TIDMARBB
RNS Number : 2930G
Arbuthnot Banking Group PLC
18 July 2023
18 July 2023
For immediate release
ARBUTHNOT BANKING GROUP PLC ("Arbuthnot", "the Company", "the
Group" or "ABG")
Unaudited results for the six months to 30 June 2023
Arbuthnot Banking Group PLC today announces a half yearly profit
before tax of GBP26.4m.
Arbuthnot Banking Group PLC is the holding company for Arbuthnot
Latham & Co., Limited.
FINANCIAL HIGHLIGHTS
-- Profit before tax increased to GBP26.4m for the six months to
30 June 2023 (30 June 2022: GBP3.4m).
-- Underlying profit before tax of GBP29.3m (30 June 2022: GBP10.7m)*.
-- Interim dividend declared of 19p per share (30 June 2022: 17p per share).
-- CET1 capital ratio of 12.2% (30 June 2022: 11.4%; 31 December
2022: 11.6%) and total capital ratio of 14.5% (30 June 2022: 14.0%;
31 December 2022: 14.0%).
-- Earnings per share of 129.4p (30 June 2022: 17.8p).
-- Net assets per share of 1470p (30 June 2022: 1300p; 31 December 2022: 1411p).
OPERATIONAL HIGHLIGHTS
-- Customer loans (including leased assets) of GBP2.3bn (30 June
2022: GBP2.1bn; 31 December 2022: GBP2.2bn) increased by 2% in the
first half of the year, and 7% year on year despite a tighter
credit appetite.
-- Customer deposits of GBP3.3bn (30 June 2022: GBP2.8bn; 31
December 2022: GBP3.1bn), a 5% increase since the year end and a
16% increase year on year.
-- Assets under management of GBP1.4bn (30 June 2022: GBP1.3bn;
31 December 2022: GBP1.3bn), a 4% increase against 31 December 2022
and an increase of 6% year on year, driven by net inflows in the
period.
SUMMARY AND OUTLOOK
-- The Group continues to benefit from the business model it has
established over many years, whereby the return to a more
normalised Bank of England ("BoE") Base Rate brings increased
revenue on both its lending and excess liquidity, which has
contributed, alongside the execution of the Group's strategy, to a
significant increase in profitability.
-- Interest rates paid on client deposits have been increased to
reflect Base Rate increases. As previously guided, the total cost
of funding is expected to increase in the second half of 2023 due
to cheaper maturing deposits being replaced with deposits at higher
rates.
-- Whilst the outlook for the economy looks increasingly
uncertain and Arbuthnot remains alert to potential increases in
credit risk, the improved profitability, and robust financial
strength, means the Group remains well positioned.
Commenting on the results, Sir Henry Angest, Chairman and Chief
Executive of Arbuthnot, said : "The Group made good progress in the
first half of the year, with a substantial increase in
profitability as the business model we have invested in over many
years, focused on relationship-based banking and diversified
lending to higher margin specialist sectors, continues to deliver
for the Group."
Notes
*Details of the calculation of underlying profit before tax can
be found in note 6
ENQUIRIES:
Arbuthnot Banking Group 020 7012 2400
Sir Henry Angest, Chairman and Chief Executive
Andrew Salmon, Group Chief Operating Officer
James Cobb, Group Finance Director
Grant Thornton UK LLP (Nominated Adviser and AQSE Corporate
Adviser) 020 7383 5100
Colin Aaronson
Samantha Harrison
George Grainger
Ciara Donnelly
Shore Capital (Broker) 020 7408 4090
Daniel Bush
David Coaten
Tom Knibbs
H/Advisors Maitland (Financial PR) 020 7379 5151
Neil Bennett
Sam Cartwright
Chairman's Statement
I am pleased to report that the Group continues to make good
progress. The profit before tax for the first six months of the
year is GBP26.4m compared to GBP3.4m in the same period last
year.
The Group remains focused on delivering the strategic aims in
the new "future state 2" presented earlier this year along with the
2022 full year results. With greater diversity in the lending
balances being provided by the specialist divisions, the overall
profitability has benefited from the upward moves in the Bank of
England Base Rate.
As previously noted, the upward shifts in the base rate create a
lag effect in the Group's net interest margins, as it takes time
for the cost of customer deposits to reprice to current market
levels as they mature. Thus, we expect net interest margins to
narrow as this repricing of deposits takes place.
The deposit market continues to remain extremely competitive,
with many offers for term deposits of one year now well in excess
of the base rate. Our bank, Arbuthnot Latham has been swift to
adjust its rates in these markets, offering new and existing
customers attractive rates.
However, with the strength of our deposit base, which is
diversified between transactional and term accounts, the average
cost of deposits stood at 2.2% for the month of June and averaged
1.9% for the first six months of the year. If base rates remains
unchanged for the next 12 - 18 months, the cost of deposits is
expected to rise to a peak of 2.9% over time.
I have previously explained that I believe that the strength of
a bank should be measured against the quality of its deposit base
rather than only capital or lending based measures. This I feel was
never more clearly demonstrated than during the recent period of
market uncertainty caused by the collapse of Silicon Valley Bank. I
was pleased to note that the relationship banking model that we
have established proved to be powerful and we saw the confidence
that our clients have in us, demonstrated by the fact that we had
net inflows of deposits during that time.
I was also pleased that during the first half of the year,
Arbuthnot Banking Group carried out a successful capital raise.
With the demand for the new equity being heavily oversubscribed, we
were able to raise GBP12m rather than the initial target of GBP10m
to help to satisfy this demand. This equity raise was designed to
allow the lending businesses to continue to build their pipelines
of new lending opportunities while at the same time having
sufficient capital to allow for the second tranche of the
Countercyclical Capital Buffer and to position us to be able to
take advantage of opportunities that are expected to arise given
the current market conditions.
This expectation proved correct as our specialist lending
business, Asset Alliance was able to acquire a GBP42m portfolio of
operating leases at a discount in May.
Given the rapid rise in interest rates, we are aware that the
outlook for credit risk has worsened. At this time we have not yet
seen a significant deterioration in our lending portfolios, however
there is early evidence of pressure on affordability to cover
interest payments becoming problematic as it takes time for the
rental market to reprice. In response we have tightened our credit
appetite, with LTVs on residential investment lending now being
targeted at around 50% rather the previous 60%.
The specialist lending divisions continue to monitor their
portfolios closely but as yet they continue to perform well.
Given its confidence in the prospects of the Group, the Board
proposes an interim dividend of 19p, being an increase of 2p over
the interim dividend paid in 2022. This interim dividend will be
paid on 22 September 2023 to shareholders on the register on 25
August 2023.
Banking
The Banking division reported a profit before tax of GBP31.1m
for the first six months (30 June 2022: GBP6.6 m ), with lending
balances totalling GBP1.45 bn and deposits of GBP3.25 bn (30 June
2022: lending of GBP1.46 bn ; deposits of GBP2.61 bn ).
Against the backdrop of ongoing economic uncertainty, the Bank
has continued to stay focused on client service, which has led to
net growth in client acquisition. The Bank's long term approach and
cautious banking model resonates well with criteria clients looking
for a bank where they can build a long term relationship.
Deposits grew by GBP165.8m in the first half of 2023 despite a
number of high profile banking failures and turbulence across the
banking sector. The Bank's strategy to hold high levels of
liquidity, with no reliance on wholesale funding meant that the
Bank operated with a consistently strong liquidity position in the
period, reassuring clients of the Bank's robustness and
resilience.
The Bank has continued to pursue its strategy to focus on more
capital efficient lending and allowing capital intensive lending to
mature and refinance away in addition to tightening its credit
criteria. The loan book fell marginally by 1% in the six months to
finish the half year at GBP1.45bn.
The impact of the changing macroeconomic environment is
resulting in some signs of stress in the loan book, however given
the Bank's cautious underwriting approach with low LTV ratios, the
Bank is well positioned to exit any defaults with little or no
loss.
Wealth Management
Assets Under Management ("AUM") closed the half-year mark at
GBP1.38bn with positive net funds flow for the first half of 2023.
The rising interest rate environment has resulted in an increase in
client withdrawals compared to prior periods, where clients are
opting to pay down their debt.
Arbuthnot Commercial Asset Based Lending ("ACABL")
ACABL has reported a profit before tax of GBP4.0 m (30 June
2022: GBP2.9 m ) an increase of 38% for the same period in the
prior year. The loan book was GBP241.1 m as at the half year
compared to GBP238.8 m in the prior year and GBP268.8m at the
previous year end.
In early May, ACABL celebrated its 5th year anniversary. Since
launch, the business has grown its loan book with facility limits
in excess of GBP500m and built a team of 31 highly experienced
staff.
The business has continued to onboard new clients and support
the growth of existing clients, however demand for transactional
funding was seen to reduce towards the end of 2022 following the
'mini budget' and this has carried over into early 2023. This has
resulted in a higher level of refinance opportunities that have and
are being carefully considered in light of the market challenges.
This has impacted the level of funds in use when compared to the
previous year end, which also takes into account some expected
client attrition given the book's maturity.
It is expected activity from Private Equity sponsors and the
wider Corporate Finance community will result in an increase in
transactional flow in the second half. Given the opportunities that
will come from more realistic enterprise values, ACABL is well
placed to fund these future transactions.
In the first quarter ACABL, renewed its accreditation to provide
loans under the Recovery Loan Scheme as a continued additional
source of funding for deal structures where appropriate.
Renaissance Asset Finance ("RAF")
RAF has reported a profit before tax of GBP0.7 m (30 June 2022:
GBP0.2m), with customer loan balances of GBP156.7 m (30 June 2022:
GBP102.6 m ).
New business levels have remained positive and the balance sheet
continues to grow in line with the Group's Future State plan, with
improved margins achieved on new business despite the current
economic environment.
Whilst some pressure is expected, particularly in the SME
customer base, the book continues to perform in the current
economic climate with problem debts marginally lower than
expected.
Asset Alliance Group ("AAG")
AAG continues to trade well with leased assets and hire purchase
loans totalling GBP258.8m at the end of June 2023 compared to
GBP128.6m as at 30 June 2022, equating to year-on-year growth of
101%, and 37% year to date. Included in the result is GBP42m of
operating leases which AAG acquired at a discount to face value, to
provide buses for contracted operations in London.
Despite the portfolio acquisition, supply chain issues continue,
however with signs of improvement beginning to appear. Where in
prior periods, supply chain issues have led to a buoyant used truck
market, the business expects this market to weaken, but margins
currently remain stronger than expected.
Mortgage Portfolios
The Group's acquired mortgage portfolio is currently operating
in line with expectations with a carrying value of GBP135.0m
compared to GBP166.2m as at 30 June 2022 and GBP148.5m as at 31
December 2022.
Operations
The Bank continues to see significant growth in client activity
with non-card related payment volumes increasing by 15% year on
year, with over 500,000 payments processed in the first half of
2023. Card transactions have also seen significant growth with
volumes in the first six months of 2023, approximately 45% higher
than the same period last year.
Having completed the core banking platform upgrade at the end of
2022, the Bank has commenced a review of its future digital
strategy that will focus on further developing the client digital
channels and streamlining a number of operational processes. The
outputs of this review will underpin the roadmap for further
technology investment over the coming 2-3 years with delivery
expected to commence later in 2023.
Outlook
The continued stubbornness of inflation has led to increased
interest rate rises which has had a positive effect on the
profitability of the Group. The outlook for the economy looks
increasingly uncertain and we remain alert to potential increases
in credit risk that may result from an economic downturn. However,
given the improved profitability and robust financial strength, the
Group remains well positioned.
Consolidated Statement of Comprehensive Income
Six months Six months
ended ended 30
30 June June
2023 2022
Note GBP000 GBP000
--------------------------------------------------------- ---- ---------- ----------
Income from banking activities
Interest income 100,320 49,088
Interest expense (31,950) (6,552)
--------------------------------------------------------- ---- ---------- ----------
Net interest income 68,370 42,536
--------------------------------------------------------- ---- ---------- ----------
Fee and commission income 11,275 10,099
Fee and commission expense (105) (59)
--------------------------------------------------------- ---- ---------- ----------
Net fee and commission income 11,170 10,040
--------------------------------------------------------- ---- ---------- ----------
Operating income from banking activities 79,540 52,576
--------------------------------------------------------- ---- ---------- ----------
Income from leasing activities
Revenue 49,895 48,851
Cost of goods sold (41,821) (40,538)
--------------------------------------------------------- ---- ---------- ----------
Gross profit from leasing activities 8,074 8,313
--------------------------------------------------------- ---- ---------- ----------
Total group operating income 87,614 60,889
--------------------------------------------------------- ---- ---------- ----------
Net impairment loss on financial assets (2,453) (1,201)
Other income 7 2,326 610
Operating expenses (61,079) (56,923)
--------------------------------------------------------- ---- ---------- ----------
Profit before income tax 26,408 3,375
Income tax expense (6,440) (705)
--------------------------------------------------------- ---- ---------- ----------
Profit for the period 19,968 2,670
--------------------------------------------------------- ---- ---------- ----------
Other comprehensive income
Items that will not be reclassified to profit or loss
Changes in fair value of equity investments at fair
value through other comprehensive income 174 462
Tax on other comprehensive income (43) (88)
--------------------------------------------------------- ---- ---------- ----------
Other comprehensive income for the period, net of tax 131 374
--------------------------------------------------------- ---- ---------- ----------
Total comprehensive income for the period 20,099 3,044
--------------------------------------------------------- ---- ---------- ----------
Earnings per share for profit attributable to the equity
holders of the Company during the period (expressed
in pence per share):
Basic earnings per share 8 129.4 17.8
Diluted earnings per share 8 129.4 17.8
Consolidated Statement of Financial Position
At 30 At 30 At 31
June June December
2023 2022 2022
GBP000 GBP000 GBP000
ASSETS
Cash and balances at central banks 646,016 512,837 732,729
Loans and advances to banks 148,970 125,839 115,787
Debt securities at amortised cost 597,473 386,880 439,753
Assets classified as held for sale 3,232 3,220 3,279
Derivative financial instruments 7,427 4,165 6,322
Loans and advances to customers 2,034,897 1,989,867 2,036,077
Other assets 66,267 110,188 52,185
Financial investments 3,684 2,970 3,404
Deferred tax asset 1,706 3,233 2,425
Intangible assets 30,535 30,853 32,549
Property, plant and equipment 220,539 118,551 175,273
Right-of-use assets 7,314 14,663 7,714
Investment properties 6,550 6,550 6,550
---------------------------------------------- --------- --------- ---------
Total assets 3,774,610 3,309,816 3,614,047
---------------------------------------------- --------- --------- ---------
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital and share premium 11,773 154 154
Retained earnings 228,250 200,785 212,037
Other reserves (82) (321) (213)
---------------------------------------------- --------- --------- ---------
Total equity 239,941 200,618 211,978
---------------------------------------------- --------- --------- ---------
LIABILITIES
Deposits from banks 197,384 230,110 236,027
Derivative financial instruments 58 162 135
Deposits from customers 3,253,890 2,801,530 3,092,549
Current tax liability 6,059 1,877 1,748
Other liabilities 32,573 23,092 26,144
Lease liabilities 7,415 15,269 7,872
Debt securities in issue 37,290 37,158 37,594
---------------------------------------------- --------- --------- ---------
Total liabilities 3,534,669 3,109,198 3,402,069
---------------------------------------------- --------- --------- ---------
Total equity and liabilities 3,774,610 3,309,816 3,614,047
---------------------------------------------- --------- --------- ---------
Consolidated Statement of Changes in Equity
Attributable to equity holders
of the Group
------------------------------------------------------ -------
Share
capital Capital Fair
and share redemption value Treasury Retained
premium reserve reserve shares earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------------------- ---------- ----------- -------- -------- --------- -------
Balance at 1 January 2023 154 19 1,067 (1,299) 212,037 211,978
Total comprehensive income for the period
Profit for the six months ended 30 June
2023 - - - - 19,968 19,968
Other comprehensive income, net of income
tax
Changes in the fair value of financial
assets at FVOCI - - 174 - - 174
Tax on other comprehensive income - - (43) - - (43)
Total other comprehensive income - - 131 - - 131
-------------------------------------------- ---------- ----------- -------- -------- --------- -------
Total comprehensive income for the period - - 131 - 19,968 20,099
-------------------------------------------- ---------- ----------- -------- -------- --------- -------
Transactions with owners, recorded directly
in equity
Contributions by and distributions to
owners
Issue of new ordinary shares 11,619 - - - - 11,619
Final dividend relating to 2022 - - - - (3,755) (3,755)
Total contributions by and distributions
to owners 11,619 - - - (3,755) 7,864
-------------------------------------------- ---------- ----------- -------- -------- --------- -------
Balance at 30 June 2023 11,773 19 1,198 (1,299) 228,250 239,941
-------------------------------------------- ---------- ----------- -------- -------- --------- -------
Attributable to equity holders
of the Group
---------------------------------------------------- -------
Capital Fair
Share redemption value Treasury Retained
capital reserve reserve shares earnings Total
GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------------------------------- -------- ----------- -------- -------- --------- -------
Balance at 1 January 2022 154 19 979 (1,299) 201,026 200,879
Total comprehensive income for the period
Profit for the six months ended 30 June
2022 - - - - 2,670 2,670
Other comprehensive income, net of income
tax
Changes in the fair value of financial
assets at FVOCI - - 462 - - 462
Tax on other comprehensive income - - (88) - - (88)
Total other comprehensive income - - 374 - - 374
-------------------------------------------- -------- ----------- -------- -------- --------- -------
Total comprehensive income for the period - - 374 - 2,670 3,044
-------------------------------------------- -------- ----------- -------- -------- --------- -------
Transactions with owners, recorded directly
in equity
Contributions by and distributions to
owners
Sale of financial assets carried at FVOCI - - (394) - 394 -
Final dividend relating to 2021 - - - - (3,305) (3,305)
Total contributions by and distributions
to owners - - (394) - (2,911) (3,305)
-------------------------------------------- -------- ----------- -------- -------- --------- -------
Balance at 30 June 2022 154 19 959 (1,299) 200,785 200,618
-------------------------------------------- -------- ----------- -------- -------- --------- -------
Consolidated Statement of Cash Flows
Six months Six months
ended ended
30 June 30 June
2023 2022*
GBP000 GBP000
------------------------------------------------------------ ---------- ----------
Cash flows from operating activities
Profit before tax 26,408 3,375
Adjustments for:
- Depreciation and amortisation 5,489 3,764
- Impairment loss on loans and advances (667) (3,749)
- Net interest income 72 73
- Elimination of exchange differences on debt securities 8,064 (9,812)
- Other non-cash or non-operating items included in profit
before tax (57) 475
- Tax expense (6,440) (705)
-------------------------------------------------------------- ---------- ----------
Cash flows from operating (losses)/profits before changes
in operating assets and liabilities 32,869 (6,579)
Changes in operating assets and liabilities:
- net increase in derivative financial instruments (1,182) (2,421)
- net increase in loans and advances to customers 1,847 (115,156)
- net (increase)/decrease in assets held for leasing (44,758) 6,674
- net increase in other assets (13,316) (824)
- net increase/(decrease) in amounts due to customers 161,341 (36,339)
- net (decrease) / increase in other liabilities 10,741 (1,660)
-------------------------------------------------------------- ---------- ----------
Net cash inflow/(outflow) from operating activities 147,542 (156,305)
-------------------------------------------------------------- ---------- ----------
Cash flows from investing activities
Acquisition of financial investments (106) (4)
Disposal of financial investments - 536
Purchase of computer software (418) (2,840)
Purchase of property, plant and equipment (2,067) (171)
Purchases of debt securities (654,605) (286,424)
Proceeds from redemption of debt securities 488,459 210,408
-------------------------------------------------------------- ---------- ----------
Net cash outflow from investing activities (168,737) (78,495)
-------------------------------------------------------------- ---------- ----------
Cash flows from financing activities
Issue of new ordinary shares 11,619 -
Decrease in borrowings (38,643) (9,949)
Lease payments (1,555) (1,406)
Dividends paid (3,756) (3,305)
-------------------------------------------------------------- ---------- ----------
Net cash used in financing activities (32,335) (14,660)
-------------------------------------------------------------- ---------- ----------
Net (decrease)/increase in cash and cash equivalents (53,530) (249,460)
Cash and cash equivalents at 1 January 848,516 888,136
-------------------------------------------------------------- ---------- ----------
Cash and cash equivalents at 30 June 794,986 638,676
-------------------------------------------------------------- ---------- ----------
*Prior year values have been represented using the indirect
method in accordance with IAS 7.
Notes to the Consolidated Financial Statements
1. Basis of preparation
The interim financial statements have been prepared on the basis
of accounting policies set out in the Group's 2022 statutory
accounts as amended by UK-adopted standards and interpretations
effective during 2023 as set out below and in accordance with IAS
34 "Interim Financial Reporting" as adopted for use in the UK. The
directors do not consider the fair value of the assets and
liabilities presented in these financial statements to be
materially different from their carrying value.
The statements were approved by the Board of Directors on 17
July 2023 and are unaudited. The interim financial statements will
be available on the Group website (www.arbuthnotgroup.com) from 19
July 2023.
2. Risks and Uncertainties
The Group regards the monitoring and controlling of risks and
uncertainties as a fundamental part of the management process.
Consequently, senior management are involved in the development of
risk management policies and in monitoring their application. A
detailed description of the risk management framework and
associated policies is set out in note 4.
The principal risks inherent in the Group's business are
reputational, macroeconomic and competitive environment, strategic,
credit, market, liquidity, operational, cyber, conduct and,
regulatory and capital.
Reputational risk
Reputational risk is the risk to the Group from a failure to
meet reasonable stakeholder expectations as a result of any event,
behaviour, action or inaction by ABG itself, its employees or those
with whom it is associated. This includes the associated risk to
earnings, capital or liquidity.
ABG seeks to ensure that all of it businesses act consistently
with the seven corporate principles as laid out on page 3 of the
Annual Report and Accounts. This is achieved through a central Risk
Management framework and supporting policies, the application of a
three-lines of defence model across the Group and oversight by
various committees. Employees are supported in training, studies
and other ways and encouraged to live out the cultural values
within the Group of integrity, energy and drive, respect,
collaboration and empowerment. In applying the seven corporate
principles, the risk of reputational damage is minimised as the
Group serves its shareholders, customers and employees with
integrity and high ethical standards.
Macroeconomic and competitive environment
The Group is exposed to indirect risk that may arise for the
macroeconomic and competitive environment.
In recent years there have been a number of global and domestic
events which have had significant implications on the Group's
operating environment, namely: Russia's War in the Ukraine,
Coronavirus and Brexit. The culmination of these events has led to
significant turmoil in both global and domestic markets. The most
significant economic effect from these events includes record
inflation driven by high fuel costs, leading to sharp and
significant increases in the cost of borrowing. Conditions have
improved since the year end however there still remains significant
uncertainty around the recovery of the UK economy which may have an
impact on the group's customers and assets.
Climate change
Climate change presents financial and reputational risks for the
banking industry. The Board consider Climate change a material risk
as per the Board approved risk appetite framework which provides a
structured approach to risk taking within agreed boundaries. The
assessment is proportional at present but will develop over time as
the Group generates further resources and industry consensus
emerges. The assessment is maintained by the Chief Risk officer and
has been informed by the ICAAP review and numerous workshops for
staff.
Whilst it is difficult to assess how climate change will unfold,
the Group is continually assessing various risk exposures. The UK
has a legally binding target to cut its greenhouse gas emissions to
"net-zero" by 2050. There is growing consensus that an orderly
transition to a low-carbon economy will bring substantial
adjustments to the global economy which will have financial
implications while bringing risks and opportunities.
The risk assessment process has been integrated into existing
risk frameworks and will be governed through the various risk
governance structures including review and recommendations by the
AL Risk Committee. Arbuthnot Latham governance has been assessed
against the Task Force on Climate-related Financial Disclosures'
("TCFD") recommended governance disclosures and where appropriate
the FCA/PRA guidance as per the Supervisory statements.
In accordance with the requirements of the PRA's Supervisory
Statement 'Enhancing banks' and insurers' approaches to managing
the financial risks from climate change', the Group has allocated
responsibility for identifying and managing the risks from climate
change to the relevant existing Senior Management Function. The
Bank is continuously developing a suitable strategic approach to
climate change and the unique challenges it poses.
The FCA have issued 'Climate Change and Green Finance: summary
of responses and next steps'. In addition to the modelling of
various scenarios and various governance reviews, Arbuthnot Latham
will continue to monitor requirements through the relationship with
UK Finance.
Strategic risk
Strategic risk is the risk that the Group's ability to achieve
its corporate and strategic objectives may be compromised. This
risk is particularly important to the Group as it continues its
growth strategy. However, the Group seeks to mitigate strategic
risk by focusing on a sustainable business model which is aligned
to the Group's business strategy. Also, the Directors normally meet
once a year outside a formal Board setting to ensure that the
Group's strategy is appropriate for the market and economy.
Credit risk
Credit risk is the risk that a counterparty (borrower) will be
unable to pay amounts in full when due. This risk exists in
Arbuthnot Latham, which currently has a loan book of GBP2.2bn (30
June 2022: GBP2.1bn). The lending portfolio in Arbuthnot Latham is
extended to clients, the majority of which is secured against cash,
property or other high quality assets. Credit risk is managed
through the Credit Committee of Arbuthnot Latham.
Market risk
Market risk arises in relation to movements in interest rates,
currencies, property and equity markets. The Group's treasury
function operates mainly to provide a service to clients and does
not take significant unmatched positions in any market for its own
account. As a result, the Group's exposure to adverse movements in
interest rates and currencies is limited to interest earnings on
its free cash and interest rate re-pricing mismatches. The Group
actively monitors its exposure to future changes in interest
rates.
The Group is exposed to changes in the market value of its
properties. The current carrying value of Investment Property is
GBP6.6m (31 December 2022: GBP6.6m) and properties classified as
inventory are carried at GBP10.5m (31 December 2022: GBP19.6m). Any
changes in the market value of the property will be accounted for
in the Income Statement for the Investment Property and could also
impact the carrying value of inventory, which is at the lower of
cost and net realisable value. As a result, it could have a
significant impact on the profit or loss of the Group.
Liquidity risk
Liquidity risk is the risk that the Group, although solvent,
either does not have sufficient financial resources to enable it to
meet its obligations as they fall due, or can only secure such
resources at an excessive cost. The Group takes a conservative
approach to managing its liquidity profile. Retail client deposits
and drawings from the Bank of England Term Funding Scheme fund the
Bank. The loan to deposit ratio is maintained at a prudent level,
and consequently the Group maintains a high level of liquidity. The
Arbuthnot Latham Board annually approves the Internal Liquidity
Adequacy Assessment Process ("ILAAP"). The Directors model various
stress scenarios and assess the resultant cash flows in order to
evaluate the Group's potential liquidity requirements. The
Directors firmly believe that sufficient liquid assets are held to
enable the Group to meet its liabilities in a stressed
environment.
Operational risk
Operational risk is the risk that the Group may be exposed to
financial losses from conducting its business. The Group's
exposures to operational risk include its Information Technology
("IT") and Operations platforms. There are additional internal
controls in these processes that are designed to protect the Group
from these risks. The Group's overall approach to managing internal
control and financial reporting is described in the Corporate
Governance section of the Annual Report.
In line with further guidance issued by the Regulator, the Bank
has continued to focus on ensuring that the design of systems and
operational plans are robust to maintain operational resilience in
the face of unexpected incidents.
Cyber risk
Cyber risk is an increasing risk for the Group within its
operational processes. It is the risk that the Group is subject to
some form of disruption arising from an interruption to its IT and
data infrastructure. The Group regularly tests the infrastructure
to ensure that it remains robust to a range of threats and has
continuity of business plans in place including a disaster recovery
plan.
Conduct risk
As a financial services provider we face conduct risk, including
selling products to customers which do not meet their needs,
failing to deal with clients' complaints effectively, not meeting
clients' expectations, and exhibiting behaviours which do not meet
market or regulatory standards.
The Group adopts a low risk appetite for any unfair customer
outcomes. It maintains clear compliance guidelines and provides
ongoing training to all employees. Periodic spot checks, compliance
monitoring and internal audits are performed to ensure these
guidelines are followed. The Group also has insurance policies in
place to provide some cover for any claims that may arise.
Regulatory and capital risk
Regulatory and capital risk includes the risk that the Group
will have insufficient capital resources to support the business
and/or does not comply with regulatory requirements. The Group
adopts a conservative approach to managing its capital. The Board
of Arbuthnot Latham approves an ICAAP annually, which includes the
performance of stringent stress tests to ensure that capital
resources are adequate over a three year horizon. Capital and
liquidity ratios are regularly monitored against the Board's
approved risk appetite as part of the risk management
framework.
Regulatory change also exists as a risk to the Group's business.
Notwithstanding the assessments carried out by the Group to manage
regulatory risk, it is not possible to predict how regulatory and
legislative changes may alter and impact the business. Significant
and unforeseen regulatory changes may reduce the Group's
competitive situation and lower its profitability.
3. Critical accounting estimates and judgements in applying
accounting policies
The Group makes estimates and assumptions that affect the
reported amounts of assets and liabilities within the next
financial year. Estimates and judgements are continually evaluated
and are based on historical experience and other factors, including
expectations of future events that are believed to be reasonable
under the circumstances. For a full list of critical accounting
estimates and judgements, please refer back to the Annual Report
and Accounts for 2022. Assumptions surrounding credit losses are
discussed in more detail below, while other critical accounting
estimates and judgements have remained unchanged from what was
previously reported.
Estimation uncertainty - Expected credit losses ("ECL") on
financial assets
The Group reviews its loan portfolios and debt security
investments to assess impairment at least on a quarterly basis. The
measurement of ECL required by IFRS 9, necessitates a number of
significant judgements. Specifically, judgements and estimation
uncertainties relate to assessment of whether credit risk on the
financial asset has increased significantly since initial
recognition, incorporation of forward-looking information ("FLI")
in the measurement of ECLs and key assumptions used in estimating
recoverable cash flows. These estimates are driven by a number of
factors that are subject to change which may result in different
levels of ECL allowances.
The Group incorporates FLI into the assessment of whether there
has been a significant increase in credit risk. Forecasts for key
macroeconomic variables that most closely correlate with the Bank's
portfolio are used to produce five economic scenarios, comprising
of a Baseline, which is the central scenario, developed internally
based on public consensus forecasts, and four less likely
scenarios, one upside and three downside scenarios (Downside 1,
Downside 2 and Extreme Downside), and the impacts of these
scenarios are then probability weighted. The estimation and
application of this FLI will require significant judgement
supported by the use of external information.
12-month ECLs on loans and advances (loans within Stage 1) are
calculated using a statistical model on a collective basis, grouped
together by product and geographical location. The key assumptions
are the probability of default, the economic scenarios and loss
given default ("LGD") having consideration for collateral. Lifetime
ECLs on loans and advances (loans within Stage 2 and 3) are
calculated based on an individual valuation of the underlying asset
and other expected cash flows.
For financial assets in Stage 2 and 3, ECL is calculated on an
individual basis and all relevant factors that have a bearing on
the expected future cash flows are taken into account. These
factors can be subjective and can include the individual
circumstances of the borrower, the realisable value of collateral,
the Group's position relative to other claimants, and the likely
cost to sell and duration of the time to collect. The level of ECL
is the difference between the value of the recoverable amount
(which is equal to the expected future cash flows discounted at the
loan's original effective interest rate), and its carrying
amount.
The Group considered the impact of various assumptions on the
calculation of ECL (changes in GDP, unemployment rates, inflation,
exchange rates, equity prices, wages and collateral values/property
prices) and concluded that collateral values/property prices, UK
GDP and UK unemployment rate are key drivers of credit risk and
credit losses for each portfolio of financial instruments.
The five macroeconomic scenarios modelled on future property
prices were as follows:
-- Baseline
-- Upside
-- Downside 1
-- Downside 2
-- Extreme downside
The tables below therefore reflect the expected probability
weightings applied for each macroeconomic scenario:
Probability weighting
Jun-23 Dec-22
------------------- ----------- ----------
Economic Scenarios
Baseline 42.0% 53.0%
Upside 21.0% 13.0%
Downside 1 18.0% 12.0%
Downside 2 12.0% 11.0%
Extreme downside 7.0% 11.0%
The tables below show the five-year forecasted average for
property prices growth, UK unemployment rate and UK real GDP
growth:
30 June 2023
Downside Downside Extreme
Base Upside 1 2 downside
-------------------------------- ------ ------ -------- -------- ---------
Five-year summary
UK House price index - average
growth 0.3% 4.0% (1.6%) (3.5%) (5.5%)
UK Commercial real estate price
- average growth (0.8%) 2.4% (2.8%) (4.8%) (6.8%)
UK Unemployment rate - average 4.2% 2.8% 5.1% 6.1% 7.0%
UK GDP - average growth 1.4% 2.0% 0.9% 0.4% (0.1%)
31 December 2022
Downside Downside Extreme
Base Upside 1 2 downside
-------------------------------- ------ ------ -------- -------- ---------
Five-year summary
UK House price index - average
growth (0.8%) 1.7% (1.9%) (3.0%) (4.2%)
UK Commercial real estate price
- average growth (2.6%) 0.2% (3.4%) (4.1%) (4.9%)
UK Unemployment rate - average 4.3% 2.8% 5.3% 6.3% 7.3%
UK GDP - average growth 1.2% 2.1% 0.8% 0.4% 0.0%
The tables below list the macroeconomic assumptions at 30 June
2023 used in the base, upside and downside scenarios over the
five-year forecast period. The assumptions represent the absolute
percentage unemployment rates and year-on-year percentage change
for GDP and property prices.
UK House price index - four quarter
growth
Downside Downside Extreme
Year Baseline Upside 1 2 downside
-------------------------------------- -------- ------ -------- -------- ---------
2023 (6.2%) (3.9%) (7.0%) (7.8%) (8.6%)
2024 (2.0%) 5.2% (6.0%) (10.0%) (13.9%)
2025 1.1% 4.0% (3.2%) (7.5%) (11.8%)
2026 3.4% 4.9% 2.3% 1.3% 0.2%
2027 5.2% 9.6% 5.8% 6.3% 6.9%
5 year average 0.3% 4.0% (1.6%) (3.5%) (5.5%)
UK Commercial real estate price
- four quarter growth
Downside Downside Extreme
Year Baseline Upside 1 2 downside
-------------------------------------- -------- ------ -------- -------- ---------
2023 (10.3%) 2.0% (13.6%) (16.9%) (20.1%)
2024 0.5% 2.6% (7.8%) (16.0%) (24.3%)
2025 1.8% 2.6% (0.7%) (3.2%) (5.8%)
2026 1.9% 2.7% 3.8% 5.8% 7.8%
2027 2.1% 1.9% 4.3% 6.4% 8.6%
5 year average (0.8%) 2.4% (2.8%) (4.8%) (6.8%)
UK Unemployment rate - annual average
Downside Downside Extreme
Year Baseline Upside 1 2 downside
-------------------------------------- -------- ------ -------- -------- ---------
2023 4.1% 3.2% 4.4% 4.7% 5.0%
2024 4.2% 2.8% 5.2% 6.2% 7.2%
2025 4.2% 2.8% 5.5% 6.9% 8.2%
2026 4.2% 2.5% 5.4% 6.5% 7.7%
2027 4.2% 2.5% 5.1% 6.1% 7.0%
5 year average 4.2% 2.8% 5.1% 6.1% 7.0%
UK GDP - annual growth
Downside Downside Extreme
Year Baseline Upside 1 2 downside
-------------------------------------- -------- ------ -------- -------- ---------
2023 0.3% 0.6% (0.6%) (1.5%) (2.4%)
2024 1.0% 2.0% - (0.9%) (1.9%)
2025 1.7% 2.3% 1.5% 1.4% 1.2%
2026 1.9% 2.5% 1.7% 1.4% 1.2%
2027 1.9% 2.5% 1.7% 1.4% 1.2%
5 year average 1.4% 2.0% 0.9% 0.4% (0.1%)
The graphs below plot the historical data for HPI, Commercial
real estate price, unemployment rate and GDP growth rate in the UK
as well as the forecasted data under each of the five
scenarios.
Management have assessed the impact of assigning a 100%
probability to each of the economic scenarios, which would have the
following impact on the Profit or Loss of the Group:
Arbuthnot Latham
Jun 2023 Dec 2022
Impact of 100% scenario probability GBPm GBPm
------------------------------------ -------- --------
Baseline 0.6 0.7
Upside 0.9 1.0
Downside 1 (2.4) (2.0)
Downside 2 (8.3) (7.5)
Extreme downside (20.6) (19.1)
4. Financial risk management
Strategy
By their nature, the Group's activities are principally related
to the use of financial instruments. The Directors and senior
management of the Group have formally adopted a Group Risk and
Controls Policy which sets out the Board's attitude to risk and
internal controls. Key risks identified by the Directors are
formally reviewed and assessed at least once a year by the Board,
in addition to which key business risks are identified, evaluated
and managed by operating management on an ongoing basis by means of
procedures such as physical controls, credit and other
authorisation limits and segregation of duties. The Board also
receives regular reports on any risk matters that need to be
brought to its attention. Significant risks identified in
connection with the development of new activities are subject to
consideration by the Board. There are budgeting procedures in place
and reports are presented regularly to the Board detailing the
results of each principal business unit, variances against budget
and prior year, and other performance data.
The principal non-operational risks inherent in the Group's
business are credit, macroeconomic, market, liquidity and
capital.
Credit risk
The Company and Group take on exposure to credit risk, which is
the risk that a counterparty will be unable to pay amounts in full
when due. Significant changes in the economy, or in the health of a
particular industry segment that represents a concentration in the
Company and Group's portfolio, could result in losses that are
different from those provided for at the balance sheet date. Credit
risk is managed through the Credit Committee of the banking
subsidiary.
The Committee regularly reviews the credit risk profile of the
Group, with a clear focus on performance against risk appetite
statements and risk metrics. The Committee considered credit
conditions during the period.
The Company and Group structure the levels of credit risk it
undertakes by placing limits on the amount of risk accepted in
relation to products, and one borrower or groups of borrowers. Such
risks are monitored on a revolving basis and subject to an annual
or more frequent review. The limits are approved periodically by
the Board of Directors and actual exposures against limits are
monitored daily.
Exposure to credit risk is managed through regular analysis of
the ability of borrowers and potential borrowers to meet interest
and capital repayment obligations and by changing these lending
limits where appropriate. Exposure to credit risk is also managed
in part by obtaining collateral, and corporate and personal
guarantees.
The Group has attempted to leverage stress test modelling
insights to inform ECL model refinements to enable reasonable
estimates. Management review of modelling approaches and outcomes
continues to inform any necessary adjustments to the ECL estimates
through the form of in-model adjustments, based on expert judgement
including the use of available information. Management
considerations included the potential severity and duration of the
economic shock, including the mitigating effects of government
support actions, as well the potential trajectory of the subsequent
recovery.
The Group employs a range of policies and practices to mitigate
credit risk. The most traditional of these is the taking of
collateral to secure advances, which is common practice. The
principal collateral types for loans and advances include, but are
not limited to:
-- Charges over residential and commercial properties;
-- Charges over business assets such as premises, inventory and accounts receivable;
-- Charges over financial instruments such as debt securities and equities;
-- Charges over other chattels; and
-- Personal guarantees
Upon initial recognition of loans and advances, the fair value
of collateral is based on valuation techniques commonly used for
the corresponding assets. In order to minimise any potential credit
loss the Group will seek additional collateral from the
counterparty as soon as impairment indicators are noticed for the
relevant individual loans and advances. Repossessed collateral, not
readily convertible into cash, is made available for sale in an
orderly fashion, with the proceeds used to reduce or repay the
outstanding indebtedness, or held as inventory where the Group
intends to develop and sell in the future. Where excess funds are
available after the debt has been repaid, they are available either
for other secured lenders with lower priority or are returned to
the customer.
Commitments to extend credit represent unused portions of
authorisations to extend credit in the form of loans, guarantees or
letters of credit. With respect to credit risk on commitments to
extend credit, the Group is potentially exposed to loss in an
amount equal to the total unused commitments. However, the likely
amount of loss is less than the total unused commitments, as most
commitments to extend credit are contingent upon customers
maintaining specific credit standards.
The Group incorporates forward-looking information into both its
assessment of whether the credit risk of an instrument has
increased significantly since its initial recognition and its
measurement of ECL. The key inputs into the measurement of the ECL
are:
-- assessment of significant increase in credit risk
-- future economic scenarios
-- probability of default
-- loss given default
-- exposure at default
The IFRS 9 impairment model adopts a three stage approach based
on the extent of credit deterioration since origination.
The Group's maximum exposure to credit risk before collateral held or other
credit enhancements is as follows:
30 June 2023
Mortgage All Other
Group Banking Portfolios RAF ACABL ASFL AAG Divisions Total
Credit risk exposures (all
stage 1, unless otherwise
stated) GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------- --------- ----------- ------- ------- ------ ------ ---------- ---------
On-balance sheet:
Cash and balances at central
banks - - - - - - 645,854 645,854
Loans and advances to banks - - - - - - 148,970 148,970
Debt securities at amortised
cost - - - - - - 597,473 597,473
Derivative financial instruments - - - - - - 7,427 7,427
Loans and advances to customers
(Gross of ECL) 1,450,674 136,014 157,972 241,255 12,472 42,444 - 2,040,831
--------- ----------- ------- ------- ------ ------ ---------- ---------
Stage 1 - Gross amount outstanding 1,361,491 111,989 152,553 226,484 11,472 42,444 - 1,906,433
Stage 2 - Gross amount outstanding 54,071 11,011 2,531 12,654 1,000 - - 81,267
Stage 3 - Gross amount outstanding 35,112 13,014 2,888 2,117 - - - 53,131
--------- ----------- ------- ------- ------ ------ ---------- ---------
Other assets - - - - - - 25,118 25,118
Financial investments - - - - - - 3,684 3,684
Off-balance sheet:
Guarantees 1,841 - - - - - - 1,841
Loan commitments 225,901 - - 284,290 665 - - 510,856
------------------------------------- --------- ----------- ------- ------- ------ ------ ---------- ---------
At 30 June 2023 1,678,416 136,014 157,972 525,545 13,137 42,444 1,428,526 3,982,054
------------------------------------- --------- ----------- ------- ------- ------ ------ ---------- ---------
30 June 2022
Mortgage All Other
Group Banking Portfolios RAF ACABL ASFL AAG Divisions Total
Credit risk exposures (all stage
1, unless otherwise stated) GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------- --------- ----------- ------- ------- ------ ------ ---------- ---------
On-balance sheet:
Cash and balances at central
banks - - - - - - 512,663 512,663
Loans and advances to banks - - - - - - 125,839 125,839
Debt securities at amortised
cost - - - - - - 386,880 386,880
Derivative financial instruments - - - - - - 4,165 4,165
Loans and advances to customers
(Gross of ECL*) 1,450,415 166,263 103,309 238,980 9,736 13,473 - 1,982,176
--------- ----------- ------- ------- ------ ------ ---------- ---------
Stage 1 - Gross amount outstanding 1,359,839 140,170 87,420 238,980 9,053 13,473 - 1,848,935
Stage 2 - Gross amount outstanding 60,041 21,279 12,318 - - - - 93,638
Stage 3 - Gross amount outstanding 30,535 4,814 3,571 - 683 - - 39,603
--------- ----------- ------- ------- ------ ------ ---------- ---------
Loans and advances to customers
at fair value through profit
or loss 10,330 10,330
Other assets - - - - - - 12,763 12,763
Financial investments - - - - - - 2,970 2,970
Off-balance sheet:
Guarantees 3,427 - - - - - - 3,427
Loan commitments 282,901 - - 68,880 1,844 - - 353,625
------------------------------------- --------- ----------- ------- ------- ------ ------ ---------- ---------
At 30 June 2022 1,736,743 166,263 103,309 307,860 11,580 13,473 1,055,610 3,394,838
------------------------------------- --------- ----------- ------- ------- ------ ------ ---------- ---------
* Prior year loans and advances to customers have been represented from
net to gross of expected credit losses (ECL) in order to align the presentation
to the annual report.
31 December 2022
Mortgage All Other
Group Banking Portfolios RAF ACABL ASFL AAG Divisions Total
Credit risk exposures (all
stage 1, unless otherwise stated) GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
------------------------------------- --------- ----------- ------- ------- ------ ------ ---------- ---------
On-balance sheet:
Cash and balances at central
banks - - - - - - 732,513 732,513
Loans and advances to banks - - - - - - 115,788 115,788
Debt securities at amortised
cost - - - - - - 439,753 439,753
Derivative financial instruments - - - - - - 6,322 6,322
Loans and advances to customers
(Gross of ECL*) 1,455,607 148,957 134,724 270,999 14,950 17,442 - 2,042,679
--------- ----------- ------- ------- ------ ------ ---------- ---------
Stage 1 - Gross amount outstanding 1,363,572 126,726 128,807 267,962 13,756 17,066 - 1,917,889
Stage 2 - Gross amount outstanding 59,904 10,777 2,454 - 1,001 376 - 74,512
Stage 3 - Gross amount outstanding 32,131 11,454 3,463 3,037 193 - - 50,278
--------- ----------- ------- ------- ------ ------ ---------- ---------
Other assets - - - - - - 14,160 14,160
Financial investments - - - - - - 3,404 3,404
Off-balance sheet:
Guarantees 2,591 - - - - 662 - 3,253
Loan commitments 219,490 - - 250,276 1,312 - - 471,078
------------------------------------- --------- ----------- ------- ------- ------ ------ ---------- ---------
At 31 December 2022 1,677,688 148,957 134,724 521,275 16,262 18,104 1,311,940 3,828,950
------------------------------------- --------- ----------- ------- ------- ------ ------ ---------- ---------
* Prior year loans and advances to customers have been represented from
net to gross of expected credit losses (ECL) in order to align the presentation
to the annual report.
The table below shows the Group's expected credit loss (ECL), by segment
and stage:
30 June 2023
Mortgage All Other
Group Banking Portfolios RAF ACABL ASFL AAG Divisions Total
ECL provisions GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------- ------- ----------- ------- ------- ------ ------ ---------- -------
Stage 1 (574) (7) (223) (121) (96) (108) - (1,129)
Stage 2 (12) (21) (45) (14) - - - (91)
Stage 3 (2,712) (995) (956) (50) - - - (4,714)
-------------------- ------- ----------- ------- ------- ------ ------ ---------- -------
At 30 June 2023 (3,298) (1,023) (1,224) (185) (96) (108) - (5,934)
-------------------- ------- ----------- ------- ------- ------ ------ ---------- -------
30 June 2022
Mortgage All Other
Group Banking Portfolios RAF ACABL ASFL AAG Divisions Total
ECL provisions GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------- ------- ----------- ------- ------- ------ ------ ---------- -------
Stage 1 (229) (15) (90) (137) (42) - - (513)
Stage 2 (4) (10) (114) - - - - (128)
Stage 3 (1,331) (70) (493) - (104) - - (1,998)
-------------------- ------- ----------- ------- ------- ------ ------ ---------- -------
At 30 June 2022 (1,564) (95) (697) (137) (146) - - (2,639)
-------------------- ------- ----------- ------- ------- ------ ------ ---------- -------
31 December 2022
Mortgage All Other
Group Banking Portfolios RAF ACABL ASFL AAG Divisions Total
ECL provisions GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
-------------------- ------- ----------- ------- ------- ------ ------ ---------- -------
Stage 1 (622) (13) (214) (167) (81) (50) - (1,146)
Stage 2 (60) (10) (60) - - - - (130)
Stage 3 (2,276) (417) (625) (2,007) - - - (5,325)
-------------------- ------- ----------- ------- ------- ------ ------ ---------- -------
At 31 December 2022 (2,958) (440) (899) (2,174) (81) (50) - (6,601)
-------------------- ------- ----------- ------- ------- ------ ------ ---------- -------
Capital management
During the period all regulated entities have complied with all
of the externally imposed capital requirements to which they are
subject. The capital position of the Group remains strong. The
Total Capital Requirement Ratio ("TCR") is 8.32% (31 December 2022:
8.32%), while the CET1 capital ratio is 12.2% (31 December 2022:
11.6%) and the total capital ratio is 14.5% (31 December 2022:
14.0%).
Valuation of financial instruments
The Group measures the fair value of an instrument using quoted
prices in an active market for that instrument. A market is
regarded as active if quoted prices are readily and regularly
available and represent actual and regularly occurring market
transactions. If a market for a financial instrument is not active,
the Group establishes fair value using a valuation technique. These
include the use of recent arm's length transactions, reference to
other instruments that are substantially the same for which market
observable prices exist, net present value and discounted cash flow
analysis. The objective of valuation techniques is to determine the
fair value of the financial instrument at the reporting date as the
price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. In
the event that fair values of assets and liabilities cannot be
reliably measured, they are carried at cost.
The Group measures fair value using the following fair value
hierarchy that reflects the significance of the inputs used in
making measurements:
-- Level 1: Quoted prices in active markets for identical assets or liabilities.
-- Level 2: Inputs other than quoted prices included within
Level 1 that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices).
This category includes instruments valued using: quoted market
prices in active markets for similar instruments; quoted prices for
identical or similar instruments in markets that are considered
less than active; or other valuation techniques in which all
significant inputs are directly or indirectly observable from
market data.
-- Level 3: Inputs that are unobservable. This category includes
all instruments for which the valuation technique includes inputs
not based on observable data and the unobservable inputs have a
significant effect on the instrument's valuation. This category
includes instruments that are valued based on quoted prices for
similar instruments for which significant unobservable adjustments
or assumptions are required to reflect differences between the
instruments.
The consideration of factors such as the magnitude and frequency
of trading activity, the availability of prices and the size of
bid/offer spreads assists in the judgement as to whether a market
is active. If in the opinion of management, a significant
proportion of the instrument's carrying amount is driven by
unobservable inputs, the instrument in its entirety is classified
as valued using significant unobservable inputs. 'Unobservable' in
this context means that there is little or no current market data
available from which to determine the level at which an arm's
length transaction would be likely to occur. It generally does not
mean that there is no market data available at all upon which to
base a determination of fair value (consensus pricing data may, for
example, be used).
The tables below analyse financial instruments measured at fair
value by the level in the fair value hierarchy into which the
measurement is categorised:
Level Level Level
1 2 3 Total
At 30 June 2023 GBP000 GBP000 GBP000 GBP000
--------------------------------- ------ ------ ------ ------
ASSETS
Derivative financial instruments - 7,427 - 7,427
Financial investments - - 3,684 3,684
Investment properties - - 6,550 6,550
--------------------------------- ------ ------ ------ ------
- 7,427 10,234 17,661
--------------------------------- ------ ------ ------ ------
LIABILITIES
Derivative financial instruments - 58 - 58
--------------------------------- ------ ------ ------ ------
- 58 - 58
--------------------------------- ------ ------ ------ ------
Level Level Level
1 2 3 Total
At 30 June 2022 GBP000 GBP000 GBP000 GBP000
---------------------------------------------- ------- ------ ------ ------
ASSETS
Derivative financial instruments - 4,165 - 4,165
Loans and advances to customers at fair value
through profit or loss - - 10,330 10,330
Financial investments - - 2,970 2,970
Investment properties - - 6,550 6,550
---------------------------------------------- ------- ------ ------ ------
- 4,165 19,850 24,015
------------------------------------------------------ ------ ------ ------
LIABILITIES
Derivative financial instruments - 162 - 162
- 162 - 162
------------------------------------------------------ ------ ------ ------
Level Level Level
1 2 3 Total
At 31 December 2022 GBP000 GBP000 GBP000 GBP000
--------------------------------- ------- ------ ------ ------
ASSETS
Derivative financial instruments - 6,322 - 6,322
Financial investments - - 3,404 3,404
Investment properties - - 6,550 6,550
--------------------------------- ------- ------ ------ ------
- 6,322 9,954 16,276
----------------------------------------- ------ ------ ------
LIABILITIES
Derivative financial instruments - 135 - 135
--------------------------------- ------- ------ ------ ------
- 135 - 135
----------------------------------------- ------ ------ ------
There were no transfers between level 1 and level 2 during
the year.
The following table reconciles the movement in level 3 financial instruments
measured at fair value (financial investments) during the year:
At 30 At 30 At 31
June June December
2023 2022 2022
Movement in level 3 GBP000 GBP000 GBP000
------------------------------------------------------- ------- ------ ---------
At 1 January 9,954 9,719 9,719
Acquisitions 106 10,334 53
Disposals - (536) (640)
Movements recognised in Other Comprehensive
Income 174 333 822
At 30 June / 31 December 10,234 19,850 9,954
-------------------------------------------------------- ------- ------ ---------
The tables below show the fair value of financial instruments
carried at amortised cost by the level in the fair value
hierarchy:
Level Level Level
1 2 3 Total
At 30 June 2023 GBP000 GBP000 GBP000 GBP000
----------------------------------- ------- --------- --------- ---------
ASSETS
Cash and balances at central banks - 646,016 - 646,016
Loans and advances to banks - 148,970 - 148,970
Debt securities at amortised cost - 597,294 - 597,294
Loans and advances to customers - - 1,995,048 1,995,048
Other assets - - 25,118 25,118
----------------------------------- ------- --------- --------- ---------
- 1,392,280 2,020,166 3,412,446
------------------------------------------- --------- --------- ---------
LIABILITIES
Deposits from banks - 197,384 - 197,384
Deposits from customers - 3,253,890 - 3,253,890
Other liabilities - - 32,573 32,573
Debt securities in issue - - 37,290 37,290
----------------------------------- ------- --------- --------- ---------
- 3,451,274 69,863 3,521,137
------------------------------------------- --------- --------- ---------
Level Level Level
1 2 3 Total
At 30 June 2022 GBP000 GBP000 GBP000 GBP000
----------------------------------- ------- --------- --------- ---------
ASSETS
Cash and balances at central banks - 512,837 - 512,837
Loans and advances to banks - 125,839 - 125,839
Debt securities at amortised cost - 386,706 - 386,706
Loans and advances to customers - - 1,947,478 1,947,478
Other assets - - 12,989 12,989
----------------------------------- ------- --------- --------- ---------
- 1,025,382 1,960,467 2,985,849
------------------------------------------- --------- --------- ---------
LIABILITIES
Deposits from banks - 230,110 - 230,110
Deposits from customers - 2,801,530 - 2,801,530
Other liabilities - - 24,634 24,634
Debt securities in issue - - 37,158 37,158
----------------------------------- ------- --------- --------- ---------
- 3,031,640 61,792 3,093,432
------------------------------------------- --------- --------- ---------
Level Level Level
1 2 3 Total
At 31 December 2022 GBP000 GBP000 GBP000 GBP000
----------------------------------- ------- --------- --------- ---------
ASSETS
Cash and balances at central banks - 732,729 - 732,729
Loans and advances to banks - 115,788 - 115,788
Debt securities at amortised cost - 439,389 - 439,389
Loans and advances to customers - - 1,996,966 1,996,966
Other assets - - 14,160 14,160
----------------------------------- ------- --------- --------- ---------
- 1,287,906 2,011,126 3,299,032
------------------------------------------- --------- --------- ---------
LIABILITIES
Deposits from banks - 236,027 - 236,027
Deposits from customers - 3,092,549 - 3,092,549
Other liabilities - - 4,954 4,954
Debt securities in issue - - 37,594 37,594
----------------------------------- ------- --------- --------- ---------
- 3,328,576 42,548 3,371,124
------------------------------------------- --------- --------- ---------
All above assets and liabilities are carried at amortised cost.
Therefore for these assets, the fair value hierarchy noted above
relates to the disclosure in this note only.
Cash and balances at central banks
The fair value of cash and balances at central banks was
calculated based upon the present value of the expected future
principal and interest cash flows. The rate used to discount the
cash flows was the market rate of interest at the balance sheet
date.
At the end of each year, the fair value of cash and balances at
central banks was calculated to be equivalent to their carrying
value.
Loans and advances to banks
The fair value of loans and advances to banks was calculated
based upon the present value of the expected future principal and
interest cash flows. The rate used to discount the cash flows was
the market rate of interest at the balance sheet date.
Loans and advances to customers
The fair value of loans and advances to customers was calculated
based upon the present value of the expected future principal and
interest cash flows. The rate used to discount the cash flows was
the market rate of interest at the balance sheet date, and the same
assumptions regarding the risk of default were applied as those
used to derive the carrying value.
The Group provides loans and advances to commercial, corporate
and personal customers at both fixed and variable rates. To
determine the fair value of loans and advances to customers, loans
are segregated into portfolios of similar characteristics. A number
of techniques are used to estimate the fair value of fixed rate
lending; these take account of expected credit losses based on
historic trends and expected future cash flows.
For the acquired loan book, the discount on acquisition is used
to determine the fair value in addition to the expected credit
losses and expected future cash flows.
Debt securities
The fair value of debt securities is based on the quoted
mid-market share price.
Derivatives
Where derivatives are traded on an exchange, the fair value is
based on prices from the exchange.
Deposits from banks
The fair value of amounts due to banks was calculated based upon
the present value of the expected future principal and interest
cash flows. The rate used to discount the cash flows was the market
rate of interest at the balance sheet date.
At the end of each year, the fair value of amounts due to banks
was calculated to be equivalent to their carrying value due to the
short maturity term of the amounts due.
Deposits from customers
The fair value of deposits from customers was calculated based
upon the present value of the expected future principal and
interest cash flows. The rate used to discount the cash flows was
the market rate of interest at the balance sheet date for the
notice deposits and deposit bonds. The fair value of instant access
deposits is equal to book value as they are repayable on
demand.
Financial liabilities
The fair value of other financial liabilities was calculated
based upon the present value of the expected future principal cash
flows.
At the end of each year, the fair value of other financial
liabilities was calculated to be equivalent to their carrying value
due to their short maturity. The other financial liabilities
include all other liabilities other than non-interest accruals.
Subordinated liabilities
The fair value of subordinated liabilities was calculated based
upon the present value of the expected future principal cash
flows.
5. Operating segments
The Group is organised into eight operating segments as
disclosed below:
1) Banking - Includes Private and Commercial Banking. Private
Banking - Provides traditional private banking services. Commercial
Banking - Provides bespoke commercial banking services and tailored
secured lending against property investments and other assets.
2) Wealth Management - Offering financial planning and investment management services.
3) Mortgage Portfolios - Acquired mortgage portfolios.
4) RAF - Specialist asset finance lender mainly in high value
cars but also business assets.
5) ACABL - Provides finance secured on either invoices, assets or stock of the borrower.
6) ASFL - Provides short term secured lending solutions to
professional and entrepreneurial property investors.
7) AAG - Provides vehicle finance and related services,
predominantly in the truck & trailer and bus & coach
markets.
8) All Other Divisions - All other smaller divisions and central
costs in Arbuthnot Latham & Co., Ltd (Investment property and
Central costs).
9) Group Centre - ABG Group management.
Transactions between the operating segments are on normal
commercial terms. Centrally incurred expenses are charged to
operating segments on an appropriate pro-rata basis. Segment assets
and liabilities comprise loans and advances to customers and
customer deposits, being the majority of the balance sheet.
All
Wealth Mortgage Other Group
Banking Management Portfolios RAF ACABL ASFL AAG Divisions Centre Total
Six months GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
ended
30 June 2023
-------------- --------- ---------- ----------- ------- ------- ------ -------- ---------- ------- ---------
Interest
revenue 51,527 - 5,125 5,500 11,253 661 778 25,476 3 100,323
Inter-segment
revenue - - - - - - - - (3) (3)
-------------- --------- ---------- ----------- ------- ------- ------ -------- ---------- ------- ---------
Interest
revenue
from external
customers 51,527 - 5,125 5,500 11,253 661 778 25,476 - 100,320
-------------- --------- ---------- ----------- ------- ------- ------ -------- ---------- ------- ---------
Fee and
commission
income 1,471 5,579 - 18 3,331 11 - 865 - 11,275
Revenue - - - - - - 49,895 - - 49,895
-------------- --------- ---------- ----------- ------- ------- ------ -------- ---------- ------- ---------
Revenue from
external
customers 52,998 5,579 5,125 5,518 14,584 672 50,673 26,341 - 161,490
-------------- --------- ---------- ----------- ------- ------- ------ -------- ---------- ------- ---------
Interest
expense 5,350 - (4,166) (1,997) (7,125) (215) (4,224) (17,475) (2,101) (31,953)
Cost of goods
sold - - - - - - (41,821) - - (41,821)
Add back
inter-segment
revenue - - - - - - - - 3 3
Fee and
commission
expense (20) - - - (85) - - - - (105)
-------------- --------- ---------- ----------- ------- ------- ------ -------- ---------- ------- ---------
Segment
operating
income 58,328 5,579 959 3,521 7,374 457 4,628 8,866 (2,098) 87,614
-------------- --------- ---------- ----------- ------- ------- ------ -------- ---------- ------- ---------
Impairment
losses (1,375) - (630) (303) (17) (15) (113) - - (2,453)
Other income 65 - - 108 - - 12 2,141 - 2,326
Operating
expenses (25,879) (7,515) (378) (2,666) (3,333) (972) (7,011) (8,171) (5,154) (61,079)
-------------- --------- ---------- ----------- ------- ------- ------ -------- ---------- ------- ---------
Segment profit
/
(loss) before
tax 31,139 (1,936) (49) 660 4,024 (530) (2,484) 2,836 (7,252) 26,408
-------------- --------- ---------- ----------- ------- ------- ------ -------- ---------- ------- ---------
Income tax
(expense)
/ income - - - (159) (950) 133 (220) (3,925) (1,319) (6,440)
-------------- --------- ---------- ----------- ------- ------- ------ -------- ---------- ------- ---------
Segment profit
/
(loss) after
tax 31,139 (1,936) (49) 501 3,074 (397) (2,704) (1,089) (8,571) 19,968
-------------- --------- ---------- ----------- ------- ------- ------ -------- ---------- ------- ---------
Loans and
advances
to customers 1,447,375 - 134,991 156,748 241,071 12,376 42,336 - - 2,034,897
Assets
available
for lease - - - - - - 216,496 - - 216,496
Other assets - - - - - - - 1,526,231 (3,014) 1,523,217
-------------- --------- ---------- ----------- ------- ------- ------ -------- ---------- ------- ---------
Segment total
assets 1,447,375 - 134,991 156,748 241,071 12,376 258,832 1,526,231 (3,014) 3,774,610
-------------- --------- ---------- ----------- ------- ------- ------ -------- ---------- ------- ---------
Customer
deposits 3,254,761 - - - - - - - (871) 3,253,890
Other
liabilities - - - - - - - 277,663 3,116 280,779
-------------- --------- ---------- ----------- ------- ------- ------ -------- ---------- ------- ---------
Segment total
liabilities 3,254,761 - - - - - - 277,663 2,245 3,534,669
-------------- --------- ---------- ----------- ------- ------- ------ -------- ---------- ------- ---------
Other segment
items:
Capital
expenditure - - - (5) - - (97,066) (1,941) - (99,012)
Depreciation
and
amortisation - - - (1) - (296) (18,429) (3,230) - (21,956)
-------------- --------- ---------- ----------- ------- ------- ------ -------- ---------- ------- ---------
The "Group Centre" segment above includes the parent entity and all
intercompany eliminations.
All
Wealth Mortgage Other Group
Banking Management Portfolios RAF ACABL ASFL AAG Divisions Centre Total
Six months GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000 GBP000
ended 30
June 2022
-------------- --------- ---------- ---------- ------- ------- ------ -------- ---------- -------- ---------
Interest
revenue 29,635 - 3,250 4,086 5,818 463 253 5,583 2 49,090
Inter-segment
revenue - - - - - - - - (2) (2)
-------------- --------- ---------- ---------- ------- ------- ------ -------- ---------- -------- ---------
Interest
revenue from
external
customers 29,635 - 3,250 4,086 5,818 463 253 5,583 - 49,088
-------------- --------- ---------- ---------- ------- ------- ------ -------- ---------- -------- ---------
Fee and
commission
income 1,564 5,332 - 138 2,670 5 - 390 - 10,099
Revenue - - - - - - 48,851 - - 48,851
-------------- --------- ---------- ---------- ------- ------- ------ -------- ---------- -------- ---------
Revenue from
external
customers 31,199 5,332 3,250 4,224 8,488 468 49,104 5,973 - 108,038
-------------- --------- ---------- ---------- ------- ------- ------ -------- ---------- -------- ---------
Interest
expense (1,613) - (882) (1,547) (2,696) (170) (1,994) 3,746 (1,398) (6,554)
Cost of goods
sold - - - - - - (40,538) - - (40,538)
Add back
inter-segment
revenue - - - - - - - - 2 2
Fee and
commission
expense 14 - - - (73) - - - - (59)
-------------- --------- ---------- ---------- ------- ------- ------ -------- ---------- -------- ---------
Segment
operating
income 29,600 5,332 2,368 2,677 5,719 298 6,572 9,719 (1,396) 60,889
-------------- --------- ---------- ---------- ------- ------- ------ -------- ---------- -------- ---------
Impairment
losses (221) - (49) (465) (46) (117) (303) - - (1,201)
Other income - - - 69 - - (182) 723 - 610
Operating
expenses (22,804) (7,171) (481) (2,124) (2,790) (751) (7,155) (9,198) (4,449) (56,923)
-------------- --------- ---------- ---------- ------- ------- ------ -------- ---------- -------- ---------
Segment profit
/ (loss)
before tax 6,575 (1,839) 1,838 157 2,883 (570) (1,068) 1,244 (5,845) 3,375
-------------- --------- ---------- ---------- ------- ------- ------ -------- ---------- -------- ---------
Income tax
(expense)
/ income - - - - - - - 624 (1,329) (705)
-------------- --------- ---------- ---------- ------- ------- ------ -------- ---------- -------- ---------
Segment profit
/ (loss)
after tax 6,575 (1,839) 1,838 157 2,883 (570) (1,068) 1,868 (7,174) 2,670
-------------- --------- ---------- ---------- ------- ------- ------ -------- ---------- -------- ---------
Loans and
advances
to customers 1,459,182 - 166,168 102,612 238,843 9,590 13,473 11,500 (11,501) 1,989,867
Assets
available for
lease - - - - - - 115,133 - - 115,133
Other assets - - - - - - - 1,206,288 (1,472) 1,204,816
-------------- --------- ---------- ---------- ------- ------- ------ -------- ---------- -------- ---------
Segment total
assets 1,459,182 - 166,168 102,612 238,843 9,590 128,606 1,217,788 (12,973) 3,309,816
-------------- --------- ---------- ---------- ------- ------- ------ -------- ---------- -------- ---------
Customer
deposits 2,611,542 - - - - - - 207,735 (17,747) 2,801,530
Other
liabilities - - - - - - - 292,414 15,254 307,668
-------------- --------- ---------- ---------- ------- ------- ------ -------- ---------- -------- ---------
Segment total
liabilities 2,611,542 - - - - - - 500,149 (2,493) 3,109,198
-------------- --------- ---------- ---------- ------- ------- ------ -------- ---------- -------- ---------
Other segment
items:
Capital
expenditure - - - (5) - - (35,612) (205) - (35,822)
Depreciation
and
amortisation - - - (3) - (25) (15,015) (2,480) (8) (17,531)
-------------- --------- ---------- ---------- ------- ------- ------ -------- ---------- -------- ---------
Segment profit is shown prior to any intra-group
eliminations.
6. Underlying Profit
The Group has reported a profit before tax of GBP26.4m (2022 H1:
GBP3.4m). The underlying profit before tax was GBP29.3m (2022 H1:
profit of GBP10.7m). There are a number of specific one-off items
which are included in the results that should be noted. These are
detailed in the table below.
30 June 30 June
2023 2022
Underlying profit reconciliation GBP000 GBP000
-------------------------------------------------------------- ------- -------
Profit before tax and group recharges 26,408 3,375
Profits earned on sale of trucks included in bargain purchase 2,940 3,328
Write down of King Street property - 3,977
-------------------------------------------------------------- ------- -------
Underlying profit 29,348 10,680
-------------------------------------------------------------- ------- -------
During 2021 the Group acquired Asset Alliance Group Holdings
Limited, which completed on 1 April 2021. The business was acquired
at a discount to its fair valued net assets resulting in a bargain
purchase of GBP8.7m in the first half of 2021.
The forgone profit on the sale of trucks generated by Asset
Alliance was GBP2.9m in the period (30 June 2022: GBP3.3m), which
is required from the acquisition accounting in 2021. The fair value
adjustments to individual assets at acquisition are reversed
through profit or loss at the point of sale.
In 2022 the net realisable value of the property in King Street
was reduced by GBP4.0m, resulting from the agreement to sell
it.
7. Other income
Included in other income is GBP0.9m recognised on a
non-refundable deposit from a property owned by the Group and
GBP0.4m in relation to a negligent property valuation.
Other items reflected in other income include rental income from
the investment property of GBP0.2m (H1 2022: GBP0.7m).
8. Earnings per ordinary share
Basic
Basic earnings per ordinary share are calculated by dividing the
profit after tax attributable to equity holders of the Company by
the weighted average number of ordinary shares 15,431,170 (2022:
15,022,629) in issue during the period.
Diluted
Diluted earnings per ordinary share are calculated by dividing
the dilutive profit after tax attributable to equity holders of the
Company by the weighted average number of ordinary shares in issue
during the period, as well as the number of dilutive share options
in issue during the period. There were no dilutive share options in
issue at the end of June (2022: nil).
Six months Six months
ended ended
30 June 30 June
2023 2022
Profit attributable GBP000 GBP000
--------------------------------------------------------- ---------- ----------
Total profit after tax attributable to equity holders of
the Company 19,968 2,670
--------------------------------------------------------- ---------- ----------
Six months Six months
ended ended
30 June 30 June
2023 2022
Basic Earnings per share p p
--------------------------------------------------------- ---------- ----------
Total Basic Earnings per share 129.4 17.8
--------------------------------------------------------- ---------- ----------
9. Share capital and share premium
30 Jun
30 Jun 2023 2022
GBP000 GBP000
----------------------------------- ----------- --------
Share capital 167 154
Share premium 11,606 -
----------------------------------- ----------- --------
Share capital and share premium 11,773 154
------------------------------------ ----------- --------
Ordinary share capital
Number of Share
shares Capital
GBP000
----------------------------------- ----------- --------
At 1 January 2023 15,279,322 153
Issue of shares 1,297,297 13
------------------------------------ ----------- --------
At 30 June 2023 16,576,619 166
------------------------------------ ----------- --------
Ordinary non-voting share capital
Number of Share
shares Capital
GBP000
----------------------------------- ----------- --------
At 1 January 2023 152,621 1
At 30 June 2023 152,621 1
----------------------------------- ----------- --------
Total share capital
Number of Share
shares Capital
GBP000
----------------------------------- ----------- --------
At 1 January 2023 15,431,943 154
Issue of shares 1,297,297 13
------------------------------------ ----------- --------
At 30 June 2023 16,729,240 167
------------------------------------ ----------- --------
(a) Share issue costs
Incremental costs directly attributable to the issue of new
shares or options by the Company are shown in equity as a
deduction, net of tax, from the proceeds.
(b) Dividends on ordinary shares
Dividends on ordinary shares are recognised in equity in the
period in which they are approved.
(c) Share buybacks
Where any Group company purchases the Company's equity share
capital (treasury shares), the consideration paid, including any
directly attributable incremental costs (net of income taxes) is
deducted from equity attributable to the Company's equity holders
until the shares are cancelled or reissued.
The Ordinary shares have a par value of 1p per share (2022: 1p
per share). At 30 June 2023 the Company held 409,314 shares (2022:
409,314) in treasury. This includes 390,274 (2022: 390,274)
Ordinary shares and 19,040 (2022: 19,040) Ordinary Non-Voting
shares.
(d) Share premium
On 14 April 2023 the Group announced an oversubscribed
conditional placing of and subscription for new voting ordinary
shares in the Company at a price of 925 pence per share, raising
approximately GBP12.0 million (before expenses). The Resolutions
put to Shareholders at the General Meeting held at 4 May 2023 were
duly passed. The Group received share premium of GBP11.6 million as
a result of the share issuance.
10. Events after the balance sheet date
There were no material post balance sheet events to report.
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END
IR ZZGMNLNLGFZM
(END) Dow Jones Newswires
July 18, 2023 02:00 ET (06:00 GMT)
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