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Final Results

28 Mar 2019 07:00

RNS Number : 2487U
Arbuthnot Banking Group PLC
28 March 2019
 

28 March 2019

For immediate release

 

ARBUTHNOT BANKING GROUP ("Arbuthnot", "the Group" or "ABG")

Audited Final Results for the year to 31 December 2018

 

Diversification as new businesses commence

 

Arbuthnot Banking Group today announces an increase in profit before tax of 172%.

 

Arbuthnot Banking Group PLC is the holding company for Arbuthnot Latham & Co., Limited and has a 15.5% shareholding in Secure Trust Bank PLC.

 

FINANCIAL HIGHLIGHTS

· Profit Before Tax £6.8m (2017: £2.5m)

· Underlying profit before tax £7.4m (2017: £3.2m)

· Operating income increased by 24% to £67.9m (2017: £54.6m)

· Negative earnings per share 134.5p (2017: positive 43.9p)*

· Continuing earnings per share 38.0p (2017: 14.0p)

· Underlying earnings per share 40.3p (2017: 17.6p)

· Final dividend per share 20p (2017: 19p), an increase of 5%

· Total full year dividend per share 35p (2017: 33p)

· Bonus share issue to create new class of non-voting shares

· Net assets £196m (2017: £236m)

· Net assets per share 1283p (2017: 1547p)

· Underlying return on deployed equity 5.6% (2017: 4.2%)

 

OPERATIONAL HIGHLIGHTS

 

Arbuthnot Latham

· Profit before tax £14.6m (2017: £11m) an increase of 33%**

· Average net margin at 4.7% (2017: 4.5%)

· Customer loans increased 17% to £1,225m (2017: £1,049m)

· Written loan volume increased 1% to £469m (2017: £466m)

· Customer deposits increased 23% to £1,714m (2017: £1,391m)

· Assets under management decreased 6% to £985m (2017: £1,044m)

· Arbuthnot Asset Based Lending launched in May 2018 issuing facilities of £43m

· Arbuthnot Specialist Finance developed with first loan approved in 2019

· Arbuthnot Direct established to provide deposit products direct to the retail market

 

Secure Trust Bank - Investment

· Shareholding now at 15.5% (2017: 18.6%)

· De-recognised as an associated undertaking due to loss of significant influence

· Net loss following de-recognition £25.7m

 

Commenting on the results, Sir Henry Angest, Chairman and Chief Executive of Arbuthnot, said: "The Group has had another good year with further deployment of capital. Diversity of earnings increased with good progress being made by the Commercial Bank, along with the launch of our new ventures, Asset Based Lending, Arbuthnot Direct and Specialist Finance. These new businesses should give the Group a strong basis from which to develop in the future." 

 

Note: * Results include £25.7m net loss on derecognition of STB associate recorded in discontinued operations.

** Includes an adjustment to RAF earn out liability giving a one off profit of £2.6m.

 

 

ENQUIRIES:

 

 

 

 

 

Arbuthnot Banking Group

0207 012 2400

 

Sir Henry Angest, Chairman and Chief Executive

 

 

Andrew Salmon, Chief Operating Officer

 

 

James Cobb, Group Finance Director

 

 

 

 

 

Stifel Nicolaus Europe Ltd trading as KBW (Nomad and Joint Broker)

0207 710 7600

 

Robin Mann

 

 

Gareth Hunt

 

 

Stewart Wallace

 

 

 

 

 

Numis Securities Ltd (Joint Broker)

0207 260 1000

 

Stephen Westgate

 

 

 

 

 

Maitland (Financial PR)

0207 379 5151

 

Neil Bennett

 

 

Jais Mehaji

 

 

Sam Cartwright

 

 

 

The 2018 Annual Report and Notice of Meeting will be posted and available on the Arbuthnot Banking Group website http://www.arbuthnotgroup.com on or before 12 April 2019. Copies may be obtained from the Company Secretary, Arbuthnot Banking Group PLC, Arbuthnot House, 7 Wilson Street, London, EC2M 2SN.

 

Consolidated statement of comprehensive income

 

 

 

 

Year ended 31 December

 

 

 

2018

2017

 

Note

 

£000

£000

Interest income

8

 

65,290

47,427

Interest expense

 

 

(10,107)

(6,334)

Net interest income

 

 

55,183

41,093

Fee and commission income

9

 

12,956

13,805

Fee and commission expense

 

 

(234)

(282)

Net fee and commission income

 

 

12,722

13,523

Operating income

 

 

67,905

54,616

Net impairment loss on financial assets

10

 

(2,731)

(394)

Other income

11

 

6,588

3,033

Operating expenses

12

 

(64,982)

(54,721)

Profit before tax from continuing operations

 

 

6,780

2,534

Income tax expense

13

 

(1,121)

(448)

Profit after tax from continuing operations

 

 

5,659

2,086

Profit from discontinued operations after tax

14

 

(25,692)

4,437

(Loss) / profit for the year

 

 

(20,033)

6,523

Other comprehensive income

 

 

 

 

Items that are or may be reclassified to profit or loss

 

 

 

 

Available-for-sale reserve

 

 

 -

128

Available-for-sale reserve - Associate

 

 

 -

389

Tax on other comprehensive income

 

 

 -

(104)

 

 

 

 

 

Items that will not be reclassified to profit or loss

 

 

 

 

Changes in fair value of equity investments at fair value through other comprehensive income

 

(13,893)

 -

Tax on other comprehensive income

 

 

(26)

 -

Other comprehensive (loss) / income for the period, net of tax

 

 

(13,919)

413

Total comprehensive (loss) / income for the period

 

 

(33,952)

6,936

 

 

 

 

 

Profit attributable to:

 

 

 

 

Equity holders of the Company

 

 

(20,033)

6,523

(Loss) / profit for the year

 

 

(20,033)

6,523

 

 

 

 

 

Total comprehensive income attributable to:

 

 

 

 

Equity holders of the Company

 

 

(33,952)

6,936

Total comprehensive (loss) / income for the period

 

 

(33,952)

6,936

 

 

 

 

 

Earnings per share for profit attributable to the equity holders of the Company during the year

 

 

 

 

(expressed in pence per share):

 

 

 

 

Basic earnings per share - Continuing operations

16

 

38.0

14.0

Basic earnings per share - Discontinued operations

16

 

(172.5)

29.9

Basic earnings per share

16

 

(134.5)

43.9

 

 

 

 

 

Diluted earnings per share - Continuing operations

16

 

38.0

14.0

Diluted earnings per share - Discontinued operations

16

 

(172.5)

29.9

Diluted earnings per share

16

 

(134.5)

43.9

 

 

Consolidated statement of financial position

 

 

 

 

At 31 December

 

 

 

2018

2017

 

Note

 

£000

£000

ASSETS

 

 

 

 

Cash and balances at central banks

17

 

405,325

313,101

Loans and advances to banks

18

 

54,173

70,679

Debt securities at amortised cost / held-to-maturity

19

 

342,691

227,019

Assets classified as held for sale

20

 

8,002

2,915

Derivative financial instruments

21

 

1,846

2,551

Loans and advances to customers

22

 

1,224,656

1,049,269

Other assets

24

 

12,716

20,624

Financial investments

25

 

35,351

2,347

Deferred tax asset

26

 

1,490

1,527

Interests in associates

27

 

83,804

Intangible assets

28

 

16,538

15,995

Property, plant and equipment

30

 

5,304

3,962

Investment property

31

 

67,081

59,439

Total assets

 

 

2,175,173

1,853,232

EQUITY AND LIABILITIES

 

 

 

 

Equity attributable to owners of the parent

 

 

 

 

Share capital

37

 

153

153

Retained earnings

38

 

209,083

237,171

Other reserves

38

 

(13,280)

(949)

Total equity

 

 

195,956

236,375

LIABILITIES

 

 

 

 

Deposits from banks

32

 

232,675

195,097

Derivative financial instruments

21

 

188

931

Deposits from customers

33

 

1,714,286

1,390,781

Current tax liability

 

 

236

705

Other liabilities

34

 

18,549

16,239

Debt securities in issue

35

 

13,283

13,104

Total liabilities

 

 

1,979,217

1,616,857

Total equity and liabilities

 

 

2,175,173

1,853,232

 

 

Chairman's statement

 

I am pleased to report that Arbuthnot Banking Group ("ABG" or "the Group") has achieved a profit before tax for 2018 of £6.8m (2017: £2.5m). It reflects our continued deployment of capital and investment in our principal banking subsidiary, Arbuthnot Latham and Co., Limited ("AL" or the "Bank"). To that end, to allow us to focus solely on managing this investment, Andrew Salmon and I resigned from the Board of Secure Trust Bank PLC in August 2018. While this was the right decision for the Group, it did result in us falling foul of the accounting rules once again. The fact that we no longer had significant influence in our associated company, meant we were required to classify our shareholding as a financial investment and recognise the resultant mark to market loss. This we have shown as discontinued operations. I always felt it was inappropriate that we were required to recognise this unrealised gain in 2016 and now feel justified as we write off a previous profit that we never should have been required to take.

 

As I reflect on the progress that the Group has made, I am encouraged that our strategy of diversification is gathering momentum. It must be noted that two significant market events took place in 2018. Firstly, the large systemic UK banks concluded their ring fencing process and secondly, the final requirement of the phasing in of the capital buffers was completed. Thus, almost ten years since the worst of the financial crisis, the largest banks are able to focus on growth strategies rather than internal projects or capital raising. It is not clear how they will build out their business, but already we have seen an increase in liquidity in the mortgage sector, as the ring fenced banks work to deploy this "trapped funding". However, we remain steadfast in our philosophy of not chasing lending volumes by lowering our returns or taking excessive credit risk.

 

I am confident that clients will still want to receive a personalised service and specialist banks will therefore continue to play a significant role in providing bespoke funding, services and advice to a market that can't be mass processed through automated credit models and algorithms. What is clear to me, is that not relying on generating income from a single market sector, will be important. This is why we have focused on diversifying our revenue streams and invested in developing new businesses.

 

Accordingly, I am pleased to see the progress that our new ventures have made in 2018. Renaissance Asset Finance ("RAF") has grown its lending balances by 21%. Arbuthnot Asset Based Lending ("ABL") commenced trading in May 2018 ahead of plan and has already issued facilities to the value of £43m and has drawn balances of £25m. This business has also carried its momentum into the new year. In January ABL issued a further £29m of facilities, being an increase of more than 50% on the December balance.

 

The Specialist Finance team joined us in August 2018 and began setting up the infrastructure and operations required to commence trading. This is largely completed now and they have begun a soft launch. Their first loan received Credit Committee approval in February 2019.

 

Given our philosophy of caution when it comes to funding our lending, I have taken a keen interest in the development of our new Arbuthnot Direct deposit platform. This enables us to provide deposit products directly to the retail market via our newly created internet platform, with rates advertised on the best buy tables. Although we do not need to raise deposits via this channel, it is good to have it available, should an attractive opportunity arise, and it is helpful in raising funds of longer duration.

 

Finally, I am satisfied with the progress that our core business has made. The Private Bank has struggled to maintain its momentum, but I hope by refocussing its strategies to concentrate on sourcing and nurturing new relationships with criteria clients, this should bring good future growth. The Commercial Bank has continued to build out both sides of the balance sheet, increasing its loan balances by 46%, while at the same time remaining self-funding, increasing deposits by £258m.

 

RBS Remedies Application

As we have previously announced, the Commercial Bank plans to take part in the RBS remedies process. We have already been selected as one of 11 banks accepted into the Incentivised Switching Scheme ("ISS"), where RBS customers are incentivised to join another bank. Additionally, AL will be submitting its application for a grant from the Capabilities and Innovation Fund. We are confident that as a well-established bank with a 186 year history of serving our clients, with high quality products and a tailored relationship-led service, we are a strong candidate for the grant we are seeking.

 

We have a proven track record of building successful businesses which meet customer needs in the sectors in which they operate. Our Commercial Bank launched in 2016 and already has customer loan balances of £443m at the year end. Success with our application for a grant from the Capability and Innovation Fund would enable us to bring our differentiated, private banking style relationship banking offer to a wider range of sectors than we are currently able to service, and to offer a more complete banking service to our clients across the country.

 

We are also delighted to be working closely with Oracle as part of the application process, as we recognise that to service our clients to the highest standards, complementary digital solutions are a prerequisite if we are to provide real competition to this under-served market. We have forged a strong and efficient working partnership with Oracle, who are the providers of our core banking technology. They have been helpful in identifying innovations in the global Commercial Banking industry and plan to deliver them to the UK Market via our bid.

 

If we are successful in this bid process, we will bring forward our plans for further developing our Commercial Banking platform, with the grant money accelerating our transformation of the Bank.

 

Non-voting Shares

In 2016 we asked shareholders to approve, at the AGM, a number of resolutions to enable us to start the process of creating and issuing a new class of shares in Arbuthnot Banking Group. These new shares will rank pari passu with the existing ordinary shares in every way, including their right to receive the same dividends as ordinary shares, except they will not have the right to vote in shareholder meetings. As a Board and Company we believe that the current control structure, has enabled the business to take long term investment decisions and sometimes develop contrarian strategies, like ceasing to lend in the height of the financial boom of the mid 2000s. This strategy paid off when we were able to take full advantage of the opportunities that came our way following the financial crisis, in particular, being able to buy Everyday Loans for £1 in 2012 and then selling it for a profit of £117m in 2016.

 

These new non-voting shares will enable us to maintain the control structure, but will provide us with the means to raise further capital, to continue to develop the business and to fund suitable inorganic deals should the opportunities arise. Thus, I am delighted to announce that we will establish these new shares following the AGM in May. To allow all of our shareholders to benefit from the new class of shares, we intend to offer them to existing shareholders by way of a bonus share issue of one new non-voting share for every 100 ordinary shares held.

 

Since this ia an exploratory exercise, your Board is keen to keep central expenses to a minimum and therefore these new shares will be listed on the NEX Growth Market following the issue and at the same time the ordinary shares will be dual listed on the NEX exchange and also AIM. The NEX Exchange is a fully regulated Recognised Investment Exchnage for shares in growth companies and its costs are significantly lower than either the main market of the London Stock Exchange or AIM. Further details are set out in the circular to shareholders enclosed with the Annual Report.

 

Board Changes and Personnel

Ian Henderson departed from the Board on 31 August and I would like to thank him for the valuable contributions he has made to AL. Jeremy Kaye our Company Secretary, decided to retire after having given 46 years of dedicated service to Arbuthnot. He was succeeded by Nick Jennings. We will miss his attention to detail that only a classical education can develop. I wish him well for a long and happy retirement. Furthermore on 8 August Paul Lynam left the Board. I thank him for the significant contribution he made in developing both Secure Trust Bank and Arbuthnot Banking Group.

 

Most importantly, I should mention that as part of our continued integration of the Group and the Bank, I was pleased to be able to appoint Andrew Salmon as CEO of Arbuthnot Latham in June 2018. Andrew has worked with me in various capacities for over 20 years. He will retain his Group responsibilities. He is supported by two deputies, James Cobb, our Group Finance Director and Stephen Fletcher, previously the Head of our Commercial Bank.

 

Finally, the performance of the Group also reflects the hard work and commitment of all the members of staff. On behalf of the Board I extend our thanks to all of them for their dedicated efforts in 2018.

 

Dividend

The Board is proposing a final dividend of 20p, an increase of 1p on last year. Together with the interim dividend of 15p it gives a total dividend of 35p (2017: 33p), which represents an increase of 2p on the ordinary dividend.

 

If approved, the dividend will be paid and the bonus share issue will be made on 17 May 2019 to shareholders on the register at close of business on 26 April 2019.

 

Outlook

The macro economic outlook has grown increasingly uncertain. Major economies have seen industrial output slow, with Germany narrowly avoiding a technical recession. At the same time trade conflicts may develop further and the impact of Brexit has yet to be reflected fully in the UK economy.

 

However, given our cautious approach to banking, I feel confident that our balance sheet should withstand any likely downturn in the economy. I am also optimistic that our new ventures can continue to make good progress and establish themselves as significant contributors to the future success of Arbuthnot Banking Group PLC.

 

Looking further ahead, the UK economy might surprise us. It has proved to be very resilient, despite all the doom and gloom, and with a strong government introducing the right economic policies to promote business, Brexit could well deliver a bright future.

 

 

Strategic Report

 

 

 

 

 

Business Review

 

 

 

Arbuthnot Latham & Co., Ltd

 

 

 

2018

2017

Operating income

£68.4m

£54.9m

Other income

£6.8m

£3.9m

Operating expenses

£57.8m

£47.4m

Profit before tax (before Group recharges)

£14.6m

£11.0m

Customer loans

£1,224.7m

£1,049.3m

Customer deposits

£1,714.3m

£1,390.8m

Total assets

£2,172.5m

£1,783.7m

Assets under management

£985.1m

£1,044.3m

Average net margin

4.7%

4.5%

Loan to deposit ratio

71.4%

75.4%

 

Arbuthnot Latham & Co., Limited has reported a profit before tax of £14.6m (2017: £11m), which is an increase of 33%. However, the underlying profit increased by 25%, when the impact of the one off adjustment to the management earn out liability for Renaissance Asset Finance and the investment made in our new business ventures are excluded.

 

At the time when the acquisition of RAF was completed, the future liability for the management earn out was estimated to be the maximum permitted under the sale and purchase agreement. This liability has now been reassessed and £2.6m taken back to profit. However, RAF continues to perform well and has increased its customer loan balances by 21% in 2018, even though this is below the level the management team had anticipated at the time of agreeing the earn out contract.

 

Overall the Bank's leading indicators, namely customer balances, showed good growth during the year. Customer loan balances increased by 17% and deposits grew by 23%. Assets under management declined by 6%, largely as a result of the market volatility experienced in the final quarter of the year, as the global markets declined by in excess of 10%.

 

The other important item in the profit of the Bank is the investment made in the new business ventures. This totalled £1.6m in the year and mainly represents the set up costs incurred by ABL and the Arbuthnot Specialist Finance ("ASF") business. The ABL team commenced in January 2018 and made good progress in establishing its operational processes. As a result of this and also of growing customer demand, the business was able to start writing business in May, two months earlier than planned. At the end of the year the business had issued customer facilities of £43m and had drawn balances of £25m. This business will continue to be a drag on earnings of the bank in 2019, but is expected to break even toward the end of 2019.

 

ASF was established in August 2018 and has grown to be a team of seven. This team has now also set up its operating systems and has entered a soft launch in 2019, with its first customer loan being approved by Credit Committee in February 2019. It will remain in build out phase during 2019 and expects to break even in 2020.

 

Credit losses in the year increased to £2.7m (2017: £0.4m), which equates to 22 basis points of the year end customer loan balances. This loss rate remains within our accepted range. However, the increase in reported losses is due to several underlying factors. Firstly, the increased size of the loan book will lead to increased credit losses, even if the loss rate remains constant. Secondly, the introduction of IFRS9 has played a significant role in the higher impairments. The standard requires losses to be attributed to loans at the time of origination as a 12 month Expected Credit Loss ("ECL") in stage one, so a growing front book requires higher provision balances. Also, the definition of when loans are considered to be in default is clearly identified, where previously some element of judgement was exercised. It is therefore expected that, in some of the stage three lending cases where provisions have been required, we will recover a large proportion of the amount outstanding.

 

Private Banking (including Dubai)

The Private Bank customer loan balances reduced by 1% as the competitive forces within the prime lending market increased during the year. It is clear that the ring fenced banks have been active in the mortgage markets as lending metrics have taken on an all too familiar picture, namely, lowering margins and increasing loan to value ratios. As a result, the Private Bank has refused to be drawn into this competition. Instead, we prefer to extend loans that we believe meet our return criteria, with volumes of loans being the resultant output rather than an input requirement. This can be seen from the loan origination volumes of the Private Bank which fell by 9% during 2018.

 

Throughout 2018 customer deposits in the Private Bank increased by 9% to close the year at £1,041m (2017: £955m). The Investment Management business started the year with funds under management of £1,044m and closed at £985m. The significant movements in this business saw £90m of gross inflows of new money, which was largely offset by transfers out. The market turbulence of the final quarter saw the funds being marked down by £79m, offsetting the gains made in the early part of the year to leave the net performance a fall of £25m.

 

During the year the management structure in the Private Bank was reorganised. Given the competition in the lending markets the Private Bank has been realigned to focus on growing the Wealth Management sector of the Bank. This will re-emphasise the need to identify and establish banking relationships with criteria clients. Over time, this should increase the flow of customer balances into deposits, investment management and also provide wealth planning opportunities.

 

Commercial Bank

The Commercial Bank continued to trade well during the year. Customer loan balances increased by £140m to close the year at £445m, a growth rate of 46%. Additionally, the Commercial Bank remained self-funding and was able to increase its customer deposits by £258m, an increase of 84%, to reach a yearend balance of £567m. However, as noted in the 2017 Annual Report and Accounts, the Commercial Bank has targeted a higher return on its lending performance and has therefore accepted a lower flow of business, which resulted in lower volumes of business being completed. Lending volumes fell by 12% to £190m as compared to 2017, which generated volumes of £217m.

 

The Commercial Bank has continued to develop its transactional proposition and to that effect has been accepted into the RBS remedies Incentivised Switching Scheme and will be submitting a bid to the Capabilities and Innovation fund for a mid-tier grant. If successful, the Commercial Bank will continue to develop its SME offering while maintaining a personalised service. This along with technology powered by our partner Oracle, should prove to be successful in the SME banking market.

 

Renaissance Asset Finance

RAF continued to perform well during the year. Customer balances increased by 21% to close the year at £86m and written volumes saw growth of 59% to reach £56m.

 

The salesforce of the business was reinforced during the year and spent time re-engaging in some of the specialist broker markets. In particular the business wrote deals to finance drainage tankers; these are larger and long term finance deals which should help to extend the term duration of the lending book.

 

The business also had some success in cross selling its products to the Private Bank network. In particular, the higher value and vintage car finance has proved popular.

 

New Ventures

During the year the Bank began developing four new lines of business.

 

Firstly, we launched the Asset Based Lending Business which provides finance secured on either invoices, assets or stock of the borrower. This business is performing ahead of expectations with issued facilities of £43m at the year end and drawn loan balances of £25m. The investment made in this business totalled £0.9m net of revenues earned in the year.

 

Secondly, the Specialist Finance business, which provides short term secured lending solutions to professional and entrepreneurial property investors commenced in August 2018, and after having set up the business platform has now entered a soft launch phase. The business cost £0.3m during 2018.

 

Thirdly, the Arbuthnot Direct deposits platform was developed during the year at a cost of £0.2m. This business will enable us to provide deposit products directly to the retail market via a newly created internet platform, with rates advertised on the best buy tables.

 

Finally, the Arbuthnot Real Estate Fund which was established in 2017, continued its exploratory work of identifying the sector of the investment market that will be the most suitable to receive the marketing of the funds products. Progress has been slow and a decision on the future viability of this fund will be concluded in the first half of 2019. Regardless of the outcome of this review, the ongoing cost of the fund was neutral in 2018.

 

Strategic Report - Financial Review

 

Arbuthnot Banking Group adopts a pragmatic approach to risk taking and seeks to maximise long term revenues and returns. Given its relative size, it is nimble and able to remain entrepreneurial and capable to taking advantage of favourable market opportunities when they arise.

 

The Group provides a range of financial services to clients and customers in its chosen markets of Private and Commercial Banking and Specialist Lending. The Group's revenues are derived from a combination of net interest income from lending, deposit taking and treasury activities, fees for services provided and commission earned on the sale of financial instruments and products. The Group also earns rental income on its investment property and receive dividends from financial investments.

 

Highlights

 

 

 

2018

2017

Summarised Income Statement

£000

£000

Net interest income

55,183

41,093

Net fee and commission income

12,722

13,523

Operating income

67,905

54,616

Other income

6,588

3,033

Operating expenses

(64,982)

(54,721)

Impairment losses - loans and advances to customers

(2,731)

(394)

Profit before tax from continuing operations

6,780

2,534

Income tax expense

(1,121)

(448)

Profit after tax from continuing operations

5,659

2,086

Profit from discontinued operations after tax

(25,692)

4,437

Profit for the year

(20,033)

6,523

 

 

 

Basic earnings per share (pence) - Continuing operations

38.0

14.0

Basic earnings per share (pence) - Discontinuing operations

(172.5)

29.9

Basic earnings per share (pence)

(134.5)

43.9

 

Underlying profit reconciliation

Arbuthnot Latham & Co.

Group Centre

Arbuthnot Banking Group

31 December 2018

£000

£000

£000

Profit before tax from continuing operations

14,574

(7,794)

6,780

AL cost of establishing new ventures

1,579

 -

1,579

STB dividend income full year at current shareholding

1,000

641

1,641

RAF deferred consideration adjustment

(2,584)

 -

(2,584)

Underlying profit

14,569

(7,153)

7,416

 

 

 

 

Underlying basic earnings per share (pence) - Continuing operations

 

 

40.3

Underlying basic earnings per share (pence)

 

 

(132.3)

 

Underlying profit reconciliation

Arbuthnot Latham & Co.

Group Centre

Arbuthnot Banking Group

31 December 2017

£000

£000

£000

Profit before tax from continuing operations

10,959

(8,425)

2,534

AL investment in operating systems

78

 -

78

AL acquisition costs

108

 -

108

RAF - full year equivalent income*

466

 -

466

Underlying profit

11,611

(8,425)

3,186

 

 

 

 

Underlying basic earnings per share (pence) - Continuing operations

 

 

17.6

Underlying basic earnings per share (pence)

 

 

47.5

* - RAF profit contribution adjustment as if received from 1 January 2017 and not as currently included from 28 April 2017 (pro forma basis).

 

The Group has reported a profit before tax on continuing operations of £6.8m (2017: £2.5m). This is an increase on the prior year of 172%. The underlying profit before tax was £7.4m (2017: £3.2m), an increase of 131%.

 

This reflects the progress being made in the core banking business as the surplus capital held by the Group continues to be deployed. However, once again the reported results contain certain one off items that need explanation.

 

Firstly, the results contain an adjustment to the predicted future liability for the amount payable to the RAF management team. At the time of the acquisition, we anticipated that the business performance of RAF would be such that the maximum amount payable of £6.5m would be achieved in the earn out period which ends in 2020. While the business continues to perform robustly, increasing its customer loan balances by 21% in the year, this will not be sufficient to attain the levels forecast in the earn out agreement. Accordingly, the liability has been reduced by £2.6m and the corresponding amount recorded as a one off profit in the Income Statement.

 

Secondly, during the year Sir Henry Angest and Andrew Salmon resigned their positions on the board of Secure Trust Bank PLC ("STB") and the Group has no right to appoint any directors to the STB board in the future. As a result of this the Group was deemed to no longer have significant influence over the associated company and thus the shareholding is now recognised as a financial investment. This required the investment to be marked to market. Given the decline in the share price of STB over the previous years, this assessment resulted in a mark to market loss of £28.7m. The loss was reflected as a discontinued activity, partly offset by the year to date income earned from the associate.

 

Given this accounting requirement, the dividend paid on this investment in the first half of the year, prior to the change in treatment, was not recorded in the profit and loss account, but will be going forward.

 

Finally, the Group continued its policy of diversification and further developed new businesses that have now started trading. The investment in Asset Based Lending, Specialist Finance and Arbuthnot Direct lowered the reported profits by £1.6m as the start-up costs of new staff and operating systems was absorbed by the profit of the Group. These businesses should move toward a breakeven point in 2019 or early 2020 and then reach profitability in 2021.

 

The Group has negative total Basic Earnings per share ("EPS") of 134.5p (2017: positive 43.9p), including the mark to market loss arising on the de-recognition of the associated company. Adjusting for this, the continuing EPS is 38.0p (2017: 14.0p), an increase of 171% or on an underlying basis the continuing EPS is 40.3p (2017: 17.6p), an increase of 129%.

 

Total operating income earned by the Group increased by 26%, largely due to the increased levels of customer loan balances as the capital deployment continued. The net margin of this lending was 4.7% (2017: 4.5%) as declines in the core bank margins 4.1% (2017: 4.4%) were offset by the higher margins earned by the new lending businesses, which has become proportionally more significant to the overall results. Fees and commissions declined due to the lower levels of Assets Under Management resulting from the global market volatility, particularly in the second half of 2018. Also wealth planning advisory fees were lower as the wealth management proposition was realigned.

 

The Group's expense base increased by 20% as the cost of the new businesses were absorbed along with natural inflationary increases and further growth in the core banking proposition. The net increase in growth of income and expenses resulted in positive operating leverage or "Jaws" of 6%.

 

Impairment losses increased to £2.7m (2017: £0.4m), with the previous loss rate of 4 basis points increasing to 22 basis points. The increase in the loss rate was largely as a result of the introduction of the IFRS9 accounting standard during the year. This has three changes, which will affect the results on an ongoing basis.

 

Firstly, the growth of the front book (Stage 1) requires provisions to be made on newly originated loans regardless of their performance, hence a growing loan book will require higher provisions.

 

Secondly, the standard requires future economic scenarios to be modelled and the result of these "stress tests" need to be factored into the resultant provisions.

 

Finally, the old accounting rules allowed for loans to be deemed "non accrual" whereby interest ceased to be accounted for on underperforming loans. Now we are required to gross up the accounting by continuing to record interest on these loans and at the same time increasing the offsetting provisions. This will result in higher impairment losses but no overall change to net income.

 

Overall the return on equity on a continuing basis for the Group was 3.0% (2017: 1.1%), which continues to be distorted by the surplus capital. This return when calculated on the capital required is 5.6 (2017: 4.2%).

 

This remains below target levels as the Group continues to develop operational scale. However, given the final increase in the capital conservation buffer on 1 January 2019, the total capital requirements (including the countercyclical buffer) now stand at levels 44% higher than 3 years ago. Thus, the ROE percentage target is now accordingly lower in the mid-teen range.

 

Balance Sheet Strength

 

 

 

2018

2017

Summarised Balance Sheet

£000

£000

Assets

 

 

Loans and advances to customers

1,224,656

1,049,269

Liquid assets

802,189

610,799

Other assets

148,328

193,164

Total assets

2,175,173

1,853,232

 

 

 

Liabilities

 

 

Customer deposits

1,714,286

1,390,781

Other liabilities

264,931

226,076

Total liabilities

1,979,217

1,616,857

Equity

195,956

236,375

Total equity and liabilities

2,175,173

1,853,232

 

During the year total assets increased to £2.2bn (2017: £1.9bn), which was as a result of our ongoing growth of customer loan balances, while at the same time maintaining our conservative funding policy of relying only on retail deposits and targeting a loan to deposit ratio of between 65-75%. Included in other assets are the Groups investment properties which total £67m and are held at fair value. The most significant of these properties is 20 King Street which is valued at £53.3m. The valuation methodology is based on a discounted cash flow model, with the most important inputs being expected rentals for prime west end office space and yield values for similar properties. These inputs were reviewed and verified by leading surveyors. The methodology has used 4% as the yield, which is in the range of observed yields of 3.75% to 4.15%. The yield gave the property value of £53.9m which was in fact £0.6m higher than the previous fair value of £53.3m. Given the subjective nature of the model, we have taken the conservative view that the valuation should remain unchanged. Further analysis of the methodologies and sensitivities that the inputs may have on the valuation can be found in Note 4 of the Report and Accounts.

 

Thus net assets of the Group now stand at £12.83 per share (2017: £15.47). The decrease is attributable to the accounting adjustments made to derecognise the associated company during the year.

 

Segmental Analysis

The segmental analysis is shown in more detail in Note 44. The Group is organised into six operating segments as disclosed below:

 

1) Private Banking - Provides traditional private banking services as well as offering financial planning and investment

management services. This segment includes Dubai and the Tay mortgage portfolio.

2) Commercial Banking - Provides bespoke commercial banking services and tailored secured lending against property

investments and other assets.

3) RAF - Specialist asset finance lender mainly in high value cars but also business assets.

4) All Other Divisions - All other smaller divisions and central costs in Arbuthnot Latham & Co., Ltd (Arbuthnot Commercial

Asset-Based Lending, Arbuthnot Direct, Arbuthnot Specialist Finance, Investment properties and Central unallocated items)

5) Group Centre - ABG Group Centre management.

 

The analysis presented below, and in the business review, is before any consolidation adjustments to reverse the impact of the intergroup operating activities and also intergroup recharges and is a fair reflection of the way the Directors manage the Group.

 

 

Private Banking

 

 

 

2018

2017

Summarised Income Statement

£000

£000

Net interest income

33,763

31,528

Net fee and commission income

11,494

12,977

Operating income

45,257

44,505

Other income

2

 -

Operating expenses - direct costs

(15,601)

(14,420)

Operating expenses - indirect costs

(21,891)

(21,848)

Impairment losses - loans and advances to customers

(1,966)

(308)

Profit before tax

5,801

7,929

 

Private Banking reported a profit before tax of £5.8m (2017: £7.9m). This is a decrease of £2.1m or 27%. This decrease is largely attributable to increased credit provisions, which rose by £1.7m, partially due to the introduction of IFRS 9.

 

Operating Income increased by 2% as increased competition in the prime loan markets caused margin compression. Also, volatility in the global markets resulted in reduced fee income from the wealth management division. Direct costs rose by nearly 10%, while allocated indirect costs were largely unchanged. The average customer yield was 4.9% (2017: 5.2%).

 

The customer loan balances of the Private Bank reduced by £7m or 1% during the year, as the competitive forces in the markets left the bank unwilling to give up returns on lending and thus not chase loan volumes at any price.

 

The deposits increased to £1,041m (2017: £955m). The average loan to value of the private banking loans was 52% (2017: 53%).

 

Commercial Banking

 

 

 

2018

2017

Summarised Income Statement

£000

£000

Net interest income

16,384

6,720

Net fee and commission income

914

471

Operating income

17,298

7,191

Operating expenses - direct costs

(5,636)

(4,584)

Operating expenses - indirect costs

(8,898)

(4,670)

Impairment losses - loans and advances to customers

(278)

 -

Profit / (loss) before tax

2,486

(2,063)

 

The Commercial Bank generated a profit before tax of £2.5m (2017: loss of £2.1m), an increase of £4.5m. This is due to the increase in operating income as the business benefited from a full year of income from loans that were mainly generated in the second half of 2017.

 

The increase in income was partially offset by a higher level of allocated or indirect costs. This is a result of the increased significance of the business, but also a higher level of central costs to oversee and control the division. The average customer loan yield was 4.0% (2017: 3.2%).

 

The customer loan book closed at £445m (2017: £305m), an increase of 46% with deposits increasing by 84% to £567m.

 

The average loan to value of the Commercial Bank loan portfolio was 50% (2017: 63%).

 

RAF

 

 

 

2018

2017

Summarised Income Statement

£000

£000

Net interest income

5,344

3,154

Net fee and commission income

137

75

Operating income

5,481

3,229

Other income

73

 -

Operating expenses - direct costs

(3,169)

(1,690)

Impairment losses - loans and advances

(437)

(86)

Profit before tax

1,948

1,453

Renaissance Asset Finance recorded a profit before tax of £1.9m (2017: £1.5m). This represents an increase of £0.5m or 34%.

 

The purchase of RAF was completed on 28 April 2017. The 2018 results therefore include a full year for both operating income and direct costs. The annualised 2017 numbers result in the comparatives being in line. An increase in customer loans were offset by a fall in customer yields, which on average for 2018 were 9.6% compared to 9.9% in 2017.

 

The customer loan balances increased by 21% to close the year at £86m (£71m).

 

Other Divisions

 

 

 

2018

2017

Summarised Income Statement

£000

£000

Net interest income

163

 -

Net fee and commission income

177

 -

Operating income

340

 -

Other income

6,683

3,870

Operating expenses - direct costs

(2,634)

(230)

Impairment losses - loans and advances to customers

(50)

 -

Profit before tax

4,339

3,640

 

The aggregated profit before tax of other divisions was £4.3m (2017: £3.6m).

 

Reported within the other divisions were Investment Properties £1.8m (2017: £1.9m), New Ventures cost of £1.6m (2017: £nil) and central items, which this year contains the £2.6m adjustment to the RAF management earn out liability and rental income earned on space in our Wilson Street offices.

 

Group Centre

 

 

 

2018

2017

Summarised Income Statement

£000

£000

Net interest income

(105)

51

Subordinated loan stock interest

(366)

(360)

Operating income

(471)

(309)

Other income

760

160

Operating expenses

(8,083)

(8,276)

Profit after tax

(7,794)

(8,425)

 

The Group costs reduced to £7.8m (2017: £8.4m) mainly due to £0.7m receipt of the interim dividend paid by STB in September.

 

IFRS 9

The provisions of IFRS 9 - Financial Instruments have been applied by the Group for the year ended 31 December 2018.

 

As a result of the implementation of IFRS 9, accounting for credit losses has fundamentally changed, moving from an "incurred" to an "expected" basis. This has required the development of credit loss models, which are used to estimate credit impairments by taking into account the composition of individual loan portfolios and the macro economic outlook at each reporting date. Also, the future economic environment has been "stressed" in varying scenarios to ensure the provisions are appropriate.

 

The introduction of IFRS 9 has resulted in an initial increase in impairment provisions and may increase volatility in the Group's Income Statement in the future (see Note 2(f)).

 

Under new capital regulations, the impact of IFRS 9 on regulatory capital is being phased in over a period of five years. The Group has a strong capital position and the fully loaded impact of IFRS 9 is not considered significant.

 

Capital

The Group's capital management policy is focused on optimising shareholder value over the long term. There is a clear focus on delivering organic growth and ensuring capital resources are sufficient to support planned levels of growth. The Board regularly reviews the capital position.

 

The Group's lead regulator, the Prudential Regulation Authority ("PRA"), sets and monitors capital requirements for the Group as a whole and for the individual banking operations. The lead regulator adopted the Basel III capital requirements with effect from 1 January 2014. As a result, the Group's regulatory capital requirements have been based on Basel III since 2014.

 

In accordance with the EU's Capital Requirements Directive ("CRD") and the required parameters set out in the PRA Handbook, the Individual Capital Adequacy Assessment Process ("ICAAP") is embedded in the risk management framework of the Group and is subject to ongoing updates and revisions when necessary. However, as a minimum, the ICAAP is updated annually as part of the business planning process. The ICAAP is a process that brings together the management framework (i.e. the policies, procedures, strategies, and systems that the Group has implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital management. The Group's regulated entity is also the principal trading subsidiary as detailed in Note 43.

 

Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a "Pillar I plus" approach to determine the level of capital the Group needs to hold. This method takes the Pillar I capital formula calculations (standardised approach for credit, market and operational risk) as a starting point, and then considers whether each of the calculations deliver a sufficient capital sum adequate to cover management's anticipated risks. Where the Board considers that the Pillar I capital does not reflect the risk, an additional capital add-on in Pillar II is applied, as per the Individual Capital Guidance ("ICG") issued by the PRA.

 

The Group's regulatory capital is divided into two tiers:

• Tier 1 comprises mainly shareholders' funds and revaluation reserves, after deducting goodwill, other intangible assets and a

significant investment in a financial institution (STB). The portion of the investment representing up to 10% of ABG's Tier 1 is added back to capital resources and then risk weighted at 250%, while anything above this 10% is deducted.

• Lower Tier 2 comprises qualifying subordinated loan capital. Lower Tier 2 capital cannot exceed 50% of Tier 1 capital.

 

The ICAAP includes a summary of the capital required to mitigate the identified risks from the Group's regulated activities and the amount of capital that the Group has available. All regulated trading entities have complied with all of the externally imposed capital requirements to which they are subject.

 

 

2018

2017

Capital ratios

£000

£000

Core Tier 1 capital

197,942

236,375

Deductions

(32,658)

(77,761)

Tier 1 capital after deductions

165,284

158,614

Tier 2 capital

13,283

13,104

Total capital

178,567

171,718

 

 

 

Core Tier 1 capital ratio (Net Core Tier 1 capital/Basel III Total Risk Exposure)

15.9%

17.3%

Total Capital Ratio (Capital/Basel III Total Risk Exposure)

17.2%

18.8%

 

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 6.

 

The principal risks inherent in the Group's business are strategic, credit, market, liquidity, operational, cyber, conduct, regulatory and macroeconomic.

 

Strategic risk

Strategic risk is the risk that may affect the Group's ability to achieve its corporate and strategic objectives. This risk is 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 Board of Directors meets once a year to hold a two day board meeting to ensure that the Group's strategy is appropriate for the market and economy.

 

Credit risk

Credit risk is the risk that a counterparty will be unable to pay amounts in full when due. This risk exists in Arbuthnot Latham, which currently has a loan book of £1,225m. The lending portfolio in AL is extended to clients, the majority of which is secured against cash, property or other assets. Credit risk is managed through the Credit Committee of AL.

 

Market risk

Market risk arises in relation to movements in interest rates, currencies 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 interest rate rises.

 

The Group is exposed to changes in the market value of properties. The current carrying value of Investment Property is £67.1m. Any changes in the market value of the property will be accounted for in the Income Statement and as a result could have a significant impact on the profit or loss of the Group.

 

The Group has a 15.5% interest in STB. This is currently recorded in the Group's balance sheet as a Financial Investment. The carrying value is adjusted to market value at each balance sheet date, according to the share price of STB. Any gains or losses that arise are recorded in Other Comprehensive Income.

 

Liquidity risk

Liquidity risk is the risk that the Group cannot meet its obligations as they fall due. 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 Group. The loan to deposit ratio is maintained at a prudent level, and consequently the Group maintains a high level of liquidity. The AL Board annually approves the Individual 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 is exposed to operational risks from its Information Technology 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.

 

Cyber risk

Cyber risk is an increasing risk that the Group is subject to within its operational processes. This 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 test 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 customers' complaints effectively, not meeting customers' expectations, and exhibiting behaviours which do not meet market or regulatory standards.

 

The Group adopts a zero risk appetite for any unfair customer outcomes. It maintains clear compliance guidelines and provides ongoing training to all staff. Periodic spot checks and internal audits are performed to ensure these guidelines are being followed. The Group also has insurance policies in place to provide some cover for any claims that may arise.

 

Regulatory risk

Regulatory risk is the risk that the Group will have insufficient capital resources to support the business or does not comply with regulatory requirements. The Group adopts a conservative approach to managing its capital. The Board 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 the 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.

 

Macroeconomic and competitive environment

The Group is also exposed to indirect risks that may arise from the macroeconomic and competitive environment. The economic environment is relatively stable in the UK. However, the international landscape is increasingly uncertain. The uncertain performance of the economies in the EU and the increasingly protectionist stance being taken by other major economies may have an adverse affect on the UK. In particular, this may cause a further softening of central London property prices, which may spread out further to the South East.

 

The Group monitors its exposure to future interest rate rises and currently has minimal lending to customers in products that would be directly sensitive to interest rate rises. However, at the current levels of interest rates, the affordability enjoyed by the Group's customers is beneficial.

 

Brexit

Given the uncertainty that exists over Brexit with the UK due to exit from the EU, the Group has tried to anticipate the risks that it may face if an economic shock arises as a result. It has also examined how business activities may be affected if free provision of services cross borders is prohibited.

 

The Group's only overseas operation is in Dubai, so the vast majority of the Group's income and expenditure is based in the UK. However, after leaving the EU we may no longer be able to provide financial advisory services to EU citizens in the EU. This amounts to an insignificant value of fees within the Income Statement. We have however made plans to be able to generate uninterrupted EU payments via the SEPA network.

 

Analysis is ongoing with our card service provides to ensure that data transfers made from the UK to EU and visa versa are compliant with the appropriate Data Protection Rules.

 

 

Finally, there are two significant business risks that may arise in an economic shock. Firstly, increased credit risk as borrowers are unable to continue to meet their interest obligations as they fall due. This would be alongside a significant fall in the collateral values of our security held against the loans. The average loan to value of our lending book is 53.9%, so to have any material impact this fall in collateral values would have to be severe and prolonged. In our ICAAP stress test scenarios, we are able to withstand a property value fall of 40% over an 18 month period alongside a doubling of our loss rates.

 

The second significant asset class that would be at risk in a down turn would be the Investment Properties, in particular 20 King Street. The sensitivity analysis of how a change in yields may affect the property values is shown in note 4. Any potential reduction in confidence in the West End prime office market would manifest itself in a lower valuation.

 

Board of Directors

 

Sir Henry Angest

Appointed to the Board in December 1985. Sir Henry is the Chairman and Chief Executive and is also Chairman of Arbuthnot Latham & Co., Limited. He gained extensive national and international experience as an executive of The Dow Chemical Company and Dow Banking Corporation. He was previously Chairman of Secure Trust Bank PLC and a Director until August 2018, Chairman of the Banking Committee of the London Investment Banking Association and a Director of the Institute of Directors. He is a Past Master of the Worshipful Company of International Bankers.

 

James Cobb FCA

Joined the Board in 1 November 2008 as Group Finance Director. He was also appointed Deputy Chief Executive of Arbuthnot Latham & Co., Limited in May 2018. He was previously Deputy Chief Financial Officer and Controller of Citigroup's Global Consumer Group in Europe, Middle East and Africa and qualified as a Chartered Accountant with Price Waterhouse.

 

Andrew Salmon FCA

Appointed a Director in March 2004. He joined the Company in 1997 as Head of Business Development and is also Chief Operating Officer and since July 2018 Chief Executive of Arbuthnot Latham & Co., Limited. He was a director of Secure Trust Bank PLC until August 2018. He was previously a director of Hambros Bank Limited and qualified as a Chartered Accountant with KPMG.

 

Ian Dewar FCA

Appointed a Non-Executive Director in August 2015. He is Chairman of the Audit Committee. He was a Partner for 19 years in the Financial Services Practice of KPMG from which he retired in 2012 after 32 years at the firm. He is a non-executive director of Brewin Dolphin Holdings PLC.

 

Sir Christopher Meyer

Appointed a Non-Executive Director in October 2007. He had a distinguished diplomatic career, culminating in 1997 as Ambassador to the USA. He was previously Ambassador to Germany, Press Secretary to Prime Minister John Major and from 2003 to 2009 Chairman of the Press Complaints Commission. He is also on the International Advisory Board of British American Business Inc., Distinguished Fellow of the Royal United Services Institute and Honorary Fellow of Peterhouse, Cambridge.

 

Sir Alan Yarrow FCSI (Hon)

Appointed a Non-Executive Director in June 2016. Sir Alan spent 37 years with Dresdner Kleinwort until 2009, latterly as Group Vice Chairman and Chairman of the UK Bank and then served as Chairman of the Chartered Institute for Securities & Investment until October 2018. He is Chairman of Turquoise Global Holdings Ltd and a director of Institutional Protection Services Ltd. He is also Vice President of the Royal Mencap Society, Independent Partnership Advisor to James Hambro & Partners and an advisor to Zeamo. Sir Alan is an Alderman, Magistrate and HM Lieutenant of the City of London, a member of the Court of the Fishmongers' Company, and Liveryman of several other Livery Companies. He is a member of the Takeover Appeal Board, the Advisory Board of the Commonwealth Investment & Advisory Council. Sir Alan was Lord Mayor of the City of London for the year 2014-15.

 

Nicholas Jennings FCA

Appointed Group Company Secretary in July 2018. He was previously Company Secretary of Daily Mail and General Trust plc and of Close Brothers Group plc. He is a Chartered Accountant.

 

Group Directors' Report

 

The Directors present their report for the year ended 31 December 2018.

 

Business Activities

The principal activities of the Group are banking and financial services. The business review and information about future developments, key performance indicators and principal risks are contained in the Strategic Report on pages 4 to 17.

 

Corporate Governance

The Corporate Governance report on pages 19 to 27 contains information about the Group's corporate governance arrangements, including in relation to the Board's decision to apply the UK Corporate Governance Code, published by the Financial Reporting Council ("FRC") in July 2018, in response to a change in the AIM Rules.

 

Results and Dividends

The results for the year are shown on page 37 of the financial statements. The Directors recommend the payment of a final dividend of 20p (2017: 19p) on the ordinary shares which, together with the interim dividend of 15p paid (2017: 14p) on 28 September 2018, represents total dividends for the year of 35p (2017: 33p). The final dividend, if approved by members at the 2019 Annual General Meeting ("AGM"), will be paid on 17 May 2019 to shareholders on the register at close of business on 26 April 2019.

 

Directors

The names of the Directors of the Company at the date of this report, together with biographical details, are given on page 18 of this Annual Report. All the Directors listed on those pages were directors of the Company throughout the year. Mr. P. A. Lynam and Mr. I.A. Henderson retired from the Board on 8 August and 31 August 2018 respectively.

 

Under Article 78 of the Articles of Association, Sir Henry Angest and Sir Christopher Meyer retire at the AGM and, being eligible, offer themselves for re-election. Sir Henry Angest has a service agreement terminable on twelve months' notice. Sir Christopher Meyer, an independent non-executive director, has a letter of appointment terminable on three months' notice.

 

Company Secretary

On 17 July 2018, Nicholas Jennings was appointed Secretary on the retirement of Jeremy Kaye. He can be contacted at the Company's registered office.

Viability Statement

In accordance with the UK Corporate Governance Code, the Directors confirm that there is a reasonable expectation that the Group will continue to operate and meet its liabilities, as they fall due, for the three-year period up to 31 December 2021. A period of three years has been chosen because it is the period covered by the Group's strategic planning cycle and also incorporated in the ICAAP, which forecasts key capital requirements, expected changes in capital resources and applies stress testing over that period.

 

The Directors' assessment has been made with reference to:

• the Group's current position and prospects - please see the Financial Review on pages 9 to 17;

• the Group's key principles - please see Corporate Philosophy on page 1; and

• the Group's risk management framework and associated policies, as explained in Note 6.

 

The Group's strategy and three-year plan are evaluated and approved by the Directors annually. The plan considers the Group's future projections of profitability, cash flows, capital requirements and resources, and other key financial and regulatory ratios over the period. The ICAAP is updated at least annually as part of the business planning process.

 

Going Concern

After making appropriate enquiries which assessed strategy, profitability, funding, risk management (see Note 6 to the financial statements) and capital resources (see Note 7), the directors are satisfied that the Company and the Group have adequate resources to continue in operation for the foreseeable future. The financial statements are therefore prepared on the going concern basis.

 

Authority to Purchase Shares

Shareholders will also be asked to approve a Special Resolution renewing the authority of the Directors to make market purchases of shares not exceeding 10% of the issued share capital. The Directors will keep the position under review in order to maximise the Company's resources in the best interests of shareholders.

 

Financial Risk Management

Details of how the Group manages risk are set out in in the Strategic Report and in Note 6 to the financial statements.

 

Directors' Interests

The interests of current Directors and their families in the ordinary shares of the Company at the dates shown, together with the percentage of the current issued share capital held, were as follows:

 

Beneficial Interests

1 January 2018

31 December 2018

26 March 2019

%

Sir Henry Angest

8,200,901

8,351,401

8,351,401

56.1

J.R. Cobb

5,000

6,000

6,000

 -

A.A. Salmon

51,699

51,699

51,699

0.3

 

Substantial Shareholders

The Company was aware at 11 March 2019 of the following substantial holdings in the ordinary shares of the Company, other than those held by one director shown above:

 

Holder

 

Ordinary Shares

%

Liontrust Asset Management

961,028

6.5

Miton Asset Management

 

662,086

4.4

Slater Investments

 

595,638

4.0

Mr. R Paston

 

529,130

3.6

M&G Investment Management

 

527,268

3.5

 

Significant Contracts

No Director, either during or at the end of the financial year, was materially interested in any contract with the Company or any of its subsidiaries or associated companies, which was significant in relation to the Group's business. At 31 December 2018, one Director had loans from Arbuthnot Latham & Co., Limited amounting to £515,000 and four directors had deposits with Arbuthnot Latham amounting to £1,884,000 all on normal commercial terms as disclosed in Note 42 to the financial statements.

 

At 1 January 2018, one Director had a loan from Secure Trust Bank PLC, which ceased to be an associated company on 8 August 2018, amounting to £409,000 and two Directors had deposits amounting to £403,000, all on normal commercial terms as disclosed in Note 42 to the financial statements.

 

Directors' Indemnities

The Company's Articles of Association provide that, subject to the provisions of the Companies Act 2006, the Company may indemnify any Director or former Director against any liability and may purchase and maintain insurance against any liability. The Company maintained directors and officers liability insurance throughout the year.

 

Employees

The Company gives due consideration to the employment of disabled persons and is an equal opportunities employer. It also regularly provides employees with information on matters of concern to them, consults on decisions likely to affect their interests and encourages their involvement in the performance of the Company through regular communications and in other ways.

 

Political Donations

The Company made political donations of £6,000 to the Conservative Party during the year (2017: £32,000).

 

Branches outside of the UK

During the year Arbuthnot Latham operated a branch in Dubai which is regulated by the Dubai Financial Services Authority.

 

Events after the Balance Sheet Date

There were no material post balance sheet events to report.

 

Annual General Meeting

The Company's AGM will be held on Thursday 9 May 2019. At the AGM, Shareholders will be asked to vote on a number of resolutions including the creation and bonus issue of a new class of ordinary non-voting shares and the re-appointment of KPMG LLP as the Company's auditor.

 

Disclosure of Information to the Auditor

Each of the persons who are Directors at the date of approval of this Annual Report confirm that:

• so far as each director is aware, there is no relevant audit information of which the Company's auditor is unaware; and

• they have taken all the steps they ought to have taken as a director to make themselves aware of any relevant audit

information and to establish that the Company's auditor is aware of that information.

 

This confirmation is given and should be interpreted in accordance with the provisions of section 418 of the Companies Act 2006.

 

 

Statement of Directors' Responsibilities in Respect of the Strategic Report and the Directors' Report and the Financial Statements

The Directors are responsible for preparing the Strategic Report, the Directors' Report and the Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Parent Company Financial Statements for each financial year. As required by the AIM Rules of the London Stock Exchange they are required to prepare the Group Financial Statements in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the EU and applicable law and have elected to prepare the Parent Company Financial Statements on the same basis.

 

Financial Statements

Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the Group profit or loss for that period. In preparing each of the Group and Parent Company Financial Statements, the Directors are required to:

 

• select suitable accounting policies and then apply them consistently;

 

• make judgements and estimates that are reasonable, relevant and reliable;

 

• state whether they have been prepared in accordance with IFRSs as adopted by the EU;

 

• assess the Group and Parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

 

• use the going concern basis of accounting unless they intend either to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its Financial Statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.

 

The Directors confirm the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group and Parent Company's position, performance, business model and strategy.

 

By order of the Board

 

N D Jennings

Secretary

27 March 2019

 

Corporate Governance

 

Introduction and Overview

Arbuthnot Banking Group has a strong and effective corporate governance framework. The Board endorses the principles of openness, integrity and accountability which underlie good governance and takes into account the provisions of the UK Corporate Governance Code in so far as they are considered applicable to and appropriate for it, given its size and circumstances, and the role and overall shareholding of its majority shareholder. Moreover, the Group contains two subsidiaries authorised to undertake regulated business under the Financial Services and Markets Act 2000, one of which (Arbuthnot Latham & Co., Ltd) is regulated by the Prudential Regulatory Authority and the Financial Conduct Authority and is an authorised deposit-taking business. It in turn has a subsidiary, Renaissance Asset Finance Limited, which is regulated by the Financial Conduct Authority. Arbuthnot Latham & Co., Ltd also operates a branch in Dubai, which is regulated by the Dubai Financial Services Authority. Accordingly, the Group operates to the high standards of corporate accountability and regulatory compliance appropriate for such a business.

 

In March 2018, the AIM Rules were amended to require AIM companies to state which corporate governance code they had decided to apply, how the AIM company complies with that code, and where it departs from its chosen code an explanation of the reasons for doing so. This information was published, as required, on the Company's website by 28 September 2018 and the Company plans to review it each year as part of its annual reporting cycle.

 

The Board decided to report against the UK Corporate Governance Code, published by the Financial Reporting Council ("FRC") in July 2018 ("the Code") with effect from 28 September 2018. This section of the Annual Report summarises how the Company applies the Code and in broad terms how it has complied with its provisions since that date, giving explanations where it has chosen not to do so.

 

The Company is led by the Board which, following changes in August 2018, comprises six members: the executive Chairman, two other executive directors, Andrew Salmon and James Cobb, and three independent non-executive directors who thereby constitute half of the Board in line with the Code. The Board sets the long term focus and customer oriented culture of the Group. The responsibilities of Sir Henry Angest as Chairman include leading the Board, ensuring its effectiveness in all aspects of its role, ensuring effective communication with shareholders, setting the Board's agenda and ensuring that all Directors are encouraged to participate fully in the activities and decision-making process of the Board.

 

In 2016 an independent Board Effectiveness Review was carried out by an external consultant. In October 2018 it was determined to carry out the annual Board Effectiveness Review internally. The evaluation took the form of a confidential questionnaire which assessed the performance of the Board and its Committees. The questions were set to explore the themes developed the previous year, including Board effectiveness, Board composition, Board dynamics, alignment of the Board and executive team, interaction with major shareholders, induction, performance and training, Board Committees and the Secretariat. The feedback was collated by the Company Secretary and discussed by the Board in November 2018. The responses were positive, confirming that the Board was of the view that it receives the correct level of insight into and oversight of the Company, both directly to it and in terms of management information and oral updates provided during meetings. Directors also agreed that the Arbuthnot culture set out in the Arbuthnot Principles and Values manifests itself at Board level and in the external view of the Group as a whole.

 

The Board

The Board met regularly throughout the year, holding six scheduled meetings as well as a two-day off-site strategy meeting. Substantive agenda items have briefing papers, which are circulated in a timely manner before each meeting. The Board ensures that it is supplied with all the information that it requires and requests in a form and of a quality to fulfil its duties.

 

In addition to overseeing the management of the Group, the Board has determined certain items which are reserved for decision by itself. These matters include approval of the Group's long-term objectives and commercial strategy, ensuring a sound system of internal control, risk management strategy, approval of major investments, acquisitions and disposals, any changes to capital structure and the overall review of corporate governance.

 

The Company Secretary is responsible for ensuring that the Board processes and procedures are appropriately followed and support effective decision making. All directors have access to the Company Secretary's advice and services. There is an agreed procedure for directors to obtain independent professional advice in the course of their duties, if necessary, at the Company's expense.

 

All directors receive induction training upon joining the Board, with individual AIM training provided by the Company's Nominated Adviser, regulatory and compliance training provided by the Group Head of Compliance or an external firm of lawyers, risk management training (including that in relation to the ICAAP and ILAAP) with an overview of credit and its associated risks and mitigation by the Head of Credit Risk in Arbuthnot Latham.

 

Overview of Compliance with the FRC Code, together with Exceptions

The Board focuses not only on the provisions of the Code but its principles, ensuring as follows:

• The Company's purpose, values and strategy as a prudently managed organisation align with its culture, with a focus on fairness and long-term shareholder returns.

• The Board has an appropriate combination of executive and non-executive directors, who have both requisite knowledge and understanding of the business and the time to commit to their specific roles.

• The Board comprises directors with the necessary combination of skills to ensure the effective discharge of its obligations, with an annual evaluation of the capability and effectiveness of each director as well as the Board as a composite whole; appropriate succession plans are also in place and reviewed annually, or more frequently if appropriate.

• The Board and Audit Committee monitor the procedures in place to ensure the independence and effectiveness of both external and internal auditors, and the risk governance framework of the Company, with all material matters highlighted to the relevant forum (Board/Committee).

• Remuneration policies and practices are designed to support strategy and promote long-term sustainable success, with a Remuneration Committee in place to oversee director and senior management pay.

 

In respect of the Code's specific provisions, an annual review is carried out, comparing the Company's governance arrangements and practices against them. Any divergences are noted, with relevant rationale considered carefully to determine whether it is appropriate. Consideration is also given to guidance issued, which may require a review of the relevant reasoning intra-year.

In line with the FRC's Guidance on Board Effectiveness, the Board additionally takes into account its suggestions of good practice when applying the Code focusing on the five key principles specified in the Code.

 

Where the Company's governance does not completely align with Code, it is generally as a result of the role of its overall majority shareholder, itself adding a level of protection to long-term shareholder interests, and it has had no negative impact on the Company.

 

All divergences from the Code, with an explanation of the reasons for doing so are set out below:

 

Provision 3 - The majority shareholder is Chairman and Chief Executive of ABG. Engagement with other major shareholders is carried out as appropriate by the Chairman, the Group Chief Operating Officer or the Group Finance Director. There has been no requirement to date to consult with them on matters delegated to Board committees, but if appropriate/when requested, this would be arranged.

 

Provision 5 - The Board has regard to the interests of all its key stakeholders in its decision making. The Company has fewer than 20 employees, all of whom have direct access to Board members. As such, it has not been deemed necessary to appoint an employee representative to the Board, nor a formal workforce advisory panel, nor a designated non-executive Director.

 

Provision 9 - Sir Henry Angest carries out the role of Chairman and Chief Executive, given his long-term interest as majority shareholder, itself aligning with the interests of other shareholders. The Group Chief Operating Officer and the Group Finance Director provide a strong, independent counterbalance, ensuring challenge and independence from a business perspective, against the stakeholder focus of the Chairman carrying out his Chairman's role. The Company follows the US model that is very successful in ensuring commercial success with strong corporate governance and stakeholder awareness, having a shared Chairman and CEO, with a separate, empowered, Chief Operating Officer.

 

Provision 10 ¬ The Board considers Sir Christopher Meyer to be independent, notwithstanding his serving more than nine years, since his views and any challenge to executive management remain firmly independent.

 

Provision 12 - The Board has not appointed a Senior Independent Director, as major shareholders talk openly with the Chairman, the Group Chief Operating Officer and the Group Finance Director on request.

 

Provision 14 - Attendance at meetings is not reported as, should a Director be unable to attend a meeting, that Director receives relevant papers in the normal manner and relays any comments in advance of the meeting to the Chairman. The same process applies in respect of the Board Committees.

 

Provision 18 - For the purposes of stability and continuity, the Company continues to offer Directors for re-election on a three-year rolling basis in accordance with the Company's Articles of Association and company law. The Directors seeking re-election at the AGM are Sir Henry Angest and Sir Christopher Meyer, who have served on the Board for 33 years and 11 years respectively. The contribution of Sir Henry Angest, who beneficially owns more than 50% of the issued share capital, has been invaluable in the successful development of the Company. Sir Christopher Meyer's wide-ranging experience including as a diplomat at the most senior level has provided an important independent measure of challenge to executive management. Accordingly, the Board fully supports the resolutions for their reappointment.

 

Provision 19 - Sir Henry Angest's role as Chairman has extended over nine years and is expected to continue indefinitely, given his key role as majority shareholder both in protecting the stability of his and other shareholder interests and in overseeing a balanced and risk-managed approach to growing the business with a view to the longer-term.

 

Provision 32 - Sir Henry Angest is Chairman of the Remuneration Committee, as is appropriate in the context of his majority shareholding.

 

Internal Control and Financial Reporting

The Board of directors has overall responsibility for the Group's system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate risk of failure to achieve business objectives and can only provide reasonable, but not absolute, assurance against the risk of material misstatement or loss.

 

The Directors and senior management of the Group review and approve the Group's Risk Appetite Statement and Risk Management Policy. Risk appetite sets out the Board's attitude to risk and internal control and includes qualitative and quantitative measures which are reported to every Board meeting; the Risk Management Policy details how risks are monitored and controlled within the Bank. Key business risks and emerging risks are continuously identified, evaluated and managed by means of limits and controls set by and managed at an operational level by AL management and governed through Arbuthnot Latham Committees.

 

Significant risks identified in connection with the development of new activities are subject to consideration by the Board. There are well-established budgeting procedures in place and reports are presented regularly to the Board detailing the results, in relation to Arbuthnot Latham, of each principal business unit, variances against budget and prior year, and other performance data. The Board receives regular reports on any risk matters that need to be brought to its attention, enabling it to assess the Group's emerging and principal risks.

 

Shareholder Communications

The Company maintains communications via one to one meetings as appropriate with its major shareholders and makes full use of the AGM to communicate with shareholders. The Company aims to present a balanced and understandable assessment in all its reports to shareholders, its regulators, other stakeholders and the wider public. Key announcements and other information can be found at www.arbuthnotgroup.com.

 

Board Committees

The Board has established Audit, Nomination, Remuneration and Donations Committees, each with formally delegated duties and responsibilities and with written terms of reference, which require consideration of the committee's effectiveness. The Board keeps the governance arrangements under review. Further information in relation to these committees is set out below. The Board maintains direct responsibility for issues of Risk without the need for its own Risk Committee, since responsibility for large lending proposals is a direct responsibility of its subsidiary, Arbuthnot Latham.

 

Audit Committee

Membership and meetings

Membership of the Audit Committee is restricted to non-executive Directors and comprises Ian Dewar (as Chairman), Sir Christopher Meyer and Sir Alan Yarrow. The Company Secretary acts as its Secretary. The Committee met four times during the year.

 

The Audit Committee oversees, on behalf of the Board, financial reporting, the appropriateness and effectiveness of systems and controls, the work of Internal Audit and the arrangements for and effectiveness of the external audit. The ultimate responsibility for reviewing and approving the Annual Report and Accounts and the Interim Report lies with the Board. The Audit Committee also reviews whistleblowing arrangements for employees to raise concerns in confidence.

 

External Audit

The Senior Statutory Auditor of the external auditors, KPMG LLP, changed in April 2018, following a five-year association with the Company. The Committee assesses the independence and objectivity, qualifications and effectiveness of the external auditors on an annual basis as well as making a recommendation on their reappointment to the Board. The Committee received a report showing the level of non-audit services provided by the external auditors during the year and members were satisfied that the extent and nature of these did not compromise auditor independence. The Committee has concluded that KPMG remain independent and that their audit is effective.

KPMG has held office since August 2009. Consequently, the Committee is required by the EU Audit Regulation 2014 to conduct a competitive audit tender in 2019. The Committee will oversee the tender process and is committed to ensure a fair and transparent process is put in place including a clearly articulated set of selection criteria agreed by the Committee in advance. The tender is not expected to occur before the AGM to be held on 9 May 2019 at which a resolution to re-appoint KPMG LLP as the Company's auditor will be proposed.

 

Activity in 2018

 

Internal Audit

On behalf of the Board, the Audit Committee monitors the effectiveness of systems and controls. To this end, Internal Audit provides the Audit Committee and the Board with detailed independent and objective assurance on the effectiveness of governance, risk management and internal controls. Since Arbuthnot Latham established its own Audit Committee, the role of the Group Audit Committee has been mainly supervisory in relation to internal audit matters, though it receives items of material note deriving from Arbuthnot Latham's internal audits, including an assessment of culture which forms part of every internal audit.

 

The Audit Committee approves the Internal Audit risk based programme of work and monitors progress against the annual plan. The Committee reviews Internal Audit resources and the arrangements that: ensure Internal Audit faces no restrictions or limitations to conducting its work; that it continues to have unrestricted access to all personnel and information; and that Internal Audit remains objective and independent from business management.

 

The Head of Internal Audit provides reports on the outcomes of Internal Audit work directly to the Committee and the Committee monitors progress against actions identified in these reports.

 

The Committee received a Self-Assessment report on Internal Audit in September 2018 and it is satisfied with Internal Audit arrangements during 2018.

 

Integrity of Financial Statements and oversight of external audit

The Committee:

 

• Received and agreed the Audit Plan prepared by the external auditors;

• Considered and formed a conclusion on the critical judgements underpinning the Financial Statements, as presented in papers prepared by management. In respect of all of these critical judgements, the Committee concluded that the treatment in the Financial Statements was appropriate.

• Received reports from the external auditors on the matters arising from their work, the key issues and conclusions they had reached;

• The Chairman of the Committee attended, as an observer, Audit Committee meetings of Arbuthnot Latham, the Company's operating subsidiary;

• The Committee monitored the changes to financial reporting requirements which came in effect on 1 January 2018, principally IFRS 9;

• In addition, it considered changes to financial reporting requirements that are not yet effective but that are likely to affect the reported results or financial position of the Group and Company in future. The most notable change is IFRS 16, Leases, where the Committee has reviewed Management's methodology, and is satisfied with the disclosures as set out in Note 3.27.

 

The reports from the external auditors include details of internal control matters that they have identified as part of the annual statutory financial statements audit. Certain aspects of the system of internal control are also subject to regulatory supervision, the results of which are monitored closely by the Committee and the Board. In addition, the Committee receives by exception reports on the ICAAP and ILAAP which are key control documents that receive detailed consideration by the board of Arbuthnot Latham.

 

The Committee approved the terms of engagement and made a recommendation to the Board on the remuneration to be paid to the external auditors in respect of their audit services.

 

Significant areas of judgement

The Audit Committee considered the following significant issues and accounting judgements in relation to the Financial Statements:

 

Impairment of loans and advances to customers

The Committee reviewed presentations from management detailing the provisioning methodology across the Group as part of the full year results process. The Committee considered and challenged the provisioning methodology applied by management, including timing of cash flows, valuation and recoverability of supporting collateral on impaired assets. The Committee concluded that the impairment provisions, including management's judgements, were appropriate.

 

The charge for impaired loans and advances totalled £2.7m for the year ended 31 December 2018. The disclosures relating to impairment provisions are set out in Note 4.1(a) to the financial statements.

 

Valuation of Investment Properties

The three investment properties are held at fair value. The Committee reviewed and challenged the key assumptions used in the valuation of the properties including yields, rental income and refurbishment costs.

 

As at 31 December 2018, the Group's property investment portfolio totalled £67.1m, as detailed in Note 31. The disclosures relating to the fair value of investment properties are set out in Note 4.1(c) to the financial statements.

 

Effective Interest rate

Interest earned on loans and receivables is recognised using the Effective Interest Rate ("EIR") method. The EIR is calculated on the initial recognition of a loan through a discounted cash flow model that incorporates fees, costs and other premiums or discounts. There have been no changes to the EIR accounting policies during the year.

 

The Committee considered and challenged the EIR methodology applied by management and specifically in relation to acquired loan portfolios. The Committee considered management assumptions including expected future customer behaviours and concluded that the EIR methodology was appropriate as at 31 December 2018.

 

The disclosures relating to EIR are set out in Note 4.1(b) to the financial statements.

 

Going Concern and Viability Statement

The financial statements are prepared on the basis that the Group and Company are each a going concern. The Audit Committee reviewed management's assessment and is satisfied that the going concern basis and assessment of the Group's longer-term viability is appropriate.

 

Other Committee activities

In November 2018, Committee members contributed to the review of the Committee's effectiveness as part of its evaluation by the Board. The review did not highlight any material concerns.

 

On behalf of the Board, the Committee reviewed the financial statements as a whole in order to assess whether they were fair, balanced and understandable. The Committee discussed and challenged the balance and fairness of the overall report with the executive directors and also considered the views of the external auditor. The Committee was satisfied that the Annual Report could be regarded as fair, balanced and understandable and proposed that the Board approve the Annual Report in that respect.

 

In March 2019 the Committee met separately with each of the Head of Internal Audit and the Senior Statutory Auditor without any other executives present. There were no issues or concerns raised by them in regard to discharging their responsibilities.

 

Nomination Committee

Membership and meetings

The Nomination Committee is chaired by Sir Henry Angest and its other members are Sir Christopher Meyer and Sir Alan Yarrow. The Head of Corporate Governance acts as its Secretary. The Committee met once during the year. It is required to meet formally at least once per year and otherwise as required.

 

The Nomination Committee assists the Board in discharging its responsibilities relating to the composition of the Board. The Nomination Committee is responsible for and evaluates on a regular basis the balance of skills, experience, independence and knowledge on the Board, its size, structure and composition, retirements and appointments of additional and replacement directors and will make appropriate recommendations to the Board on such matters. The Nomination Committee also considers succession planning, taking into account the skills and expertise that will be needed on and beneficial to the Board in the future.

 

Activity in 2018

The Committee reviewed policies on Board Diversity, Board Suitability and Board Training and Development. It also assessed and confirmed the collective and individual suitability of Board members. The contribution of Sir Henry Angest remains invaluable in the successful development of the Company. As regards the non-executive Directors' skill sets, Ian Dewar, with a wealth of experience as a partner in a major accounting firm, has successfully chaired the Audit Committee. Sir Christopher Meyer's wide-ranging experience including as a diplomat at the highest level has provided an important independent measure of challenge to executive management. The Board has benefitted from Sir Alan Yarrow's wise counsel, challenge to management and many years' experience in the City of London.

In November 2018, the Committee confirmed that the Board's current composition provides the Company with a balanced, knowledgeable, diverse and informed group of directors, bringing strategic acumen, foresight and challenge to the executive, commensurate with the size of the business. The Committee reviewed succession planning and agreed that there was a sensible and strong plan in place. In terms of any new hires, it noted that account would be taken of provisions in the Board Diversity Policy. The Committee also agreed that it continued to operate effectively and, as such, no changes to its membership, composition or activities were proposed to the Board.

 

Remuneration Committee

Membership and meetings

Membership is detailed in the Remuneration Report on page 28. The Committee met twice during the year. It is required to meet formally at least once per year and otherwise as required.

 

The Remuneration Committee assists the Board in determining its responsibilities in relation to remuneration including, inter alia, in relation to the Company's policy on executive remuneration determining, the individual remuneration and benefits package of each of the Executive Directors and the fees for Non-Executive Directors.

 

The Committee also deals with remuneration-related issues under the Prudential Regulation Authority's Remuneration Code applicable to the Company. The Remuneration Report on pages 28 and 29 gives further information and details of each Director's remuneration.

 

Donations Committee

Membership and meetings

The Donations Committee is chaired by Sir Henry Angest and its other members are Sir Christopher Meyer and Sir Alan Yarrow. The Committee met once during the year.

 

The Committee considers any political donation or expenditure as defined within sections 366 and 367 of the Companies Act 2006.

 

Remuneration Report

 

Remuneration Committee

Membership of the Remuneration Committee is limited to non-executive directors together with Sir Henry Angest as Chairman. The present members of the Committee are Sir Henry Angest, Sir Christopher Meyer and Sir Alan Yarrow. The Head of Corporate Governance acts as its Secretary. The Committee met twice during the year.

 

The Committee has responsibility for producing recommendations on the overall remuneration policy for directors for review by the Board and for setting the remuneration of individual directors. Members of the Committee do not vote on their own remuneration.

 

Remuneration Policy

The Remuneration Committee determines the remuneration of individual directors having regard to the size and nature of the business; the importance of attracting, retaining and motivating management of the appropriate calibre without paying more than is necessary for this purpose; remuneration data for comparable positions, in particular the rising remuneration packages at challenger banks; the need to align the interests of executives with those of shareholders; and an appropriate balance between current remuneration and longer-term performance-related rewards. The remuneration package can comprise a combination of basic annual salary and benefits (including pension), a discretionary annual bonus award related to the Committee's assessment of the contribution made by the executive during the year and longer-term incentives, including executive share options. Pension benefits take the form of annual contributions paid by the Company to individual money purchase schemes. The Remuneration Committee reviews salary levels each year based on the performance of the Group during the preceding financial period. This review does not necessarily lead to increases in salary levels. For the purposes of the FCA Remuneration Code, all the provisions of which have been implemented, the Group and its subsidiaries are all considered to be Tier 3 institutions.

 

Activity in 2018

The Remuneration Committee undertook its regular activities during the year including reviewing the operation of the Remuneration Policy, having regard to the performance of the Company during the year, with particular regard to the level of discretionary bonus awarded and the level of inflation impacting on salaries.

 

Directors' Service Contracts

Sir Henry Angest, Mr. Salmon and Mr. Cobb each have service contracts terminable at any time on 12 months' notice in writing by either party.

 

Long Term Incentive Schemes

Grants were made to three Directors on 14 June 2016 under Phantom Option Scheme introduced on that date, to acquire ordinary 1p shares in the Company at 1591p exercisable in respect of 50% on or after 15 June 2019 and in respect of the remaining 50% on or after 15 June 2021 when a cash payment would be made equal to any increase in market value.

 

Under this Scheme, Mr. Salmon was granted a phantom option to acquire 200,000 ordinary 1p shares in the Company, which remained outstanding at 31 December 2018. Mr. Cobb was granted a phantom option to acquire 100,000 ordinary 1p shares in the Company, which remained outstanding at 31 December 2018. The phantom option granted to Mr. Henderson to acquire 100,000 ordinary 1p shares in the Company lapsed on 31 August 2018 when he left the Company. The fair value of the remaining options at the grant date was £1m.

 

Directors' Emoluments

 

 

 

2018

2017

 

£000

£000

Fees (including benefits in kind)

205

205

Salary payments (including benefits in kind)

4,387

4,533

Pension contributions

93

105

 

4,685

4,843

 

 

 

 

 

 

 

Total

Total

 

Salary

Bonus

Benefits

Pension

Fees

2018

2017

 

£000

£000

£000

£000

£000

£000

£000

Sir Henry Angest

1,200

 -

79

 -

 -

1,279

1,289

JR Cobb

625

300

17

35

 -

977

852

IA Dewar

 -

 -

 -

 -

75

75

75

IA Henderson (to 31/08/2018)

333

 -

11

23

 -

367

840

Sir Christopher Meyer

 -

 -

 -

 -

60

60

60

AA Salmon

1,200

600

22

35

 -

1,857

1,657

Sir Alan Yarrow

 -

 -

 -

 -

70

70

70

 

3,358

900

129

93

205

4,685

4,843

 

Details of any shares or options held by directors are presented on page 20 and 122.

 

The emoluments of the Chairman were £1,279,000 (2017: £1,289,000). The emoluments of the highest paid director were £1,857,000 (2017: £1,657,000) including pension contributions of £35,000 (2017: £35,000).

 

Secure Trust Bank was paid a fee of £36,000 up to 8 August 2018 (2017: £60,000) for the services of Mr. Lynam rendered as a non-executive director.

 

Retirement benefits are accruing under money purchase schemes for three directors who served during 2018 (2017: four directors).

 

Independent Auditor's Report

 

The Independent Auditor's report can be viewed at the following link: 

 

http://www.rns-pdf.londonstockexchange.com/rns/2487U_1-2019-3-27.pdf

 

 

Company statement of financial position

 

 

 

 

At 31 December

 

 

 

2018

2017

 

Note

 

£000

£000

ASSETS

 

 

 

 

Loans and advances to banks

18

 

17,008

36,103

Financial investments

25

 

19,313

140

Current tax asset

 

 

52

 -

Deferred tax asset

26

 

113

641

Intangible assets

28

 

6

 -

Property, plant and equipment

30

 

208

157

Other assets

24

 

42

199

Interests in associates

27

 

 -

5,056

Interests in subsidiaries

43

 

134,614

97,802

Total assets

 

 

171,356

140,098

EQUITY AND LIABILITIES

 

 

 

 

Equity

 

 

 

 

Share capital

37

 

153

153

Other reserves

38

 

(8,133)

(1,111)

Retained earnings

38

 

162,729

124,659

Total equity

 

 

154,749

123,701

LIABILITIES

 

 

 

 

Current tax liability

 

 

 -

152

Other liabilities

34

 

3,324

3,141

Debt securities in issue

35

 

13,283

13,104

Total liabilities

 

 

16,607

16,397

Total equity and liabilities

 

 

171,356

140,098

 

 

 

 

 

The Company has elected to take the exemption under section 408 of the Companies Act 2006 not to present the Parent Company profit and loss account. The profit for the Parent Company for the year is presented in the Statement of Changes in Equity.

 

 

Consolidated statement of changes in equity

 

Attributable to equity holders of the Group

Share capital

Capital redemption reserve

Fair value reserve*

Treasury shares

Retained earnings

Total

£000

£000

£000

£000

£000

£000

Balance at 31 December 2017

153

20

162

(1,131)

237,171

236,375

IFRS 9 adjustment net of tax

 -

 -

 -

 -

(2,090)

(2,090)

Balance at 1 January 2018

153

20

162

(1,131)

235,081

234,285

Total comprehensive income for the period

Loss for 2018

 -

 -

 -

 -

(20,033)

(20,033)

Other comprehensive income, net of tax

Changes in fair value of equity investments at fair value through other comprehensive income**

 -

 -

(13,893)

 -

 -

(13,893)

Tax on other comprehensive income

 -

 -

(26)

 -

 -

(26)

Total other comprehensive income

 -

 -

(13,919)

 -

 -

(13,919)

Total comprehensive income for the period

 -

 -

(13,919)

 -

(20,033)

(33,952)

Transactions with owners, recorded directly in equity

Contributions by and distributions to owners

Unwind Employee Trust

 -

 -

 -

 -

685

685

Sale of Secure Trust Bank shares

 -

 -

1,588

 -

(1,588)

 -

Final dividend relating to 2017

 -

 -

 -

 -

(2,829)

(2,829)

Interim dividend relating to 2018

 -

 -

 -

 -

(2,233)

(2,233)

Total contributions by and distributions to owners

 -

 -

1,588

 -

(5,965)

(4,377)

Balance at 31 December 2018

153

20

(12,169)

(1,131)

209,083

195,956

* The Available-for-sale reserve in 2017 was reclassified to the Fair value reserve as from 1 January 2018 with the introduction of IFRS 9.

** Mainly relate to movement in STB share price. There is currently no tax implications to the movement as the shareholding still qualifies for significant shareholding exemption.

 

Attributable to equity holders of the Group

Share capital

Capital redemption reserve

Available-for-sale reserve

Treasury shares

Retained earnings

Total

£000

£000

£000

£000

£000

£000

Balance at 1 January 2017

153

20

(251)

(1,131)

235,567

234,358

Total comprehensive income for the period

Profit for 2017

 -

 -

 -

 -

6,523

6,523

Other comprehensive income, net of tax

Available-for-sale reserve - net change in fair value

 -

 -

128

 -

 -

128

Available-for-sale reserve - Associate - net change in fair value

 -

 -

389

 -

 -

389

Tax on other comprehensive income

 -

 -

(104)

 -

 -

(104)

Total other comprehensive income

 -

 -

413

 -

 -

413

Total comprehensive income for the period

 -

 -

413

 -

6,523

6,936

Transactions with owners, recorded directly in equity

Contributions by and distributions to owners

Equity settled share based payment transactions

 -

 -

 -

 -

(155)

(155)

Final dividend relating to 2016

 -

 -

 -

 -

(2,680)

(2,680)

Interim dividend relating to 2017

 -

 -

 -

 -

(2,084)

(2,084)

Total contributions by and distributions to owners

 -

 -

 -

 -

(4,919)

(4,919)

Balance at 31 December 2017

153

20

162

(1,131)

237,171

236,375

 

Company statement of changes in equity

 

Attributable to equity holders of the Company

Share capital

Capital redemption reserve

Fair value/ available-for-sale reserve*

Treasury shares

Retained earnings

Total

£000

£000

£000

£000

£000

£000

Balance at 1 January 2017

153

20

 -

(1,131)

133,847

132,889

Total comprehensive income for the period

Loss for 2017

 -

 -

 -

 -

(4,269)

(4,269)

Other comprehensive income, net of income tax

-

-

-

-

-

-

Total comprehensive income for the period

 -

 -

 -

 -

(4,269)

(4,269)

Transactions with owners, recorded directly in equity

Contributions by and distributions to owners

Equity settled share based payment transactions

 -

 -

 -

 -

(155)

(155)

Final dividend relating to 2016

 -

 -

 -

 -

(2,680)

(2,680)

Interim dividend relating to 2017

 -

 -

 -

 -

(2,084)

(2,084)

Total contributions by and distributions to owners

 -

 -

 -

 -

(4,919)

(4,919)

Balance at 31 December 2017

153

20

 -

(1,131)

124,659

123,701

Total comprehensive income for the period

Profit for 2018

 -

 -

 -

 -

46,049

46,049

Other comprehensive income, net of income tax

-

-

-

-

-

-

Changes in fair value of equity investments at fair value through other comprehensive income**

 -

 -

(10,624)

 -

 -

(10,624)

Total other comprehensive income

 -

 -

(10,624)

 -

 -

(10,624)

Total comprehensive income for the period

 -

 -

(10,624)

 -

46,049

35,425

Transactions with owners, recorded directly in equity

Contributions by and distributions to owners

Unwind Employee Trust

 -

 -

 -

 -

685

685

Sale of Secure Trust Bank shares

 -

 -

1,588

 -

(1,588)

 -

Transfer of Secure Trust Bank shares to AL

 -

 -

2,014

 -

(2,014)

 -

Final dividend relating to 2017

 -

 -

 -

 -

(2,829)

(2,829)

Interim dividend relating to 2018

 -

 -

 -

 -

(2,233)

(2,233)

Total contributions by and distributions to owners

 -

 -

3,602

 -

(7,979)

(4,377)

Balance at 31 December 2018

153

20

(7,022)

(1,131)

162,729

154,749

* The Available-for-sale reserve in 2017 was reclassified to the Fair value reserve as from 1 January 2018 with the introduction of IFRS 9.

** Mainly relate to movement in STB share price. There is currently no tax implications to the movement as the shareholding still qualifies for significant shareholding exemption.

 

Consolidated statement of cash flows

 

Year ended 31 December

Year ended 31 December

2018

2017

Note

£000

£000

Cash flows from operating activities

Interest received

73,879

43,389

Interest paid

(8,290)

(6,093)

Fees and commissions received

13,669

8,682

Other income

6,588

3,033

Cash payments to employees and suppliers

(84,216)

(47,600)

Taxation paid

(1,217)

(379)

Cash flows from operating profits before changes in operating assets and liabilities

413

1,032

Changes in operating assets and liabilities:

 - net increase in derivative financial instruments

(38)

(331)

 - net increase in loans and advances to customers

(180,600)

(233,175)

 - net decrease/(increase) in other assets

4,758

(7,952)

 - net increase in amounts due to customers

323,505

392,937

 - net increase/(decrease) in other liabilities

2,310

(843)

Net cash inflow from operating activities

150,348

151,668

Cash flows from investing activities

Disposal of financial investments

9,301

 -

Purchase of computer software

28

(2,294)

(2,641)

Purchase of property, plant and equipment

30

(2,482)

(666)

Proceeds from sale of property, plant and equipment

30

97

 -

Purchase of investment property

31

(879)

(6,421)

Disposal of Tarn Crag (Holdings) Limited

27

 -

900

Purchase of Renaissance Asset Finance Limited

29

 -

(2,072)

Cash balance acquired through Renaissance Asset Finance Limited acquisition

29

 -

2,815

Purchase of debt securities

(467,772)

(211,080)

Proceeds from redemption of debt securities

356,883

90,410

Net cash outflow from investing activities

(107,146)

(128,755)

Cash flows from financing activities

Increase/(decrease) in borrowings

37,578

132,928

Dividends paid

(5,062)

(4,764)

Net cash inflow/(outflow) from financing activities

32,516

128,164

Net increase in cash and cash equivalents

75,718

151,077

Cash and cash equivalents at 1 January

383,780

232,703

Cash and cash equivalents at 31 December

41

459,498

383,780

 

Company statement of cash flows

 

Year ended 31 December

Year ended 31 December

2018

2017

Note

£000

£000

Cash flows from operating activities

Dividends received from subsidiaries

3,056

2,618

Interest received

84

202

Interest paid

(559)

(513)

Other income

52,260

1,643

Cash payments to employees and suppliers

(50,316)

(7,977)

Taxation paid

(402)

 -

Cash flows from operating profit/(loss) before changes in operating assets and liabilities

4,123

(4,027)

Changes in operating assets and liabilities:

 - net decrease/(increase) in group company balances

155

(1,788)

 - net (increase)/decrease in other assets

(1)

690

 - net increase in other liabilities

187

120

Net cash inflow/(outflow) from operating activities

4,464

(5,005)

Cash flows from investing activities

Increase investment in subsidiary

43

(18,500)

(43,200)

Disposal of property, plant and equipment

97

 -

Purchase of property, plant and equipment

30

(94)

 -

Net cash (outflow)/inflow from investing activities

(18,497)

(43,200)

Cash flows from financing activities

Dividends paid

(5,062)

(4,764)

Net cash used in financing activities

(5,062)

(4,764)

Net decrease in cash and cash equivalents

(19,095)

(52,969)

Cash and cash equivalents at 1 January

36,103

89,072

Cash and cash equivalents at 31 December

41

17,008

36,103

 

Notes to the Consolidated Financial Statements

 

1. Reporting entity

Arbuthnot Banking Group PLC is a company domiciled in the United Kingdom. The registered address of Arbuthnot Banking Group PLC is 7 Wilson Street, London, EC2M 2SN. The consolidated financial statements of Arbuthnot Banking Group PLC as at and for the year ended 31 December 2018 comprise Arbuthnot Banking Group PLC and its subsidiaries (together referred to as the "Group" and individually as "subsidiaries"). The Company is the holding company of a group primarily involved in banking and financial services.

 

2. Basis of preparation

(a) Statement of compliance

The Group's consolidated financial statements and the Company's financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs as adopted and endorsed by the EU) and the Companies Act 2006 applicable to companies reporting under IFRS. 

 

The consolidated financial statements were authorised for issue by the Board of Directors on 27 March 2019.

 

(b) Basis of measurement

The consolidated and company financial statements have been prepared under the historical cost convention, as modified by investment property and derivatives, financial assets and financial liabilities at fair value through profit or loss or other comprehensive income.

 

(c) Functional and presentational currency

Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates ("the functional currency"). The consolidated financial statements are presented in Pounds Sterling, which is the Company's functional and the Group's presentational currency.

 

(d) Use of estimates and judgements

The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.

 

(e) Going concern

After making appropriate enquiries which assessed strategy, profitability, funding, risk management (see Note 6) and capital resources (see Note 7), the directors are satisfied that the Company and the Group have adequate resources to continue in operation for the foreseeable future. The financial statements are therefore prepared on the going concern basis.

 

(f) Accounting developments

The accounting policies adopted are consistent with those of the previous financial year, except for the following:

 

IFRS 9 'Financial Instruments'

IFRS 9 Financial Instruments is effective for annual periods beginning on or after 1 January 2018. It replaces IAS 39 Financial Instruments: Recognition and Measurement. The Group has adopted IFRS 9 on 1 January 2018. This results in changes in accounting policies previously recognised in the financial statements.

 

In accordance with the transitional arrangements of IFRS 9 comparative figures have not been restated. However, as required by the transitional arrangements if prior periods are not restated, any difference arising between IAS 39 carrying amounts and IFRS 9 carrying amounts at 1 January 2018 are recognised in opening retained earnings (or in other comprehensive income, as applicable) at 1 January 2018.

 

IFRS 9 introduces key changes in the following areas:

• Classification and measurement, that is based on the business model and contractual cash flow characteristics of the financial instruments.

• Impairment, introducing an expected credit loss model using forward looking information which replaces the incurred loss model. The expected loss model introduces a three stage approach to impairment.

 

a) Classification and measurement

The Group classifies financial assets into one of the three following categories:

• Amortised cost, financial assets held in a business model in order to collect contractual cash flows, where the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest ("SPPI") on the principal amount outstanding.

• Fair value through other comprehensive income ("FVOCI"), financial assets held in a business model which collects contractual cash flows and sells financial assets where the contractual terms of the financial assets give rise on specified dates to cash flows that are solely payments of principal and interest ("SPPI") on the principal amount outstanding. The Group currently has no financial assets within this business model.

• Fair value through profit or loss ("FVPL), assets not measured at amortised cost or FVOCI. There is an option to make an irrevocable election on initial recognition for non-traded equity investments to be measured at FVOCI, in which case dividends are recognised in profit or loss, but gains or losses are not reclassified to profit or loss upon de-recognition, and impairment is not recognised in the income statement. The election can be made on an instrument by instrument basis.

 

IFRS 9 has not changed the classification or measurement of the Groups financial liabilities.

 

(b) Impairment

IFRS 9 replaced the IAS 39 "incurred loss" impairment recognition framework with a three stage expected credit loss approach ("ECL"). The three stages under IFRS 9 are as follows:

• Stage 1 - entities are required to recognise a 12 month ECL allowance on initial recognition.

• Stage 2 - a lifetime loss allowance is held for assets where a significant increase in credit risk has been identified since initial recognition for financial assets that are not credit impaired. The assessment of whether credit risk has increased significantly since initial recognition is performed for each reporting period for the life of the loan.

• Stage 3 - a lifetime ECL allowance is required for financial assets that are credit impaired at the reporting date.

 

Measurement of ECL

The assessment of credit risk and the estimation of ECL are unbiased and probability weighted. ECL is measured on either a 12 month (Stage 1) or lifetime (Stage 2) basis depending on whether a significant increase in credit risk has occurred since initial recognition or where an account meets the Group's definition of default (Stage 3).

 

The ECL calculation is a product of an individual loan's probability of default ('PD'), exposure at default ('EAD') and loss given default ('LGD') discounted at the effective interest rate ('EIR').

 

Significant increase in credit risk ("SICR") (movement to Stage 2)

The Group's transfer criteria determines what constitutes a significant increase in credit risk, which results in a financial asset being moved from Stage 1 to Stage 2. The Group has determined that a significant increase in credit risk arises when an individual borrower is more than 30 days past due or if forbearance measures have been put in place.

 

The Group monitors the ongoing appropriateness of the transfer criteria, where any proposed amendments will be reviewed and approved by the Groups Credit Committees at least annually and more frequently if required.

 

A borrower will move back into stage 1 conditional upon both a minimum of 6 months' good account conduct and the improvement of the Client's situation to the extent that the probability of default has receded sufficiently and a full repayment of the loan, without recourse to the collateral, is likely.

 

Definition of default (movement to Stage 3)

The Group uses a number of qualitative and quantitative criteria to determine whether an account meets the definition of default and as a result moves into Stage 3. The criteria are as follows:

• The rebuttable assumption that more than 90 days past due is an indicator of default. The Group therefore deems more than 90 days past due as an indicator of default, except for cases where the customer is already within forbearance. This will ensure that the policy is aligned with the Basel/Regulatory definition of default.

• The Group has also deemed it appropriate to classify accounts where there has been a breach in agreed forbearance arrangements, recovery action is in hand or Bankruptcy proceedings or similar insolvency process of a client, or director of a company.

A borrower will move out of Stage 3 when their credit risk improves such that they are no longer past due and remain up to date for an internally approved period.

 

Forward looking macroeconomic scenarios

IFRS 9 requires the entity to consider the risk of default and impairment loss taking into account expectations of economic changes that are reasonable.

 

The Group uses a bespoke macroeconomic model to determine the most significant factors which may influence the likelihood of an exposure defaulting in the future. At present, the most significant macroeconomic factor relates to property prices. The Group currently consider five probability weighted scenarios. The model adopts five probability weighted scenarios no change, severe, moderate, growth and decline. The Group has derived an approach for factoring probability weighted macroeconomic forecasts into ECL calculations, adjusting PD and LGD estimates.

 

Expected life

IFRS 9 requires lifetime expected credit losses to be measured over the expected life. Currently the Group considers the loan's behavioural life is equal to the contractual loan term. This approach will continue to be monitored and enhanced if and when deemed appropriate.

 

Transition disclosures

The following table shows the original measurement categories in accordance with IAS 39 and the new measurement categories under IFRS 9 for the Group's financial assets and financial liabilities as at 1 January 2018:

 

Original classification under IAS 39

Carrying amount under IAS 39 on 31 December 2017

New classification under IFRS 9

Carrying amount under IFRS 9 on 1 January 2018

Financial assets

£000

£000

Cash and balances at central banks

Loans and receivables

313,101

Amortised cost

313,101

Loans and advances to banks

Loans and receivables

70,679

Amortised cost

70,679

Debt securities

Held-to-maturity

227,019

Amortised cost

227,019

Derivative financial instruments

FVPL

2,551

Mandatorily at FVPL

2,551

Loans and advances to customers

Loans and receivables

1,049,269

Amortised cost

1,046,689

Financial investments - Equity

Available-for-sale

1,635

Designated FVOCI

1,635

Financial investments - Debt

Available-for-sale

712

FVPL

712

Total financial assets

1,664,966

1,662,386

Financial liabilities

Deposits from banks

Amortised cost

195,097

Amortised cost

195,097

Deposits from customers

Amortised cost

1,390,781

Amortised cost

1,390,781

Derivative financial instruments

FVPL

931

Mandatorily at FVPL

931

Total financial liabilities

1,586,809

1,586,809

 

The following table sets out the impact of adopting IFRS 9 on the statement of financial position carrying amounts and retained earnings as at 1 January 2018. Only balances impacted by the transition to IFRS 9 are included in the table; all other balances are unchanged.

 

Group

Impact of adoption of IFRS 9 on retained earnings

£000

Recognition of expected credit losses under IFRS 9

2,580

Related tax

(490)

Impact at 1 January 2018

2,090

 

Impact of adopting IFRS 9 on the impairment of the financial assets

The most significant impact on the Group's financial statements from the adoption of IFRS 9 results from the new impairment requirements. On the adoption of IFRS 9 on 1 January 2018, the increase in loss allowances (before tax) was £2.6m.

 

The following table reconciles the closing impairment for financial assets in accordance with IAS 39 as at 31 December 2017, to the opening ECL allowance determined in accordance with IFRS 9 as at 1 January 2018:

 

IAS 39 carrying amount on 31 December 2017

IFRS 9 opening balance on 1 January 2019

Of which

Re-measurement

Stage 1

Stage 2

Stage 3

Group

£000

£000

£000

£000

£000

£000

Loans and advances to customers (gross)

1,050,631

 -

1,050,631

992,252

29,502

28,877

Less allowances for impairment

(1,362)

(2,580)

(3,942)

(1,244)

(1,178)

(1,520)

Loans and advances to customers

1,049,269

(2,580)

1,046,689

991,008

28,324

27,357

 

The ECL coverage as a percentage of gross loans and advances at 1 January 2018 was 0.38% and by Stage as follows: Stage 1 - 0.13%, Stage 2 - 3.99% and Stage 3 - 5.26%.

 

Forward looking information

The Group incorporates forward looking information (FLI) into the assessment of whether there has been a significant increase in credit risk and the calculation of ECLs. 

 

IFRS 9 requires an unbiased and probability weighted estimate of credit losses by evaluating a range of possible outcomes that incorporates forecasts of future economic conditions. FLI is required to be incorporated into the measurement of ECL as well as the determination of whether there has been a significant increase in credit risk since origination. Measurement of ECLs at each reporting period should reflect reasonable and supportable information at the reporting date about past events, current conditions and forecasts of future economic conditions. Forecasts for key macroeconomic variables that most closely correlate with the Bank's portfolio are used to produce five economic scenarios, comprising of no change, upside case, downside case, moderate stress and severe stress, and the impacts of these scenarios are then probability weighted. The estimation and application of this forward looking information will require significant judgement. External information is used to produce the forecast information.

 

Transition impact including impact on capital

The Group recorded an adjustment to its opening retained earnings as at 1 January 2018 to reflect the application of the new requirements at the adoption date, and has not restated comparative periods. The total adjustment to capital was £2.8m.

 

Under IFRS 9, the Group's CET1 ratio has reduced by approximately 1 basis points after transitional relief (23 basis points before transitional relief). This is mainly driven by the increase in IFRS 9 ECL for standardised portfolios that directly impacts CET1 as there is no regulatory deduction to absorb the increase.

 

CET 1 ratio

• 17.32% under IAS 39 at 31 December 2017;

• 17.09% under IFRS 9 at 1 January 2018 before transitional relief;

• 17.31% under IFRS 9 at 1 January 2018 after transitional relief.

 

Transitional relief relates to the phasing of the impact of the initial adoption of ECL as permitted by Regulation (EU) 2017/2395 of the European Parliament and Council. The Group has adopted the transitional relief. Under this approach, the balance of ECL allowances in excess of the regulatory excess EL and standardised portfolios are phased into the CET1 capital base over 5 years. The proportion phased in for the balance at each reporting period is 2018: 5%; 2019 15%; 2020 30%; 2021 50%; 2022 75%. From 2023 onwards, there is no transitional relief.

 

v) Impact on Governance and Controls

The Group plans to apply its existing governance framework to ensure that appropriate controls and validations are in place over key processes and judgments to determine the ECL. As part of the implementation, the Group has refined existing internal controls and implemented new controls where required in areas that are impacted by IFRS 9, including controls over the development and probability weighting of macroeconomic scenarios, credit risk data and systems, and the determination of a significant increase in credit risk.

 

IFRS 15 Revenue from Contracts with customers

On 1 January 2018, the Group adopted the requirements of IFRS 15. IFRS 15 established a comprehensive framework for revenue recognition. It replaces existing revenue recognition guidance, including IAS 18 Revenue.

 

IFRS 15 establishes the principles to apply when reporting information about the nature, amount, timing and uncertainty of revenue and cash flows from a contract with a customer. The standard introduces a five step revenue recognition model to be applied to all contracts with customers to determine whether, how much, and when revenue is recognised. 

 

The new standard replaces IAS 18 'Revenue', IAS 11 'Construction Contracts' and related interpretations. It applies to all revenue arising from contracts with customers but does not apply to insurance contracts, financial instruments or lease contracts, which fall under the scope of other IFRS standards. It also does not apply if two companies in the same line of business exchange non-monetary assets to facilitate sales to other parties. Of particular note, interest income, the main source of revenue for the Group, falls outside the scope of IFRS 15.

 

The Group also generates fees from banking services, primarily management fees and commissions. Fees in respect of banking services are recognised in line with the satisfaction of performance obligations. This can be either at a point in time or over time, in line with the provision of the service to the customer. The majority of banking services are performed at a point in time and payment is due from a customer at the time a transaction takes place. For services performed over time, payment is generally due in line with the satisfaction of performance obligations. The costs of providing these banking services are incurred as the services are rendered. The price is usually fixed and always determinable.

 

The Group has adopted IFRS 15 using the cumulative effect method (without practical expedients), as such the standard is applied as of 1 January 2018 and comparative information is not restated. The cumulative effect of initially applying IFRS 15 is recognised as an adjustment to the opening balance of retained earnings. IFRS 15 is only applied retrospectively to contracts that are not completed contracts at 1 January 2018. 

 

The Group assessed its non-interest revenue streams that fall under the scope of IFRS 15 and determined that there was no material impact on the amount or timing of revenue to be recognised as a result of the adoption of IFRS 15. As such there is no adjustment to the opening balance of retained earnings or related tax balances. Furthermore, there is no impact to the consolidated statement of financial position or the consolidated statements of profit and loss and other comprehensive income. Revenue is disaggregated by reportable segment as detailed in Note 9.

 

3. Significant accounting policies

 

The accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

 

3.1. Consolidation

(a) Subsidiaries

Subsidiaries are all investees (including special purpose entities) controlled by the Group. The Group controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.

 

The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group's shares of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the Statement of Comprehensive Income as a gain on bargain purchase. Contingent consideration related to an acquisition is initially recognised at the date of acquisition as part of the consideration transferred, measured at its acquisition date fair value and recognised as a liability. The fair value of a contingent consideration liability recognised on acquisition is remeasured at key reporting dates until it is settled, changes in fair value are recognised in the profit or loss.

 

The Company's investments in subsidiaries are recorded at cost less, where appropriate, provisions for impairment in value.

 

Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.

 

(b) Changes in ownership and non-controlling interests

Changes in ownership interest in a subsidiary that do not result in the loss of control are accounted for as equity transactions and no gain or loss is recognised. Adjustments to non-controlling interests are based on a proportionate amount of the net assets of the subsidiary.

 

When control of a subsidiary is lost, the Group derecognises the assets, liabilities, non-controlling interest and all other components of equity relating to the former subsidiary from the consolidated statement of financial position. Any resulting gain or loss is recognised in profit or loss. Any investment retained in the former subsidiary is recognised at its fair value at the date when control is lost.

 

(c) Special purpose entities

Special purpose entities ("SPEs") are entities that are created to accomplish a narrow and well-defined objective such as the securitisation of particular assets or the execution of a specific borrowing or lending transaction. SPEs are consolidated when the investor controls the investee. The investor would only control the investee if it had all of the following:

 

• power over the investee;

• exposure, or rights, to variable returns from its involvement with the investee; and

• the ability to use its power over the investee to affect the amount of the investor's returns.

 

The assessment of whether the Group has control over an SPE is carried out at inception and the initial assessment is only reconsidered at a later date if there were any changes to the structure or terms of the SPE, or there were additional transactions between the Group and the SPE.

 

(d) Associates

Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity. Associates are accounted for using the equity method and are initially recognised at cost. The Group's investment includes goodwill identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include the Group's share of the total comprehensive income and equity movements of equity accounted investees, from the date that significant influence commences until the date that significant influence ceases. When the Group's share of losses exceeds its interest in an equity accounted investee, the Group's carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the investee.

 

3.2. Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the Group Board. The Group Board, which is responsible for allocating resources and assessing performance of the operating segments, has been identified as the chief operating decision maker. All transactions between segments are conducted on an arm's length basis. Income and expenses directly associated with each segment are included in determining segment performance. There are six operating segments:

 

• Private Banking - Provides traditional private banking services as well as offering financial planning and investment management services.

• Commercial Banking - Provides bespoke commercial banking services and tailored secured lending against property investments and other assets.

• Renaissance Asset Finance - Specialist asset finance lender mainly in high value cars but also business assets.

• All other divisions - All other smaller divisions and central costs in Arbuthnot Latham & Co., Ltd (Arbuthnot Commercial Asset-Based Lending, Arbuthnot Direct, Arbuthnot Specialist Finance, Dubai, Tay mortgage portfolio, Investment properties and Central costs)

• Group Centre - ABG Group Centre management

 

3.3. Foreign currency translation

Foreign currency transactions are translated into the functional currency using the spot exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Comprehensive Income. Foreign exchange differences arising from translation of equity instruments, where an election has been made to present subsequent fair value changes in Other Comprehensive Income ("OCI"), will also be recognised in OCI.

 

3.4. Interest income and expense

Interest income and expense are recognised in the Statement of Comprehensive Income for all instruments measured at amortised cost using the effective interest rate ("EIR") method.

 

The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to:

• the gross carrying amount of the financial asset; or

• the amortised cost of the financial liability.

 

The 'gross carrying amount of a financial asset' is the amortised cost of a financial asset before adjusting for any expected credit loss allowance. When calculating the effective interest rate, the Group takes into account all contractual terms of the financial instrument but does not consider expected credit losses.

 

The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. The carrying amount of the financial asset or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense.

 

For financial assets that have become credit impaired following initial recognition, interest income is calculated by applying the effective interest rate to the amortised cost of the financial asset. If the asset is no longer credit impaired, then the calculation of interest income reverts to the gross basis.

 

The Group monitors the actual cash flows for each acquired book and where they diverge significantly from expectation, the future cash flows are reset. Expectation may diverge due to factors such as one-off payments or expected credit losses. In assessing whether to adjust future cash flows on an acquired portfolio, the Group considers the cash variance on an absolute and percentage basis. The Group also considers the total variance across all acquired portfolios. Where cash flows for an acquired portfolio are reset, they are discounted at the EIR to derive a new carrying value, with changes taken to profit or loss as interest income. The EIR rate is adjusted for events where there is a change to the reference interest rate (Bank of England base rate) affecting portfolios with a variable interest rate which will impact future cash flows. The revised EIR is the rate which exactly discounts the revised cash flows to the net carrying value of the loan portfolio.

 

3.5. Fee and commission income

Fee and commission income which is integral to the EIR on a financial asset are included in the effective interest rate (see note 3.4).

 

All other fee and commission income is recognised as the related services are performed, under IFRS 15. Fee and commission income is reported in the below segments.

 

Types of fee

Description

Banking commissions

- Banking Tariffs are charged monthly for services provided.

 

Investment management fees

 

- Annual asset management fees relate to a single performance

obligation that is continuously provided over an extended period

of time.

 

Wealth planning fees

 

- Provision of bespoke, independent Wealth Planning solutions to 

Arbuthnot Latham's clients to help them achieve their long-term

financial goals.

 

Foreign exchange fees

 

- Provides foreign currencies for our clients to purchase/sell.

 

The principles in applying IFRS 15 to fee and commission use the following 5 step model:

• identify the contract(s) with a customer;

• identify the performance obligations in the contract;

• determine the transaction price;

• allocate the transaction price to the performance obligations in the contract; and

• recognise revenue when or as the Group satisfies its performance obligations.

 

Asset and other management, advisory and service fees are recognised, under IFRS 15, as the related services are performed. The same principle is applied for financial planning services that are continuously provided over an extended period of time.

 

The Group includes the transaction price, some or all of an amount of, variable consideration estimated only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

 

Policy applicable before 1 January 2018

Fees and commissions which are not considered integral to the effective interest rate are recognised on an accrual basis when the service has been provided.

 

Asset and other management, advisory and service fees are recognised on an accruals basis as the related services are performed. The same principle is applied for financial planning services that are continuously provided over an extended period of time. 

 

3.6. Rental income

Rental income is recognised on a straight line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income over the term of the lease.

 

3.7. Discontinued operations

A discontinued operation is a component of the Group's business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which:

• represents a separate major line of business or geographical area of operations;

• is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or

• is a subsidiary acquired exclusively with a view to re-sale.

 

Classification as a discontinued operation occurs on disposal or when the operation meets the criteria to be classified as held for sale (see note 3.14), if earlier. When an operation is classified as a discontinued operation, the comparative Statement of Comprehensive Income is re-presented as if the operation had been discontinued from the start of the comparative year.

 

 

3.8. Financial assets and financial liabilities

3.8.1 Financial assets and financial liabilities (Policy applicable from 1 January 2018)

IFRS 9 requires financial assets and liabilities to be measured at amortised cost, fair value through other comprehensive income ("FVOCI") or fair value through the profit and loss ("FVPL"). Liabilities are measured at amortised cost or FVPL. The Group classifies financial assets and financial liabilities in the following categories: financial assets and financial liabilities at FVPL; FVOCI, financial assets and liabilities at amortised cost and other financial liabilities. Management determines the classification of its financial instruments at initial recognition.

 

A financial asset or financial liability is measured initially at fair value plus, transaction costs that are directly attributable to its acquisition or issue with the exception of financial assets at FVPL where these costs are debited to the income statement.

 

(a) Financial instruments measured at amortised cost

Financial assets that are held to collect contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. A basic lending arrangement results in contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. Financial assets measured at amortised cost are predominantly loans and advances and debt securities.

 

Loans and advances

Loans and advances are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable and the SPPI criteria are met. Loans are recognised when cash is advanced to the borrowers inclusive of transaction costs. Loans and advances, other than those relating to assets leased to customers, are carried at amortised cost using the effective interest rate method. The accounting for assets leased to customers is set out under note 3.18(a).

 

Debt securities at amortised cost

Debt securities at amortised cost are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group has determined meets the SPPI criteria. Debt security investments are carried at amortised cost using the effective interest rate method, less any impairment loss.

 

(b) Financial assets and financial liabilities at FVPL

Financial assets and liabilities are classified at FVPL where they do not meet the criteria to be measured at amortised cost or FVOCI or where financial assets are designated at FVPL to reduce an accounting mismatch. They are measured at fair value in the statement of financial position, with fair value gains/losses recognised in the income statement.

 

Financial assets that are held for trading or managed within a business model that is evaluated on a fair value basis are measured at FVPL, because the business objective is neither hold-to-collect contractual cash flows nor hold-to-collect-and-sell contractual cash flows.

 

This category comprises derivative financial instruments and financial investments. Derivative financial instruments utilised by the Group include structured notes and derivatives used for hedging purposes.

 

Financial assets and liabilities at FVPL are initially recognised on the date from which the Group becomes a party to the contractual provisions of the instrument, including any acquisition costs. Subsequent measurement of financial assets and financial liabilities held in this category are carried at FVPL until the investment is sold.

 

(c) Financial instruments at FVOCI

Financial instruments at FVOCI are those not classified as another category of financial assets. These include investments in special purpose vehicles and equity investments in unquoted vehicles. They may be sold in response to liquidity requirements, interest rate, exchange rate or equity price movements. Financial investments are initially recognised at cost, which is considered as the fair value of the investment including any acquisition costs. The securities are subsequently measured at fair value in the statement of financial position.

 

Fair value changes in the securities are recognised directly in equity (OCI).

 

A debt instrument is measured at fair value through other comprehensive income if it meets both of the following conditions:

• the asset is held within a business model whose objective is achieved by collecting contractual cash flows and selling financial assets; and

• the contractual terms of the financial asset meet the SPPI criterion.

 

There is a rebuttable presumption that all equity investments are FVPL, however on initial recognition the Group may make an irrevocable election to present the fair value movement of equity investments that are not held for trading within OCI. The election can be made on an instrument by instrument basis.

For debt instruments, changes in fair value are recognised in OCI.

For equity instruments, there are no reclassifications of gains and losses to the profit or loss statement on derecognition and no impairment recognised in the profit or loss. Equity fair value movements are not reclassified from OCI under any circumstances.

 

(d) Financial guarantees and loan commitments

Financial guarantees represent undertakings that the Group will meet a customer's obligation to third parties if the customer fails to do so. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. The Group is theoretically exposed to loss in an amount equal to the total guarantees or unused commitments; however, the likely amount of loss is expected to be significantly less; most commitments to extend credit are contingent upon customers maintaining specific credit standards. Liabilities under financial guarantee contracts are initially recorded at their fair value, and the initial fair value is amortised over the life of the financial guarantee. Subsequently, the financial guarantee liabilities are measured at the higher of the initial fair value, less cumulative amortisation, and the best estimate of the expenditure to settle obligations.

 

(e) Other financial liabilities

Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments. Other financial liabilities are recognised when cash is received from the depositors. Other financial liabilities are carried at amortised cost using the effective interest rate method. The fair value of other liabilities repayable on demand is assumed to be the amount payable on demand at the Statement of Financial Position date.

 

Basis of measurement for financial assets and liabilities

Amortised cost measurement

The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, minus principal payments, plus or minus the cumulative amortisation using the effective interest rate method of any difference between the initial amount recognised and the maturity amount, less any reduction for impairment.

 

Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

 

When available, 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 on an arm's length basis.

 

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.

 

For measuring derivatives that might change classification from being an asset to a liability or vice versa such as interest rate swaps, fair values take into account both credit valuation adjustment (CVA) and debit valuation adjustment (DVA) when market participants take this into consideration in pricing the derivatives.

 

Derecognition

Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or when the Group has transferred substantially all risks and rewards of ownership. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability in the Statement of Financial Position. In transactions in which the Group neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. There have not been any instances where assets have only been partially derecognised.

 

The Group derecognises a financial liability when its contractual obligations are discharged, cancelled, expire, are modified or exchanged.

 

Offsetting

Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group currently has a legally enforceable right to set off the amounts and it intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously.

 

Income and expenses are presented on a net basis only when permitted under IFRS, or for gains and losses arising from a group of similar transactions such as the Group's trading activity.

 

3.8.2 Financial assets and financial liabilities (Policy applicable before 1 January 2018)

The Group classifies financial assets and financial liabilities in the following categories: financial assets and financial liabilities at FVTPL; loans and receivables; held-to-maturity investments; available-for-sale financial assets and other financial liabilities. Management determines the classification of its investments at acquisition. A financial asset or financial liability is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its acquisition or issue.

 

(a) Financial assets and financial liabilities at FVTPL (policy applicable before 1 January 2018)

This category comprises listed securities and derivative financial instruments. Derivative financial instruments utilised by the Group include embedded derivatives and derivatives used for hedging purposes. Financial assets and liabilities at fair value through profit or loss are initially recognised on the date from which the Group becomes a party to the contractual provisions of the instrument. Subsequent measurement of financial assets and financial liabilities held in this category are carried at fair value through profit or loss.

 

(b) Loans and receivables (policy applicable before 1 January 2018)

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active

market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. Loans are recognised when cash is advanced to the borrowers. Loans and receivables, other than those relating to assets leased to customers, are carried at amortised cost using the effective interest rate method.

 

(c) Held-to-maturity (policy applicable before 1 January 2018)

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the

Group has the positive intent and ability to hold to maturity and that have not been designated at FVTPL or as available-for-sale investments. Held-to-maturity investments are carried at amortised cost using the effective interest rate method, less any impairment loss.

 

(d) Available-for-sale (policy applicable before 1 January 2018)

Available-for-sale ("AFS") investments are those not classified as another category of financial assets. These include investments in special purpose vehicles and equity investments in unquoted vehicles. They may be sold in response to liquidity requirements, interest rate, exchange rate or equity price movements. AFS investments are initially recognised at cost, which is considered as the fair value of the investment including any acquisition costs. AFS securities are subsequently measured at fair value in the statement of financial position. 

 

Fair value changes in the AFS securities are recognised directly in equity (AFS reserve) until the investment is sold or impaired. Once sold or impaired, the cumulative gains or losses previously recognised in the AFS reserve are recycled to the profit or loss.

 

(f) Other financial liabilities

Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments. Other financial liabilities are

recognised when cash is received from the depositors. Other financial liabilities are carried at amortised cost using the effective interest rate method. The fair value of other liabilities repayable on demand is assumed to be the amount payable on demand at the Statement of Financial Position date.

 

3.9. Derivative financial instruments

All derivatives are recognised at their fair value. Fair values are obtained using recent arm's length transactions or calculated using valuation techniques such as discounted cash flow models at the prevailing interest rates, and for structured notes classified as financial instruments fair values are obtained from quoted market prices in active markets. Derivatives are shown in the Statement of Financial Position as assets when their fair value is positive and as liabilities when their fair value is negative.

 

Embedded derivatives (policy before 1 January 2018)

Embedded derivatives arise from contracts ('hybrid contracts') containing both a derivative (the 'embedded derivative') and a non-derivative (the 'host contract'). Where the economic characteristics and risks of the embedded derivatives are not closely related to those of the host contract, and the host contract is not at fair value through profit or loss, the embedded derivative is bifurcated and reported at fair value and gains or losses are recognised in the Statement of Comprehensive Income.

 

3.10. Impairment of financial assets

(a) Assets carried at amortised cost

The Group recognises loss allowances on an expected credit loss basis for all financial assets measured at amortised cost, including loans and advances, debt securities and loan commitments.

 

Credit loss allowances are measured as an amount equal to lifetime ECL, except for the following assets, for which they are measured as 12 month ECL:

• Financial assets determined to have a low credit risk at the reporting date

• Financial assets which have not experienced a significant increase in credit risk since their initial recognition.

 

Impairment model

The IFRS 9 impairment model adopts a three stage approach based on the extent of credit deterioration since origination:

 

• Stage 1: 12month ECL applies to all financial assets that have not experienced a significant increase in credit risk ("SICR") since origination and are not credit impaired. The ECL will be computed based on the probability of default events occurring over the next 12 months. This Stage 1 approach is different from the historic approach which estimates a collective allowance to recognise losses that have been incurred but not reported on performing loans. Stage 1 includes the current performing loans (up to date and in arrears of less than 10 days) and those within Heightened Business Monitoring ("HBM"). Accounts requiring HBM are classified as a short-term deterioration in financial circumstances and are tightly monitored with additional proactive client engagement, but not deemed SICR.

 

A financial asset is within HBM where:

• A loan is in arrears between 10 and 30 days;

• Bankers become aware of signs of potential future difficulties, such as

- cash flow difficulties

- unexpected hard core borrowing

- regular requests for excesses

- returned cheques

- lack of engagement/failure to respond to information requests

- breach of covenants/conditions

- count court judgements

 

• Stage 2: When a financial asset experiences a SICR subsequent to origination, but is not in default, it is considered to be in Stage 2. This requires the computation of ECL based on the probability of all possible default events occurring over the remaining life of the financial asset. Provisions are higher in this stage (except where the value of charge against the financial asset is sufficient to enable recovery in full) because of an increase in credit risk and the impact of a longer time horizon being considered (compared to 12 months in Stage 1).

 

Evidence that a financial asset has experienced a SICR includes the following considerations:

• A loan is in arrears between 31 and 90 days;

• Forbearance action has been undertaken;

 

• Stage 3: Financial assets that are credit impaired are included in this stage. Similar to Stage 2, the allowance for credit losses will continue to capture the lifetime expected credit losses. At each reporting date, the Group will assess whether financial assets carried at amortised cost are in default. A financial asset will be considered to be in default when an event(s) that has a detrimental impact on estimated future cash flows have occurred.

 

Evidence that a financial asset is within Stage 3 includes the following data:

• A loan is in arrears in excess of 90 days;

• Breach of terms of forbearance;

• Recovery action is in hand; or

• Bankruptcy proceedings or similar insolvency process of a client, or director of a company.

 

The credit risk of financial assets that become credit impaired are not expected to improve such that they are no longer considered credit impaired.

 

Presentation of allowance for ECL in the statement of financial position

For financial assets measured at amortised cost, these are presented as the gross carrying amount of the assets minus a deduction for the ECL.

 

Write-off

Loans and debt securities are written off (either partially or in full) when there is no realistic prospect of recovery. This is the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the outstanding amount due.

 

(b) Renegotiated loans

Loans that are neither subject to ECLs nor individually significant, and whose terms have been renegotiated, are no longer considered to be past due but are treated as new loans.

 

(c) Forbearance

Under certain circumstances, the Group may use forbearance measures to assist borrowers who are experiencing significant financial hardship. Any forbearance support is assessed on a case by case basis in line with best practice and subject to regular monitoring and review. The Group seeks to ensure that any forbearance results in a fair outcome for both the customer and the Group.

 

(d) Assets classified as financial investments

Equity instruments at fair value through other comprehensive income

Equity investments are not subject to impairment charges recognised in the income statement. Any fair value gains and losses are recognised in OCI whch are not subject to reclassification to the income statement on derecognition.

 

Debt instruments at FVOCI

Changes in fair value are recognised in OCI, the loss allowance will be recognised in OCI and shall not reduce the carrying amount of the financial asset in the statement of financial position. Impairment costs will be recognised in the profit or loss with a corresponding entry to OCI. On derecognition, cumulative gains and losses in OCI are reclassified to the profit or loss.

 

Impairments to financial assets carried at FVOCI are recognised in the Statement of Comprehensive Income.

 

Impairment of assets carried at amortised cost (Policy applicable before 1 January 2018)

On an ongoing basis the Group assesses whether there is objective evidence that a financial asset or group of financial assets is

impaired. Objective evidence is the occurrence of a loss event, after the initial recognition of the asset, that impacts on the estimated

contractual future cash flows of the financial asset or group of financial assets, and can be reliably estimated.

The criteria that the Group uses to determine whether there is objective evidence of an impairment loss include, but are not limited to the following:

• Delinquency in contractual payments of principal or interest;

• Cash flow difficulties experienced by the borrower;

• Initiation of bankruptcy proceedings;

• Deterioration in the value of collateral;

• Deterioration of the borrower's competitive position.

 

If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the financial asset's original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the Statement of Comprehensive Income.

 

If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.

 

The Group considers evidence of impairment for loans and advances at both a specific asset and collective level. All individually

significant loans and advances are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. In assessing collective impairment, the Group uses historical trends of the probability of default, emergence period, the timing of recoveries and the amount of loss incurred, adjusted for management's judgement as to whether current economic and credit conditions are such that the actual losses are likely to be significantly different to historic trends.

 

When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all

the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts

previously written off decrease the amount of the provision for loan impairment in the Statement of Comprehensive Income.

A customer's account may be modified to assist customers who are in or have recently overcome financial difficulties and have

demonstrated both the ability and willingness to meet the current or modified loan contractual payments. Loans that have renegotiated or deferred terms, resulting in a substantial modification to the cash flows, are no longer considered to be past due but are treated as new loans recognised at fair value, provided the customers comply with the renegotiated or deferred terms.

 

3.11. Impairment of non-financial assets

The carrying amounts of the Group's non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated. Impairment for goodwill is discussed in more detail under note 3.15(a).

 

3.12. Term Funding Scheme

The Term Funding Scheme ("TFS") was announced by the Bank of England on 4 August 2016 and became effective from 19 September 2016. The scheme is now closed. The TFS allows participants to borrow central bank reserves in exchange for eligible collateral. Amounts drawn from the TFS are included within "Deposits from banks" on the Statement of Financial Position as detailed in Note 32.

 

3.13. Inventory

Land acquired through repossession of collateral which is subsequently held in the ordinary course of business with a view to develop and sell is accounted for as inventory.

 

Inventory is measured at the lower of cost or net realisable value. The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

 

3.14. Assets classified as held for sale

Assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than through continuing use, are classified as held for sale.

 

The criteria that the Group uses to determine whether an asset is held for sale under IFRS 5 include, but are not limited to the following:

• Management is committed to a plan to sell

• The asset is available for immediate sale

• An active programme to locate a buyer is initiated

• The sale is highly probable, within 12 months of classification as held for sale

• The asset is being actively marketed for sale at a sales price reasonable in relation to its fair value

 

Current assets held for sale are measured at the lower of their carrying amount and fair value less costs to sell except where measurement and remeasurement is outside the scope of IFRS 5. Where investments that have initially been recognised as current assets held for sale, because the Group has been deemed to hold a controlling stake, are subsequently disposed of or diluted such that the Group's holding is no longer deemed a controlling stake, the investment will subsequently be classified as fair value through profit or loss or fair value through other comprehensive income investments in accordance with IFRS 9. Subsequent movements will be recognised in accordance with the Group's accounting policy for the newly adopted classification.

 

Once classified as held for sale, intangible assets and property, plant and equipment are no longer amortised or depreciated.

 

3.15. Intangible assets

(a) Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary or associate at the date of acquisition. Goodwill on acquisitions of subsidiaries or associates is included in 'intangible assets'. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

 

The Group reviews the goodwill for impairment at least annually or more frequently when events or changes in economic circumstances indicate that impairment may have taken place and carries goodwill at cost less accumulated impairment losses. Assets are grouped together in the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the "cash-generating unit" or "CGU"). For impairment testing purposes goodwill cannot be allocated to a CGU that is greater than a reported operating segment. CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. The test for impairment involves comparing the carrying value of goodwill with the present value of pre-tax cash flows, discounted at a rate of interest that reflects the inherent risks of the CGU to which the goodwill relates, or the CGU's fair value if this is higher.

 

(b) Computer software

Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of the expected useful lives (three to ten years).

 

Costs associated with maintaining computer software programs are recognised as an expense as incurred.

 

Costs associated with developing computer software which are assets in the course of construction, which management has assessed to not be available for use, are not amortised.

 

(c) Other intangibles

Other intangibles include trademarks, customer relationships, broker relationships, technology and banking licences acquired. These costs are amortised on the basis of the expected useful lives (three to fourteen years).

 

3.16. Property, plant and equipment

Land and buildings comprise mainly branches and offices and are stated at the latest valuation with subsequent additions at cost less depreciation. Plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

 

Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over their estimated useful lives, applying the following annual rates, which are subject to regular review:

 

Leasehold improvements

3 to 20 years

Office equipment

3 to 10 years

Computer equipment

3 to 5 years

Motor vehicles

4 years

 

Leasehold improvements are depreciated over the term of the lease (until the first break clause). Gains and losses on disposals are determined by deducting carrying amount from proceeds. These are included in the Statement of Comprehensive Income.

 

3.17. Investment property

Investment property is initially measured at cost. Transaction costs are included in the initial measurement. Subsequently, investment property is measured at fair value, with any change therein recognised in profit and loss within other income.

 

If a change in use occurs and investment property is transferred to owner-occupied property, the property's deemed cost for subsequent reporting is its fair value at the date of change in use.

 

3.18. Leases

(a) As a lessor

Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title, are classified as finance leases. When assets are held subject to finance leases, the present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return.

 

Assets leased to customers under agreements which do not transfer substantially all the risks and rewards of ownership are classified as operating leases. When assets are held subject to operating leases, the underlying assets are held at cost less accumulated depreciation. The assets are depreciated down to their estimated residual values on a straight-line basis over the lease term. Lease rental income is recognised on a straight line basis over the lease term.

 

(b) As a lessee

Rentals made under operating leases are recognised in the Statement of Comprehensive Income on a straight-line basis over the term of the lease.

 

Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. Leased assets by way of finance leases are stated at an amount equal to the lower of their fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation. Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.

 

3.19. Cash and cash equivalents

For the purposes of the Statement of Cash Flows, cash and cash equivalents comprises cash on hand and demand deposits, and cash equivalents are deemed highly liquid investments that are convertible into cash with an insignificant risk of changes in value with a maturity of three months or less at the date of acquisition.

 

3.20. Employee benefits

(a) Post-retirement obligations

The Group contributes to a defined contribution scheme and to individual defined contribution schemes for the benefit of certain employees. The schemes are funded through payments to insurance companies or trustee-administered funds at the contribution rates agreed with individual employees.

 

The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available.

 

There are no post-retirement benefits other than pensions.

(b) Share-based compensation - cash settled

The Group adopts a Black-Scholes valuation model in calculating the fair value of the share options as adjusted for an attrition rate for members of the scheme and a probability of pay-out reflecting the risk of not meeting the terms of the scheme over the vesting period. The number of share options that are expected to vest are reviewed at least annually.

 

The fair value of cash settled share-based payments is recognised as personnel expenses in the profit or loss with a corresponding increase in liabilities over the vesting period. The liability is remeasured at each reporting date and at settlement date based on the fair value of the options granted, with a corresponding adjustment to personnel expenses.

 

(c) Deferred cash bonus scheme

The Bank has a deferred cash bonus scheme for senior employees. The cost of the award is recognised to the income statement over the period to which the performance relates.

 

(d) Short-term incentive plan

The Group has a short-term incentive plan payable to employees of one of its subsidiary companies. The award of a profit share is based on a percentage of the net profit of a Group subsidiary.

 

3.21. Taxation

Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits arise. Income tax recoverable on tax allowable losses is recognised as an asset only to the extent that it is regarded as recoverable by offset against current or future taxable profits.

 

Deferred tax is provided in full on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax is not accounted for if it arises from the initial recognition of goodwill, the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable future. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the Statement of Financial Position date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

 

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, when they intend to settle current tax liabilities and assets on a net basis or the tax assets and liabilities will be realised simultaneously.

 

Deferred tax assets are recognised where it is probable that future taxable profits will be available against which the temporary differences can be utilised.

 

3.22. Issued debt and equity securities

Issued financial instruments or their components are classified as liabilities where the contractual arrangement results in the Group having a present obligation to either deliver cash or another financial asset to the holder, to exchange financial instruments on terms that are potentially unfavourable. Issued financial instruments, or their components, are classified as equity where they meet the definition of equity and confer on the holder a residual interest in the assets of the Company. The components of issued financial instruments that contain both liability and equity elements are accounted for separately with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component.

 

Financial liabilities, other than trading liabilities at fair value, are carried at amortised cost using the effective interest rate method as set out in policy 3.4. Equity instruments, including share capital, are initially recognised as net proceeds, after deducting transaction costs and any related income tax. Dividend and other payments to equity holders are deducted from equity, net of any related tax.

 

3.23. Share capital

(a) Share issue costs

Incremental costs directly attributable to the issue of new shares or options by Arbuthnot Banking Group, 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.

 

3.24. Financial guarantees and loan commitments

Financial guarantees represent undertakings that the Group will meet a customer's obligation to third parties if the customer fails to do so. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. The Group is theoretically exposed to loss in an amount equal to the total guarantees or unused commitments. However, the likely amount of loss is expected to be significantly less; most commitments to extend credit are contingent upon customers maintaining specific credit standards. Liabilities under financial guarantee contracts are initially recorded at their fair value, and the initial fair value is amortised over the life of the financial guarantee. Subsequently, the financial guarantee liabilities are measured at the higher of the initial fair value, less cumulative amortisation, and the best estimate of the expenditure to settle obligations.

 

 

3.25. Fiduciary activities

The Group commonly acts as trustee and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income arising thereon are excluded from these financial statements, as they are not assets of the Group.

 

3.26. Provisions and contingent liabilities

Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of economic resources will be required from the Group and amounts can be reliably measured.

 

Onerous contract provisions are recognised for losses on contracts where the forecast costs of fulfilling the contract throughout the contract period exceed the forecast income receivable. In assessing the amount of the loss to provide on any contract, account is taken of the Group's forecast results which the contract is servicing. The provision is calculated based on discounted cash flows to the end of the contract.

 

Contingent liabilities are disclosed when the Group has a present obligation as a result of a past event, but the probability that it will be required to settle that obligation is more than remote, but not probable.

 

3.27. New standards and interpretations not yet adopted

The following standards, interpretations and amendments to existing standards have been published and are mandatory for the Group's accounting periods beginning on or after 1 January 2019 or later periods, but the Group has not early adopted them:

 

IFRS 16, 'Leases' (effective from 1 January 2019).

IFRS 16 is effective for annual periods beginning on or after 1 January 2019. IFRS 16 replaces existing leases guidance, including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases - Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 removes the distinction between finance and operating leases and instead provides a single lessee accounting model. The Group, as a lessee, will be required to recognise lease liabilities and corresponding right-of-use assets for all applicable leases. The new standard also provides the option not to recognise 'short-term' leases and leases of 'low-value' assets. Where this exemption is taken, such leases will continue to be expensed to the income statement over the term of the lease.

 

The income statement recognition pattern for the Group's leases will differ from the current pattern for operating leases, with interest on the liabilities and depreciation expense on the right-of-use assets recognised separately. In the cash flow statement, lease payments will be categorised within financing activities rather than operating activities.

 

The Group will reassess the classification of subleases in which the Group is a lessor. Based on the information currently available the implementation of IFRS 16 is not expected to have a material impact on the financial statements.

 

IFRS 16 does not significantly change the accounting for finance leases or leases by lessors.

 

Management are currently reviewing all long-term contractual agreements to ensure all leases are correctly transitioned.

 

The Group continues to evaluate the full impact of IFRS 16, but expects to recognise right-of-use assets on its balance sheet at the adoption date in respect of property assets currently accounted for as operating leases. A corresponding lease liability will also be recognised, representing the future payments to be made under these leases, discounted at the rate implicitly defined in the lease or, where no rate is defined in the lease, the Group's incremental borrowing rate at lease inception.

 

Transition

The standard is effective for annual periods beginning on or after 1 January 2019. The Group plans to apply IFRS 16 initially on 1 January 2019, using the modified retrospective approach (option 2). As a result there will be no impact to retained earnings on adoption of IFRS 16, with no restatement of comparative information.

 

Additionally, on transition, the Group will apply the practical expedient to grandfather the definition of a lease on transition

This means that it will apply IFRS 16 to all contracts entered into before 1 January 2019 and identified as leases in accordance with IAS 17 and IFRIC 4

 

The Bank has assessed the impact that the initial application will have on its business and will adopt the standard for the year ending 31 December 2019.

It estimates that the IFRS 16 transition amount will:

• increase assets and liabilities by approximately £21m as at 1 January 2019;

• reduce the Group's CETI ratio by 32bps; and

• increase operating expenditure by £0.4m in 2019.

 

4. 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.

 

4.1 Estimation uncertainty

(a) 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 basis for evaluating impairment losses is described in accounting policy 3.10. The measurement of ECL required by the implementation of IFRS 9, from 1 January 2018, 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 no change, upside case, downside case, moderate stress and severe stress, 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. The key assumptions are the probability of default and the economic scenarios. Life time 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 individually significant 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.

 

Management considered a range of variables in determining the level of future ECL. The two of the key judgements were in relation to "time to collect" and "collateral valuations". Sensitivity analysis was carried out based on what was considered reasonably possible in the current market conditions.

 

If time to collect increased by six months across all Stage 2 and 3 client exposures, this would lead to a negative £0.4m impact through the Profit or Loss. A six month reduction in time to collect would lead to a £0.3m favourable impact on the Profit or Loss.

 

If the collateral valuations increased by 10% across all Stage 3 client exposures, this would lead to a positive £1.3m impact through the Profit or Loss. If the collateral valuations decreased by 10% across all Stage 3 client exposures, this would lead to a £1.9m adverse impact on the Profit or Loss.

 

Another of the key judgements concerns the probability of the economic scenarios to the measurement of the ECL. The probability weighting and forward looking economic scenarios as at 31 December 2018 are as follows:

 

Probability weighted forward looking economic scenarios

Highest Stress

Moderate Stress

No Change

Growth

Decline

Probability of scenario

1.0%

3.0%

21.0%

25.0%

50.0%

Impact of scenario

 - Change in collateral values

London

(40.0%)

(20.0%)

 -

0.5%

(2.0%)

Rest of UK

(40.0%)

(20.0%)

 -

0.5%

(1.5%)

Overseas

(40.0%)

(20.0%)

 -

2.3%

(1.0%)

 - Movement in share prices*

 -

 -

 -

4.0%

(4.0%)

* - for loans secured against equity portfolios

 

Management assess a range of scenarios and in the current economic climate it is reasonably possible that the moderate scenario could increase to 9% probability, the decline scenario increase to 60% probability and the growth scenario reduce to 10% probability this would lead to a negative £0.2m impact through Profit or Loss.

 

(b) Effective Interest Rate

Acquired loan books are initially recognised at fair value. Subsequently, they are measured under the effective interest rate method, based on cash flow models which require significant judgement assumptions on prepayment rates, late payments, the probability and timing of defaults and the amount of incurred losses. Management review the expected cash flows against actual cash flows to ensure future assumptions on customer behaviour and future cash flows remain valid. If the estimates of future cash flows are revised, the gross carrying value of the financial asset is recalculated as the present value of the estimated future contractual cash flows discounted at the original effective interest rate, or in the case of the acquired books the credit-adjusted effective interest rate. The adjustment to the carrying value of the loan book is recognised in the Statement of Comprehensive Income.

 

Under both IFRS 9 and IAS 39, for the originated loan portfolio interest income is recorded using the effective interest rate method. The key assumptions applied by Management in the EIR methodology remain materially unchanged from the 2017 financial statements.

 

Management must therefore use judgement to estimate the expected life of each instrument. The accuracy of the effective interest rate would therefore be affected by unexpected market movements resulting in altered customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect assumptions.

 

If customer loans repaid 6 months earlier than anticipated on the originated loan book, interest income would increase by £0.8m (2017: £0.3m), due to acceleration of fee income.

 

In 2018 the Group recognised £0.9m (2017: £64k) of additional interest income to reflect actual cash flows received on the acquired mortgage books being in excess of forecast cash flows.

 

The key judgements in relation to calculating the net present value of the acquired mortgage books relate to the timing of future cash flows and loss rates on principal repayments. Management have considered an early and delayed 6 month sensitivity on the timing of repayment and a 10% increase and decrease of principal repayments to be to be reasonably possible.

 

If the acquired loan books were modelled to accelerate cash flows by 6 months, it would increase interest income in 2018 by £0.3m (2017: £0.4m) while a 10% increase in principal repayments will increase interest income in 2018 by £0.3m (2017: £0.2m) through a cash flow reset adjustment. Additionally a 10% increase in credit losses would reduce interest income in 2018 by £0.3m (2017: £0.2m) through a cash flow reset adjustment.

 

Management must therefore use judgement to estimate the expected life of each instrument. The accuracy of the effective interest rate would therefore be affected by unexpected market movements resulting in altered customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect assumptions.

 

Due to acceleration of fee income, if customer loans repaid 6 months earlier than anticipated, interest income would increase by £0.8m (2017: £0.3m).

(c) Investment property

The valuations that the Group places on its investment properties are subject to a degree of uncertainty and are calculated on the basis of assumptions in relation to prevailing market rents and effective yields. These assumptions may not prove to be accurate, particularly in periods of market volatility. The current uncertainty due to Brexit has had the effect of reducing the activity in the property market, which, has in turn resulted in less market evidence being available for Management in making its judgement on the key assumptions of property yield and market rent. The Group currently owns three investment properties, as outlined in note 29.

 

The Group's in-house surveyors have valued all three investment properties utilising externally sourced market information and property specific knowledge.

 

King Street in London with value of £53.3m (2017: £53.3m)

The King Street property is currently fully tenanted, with the main lease ending in 2019 at which point the offices will be refurbished and re-let at prevailing market rents. The valuation assessment considers the net present value of net cash flows to be generated from the property, taking into account expected rental growth rate, void periods, occupancy rate, lease incentive costs such as rent-free periods and other costs not paid by tenants. The expected net cash flows are discounted using risk-adjusted discount rates. Among other factors, the discount rate estimation considers the quality of a building and its location, tenant quality and lease terms. Management judgement is required for the inputs used in the discounted cash flow model, which have been assessed as follows:

 

• yield: 4%

• future rent forecast (per square ft.) £102.50

• refurbishment period of 6 months and rent to be increased by 5% (every 5 years)

• estimated refurbishment costs: £2.2m

 

Revised fair value gain / (loss)

Variable

£'m

%

Forecast yield

4.00%

 - Yield 0.25% lower

3.75%

5.2

9.72%

 - Yield 0.15% lower

3.85%

3.3

6.15%

 - Yield 0.15% higher

4.15%

(1.9)

(3.50%)

 - Yield 0.25% higher

4.25%

(3.4)

(6.40%)

Future forecast rent (Per Square Foot)

102.5

- Positive +5%

107.6

3.0

5.56%

- Negative -5%

97.4

(1.8)

(3.29%)

Forecast periodic Rent Increases (Every 5 years)

5%

- Positive +25%

6%

3.6

6.75%

- Negative -25%

4%

(2.1)

(4.00%)

Forecast refurbishment Costs

2.2

Cost of refurbishment doubles

4.5

- 5% increase to rental value per square foot (p.s.f.)

0.9

1.78%

- No impact to rental value

(1.4)

(2.65%)

No refurbishment undertaken

-

- Existing tenants rent p.s.f maintained and periodic rent increase 5%

0.8

1.52%

- Existing tenants rent p.s.f maintained and periodic rent increase 4%

(2.6)

(4.90%)

 

4 St Philips Place in Birmingham with value of £7m (2017: £6.1m)

The St Philips Place property was acquired on 24 November 2017. The property is currently undergoing comprehensive refurbishment and is therefore unoccupied at the end of the financial year. A development appraisal has been undertaken by estimating the gross development value and deducting the estimated costs to complete the refurbishment, arm's length financing costs and development profit margin.

 

The gross development has the following key inputs:

• forecast yield: 6.25%

• forecast annual rent: £0.77m

• refurbishment costs: £3.2m

 

Revised fair value gain / (loss)

Variable

£'m

%

Forecast yield

6.25%

Yield 0.25% lower

6.00%

0.3

3.89%

Yield 0.25% higher

6.50%

(0.5)

(7.13%)

Forecast net rental value (Total Annual £'m)

0.77

Positive +5%

0.81

0.4

5.42%

Negative -5%

0.73

(0.6)

(9.61%)

Forecast development costs

(3.2)

Costs increase +10%

(3.5)

(0.4)

(6.15%)

Costs decrease -10%

(2.9)

0.2

2.68%

 

Crescent Office Park in Bath with value of £6.8m (2017: £6.8m)

In December 2017, the office building was acquired with the intention to be included within a new property fund initiative that the Group had planned to start-up. The property had tenants in situ with the Fund recognising rental income.

 

It was recognised as held for sale under IFRS 5 and therefore not consolidated in the financial statements in 2017. In 2018 the launch of the property fund was placed on hold and as a result it was reclassified as an investment property as the property no longer met the IFRS 5 criteria. The property remained occupied as at 31 December 2018 with the Group receiving rental income.

 

In accordance with IAS 40, the property is recognised at fair value, with its carrying value at year end of £6.8m equal to its fair value.

 

The valuation of the property has the following key inputs:

• yield: 6.50%

• future rent increases (every five years): 4.00%

 

Revised fair value gain / (loss)

Variable

£'m

%

Model Yield

6.50%

 - Yield 0.25% lower

6.25%

0.2

2.25%

 - Yield 0.25% higher

6.75%

(0.4)

(6.10%)

Model Future Rent Increases (Every 5 Years)

4.00%

- Positive +25%

5.00%

0.2

3.11%

- Negative -25%

3.00%

(0.1)

(2.10%)

 

(e) IFRS 9 'Financial Instruments'

On 1 January 2018, the Group adopted the requirements of IFRS 9. IFRS 9 introduces new requirements for the classification and measurement, impairment and hedge accounting of financial assets and liabilities. The new standard replaces IAS 39 'Financial Instruments: Recognition and Measurement'.

 

The Group has adjusted its opening 1 January 2018 retained earnings to reflect the application of the new requirements of IFRS 9. In accordance with the transition requirements, comparative periods are not restated. As such, the comparative periods in 2017 are reported under the requirements of IAS 39 and are not comparable to the information presented for 2018.

 

5. Maturity analysis of assets and liabilities

The table below shows the maturity analysis of assets and liabilities of the Group as at 31 December 2018:

Due within one year

Due after more than one year

Total

At 31 December 2018

£000

£000

£000

ASSETS

Cash and balances at central banks

405,325

405,325

Loans and advances to banks

54,173

54,173

Debt securities at amortised cost

203,211

139,480

342,691

Assets classified as held for sale

8,002

8,002

Derivative financial instruments

192

1,654

1,846

Loans and advances to customers

388,603

836,053

1,224,656

Other assets

8,257

4,459

12,716

Financial investments

14,976

20,375

35,351

Deferred tax asset

1,490

1,490

Intangible assets

16,538

16,538

Property, plant and equipment

5,304

5,304

Investment property

67,081

67,081

1,082,739

1,092,434

2,175,173

LIABILITIES

Deposits from banks

7,675

225,000

232,675

Derivative financial instruments

188

188

Deposits from customers

1,624,978

89,308

1,714,286

Current tax liability

236

236

Other liabilities

18,549

18,549

Debt securities in issue

13,283

13,283

1,651,626

327,591

1,979,217

 

The table below shows the maturity analysis of assets and liabilities of the Group as at 31 December 2017:

Due within one year

Due after more than one year

Total

At 31 December 2017

£000

£000

£000

ASSETS

Cash and balances at central banks

313,101

313,101

Loans and advances to banks

70,679

70,679

Debt securities held-to-maturity

122,236

104,783

227,019

Assets classified as held for sale

2,915

2,915

Derivative financial instruments

950

1,601

2,551

Loans and advances to customers

224,954

824,315

1,049,269

Other assets

16,188

4,436

20,624

Financial investments

128

2,219

2,347

Deferred tax asset

1,527

1,527

Investment in associate

83,804

83,804

Intangible assets

15,995

15,995

Property, plant and equipment

3,962

3,962

Investment property

59,439

59,439

751,151

1,102,081

1,853,232

LIABILITIES

Deposits from banks

195,097

195,097

Derivative financial instruments

931

931

Deposits from customers

1,333,423

57,358

1,390,781

Current tax liability

705

705

Other liabilities

16,239

16,239

Debt securities in issue

13,104

13,104

1,546,395

70,462

1,616,857

 

The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2018:

Due within one year

Due after more than one year

Total

At 31 December 2018

£000

£000

£000

ASSETS

Loans and advances to banks

6

6

Loans and advances to banks - due from subsidiary undertakings

17,002

17,002

Financial investments

19,313

19,313

Current tax asset

52

52

Deferred tax asset

113

113

Intangible assets

6

6

Property, plant and equipment

208

208

Other assets

42

42

Interests in subsidiaries

134,614

134,614

17,102

154,254

171,356

LIABILITIES

Other liabilities

3,324

3,324

Debt securities in issue

13,283

13,283

3,324

13,283

16,607

 

The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2017:

Due within one year

Due after more than one year

Total

At 31 December 2017

£000

£000

£000

ASSETS

Loans and advances to banks

6

6

Loans and advances to banks - due from subsidiary undertakings

36,097

36,097

Financial investments

128

12

140

Deferred tax asset

641

641

Property, plant and equipment

157

157

Other assets

199

199

Interests in associates

5,056

5,056

Interests in subsidiaries

97,802

97,802

36,430

103,668

140,098

LIABILITIES

Current tax liability

152

152

Other liabilities

3,141

3,141

Debt securities in issue

13,104

13,104

3,293

13,104

16,397

 

6. 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, market, liquidity and capital.

 

(a) 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 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 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:

• future economic scenarios

• probability of default

• loss given default

• exposure at default

 

The Group's maximum exposure to credit risk before collateral held or other credit enhancements is as follows:

 

2018

Group

Private Banking

Commercial Banking

RAF

All Other Divisions

Total

Credit risk exposures (all stage 1, unless otherwise stated)

£000

£000

£000

£000

£000

On-balance sheet:

Cash and balances at central banks

 -

 -

 -

405,325

405,325

Loans and advances to banks

 -

 -

354

53,819

54,173

Debt securities at amortised cost

 -

 -

 -

342,691

342,691

Derivative financial instruments

 -

 -

 -

1,846

1,846

Loans and advances to customers (net of ECL)

670,464

443,108

85,957

25,127

1,224,656

Stage 1

618,487

431,630

84,275

25,127

1,159,519

Stage 2

20,033

11,478

1,180

 -

32,691

Stage 3

31,944

 -

502

 -

32,446

Other assets

 -

 -

443

2,533

2,976

Financial investments

 -

 -

 -

35,351

35,351

Off-balance sheet:

Guarantees

435

1,309

 -

 -

1,744

Loan commitments and other credit related liabilities

51,950

15,930

 -

 -

67,880

At 31 December

722,849

460,347

86,754

866,692

2,136,642

 

2017

Group

Private Banking

Commercial Banking

RAF

All Other Divisions

Total

Credit risk exposures (under IAS 39)

£000

£000

£000

£000

£000

On-balance sheet:

Cash and balances at central banks

 -

 -

 -

313,101

313,101

Loans and advances to banks

 -

 -

1,087

69,592

70,679

Debt securities held-to-maturity

 -

 -

 -

227,019

227,019

Derivative financial instruments

 -

 -

 -

2,551

2,551

Loans and advances to customers (net of impairment)

650,245

305,055

71,265

22,704

1,049,269

Other assets

 -

 -

137

11,827

11,964

Financial investments

 -

 -

 -

2,347

2,347

Off-balance sheet:

Guarantees

443

2,533

 -

 -

2,976

Loan commitments and other credit related liabilities

85,303

46,660

 -

 -

131,963

At 31 December

735,991

354,248

72,489

649,141

1,811,869

The Company's maximum exposure to credit risk (all stage 1) before collateral held or other credit enhancements is as follows:

 

2018

2017

 

£000

£000

 

Credit risk exposures relating to on-balance sheet assets are as follows:

 

Loans and advances to banks

17,008

36,103

 

Financial investments

19,313

140

 

Other assets

 -

162

 

At 31 December

36,321

36,405

 

 

The above tables represent the maximum credit risk exposure (net of impairment) to the Group and Company at 31 December 2018 and 2017 without taking account of any collateral held or other credit enhancements attached. For financial assets, the balances are based on gross carrying amounts as reported in the Statement of Financial Position. For guarantees and loan commitments, the amounts in the table represent the amounts for which the group is contractually committed.

 

The table below represents an analysis of the loan to values of the exposures secured by property for the Group:

2018

Private Banking

Commercial Banking

Total

Loan Balance

Collateral

Loan Balance

Collateral

Loan Balance

Collateral

Group

£000

£000

£000

£000

£000

£000

Less than 60%

312,478

698,621

249,446

559,271

561,924

1,257,892

Stage 1

297,674

659,650

238,071

532,671

535,745

1,192,321

Stage 2

8,701

25,830

11,375

26,600

20,076

52,430

Stage 3

6,103

13,141

 -

 -

6,103

13,141

60%-80%

224,782

309,329

165,954

259,917

390,736

569,246

Stage 1

211,737

288,994

165,954

259,917

377,691

548,911

Stage 2

9,458

14,535

 -

 -

9,458

14,535

Stage 3

3,587

5,800

-

-

-

-

80%-100%

64,649

49,740

6,540

9,400

71,189

59,140

Stage 1

52,968

37,161

6,540

9,400

59,508

46,561

Stage 2

531

550

 -

 -

531

550

Stage 3

11,150

12,029

 -

 -

11,150

12,029

Greater than 100%*

28,528

16,860

8,918

7,614

37,446

24,474

Stage 1

16,654

8,245

8,918

7,614

25,572

15,859

Stage 2

-

-

-

-

-

-

Stage 3

11,874

8,615

 -

 -

11,874

8,615

Total

630,437

1,074,550

430,858

836,202

1,061,295

1,910,752

 

*In addition to property, other security is taken, including charges over Arbuthnot Latham Investment Management portfolios, other chattels and personal guarantees. The increase in loan to values greater than 100% is due to an increase in exposures collateralised by other assets.

 

£19.3m of balances with a loan to value of greater than 100% are within Stage 3. Property valuations used are those from the loan origination date or updated 3rd party valuations where applicable.

2017

 

Private Banking

Commercial Banking

Total

 

Loan Balance

Collateral

Loan Balance

Collateral

Loan Balance

Collateral

 

Group

£000

£000

£000

£000

£000

£000

 

Less than 60%

288,734

740,812

166,666

367,550

455,400

1,108,362

 

60%-80%

238,760

356,242

108,996

168,015

347,756

524,257

 

80%-100%

64,288

75,298

5,538

5,700

69,826

80,998

 

Greater than 100%

32,206

26,124

9,142

8,230

41,348

34,354

 

Total

623,988

1,198,476

290,342

549,495

914,330

1,747,971

 

Prior year numbers are presented under IAS 39 and therefore has no Staging.

 

The table below represents an analysis of loan commitments compared to the values of properties for the Group (all Stage 1):

2018

Private Banking

Commercial Banking

Total

Loan Balance

Collateral

Loan Balance

Collateral

Loan Balance

Collateral

Group

£000

£000

£000

£000

£000

£000

Less than 60%

30,289

83,603

14,880

32,097

45,169

115,700

60%-80%

15,467

23,295

1,050

1,615

16,517

24,910

Total

45,756

106,898

15,930

33,712

61,686

140,610

2017

Private Banking

Commercial Banking

Total

Loan Balance

Collateral

Loan Balance

Collateral

Loan Balance

Collateral

Group

£000

£000

£000

£000

£000

£000

Less than 60%

62,294

218,643

481

56,000

62,775

274,643

60%-80%

20,471

29,935

5,869

8,861

26,340

38,796

80%-100%

28,825

31,982

754

754

29,579

32,736

Greater than 100%

3,590

3,253

1,500

852

5,090

4,105

Total

115,180

283,813

8,604

66,467

123,784

350,280

 

Renegotiated loans and forbearance

The contractual terms of a loan may be modified due to factors that are not related to the current or potential credit deterioration of the customer (changing market conditions, customer retention, etc.). In such cases, the modified loan may be derecognised and the renegotiated loan recognised as a new loan at fair value.

 

When the terms of a financial asset are modified and the modification does not result in derecognition, the determination of whether the asset's credit risk has increased significantly reflects the comparison of:

• its remaining lifetime PD at the reporting date based on the modified terms; with

• the remaining lifetime PD estimated based on data on initial recognition and the original contractual terms.

 

When modification results in derecognition, a new loan is recognised and allocated to Stage 1 (assuming it is not credit-impaired at that time).

 

The Group renegotiates loans to customers in financial difficulties (referred to as 'forbearance') to maximise collection opportunities and minimise the risk of default. Under the Group's forbearance policy, loan forbearance is granted on a selective basis if the debtors is currently in default on its debt, or if there is a high risk of default, there is evidence that the debtor made all reasonable efforts to pay under the original contractual terms and the debtor is expected to be able to meet the revised terms.

 

The revised terms can include changing the timing of interest payments, extending the date of repayment of the loan, transferring a loan to interest only payments and a payment holiday. Both retail and corporate loans are subject to the forbearance policy. The Group Credit Committee regularly reviews reports on forbearance.

 

For financial assets modified as part of the Group's forbearance policy, the estimate of PD reflects whether the modification has improved or restored the Group's ability to collect interest and principal and the Group's previous experience of similar forbearance action. As part of this process, the Group evaluates the borrower's payment performance against the modified contractual terms and considers various behavioural indicators.

 

Generally, the forbearance is a qualitative indicator of a SICR (see note 3.10)

 

As at 31 December 2018, loans for which forbearance measures were in place totalled 2.22% (2017: 2.94%) of total value of loans to customers for the Group. 2017 forbearance has been reclassified to align to current forbearance policy. These are set out in the following table:

 

2018

2017

Number

Loan Balance

Number

Loan Balance

£000

£000

Transfer to interest only

1

175

 -

 -

Term extension

15

25,814

15

29,586

Payment holiday

16

1,189

5

1,237

Total forbearance

32

27,178

20

30,823

 

Concentration risk

The tables below show the concentration in the loan book based on the most significant type of collateral held for each loan.

 

Loans and advances to customers

Loan Commitments

2018

2017

2018

2017

£000

£000

£000

£000

Concentration by product

Asset based lending*

25,128

 -

18,122

 -

Asset finance

85,958

71,425

 -

 -

Cash collateralised

5,379

17,747

 -

 -

Commercial lending

248,042

202,912

4,806

24,371

Investment portfolio secured

45,182

49,667

3,136

4,222

Mixed collateral**

91,167

70,954

4,867

3,957

Residential mortgages

713,095

633,003

54,346

99,413

Unsecured

10,705

3,561

725

 -

At 31 December

1,224,656

1,049,269

86,002

131,963

Concentration by location

East Anglia

32,960

18,438

294

 -

London

455,567

407,805

28,096

56,777

Midlands

69,686

42,484

3,538

800

North East

18,448

25,741

1,050

 -

North West

59,045

44,630

1,275

825

Northern Ireland

2,813

2,903

 -

 -

Scotland

10,793

10,988

 -

 -

South East

219,890

203,305

15,522

23,462

South West

140,560

116,692

9,201

15,236

Wales

7,521

8,002

426

 -

Overseas

30,486

21,556

1,400

 -

Non-property collateral

176,887

146,725

25,200

34,863

At 31 December

1,224,656

1,049,269

86,002

131,963

 

* In 2018 Q1, the Group began its asset-based lending business including invoice discounting, supported by stock, plant & machinery, property and cash flow lending.

** Mixed collateral is where there is no single, overall, majority collateral type.

 

(b) Operational risk (unaudited)

The Group's objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group's reputation with overall cost effectiveness and to avoid control procedures that restrict initiatives and creativity. The Group is exposed to operational risks from its Information Technology 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.

 

Compliance with Group standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results of the Internal Audit reviews are discussed with senior management, with summaries submitted to the Arbuthnot Banking Group Audit Committee.

 

Cyber risk

Cyber risk is an increasing risk that the Group is subject to within its operational processes. This 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 test 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 provision.

 

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 customers' complaints effectively; not meeting customers' expectations; and exhibiting behaviours which do not meet market or regulatory standards.

 

The Group adopts a zero risk appetite for any unfair customer outcomes. It maintains clear compliance guidelines and provides ongoing training to all staff. Periodic spot checks and internal audits are performed to ensure these guidelines are being followed. The Group also has insurance policies in place to provide some cover for any claims that may arise.

 

(c) Market risk

Price risk

The Company and Group are exposed to price risk from equity investments and derivatives held by the Group. The Group is not exposed to commodity price risk.

 

Based upon the financial investment exposure in Note 25, a stress test scenario of a 10% (2017: 10%) decline in market prices, would result in a £17,000 (2017: £32,000) decrease in the Group's income and a decrease of £3.5m (2017: £231,000) in the Group's equity. The Group considers a 10% stress test scenario appropriate after taking the current values and historic data into account.

 

Based upon the financial investment exposure given in Note 25, a stress test scenario of a 10% (2017: 10%) decline in market prices, would result in a £nil (2017: £13,000) decrease in the Company's income and a decrease of £1.9m (2017: £11,000) in the Company's equity.

 

Currency risk

The Company and Group take on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. This is managed through the Group entering into forward foreign exchange contracts. The Board sets limits on the level of exposure for both overnight and intra-day positions, which are monitored daily. The table below summarises the Group's exposure to foreign currency exchange rate risk at 31 December 2018. Included in the table below are the Group's assets and liabilities at carrying amounts, categorised by currency.

 

GBP (£)

USD ($)

Euro (€)

Other

Total

At 31 December 2018

£000

£000

£000

£000

£000

ASSETS

Cash and balances at central banks

405,244

30

47

4

405,325

Loans and advances to banks

8,856

13,794

19,714

11,809

54,173

Debt securities at amortised cost

243,680

99,011

 -

 -

342,691

Derivative financial instruments

1,655

4

3

184

1,846

Loans and advances to customers

1,169,157

16,122

39,377

 -

1,224,656

Other assets

2,861

 -

115

 -

2,976

Financial investments

34,219

954

178

 -

35,351

1,865,672

129,915

59,434

11,997

2,067,018

LIABILITIES

Deposits from banks

232,675

 -

 -

 -

232,675

Derivative financial instruments

3

4

1

180

188

Deposits from customers

1,526,623

130,061

46,068

11,534

1,714,286

Other liabilities

1,782

 -

 -

 -

1,782

Debt securities in issue

 -

 -

13,283

 -

13,283

1,761,083

130,065

59,352

11,714

1,962,214

Net on-balance sheet position

104,589

(150)

82

283

104,804

Credit commitments

67,880

 -

 -

 -

67,880

 

The table below summarises the Group's exposure to foreign currency exchange risk at 31 December 2017:

GBP (£)

USD ($)

Euro (€)

Other

Total

At 31 December 2017

£000

£000

£000

£000

£000

ASSETS

Cash and balances at central banks

313,101

 -

 -

 -

313,101

Loans and advances to banks

6,027

40,870

16,944

6,838

70,679

Debt securities held-to-maturity

170,723

56,296

 -

 -

227,019

Derivative financial instruments

2,525

1

25

 -

2,551

Loans and advances to customers

997,025

14,912

37,332

 -

1,049,269

Other assets

11,964

 -

 -

 -

11,964

Financial investments

140

706

1,501

 -

2,347

1,501,505

112,785

55,802

6,838

1,676,930

LIABILITIES

Deposits from banks

195,067

 -

 -

30

195,097

Derivative financial instruments

914

1

 -

16

931

Deposits from customers

1,228,878

112,731

42,733

6,439

1,390,781

Other liabilities

1,207

 -

 -

 -

1,207

Debt securities in issue

 -

 -

13,104

 -

13,104

1,426,066

112,732

55,837

6,485

1,601,120

Net on-balance sheet position

75,439

53

(35)

353

75,810

Credit commitments

131,963

 -

 -

 -

131,963

 

Derivative financial instruments (see note 21) are in place to mitigate foreign currency risk on net exposures for each currency. A 10% strengthening of the pound against the US dollar would lead to a £5,000 increase (2017: £5,000 increase) in Group profits and equity, while a 10% weakening of the pound against the US dollar would lead to the same decrease in Group profits and equity. Similarly, a 10% strengthening of the pound against the Euro would lead to a £4,000 increase (2017: £4,000 increase) in Group profits and equity, while a 10% weakening of the pound against the Euro would lead to the same increase in Group profits and equity..

 

The table below summarises the Company's exposure to foreign currency exchange rate risk at 31 December 2018:

GBP (£)

Euro (€)

Total

At 31 December 2018

£000

£000

£000

ASSETS

Loans and advances to banks

3,437

13,571

17,008

Financial investments

19,313

 -

19,313

22,750

13,571

36,321

LIABILITIES

Other liabilities

1,838

 -

1,838

Debt securities in issue

 -

13,283

13,283

1,838

13,283

15,121

Net on-balance sheet position

20,912

288

21,200

 

The table below summarises the Company's exposure to foreign currency exchange rate risk at 31 December 2017:

GBP (£)

Euro (€)

Total

At 31 December 2017

£000

£000

£000

ASSETS

Loans and advances to banks

22,734

13,369

36,103

Financial investments

140

 -

140

Other assets

162

 -

162

23,036

13,369

36,405

LIABILITIES

Other liabilities

1,840

 -

1,840

Debt securities in issue

 -

13,104

13,104

1,840

13,104

14,944

Net on-balance sheet position

21,196

265

21,461

 

A 10% strengthening of the pound against the Euro would lead to £3,000 (2017: £3,000) decrease in the Company profits and equity, conversely a 10% weakening of the pound against the Euro would lead to the same increase in the Company profits and equity.

 

Interest rate risk

Interest rate risk is the potential adverse impact on the Company and Group's future cash flows from changes in interest rates, and arises from the differing interest rate risk characteristics of the Company and Group's assets and liabilities. In particular, fixed rate savings and borrowing products expose the Group to the risk that a change in interest rates could cause either a reduction in interest income or an increase in interest expense relative to variable rate interest flows. The Group seeks to "match" interest rate risk on either side of the Statement of Financial Position. However, this is not a perfect match and interest rate risk is present in: Money market transactions of a fixed rate nature, fixed rate loans, fixed rate savings accounts and floating rate products dependent on when they re-price at a future date.

 

Interest rate risk is measured throughout the maturity bandings of the book on a parallel shift scenario for a 200 basis points movement. Interest rate risk is managed to limit value at risk to be less than £1.5m. The current position of the balance sheet is such that it results in a favourable impact on the economic value of equity of £1.3m (2017: £0.8m) for a positive 200bps shift and an adverse impact of £1.4m (2017: £0.8m) for a negative 200bps movement. The negative movement is capped at the Bank of England base rate of 75bps (2017: 50bps), which result in a negative impact of £0.5m (2017: £0.3m). The Company has no fixed rate exposures, but an upward change of 50bps on variable rates would increase pre-tax profits and equity by £10,000 (2017: increase pre-tax profits and equity by £10,000).

 

The following tables summarise the re-pricing periods for the assets and liabilities in the Company and Group, including derivative financial instruments which are principally used to reduce exposure to interest rate risk. Items are allocated to time bands by reference to the earlier of the next contractual interest rate re-price and the maturity date.

 

Group

Within 3 months

More than 3 months but less than 6 months

More than 6 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

Non interest bearing

Total

As at 31 December 2018

£000

£000

£000

£000

£000

£000

£000

ASSETS

Cash and balances at central banks

405,325

 -

 -

 -

 -

 -

405,325

Loans and advances to banks

54,115

 -

58

 -

 -

 -

54,173

Debt securities at amortised cost

269,026

27,846

41,896

3,923

 -

 -

342,691

Derivative financial instruments

304

 -

 -

1,542

 -

 -

1,846

Loans and advances to customers

1,030,316

6,107

17,502

170,525

206

 -

1,224,656

Other assets*

 -

 -

 -

 -

 -

111,131

111,131

Financial investments

 -

 -

 -

 -

 -

35,351

35,351

1,759,086

33,953

59,456

175,990

206

146,482

2,175,173

LIABILITIES

Deposits from banks

232,675

 -

 -

 -

 -

 -

232,675

Derivative financial instruments

188

 -

 -

 -

 -

 -

188

Deposits from customers

1,255,488

197,785

95,868

165,145

 -

 -

1,714,286

Other liabilities**

 -

 -

 -

 -

 -

18,785

18,785

Debt securities in issue

13,283

 -

 -

 -

 -

 -

13,283

Equity

 -

 -

 -

 -

 -

195,956

195,956

1,501,634

197,785

95,868

165,145

 -

214,741

2,175,173

Impact of derivative instruments

25,762

 -

 -

(25,762)

 -

 -

Interest rate sensitivity gap

283,214

(163,832)

(36,412)

(14,917)

206

(68,259)

Cumulative gap

283,214

119,382

82,970

68,053

68,259

 -

* Other assets include all remaining assets in the Statement of Financial Position, which are not shown separately above.

** Other liabilities include all remaining liabilities in the Statement of Financial Position, which are not shown separately above.

 

Group

Within 3 months

More than 3 months but less than 6 months

More than 6 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

Non interest bearing

Total

As at 31 December 2017

£000

£000

£000

£000

£000

£000

£000

ASSETS

Cash and balances at central banks

313,101

 -

 -

 -

 -

 -

313,101

Loans and advances to banks

61,211

579

8,889

 -

 -

 -

70,679

Debt securities held-to-maturity

185,926

35,093

6,000

 -

 -

 -

227,019

Derivative financial instruments

950

 -

 -

1,601

 -

 -

2,551

Loans and advances to customers

880,822

6,938

10,774

143,979

 -

6,756

1,049,269

Other assets

 -

 -

 -

 -

 -

188,266

188,266

Financial investments

 -

 -

 -

 -

 -

2,347

2,347

1,442,010

42,610

25,663

145,580

 -

197,369

1,853,232

LIABILITIES

Deposits from banks

195,097

 -

 -

 -

 -

 -

195,097

Derivative financial instruments

931

 -

 -

 -

 -

 -

931

Deposits from customers

1,061,442

162,503

109,478

57,358

 -

 -

1,390,781

Other liabilities

 -

 -

 -

 -

 -

16,944

16,944

Debt securities in issue

13,104

 -

 -

 -

 -

 -

13,104

Equity

 -

 -

 -

 -

 -

236,375

236,375

1,270,574

162,503

109,478

57,358

 -

253,319

1,853,232

Impact of derivative instruments

17,824

 -

 -

(17,824)

 -

 -

Interest rate sensitivity gap

189,260

(119,893)

(83,815)

70,398

 -

(55,950)

Cumulative gap

189,260

69,367

(14,448)

55,950

55,950

 -

* Other assets include all remaining assets in the Statement of Financial Position, which are not shown separately above.

** Other liabilities include all remaining liabilities in the Statement of Financial Position, which are not shown separately above.

 

Company

Within 3 months

More than 3 months but less than 6 months

More than 6 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

Non interest bearing

Total

As at 31 December 2018

£000

£000

£000

£000

£000

£000

£000

ASSETS

Loans and advances to banks

16,977

 -

 -

 -

 -

31

17,008

Other assets*

 -

 -

 -

 -

 -

135,035

135,035

Financial investments

 -

 -

 -

 -

 -

19,313

19,313

16,977

 -

 -

 -

 -

154,379

171,356

LIABILITIES

Other liabilities**

 -

 -

 -

 -

 -

3,324

3,324

Debt securities in issue

13,283

 -

 -

 -

 -

 -

13,283

Equity

 -

 -

 -

 -

 -

154,749

154,749

13,283

 -

 -

 -

 -

158,073

171,356

Interest rate sensitivity gap

3,694

 -

 -

 -

 -

(3,694)

Cumulative gap

3,694

3,694

3,694

3,694

3,694

 -

* Other assets include all remaining assets in the Statement of Financial Position, which are not shown separately above.

** Other liabilities include all remaining liabilities in the Statement of Financial Position, which are not shown separately above.

Company

Within 3 months

More than 3 months but less than 6 months

More than 6 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

Non interest bearing

Total

As at 31 December 2017

£000

£000

£000

£000

£000

£000

£000

ASSETS

Loans and advances to banks

35,944

 -

 -

 -

 -

159

36,103

Other assets*

 -

 -

 -

 -

 -

103,855

103,855

Financial investments

 -

 -

 -

 -

 -

140

140

35,944

 -

 -

 -

 -

104,154

140,098

LIABILITIES

Other liabilities**

 -

 -

 -

 -

 -

3,293

3,293

Debt securities in issue

13,104

 -

 -

 -

 -

 -

13,104

Equity

 -

 -

 -

 -

 -

123,701

123,701

13,104

 -

 -

 -

 -

126,994

140,098

Interest rate sensitivity gap

22,840

 -

 -

 -

 -

(22,840)

Cumulative gap

22,840

22,840

22,840

22,840

22,840

 -

* Other assets include all remaining assets in the Statement of Financial Position, which are not shown separately above.

** Other liabilities include all remaining liabilities in the Statement of Financial Position, which are not shown separately above.

 

(d) Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its obligations associated with its financial liabilities that are settled by delivering cash or another financial asset.

 

The Group's approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group's reputation. The liquidity requirements of the Group are met through withdrawing funds from its Bank of England Reserve Account to cover any short-term fluctuations and longer term funding to address any structural liquidity requirements.

 

The Group has formal governance structures in place to manage and mitigate liquidity risk on a day to day basis. The Board of AL sets and approves the liquidity risk management strategy. The Assets and Liabilities Committee ("ALCO"), comprising senior executives of the Group, monitors liquidity risk. Key liquidity risk management information is reported by the finance teams and monitored by the Chief Executive Officer and Finance Director on a daily basis. The ALCO meets monthly to review liquidity risk against set thresholds and risk indicators including early warning indicators, liquidity risk tolerance levels and Individual Liquidity Adequacy Assessment Process ("ILAAP") metrics.

 

The PRA requires the Board to ensure that the Group has adequate levels of liquidity resources and a prudent funding profile, and that it comprehensively manages and controls liquidity and funding risks. The Group maintains deposits placed at the Bank of England, and highly liquid unencumbered assets that can be called upon to create sufficient liquidity to meet liabilities on demand, particularly in a period of liquidity stress.

 

Arbuthnot Latham & Co., Limited ("AL") has a Board approved ILAAP, and maintains liquidity buffers in excess of the minimum requirements. The ILAAP is embedded in the risk management framework of the Group and is subject to ongoing updates and revisions when necessary. At a minimum, the ILAAP is undated annually. The Liquidity Coverage Ratio ("LCR") regime has applied to the Group from 1 October 2015, requiring management of net 30 day cash outflows as a proportion of high quality liquid assets. The actual LCR at 282% (2017: 222%) has significantly exceeded the regulatory minimum of 90% (2017: 80%) throughout the year.

 

The Group is exposed to daily calls on its available cash resources from current accounts, maturing deposits and loan draw-downs. The Group maintains significant cash resources to meet all of these needs as they fall due. The matching and controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks to be completely matched, as transacted business is often of uncertain term and of different types.

 

The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing liabilities as they mature are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates.

 

The tables below show the undiscounted contractual cash flows of the Group's financial liabilities and assets as at 31 December 2018:

Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2018

£000

£000

£000

£000

£000

£000

Financial liability by type

Non-derivative liabilities

Deposits from banks

232,675

(232,675)

(232,675)

 -

 -

 -

Deposits from customers

1,714,286

(1,719,600)

(1,274,190)

(355,512)

(89,898)

 -

Other liabilities

1,782

(1,782)

(1,775)

 -

 -

(7)

Debt securities in issue

13,283

(19,431)

(90)

(271)

(1,447)

(17,623)

Issued financial guarantee contracts

 -

(1,744)

(1,744)

 -

 -

 -

Unrecognised loan commitments

 -

(86,002)

(86,002)

 -

 -

 -

1,962,026

(2,061,234)

(1,596,476)

(355,783)

(91,345)

(17,630)

Derivative liabilities

Risk management:

188

 - Outflows

 -

(188)

(188)

 -

 -

 -

188

(188)

(188)

 -

 -

 -

 

 

 

 

 

Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2018

£000

£000

£000

£000

£000

£000

Financial asset by type

Non-derivative assets

Cash and balances at central banks

405,325

405,325

405,325

 -

 -

 -

Loans and advances to banks

54,173

54,173

54,115

58

 -

 -

Debt securities at amortised cost

342,691

346,694

129,604

101,449

115,641

 -

Loans and advances to customers

1,224,656

1,382,857

46,646

173,077

1,038,465

124,669

Other assets

2,976

2,976

2,976

 -

 -

 -

Financial investments

35,351

35,351

16,038

 -

19,313

 -

2,065,172

2,227,376

654,704

274,584

1,173,419

124,669

Derivative assets

Risk management:

1,846

 - Inflows

 -

1,846

 -

 -

 -

1,846

1,846

1,846

 -

 -

 -

1,846

 

The tables below show the undiscounted contractual cash flows of the Group's financial liabilities and assets as at 31 December 2017:

Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2017

£000

£000

£000

£000

£000

£000

Financial liability by type

Non-derivative liabilities

Deposits from banks

195,097

(195,097)

(195,097)

 -

 -

 -

Deposits from customers

1,390,781

(1,395,770)

(1,040,893)

(293,425)

(61,452)

 -

Other liabilities

1,207

(1,207)

(1,207)

 -

 -

 -

Debt securities in issue

13,104

(19,381)

(87)

(262)

(1,395)

(17,637)

Issued financial guarantee contracts

 -

(2,976)

(2,976)

 -

 -

 -

Unrecognised loan commitments

 -

(131,963)

(131,963)

 -

 -

 -

1,600,189

(1,746,394)

(1,372,223)

(293,687)

(62,847)

(17,637)

Derivative liabilities

Risk management:

931

 - Outflows

 -

(931)

(931)

 -

 -

 -

931

(931)

(931)

 -

 -

 -

 

 

 

Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2017

£000

£000

£000

£000

£000

£000

Financial asset by type

Non-derivative assets

Cash and balances at central banks

313,101

313,101

313,101

 -

 -

 -

Loans and advances to banks

70,679

70,679

61,211

579

8,889

 -

Debt securities held-to-maturity

227,019

227,166

22,886

101,277

103,003

 -

Loans and advances to customers

1,049,269

1,187,665

126,689

121,493

800,091

139,392

Other assets

11,964

11,964

11,964

 -

 -

 -

Financial investments

2,347

2,347

2,335

 -

12

 -

1,674,379

1,812,922

538,186

223,349

911,995

139,392

Derivative assets

Risk management:

2,551

 - Inflows

 -

2,551

 -

 -

 -

2,551

2,551

2,551

 -

 -

 -

2,551

 

 

The table below sets out the components of the Group's liquidity reserves:

31 December 2018

31 December 2017

Amount

Fair value

Amount

Fair value

Liquidity reserves

£000

£000

£000

£000

Cash and balances at central banks

405,325

405,325

313,101

313,101

Loans and advances to banks

54,173

54,173

70,679

70,679

Debt securities at amortised cost / held-to-maturity

342,691

344,001

227,019

227,951

Undrawn credit lines

10,000

10,000

10,000

10,000

812,189

813,499

620,799

621,731

 

Assets pledged as collateral or encumbered

The total financial assets recognised in the statement of financial position that had been pledged as collateral for liabilities at 31 December 2018 were £308.9m (2017: £208.7m).

 

Financial assets are pledged as collateral as part of sales and repurchases, securities borrowing and securitisation transactions under terms that are usual and customary for such activities. In addition, as part of these transactions, the Group has received collateral that it is permitted to sell or repledge in the absence of default.

 

The table below analyses the contractual cash flows of the Company's financial liabilities and assets as at 31 December 2018:

 

Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2018

£000

£000

£000

£000

£000

£000

Financial liability by type

Non-derivative liabilities

Other liabilities

1,838

(1,838)

(248)

 -

 -

(1,590)

Issued financial guarantee contracts

13,283

(19,431)

(90)

(271)

(1,447)

(17,623)

15,121

(21,269)

(338)

(271)

(1,447)

(19,213)

Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2018

£000

£000

£000

£000

£000

£000

Financial asset by type

Non-derivative assets

Loans and advances to banks

17,008

17,008

17,008

 -

 -

 -

Financial investments

19,313

19,313

 -

 -

19,313

 -

36,321

36,321

17,008

 -

19,313

 -

 

The table below analyses the contractual cash flows of the Company's financial liabilities and assets as at 31 December 2017:

Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2017

£000

£000

£000

£000

£000

£000

Financial liability by type

Non-derivative liabilities

Other liabilities

1,840

(1,840)

(251)

 -

 -

(1,589)

Debt securities in issue

13,104

(19,381)

(87)

(262)

(1,395)

(17,637)

14,944

(21,221)

(338)

(262)

(1,395)

(19,226)

Carrying amount

Gross nominal inflow/ (outflow)

Not more than 3 months

More than 3 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

At 31 December 2017

£000

£000

£000

£000

£000

£000

Financial asset by type

Non-derivative assets

Loans and advances to banks

36,103

36,103

36,103

 -

 -

 -

Financial investments

140

140

128

 -

12

 -

Other assets

162

162

162

 -

 -

 -

36,405

36,405

36,393

 -

12

 -

 

The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature

are important factors in assessing the liquidity of the Group and its exposure to changes in interest rates and exchange rates.

 

Fiduciary activities

The Group provides investment management and advisory services to third parties, which involve the Group making allocation and purchase and sale decisions in relation to a wide range of financial instruments. Those assets that are held in a fiduciary capacity are not included in these financial statements. These services give rise to the risk that the Group may be accused of maladministration or underperformance. At the balance sheet date, the Group had investment management accounts amounting to approximately £985m (2017: £1,044m). Additionally, the Group provides investment advisory services.

 

(e) Financial assets and liabilities

The tables below set out the Group's financial assets and financial liabilities into their respective classifications:

FVPL

FVOCI

Amortised cost

Total carrying amount

Fair value

At 31 December 2018

£000

£000

£000

£000

£000

ASSETS

Cash and balances at central banks

 -

 -

405,325

405,325

405,325

Loans and advances to banks

 -

 -

54,173

54,173

54,173

Debt securities at amortised cost

 -

 -

342,691

342,691

344,001

Derivative financial instruments

1,846

 -

 -

1,846

1,846

Loans and advances to customers

 -

 -

1,224,656

1,224,656

1,187,408

Other assets

2,976

 -

 -

2,976

2,976

Financial investments

165

35,186

 -

35,351

35,351

4,987

35,186

2,026,845

2,067,018

2,031,080

LIABILITIES

Deposits from banks

 -

 -

232,675

232,675

232,675

Derivative financial instruments

188

 -

 -

188

188

Deposits from customers

 -

 -

1,714,286

1,714,286

1,714,286

Other liabilities

1,782

 -

 -

1,782

1,782

Debt securities in issue

 -

 -

13,283

13,283

13,283

1,970

 -

1,960,244

1,962,214

1,962,214

Fair value through profit or loss

Held-to-maturity

Loans and receivables

Available-for-sale

Liabilities at amortised cost

Total carrying amount

Fair value

At 31 December 2017

£000

£000

£000

£000

£000

£000

£000

ASSETS

Cash and balances at central banks

 -

 -

313,101

 -

 -

313,101

313,101

Loans and advances to banks

 -

 -

70,679

 -

 -

70,679

70,679

Debt securities held-to-maturity

 -

227,019

 -

 -

 -

227,019

227,951

Derivative financial instruments

2,551

 -

 -

 -

 -

2,551

2,551

Loans and advances to customers

 -

 -

1,049,269

 -

 -

1,049,269

1,022,816

Other assets

 -

 -

11,964

 -

 -

11,964

11,964

Financial investments

 -

 -

 -

2,347

 -

2,347

2,347

2,551

227,019

1,445,013

2,347

 -

1,676,930

1,651,409

LIABILITIES

Deposits from banks

 -

 -

 -

 -

195,097

195,097

195,097

Derivative financial instruments

931

 -

 -

 -

 -

931

931

Deposits from customers

 -

 -

 -

 -

1,390,781

1,390,781

1,390,781

Other liabilities

 -

 -

1,207

 -

 -

1,207

1,207

Debt securities in issue

 -

 -

 -

 -

13,104

13,104

13,104

931

 -

1,207

 -

1,598,982

1,601,120

1,601,120

 

The Group's accounting policies on the classification of financial instruments under IFRS 9 are set out in Note 3.8. The application of these policies resulted in reclassifications set out in Note 2(f).

 

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 1

Level 2

Level 3

Total

At 31 December 2018

£000

£000

£000

£000

ASSETS

Derivative financial instruments

 -

1,846

 -

1,846

Financial investments

34,223

 -

1,128

35,351

34,223

1,846

1,128

37,197

LIABILITIES

Derivative financial instruments

 -

188

 -

188

 -

188

 -

188

 

Level 1

Level 2

Level 3

Total

At 31 December 2017

£000

£000

£000

£000

ASSETS

Derivative financial instruments

 -

2,551

 -

2,551

Financial investments

144

 -

2,203

2,347

144

2,551

2,203

4,898

LIABILITIES

Derivative financial instruments

 -

931

 -

931

 -

931

 -

931

 

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:

2018

2017

Movement in level 3

£000

£000

At 1 January

2,203

2,012

Consideration received

163

 -

Disposals

(1,403)

 -

Movements recognised in Other Comprehensive Income

135

136

Movements recognised in the Income Statement

30

55

At 31 December

1,128

2,203

 

Secure Trust bank investment

The Group currently holds equity shares in Secure Trust Bank plc, valued at £34.2m (2017: £nil). The shares are recognised at fair value using quoted prices on the London Stock Exchange.

 

Visa Inc. investment

Arbuthnot Latham currently holds preference shares in Visa Inc., valued at £863k (2017: £706k) as at 31 December 2018. These shares have been valued at their future conversion value into Visa Inc. common stock. The valuation includes a 31% haircut, comprising 25% due to a contingent liability disclosed in Visa Europe's accounts in relation to litigation and 6% based on a liquidity discount.

 

Investment in overseas property company

Arbuthnot Latham currently holds a debt and equity investment classified as FVPL in a property company which owns an office building through its 100% owned subsidiary. During 2018 the subsidiary company was sold under the terms of the sale agreement the buyer agreed to purchase 100% of the share capital and reimburse all outstanding loans. The proceeds of the sale have been distributed to the investors, except for the amount withheld for the general and specific warranties (which will be released in three instalments at 18 month intervals) included as a condition of the sale agreement. A distribution of £1.6m has been received and a gain of £75k has been recognised in profit or loss during the year. The investment has been valued at £165k as at 31 December 2018. The investment has been valued as the discounted consideration outstanding less 11% hair cut for the warranties.

 

Hetz Ventures, L.P.

Arbuthnot Latham currently holds an equity investment in Hetz Ventures, L.P. which was a launched in January 2018 with the primary objective to generate attractive risk-adjusted returns for its Partners, principally through long-term capital appreciation, by making, holding and disposing of equity and equity-related investments in early stage revenue generating Israeli technology companies, primarily in cyber, fin-tech and the disruptive software sectors. The company has committed to a capital contribution of USD $1.0m of the total closing fund capital of USD$55.0m. At 31 December 2018 the company had made capital contributions into the Fund of $168k.

 

The investment is classified as FVOCI and is valued at fair value by Hetz Ventures, L.P. at £0.1m as at 31 December 2018. As at year end the fair value is deemed to be cost less management fees due to the immature stage of investments that have been made by the Fund.

 

The tables below analyse financial instruments not measured at fair value by the level in the fair value hierarchy:

 

Level 1

Level 2

Level 3

Total

At 31 December 2018

£000

£000

£000

£000

ASSETS

Cash and balances at central banks

 -

405,325

 -

405,325

Loans and advances to banks

 -

54,173

 -

54,173

Debt securities at amortised cost

 -

342,691

 -

342,691

Loans and advances to customers*

 -

996,198

228,458

1,224,656

Other assets

 -

 -

2,976

2,976

 -

1,798,387

231,434

2,029,821

LIABILITIES

Deposits from banks

 -

232,675

 -

232,675

Deposits from customers

 -

1,714,286

 -

1,714,286

Other liabilities

 -

 -

1,782

1,782

Debt securities in issue

 -

 -

13,283

13,283

 -

1,946,961

15,065

1,962,026

* On transition to IFRS 9 on 1 January 2018, all loans on a variable rate are now recognised as Level 2 financial instruments.

 

Level 1

Level 2

Level 3

Total

At 31 December 2017

£000

£000

£000

£000

ASSETS

Cash and balances at central banks

 -

313,101

 -

313,101

Loans and advances to banks

 -

70,679

 -

70,679

Debt securities held-to-maturity

 -

227,019

 -

227,019

Loans and advances to customers

 -

 -

1,049,269

1,049,269

Other assets

 -

 -

11,964

11,964

 -

610,799

1,061,233

1,672,032

LIABILITIES

Deposits from banks

 -

195,097

 -

195,097

Deposits from customers

 -

1,390,781

 -

1,390,781

Other liabilities

 -

 -

1,207

1,207

Debt securities in issue

 -

 -

13,104

13,104

 -

1,585,878

14,311

1,600,189

 

7. Capital management

The Group's capital management policy is focused on optimising shareholder value. There is a clear focus on delivering organic growth and ensuring capital resources are sufficient to support planned levels of growth. The Board regularly reviews the capital position.

 

The Group's lead regulator, the Prudential Regulatory Authority ("PRA"), sets and monitors capital requirements for the Group

 

In accordance with the EU's Capital Requirements Directive ("CRD") and the required parameters set out in the PRA Handbook (BIPRU 2.2), the Individual Capital Adequacy Assessment Process ("ICAAP") is embedded in the risk management framework of the Group and is subject to ongoing updates and revisions when necessary. However, at a minimum, the ICAAP is updated annually as part of the business planning process. The ICAAP is a process that brings together the management framework (i.e. the policies, procedures, strategies, and systems that the Group has implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital management.

 

Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a "Pillar I plus" approach to determine the level of capital the Group needs to hold. This method takes the Pillar I capital formula calculations (standardised approach for credit, market and operational risk) as a starting point, and then considers whether each of the calculations delivers a sufficient capital sum adequately to cover management's anticipated risks. Where the Board considered that the Pillar I calculations did not reflect the risk, an additional capital add-on in Pillar II is applied, as per the Total Capital Requirement ("TCR") issued by the PRA. The current TCR of the Group is 9.00%.

 

The Group's regulatory capital is divided into two tiers:

• Tier 1 comprises mainly shareholders' funds and revaluation reserves, after deducting goodwill, other intangible assets and the

deduction for a significant investment in a financial institution (STB). The portion of the investment representing up to 10% of

ABG's Tier 1 is added back to capital resources and then risk weighted at 250%, while anything above the 10% is therefore

deducted.

• Lower Tier 2 comprises qualifying subordinated loan capital. Lower Tier 2 capital cannot exceed 50% of Tier 1 capital.

 

The following table shows the regulatory capital resources as managed by the Group:

2018

2017

£000

£000

Tier 1

Share capital

153

153

Retained earnings*

209,083

237,171

Deduction for significant investment*

(34,219)

(83,804)

Add back 10% of CET1 (risk weighted at 250%)

18,137

22,038

Capital redemption reserve

20

20

IFRS 9 - Transitional add back

1,986

Treasury shares

(1,131)

(1,131)

Deduction for goodwill

(5,202)

(5,202)

Deduction for other intangibles

(11,336)

(10,793)

Fair value/Available-for-sale reserve*

(12,169)

162

Prudent valuation deduction

(38)

Total tier 1 capital resources

165,284

158,614

Tier 2

Debt securities in issue

13,283

13,104

Total tier 2 capital resources

13,283

13,104

Total tier 1 & tier 2 capital resources

178,567

171,718

Core Tier 1 capital ratio (Net Core Tier 1 capital/Basel III Total Risk Exposure)

15.9%

17.3%

Total Capital Ratio (Capital/Basel III Total Risk Exposure)

17.2%

18.8%

 

\* The reduced deduction for significant investment is due to the fall in the fair value of the investment in STB, which is now accounted for as a financial asset at fair value through OCI. The initial fair value adjustment went through retained earnings as part of the net current year loss recorded and fair value losses since then are reflected in the fair value reserve.

 

The ICAAP includes a summary of the capital required to mitigate the identified risks in its regulated entities and the amount of capital that the Group has available. The PRA sets TCR for each UK bank calibrated by reference to its Capital Resources Requirement, broadly equivalent to 8 percent of risk weighted assets and thus representing the capital required under Pillar I of the Basel III framework. The ICAAP is a key input into the PRA's TCR setting process, which addresses the requirements of Pillar II of the Basel III framework. The PRA's approach is to monitor the available capital resources in relation to the TCR requirement. The Group maintains an extra internal buffer and capital ratios are reviewed on a monthly basis to ensure that external requirements are adhered to. All regulated entities have complied with all of the externally imposed capital requirements to which they are subject.

 

Pillar III complements the minimum capital requirements (Pillar I) and the supervisory review process (Pillar II). Its aim is to encourage market discipline by developing a set of disclosure requirements which will allow market participants to assess key pieces of information on a firm's capital, risk exposures and risk assessment processes. Our Pillar III disclosures for the year ended 31 December 2018 are published as a separate document on the Group website under Investor Relations (Announcements & Shareholder Info).

 

8. Net interest income

2018

2017

£000

£000

Cash and balances at central banks

2,264

801

Loans and advances to banks

2,703

258

Debt securities at amortised cost / held-to-maturity

3,303

1,353

Loans and advances to customers

57,020

45,015

65,290

47,427

Deposits from banks

(1,517)

(35)

Deposits from customers

(8,224)

(5,939)

Debt securities in issue

(366)

(360)

Interest expense

(10,107)

(6,334)

Net interest income

55,183

41,093

 

9. Fee and commission income

Fee and commission income is disaggregated below and includes a total for fees in scope of IFRS 15, Revenues from Contracts with Customers:

Group

Private Banking

Commercial Banking

RAF

All other divisions

Total

At 31 December 2018

£000

£000

£000

£000

£000

Banking commissions

747

617

151

220

1,735

Foreign exchange fees

558

232

 -

537

1,327

Investment management fees

8,177

 -

 -

1

8,178

Wealth planning fees

1,404

 -

 -

312

1,716

Total fee and commission income

10,886

849

151

1,070

12,956

 

Group

Private Banking

Commercial Banking

RAF

All other divisions

Total

At 31 December 2017

£000

£000

£000

£000

£000

Banking and services fees

1,487

374

 -

402

2,263

Foreign exchange fees

545

161

 -

356

1,062

Investment management fees

7,870

 -

 -

17

7,887

Wealth planning fees

2,593

 -

 -

 -

2,593

Total fee and commission income

12,495

535

 -

775

13,805

 

10. Net impairment loss on financial assets

2018

2017

£000

£000

Net Impairment losses on loans and advances to customers

2,731

394

Of which:

Stage 1

821

 -

Stage 3

1,910

 -

2,731

394

The provision charge in 2018 has increased largely due to the transition to IFRS 9, if 2017 was restated on an IFRS 9 basis the charge would have been £3.0m.

During the year, the Group recovered £41k (2017: £116k) of loans which had previously been written off.

 

11. Other income

Other income includes a fair value adjustment of £2.6m (2017: £nil), to the contingent consideration for the acquisition of Renaissance Asset Finance Ltd. The fair value adjustment is based on management's assessment of the underlying performance of the business and reflects a reduction in the estimated future liability payable under the sale and purchase agreement.

 

Other items reflected in other income include rental income from the investment properties (see Note 31) of £2.6m (2017: £2.1m), premises recharges of £0.7m (2017: £0.7m) to STB for office space occupied and dividends received on the shares held in STB of £0.7m, since de-recognition as an associate undertaking.

 

12. Operating expenses

2018

2017

Operating expenses comprise:

£000

£000

Staff costs, including Directors:

Wages, salaries and bonuses

37,051

30,937

Social security costs

4,176

3,576

Pension costs

1,842

1,558

Share based payment transactions (note 39)

(318)

189

Amortisation of intangibles (note 28)

1,752

1,036

Depreciation (note 30)

1,122

1,508

Financial Services Compensation Scheme Levy

113

190

Operating lease rentals

3,143

3,087

Operating expenses for investment property

282

230

Acquisitions costs

378

108

Other administrative expenses

15,441

12,302

Total operating expenses from continuing operations

64,982

54,721

 

Details on Directors remuneration are disclosed in the Remuneration Report on page ##RREP.

 

2018

2017

Remuneration of the auditor and its associates, excluding VAT, was as follows:

£000

£000

Fees payable to the Company's auditor for the audit of the Company's annual accounts

112

105

Fees payable to the Company's auditor and its associates for other services:

Audit of the accounts of subsidiaries

323

221

Audit related assurance services

160

85

Other assurance services

10

17

Other non-audit services

10

 -

Total fees payable

615

428

 

13. Income tax expense

2018

2017

United Kingdom corporation tax at 19% (2017: 19.25%)

£000

£000

Current taxation

Corporation tax charge - current year

620

472

Corporation tax charge - adjustments in respect of prior years

132

(141)

752

331

Deferred taxation

Origination and reversal of temporary differences

350

(135)

Adjustments in respect of prior years

19

252

369

117

Income tax expense

1,121

448

Tax reconciliation

Profit before tax

6,780

2,534

Tax at 19% (2017: 19.25%)

1,288

488

Permanent difference - Tax on associate income

(854)

(429)

Other permanent differences

536

277

Tax rate change

 -

1

Prior period adjustments

151

111

Corporation tax charge for the year

1,121

448

 

Permanent differences mainly relate to associate income which is reflected after tax.

 

The tax charge on discontinuing operations is disclosed in note 14.

 

On 26 October 2015 the Government substantively enacted a reduction in the UK corporation tax rate from 20% to 19% (effective from 1 April 2017). An additional reduction to 17% (effective from 1 April 2020) was substantively enacted on 6 September 2016. This will reduce the Bank's future current tax charge accordingly.

 

14. Discontinued operations

The profit after tax from discontinued operations is made up as follows:

 

Year ended 31 December

Year ended 31 December

2018

2017

Discontinued operations

£000

£000

Profit after tax from discontinued operations - STB associate income (up to 8 August 2018)

2,971

4,437

Loss after tax on de-recognition of STB

(28,663)

 -

Loss after tax from discontinued operations

(25,692)

4,437

 

15. Average number of employees

2018

2017

Private Banking

135

136

Commercial Banking

46

38

RAF

26

13

All Other Divisions

182

161

Group Centre

17

17

406

365

 

16. 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 14,889,048 (2017: 14,852,763) in issue during the year.

 

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 year, as well as the number of dilutive share options in issue during the year. The number of dilutive share options in issue at the year end was nil (2017: nil).

 

2018

2017

Profit & dilutive profit attributable

£000

£000

Total (loss) / profit after tax attributable to equity holders of the Company

(20,033)

6,523

Profit after tax from continuing operations attributable to equity holders of the Company

5,659

2,086

(Loss) / profit after tax from discontinued operations attributable to equity holders of the Company

(25,692)

4,437

2018

2017

Basic & Diluted Earnings per share

p

p

Total Basic Earnings per share

(134.5)

43.9

Basic Earnings per share from continuing operations

38.0

14.0

Basic Earnings per share from discontinued operations

(172.5)

29.9

 

17. Cash and balances at central banks

2018

2017

Group

£000

£000

Cash and balances at central banks

 405,325

313,101

 

All assets have been assessed as Stage 1 at 1 January and 31 December 2018, with immaterial ECL.

 

Surplus funds are mainly held in the Bank of England reserve account, with the remainder held in certificates of deposit, fixed rate notes and money market deposits in highly rated banks (the majority held in UK clearing banks).

 

18. Loans and advances to banks

2018

2017

Group

£000

£000

Placements with banks included in cash and cash equivalents (note 41)

54,173

70,679

The table below presents an analysis of loans and advances to banks by rating agency designation as at 31 December, based on Moody's long term ratings:

2018

2017

Group

£000

£000

Aaa

709

 -

Aa3

42,230

39,871

A1

8,880

20,553

A2

1,906

10,012

A3

10

 -

Baa1

430

235

Unrated

8

8

54,173

70,679

None of the loans and advances to banks are past due (2017: £nil). ECL has been assessed as immaterial.

2018

2017

Company

£000

£000

Placements with banks included in cash and cash equivalents (note 41)

17,008

36,103

Loans and advances to banks include bank balances of £17.0m (2017: £36.1m) with Arbuthnot Latham & Co., Ltd.

 

19. Debt securities at amortised cost / held-to-maturity

Debt securities represent certificates of deposit.

 

The movement in debt securities may be summarised as follows:

2018

2017

Group

£000

£000

At 1 January

227,019

107,300

Exchange difference

4,783

(951)

Additions

467,772

211,080

Redemptions

(356,883)

(90,410)

At 31 December

342,691

227,019

 

The table below presents an analysis of debt securities by rating agency designation at 31 December, based on Moody's long term ratings:

2018

2017

Group

£000

£000

Aaa

76,281

100,106

Aa1

84,218

51,389

Aa2

32,325

5,946

Aa3

56,046

18,384

A1

75,657

18,187

A2

18,164

 -

A3

 -

33,007

342,691

227,019

None of the debt securities are past due (2017: £nil). ECL has been assessed as immaterial.

 

20. Assets classified as held for sale

Group

2018

2017

£000

£000

Seed capital investments held for sale

-

-

Repossessed property held for sale

8,002

2,915

8,002

2,915

 

Seed capital investments held for sale

The Group considers itself a sponsor of an investment fund when it facilitates the establishment of a fund in which the Group is the investment manager. The Group ordinarily provides seed capital in order to provide initial scale and facilitate marketing of the funds to third-party investors. The fund is then financed through the issue of units to investors. Aggregate interests held by the Group include seed capital, management fees and performance fees. The Group generates management and performance fee income from managing the assets on behalf of third-party investors.

 

The Group has an investment of £nil (2017: £1) in the share capital of the SPV created to administer the fund. At 31 December 2018, the Group has a receivable of £nil (2017: £6.8m) from the SPV, which is reflected in Note 24.

 

In 2017, the Fund was classified as held for sale, the criteria required for this classification have not been met in 2018 and therefore has been consolidated in 2018.

 

Repossessed property held for sale

In the prior year, a property in Spain held as collateral on a loan was repossessed. As at the time of repossession, it was expected that the property would be sold in 12 months, it was recognised as held for sale. A sale was not possible within during the year, due to factors outside of the Group's control, however as a sale is assessed to be probable within 12 months, it has been recognised as held for sale with a carrying value of £3.1m (2017: £2.9m)

 

During the year, a further property in Spain held as collateral on a loan, valued at £4.9m at year end was repossessed. The Group's policy is to pursue timely realisation of the collateral in an orderly manner. The property is recognised as an asset held for sale.

 

All repossessed property is expected to be sold within 12 months.

 

21. Derivative financial instruments

2018

2017

Contract/ notional amount

Fair value assets

Fair value liabilities

Contract/ notional amount

Fair value assets

Fair value liabilities

Group

£000

£000

£000

£000

£000

£000

Currency swaps

4,929

192

188

9,614

950

931

Interest rate swaps

25,762

112

 -

17,824

 -

 -

Structured notes

1,607

1,542

 -

1,607

1,601

 -

32,298

1,846

188

29,045

2,551

931

 

All assets have been assessed as Stage 1 as at 1 January and 31 December 2018, with immaterial ECL.

 

The principal derivatives used by the Group are over the counter exchange rate contracts. Exchange rate related contracts include currency swaps and interest rate swaps.

 

A forward foreign exchange contract is an agreement to buy or sell a specified amount of foreign currency on a specified future date at an agreed rate. Currency swaps generally involve the exchange of interest payment obligations denominated in different currencies; exchange of principal can be notional or actual. The currency swaps are settled net and therefore the fair value is small in comparison to the contract/notional amount. Interest rate swaps are used to hedge against the Profit or Loss impact resulting from the movement in interest rates, due to some exposures having fixed rate terms.

 

Also included in derivative financial instruments are structured notes. The Group invested in the structured notes, which are maturing in 2021.

 

The Group only uses investment graded banks as counterparties for derivative financial instruments. None of the contracts are collateralised.

 

The table below presents an analysis of derivative financial instruments contract/notional amounts by rating agency designation of

counterparty bank at 31 December, based on Moody's long term ratings:

2018

2017

Group

£000

£000

A1

29,601

26,521

A2

2,635

2,524

Baa1

62

 -

32,298

29,045

 

22. Loans and advances to customers

Analyses of loans and advances to customers:

2018

IAS 39

Stage 1

Stage 2

Stage 3

Total

Group

£000

£000

£000

£000

£000

At 31 December 2017

1,050,631

 -

 -

 -

1,050,631

IFRS 9 reclassification into Stages

(1,050,631)

992,252

29,502

28,877

 -

Gross loans and advances at 1 January 2018

 -

992,252

29,502

28,877

1,050,631

Originations

458,825

 -

 -

458,825

Repayments and write-offs

(266,890)

(8,809)

(2,526)

(278,225)

Transfer to Stage 1

7,975

(7,975)

 -

Transfer to Stage 2

(27,929)

28,975

(1,046)

 -

Transfer to Stage 3

(3,109)

(8,993)

12,102

 -

Gross loans and advances at 31 December 2018

 -

1,161,124

32,700

37,407

1,231,231

Less allowances for ECLs (see Note 23)

 -

(1,606)

(8)

(4,961)

(6,575)

Net loans and advances at 31 December 2018

 -

1,159,518

32,692

32,446

1,224,656

2017

IAS 39

Stage 1

Stage 2

Stage 3

Total

Group

£000

£000

£000

£000

£000

Gross loans and advances at 31 December 2017

1,050,631

 -

 -

 -

1,050,631

Less allowances for impairments (see Note 23)

(1,362)

 -

 -

 -

(1,362)

Net loans and advances at 31 December 2017

1,049,269

 -

 -

 -

1,049,269

 

Comparative data for 2017 has been prepared under IAS 39. For a maturity profile of loans and advances to customers, refer to note 6.

 

Loans and advances to customers by division (net of ECL / impairments):

2018

Private Banking

Commercial Banking

RAF

All Other Divisions

Total

Group

£000

£000

£000

£000

£000

Stage 1

618,486

431,630

84,276

25,126

1,159,518

Stage 2

20,034

11,478

1,180

 -

32,692

Stage 3

31,944

 -

502

 -

32,446

At 31 December 2018

670,464

443,108

85,958

25,126

1,224,656

2017

Private Banking

Commercial Banking

RAF

All Other Divisions

Total

Group

£000

£000

£000

£000

£000

At 31 December 2017

650,245

305,055

71,265

22,704

1,049,269

 

Analyses of past due loans and advances to customers by division:

2018

Private Banking

Commercial Banking

RAF

All Other Divisions

Total

Group

£000

£000

£000

£000

£000

Up to 30 days

47,766

20,784

2,519

 -

71,069

Stage 1

47,766

20,784

2,078

 -

70,628

Stage 2

 -

 -

154

 -

154

Stage 3

 -

 -

287

 -

287

30 - 60 days

662

2,300

775

 -

3,737

Stage 2

662

2,300

565

 -

3,527

Stage 3

 -

 -

210

 -

210

60 - 90 days

385

4,177

297

 -

4,859

Stage 2

385

4,177

175

 -

4,737

Stage 3

 -

 -

122

 -

122

Over 90 days

49,415

 -

546

 -

49,961

Stage 2

12,901

 -

272

 -

13,173

Stage 3

36,514

 -

274

 -

36,788

At 31 December

98,228

27,261

4,137

 -

129,626

 

2017

Private Banking

Commercial Banking

RAF

All Other Divisions

Total

Group

£000

£000

£000

£000

£000

Up to 30 days

90,527

24,599

 -

 -

115,126

30 - 60 days

11,043

 -

 -

 -

11,043

60 - 90 days

5,078

 -

 -

 -

5,078

At 31 December

106,648

24,599

 -

 -

131,247

Prior year numbers are presented under IAS 39 and therefore has no Staging.

 

Loans and advances to customers include finance lease receivables as follows:

2018

2017

Group

£000

£000

Gross investment in finance lease receivables:

 - No later than 1 year

36,609

28,911

 - Later than 1 year and no later than 5 years

62,541

53,766

 - Later than 5 years

214

 -

99,364

82,677

Unearned future finance income on finance leases

(13,406)

(11,412)

Net investment in finance leases

85,958

71,265

The net investment in finance leases may be analysed as follows:

 - No later than 1 year

30,657

23,170

 - Later than 1 year and no later than 5 years

55,095

48,095

 - Later than 5 years

206

 -

85,958

71,265

 

(b) Loans and advances renegotiated

Restructuring activities include external payment arrangements, modification and deferral of payments. Following restructuring, a previously overdue customer account is reset to a normal status and managed together with other similar accounts. Restructuring policies and practices are based on indicators or criteria which, in the judgement of management, indicate that payment will most likely continue. These policies are kept under continuous review. Renegotiated loans that would otherwise be past due or impaired totalled £nil (2017: £nil).

 

(c) Collateral held

Collateral is measured at fair value less costs to sell. Most of the loans are secured by property. The fair value of the collateral held against loans and advances in Stage 3 is £51.3m (2017: £59.4m - collateral of loans and advances recognised as impaired under IAS 39) against loans (net of ECL) of £37.4m (2017: £29.7m - loans and advances recognised as impaired under IAS 39). The weighted average loan-to-value is 72.9% (2017: 50%).

 

23. Allowances for impairment of loans and advances

An analysis of movements in the allowance for ECLs:

IAS 39

Stage 1

Stage 2

Stage 3

Total

Group

£000

£000

£000

£000

£000

At 31 December 2017

1,362

1,362

IFRS 9 transition adjustment

2,580

2,580

Reclassification into IFRS 9 Stages

(3,942)

1,244

1,178

1,520

 -

At 1 January 2018

 -

1,244

1,178

1,520

3,942

Transfer to Stage 1

-

-

-

-

Transfer to Stage 2

(378)

378

 -

-

Transfer to Stage 3

(81)

(1,548)

1,629

 -

Current year charge

821

 -

1,871

2,692

Adjustment due to variation in expected future cash flows

 -

 -

78

78

Repayments and write-offs

 -

 -

(137)

(137)

At 31 December 2018

 -

1,606

8

4,961

6,575

 

Allowances for impairments of loans and advances - IAS 39 comparatives

Reconciliation of specific allowance for impairments:

2017

Group

£000

At 1 January

973

Impairment losses

329

On acquisition of RAF (see note 29)

51

Loans written off during the year as uncollectible

(15)

Amounts recovered during the year

(116)

At 31 December

1,222

Reconciliation of collective allowance for impairments:

2017

Group

£000

On acquisition of RAF (see note 29)

75

Impairment losses

65

At 31 December

140

Total allowance for impairments as at 31 December 2017

1,362

 

24. Other assets

2018

2017

Group

£000

£000

Trade receivables

2,976

5,208

Inventory

4,058

4,436

Receivable from investment fund held for sale

 -

6,756

Prepayments and accrued income

5,682

4,224

12,716

20,624

 

As allowed by IFRS 9, the Group utilises the practical expedient for the stage allocation of particular financial instruments which are deemed 'low credit risk'. This practical expedient permits the Group to assume, without more detailed analysis, that the credit risk on a financial instrument has not increased significantly since initial recognition if the financial instrument is determined to have 'low credit' at the reporting date. The Group allocates such assets to Stage 1. The low credit risk exemption is applied to Trade receivables. ECL has been assessed as immaterial.

 

Inventory

Land acquired through repossession of collateral which is subsequently held in the ordinary course of business with a view to develop and sell is accounted for as inventory. The land is currently in the process of being redeveloped and will ultimately be sold off as individual residential plots. The proceeds from the sale of these plots will be used to repay the outstanding loans. Pinnacle Universal is a special purpose vehicle, 100% owned by the Group, which owns this land.

 

2018

2017

Company

£000

£000

Trade receivables

 -

3

Due from subsidiary undertakings

 -

159

Prepayments and accrued income

42

37

42

199

 

25. Financial investments

2018

2017

Group

£000

£000

Designated at fair value through profit and loss

 - Listed securities

 -

128

 - Debt securities

165

 -

Designated at fair value through other comprehensive income

 - Listed securities

34,222

4

 - Debt securities

 -

1,497

 - Unlisted securities

964

718

Total financial investments

35,351

2,347

 

Listed securities

The Group holds investments in listed securities which are valued based on quoted prices.

 

On 8 August 2018, ABG lost significant influence over STB. At this date the interest in associate was de-recognised and the shares held in STB were marked to market and disclosed as a financial investment. The shares were designated as FVOCI for strategic purposes. In November 2018 ABG sold 575,000 shares held in STB, reducing the shareholding from 18.64% to 15.53%. The carrying value at year end is £34.2m and £0.7m of dividends were received in the year.

 

Debt securities

The Group has made an investment in an unlisted special purpose vehicle, set up to acquire and enhance the value of a commercial property through its 100% owned subsidiary. During 2018 the subsidiary company was sold under the terms of the sale agreement the buyer agreed to purchase 100% of the share capital and reimburse all outstanding loans. The proceeds of the sale have been distributed o the investors, except for the amount withheld for the general and specific warranties (which will be released in three instalments at 18 month intervals included as a condition of the sale agreement. A distribution of £1.6m has been received and a gain of £0.1m has been recognised in profit or loss during the year. The investment has been valued at £0.2m as at 31 December 2018 (see note 6. (e)).

 

Unlisted securities

All unlisted securities have been designated as FVOCI as they are held for strategic reasons.

 

On 23 June 2016 Arbuthnot Latham received €1.3m cash consideration following Visa Inc.'s completion of the acquisition of Visa Europe. As part of the deal Arbuthnot Latham also received preference shares in Visa Inc., these have been valued at their future conversion value into Visa Inc. common stock. Management has assessed the fair value of the Group's investment as £863k (2017: £706k). This valuation includes a 31% haircut.

 

On adoption of IFRS 9 at 1 January 2018, the Group designated its investment in the security as FVOCI. Previously, this investment was classified as available for sale and measured at fair value through other comprehensive income. Dividends received during the year amounted to £7k (2017: £2k).

 

A further investment in an unlisted investment vehicle was a made in the year. The carrying value at year end is £100k and no dividends were received in the year.

 

2018

2017

Company

£000

£000

Financial investments comprise:

 - Listed securities (at fair value through OCI)

19,312

128

 - Unlisted securities (at fair value through OCI)

1

12

Total financial investments

19,313

140

 

26. Deferred taxation

The deferred tax asset comprises:

2018

2017

Group

£000

£000

Accelerated capital allowances and other short-term timing differences

(68)

372

Movement in fair value of financial investments FVOCI / available-for-sale

(66)

(40)

Unutilised tax losses

1,134

1,195

IFRS 9 adjustment

490

 -

Deferred tax asset

1,490

1,527

At 1 January

1,527

1,665

On acquisition of RAF

 -

5

Other Comprehensive Income - FVOCI / available-for-sale

(26)

(26)

Profit and loss account - accelerated capital allowances and other short-term timing differences

(96)

(576)

Profit and loss account - tax losses

(405)

459

IFRS 9 adjustment

490

 -

Deferred tax asset at 31 December

1,490

1,527

 

2018

2017

Company

£000

£000

Accelerated capital allowances and other short-term timing differences

2

346

Tax losses

111

295

Deferred tax asset

113

641

At 1 January

641

397

Profit and loss account - accelerated capital allowances and other short-term timing differences

 -

(51)

Profit and loss account - tax losses

(528)

295

Deferred tax asset at 31 December

113

641

 

Deferred tax assets are recognised for tax losses to the extent that the realisation of the related tax benefit through future taxable profits is probable.

 

27. Interests in associates

2018

2017

Group

£000

£000

Secure Trust Bank PLC

 - 

83,804

Interests in associates

 - 

83,804

 

Secure Trust Bank ("STB")

At 31 December 2017, ABG had an 18.64% shareholding in STB. On 8 August 2018, ABG lost significant influence over STB and as such the interest in associate was de-recognised. This resulted in a loss on de-recognition of £28.7m, as the shares were marked to market at that date. The profit from associate up to 8 August 2018 was £3m. Going forward the shareholding in STB is reflected as a financial investment as disclosed in Note 25.

 

Interest in associate for the Company is set out below:

2018

2017

Company

£000

£000

Secure Trust Bank PLC

 - 

5,056

Interests in associates

 - 

5,056

 

28. Intangible assets

Goodwill

Computer software

Other intangibles

Total

Group

£000

£000

£000

£000

Cost

At 1 January 2017

1,682

8,507

214

10,403

Additions

 -

2,641

 -

2,641

On Acquisition - RAF (see note 29)

3,520

 -

2,348

5,868

At 31 December 2017

5,202

11,148

2,562

18,912

Additions

 -

2,294

 -

2,294

At 31 December 2018

5,202

13,442

2,562

21,206

Accumulated amortisation

At 1 January 2017

 -

(1,732)

(149)

(1,881)

Amortisation charge

 -

(830)

(206)

(1,036)

At 31 December 2017

 -

(2,562)

(355)

(2,917)

Amortisation charge

 -

(1,483)

(268)

(1,751)

At 31 December 2018

 -

(4,045)

(623)

(4,668)

Net book amount

At 31 December 2017

5,202

8,586

2,207

15,995

At 31 December 2018

5,202

9,397

1,939

16,538

 

The accounting policy for goodwill is described in note 3.15 (a). The Group reviews the goodwill for impairment at least annually or when events or changes in economic circumstances indicate that impairment may have taken place. Significant management judgements are made in estimations, to evaluate whether an impairment of goodwill is necessary. Impairment testing is performed at CGU level and the following two items, with judgements surrounding them, have a significant impact on the estimations used in determining the necessity of an impairment charge:

 

• Future cash flows - Cash flow forecasts reflect management's view of future business forecasts at the time of the assessment. A detailed three year budget is done every year and management also uses judgement in applying a growth rate. The accuracy of future cash flows is subject to a high degree of uncertainty in volatile market conditions. During such conditions, management would perform impairment testing more frequently than annually to ensure that the assumptions applied are still valid in the current market conditions.

 

• Discount rate - Management also apply judgement in determining the discount rate used to discount future expected cash flows. The discount rate is derived from the cost of capital for each CGU.

 

The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. There are currently two CGUs (2017: two) with goodwill attached; the core Arbuthnot Latham CGU (£1.7m) and RAF CGU (£3.5m).

 

Management considers the value in use for both CGUs to be the discounted cash flows over 5 years with a terminal value (2017: 5 years with a terminal value). The 5 year discounted cash flows with a terminal value are considered to be appropriate as the goodwill relates to an ongoing well established business and not underlying assets with finite lives. The terminal value is calculated by applying a discounted perpetual growth model to the profit expected in 2020 as per the approved 3 year plan. A growth rate of 8.9% (2017: 12.5%) was used for income and 6.9% (2017: 18%) for expenditure from 2018 to 2020 (these rates were the best estimate of future forecasted performance), while a 3% (2017: 3%) percent growth rate for income and expenditure (a more conservative approach was taken for latter years as these were not budgeted for in detail as per the three year plan approved by the Board of Directors) was used for cash flows after the approved three year plan.

 

Management considers the value in use for the RAF CGU to be the discounted cash flows over 5 years with a terminal value. The 5 year discounted cash flows with a terminal value are considered to be appropriate as the goodwill relates to an ongoing, well established, business and not underlying assets with finite lives. The terminal value is calculated by applying a discounted perpetual growth model to the profit expected in 2022 as per the approved budget. A growth rate of 3% (2017: 5%) was used (this rate was the best estimate of future forecasted performance).

 

The growth rates used are above the forecast UK growth rate of 1.3% to reflect the Bank's current growth strategy enabled by capital available at parent level.

 

Cash flows were discounted at a pre-tax rate of 12% (2017: 12%) to their net present value. The discount rate of 12% is considered to be appropriate after evaluating current market assessments of the time value of money and the risks specific to the assets or CGUs.

 

Currently, the value in use and fair value less costs to sell of both CGUs exceed the carrying values of the associated goodwill and as a result no sensitivity analysis was performed.

 

29. Acquisition of Renaissance Asset Finance Ltd

On 28 April 2017, Arbuthnot Latham & Co. Ltd completed the acquisition of 100% of the share capital of Renaissance Asset Finance Limited ("RAF") from its founders following receipt of regulatory approval.

 

RAF is a provider of finance for a range of specialist assets which includes vintage and expensive cars and SME business assets. The acquisition supported ALs strategy to diversify its proposition within the specialist financial services sector.

 

The consideration will be paid in four staged amounts, all of which will be in cash. The first payment was equal to the net assets at completion of £2.1m. The remaining three payments are performance related and will be based on the profits of RAF in each of the three calendar years 2018 to 2020. The maximum amount payable for the performance based payments is limited to £6.5m. AL has also provided an intercompany loan to RAF at completion of £57m to re-finance RAF's existing finance liabilities. The consideration and the refinancing of RAF's funding liabilities have been satisfied from the Group's current cash resources.

 

The assets acquired and resulting goodwill on acquisition are set out in the table below. The fair value of intangibles acquired include £0.4m relating to customer relationships, £1.5m relating to broker relationships and £0.4m for the brand. The resultant goodwill represented the assembled specialist workforce, established process and control environment, cross selling opportunities between the two companies and the opportunity cost of a fully operational company within the sector.

 

Acquired

Recognised

assets /

Fair value

values on

liabilities

adjustments

acquisition

£000

£000

£000

Loans and advances to banks

2,815

2,815

Loans and advances to customers

57,684

57,684

Other asset

1,341

1,341

Deferred tax assets

5

5

Intangible assets

2,348

2,348

Property, plant and equipment

23

23

Total assets

61,868

2,348

64,216

Deposits from banks

58,969

58,969

Current tax liability

195

195

Other liabilities

632

632

Total liabilities

59,796

59,796

Net identifiable assets

2,072

2,348

4,420

Consideration

7,940

Goodwill

3,520

 

30. Property, plant and equipment

Freehold land and buildings

Leasehold improvements

Computer and other equipment

Motor Vehicles

Total

Group

£000

£000

£000

£000

Cost or valuation

At 1 January 2017

 -

4,587

2,741

97

7,425

Additions

 -

408

258

 -

666

On acquisition - RAF (see note 29)

 -

20

52

 -

72

Disposals

 -

 -

(10)

 -

(10)

At 31 December 2017

 -

5,015

3,041

97

8,153

Additions

 -

1,764

627

91

2,482

Disposals

 -

 -

 -

(97)

(97)

At 31 December 2018

 -

6,779

3,668

91

10,538

At 1 January 2017

 -

(1,217)

(1,380)

(46)

(2,643)

Depreciation charge

 -

(944)

(540)

(25)

(1,509)

On acquisition - RAF (see note 29)

 -

(16)

(33)

 -

(49)

Disposals

 -

 -

10

 -

10

At 31 December 2017

 -

(2,177)

(1,943)

(71)

(4,191)

Depreciation charge

 -

(823)

(276)

(23)

(1,122)

Disposals

 -

 -

 -

79

79

At 31 December 2018

 -

(3,000)

(2,219)

(15)

(5,234)

Net book amount

At 31 December 2017

 -

2,838

1,098

26

3,962

At 31 December 2018

 -

3,779

1,449

76

5,304

 

Included within the depreciation charge for the year is £nil (2017: £78k) of additional depreciation in relation to the early termination of a property lease.

 

Computer and other equipment

Motor Vehicles

Total

Company

£000

£000

£000

Cost or valuation

At 1 January 2017

214

97

311

At 31 December 2017

214

97

311

Additions

3

91

94

Disposals

(97)

(97)

At 31 December 2018

217

91

308

Accumulated depreciation

At 1 January 2017

(82)

(46)

(128)

Depreciation charge

(2)

(24)

(26)

At 31 December 2017

(84)

(70)

(154)

Depreciation charge

(1)

(24)

(25)

Disposals

79

79

At 31 December 2018

(85)

(15)

(100)

Net book amount

At 31 December 2017

130

27

157

At 31 December 2018

132

76

208

31. Investment property

2018

2017

Group

£000

£000

Opening balance

59,439

53,339

Additions

879

6,421

Transfer

6,763

 -

Fair value adjustment

 -

(321)

At 31 December 2018

67,081

59,439

 

£0.9m of additions in 2018 relate to development costs of the St Philips Place property. No property interests are held under operating leases and accounted for as investment property.

 

King Street London

Arbuthnot Latham & Co., Limited acquired premises in the West End of London (namely 20 King Street/10 St James's Street) on 23 June 2016. The property comprises 22,450 square feet of office space and approximately 7,000 square feet of retail space. The property is held by way of leasehold from The Crown Estate Commissioners that expires in 2136 and with a rent review every five years.

 

The property is currently fully tenanted, with the main lease ending in 2019. It is accounted for as investment property and the Group has elected to apply the fair value model. It was therefore initially recognised at cost and then subsequently at fair value. The fair value is determined using the rental income on the property and the associated effective yield of similar properties in the surrounding area (see note 4.1(d)). At 31 December 2018 there was no material difference between the cost of the property and the fair value. Independent market commentary of the prime London property market was undertaken at year end to support the valuation.

 

The Group received £2.1m (2017: £2.1m) rental income during the year and incurred £0.2m (2017: £0.2m) of direct operating expenses.

 

St Philips Place Birmingham

On 24 November 2017, Arbuthnot Latham & Co., Limited acquired leasehold premises in Birmingham (St Philips House, 4 St Philips Place). The property comprises 24,286 square feet of office space.

 

The property is unoccupied and is currently undergoing comprehensive refurbishment at an estimated cost of £3.2m. After refurbishment the property will be let out. It is accounted for as investment property and the Group has elected to apply the fair value model. It was therefore initially recognised at cost and then subsequently at fair value (see note 4.1(c)).

 

A development appraisal has been completed by estimating the gross development value and deducting the estimated costs to complete the refurbishment, arm's length financing costs and development profit margin.

 

Crescent Office Park, Bath

In November 2017, a Property Fund, based in Jersey and owned by the Group, acquired a freehold office building in Bath. The property comprises 25,526 square ft. over ground and two upper floors with parking spaces. The property was acquired for £6.35m. On the date of acquisition, the property was being multi-let to tenants and was at full capacity.

 

In 2017, the Fund was recognised as an asset held for sale under IFRS 5 and therefore not consolidated in the financial statements. At 31 December 2018 it was consolidated into the Group as it no longer met the IFRS 5 criteria and is recognised as an investment property. The Group has elected to apply the fair value model (see note 4.1(c)).

 

The Group recognised £0.5m rental income during the year and incurred £0.5m of operating expenses.

 

32. Deposits from banks

2018

2017

Group

£000

£000

Deposits from other banks

232,675

195,097

Deposits from banks include £225m (2017: £188m) obtained through the Bank of England Term Funding Scheme ("TFS"). For a maturity profile of deposits from banks, refer to Note 6.

 

33. Deposits from customers

2018

2017

Group

£000

£000

Current/demand accounts

944,564

868,855

Notice accounts

75,879

101,909

Term deposits

693,843

420,017

1,714,286

1,390,781

 

Included in customer accounts are deposits of £24.5m (2017: £29.2m) held as collateral for loans and advances. The fair value of these deposits approximates their carrying value.

 

For a maturity profile of deposits from customers, refer to Note 6.

 

34. Other liabilities

2018

2017

Group

£000

£000

Trade payables

1,782

1,207

Accruals and deferred income

16,767

15,032

18,549

16,239

 

Financial Services Compensation Scheme Levy

In common with all regulated UK deposit takers, AL pays levies to the Financial Services Compensation Scheme ("FSCS") to enable the FSCS to meet claims against the Scheme. The FSCS levy consists of two parts: a management expenses levy and a more significant compensation levy. The management expenses levy covers the costs of running the scheme and the compensation levy covers the amount of compensation and associated interest the Scheme pays, net of any recoveries it makes using the rights that have been assigned to it.

 

The Group's FSCS provision reflects market participation up to the reporting date and the accrual of £nil (2017: £0.2m) relates to the interest levy for the Scheme year 2019/20 which was paid in 2018. This amount was calculated on the basis of the Group's share of protected deposits and the FSCS's estimate of total interest levies payable for each Scheme year.

 

2018

2017

Company

£000

£000

Due to subsidiary undertakings

1,838

1,840

Accruals and deferred income

1,486

1,301

3,324

3,141

 

35. Debt securities in issue

2018

2017

Group and Company

£000

£000

Subordinated loan notes

13,283

13,104

 

The subordinated loan notes were issued on 7 November 2005 and are denominated in Euros. The principal amount outstanding at 31 December 2018 was €15,000,000 (2017: €15,000,000). The notes carry interest at 3% over the interbank rate for three month deposits in euros and are repayable at par in August 2035 unless redeemed or repurchased earlier by the Company.

 

The contractual undiscounted amount that will be required to be paid at maturity of the above debt securities is €15,000,000.

 

Given the fact that the Group has never been subject to a published credit rating by any of the relevant agencies and the notes in issue are not quoted, it is not considered possible to estimate a fair value for these notes.

 

36. Contingent liabilities and commitments

 

Contingent liabilities

The Group is subject to extensive regulation in the conduct of its business. A failure to comply with applicable regulations could result in regulatory investigations, fines and restrictions on some of the Group's business activities or other sanctions. The Group seeks to minimise this risk through the adoption and compliance with policies and procedures, continuing to refine controls over business practices and behaviour, employee training, the use of appropriate documentation, and the involvement of outside legal counsel where appropriate.

 

Capital commitments

At 31 December 2018, the Group had capital commitments of US$0.7m (2017: £nil) in respect of a contribution in an equity investment.

 

Credit commitments

The contractual amounts of the Group's off-balance sheet financial instruments that commit it to extend credit to customers are as follows:

 

2018

2017

Group

£000

£000

Guarantees and other contingent liabilities

1,744

2,976

Commitments to extend credit:

 - Original term to maturity of one year or less

67,880

131,963

69,624

134,939

Operating lease commitments

Where a Group company is the lessee, the future aggregate lease payments under non-cancellable operating leases are as follows:

2018

2017

Group

£000

£000

Expiring:

Within 1 year

2,129

2,330

Later than 1 year and no later than 5 years

10,787

10,943

Later than 5 years

2,661

5,384

15,577

18,657

 

In 2013, Arbuthnot Latham & Co., Ltd entered into a 16 year lease on 7 Wilson Street, London (the head office for Arbuthnot Banking Group PLC and the principal location for Arbuthnot Latham & Co., Ltd), with a break at 11 years and rent reviews after 5, 10 and 15 years. The initial rent is £1.75m per annum. This lease forms the most significant part of the operating leases disclosed in the table above.

 

In 2015, the Bank entered into a 10 year lease to occupy part of the ground floor of The Senate, Southernhay Gardens, Exeter, with a break clause and rent review after 5 years. The initial rent is £0.1m per annum.

 

In 2017, the Bank entered into a 10 year lease to occupy part of the eighth floor of 82 King Street, Manchester, with a break clause and rent review after 5 years. The initial rent is £0.1m per annum.

 

On 3 January 2018, Arbuthnot Latham entered into a 12 year lease (up to 16 October 2029) to occupy the first, second and third floor of 10 Dominion Street London, with a break clause on 16 October 2024. The initial rent is £0.7m per annum.

 

In addition to the above commitments, ground rent of £0.2m per annum is payable for the remaining term of 118 years of the King Street investment property.

 

37. Share capital

Number of shares

Ordinary share capital

Share premium

Group and Company

£000

£000

At 1 January 2017

15,279,322

153

 -

At 31 December 2017 & December 2018

15,279,322

153

 

The Ordinary shares have a par value of 1p per share (2017: 1p per share). At 31 December 2018 the Company held 390,274 shares (2017: 390,274) in treasury.

 

38. Reserves and retained earnings

2018

2017

Group

£000

£000

Capital redemption reserve

20

20

Fair value reserve / Available-for-sale reserve

(12,169)

162

Treasury shares

(1,131)

(1,131)

Retained earnings

209,083

237,171

Total reserves at 31 December

195,803

236,222

 

The capital redemption reserve represents a reserve created after the Company purchased its own shares which resulted in a reduction of share capital.

 

2018

2017

Company

£000

£000

Capital redemption reserve

20

20

Fair value reserve

(7,022)

 -

Treasury shares

(1,131)

(1,131)

Retained earnings

162,729

124,659

Total reserves as 31 December

154,596

123,548

 

39. Share-based payment options

 

Company - cash settled

On 14 June 2016 Mr. Salmon was granted phantom options pursuant to the Phantom Option Scheme to acquire 200,000 ordinary 1p shares in the Company at 1591p exercisable in respect of 50% on or after 15 June 2019 and in respect of the remaining 50% on or after 15 June 2021 when a cash payment would be made equal to any increase in value. On 14 June 2016 Mr. Cobb and Mr. Henderson were each granted phantom options pursuant to the Phantom Option Scheme to acquire 100,000 ordinary 1p shares in the Company at 1591p exercisable in respect of 50% on or after 15 June 2019 and in respect of the remaining 50% on or after 15 June 2021 when a cash payment would be made equal to any increase in market value. The fair value of the options at grant date was £1.3m. At 31 December 2018, the fair value of the options was £0.1m (2017: £0.8m).

 

The performance conditions of the Scheme are that for the duration of the vesting period, the dividends paid by ABG must have increased in percentage terms when compared to an assumed dividend of 29p per share in respect of the financial year ending 31 December 2016, by a minimum of the increase in the Retail Prices Index during that period.

 

Also from the grant date to the date the Option is exercised, there must be no public criticism by any regulatory authority on the operation of ABG or any of its subsidiaries which has a material impact on the business of ABG.

 

Options are forfeited if they remain unexercised after a period of more than 7 years from the date of grant. If the participant ceases to be employed by the Group by reason of injury, disability, ill-health or redundancy; or because his employing company ceases to be a shareholder of the Group; or because his employing business is being transferred out of the Group, his option may be exercised within 6 months after such cessation. In the event of the death of a participant, the personal representatives of a participant may exercise an option, to the extent exercisable at the date of death, within 6 months after the death of the participant.

 

On cessation of employment for any other reason (or when a participant serves, or has been served with, notice of termination of such employment), the option will lapse although the Remuneration Committee has discretion to allow the exercise of the option for a period not exceeding 6 months from the date of such cessation.

 

In such circumstances, the performance conditions may be modified or waived as the Remuneration Committee, acting fairly and reasonably and taking due consideration of the circumstances, thinks fit. The number of Ordinary Shares which can be acquired on exercise will be pro-rated on a time elapsed basis, unless the Remuneration Committee, acting fairly and reasonably and taking due consideration of the circumstances, decides otherwise. In determining whether to exercise its discretion in these respects, the Remuneration Committee must satisfy itself that the early exercise of an option does not constitute a reward for failure.

 

The probability of payout has been assigned based on the likelihood of meeting the performance criteria, which is 100%. The Directors consider that there is some uncertainty surrounding whether the participants will all still be in situ and eligible at the vesting date. Therefore the directors have assumed a 9% attrition rate for the share options vesting in June 2019 and 15% attrition rate for the share options vesting in June 2021. The attrition rate will increase by 3% per year until the vesting date. ABG had a write back of £0.3m in relation to share based payments during 2018 (2017: £0.2m expense), as disclosed in Note 12.

 

Measurement inputs and assumptions used in the Black-Scholes model are as follows:

2018

2017

Expected Stock Price Volatility

19.8%

27.0%

Expected Dividend Yield

3.6%

2.5%

Risk Free Interest Rate

0.8%

0.5%

Average Expected Life (in years)

1.46

2.46

 

40. Dividends per share

Final dividends are not accounted for until they have been approved at the Annual General Meeting. At the meeting on 9 May 2019, a dividend in respect of 2018 of 20p per share (2017: actual dividend 19p per share) amounting to a total of £2.98m (2017: actual £2.83m) is to be proposed. The financial statements for the year ended 31 December 2018 do not reflect the final dividend which will be accounted for in shareholders' equity as an appropriation of retained profits in the year ending 31 December 2019.

 

41. Cash and cash equivalents

For the purposes of the Statement of Cash Flows, cash and cash equivalents are comprised of the following balances with less than three months' maturity from the date of acquisition.

 

2018

2017

Group

£000

£000

Cash and balances at central banks (Note 17)

405,325

313,101

Loans and advances to banks (Note 18)

54,173

70,679

459,498

383,780

2018

2017

Company

£000

£000

Loans and advances to banks

17,008

36,103

 

42. Related party transactions

Related parties of the Company and Group include subsidiaries, directors, Key Management Personnel, close family members of Key Management Personnel and entities which are controlled, jointly controlled or significantly influenced, or for which significant voting power is held, by Key Management Personnel or their close family members.

 

Other than the directors' remuneration (see Remuneration Report pages 27 to 28), payment of dividends and transactions with subsidiaries and associates, there were no related party transactions within the Parent Company. A number of banking transactions are entered into with related parties in the normal course of business on normal commercial terms. These include loans and deposits. Except for the directors' disclosures, there were no other Key Management Personnel disclosures; therefore the tables below relate to directors and their close family members.

2018

2017

Group - subsidiaries

£000

£000

Loans

Loans outstanding at 1 January

508

1,361

Loans advanced during the year

126

150

Loan repayments during the year

(2)

(3)

Transfer to deposits during the year

(117)

 -

Transferred to loans with associates

 -

(1,000)

Loans outstanding at 31 December

515

508

Interest income earned

15

23

 

2018

2017

Group - associates

£000

£000

Loans

Loans outstanding at 1 January

1,409

404

Loans advanced during the year

 -

5

Loan repayments during the year

(1,409)

 -

Transferred from loans with subsidiaries

 -

1,000

Loans outstanding at 31 December

 -

1,409

Interest income earned

 -

5

 

The loans to directors are mainly secured on property, shares or cash and bear interest at rates linked to base rate. No provisions have been recognised in respect of loans given to related parties (2017: £nil).

2018

2017

Group - subsidiaries

£000

£000

Deposits

Deposits at 1 January

3,233

3,398

Deposits placed during the year

3,390

3,563

Deposits repaid during the year

(4,622)

(2,728)

Transfer to loans during the year

(117)

 -

Transferred to deposits with associates

 -

(1,000)

Deposits at 31 December

1,884

3,233

Interest expense on deposits

7

46

 

2018

2017

Group - associates

£000

£000

Deposits

Deposits at 1 January

1,403

318

Deposits placed during the year

 -

85

Deposits repaid during the year

(1,403)

 -

Transferred from deposits with subsidiaries

 -

1,000

Deposits at 31 December

 -

1,403

Interest expense on deposits

 -

5

 

Details of directors' remuneration are given in the Remuneration Report. The Directors do not believe that there were any other transactions with key management or their close family members that require disclosure.

Details of principal subsidiaries are given in Note 43. Transactions and balances with subsidiaries are shown below:

2018

2017

Highest balance during the year

Balance at 31 December

Highest balance during the year

Balance at 31 December

£000

£000

£000

£000

ASSETS

Due from subsidiary undertakings

35,483

17,002

89,150

36,256

Shares in subsidiary undertakings

134,614

134,614

97,802

97,802

170,097

151,616

186,952

134,058

LIABILITIES

Due to subsidiary undertakings

2,097

1,566

4,011

1,570

2,097

1,566

4,011

1,570

 

The disclosure of the year end balance and the highest balance during the year is considered the most meaningful information to represent the transactions during the year. The above transactions arose during the normal course of business and are on substantially the same terms as for comparable transactions with third parties.

 

The Company undertook the following transactions with other companies in the Group during the year:

2018

2017

£000

£000

Arbuthnot Latham & Co., Ltd - Recharge of property and IT costs

930

1,087

Arbuthnot Latham & Co., Ltd - Recharge for costs paid on the Company's behalf

1,520

1,501

Arbuthnot Latham & Co., Ltd - Group recharges for shared services

(1,200)

(1,483)

Secure Trust Bank PLC (from 16 June 2016 to 8 August 2018 as associate) - Group recharges for shared services

(751)

(813)

Secure Trust Bank PLC (from 16 June 2016 to 8 August 2018 as associate) - Dividends received

(2,101)

(2,618)

Total

(1,602)

(2,326)

 

43. Interests in subsidiaries

Investment at cost

Impairment provisions

Net

Company

£000

£000

£000

At 1 January 2017

57,166

(2,564)

54,602

Capital contributions to Arbuthnot Latham & Co., Limited

43,200

43,200

At 31 December 2017

100,366

(2,564)

97,802

Capital contributions to Arbuthnot Latham & Co., Limited

36,812

36,812

At 31 December 2018

137,178

(2,564)

134,614

 

2018

2017

Company

£000

£000

Subsidiary undertakings:

Bank

132,314

95,502

Other

2,300

2,300

Total

134,614

97,802

 

(a) List of subsidiaries

Arbuthnot Latham & Co., Limited is the only significant subsidiary of Arbuthnot Banking Group. Arbuthnot Latham is incorporated in the United Kingdom, has a principal activity of Private and Commercial Banking and is 100% owned by the Group.

The table below provides details of other subsidiaries of Arbuthnot Banking Group PLC at 31 December:

% shareholding

Country of incorporation

Principal activity

Direct shareholding

Arbuthnot Fund Managers Limited

100.0%

UK

Dormant

Arbuthnot Investments Limited

100.0%

UK

Dormant

Arbuthnot Limited

100.0%

UK

Dormant

Arbuthnot Properties Limited

100.0%

UK

Dormant

Arbuthnot Unit Trust Management Limited

100.0%

UK

Dormant

Gilliat Financial Solutions Limited

100.0%

UK

Dormant

Peoples Trust and Savings Plc

100.0%

UK

Dormant

West Yorkshire Insurance Company Limited

100.0%

UK

Non-trading

Windward Insurance Company PCC Limited

100.0%

Guernsey

Insurance

Indirect shareholding via intermediate holding companies

Arbuthnot Commercial Asset Based Lending Limited

100.0%

UK

Asset Finance

Arbuthnot Latham (Nominees) Limited

100.0%

UK

Dormant

Arbuthnot Latham Real Estate Holdco Limited

100.0%

Jersey

Property Investment

Arbuthnot Latham Real Estate Holdings Limited

100.0%

UK

Property Investment

Arbuthnot Latham Real Estate PropCo Limited

100.0%

Jersey

Property Investment

Arbuthnot Real Estate Capital Limited

100.0%

Jersey

Property Investment

Arbuthnot Real Estate Capital GP 1 Limited

100.0%

Jersey

Property Investment

Arbuthnot Real Estate Capital Fund 1 Limited

100.0%

Jersey

Property Investment

Arbuthnot Securities Limited

100.0%

UK

Dormant

Arbuthnot Specialist Finance Limited

100.0%

UK

Dormant

Artillery Nominees Limited (dissolved 16 January 2018)

100.0%

UK

Dormant

John K Gilliat & Co., Limited

100.0%

UK

Dormant

Pinnacle Universal Limited

100.0%

BVI

Property development

Pinnacle Universal Limited

100.0%

UK

Dormant

Renaissance Asset Finance Limited

100.0%

UK

Asset Finance

 

All the subsidiary and related undertakings above are unlisted and none are banking institutions. All entities are included in the consolidated financial statements and have an accounting reference date of 31 December. On 16 January 2018, Artillery Nominees Limited was dissolved.

 

All Jersey entities have their registered office as 26 New Street, St Helier, Jersey, JE2 3RA. Pinnacle Universal Limited's (BVI) registered office is 9 Columbus Centre, Pelican Drive, Road Town, Tortola, BVI. All other entities listed above have their registered office as 7 Wilson Street, London, EC2M 2SN.

 

(b) Non-controlling interests in subsidiaries

There were no non-controlling interests at the end of 2017 or 2018.

 

(c) Significant restrictions

The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities other than those resulting from the supervisory frameworks within which banking subsidiaries operate. The supervisory frameworks require banking subsidiaries to keep certain levels of regulatory capital and liquid assets, limit their exposure to other parts of the Group and comply with other ratios. The carrying amounts of the banking subsidiary's assets and liabilities are £2,171m and £1,994m respectively (2017: £1,784m and £1,651m respectively).

 

(d) Risks associated with interests

During the year Arbuthnot Banking Group PLC made £36.8m (2017: £43.2m) capital contributions to Arbuthnot Latham & Co., Ltd. The contributions were made to assist the Bank during a period of growth to ensure that all regulatory capital requirements were met.

 

44. Operating segments

The Group is organised into six operating segments as disclosed below:

 

1) Private Banking - Provides traditional private banking services as well as offering financial planning and investment

management services. This segment includes Dubai and the Tay mortgage portfolio.

2) Commercial Banking - Provides bespoke commercial banking services and tailored secured lending against property

investments and other assets.

3) RAF - Specialist asset finance lender mainly in high value cars but also business assets.

4) All Other Divisions - All other smaller divisions and central costs in Arbuthnot Latham & Co., Ltd (Arbuthnot Commercial

Asset-Based Lending, Arbuthnot Direct, Arbuthnot Specialist Finance, Investment properties and Central unallocated items)

5) Group Centre - ABG Group Centre 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.

 

Continuing operations

Discontinued Operations

Private banking

Commercial Banking

RAF

All Other Divisions

Group Centre

Total

Retail Bank Associate Income

Group Total

Year ended 31 December 2018

£000

£000

£000

£000

£000

£000

£000

£000

Interest revenue

38,185

18,889

7,536

680

88

65,378

 -

65,378

Inter-segment revenue

 -

 -

 -

 -

(88)

(88)

 -

(88)

Interest revenue from external customers

38,185

18,889

7,536

680

 -

65,290

 -

65,290

Fee and commission income

11,550

1,036

151

219

 -

12,956

 -

12,956

Revenue from external customers

49,735

19,925

7,687

899

 -

78,246

 -

78,246

Interest expense

(4,422)

(2,505)

(2,192)

(517)

(199)

(9,835)

 -

(9,835)

Add back inter-segment revenue

 -

 -

 -

 -

88

88

 -

88

Subordinated loan note interest

 -

(360)

(360)

 -

(360)

Fee and commission expense

(56)

(122)

(14)

(42)

 -

(234)

 -

(234)

Segment operating income

45,257

17,298

5,481

340

(471)

67,905

 -

67,905

Impairment losses

(1,966)

(278)

(437)

(50)

 -

(2,731)

 -

(2,731)

Other income

2

 -

73

6,683

(170)

6,588

 -

6,588

Operating expenses

(37,492)

(14,534)

(3,169)

(2,634)

(7,153)

(64,982)

 -

(64,982)

Segment profit / (loss) before tax

5,801

2,486

1,948

4,339

(7,794)

6,780

 -

6,780

Income tax (expense) / income

 -

 -

(431)

35

(725)

(1,121)

 -

(1,121)

Segment profit / (loss) after tax

5,801

2,486

1,517

4,374

(8,519)

5,659

 -

5,659

Loss from discontinued operations

 -

 -

 -

 -

 -

 -

(25,692)

(25,692)

Segment profit / (loss) after tax

5,801

2,486

1,517

4,374

(8,519)

5,659

(25,692)

(20,033)

Loans and advances to customers

670,464

443,108

85,958

36,626

(11,500)

1,224,656

 -

1,224,656

Other assets

 -

 -

 -

936,370

14,147

950,517

 -

950,517

Segment total assets

670,464

443,108

85,958

972,996

2,647

2,175,173

 -

2,175,173

Customer deposits

1,041,208

566,748

 -

136,092

(29,762)

1,714,286

 -

1,714,286

Other liabilities

 -

 -

 -

251,437

13,494

264,931

 -

264,931

Segment total liabilities

1,041,208

566,748

 -

387,529

(16,268)

1,979,217

 -

1,979,217

Other segment items:

The "Group Centre" segment above includes the parent entity and all intercompany eliminations.

 

Continuing operations

Discontinued operations

Private Banking

Commercial Banking

RAF

All Other Divisions

Group Centre

Total

Retail Bank Associate Income

Group Total

Year ended 31 December 2017

£000

£000

£000

£000

£000

£000

£000

£000

Interest revenue

36,179

7,228

4,194

 -

204

47,805

 -

47,805

Inter-segment revenue

(174)

 -

 -

 -

(204)

(378)

 -

(378)

Interest revenue from external customers

36,005

7,228

4,194

 -

 -

47,427

 -

47,427

Fee and commission income

13,104

621

80

 -

 -

13,805

 -

13,805

Revenue from external customers

49,109

7,849

4,274

 -

 -

61,232

 -

61,232

Interest expense

(4,651)

(508)

(1,040)

 -

(153)

(6,352)

 -

(6,352)

Add back inter-segment revenue

174

 -

 -

 -

204

378

 -

378

Subordinated loan note interest

 -

 -

 -

 -

(360)

(360)

 -

(360)

Fee and commission expense

(127)

(150)

(5)

 -

 -

(282)

 -

(282)

Segment operating income

44,505

7,191

3,229

 -

(309)

54,616

 -

54,616

Impairment losses

(308)

 -

(86)

 -

 -

(394)

 -

(394)

Other income

 -

 -

 -

3,870

(837)

3,033

 -

3,033

Operating expenses

(36,268)

(9,254)

(1,690)

(230)

(7,279)

(54,721)

 -

(54,721)

Segment profit / (loss) before tax

7,929

(2,063)

1,453

3,640

(8,425)

2,534

 -

2,534

Income tax (expense) / income

 -

 -

(303)

(237)

92

(448)

 -

(448)

Segment profit / (loss) after tax

7,929

(2,063)

1,150

3,403

(8,333)

2,086

 -

2,086

Profit from discontinued operations

 -

 -

 -

 -

 -

 -

4,437

4,437

Segment profit / (loss) after tax

7,929

(2,063)

1,150

3,403

(8,333)

2,086

4,437

6,523

Loans and advances to customers

650,245

305,055

71,265

34,204

(11,500)

1,049,269

 -

1,049,269

Other assets

 -

 -

 -

721,502

82,461

803,963

 -

803,963

Segment total assets

650,245

305,055

71,265

755,706

70,961

1,853,232

 -

1,853,232

Customer deposits

954,577

308,341

 -

176,886

(49,023)

1,390,781

 -

1,390,781

Other liabilities

 -

 -

 -

210,680

15,396

226,076

 -

226,076

Segment total liabilities

954,577

308,341

 -

387,566

(33,627)

1,616,857

 -

1,616,857

Other segment items:

Capital expenditure

 -

 -

 -

(3,307)

 -

(3,307)

 -

(3,307)

Depreciation and amortisation

 -

 -

 -

(2,354)

(26)

(2,380)

 -

(2,380)

 

Segment profit is shown prior to any intra-group eliminations.

 

Prior year numbers have been represented according to the 2018 operating segments reported to management. The UK private bank has a branch in Dubai, which generated £4.4m (2017: £4.5m) of income and had direct operating costs of £2.9m (2017: £2.7m). All Dubai branch income is booked in the UK. Other than the Dubai branch, all operations of the Group are conducted wholly within the United Kingdom and geographical information is therefore not presented.

 

45. Country by Country Reporting

Article 89 of the EU Directive 2013/36/EU otherwise known as the Capital Requirements Directive IV ('CRD IV') was implemented into UK domestic legislation through statutory instrument 2013 No. 3118, the Capital Requirements (Country-by-Country Reporting) Regulations 2013 (the Regulations), which were laid before the UK Parliament on 10 December 2013 and which came into force on 1 January 2014.

 

Article 89 requires credit institutions and investment firms in the EU to disclose annually, specifying, by Member State and by third country in which it has an establishment, the following information on a consolidated basis for the financial year: name, nature of activities, geographical location, turnover, number of employees, profit or loss before tax, tax on profit or loss and public subsidies received.

 

31 December 2018

Turnover

Number FTE

Profit/(loss)

Tax paid

Location

(£m)

employees

before tax (£m)

(£m)

UK

 67.9

 423

 9.7

 1.2

Dubai

 - 

 14

(2.9)

 - 

31 December 2017

Turnover

Number FTE

Profit/(loss)

Tax paid

Location

(£m)

employees

before tax (£m)

(£m)

UK

 54.6

 350

 9.8

 - 

Dubai

 - 

 16

(2.7)

 - 

The Dubai branch income is booked through the UK, hence the turnover is nil in the above analysis. Offsetting this income against Dubai branch costs would result in a £1.6m profit (2017: £1.8m). After indirect cost allocation it results in a loss of £0.8m (2017: loss of £0.5m). No public subsidies were received during 2018

 

46. Ultimate controlling party

The Company regards Sir Henry Angest, the Group Chairman and Chief Executive Officer, who has a beneficial interest in 56.1% of the issued share capital of the Company, as the ultimate controlling party. Details of his remuneration are given in the Remuneration Report and Note 42 of the consolidated financial statements includes related party transactions with Sir Henry Angest.

 

47. Events after the balance sheet date

There were no material post balance sheet events to report.

 

Five Year Summary

 

2014

2015

2016

2017

2018

£000

£000

£000

£000

£000

Profit \ (loss) for the year after tax

17,016

26,524

227,569

6,523

(20,033)

(Loss) / profit before tax from continuing operations*

(3,824)

(2,606)

(1,966)

2,534

6,780

Total Earnings per share

Basic (p)

58.6

86.3

1,127.2

43.9

(134.5)

Earnings per share from continuing operations*

Basic (p)

(24.8)

(16.9)

(18.2)

14.0

38.0

Dividends per share (p)

- ordinary

27.0

29.0

31.0

33.0

35.0

- special

 -

 -

325.0

 -

 -

Other KPI:

2014

2015

2016

2017

2018

£000

£000

£000

£000

£000

Net asset value per share (p)

1,136.0

1,252.7

1,533.8

1,547.0

1,282.5

* - Prior year numbers have been restated for continuing operations.

 

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
END
 
 
FR JRMLTMBATBBL
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5th May 20238:05 amRNSDirector/PDMR Shareholding
4th May 202311:32 amRNSResult of General Meeting and Total Voting Rights
3rd May 20231:45 pmEQSHardman & Co Q&A on Arbuthnot Banking Group (ARBB): Core and new franchises growth in profits and loans
14th Apr 20235:30 pmRNSPlacing and Subscription raising £12.0 million
6th Apr 202312:15 pmEQSHardman & Co Research on Arbuthnot Banking Group (ARBB) 2022: profits and growth in core and new franchises
30th Mar 20237:00 amRNSAudited Final Results for the year to 31 Dec 2022
23rd Feb 20237:00 amRNSPre Close Trading Update
16th Jan 202311:25 amRNSHolding(s) in Company
6th Jan 20232:52 pmRNSHolding(s) in Company
3rd Nov 202211:00 amEQSHardman & Co - Q&A on Arbuthnot Banking Group (ARBB): More upgrades from latest trading statement
14th Oct 20227:00 amRNSDirector/PDMR Shareholding
13th Oct 20222:42 pmRNSSale of long leasehold property
12th Oct 202212:40 pmEQSHardman & Co Research: Arbuthnot Banking Group (ARBB): 3Q’22 trading statement – yet another upgrade
7th Oct 20227:00 amRNSDirector/PDMR Shareholding
5th Oct 20227:00 amRNSThird Quarter 2022 Trading Update
16th Aug 20229:14 amEQSHardman & Co: Q&A on Arbuthnot Banking Group Plc (ARBB): Relationship banking benefits when interest rates rise
11th Aug 20221:50 pmEQSHardman & Co Research : Pantheon International Plc (PIN): FY’22 results: it is not just lionesses that roar
1st Aug 20227:00 amRNSDirectorate Changes
22nd Jul 202210:50 amEQSHardman & Co Research : Arbuthnot Banking Group (ARBB): The power ranger of relationship deposit banking
20th Jul 20225:19 pmRNSSale of long leasehold property
19th Jul 20227:00 amRNSHalf-year Report
6th Jul 20221:46 pmRNSChange to Sole Corporate Broker
25th May 20223:11 pmRNSResult of AGM
25th May 20221:13 pmRNSAnnual General Meeting 2022 and Trading Update
7th Apr 20223:50 pmEQSHardman & Co Research: Arbuthnot Banking Group (ARBB): Back to profitable growth with interest-rate kicker
24th Mar 20227:00 amRNSFinal Results
22nd Mar 202211:18 amRNSHolding(s) in Company
22nd Mar 20227:00 amRNSHolding in Company
16th Mar 20225:18 pmRNSHolding(s) in Company
16th Feb 20227:00 amRNSPre Close Trading Update
4th Jan 20227:00 amRNSChange in Director's Responsibilities
30th Nov 20212:51 pmRNSHolding(s) in Company

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