REG - Close Bros Grp PLC - Half-year Report for six months to 31 January 2024
19/03/2024 07:00
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RNS Number : 3257H Close Brothers Group PLC 19 March 2024
Half Year Results for the Six Months to 31 January 2024
19 March 2024
Adrian Sainsbury, Chief Executive, said:
"Performance in the first half of 2024 reflected continued loan book growth
across our businesses in Banking at strong margins, and an improved credit
performance. CBAM delivered strong net inflows and whilst Winterflood's
performance remains affected by weakness in retail trading activity, it
remains well placed for a recovery in investor appetite.
The FCA's review of the motor finance industry is ongoing and it would be
premature to predict the outcome or estimate the potential impact on the
group. The Board however recognises the paramount importance of preparing the
group for a range of outcomes from this review. As part of this, the Board is
taking a number of decisive actions to strengthen our capital position
materially. These include the difficult decision taken last month not to pay
dividends in respect of the current financial year. In addition, we are taking
steps to optimise our risk weighted assets and reduce costs.
These steps are being taken whilst continuing to provide excellent service to
all our customers and protect our valuable franchise. The distinctive strength
of our through-the-cycle business model, our long-term relationships, the deep
expertise of our people and our consistent service endure. While we are
working through a current period of uncertainty, the Board is taking decisive
actions and is confident that the group will emerge well positioned to take
advantage of future opportunities."
Key Financials(1)
( ) First half First half Change
2024 2023 %
Statutory operating profit before tax £93.8m £11.7m 702
Adjusted operating profit2 £94.4m £12.6m 649
Adjusted basic earnings per share3 46.3p 6.1p
Basic earnings per share3 46.0p 5.6p
Ordinary dividend per share - 22.5p
Return on opening equity 8.4% 1.1%
Return on average tangible equity 10.1% 1.3%
Net interest margin(4) 7.5% 8.0%
Bad debt ratio(4) 0.9% 3.6%
31 January 31 July Change
2024 2023 %
Loan book(5) £9.9bn £9.5bn 4
Total client assets £18.5bn £17.3bn 7
NAV per share £11.0 £11.0
TNAV per share £9.2 £9.3
CET1 capital ratio (transitional) 13.0% 13.3%
Tier 1 capital ratio (transitional) 15.0% 13.3%
Total capital ratio (transitional) 16.9% 15.3%
Key Financials (Excluding Novitas)
( ) First half First half Change
2024 2023 %
Statutory operating profit before tax £93.6m £116.6m (20)
Adjusted operating profit £94.2m £117.5m (20)
Net interest margin(4) 7.5% 7.8%
Bad debt ratio(4) 0.8% 1.1%
31 January 31 July Change
2024 2023 %
Loan book(5) £9.8bn £9.5bn 4
1. Please refer to definitions on pages 25 to 27.
2. Adjusted operating profit is stated before amortisation of intangible
assets on acquisition, goodwill impairment, exceptional items and tax.
3. Refer to note 4 for the calculation of basic and adjusted earnings per
share.
4. Net interest margin and bad debt ratio calculated on an annualised basis.
5. Loan book includes operating lease assets.
Financial performance
• Resilient operating income of £470.8 million (H1 2023: £474.3
million), down 1%, reflecting growth in Banking and Close Brothers Asset
Management, offset by a reduction in Winterflood and higher Group (central
functions) net expenses
• Operating expenses up 12% reflecting increases in staff costs and
continued investment in Banking
• Statutory operating profit before tax of £93.8 million (H1 2023: £11.7
million), reflecting non-recurrence of prior year impairment charges of
£114.6 million related to Novitas. Excluding Novitas, adjusted operating
profit reduced to £94.2 million (H1 2023: £117.5 million), reflecting cost
growth, a reduction in Winterflood income and higher Group (central functions)
net expenses
• Group return on average tangible equity ("RoTE") of 10.1% (H1 2023:
1.3%)
• In Banking, we delivered loan book growth of 4% to £9.9 billion (31
July 2023: £9.5 billion), driven by strong growth in Property and continued
good demand in Asset Finance and the UK Motor Finance business, partly offset
by the normal seasonal impact seen in the Premium and Invoice Finance
businesses. We delivered a strong net interest margin of 7.5% (H1 2023: 8.0%;
2023: 7.7%). Our credit performance improved, with an annualised bad debt
ratio of 0.9% (H1 2023: 3.6%)
• Close Brothers Asset Management delivered strong net inflows of 9%
annualised, with a significant contribution from our bespoke investment
management business. Total managed assets ("AuM") increased 8% to £17.7
billion, driven by net inflows and positive market performance
• In Winterflood, market conditions have remained unfavourable;
Winterflood Business Services ("WBS") income was up 24% to £7.8 million and
reflected an 11% year-on-year increase in assets under administration ("AuA")
to £13.8 billion
• Strong balance sheet position with our Common Equity Tier 1 ("CET1")
ratio of 13.0% at 31 January 2024 (31 July 2023: 13.3%), significantly above
our applicable requirement of 9.5%
• Decision to suspend dividends in respect of current financial year
announced on 15 February 2024
Decisive actions to further strengthen capital position
• The Board has concluded that no legal or constructive obligation exists
at the half year in relation to the FCA review and therefore, no provision has
been recognised in the period in accordance with the relevant accounting
standards
• There is significant uncertainty about the outcome of the FCA's review
at this early stage, and the timing, scope and quantum of any potential
financial impact on the group cannot be reliably estimated at present
• The Board considers it prudent for the group to further strengthen its
capital position. The group has identified actions which, combined with the
decision to not pay any dividend payments in the current financial year, could
strengthen the group's available CET1 capital by approximately £200 million.
These actions include a combination of significant risk transfer of assets and
selective loan book growth to optimise risk weighted assets, supported by
additional cost management initiatives. We continue to evaluate a range of
other potential management actions which could enhance available CET1 capital
by at least another c.£100 million. Additionally, as our business continues
to organically generate capital through 2025, the retention of earnings could
potentially strengthen the group's capital position by a further £100
million, if required. In all, these measures could strengthen the group's
available CET1 capital by approximately £400 million by the end of the 2025
financial year when compared to the group's projected CET1 capital ratio for
31 July 2025, prior to any management actions. The Board is confident that
these decisive actions will position the group well to withstand a range of
scenarios and potential outcomes
Update on guidance
In Banking¸ we are encouraged by the performance in the first half,
notwithstanding the significant uncertainty in relation to the FCA's review of
historical motor finance commission arrangements
• Expect to broadly sustain underlying loan book growth in the second half
of the 2024 financial year
• Well positioned to maintain a strong net interest margin, broadly
aligned with the reported NIM in the first half
• Continue to expect c.8-10% increase in Banking costs in 2024, excluding
costs related to the recently announced acquisition of Bluestone Motor Finance
(Ireland)
• We have mobilised additional cost management initiatives which are
expected to generate annualised savings of c.£20 million by the 2026
financial year, partly offsetting the adverse impact on the group's income as
a result of the management actions
• We remain committed to more closely aligning income and cost growth for
the 2025 financial year (excluding any restructuring costs) and delivering
positive operating leverage over the medium term
• Expect the bad debt ratio to remain below our long-term average of 1.2%
in H2 2024, based on current market conditions
In Close Brothers Asset Management ("CBAM"), we are well placed to consolidate
our position and maximise opportunities to accelerate profitability
• Targeting net inflows of 6-10%
• Expect operating margin to increase from 2025 onwards towards a
longer-term target of above 20%
In Winterflood, we are well placed to retain our leading market position and
benefit when investor appetite returns
• Remain focused on diversifying revenue streams
• Expect to grow AuA in WBS to over £20 billion by 2026
As noted above, we have identified and continue to evaluate a number of
management actions to continue to support our customers and protect our
valuable franchise. Over the medium term, we remain committed to our previous
CET1 capital target of 12% to 13% but expect to operate above this range in
the near-term as a result of the identified management actions.
These actions will leave us well positioned to withstand a range of scenarios
and potential outcomes and are expected to adversely impact the group's
operating profit in the next financial year. An update on our guidance for the
2025 financial year will be provided at our Full-Year results announcement.
Enquiries
Sophie Gillingham Close Brothers Group plc 020 3857 6574
Camila Sugimura Close Brothers Group plc 020 3857 6577
Kimberley Taylor Close Brothers Group plc 020 3857 6233
Ingrid Diaz Close Brothers Group plc 020 3857 6088
Sam Cartwright H/Advisors Maitland 07827 254 561
A virtual presentation to analysts and investors will be held today at 9.30 am
GMT followed by a Q&A session. A webcast and dial-in facility will be
available by registering at
https://webcasts.closebrothers.com/results/HalfYearResults2024.
Basis of Presentation
Results are presented both on a statutory and an adjusted basis to aid
comparability between periods. Adjusted measures are presented on a basis
consistent with prior periods and exclude amortisation of intangible assets on
acquisition, to present the performance of the group's acquired businesses
consistent with its other businesses; and any exceptional and other adjusting
items which do not reflect underlying trading performance. Please refer to
note 2 for further details on items excluded from the adjusted performance
metrics.
Financial Calendar (Provisional)
The enclosed provisional financial calendar below is updated on a regular
basis throughout the year. Please refer to our website www.closebrothers.com
(http://www.closebrothers.com) for up-to-date details. As announced at the
2023 Preliminary Results, the group has decided to discontinue the issuance of
pre-close trading updates in order to align more closely with prevailing
market and industry practice.
Event Date
Third quarter trading update 22 May 2024
Financial year end 31 July 2024
Preliminary results 24 September 2024
About Close Brothers
Close Brothers is a leading UK merchant banking group providing lending,
deposit taking, wealth management services and securities trading. We employ
approximately 4,000 people, principally in the United Kingdom and Ireland.
Close Brothers Group plc is listed on the London Stock Exchange and is a
constituent of the FTSE 250.
Chief Executive's Statement
Performance in the first half of 2024 reflected continued loan book growth
across our businesses in Banking at strong margins, and an improved credit
performance. CBAM delivered strong net inflows and whilst Winterflood's
performance remains affected by weakness in retail trading activity, it
remains well placed for a recovery in investor appetite.
This first half has seen a mixed market backdrop. Whilst we have seen some
improvement in macroeconomic indicators, economic headwinds remain as interest
rates have stabilised at higher levels while inflation persists. Customer
demand levels have remained robust in Banking. Our market-facing businesses
continued to encounter a challenging market environment, although CBAM
attracted new client assets and delivered a good fund performance across asset
classes.
Notwithstanding the continued uncertain macroeconomic environment for
individuals and SMEs in the UK, we continue to support our nearly three
million customers, including c.360,000 SME businesses, through the cycle. In
our Banking division, we employ almost 3,000 colleagues across 40 locations
throughout the country. Our primary focus is helping customers by offering
additional borrowing capacity to acquire essential assets for their personal
lives or small businesses.
Financial Performance
Statutory operating profit before tax was £93.8 million (H1 2023: £11.7
million). The increase was mainly driven by the non-recurrence of the prior
year impairment charges related to Novitas. In Banking, excluding Novitas, the
profit performance reflected good loan book growth of 9% year-on-year, a
strong net interest margin of 7.5% and an improved credit performance, with a
bad debt ratio of 0.8%. This was more than offset by increased costs due to
inflation-related salary rises, new hires and investment in our strategic
programmes and cost efficiency initiatives. Our Asset Management division
delivered strong net inflows of 9% annualised, although profit reduced, as
income growth was more than offset by costs primarily related to wage
inflation and new hires. Winterflood's performance has been adversely impacted
by continued weakness in investor appetite and market uncertainty, resulting
in an operating loss of £2.6 million. We remain confident in the track record
of our trading business and are well positioned to retain our market position
and benefit when investor appetite returns. WBS continued to see good
momentum, with income rising 24% to £7.8 million and an 11% year-on-year
increase in AuA to £13.8 billion.
We maintained our strong balance sheet and conservative approach to managing
our financial resources in the first half. Our capital position was strong,
with our CET1 capital ratio at 13.0% (31 July 2023: 13.3%), significantly
above our applicable requirement of 9.5%. Total funding increased 3% to £12.7
billion (31 July 2023: £12.4 billion), with 16% growth in our retail deposit
base, demonstrating the strength of our Savings proposition. We maintained our
prudent liquidity position, with our Liquidity Coverage Ratio over 1,000%,
substantially exceeding regulatory requirements.
Significant uncertainty arising from the FCA's review of the motor finance
industry
The FCA recently announced that it is undertaking a review of the motor
finance market due to the high number of complaints coming to the Financial
Ombudsman Service ("FOS") from customers regarding discretionary commission
arrangements in effect prior to the 2021 ban on these models. The FCA aims to
communicate a decision on next steps by the end of September 2024. This has
caused significant uncertainty for the industry and the group regarding any
potential remediation action as a result of the review. Close Brothers Motor
Finance ("CBMF") has operated in the motor finance market for a number of
years, during which we have sought to comply with the relevant regulatory
requirements. There are a range of possible outcomes and therefore, as
announced on 15 February, we are implementing actions to further strengthen
the group's capital position, with the priority of protecting and sustaining
our valuable franchise.
We have a long-term progressive dividend track record and the decision to not
pay any dividends for this financial year was not made lightly. It reflects
our proactive and prudent approach to managing our financial resources. We
have identified actions which, combined with the decision not to pay a
dividend in the current financial year, are expected to strengthen the group's
available CET1 capital by approximately £200 million. These actions include a
combination of significant risk transfer of assets and selective loan book
growth to optimise risk weighted assets, supported by additional cost
management initiatives which could enhance available CET1 capital by at least
another c.£100 million. Additionally, as our business continues to
organically generate capital through 2025, the retention of earnings could
potentially strengthen the group's capital position by a further £100
million, if required. In all, these measures could strengthen the group's
available CET1 capital by approximately £400 million by the end of the 2025
financial year when compared to the group's projected CET1 capital ratio for
31 July 2025, prior to any management actions. The Board is confident that
these decisive actions will position the group well to withstand a range of
scenarios and potential outcomes.
Continued focus on strengthening our valuable franchise
Notwithstanding the prevailing uncertainty, we remain focused on delivering on
our strategy and strengthening our valuable franchise. This means we will
continue to review our portfolio of businesses to ensure they each deliver
attractive returns. We have mobilised additional cost management initiatives
in Banking, which are expected to generate annualised savings of c.£20
million by the 2026 financial year, to support the ongoing profitability of
our business.
The distinctive strengths of our through-the-cycle model - our long-term
relationships, the deep expertise of our people and our customer-centric
approach - endure. We are taking decisive actions to navigate through this
period of uncertainty and are confident that the group will emerge well
positioned to take advantage of future opportunities.
Adrian Sainsbury
Chief Executive
19 March 2024
FCA's review of historical motor finance commission arrangements
On 11 January 2024, the FCA announced it is using its powers under section 166
of the Financial Services and Markets Act 2000 to review historical motor
finance commission arrangements and sales at several firms, following high
numbers of complaints from customers. The review follows the FOS publication
of its first two decisions upholding customer complaints relating to
discretionary commission arrangements ("DCAs") against two other lenders in
the market. The FCA aims to communicate a decision on next steps by the end of
September 2024.
Overview of commission models operated(1)
CBMF has operated in the motor finance market for a number of years, during
which we have sought to comply with the relevant regulatory requirements.
Prior to 2016, CBMF operated an Upward Difference in Charges ("DIC") model.
This allowed the dealer or broker full discretion over the customer rate and
the commission earnt on point-of-sale finance, subject to a hard cap on the
amount of commission. Under the DIC model, commission, if any, was paid as a
percentage of the total interest paid by the customer.
From 2016, CBMF introduced a Downward Scaled Commission ("DSM") model, which
capped both the interest charged to the customer and commission paid to the
dealer or broker. This meant that CBMF set the headline rate for the customer
and the dealers could only reduce this by decreasing their level of
commission. Under the DSM model, commission, if any, was paid as a percentage
of the loan size.
From 2021 onwards, CBMF introduced a Risk Adjusted Pricing Model which set the
rate for the customer and adjusted the rate according to the customer risk
profile. Dealer discretion was removed entirely. Under the Risk Adjusted
Pricing Model, commission, if any, is paid as a fixed percentage of the loan
size.
All historical models included a "hard cap" on the commission amount paid to
the broker or dealer. Commission disclosures were also reviewed and enhanced
over time.
(1) For simplicity, dates shown above assume transition when substantially
complete.
Impact on Close Brothers
The FCA review is progressing to determine whether there has been
industry-wide failure to comply with regulatory requirements which has caused
customers harm and, if so, whether it needs to take any actions. Based on the
status at the half year and in accordance with the relevant accounting
standards, the Board has concluded that no legal or constructive obligation
exists and it is currently not required or appropriate to recognise a
provision in relation to this matter. The FCA has indicated there could be a
range of outcomes, with one potential outcome being an industry-wide consumer
redress scheme. The estimated impact of any redress scheme, if required, is
highly dependent on a number of factors including, for example, the time
period covered; the DCA models impacted (the group operated a number of
different models during the period under review); appropriate reference
commission rates set for any redress; and response rates to any redress
scheme. As such, at this early stage, the timing, scope and quantum of the
potential financial impact on the group, if any, cannot be reliably estimated
at present. In addition, it is not practicable at this stage to estimate any
potential financial impact arising from this issue.
The group is subject to a number of claims through the courts regarding
historical commission arrangements with intermediaries on its motor finance
products. As of 29 February 2024, where individual cases were adjudicated in
County Court, in the majority of the outcomes for Close Brothers where the
courts found that there was no demonstrable customer harm and hence no
compensation to pay, albeit there have been a limited number of adjudicated
cases at this stage. There are also a number of complaints that have been
referred to FOS for a determination. To date no final FOS decisions have been
made upholding complaints against Close Brothers.
Since the announcement by the FCA of its review of historical motor finance
commission arrangements, we have seen a further increase in complaints. We
continue to monitor the impact on our current handling of complaints and are
following the playbooks in place to ensure we have the appropriate resources
to respond effectively.
Further strengthening our capital base to continue to support customers and
protect our valuable franchise
The group has a strong capital, funding and liquidity position. At 31 January
2024, our CET1 and Total capital ratios were 13.0% and 16.9% respectively (31
July 2023: 13.3% and 15.3%), providing significant headroom over the
applicable requirements. Our leverage ratio, which is a measure of capital
strength not affected by risk weightings, remained strong at 12.7%. Our
conservative approach to funding is based on the principle of "borrow long,
lend short" and we hold liquidity levels comfortably ahead of both internal
risk appetite and regulatory requirements, with a Liquidity Coverage Ratio in
excess of 1,000%. As of 29 February 2024, there have been no significant
changes in our deposit base and liquidity metrics.
While there is no certainty regarding any potential financial impact as a
result of the FCA's review, the Board recognises the need to plan for a range
of possible outcomes. It is a long-standing priority of the group to maintain
a strong balance sheet and prudent approach to managing its financial
resources. To that end, the Board considers it prudent for the group to
further strengthen its capital position, while supporting our customers and
business franchise.
As previously announced, the group will not pay any dividends on its ordinary
shares for the current financial year, and the reinstatement of dividends in
2025 and beyond will be reviewed once the FCA has concluded its process and
any financial consequences for the group have been assessed. As a result, we
expect to retain c.£100 million of CET1 capital in the 2024 financial year,
of which c.£50 million has been reflected in the CET1 capital position at 31
January 2024.
The Board is taking steps to further strengthen the group's capital position
by optimising risk weighted assets ("RWAs"). We plan to reduce RWA growth by
approximately £1 billion through a combination of selective loan book growth,
partnerships and significant risk transfer of assets related to our Motor
Finance business through securitisations.
We have also mobilised additional cost management initiatives which are
expected to generate annualised savings of c.£20 million by the 2026
financial year, partly offsetting the adverse impact on the group's income as
a result of the management actions.
We continue to evaluate a range of other potential management actions which
could strengthen the group's capital position over and above our ongoing
organic capital generation through 2025. These include potential risk transfer
of other portfolios through securitisation, a continued review of our business
portfolios and other tactical actions. We estimate this could enhance
available CET1 capital by at least another c.£100 million. Additionally, as
our business continues to organically generate capital through 2025, the
retention of earnings could potentially strengthen the group's capital
position by a further £100 million, if required.
Combined with the decision to not pay any dividends in the current financial
year, these measures could strengthen the group's available CET1 capital by
approximately £400 million by the end of the 2025 financial year (when
compared to the group's projected CET1 capital ratio for 31 July 2025, prior
to any management actions). The Board is confident that these decisive actions
position the group well to withstand a range of scenarios and potential
outcomes. Nevertheless, there remains considerable uncertainty regarding the
specifics of any potential redress scheme, if required, as well as its timing.
Overview of Financial Performance
Summary Group Income Statement(1)
First half First half Change
2024 2023 %
£ million £ million
Operating income 470.8 474.3 (1)
Adjusted operating expenses (334.7) (299.5) 12
Impairment losses on financial assets (41.7) (162.2) (74)
Adjusted operating profit 94.4 12.6 649
Banking 111.7 15.0 645
Commercial 50.9 (33.1) 254
Of which: Novitas 0.2 (104.9) n/a
Retail 19.0 14.7 29
Property 41.8 33.4 25
Asset Management 6.3 8.6 (27)
Winterflood (2.6) 2.4 (208)
Group (21.0) (13.4) 57
Amortisation of intangible assets on acquisition (0.6) (0.9) (33)
Statutory operating profit before tax 93.8 11.7 702
Tax (25.0) (3.3) 658
Profit after tax 68.8 8.4 719
Profit attributable to shareholders 68.8 8.4 719
Adjusted basic earnings per share2 46.3p 6.1p
Basic earnings per share2 46.0p 5.6p
Ordinary dividend per share - 22.5p
Return on opening equity 8.4% 1.1%
Return on average tangible equity 10.1% 1.3%
1. Adjusted measures are presented on a basis consistent with prior periods
and exclude amortisation of intangible assets on acquisition, to present the
performance of the group's acquired businesses consistent with its other
businesses; and any exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the reconciliation between
operating and adjusted measures can be found in note 2.
2. Refer to note 4 for the calculation of basic and adjusted earnings per
share.
Financial Performance
Adjusted operating profit and returns
Adjusted operating profit increased to £94.4 million (H1 2023: £12.6
million), driven by the non-recurrence of the significant impairment charges
incurred in relation to Novitas in the prior year. Excluding Novitas, adjusted
operating profit reduced 20% to £94.2 million (H1 2023: £117.5 million),
primarily reflecting cost growth, a reduction in income in Winterflood and an
increase in group (central functions) net expenses to reflect the interest
rate on the Group bond issued in June 2023, partly offset by lower impairment
charges.
Statutory operating profit before tax increased to £93.8 million (H1 2023:
£11.7 million). Return on opening equity increased to 8.4% (H1 2023: 1.1%)
and return on average tangible equity increased to 10.1% (H1 2023: 1.3%).
Banking adjusted operating profit increased to £111.7 million (H1 2023:
£15.0 million), with the prior year including an impairment charge of £114.6
million in relation to Novitas. Excluding Novitas, Banking adjusted operating
profit decreased 7% to £111.5 million (H1 2023: £119.9 million), as income
growth and lower impairment charges were more than offset by higher costs. In
the Asset Management division, adjusted operating profit declined by 27% to
£6.3 million (H1 2023: £8.6 million) as growth in income was more than
offset by higher costs. Winterflood delivered an operating loss of £2.6
million (H1 2023: operating profit of £2.4 million), primarily reflecting
lower trading income. Group net expenses, which include the central functions
such as finance, legal and compliance, risk and human resources, increased to
£21.0 million (H1 2023: £13.4 million), driven primarily by the interest
charges incurred on the Group's £250 million senior unsecured bond issued in
June 2023 at an interest rate of 7.75%.
Operating income
Operating income decreased marginally to £470.8 million (H1 2023: £474.3
million), with growth in Asset Management and Banking offset by a decline in
Winterflood and net interest expenses from debt issued by the holding company
in June 2023. Income in the Banking division increased marginally, reflecting
loan book growth and strong margins, with the prior year period benefitting
from one-off items related to derivatives outside of a hedge accounting
relationship (mark-to-market swaps) and Novitas income. Excluding the impact
of these swaps and Novitas, Banking income increased 6%. Income in the Asset
Management division increased 7%, reflecting positive net inflows and market
movements. Income in Winterflood declined 12%, with the decline in trading
income more than offsetting growth in WBS.
Adjusted operating expenses
Adjusted operating expenses rose 12% to £334.7 million (H1 2023: £299.5
million) as we saw increased staff costs across the group, as well as
continued investment in Banking. In Banking, costs increased 13% as we
incurred higher staff costs and continued to invest in our strategic
programmes and cost saving initiatives. Costs rose 12% in Asset Management
mainly reflecting new hires and higher staff costs due to inflation-related
salary increases. Winterflood's costs increased marginally, primarily driven
by inflation-related salary increases and one-off costs incurred by relocating
premises, partly offset by lower variable compensation and a reduction in
settlement costs.
Overall, the group's expense/income ratio increased to 71% (H1 2023: 63%),
whilst the compensation ratio increased to 41% (H1 2023: 36%), reflecting
inflation-related wage increases, a normalisation of performance-driven
bonuses and new hires.
Impairment charges and IFRS 9 provisioning
Impairment charges decreased significantly to £41.7 million (H1 2023: £162.2
million), corresponding to an annualised bad debt ratio of 0.9% (H1 2023: 3.6%
annualised), with the prior year period including a charge of £114.6 million
in relation to Novitas. Overall provision coverage increased marginally to
4.1% (31 July 2023: 3.9%).
Excluding Novitas, impairment charges reduced 17% to £39.5 million (H1 2023:
£47.6 million), reflecting the improved macroeconomic outlook compared to the
prior year period, partly offset by loan book growth and the ongoing review of
provisions and coverage across our loan portfolios. The bad debt ratio,
excluding Novitas, reduced to 0.8% annualised (H1 2023: 1.1% annualised) and
remains below our long-term bad debt ratio of 1.2%(1). The coverage ratio
remained stable at 2.1% (31 July 2023: 2.1%), excluding Novitas.
Since the previous financial year end, we have updated the macroeconomic
scenarios to reflect the latest available information regarding the
macroeconomic environment and outlook, although the weightings assigned to
them remain unchanged. At 31 January 2024, there was a 30% weighting to the
strong upside, 32.5% weighting to the baseline, 20% weighting to the mild
downside, 10.5% weighting to the moderate downside and 7% weighting to the
protracted downside.
Whilst we have not seen a significant impact on credit performance, we
continue to monitor closely the evolving impacts of inflation and cost of
living on our customers. We remain confident in the quality of our loan book,
which is predominantly secured or structurally protected, prudently
underwritten, diverse, and supported by the deep expertise of our people. We
continue to expect the bad debt ratio for H2 2024 to remain below our
long-term average, based on current market conditions.
Tax expense
The tax expense in the first half of the year was £25.0 million (H1 2023:
£3.3 million), which corresponds to an effective tax rate of 26.7% (H1 2023:
28.2%) for the period, representing the best estimate of the annual effective
tax rate expected for the full year.
The standard UK corporation tax rate for the financial year is 25.0% (six
months ended 31 January 2023: 21.0%; year ended 31 July 2023: 21.0%). The
effective tax rate is above the UK corporation tax rate primarily due to
disallowable expenditure.
Earnings per share
Adjusted basic earnings per share ("EPS") was 46.3p (H1 2023: 6.1p) and basic
EPS was 46.0p (H1 2023: 5.6p).
We anticipate EPS, return on opening equity and return on average tangible
equity to be impacted from the second half of 2024 onwards by the payment of
the coupon relating to the Fixed Rate Resetting Additional Tier 1 Perpetual
Subordinated Contingent Convertible ("AT1") Securities, at a rate of 11.125%,
which will be due on 29 May and 29 November each year, commencing on 29 May
2024. Any AT1 coupons paid will be deducted from retained earnings, reducing
the profit attributable to ordinary shareholders.
Dividend
As announced on 15 February 2024, given the significant uncertainty regarding
the outcome of the FCA's review of historical motor finance commissions
arrangements and any potential financial impact as a result, the Board
recognises the need to plan for a range of possible outcomes from the review.
It is a long-standing priority of the group to maintain a strong balance sheet
and prudent approach to managing its financial resources. To that end, the
Board considers it prudent for the group to further strengthen its capital
position, while supporting our customers and business franchise.
Therefore, the group will not pay any dividends on its ordinary shares for the
current financial year, and the reinstatement of dividends in the 2025
financial year and beyond will be reviewed once the FCA has concluded its
process and any financial consequences for the group have been assessed.
Summary Group Balance Sheet
31 January 2024 31 July 2023
£ million £ million
Loans and advances to customers and operating lease assets1 9,893.0 9,526.2
Treasury assets2 2,185.2 2,229.4
Market-making assets3 974.3 787.6
Other assets 985.3 1,007.1
Total assets 14,037.8 13,550.3
Deposits by customers 8,264.0 7,724.5
Borrowings4 2,492.3 2,839.4
Market-making liabilities3 902.3 700.7
Other liabilities 547.4 640.8
Total liabilities 12,206.0 11,905.4
Equity(5) 1,831.8 1,644.9
Total liabilities and equity 14,037.8 13,550.3
1. Includes operating lease assets of £282.0 million (31 July 2023: £271.2
million).
2. Treasury assets comprise cash and balances at central banks and debt
securities held to support the Banking division.
3. Market-making assets and liabilities comprise settlement balances, long and
short trading positions and loans to or from money brokers.
4. Borrowings comprise debt securities in issue, loans and overdrafts from
banks and subordinated loan capital.
5. Equity includes the group's £200.0 million Fixed Rate Reset Perpetual
Subordinated Contingent Convertible Securities (AT1 securities), net of
transaction costs, which are classified as an equity instrument under IAS 32.
The group maintained a strong balance sheet and a prudent approach to managing
its financial resources. The fundamental structure of the balance sheet
remains unchanged, with most of the assets and liabilities relating to our
Banking activities. Loans and advances make up the majority of assets. Other
items on the balance sheet include treasury assets held for liquidity
purposes, and settlement balances in Winterflood. Intangibles, property, plant
and equipment, and prepayments are included as other assets. Liabilities are
predominantly made up of customer deposits and both secured and unsecured
borrowings to fund the loan book.
Total assets increased 4% to £14.0 billion (31 July 2023: £13.6 billion),
mainly reflecting growth in the loan book and higher market-making assets.
Total liabilities were 3% higher at £12.2 billion (31 July 2023: £11.9
billion), driven primarily by higher customer deposits and market-making
liabilities, partly offset by a reduction in borrowings. Both market-making
assets and liabilities, which related to trading activity at Winterflood, were
higher due to an increase in value traded at the end of the period.
Total equity increased 11% to £1.8 billion (31 July 2023: £1.6 billion),
primarily reflecting the issuance of AT1 securities net of transaction costs
and profit in the first half, which was partially offset by payments related
to the final dividend for the 2023 financial year of £67.1 million (31
January 2023: £65.6 million). The group's return on assets increased to 1.0%
(H1 2023: 0.1%).
Group Capital
31 January 2024 31 July 2023
£ million £ million
Common equity tier 1 capital 1,353.0 1,310.8
Tier 1 capital 1,553.0 1,310.8
Total capital 1,753.0 1,510.8
Risk weighted assets 10,380.2 9,847.6
Common equity tier 1 capital ratio (transitional) 13.0% 13.3%
Tier 1 capital ratio (transitional) 15.0% 13.3%
Total capital ratio (transitional) 16.9% 15.3%
Leverage ratio1 12.7% 11.4%
1. The leverage ratio is calculated as tier 1 capital as a percentage of total
balance sheet assets excluding central bank claims, adjusting for certain
capital deductions, including intangible assets, and off-balance sheet
exposures, in line with the UK leverage framework under the UK Capital
Requirements Regulation.
Movements in Capital and Other Regulatory Metrics
The CET1 capital ratio reduced from 13.3% to 13.0%, mainly driven by loan book
growth (-c.60bps), a decrease in IFRS 9 transitional arrangements (-c.20bps)
and the Bluestone Motor Finance acquisition (-c.20bps). This was partly offset
by capital generation through profit (c.70bps). Following the announcement
that the group will not pay any dividends on its ordinary shares for the
current financial year, no foreseeable dividend on ordinary shares has been
deducted from CET1 capital.
CET1 capital increased 3% to £1,353.0 million (31 July 2023: £1,310.8
million), reflecting capital generation through profit of £68.8 million,
partly offset by a decrease in the transitional IFRS 9 add-back to capital of
£16.6 million and an increase in intangible assets deducted from capital of
£4.9 million.
Tier 1 capital increased 18% to £1,553.0 million (31 July 2023: £1,310.8
million), primarily driven by the issuance of the group's inaugural AT1 in a
£200 million transaction to optimise the capital structure and provide
further flexibility to grow the business. The transaction strengthened the
regulatory capital position by filling the Pillar 1 and Pillar 2A AT1 capacity
with the proceeds and was in line with the group's strategy and capital
management framework.
Total capital increased 16% to £1,753.0 million (31 July 2023: £1,510.8
million), reflecting the AT1 issuance.
RWAs increased by 5% to £10.4 billion (31 July 2023: £9.8 billion), driven
by loan book growth (c.£445 million) primarily in Commercial and Property,
and the acquisition of Bluestone Motor Finance (c.£105 million).
At 31 January 2024, CET1, tier 1 and total capital ratios were 13.0% (31 July
2023: 13.3%), 15.0% (31 July 2023: 13.3%) and 16.9% (31 July 2023: 15.3%),
respectively.
The CET1, tier 1 and total capital ratio requirements, excluding any
applicable Prudential Regulation Authority ("PRA") buffer, were 9.5%, 11.2%
and 13.4%, respectively, at 31 January 2024. Accordingly, we continue to have
headroom significantly above the requirements of c.350bps in the CET1 capital
ratio, c.380bps in the tier 1 capital ratio and c.350bps in the total capital
ratio.
The group applies IFRS 9 regulatory transitional arrangements which allow
banks to add back to their capital base a proportion of the IFRS 9 impairment
charges during the transitional period. Our capital ratios are presented on a
transitional basis after the application of these arrangements. On a fully
loaded basis, without their application, the CET1, tier 1 and total capital
ratios would be 12.9%, 14.8% and 16.8%, respectively.
The leverage ratio, which is a transparent measure of capital strength not
affected by risk weightings, increased to 12.7% (31 July 2023: 11.4%).
The PRA published PS 17/23, part one of the near-final rules on the
implementation of Basel 3.1 standards, in December 2023. The second part is
expected by 30 June 2024, which should provide further clarity regarding the
SME supporting factor. The implementation date is set for 1 July 2025. As
previously announced, we estimate that if implemented in its current form, it
would represent an increase of up to c.10% in the group's RWAs calculated
under the standardised approach. This is primarily as a result of the proposed
removal of the SME supporting factor, new conversion factor for cancellable
facilities and new market risk rules.
As outlined at the Full Year 2023 results, our application to transition to
the Internal Ratings Based ("IRB") approach has successfully moved to Phase 2
of the process and engagement with the regulator continues, following our
initial application to the PRA in December 2020. Our Motor Finance, Property
Finance and Energy portfolios, where the use of models is most mature, were
submitted with our initial application.
Further strengthening our capital position
As outlined above, the Board is implementing a range of actions to further
strengthen the group's capital position. Additionally, we continue to evaluate
other potential management actions which could strengthen the group's
available CET1 capital over and above our ongoing organic capital generation
through 2025. In all, these measures could strengthen the group's available
CET1 capital by approximately £400 million by the end of the 2025 financial
year (when compared to the group's projected CET1 capital ratio for 31 July
2025, prior to any management actions). The Board is confident that these
decisive actions will position the group well to withstand a range of
scenarios and potential outcomes. Nevertheless, there remains considerable
uncertainty regarding the specifics of any potential redress scheme, if
required, as well as its timing.
Over the medium term, we remain committed to our previous CET1 capital target
range of 12% to 13% but expect to operate above this range in the near-term as
a result of the identified management actions.
Group Funding(1)
31 January 2024 31 July 2023
£ million £ million
Customer deposits 8,264.0 7,724.5
Secured funding 1,351.3 1,676.6
Unsecured funding2 1,227.0 1,308.6
Equity 1,831.8 1,644.9
Total available funding3 12,674.1 12,354.6
Total funding as % of loan book4 128% 130%
Average maturity of funding allocated to loan book5 21 months 21 months
1. Numbers relate to core funding and exclude working capital facilities at
the business level.
2. Unsecured funding excludes £49.0 million (31 July 2023: £44.3 million) of
non-facility overdrafts included in borrowings and includes £135.0 million
(31 July 2023: £190.0 million) of undrawn facilities.
3. Includes £250 million of funds raised via a senior unsecured bond with a
five-year tenor by Close Brothers Group plc, the group's holding company, in
June 2023, with proceeds currently used for general corporate purposes.
4. Total funding as a % of loan book includes £282.0 million (31 July 2023:
£271.2 million) of operating lease assets in the loan book figure.
5. Average maturity of total available funding, excluding equity and funding
held for liquidity purposes.
Our Treasury function is focused on managing funding and liquidity to support
the Banking businesses, as well as interest rate risk. This incorporates our
Savings business, which provides simple and straightforward savings products
to both individuals and businesses, whilst being committed to providing the
highest level of customer service.
Our diverse funding sources enable us to adapt our position to changing market
conditions and demand. Our conservative approach to funding is based on the
principle of "borrow long, lend short", with a spread of maturities over the
medium and longer term, comfortably ahead of a shorter average loan book
maturity. We have maintained a prudent maturity profile, with the average
maturity of funding allocated to the loan book at 21 months (31 July 2023: 21
months), ahead of the average loan book maturity at 16 months (31 July 2023:
16 months).
Our funding draws on a wide range of wholesale and deposit markets including
several public debt securities at both group and operating company level, as
well as public and private secured funding programmes and a diverse mix of
customer deposits. This broad funding base reduces concentration risk and
ensures we can adapt our position through the cycle.
We increased total funding in the first half by 3% to £12.7 billion (31 July
2023: £12.4 billion) which accounted for 128% (31 July 2023: 130%) of the
loan book at the balance sheet date. The average cost of funding in Banking
increased to 5.4% (2023: 3.2%) due to a higher base rate and customer deposit
pricing pressure. We took actions to mitigate this pressure by optimising the
group's liability mix based on funding needs, customer demand and market
pricing, significantly growing our retail deposit base to utilise this lower
cost of funding for the group. We are well positioned to continue benefiting
from our diverse funding base, and expect cost of funds to be nearing the peak
of the current interest rate cycle.
Customer deposits increased 7% to £8.3 billion (31 July 2023: £7.7 billion)
overall. Of this, non-retail deposits decreased 3% to £3.4 billion (31 July
2023: £3.5 billion) and retail deposits increased by 16% to £4.9 billion (31
July 2023: £4.2 billion), as we actively sought to grow our retail deposit
base. In line with our prudent and conservative approach to funding, our
deposits are predominantly term, with only 5% of total deposits available on
demand and over 70% having at least three months to maturity. At 31 January
2024, approximately 85% of retail deposits were protected by the Financial
Services Compensation Scheme. As of 29 February 2024, there have been no
significant changes in our deposit base.
The investment in our customer deposit platform continues to deliver benefits.
Deposits held through this platform have grown by c.50% over five years to
over £5.6 billion. We continue to drive scalability through an array of
funding sources, with both Easy Access and an additional deposit aggregator
being introduced over the last year and complementing our existing offering of
Notice Accounts and Fixed Rate Cash ISAs. The introduction of Easy Access
provides us access to a large potential deposit pool, with Easy Access
balances now sitting at c.£250 million. We remain focused on continuing to
grow and diversify our retail deposit base and further optimise our cost of
funding and maturity profile.
Secured funding decreased 19% to £1.4 billion (31 July 2023: £1.7 billion),
with our fifth public Motor Finance securitisation completed in November 2023
more than offset by a £250 million repayment related to our Motor Finance
warehouse securitisation and the repayment of £228 million of the Term
Funding Scheme for Small and Medium-sized Enterprises ("TFSME") ahead of the
scheduled maturity date. This takes our drawings under the scheme to £372
million (31 July 2023: £600 million). Over the next 12 months, £262 million
of TFSME will mature, which we expect to replace in line with our diverse
funding profile, dependent on market conditions and demand. A further £110
million will mature in October 2025.
Unsecured funding, which includes senior unsecured and subordinated bonds and
undrawn committed revolving facilities, reduced 6% to £1.2 billion (31 July
2023: £1.3 billion).
Our credit ratings continue to reflect the group's inherent financial
strength, diversified business model and consistent risk appetite. Moody's
Investors Services ("Moody's") reaffirmed their rating for Close Brothers
Group as "A2/P1" and Close Brothers Limited as "Aa3/P1", in January 2024,
whilst downgrading the outlook from "stable" to "negative". Close Brothers
Group's subordinated debt rating was also upgraded to A2 from A3 by Moody's.
In February 2024, following the end of the first half, Fitch Ratings ("Fitch")
downgraded both CBG and CBL long-term Issuer Default Ratings ("IDRs") to BBB+
from A-, and affirmed CBG and CBL short-term IDRs of F2 and "negative"
outlook to reflect anticipated lower profitability and risks to earnings from
the FCA's motor review.
Group Liquidity
31 January 2024 31 July 2023
£ million £ million
Cash and balances at central banks 1,658.5 1,937.0
Sovereign and central bank debt1 193.3 186.1
Supranational, sub-sovereigns and agency ("SSA") bonds 145.6 -
Covered bonds 187.8 106.3
Treasury assets 2,185.2 2,229.4
1. There was £12 million encumbered sovereign debt and central bank debt and
covered bonds at 31 January 2024 (31 July 2023: £nil).
The group continues to adopt a conservative stance on liquidity, ensuring it
is comfortably ahead of both internal risk appetite and regulatory
requirements.
Maintaining a strong level of liquidity, particularly in light of the
significant uncertainty regarding the outcome of the FCA's review, remains a
key priority for the group. We have a large, high quality liquid asset
portfolio held mainly in cash and government bonds. In the first half,
treasury assets were broadly stable at £2.2 billion (31 July 2023: £2.2
billion) and were predominantly held on deposit with the Bank of England.
We regularly assess and stress test the group's liquidity requirements and
continue to exceed the liquidity coverage ratio ("LCR") regulatory
requirements, with a 12-month average to 31 January 2024 LCR of 1,091% (31
July 2023: 1,143%). In addition to internal measures, we monitor funding risk
based on the CRR rules for the net stable funding ratio ("NSFR"). The
four-quarter average NSFR to 31 January 2024 was 130.8% (31 July 2023:
126.0%). As of 29 February 2024, there have been no significant changes to
these ratios.
Business Review
Banking
Key Financials
First half First half Change
2024 2023 %
£ million £ million
Operating income 365.3 363.9 0
Adjusted operating expenses (211.8) (186.7) 13
Impairment losses on financial assets (41.8) (162.2) (74)
Adjusted operating profit 111.7 15.0 645
Adjusted operating profit, pre provisions 153.5 177.2 (13)
Net interest margin 7.5% 8.0%
Expense/income ratio 58% 51%
Bad debt ratio 0.9% 3.6%
Return on net loan book 2.3% 0.3%
Return on opening equity 12.3% 1.1%
Closing loan book and operating lease assets 9,893.0 9,041.0 9
Key Financials (Excluding Novitas)
First half First half Change
2024 2023 %
£ million £ million
Operating income 360.3 349.9 3
Adjusted operating expenses (209.2) (182.4) 15
Impairment losses on financial assets (39.6) (47.6) (17)
Adjusted operating profit 111.5 119.9 (7)
Adjusted operating profit, pre provisions 151.1 167.5 (10)
Net interest margin 7.5% 7.8%
Expense/income ratio 58% 51%
Bad debt ratio 0.8% 1.1%
Closing loan book and operating lease assets 9,830.3 8,979.1 9
Continued demand and loan book growth across our businesses, as we maintained
our pricing discipline and improved underlying credit performance
The market backdrop has been mixed in the first half. Whilst we have seen some
improvement in macroeconomic indicators, economic headwinds remain as interest
rates have stabilised at higher levels and inflation persists. Notwithstanding
the uncertainty this creates for individuals and SMEs, we continued to support
our customers and lend through the cycle as we consistently applied our
prudent underwriting and pricing discipline.
Banking adjusted operating profit increased to £111.7 million (H1 2023:
£15.0 million), with the prior year period including an impairment charge of
£114.6 million in relation to Novitas. On a pre-provision basis, adjusted
operating profit decreased 13% to £153.5 million (H1 2023: £177.2 million).
Excluding Novitas, Banking adjusted operating profit decreased 7% to £111.5
million (H1 2023: £119.9 million), as income growth and lower impairment
charges were more than offset by higher costs.
The loan book grew 4% in the first half to £9.9 billion (31 July 2023: £9.5
billion), driven by strong growth in Property and continued good demand in
Asset Finance and the UK Motor Finance business, partly offset by the normal
seasonal impact seen in the Premium and Invoice Finance businesses.
Excluding the businesses in run-off, Novitas and the legacy Republic of
Ireland Motor Finance, the loan book grew 5% to £9.7 billion (31 July 2023:
£9.3 billion).
Operating income increased marginally to £365.3 million (H1 2023: £363.9
million), reflecting loan book growth and strong margins, whilst the prior
year period benefitted from movements in derivatives outside of a hedge
accounting relationship (mark-to-market swaps) (£7 million benefit in H1 2023
versus £4 million adverse impact in H1 2024) and Novitas income (£14 million
in H1 2023 versus £5 million income in H1 2024). Excluding the impact of
these movements in derivatives and Novitas, operating income grew 6%, driven
by loan book growth.
Whilst we remained focused on pricing discipline and optimising the group's
liability mix and funding costs in the higher rate environment, the net
interest margin decreased to 7.5% (H1 2023: 8.0%, 2023: 7.7%) on a reported
basis, primarily reflecting the impact of the derivatives not designed as
hedging instruments and Novitas benefitting the prior year period. Excluding
the impact of these items, the net interest margin was broadly stable at 7.6%
(H1 2023: 7.7%, H2 2023: 7.6%). We are well positioned to maintain a strong
net interest margin and pass on higher cost of funds as we remain focused on
asset pricing.
Across the Banking division, we have invested to support our
relationship-based model and make our experts even more valuable. We have
recently completed the Asset Finance transformation programme, which has
introduced a single platform across the business, standardising processes,
increasing efficiencies and improving customer insights. Through the
investment made in the Motor Finance business, we have created the ability to
partner with more finance technology providers, such as iVendi and
AutoConvert, as well as increasing capability from existing providers,
resulting in an uplift in finance proposal volumes and giving us access to a
wider pool of motor retailers. We continue to build on the investment made in
our Savings business to grow our deposit base and customer numbers.
Furthermore, following a programme to implement the requirements of the FCA's
Consumer Duty, our focus remains on embedding compliance and implementing
Consumer Duty changes for books of business not open to new customers. We
continue to see investment through the cycle as vital in protecting our model,
enhancing efficiency and future-proofing our income generation capabilities.
Although operating expenses increased 13% to £211.8 million (H1 2023: £186.7
million), when looking at consecutive halves, we incurred a higher rate of
cost growth in the second half of the 2023 financial year (9% / £16.3 million
increase) compared to the first half of 2024 (4% / £8.8 million increase).
This was mainly due to the timing of investment spend over the period.
The overall increase in operating expenses was driven by higher staff costs to
reflect inflation-related salary rises and new hires, investment in our
strategic programmes and cost saving initiatives, volume and activity-driven
growth, and the acquisition of Bluestone Motor Finance. This was partially
offset by efficiency savings. We also incurred additional costs related to the
handling of heightened complaint volumes in Motor Finance. The expense/income
ratio increased to 58% (H1 2023: 51%) and the compensation ratio rose to 32%
(H1 2023: 29%), reflecting the normalisation of performance-driven bonuses.
We remain on track to deliver c.8-10% growth in Banking costs in the 2024
financial year, excluding costs related to the recently announced acquisition
of Bluestone Motor Finance (Ireland). We expect growth in the Banking cost
base over the 2024 financial year to be driven primarily by volume and
activity-driven growth, inflationary-related increases and higher resulting
compensation, investment spend and c.£10 million of costs related to the
heightened volume of complaints in the Motor Finance business regarding
historical discretionary commission arrangements. This increase is being
partly offset by the progress we have made on our tactical and strategic cost
management initiatives. We expect to incur c.£8 million (2023: £8.7 million)
of costs related to Novitas as we continue to wind down the business.
In addition to this growth, we expect to incur c.£7 million of costs over the
2024 financial year in relation to the acquisition, integration and running of
Bluestone Motor Finance (Ireland), which completed in October 2023.
We have made good progress on our strategic cost management initiatives. Our
technology transformation programme, initiated in 2023, aims to simplify our
technology estate as well as consolidating and increasing our use of
outsourcing. As part of this, we have already removed 83 IT applications, with
more in the pipeline, and reduced our headcount by c.100.
In the period we have mobilised further cost management initiatives to support
the ongoing profitability of the business, particularly in light of the
capital actions and their expected impact on future income. These include
rationalising our third party suppliers and property footprint, and adjusting
our workforce to drive increased efficiency and effectiveness. We expect these
measures to deliver annualised savings of £20 million by the 2026 financial
year.
With the benefit of these additional measures, we remain committed to more
closely aligning income and cost growth (excluding any restructuring costs) in
the 2025 financial year, and delivering positive operating leverage over the
medium term.
Impairment charges decreased significantly to £41.8 million (H1 2023: £162.2
million), corresponding to an annualised bad debt ratio of 0.9% (H1 2023:
3.6%), with the prior year period including a charge of £114.6 million in
relation to Novitas. Overall provision coverage increased marginally to 4.1%
(31 July 2023: 3.9%).
Excluding Novitas, impairment charges reduced 17% to £39.6 million (H1 2023:
£47.6 million), mainly driven by the improved macroeconomic outlook compared
to the prior year period, partly offset by loan book growth and the ongoing
review of provisions and coverage across our loan portfolios. The bad debt
ratio, excluding Novitas, reduced to 0.8% annualised (H1 2023: 1.1%) and
remains below our long-term bad debt ratio of 1.2%. The coverage ratio
remained stable at 2.1% (31 July 2023: 2.1%), excluding Novitas.
Whilst we have not seen a significant impact on credit performance, we
continue to monitor closely the evolving impacts of inflation and cost of
living on our customers. We remain confident in the quality of our loan book,
which is predominantly secured or structurally protected, prudently
underwritten, diverse, and supported by the deep expertise of our people. We
continue to expect the bad debt ratio for H2 2024 to remain below our
long-term average, based on current market conditions.
Progress on resolving issues relating to Novitas
The decision was made to wind down Novitas and withdraw from the legal
services financing market following a strategic review in July 2021, which
concluded that the overall risk profile of the business was no longer
compatible with our long-term strategy and risk appetite. As announced in H1
2023, we have accelerated our efforts to resolve the issues surrounding this
business. We continue to pursue formal legal action against one of the After
the Event ("ATE") insurers and have entered into a settlement with another
smaller ATE insurer.
We recognised impairment charges of £2.2 million in relation to Novitas in
the first half, mainly comprising legal costs. While we will continue to
review provisioning levels in light of future developments, including the
experienced credit performance of the book and the outcome of the group's
initiated legal action, we believe the provisions adequately reflect the
remaining risk of credit losses for the Novitas loan book (c.£63 million net
loan book at 31 January 2024).
In addition, in line with IFRS 9 requirements, a proportion of the expected
credit loss is expected to unwind, over the estimated time to recovery period,
to interest income. The group remains focused on maximising the recovery of
remaining loan balances, either through successful outcome of cases or
recourse to the customers' ATE insurers, whilst complying with its regulatory
obligations and always focusing on ensuring good customer outcomes. We expect
net income related to Novitas to reduce from £18.9 million in 2023 to c.£10
million in 2024.
Loan Book Analysis
31 January 2024 31 July 2023 Change
£ million £ million %
Commercial 5,028.5 4,821.3 4
Commercial - Excluding Novitas 4,965.8 4,761.4 4
Asset Finance1 3,687.8 3,481.3 6
Invoice and Speciality Finance1 1,340.7 1,340.0 -
Invoice and Speciality Finance - Excluding Novitas1 1,278.0 1,280.1 -
Retail 3,025.9 3,001.8 1
Motor Finance2 1,984.0 1,948.4 2
Premium Finance 1,041.9 1,053.4 (1)
Property 1,838.6 1,703.1 8
Closing loan book and operating lease assets3 9,893.0 9,526.2 4
Closing loan book and operating lease assets - Excluding Novitas 9,830.3 9,466.3 4
1. The Asset Finance and Invoice and Speciality Finance loan books have been
re-presented for 31 July 2023 to reflect the recategorization of Close
Brothers Brewery Rentals ("CBBR") from Invoice and Speciality Finance to Asset
Finance.
2. The Motor Finance loan book includes £144.5 million (31 July 2023:
£206.7million) relating to the Republic of Ireland Motor Finance business,
which is in run-off following the cessation of our previous partnership in the
Republic of Ireland from 30 June 2022.
3. Includes operating lease assets of £282.0 million (31 July 2023: £271.2
million).
Focus on disciplined growth
During the first half, we remained focused on delivering disciplined growth
whilst prioritising our margins and credit quality, with our growth
initiatives delivering a significant contribution of loan book growth.
The loan book grew 4% in the six months since 31 July 2023 to £9.9 billion
(31 July 2023: £9.5 billion). This reflected strong growth in Property and
continued good demand in Asset Finance and the UK Motor Finance business. This
was partly offset by the normal seasonal impact seen in the Premium and
Invoice Finance businesses, and the run-off of the legacy Republic of Ireland
Motor Finance loan book.
Excluding the businesses in run-off, Novitas and the legacy Republic of
Ireland Motor Finance business, the loan book grew 5% to £9.7 billion (31
July 2023: £9.3 billion).
The Commercial loan book grew 4% to £5.0 billion (31 July 2023: £4.8
billion), despite the roll-off of government supported lending under schemes
such as the Coronavirus Business Interruption Loan Scheme ("CBILS"). Asset
Finance delivered loan book growth of 6%, with strong new business volumes in
the Leasing business particularly from the Contract Hire, Energy and Materials
Handling portfolios. Invoice and Speciality Finance was broadly stable
reflecting the normal seasonal impact in the first half, notwithstanding a
slight uptick in Invoice Finance utilisation. Excluding Novitas, the
Commercial book increased 4% to £5.0 billion (31 July 2023: £4.8 billion).
The Retail loan book grew 1% to £3.0 billion (31 July 2023: £3.0 billion).
Motor Finance increased 2%, with growth in the UK Motor Finance business more
than offsetting the decline in the legacy Republic of Ireland loan book
following the cessation of our previous partnership in June 2022. Following
the acquisition of Bluestone Motor Finance (Ireland), which completed in
October 2023, the Motor Finance business is re-building its presence in the
Republic of Ireland with a loan book of £16 million at 31 January 2024. The
Premium Finance loan book has achieved record levels in the first half, with
strong demand from customers alongside continued premium inflation. However,
the book contracted 1% since 31 July 2023 due to normal seasonality.
The legacy Republic of Ireland Motor Finance business accounted for 7% of the
Motor Finance loan book (31 July 2023: 11%) and 1% of the Banking loan book
(31 July 2023: 2%).
The Property loan book grew 8% as we saw strong drawdowns from our healthy new
business pipeline in the first half, with the stabilisation of interest rates
and improving market sentiment.
We expect to broadly sustain underlying loan book growth in the second half of
the 2024 financial year.
Banking: Commercial
First half First half Change
2024 2023 %
£ million £ million
Operating income 168.5 182.3 (8)
Adjusted operating expenses (103.0) (92.9) 11
Impairment losses on financial assets (14.6) (122.5) (88)
Adjusted operating profit 50.9 (33.1) (254)
Adjusted operating profit, pre provisions 65.5 89.4 (27)
Net interest margin 6.8% 8.0%
Expense/income ratio 61% 51%
Bad debt ratio 0.6% 5.4%
Closing loan book and operating lease assets1 5,028.5 4,550.3 11
Commercial key metrics excluding Novitas
First half First half Change
2024 2023 %
£ million £ million
Operating income 163.5 168.3 (3)
Adjusted operating expenses (100.4) (88.6) 13
Impairment losses on financial assets (12.4) (7.9) 57
Adjusted operating profit 50.7 71.8 (29)
Adjusted operating profit, pre provisions 63.1 79.7 (21)
Net interest margin 6.7% 7.6%
Expense/income ratio 61% 53%
Bad debt ratio 0.5% 0.4%
Closing loan book and operating lease assets1 4,965.8 4,488.4 11
1. Operating lease assets of £282.0 million (31 July 2023: £271.2 million).
Good demand in Commercial as we continued to support our SME customers
The Commercial businesses provide specialist, predominantly secured lending
principally to the SME market and include Asset Finance and Invoice and
Speciality Finance. We finance a diverse range of sectors, with Asset Finance
offering commercial asset financing, hire purchase and leasing solutions
across a broad range of assets including commercial vehicles, machine tools,
contractors' plant, printing equipment, company car fleets, energy project
finance, and aircraft and marine vessels, as well as our Vehicle Hire and
Brewery Rentals businesses. The Invoice and Speciality Finance business
provides debt factoring, invoice discounting and asset-based lending, and also
includes Novitas. As previously announced, Novitas ceased lending to new
customers in July 2021.
Despite market uncertainty persisting in the period, the diversity of our
offering has resulted in customer demand remaining strong. We reached a
significant milestone in the first half, with the Commercial loan book
exceeding £5 billion following good new business volumes. Our new initiatives
continue to prove successful, with the agricultural equipment and materials
handling teams both having written healthy levels of new business, and our
second syndication deal completed by Invoice Finance.
Adjusted operating profit for Commercial increased to £50.9 million (H1 2023:
loss of £33.1 million), reflecting a significant decrease in impairment
charges. On a pre-provision basis, adjusted operating profit reduced 27% to
£65.5 million (H1 2023: £89.4 million).
Excluding Novitas, adjusted operating profit decreased 29% to £50.7 million
(H1 2023: £71.8 million), mainly driven by cost growth.
Operating income reduced 8% to £168.5 million (H1 2023: £182.3 million) as
the benefit from loan book growth was offset by pressure on margin on new
business in Asset Finance and a reduction in Novitas income. The net interest
margin decreased to 6.8% (H1 2023: 8.0%) as we sought to balance the repricing
of new business written in Asset Finance with our focus on maintaining support
to our customers impacted by the higher inflationary environment. In addition,
loan book growth mix in the first half reflected increased new business levels
in some of our portfolios with larger loan sizes and lower margin, such as
Energy. Excluding Novitas, the net interest margin decreased to 6.7% (H1 2023:
7.6%).
Operating expenses grew 11% to £103.0 million (H1 2023: £92.9 million),
driven by higher staff costs and investment spend as we completed the Asset
Finance transformation programme. This was partly offset by lower costs in
relation to Novitas. As a result, the expense/income ratio increased to 61%
(H1 2023: 51%).
Impairment charges decreased significantly to £14.6 million (H1 2023: £122.5
million), with £114.6 million incurred in relation to Novitas in the prior
year period. Provision coverage increased slightly to 5.4% (31 July 2023:
5.2%).
Excluding Novitas, impairment charges rose to £12.4 million (H1 2023: £7.9
million), reflecting loan book growth and the ongoing review of provisions and
coverage. This resulted in a bad debt ratio of 0.5% annualised (H1 2023:
0.4%). The coverage ratio remained broadly stable at 1.5% (31 July 2023:
1.4%), excluding Novitas.
Banking: Retail
First half First half Change
2024 2023 %
£ million £ million
Operating income 131.8 123.2 7
Operating expenses (90.8) (79.1) 15
Impairment losses on financial assets (22.0) (29.4) (25)
Operating profit 19.0 14.7 29
Operating profit, pre provisions 41.0 44.1 (7)
Net interest margin 8.7% 8.2%
Expense/income ratio 69% 64%
Bad debt ratio 1.5% 1.9%
Closing loan book1 3,025.9 2,970.3 2
1. The Motor Finance loan book includes £144.5 million (31 July 2023: £206.7
million) relating to the legacy Republic of Ireland Motor Finance business,
which is in run-off following the cessation of our previous partnership in the
Republic of Ireland from 30 June 2022.
Continued focus on prioritising our margins and underwriting discipline
The Retail businesses provide intermediated finance, through motor dealers,
motor finance brokers and insurance brokers. Finance is provided to both
individuals and to a broad spectrum of UK businesses.
Although the backdrop remained mixed in the first half, we delivered a good
performance overall. In Motor Finance, we saw a significant year-on-year
increase in new business volumes as we increased our routes to market through
new intermediaries, emerging channels and consumer brands, in line with our
ethos of being where the consumer chooses finance. The acquisition of
Bluestone Motor Finance is providing a platform for us to re-build our Motor
Finance business in the Republic of Ireland. In Premium Finance, we remain
focused on providing excellent service levels to both our customers and
partners in the purchase of insurance. We continue to enhance our proposition
to support our broker partners and their customers, be they individuals or
businesses. We have continued to focus on providing insight and capabilities
to our partners to aid them in delivering improved outcomes.
Operating profit for Retail increased to £19.0 million (H1 2023: £14.7
million), as income growth and lower impairment charges more than offset
higher costs. On a pre-provision basis, operating profit reduced 7% to £41.0
million (H1 2023: £44.1 million).
Operating income increased 7% to £131.8 million (H1 2023: £123.2 million),
reflecting growth in the Premium Finance loan book compared to the prior year
period and a recovery in the net interest margin to 8.7% (H1 2023: 8.2%)
following the absorption of funding increases last year.
Operating expenses rose 15% to £90.8 million (H1 2023: £79.1 million),
driven mainly by additional costs related to the handling of heightened
complaint volumes in Motor Finance, as well as higher staff costs and the
acquisition of Bluestone Motor Finance. As a result, the expense/income ratio
increased to 69% (H1 2023: 64%).
As previously outlined, the FCA is conducting a review of historical motor
finance commission arrangements and sales at several firms, following high
numbers of complaints from customers. The estimated impact of any redress
scheme, if required, is highly dependent on a number of factors and as such,
at this early stage, the timing, scope and quantum of a potential financial
impact on the group, if any, cannot be reliably estimated at present. We
continue to monitor the impact on our current handling of complaints and are
following the playbooks in place to ensure we have the appropriate resources
to respond effectively. We expect to incur costs of c.£10 million in the 2024
financial year in relation to the heightened volume of complaints.
Impairment charges reduced to £22.0 million (H1 2023: £29.4 million),
resulting in an annualised bad debt ratio of 1.5% (H1 2023: 1.9%). This was
driven primarily by an improvement in the macroeconomic outlook compared to
the prior year period, partly offset by model refinements. As reported
previously, following an increase in arrears in Motor Finance in the first
half of the 2023 financial year, they have since remained stable, albeit at a
higher level than pre-pandemic, reflecting cost of living pressures on our
customers. The provision coverage ratio remained stable at 2.9% (31 July 2023:
2.9%).
We remain confident in the credit quality of the Retail loan book. The Motor
Finance loan book is predominantly secured on second hand vehicles which are
less exposed to depreciation or significant declines in value than new cars.
Our core Motor Finance product remains hire-purchase contracts, with less
exposure to residual value risk associated with Personal Contract Plans
("PCP"), which accounted for c.9% of the Motor Finance loan book at 31 January
2024 (c.9% at 31 July 2023). The Premium Finance loan book benefits from
various forms of structural protection including premium refundability and, in
most cases, broker recourse for the personal lines product.
Banking: Property
First half First half Change
2024 2023 %
£ million £ million
Operating income 65.0 58.4 11
Operating expenses (18.0) (14.7) 22
Impairment losses on financial assets (5.2) (10.3) (50)
Operating profit 41.8 33.4 25
Operating profit, pre provisions 47.0 43.7 8
Net interest margin 7.3% 7.8%
Expense/income ratio 28% 25%
Bad debt ratio 0.6% 1.4%
Closing loan book 1,838.6 1,520.4 21
Strong drawdowns from our healthy pipeline driving loan book growth
Property comprises Property Finance and Commercial Acceptances. The Property
Finance business is focused on specialist residential development finance to
established professional developers in the UK. Commercial Acceptances provides
bridging loans and loans for refurbishment projects.
This half year has seen some cautious optimism returning to the UK property
market, following a slowdown in the prior year. Whilst some economic headwinds
remain, a stabilisation of interest rates has led to improved buyer sentiment
and is supporting residential developers in making investment decisions.
Although we have seen some pressure on our lending margins, we remain focused
on retaining our pricing discipline and relationship-led proposition,
supporting our clients through-the-cycle. We have continued to see good demand
for initiatives including our regional expansion, our enhanced loan-to-value
product and our partnership with Travis Perkins, which enables SME
housebuilders to access discounted building supplies and materials directly
via a credit facility. Our pipeline remains strong at c.£1.1 billion.
Operating profit increased 25% to £41.8 million (H1 2023: £33.4 million), as
income growth and a reduction in impairment charges more than offset an
increase in operating expenses. On a pre-provision basis, operating profit
increased 8% to £47.0 million (H1 2023: £43.7 million).
Operating income rose 11% to £65.0 million (H1 2023: £58.4 million), driven
by strong loan book growth, although the net interest margin decreased to 7.3%
(H1 2023: 7.8%), mainly reflecting lower fee yields than the prior period.
Operating expenses increased to £18.0 million (H1 2023: £14.7 million),
reflecting higher staff costs. As a result, the expense/income ratio increased
to 28% (H1 2023: 25%).
Impairment charges decreased to £5.2 million (H1 2023: £10.3 million),
resulting in an annualised bad debt ratio of 0.6% (H1 2023: 1.4%). This was
driven by lower impairment charges to reflect an improvement in macroeconomic
variables and outlook, partly offset by loan book growth and an ongoing review
of provisions and coverage, which included increased specific provisions for
existing single names. The provision coverage ratio remained broadly stable at
2.5% (31 July 2023: 2.4%).
The Property loan book is conservatively underwritten. We work with
experienced, professional developers, predominantly SMEs with a focus on
delivering mid-priced family housing, and have minimal exposure to the prime
central London market, with our regional loan book making up over 50% of the
Property Finance portfolio. Our long track record, expertise and quality of
service ensure the business remains resilient to competition and continues to
generate high levels of repeat business.
Asset Management
Key Financials(1)
First half First half Change
2024 2023 %
£ million £ million
Investment management 61.3 54.2 13
Advice and other services 14.0 15.7 (11)
Other income2 1.0 1.1 (9)
Operating income 76.3 71.0 7
Adjusted operating expenses(1) (70.0) (62.4) 12
Impairment losses on financial assets - - -
Adjusted operating profit 6.3 8.6 (27)
Revenue margin (bps) 84 83
Operating margin 8% 12%
Return on opening equity 7.6% 13.1%
1. Adjusted measures are presented on a basis consistent with prior periods
and exclude amortisation of intangible assets on acquisition, to present the
performance of the group's acquired businesses consistent with its other
businesses; and any exceptional and other adjusting items which do not reflect
underlying trading performance. Further detail on the reconciliation between
operating and adjusted measures can be found in note 2.
2. Other income includes net interest income and expense, income on principal
investments and other income.
Well placed to build on successful growth
Close Brothers Asset Management provides personal financial advice and
investment management services to private clients in the UK, including full
bespoke management, managed portfolios and funds, distributed both directly
via our advisers and investment managers, and through third party financial
advisers.
Total operating income rose 7% to £76.3 million (H1 2023: £71.0 million),
reflecting positive net inflows and market movements, with growth in AuM
delivered by our bespoke investment management business resulting in higher
investment management income. As a result, the revenue margin increased
marginally to 84bps (H1 2023: 83bps).
Adjusted operating expenses increased 12% to £70.0 million (H1 2023: £62.4
million), reflecting higher staff costs mainly due to investment in new hires
and inflation-related salary increases. Of this, £5.0 million (H1 2023: £3.3
million) of costs related to the hiring of investment managers and the
associated AuM in the bespoke investment management business. The
expense/income ratio grew to 92% (H1 2023: 88%), with the compensation ratio
also increasing to 63% (H1 2023: 58%). Our previous investments in technology
have driven increased efficiency and operational resilience, whilst also
improving client experience.
Adjusted operating profit in CBAM decreased 27% to £6.3 million (H1 2023:
£8.6 million), as growth in income was more than offset by higher costs. The
operating margin reduced to 8% (H1 2023: 12%), corresponding to 15% (H1 2023:
17%) when excluding the costs related to the hiring of investment managers and
the associated AuM in the bespoke investment management business. Statutory
operating profit before tax was £5.7 million (H1 2023: £7.8 million).
CBAM has a strong track record of growth, with healthy net inflows delivered
by successfully serving existing clients and attracting new clients, combined
with building new investment teams and acquiring selective IFA businesses. The
business remains closely aligned with long-term structural growth opportunity
presented by the wealth management industry and continues to be an attractive
franchise for both portfolio managers and clients.
We continued to deliver growth in the first half through the hiring of nine
bespoke investment managers (H1 2023: five). Following a period of strong
growth in our Bespoke business, our priority in this channel is now to
consolidate our position and maximise opportunities to accelerate our
profitability, shifting our focus to selective bespoke investment management
hiring only. In our Wealth Planning business, we announced the acquisition of
Bottriell Adams in December 2023.
We have recently completed a refresh of our brand, reflecting CBAM's four
values of Clients, People, Integrity, and Excellence. We offer an attractive
proposition built around these values, with almost 90 financial planners and
over 75 bespoke investment managers across 15 locations around the UK focused
on providing excellent service.
Strong net inflows notwithstanding economic uncertainty
Notwithstanding the uncertainty around the economic outlook in the first
quarter, we saw an uptick in equity markets and in turn, investor sentiment in
the second quarter. Over the period, we saw strong net inflows of £732
million (H1 2023: £474 million) and delivered an annualised net inflow rate
of 9% (H1 2023: 6%), with the bespoke investment management business
contributing significantly to the overall inflow rate. This momentum has
continued since the first half, with the annualised net inflow rate unchanged
at 9% at the end of February 2024.
Total managed assets increased 8% to £17.7 billion (31 July 2023: £16.4
billion), driven by strong net inflows and positive market performance. Total
client assets, which includes advised and managed assets, also increased by 7%
to £18.5 billion (31 July 2023: £17.3 billion).
In December 2023, we announced the acquisition of Bottriell Adams, an IFA
business based in Dorset with approximately £220 million of assets. Bottriell
Adams' partners, financial planners and support team joined us as part of the
acquisition, as CBAM extends its regional presence in the South West. The
acquisition completed in March and the associated client assets will be
reflected in AuA in the second half of the year.
Whilst substantive compliance with the FCA's Consumer Duty requirements has
been achieved, our focus remains on embedding compliance and ensuring the
appropriate frameworks and governance are in place to monitor good customer
outcomes. We continue to assess the value for money that CBAM's funds provide
annually and are comfortable with the current fees payable.
Movement in Client Assets
Six months to 12 months to Six months to
31 January 31 July 31 January
2024 2023 2023
£ million £ million £ million
Opening managed assets 16,419 15,302 15,302
Inflows 1,621 2,729 1,155
Outflows (889) (1,411) (681)
Net inflows 732 1,318 474
Market movements 524 (201) (61)
Total managed assets 17,675 16,419 15,715
Advised only assets 872 907 1,196
Total client assets1 18,547 17,326 16,911
Annualised net flows as % of opening managed assets 9% 9% 6%
1. Total client assets include £5.0 billion of assets (31 July 2023: £4.9
billion) that are both advised and managed.
Fund performance
Our funds and segregated bespoke portfolios are designed to provide attractive
risk-adjusted returns for our clients, consistent with their long-term goals
and investment objectives. Fund performance in the first half has been good
across asset classes, with all our funds delivering positive absolute returns
during the period, and most of our funds outperforming their peer group. Given
the uncertain market conditions seen, particularly in the first quarter, these
results demonstrate the strength of our investment team.
Our sustainable funds and Net Zero commitment
At CBAM, we believe that sustainability is an important part of achieving
excellence and building wealth for our clients. Our approach to responsible
investment is to continue to integrate the evaluation of material ESG factors
within our investment research process over time, with the goal of widening
our information set to evaluate investments risk and financial return.
We continue to explore options for enhancing our sustainable offering, which
includes ethical screening, sustainable funds and our Socially Responsible
Investment Service. Our Sustainable Select Fixed Income fund, which utilises a
sustainable investment methodology to target a reduction in CO(2) emissions
intensity versus its benchmark, has seen good traction since its creation in
March 2023 and we continue to see strong inflows into this product.
We became signatories to the Net Zero Asset Managers initiative in September
2022 and as part of our initial target disclosure, committed to 18% of our AuM
being in line with net zero by 2050.
Well positioned to consolidate our position
Following a period of strong growth, our priority is to consolidate our
position and maximise opportunities to accelerate our profitability through
providing excellent service, building on the strength of our client
relationships, and in our Bespoke business by shifting our focus to only
selective hiring of bespoke investment managers. We continue to target net
inflows in the range of 6-10% and following a period of significant
investment, expect our operating margin to increase from 2025 onwards towards
a longer-term target of above 20%. We remain confident that our vertically
integrated, multi-channel business model positions us well for ongoing demand
for our services and the structural growth opportunity presented by the wealth
management industry.
Winterflood
Key Financials
First half First half Change
2024 2023 %
£ million £ million
Operating income 34.2 39.0 (12)
Operating expenses (36.9) (36.6) 1
Impairment gains on financial assets 0.1 - n/a
Operating (loss) / profit (2.6) 2.4 (208)
Average bargains per day ('000) 52 61
Operating margin (8%) 6%
Return on opening equity (4.1%) 3.9%
Loss days 3 1
Winterflood Business Services Assets under Administration (billion) 13.8 12.4
Uncertain macroeconomic outlook continued to negatively affect trading
performance
Winterflood is a leading UK market maker, delivering high quality execution
services to platforms, stockbrokers, wealth managers and institutional
investors, as well as providing corporate advisory services to investment
trusts and outsourced dealing and custody services via Winterflood Business
Services ("WBS").
In the first half, the market environment, both domestically and globally,
remained challenging as UK macroeconomic factors and geopolitical concerns
continued to impact investor confidence. With investors able to achieve
equity-like returns from money markets and debt instruments, which have a
lower risk profile, we have seen relatively subdued trading and Investment
Trusts corporate activity. As a result, Winterflood delivered an operating
loss of £2.6 million (H1 2023: operating profit of £2.4 million), with
broadly stable costs more than offsetting a decline in income.
Operating income reduced 12% to £34.2 million (H1 2023: £39.0 million), with
the decline in trading income more than offsetting growth in WBS.
Trading income decreased 19% to £25.6 million (H1 2023: £31.7 million)
reflecting the unfavourable market conditions, particularly in the first
quarter, as equity and bond prices declined. Whilst performance improved in
the second quarter, as central bank monetary policy began to positively impact
inflation, the recent dampening of rate cut expectations in the short-term has
weighed on market sentiment. Average daily bargains declined 15% to 52k (H1
2023: 61k) in the first half, although we have maintained our market leading
position.
Notwithstanding low issuance and transaction volumes in the period, income
from the Investments Trusts corporate business has increased 31% to £1.7
million (H1 2023: £1.3 million). We are exploring growth opportunities which
are additive to the business and remain well placed for when market activity
returns.
WBS continued to see good momentum, with income rising 24% to £7.8 million
(H1 2023: £6.3 million). AuA increased 11% year-on-year to £13.8 billion (H1
2023: £12.4bn, 2023: £12.9 billion), supported by positive market movements
and net inflows, as equity markets recovered in the second quarter. WBS
remains focused on developing its client relationships and investing in its
award-winning proprietary technology to provide highly scalable and bespoke
solutions for clients. WBS is well positioned for further growth, both
organically and supported by a solid pipeline of clients, having exceeded its
original target AuA of £10 billion in the 2023 financial year. We remain
confident in the outlook and expect the business to grow AuA to over £20
billion by full year 2026.
Operating expenses increased marginally to £36.9 million (H1 2023: £36.6
million), primarily driven by inflation-related salary increases and one-off
costs incurred by relocating premises. This was partly offset by reduced
variable compensation and a decline in settlement fees resulting from lower
trading activity.
Given ongoing UK economic pressures, we have recently undertaken a cost review
to right-size elements of the business, to ensure we are appropriately and
efficiently organised to meet current business requirements, whilst remaining
scalable for future growth. This cost review will result in annualised fixed
cost savings of 5% in 2025. We remain focused on driving efficiencies and
optimising organisational resilience, whilst maintaining the strengths of the
franchise for when investor activity returns.
Winterflood has a long track record of trading profitably through a range of
conditions and remains well placed to retain our market position and benefit
when investor appetite returns. We continue to diversify our revenue streams
and explore growth opportunities to balance the cyclicality seen in the
trading business, with WBS expecting to grow AuA to over £20 billion by 2026.
Definitions
Adjusted: Adjusted measures are presented on a basis consistent with prior
periods and exclude amortisation of intangible assets on acquisition, to
present the performance of the group's acquired businesses consistent with its
other businesses; and any exceptional and other adjusting items which do not
reflect underlying trading performance
Additional Tier 1 ("AT1") capital: Additional regulatory capital that along
with CET1 capital makes up a bank's Tier 1 regulatory capital. Includes the
group's perpetual subordinated contingent convertible securities classified as
other equity instruments under IAS 32
Assets under administration: Total assets for which Winterflood Business
Services provide custody and administrative services
Bad debt ratio: Impairment losses in the year as a percentage of average net
loans and advances to customers and operating lease assets
Bargains per day: Average daily number of Winterflood's trades with third
parties
Business as usual ("BAU") costs: Operating expenses excluding depreciation and
other costs related to investments
Bounce Back Loan Scheme ("BBLS"): UK government business lending scheme that
helped small and medium-sized businesses to borrow between £2,000 and
£50,000 (up to a maximum of 25% of their turnover)
Capital Requirements Regulation ("CRR"): Capital Requirements Regulation as
implemented in the PRA Rulebook CRR Instrument and the PRA Rulebook CRR Firms:
Leverage Instrument (collectively known as "CRR")
CET1 capital ratio: Measure of the group's CET1 capital as a percentage of
risk weighted assets, as required by CRR
Common equity tier 1 ("CET1") capital: Measure of capital as defined by the
CRR. CET1 capital consists of the highest quality capital including ordinary
shares, share premium account, retained earnings and other reserves, less
goodwill and certain intangible assets and other regulatory adjustments
Compensation ratio: Total staff costs as a percentage of adjusted operating
income
Coronavirus Business Interruption Loan Scheme ("CBILS"): UK government
business lending scheme that helped small and medium-sized businesses access
loans and other kinds of finance up to £5 million
Coronavirus Large Business Interruption Loan Scheme ("CLBILS"): UK government
business lending scheme that helped medium and large-sized businesses access
loans and other kinds of finance up to £200 million
Cost of funds: Interest expense incurred to support the lending activities
divided by the average net loans and advances to customers and operating lease
assets
Credit impaired: Where one or more events that have a detrimental impact on
the estimated future cash flows of a loan have occurred. Credit impaired
events are more severe than SICR triggers. Accounts which are credit impaired
will be allocated to
Stage 3
Discounting: The process of determining the present value of future payments
Dividend per share ("DPS"): Comprises the final dividend proposed for the
respective year, together with the interim dividend declared and paid in the
year
Earnings per share ("EPS"): Profit attributable to ordinary shareholders
divided by number of basic shares
Effective interest rate ("EIR"): The interest rate at which revenue is
recognised on loans and discounted to their carrying value over the life of
the financial asset
Effective tax rate ("ETR"): Tax on operating profit/(loss) as a percentage of
operating profit/(loss) on ordinary activities before tax
Expected credit loss ("ECL"): The unbiased probability-weighted average credit
loss determined by evaluating a range of possible outcomes and future economic
conditions
Expense/income ratio: Total adjusted operating expenses divided by operating
income
Financial Conduct Authority ("FCA"): A financial regulatory body in the UK,
regulating financial firms and maintaining integrity of the UK's financial
market
Forbearance: Forbearance occurs when a customer is experiencing financial
difficulty in meeting their financial commitments and a concession is granted,
by changing the terms of the financial arrangement, which would not otherwise
be considered
Funding allocated to loan book: Total available funding, excluding equity and
funding held for liquidity purposes
Gross carrying amount: Loan book before expected credit loss provision
High quality liquid assets ("HQLAs"): Assets which qualify for regulatory
liquidity purposes, including Bank of England deposits and sovereign and
central bank debt
Independent financial adviser ("IFA"): Professional offering independent,
whole of market advice to clients including investments, pensions, protection
and mortgages
Internal ratings based ("IRB") approach: A supervisor-approved method using
internal models, rather than standardised risk weightings, to calculate
regulatory capital requirements for credit risk
International Financial Reporting Standards ("IFRS"): Globally accepted
accounting standards issued by the IFRS Foundation and the International
Accounting Standards Board
Investment costs: Includes depreciation and other costs related to investment
in multi-year projects, new business initiatives and pilots and cyber
resilience. Excludes IFRS 16 depreciation
Leverage ratio: Tier 1 capital as a percentage of total balance sheet assets,
adjusted for certain capital deductions, including intangible assets, and
off-balance sheet exposures
Liquidity coverage ratio ("LCR"): Measure of the group's HQLAs as a percentage
of expected net cash outflows over the next
30 days in a stressed scenario
Loan to value ("LTV") ratio: For a secured or structurally protected loan, the
loan balance as a percentage of the total value of the asset
Long-term bad debt ratio: Long-term bad debt ratio is calculated using IAS 39
until the change to IFRS 9 in FY19. Bad debt ratio excluding Novitas only
disclosed from FY21 onwards. Long-term average bad debt ratio of 1.2% based on
the average bad debt ratio for FY08-H124, excluding Novitas.
Loss day: Where aggregate gross trading book revenues are negative at the end
of a trading day
Loss given default ("LGD"): The amount lost on a loan if a customer defaults
Managed assets or assets under management ("AuM"): Total market value of
assets which are managed by Close Brothers Asset Management in one of our
investment solutions
Modelled expected credit loss provision: ECL = PD x LGD x EAD
Net asset value ("NAV") per share: Total assets less total liabilities and
other equity instruments, divided by the number of ordinary shares in issue
excluding own shares
Net carrying amount: Loan book value after expected credit loss provision
Net flows: Net flows as a percentage of opening managed assets calculated on
an annualised basis
Net interest margin ("NIM"): Operating income generated by lending activities,
including interest income net of interest expense, fees and commissions income
net of fees and commissions expense, and operating lease income net of
operating lease expense, less depreciation on operating lease assets, divided
by average net loans and advances to customers and operating lease assets
Net stable funding ratio ("NSFR"): Regulatory measure of the group's weighted
funding as a percentage of weighted assets
Net zero: Target of completely negating the amount of greenhouse gases
produced by reducing emissions or implementing methods for their removal
Operating margin: Adjusted operating profit divided by operating income
Personal Contract Plan ("PCP"): PCP is a form of vehicle finance where the
customer defers a significant portion of credit to the final repayment at the
end of the agreement, thereby lowering the monthly repayments compared to a
standard hire-purchase arrangement. At the final repayment date, the customer
has the option to: (a) pay the final payment and take the ownership of the
vehicle; (b) return the vehicle and not pay the final repayment; or (c)
part-exchange the vehicle with any equity being put towards the cost of a new
vehicle
Probability of default ("PD"): Probability that a customer will default on
their loan
Prudential Regulation Authority ("PRA"): A financial regulatory body,
responsible for regulating and supervising banks and other financial
institutions in the UK
Recovery Loan Scheme: Launched in April 2021 as a replacement to CBILS. Under
the terms of the scheme, businesses of any size that have been adversely
impacted by the Covid-19 pandemic can apply to borrow up to £10 million, with
accredited lenders receiving a government-backed guarantee of 80% on losses
that may arise
Return on assets: Adjusted operating profit attributable to shareholders
divided by total closing assets at the balance sheet date
Return on average tangible equity ("RoTE"): Adjusted operating profit
attributable to ordinary shareholders divided by average total shareholder's
equity, excluding intangible assets and other equity instruments
Return on net loan book ("RoNLB"): Adjusted operating profit from lending
activities divided by average net loans and advances to customers and
operating lease assets
Return on opening equity ("RoE"): Adjusted operating profit attributable to
ordinary shareholders divided by opening equity, excluding non-controlling
interests and other equity instruments
Revenue margin: Income from advice, investment management and related services
divided by average total client assets. Average total client assets calculated
as a two-point average
Risk weighted assets ("RWAs"): A measure of the amount of a bank's assets,
adjusted for risk in line with the CRR. It is used in determining the capital
requirement for a financial institution
Secured debt: Debt backed or secured by collateral
Senior debt: Represents the type of debt that takes priority over other
unsecured or more junior debt owed by the issuer. Senior debt is first to be
repaid ahead of other lenders or creditors
Significant increase in credit risk ("SICR"): An assessment of whether credit
risk has increased significantly since initial recognition of a loan using a
range of triggers. Accounts which have experienced a significant increase in
credit risk will be allocated to Stage 2
Standardised approach: Generic term for regulator-defined approaches for
calculating credit, operational and market risk capital requirements as set
out in the CRR
Subordinated debt: Represents debt that ranks below, and is repaid after
claims of, other secured or senior debt owed by the issuer
Tangible net asset value ("TNAV") per share: Total assets less total
liabilities, other equity instruments and intangible assets, divided by the
number of ordinary shares in issue excluding own shares
Task Force on Climate-related Financial Disclosures ("TCFD"): Regulatory
framework to improve and increase reporting of climate-related financial
information, including more effective and consistent disclosure of
climate-related risks and opportunities
Term funding: Funding with a remaining maturity greater than 12 months
Term Funding Scheme for Small and Medium-sized Enterprises ("TFSME"): The Bank
of England's Term Funding Scheme with additional incentives for SMEs
Tier 2 capital: Additional regulatory capital that along with Tier 1 capital
makes up a bank's total regulatory capital. Includes qualifying subordinated
debt
Total client assets ("TCA"): Total market value of all client assets including
both managed assets and assets under advice and/or administration in the Asset
Management division
Total funding as % of loan book: Total funding divided by net loans and
advances to customers and operating lease assets
Watch list: Internal risk management process for heightened monitoring of
exposures that are showing increased credit risk
Principal Risks and Uncertainties
The group faces a number of risks in the normal course of business. To manage
these effectively, a consistent approach is adopted based on a set of
overarching principles, namely:
· adhering to our established and proven business model;
· implementing an integrated risk management approach based on the
concept of "three lines of defence"; and
· setting and operating within clearly defined risk appetites,
monitored with defined metrics and limits.
At the core of the group's risk management framework are the group's principal
risks which are the risks that have been identified as those most material in
the delivery of the group's strategic objectives. A detailed description of
each, including an overview of our risk management and mitigation approach, is
disclosed on pages 90 to 130 of the 2023 Annual Report. The Annual Report can
be accessed via the Investor Relations home page on the group's website at
www.closebrothers.com (http://www.closebrothers.com) .
The principal risks are listed below and are subject to ongoing review to
ensure that the framework remains aligned to the prevailing risk
environment. In the current macroeconomic and operating environment, we
remain vigilant to developments in our principal risk profile, as well as
proactive monitoring via an established framework of a suite of emerging risk
which reflect broader market uncertainties.
A summary of the group's principal risks are detailed below:
Business and strategic risk - The group operates in an environment where it is
exposed to an array of independent influencing factors. Its profitability can
be impacted by: the broader UK economic climate; front-line sales performance;
changes in technology; regulation and customer behaviour; cost movements; and
competition from traditional and new players. All of these can vary in both
nature and extent across its divisions. Changes in these factors may affect
the Banking division's ability to write loans as it seeks to maintain its
desired risk and reward criteria, result in lower new business volumes in
Asset Management, impact levels of trading activity at Winterflood, or result
in additional investment requirements and higher costs of operation.
Notwithstanding the uncertainty arising from the FCA review and associated
management actions, our current outlook on Business and Strategic Risk remains
broadly unchanged since the last reporting period.
Capital risk - The group is required to hold sufficient regulatory capital
(including equity and other loss-absorbing debt instruments) to enable it to
operate effectively. This includes meeting minimum regulatory requirements,
operating within risk appetites set by the board and supporting its strategic
goals. During the period, the group successfully issued £200 million of
Additional Tier 1 capital ('AT1') to boost its overall capital strength and
diversify its sources of capital, thereby opening access to previously unused
capital markets. As explained above, the group is experiencing headwinds that
may impact on its capital position in the future. The group has identified
actions which seek to mitigate these risks including, but not limited to, the
decision to not pay any dividend payments in the current financial year,
optimising RWA growth, and significant risk transfer of assets. As recently
announced, the group's board has decided it will not pay dividends relating to
the 2024 financial year, and the reinstatement of dividends in the 2025
financial year and beyond will be reviewed once the FCA concludes its review
on historical motor finance commission arrangements and the financial
consequences for the group have been assessed. This decision will ensure that
capital is retained in the group.
Conduct risk - The group's behaviours, or those of its colleagues, whether
intentional or unintentional, could result in poor outcomes for our customers
or the markets in which the group operates. The group recognises the
importance of delivering good customer outcomes and seeks to reasonably avoid
customer detriment and foreseeable harm resulting from inappropriate
judgements or behaviours in the execution of business activities. To support
this, the group strives to maintain a culture aligned to its values and places
the customer at the heart of the business model. This is achieved by acting in
good faith towards customers, taking steps to proactively avoid causing
foreseeable harm and supporting customers to pursue their financial
objectives. This approach is founded in customers being central to our purpose
and this ethos is embedded within our culture. Reporting on, and monitoring
of, conduct risk is a key aspect of risk management activities and is aligned
to the Financial Conduct Authority's ("FCA") Consumer Duty regulatory
obligations for retail customers. The approach to monitoring conduct risk is
expected to further evolve as additional insights are garnered and considered
as part of continuous improvement. Closed-book implementation activities for
Consumer Duty are well progressed in line with the FCA's implementation
deadline of 31 July 2024.
Conduct risk considerations of the above-mentioned FCA review of historical
motor finance commission arrangements will be kept under review as the
situation develops.
Credit risk - As a lender to businesses and individuals, the bank is primarily
exposed to credit losses if customers are unable to repay loans and
outstanding interest and fees. The group also has exposure to counterparties
including those with which it places deposits or trades, and a small number of
derivative contracts to hedge interest rate and foreign exchange exposures.
Whilst we have not seen a significant impact on credit performance, we
continue to monitor closely the evolving impacts of rising inflation and cost
of living on our customers. We remain confident in the quality of our loan
book, which is predominantly secured, prudently underwritten, diverse, and
supported by the deep expertise of our people.
Funding and liquidity risk - The Banking division's access to funding remains
key to support our lending activities and the liquidity requirements of the
group. Funding and liquidity are measured and monitored on a daily basis with
issues escalated as appropriate. During this period the bank has closely
monitored how events have impacted its funding and liquidity position. The
bank's 'borrow long, lend short' funding approach provides significant
resilience against short- to medium-term liquidity shocks and accordingly
there has been minimal impacts to the bank's liquidity position. In addition
to its prudent funding model, the bank holds significant amounts of liquid
assets to ensure it is well positioned to manage through any liquidity
pressure should it arise in the future.
Legal and regulatory risk - The group is subject to the laws and regulations
of the various jurisdictions in which it operates. Failure to comply with
existing legal or regulatory requirements, or to adapt to changes in these
requirements in a timely fashion, may have negative consequences for the
group. Similarly, changes to regulation can impact our financial performance,
capital, liquidity, and the markets in which we operate. Whilst the inherent
risk exposure for the group continues to increase across the jurisdictions in
which it operates, the group remains attuned to the developing regulatory
requirements, and horizon scanning activities which helps ensure all legal and
regulatory risks are considered at the earliest opportunity.
On 11 January, the FCA announced they would be carrying out a review to assess
whether the historical use of discretionary commission arrangements between
lenders and credit brokers in the motor finance market may have caused
customer harm. Currently there is significant uncertainty about the outcome of
the FCA's review, and the timing, scope and quantum of any potential financial
impact on the group cannot be reliably estimated at present. In accordance
with the relevant accounting standards, the Board has concluded that it is
currently not required or appropriate to recognise a provision in relation to
this matter. In addition, it is not practicable at this early stage to
estimate any potential financial impact arising from this issue.
Non-traded market risk - Changes in market prices such as interest rates,
credit spreads and foreign exchange rates have the potential to impact the
value of assets or liabilities outside the trading book. Our current outlook
on non-traded market risk remains broadly unchanged since the last reporting
period.
Operational risk -The group is exposed to various operational risks through
its day-to-day operations, all of which have the potential to result in
financial loss or adverse impact. Losses typically crystallise as a result of
inadequate or failed internal processes, people, models and systems, or as a
result of external factors, including but not limited to Cyber and Information
Security. Impacts to the business, customers, third parties and the markets in
which the group operates are considered within a maturing framework for
resilient delivery of important business services.
The outlook for operational risk remains stable. Scenario analysis is used to
assess how severe but plausible operational risks will affect the group,
providing a forward-looking basis for evaluating and managing operational risk
exposures. Notwithstanding, close monitoring continues on external factors and
impacts which could arise from geo-political impacts and the legal and
regulatory environment.
Reputational risk - Protection and effective stewardship of the group's
reputation are fundamental to its long-term success. Detrimental stakeholder
perception could lead to impairment of the group's current business and future
goals. This could arise in the course of the group's usual activities, such as
through employee, supplier or intermediary conduct, the provision of products
and services, crystallisation of another risk type, or as a result of changes
outside of its influence.
Given the uncertainty associated with the FCA's market-wide review of historic
discretionary commission arrangements, reputational risk is heightened. We
continue to monitor this closely for all stakeholder groups. The FCA's
intervention has led to increased media speculation about the impact to the
market as well as the impact to the group as referred to on page 28 above.
Traded market risk - A change in the value of an underlying market variable
could give rise to an adverse movement in the value of the group's assets. Our
current outlook on traded market risk remains broadly unchanged since the last
reporting period.
Climate risk - Running alongside the suite of principal risks is climate risk,
which the group categorises as a cross-cutting risk, as the impacts arising
from climate change have the ability to impact across the spectrum of
principal risks. Climate risk represents a continued area of focus and the
group continues to closely monitor government and regulatory developments in
parallel to managing its own carbon footprint and supporting its customers to
manage their climate risk impacts. Climate risk is embedded within the
group's risk management framework, ensuring effective oversight. Climate
disclosures are disclosed on pages 38 to 64 of the 2023 Annual Report, in line
with the recommendations of the Taskforce for Climate-related Financial
Disclosures ("TCFD").
Emerging and evolving risks
In addition to day-to-day management of its principal risks, the group
utilises an established framework to monitor its portfolio for emerging risks,
consider broader market uncertainties, and support its organisational
readiness to respond. Group-level emerging risks are monitored by the Group
Risk and Compliance Committee on an ongoing basis, with key themes and
patterns of deterioration monitored via several sub-risks.
Current group level emerging risks include economic and geopolitical
uncertainty, medium to long-term transitional climate risks, economic
uncertainty, legal and regulatory change, supply chain risks, change execution
risk and strategic disruption.
Directors' Responsibility Statement
Each of the Directors confirms that, to the best of their knowledge:
· the condensed consolidated interim financial statements
("interim financial statements") have been prepared in accordance with
International Accounting Standard 34 "Interim Financial Reporting" as
contained in UK-adopted International Accounting Standards ("IAS");
· the half year results include a fair review of the
information required by Disclosure and Transparency Rule 4.2.7R (indication of
important events during the first six months of the financial year and their
impact on the interim financial statements, and a description of principal
risks and uncertainties for the remaining six months of the financial year);
and
· the half year results include a fair review of the
information required by Disclosure and Transparency Rule 4.2.8R (disclosure of
related parties transactions that have taken place during the first six months
of the current financial year and that have materially affected the financial
position or performance of the company, and any changes in the related parties
transactions described in the last Annual Report that could do so).
The Directors of Close Brothers Group plc as at the date of this report are as
listed on pages 138 to 140 of the company's 2023 Annual Report, subject to the
following changes: Oliver Corbett and Peter Duffy ceased to be directors of
the company on 16 November 2023 and 15 February 2024 respectively. A list of
current Directors is maintained on the company's website www.closebrothers.com
(http://www.closebrothers.com) .
On behalf of the board
Michael N. Biggs Adrian J. Sainsbury
Chairman Chief Executive
19 March 2024
Independent review report to Close Brothers Group plc
Report on the condensed consolidated interim financial statements
Our conclusion
We have reviewed Close Brothers Group plc's condensed consolidated interim
financial statements (the "interim financial statements") in the Half Year
Results of Close Brothers Group plc for the 6 month period ended
31 January 2024 (the "period").
Based on our review, nothing has come to our attention that causes us to
believe that the interim financial statements are not prepared, in all
material respects, in accordance with UK adopted International Accounting
Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
The interim financial statements comprise:
● the consolidated balance sheet as at 31 January 2024;
● the consolidated income statement and consolidated statement of
comprehensive income for the period then ended;
● the consolidated statement of changes in equity for the period
then ended
● the consolidated cash flow statement for the period then ended;
and
● the explanatory notes to the interim financial statements.
The interim financial statements included in the Half Year Results of Close
Brothers Group plc have been prepared in accordance with UK adopted
International Accounting Standard 34, 'Interim Financial Reporting' and the
Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority.
Basis for conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410, 'Review of Interim Financial Information Performed by
the Independent Auditor of the Entity' issued by the Financial Reporting
Council for use in the United Kingdom ("ISRE (UK) 2410"). A review of interim
financial information consists of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and
other review procedures.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and, consequently, does not
enable us to obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do not express
an audit opinion.
We have read the other information contained in the Half Year Results and
considered whether it contains any apparent misstatements or material
inconsistencies with the information in the interim financial statements.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for conclusion section of this report,
nothing has come to our attention to suggest that the directors have
inappropriately adopted the going concern basis of accounting or that the
directors have identified material uncertainties relating to going concern
that are not appropriately disclosed. This conclusion is based on the review
procedures performed in accordance with ISRE (UK) 2410. However, future events
or conditions may cause the group to cease to continue as a going concern.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The Half Year Results, including the interim financial statements, is the
responsibility of, and has been approved by the directors. The directors are
responsible for preparing the Half Year Results in accordance with the
Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority. In preparing the Half Year Results, including the
interim financial statements, the directors are responsible for assessing the
group's ability to continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the group or to
cease operations, or have no realistic alternative but to do so.
Our responsibility is to express a conclusion on the interim financial
statements in the Half Year Results based on our review. Our conclusion,
including our Conclusions relating to going concern, is based on procedures
that are less extensive than audit procedures, as described in the Basis for
conclusion paragraph of this report. This report, including the conclusion,
has been prepared for and only for the company for the purpose of complying
with the Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We do not, in
giving this conclusion, accept or assume responsibility for any other purpose
or to any other person to whom this report is shown or into whose hands it may
come save where expressly agreed by our prior consent in writing.
PricewaterhouseCoopers LLP
Chartered Accountants
London
19 March 2024
Consolidated Income Statement
for the six months ended 31 January 2024
Six months ended 31 January Year ended 31 July
Note 2024 2023 2023
Unaudited Unaudited Audited
£ million
£ million
£ million
Interest income 569.3 414.4 897.5
Interest expense (272.6) (117.0) (304.9)
Net interest income 296.7 297.4 592.6
Fee and commission income 132.8 130.1 262.9
Fee and commission expense (11.3) (8.7) (17.9)
Gains less losses arising from dealing in securities 25.2 31.9 58.6
Other income 67.3 61.8 114.2
Depreciation of operating lease assets and other direct costs (39.9) (38.2) (77.8)
Non-interest income 174.1 176.9 340.0
Operating income 2 470.8 474.3 932.6
Administrative expenses (334.7) (299.5) (615.0)
Impairment losses on financial assets 6 (41.7) (162.2) (204.1)
Total operating expenses before amortisation of intangible assets on (376.4) (461.7) (819.1)
acquisition
Operating profit before amortisation of intangible assets on acquisition 94.4 12.6 113.5
Amortisation of intangible assets on acquisition (0.6) (0.9) (1.5)
Operating profit before tax 93.8 11.7 112.0
Tax 3 (25.0) (3.3) (30.9)
Profit after tax 68.8 8.4 81.1
Profit attributable to shareholders 68.8 8.4 81.1
Basic earnings per share 4 46.0p 5.6p 54.3p
Diluted earnings per share 4 46.0p 5.6p 54.2p
Ordinary dividend per share 5 - 22.5p 67.5p
Consolidated Statement of Comprehensive Income
for the six months ended 31 January 2024
Six months ended 31 January Year ended 31 July
2024 2023 2023
Unaudited Unaudited Audited
£ million
£ million
£ million
Profit after tax 68.8 8.4 81.1
Items that may be reclassified to income statement
Currency translation (losses)/gains (0.2) 1.0 0.7
(Losses)/gains on cash flow hedging (14.0) 18.7 17.6
Losses on financial instruments classified at fair value through other (2.5) (4.7) (3.9)
comprehensive income
Tax relating to items that may be reclassified 4.6 (3.9) (4.3)
(12.1) 11.1 10.1
Items that will not be reclassified to income statement
Defined benefit pension scheme gains/(losses) 0.1 (5.5) (5.7)
Tax relating to items that will not be reclassified - 1.5 1.6
0.1 (4.0) (4.1)
Other comprehensive income, net of tax (12.0) 7.1 6.0
Total comprehensive income 56.8 15.5 87.1
Attributable to
Shareholders 56.8 15.5 87.1
Consolidated Balance Sheet
at 31 January 2024
Note 31 January 31 July
2023
2024
Audited
Unaudited
£ million
£ million
Assets
Cash and balances at central banks 1,658.5 1,937.0
Settlement balances 913.5 707.0
Loans and advances to banks 275.6 330.3
Loans and advances to customers 6 9,611.0 9,255.0
Debt securities 7 550.3 307.6
Equity shares 8 26.6 29.3
Loans to money brokers against stock advanced 20.6 37.6
Derivative financial instruments 85.0 88.5
Intangible assets 9 268.5 263.7
Property, plant and equipment 10 365.1 357.1
Current tax assets 52.0 42.3
Deferred tax assets 13.7 10.8
Prepayments, accrued income and other assets 197.4 184.1
Total assets 14,037.8 13,550.3
Liabilities
Settlement balances and short positions 11 886.4 695.9
Deposits from banks 12 131.9 141.9
Deposits from customers 12 8,264.0 7,724.5
Loans and overdrafts from banks 12 437.8 651.9
Debt securities in issue 12 1,870.1 2,012.6
Loans from money brokers against stock advanced 15.9 4.8
Derivative financial instruments 145.5 195.9
Accruals, deferred income and other liabilities 270.0 303.0
Subordinated loan capital 12 184.4 174.9
Total liabilities 12,206.0 11,905.4
Equity
Called up share capital 38.0 38.0
Retained earnings 1,610.4 1,608.5
Other equity instrument 13 197.6 -
Other reserves (14.2) (1.6)
Total shareholders' and other owners' equity 1,831.8 1,644.9
Total equity 1,831.8 1,644.9
Total equity and liabilities 14,037.8 13,550.3
Consolidated Statement of Changes in Equity
for the six months ended 31 January 2024
Other reserves
Called up share capital Retained earnings Other FVOCI reserve Share- Exchange movements reserve Cash flow hedging reserve Total attributable to equity holders Total
£ million
£ million
£ million
based payments reserve £ million
£ million
£ million
£ million
equity
equity instrument
£ million
£ million
At 1 August 2022 -
(audited) 38.0 1,628.4 0.1 (29.2) (1.5) 21.7 1,657.5 1,657.5
Profit for the period - 8.4 - - - - - 8.4 8.4
Other comprehensive income/(expense) - (4.0) - (3.4) - 1.0 13.5 7.1 7.1
Total comprehensive income for the period - 4.4 - (3.4) - 1.0 13.5 15.5 15.5
Dividends paid (note 5) - (65.6) - - - - - (65.6) (65.6)
Shares purchased - - - - (5.1) - - (5.1) (5.1)
Shares released - - - - 3.8 - - 3.8 3.8
Other movements - 1.2 - - (0.9) - - 0.3 0.3
Income tax - (0.3) - - - - - (0.3) (0.3)
At 31 January 2023 38.0 1,568.1 - (3.3) (31.4) (0.5) 35.2 1,606.1 1,606.1
(unaudited)
Profit for the period - 72.7 - - - - - 72.7 72.7
Other comprehensive (expense)/income - (0.1) - 0.6 - (0.8) (0.8) (1.1) (1.1)
Total comprehensive income for the period - 72.6 - 0.6 - (0.8) (0.8) 71.6 71.6
Dividends paid (note 5) - (33.5) - - - - - (33.5) (33.5)
Shares purchased - - - - 0.1 - - 0.1 0.1
Shares released - - - - 1.8 - - 1.8 1.8
Other movements - 1.1 - - (2.5) - - (1.4) (1.4)
Income tax - 0.2 - - - - - 0.2 0.2
At 31 July 2023 38.0 1,608.5 - (2.7) (32.0) (1.3) 34.4 1,644.9 1,644.9
(audited)
Profit for the period - 68.8 - - - - - 68.8 68.8
Other comprehensive income/(expense) - 0.1 - (1.8) - (0.2) (10.1) (12.0) (12.0)
Total comprehensive income for the period - 68.9 - (1.8) - (0.2) (10.1) 56.8 56.8
Dividends paid (note 5) - (67.1) - - - - - (67.1) (67.1)
Shares purchased - - - - (3.6) - - (3.6) (3.6)
Shares released - - - - 3.6 - - 3.6 3.6
Other movements (note 13) - 0.1 197.6 - (0.5) - - 197.2 197.2
Income tax - - - - - - - - -
At 31 January 2024 38.0 1,610.4 197.6 (4.5) (32.5) (1.5) 24.3 1,831.8 1,831.8
(unaudited)
Consolidated Cash Flow Statement
for the six months ended 31 January 2024
Six months ended Year ended 31 July
31 January
Note 2024 2023 2023
Unaudited Unaudited Audited
£ million
£ million
£ million
Net cash (outflow)/inflow from operating activities 18(a) (394.0) 833.1 1,021.4
Net cash (outflow)/inflow from investing activities
Purchase of:
Property, plant and equipment (8.4) (5.1) (8.7)
Intangible assets - software (15.7) (27.0) (53.2)
Subsidiaries, net of cash acquired 18(b) (11.2) (0.5) (0.5)
Sale of:
Subsidiaries 18(c) 0.2 0.5 -
(35.1) (32.1) (62.4)
Net cash (outflow)/inflow before financing activities (429.1) 801.0 959.0
Financing activities
Purchase of own shares for employee share award schemes (3.6) (5.1) (5.0)
Equity dividends paid (67.1) (65.6) (99.1)
Interest paid on subordinated loan capital and debt financing (11.7) (5.4) (10.9)
Payment of lease liabilities (7.9) (7.6) (16.2)
Issuance of senior bond - - 248.5
Redemption of senior bond - - (250.0)
Issuance of Additional Tier 1 ("AT1") capital securities 200.0 - -
Costs arising on issuance of AT1 (2.4) - -
Net (decrease)/increase in cash (321.8) 717.3 826.3
Cash and cash equivalents at beginning of year 2,209.3 1,383.0 1,383.0
Cash and cash equivalents at end of year 18(d) 1,887.5 2,100.3 2,209.3
The Notes
1. Basis of Preparation and Accounting Policies
The half year results have been prepared in accordance with the Disclosure
Guidance and Transparency Rules of the Financial Conduct Authority and the
condensed consolidated interim financial statements ("interim financial
statements") have been prepared in accordance with UK-adopted International
Accounting Standards. These include International Accounting Standard ("IAS")
34 'Interim Financial Reporting', which specifically addresses the contents of
interim financial statements. The interim financial statements incorporate the
individual financial statements of Close Brothers Group plc and the entities
it controls, using the acquisition method of accounting.
The half year results are unaudited and do not constitute statutory accounts
within the meaning of Section 434 of the Companies Act 2006. However, the
information has been reviewed by the group's auditor, PricewaterhouseCoopers
LLP, and their report appears above.
The financial information for the year ended 31 July 2023 contained within
this half year report does not constitute statutory accounts as defined in
Section 434 of the Companies Act 2006. A copy of those statutory accounts,
which have been prepared in accordance with international accounting standards
in conformity with the requirements of the Companies Act 2006, has been
delivered to the Registrar of Companies. PricewaterhouseCoopers LLP has
reported on those accounts. The report of the auditor on those statutory
accounts was unqualified, did not contain an emphasis of matter paragraph and
did not contain a statement under Section 498(2) or (3) of the Companies Act
2006.
The directors have a reasonable expectation that the company and the group as
a whole have adequate resources to continue in operational existence for the
foreseeable future, a period of not less than 12 months from the date of this
report. For this reason, they continue to adopt the going concern basis in
preparing the condensed consolidated half year financial statements.
The accounting policies applied are consistent with those set out on pages 211
to 216 of the 2023 Annual Report, except for an additional policy in relation
to the group's issuance of Additional Tier 1 capital securities, which are
classified as an equity instrument under IAS 32 'Financial Instruments:
Presentation', and an update to the estimated useful lives of computer
software classified as intangible assets on page 215 of the 2023 Annual
Report.
Financial instruments are classified as equity when there is no contractual
obligation to deliver cash, another financial asset, or a variable number of
the group's own equity instruments to another entity. The instrument is
measured at cost less transaction costs and distributions are recognised as a
deduction from retained earnings when they become irrevocable. Please see note
13 for more information.
The estimated useful lives of computer software have been updated from a range
of 3 to 5 years to a range of 3 to 10 years reflecting the longer useful lives
of new core software platforms within the group.
Critical accounting judgements and estimates
The reported results of the group are sensitive to the judgements, estimates
and assumptions that underlie the application of its accounting policies and
preparation of its financial statements. The group's estimates and assumptions
are based on historical experience and reasonable expectations of future
events and are reviewed on an ongoing basis. Actual results in the future may
differ from the amounts estimated due to the inherent uncertainty. The group's
critical accounting judgements and key sources of estimation uncertainty, set
out below, are unchanged from those identified in the 2023 Annual Report
except for an additional critical judgement in relation to Motor Finance
commission arrangements.
Critical accounting judgements
Motor Finance commission arrangements
The group continues to receive a high number of complaints, many of which are
now with the Financial Ombudsman Service ("FOS"), regarding historic
Discretionary Commission Arrangements ("DCAs") with intermediaries on its
Motor Finance products. Judgement is required in determining that the criteria
for the recognition of a provision under IAS 37 'Provisions, Contingent
Liabilities and Contingent Assets' have not been met. This matter has been
disclosed as a contingent liability. Please see note 16 for more information.
Expected credit losses
At 31 January 2024, the group's expected credit loss provision was £408.0
million (31 July 2023: £380.6 million). The calculation of the group's
expected credit loss provision under IFRS 9 requires the group to make a
number of judgements, assumptions and estimates, which have a material impact
on the accounts. The assessment is unbiased, probability weighted and uses
historical, current and forward-looking information. These judgements are
consistent with those set out in the 2023 Annual Report and the most
significant judgements are set out below.
Significant increase in credit risk
Assets are transferred from Stage 1 to Stage 2 when there has been a
significant increase in credit risk since initial recognition. Typically, the
group assesses whether a significant increase in credit risk has occurred
based on a quantitative and qualitative assessment, with a "30 days past due"
backstop. Due to the diverse nature of the group's lending businesses, the
specific indicators of a significant increase in credit risk vary by business
and may include some or all of the following factors:
• Quantitative assessment: the lifetime probability of default
("PD") has increased by more than an agreed threshold relative to the
equivalent at origination. Thresholds are based on a fixed number of risk
grade movements which are bespoke to each business to ensure that the
increased risk since origination is appropriately captured;
• Qualitative assessment: events or observed behaviour that
indicate credit deterioration. This includes a wide range of information that
is reasonably available including individual credit assessments of the
financial performance of borrowers as appropriate during routine reviews, plus
forbearance and watch list information; or
• Backstop criteria: the "30 days past due" backstop is met.
Definition of default
The definition of default is an important building block for expected credit
loss models and is considered a key judgement. A default is considered to have
occurred if any unlikeliness to pay criterion is met or when a financial asset
meets a "90 days past due" backstop. While some criteria are factual (e.g.
administration, insolvency or bankruptcy), others require a judgemental
assessment of whether the borrower has financial difficulties which are
expected to have a detrimental impact on their ability to meet contractual
obligations. A change in the definition of default may have a material impact
on the expected credit loss provision.
Key sources of estimation uncertainty
The key sources of estimation uncertainty of the group relate to expected
credit loss provisions and goodwill and are as follows:
• Two key model estimates, being time to recover periods and
recovery rates, underpinning the expected credit loss provision of Novitas;
• Forward-looking macroeconomic information incorporated into
expected credit loss models. This was also a key estimate in the prior year;
• Adjustments by management to model calculated expected credit
losses due to limitations in the group's expected credit loss models or input
data, which may be identified through ongoing model monitoring and validation
of models; and
• Estimate of future cash flow forecasts in the calculation of
value in use for the testing of goodwill for impairment in relation to the
Winterflood Securities cash generating unit.
More information on these key sources of estimation uncertainty is below
except adjustments and goodwill which can be found in note 6(c) and note 9
respectively.
Novitas loans
Novitas provided funding to individuals who wished to pursue legal cases. The
majority of the Novitas portfolio, and therefore provision, relates to civil
litigation cases. To protect customers in the event that their case failed, it
was a condition of the Novitas loan agreements that an individual purchased an
After the Event ("ATE") insurance policy which covered the loan.
As previously announced, following a strategic review, in July 2021 the group
decided to cease permanently the approval of lending to new customers across
all of the products offered by Novitas and withdraw from the legal services
financing market. Since that time, the Novitas loan book has been in run-off,
and the business has continued to work with solicitors and insurers, with a
focus on supporting existing customers and managing the existing book to
ensure good customer outcomes, where it is within Novitas' ability to do so.
In the first half of the financial year under review, management has
maintained its assumptions for expected case failure rates, expected time to
recover periods and expected recovery rates which continue to appropriately
reflect experienced credit performance and ongoing dialogue with customers'
insurers. Since 31 July 2023, expected credit loss provisions have increased
by £16.0 million to £200.1 million (31 July 2023: £184.1 million). The
increase to the expected credit loss provision is a result of interest accrual
on Civil Litigation accounts, for which a full loss provision is applied.
Based on the current position, the majority of loans in the portfolio continue
to be assessed as credit-impaired and are considered Stage 3. Expected credit
losses for the portfolio have been calculated by comparing the gross loan
balance to expected cash flows discounted at the original effective interest
rate, over an appropriate time to recovery period. In line with IFRS 9, a
proportion of the expected credit loss is expected to unwind, over the
estimated time to recover period, to interest income, which reflects the
requirement to recognise interest income on Stage 3 loans on a net basis.
Given that the majority of the Novitas portfolio is in Stage 3, the key
sources of estimation uncertainty for the portfolio's expected credit loss
provision are time to recover periods and recovery rates for the Civil
Litigation portfolio. On this basis management have assessed and completed
sensitivity analysis when compared to the expected credit loss provision for
Novitas of £200.1 million (31 July 2023: £184.1 million). At 31 January
2024, a 10% absolute deterioration or improvement in recovery rates would
increase or decrease the ECL provision by £13.4 million. Separately, a
12-month improvement in the time to recover period will reduce the ECL
provision by £13.4 million, while a 12-month delay in the time to recover
period will increase the ECL provision by £10.9 million.
Forward-looking information
Determining expected credit losses under IFRS 9 requires the incorporation of
forward-looking macroeconomic information that is reasonable, supportable and
includes assumptions linked to economic variables that impact losses in each
portfolio. The introduction of macroeconomic information introduces additional
volatility to provisions.
In order to calculate forward-looking provisions, economic scenarios are
sourced from Moody's Analytics. These scenarios cover a range of plausible
economic conditions that are then used to project potential credit outcomes
for each portfolio. An overview of these scenarios using key macroeconomic
indicators is provided below. Ongoing benchmarking of the scenarios to other
economic providers is carried out monthly to provide management with comfort
on Moody's Analytics scenario paths.
Five different projected economic scenarios are currently considered to cover
a range of possible outcomes. These include a baseline scenario, which
reflects the best view of future economic events. In addition, one upside
scenario and three downside scenario paths are defined relative to the
baseline. Management assigns the scenarios a probability weighting to reflect
the likelihood of specific scenarios, and therefore loss outcomes,
materialising, using a combination of quantitative analysis and expert
judgement.
The impact of forward-looking information varies across the group's lending
businesses because of the differing sensitivity of each portfolio to specific
macroeconomic variables. This is reflected through the development of bespoke
macroeconomic models that recognise the specific response of each business to
the macroeconomic environment.
The modelled impact of macroeconomic scenarios and their respective weightings
is reviewed by business experts in relation to stage allocation and coverage
ratios at the individual and portfolio level, incorporating management's
experience and knowledge of customers, the sectors in which they operate, and
the assets financed.
This includes assessment of the reaction of the ECL in the context of the
prevailing and forecast economic conditions, for example where currently
higher interest rates and inflationary conditions exist compared to recent
periods.
Economic forecasts have evolved over the course of 2023 and beginning of 2024
and reflect the continued economic challenges and uncertainty. Forecasts
deployed in IFRS 9 macroeconomic models are updated on a monthly basis. At 31
January 2024, the latest baseline scenario forecasts GDP growth of 0.3% in
calendar year 2024 and an average base rate of 5.0% across calendar year 2024.
CPI is forecast to be 2.4% in calendar year 2024 and 2.1% in calendar year
2025 in the baseline scenario.
At 31 January 2024, the scenario weightings were: 30% strong upside, 32.5%
baseline, 20% mild downside, 10.5% moderate downside and 7% protracted
downside. As economic forecasts are considered to continue to appropriately
reflect the uncertainty in the macroeconomic environment, no change has been
made to the weightings ascribed to the scenarios since 31 July 2023.
Given the ongoing economic uncertainty, further analysis has been undertaken
to assess the appropriateness of the five scenarios used. This included
benchmarking the baseline scenario to consensus economic views, as well as
consideration of an additional forecast related to stagflation, which could be
considered as an alternative downside scenario.
Compared to the scenarios in use in the expected credit losses calculation,
the stagflation scenario includes a longer period of higher interest rates
coupled with a shallower but extended impact on GDP. Due to the relatively
short tenor of the portfolios the stagflation scenario is considered to be of
less relevance than those deployed. This is supported by the fact that, due to
the higher severity of recessionary factors in the existing scenarios, using
the stagflation scenario instead of the moderate or protracted downside
scenario would result in lower expected credit losses.
The final scenarios deployed reflect relative stability in the UK economic
outlook compared to 31 July 2023. Under the baseline scenario, UK headline CPI
inflation continues to fall following impacts of sustained base rate increases
and eased supply chain pressures. House price outlook includes contraction
across all scenarios; however, to a lesser extent than previously anticipated.
Unemployment rate forecasts have marginally deteriorated compared to 31 July
2023.
FY 2024 and FY 2025 scenario forecasts and weights
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
2024 2025 2024 2025 2024 2025 2024 2025 2024 2025
At 31 January 2024
UK GDP Growth 0.3% 0.8% 2.8% 2.0% (2.1%) 0.3% (3.5%) (1.9%) (4.3%) (3.6%)
UK Unemployment 4.5% 4.7% 4.1% 3.9% 4.9% 5.0% 5.6% 7.3% 6.3% 8.5%
UK HPI Growth (1.8%) 3.1% 12.0% 6.3% (8.9%) 2.3% (12.6%) (6.3%) (18.5%) (10.3%)
BoE Base Rate 5.0% 3.3% 5.2% 3.4% 4.7% 2.5% 4.3% 1.7% 3.8% 1.3%
Consumer Price Index 2.4% 2.1% 2.0% 2.1% 0.7% 1.2% (1.1%) 0.7% (3.9%) (0.3%)
Weighting 32.5% 30% 20% 10.5% 7%
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
2023 2024 2023 2024 2023 2024 2023 2024 2023 2024
At 31 July 2023
UK GDP Growth 0.5% 0.3% 1.3% 3.0% (0.2%) (2.3%) (0.6%) (4.8%) (0.8%) (6.2%)
UK Unemployment 4.1% 4.4% 3.9% 3.9% 4.2% 4.8% 4.4% 6.5% 4.5% 7.7%
UK HPI Growth (6.3%) (1.4%) (0.4%) 8.3% (9.1%) (6.9%) (10.8%) (13.2%) (12.6%) (20.1%)
BoE Base Rate 4.9% 5.5% 4.9% 5.7% 4.8% 4.8% 4.7% 4.2% 4.5% 3.6%
Consumer Price Index 5.2% 2.2% 4.8% 2.2% 3.8% 1.2% 3.0% (0.3%) 1.5% (2.3%)
Weighting 32.5% 30% 20% 10.5% 7%
Notes:
UK GDP growth: National Accounts Annual Real Gross Domestic Product,
Seasonally Adjusted - year-on-year change (%)
UK unemployment: ONS Labour Force Survey, Seasonally Adjusted - Average (%)
UK HPI growth: Average nominal house prices, Land Registry, Seasonally
Adjusted - Q4-to-Q4 change (%)
BoE base rate: Bank of England base rate - Average (%)
Consumer Price Index: ONS, All items, annual inflation - Q4-to-Q4 change (%)
Five-year average (calendar year 2024 - 2028)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
At 31 January 2024
UK GDP Growth 1.1% 1.9% 0.7% 0.2% 0.1%
UK Unemployment 4.7% 4.1% 4.9% 6.8% 7.8%
UK HPI Growth 2.0% 3.5% 0.3% (1.2%) (3.8%)
BoE Base Rate 3.1% 3.1% 2.7% 2.0% 1.4%
Consumer Price Index 2.1% 2.0% 1.6% 1.0% 0.1%
Weighting 32.5% 30% 20% 10.5% 7%
Five-year average (calendar year 2023 - 2027)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
At 31 July 2023
UK GDP Growth 0.9% 1.7% 0.5% 0.0% (0.1%)
UK Unemployment 4.4% 3.9% 4.6% 6.4% 7.3%
UK HPI Growth 0.5% 2.1% (1.1%) (2.9%) (5.4%)
BoE Base Rate 3.8% 3.8% 3.5% 2.8% 2.3%
Consumer Price Index 2.6% 2.6% 2.1% 1.6% 0.7%
Weighting 32.5% 30% 20% 10.5% 7%
Notes:
UK GDP growth: National Accounts Annual Real Gross Domestic Product,
Seasonally Adjusted - CAGR (%)
UK unemployment: ONS Labour Force Survey, Seasonally Adjusted - Average (%)
UK HPI growth: Average nominal house prices, Land Registry, Seasonally
Adjusted - CAGR (%)
BoE base rate: Bank of England base rate - Average (%)
Consumer Price Index: ONS, All items, annual inflation - CAGR (%)
The tables above show economic assumptions within each scenario, and the
weighting applied to each at 31 January 2024. The metrics shown are key UK
economic indicators, chosen to describe the economic scenarios. These are the
main metrics used to set scenario paths, which then influence a wide range of
additional metrics that are used in expected credit loss models. The first
tables show the forecasts of the key metrics for the scenarios utilised for
calendar years 2024 and 2025. The subsequent tables show averages and
peak-to-trough ranges for the same key metrics over the five-year period from
2024 to 2028.
These periods have been included as they demonstrate the short-, medium- and
long-term outlooks for the key macroeconomic indicators which form the basis
of the scenario forecasts. The portfolio has an average residual maturity of
16 months, with c.99% of loan value having a maturity of five years or less.
The tables below provide a summary for the five-year period (calendar year
2024 - 2028) of the peak to trough range of values of the key UK economic
variables used within the economic scenarios at 31 January 2024 and 31 July
2023:
Five-year period (calendar year 2024 - 2028)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
At 31 January 2024
UK GDP Growth 5.9% 0.1% 10.0% 1.2% 3.7% (3.3%) 1.0% (6.1%) 0.4% (8.1%)
UK Unemployment 4.9% 4.4% 4.5% 3.8% 5.1% 4.7% 7.5% 4.7% 8.7% 4.9%
UK HPI Growth 10.4% (1.8%) 21.5% 1.2% 1.7% (9.7%) (2.3%) (18.1%) (3.1%) (26.9%)
BoE Base Rate 5.3% 2.3% 5.4% 2.3% 5.2% 1.9% 5.1% 0.9% 5.1% 0.4%
Consumer Price Index 3.4% 1.7% 3.0% 1.7% 2.2% 0.6% 2.0% (1.1%) 1.9% (3.9%)
Weighting 32.5% 30% 20% 10.5% 7%
Five-year period (calendar year 2023 - 2027)
Baseline Upside (strong) Downside (mild) Downside (moderate) Downside (protracted)
Peak Trough Peak Trough Peak Trough Peak Trough Peak Trough
At 31 July 2023
UK GDP Growth 4.6% 0.1% 8.7% 0.1% 2.5% (3.0%) 0.3% (5.9%) 0.3% (8.1%)
UK Unemployment 4.6% 3.9% 4.1% 3.7% 4.9% 3.9% 7.3% 3.9% 8.5% 3.9%
UK HPI Growth 2.6% (7.8%) 12.9% (3.1%) (0.5%) (15.4%) (0.5%) (24.0%) (0.5%) (32.1%)
BoE Base Rate 5.8% 2.3% 5.9% 2.3% 5.4% 2.2% 5.2% 1.3% 5.2% 0.6%
Consumer Price Index 10.2% 1.8% 10.2% 1.8% 10.2% 0.8% 10.2% (1.0%) 10.2% (3.8%)
Weighting 32.5% 30% 20% 10.5% 7%
Notes:
UK GDP growth: Maximum and minimum quarterly GDP as a percentage change from
start of period (%)
UK unemployment: Maximum and minimum unemployment rate (%)
UK HPI growth: Maximum and minimum average nominal house price as a percentage
change from start of period (%)
BoE base rate: Maximum and minimum Bank of England base rate (%)
Consumer Price Index: Maximum and minimum inflation rate over the five-year
period (%).
The following charts below represent the quarterly forecast data included in
the above tables incorporating actual metrics up to 31 January 2024. The dark
blue line shows the baseline scenario, while the other lines represent the
various upside and downside scenarios.
Scenario sensitivity analysis
The expected credit loss provision is sensitive to judgement and estimations
made with regard to the selection and weighting of multiple economic
scenarios. As a result, management has assessed and considered the sensitivity
of the provision as follows:
For the majority of the portfolios, the modelled expected credit loss
provision has been recalculated under the upside strong and downside
protracted scenarios described above, applying a 100% weighting to each
scenario in turn. The change in provision requirement is driven by the
movement in risk metrics under each scenario and resulting impact on stage
allocation. The key considerations applied in performing the sensitivity
analysis are consistent with those set out on page 113 of the 2023 Annual
Report.
Based on the above analysis, at 31 January 2024, application of 100% weighting
to the upside strong scenario would decrease the expected credit loss by
£17.4 million whilst application of 100% weighting to the downside protracted
scenario would increase the expected credit loss by £31.3 million, driven by
the aforementioned changes in risk metrics and stage allocation of the
portfolios.
When performing sensitivity analysis there is a high degree of estimation
uncertainty. On this basis, 100% weighted expected credit loss provisions
presented for the upside and downside scenarios should not be taken to
represent the lower or upper range of possible and actual expected credit loss
outcomes. The recalculated expected credit loss provision for each of the
scenarios should be read in the context of the sensitivity analysis as a whole
and in conjunction with the narrative disclosures provided in note 6. The
modelled impact presented is based on gross loans and advances to customers at
31 January 2024; it does not incorporate future changes relating to
performance, growth or credit risk. In addition, given the change in the
macroeconomic conditions, underlying modelled provisions and methodology, and
refined approach to adjustments, comparison between the sensitivity results at
31 January 2024 and 31 July 2023 is not appropriate.
The economic environment remains uncertain and future impairment charges may
be subject to further volatility, including from changes to macroeconomic
variable forecasts impacted by geopolitical tensions and sustained cost of
living pressures.
2. Segmental Analysis
The directors manage the group by class of business and present the segmental
analysis on that basis. The group's activities are presented in five (2023:
five) operating segments: Commercial, Retail, Property, Asset Management and
Securities.
In the segmental reporting information that follows, Group consists of central
functions as well as various non-trading head office companies and
consolidation adjustments and is set out in order that the information
presented reconciles to the consolidated income statement. The Group balance
sheet primarily includes treasury assets and liabilities comprising cash and
balances at central banks, debt securities, customer deposits and other
borrowings.
Divisions continue to charge market prices for the limited services rendered
to other parts of the group. Funding charges between segments take into
account commercial demands. More than 90% of the group's activities, revenue
and assets are located in the UK.
Summary income statement for the six months ended 31 January 2024
Banking
Commercial Retail Property Asset Securities Group Total
£ million
£ million
£ million
Management
£ million
£ million
£ million
£ million
Summary income statement
for the six months ended 31 January 2024
Net interest income/(expense) 115.6 117.3 63.2 5.5 0.1 (5.0) 296.7
Non-interest income 52.9 14.5 1.8 70.8 34.1 - 174.1
Operating income/(expense) 168.5 131.8 65.0 76.3 34.2 (5.0) 470.8
Administrative expenses (90.9) (80.4) (15.7) (67.0) (34.0) (14.8) (302.8)
Depreciation and amortisation (12.1) (10.4) (2.3) (3.0) (2.9) (1.2) (31.9)
Impairment losses on financial assets (14.6) (22.0) (5.2) - 0.1 - (41.7)
Total operating expenses before amortisation of intangible assets on (117.6) (112.8) (23.2) (70.0) (36.8) (16.0) (376.4)
acquisition
Adjusted operating profit/(loss)1 50.9 19.0 41.8 6.3 (2.6) (21.0) 94.4
Amortisation of intangible assets on acquisition - - - (0.6) - - (0.6)
Operating profit/(loss) before tax 50.9 19.0 41.8 5.7 (2.6) (21.0) 93.8
External operating income/(expense) 257.9 187.0 109.4 75.8 34.2 (193.5) 470.8
Inter segment operating (expense)/income (89.4) (55.2) (44.4) 0.5 - 188.5 -
Segment operating income/(expense) 168.5 131.8 65.0 76.3 34.2 (5.0) 470.8
1. Adjusted operating profit/(loss) is stated before amortisation of
intangible assets on acquisition and tax.
The Commercial operating segment above includes Novitas, which ceased lending
to new customers in July 2021 following a strategic review. In the period
ended 31 January 2024, Novitas recorded an operating gain of £0.2 million
(six months ended 31 January 2023: loss of £104.9 million; year ended 31 July
2023: loss of £84.2 million), with impairment losses of £2.2 million (six
months ended 31 January 2023: £114.6 million; year ended 31 July 2023:
£116.8 million).
Novitas' income for the period was £5.0 million (six months ended 31 January
2023: £14.0 million; year ended 31 July 2023: £18.9 million) and expenses
were £2.6 million (six months ended 31 January 2023: £4.3 million; year
ended 31 July 2023: £8.7 million). In line with IFRS 9's requirement to
recognise interest income on Stage 3 loans on a net basis, income includes the
partial unwinding over time of the expected credit loss previously recognised.
Summary balance sheet information at 31 January 2024
Banking
Commercial Retail Property Asset Management Securities Group2 Total
£ million
£ million
£ million
£ million
£ million
£ million £ million
Summary balance sheet information at
31 January 2024
Total assets1 5,028.5 3,025.9 1,838.6 171.1 1,069.9 2,903.8 14,037.8
Total liabilities - - - 53.2 979.2 11,173.6 12,206.0
1. Total assets for the Banking operating segments comprise the loan book
and operating lease assets only. The Commercial operating segment includes the
net loan book of Novitas of £62.7 million.
2. Balance sheet includes £2,906.6 million assets and £11,114.0 million
liabilities attributable to the Banking division primarily comprising the
treasury balances described in the second paragraph of this note.
Equity is allocated across the group as set out below. Banking division
equity, which is managed as a whole rather than on a segmental basis, reflects
loan book and operating lease assets of £9,893.0 million, in addition to
assets and liabilities of £2,906.6 million and £11,114.0 million
respectively primarily comprising treasury balances which are included within
the Group column above.
Banking Asset Securities Group Total
£ million Management £ million £ million £ million
£ million
Equity 1,685.6 117.9 90.7 (62.4) 1,831.8
Summary income statement for the six months ended 31 January 2023
Banking
Commercial Retail Property Asset Securities Group Total
£ million
£ million
£ million
£ million
Management £ million £ million
£ million
Summary income statement
for the six months ended 31 January 2023
Net interest income/(expense) 130.9 107.2 57.3 1.6 - 0.4 297.4
Non-interest income 51.4 16.0 1.1 69.4 39.0 - 176.9
Operating income/(expense) 182.3 123.2 58.4 71.0 39.0 0.4 474.3
Administrative expenses (81.8) (68.4) (12.6) (59.8) (34.6) (12.7) (269.9)
Depreciation and amortisation (11.1) (10.7) (2.1) (2.6) (2.0) (1.1) (29.6)
Impairment losses on financial assets (122.5) (29.4) (10.3) - - - (162.2)
Total operating expenses before amortisation of intangible assets on (215.4) (108.5) (25.0) (62.4) (36.6) (13.8) (461.7)
acquisition
Adjusted operating profit/(loss)1 (33.1) 14.7 33.4 8.6 2.4 (13.4) 12.6
Amortisation of intangible assets on acquisition (0.1) - - (0.8) - - (0.9)
Operating profit/(loss) before tax (33.2) 14.7 33.4 7.8 2.4 (13.4) 11.7
External operating income/(expense) 221.4 146.7 77.0 70.7 39.0 (80.5) 474.3
Inter segment operating (expense)/income (39.1) (23.5) (18.6) 0.3 - 80.9 -
Segment operating income/(expense) 182.3 123.2 58.4 71.0 39.0 0.4 474.3
1. Adjusted operating profit/(loss) is stated before amortisation of
intangible assets on acquisition and tax.
Summary income statement for the year ended 31 July 2023
Banking
Commercial Retail Property Asset Securities Group Total
£ million
£ million
£ million
Management
£ million
£ million
£ million
£ million
Summary income statement
for the year ended 31 July 2023
Net interest income/(expense) 251.2 218.4 117.1 6.7 0.5 (1.3) 592.6
Non-interest income 96.6 29.7 0.8 138.1 74.8 - 340.0
Operating income/(expense) 347.8 248.1 117.9 144.8 75.3 (1.3) 932.6
Administrative expenses (171.5) (142.8) (26.5) (123.3) (67.5) (22.2) (553.8)
Depreciation and amortisation (22.9) (21.6) (4.4) (5.5) (4.3) (2.5) (61.2)
Impairment losses on financial assets (137.5) (49.0) (17.5) (0.1) - - (204.1)
Total operating expenses before amortisation of intangible assets on (331.9) (213.4) (48.4) (128.9) (71.8) (24.7) (819.1)
acquisition
Adjusted operating profit/(loss)1 15.9 34.7 69.5 15.9 3.5 (26.0) 113.5
Amortisation of intangible assets on acquisition - - - (1.5) - - (1.5)
Operating profit/(loss) before tax 15.9 34.7 69.5 14.4 3.5 (26.0) 112.0
External operating income/(expense) 451.1 308.6 170.3 144.2 75.3 (216.9) 932.6
Inter segment operating (expense)/income (103.3) (60.5) (52.4) 0.6 - 215.6 -
Segment operating income/(expense) 347.8 248.1 117.9 144.8 75.3 (1.3) 932.6
1. Adjusted operating profit/(loss) is stated before amortisation of
intangible assets on acquisition and tax.
Summary balance sheet information at 31 July 2023
Banking
Commercial Retail Property Asset Securities Group2 Total
£ million
£ million
£ million
Management
£ million £ million £ million £ million
Summary balance sheet information at 31 July 2023
Total assets1 4,821.3 3,001.8 1,703.1 177.9 870.5 2,975.7 13,550.3
Total liabilities - - - 64.1 778.1 11,063.2 11,905.4
1. Total assets for the Banking operating segments comprise the loan book
and operating lease assets only. The Commercial operating segment includes the
net loan book of Novitas of £59.9 million at 31 July 2023.
2. Balance sheet includes £2,977.4 million assets and £11,151.9 million
liabilities attributable to the Banking division primarily comprising the
treasury balances described in the second paragraph of this note.
Equity is allocated across the group as set out below. Banking division
equity, which is managed as a whole rather than on a segmental basis, reflects
loan book and operating lease assets of £9,526.2 million, in addition to
assets and liabilities of £2,977.4 million and £11,151.9 million
respectively primarily comprising treasury balances which are included within
the Group column above.
Banking Asset Securities Group Total
Management
£ million
£ million £ million £ million
£ million
Equity 1,351.7 113.8 92.4 87.0 1,644.9
3. Taxation
Six months ended Year ended
31 January 31 July
2024 2023 2023
£ million
£ million
£ million
Tax charged/(credited) to the income statement
Current tax:
UK corporation tax 21.6 (2.1) 18.1
Foreign tax 0.8 0.8 2.3
Adjustments in respect of previous years - - (8.2)
22.4 (1.3) 12.2
Deferred tax:
Deferred tax charge for the current year 2.6 4.6 11.4
Adjustments in respect of previous years - - 7.3
25.0 3.3 30.9
Tax on items not (credited)/charged to the income statement
Current tax relating to:
Share-based payments - - (0.2)
Deferred tax relating to:
Cash flow hedging (3.9) 5.2 4.9
Defined benefit pension scheme - (1.5) (1.6)
Financial instruments classified as fair value through other comprehensive (0.7) (1.3) (1.1)
income
Share-based payments - 0.3 0.3
Currency translation gains - - 0.5
(4.6) 2.7 2.8
Reconciliation to tax expense
UK corporation tax for the period at 25.0% (2023: 21.0%) on operating profit 23.5 2.5 23.5
before tax
Effect of different tax rates in other jurisdictions - - (0.3)
Disallowable items and other permanent differences 1.2 0.2 1.6
Banking surcharge 0.3 0.6 6.2
Deferred tax impact of decreased tax rates - - 0.8
Prior year tax provision - - (0.9)
25.0 3.3 30.9
The effective tax rate for the period is 26.7% (six months ended 31 January
2023: 28.2%; year ended 31 July 2023: 27.6%), representing the best estimate
of the annual effective tax rate expected for the full year.
The standard UK corporation tax rate for the financial year is 25.0% (six
months ended 31 January 2023: 21.0%; year ended 31 July 2023: 21.0%). The
effective tax rate is above the UK corporation tax rate primarily due to
disallowable expenditure.
The UK government has implemented the Pillar Two global minimum tax rate of
15% and a UK domestic minimum top-up tax with effect from the group's
financial year commencing 1 August 2024. Other jurisdictions have or are
expected to introduce their own domestic minimum top-up tax regimes. The
jurisdictions in relation to which Pillar Two tax liabilities are expected to
potentially arise for the group are the Republic of Ireland, Jersey and
Guernsey, however the impact is expected to be immaterial.
4. Earnings per Share
The calculation of basic earnings per share is based on the profit
attributable to shareholders and the number of basic weighted average shares.
When calculating the diluted earnings per share, the weighted average number
of shares in issue is adjusted for the effects of all dilutive share options
and awards.
Six months ended
31 January Year ended
31 July
2024 2023 2023
Basic 46.0p 5.6p 54.3p
Diluted 46.0p 5.6p 54.2p
Adjusted basic1 46.3p 6.1p 55.1p
Adjusted diluted1 46.3p 6.1p 55.0p
1. Excludes amortisation of intangible assets on acquisition and tax.
Six months ended Year ended
31 January 31 July
2024 2023 2023
£ million
£ million
£ million
Profit attributable to shareholders 68.8 8.4 81.1
Adjustments:
Amortisation of intangible assets on acquisition 0.6 0.9 1.5
Tax effect of adjustments (0.1) (0.2) (0.3)
Adjusted profit attributable to shareholders 69.3 9.1 82.3
Six months ended Year ended
31 January 31 July
2024 2023 2023
million million million
Average number of shares
Basic weighted 149.6 149.4 149.4
Effect of dilutive share options and awards - 0.7 0.2
Diluted weighted 149.6 150.1 149.6
5. Dividends
Six months ended Year ended
31 January 31 July
2024 2023 2023
£ million £ million £ million
For each ordinary share
Interim dividend for previous financial year paid in April 2023: 22.5p - - 33.5
Final dividend for previous financial year paid in November 2023: 45.0p 67.1 65.6 65.6
(November 2022: 44.0p)
67.1 65.6 99.1
As disclosed on 15 February 2024 in a trading update and dividend
announcement, the group will not pay any dividends on its ordinary shares for
the current financial year ending 31 July 2024.
6. Loans and Advances to Customers
(a) Maturity analysis of loans and advances to customers
The following table sets out a maturity analysis of loans and advances to
customers. At 31 January 2024 loans and advances to customers with a maturity
of two years or less was £7,464.1 million (31 July 2023: £7,158.8 million)
representing 74.5% (31 July 2023: 74.3%) of total gross loans and advances to
customers:
On demand Within three months Between three months and one year Between Between After Total gross Impairment provisions Total net
more than five years
£ million £ million £ million one and two and
loans and £ million loans and
£ million
two years five years advances to advances to
£ million £ million customers customers
£ million £ million
At 31 January 2024 81.8 2,741.5 2,664.3 1,976.5 2,412.6 142.3 10,019.0 (408.0) 9,611.0
At 31 July 2023 76.5 2,597.8 2,636.5 1,848.0 2,337.2 139.6 9,635.6 (380.6) 9,255.0
(b) Loans and advances to customers and impairment provisions by stage
Gross loans and advances to customers by stage and the corresponding
impairment provisions and provision coverage ratios are set out below:
Stage 2
Stage 1 Less than 30 days past due Greater than or equal to 30 days past due Total Stage 3 Total
£ million
£ million
£ million
£ million
£ million £ million
At 31 January 2024
Gross loans and advances to customers
Commercial 3,831.4 751.7 53.1 804.8 381.2 5,017.4
Of which: Commercial excluding Novitas 3,830.9 750.7 53.1 803.8 119.9 4,754.6
Of which: Novitas 0.5 1.0 - 1.0 261.3 262.8
Retail 2,837.8 183.0 11.7 194.7 83.9 3,116.4
Property 1,598.5 7.8 101.7 109.5 177.2 1,885.2
8,267.7 942.5 166.5 1,109.0 642.3 10,019.0
Impairment provisions
Commercial 24.4 13.4 4.5 17.9 228.6 270.9
Of which: Commercial excluding Novitas 24.2 12.5 4.5 17.0 29.6 70.8
Of which: Novitas 0.2 0.9 - 0.9 199.0 200.1
Retail 27.1 12.4 2.6 15.0 48.4 90.5
Property 3.9 0.7 3.1 3.8 38.9 46.6
55.4 26.5 10.2 36.7 315.9 408.0
Provision coverage ratio
Commercial 0.6% 1.8% 8.5% 2.2% 60.0% 5.4%
Within which: Commercial excluding Novitas 0.6% 1.7% 8.5% 2.1% 24.7% 1.5%
Within which: Novitas 40.0% 90.0% - 90.0% 76.2% 76.1%
Retail 1.0% 6.8% 22.2% 7.7% 57.7% 2.9%
Property 0.2% 9.0% 3.0% 3.5% 22.0% 2.5%
0.7% 2.8% 6.1% 3.3% 49.2% 4.1%
Stage 2
Stage 1 Less than 30 days past due Greater than or equal to 30 days past due Total Stage 3 Total
£ million
£ million
£ million
£ million
£ million £ million
At 31 July 2023
Gross loans and advances to customers
Commercial 3,686.1 750.9 23.2 774.1 339.4 4,799.6
Of which: Commercial excluding Novitas 3,685.1 749.6 23.2 772.8 97.7 4,555.6
Of which: Novitas 1.0 1.3 - 1.3 241.7 244.0
Retail 2,839.1 159.1 18.4 177.5 74.6 3,091.2
Property 1,465.0 85.7 24.7 110.4 169.4 1,744.8
7,990.2 995.7 66.3 1,062.0 583.4 9,635.6
Impairment provisions
Commercial 25.1 13.9 2.4 16.3 208.1 249.5
Of which: Commercial excluding Novitas 24.9 13.6 2.4 16.0 24.5 65.4
Of which: Novitas 0.2 0.3 - 0.3 183.6 184.1
Retail 27.9 11.6 2.6 14.2 47.3 89.4
Property 5.1 1.4 0.3 1.7 34.9 41.7
58.1 26.9 5.3 32.2 290.3 380.6
Provision coverage ratio
Commercial 0.7% 1.9% 10.3% 2.1% 61.3% 5.2%
Within which: Commercial excluding Novitas 0.7% 1.8% 10.3% 2.1% 25.1% 1.4%
Within which: Novitas 20.0% 23.1% - 23.1% 76.0% 75.5%
Retail 1.0% 7.3% 14.1% 8.0% 63.4% 2.9%
Property 0.3% 1.6% 1.2% 1.5% 20.6% 2.4%
0.7% 2.7% 8.0% 3.0% 49.8% 3.9%
In Commercial, the impairment coverage ratio increased to 5.4% (31 July 2023:
5.2%), reflecting Novitas Stage 3 interest accrual. This is in line with the
requirement under IFRS 9 to recognise interest on a net basis. Excluding
Novitas, the Commercial provision coverage ratio increased to 1.5% (31 July
2023: 1.4%) as a result of slight deterioration in staging profile.
In Retail, the provision coverage ratio was unchanged at 2.9% (31 July 2023:
2.9%), reflecting stable performance against sustained macroeconomic
uncertainty and cost of living pressures on customers.
In Property, the provision coverage ratio increased to 2.5% (31 July 2023:
2.4%), with strong levels of new business offset by uplifts in provisions
against existing single names.
(c) Adjustments
By their nature, limitations in the group's expected credit loss models or
input data may be identified through ongoing model monitoring and validation
of models. In certain circumstances, management make appropriate adjustments
to model-calculated expected credit losses. Adjustments have been identified
as a key source of estimation uncertainty.
During the previous financial year, adjustments were applied in response to
improvements in macroeconomic forecasts that resulted in releases in modelled
provisions. A number of these releases were considered premature or
counterintuitive by management and adjustments were made as a result. These
adjustments recognise the ongoing uncertainty associated with the current
environment and accordingly have been maintained during the first half of the
financial year under review. The adjustments have been reassessed at 31
January 2024 and have reduced in line with emerging trends in the portfolios.
This relationship between the adjustments and credit performance will continue
to be assessed at each reporting period, with the value of the adjustments
expected to reduce over time.
At 31 January 2024, £11.3 million (31 July 2023: £17.0 million) of the
expected credit loss provision was attributable to adjustments.
(d) Reconciliation of loans and advances to customers and impairment
provisions
Reconciliations of gross loans and advances to customers and associated
impairment provisions are set out below.
New financial assets originate in Stage 1 only, and the amount presented
represents the value at origination.
Subsequently, a loan may transfer between stages, and the presentation of such
transfers is based on a comparison of the loan at the beginning of the year
(or at origination if this occurred during the year) and the end of the year
(or just prior to final repayment or write off).
Repayments relating to loans which transferred between stages during the year
are presented within the transfers between stages lines. Such transfers do not
represent overnight reclassification from one stage to another. All other
repayments are presented in a separate line.
ECL model methodologies may be updated or enhanced from time to time and the
impacts of such changes are presented on a separate line. During the previous
year, a number of enhancements were made to the models in the Premium
business. The enhancements were made to address known model limitations and to
ensure modelled provisions better reflect future loss emergence.
Enhancements to our model suite are a contributory factor to ECL movements and
such factors have been taken into consideration when assessing any required
adjustments to modelled output and ensuring appropriate provision coverage
levels.
A loan is written off when there is no reasonable expectation of further
recovery following realisation of all associated collateral and available
recovery actions against the customer.
Stage 1 Stage 2 Stage 3 Total
£ million
£ million
£ million £ million
Gross loans and advances to customers
At 1 August 2023 7,990.2 1,062.0 583.4 9,635.6
New financial assets originated 3,447.4 - - 3,447.4
Transfers to Stage 1 172.1 (213.5) (9.1) (50.5)
Transfers to Stage 2 (723.9) 656.9 (5.2) (72.2)
Transfers to Stage 3 (107.2) (80.9) 153.4 (34.7)
Net transfers between stages and repayments1 (659.0) 362.5 139.1 (157.4)
Repayments while stage remained unchanged and final repayments (2,510.5) (315.3) (56.6) (2,882.4)
Changes to model methodologies - - - -
Write offs (0.4) (0.2) (23.6) (24.2)
At 31 January 2024 8,267.7 1,109.0 642.3 10,019.0
1. Repayments relate only to financial assets which transferred between
stages during the year. Other repayments are shown in the line below.
Stage 1 Stage 2 Stage 31 Total
£ million
£ million
£ million £ million
Gross loans and advances to customers
At 1 August 2022 7,627.0 1,158.9 358.6 9,144.5
New financial assets originated 6,604.0 - - 6,604.0
Transfers to Stage 1 276.2 (373.2) (6.8) (103.8)
Transfers to Stage 2 (1,068.6) 878.6 (16.1) (206.1)
Transfers to Stage 3 (303.6) (194.4) 421.5 (76.5)
Net transfers between stages and repayments2 (1,096.0) 311.0 398.6 (386.4)
Repayments while stage remained unchanged and final repayments (5,118.8) (403.5) (100.4) (5,622.7)
Changes to model methodologies (25.6) (4.0) 29.6 -
Write offs (0.4) (0.4) (103.0) (103.8)
At 31 July 2023 7,990.2 1,062.0 583.4 9,635.6
1. A significant proportion of the Stage 3 movements is driven by Novitas
with £174.4 million of transfers to Stage 3 and £37.4 million of write-offs.
In addition, £49.2 million of Novitas movements are included within
'Repayments while stage remained unchanged and final repayments', comprising
largely of accrued interest. The accrued interest is partly offset by ECL
increases included within the adjacent ECL reconciliation, in line with IFRS
9's requirement to recognise interest income on Stage 3 loans on a net basis.
2. Repayments relate only to financial assets which transferred between
stages during the year. Other repayments are shown in the line below.
Stage 1 Stage 2 Stage 3 Total
£ million
£ million
£ million £ million
Impairment provisions on loans and advances to customers
At 1 August 2023 58.1 32.2 290.3 380.6
New financial assets originated 26.8 - - 26.8
Transfers to Stage 1 1.1 (4.0) (0.4) (3.3)
Transfers to Stage 2 (8.0) 24.5 (0.6) 15.9
Transfers to Stage 3 (2.0) (7.9) 42.3 32.4
Net remeasurement of expected credit losses arising from transfers between (8.9) 12.6 41.3 45.0
stages and repayments1
Repayments and ECL movements while stage remained unchanged and final (20.2) (7.9) 4.7 (23.4)
repayments
Changes to model methodologies - - - -
Charge to the income statement (2.3) 4.7 46.0 48.4
Write offs (0.4) (0.2) (20.4) (21.0)
At 31 January 2024 55.4 36.7 315.9 408.0
1. Repayments relate only to financial assets which transferred between
stages during the year. Other repayments are shown in the line below.
Stage 1 Stage 2 Stage 31 Total
£ million
£ million
£ million £ million
Impairment provisions on loans and advances to customers
At 1 August 2022 50.3 78.3 157.0 285.6
New financial assets originated 46.7 - - 46.7
Transfers to Stage 1 1.2 (7.7) (1.0) (7.5)
Transfers to Stage 2 (8.7) 27.7 (5.7) 13.3
Transfers to Stage 3 (11.2) (53.3) 227.2 162.7
Net remeasurement of expected credit losses arising from transfers between (18.7) 220.5 168.5
stages and repayments2
(33.3)
Repayments and ECL movements while stage remained unchanged and final (17.8) (10.7) (20.0) (48.5)
repayments
Changes to model methodologies (2.2) (1.9) 2.3 (1.8)
Charge to the income statement 8.0 (45.9) 202.8 164.9
Write offs (0.2) (0.2) (69.5) (69.9)
At 31 July 2023 58.1 32.2 290.3 380.6
1. A significant proportion of the Stage 3 movements is driven by Novitas
with £147.6 million of transfers to Stage 3 and £11.9 million of write-offs.
2. Repayments relate only to financial assets which transferred between
stages during the year. Other repayments are shown in the line below.
Six months ended Year ended
31 January 31 July
2024 2023 2023
£ million £ million £ million
Impairment losses relating to loans and advances to customers:
Charge to income statement arising from movement in impairment provisions 48.4 131.0 164.9
Amounts written off directly to income statement, net of recoveries and other (7.4) 31.4 39.4
costs(1)
41.0 162.4 204.3
Impairment losses/(gains) relating to other financial assets 0.7 (0.2) (0.2)
Impairment losses on financial assets recognised in income statement 41.7 162.2 204.1
1. In line with IFRS 9's requirement to recognise interest income on Stage 3
loans on a net basis, this includes £(16.3) million (six months ended 31
January 2023: £nil; year ended 31 July 2023: £nil) in Novitas relating to
the partial unwinding over time of the expected credit loss recognised
previously.
Impairment losses on financial assets of £41.7 million (six months ended 31
January 2023: £162.2 million; year ended 31 July 2023: £204.1 million)
include £2.2 million in relation to Novitas (six months ended 31 January
2023: £114.6 million; year ended 31 July 2023: £116.8 million).
7. Debt Securities
Fair value through profit or loss Fair value through other comprehensive Amortised cost Total
income
£ million
£ million £ million
£ million
Sovereign and central bank debt - 193.3 - 193.3
Supranational, sub-sovereigns and agency ("SSA") bonds - 145.6 - 145.6
Covered bonds - 187.8 - 187.8
Long trading positions in debt securities 15.6 - - 15.6
Other debt securities 1.2 - 6.8 8.0
At 31 January 2024 16.8 526.7 6.8 550.3
Fair value Fair value Amortised Total
through profit
through other
cost
or loss
£ million
comprehensive income £ million
£ million
£ million
Sovereign and central bank debt - 186.1 - 186.1
SSA bonds - - - -
Covered bonds - 106.3 - 106.3
Long trading positions in debt securities 15.2 - - 15.2
Other debt securities - - - -
At 31 July 2023 15.2 292.4 - 307.6
Movements on the book value of sovereign and central bank debt comprise:
Six months Year ended
ended 31 July
31 January 2023
2024 £ million
£ million
Sovereign and central bank debt at 1 August 186.1 415.4
Additions - 269.7
Redemptions/disposals - (459.2)
Currency translation differences (0.6) (0.3)
Movement in value 7.8 (39.5)
Sovereign and central bank debt at end of period 193.3 186.1
Movements on the book value of SSA bonds comprise:
Six months Year ended
ended 31 July
31 January 2023
2024 £ million
£ million
SSA bonds at 1 August - -
Additions 140.9 -
Currency translation differences (0.1) -
Movement in value 4.8 -
SSA bonds at end of period 145.6 -
Movements on the book value of covered bonds comprise:
Six months Year ended
ended 31 July
31 January 2023
2024 £ million
£ million
Covered bonds at 1 August 106.3 -
Additions 139.8 105.4
Redemptions/disposals (59.0) -
Currency translation differences (0.1) -
Movement in value 0.8 0.9
Covered bonds at end of period 187.8 106.3
8. Equity Shares
31 January 31 July
2024 2023
£ million £ million
Long trading positions 24.6 27.8
Other equity shares 2.0 1.5
26.6 29.3
9. Intangible Assets
Goodwill Software Intangible Group total
£ million £ million assets on £ million
acquisition
£ million
Cost
At 1 August 2022 142.6 299.5 51.0 493.1
Additions - 27.1 - 27.1
Disposals (0.1) (1.7) (0.6) (2.4)
At 31 January 2023 142.5 324.9 50.4 517.8
Additions - 23.4 - 23.4
Disposals - (15.1) - (15.1)
At 31 July 2023 142.5 333.2 50.4 526.1
Additions 8.0 16.1 - 24.1
Disposals - (6.1) - (6.1)
At 31 January 2024 150.5 343.2 50.4 544.1
Amortisation
At 1 August 2022 47.9 147.4 45.8 241.1
Amortisation charge for the period - 17.3 0.9 18.2
Disposals - (1.1) (0.6) (1.7)
At 31 January 2023 47.9 163.6 46.1 257.6
Amortisation charge for the period - 18.8 0.6 19.4
Disposals - (14.6) - (14.6)
At 31 July 2023 47.9 167.8 46.7 262.4
Additions - 18.6 0.6 19.2
Disposals - (6.0) - (6.0)
At 31 January 2024 47.9 180.4 47.3 275.6
Net book value at 31 January 2024 102.6 162.8 3.1 268.5
Net book value at 31 July 2023 94.6 165.4 3.7 263.7
Net book value at 31 January 2023 94.6 161.3 4.3 260.2
Net book value at 1 August 2022 94.7 152.1 5.2 252.0
Goodwill addition of £8.0 million (six months ended 31 January 2023: £nil;
year ended 31 July 2023: £nil) relates to the group's acquisition of the 100%
shareholding of Bluestone Motor Finance (Ireland) DAC, a provider of motor
finance in Ireland, for cash consideration of €17.2 million. Net assets
acquired largely comprised loans and advances to customers, cash, debt
securities and borrowings. The goodwill includes intangible assets on
acquisition and the valuation of this is expected to be finalised within one
year of the acquisition date in line with IFRS 3 'Business Combinations'. The
acquisition was completed on 31 October 2023 as announced in the group's
scheduled trading update on 16 November 2023. Following this acquisition, the
Motor Finance business is re-building its presence in the Republic of Ireland
and Bluestone had a loan book of £16 million at 31 January 2024.
Intangible assets on acquisition relate to broker and customer relationships
and are amortised over a period of eight to 20 years. In the six months ended
31 January 2024, £0.6 million (six months ended 31 January 2023: £0.9
million; year ended 31 July 2023: £1.5 million) of the amortisation charge is
included in amortisation of intangible assets on acquisition and £18.6
million (six months ended 31 January 2023: £17.3 million; year ended 31 July
2023: £36.1 million) of the amortisation charge is included in administrative
expenses shown in the consolidated income statement.
Impairment tests for goodwill
At 31 January 2024, goodwill has been allocated to eight (31 July 2023: eight)
individual cash generating units ("CGUs"). Six are within the Banking division
(31 July 2023: six), one is the Asset Management division (31 July 2023: one)
and one is Winterflood in the Securities division (31 July 2023: one).
Goodwill impairment reviews have been carried out and no impairment has been
identified at 31 January 2024. The methodologies used in the impairment
reviews are consistent with those described in note 14 of the 2023 Annual
Report.
Winterflood recorded lower profits in the period with a lower value in use
driven by difficult market conditions. The business has a long track record of
trading profitably in a range of conditions and is well placed to take
advantage when investor confidence recovers. Nevertheless, future market
conditions remain uncertain and as such, consistent with the prior year, the
value in use calculation for this CGU has been identified as a key source of
estimation uncertainty as set out in note 1 'Critical Accounting Judgements
and Estimates'. The most significant uncertainty within the Winterflood value
in use calculation relates to the expected future cash flows, where certain
scenarios considered less probable by management, for example a decrease in
the annual growth rate to 0%, would lead to the carrying value of the CGU
equalling or exceeding the recoverable value.
10. Property, Plant and Equipment
Leasehold property Fixtures, Assets Motor Right of use Total
£ million fittings and held under vehicles assets1 £ million
equipment operating £ million £ million
£ million leases
£ million
Cost
At 1 August 2022 20.9 62.6 398.2 0.2 78.5 560.4
Additions - 5.1 41.7 - 5.7 52.5
Disposals (0.1) (1.2) (11.7) - (3.3) (16.3)
At 31 January 2023 20.8 66.5 428.2 0.2 80.9 596.6
Additions 1.0 2.4 51.4 0.2 19.0 74.0
Disposals (0.3) (3.4) (30.5) - (5.9) (40.1)
At 31 July 2023 21.5 65.5 449.1 0.4 94.0 630.5
Additions 0.3 8.1 41.6 - 3.5 53.5
Disposals - (5.0) (25.2) - (4.1) (34.3)
At 31 January 2024 21.8 68.6 465.5 0.4 93.4 649.7
Depreciation and impairment
At 1 August 2022 13.0 36.9 158.2 0.2 29.6 237.9
Depreciation and impairment charges for the period 1.0 4.2 21.2 - 7.1 33.5
Disposals (0.1) (1.4) (7.5) - (1.8) (10.8)
At 31 January 2023 13.9 39.7 171.9 0.2 34.9 260.6
Depreciation and impairment charges for the period 1.4 4.1 24.3 - 7.3 37.1
Disposals (0.3) (2.9) (18.3) - (2.8) (24.3)
At 31 July 2023 15.0 40.9 177.9 0.2 39.4 273.4
Depreciation and impairment charges for the period 1.1 4.4 21.6 - 7.8 34.9
Disposals - (5.1) (16.0) - (2.6) (23.7)
At 31 January 2024 16.1 40.2 183.5 0.2 44.6 284.6
Net book value at 31 January 2024 5.7 28.4 282.0 0.2 48.8 365.1
Net book value at 31 July 2023 6.5 24.6 271.2 0.2 54.6 357.1
Net book value at 31 January 2023 6.9 26.8 256.3 - 46.0 336.0
Net book value at 1 August 2022 7.9 25.7 240.0 - 48.9 322.5
1. Right of use assets primarily relate to the group's leasehold properties.
11. Settlement Balances and Short Positions
31 January 31 July
2024 2023
£ million
£ million
Settlement balances 875.1 686.0
Short positions in:
Debt securities 4.5 3.5
Equity shares 6.8 6.4
11.3 9.9
886.4 695.9
12. Financial Liabilities
On demand Within three Between Between Between After Total
£ million months three months and one year one and two and more than £ million
two years
five years
£ million £ million
five years
£ million £ million
£ million
Deposits by banks 0.9 43.5 87.5 - - - 131.9
Deposits by customers 436.3 1,932.8 3,704.6 1,537.4 652.9 - 8,264.0
Loans and overdrafts from banks 31.5 24.2 272.1 110.0 - - 437.8
Debt securities in issue - 43.4 135.3 175.9 1,188.6 326.9 1,870.1
Subordinated loan capital1 - 1.6 - - - 182.8 184.4
At 31 January 2024 468.7 2,045.5 4,199.5 1,823.3 1,841.5 509.7 10,888.2
1. Comprises issuances of £200.0 million with contractual maturity date of
2031 and optional prepayment date of 2026.
On demand Within three months Between Between Between two and five years After Total
three months and one year
one and
more than
£ million £ million
two years £ million
five years £ million
£ million
£ million £ million
Deposits by banks 10.3 43.6 88.0 - - - 141.9
Deposits by customers 175.1 1,836.4 3,745.9 1,305.0 662.1 - 7,724.5
Loans and overdrafts from banks 31.8 20.1 228.0 262.0 110.0 - 651.9
Debt securities in issue - 30.4 228.7 197.8 1,261.8 293.9 2,012.6
Subordinated loan capital1 - 1.6 - - - 173.3 174.9
At 31 July 2023 217.2 1,932.1 4,290.6 1,764.8 2,033.9 467.2 10,705.8
1. Comprises issuances of £200.0 million with contractual maturity date of
2031 and optional prepayment date of 2026.
Assets pledged and received as collateral
The group pledges assets for repurchase agreements and securities borrowing
agreements which are generally conducted under terms that are customary to
standard borrowing contracts.
At 31 January 2024, the group was a participant of the Bank of England's Term
Funding Scheme with Additional Incentives for SMEs ("TFSME") and the Indexed
Long term Repo ("ILTR"). Under these schemes, asset finance loan receivables
of £578.2 million (31 July 2023: £863.4 million), UK gilts with a market
value of £12.0 million (31 July 2023: £nil) and retained notes relating to
Motor Finance loan receivables of £57.3 million (31 July 2023: £83.4
million) were positioned as collateral with the Bank of England, against which
£372.0 million (31 July 2023: £600.0 million) of cash was drawn from the
TFSME and £10.0 million (31 July 2023: £5.0 million) from the ILTR. During
the period ended 31 January 2024, the group early repaid £228.0m (31 July
2023: £nil) of TFSME drawdowns.
The term of the TFSME transactions is four years from the date of each
drawdown but the group may choose to repay earlier at its discretion. The term
of the ILTR transaction is six months and cannot be repaid earlier. The risks
and rewards of the loan receivables remain with the group and continue to be
recognised in loans and advances to customers on the consolidated balance
sheet.
The group has securitised without recourse and restrictions £1,760.1 million
(31 July 2023: £1,436.3 million) of its insurance premium and motor loan
receivables in return for cash and asset-backed securities in issue of
£1,546.4 million (31 July 2023: £1,187.4 million). This includes the £57.3
million (31 July 2023: £83.4 million) retained notes positioned as collateral
with the Bank of England. As the group has retained exposure to substantially
all the credit risk and rewards of the residual benefit of the underlying
assets it continues to recognise these assets in loans and advances to
customers in its consolidated balance sheet.
13. Other Equity Instrument
Other equity instrument comprises the group's £200.0 million Fixed Rate Reset
Perpetual Subordinated Contingent Convertible Securities, or Additional Tier 1
capital ("AT1"), issued on 29 November 2023. These AT1 securities are
classified as an equity instrument under IAS 32 'Financial Instruments:
Presentation' with the proceeds recognised in equity net of transaction costs
of £2.4 million.
These securities carry a coupon of 11.125%, payable semi-annually on 29 May
and 29 November of each year, commencing on 29 May 2024, and have a first
reset date on 29 May 2029. The securities include, among other things, a
conversion trigger of 7.0% Common Equity Tier 1 capital ratio and are callable
any time in the six-month period prior to and including the first reset date
or on each reset date occurring every 5 years thereafter.
14. Capital
31 January 31 July
2024 2023
£ million £ million
CET1 capital
Total equity per balance sheet 1,831.8 1,644.9
Adjustments to CET1 capital
Contingent convertible securities recognised as AT1 capital1 (197.6) -
Intangible assets, net of associated deferred tax liabilities (267.7) (262.8)
Foreseeable dividends and charges2 (2.9) (67.0)
Cash flow hedging reserve (24.3) (34.4)
Pension asset, net of associated deferred tax liabilities (0.9) (1.0)
Prudent valuation adjustment (0.6) (0.4)
Insufficient coverage for non-performing exposures3 - (0.4)
IFRS 9 transitional arrangements4 15.2 31.9
CET1 capital5 1,353.0 1,310.8
AT1 capital 200.0 -
Tier 1 capital5 1,553.0 1,310.8
Tier 2 capital - subordinated debt 200.0 200.0
Total regulatory capital5 1,753.0 1,510.8
RWAs (notional)
Credit and counterparty credit risk 9,197.9 8,655.4
Operational risk6 1,084.0 1,084.0
Market risk6 98.3 108.2
10,380.2 9,847.6
CET1 capital ratio5 13.0% 13.3%
Tier 1 capital ratio5 15.0% 13.3%
Total capital ratio5 16.9% 15.3%
1. The contingent convertible securities are classified as an equity
instrument for accounting but treated as AT1 for regulatory capital purposes.
2. Under CRR Article 26, a deduction has been recognised at 31 January 2024
and 31 July 2023 for foreseeable dividends and charges. At 31 July 2023 this
reflected the proposed final dividend for the year ended 31 July 2023. At 31
January 2024 the deduction reflected a foreseeable charge for the coupon on
the group's contingent convertible securities. No foreseeable dividend on
ordinary shares has been recognised at 31 January 2024 following the group's
announcement on 15 February 2024 that no dividend will be paid for the year
ended 31 July 2024.
3. The deduction for non-performing exposures is not required at 31 January
2024, in line with policy statement PS14/23 effective on 14 November 2023.
4. The group has elected to apply IFRS 9 transitional arrangements for 31
January 2024, which allow the capital impact of expected credit losses to be
phased in over the transitional period.
5. Shown after applying IFRS 9 transitional arrangements and the CRR
transitional and qualifying own funds arrangements in force at the time.
Without their application, at 31 January 2024 the CET1 capital ratio would be
12.9%, the tier 1 capital ratio 14.8% and total capital ratio 16.8% (31 July
2023: CET1 capital ratio 13.0%, tier 1 capital ratio 13.0%, and total capital
ratio 15.1%).
6. Operational and market risk include an adjustment at 8% in order to
determine notional RWAs.
The following table shows the movement in CET1 capital during the period:
Six months ended Year ended
31 January 31 July
2024 2023 2023
£ million £ million £ million
CET1 capital at 1 August 1,310.8 1,396.7 1,396.7
Profit in the period attributable to shareholders 68.8 8.4 81.1
Dividends paid and foreseen (3.0) (33.5) (100.5)
IFRS 9 transitional arrangements (16.6) (49.0) (51.1)
(Increase)/decrease in intangible assets, net of associated deferred tax (4.9) (8.4) (12.1)
liabilities
Other movements in reserves recognised for CET1 capital (2.4) (6.5) (7.3)
Other movements in adjustments from CET1 capital 0.3 3.0 4.0
CET1 capital at end of period 1,353.0 1,310.7 1,310.8
This note does not form a part of the interim financial statements referred to
by PwC in its independent review report.
15. Defined Benefit Pension Scheme
During the previous year, the group's only defined benefit pension scheme
("the scheme") entered into a buy-in transaction with an insurance company
covering all members of the scheme. A buy-in is a bulk annuity policy that
matches the scheme's assets and liabilities. It represents a significant
de-risking of the investment portfolio and hence a significant reduction in
the group's long-term exposure to pension funding risk.
As a result of this transaction, the pension surplus on the group's balance
sheet decreased to £1.3 million at 31 July 2023 relating to the cash held by
the scheme, with the fair value of the insurance policy matched to the fair
value of the scheme's liabilities, which remains subject to changes in
actuarial valuations. The loss of the pension surplus represents the one-off
premium paid for the insurance policy and was recognised within other
comprehensive income in the six months ended 31 January 2023. There are no
significant movements in the pension surplus in the current period ended 31
January 2024.
16. Contingent Liabilities
Motor Finance commission arrangements
As disclosed in previous periods, the group continues to receive a high number
of complaints, many of which are now with the Financial Ombudsman Service
("FOS"), and is subject to a number of claims through the courts regarding
historic Discretionary Commission Arrangements ("DCAs") with intermediaries on
its Motor Finance products. This follows the FCA's Motor Market Review in
2019.
On 11 January 2024, the FOS published its first two decisions upholding
customer complaints relating to DCAs against two other lenders in the market
and instructed them to pay compensation to the complainants if they accepted
the outcome. On the same day, recognising that these decisions were likely to
significantly increase the number of complaints to motor finance providers and
the FOS, risking disorderly and inconsistent outcomes as well as market
instability, the FCA released policy statement PS 24/1 which introduced
temporary changes to handling rules for motor finance complaints until at
least September 2024. This means that firms will not have to respond to
these complaints within the normal time limits. This was to allow the FCA time
to carry out diagnostic work to determine whether or not there has been
widespread failure to comply with regulatory requirements which has caused
customers harm and, if so, whether it needs to take any action. The FCA has
indicated that such steps could include establishing an industry-wide consumer
redress scheme and/or applying to the Financial Markets Test Case Scheme, to
help resolve any contested legal issues of general importance. The FCA aims to
communicate a decision on next steps by the end of September 2024.
As set out in our trading update on 15 February 2024, there is significant
uncertainty about the outcome of the FCA's review at this early stage. The FCA
has indicated there could be a range of outcomes, with one potential outcome
being an industry-wide consumer redress scheme. The estimated impact of any
redress scheme, if required, is highly dependent on a number of factors such
as: the time period covered; the DCA models impacted (the group operated a
number of different models during the period under review); appropriate
reference commission rates set for any redress; and response rates to any
redress scheme. As such, at this early stage, the timing, scope and quantum of
any potential financial impact on the group cannot be reliably estimated at
present.
Based on the status at the half year and in accordance with the relevant
accounting standards, the Board has concluded that no legal nor constructive
obligation exists and it is currently not required or appropriate to recognise
a provision in the group's Half-Year 2024 results. In addition, it is not
practicable at this early stage to estimate any potential financial impact
arising from this issue.
In the normal course of the group's business, there may be other contingent
liabilities relating to complaints, legal proceedings or regulatory reviews.
These cases are not currently expected to have a material impact on the group.
17. Related Party Transactions
Related party transactions, including salary and benefits provided to
directors and key management, did not have a material effect on the financial
position or performance of the group during the period. There were no changes
to the type and nature of the related party transactions disclosed in the 2023
Annual Report that could have a material effect on the financial position and
performance of the group in the six months to 31 January 2024.
18. Consolidated Cash Flow Statement Reconciliation
Six months ended Year ended
31 January 31 July
2024 2023 2023
£ million
£ million
£ million
(a) Reconciliation of operating profit before tax to net cash inflow from
operating activities
Operating profit before tax 93.8 11.7 112.0
Tax (paid)/refunded (31.9) 1.9 (7.4)
Depreciation, amortisation and impairment 54.1 51.7 108.2
Impairment losses on financial assets 41.7 162.2 204.1
Amortisation of de-designated cash flow hedges (15.4) - -
(Increase)/decrease in:
Interest receivable and prepaid expenses (6.3) (14.7) (6.8)
Net settlement balances and trading positions (13.2) (31.1) (11.4)
Net loans from money brokers against stock advanced 28.1 22.0 15.6
Decrease in interest payable and accrued expenses (21.7) (45.2) (16.5)
Net cash inflow from trading activities 129.2 158.5 397.8
Cash (outflow)/inflow arising from changes in:
Loans and advances to banks not repayable on demand 11.2 (9.8) (21.1)
Loans and advances to customers (401.1) (54.1) (584.3)
Assets held under operating leases (31.8) (36.8) (73.2)
Certificates of deposit - 134.4 185.0
Sovereign and central bank debt - 205.0 191.2
SSA bonds (140.9) - -
Covered bonds (80.8) - (105.4)
Deposits by banks (9.2) (8.3) (22.1)
Deposits by customers 542.1 462.4 942.5
Loans and overdrafts from banks (220.0) 30.5 29.2
Debt securities in issue (net) (181.5) (38.7) 14.4
Derivative financial instruments (net) - - 70.4
Other assets less other liabilities (11.2) (10.0) (3.0)
Net cash (outflow)/inflow from operating activities (394.0) 833.1 1,021.4
(b) Analysis of net cash outflow in respect of the purchase of subsidiaries
Purchase of subsidiaries, net of cash acquired (11.2) (0.5) (0.5)
(c) Analysis of net cash inflow in respect of the sale of subsidiaries
Cash consideration received 0.2 0.5 -
(d) Analysis of cash and cash equivalents1
Cash and balances at central banks 1,641.7 1,858.4 1,918.4
Loans and advances to banks 245.8 241.9 290.9
1,887.5 2,100.3 2,209.3
1. Excludes £46.6 million (31 January 2023: £47.6 million; 31 July 2023:
£58.0 million) of Bank of England and other cash reserve accounts and cash
held in trust.
During the period ended 31 January 2024, the non-cash changes on debt
financing amounted to £21.4 million (31 January 2023: £5.9 million; 31 July
2023: £0.9 million) arising largely from interest accretions and fair value
hedging movements.
19. Fair Value of Financial Assets and Liabilities
The fair values of the group's subordinated loan capital and debt securities
in issue are set out below.
31 January 2024 31 July 2023
Fair value Carrying value Fair value Carrying value
£ million
£ million
£ million
£ million
Subordinated loan capital 171.5 184.4 165.8 174.9
Debt securities in issue 1,877.1 1,870.1 2,008.0 2,012.6
The fair value of gross loans and advances to customers at 31 January 2024 is
estimated to be £9,450.1 million (31 July 2023: £9,046.2 million), with a
carrying value of £9,611.0 million (31 July 2023: £9,255.0 million). The
fair value of deposits by customers is estimated to be £8,260.7 million (31
July 2023: £7,668.7 million), with a carrying value: £8,264.0 million (31
July 2023: £7,724.5 million). These estimates are based on highly simplified
assumptions and inputs and may differ to actual amounts received or paid. The
differences between fair value and carrying value are not considered to be
significant, and are consistent with management's expectations given the
nature of the Banking business and the short average tenor of the instruments.
The group holds financial instruments that are measured at fair value
subsequent to initial recognition. Each instrument has been categorised within
one of three levels using a fair value hierarchy that reflects the
significance of the inputs used in making the measurements. These levels are
based on the degree to which the fair value is observable and are defined in
note 26 "Financial risk management" of the 2023 Annual Report. The table below
shows the classification of financial instruments held at fair value into the
valuation hierarchy:
Level 1 Level 2 Level 3 Total
£ million
£ million
£ million
£ million
At 31 January 2024
Assets
Debt securities:
Sovereign and central bank debt 193.3 - - 193.3
SSA bonds 145.6 - - 145.6
Covered bonds 187.8 - - 187.8
Long trading positions in debt securities 13.4 2.2 - 15.6
Equity shares 4.7 21.4 0.5 26.6
Derivative financial instruments - 73.2 11.8 85.0
Contingent consideration - - 1.8 1.8
Other assets - - 1.2 1.2
544.8 96.8 15.3 656.9
Liabilities
Short positions:
Debt securities 3.5 1.0 - 4.5
Equity shares 1.6 5.2 - 6.8
Derivative financial instruments - 133.3 12.2 145.5
Contingent consideration - - - -
5.1 139.5 12.2 156.8
Level 1 Level 2 Level 3 Total
£ million
£ million
£ million
£ million
At 31 July 2023
Assets
Debt securities:
Sovereign and central bank debt 186.1 - - 186.1
SSA bonds - - - -
Covered bonds 106.3 - - 106.3
Long trading positions in debt securities 13.6 1.6 - 15.2
Equity shares 3.9 25.1 0.3 29.3
Derivative financial instruments - 77.4 11.1 88.5
Contingent consideration - - 2.0 2.0
Other assets - - - -
309.9 104.1 13.4 427.4
Liabilities
Short positions:
Debt securities 2.3 1.2 - 3.5
Equity shares 1.7 4.6 0.1 6.4
Derivative financial instruments - 184.7 11.2 195.9
Contingent consideration - - 2.8 2.8
4.0 190.5 14.1 208.6
There is no significant change to the valuation methodologies relating to
Level 2 and 3 financial instruments disclosed in note 26 "Financial risk
management" of the 2023 Annual Report. Instruments classified as Level 3
predominantly comprise over-the-counter derivatives.
The valuation of Level 3 derivatives is similar to Level 2 derivatives and
includes the use of discounted future cash flow models, with the most
significant input into these models being interest rate yield curves developed
from quoted rates. The fair value of contingent consideration is determined on
a discounted expected cash flow basis. The group believes that there is no
reasonably possible change to inputs used in the valuation of these positions
which would have a material effect on the group's consolidated income
statement.
During the period, £0.3 million of equity shares were transferred from Level
2 to 3. In 2023, £1.6 million of derivative financial assets and £1.8
million of derivative financial liabilities were transferred from Level 2 to
3.
Movements in financial instruments categorised as Level 3 were:
Derivative financial Derivative financial Equity Contingent consideration Other
assets liabilities shares £ million assets
£ million £ million £ million £ million Total
£ million
At 1 August 2022 - - 0.2 (1.3) - (1.1)
Total gains recognised in the consolidated income statement - 0.2 -
- - 0.2
Purchases, issues and transfers in - - - 0.5 - 0.5
Sales, settlements and transfers out - - - - - -
At 31 January 2023 (unaudited) - - 0.2 (0.6) - (0.4)
Total gains/(losses) recognised in the consolidated income statement - (0.3)
9.5 (9.4) - (0.2)
Purchases, issues and transfers in 1.6 (1.8) - 0.1 - (0.1)
Sales, settlements and transfers out - - - - - -
At 31 July 2023 11.1 (11.2) 0.2 (0.8) - (0.7)
Total gains/(losses) recognised in the consolidated income statement - 0.4 -
0.7 (1.0) 0.1
Purchases, issues and transfers in - - 0.3 - 1.2 1.5
Sales, settlements and transfers out - - - 2.2 - 2.2
At 31 January 2024 11.8 (12.2) 0.5 1.8 1.2 3.1
The loss recognised in the consolidated income statement relating to level 3
instruments held at 31 January 2024 amounted to £0.3 million (31 January
2023: £0.2 million gain, 31 July 2023: £nil).
20. Additional Support for Customers
Forbearance
Forbearance occurs when a customer is experiencing difficulty in meeting their
financial commitments and a concession is granted, by changing the terms of
the financial arrangement, which would not otherwise be considered. This
arrangement can be temporary or permanent depending on the customer's
circumstances.
The Banking division reports on forborne exposures as either performing or
non-performing in line with regulatory requirements. A forbearance policy is
maintained to ensure the necessary processes are in place to enable
consistently fair treatment of all customers and that each is managed based on
their individual circumstances. The arrangements agreed with customers will
aim to create a sustainable and affordable financial position, thereby
reducing the likelihood of suffering a credit loss. The forbearance policy is
periodically reviewed to ensure it remains effective.
The Banking division offers a range of concessions to support customers which
vary depending on the product and the customer's status. Such concessions
include an extension outside terms (for example a higher LTV or overpayments)
and refinancing, which may incorporate an extension of the loan tenor and
capitalisation of arrears. Furthermore, other forms of forbearance such as
moratorium, covenant waivers and rate concessions are also offered.
Forbearance analysis
At 31 January 2024 the gross carrying amount of exposures with forbearance
measures was £255.4 million (31 July 2023: £214.6 million). The key driver
of this value increase has been Asset Finance, reflecting continued efforts to
support customers via provision of concessions reflective of their
circumstances. The increase in volumes is mainly driven by Premium Finance,
however this has a limited impact on overall forborne balances due to the low
average loan size. This has been partly offset by reducing volumes across
other businesses.
An analysis of forborne loans is shown in the table below:
Gross loans and advances to customers Forborne loans Forborne loans as a percentage of gross loans and advances to customers Provision on forborne loans Number of customers supported
£ million £ million % £ million
31 January 2024 10,019.0 255.4 2.5% 62.1 8,988
31 July 2023 9,635.6 214.6 2.2% 56.1 6,996
The following is a breakdown of forborne loans by segment:
31 January 31 July
2024 2023
£ million £ million
Commercial 70.4 38.0
Retail 34.1 28.8
Property 150.9 147.8
255.4 214.6
The following is a breakdown of the number of customers supported by segment:
31 January 31 July
2024 2023
Number of customers supported Number of customers supported
Commercial 289 243
Retail 8,652 6,700
Property 47 53
8,988 6,996
The following is a breakdown of forborne loans by concession type:
31 January 31 July
2024 20231
£ million £ million
Extension outside terms 107.6 105.8
Refinancing 33.3 10.4
Moratorium 82.2 66.1
Deferring collections/recoveries activities 28.7 29.8
Other modifications 3.6 2.5
255.4 214.6
1. Comparatives have been updated to present deferring
collections/recoveries activities category in a separate line.
Government lending schemes
Over the pandemic period, following accreditation, customers' facilities were
offered under the UK government-introduced Coronavirus Business Interruption
Loan Scheme ("CBILS"), the Coronavirus Large Business Interruption Loan Scheme
("CLBILS") and the Bounce Back Loan Scheme ("BBLS"), thereby enabling the
Banking division to maximise its support to small businesses. At 31 January
2024, there are 3,642 (31 July 2023: 4,364) remaining facilities, with a
residual balance of £311.7 million (31 July 2023: £456.3 million) as
repayments continue to be made across the Asset Finance & Leasing and
Invoice & Speciality Finance businesses.
The Banking division also received accreditation to offer products under the
Recovery Loan Scheme ("RLS"), and schemes in the Republic of Ireland.
Applications for facilities under phase 2 of the RLS closed in June 2022 and
subsequently facilities have been offered under the new RLS phase 3. At 31
January 2024, there are 1,117 (31 July 2023: 943) live facilities, with
balances of £289.0 million (31 July 2023: £276.2 million), and a further 59
(31 July 2023: 58) approved facilities with limits of £14.8 million (31 July
2023: £14.3 million)
The Banking division maintains a regular reporting cycle of these facilities
to monitor performance. To date, a number of claims have been made and
payments received under the government guarantee.
21. Interest Rate Risk
The group recognises three main sources of interest rate risk in the banking
book ("IRRBB") which could adversely impact future income or the value of the
balance sheet:
• repricing risk - the risk presented by assets and liabilities
that reprice at different times and rates;
• embedded optionality risk - the risk presented by contract
terms embedded into certain assets and liabilities; and
• basis risk - the risk presented by a mismatch in the reference
interest rate for assets and liabilities.
IRRBB is assessed and measured by applying key behavioural and modelling
assumptions including, but not limited to, those related to fixed rate loans
subject to prepayment risk, the behaviour of non-maturity assets and
liabilities, the treatment of own equity and the expectation of embedded
interest rate options. This assessment is performed across a range of
regulatory prescribed and internal interest rate shock scenarios approved by
the bank's Asset and Liability Committee.
Two measures are used for measuring IRRBB, namely Earnings at Risk ("EaR") and
Economic Value ("EV"):
• EaR measures short-term impacts to earnings, highlighting any
earnings sensitivity should rates change unexpectedly.
• EV measures longer-term earnings sensitivity due to rate
changes, highlighting the potential future sensitivity of earnings, and any
risk to capital.
No material IRRBB exposure exists in the other parts of the group, and
accordingly the analysis below relates to the Banking division and company.
EaR impact
The table below sets out the assessed impact on net interest income over a
12-month period from interest rate changes. The results shown are for an
instantaneous and parallel change in interest rates at 31 January 2024:
31 January 31 July
2024 2023
£ million £ million
0.5% increase 1.9 4.5
2.5% increase 9.5 22.6
0.5% decrease (1.9) (4.5)
2.5% decrease (9.7) (22.8)
The group's EaR at 31 January 2024 reflects its policy to ensure exposure to
interest rate shocks is managed within the group's risk appetites. As BoE held
rates constant since 3(rd) August 2023 the group reduced its exposure to short
term rate movements resulting in a decrease in its EaR sensitivity compared to
31 July 2023.
EV impact
The table below sets out the assessed impact on our base case EV, which
measures the impact on equity value of an instantaneous and parallel change in
interest rates at 31 January 2024:
31 January 31 July
2024 2023
£ million £ million
0.5% increase 4.5 4.4
2.5% increase 22.3 21.5
0.5% decrease (4.4) (4.4)
2.5% decrease (19.3) (21.9)
The group's EV at 31 January 2024 reflects its policy to ensure exposure to
interest rate shocks is managed within the group's risk appetites. In a rising
rate environment, the distance to the interest rate floors increases and so
the benefit of the floors on the group's lending decreases. The EV measure is
a combination of our repricing profile, which is positively correlated to
rising rates, offset partially by embedded optionality to cover interest rate
floors within the bank's lending and borrowing activities.
22. Post Balance Sheet Event
In December 2023, the group announced the acquisition of Bottriell Adams, an
IFA business based in Dorset with approximately £220 million of client
assets, as the Asset Management division extends its regional presence in the
South West. The acquisition was completed in March 2024.
Cautionary Statement
Certain statements included or incorporated by reference within this
announcement may constitute "forward-looking statements" in respect of the
group's operations, performance, prospects and/or financial condition. All
statements other than statements of historical fact are, or may be deemed to
be, forward-looking statements. Forward-looking statements are sometimes, but
not always, identified by their use of a date in the future or such words as
"anticipates", "aims", "due", "could", "may", "will", "should", "expects",
"believes", "intends", "plans", "potential", "targets", "goal" or "estimates".
By their nature, forward-looking statements involve a number of risks,
uncertainties and assumptions and actual results or events may differ
materially from those expressed or implied by those statements. There are also
a number of factors that could cause actual future operations, performance,
financial conditions, results or developments to differ materially from the
plans, goals and expectations expressed or implied by these forward-looking
statements and forecasts. These factors include, but are not limited to, those
contained in the Group's annual report (available at:
https://www.closebrothers.com/investor-relations
(https://www.closebrothers.com/investor-relations) ). Accordingly, no
assurance can be given that any particular expectation will be met and
reliance should not be placed on any forward-looking statement. Additionally,
forward-looking statements regarding past trends or activities should not be
taken as a representation that such trends or activities will continue in the
future.
Except as may be required by law or regulation, no responsibility or
obligation is accepted to update or revise any forward-looking statement
resulting from new information, future events or otherwise. Nothing in this
announcement should be construed as a profit forecast. Past performance cannot
be relied upon as a guide to future performance and persons needing advice
should consult an independent financial adviser.
This announcement does not constitute or form part of any offer or invitation
to sell, or any solicitation of any offer to subscribe for or purchase any
shares or other securities in the company or any of its group members, nor
shall it or any part of it or the fact of its distribution form the basis of,
or be relied on in connection with, any contract or commitment or investment
decisions relating thereto, nor does it constitute a recommendation regarding
the shares or other securities of the company or any of its group members.
Statements in this announcement reflect the knowledge and information
available at the time of its preparation. Liability arising from anything in
this announcement shall be governed by English law. Nothing in this
announcement shall exclude any liability under applicable laws that cannot be
excluded in accordance with such laws.
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