
balance sheet and a prudent approach to managing its financial
resources. The fundamental structure of the balance sheet remains
unchanged, with most of the assets and liabilities relating to our
Banking activities. Loans and advances make up the majority of
assets. Other items on the balance sheet include treasury assets
held for liquidity purposes, and settlement balances in
Winterflood. Intangibles, property, plant and equipment, and
prepayments are included as other assets. Liabilities are
predominantly made up of customer deposits and both secured and
unsecured borrowings to fund the loan book.
Total assets increased 4% to £14.0
billion (31 July 2023: £13.6 billion), mainly reflecting growth in
the loan book and higher market-making assets. Total liabilities
were 3% higher at £12.2 billion (31 July 2023: £11.9 billion),
driven primarily by higher customer deposits and market-making
liabilities, partly offset by a reduction in borrowings. Both
market-making assets and liabilities, which related to trading
activity at Winterflood, were higher due to an increase in value
traded at the end of the period.
Total equity increased 11% to £1.8
billion (31 July 2023: £1.6 billion), primarily reflecting the
issuance of AT1 securities net of transaction costs and profit in
the first half, which was partially offset by payments related to
the final dividend for the 2023 financial year of £67.1 million (31
January 2023: £65.6 million). The group's return on assets
increased to 1.0% (H1 2023: 0.1%).
Group Capital
|
31 January 2024
£ million
|
31 July 2023
£ million
|
Common equity tier 1
capital
|
1,353.0
|
1,310.8
|
Tier 1 capital
|
1,553.0
|
1,310.8
|
Total capital
|
1,753.0
|
1,510.8
|
Risk weighted assets
|
10,380.2
|
9,847.6
|
Common equity tier 1 capital ratio
(transitional)
|
13.0%
|
13.3%
|
Tier 1 capital ratio
(transitional)
|
15.0%
|
13.3%
|
Total capital ratio
(transitional)
|
16.9%
|
15.3%
|
Leverage ratio1
|
12.7%
|
11.4%
|
1. 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 13.3% to 13.0%, mainly driven by loan book growth (-c.60bps),
a decrease in IFRS 9 transitional arrangements (-c.20bps) and the
Bluestone Motor Finance acquisition (-c.20bps). This was partly
offset by capital generation through profit (c.70bps). Following
the announcement that the group will not pay any dividends on its
ordinary shares for the current financial year, no foreseeable
dividend on ordinary shares has been deducted from CET1
capital.
CET1 capital increased 3% to
£1,353.0 million (31 July 2023: £1,310.8 million), reflecting
capital generation through profit of £68.8 million, partly offset
by a decrease in the transitional IFRS 9 add-back to capital of
£16.6 million and an increase in intangible assets deducted from
capital of £4.9 million.
Tier 1 capital increased 18% to
£1,553.0 million (31 July 2023: £1,310.8 million), primarily driven
by the issuance of the group's inaugural AT1 in a £200 million
transaction to optimise the capital structure and provide further
flexibility to grow the business. The transaction strengthened the
regulatory capital position by filling the Pillar 1 and Pillar 2A
AT1 capacity with the proceeds and was in line with the group's
strategy and capital management framework.
Total capital increased 16% to
£1,753.0 million (31 July 2023: £1,510.8 million), reflecting the
AT1 issuance.
RWAs increased by 5% to £10.4
billion (31 July 2023: £9.8 billion), driven by loan book growth
(c.£445 million) primarily in Commercial and Property, and the
acquisition of Bluestone Motor Finance (c.£105 million).
At 31 January 2024, CET1, tier 1
and total capital ratios were 13.0% (31 July 2023: 13.3%), 15.0%
(31 July 2023: 13.3%) and 16.9% (31 July 2023: 15.3%),
respectively.
The 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,
at 31 January 2024. Accordingly, we continue to have headroom
significantly above the requirements of c.350bps in the CET1
capital ratio, c.380bps in the tier 1 capital ratio and c.350bps 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 12.9%, 14.8% and 16.8%,
respectively.
The leverage ratio, which is a
transparent measure of capital strength not affected by risk
weightings, increased to 12.7% (31 July 2023: 11.4%).
The PRA published PS 17/23, part
one of the near-final rules on the implementation of Basel 3.1
standards, in December 2023. The second part is expected by 30 June
2024, which should provide further clarity regarding the SME
supporting factor. The implementation date is set for 1 July 2025.
As previously announced, 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, new conversion factor for cancellable facilities and new
market risk rules.
As outlined at the Full Year 2023
results, our application to transition to the Internal Ratings
Based ("IRB") approach has successfully moved to Phase 2 of the
process and engagement with the regulator continues, following our
initial application to the PRA in December 2020. Our Motor Finance,
Property Finance and Energy portfolios, where the use of models is
most mature, were submitted with our initial
application.
Further strengthening our capital
position
As outlined above, the Board is
implementing a range of actions to further strengthen the group's
capital position. Additionally, we continue to evaluate other
potential management actions which could strengthen the group's
available CET1 capital over and above our ongoing organic capital
generation through 2025. In all, these measures could strengthen
the group's available CET1 capital by approximately £400 million by
the end of the 2025 financial year (when compared to the group's
projected CET1 capital ratio for 31 July 2025, prior to any
management actions). The Board is confident that these decisive
actions will position the group well to withstand a range of
scenarios and potential outcomes. Nevertheless, there remains
considerable uncertainty regarding the specifics of any potential
redress scheme, if required, as well as its timing.
Over the medium term, we remain
committed to our previous CET1 capital target range of 12% to 13%
but expect to operate above this range in the near-term as a result
of the identified management actions.
Group
Funding1
|
31 January 2024
£ million
|
31 July 2023
£ million
|
Customer deposits
|
8,264.0
|
7,724.5
|
Secured funding
|
1,351.3
|
1,676.6
|
Unsecured funding2
|
1,227.0
|
1,308.6
|
Equity
|
1,831.8
|
1,644.9
|
Total available
funding3
|
12,674.1
|
12,354.6
|
Total funding as % of loan
book4
|
128%
|
130%
|
Average maturity of funding
allocated to loan book5
|
21 months
|
21 months
|
1. Numbers relate to core funding
and exclude working capital facilities at the business
level.
2. Unsecured funding excludes £49.0
million (31 July 2023: £44.3 million) of non-facility overdrafts
included in borrowings and includes £135.0 million (31 July 2023:
£190.0 million) of undrawn facilities.
3. Includes £250 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 used for general corporate purposes.
4. Total funding as a % of loan
book includes £282.0 million (31 July 2023: £271.2 million) of
operating lease assets in the loan book figure.
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.
Our diverse funding sources enable
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. We have maintained a prudent maturity profile, with
the average maturity of funding allocated to the loan book at 21
months (31 July 2023: 21 months), ahead of the average loan book
maturity at 16 months (31 July 2023: 16 months).
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. This broad funding base reduces concentration
risk and ensures we can adapt our position through the
cycle.
We increased total funding in the
first half by 3% to £12.7 billion (31 July 2023: £12.4 billion)
which accounted for 128% (31 July 2023: 130%) of the loan book at
the balance sheet date. The average cost of funding in Banking
increased to 5.4% (2023: 3.2%) due to a higher base rate and
customer deposit pricing pressure. We took actions to mitigate this
pressure by optimising the group's liability mix based on funding
needs, customer demand and market pricing, significantly growing
our retail deposit base to utilise this lower cost of funding for
the group. We are well positioned to continue benefiting from our
diverse funding base, and expect cost of funds to be nearing the
peak of the current interest rate cycle.
Customer deposits increased 7% to
£8.3 billion (31 July 2023: £7.7 billion) overall. Of this,
non-retail deposits decreased 3% to £3.4 billion (31 July 2023:
£3.5 billion) and retail deposits increased by 16% to £4.9 billion
(31 July 2023: £4.2 billion), as we actively sought to grow our
retail deposit base. In line with our prudent and conservative
approach to funding, our deposits are predominantly term, with only
5% of total deposits available on demand and over 70% having at
least three months to maturity. At 31 January 2024, approximately
85% of retail deposits were protected by the Financial Services
Compensation Scheme. As of 29 February 2024, there have been no
significant changes in our deposit base.
The investment in our customer
deposit platform continues to deliver benefits. Deposits held
through this platform have grown by c.50% over five years to over
£5.6 billion. We continue to drive scalability through an array of
funding sources, with both Easy Access and an additional deposit
aggregator being introduced over the last year and complementing
our existing offering of Notice Accounts and Fixed Rate Cash ISAs.
The introduction of Easy Access provides us access to a large
potential deposit pool, with Easy Access balances now sitting at
c.£250 million. We remain focused on continuing to grow and
diversify our retail deposit base and further optimise our cost of
funding and maturity profile.
Secured funding decreased 19% to
£1.4 billion (31 July 2023: £1.7 billion), with our fifth public
Motor Finance securitisation completed in November 2023 more than
offset by a £250 million repayment related to our Motor Finance
warehouse securitisation and the repayment of £228 million of the
Term Funding Scheme for Small and Medium-sized Enterprises
("TFSME") ahead of the scheduled maturity date. This takes our
drawings under the scheme to £372 million (31 July 2023: £600
million). Over the next 12 months, £262 million of TFSME will
mature, which we expect to replace in line with our diverse funding
profile, dependent on market conditions and demand. A further £110
million will mature in October 2025.
Unsecured funding, which includes
senior unsecured and subordinated bonds and undrawn committed
revolving facilities, reduced 6% to £1.2 billion (31 July 2023:
£1.3 billion).
Our credit ratings continue to
reflect the group's inherent financial strength, 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", in January
2024, whilst downgrading the outlook from "stable" to "negative".
Close Brothers Group's subordinated debt rating was also upgraded
to A2 from A3 by Moody's. In February 2024, following the end of
the first half, Fitch Ratings ("Fitch") downgraded both CBG and CBL
long-term Issuer Default Ratings ("IDRs") to BBB+ from A-,
and affirmed CBG and CBL short-term IDRs of F2 and "negative"
outlook to reflect anticipated lower profitability and risks to
earnings from the FCA's motor review.
Group Liquidity
|
31 January 2024
£ million
|
31 July 2023
£ million
|
Cash and balances at central
banks
|
1,658.5
|
1,937.0
|
Sovereign and central bank
debt1
|
193.3
|
186.1
|
Supranational, sub-sovereigns and
agency ("SSA") bonds
|
145.6
|
-
|
Covered bonds
|
187.8
|
106.3
|
Treasury assets
|
2,185.2
|
2,229.4
|
1. There was £12 million encumbered
sovereign debt and central bank debt and covered bonds at 31
January 2024 (31 July 2023: £nil).
The group continues to adopt a
conservative stance on liquidity, ensuring it is comfortably ahead
of both internal risk appetite and regulatory
requirements.
Maintaining a strong level of
liquidity, particularly in light of the significant uncertainty
regarding the outcome of the FCA's review, remains a key priority
for the group. We have a large, high quality liquid asset portfolio
held mainly in cash and government bonds. In the first half,
treasury assets were broadly stable at £2.2 billion (31 July 2023:
£2.2 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 exceed the
liquidity coverage ratio ("LCR") regulatory requirements, with a
12-month average to 31 January 2024 LCR of 1,091% (31 July 2023:
1,143%). In addition to internal measures, we monitor funding risk
based on the CRR rules for the net stable funding ratio ("NSFR").
The four-quarter average NSFR to 31 January 2024 was 130.8% (31
July 2023: 126.0%). As of 29 February 2024, there have been no
significant changes to these ratios.
Business Review
Banking
Key Financials
|
First half
2024
£ million
|
First half
2023
£ million
|
Change
%
|
Operating income
|
365.3
|
363.9
|
0
|
Adjusted operating
expenses
|
(211.8)
|
(186.7)
|
13
|
Impairment losses on financial
assets
|
(41.8)
|
(162.2)
|
(74)
|
Adjusted operating
profit
|
111.7
|
15.0
|
645
|
Adjusted operating profit, pre
provisions
|
153.5
|
177.2
|
(13)
|
|
|
|
|
Net interest margin
|
7.5%
|
8.0%
|
|
Expense/income ratio
|
58%
|
51%
|
|
Bad debt ratio
|
0.9%
|
3.6%
|
|
Return on net loan book
|
2.3%
|
0.3%
|
|
Return on opening
equity
|
12.3%
|
1.1%
|
|
Closing loan book and operating
lease assets
|
9,893.0
|
9,041.0
|
9
|
Key Financials (Excluding
Novitas)
|
First half
2024
£ million
|
First half
2023
£ million
|
Change
%
|
Operating income
|
360.3
|
349.9
|
3
|
Adjusted operating
expenses
|
(209.2)
|
(182.4)
|
15
|
Impairment losses on financial
assets
|
(39.6)
|
(47.6)
|
(17)
|
Adjusted operating
profit
|
111.5
|
119.9
|
(7)
|
Adjusted operating profit, pre
provisions
|
151.1
|
167.5
|
(10)
|
|
|
|
|
Net interest margin
|
7.5%
|
7.8%
|
|
Expense/income ratio
|
58%
|
51%
|
|
Bad debt ratio
|
0.8%
|
1.1%
|
|
Closing loan book and operating
lease assets
|
9,830.3
|
8,979.1
|
9
|
Continued demand and loan book
growth across our businesses, as we maintained our pricing
discipline and improved underlying credit performance
The market backdrop has been mixed
in the first half. Whilst we have seen some improvement in
macroeconomic indicators, economic headwinds remain as interest
rates have stabilised at higher levels and inflation persists.
Notwithstanding the uncertainty this creates for individuals and
SMEs, we continued to support our customers and lend through the
cycle as we consistently applied our prudent underwriting and
pricing discipline.
Banking adjusted operating profit
increased to £111.7 million (H1 2023: £15.0 million), with the
prior year period including an impairment charge of £114.6 million
in relation to Novitas. On a pre-provision basis, adjusted
operating profit decreased 13% to £153.5 million (H1 2023: £177.2
million).
Excluding Novitas, Banking
adjusted operating profit decreased 7% to £111.5 million (H1 2023:
£119.9 million), as income growth and lower impairment charges were
more than offset by higher costs.
The loan book grew 4% in the first
half to £9.9 billion (31 July 2023: £9.5 billion), driven by strong
growth in Property and continued good demand in Asset Finance and
the UK Motor Finance business, partly offset by the normal seasonal
impact seen in the Premium and Invoice Finance
businesses.
Excluding the businesses in
run-off, Novitas and the legacy Republic of Ireland Motor Finance,
the loan book grew 5% to £9.7 billion (31 July 2023: £9.3
billion).
Operating income increased
marginally to £365.3 million (H1 2023: £363.9 million), reflecting
loan book growth and strong margins, whilst the prior year period
benefitted from movements in derivatives outside of a hedge
accounting relationship (mark-to-market swaps) (£7 million benefit
in H1 2023 versus £4 million adverse impact in H1 2024) and Novitas
income (£14 million in H1 2023 versus £5 million income in H1
2024). Excluding the impact of these movements in derivatives and
Novitas, operating income grew 6%, driven by loan book
growth.
Whilst we remained focused on
pricing discipline and optimising the group's liability mix and
funding costs in the higher rate environment, the net interest
margin decreased to 7.5% (H1 2023: 8.0%, 2023: 7.7%) on a reported
basis, primarily reflecting the impact of the derivatives not
designed as hedging instruments and Novitas benefitting the prior
year period. Excluding the impact of these items, the net interest
margin was broadly stable at 7.6% (H1 2023: 7.7%, H2 2023: 7.6%).
We are well positioned to maintain a strong net interest margin and
pass on higher cost of funds as we remain focused on asset
pricing.
Across the Banking division, we
have invested to support our relationship-based model and make our
experts even more valuable. We have recently completed the Asset
Finance transformation programme, which has introduced a single
platform across the business, standardising processes, increasing
efficiencies and improving customer insights. Through the
investment made in the Motor Finance business, we have created the
ability to partner with more finance technology providers, such as
iVendi and AutoConvert, as well as increasing capability from
existing providers, resulting in an uplift in finance proposal
volumes and giving us access to a wider pool of motor retailers. We
continue to build on the investment made in our Savings business to
grow our deposit base and customer numbers. Furthermore, following
a programme to implement the requirements of the FCA's Consumer
Duty, our focus remains on embedding compliance and implementing
Consumer Duty changes for books of business not open to new
customers. We continue to see investment through the cycle as vital
in protecting our model, enhancing efficiency and future-proofing
our income generation capabilities.
Although operating expenses
increased 13% to £211.8 million (H1 2023: £186.7 million), when
looking at consecutive halves, we incurred a higher rate of cost
growth in the second half of the 2023 financial year (9% / £16.3
million increase) compared to the first half of 2024 (4% / £8.8
million increase). This was mainly due to the timing of investment
spend over the period.
The overall increase in operating
expenses was driven by higher staff costs to reflect
inflation-related salary rises and new hires, investment in our
strategic programmes and cost saving initiatives, volume and
activity-driven growth, and the acquisition of Bluestone Motor
Finance. This was partially offset by efficiency savings. We also
incurred additional costs related to the handling of heightened
complaint volumes in Motor Finance. The expense/income ratio
increased to 58% (H1 2023: 51%) and the compensation ratio rose to
32% (H1 2023: 29%), reflecting the normalisation of
performance-driven bonuses.
We remain on track to deliver
c.8-10% growth in Banking costs in the 2024 financial year,
excluding costs related to the recently announced acquisition of
Bluestone Motor Finance (Ireland). We expect growth in the Banking
cost base over the 2024 financial year to be driven primarily by
volume and activity-driven growth, inflationary-related increases
and higher resulting compensation, investment spend and c.£10
million of costs related to the heightened volume of complaints in
the Motor Finance business regarding historical discretionary
commission arrangements. This increase is being partly offset by
the progress we have made on our tactical and strategic cost
management initiatives. We expect to incur c.£8 million (2023: £8.7
million) of costs related to Novitas as we continue to wind down
the business.
In addition to this growth, we
expect to incur c.£7 million of costs over the 2024 financial year
in relation to the acquisition, integration and running of
Bluestone Motor Finance (Ireland), which completed in October
2023.
We have made good progress on our
strategic cost management initiatives. Our technology
transformation programme, initiated in 2023, aims to simplify our
technology estate as well as consolidating and increasing our use
of outsourcing. As part of this, we have already removed 83 IT
applications, with more in the pipeline, and reduced our headcount
by c.100.
In the period we have mobilised
further cost management initiatives to support the ongoing
profitability of the business, particularly in light of the capital
actions and their expected impact on future income. These include
rationalising our third party suppliers and property footprint, and
adjusting our workforce to drive increased efficiency and
effectiveness. We expect these measures to deliver annualised
savings of £20 million by the 2026 financial year.
With the benefit of these
additional measures, we remain committed to more closely aligning
income and cost growth (excluding any restructuring costs) in the
2025 financial year, and delivering positive operating leverage
over the medium term.
Impairment charges decreased
significantly to £41.8 million (H1 2023: £162.2 million),
corresponding to an annualised bad debt ratio of 0.9% (H1 2023:
3.6%), with the prior year period including a charge of £114.6
million in relation to Novitas. Overall provision coverage
increased marginally to 4.1% (31 July 2023: 3.9%).
Excluding Novitas, impairment
charges reduced 17% to £39.6 million (H1 2023: £47.6 million),
mainly driven by the improved macroeconomic outlook compared to the
prior year period, partly offset by loan book growth and the
ongoing review of provisions and coverage across our loan
portfolios. The bad debt ratio, excluding Novitas, reduced to 0.8%
annualised (H1 2023: 1.1%) and remains below our long-term bad debt
ratio of 1.2%. The coverage ratio remained stable at 2.1% (31 July
2023: 2.1%), excluding Novitas.
Whilst we have not seen a
significant impact on credit performance, we continue to monitor
closely the evolving impacts of 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 continue to expect the bad debt ratio for H2 2024 to
remain below our long-term average, based on current market
conditions.
Progress on resolving issues relating to
Novitas
The decision was made to wind down
Novitas and withdraw from the legal services financing market
following a strategic review in July 2021, which concluded that the
overall risk profile of the business was no longer compatible with
our long-term strategy and risk appetite. As announced in H1 2023,
we have accelerated our efforts to resolve the issues surrounding
this business. We continue to pursue formal legal action against
one of the After the Event ("ATE") insurers and have entered into a
settlement with another smaller ATE insurer.
We recognised impairment charges
of £2.2 million in relation to Novitas in the first half, mainly
comprising legal costs. 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 (c.£63 million net loan book at 31 January
2024).
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 £18.9 million in 2023 to c.£10 million in
2024.
Loan Book Analysis
|
31 January 2024
|
31 July 2023
|
Change
|
|
£ million
|
£ million
|
%
|
Commercial
|
5,028.5
|
4,821.3
|
4
|
Commercial - Excluding
Novitas
|
4,965.8
|
4,761.4
|
4
|
Asset Finance1
|
3,687.8
|
3,481.3
|
6
|
Invoice and Speciality
Finance1
|
1,340.7
|
1,340.0
|
-
|
Invoice and Speciality Finance -
Excluding Novitas1
|
1,278.0
|
1,280.1
|
-
|
Retail
|
3,025.9
|
3,001.8
|
1
|
Motor Finance2
|
1,984.0
|
1,948.4
|
2
|
Premium Finance
|
1,041.9
|
1,053.4
|
(1)
|
Property
|
1,838.6
|
1,703.1
|
8
|
Closing loan book and operating
lease assets3
|
9,893.0
|
9,526.2
|
4
|
Closing loan book and operating
lease assets - Excluding Novitas
|
9,830.3
|
9,466.3
|
4
|
1. The Asset Finance and Invoice
and Speciality Finance loan books have been re-presented for 31
July 2023 to reflect the recategorization of Close Brothers Brewery
Rentals ("CBBR") from Invoice and Speciality Finance to Asset
Finance.
2. The Motor Finance loan book
includes £144.5 million (31 July 2023: £206.7million) 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 £282.0 million (31 July 2023: £271.2 million).
Focus on disciplined
growth
During the first half, we remained
focused on delivering disciplined growth whilst prioritising our
margins and credit quality, with our growth initiatives delivering
a significant contribution of loan book growth.
The loan book grew 4% in the six
months since 31 July 2023 to £9.9 billion (31 July 2023: £9.5
billion). This reflected strong growth in Property and continued
good demand in Asset Finance and the UK Motor Finance business.
This was partly offset by the normal seasonal impact seen in the
Premium and Invoice Finance businesses, and the run-off of the
legacy Republic of Ireland Motor Finance loan book.
Excluding the businesses in
run-off, Novitas and the legacy Republic of Ireland Motor Finance
business, the loan book grew 5% to £9.7 billion (31 July 2023: £9.3
billion).
The Commercial loan book grew 4%
to £5.0 billion (31 July 2023: £4.8 billion), despite the roll-off
of government supported lending under schemes such as the
Coronavirus Business Interruption Loan Scheme ("CBILS"). Asset
Finance delivered loan book growth of 6%, with strong new business
volumes in the Leasing business particularly from the Contract
Hire, Energy and Materials Handling portfolios. Invoice and
Speciality Finance was broadly stable reflecting the normal
seasonal impact in the first half, notwithstanding a slight uptick
in Invoice Finance utilisation. Excluding Novitas, the Commercial
book increased 4% to £5.0 billion (31 July 2023: £4.8
billion).
The Retail loan book grew 1% to
£3.0 billion (31 July 2023: £3.0 billion). Motor Finance increased
2%, with growth in the UK Motor Finance business more than
offsetting the decline in the legacy Republic of Ireland loan book
following the cessation of our previous partnership in June 2022.
Following the acquisition of Bluestone Motor Finance (Ireland),
which completed in October 2023, the Motor Finance business is
re-building its presence in the Republic of Ireland with a loan
book of £16 million at 31 January 2024. The Premium Finance loan
book has achieved record levels in the first half, with strong
demand from customers alongside continued premium inflation.
However, the book contracted 1% since 31 July 2023 due to normal
seasonality.
The legacy Republic of Ireland
Motor Finance business accounted for 7% of the Motor Finance loan
book (31 July 2023: 11%) and 1% of the Banking loan book (31 July
2023: 2%).
The Property loan book grew 8% as
we saw strong drawdowns from our healthy new business pipeline in
the first half, with the stabilisation of interest rates and
improving market sentiment.
We expect to broadly sustain
underlying loan book growth in the second half of the 2024
financial year.
Banking: Commercial
|
First half
2024
£ million
|
First half
2023
£ million
|
Change
%
|
Operating income
|
168.5
|
182.3
|
(8)
|
Adjusted operating
expenses
|
(103.0)
|
(92.9)
|
11
|
Impairment losses on financial
assets
|
(14.6)
|
(122.5)
|
(88)
|
Adjusted operating
profit
|
50.9
|
(33.1)
|
(254)
|
Adjusted operating profit, pre
provisions
|
65.5
|
89.4
|
(27)
|
|
|
|
|
Net interest margin
|
6.8%
|
8.0%
|
|
Expense/income ratio
|
61%
|
51%
|
|
Bad debt ratio
|
0.6%
|
5.4%
|
|
Closing loan book and operating
lease assets1
|
5,028.5
|
4,550.3
|
11
|
Commercial key metrics excluding
Novitas
|
First half
2024
£ million
|
First half
2023
£ million
|
Change
%
|
Operating income
|
163.5
|
168.3
|
(3)
|
Adjusted operating
expenses
|
(100.4)
|
(88.6)
|
13
|
Impairment losses on financial
assets
|
(12.4)
|
(7.9)
|
57
|
Adjusted operating
profit
|
50.7
|
71.8
|
(29)
|
Adjusted operating profit, pre
provisions
|
63.1
|
79.7
|
(21)
|
|
|
|
|
Net interest margin
|
6.7%
|
7.6%
|
|
Expense/income ratio
|
61%
|
53%
|
|
Bad debt ratio
|
0.5%
|
0.4%
|
|
Closing loan book and operating
lease assets1
|
4,965.8
|
4,488.4
|
11
|
1. Operating lease assets of £282.0
million (31 July 2023: £271.2 million).
Good demand in Commercial as we
continued 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 and Brewery Rentals
businesses. The Invoice and Speciality Finance business provides
debt factoring, invoice discounting and asset-based lending, and
also includes Novitas. As previously announced, Novitas ceased
lending to new customers in July 2021.
Despite market uncertainty
persisting in the period, the diversity of our offering has
resulted in customer demand remaining strong. We reached a
significant milestone in the first half, with the Commercial loan
book exceeding £5 billion following good new business volumes. Our
new initiatives continue to prove successful, with the agricultural
equipment and materials handling teams both having written healthy
levels of new business, and our second syndication deal completed
by Invoice Finance.
Adjusted operating profit for
Commercial increased to £50.9 million (H1 2023: loss of £33.1
million), reflecting a significant decrease in impairment charges.
On a pre-provision basis, adjusted operating profit reduced 27% to
£65.5 million (H1 2023: £89.4 million).
Excluding Novitas, adjusted
operating profit decreased 29% to £50.7 million (H1 2023: £71.8
million), mainly driven by cost growth.
Operating income reduced 8% to
£168.5 million (H1 2023: £182.3 million) as the benefit from loan
book growth was offset by pressure on margin on new business in
Asset Finance and a reduction in Novitas income. The net interest
margin decreased to 6.8% (H1 2023: 8.0%) as we sought to balance
the repricing of new business written in Asset Finance with our
focus on maintaining support to our customers impacted by the
higher inflationary environment. In addition, loan book growth mix
in the first half reflected increased new business levels in some
of our portfolios with larger loan sizes and lower margin, such as
Energy. Excluding Novitas, the net interest margin decreased to
6.7% (H1 2023: 7.6%).
Operating expenses grew 11% to
£103.0 million (H1 2023: £92.9 million), driven by higher staff
costs and investment spend as we completed the Asset Finance
transformation programme. This was partly offset by lower costs in
relation to Novitas. As a result, the expense/income ratio
increased to 61% (H1 2023: 51%).
Impairment charges decreased
significantly to £14.6 million (H1 2023: £122.5 million), with
£114.6 million incurred in relation to Novitas in the prior year
period. Provision coverage increased slightly to 5.4% (31 July
2023: 5.2%).
Excluding Novitas, impairment
charges rose to £12.4 million (H1 2023: £7.9 million), reflecting
loan book growth and the ongoing review of provisions and coverage.
This resulted in a bad debt ratio of 0.5% annualised (H1 2023:
0.4%). The coverage ratio remained broadly stable at 1.5% (31 July
2023: 1.4%), excluding Novitas.
Banking: Retail
|
First half
2024
£ million
|
First half
2023
£ million
|
Change
%
|
Operating income
|
131.8
|
123.2
|
7
|
Operating expenses
|
(90.8)
|
(79.1)
|
15
|
Impairment losses on financial
assets
|
(22.0)
|
(29.4)
|
(25)
|
Operating profit
|
19.0
|
14.7
|
29
|
Operating profit, pre
provisions
|
41.0
|
44.1
|
(7)
|
|
|
|
|
Net interest margin
|
8.7%
|
8.2%
|
|
Expense/income ratio
|
69%
|
64%
|
|
Bad debt ratio
|
1.5%
|
1.9%
|
|
Closing loan book1
|
3,025.9
|
2,970.3
|
2
|
1. The Motor Finance loan book
includes £144.5 million (31 July 2023: £206.7 million) relating to
the legacy 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.
Continued focus on prioritising
our margins and underwriting discipline
The Retail businesses provide
intermediated finance, through motor dealers, motor finance brokers
and insurance brokers. Finance is provided to both individuals and
to a broad spectrum of UK businesses.
Although the backdrop remained
mixed in the first half, we delivered a good performance overall.
In Motor Finance, we saw a significant year-on-year increase in new
business volumes as we increased our routes to market through new
intermediaries, emerging channels and consumer brands, in line with
our ethos of being where the consumer chooses finance. The
acquisition of Bluestone Motor Finance is providing a platform for
us to re-build our Motor Finance business in the Republic of
Ireland. In Premium Finance, we remain focused on providing
excellent service levels to both our customers and partners in the
purchase of insurance. We continue to enhance our proposition to
support our broker partners and their customers, be they
individuals or businesses. We have continued to focus on providing
insight and capabilities to our partners to aid them in delivering
improved outcomes.
Operating profit for Retail
increased to £19.0 million (H1 2023: £14.7 million), as income
growth and lower impairment charges more than offset higher costs.
On a pre-provision basis, operating profit reduced 7% to £41.0
million (H1 2023: £44.1 million).
Operating income increased 7% to
£131.8 million (H1 2023: £123.2 million), reflecting growth in the
Premium Finance loan book compared to the prior year period and a
recovery in the net interest margin to 8.7% (H1 2023: 8.2%)
following the absorption of funding increases last
year.
Operating expenses rose 15% to
£90.8 million (H1 2023: £79.1 million), driven mainly by additional
costs related to the handling of heightened complaint volumes in
Motor Finance, as well as higher staff costs and the acquisition of
Bluestone Motor Finance. As a result, the expense/income ratio
increased to 69% (H1 2023: 64%).
As previously outlined, the FCA is
conducting a review of historical motor finance commission
arrangements and sales at several firms, following high numbers of
complaints from customers. The estimated impact of any redress
scheme, if required, is highly dependent on a number of factors and
as such, at this early stage, the timing, scope and quantum of a
potential financial impact on the group, if any, cannot be reliably
estimated at present. We continue to monitor the impact on our
current handling of complaints and are following the playbooks in
place to ensure we have the appropriate resources to respond
effectively. We expect to incur costs of c.£10 million in the 2024
financial year in relation to the heightened volume of
complaints.
Impairment charges reduced to
£22.0 million (H1 2023: £29.4 million), resulting in an annualised
bad debt ratio of 1.5% (H1 2023: 1.9%). This was driven primarily
by an improvement in the macroeconomic outlook compared to the
prior year period, partly offset by model refinements. As reported
previously, following an increase in arrears in Motor Finance in
the first half of the 2023 financial year, they have since remained
stable, albeit at a higher level than pre-pandemic, reflecting cost
of living pressures on our customers. The provision coverage ratio
remained stable at 2.9% (31 July 2023: 2.9%).
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 January 2024 (c.9% at 31 July
2023). The Premium Finance loan book benefits from various forms of
structural protection including premium refundability and, in most
cases, broker recourse for the personal lines product.
Banking: Property
|
First half
2024
£ million
|
First half
2023
£ million
|
Change
%
|
Operating income
|
65.0
|
58.4
|
11
|
Operating expenses
|
(18.0)
|
(14.7)
|
22
|
Impairment losses on financial
assets
|
(5.2)
|
(10.3)
|
(50)
|
Operating profit
|
41.8
|
33.4
|
25
|
Operating profit, pre
provisions
|
47.0
|
43.7
|
8
|
|
|
|
|
Net interest margin
|
7.3%
|
7.8%
|
|
Expense/income ratio
|
28%
|
25%
|
|
Bad debt ratio
|
0.6%
|
1.4%
|
|
Closing loan book
|
1,838.6
|
1,520.4
|
21
|
Strong drawdowns from our healthy
pipeline driving loan book growth
Property comprises Property
Finance and Commercial Acceptances. The Property Finance business
is focused on specialist residential development finance to
established professional developers in the UK. Commercial
Acceptances provides bridging loans and loans for refurbishment
projects.
This half year has seen some
cautious optimism returning to the UK property market, following a
slowdown in the prior year. Whilst some economic headwinds remain,
a stabilisation of interest rates has led to improved buyer
sentiment and is supporting residential developers in making
investment decisions. Although we have seen some pressure on our
lending margins, we remain focused on retaining our pricing
discipline and relationship-led proposition, supporting our clients
through-the-cycle. We have continued to see good demand for
initiatives including our regional expansion, our enhanced
loan-to-value product and our partnership with Travis Perkins,
which enables SME housebuilders to access discounted building
supplies and materials directly via a credit facility. Our pipeline
remains strong at c.£1.1 billion.
Operating profit increased 25% to
£41.8 million (H1 2023: £33.4 million), as income growth and a
reduction in impairment charges more than offset an increase in
operating expenses. On a pre-provision basis, operating profit
increased 8% to £47.0 million (H1 2023: £43.7 million).
Operating income rose 11% to £65.0
million (H1 2023: £58.4 million), driven by strong loan book
growth, although the net interest margin decreased to 7.3% (H1
2023: 7.8%), mainly reflecting lower fee yields than the prior
period.
Operating expenses increased to
£18.0 million (H1 2023: £14.7 million), reflecting higher staff
costs. As a result, the expense/income ratio increased to 28% (H1
2023: 25%).
Impairment charges decreased to
£5.2 million (H1 2023: £10.3 million), resulting in an annualised
bad debt ratio of 0.6% (H1 2023: 1.4%). This was driven by lower
impairment charges to reflect an improvement in macroeconomic
variables and outlook, partly offset by loan book growth and an
ongoing review of provisions and coverage, which included increased
specific provisions for existing single names. The provision
coverage ratio remained broadly stable at 2.5% (31 July 2023:
2.4%).
The Property loan book is
conservatively underwritten. We work with experienced, professional
developers, predominantly SMEs with a focus on delivering
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
Financials1
|
First half
2024
£ million
|
First half
2023
£ million
|
Change
%
|
Investment management
|
61.3
|
54.2
|
13
|
Advice and other
services
|
14.0
|
15.7
|
(11)
|
Other income2
|
1.0
|
1.1
|
(9)
|
Operating income
|
76.3
|
71.0
|
7
|
Adjusted operating
expenses1
|
(70.0)
|
(62.4)
|
12
|
Impairment losses on financial
assets
|
-
|
-
|
-
|
Adjusted operating
profit
|
6.3
|
8.6
|
(27)
|
|
|
|
|
Revenue margin (bps)
|
84
|
83
|
|
Operating margin
|
8%
|
12%
|
|
Return on opening equity
|
7.6%
|
13.1%
|
|
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. Other income includes net
interest income and expense, income on principal investments and
other income.
Well placed to build on successful
growth
Close Brothers Asset Management
provides personal financial advice and investment management
services to private clients in the UK, including full bespoke
management, managed portfolios and funds, distributed both directly
via our advisers and investment managers, and through third party
financial advisers.
Total operating income rose 7% to
£76.3 million (H1 2023: £71.0 million), reflecting positive net
inflows and market movements, with growth in AuM delivered by our
bespoke investment management business resulting in higher
investment management income. As a result, the revenue margin
increased marginally to 84bps (H1 2023: 83bps).
Adjusted operating expenses
increased 12% to £70.0 million (H1 2023: £62.4 million), reflecting
higher staff costs mainly due to investment in new hires and
inflation-related salary increases. Of this, £5.0 million (H1 2023:
£3.3 million) of costs related to the hiring of investment managers
and the associated AuM in the bespoke investment management
business. The expense/income ratio grew to 92% (H1 2023: 88%), with
the compensation ratio also increasing to 63% (H1 2023: 58%). Our
previous investments in technology have driven increased efficiency
and operational resilience, whilst also improving client
experience.
Adjusted operating profit in CBAM
decreased 27% to £6.3 million (H1 2023: £8.6 million), as growth in
income was more than offset by higher costs. The operating margin
reduced to 8% (H1 2023: 12%), corresponding to 15% (H1 2023: 17%)
when excluding the costs related to the hiring of investment
managers and the associated AuM in the bespoke investment
management business. Statutory operating profit before tax was £5.7
million (H1 2023: £7.8 million).
CBAM has a strong track record of
growth, with healthy net inflows delivered by successfully serving
existing clients and attracting new clients, combined with building
new investment teams and acquiring selective IFA businesses. The
business remains closely aligned with long-term structural growth
opportunity presented by the wealth management industry and
continues to be an attractive franchise for both portfolio managers
and clients.
We continued to deliver growth in
the first half through the hiring of nine bespoke investment
managers (H1 2023: five). Following a period of strong growth
in our Bespoke business, our priority in this channel is now to
consolidate our position and maximise opportunities to accelerate
our profitability, shifting our focus to selective bespoke
investment management hiring only. In our Wealth Planning business,
we announced the acquisition of Bottriell Adams in December
2023.
We have recently completed a
refresh of our brand, reflecting CBAM's four values of Clients,
People, Integrity, and Excellence. We offer an attractive
proposition built around these values, with almost 90 financial
planners and over 75 bespoke investment managers across 15
locations around the UK focused on providing excellent
service.
Strong net inflows notwithstanding
economic uncertainty
Notwithstanding the uncertainty
around the economic outlook in the first quarter, we saw an uptick
in equity markets and in turn, investor sentiment in the second
quarter. Over the period, we saw strong net inflows of £732 million
(H1 2023: £474 million) and delivered an annualised net inflow rate
of 9% (H1 2023: 6%), with the bespoke investment management
business contributing significantly to the overall inflow rate.
This momentum has continued since the first half, with the
annualised net inflow rate unchanged at 9% at the end of February
2024.
Total managed assets increased 8%
to £17.7 billion (31 July 2023: £16.4 billion), driven by strong
net inflows and positive market performance. Total client assets,
which includes advised and managed assets, also increased by 7% to
£18.5 billion (31 July 2023: £17.3 billion).
In December 2023, we announced the
acquisition of Bottriell Adams, an IFA business based in Dorset
with approximately £220 million of assets. Bottriell Adams'
partners, financial planners and support team joined us as part of
the acquisition, as CBAM extends its regional presence in the South
West. The acquisition completed in March and the associated client
assets will be reflected in AuA in the second half of the
year.
Whilst substantive compliance with
the FCA's Consumer Duty requirements has been achieved, our focus
remains on embedding compliance and ensuring the appropriate
frameworks and governance are in place to monitor good customer
outcomes. We continue to assess the value for money that CBAM's
funds provide annually and are comfortable with the current fees
payable.
Movement in Client
Assets
|
Six months to
31 January
2024
£ million
|
12 months to
31 July
2023
£ million
|
Six months to
31 January
2023
£ million
|
Opening managed assets
|
16,419
|
15,302
|
15,302
|
Inflows
|
1,621
|
2,729
|
1,155
|
Outflows
|
(889)
|
(1,411)
|
(681)
|
Net inflows
|
732
|
1,318
|
474
|
Market movements
|
524
|
(201)
|
(61)
|
Total managed assets
|
17,675
|
16,419
|
15,715
|
Advised only assets
|
872
|
907
|
1,196
|
Total client assets1
|
18,547
|
17,326
|
16,911
|
Annualised net flows as % of
opening managed assets
|
9%
|
9%
|
6%
|
1. Total client assets include £5.0
billion of assets (31 July 2023: £4.9 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 in the first half has been
good across asset classes, with all our funds delivering positive
absolute returns during the period, and most of our funds
outperforming their peer group. Given the uncertain market
conditions seen, particularly in the first quarter, these results
demonstrate the strength of our investment team.
Our sustainable funds and Net Zero
commitment
At CBAM, we believe that
sustainability is an important part of achieving excellence and
building wealth for our clients. Our approach to responsible
investment is to continue to integrate the evaluation of material
ESG factors within our investment research process over time, with
the goal of widening our information set to evaluate investments
risk and financial return.
We continue to explore options for
enhancing our sustainable offering, which includes ethical
screening, sustainable funds and our Socially Responsible
Investment Service. Our Sustainable Select Fixed Income fund, which
utilises a sustainable investment methodology to target a reduction
in CO2 emissions intensity versus its benchmark, has
seen good traction since its creation in March 2023 and we continue
to see strong inflows into this product.
We became signatories to the Net
Zero Asset Managers initiative in September 2022 and as part of our
initial target disclosure, committed to 18% of our AuM being in
line with net zero by 2050.
Well positioned to consolidate our
position
Following a period of strong
growth, our priority is to consolidate our position and maximise
opportunities to accelerate our profitability through providing
excellent service, building on the strength of our client
relationships, and in our Bespoke business by shifting our focus to
only selective hiring of bespoke investment managers. We continue
to target net inflows in the range of 6-10% and following a period
of significant investment, expect our operating margin to increase
from 2025 onwards towards a longer-term target of above 20%. 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.
Winterflood
Key Financials
|
First half
2024
£ million
|
First half
2023
£ million
|
Change
%
|
Operating income
|
34.2
|
39.0
|
(12)
|
Operating expenses
|
(36.9)
|
(36.6)
|
1
|
Impairment gains on financial
assets
|
0.1
|
-
|
n/a
|
Operating (loss) /
profit
|
(2.6)
|
2.4
|
(208)
|
|
|
|
|
Average bargains per day
('000)
|
52
|
61
|
|
Operating margin
|
(8%)
|
6%
|
|
Return on opening
equity
|
(4.1%)
|
3.9%
|
|
Loss days
|
3
|
1
|
|
Winterflood Business Services
Assets under Administration (billion)
|
13.8
|
12.4
|
|
Uncertain macroeconomic outlook
continued to negatively affect trading performance
Winterflood is a leading UK market
maker, delivering high quality execution services to platforms,
stockbrokers, wealth managers and institutional investors, as well
as providing corporate advisory services to investment trusts and
outsourced dealing and custody services via Winterflood Business
Services ("WBS").
In the first half, the market
environment, both domestically and globally, remained challenging
as UK macroeconomic factors and geopolitical concerns continued to
impact investor confidence. With investors able to achieve
equity-like returns from money markets and debt instruments, which
have a lower risk profile, we have seen relatively subdued trading
and Investment Trusts corporate activity. As a result, Winterflood
delivered an operating loss of £2.6 million (H1 2023: operating
profit of £2.4 million), with broadly stable costs more than
offsetting a decline in income.
Operating income reduced 12% to
£34.2 million (H1 2023: £39.0 million), with the decline in trading
income more than offsetting growth in WBS.
Trading income decreased 19% to
£25.6 million (H1 2023: £31.7 million) reflecting the unfavourable
market conditions, particularly in the first quarter, as equity and
bond prices declined. Whilst performance improved in the second
quarter, as central bank monetary policy began to positively impact
inflation, the recent dampening of rate cut expectations in the
short-term has weighed on market sentiment. Average daily bargains
declined 15% to 52k (H1 2023: 61k) in the first half, although we
have maintained our market leading position.
Notwithstanding low issuance and
transaction volumes in the period, income from the Investments
Trusts corporate business has increased 31% to £1.7 million (H1
2023: £1.3 million). We are exploring growth opportunities which
are additive to the business and remain well placed for when market
activity returns.
WBS continued to see good
momentum, with income rising 24% to £7.8 million (H1 2023: £6.3
million). AuA increased 11% year-on-year to £13.8 billion (H1 2023:
£12.4bn, 2023: £12.9 billion), supported by positive market
movements and net inflows, as equity markets recovered in the
second quarter. WBS remains focused on developing its client
relationships and investing in its award-winning proprietary
technology to provide highly scalable and bespoke solutions for
clients. WBS is well positioned for further growth, both
organically and supported by a solid pipeline of clients, having
exceeded its original target AuA of £10 billion in the 2023
financial year. We remain confident in the outlook and expect the
business to grow AuA to over £20 billion by full year
2026.
Operating expenses increased
marginally to £36.9 million (H1 2023: £36.6 million), primarily
driven by inflation-related salary increases and one-off costs
incurred by relocating premises. This was partly offset by reduced
variable compensation and a decline in settlement fees resulting
from lower trading activity.
Given ongoing UK economic
pressures, we have recently undertaken a cost review to right-size
elements of the business, to ensure we are appropriately and
efficiently organised to meet current business requirements, whilst
remaining scalable for future growth. This cost review will result
in annualised fixed cost savings of 5% in 2025. We remain focused
on driving efficiencies and optimising organisational resilience,
whilst maintaining the strengths of the franchise for when investor
activity returns.
Winterflood has a long track
record of trading profitably through a range of conditions and
remains well placed 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
seen in the trading business, with WBS expecting to grow AuA to
over £20 billion by 2026.
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
Additional Tier 1 ("AT1")
capital: Additional regulatory capital
that along with CET1 capital makes up a bank's Tier 1 regulatory
capital. Includes the group's perpetual subordinated contingent
convertible securities classified as other equity instruments under
IAS 32
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 £2,000 and £50,000 (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 £5
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 £200 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 ordinary 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
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
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
Long-term bad debt ratio: Long-term bad debt ratio is calculated using IAS 39 until the
change to IFRS 9 in FY19. Bad debt ratio excluding Novitas only
disclosed from FY21 onwards. Long-term average bad debt ratio of
1.2% based on the average bad debt ratio for FY08-H124, excluding
Novitas.
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 asset value ("NAV") per
share: Total assets less total liabilities
and other equity instruments, divided by the number of ordinary
shares in issue excluding own shares
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 £10 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
("RoTE"): Adjusted operating profit
attributable to ordinary shareholders divided by average total
shareholder's equity, excluding intangible assets and other equity
instruments
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 ordinary shareholders divided by opening equity,
excluding non-controlling interests and other equity
instruments
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
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
Tangible net asset value ("TNAV")
per share: Total
assets less total liabilities, other equity instruments and
intangible assets, divided by the number of ordinary shares in
issue excluding own shares
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 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
Watch list: Internal risk management process for heightened monitoring of
exposures that are showing increased credit risk
Principal Risks and Uncertainties
The group faces a number of risks in
the normal course of business. To manage these effectively, a
consistent approach is adopted based on a set of overarching
principles, namely:
· adhering to our established and proven business
model;
· implementing an integrated risk management approach based on
the concept of "three lines of defence"; and
· setting and operating within clearly defined risk appetites,
monitored with defined metrics and limits.
At the core of the group's risk
management framework are the group's principal risks which are the
risks that have been identified as those most material in the
delivery of the group's strategic objectives. A detailed
description of each, including an overview of our risk management
and mitigation approach, is disclosed on pages 90 to 130 of the
2023 Annual Report. The Annual Report can be accessed via the
Investor Relations home page on the group's website at
www.closebrothers.com.
The principal risks are listed
below and are subject to ongoing review to ensure that the
framework remains aligned to the prevailing risk environment.
In the current macroeconomic and operating environment, we remain
vigilant to developments in our principal risk profile, as well as
proactive monitoring via an established framework of a suite of
emerging risk which reflect broader market
uncertainties.
A summary of the group's principal
risks are detailed below:
Business and strategic risk -
The group operates in an environment where it is exposed to an
array of independent influencing factors. Its profitability can be
impacted by: the broader UK economic climate; front-line sales
performance; changes in technology; regulation and customer
behaviour; cost movements; and competition from traditional and new
players. All of these can vary in both nature and extent across its
divisions. Changes in these factors may affect the Banking
division's ability to write loans as it seeks to maintain its
desired risk and reward criteria, result in lower new business
volumes in Asset Management, impact levels of trading activity at
Winterflood, or result in additional investment requirements and
higher costs of operation. Notwithstanding the uncertainty arising
from the FCA review and associated management actions, our current
outlook on Business and Strategic Risk remains broadly unchanged
since the last reporting period.
Capital risk - The group is
required to hold sufficient regulatory capital (including equity
and other loss-absorbing debt instruments) to enable it to operate
effectively. This includes meeting minimum regulatory requirements,
operating within risk appetites set by the board and supporting its
strategic goals. During the period, the group successfully issued
£200 million of Additional Tier 1 capital ('AT1') to boost its
overall capital strength and diversify its sources of capital,
thereby opening access to previously unused capital markets. As
explained above, the group is experiencing headwinds that may
impact on its capital position in the future. The group has
identified actions which seek to mitigate these risks including,
but not limited to, the decision to not pay any dividend payments
in the current financial year, optimising RWA growth, and
significant risk transfer of assets. As recently announced,
the group's board has decided it will not pay dividends relating to
the 2024 financial year, and the reinstatement of dividends in the
2025 financial year and beyond will be reviewed once the FCA
concludes its review on historical motor finance commission
arrangements and the financial consequences for the group have been
assessed. This decision will ensure that capital is retained in the
group.
Conduct risk - The group's
behaviours, or those of its colleagues, whether intentional or
unintentional, could result in poor outcomes for our customers or
the markets in which the group operates. The group recognises the
importance of delivering good customer outcomes and seeks to
reasonably avoid customer detriment and foreseeable harm resulting
from inappropriate judgements or behaviours in the execution of
business activities. To support this, the group strives to maintain
a culture aligned to its values and places the customer at the
heart of the business model. This is achieved by acting in good
faith towards customers, taking steps to proactively avoid causing
foreseeable harm and supporting customers to pursue their financial
objectives. This approach is founded in customers being central to
our purpose and this ethos is embedded within our culture.
Reporting on, and monitoring of, conduct risk is a key aspect of
risk management activities and is aligned to the Financial Conduct
Authority's ("FCA") Consumer Duty regulatory obligations for retail
customers. The approach to monitoring conduct risk is expected to
further evolve as additional insights are garnered and considered
as part of continuous improvement. Closed-book implementation
activities for Consumer Duty are well progressed in line with the
FCA's implementation deadline of 31 July 2024.
Conduct risk considerations of the
above-mentioned FCA review of historical motor finance commission
arrangements will be kept under review as the situation
develops.
Credit risk - As a lender to
businesses and individuals, the bank is primarily exposed to credit
losses if customers are unable to repay loans and outstanding
interest and fees. The group also has exposure to counterparties
including those with which it places deposits or trades, and a
small number of derivative contracts to hedge interest rate and
foreign exchange exposures.
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, prudently underwritten,
diverse, and supported by the deep expertise of our
people.
Funding and liquidity risk -
The Banking division's access to funding remains key to support our
lending activities and the liquidity requirements of the group.
Funding and liquidity are measured and monitored on a daily basis
with issues escalated as appropriate. During this period the bank
has closely monitored how events have impacted its funding and
liquidity position. The bank's 'borrow long, lend short' funding
approach provides significant resilience against short- to
medium-term liquidity shocks and accordingly there has been minimal
impacts to the bank's liquidity position. In addition to its
prudent funding model, the bank holds significant amounts of liquid
assets to ensure it is well positioned to manage through any
liquidity pressure should it arise in the future.
Legal and regulatory risk -
The group is subject to the laws and regulations of the various
jurisdictions in which it operates. Failure to comply with existing
legal or regulatory requirements, or to adapt to changes in these
requirements in a timely fashion, may have negative consequences
for the group. Similarly, changes to regulation can impact our
financial performance, capital, liquidity, and the markets in which
we operate. Whilst the inherent risk exposure for the group
continues to increase across the jurisdictions in which it
operates, the group remains attuned to the developing regulatory
requirements, and horizon scanning activities which helps ensure
all legal and regulatory risks are considered at the earliest
opportunity.
On 11 January, the FCA announced
they would be carrying out a review to assess whether the
historical use of discretionary commission arrangements between
lenders and credit brokers in the motor finance market may have
caused customer harm. Currently there is significant uncertainty
about the outcome of the FCA's review, and the timing, scope and
quantum of any potential financial impact on the group cannot be
reliably estimated at present. In accordance with the relevant
accounting standards, the Board has concluded that it is currently
not required or appropriate to recognise a provision in relation to
this matter. In addition, it is not practicable at this early stage
to estimate any potential financial impact arising from this
issue.
Non-traded market risk -
Changes in market prices such as interest rates, credit spreads and
foreign exchange rates have the potential to impact the value of
assets or liabilities outside the trading book. Our current outlook
on non-traded market risk remains broadly unchanged since the last
reporting period.
Operational risk -The group
is exposed to various operational risks through its day-to-day
operations, all of which have the potential to result in financial
loss or adverse impact. Losses typically crystallise as a result of
inadequate or failed internal processes, people, models and
systems, or as a result of external factors, including but not
limited to Cyber and Information Security. Impacts to the business,
customers, third parties and the markets in which the group
operates are considered within a maturing framework for resilient
delivery of important business services.
The outlook for operational risk
remains stable. Scenario analysis is used to assess how severe but
plausible operational risks will affect the group, providing a
forward-looking basis for evaluating and managing operational risk
exposures. Notwithstanding, close monitoring continues on external
factors and impacts which could arise from geo-political impacts
and the legal and regulatory environment.
Reputational risk -
Protection and effective stewardship of the group's reputation are
fundamental to its long-term success. Detrimental stakeholder
perception could lead to impairment of the group's current business
and future goals. This could arise in the course of the group's
usual activities, such as through employee, supplier or
intermediary conduct, the provision of products and services,
crystallisation of another risk type, or as a result of changes
outside of its influence.
Given the uncertainty associated
with the FCA's market-wide review of historic discretionary
commission arrangements, reputational risk is heightened. We
continue to monitor this closely for all stakeholder groups. The
FCA's intervention has led to increased media speculation about the
impact to the market as well as the impact to the group as referred
to on page 28 above.
Traded market risk - A change
in the value of an underlying market variable could give rise to an
adverse movement in the value of the group's assets. Our current
outlook on traded market risk remains broadly unchanged since the
last reporting period.
Climate risk - Running
alongside the suite of principal risks is climate risk, which the
group categorises as a cross-cutting risk, as the impacts arising
from climate change have the ability to impact across the spectrum
of principal risks. Climate risk represents a continued area of
focus and the group continues to closely monitor government and
regulatory developments in parallel to managing its own carbon
footprint and supporting its customers to manage their climate risk
impacts. Climate risk is embedded within the group's risk
management framework, ensuring effective oversight. Climate
disclosures are disclosed on pages 38 to 64 of the 2023 Annual
Report, in line with the recommendations of the Taskforce for
Climate-related Financial Disclosures ("TCFD").
Emerging and evolving
risks
In addition to day-to-day
management of its principal risks, the group utilises an
established framework to monitor its portfolio for emerging risks,
consider broader market uncertainties, and support its
organisational readiness to respond. Group-level emerging risks are
monitored by the Group Risk and Compliance Committee on an ongoing
basis, with key themes and patterns of deterioration monitored via
several sub-risks.
Current group level emerging risks
include economic and geopolitical uncertainty, medium to long-term
transitional climate risks, economic uncertainty, legal and
regulatory change, supply chain risks, change execution risk and
strategic disruption.
Directors' Responsibility
Statement
Each of the Directors confirms
that, to the best of their knowledge:
·
the condensed consolidated interim financial
statements ("interim financial statements") have been prepared in
accordance with International Accounting Standard 34 "Interim
Financial Reporting" as contained in UK-adopted International
Accounting Standards ("IAS");
|
·
the half year results include a fair review of
the information required by Disclosure and Transparency Rule 4.2.7R
(indication of important events during the first six months of the
financial year and their impact on the interim financial
statements, and a description of principal risks and uncertainties
for the remaining six months of the financial year); and
|
·
the half year results include a fair review of
the information required by Disclosure and Transparency Rule 4.2.8R
(disclosure of related parties transactions that have taken place
during the first six months of the current financial year and that
have materially affected the financial position or performance of
the company, and any changes in the related parties transactions
described in the last Annual Report that could do so).
|
The Directors of Close Brothers
Group plc as at the date of this report are as listed on pages 138
to 140 of the company's 2023 Annual Report, subject to the
following changes: Oliver Corbett and Peter Duffy ceased to be
directors of the company on 16 November 2023 and 15 February 2024
respectively. A list of current Directors is maintained on the
company's website www.closebrothers.com.
On behalf of the board
Michael N. Biggs
Chairman
|
Adrian J. Sainsbury
Chief Executive
|
19 March 2024
Independent review report to Close
Brothers Group plc
Report on the condensed
consolidated interim financial statements
Our conclusion
We have reviewed Close Brothers
Group plc's condensed consolidated interim financial statements
(the "interim financial statements") in the Half Year Results of
Close Brothers Group plc for the 6 month period ended
31 January 2024 (the "period").
Based on our review, nothing has
come to our attention that causes us to believe that the interim
financial statements are not prepared, in all material respects, in
accordance with UK adopted International Accounting Standard 34,
'Interim Financial Reporting' and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial
Conduct Authority.
The interim financial statements
comprise:
● the
consolidated balance sheet as at
31 January 2024;
● the
consolidated income statement and consolidated statement of
comprehensive income for the period then ended;
● the
consolidated statement of changes in equity for the period then
ended
● the
consolidated cash flow statement for the period then ended;
and
● the
explanatory notes to the interim financial statements.
The interim financial statements
included in the Half Year Results of Close Brothers Group plc have
been prepared in accordance with UK adopted International
Accounting Standard 34, 'Interim Financial Reporting' and the
Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority.
Basis for conclusion
We conducted our review in
accordance with International Standard on Review Engagements (UK)
2410, 'Review of Interim Financial Information Performed by the
Independent Auditor of the Entity' issued by the Financial
Reporting Council for use in the United Kingdom ("ISRE (UK) 2410").
A review of interim financial information consists of making
enquiries, primarily of persons responsible for financial and
accounting matters, and applying analytical and other review
procedures.
A review is substantially less in
scope than an audit conducted in accordance with International
Standards on Auditing (UK) and, consequently, does not enable us to
obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do
not express an audit opinion.
We have read the other information
contained in the Half Year Results and considered whether it
contains any apparent misstatements or material inconsistencies
with the information in the interim financial
statements.
Conclusions relating to going concern
Based on our review procedures,
which are less extensive than those performed in an audit as
described in the Basis for conclusion section of this report,
nothing has come to our attention to suggest that the directors
have inappropriately adopted the going concern basis of accounting
or that the directors have identified material uncertainties
relating to going concern that are not appropriately disclosed.
This conclusion is based on the review procedures performed in
accordance with ISRE (UK) 2410. However, future events or
conditions may cause the group to cease to continue as a going
concern.
Responsibilities for the interim
financial statements and the review
Our responsibilities and those of the
directors
The Half Year Results, including
the interim financial statements, is the responsibility of, and has
been approved by the directors. The directors are responsible for
preparing the Half Year Results in accordance with the Disclosure
Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority. In preparing the Half Year Results,
including the interim financial statements, the directors are
responsible for assessing the group's ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the
directors either intend to liquidate the group or to cease
operations, or have no realistic alternative but to do
so.
Our responsibility is to express a
conclusion on the interim financial statements in the Half Year
Results based on our review. Our conclusion, including our
Conclusions relating to going concern, is based on procedures that
are less extensive than audit procedures, as described in the Basis
for conclusion paragraph of this report. This report, including the
conclusion, has been prepared for and only for the company for the
purpose of complying with the Disclosure Guidance and Transparency
Rules sourcebook of the United Kingdom's Financial Conduct
Authority and for no other purpose. We do not, in giving this
conclusion, accept or assume responsibility for any other purpose
or to any other person to whom this report is shown or into whose
hands it may come save where expressly agreed by our prior consent
in writing.
PricewaterhouseCoopers
LLP
Chartered Accountants
London
19 March 2024
Consolidated Income
Statement
for the six months ended 31 January
2024
|
|
Six
months ended 31 January
|
Year ended 31 July
|
|
Note
|
2024
Unaudited
£ million
|
2023
Unaudited
£ million
|
2023
Audited
£ million
|
Interest income
|
|
569.3
|
414.4
|
897.5
|
Interest expense
|
|
(272.6)
|
(117.0)
|
(304.9)
|
|
|
|
|
|
Net interest income
|
|
296.7
|
297.4
|
592.6
|
Fee and commission
income
|
|
132.8
|
130.1
|
262.9
|
Fee and commission
expense
|
|
(11.3)
|
(8.7)
|
(17.9)
|
Gains less losses arising from
dealing in securities
|
|
25.2
|
31.9
|
58.6
|
Other income
|
|
67.3
|
61.8
|
114.2
|
Depreciation of operating lease
assets and other direct costs
|
|
(39.9)
|
(38.2)
|
(77.8)
|
|
|
|
|
|
Non-interest income
|
|
174.1
|
176.9
|
340.0
|
|
|
|
|
|
Operating income
|
2
|
470.8
|
474.3
|
932.6
|
|
|
|
|
|
Administrative expenses
|
|
(334.7)
|
(299.5)
|
(615.0)
|
Impairment losses on financial
assets
|
6
|
(41.7)
|
(162.2)
|
(204.1)
|
Total operating expenses before
amortisation of intangible assets on acquisition
|
|
(376.4)
|
(461.7)
|
(819.1)
|
Operating profit before
amortisation of intangible assets on acquisition
|
|
94.4
|
12.6
|
113.5
|
Amortisation of intangible assets
on acquisition
|
|
(0.6)
|
(0.9)
|
(1.5)
|
|
|
|
|
|
Operating profit before
tax
|
|
93.8
|
11.7
|
112.0
|
Tax
|
3
|
(25.0)
|
(3.3)
|
(30.9)
|
Profit after tax
|
|
68.8
|
8.4
|
81.1
|
|
|
|
|
|
Profit attributable to
shareholders
|
|
68.8
|
8.4
|
81.1
|
|
|
|
|
|
Basic earnings per
share
|
4
|
46.0p
|
5.6p
|
54.3p
|
Diluted earnings per
share
|
4
|
46.0p
|
5.6p
|
54.2p
|
|
|
|
|
|
Ordinary dividend per
share
|
5
|
-
|
22.5p
|
67.5p
|
|
|
|
|
| |
Consolidated Statement of
Comprehensive Income
for the six months ended 31 January
2024
|
Six
months ended 31 January
|
Year ended 31 July
|
|
2024
Unaudited
£ million
|
2023
Unaudited
£ million
|
2023
Audited
£ million
|
Profit after tax
|
68.8
|
8.4
|
81.1
|
|
|
|
|
Items that may be reclassified to
income statement
|
|
|
|
Currency translation
(losses)/gains
|
(0.2)
|
1.0
|
0.7
|
(Losses)/gains on cash flow
hedging
|
(14.0)
|
18.7
|
17.6
|
Losses on financial instruments
classified at fair value through other comprehensive
income
|
(2.5)
|
(4.7)
|
(3.9)
|
Tax relating to items that may be
reclassified
|
4.6
|
(3.9)
|
(4.3)
|
|
(12.1)
|
11.1
|
10.1
|
|
|
|
|
Items that will not be
reclassified to income statement
|
|
|
|
Defined benefit pension scheme
gains/(losses)
|
0.1
|
(5.5)
|
(5.7)
|
Tax relating to items that will
not be reclassified
|
-
|
1.5
|
1.6
|
|
|
|
|
|
0.1
|
(4.0)
|
(4.1)
|
|
|
|
|
Other comprehensive income, net of
tax
|
(12.0)
|
7.1
|
6.0
|
|
|
|
|
Total comprehensive
income
|
56.8
|
15.5
|
87.1
|
|
|
|
|
Attributable to
|
|
|
|
Shareholders
|
56.8
|
15.5
|
87.1
|
Consolidated Balance
Sheet
at 31 January 2024
|
Note
|
31 January
2024
Unaudited
£ million
|
31 July
2023
Audited
£ million
|
Assets
|
|
|
|
Cash and balances at central
banks
|
|
1,658.5
|
1,937.0
|
Settlement balances
|
|
913.5
|
707.0
|
Loans and advances to
banks
|
|
275.6
|
330.3
|
Loans and advances to
customers
|
6
|
9,611.0
|
9,255.0
|
Debt securities
|
7
|
550.3
|
307.6
|
Equity shares
|
8
|
26.6
|
29.3
|
Loans to money brokers against
stock advanced
|
|
20.6
|
37.6
|
Derivative financial
instruments
|
|
85.0
|
88.5
|
Intangible assets
|
9
|
268.5
|
263.7
|
Property, plant and
equipment
|
10
|
365.1
|
357.1
|
Current tax assets
|
|
52.0
|
42.3
|
Deferred tax assets
|
|
13.7
|
10.8
|
Prepayments, accrued income and
other assets
|
|
197.4
|
184.1
|
|
|
|
|
Total assets
|
|
14,037.8
|
13,550.3
|
|
|
|
|
Liabilities
|
|
|
|
Settlement balances and short
positions
|
11
|
886.4
|
695.9
|
Deposits from banks
|
12
|
131.9
|
141.9
|
Deposits from customers
|
12
|
8,264.0
|
7,724.5
|
Loans and overdrafts from
banks
|
12
|
437.8
|
651.9
|
Debt securities in
issue
|
12
|
1,870.1
|
2,012.6
|
Loans from money brokers against
stock advanced
|
|
15.9
|
4.8
|
Derivative financial
instruments
|
|
145.5
|
195.9
|
Accruals, deferred income and
other liabilities
|
|
270.0
|
303.0
|
Subordinated loan
capital
|
12
|
184.4
|
174.9
|
|
|
|
|
Total liabilities
|
|
12,206.0
|
11,905.4
|
|
|
|
|
Equity
|
|
|
|
Called up share capital
|
|
38.0
|
38.0
|
Retained earnings
|
|
1,610.4
|
1,608.5
|
Other equity instrument
|
13
|
197.6
|
-
|
Other reserves
|
|
(14.2)
|
(1.6)
|
|
|
|
|
Total shareholders' and other
owners' equity
|
|
1,831.8
|
1,644.9
|
|
|
|
|
Total equity
|
|
1,831.8
|
1,644.9
|
|
|
|
|
Total equity and
liabilities
|
|
14,037.8
|
13,550.3
|
Consolidated Statement of Changes
in Equity
for the six months ended 31 January
2024
|
|
|
|
Other reserves
|
|
|
|
Called up share capital
£ million
|
Retained earnings
£ million
|
Other
equity instrument
£ million
|
FVOCI reserve
£ million
|
Share-
based payments reserve £ million
|
Exchange movements reserve
£ million
|
Cash flow hedging reserve
£ million
|
Total attributable to equity
holders
£ million
|
Total
equity
£ million
|
At 1 August 2022
(audited)
|
38.0
|
1,628.4
|
-
|
0.1
|
(29.2)
|
(1.5)
|
21.7
|
1,657.5
|
1,657.5
|
|
|
|
|
|
|
|
|
|
|
Profit for the period
|
-
|
8.4
|
-
|
-
|
-
|
-
|
-
|
8.4
|
8.4
|
Other comprehensive
income/(expense)
|
-
|
(4.0)
|
-
|
(3.4)
|
-
|
1.0
|
13.5
|
7.1
|
7.1
|
Total comprehensive income for the
period
|
-
|
4.4
|
-
|
(3.4)
|
-
|
1.0
|
13.5
|
15.5
|
15.5
|
Dividends paid (note 5)
|
-
|
(65.6)
|
-
|
-
|
-
|
-
|
-
|
(65.6)
|
(65.6)
|
Shares purchased
|
-
|
-
|
-
|
-
|
(5.1)
|
-
|
-
|
(5.1)
|
(5.1)
|
Shares released
|
-
|
-
|
-
|
-
|
3.8
|
-
|
-
|
3.8
|
3.8
|
Other movements
|
-
|
1.2
|
-
|
-
|
(0.9)
|
-
|
-
|
0.3
|
0.3
|
Income tax
|
-
|
(0.3)
|
-
|
-
|
-
|
-
|
-
|
(0.3)
|
(0.3)
|
At 31
January 2023
(unaudited)
|
38.0
|
1,568.1
|
-
|
(3.3)
|
(31.4)
|
(0.5)
|
35.2
|
1,606.1
|
1,606.1
|
|
|
|
|
|
|
|
|
|
|
Profit for the period
|
-
|
72.7
|
-
|
-
|
-
|
-
|
-
|
72.7
|
72.7
|
Other comprehensive
(expense)/income
|
-
|
(0.1)
|
-
|
0.6
|
-
|
(0.8)
|
(0.8)
|
(1.1)
|
(1.1)
|
Total comprehensive income for the
period
|
-
|
72.6
|
-
|
0.6
|
-
|
(0.8)
|
(0.8)
|
71.6
|
71.6
|
Dividends paid (note 5)
|
-
|
(33.5)
|
-
|
-
|
-
|
-
|
-
|
(33.5)
|
(33.5)
|
Shares purchased
|
-
|
-
|
-
|
-
|
0.1
|
-
|
-
|
0.1
|
0.1
|
Shares released
|
-
|
-
|
-
|
-
|
1.8
|
-
|
-
|
1.8
|
1.8
|
Other movements
|
-
|
1.1
|
-
|
-
|
(2.5)
|
-
|
-
|
(1.4)
|
(1.4)
|
Income tax
|
-
|
0.2
|
-
|
-
|
-
|
-
|
-
|
0.2
|
0.2
|
At 31 July 2023
(audited)
|
38.0
|
1,608.5
|
-
|
(2.7)
|
(32.0)
|
(1.3)
|
34.4
|
1,644.9
|
1,644.9
|
|
|
|
|
|
|
|
|
|
|
Profit for the period
|
-
|
68.8
|
-
|
-
|
-
|
-
|
-
|
68.8
|
68.8
|
Other comprehensive
income/(expense)
|
-
|
0.1
|
-
|
(1.8)
|
-
|
(0.2)
|
(10.1)
|
(12.0)
|
(12.0)
|
Total comprehensive income for the
period
|
-
|
68.9
|
-
|
(1.8)
|
-
|
(0.2)
|
(10.1)
|
56.8
|
56.8
|
Dividends paid (note 5)
|
-
|
(67.1)
|
-
|
-
|
-
|
-
|
-
|
(67.1)
|
(67.1)
|
Shares purchased
|
-
|
-
|
-
|
-
|
(3.6)
|
-
|
-
|
(3.6)
|
(3.6)
|
Shares released
|
-
|
-
|
-
|
-
|
3.6
|
-
|
-
|
3.6
|
3.6
|
Other movements (note
13)
|
-
|
0.1
|
197.6
|
-
|
(0.5)
|
-
|
-
|
197.2
|
197.2
|
Income tax
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
At 31 January 2024
(unaudited)
|
38.0
|
1,610.4
|
197.6
|
(4.5)
|
(32.5)
|
(1.5)
|
24.3
|
1,831.8
|
1,831.8
|
Consolidated Cash Flow
Statement
for the six months ended 31 January
2024
|
|
Six
months ended
31
January
|
Year ended 31 July
|
|
Note
|
2024
Unaudited
£ million
|
2023
Unaudited
£ million
|
2023
Audited
£ million
|
Net cash (outflow)/inflow from
operating activities
|
18(a)
|
(394.0)
|
833.1
|
1,021.4
|
|
|
|
|
|
Net cash (outflow)/inflow from
investing activities
|
|
|
|
|
Purchase of:
|
|
|
|
|
Property, plant and
equipment
|
|
(8.4)
|
(5.1)
|
(8.7)
|
Intangible assets -
software
|
|
(15.7)
|
(27.0)
|
(53.2)
|
Subsidiaries, net of cash
acquired
|
18(b)
|
(11.2)
|
(0.5)
|
(0.5)
|
Sale of:
|
|
|
|
|
Subsidiaries
|
18(c)
|
0.2
|
0.5
|
-
|
|
|
(35.1)
|
(32.1)
|
(62.4)
|
|
|
|
|
|
Net cash (outflow)/inflow before
financing activities
|
|
(429.1)
|
801.0
|
959.0
|
|
|
|
|
|
Financing activities
|
|
|
|
|
Purchase of own shares for
employee share award schemes
|
|
(3.6)
|
(5.1)
|
(5.0)
|
Equity dividends paid
|
|
(67.1)
|
(65.6)
|
(99.1)
|
Interest paid on subordinated loan
capital and debt financing
|
|
(11.7)
|
(5.4)
|
(10.9)
|
Payment of lease
liabilities
|
|
(7.9)
|
(7.6)
|
(16.2)
|
Issuance of senior bond
|
|
-
|
-
|
248.5
|
Redemption of senior
bond
|
|
-
|
-
|
(250.0)
|
Issuance of Additional Tier 1
("AT1") capital securities
|
|
200.0
|
-
|
-
|
Costs arising on issuance of
AT1
|
|
(2.4)
|
-
|
-
|
|
|
|
|
|
Net (decrease)/increase in
cash
|
|
(321.8)
|
717.3
|
826.3
|
Cash and cash equivalents at
beginning of year
|
|
2,209.3
|
1,383.0
|
1,383.0
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
18(d)
|
1,887.5
|
2,100.3
|
2,209.3
|
The Notes
1. Basis of Preparation and
Accounting Policies
The half year results have been
prepared in accordance with the Disclosure Guidance and
Transparency Rules of the Financial Conduct Authority and the
condensed consolidated interim financial statements ("interim
financial statements") have been prepared in accordance with
UK-adopted International Accounting Standards. These include
International Accounting Standard ("IAS") 34 'Interim Financial
Reporting', which specifically addresses the contents of interim
financial statements. The interim financial statements incorporate
the individual financial statements of Close Brothers Group plc and
the entities it controls, using the acquisition method of
accounting.
The half year results are unaudited
and do not constitute statutory accounts within the meaning of
Section 434 of the Companies Act 2006. However, the information has
been reviewed by the group's auditor, PricewaterhouseCoopers LLP,
and their report appears above.
The financial information for the
year ended 31 July 2023 contained within this half year report does
not constitute statutory accounts as defined in Section 434 of the
Companies Act 2006. A copy of those statutory accounts, which have
been prepared in accordance with international accounting standards
in conformity with the requirements of the Companies Act 2006, has
been delivered to the Registrar of Companies.
PricewaterhouseCoopers LLP has reported on those accounts. The
report of the auditor on those statutory accounts was unqualified,
did not contain an emphasis of matter paragraph and did not contain
a statement under Section 498(2) or (3) of the Companies Act
2006.
The directors have a reasonable
expectation that the company and the group as a whole have adequate
resources to continue in operational existence for the foreseeable
future, a period of not less than 12 months from the date of this
report. For this reason, they continue to adopt the going concern
basis in preparing the condensed consolidated half year financial
statements.
The accounting policies applied are
consistent with those set out on pages 211 to 216 of the 2023
Annual Report, except for an additional policy in relation to the
group's issuance of Additional Tier 1 capital securities, which are
classified as an equity instrument under IAS 32 'Financial
Instruments: Presentation', and an update to the estimated useful
lives of computer software classified as intangible assets on page
215 of the 2023 Annual Report.
Financial instruments are classified
as equity when there is no contractual obligation to deliver cash,
another financial asset, or a variable number of the group's own
equity instruments to another entity. The instrument is measured at
cost less transaction costs and distributions are recognised as a
deduction from retained earnings when they become irrevocable.
Please see note 13 for more information.
The estimated useful lives of
computer software have been updated from a range of 3 to 5 years to
a range of 3 to 10 years reflecting the longer useful lives of new
core software platforms within the group.
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. 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
and key sources of estimation uncertainty, set out below, are
unchanged from those identified in the 2023 Annual Report except
for an additional critical judgement in relation to Motor Finance
commission arrangements.
Critical accounting
judgements
Motor Finance commission
arrangements
The group continues to receive a
high number of complaints, many of which are now with the Financial
Ombudsman Service ("FOS"), regarding historic Discretionary
Commission Arrangements ("DCAs") with intermediaries on its Motor
Finance products. Judgement is required in determining that the
criteria for the recognition of a provision under IAS 37
'Provisions, Contingent Liabilities and Contingent Assets' have not
been met. This matter has been disclosed as a contingent liability.
Please see note 16 for more information.
Expected credit losses
At 31 January 2024, the group's
expected credit loss provision was £408.0 million (31 July 2023:
£380.6 million). The calculation of the group's expected credit
loss provision under IFRS 9 requires the group to make a number of
judgements, assumptions and estimates, which have a material impact
on the accounts. The assessment is unbiased, probability weighted
and uses historical, current and forward-looking information. These
judgements are consistent with those set out in the 2023 Annual
Report and the most significant judgements are set out
below.
Significant increase in credit
risk
Assets are transferred from Stage 1
to Stage 2 when there has been a significant increase in credit
risk since initial recognition. 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 that
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;
• 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; 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.
More information on these key
sources of estimation uncertainty is below except adjustments and
goodwill which can be found in note 6(c) and note 9
respectively.
Novitas loans
Novitas provided funding to
individuals who wished 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
failed, 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 has maintained its assumptions for
expected case failure rates, expected time to recover periods and
expected recovery rates which continue to appropriately reflect
experienced credit performance and ongoing dialogue with customers'
insurers. Since 31 July 2023, expected credit loss provisions have
increased by £16.0 million to £200.1 million (31 July 2023: £184.1
million). The increase to the expected credit loss provision is a
result of interest accrual on Civil Litigation accounts, for which
a full loss provision is applied.
Based on the current position, the
majority of loans in the portfolio continue to be assessed as
credit-impaired and are considered Stage 3. 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.
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 for the Civil Litigation
portfolio. On this basis management have assessed and completed
sensitivity analysis when compared to the expected credit loss
provision for Novitas of £200.1 million (31 July 2023: £184.1
million). At 31 January 2024, a 10% absolute deterioration or
improvement in recovery rates would increase or decrease the ECL
provision by £13.4 million. Separately, a 12-month improvement in
the time to recover period will reduce the ECL provision by £13.4
million, while a 12-month delay in the time to recover period will
increase the ECL provision by £10.9 million.
Forward-looking
information
Determining expected credit losses
under IFRS 9 requires the incorporation of forward-looking
macroeconomic information that is reasonable, supportable and
includes assumptions linked to economic variables that impact
losses in each portfolio. The introduction of macroeconomic
information introduces additional volatility to
provisions.
In order to calculate
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 beginning of 2024 and reflect the continued
economic challenges and uncertainty. Forecasts deployed in IFRS 9
macroeconomic models are updated on a monthly basis. At 31 January
2024, the latest baseline scenario forecasts GDP growth of 0.3% in
calendar year 2024 and an average base rate of 5.0% across calendar
year 2024. CPI is forecast to be 2.4% in calendar year 2024 and
2.1% in calendar year 2025 in the baseline scenario.
At 31 January 2024, 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 continue to appropriately
reflect the uncertainty in the macroeconomic environment, no change
has been made to the weightings ascribed to the scenarios since 31
July 2023.
Given the ongoing 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
relative stability in the UK economic outlook compared to 31 July
2023. Under the baseline scenario, UK headline CPI inflation
continues to fall following impacts of sustained base rate
increases and eased supply chain pressures. House price outlook
includes contraction across all scenarios; however, to a lesser
extent than previously anticipated. Unemployment rate forecasts
have marginally deteriorated compared to 31 July 2023.
FY 2024 and FY 2025 scenario
forecasts and weights
|
Baseline
|
Upside (strong)
|
Downside (mild)
|
Downside (moderate)
|
Downside (protracted)
|
|
2024
|
2025
|
2024
|
2025
|
2024
|
2025
|
2024
|
2025
|
2024
|
2025
|
At 31 January 2024
|
|
|
|
|
|
|
|
|
|
|
UK GDP Growth
|
0.3%
|
0.8%
|
2.8%
|
2.0%
|
(2.1%)
|
0.3%
|
(3.5%)
|
(1.9%)
|
(4.3%)
|
(3.6%)
|
UK Unemployment
|
4.5%
|
4.7%
|
4.1%
|
3.9%
|
4.9%
|
5.0%
|
5.6%
|
7.3%
|
6.3%
|
8.5%
|
UK HPI Growth
|
(1.8%)
|
3.1%
|
12.0%
|
6.3%
|
(8.9%)
|
2.3%
|
(12.6%)
|
(6.3%)
|
(18.5%)
|
(10.3%)
|
BoE Base Rate
|
5.0%
|
3.3%
|
5.2%
|
3.4%
|
4.7%
|
2.5%
|
4.3%
|
1.7%
|
3.8%
|
1.3%
|
Consumer Price Index
|
2.4%
|
2.1%
|
2.0%
|
2.1%
|
0.7%
|
1.2%
|
(1.1%)
|
0.7%
|
(3.9%)
|
(0.3%)
|
Weighting
|
32.5%
|
30%
|
20%
|
10.5%
|
7%
|
|
Baseline
|
Upside (strong)
|
Downside (mild)
|
Downside (moderate)
|
Downside (protracted)
|
|
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%
|
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
2024 - 2028)
|
|
Baseline
|
Upside (strong)
|
Downside (mild)
|
Downside (moderate)
|
Downside (protracted)
|
At 31 January 2024
|
|
|
|
|
|
UK GDP Growth
|
1.1%
|
1.9%
|
0.7%
|
0.2%
|
0.1%
|
UK Unemployment
|
4.7%
|
4.1%
|
4.9%
|
6.8%
|
7.8%
|
UK HPI Growth
|
2.0%
|
3.5%
|
0.3%
|
(1.2%)
|
(3.8%)
|
BoE Base Rate
|
3.1%
|
3.1%
|
2.7%
|
2.0%
|
1.4%
|
Consumer Price Index
|
2.1%
|
2.0%
|
1.6%
|
1.0%
|
0.1%
|
Weighting
|
32.5%
|
30%
|
20%
|
10.5%
|
7%
|
|
Five-year average (calendar year
2023 - 2027)
|
|
Baseline
|
Upside (strong)
|
Downside (mild)
|
Downside (moderate)
|
Downside (protracted)
|
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%
|
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 tables above show economic
assumptions within each scenario, and the weighting applied to each
at 31 January 2024. 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 2024 and 2025. The
subsequent tables show averages and peak-to-trough ranges for the
same key metrics over the five-year period from 2024 to
2028.
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.99% of loan value having a maturity of five years or
less.
The tables below provide a summary
for the five-year period (calendar year 2024 - 2028) of the peak to
trough range of values of the key UK economic variables used within
the economic scenarios at 31 January 2024 and 31 July
2023:
Five-year period (calendar year 2024 -
2028)
|
Baseline
|
Upside (strong)
|
Downside (mild)
|
Downside (moderate)
|
Downside (protracted)
|
|
Peak
|
Trough
|
Peak
|
Trough
|
Peak
|
Trough
|
Peak
|
Trough
|
Peak
|
Trough
|
At 31 January 2024
|
|
|
|
|
|
|
|
|
|
|
UK GDP Growth
|
5.9%
|
0.1%
|
10.0%
|
1.2%
|
3.7%
|
(3.3%)
|
1.0%
|
(6.1%)
|
0.4%
|
(8.1%)
|
UK Unemployment
|
4.9%
|
4.4%
|
4.5%
|
3.8%
|
5.1%
|
4.7%
|
7.5%
|
4.7%
|
8.7%
|
4.9%
|
UK HPI Growth
|
10.4%
|
(1.8%)
|
21.5%
|
1.2%
|
1.7%
|
(9.7%)
|
(2.3%)
|
(18.1%)
|
(3.1%)
|
(26.9%)
|
BoE Base Rate
|
5.3%
|
2.3%
|
5.4%
|
2.3%
|
5.2%
|
1.9%
|
5.1%
|
0.9%
|
5.1%
|
0.4%
|
Consumer Price Index
|
3.4%
|
1.7%
|
3.0%
|
1.7%
|
2.2%
|
0.6%
|
2.0%
|
(1.1%)
|
1.9%
|
(3.9%)
|
Weighting
|
32.5%
|
30%
|
20%
|
10.5%
|
7%
|
Five-year period (calendar year
2023 - 2027)
|
Baseline
|
Upside (strong)
|
Downside (mild)
|
Downside (moderate)
|
Downside (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%
|
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 January 2024. 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. The key considerations applied in performing the
sensitivity analysis are consistent with those set out on page 113
of the 2023 Annual Report.
Based on the above analysis, at 31
January 2024, application of 100% weighting to the upside strong
scenario would decrease the expected credit loss by £17.4 million
whilst application of 100% weighting to the downside protracted
scenario would increase the expected credit loss by £31.3 million,
driven by the aforementioned changes in risk metrics and stage
allocation of the portfolios.
When performing sensitivity analysis
there is a high degree of estimation uncertainty. On this basis,
100% weighted expected credit loss provisions presented for the
upside and downside scenarios should not be taken to represent the
lower or upper range of possible and actual expected credit loss
outcomes. The recalculated expected credit loss provision for each
of the scenarios should be read in the context of the sensitivity
analysis as a whole and in conjunction with the narrative
disclosures provided in note 6. The modelled impact presented is
based on gross loans and advances to customers at 31 January 2024;
it does not incorporate future changes relating to performance,
growth or credit risk. In addition, given the change in the
macroeconomic conditions, underlying modelled provisions and
methodology, and refined approach to adjustments, comparison
between the sensitivity results at 31 January 2024 and 31 July 2023
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.
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 (2023: 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 six months ended 31 January
2024
|
Banking
|
|
|
|
|
|
Commercial
£ million
|
Retail
£ million
|
Property
£ million
|
Asset
Management
£ million
|
Securities
£ million
|
Group
£ million
|
Total
£ million
|
Summary income statement
for the six months ended 31 January 2024
|
|
|
|
|
|
|
|
Net interest
income/(expense)
|
115.6
|
117.3
|
63.2
|
5.5
|
0.1
|
(5.0)
|
296.7
|
Non-interest income
|
52.9
|
14.5
|
1.8
|
70.8
|
34.1
|
-
|
174.1
|
|
|
|
|
|
|
|
|
Operating
income/(expense)
|
168.5
|
131.8
|
65.0
|
76.3
|
34.2
|
(5.0)
|
470.8
|
|
|
|
|
|
|
|
|
Administrative expenses
|
(90.9)
|
(80.4)
|
(15.7)
|
(67.0)
|
(34.0)
|
(14.8)
|
(302.8)
|
Depreciation and
amortisation
|
(12.1)
|
(10.4)
|
(2.3)
|
(3.0)
|
(2.9)
|
(1.2)
|
(31.9)
|
Impairment losses on financial
assets
|
(14.6)
|
(22.0)
|
(5.2)
|
-
|
0.1
|
-
|
(41.7)
|
|
|
|
|
|
|
|
|
Total operating expenses before
amortisation of intangible assets on acquisition
|
(117.6)
|
(112.8)
|
(23.2)
|
(70.0)
|
(36.8)
|
(16.0)
|
(376.4)
|
|
|
|
|
|
|
|
|
Adjusted operating
profit/(loss)1
|
50.9
|
19.0
|
41.8
|
6.3
|
(2.6)
|
(21.0)
|
94.4
|
Amortisation of intangible assets
on acquisition
|
-
|
-
|
-
|
(0.6)
|
-
|
-
|
(0.6)
|
|
|
|
|
|
|
|
|
Operating profit/(loss) before
tax
|
50.9
|
19.0
|
41.8
|
5.7
|
(2.6)
|
(21.0)
|
93.8
|
|
|
|
|
|
|
|
|
External operating
income/(expense)
|
257.9
|
187.0
|
109.4
|
75.8
|
34.2
|
(193.5)
|
470.8
|
Inter segment operating
(expense)/income
|
(89.4)
|
(55.2)
|
(44.4)
|
0.5
|
-
|
188.5
|
-
|
|
|
|
|
|
|
|
|
Segment operating
income/(expense)
|
168.5
|
131.8
|
65.0
|
76.3
|
34.2
|
(5.0)
|
470.8
|
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. In the period ended 31
January 2024, Novitas recorded an operating gain of £0.2 million
(six months ended 31 January 2023: loss of £104.9 million; year
ended 31 July 2023: loss of £84.2 million), with impairment losses
of £2.2 million (six months ended 31 January 2023: £114.6 million;
year ended 31 July 2023: £116.8 million).
Novitas' income for the period was
£5.0 million (six months ended 31 January 2023: £14.0 million; year
ended 31 July 2023: £18.9 million) and expenses were £2.6 million
(six months ended 31 January 2023: £4.3 million; year ended 31 July
2023: £8.7 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
previously recognised.
Summary balance sheet information at 31 January
2024
|
Banking
|
|
|
|
|
|
Commercial
£ million
|
Retail
£ million
|
Property
£ million
|
Asset Management
£ million
|
Securities
£ million
|
Group2
£ million
|
Total
£ million
|
Summary balance sheet information
at
31 January 2024
|
|
|
|
|
|
|
|
Total assets1
|
5,028.5
|
3,025.9
|
1,838.6
|
171.1
|
1,069.9
|
2,903.8
|
14,037.8
|
Total liabilities
|
-
|
-
|
-
|
53.2
|
979.2
|
11,173.6
|
12,206.0
|
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 £62.7 million.
2. Balance sheet includes
£2,906.6 million assets and £11,114.0 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 £9,893.0 million, in addition to assets
and liabilities of £2,906.6 million and £11,114.0 million
respectively primarily comprising treasury balances which are
included within the Group column above.
|
Banking
£ million
|
Asset
Management
£ million
|
Securities
£ million
|
Group
£ million
|
Total
£ million
|
Equity
|
1,685.6
|
117.9
|
90.7
|
(62.4)
|
1,831.8
|
Summary income statement for the
six months ended 31 January 2023
|
Banking
|
|
|
|
|
|
Commercial
£ million
|
Retail
£ million
|
Property
£ million
|
Asset
Management
£ million
|
Securities
£ million
|
Group
£ million
|
Total
£ million
|
Summary income statement
for the six months ended 31 January 2023
|
|
|
|
|
|
|
|
Net interest
income/(expense)
|
130.9
|
107.2
|
57.3
|
1.6
|
-
|
0.4
|
297.4
|
Non-interest income
|
51.4
|
16.0
|
1.1
|
69.4
|
39.0
|
-
|
176.9
|
|
|
|
|
|
|
|
|
Operating
income/(expense)
|
182.3
|
123.2
|
58.4
|
71.0
|
39.0
|
0.4
|
474.3
|
|
|
|
|
|
|
|
|
Administrative expenses
|
(81.8)
|
(68.4)
|
(12.6)
|
(59.8)
|
(34.6)
|
(12.7)
|
(269.9)
|
Depreciation and
amortisation
|
(11.1)
|
(10.7)
|
(2.1)
|
(2.6)
|
(2.0)
|
(1.1)
|
(29.6)
|
Impairment losses on financial
assets
|
(122.5)
|
(29.4)
|
(10.3)
|
-
|
-
|
-
|
(162.2)
|
|
|
|
|
|
|
|
|
Total operating expenses before
amortisation of intangible assets on acquisition
|
(215.4)
|
(108.5)
|
(25.0)
|
(62.4)
|
(36.6)
|
(13.8)
|
(461.7)
|
|
|
|
|
|
|
|
|
Adjusted operating
profit/(loss)1
|
(33.1)
|
14.7
|
33.4
|
8.6
|
2.4
|
(13.4)
|
12.6
|
Amortisation of intangible assets
on acquisition
|
(0.1)
|
-
|
-
|
(0.8)
|
-
|
-
|
(0.9)
|
|
|
|
|
|
|
|
|
Operating profit/(loss) before tax
|
(33.2)
|
14.7
|
33.4
|
7.8
|
2.4
|
(13.4)
|
11.7
|
|
|
|
|
|
|
|
|
External operating
income/(expense)
|
221.4
|
146.7
|
77.0
|
70.7
|
39.0
|
(80.5)
|
474.3
|
Inter segment operating
(expense)/income
|
(39.1)
|
(23.5)
|
(18.6)
|
0.3
|
-
|
80.9
|
-
|
|
|
|
|
|
|
|
|
Segment operating
income/(expense)
|
182.3
|
123.2
|
58.4
|
71.0
|
39.0
|
0.4
|
474.3
|
1. Adjusted operating
profit/(loss) is stated before amortisation of intangible assets on
acquisition and tax.
Summary income statement for the
year ended 31 July 2023
|
Banking
|
|
|
|
|
|
Commercial
£ million
|
Retail
£ million
|
Property
£ million
|
Asset
Management
£ million
|
Securities
£ million
|
Group
£ million
|
Total
£ 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.
Summary balance sheet information
at 31 July 2023
|
Banking
|
|
|
|
|
|
Commercial
£ million
|
Retail
£ million
|
Property
£ million
|
Asset
Management
£ million
|
Securities
£ million
|
Group2
£ million
|
Total
£ million
|
Summary balance sheet information
at 31 July 2023
|
|
|
|
|
|
|
|
Total assets1
|
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 £59.9 million at 31 July
2023.
2. Balance sheet includes
£2,977.4 million assets and £11,151.9 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 £9,526.2 million, in addition to assets
and liabilities of £2,977.4 million and £11,151.9 million
respectively primarily comprising treasury balances which are
included within the Group column above.
|
Banking
£ million
|
Asset
Management
£ million
|
Securities
£ million
|
Group
£ million
|
Total
£ million
|
Equity
|
1,351.7
|
113.8
|
92.4
|
87.0
|
1,644.9
|
3. Taxation
|
Six
months ended
31
January
|
Year ended
31 July
|
|
2024
£ million
|
2023
£ million
|
2023
£ million
|
Tax charged/(credited) to the
income statement
|
|
|
|
Current tax:
|
|
|
|
UK corporation tax
|
21.6
|
(2.1)
|
18.1
|
Foreign tax
|
0.8
|
0.8
|
2.3
|
Adjustments in respect of previous
years
|
-
|
-
|
(8.2)
|
|
22.4
|
(1.3)
|
12.2
|
Deferred tax:
|
|
|
|
Deferred tax charge for the
current year
|
2.6
|
4.6
|
11.4
|
Adjustments in respect of previous
years
|
-
|
-
|
7.3
|
|
|
|
|
|
25.0
|
3.3
|
30.9
|
|
|
|
|
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
|
(3.9)
|
5.2
|
4.9
|
Defined benefit pension
scheme
|
-
|
(1.5)
|
(1.6)
|
Financial instruments classified
as fair value through other comprehensive income
|
(0.7)
|
(1.3)
|
(1.1)
|
Share-based payments
|
-
|
0.3
|
0.3
|
Currency translation
gains
|
-
|
-
|
0.5
|
|
|
|
|
|
(4.6)
|
2.7
|
2.8
|
|
|
|
|
Reconciliation to tax
expense
|
|
|
|
UK corporation tax for the period
at 25.0% (2023: 21.0%) on operating profit before tax
|
23.5
|
2.5
|
23.5
|
Effect of different tax rates in
other jurisdictions
|
-
|
-
|
(0.3)
|
Disallowable items and other
permanent differences
|
1.2
|
0.2
|
1.6
|
Banking surcharge
|
0.3
|
0.6
|
6.2
|
Deferred tax impact of decreased
tax rates
|
-
|
-
|
0.8
|
Prior year tax
provision
|
-
|
-
|
(0.9)
|
|
|
|
|
|
25.0
|
3.3
|
30.9
|
The effective tax rate for the
period is 26.7% (six months ended 31 January 2023: 28.2%; year
ended 31 July 2023: 27.6%), representing the best estimate of the
annual effective tax rate expected for the full
year.
The standard UK corporation tax
rate for the financial year is 25.0% (six
months ended 31 January 2023: 21.0%; year ended 31 July
2023: 21.0%). The effective tax rate is above the
UK corporation tax rate primarily due to disallowable
expenditure.
The UK government has implemented
the Pillar Two global minimum tax rate of 15% and a UK domestic
minimum top-up tax with effect from the group's financial year
commencing 1 August 2024. Other jurisdictions have or are
expected to introduce their own domestic minimum top-up tax
regimes. The jurisdictions in relation to which Pillar Two
tax liabilities are expected to potentially arise for the group are
the Republic of Ireland, Jersey and Guernsey, however the impact is
expected to be immaterial.
4. Earnings per Share
The calculation of basic earnings
per share is based on the profit attributable to shareholders and
the number of basic weighted average shares. When calculating the
diluted earnings per share, the weighted average number of shares
in issue is adjusted for the effects of all dilutive share options
and awards.
|
Six
months ended
31
January
|
Year ended
31 July
|
|
2024
|
2023
|
2023
|
Basic
|
46.0p
|
5.6p
|
54.3p
|
Diluted
|
46.0p
|
5.6p
|
54.2p
|
Adjusted basic1
|
46.3p
|
6.1p
|
55.1p
|
Adjusted diluted1
|
46.3p
|
6.1p
|
55.0p
|
1. Excludes amortisation of
intangible assets on acquisition and tax.
|
Six
months ended
31
January
|
Year ended
31 July
|
|
2024
£ million
|
2023
£ million
|
2023
£ million
|
Profit attributable to
shareholders
|
68.8
|
8.4
|
81.1
|
Adjustments:
|
|
|
|
Amortisation of intangible assets
on acquisition
|
0.6
|
0.9
|
1.5
|
Tax effect of
adjustments
|
(0.1)
|
(0.2)
|
(0.3)
|
|
|
|
|
Adjusted profit attributable to
shareholders
|
69.3
|
9.1
|
82.3
|
|
Six
months ended
31
January
|
Year ended
31 July
|
|
2024
million
|
2023
million
|
2023
million
|
Average number of
shares
|
|
|
|
Basic weighted
|
149.6
|
149.4
|
149.4
|
Effect of dilutive share options
and awards
|
-
|
0.7
|
0.2
|
|
|
|
|
Diluted weighted
|
149.6
|
150.1
|
149.6
|
5. Dividends
|
Six
months ended
31
January
|
Year ended
31 July
|
|
2024
£ million
|
2023
£ million
|
2023
£ million
|
For each ordinary share
|
|
|
|
Interim dividend for previous
financial year paid in April 2023: 22.5p
|
-
|
-
|
33.5
|
Final dividend for previous
financial year paid in November 2023: 45.0p
(November 2022: 44.0p)
|
67.1
|
65.6
|
65.6
|
|
|
|
|
|
67.1
|
65.6
|
99.1
|
As disclosed on 15 February 2024 in
a trading update and dividend announcement, the group will not pay
any dividends on its ordinary shares for the current financial year
ending 31 July 2024.
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 January
2024 loans and advances to customers with a maturity of two years
or less was £7,464.1 million (31 July 2023: £7,158.8 million)
representing 74.5% (31 July 2023: 74.3%) of total gross loans and
advances to customers:
|
On demand
£ million
|
Within three months
£ million
|
Between three months and one
year
£ million
|
Between
one and
two years
£ million
|
Between
two and
five years
£ million
|
After
more than five years
£ million
|
Total gross
loans and
advances to
customers
£ million
|
Impairment provisions
£ million
|
Total net
loans and
advances to
customers
£ million
|
At 31 January 2024
|
81.8
|
2,741.5
|
2,664.3
|
1,976.5
|
2,412.6
|
142.3
|
10,019.0
|
(408.0)
|
9,611.0
|
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
|
(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
|
|
|
|
Stage 1
£ million
|
Less than 30 days past due
£ million
|
Greater than or equal to 30 days
past due
£ million
|
Total
£ million
|
Stage 3
£ million
|
Total
£ million
|
At 31 January 2024
|
|
|
|
|
|
|
Gross loans and advances to
customers
|
|
|
|
|
|
|
Commercial
|
3,831.4
|
751.7
|
53.1
|
804.8
|
381.2
|
5,017.4
|
Of which: Commercial excluding
Novitas
|
3,830.9
|
750.7
|
53.1
|
803.8
|
119.9
|
4,754.6
|
Of which: Novitas
|
0.5
|
1.0
|
-
|
1.0
|
261.3
|
262.8
|
Retail
|
2,837.8
|
183.0
|
11.7
|
194.7
|
83.9
|
3,116.4
|
Property
|
1,598.5
|
7.8
|
101.7
|
109.5
|
177.2
|
1,885.2
|
|
|
|
|
|
|
|
|
8,267.7
|
942.5
|
166.5
|
1,109.0
|
642.3
|
10,019.0
|
Impairment provisions
|
|
|
|
|
|
|
Commercial
|
24.4
|
13.4
|
4.5
|
17.9
|
228.6
|
270.9
|
Of which: Commercial excluding
Novitas
|
24.2
|
12.5
|
4.5
|
17.0
|
29.6
|
70.8
|
Of which: Novitas
|
0.2
|
0.9
|
-
|
0.9
|
199.0
|
200.1
|
Retail
|
27.1
|
12.4
|
2.6
|
15.0
|
48.4
|
90.5
|
Property
|
3.9
|
0.7
|
3.1
|
3.8
|
38.9
|
46.6
|
|
|
|
|
|
|
|
|
55.4
|
26.5
|
10.2
|
36.7
|
315.9
|
408.0
|
Provision coverage
ratio
|
|
|
|
|
|
|
Commercial
|
0.6%
|
1.8%
|
8.5%
|
2.2%
|
60.0%
|
5.4%
|
Within which: Commercial excluding
Novitas
|
0.6%
|
1.7%
|
8.5%
|
2.1%
|
24.7%
|
1.5%
|
Within which: Novitas
|
40.0%
|
90.0%
|
-
|
90.0%
|
76.2%
|
76.1%
|
Retail
|
1.0%
|
6.8%
|
22.2%
|
7.7%
|
57.7%
|
2.9%
|
Property
|
0.2%
|
9.0%
|
3.0%
|
3.5%
|
22.0%
|
2.5%
|
|
|
|
|
|
|
|
|
0.7%
|
2.8%
|
6.1%
|
3.3%
|
49.2%
|
4.1%
|
|
|
Stage 2
|
|
|
|
Stage 1
£ million
|
Less than 30 days past due
£ million
|
Greater than or equal to 30 days
past due
£ million
|
Total
£ million
|
Stage 3
£ million
|
Total
£ 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%
|
In Commercial, the impairment
coverage ratio increased to 5.4% (31 July 2023: 5.2%), reflecting
Novitas Stage 3 interest accrual. This is in line with the
requirement under IFRS 9 to recognise interest on a net basis.
Excluding Novitas, the Commercial provision coverage ratio
increased to 1.5% (31 July 2023: 1.4%) as a result of slight
deterioration in staging profile.
In Retail, the provision coverage
ratio was unchanged at 2.9% (31 July 2023: 2.9%), reflecting stable
performance against sustained macroeconomic uncertainty and cost of
living pressures on customers.
In Property, the provision coverage
ratio increased to 2.5% (31 July 2023: 2.4%), with strong levels of
new business offset by uplifts in provisions against existing
single names.
(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.
During the previous financial year,
adjustments were 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 were made as a
result. These adjustments recognise the ongoing uncertainty
associated with the current environment and accordingly have been
maintained during the first half of the financial year under
review. The adjustments have been reassessed at 31 January 2024 and
have reduced in line with emerging trends in the portfolios. This
relationship between the adjustments and credit performance will
continue to be assessed at each reporting period, with the value of
the adjustments expected to reduce over time.
At 31 January 2024, £11.3 million
(31 July 2023: £17.0 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 previous 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 1
£ million
|
Stage 2
£ million
|
Stage 3
£ million
|
Total
£ million
|
Gross loans and advances to
customers
|
|
|
|
|
At 1 August 2023
|
7,990.2
|
1,062.0
|
583.4
|
9,635.6
|
New financial assets
originated
|
3,447.4
|
-
|
-
|
3,447.4
|
Transfers to Stage 1
|
172.1
|
(213.5)
|
(9.1)
|
(50.5)
|
Transfers to Stage 2
|
(723.9)
|
656.9
|
(5.2)
|
(72.2)
|
Transfers to Stage 3
|
(107.2)
|
(80.9)
|
153.4
|
(34.7)
|
|
|
|
|
|
Net transfers between stages and
repayments1
|
(659.0)
|
362.5
|
139.1
|
(157.4)
|
Repayments while stage remained
unchanged and final repayments
|
(2,510.5)
|
(315.3)
|
(56.6)
|
(2,882.4)
|
Changes to model
methodologies
|
-
|
-
|
-
|
-
|
Write offs
|
(0.4)
|
(0.2)
|
(23.6)
|
(24.2)
|
|
|
|
|
|
At
31 January 2024
|
8,267.7
|
1,109.0
|
642.3
|
10,019.0
|
1. Repayments relate only to
financial assets which transferred between stages during the year.
Other repayments are shown in the line below.
|
Stage 1
£ million
|
Stage 2
£ million
|
Stage 31
£ million
|
Total
£ 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
repayments2
|
(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 £174.4 million
of transfers to Stage 3 and £37.4 million of write-offs. In
addition, £49.2 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 1
£ million
|
Stage 2
£ million
|
Stage 3
£ million
|
Total
£ million
|
Impairment provisions on loans and
advances to customers
|
|
|
|
|
At 1 August 2023
|
58.1
|
32.2
|
290.3
|
380.6
|
New financial assets
originated
|
26.8
|
-
|
-
|
26.8
|
Transfers to Stage 1
|
1.1
|
(4.0)
|
(0.4)
|
(3.3)
|
Transfers to Stage 2
|
(8.0)
|
24.5
|
(0.6)
|
15.9
|
Transfers to Stage 3
|
(2.0)
|
(7.9)
|
42.3
|
32.4
|
|
|
|
|
|
Net remeasurement of expected
credit losses arising from transfers between stages and
repayments1
|
(8.9)
|
12.6
|
41.3
|
45.0
|
Repayments and ECL movements while
stage remained unchanged and final repayments
|
(20.2)
|
(7.9)
|
4.7
|
(23.4)
|
Changes to model
methodologies
|
-
|
-
|
-
|
-
|
Charge to the income
statement
|
(2.3)
|
4.7
|
46.0
|
48.4
|
Write offs
|
(0.4)
|
(0.2)
|
(20.4)
|
(21.0)
|
|
|
|
|
|
At 31 January 2024
|
55.4
|
36.7
|
315.9
|
408.0
|
1. Repayments relate only to
financial assets which transferred between stages during the year.
Other repayments are shown in the line below.
|
Stage 1
£ million
|
Stage 2
£ million
|
Stage 31
£ million
|
Total
£ 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
repayments2
|
(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 £147.6 million
of transfers to Stage 3 and £11.9 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.
|
Six
months ended
31
January
|
Year ended
31 July
|
|
2024
£ million
|
2023
£ million
|
2023
£ million
|
Impairment losses relating to
loans and advances to customers:
|
|
|
|
Charge to income statement arising
from movement in impairment provisions
|
48.4
|
131.0
|
164.9
|
Amounts written off directly to
income statement, net of recoveries and other
costs1
|
(7.4)
|
31.4
|
39.4
|
|
41.0
|
162.4
|
204.3
|
Impairment losses/(gains) relating
to other financial assets
|
0.7
|
(0.2)
|
(0.2)
|
|
|
|
|
Impairment losses on financial
assets recognised in income statement
|
41.7
|
162.2
|
204.1
|
1. In line with IFRS 9's
requirement to recognise interest income on Stage 3 loans on a net
basis, this includes £(16.3) million (six months ended 31 January
2023: £nil; year ended 31 July 2023: £nil) in Novitas relating to
the partial unwinding over time of the expected credit loss
recognised previously.
Impairment losses on financial
assets of £41.7 million (six months ended 31 January 2023: £162.2
million; year ended 31 July 2023: £204.1 million) include £2.2
million in relation to Novitas (six months ended 31 January 2023:
£114.6 million; year ended 31 July 2023: £116.8
million).
7. Debt Securities
|
Fair value through profit or
loss
£ million
|
Fair value through other
comprehensive
income
£ million
|
Amortised cost
£ million
|
Total
£ million
|
Sovereign and central bank
debt
|
-
|
193.3
|
-
|
193.3
|
Supranational, sub-sovereigns and
agency ("SSA") bonds
|
-
|
145.6
|
-
|
145.6
|
Covered bonds
|
-
|
187.8
|
-
|
187.8
|
Long trading positions in debt
securities
|
15.6
|
-
|
-
|
15.6
|
Other debt securities
|
1.2
|
-
|
6.8
|
8.0
|
|
|
|
|
|
At 31 January 2024
|
16.8
|
526.7
|
6.8
|
550.3
|
|
Fair value
through profit
or loss
£ million
|
Fair value
through other
comprehensive income
£ million
|
Amortised
cost
£ million
|
Total
£ million
|
Sovereign and central bank
debt
|
-
|
186.1
|
-
|
186.1
|
SSA bonds
|
-
|
-
|
-
|
-
|
Covered bonds
|
-
|
106.3
|
-
|
106.3
|
Long trading positions in debt
securities
|
15.2
|
-
|
-
|
15.2
|
Other debt securities
|
-
|
-
|
-
|
-
|
|
|
|
|
|
At 31 July 2023
|
15.2
|
292.4
|
-
|
307.6
|
Movements on the book value of
sovereign and central bank debt comprise:
|
Six months
ended
31 January
2024
£ million
|
Year ended
31 July
2023
£ million
|
Sovereign and central bank debt at
1 August
|
186.1
|
415.4
|
Additions
|
-
|
269.7
|
Redemptions/disposals
|
-
|
(459.2)
|
Currency translation
differences
|
(0.6)
|
(0.3)
|
Movement in value
|
7.8
|
(39.5)
|
|
|
|
Sovereign and central bank debt at
end of period
|
193.3
|
186.1
|
Movements on the book value of SSA
bonds comprise:
|
Six months
ended
31 January
2024
£ million
|
Year ended
31 July
2023
£ million
|
SSA bonds at 1 August
|
-
|
-
|
Additions
|
140.9
|
-
|
Currency translation
differences
|
(0.1)
|
-
|
Movement in value
|
4.8
|
-
|
|
|
|
SSA bonds at end of
period
|
145.6
|
-
|
Movements on the book value of
covered bonds comprise:
|
Six months
ended
31 January
2024
£ million
|
Year ended
31 July
2023
£ million
|
Covered bonds at 1
August
|
106.3
|
-
|
Additions
|
139.8
|
105.4
|
Redemptions/disposals
|
(59.0)
|
-
|
Currency translation
differences
|
(0.1)
|
-
|
Movement in value
|
0.8
|
0.9
|
|
|
|
Covered bonds at end of
period
|
187.8
|
106.3
|
8. Equity Shares
|
31 January
2024
£ million
|
31 July
2023
£ million
|
Long trading positions
|
24.6
|
27.8
|
Other equity shares
|
2.0
|
1.5
|
|
|
|
|
26.6
|
29.3
|
9. Intangible Assets
|
|
Goodwill
£ million
|
Software
£ million
|
Intangible
assets on
acquisition
£ million
|
Group total
£ million
|
Cost
|
|
|
|
|
|
At 1 August 2022
|
|
142.6
|
299.5
|
51.0
|
493.1
|
Additions
|
|
-
|
27.1
|
-
|
27.1
|
Disposals
|
|
(0.1)
|
(1.7)
|
(0.6)
|
(2.4)
|
|
|
|
|
|
|
At 31 January 2023
|
|
142.5
|
324.9
|
50.4
|
517.8
|
Additions
|
|
-
|
23.4
|
-
|
23.4
|
Disposals
|
|
-
|
(15.1)
|
-
|
(15.1)
|
|
|
|
|
|
|
At 31 July 2023
|
|
142.5
|
333.2
|
50.4
|
526.1
|
Additions
|
|
8.0
|
16.1
|
-
|
24.1
|
Disposals
|
|
-
|
(6.1)
|
-
|
(6.1)
|
|
|
|
|
|
|
At 31 January 2024
|
|
150.5
|
343.2
|
50.4
|
544.1
|
|
|
|
|
|
|
Amortisation
|
|
|
|
|
|
At 1 August 2022
|
|
47.9
|
147.4
|
45.8
|
241.1
|
Amortisation charge for the
period
|
|
-
|
17.3
|
0.9
|
18.2
|
Disposals
|
|
-
|
(1.1)
|
(0.6)
|
(1.7)
|
|
|
|
|
|
|
At 31 January 2023
|
|
47.9
|
163.6
|
46.1
|
257.6
|
Amortisation charge for the
period
|
|
-
|
18.8
|
0.6
|
19.4
|
Disposals
|
|
-
|
(14.6)
|
-
|
(14.6)
|
|
|
|
|
|
|
At 31 July 2023
|
|
47.9
|
167.8
|
46.7
|
262.4
|
Additions
|
|
-
|
18.6
|
0.6
|
19.2
|
Disposals
|
|
-
|
(6.0)
|
-
|
(6.0)
|
|
|
|
|
|
|
At 31 January 2024
|
|
47.9
|
180.4
|
47.3
|
275.6
|
|
|
|
|
|
|
Net book value at 31 January
2024
|
|
102.6
|
162.8
|
3.1
|
268.5
|
|
|
|
|
|
|
Net book value at 31 July
2023
|
|
94.6
|
165.4
|
3.7
|
263.7
|
|
|
|
|
|
|
Net book value at 31 January
2023
|
|
94.6
|
161.3
|
4.3
|
260.2
|
|
|
|
|
|
|
Net book value at 1 August
2022
|
|
94.7
|
152.1
|
5.2
|
252.0
|
Goodwill addition of £8.0 million
(six months ended 31 January 2023: £nil; year ended 31 July 2023:
£nil) relates to the group's acquisition of the 100% shareholding
of Bluestone Motor Finance (Ireland) DAC, a provider of motor
finance in Ireland, for cash consideration of €17.2 million. Net
assets acquired largely comprised loans and advances to customers,
cash, debt securities and borrowings. The goodwill includes
intangible assets on acquisition and the valuation of this is
expected to be finalised within one year of the acquisition date in
line with IFRS 3 'Business Combinations'. The acquisition was
completed on 31 October 2023 as announced in the group's scheduled
trading update on 16 November 2023. Following this acquisition, the
Motor Finance business is re-building its presence in the Republic
of Ireland and Bluestone had a loan book of £16 million at 31
January 2024.
Intangible assets on acquisition
relate to broker and customer relationships and are amortised over
a period of eight to 20 years. In the six months ended 31 January
2024, £0.6 million (six months ended 31 January 2023: £0.9 million;
year ended 31 July 2023: £1.5 million) of the amortisation charge
is included in amortisation of intangible assets on acquisition and
£18.6 million (six months ended 31 January 2023: £17.3 million;
year ended 31 July 2023: £36.1 million) of the amortisation charge
is included in administrative expenses shown in the consolidated
income statement.
Impairment tests for
goodwill
At 31 January 2024, goodwill has
been allocated to eight (31 July 2023: eight) individual cash
generating units ("CGUs"). Six are within the Banking division (31
July 2023: six), one is the Asset Management division (31 July
2023: one) and one is Winterflood in the Securities division (31
July 2023: one). Goodwill impairment reviews have been carried out
and no impairment has been identified at 31 January 2024. The
methodologies used in the impairment reviews are consistent with
those described in note 14 of the 2023 Annual Report.
Winterflood recorded lower profits
in the period with a lower value in use 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, consistent with the
prior year, the value in use calculation for this CGU has been
identified as a key source of estimation uncertainty as set out in
note 1 'Critical Accounting Judgements and Estimates'. The most
significant uncertainty within the Winterflood value in use
calculation relates to the expected future cash flows, where
certain scenarios considered less probable by management, for
example a decrease in the annual growth rate to 0%, would lead to
the carrying value of the CGU equalling or exceeding the
recoverable value.
10. Property, Plant and
Equipment
|
Leasehold property
£ million
|
Fixtures,
fittings and
equipment
£ million
|
Assets
held under
operating
leases
£ million
|
Motor
vehicles
£ million
|
Right of use
assets1
£ million
|
Total
£ million
|
|
|
|
|
|
|
|
Cost
|
|
|
|
|
|
|
At 1 August 2022
|
20.9
|
62.6
|
398.2
|
0.2
|
78.5
|
560.4
|
Additions
|
-
|
5.1
|
41.7
|
-
|
5.7
|
52.5
|
Disposals
|
(0.1)
|
(1.2)
|
(11.7)
|
-
|
(3.3)
|
(16.3)
|
|
|
|
|
|
|
|
At 31 January 2023
|
20.8
|
66.5
|
428.2
|
0.2
|
80.9
|
596.6
|
Additions
|
1.0
|
2.4
|
51.4
|
0.2
|
19.0
|
74.0
|
Disposals
|
(0.3)
|
(3.4)
|
(30.5)
|
-
|
(5.9)
|
(40.1)
|
|
|
|
|
|
|
|
At 31 July 2023
|
21.5
|
65.5
|
449.1
|
0.4
|
94.0
|
630.5
|
Additions
|
0.3
|
8.1
|
41.6
|
-
|
3.5
|
53.5
|
Disposals
|
-
|
(5.0)
|
(25.2)
|
-
|
(4.1)
|
(34.3)
|
|
|
|
|
|
|
|
At 31 January 2024
|
21.8
|
68.6
|
465.5
|
0.4
|
93.4
|
649.7
|
|
|
|
|
|
|
|
Depreciation and
impairment
|
|
|
|
|
|
|
At 1 August 2022
|
13.0
|
36.9
|
158.2
|
0.2
|
29.6
|
237.9
|
Depreciation and impairment
charges for the period
|
1.0
|
4.2
|
21.2
|
-
|
7.1
|
33.5
|
Disposals
|
(0.1)
|
(1.4)
|
(7.5)
|
-
|
(1.8)
|
(10.8)
|
|
|
|
|
|
|
|
At 31 January 2023
|
13.9
|
39.7
|
171.9
|
0.2
|
34.9
|
260.6
|
Depreciation and impairment
charges for the period
|
1.4
|
4.1
|
24.3
|
-
|
7.3
|
37.1
|
Disposals
|
(0.3)
|
(2.9)
|
(18.3)
|
-
|
(2.8)
|
(24.3)
|
|
|
|
|
|
|
|
At 31 July 2023
|
15.0
|
40.9
|
177.9
|
0.2
|
39.4
|
273.4
|
Depreciation and impairment
charges for the period
|
1.1
|
4.4
|
21.6
|
-
|
7.8
|
34.9
|
Disposals
|
-
|
(5.1)
|
(16.0)
|
-
|
(2.6)
|
(23.7)
|
|
|
|
|
|
|
|
At 31 January 2024
|
16.1
|
40.2
|
183.5
|
0.2
|
44.6
|
284.6
|
|
|
|
|
|
|
|
Net book value at 31 January
2024
|
5.7
|
28.4
|
282.0
|
0.2
|
48.8
|
365.1
|
|
|
|
|
|
|
|
Net book value at 31 July
2023
|
6.5
|
24.6
|
271.2
|
0.2
|
54.6
|
357.1
|
|
|
|
|
|
|
|
Net book value at 31 January
2023
|
6.9
|
26.8
|
256.3
|
-
|
46.0
|
336.0
|
|
|
|
|
|
|
|
Net book value at 1 August
2022
|
7.9
|
25.7
|
240.0
|
-
|
48.9
|
322.5
|
1. Right of use assets
primarily relate to the group's leasehold properties.
11. Settlement Balances and Short
Positions
|
31 January
2024
£ million
|
31 July
2023
£ million
|
Settlement balances
|
875.1
|
686.0
|
Short positions in:
|
|
|
Debt securities
|
4.5
|
3.5
|
Equity shares
|
6.8
|
6.4
|
|
11.3
|
9.9
|
|
|
|
|
886.4
|
695.9
|
12. Financial
Liabilities
|
On demand
£ million
|
Within three
months
£ million
|
Between
three months and one
year
£ million
|
Between
one and
two years
£ million
|
Between
two and
five years
£ million
|
After
more than
five years
£ million
|
Total
£ million
|
Deposits by banks
|
0.9
|
43.5
|
87.5
|
-
|
-
|
-
|
131.9
|
Deposits by customers
|
436.3
|
1,932.8
|
3,704.6
|
1,537.4
|
652.9
|
-
|
8,264.0
|
Loans and overdrafts from
banks
|
31.5
|
24.2
|
272.1
|
110.0
|
-
|
-
|
437.8
|
Debt securities in
issue
|
-
|
43.4
|
135.3
|
175.9
|
1,188.6
|
326.9
|
1,870.1
|
Subordinated loan
capital1
|
-
|
1.6
|
-
|
-
|
-
|
182.8
|
184.4
|
|
|
|
|
|
|
|
|
At 31 January 2024
|
468.7
|
2,045.5
|
4,199.5
|
1,823.3
|
1,841.5
|
509.7
|
10,888.2
|
1. Comprises issuances of
£200.0 million with contractual maturity date of 2031 and optional
prepayment date of 2026.
|
On demand
£ million
|
Within three months
£ million
|
Between
three months and one year
£ million
|
Between
one and
two years
£ million
|
Between two and five
years
£ million
|
After
more than
five years
£ million
|
Total
£ 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
|
Subordinated loan
capital1
|
-
|
1.6
|
-
|
-
|
-
|
173.3
|
174.9
|
|
|
|
|
|
|
|
|
At 31 July 2023
|
217.2
|
1,932.1
|
4,290.6
|
1,764.8
|
2,033.9
|
467.2
|
10,705.8
|
1. Comprises issuances of
£200.0 million with contractual maturity date of 2031 and optional
prepayment date of 2026.
Assets pledged and received as
collateral
The group pledges assets for
repurchase agreements and securities borrowing agreements which are
generally conducted under terms that are customary to standard
borrowing contracts.
At 31 January 2024, the group was 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 £578.2 million (31 July 2023: £863.4 million), UK gilts with a
market value of £12.0 million (31 July 2023: £nil) and retained
notes relating to Motor Finance loan receivables of £57.3 million
(31 July 2023: £83.4 million) were positioned as collateral with
the Bank of England, against which £372.0 million (31 July 2023:
£600.0 million) of cash was drawn from the TFSME and £10.0 million
(31 July 2023: £5.0 million) from the ILTR. During the period ended
31 January 2024, the group early repaid £228.0m (31 July 2023:
£nil) of TFSME drawdowns.
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 £1,760.1 million (31 July 2023: £1,436.3
million) of its insurance premium and motor loan receivables in
return for cash and asset-backed securities in issue of £1,546.4
million (31 July 2023: £1,187.4 million). This includes the £57.3
million (31 July 2023: £83.4 million) retained notes positioned as
collateral with the Bank of England. As the group has retained
exposure to substantially all the credit risk and rewards of the
residual benefit of the underlying assets it continues to recognise
these assets in loans and advances to customers in its consolidated
balance sheet.
13. Other Equity
Instrument
Other equity instrument comprises
the group's £200.0 million Fixed Rate Reset Perpetual Subordinated
Contingent Convertible Securities, or Additional Tier 1 capital
("AT1"), issued on 29 November 2023. These AT1 securities are
classified as an equity instrument under IAS 32 'Financial
Instruments: Presentation' with the proceeds recognised in equity
net of transaction costs of £2.4 million.
These securities carry a coupon of
11.125%, payable semi-annually on 29 May and 29 November of each
year, commencing on 29 May 2024, and have a first reset date on 29
May 2029. The securities include, among other things, a conversion
trigger of 7.0% Common Equity Tier 1 capital ratio and are callable
any time in the six-month period prior to and including the first
reset date or on each reset date occurring every 5 years
thereafter.
14. Capital
|
31 January
|
31 July
|
|
2024
|
2023
|
|
£ million
|
£ million
|
CET1 capital
|
|
|
Total equity per balance
sheet
|
1,831.8
|
1,644.9
|
|
|
|
Adjustments to CET1
capital
|
|
|
Contingent convertible securities
recognised as AT1 capital1
|
(197.6)
|
-
|
Intangible assets, net of
associated deferred tax liabilities
|
(267.7)
|
(262.8)
|
Foreseeable dividends and
charges2
|
(2.9)
|
(67.0)
|
Cash flow hedging
reserve
|
(24.3)
|
(34.4)
|
Pension asset, net of associated
deferred tax liabilities
|
(0.9)
|
(1.0)
|
Prudent valuation
adjustment
|
(0.6)
|
(0.4)
|
Insufficient coverage for
non-performing exposures3
|
-
|
(0.4)
|
IFRS 9 transitional
arrangements4
|
15.2
|
31.9
|
|
|
|
CET1 capital5
|
1,353.0
|
1,310.8
|
|
|
|
AT1 capital
|
200.0
|
-
|
|
|
|
Tier 1 capital5
|
1,553.0
|
1,310.8
|
|
|
|
Tier 2 capital - subordinated
debt
|
200.0
|
200.0
|
|
|
|
Total regulatory
capital5
|
1,753.0
|
1,510.8
|
|
|
|
RWAs (notional)
|
|
|
Credit and counterparty credit
risk
|
9,197.9
|
8,655.4
|
Operational risk6
|
1,084.0
|
1,084.0
|
Market risk6
|
98.3
|
108.2
|
|
|
|
|
10,380.2
|
9,847.6
|
|
|
|
CET1 capital ratio5
|
13.0%
|
13.3%
|
Tier 1 capital ratio5
|
15.0%
|
13.3%
|
Total capital ratio5
|
16.9%
|
15.3%
|
1. The contingent convertible
securities are classified as an equity instrument for accounting
but treated as AT1 for regulatory capital purposes.
2. Under CRR Article 26, a
deduction has been recognised at 31 January 2024 and 31 July 2023
for foreseeable dividends and charges. At 31 July 2023 this
reflected the proposed final dividend for the year ended 31 July
2023. At 31 January 2024 the deduction reflected a foreseeable
charge for the coupon on the group's contingent convertible
securities. No foreseeable dividend on ordinary shares has been
recognised at 31 January 2024 following the group's announcement on
15 February 2024 that no dividend will be paid for the year ended
31 July 2024.
3. The deduction for
non-performing exposures is not required at 31 January 2024, in
line with policy statement PS14/23 effective on 14 November
2023.
4. The group has elected to
apply IFRS 9 transitional arrangements for 31 January 2024, which
allow the capital impact of expected credit losses to be phased in
over the transitional period.
5. Shown after applying IFRS
9 transitional arrangements and the CRR transitional and qualifying
own funds arrangements in force at the time. Without their
application, at 31 January 2024 the CET1 capital ratio would be
12.9%, the tier 1 capital ratio 14.8% and total capital ratio 16.8%
(31 July 2023: CET1 capital ratio 13.0%, tier 1 capital ratio
13.0%, and total capital ratio 15.1%).
6. 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 period:
|
|
Six
months ended
31
January
|
Year ended
31 July
|
|
|
2024
|
2023
|
2023
|
|
|
£ million
|
£ million
|
£ million
|
CET1 capital at 1
August
|
|
1,310.8
|
1,396.7
|
1,396.7
|
Profit in the period attributable
to shareholders
|
|
68.8
|
8.4
|
81.1
|
Dividends paid and
foreseen
|
|
(3.0)
|
(33.5)
|
(100.5)
|
IFRS 9 transitional
arrangements
|
|
(16.6)
|
(49.0)
|
(51.1)
|
(Increase)/decrease in intangible
assets, net of associated deferred tax liabilities
|
|
(4.9)
|
(8.4)
|
(12.1)
|
Other movements in reserves
recognised for CET1 capital
|
|
(2.4)
|
(6.5)
|
(7.3)
|
Other movements in adjustments
from CET1 capital
|
|
0.3
|
3.0
|
4.0
|
|
|
|
|
|
CET1 capital at end of
period
|
|
1,353.0
|
1,310.7
|
1,310.8
|
This note does not form a part of
the interim financial statements referred to by PwC in its
independent review report.
15. Defined Benefit Pension
Scheme
During the previous 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 decreased to £1.3
million at 31 July 2023 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, which remains subject to changes
in actuarial valuations. The loss of the pension surplus represents
the one-off premium paid for the insurance policy and was
recognised within other comprehensive income in the six months
ended 31 January 2023. There are no significant movements in the
pension surplus in the current period ended 31 January
2024.
16. Contingent Liabilities
Motor Finance commission
arrangements
As disclosed in previous periods,
the group continues to receive a high number of complaints, many of
which are now with the Financial Ombudsman Service ("FOS"), and is
subject to a number of claims through the courts regarding historic
Discretionary Commission Arrangements ("DCAs") with intermediaries
on its Motor Finance products. This follows the FCA's Motor Market
Review in 2019.
On 11 January 2024, the FOS
published its first two decisions upholding customer complaints
relating to DCAs against two other lenders in the market and
instructed them to pay compensation to the complainants if they
accepted the outcome. On the same day, recognising that these
decisions were likely to significantly increase the number of
complaints to motor finance providers and the FOS, risking
disorderly and inconsistent outcomes as well as market instability,
the FCA released policy statement PS 24/1 which introduced
temporary changes to handling rules for motor finance complaints
until at least September 2024. This means that firms will not
have to respond to these complaints within the normal time limits.
This was to allow the FCA time to carry out diagnostic work to
determine whether or not there has been widespread failure to
comply with regulatory requirements which has caused customers harm
and, if so, whether it needs to take any action. The FCA has
indicated that such steps could include establishing an
industry-wide consumer redress scheme and/or applying to the
Financial Markets Test Case Scheme, to help resolve any contested
legal issues of general importance. The FCA aims to communicate a
decision on next steps by the end of September 2024.
As set out in our trading update on
15 February 2024, there is significant uncertainty about the
outcome of the FCA's review at this early stage. The FCA has
indicated there could be a range of outcomes, with one potential
outcome being an industry-wide consumer redress scheme. The
estimated impact of any redress scheme, if required, is highly
dependent on a number of factors such as: the time period covered;
the DCA models impacted (the group operated a number of different
models during the period under review); appropriate reference
commission rates set for any redress; and response rates to any
redress scheme. As such, at this early stage, the timing, scope and
quantum of any potential financial impact on the group cannot be
reliably estimated at present.
Based on the status at the half year
and in accordance with the relevant accounting standards, the Board
has concluded that no legal nor constructive obligation exists and
it is currently not required or appropriate to recognise a
provision in the group's Half-Year 2024 results. In addition, it is
not practicable at this early stage to estimate any potential
financial impact arising from this issue.
In the normal course of the group's
business, there may be other contingent liabilities relating to
complaints, legal proceedings or regulatory reviews. These cases
are not currently expected to have a material impact on the
group.
17. Related Party
Transactions
Related party transactions,
including salary and benefits provided to directors and key
management, did not have a material effect on the financial
position or performance of the group during the period. There were
no changes to the type and nature of the related party transactions
disclosed in the 2023 Annual Report that could have a material
effect on the financial position and performance of the group in
the six months to 31 January 2024.
18. Consolidated Cash Flow
Statement Reconciliation
|
Six
months ended
31
January
|
Year ended
31 July
|
|
2024
£ million
|
2023
£ million
|
2023
£ million
|
(a) Reconciliation of operating
profit before tax to net cash inflow from operating
activities
|
|
|
|
Operating profit before
tax
|
93.8
|
11.7
|
112.0
|
Tax (paid)/refunded
|
(31.9)
|
1.9
|
(7.4)
|
Depreciation, amortisation and
impairment
|
54.1
|
51.7
|
108.2
|
Impairment losses on financial
assets
|
41.7
|
162.2
|
204.1
|
Amortisation of de-designated cash
flow hedges
|
(15.4)
|
-
|
-
|
(Increase)/decrease in:
|
|
|
|
Interest receivable and prepaid
expenses
|
(6.3)
|
(14.7)
|
(6.8)
|
Net settlement balances and
trading positions
|
(13.2)
|
(31.1)
|
(11.4)
|
Net loans from money brokers
against stock advanced
|
28.1
|
22.0
|
15.6
|
Decrease in interest payable and
accrued expenses
|
(21.7)
|
(45.2)
|
(16.5)
|
|
|
|
|
Net cash inflow from trading
activities
|
129.2
|
158.5
|
397.8
|
Cash (outflow)/inflow arising from
changes in:
|
|
|
|
Loans and advances to banks not
repayable on demand
|
11.2
|
(9.8)
|
(21.1)
|
Loans and advances to
customers
|
(401.1)
|
(54.1)
|
(584.3)
|
Assets held under operating
leases
|
(31.8)
|
(36.8)
|
(73.2)
|
Certificates of deposit
|
-
|
134.4
|
185.0
|
Sovereign and central bank
debt
|
-
|
205.0
|
191.2
|
SSA bonds
|
(140.9)
|
-
|
-
|
Covered bonds
|
(80.8)
|
-
|
(105.4)
|
Deposits by banks
|
(9.2)
|
(8.3)
|
(22.1)
|
Deposits by customers
|
542.1
|
462.4
|
942.5
|
Loans and overdrafts from
banks
|
(220.0)
|
30.5
|
29.2
|
Debt securities in issue
(net)
|
(181.5)
|
(38.7)
|
14.4
|
Derivative financial instruments
(net)
|
-
|
-
|
70.4
|
Other assets less other
liabilities
|
(11.2)
|
(10.0)
|
(3.0)
|
|
|
|
|
Net cash (outflow)/inflow from
operating activities
|
(394.0)
|
833.1
|
1,021.4
|
|
|
|
|
(b) Analysis of net cash outflow
in respect of the purchase of subsidiaries
|
|
|
|
Purchase of subsidiaries, net of
cash acquired
|
(11.2)
|
(0.5)
|
(0.5)
|
|
|
|
|
(c) Analysis of net cash inflow in
respect of the sale of subsidiaries
|
|
|
|
Cash consideration
received
|
0.2
|
0.5
|
-
|
|
|
|
|
(d) Analysis of cash and cash
equivalents1
|
|
|
|
Cash and balances at central
banks
|
1,641.7
|
1,858.4
|
1,918.4
|
Loans and advances to
banks
|
245.8
|
241.9
|
290.9
|
|
|
|
|
|
1,887.5
|
2,100.3
|
2,209.3
|
1. Excludes £46.6 million (31
January 2023: £47.6 million; 31 July 2023: £58.0 million) of Bank
of England and other cash reserve accounts and cash held in
trust.
During the period ended 31 January
2024, the non-cash changes on debt financing amounted to £21.4
million (31 January 2023: £5.9 million; 31 July 2023: £0.9 million)
arising largely from interest accretions and fair value hedging
movements.
19. 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 January 2024
|
|
31 July 2023
|
|
Fair value
£ million
|
Carrying value
£ million
|
|
Fair value
£ million
|
Carrying value
£ million
|
Subordinated loan
capital
|
171.5
|
184.4
|
|
165.8
|
174.9
|
Debt securities in
issue
|
1,877.1
|
1,870.1
|
|
2,008.0
|
2,012.6
|
The fair value of gross loans and
advances to customers at 31 January 2024 is estimated to be
£9,450.1 million (31 July 2023: £9,046.2 million), with a carrying
value of £9,611.0 million (31 July 2023: £9,255.0 million). The
fair value of deposits by customers is estimated to be £8,260.7
million (31 July 2023: £7,668.7 million), with a carrying value:
£8,264.0 million (31 July 2023: £7,724.5 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.
The group holds financial
instruments that are measured at fair value subsequent to initial
recognition. Each instrument has been categorised within one of
three levels using a fair value hierarchy that reflects the
significance of the inputs used in making the measurements. These
levels are based on the degree to which the fair value is
observable and are defined in note 26 "Financial risk management"
of the 2023 Annual Report. The table below shows the classification
of financial instruments held at fair value into the valuation
hierarchy:
|
Level 1
£ million
|
Level 2
£ million
|
Level 3
£ million
|
Total
£ million
|
At 31 January 2024
|
|
|
|
|
Assets
|
|
|
|
|
Debt securities:
|
|
|
|
|
Sovereign and central bank
debt
|
193.3
|
-
|
-
|
193.3
|
SSA bonds
|
145.6
|
-
|
-
|
145.6
|
Covered bonds
|
187.8
|
-
|
-
|
187.8
|
Long trading positions in debt
securities
|
13.4
|
2.2
|
-
|
15.6
|
Equity shares
|
4.7
|
21.4
|
0.5
|
26.6
|
Derivative financial
instruments
|
-
|
73.2
|
11.8
|
85.0
|
Contingent
consideration
|
-
|
-
|
1.8
|
1.8
|
Other assets
|
-
|
-
|
1.2
|
1.2
|
|
|
|
|
|
|
544.8
|
96.8
|
15.3
|
656.9
|
Liabilities
|
|
|
|
|
Short positions:
|
|
|
|
|
Debt securities
|
3.5
|
1.0
|
-
|
4.5
|
Equity shares
|
1.6
|
5.2
|
-
|
6.8
|
Derivative financial
instruments
|
-
|
133.3
|
12.2
|
145.5
|
Contingent
consideration
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
5.1
|
139.5
|
12.2
|
156.8
|
|
Level 1
£ million
|
Level 2
£ million
|
Level 3
£ million
|
Total
£ million
|
At 31 July 2023
|
|
|
|
|
Assets
|
|
|
|
|
Debt securities:
|
|
|
|
|
Sovereign and central bank
debt
|
186.1
|
-
|
-
|
186.1
|
SSA bonds
|
-
|
-
|
-
|
-
|
Covered bonds
|
106.3
|
-
|
-
|
106.3
|
Long trading positions in debt
securities
|
13.6
|
1.6
|
-
|
15.2
|
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
|
Other assets
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
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
|
There is no significant change to
the valuation methodologies relating to Level 2 and 3 financial
instruments disclosed in note 26 "Financial risk management" of the
2023 Annual Report. Instruments classified as Level 3 predominantly
comprise over-the-counter derivatives.
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 period, £0.3 million of
equity shares were transferred from Level 2 to 3. In 2023, £1.6
million of derivative financial assets and £1.8 million of
derivative financial liabilities were transferred from Level 2 to
3.
Movements in financial instruments
categorised as Level 3 were:
|
Derivative financial
assets
£ million
|
Derivative financial
liabilities
£ million
|
Equity
shares
£ million
|
Contingent consideration
£ million
|
Other
assets
£ million
|
Total
£ million
|
At 1 August 2022
|
-
|
-
|
0.2
|
(1.3)
|
-
|
(1.1)
|
Total gains recognised in the
consolidated income statement
|
-
|
-
|
-
|
0.2
|
-
|
0.2
|
Purchases, issues and transfers
in
|
-
|
-
|
-
|
0.5
|
-
|
0.5
|
Sales, settlements and transfers
out
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
At 31 January 2023
(unaudited)
|
-
|
-
|
0.2
|
(0.6)
|
-
|
(0.4)
|
Total gains/(losses) recognised in
the consolidated income statement
|
9.5
|
(9.4)
|
-
|
(0.3)
|
-
|
(0.2)
|
Purchases, issues and transfers
in
|
1.6
|
(1.8)
|
-
|
0.1
|
-
|
(0.1)
|
Sales, settlements and transfers
out
|
-
|
-
|
-
|
-
|
-
|
-
|
|
|
|
|
|
|
|
At 31 July 2023
|
11.1
|
(11.2)
|
0.2
|
(0.8)
|
-
|
(0.7)
|
Total gains/(losses) recognised in
the consolidated income statement
|
0.7
|
(1.0)
|
-
|
0.4
|
-
|
0.1
|
Purchases, issues and transfers
in
|
-
|
-
|
0.3
|
-
|
1.2
|
1.5
|
Sales, settlements and transfers
out
|
-
|
-
|
-
|
2.2
|
-
|
2.2
|
|
|
|
|
|
|
|
At 31 January 2024
|
11.8
|
(12.2)
|
0.5
|
1.8
|
1.2
|
3.1
|
The loss recognised in the
consolidated income statement relating to level 3 instruments held
at 31 January 2024 amounted to £0.3 million (31 January 2023: £0.2
million gain, 31 July 2023: £nil).
20. 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 January 2024 the gross
carrying amount of exposures with forbearance measures was £255.4
million (31 July 2023: £214.6 million). The key driver of this
value increase has been Asset Finance, reflecting continued efforts
to support customers via provision of concessions reflective of
their circumstances. The increase in volumes is mainly driven by
Premium Finance, however this has a limited impact on overall
forborne balances due to the low average loan size. This has been
partly offset by reducing volumes across other
businesses.
An analysis of forborne loans is
shown in the table below:
|
Gross loans and advances to
customers
|
Forborne loans
|
Forborne loans as a percentage of
gross loans and advances to customers
|
Provision on forborne
loans
|
Number of customers
supported
|
|
£ million
|
£ million
|
%
|
£ million
|
|
31 January 2024
|
|
10,019.0
|
255.4
|
2.5%
|
62.1
|
8,988
|
31 July 2023
|
9,635.6
|
214.6
|
2.2%
|
56.1
|
6,996
|
|
|
|
|
|
| |
The following is a breakdown of
forborne loans by segment:
|
31 January
2024
|
|
31 July
2023
|
|
£ million
|
|
£ million
|
Commercial
|
70.4
|
|
38.0
|
Retail
|
34.1
|
|
28.8
|
Property
|
150.9
|
|
147.8
|
|
255.4
|
|
214.6
|
The following is a breakdown of the
number of customers supported by segment:
|
31 January
2024
Number of customers
supported
|
|
31 July
2023
Number of customers
supported
|
Commercial
|
289
|
|
243
|
Retail
|
8,652
|
|
6,700
|
Property
|
47
|
|
53
|
|
8,988
|
|
6,996
|
The following is a breakdown of
forborne loans by concession type:
|
31 January
2024
|
|
31 July
20231
|
|
£ million
|
|
£ million
|
Extension outside terms
|
107.6
|
|
105.8
|
Refinancing
|
33.3
|
|
10.4
|
Moratorium
|
82.2
|
|
66.1
|
Deferring collections/recoveries
activities
|
28.7
|
|
29.8
|
Other modifications
|
3.6
|
|
2.5
|
|
255.4
|
|
214.6
|
1. Comparatives have been
updated to present deferring collections/recoveries activities
category in a separate line.
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 January 2024, there are 3,642 (31 July 2023:
4,364) remaining facilities, with a residual balance of £311.7
million (31 July 2023: £456.3 million) as repayments continue to be
made across the 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
subsequently facilities have been offered under the new RLS phase
3. At 31 January 2024, there are 1,117 (31 July 2023: 943) live
facilities, with balances of £289.0 million (31 July 2023: £276.2
million), and a further 59 (31 July 2023: 58) approved facilities
with limits of £14.8 million (31 July 2023: £14.3
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.
21. 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 IRRBB 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 January
2024:
|
|
31 January
|
31 July
|
|
|
2024
|
2023
|
|
|
£ million
|
£ million
|
0.5% increase
|
|
1.9
|
4.5
|
2.5% increase
|
|
9.5
|
22.6
|
0.5% decrease
|
|
(1.9)
|
(4.5)
|
2.5% decrease
|
|
(9.7)
|
(22.8)
|
The group's EaR at 31 January 2024
reflects its policy to ensure exposure to interest rate shocks is
managed within the group's risk appetites. As BoE held rates
constant since 3rd August 2023 the group reduced its
exposure to short term rate movements resulting in a decrease in
its EaR sensitivity compared to 31 July 2023.
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 January 2024:
|
|
31 January
|
31 July
|
|
|
2024
|
2023
|
|
|
£ million
|
£ million
|
0.5% increase
|
|
4.5
|
4.4
|
2.5% increase
|
|
22.3
|
21.5
|
0.5% decrease
|
|
(4.4)
|
(4.4)
|
2.5% decrease
|
|
(19.3)
|
(21.9)
|
The group's EV at 31 January 2024
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. 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.
22. Post Balance Sheet
Event
In December 2023, the group
announced the acquisition of Bottriell Adams, an IFA business based
in Dorset with approximately £220 million of client assets, as the
Asset Management division extends its regional presence in the
South West. The acquisition was completed in March 2024.
Cautionary Statement
Certain statements included or
incorporated by reference within this announcement may constitute
"forward-looking statements" in respect of the group's operations,
performance, prospects and/or financial condition. All statements
other than statements of historical fact are, or may be deemed to
be, forward-looking statements. Forward-looking statements are
sometimes, but not always, identified by their use of a date in the
future or such words as "anticipates", "aims", "due", "could",
"may", "will", "should", "expects", "believes", "intends", "plans",
"potential", "targets", "goal" or "estimates". By their nature,
forward-looking statements involve a number of risks, uncertainties
and assumptions and actual results or events may differ materially
from those expressed or implied by those statements. There are also
a number of factors that could cause actual future operations,
performance, financial conditions, results or developments to
differ materially from the plans, goals and expectations expressed
or implied by these forward-looking statements and forecasts. These
factors include, but are not limited to, those contained in the
Group's annual report (available at: https://www.closebrothers.com/investor-relations).
Accordingly, no assurance can be given that any particular
expectation will be met and reliance should not be placed on any
forward-looking statement. Additionally, forward-looking statements
regarding past trends or activities should not be taken as a
representation that such trends or activities will continue in the
future.
Except as may be required by law
or regulation, no responsibility or obligation is accepted to
update or revise any forward-looking statement resulting from new
information, future events or otherwise. Nothing in this
announcement should be construed as a profit forecast. Past
performance cannot be relied upon as a guide to future performance
and persons needing advice should consult an independent financial
adviser.
This announcement does not
constitute or form part of any offer or invitation to sell, or any
solicitation of any offer to subscribe for or purchase any shares
or other securities in the company or any of its group members, nor
shall it or any part of it or the fact of its distribution form the
basis of, or be relied on in connection with, any contract or
commitment or investment decisions relating thereto, nor does it
constitute a recommendation regarding the shares or other
securities of the company or any of its group members. Statements
in this announcement reflect the knowledge and information
available at the time of its preparation. Liability arising from
anything in this announcement shall be governed by English law.
Nothing in this announcement shall exclude any liability under
applicable laws that cannot be excluded in accordance with such
laws.