Annual Report 2011
Arbuthnot Banking Group PLC
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Corporate Philosophy
Group Highlights
Chairman’s Statement
Business Review
Private Banking – Arbuthnot Latham & Co.
Retail Banking – Secure Trust Bank
Financial Review
Group Board
Directors’ Report
Corporate Governance
Remuneration Report
Independent Auditor’s Report
Consolidated Statement of Comprehensive Income
Consolidated Statement of Financial Position
Company Statement of Financial Position
Consolidated Statement of Changes in Equity
Company Statement of Changes in Equity
Consolidated Statement of Cash Flows
Company Statement of Cash Flows
Principal Accounting Policies
Notes to the Consolidated Financial Statements
Five Year Summary
Response to Independent Commission on Banking Report
Corporate Contacts & Advisers
Annual Report & Accounts 2011
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Corporate Philosophy
Arbuthnot has a 179 year history of serving its customers,
as well as a long track record of progress against the
background of a continually changing environment.
The ability of Arbuthnot to adapt and grow has come
from managing the business through seven key principles
developed over time. These principles, always applied
with pragmatism and common sense, govern the
activities of the Group, ranging from major strategic
issues to smaller day-to-day operational matters.
The continued application of these principles will
allow the business to pursue growth in a controlled
manner, providing a high quality service to its customers
whilst delivering good returns to shareholders and
securing the well-being of its employees.
Henry Angest
Chairman & CEO
14 March 2012
1. Arbuthnot serves its shareholders, its customers
and its employees with integrity and high ethical
standards. This is expressed in a progressive dividend
policy, in fair pricing and pay for performance.
2. Arbuthnot attaches great importance to good
relations with customers and business partners,
and treating them fairly and promptly. Arbuthnot
believes in reciprocity.
3. Arbuthnot is independent, and profit and growth
oriented while maintaining a controlled risk
profile.
4. Arbuthnot’s approach is based on diversification,
a long-term view, empowerment of management
and a culture of rewards for achievements.
5. Arbuthnot’s business is conducted in an innovative,
flexible and entrepreneurial manner, with an
opportunistic and counter-cyclical attitude.
6. Arbuthnot does not sacrifice long term prospects
for short term gains – nor sacrifice stability for
quick profits.
7. Ultimately, the success of Arbuthnot depends on
the teamwork, commitment, and performance of
its employees, combined with the determination
to win.
“ He whose ranks are united in purpose will be victorious”
Sun Tzu
The Art of War
circa 500 BC
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Arbuthnot Banking Group PLC
Group Highlights
Overall, 2011 was a transformational
year for Arbuthnot Banking Group.
Following the successful flotation
of Secure Trust Bank and the sale of
Arbuthnot Securities, the Group has
ended the year in a strong position to
take advantage of new opportunities.
Operating income
Total dividend per share
£45.5m
£37.8m 2010
24.0p
23.0p 2010
Profit before tax
Total assets
£5.1m
£4.1m 2010
£769.3m
£565.1m 2010
Regulatory capital
£55.7m
£43.9m 2010
(Loss)/profit attributable
to Equity holders of the
Company
(£5.0m)
£3.7m 2010
Net asset value per share
312.2p
227.7p 2010
Private Banking
The Private Banking division doubled
its profits with strong growth across
loans, deposits and assets under
management. Its ability to offer tailored
private banking and wealth management
solutions to clients means it is well
positioned for future organic growth.
Retail Banking
2011 has been a milestone year for the
development of Secure Trust Bank. It has
delivered a strong underlying financial
performance whilst putting in place the
foundations for its ambitious growth plans.
Annual Report & Accounts 2011
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Private Banking
Private banking comprises current accounts,
deposit accounts, loans, overdrafts and
foreign exchange. Each client deals with
a dedicated Private Banker who is key to
providing an individual service.
Investment Management
Our discretionary investment management
service comprises asset management,
developing tailored investment strategies
to ensure that each client’s specific
investment objectives are met.
Wealth Planning
The wealth planning service is built
on long-term relationships and bespoke
financial strategies. The service is
independent and fee, not commission
based, with clients receiving a service
covering estate and tax planning, pensions
and wealth preservation and generation.
Gilliat Financial Solutions
Gilliat Financial Solutions designs, packages
and distributes structured products to
financial intermediaries.
Motor Finance
A multi-channel offering through motor dealers
and brokers. The hire purchase agreements
are fixed rate, fixed term and secured mainly
against used cars with finance term periods
varying from 24 to 60 months with a
maximum loan size of £15,000.
Retail Point of Sale Finance
Lending solutions for store and online retailers
and an “e”-tailer proposition distributed
through partnership with Pay4Later. Unsecured,
fixed rate and fixed term loans with payments
received monthly. Loans vary in term from
six months to 48 months and range from
£250 to £12,000.
Personal Unsecured Lending
Fixed rate, fixed term products with
payments received monthly. Loan terms are
between 12 months and 60 months with
advances varying from £500 to £15,000.
Current Account
A current account with a prepaid card.
The account charges a monthly fee of
£12.50 but customers have the ability to
earn rewards at participating retailers.
Savings
A combination of instant access accounts,
notice deposits and deposit bonds with
competitive interest rates
Arbuthnot Latham provides a high quality
private banking and wealth management
service, consisting of four core elements:
Secure Trust Bank is an established UK
retail bank. Its core business is to provide
banking services including a range of lending
solutions and deposits. It also provides
fee-based current accounts to UK customers
who may not be adequately served by
other banks.
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Arbuthnot Banking Group PLC
Chairman’s Statement
Chairman’s Statement
Sometimes I believe we live in a parallel universe. After the successful
sale of part of our investment in Secure Trust Bank (STB), Arbuthnot
Banking Group (ABG) would have made a “profit” of £10 million in
layman’s terms. However, the application of the accounting rules
resulted in a loss of £7 million, as they do not recognise this gain as
a profit. These same accounting rules previously allowed failed banks
to show huge imaginary profits on which excessive bonuses were
paid out. They also allowed the banks to revalue their own debt
showing artificial profits as their credit ratings plunged. I can only
live in hope that one day we will return to a saner world, where a
spade is called a spade and where profits mean cash in the till.
In the real world, the past year has been a year of transformational
changes for ABG. In November we saw the very successful flotation
of STB on the AIM market, one of few listings in 2011 and the first
by a bank in many years. We used the IPO to increase the capital
base of STB in order to take advantage of the many business opportunities
available in the present market place and to strengthen the Group
balance sheet. Giving the Bank its own currency has allowed its
management increased room for growth, while as majority shareholder
ABG will continue to ensure that its principles of careful stewardship
of the business will be maintained.
The opposite was true for Arbuthnot Securities (ASL). In the market
place for small brokers we could see no improvement in sight and
concluded that perhaps the environment may well have changed
fundamentally. So we decided to cut our losses and to exit this
business. We believe the deployment of our resources in the two
Banks will bring better returns for our shareholders. We were
pleased to find a good partner for ASL in Westhouse Holdings plc.
Arbuthnot Latham had its own fair share of change. While the business
made very good progress and Gilliat has now become profitable,
Arbuthnot Latham’s capable CEO, Dean Proctor, received an offer
he could not refuse. Sadly this is not the only case of a young banking
executive with an outstanding future, deciding that he has better
economic prospects abroad. Unfortunately for our country, not
only are an increasing number of highly mobile young and senior
banking and financial services executives leaving the country, but
few are coming back and even fewer foreign executives are joining
us. This is a reversal of the previous trend and a serious problem.
I believe there are two reasons for this:
1. With all the vilification being heaped upon them, it is no
surprise that honest bankers – and they are the big majority -
are feeling persecuted.
Annual Report & Accounts 2011
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2. There is a lot of talk about fairness, but fairness should be about
rewarding hard work and enterprise. A tax rate of 50% or more
is not fair. Such a rate is anti-competitive and counterproductive.
It damages incentives and undermines economic growth.
Which are the most economically successful countries in the world?
Those with moderate or flat tax rates that encourage and reward hard
work and entrepreneurship such as Hong Kong, Singapore, Switzerland,
USA and not to forget the United Kingdom, when under Lady
Thatcher’s leadership.
There are many more issues and dangers that affect our business, but
I will only mention three. Firstly, the Independent Commission on
Banking Report, the Vickers Report. How the Government implements
its recommendations is of great importance to Arbuthnot and the
whole banking industry. I have given my initial thoughts in an article
that was published, together with other views, by the CSFI. The article,
which was written with the help of Dr. Atholl Turrell, is reprinted
at the back of the Annual Report.
The second issue is the ongoing crisis within the Euro Zone, where
politicians seem incapable – or unwilling – to resolve the matter
decisively and prefer to procrastinate and postpone the inevitable
outcome. Meanwhile, the weakened countries lurch towards default
and economic ruin. It is clear that while this debacle continues, the
impact on the UK economy and the banking sector can only be negative,
albeit I am not as pessimistic as others and I believe with good financial
management the UK could avoid the worst and recover quickly.
And thirdly, there is the issue of increasing regulation. As I have said
many times, we don’t need more regulation, but we could do with a
better targeted regime. Since 90% of the prudential regulation now
comes from Brussels, it is difficult for our own regulators to do much
about it, however they could abstain from gold plating the European edicts.
Private Banking – Arbuthnot Latham & Co., Limited
The Private Banking business performed well, with pre-tax profit
of £2.0 million (2010: £1.0 million).
Arbuthnot Latham continued to lend cautiously and maintained the
quality of collateral held as security. As a result client loans grew
by £27 million to £238 million, a 13% growth over 2010 with
credit losses at less than 1% of the asset book.
Client deposits grew by £70 million in 2011 to £420 million, a 20%
year on year increase. The resulting loan to deposit ratio closed the
year below our target at 57%.
Arbuthnot Latham continues to focus on expanding its asset management
and wealth planning offerings, with further investment in people and
systems initiated in 2011. These initiatives, when fully implemented,
will provide a strong foundation for future organic growth.
From a modest base, discretionary assets under management
grew by 40% and fee income from wealth planning grew by 10%.
This growth is a result of high net worth clients being attracted to
the full wealth management and private banking proposition.
Gilliat Financial Solutions made its first annual profit of £0.2 million
(2010:£0.6 million loss) as the business launched in July 2009
continued to build momentum transacting business with an
increasing number of Financial Advisors and Intermediaries.
As reported above, Arbuthnot Latham’s charismatic CEO, Dean
Proctor, has left us. Our best wishes go with him. Fortunately,
we were able to find a strong successor in James Fleming. James joins
us from Coutts where he had been a senior director.
Retail Banking – Secure Trust Bank PLC
Pre-tax profits of Secure Trust Bank, before IPO costs and group
recharges, were £9.6 million (2010: £8.5 million). In isolation the
growth of 13% is highly commendable. However, the underlying
picture is stronger. The 2010 results were heavily influenced by the
profits generated by the portfolios acquired from LV and Citi in 2009.
The income benefit of these portfolios, which had a high profit margin,
peaked in 2010 and reduced by over £4 million in 2011.
During the year the Bank’s lending operations continued to generate
very strong, controlled, organic growth. Overall new business lending
volumes grew 51% to £136 million (2010: £90 million) which fuelled
an increase of 73% in overall customer loans to £155 million (2010:
£89 million)
The portfolios of books acquired in 2009 continue to be collected
out in line with expectations, with the balance outstanding declining
to £2.5 million at 31 December 2011 (2010: £10.7m).
The IPO has significantly raised STB’s corporate profile and it has
seen an increase in the scale, scope and range of opportunities being
brought to it for consideration. There is a clear growth strategy and
STB is working on a number of significant projects which will add
considerable value to the business if completed.
Board Changes and Personnel
As a result of the sale of our Securities Business Neil Kirton and
Atholl Turrell resigned from the Board on 29 December 2011 and
31 December 2011 respectively.
As already mentioned Dean Proctor resigned from the Board on 1 March
2012 to move overseas and was replaced on the same day by James Fleming.
I would like to thank the three directors who have left for the
contributions that they have made to the Group.
These results once again reflect the continuing dedication and
commitment of our employees who have done well in the current
environment. On behalf of the Board I extend our thanks to all
staff for their contributions made to the Group in 2011.
Dividend
The Board is proposing a final dividend of 13p, an increase of 1p on
last year, making a total dividend of 24p (2011: 23p). If approved,
the dividend will be paid on 18 May 2012 to shareholders on the
register at close of business on 20 April 2012.
Outlook
Overall, 2011 was a transformational year for the Arbuthnot Banking
Group PLC. The two banking businesses performed well and the Group
ended the year on a firm foundation, regulatory capital increased by
27% to £55.7m and the total balance sheet by 36% to £769m and
net asset value per share rose by 85p. At the same time high liquidity
was maintained. The Group’s overall position has strengthened
considerably allowing it to continue to grow over the coming years
as it exploits the opportunities that are arising, barring any macro-
economic upheaval.
Henry Angest
Chairman & CEO
14 March 2012
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Arbuthnot Banking Group PLC
Arbuthnot Latham & Co
Pre-tax profits for the Private Banking division doubled in the year
to £2m (2010: £1m) and the underlying growth of the business
was somewhat higher as these results include an additional £1m of
credit provisions taken against two legacy accounts and a further
decline in returns from our surplus funds, as we have held more
money with the Bank of England rather than in the wholesale
markets.
Total assets increased and for the first time stand at a level greater
than half a billion pounds and assets under the Bank’s direction
are now in excess of one billion pounds.
The conditions for lending continued to be favourable during the
year and the Bank was able to grow its loan portfolio by £27m
to £238m while widening lending margins and maintaining the
quality of collateral held. The loan to value of the overall book was
48% and retail deposits increased by £70m to £420m to close the
year with a loan to deposit ratio of 57%. The returns earned on the
surplus funds continued to decrease over the year as the decision
was taken to hold more funds at the Bank of England, which given
ongoing problems with the Euro Zone banks, was seen as the
safer option rather than the wholesale markets. The credit losses
experienced by the Bank remain under 1%.
The Bank continues to expand its asset management and wealth
planning services and further investments in people and systems
were made during the year. These initiatives are providing the
foundation for future organic growth.
Arbuthnot Latham became the first UK bank to achieve chartered
wealth planning status. This reflects the high quality of service
offered and the chartered status of the individual wealth planners.
The Bank is well placed to thrive as the advisory and investment
management business environment continues to evolve leading up
to and beyond the implementation of the FSA Retail Distribution
Review (RDR) in January 2013. This recognition of the services
provided has enabled the discretionary assets under management to
grow from a modest base by 40% and wealth planning income to
increase by 10%.
The structured notes distribution business, Gilliat Financial
Solutions, delivered a full year profit of £0.2m (2010: loss of £0.6m)
as it started to return the investment made by the Group since
its launch in 2009. The profit was a result of significantly higher
revenues as Gilliat was able to generate volumes in excess of £90m.
Business is being done with an increasing number of Independent
Financial Advisors (IFAs) and other intermediaries. This reflects
the growing recognition of the brand within the retail distribution
network.
Annual Report & Accounts 2011
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Operating and other income
Operating expenses
Profit before tax
Customer net margin
£20.3m
£16.9m 2010
£16.0m
£14.9m 2010
£2.0m
£1.0m 2010
4.0%
4.0% 2010
Customer loans
Customer deposits
Total assets
Loan to deposit
£238.2m
£210.8m 2010
£420.0m
£349.5m 2010
£554.9
£417.9m 2010
57%
60% 2010
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Arbuthnot Banking Group PLC
Secure Trust Bank
The pre-tax profits of Secure Trust Bank, before IPO costs and group
recharges, were £9.6m (2010: £8.5m). In isolation the growth of
13% is commendable. However, this rather understates the stronger
underlying picture. The 2010 results were heavily influenced by the
profits generated by the portfolios acquired from LV and Citi in
2009. The income benefit of these portfolios, which had a high
profit margin, peaked in 2010 and reduced by over £4m in 2011.
These ‘run off’ profits have all been replaced by organically generated
and sustainable new business.
Secure Trust Bank had anticipated creating a joint venture in the
second half of the year and geared up its deposit balances to fund
the expected initial portfolio purchase of around £50m. It was
announced on 10 January 2012 that a structure could not be agreed
that met regulatory requirements and which fell within Secure Trust
Bank’s risk appetite and that the joint venture would not proceed
as anticipated. The combination of the cost of carrying the surplus
deposits together with direct expenses incurred in setting up the
joint venture reduced Secure Trust Bank’s 2011 profit before tax
by approximately £1m.
During the year Secure Trust Bank’s lending operations continued
to generate strong, controlled, organic growth. Overall, new business
lending volumes grew 51% to £135.9m (2010: £90.2m) which led
to an increase of 73% in overall balance sheet lending assets to
£154.6m (2010: £89.5m)
Motor finance, a business which Secure Trust Bank entered cautiously
during 2009, grew to a book of £63.4m at 31 December 2011
(2010: £31.3m). This business, which focuses on the near prime
market segment, substantially expanded its network of brokers and
dealers to the point where it now has national coverage and a fully
independent sales force which services over 70% of the Top 20 UK
car dealer groups.
Personal unsecured lending also evidenced strong growth with the
31 December 2011 balance sheet growing to £43.6m (2010: £22.4m).
Secure Trust Bank has continued to broaden its distribution capabilities
in this segment and entered into a number of significant new
introducer relationships during the year.
Retail Point of Sale business saw balances at 31 December 2011
grow to £42.6m (2010: £21.6m)
The portfolios of books acquired in 2009 continued to be collected
in line with expectations, with the balance outstanding declining to
£2.5m at 31 December 2011 (2010: £10.7m).
There has been significant investment in Secure Trust Bank’s operational
infrastructure during 2011 which in particular has enhanced the
competitiveness of the current account offering. Despite tempering
the growth rate of this product, pending installation of the new
platform, net customer numbers increased to 17,178 at the end of
the year (2010: 9,576). Over 1,000 new customers are signing up
each month and Secure Trust Bank continues to see substantial
potential in this area.
As anticipated, OneBill customer numbers continue to decline over
time. However, the attrition rates have been somewhat slower than
expected which serves to highlight the attraction of this product.
Work continues on the development of a next generation OneBill
product and it is expected that customer trials will begin in the second
half of 2012. The growth of other profit streams developed over the
last three years will mean that this product will become progressively
less significant to the profitability of the overall business.
Secure Trust Bank continues to see strong demand for all of its core
products and envisages robust organic growth this year. The IPO has
significantly increased the corporate profile and Secure Trust Bank
has seen an increase in the scale, scope and range of opportunities
being brought to it for consideration. It has a clear growth strategy
and it is working on a number of significant projects which will add
considerable value to the business if completed.
Secure Trust Bank was delighted to receive the Dealer Finance
Provider 2012 award from the Institute of Transport Management
in February in recognition of its increased importance to the motor
industry at a time when other finance providers have been reducing
their investment or exiting the market.
Annual Report & Accounts 2011
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Operating income
Operating expenses
Profit before tax
Net interest margin
£28.5m
£23.9m 2010
£14.8m
£13.2m 2010
£9.1m
£8.5m 2010
14.0%
18.4% 2010
Customer loans – unsecured
Customer deposits
Customer numbers
Cost income ratio
£154.6m
£89.5m 2010
£272.1m
£153.8m 2010
140,000
96,000 2010
0.53
0.47 2010
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Arbuthnot Banking Group PLC
Financial Review
Arbuthnot Banking Group adopts a conservative approach to risk
taking and seeks to maximise long term revenues and returns.
Given its relative size, it is able to remain entrepreneurial and capable
of taking advantage of market opportunities when they arise.
Following the decision to exit from the Investment Banking business,
which has been designated as discontinued, it now provides a range
of financial services to customers and clients in its two chosen niche
markets of Private Banking (Arbuthnot Latham) and Retail Banking
(Secure Trust Bank). The Group’s revenues are derived from a
combination of net interest income from lending, deposit-taking and
money market activities, fees for services provided to customers and
clients and commissions earned on the sale of financial instruments
and products.
Highlights
Summarised Income Statement
2011
£’000
27,243
18,327
Net interest income
Net fee and commission income
Gains less losses from dealing in securities
(112)
(Group)
45,458
Operating income
1,120
Other income
(34,525)
Operating expenses
(6,813)
Impairment losses on financial assets
(124)
Fair value movement derivatives
5,116
Profit on continuing operations before tax
(1,817)
Income tax
Profit on continuing operations after tax
3,299
Loss from discontinued operations after tax (10,249)
(6,950)
(Loss) / profit after tax
(33.3)
Basic earnings per share (pence)
2010
£’000
21,370
16,538
(136)
37,772
1,042
(31,603)
(3,146)
–
4,065
(1,238)
2,827
894
3,721
25.0
As noted in last year’s financial review, the Group continued to experience
two very different types of market conditions across its trading
divisions. This led to two transformational decisions for the Group.
The lack of capacity in the lending markets continued as the larger
banks continued their retrenchment. However, despite the uncertain
economic conditions, the ability of our borrowers to repay their debts
has been better than was expected. Given this market opportunity,
and the fact that Secure Trust Bank had proven itself capable of
exploiting these conditions, it was decided that the next step would
be to accelerate its growth and a separate listing of this Bank would
enable it to execute this strategy.
The market appetite for IPOs had fallen steadily during 2011, but
the fact that we were able to complete a successful flotation in November,
demonstrates that the market also strongly supported the strategy.
The transaction generated a consolidated “gain on sale” of £17m,
which has been recorded directly to reserves in accordance with
the accounting rules.
For the Investment Bank, the corporate markets continued to be
extremely difficult, primary income levels fell dramatically as the
whole industry experienced a lack of appetite for fundraising activities.
Also the levels of secondary commission incomes continued their
downward trend. As reported in the Interim Results, a restructuring
programme was put in place in the third quarter. The results of this
appeared to show no signs of improving the performance of the
business and the forward looking projections showed no improvement
in the medium term. As a result it was decided to exit the business
and a successful sale of Arbuthnot Securities Ltd was agreed with
Westhouse Holdings PLC on 18 November. The performance of the
business and resultant costs to the Group are therefore reported as
discontinued operations.
Overall the Group made a profit before tax from its continuing
operations of £5.1m and when the cost of listing Secure Trust Bank
(£0.5m) is excluded, these businesses increased by nearly 40%,
which is in line with the growth levels that our banking businesses
have been experiencing in recent years.
Operating income increased by 20% offset by expense growth of
approximately 9% resulting in a positive organic operating leverage
of 11%.
The Group is reporting a loss after tax of £7m for 2011. However, as
mentioned earlier this does not include the gain on sale from the listing
of Secure Trust Bank. The better measure of performance in the year
would be the increase in net assets. These are shown in the Statement
of Changes in Equity. This shows that the net assets of the Group
increased from £34.1m to £47.0m, a 38% increase. Given this also
equates to an equivalent increase in the Group Regulatory capital,
the Group is now well positioned to grow in the future.
Balance Sheet Strength
Summarised Balance Sheet
Assets
Loans and advances to customers
Liquid assets
Other assets
Total assets
Liabilities
Customer deposits
Other liabilities
Total liabilities
Equity
Total equity and liabilities
2011
£’000
392,789
350,223
26,304
769,316
2010
£’000
300,252
228,971
35,887
565,110
693,800
28,545
722,345
46,971
769,316
503,257
27,705
530,962
34,148
565,110
The total assets of the Group increased by 36% again led by the
growth in our lending businesses and our continued conservative
approach to maintaining adequate liquidity resources.
The Group’s total assets broke through the half billion pound level
for the first time in 2010 and during 2011 exceeded £750m remaining
on a trajectory to exceed one billion pounds in the near future.
Customer deposits grew by 38% during the year to close at £693.8m.
The Group remains entirely funded by retail deposits. The Group
closed the year with a loan to deposit ratio of 56.6% (2010: 59.7%).
Segmental Analysis
The segmental analysis in Note 38 to the Consolidated Financial
Statements of the Annual Report highlights the disclosures required
under IFRS 8 ‘Operating Segments’. The operating segments are Private
Annual Report & Accounts 2011
11
Total assets increased by 33% to £554.9m (2010: £417.9m) with
customer lending increasing by 13%. The loan to value on the
portfolio remains at a healthy 48%.
The liabilities continued to follow the conservative policy on liquidity
seeing an inflow of £70m of customer deposits representing a 20%
increase from 2010. The loan to deposit ratio closed the year at 57%.
The Private Bank remains well capitalised with a total capital ratio
of 13.3% (2010: 13.1%) and a core tier 1 ratio of 10.2% (2010: 11.1%).
International Private Banking – Arbuthnot AG
Costs associated with the Swiss Bank were £0.1m (2010: £0.1m) as
the third party continued in its regulatory application to invest in
the Swiss bank.
Retail Banking – Secure Trust Bank
Net interest income
Net fee and commission income
Operating income
Other income
Operating expenses
Impairment losses
Profit before tax
2011
£’000
17,227
11,233
28,460
36
(14,834)
(4,601)
9,061
2010
£’000
12,464
11,489
23,953
–
(13,275)
(2,167)
8,511
Profit before tax is £9.1m (2010: £8.5m) however, after adding back
the cost of listing the business, the adjusted profit before tax is £9.6m
which represents a 13% increase during the year.
The profit would have been somewhat higher than reported. However
the business incurred in excess of £1m of expenses principally being
cost of holding surplus liquidity in readiness for concluding the lending
joint venture that was indicated in the interim results for 2011. The
business was unable to reach an agreement that satisfied both regulatory
requirements and our conservative risk appetite, so the project was
terminated. These surplus funds will be deployed by the business
during 2012.
The growth in the year was again mainly led by the lending business
with good growth across all the portfolios, which is in line with the
plan to grow a diversified portfolio of lending books. The growth
generated was also able to offset the declining contribution from
the acquired portfolios. It is also important to note that the level of
fees and commissions halted their downward trend in 2011 and has
returned to an upward trajectory, recording income of £13.2m and
reaching levels not seen since 2009. This is as a result of the current
account revenues now offsetting the decline in revenues from OneBill.
The current account closed the year with 17,178 open accounts (2010:
9,576) and OneBill ended the year with 28,698 (2010: 31,720).
Banking (Arbuthnot Latham), International Private Banking (Arbuthnot
AG) and Retail Banking (Secure Trust Bank). Group costs and
intercompany elimination journals are shown separately to reconcile
back to the Group consolidated result. The analysis presented below,
and in the business review, is prior to any consolidation adjustments
to remove the impact of intergroup operating activities and also
intergroup recharges and is a fair reflection of the way the Directors
manage the Group.
Private Banking – Arbuthnot Latham
Net interest income
Net fee and commission income
Operating income
Other income
Operating expenses
Impairment losses
Profit before tax
2011
£’000
10,594
7,094
17,688
2,631
(16,025)
(2,336)
1,958
2010
£’000
9,380
5,049
14,429
2,491
(14,896)
(979)
1,045
The profit before tax increased to £2m (2010: £1m) as the Private
Bank continued to successfully implement its strategy of providing
a full service banking and advisory product offering.
The lending opportunities presented to the Bank continued to be
of high quality and at attractive yields. The advisory services and
discretionary management increased its fee income by 32% as a
result of an 40% increase in discretionary assets under management.
Profitability continues to be reduced as the interbank market returns
remain low. This has also been affected by our decision to hold more
funds at the Bank of England than necessary while uncertainty
continues in the wider banking market as the financial crisis continues
in the Euro Zone.
Impairment losses increased to £2.2m during the year due almost
entirely to provisions taken against two legacy loans. Despite this
increase the loss rate continues to be below 1% of the customer loan
book and the credit quality of the remaining book remains high and
well secured.
Gilliat Financial Solutions returned its first full year profit (£0.2m)
during 2011 as it has continued to widen its reach within the Financial
advisor and intermediary networks.
Assets
Advances
Liquid assets
Other assets (including Group companies)
Total assets
2011
£’000
238,203
292,151
24,581
554,935
2010
£’000
210,753
182,512
24,588
417,853
Liabilities
Customer deposits
Other liabilities
(including Group companies)
Total liabilities
Equity
Total equity and liabilities
421,737
349,478
110,854
532,591
22,344
554,935
45,452
394,930
22,923
417,853
12
Arbuthnot Banking Group PLC
Financial Review
Assets
Asset finance
Motor vehicles
Cycles
Musical instruments
Personal computers
e-tailer
Other
Personal lending
Other lending
Acquired portfolios
Liquid assets
Other assets (including Group companies)
Total assets
63,376
13,784
5,398
16,972
4,371
2,083
105,984
43,601
2,520
2,480
56,018
97,332
307,935
Liabilities
272,063
Customer deposits
Other liabilities (including Group companies) 11,962
284,025
Total liabilities
Equity
23,910
307,935
Total equity and liabilities
2011
£’000
2010
£’000
31,270
8,984
7,274
5,118
264
102
53,012
22,407
3,074
10,723
45,144
42,647
177,007
153,778
7,212
160,990
16,017
177,007
During the year the asset finance business increased the overall
portfolio size by 97% to end the year at £103.9m, mainly led by the
motor vehicle portfolio which doubled in size. The personal computer
business grew three fold and the business also launched its internet
credit offering in conjunction with Pay4Later.
The personal loan portfolio increased by 95% to £43.6m. The acquired
portfolios continued to be collected out as per expectations and
closed the year with only £2.5m of balances remaining.
The customer deposit balances grew by 77% to £272.1m following
the successful take up of the banks new fixed term bond offerings of
2, 3, 4 and 5 year maturities.
Discontinued operations
(Investment Banking – Arbuthnot Securities)
Net interest income
Net fee and commission income
Gains less losses from dealing in securities
Operating income
Other income
Operating expenses
(Loss) / profit before tax
2011
£’000
(144)
6,510
149
6,515
6
(19,719)
(13,198)
2010
£’000
(232)
12,755
4,456
16,979
89
(16,029)
1,039
The total impact on the Group’s profitability from the discontinued
operations was £13.2m, which comprises three items:
1) Operating losses totalled £7.9m. This decline was attributable
to the significant reduction in fees earned on fundraising activities
and the continued decline in secondary commissions. The business
also incurred a £0.8m expense in restructuring the business in
the third quarter.
2) As a result of agreeing the sale, Arbuthnot Securities has been
recorded in the accounts at the lower of the consideration receivable
and the net asset value. This results in a charge to profit & loss
of £1.6m and effectively brings the predicted loss on sale into
the 2011 results, despite the fact that the completion of the
transaction did not take place until 20 January 2012.
3) As part of the process of discontinuing the business, the Group
has taken impairment provisions of £3.7m, £3.1m of which results
from the unwinding of the Long Term Incentive Plan that had been
established for the employees of Arbuthnot Securities. The remaining
amounts are against illiquid stocks and an outstanding receivable,
both of these items were not transferred to Westhouse as part of
the sale agreement.
Group & Other Costs
Operating Income
Other income
Group costs
Group head office property costs
Subordinated loan stock interest
Total Group & other costs
Loss before tax
2011
£’000
(63)
–
(4,056)
(1,164)
(573)
(5,793)
(5,856)
2010
£’000
(75)
227
(4,039)
(1,020)
(483)
(5,542)
(5,390)
The net Group costs increased by 9% to £5.9m (2010: £5.4m). This was
due to higher property costs, higher interest charges on the subordinated
loan and one-off items included in other income in the prior year.
Capital
The Group’s capital management policy is focused on optimising
shareholder value over the long term. There is a clear focus on
delivering organic growth and ensuring capital resources are
sufficient to support planned levels of growth. The Board regularly
reviews the capital position.
In accordance with the EU’s Capital Requirements Directive (CRD)
and the required parameters set out in the FSA Handbook (BIPRU
2.2), the Individual Capital Adequacy Assessment Process (ICAAP)
is embedded in the risk management framework of the Group and is
subject to ongoing updates and revisions when necessary. However,
at a minimum, the ICAAP is updated annually as part of the business
planning process. The ICAAP is a process that brings together the
management framework (i.e. the policies, procedures, strategies, and
systems that the Group has implemented to identify, manage and
mitigate its risks) and the financial disciplines of business planning
and capital management.
The Group’s regulated entities are also the principal trading
subsidiaries as detailed in Note 37.
Not all material risks can be mitigated by capital, but where capital is
appropriate the Board has adopted a “Pillar I plus” approach to determine
the level of capital the Group needs to hold. This method takes the
Pillar I capital formula calculations (standardised approach for
credit, market and operational risk) as a starting point, and then
considers whether each of the calculations deliver a sufficient capital
sum adequately to cover management’s anticipated risks. Where the
Board considered that the Pillar I calculations did not reflect the risk,
an additional capital add-on in Pillar II is applied.
Annual Report & Accounts 2011
13
The Group’s regulatory capital is divided into two tiers:
• Tier 1 comprises mainly shareholders’ funds and non-controlling
interest, after deducting goodwill and other intangible assets.
• Lower Tier 2 comprises qualifying subordinated loan capital and
revaluation reserves. Lower Tier 2 capital cannot exceed 50% of
tier 1 capital.
The ICAAP includes a summary of the capital required to mitigate
the identified risks in its regulated entities and the amount of capital
that the Group has available. The latest version of the Group ICAAP
is currently in the process of being approved by the Board. All
regulated entities have complied with all of the externally imposed
capital requirements to which they are subject.
Core Tier 1 capital
Tier 1 capital after deductions
Tier 2
Total capital
Core Tier 1 capital ratio
(Net Core Tier 1 capital/ Basel 2 RWAs*)
Total Capital ratio (Capital/ Basel 2 RWAs*)
* - Risk Weighted Assets (RWAs)
2011
£’000
46,831
43,270
12,396
55,666
16.7%
21.5%
Risks and Uncertainties
The Group regards the monitoring and controlling of risks and
uncertainties as a fundamental part of the management process.
Consequently, senior management are involved in the development
of risk management policies and in monitoring their application.
A detailed description of risk management and their associated
policies is set out in note 4 to the financial statements.
The principal risks inherent in the Group’s business are credit,
market, liquidity, operational and regulatory.
Credit risk is the risk that a counterparty will be unable to pay
amounts in full when due. This risk exists mainly in Arbuthnot
Latham & Co., Limited and Secure Trust Bank PLC, who currently
have loan books of £238.2m and £154.6m respectively.
The lending portfolio in Arbuthnot Latham is extended to our
Private Banking clients, the majority of which is secured against
cash, property or other assets.
The portfolios within Secure Trust are extended to retail customers
and are largely unsecured.
Credit risk is managed through the Credit Committees of each of
the two banks with significant exposures also being approved by
the Group Risk Committee.
Market risk arises in relation to movement in the interest rates,
currencies and equity markets.
The Group’s treasury function operates mainly to provide a service
to clients and does not take significant unmatched positions in any
market for its own account. Hence, the Group’s exposure to adverse
movements in interest rates and currencies is limited to interest
earnings on its free cash and interest rate re-pricing mismatches.
Liquidity risk is the risk that the Group cannot meet its liabilities as
they fall due. The Group takes a conservative approach to managing
its liquidity profile. It has placed no reliance on the wholesale lending
markets and is entirely funded by retail customer deposits. The loan to
deposit ratios are maintained at prudent levels. Following introduction
of the new liquidity regime, which came into force on 1 October
2010, the Group now maintains liquidity asset buffers which
comprise high quality, unencumbered assets such as Government
Securities, which can be called upon to meet the Group’s liabilities.
Operational risk is the risk that the Group may be exposed to financial
losses from conducting its business. The largest exposure to this risk
exists in Arbuthnot Latham as mis-selling risk via its wealth management
advisory service and its structured product distribution business.
The Group maintains clear compliance guidelines and provides ongoing
training to all staff. Periodic spot checks and internal audits are performed
to ensure these guidelines are being maintained. The Group also has
insurance policies in place to cover any claims that may arise.
The Group is also exposed to operational risks from its Information
Technology and Operations platforms. There are additional internal
controls in these processes that are designed to protect the Group
from these risks. The Group’s overall approach to managing internal
control and financial reporting is described in the Corporate
Governance section of the Annual Report.
Regulatory risk is the risk that the Group will have insufficient capital
resources to support the business or does not comply with regulatory
requirements. The Group adopts a conservative approach to managing
the capital of the Group. The principal regulated entities maintain
capital ratios in excess of the minimum level set by the regulator.
Capital requirements are forecast as part of the annual budgeting
process and these are regularly monitored. Annually the Group
Board assesses the robustness of the capital requirements as part of
the Individual Capital Adequacy Assessment Process (ICAAP) where
stringent stress tests are performed to ensure that capital resources
are adequate over a future three year horizon.
Dividend
The Board proposes a final dividend of 13 pence per share to be paid
on 18 May 2012, giving a total dividend for the year of 24 pence
(2010: 23 pence) per share.
Going Concern
After making appropriate enquiries which assessed strategy,
profitability, funding, risk management (see Note 4) and capital
resources (see Note 5), the directors are satisfied that the Company
and the Group have adequate resources to continue in operation for
the foreseeable future. The financial statements are, therefore,
prepared on the going concern basis.
James Cobb
Group Finance Director
14 March 2012
14
Arbuthnot Banking Group PLC
Board of Directors
Henry Angest
Chairman and Chief Executive of the Group
and Chairman of Secure Trust Bank PLC,
Arbuthnot Latham & Co., Limited and
Arbuthnot Securities Limited. He is a past
Master of the Worshipful Company of
International Bankers. Previously he was
an International Executive with The Dow
Chemical Company and Dow Banking
Corporation in Switzerland, USA, Brazil,
Hong Kong and the UK. He has a law
degree from University of Basel and is an
Hon. Fellow of UHI (University of the
Highlands and Islands).
James Cobb ACA
James Cobb joined the Board on 1 Novem-
ber 2008 as Group Finance Director. He
was previously Deputy Chief Financial
Officer and Controller of Citigroup’s Global
Consumer Group in Europe, Middle East
and Africa and qualified as a Chartered
Accountant with Price Waterhouse.
James Fleming
James Fleming joined the Board on 1 March
2012 as Chief Executive Officer of Arbuthnot
Latham & Co., Limited. He joined from
Coutts & Co where he held the position of
Head of International Private Banking and
more recently was Managing Director of the
UK Entrepreneurs, Landowners and Inpatriates
businesses. Prior to Coutts, James was
Managing Director of SG Hambros UK.
He has over 25 years experience of private
banking.
Andrew Salmon ACA
Appointed a director on 8 March 2004.
He joined the Company in 1997 and is
Chief Operating Officer and Head of
Business Development. He was previously
a director of Hambros Bank Limited and
qualified as a Chartered Accountant with
KPMG.
Robert Wickham
Deputy Chairman and senior independent
non-executive director. He was formerly on
the Management Board of Bank of Scotland.
He is also an independent non-executive
director of Arbuthnot Latham & Co., Limited.
Jeremy Robin Kaye FCIS
Secretary.
Annual Report & Accounts 2011
15
Ruth Lea
Independent non-executive director since
1 November 2005 and Economic Adviser to
the Group. She was previously the Director
of Global Vision, Director of the Centre for
Policy Studies, Head of the Policy Unit at
the Institute of Directors, Economics Editor
at ITN, Chief UK Economist at Lehman
Brothers and Chief Economist at Mitsubishi
Bank. She also spent 16 years in the Civil
Service in the Treasury, the Department of
Trade and Industry, the Central Statistical
Office and the Civil Service College.
Paul Lynam
Paul Lynam joined the Board on
13 September 2010 as Chief Executive
of Secure Trust Bank PLC. Prior to his
appointment, Paul spent 22 years in a
variety of roles with RBS and NatWest.
These included Managing Director, Banking;
Chief Executive, UK Business Banking and
Managing Director, Lombard North Central
PLC. Paul holds degree level Banking and
Corporate Treasury qualifications.
Sir Christopher Meyer
Independent non-executive director since
1 October 2007. He retired as Chairman
of the Press Complaints Commission on
30 March 2009. He had a distinguished
diplomatic career, in 1997 he was appointed
as Ambassador to Germany and from 1997
– 2003 he was Ambassador to the USA.
Between 1994 and 1996, he was Press Secretary
to Prime Minister John Major. He is also on
the International Advisory Board of British
American Business Inc. and Chairman of
the Advisory Board of Pagefield.
16
Arbuthnot Banking Group PLC
Group Directors’ Report
The Directors submit their annual report and the audited consolidated
financial statements for the year ended 31 December 2011.
Principal Activities and Review
The principal activities of the Group are banking and financial
services. A business review in accordance with Section 417 of the
Companies Act 2006 forming part of this report is set out on
pages 6 to 13.
Results and Dividends
The results for the year are shown on page 24. The loss after tax
for the year of £7 million (2010: profit after tax of £3.7 million) is
included in reserves.
The Directors recommend the payment of a final dividend of 13 pence
on the ordinary shares which, together with the interim dividend of
11 pence paid on 2 November 2011, represents a total dividend for
the year of 24 pence (2010: 23 pence). A scrip dividend alternative
was offered on the interim dividend but is not being offered in respect
of the final dividend for 2011. The final dividend, if approved by members
at the Annual General Meeting, will be paid on 18 May 2012 to
shareholders on the register at close of business on 20 April 2012.
Information on the listing on the Alternative Investment Market of
shares in Secure Trust Bank PLC with the reduction in the Company’s
shareholding to 75.5% and the sale of Arbuthnot Securities Limited
are set out in the business review.
At the same time as posting the Annual Report there has been separately
issued a letter from the Chairman accompanying the Notice of the
Annual General Meeting. This notice includes a special resolution,
which will be moved in relation to the proposed cancellation of the
share premium account.
Share Capital
On 10 January 2012 the Company repurchased 5,000 ordinary
shares at 328p per share and on 12 January 2012 a further 5,000
ordinary shares at 355p, such shares being held as Treasury Shares.
At the Annual General Meeting shareholders will be asked to approve
two Special Resolutions; the authority granted by each of them will
expire at the conclusion of the Annual General Meeting in 2013.
The first continues the authority of the Directors to issue shares in
nominal value equal to 5% of the existing share capital for cash,
otherwise than to existing shareholders pro rata to their holdings.
The Directors have no present intention of issuing any shares and
will not issue shares which would effectively change the control of
the Company without the prior approval of shareholders in General
Meeting.
The second renews the authority of the Directors to make market
purchases of shares not exceeding 10% of the existing issued share
capital. The Directors will keep the position under review in order to
maximise the Company’s resources in the best interests of shareholders.
Substantial Shareholders
The Company was aware at 13 March 2012 of the following substantial
holdings in the ordinary shares of the Company, other than those
held by one director shown below:
Holder
Prudential plc
Mr. R Paston
Directors
H Angest
R J J Wickham
J R Cobb
J W Fleming
Ms. R J Lea
P A Lynam
Sir Christopher Meyer
A A Salmon
Ordinary Shares
712,929
529,130
%
4.7
3.5
Chairman & CEO
Deputy Chairman
Finance Director
Chief Operating Officer
Apart from Mr. N.W. Kirton who resigned from the Board on 29
December 2011 and Dr. A.D. Turrell who resigned from the Board
on 31 December 2011, all directors other than Mr. J.W. Fleming
who was appointed a director on 1 March 2012 served throughout
the year. Mr. D.M. Proctor, who served as a director throughout
2011, resigned from the Board on 1 March 2012.
Mr. Fleming retires under Article 75 of the Articles of Association
and, being eligible, offers himself for election. Mr. Fleming has a
service agreement with a subsidiary company terminable on twelve
months’ notice.
Ms. R. J. Lea and Mr. R.J.J. Wickham retire under Article 78 of the
Articles of Association and, being eligible, offer themselves for re-
election. Each of these directors is non-executive and they do not
have service agreements.
According to the information kept under Section 3 of the Disclosure
and Transparency Rules 2006, the interests of directors and their
families in the ordinary 1p shares of the Company at the dates
shown were, and the percentage of the current issued share capital
held is, as follows:
1 January
31 December
14 March
7,917,862 8,186,901
2011
Beneficial Interests
H Angest
P A Lynam 10,000
A A Salmon 50,000
R J J Wickham 3,600
2011
2011
10,000
51,699
3,600
8,186,901
10,000
51,699
3,600
%
53.6
0.1
0.3
–
On 21 May 2008 Mr. Salmon was granted an option to subscribe
between May 2011 and May 2015 for 100,000 ordinary 1p shares
in the Company at 337.5p.
On 5 November 2008 Mr. Cobb was granted an option to subscribe
between November 2011 and November 2015 for 50,000 ordinary
1p shares in the Company at 320p.
Annual Report & Accounts 2011
17
Dr. Turrell, a former director of the Company, has an option to
subscribe for 50,000 ordinary 1p shares in the Company at 380p,
exercisable until 31 December 2012.
Charitable Donations
The Company made charitable donations of £71,000 during the
year (2010: £55,000).
On 2 November 2011 Mr. Lynam and Mr. Salmon were each
granted options to subscribe for 141,666 ordinary 40p shares
in Secure Trust Bank PLC at 720p between 2 November 2014 and
1 November 2021, and a further 141,667 shares at 720p between
2 November 2016 and 1 November 2021.
Political Donations
The Company made a political donation of £15,000 to the
Conservative Party and £20,000 to the No2AV campaign during
the year (2010: political donations £25,000).
Apart from the interests disclosed above, no director was interested
at any time in the year in the share capital of Group companies.
Status
The Company is not a close company as defined in the Income and
Corporation Taxes Act 1988.
No director, either during or at the end of the financial year, was
materially interested in any contract with the Company or any of its
subsidiaries, which was significant in relation to the Group’s business.
At 31 December 2011 one director had a loan from Arbuthnot Latham
& Co., Limited amounting to £2,337,000, on normal commercial
terms as disclosed in note 36 to the financial statements. At 31 December
2011 two directors had deposits with Secure Trust Bank PLC amounting
to £212,000 and four directors had deposits with Arbuthnot Latham
& Co., Limited amounting to £1,061,000, all on normal commercial
terms as disclosed in note 36 to the financial statements.
Auditors
A resolution to reappoint KPMG Audit Plc as auditors of the Company
will be proposed at the forthcoming Annual General Meeting at a
fee to be agreed in due course by the Directors.
The Directors have disclosed to the auditors to the best of their
knowledge and belief all relevant information necessary to assist
the auditors in the preparation of their report.
By order of the Board
The Company maintains insurance to provide liability cover for
directors and officers of the Company.
J R Kaye
Secretary
Board Committees
The report of the Remuneration Committee on pages 20 to 21
will be the subject of an Ordinary Resolution at the Annual
General Meeting.
14 March 2012
Information on the Audit, Nomination, Risk and Donations
Committees is included in the Corporate Governance section of
the Annual Report on page 18 to 19.
Employees
The Company gives due consideration to the employment of disabled
persons and is an equal opportunities employer. It also regularly
provides employees with information on matters of concern to them,
consults on decisions likely to affect their interests and encourages
their involvement in the performance of the Company through share
participation and in other ways.
Supplier Payment Policy
The Company’s policy is to make payment in line with terms agreed
with individual suppliers, payment being effected on average within
30 days of invoice.
Forbearance
The Group has always looked to support customers who are in
financial difficulty. We seek to engage in early communication with
borrowers experiencing difficulty in meeting their repayments, to
obtain their commitment to maintaining or re-establishing their
contractual payment plan. We consider forbearance options on a
case by case basis in line with best practice and they are subject to
regular monitoring and review.
18
Arbuthnot Banking Group PLC
Corporate Governance
AIM companies are not required to comply with The Combined
Code. Nevertheless, the Board endorses the principles of openness,
integrity and accountability which underlie good corporate governance
and intends to take into account the provisions of The Combined
Code in so far as they are appropriate to the Group’s size and
circumstances. Moreover, the Group contains subsidiaries authorised
to undertake regulated business under the Financial Services and
Markets Act 2000 and regulated by the Financial Services Authority,
including two which are authorised deposit taking businesses.
Accordingly, the Group operates to the high standards of corporate
accountability and regulatory compliance appropriate for such
businesses.
Directors
The Group is led and controlled by an effective Board which comprises
five executive directors and three non-executive directors.
The senior independent non-executive director is Robert Wickham,
who in addition is Deputy Chairman. Although Mr. Wickham has
served on the Board for eighteen years from the date of his first
election, he displays independence in both character and judgement
and there are no other relationships or circumstances which could
affect his judgement. Accordingly, the Board considers him to be
independent.
The Board
The Board meets regularly throughout the year. Substantive agenda
items have briefing papers, which are circulated in a timely manner
before each meeting. The Board is satisfied that it is supplied with
all the information that it requires and requests, in a form and of a
quality to enable it to discharge its duties. In addition to ongoing
matters concerning the strategy and management of the Company
and of the Group, the Board has determined certain items which are
reserved for decision by itself. These matters include the acquisition
and disposal of other than minor businesses, the issue of capital by
any Group company and any transaction by a subsidiary company
that cannot be made within its own resources, or that is not in the
normal course of its business.
The Company Secretary is responsible for ensuring that Board processes
and procedures are appropriately followed and support effective
decision making. All directors have access to the Company Secretary’s
advice and services and there is an agreed procedure for directors to
obtain independent professional advice in the course of their duties,
if necessary, at the Company’s expense.
The Board has delegated certain of its responsibilities to Committees.
All Committees have written terms of reference.
Audit Committee
Membership of the Audit Committee is limited to non-executive
directors and comprises Ruth Lea (as Chairman), Sir Christopher
Meyer and Robert Wickham.
The Audit Committee provides a forum for discussing with the Group’s
external auditors their report on the annual accounts, reviewing the
scope, results and effectiveness of the internal audit work programme
and considering any other matters which might have a financial impact
on the Company, including the Group’s arrangements by which staff
may, in confidence, raise concerns about possible improprieties in
matters of financial reporting or other matters. The Audit Committee’s
responsibilities include reviewing the Group’s system of internal
control and the process for evaluating and monitoring risk. The
Committee also reviews the appointment, terms of engagement and
objectivity of the external auditors, including the level of non-audit
services provided, and ensures that there is an appropriate audit
relationship.
Remuneration Committee
Information on the Remuneration Committee and details of the
Directors’ remuneration are set out in the separate Remuneration
Report.
Nomination Committee
The Nomination Committee is chaired by Henry Angest and its
other members are Robert Wickham and Ruth Lea. Before a Board
appointment is made the skills, knowledge and experience required
for a particular appointment are evaluated.
Risk Committee
The Risk Committee is chaired by Henry Angest and its other members
are James Cobb, James Fleming, John Reed (non-executive of
Arbuthnot Latham), Andrew Salmon and Robert Wickham. The role
of the Risk Committee is to approve specific risk policies for Group
subsidiaries and significant individual credit or other exposures
Donations Committee
The Donations Committee is chaired by Henry Angest and its other
members are Robert Wickham and Ruth Lea. The Committee considers
any political donation or expenditure as defined within the Political
Parties, Elections and Referendums Act 2000.
Shareholder Communications
The Company maintains a regular dialogue with its shareholders
and makes full use of the Annual General Meeting and any other
General Meetings to communicate with investors.
The Company aims to present a balanced and understandable
assessment in all its reports to shareholders, its regulators and the
wider public. Key announcements and other information can be
found at: www.arbuthnotgroup.com.
Annual Report & Accounts 2011
19
• select suitable accounting policies and then apply them
consistently;
• make judgments and estimates that are reasonable and prudent;
• state whether they have been prepared in accordance with
IFRSs as adopted by the EU; and
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and the
Parent Company will continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Parent Company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Parent Company and enable them to ensure
that its financial statements comply with the Companies Act 2006.
They have general responsibility for taking such steps as are reasonably
open to them to safeguard the assets of the Group and to prevent
and detect fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Company’s
website. Legislation in the UK governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
Statement of Disclosure of Information to Auditors
The directors confirm that:
•
so far as each director is aware, there is no relevant audit
information of which the Company’s auditors are unaware; and
• the Directors have taken all the steps they ought to have taken
as directors to make themselves aware of any relevant audit
information and to establish that the Company’s auditors are
aware of that information.
Internal Control and Financial Reporting
The Board of directors has overall responsibility for the Group’s
system of internal control and for reviewing its effectiveness. Such a
system is designed to manage rather than eliminate risk of failure to
achieve business objectives and can only provide reasonable but not
absolute assurance against the risk of material misstatement or loss.
The Directors and senior management of the Group have formally
adopted a Group Risk and Controls Policy which sets out the Board’s
attitude to risk and internal control. Key risks identified by the
Directors are formally reviewed and assessed at least once a year
by the Board, in addition to which key business risks are identified,
evaluated and managed by operating management on an ongoing
basis by means of procedures such as physical controls, credit and
other authorisation limits and segregation of duties. The Board also
receives regular reports on any risk matters that need to be brought
to its attention. Significant risks identified in connection with the
development of new activities are subject to consideration by the
Board. There are well-established budgeting procedures in place
and reports are presented regularly to the Board detailing the results
of each principal business unit, variances against budget and prior
year, and other performance data.
The effectiveness of the internal control system is reviewed regularly
by the Board and the Audit Committee, which also receives reports
of reviews undertaken by the internal audit function which was
outsourced to Ernst & Young. The Audit Committee also receives
reports from the external auditors, KPMG Audit Plc, which include
details of internal control matters that they have identified. Certain
aspects of the system of internal control are also subject to regulatory
supervision, the results of which are monitored closely by the Board.
Going Concern
After making appropriate enquiries which assessed strategy,
profitability, funding and capital resources, the Directors are
satisfied that the Company and the Group have adequate resources
to continue in operation for the foreseeable future. The financial
statements are, therefore, prepared on the going concern basis.
Statement of Directors’ Responsibilities
The Directors are responsible for preparing the Annual Report and
the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and Parent
Company financial statements for each financial year. As required
by the AIM Rules of the London Stock Exchange they are required
to prepare the Group financial statements in accordance with IFRSs
as adopted by the EU and applicable law and have elected to prepare
the Parent Company financial statements on the same basis.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair view
of the state of affairs of the Group and Parent Company and of their
profit or loss for that period. In preparing each of the Group and
Parent Company financial statements, the Directors are required to:
20
Arbuthnot Banking Group PLC
Remuneration Report
Remuneration Committee
Membership of the Remuneration Committee is limited to non-
executive directors together with Henry Angest as Chairman.
The present members of the Committee are Henry Angest,
Robert Wickham and Ruth Lea.
Share Option and Long Term Incentive Schemes
This part of the remuneration report is audited information.
In May 2005, the Company extended its Unapproved Executive
Share Option Scheme for a further period of 10 years.
The Committee has responsibility for producing recommendations
on the overall remuneration policy for directors and for setting the
remuneration of individual directors, both for review by the Board.
Members of the Committee do not vote on their own remuneration.
Remuneration Policy
The Remuneration Committee determines the remuneration of individual
directors having regard to the size and nature of the business; the
importance of attracting, retaining and motivating management of
the appropriate calibre without paying more than is necessary for
this purpose; remuneration data for comparable positions; the need
to align the interests of executives with those of shareholders; and
an appropriate balance between current remuneration and longer
term performance–related rewards. The remuneration package can
comprise a combination of basic annual salary and benefits (including
pension), a discretionary annual bonus award related to the Committee’s
assessment of the contribution made by the executive during the
year and longer term incentives, including executive share options.
Pension benefits take the form of annual contributions paid by the
Company to individual money purchase schemes. The Remuneration
Committee reviews salary levels each year based on the performance
of the Group during the preceding financial period. This review
does not necessarily lead to increases in salary levels. During 2011
the Group implemented all the provisions required under the FSA
Remuneration Code. Accordingly the Group and its subsidiaries
are all considered to be Tier 3 institutions.
Directors’ Service Contracts
Henry Angest, James Fleming, Paul Lynam and Andrew Salmon
each have service contracts terminable at any time on 12 months’
notice in writing by either party. James Cobb has a service contract
terminable at any time on 6 months’ notice in writing by either party.
The Company has an ESOP (“the Arbuthnot ESOP Trust”) under
which trustees may purchase shares in the Company to satisfy the
exercise of share options by employees including executive directors.
At the date of this remuneration report, the only outstanding
options to directors under the Unapproved Executive Share Option
Scheme are those in relation to 100,000 shares for Andrew Salmon
and 50,000 shares for James Cobb. 150,500 shares are held in the
Arbuthnot ESOP Trust.
Under the Unapproved Executive Share Option Scheme of the Company’s
subsidiary, Secure Trust Bank PLC, established in November 2011,
P Lynam and A Salmon were each granted options over 283,333
shares in that company.
Directors’ Emoluments
This part of the remuneration report is audited information.
2011
£’000
Fees (including benefits in kind)
180
Salary payments (including benefits in kind) 2,808
100
Loss of office
160
Pension contributions
3,248
2010
£’000
185
2,395
552
153
3,285
Annual Report & Accounts 2011
21
H Angest
JR Cobb
GA Jennison (to 10/05/10)
NW Kirton (to 29/12/11)
PA Lynam (from 13/09/10)
DM Proctor
AA Salmon
AD Turrell (to 31/12/11)
Ms RJ Lea
Sir Christopher Meyer
Sir Michael Peat (to 11/03/10)
RJJW Wickham
Salary
£000
360
226
–
225
233
221
315
203
–
–
–
–
1,783
Bonus
£000
–
100
–
70
400
–
300
–
–
–
–
–
870
Benefits
£000
55
16
–
28
17
17
22
–
–
–
–
–
155
Pension
£000
–
35
–
35
35
20
35
–
–
–
–
–
160
Fees
£000
–
–
–
–
–
–
–
–
85
45
–
50
180
Loss of
office
£000
–
–
–
–
–
–
–
100
–
–
–
–
100
Total
2011
£000
415
377
–
358
685
258
672
303
85
45
–
50
3,248
Total
2010
£000
444
402
642
418
82
302
607
203
79
45
11
50
3,285
Details of any shares or options held by directors are presented on pages 16 and 17.
The emoluments of the Chairman were £415,000 (2010: £444,000 ). The emoluments of the highest paid director were £685,000
(2010: £642,000 ) including pension contributions of £35,000 (2010: £nil).
Mr. R J J Wickham is a director of Calando Finance Limited which received an annual fee of £50,000 (2010: £50,000) in respect of his
services to the Group.
These amounts are included in the above figures.
Retirement benefits are accruing under money purchase schemes for five directors who served during 2011 (2010: six directors).
Henry Angest
Chairman of the Remuneration Committee
14 March 2012
22
Arbuthnot Banking Group PLC
Independent Auditor’s Report
to the members of Arbuthnot Banking Group PLC
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is
provided on the APB’s web-site at www.frc.org.uk/apb/scope/
private.cfm.
Opinion on financial statements
In our opinion:
• the financial statements give a true and fair view of the state of
the Group’s and of the Parent Company’s affairs as at 31 December
2011 and of the Group’s loss for the year then ended;
• the Group financial statements have been properly prepared in
accordance with IFRSs as adopted by the EU;
• the Parent Company financial statements have been properly
prepared in accordance with IFRSs as adopted by the EU and as
applied in accordance with the provisions of the Companies Act
2006; and
• the financial statements have been prepared in accordance with
the requirements of the Companies Act 2006.
We have audited the financial statements of Arbuthnot Banking
Group PLC for the year ended 31 December 2011 set out on pages
24 to 69. The financial reporting framework that has been applied
in their preparation is applicable law and International Financial
Reporting Standards (IFRSs) as adopted by the EU and, as regards
the Parent Company financial statements, as applied in accordance
with the provisions of the Companies Act 2006.
In addition to our audit of the financial statements, the directors
have engaged us to audit the information in the Directors’
Remuneration Report that is described as having been audited,
which the directors have decided to prepare (in addition to that
required to be prepared) as if the Company were required to comply
with the requirements of Schedule 8 to the Companies Act 2006
The Large and Medium-sized Companies and Groups (Accounts
and Reports) Regulations 2008 (SI 2008 No. 410).
This report is made solely to the Company’s members, as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006
and, in respect of the separate opinion in relation to the Directors’
Remuneration Report and reporting on corporate governance, on
terms that have been agreed. Our audit work has been undertaken
so that we might state to the Company’s members those matters we
are required to state to them in an auditor’s report and, in respect
of the separate opinion in relation to the Directors’ Remuneration
Report, those matters that we have agreed to state to them in our
report, and for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility to anyone other than
the Company and the Company’s members, as a body, for our audit
work, for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditors
As explained more fully in the Directors’ Responsibilities Statement
set out on page 19, the directors are responsible for the preparation
of the financial statements and for being satisfied that they give a
true and fair view. Our responsibility is to audit, and express an
opinion on, the financial statements in accordance with applicable
law and International Standards on Auditing (UK and Ireland).
Those standards require us to comply with the Auditing Practices
Board’s (APB’s) Ethical Standards for Auditors.
Annual Report & Accounts 2011
23
In our opinion:
• the part of the Directors’ Remuneration Report which we were
engaged to audit has been properly prepared in accordance with
Schedule 8 to the Companies Act 2006 The Large and Medium-
sized Companies and Groups (Accounts and Reports) Regulations
2008, as if those requirements were to apply to the Company;
and
• the information given in the Directors’ Report for the financial
year for which the financial statements are prepared is consistent
with the financial statements.
Matters on which we are required to report by exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 and under the terms of our
engagement we are required to report to you if, in our opinion:
• adequate accounting records have not been kept by the Parent
Company, or returns adequate for our audit have not been
received from branches not visited by us; or
• the parent company financial statements and the part of the
Directors’ Remuneration Report which we were engaged to
audit are not in agreement with the accounting records and
returns; or
• certain disclosures of directors’ remuneration specified by law
are not made; or
• we have not received all the information and explanations we
require for our audit.
Ian A Dewar (Senior Statutory Auditor)
for and on behalf of KPMG Audit Plc, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
14 March 2012
24
Arbuthnot Banking Group PLC
Consolidated Statement of Comprehensive Income
Note
6
7
8
10
12
9
Interest and similar income
Interest expense and similar charges
Net interest income
Fee and commission income
Fee and commission expense
Net fee and commission income
Gains less losses from dealing in securities
Operating income
Net impairment loss on financial assets
Fair value movement on derivatives
Other income
Operating expenses
Profit before income tax from continuing operations
Income tax expense
Profit after income tax from continuing operations
Loss from discontinued operations after tax
(Loss)/profit for the year
Foreign currency translation reserve
Revaluation reserve
– Adjustment
– Amount transferred to profit and loss
Cash flow hedging reserve
– Effective portion of changes in fair value
– Amount transferred to profit and loss
Available-for-sale reserve
Other comprehensive income for the period, net of income tax
Total comprehensive income for the period
(Loss)/profit attributable to:
Equity holders of the Company
Non-controlling interests
Total comprehensive income attributable to:
Equity holders of the Company
Non-controlling interests
Year ended
31 December
2011
£000
Year ended
31 December
2010
£000
39,233
(11,990)
27,243
20,087
(1,760)
18,327
(112)
45,458
(6,813)
(124)
1,120
(34,525)
5,116
(1,817)
3,299
(10,249)
(6,950)
(12)
–
(2)
(333)
4
(142)
(485)
(7,435)
(5,014)
(1,936)
(6,950)
(5,499)
(1,936)
(7,435)
29,325
(7,955)
21,370
16,902
(364)
16,538
(136)
37,772
(3,146)
–
1,042
(31,603)
4,065
(1,238)
2,827
894
3,721
(300)
(112)
–
–
–
142
(270)
3,451
3,747
(26)
3,721
3,477
(26)
3,451
Earnings per share for profit attributable to the equity holders of the Company during the year
(expressed in pence per share):
– basic and fully diluted
13
(33.3)
25.0
The notes on pages 32 to 69 are an integral part of these consolidated financial statements
Annual Report & Accounts 2011
25
Consolidated Statement of Financial Position
ASSETS
Cash
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Trading securities – long positions
Debt securities held-to-maturity
Assets classified as held for sale
Current tax asset
Other assets
Financial investments
Intangible assets
Property, plant and equipment
Deferred tax asset
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Share premium account
Retained earnings
Other reserves
Non-controlling interests
Total equity
LIABILITIES
Deposits from banks
Trading securities – short positions
Derivative financial instruments
Deposits from customers
Liabilities relating to assets classified as held for sale
Current tax liability
Other liabilities
Deferred tax liability
Debt securities in issue
Total liabilities
Total equity and liabilities
Note
14
25
15
17
16
19
9
23
20
21
22
29
31
31
32
32
24
16
25
26
9
27
29
28
At 31 December
2011
£000
2010
£000
243,183
951
66,961
392,789
–
40,079
3,674
457
8,645
3,076
3,561
5,214
726
769,316
153
21,085
21,571
(1,836)
5,998
46,971
8
–
–
693,800
1,291
–
14,893
97
12,256
722,345
769,316
73,772
–
12,080
300,252
3,232
143,119
–
–
17,948
4,957
2,915
5,903
932
565,110
150
21,085
12,142
(1,347)
2,118
34,148
3,706
775
184
503,257
–
751
9,533
126
12,630
530,962
565,110
The financial statements on pages 24 to 69 were approved and authorised for issue by the Board of directors on 14 March 2012 and were signed on
behalf by:
H Angest
Director
JR Cobb
Director
Registered Number: 1954085
The notes on pages 32 to 69 are an integral part of these consolidated financial statements
26
Arbuthnot Banking Group PLC
Company Statement of Financial Position
ASSETS
Current assets
Due from subsidiary undertakings
Financial investments
Other debtors
Non-current assets
Shares in subsidiary undertakings
Intangible assets
Property, plant and equipment
Due from subsidiary undertakings
Total assets
EQUITY AND LIABILITIES
Equity
Share capital
Share premium account
Other reserves
Retained earnings
Total equity
LIABILITIES
Current liabilities
Deposits from banks
Due to subsidiary undertakings
Accruals
Non-current liabilities
Debt securities in issue
Total liabilities
Total equity and liabilities
Note
20
37
21
22
31
31
32
32
28
At 31 December
2011
£000
2010
£000
15,848
218
1,175
25,233
28
127
9,000
51,629
153
21,085
(1,077)
8,517
28,678
–
6,020
4,675
12,256
22,951
51,629
7,795
330
2,386
28,633
36
88
7,750
47,018
150
21,085
(1,077)
415
20,573
2,869
10,097
849
12,630
26,445
47,018
The Company has elected to take the exemption under section 408 of the Companies Act 2006 not to present the Parent Company profit and loss
account. The profit for the Parent Company for the year is presented in the Statement of Changes in Equity.
The financial statements on pages 24 to 69 were approved and authorised for issue by the Board of directors on 14 March 2012 and were signed on
behalf by:
H Angest
Director
JR Cobb
Director
The notes on pages 32 to 69 are an integral part of these consolidated financial statements
Annual Report & Accounts 2011
27
Consolidated Statement of Changes in Equity
Balance at 1 January 2011
Total comprehensive income
for the period
Loss for 2011
Other comprehensive income,
net of income tax
Foreign currency translation
reserve
Revaluation reserve
– Adjustment
– Amount transferred to
profit and loss
Cash flow hedging reserve
– Effective portion of changes
in fair value
– Amount transferred to profit
and loss
Available-for-sale reserve
Total other comprehensive income
Total comprehensive income
for the period
Transactions with owners,
recorded directly in equity
Contributions by and
distributions to owners
Charge for share based payments
Sale of Secure Trust Bank shares
Final dividend relating to 2010
Interim dividend relating to 2011
New share capital subscribed
Transfer to retained earnings in lieu
of cash dividends
Total contributions by and
distributions to owners
Attributable to equity holders of the Group
Share
Share
premium
capital
account
£000
£000
150 21,085
Foreign
currency
translation Revaluation
reserve
£000
146
reserve
£000
(558)
Capital
redemption
reserve
£000
20
Available-
for-sale
reserve
£000
142
Cash flow
hedging
reserve
£000
–
Treasury
shares
£000
Retained
earnings
£000
(1,097) 12,142
Non-
controlling
interests
£000
Total
£000
2,118 34,148
–
–
–
–
–
–
–
–
(5,014)
(1,936)
(6,950)
–
–
–
–
–
–
–
–
–
–
–
–
3
–
–
–
–
–
–
–
–
–
–
–
–
902
–
(902)
3
–
(12)
–
–
–
–
–
–
(4)
(2)
–
–
–
(12)
(6)
(12)
(6)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(333)
–
(142)
4
–
(142)
(329)
–
–
–
–
–
–
–
–
4
–
–
–
–
4
–
–
–
–
–
–
–
(12)
–
(2)
(333)
4
(142)
(485)
(142)
(329)
–
(5,010)
(1,936)
(7,435)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– 16,899
(1,754)
–
(1,608)
–
–
–
70
70
5,746 22,645
(1,754)
(1,608)
905
–
–
–
–
902
–
–
– 14,439
5,816 20,258
(329)
(1,097) 21,571
5,998 46,971
Balance at 31 December 2011
153 21,085
(570)
140
20
The notes on pages 32 to 69 are an integral part of these consolidated financial statements
28
Arbuthnot Banking Group PLC
Consolidated Statement of Changes in Equity continued
Balance at 1 January 2010
Total comprehensive income for the period
Profit/(loss) for 2010
Other comprehensive income, net of
income tax
Foreign currency translation reserve
Revaluation reserve
– Adjustment
Available-for-sale reserve
Total other comprehensive income
Total comprehensive income for the period
Transactions with owners,
recorded directly in equity
Contributions by and
distributions to owners
Purchase of own shares
Final dividend relating to 2009
Interim dividend relating to 2010
Total contributions by and distributions
to owners
Attributable to equity holders of the Group
Share
Share
premium
capital
account
£000
£000
150 21,085
Foreign
currency
translation Revaluation
reserve
£000
258
reserve
£000
(258)
Capital
redemption
reserve
£000
20
Available-
for-sale
reserve
£000
–
Treasury
Retained
shares
earnings
£000
£000
(940) 11,684
Non-
controlling
interests
£000
Total
£000
2,144 34,143
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(300)
–
–
–
(112)
–
(300)
(112)
(300)
(112)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
142
142
142
–
–
–
–
–
3,747
(26)
3,721
–
–
–
–
–
–
–
–
–
–
–
–
–
(300)
(112)
142
(270)
3,747
(26)
3,451
(157)
–
–
–
(1,681)
(1,608)
–
–
–
(157)
(1,681)
(1,608)
(157)
(3,289)
–
(3,446)
Balance at 31 December 2010
150 21,085
(558)
146
20
142
(1,097) 12,142
2,118 34,148
The notes on pages 32 to 69 are an integral part of these consolidated financial statements
Annual Report & Accounts 2011
29
Company Statement of Changes in Equity
Balance at 1 January 2010
Total comprehensive income for the period
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Purchase of own shares
Final dividend relating to 2009
Interim dividend relating to 2010
Total contributions by and distributions to owners
Attributable to equity holders of the Company
Share
capital
£000
150
Share
premium
account
£000
21,085
Capital
redemption
reserve
£000
20
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Treasury
shares
£000
(940)
Retained
earnings
£000
1,862
Total
£000
22,177
–
1,842
1,842
(157)
–
–
(157)
–
(1,681)
(1,608)
(3,289)
(157)
(1,681)
(1,608)
(3,446)
Balance at 1 January 2011
150
21,085
20
(1,097)
415
20,573
–
10,562
10,562
–
–
–
–
–
(1,754)
(1,608)
–
902
(2,460)
8,517
(1,754)
(1,608)
905
–
(2,457)
28,678
Total comprehensive income for the period
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Final dividend relating to 2010
Interim dividend relating to 2011
New share capital subscribed
Transfer to retained earnings in lieu
of cash dividends
Total contributions by and distributions to owners
–
–
–
3
–
–
–
–
–
902
(902)
–
–
–
–
–
–
–
Balance at 31 December 2011
153
21,085
20
(1,097)
The notes on pages 32 to 69 are an integral part of these consolidated financial statements
30
Arbuthnot Banking Group PLC
Consolidated Statement of Cash Flow
Year ended
31 December
2011
£000
Year ended
31 December
2010
£000
39,337
(11,494)
24,837
1,263
(59,287)
101
27,612
(8,189)
30,310
5,451
(46,913)
(1,539)
(5,243)
6,732
2,457
(1,135)
(94,655)
5,629
(3,698)
190,543
6,651
100,549
(113)
1,740
(1,004)
(205)
33
(174,337)
277,441
103,555
–
(2,457)
22,645
20,188
224,292
85,852
310,144
(757)
420
(72,425)
806
820
117,258
(3,684)
49,170
(605)
450
(426)
(286)
1,673
(452,576)
437,054
(14,716)
(157)
(3,289)
–
(3,446)
31,008
54,844
85,852
Cash flows from operating activities
Interest and similar income received
Interest and similar charges paid
Fees and commissions received
Net trading and other income
Cash payments to employees and suppliers
Taxation (paid)/received
Cash flows from operating (losses)/profits before changes in operating
assets and liabilities
Changes in operating assets and liabilities:
– net decrease/(increase) in trading securities
– net (increase)/decrease in derivative financial instruments
– net increase in loans and advances to customers
– net decrease in other assets
– net (decrease)/increase in deposits from banks
– net increase in amounts due to customers
– net increase/(decrease) in other liabilities
Net cash inflow from operating activities
Cash flows from investing activities
Acquisition of financial investments
Disposal of financial investments
Purchase of computer software
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment
Purchases of debt securities
Proceeds from redemption of debt securities
Net cash from investing activities
Cash flows from financing activities
Purchase of treasury shares
Dividends paid
Proceeds from sale and issue of Secure Trust Bank shares
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
Note
21
22
35
The notes on pages 32 to 69 are an integral part of these consolidated financial statements
Annual Report & Accounts 2011
31
Company Statement of Cash Flows
Note
Year ended
31 December
2011
£000
Year ended
31 December
2010
£000
Cash flows from operating activities
Dividends received from subsidiaries
Interest and similar income received
Interest and similar charges paid
Net trading and other income
Cash payments to employees and suppliers
Taxation received
Cash flows from operating profits before changes in operating
assets and liabilities
Changes in operating assets and liabilities:
– net (increase)/decrease in group company balances
– net decrease/(increase) in other assets
– net increase in other liabilities
Net cash inflow from operating activities
Cash flows from investing activities
Increase in loans to subsidiary companies
Repayment of loans to subsidiary companies
Increase investment in subsidiary
Disposal of share in subsidiaries, net of cash and cash equivalents disposed
Disposal of financial investments
Purchase of computer software
Purchase of property, plant and equipment
21
22
Net cash from investing activities
Cash flows from financing activities
Purchase of treasury shares
Dividends paid
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
8,500
283
(820)
13,734
(9,149)
958
13,506
(4,140)
1,211
3,826
14,403
(2,000)
750
(1,800)
1,897
112
–
(46)
(1,087)
–
(2,457)
(2,457)
10,859
2,470
13,329
4,150
342
(778)
2,921
(5,949)
775
1,461
2,764
(683)
219
3,761
–
–
(9)
–
135
(40)
(17)
69
(157)
(3,289)
(3,446)
384
2,086
2,470
The notes on pages 32 to 69 are an integral part of these consolidated financial statements
32
Arbuthnot Banking Group PLC
Principal Accounting Policies
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been
consistently applied to all the years presented, unless otherwise stated.
1.1. Reporting entity
Arbuthnot Banking Group PLC is a company domiciled in United Kingdom. The registered address of the Arbuthnot Banking Group PLC is
One Arleston Way, Solihull B90 4LH. The consolidated financial statements of the Arbuthnot Banking Group PLC as at and for the year ended
31 December 2011 comprise the Arbuthnot Banking Group PLC and its subsidiaries (together referred to as the “Group” and individually as
“subsidiaries”). The Company is primarily involved in banking and financial services.
1.2. Basis of presentation
The Group’s consolidated financial statements and the Company’s financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRSs as adopted and endorsed by the EU) and the Companies Act 2006 applicable to companies reporting under
IFRS. They have been prepared under the historical cost convention, as modified by the revaluation of land and buildings, available-for-sale financial
assets, and financial assets and financial liabilities at fair value through profit or loss.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires
management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement
or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 2.
The Group’s business activities and financial position, the factors likely to affect its future development and performance, and its objectives and
policies in managing the financial risks to which it is exposed and its capital are discussed in the Financial Review. The Directors have assessed, in
the light of current and anticipated economic conditions, the Group’s ability to continue as a going concern. The Directors confirm they are satisfied
that the Company and the Group have adequate resources to continue in business for the foreseeable future. For this reason, they continue to adopt
the ‘going concern’ basis for preparing accounts.
(a) Standards, interpretations and amendments effective in 2011 – relevant to the Group
•
IFRS 2 (Revised), ‘Share-based payments’. The revised standard clarifies the scope and accounting for group cash-settled share-based payments
in the separate financial statements of the entity receiving the goods or services when that entity has no obligation to settle the share-based
payment transaction.
•
•
•
IFRS 3 (Revised), ‘Business combinations’. The revised standard continues to apply the acquisition method to business combinations, however,
all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt
subsequently re-measured through the Statement of Comprehensive Income. There is a choice on an acquisition-by-acquisition basis to measure
the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets.
All acquisition-related costs should be expensed.
IAS 24 (Revised), ‘Related party disclosures’ (effective from 1 January 2011 – early adopted). The revised standard includes an exemption from
the disclosure requirements for related party transactions between “state controlled” entities and includes a revised definition for related parties.
IAS 27 (Revised), ‘Consolidated and separate financial statements’. The revised standard requires the effects of all transactions with non-
controlling interests to be recorded in equity if there is no change in control. Any remaining interest in an investee is re-measured to fair value
in determining the gain or loss recognised in profit or loss where control over the investee is lost.
•
Improvements to IFRSs. Sets out minor amendments to IFRS standards as part of annual improvements process.
The above changes did not have any material impact on the financial statements.
(b) Standards, interpretations and amendments to existing standards that are not yet effective and have not been early adopted by the Group
The following standards, interpretations and amendments to existing standards have been published and are mandatory for the Group’s accounting
periods beginning on or after 1 January 2012 or later periods, but the Group has not early adopted them:
•
•
IFRS 7 (Revised), ‘Disclosures – Transfers of Financial Assets’ (effective from 1 July 2011). The revised standard requires additional disclosures
for transfers of financial assets and where there are a disproportionate amount of transactions undertaken around the period end. The revised
standard will not have any material impact on the Group’s financial accounts.
IFRS 7 (Revised), ‘Disclosures – Offsetting Financial Assets and Financial Liabilities’ (effective 1 January 2013). The revised standard amend
the required disclosures to include information that will enable users of an entity’s financial statements to evaluate the effect or potential effect of
netting arrangements, including rights of set-off associated with the entity’s recognised financial assets and recognised financial liabilities, on the
entity’s financial position.*
Annual Report & Accounts 2011
33
1.2. Basis of presentation continued
•
IFRS 10, ‘Consolidated Financial Statements’ and IAS 27 (Revised), ‘Separate Financial Statements’ (effective 1 January 2013). IFRS 10
supersedes IAS 27 and SIC-12, and provides a single model to be applied in the control analysis for all investees. There are some minor
clarifications in IAS27, and the requirements of IAS 28 and IAS 31 have been incorporated into IAS 27.*
•
•
•
•
•
IFRS 11, ‘Joint Arrangements’ (effective 1 January 2013). This standard replaces the existing accounting for subsidiaries and joint ventures (now
joint arrangements) and removes the choice of equity or proportionate accounting for jointly controlled entities, as was the case under IAS 31.*
IFRS 12, ‘Disclosure of Interests in Other Entities’ (effective 1 January 2013). This standard replaces the existing accounting for subsidiaries
and joint ventures (now joint arrangements) and contains the disclosure requirements for entities that have interests in subsidiaries, joint
arrangements, associates and/or unconsolidated structured entities.*
IFRS 13, ‘Fair Value Measurement’ (effective 1 January 2013). This standard replaces the existing guidance on fair value measurement in
different IFRSs with a single definition of fair value, a framework for measuring fair values and disclosures about fair value measurements.*
IAS 32 (Revised), ‘Offsetting Financial Assets and Financial Liabilities’ (effective 1 January 2014). This standard was amended to clarify the
offsetting criteria, specifically when an entity currently has a legal right of set off; and when gross settlement is equivalent to net settlement.*
IFRS 9, ‘Financial instruments’ (effective from 1 January 2015). This standard deals with the classification and measurement of financial assets
and will replace IAS 39. The requirements of this standard represent a significant change from the existing requirements in IAS 39. The standard
contains two primary measurement categories for financial assets: amortised cost and fair value. The standard eliminates the existing IAS 39
categories of ‘held to maturity’, ‘available for sale’ and ‘ loans and receivables’. The potential effect of this standard is currently being evaluated
but it is expected to have a pervasive impact on the Group’s financial statements, due to the nature of the Group’s operations.*
* – These standards have not yet been endorsed by the EU.
1.3. Consolidation
(a) Subsidiaries
Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies,
generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are
currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated
from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases.
The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the
fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to
the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their
fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of
the Group’s shares of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets
of the subsidiary acquired, the difference is recognised directly in the Statement of Comprehensive Income.
Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also
eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
(b) Special purpose entities
Special purpose entities (SPEs) are entities that are created to accomplish a narrow and well-defined objective such as the securitisation of particular
assets, or the execution of a specific borrowing or lending transaction. SPEs are consolidated when the substance of the relationship between the
Group and the entity and the evaluation of the Group’s exposure to the risks and rewards of the SPE indicates control. The following circumstances
may indicate control by the Group and would therefore require consolidation of the SPE:
•
•
•
•
in substance, the activities of the SPE are being conducted on behalf of the entity according to its specific business needs so that the entity
obtains benefits from the SPE’s operation;
in substance, the entity has the decision-making powers to obtain the majority of the benefits of the activities of the SPE or, by setting up an
‘autopilot’ mechanism, the entity has delegated these decision-making powers;
in substance, the entity has rights to obtain the majority of the benefits of the SPE and therefore may be exposed to risks incident to the activities
of the SPE; or
in substance, the entity retains the majority of the residual or ownership risks related to the SPE or its assets in order to obtain benefits from its
activities.
34
Arbuthnot Banking Group PLC
Principal Accounting Policies continued
1.3. Consolidation continued
The assessment of whether the Group has control over an SPE is carried out at inception and the initial assessment is only reconsidered at a later date
if there were any changes to the structure or terms of the SPE, or there were additional transactions between the Group and the SPE.
(c) Transactions and non-controlling interests
Changes in ownership interest in a subsidiary that do not result in the loss of control are accounted for as equity transactions and no gain or loss is recognised.
1.4. Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the Group Board. The Group Board, which is
responsible for allocating resources and assessing performance of the operating segments, has been identified as the chief operating decision maker.
All transactions between segments are conducted on an arm’s length basis. Income and expenses directly associated with each segment are included
in determining segment performance. There are three main operating segments:
•
•
•
Retail Banking
International Private Banking
UK Private Banking
1.5. Foreign currency translation
(a) Functional and presentational currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in
which the entity operates (‘the functional currency’). The consolidated financial statements are presented in pounds sterling, which is the Company’s
functional and the Group’s presentational currency.
(b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation
where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-
end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the Statement of Comprehensive Income.
(c) Group companies
The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional
currency different from the presentational currency are translated into the presentation currency as follows:
•
•
assets and liabilities for each Statement of Financial Position presented are translated at the closing rate at the date of that Statement of Financial Position;
income and expenses for each Statement of Comprehensive Income are translated at average exchange rates (unless this average is not a
reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are
translated at the rate on the dates of the transactions); and
•
all resulting exchange differences are recognised as a separate component of equity.
On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency
instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is partially disposed of or sold,
exchange differences that were recorded in equity are recognised in the Statement of Comprehensive Income as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and
translated at the closing rate.
1.6. Interest income and expense
Interest income and expense are recognised in the Statement of Comprehensive Income for all instruments measured at amortised cost using the
effective interest method.
The effective interest method calculates the amortised cost of a financial asset or a financial liability and allocates the interest income or interest
expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments or receipts through the expected
life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When
calculating the effective interest rate, the Group takes into account all contractual terms of the financial instrument but does not consider future
credit losses. The calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate,
transaction costs and all other premiums or discounts.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised
using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.
Annual Report & Accounts 2011
35
1.7. Fee and commission income
Fees and commissions which are not considered integral to the effective interest rate are generally recognised on an accrual basis when the service
has been provided. Loan commitment fees are deferred and recognised as an adjustment to the effective interest rate on the loan.
Commission and fees arising from negotiating, or participating in the negotiation of, a transaction for a third party – such as the issue or the
acquisition of shares or other securities or the purchase or sale of businesses – are recognised on completion of the underlying transaction. Asset
and other management, advisory and service fees are recognised based on the applicable service contracts, usually on a time apportioned basis.
The same principle is applied for financial planning and insurance services that are continuously provided over an extended period of time.
Commissions arising from the sale of structured products are recognised at the point of sale as there are no further services provided or due.
1.8. Gains less losses arising from dealing in securities
This includes the net gains arising from both buying and selling securities and from positions held in securities, including related interest income
and dividends, recognised on trade-date – the date on which the Group commits to purchase or sell the asset.
1.9. Financial assets and financial liabilities
The Group classifies its financial assets and financial liabilities in the following categories: financial assets and financial liabilities at fair value
through profit or loss; loans and receivables; held-to-maturity investments; available-for-sale financial assets and other financial liabilities.
Management determines the classification of its investments at initial recognition. A financial asset or financial liability is measured initially at fair
value. At inception transaction costs that are directly attributable to its acquisition or issue, for an item not at fair value through profit or loss, is
added to the fair value of the financial asset and deducted from the fair value of the financial liability.
(a) Financial assets and financial liabilities at fair value through profit or loss
This category comprises listed securities and derivative financial instruments. Derivative financial instruments utilised by the Group include
embedded derivatives and derivatives used for hedging purposes. Financial assets and liabilities at fair value through profit or loss are initially
recognised on trade-date – the date on which the Group becomes a party to the contractual provisions of the instrument. Subsequent measurement
of financial assets and financial liabilities held in this category are carried at fair value through profit or loss.
(b) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise
when the Group provides money, goods or services directly to a debtor with no intention of trading the receivable. Loans are recognised when cash
is advanced to the borrowers. Loans and receivables are carried at amortised cost using the effective interest method.
(c) Held-to-maturity
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s
management has the positive intention and ability to hold to maturity. Held-to-maturity investments are carried at amortised cost using the effective
interest method.
(d) Available-for-sale
Available-for-sale investments are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity
or changes in interest rates, exchange rates or equity prices. Included in available-for-sale are equity investments in special purpose vehicles set up
to acquire and enhance the value of commercial properties and equity investments in unquoted vehicles. These investments are of a medium term
nature. There is no open market for these assets and there are no available-for-sale debt securities. Unquoted equity securities whose fair value
cannot reliably be measured are carried at cost. All other available-for-sale investments are carried at fair value. Fair value changes on the equity
securities are recognised in other comprehensive income (fair value reserve) until the investment is sold or impaired. Once sold or impaired the
cumulative gains or losses previously recognised in other comprehensive income is reclassified to profit or loss.
(e) Other financial liabilities
Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments. Other financial liabilities are recognised when
cash is received from the depositors. Other financial liabilities are carried at amortised cost using the effective interest method. The fair value of
other liabilities repayable on demand is assumed to be the amount payable on demand at the Statement of Financial Position date.
Derecognition
Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or where the Group has transferred
substantially all risks and rewards of ownership. Any interest in transferred financial assets that qualify for derecognition that is created or retained
by the Group is recognised as a separate asset or liability in the Statement of Financial Position. In transactions which the Group neither retains
nor transfers substantially all the risks and rewards of ownership of a financial asset and it retains control over the asset, the Group continues
to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the
transferred asset. There have not been any instances where assets have only been partially derecognised.
The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.
36
Arbuthnot Banking Group PLC
Principal Accounting Policies continued
1.9. Financial assets and financial liabilities continued
Amortised cost measurement
The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial
recognition, minus principal payments, plus or minus the cumulative amortisation using the effective interest method of any difference between the
initial amount recognised and the maturity amount, minus any reduction for impairment.
Fair value measurement
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length
transaction on the measurement date. The fair value of assets and liabilities traded in active markets are based on current bid and offer prices
respectively. If the market is not active the Group establishes a fair value by using appropriate valuation techniques. These include the use of recent
arm’s length transactions, reference to other instruments that are substantially the same for which market observable prices exist, net present value
and discounted cash flow analysis.
1.10. Derivative financial instruments and hedge accounting
All derivatives are recognised at their fair value. Fair values are obtained from quoted market prices in active markets, including recent arm’s length
transactions or using valuation techniques such as discounted cash flow models. Derivatives are shown in the Statement of Financial Position as
assets when their fair value is positive and as liabilities when their fair value is negative.
(a) Fair value hedges
The Group assesses at each Statement of Financial Position date changes in the fair value of derivatives are recognised immediately in the Statement
of Comprehensive Income, together with the changes in fair value of the hedged assets or liabilities.
If a hedging relationship no longer meets the criteria for hedge accounting, the carrying amount of the hedged item is amortised over the residual
period to maturity, as part of the newly calculated effective interest rate. However, if the hedged item has been derecognised, it is immediately
released to the Statement of Comprehensive Income.
(b) Cash flow hedges
These cash flow hedges are used to hedge against fluctuations in future cash flows from interest rate movements on variable rate customer deposits.
On initial purchase the derivative is valued at fair value and then the effective portion of the change in the fair value of the hedging instrument is
recognised in equity (cash flow hedging reserve) until the gain or loss on the hedged item is realised, when it is amortised; the ineffective portion of
the hedging instrument is recognised in the Statement of Comprehensive Income immediately.
If a hedging derivative expires or is sold, terminated, or exchanged, or the hedge no longer meets the criteria for cash flow hedge accounting, or the
hedge designation is revoked, then hedge accounting is discontinued prospectively. In a discontinued hedge of a forecast transaction the cumulative
amount recognised in other comprehensive income from the period when the hedge was effective is reclassified from equity to profit or loss as a
reclassification adjustment when the forecast transaction occurs and affects profit or loss. If the forecast transaction is no longer expected to occur,
then the balance in other comprehensive income is reclassified immediately to profit or loss as a reclassification adjustment.
Hedge effectiveness testing
On initial designation of the hedge, the Group formally documents the relationship between the hedging instruments and the hedged items,
including the risk management objective and strategy in undertaking the hedge, together with the method that will be used to assess the effectiveness
of the hedging relationship. The Group makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, as to
whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged
items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80-125%. The Group
makes an assessment for a cash flow hedge of a forecast transaction, as to whether the forecast transaction is highly probable to occur and presents
an exposure to variations in cash flows that could ultimately affect profit or loss.
(c) Embedded derivatives
Embedded derivatives arise from contracts (‘hybrid contracts’) containing both a derivative (the ‘embedded derivative’) and a non-derivative (the
‘host contract’). Where the economic characteristics and risks of the embedded derivatives are not closely related to those of the host contract, and
the host contract is not at fair value through profit of loss, the embedded derivative is bifurcated and reported at fair value and gains or losses are
recognised in the Statement of Comprehensive Income.
1.11. Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the Statement of Financial Position when there is a legally enforceable right
to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
Annual Report & Accounts 2011
37
1.12. Impairment of financial assets
(a) Assets carried at amortised cost
On an ongoing basis the Group assesses whether there is objective evidence that a financial asset or group of financial assets is impaired. Objective
evidence is the occurrence of a loss event, after the initial recognition of the asset, that impact on the estimated future cash flows of the financial
asset or group of financial assets, and can be reliably estimated.
The criteria that the Group uses to determine that there is objective evidence of an impairment loss include, but are not limited to, the following:
•
•
•
•
•
Delinquency in contractual payments of principal or interest;
Cash flow difficulties experienced by the borrower;
Initiation of bankruptcy proceedings;
Deterioration in the value of collateral;
Deterioration of the borrower’s competitive position;
If there is objective evidence that an impairment loss on loans and receivables or held-to-maturity investments carried at amortised cost has been
incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash
flows discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance
account and the amount of the loss is recognised in the Statement of Comprehensive Income. If a loan or held-to maturity investment has a variable
interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. When a loan
is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all the necessary procedures have
been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the
provision for loan impairment in the Statement of Comprehensive Income.
(b) Assets classified as available for sale
The Group assesses at each Statement of Financial Position date whether there is objective evidence that a financial asset or a group of financial
assets is impaired. In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security
below its cost is considered as an indicator that the securities are impaired. If any such evidence exists for available-for-sale financial assets, the
cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial
asset previously recognised in profit or loss – is removed from equity and recognised in the Statement of Comprehensive Income. Impairment losses
recognised in the Statement of Comprehensive Income on equity instruments are not reversed through the Statement of Comprehensive Income.
(c) Renegotiated loans
Loans that are either subject to collective impairment assessment or individually significant and whose terms have been renegotiated are no longer
considered to be past due but are treated as new loans.
1.13. Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired
subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in ‘intangible assets’. Gains and losses on the disposal of
an entity include the carrying amount of goodwill relating to the entity sold.
The Group reviews the goodwill for impairment at least annually or when events or changes in economic circumstances indicate that impairment
may have taken place and carry goodwill at cost less accumulated impairment losses. Assets are grouped together into the smallest group of assets
that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-
generating unit” or “CGU”). For impairment testing purposes goodwill cannot be allocated to a CGU that is greater than a reported operating
segment. CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at
which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are
expected to benefit from the synergies of the combination.
The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. There are currently two CGU’s with
goodwill attached to it; the core Arbuthnot Latham CGU and the Music Finance CGU.
Management considers the value in use for the core Arbuthnot Latham CGU to be the discounted cash flows over 5 years with a terminal value
(2010: 5 years with a terminal value). The 5 year plan with a terminal value is considered to be appropriate as the goodwill relates to an ongoing
well established business and not underlying assets with finite lives. The terminal value is calculated by applying a discounted perpetual growth
model to the profit expected in 2014 as per the approved 3 year plan. A growth rate of 5% (2010: 8%) was used for income and 4% (2010: 9%) for
expenditure from 2012 to 2014 (these rates were the best estimate of future forecasted performance), while a 4% (2010: 4%) percent growth rate
for income and expenditure (a more conservative approach was taken for latter years as these were not budgeted for in detail as per the three year
plan approved by the Board of Directors) was used for cash flows after the approved three year plan.
38
Arbuthnot Banking Group PLC
Principal Accounting Policies continued
1.13. Intangible assets continued
Management considers the value in use for the Music Finance CGU to be the discounted cash flows over 5 years (2010: 5 years). Income and
expenditure were kept flat (2010: 0%) over the 5 year period.
Cash flows were discounted at a pre-tax rate of 12% (2010: 12%) to their net present value. The discount rate of 12% is considered to be
appropriate after evaluating current market assessments of the time value of money and the risks specific to the assets or CGUs. Currently the value
in use and fair value less costs to sell far exceeds the carrying value and as such no sensitivity analysis was done.
Impairment losses are recognised in profit and loss if the carrying amounts exceed the recoverable amounts.
(b) Computer software
Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs
are amortised on the basis of the expected useful lives (three to five years).
Costs associated with developing or maintaining computer software programs are recognised as an expense as incurred.
1.14. Property, plant and equipment
Land and buildings comprise mainly branches and offices and are stated at the latest valuation with subsequent additions at cost less depreciation.
Plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition
of the items.
Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost to their residual values over
their estimated useful lives, applying the following annual rates, which are subject to regular review:
Freehold buildings
Office equipment
Computer equipment
Motor vehicles
50 years
6 to 20 years
3 to 5 years
4 years
Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the Statement of Comprehensive
Income. Depreciation on revalued freehold buildings is calculated using the straight-line method over the remaining useful life. Revaluation of assets
and any subsequent disposals are addressed through the revaluation reserve and any changes are transferred to retained earnings.
1.15. Leases
(a) As a lessor
Assets leased to customers under agreements which transfer substantially all the risks and rewards of ownership, with or without ultimate legal title,
are classified as finance leases. When assets are held subject to finance leases, the present value of the lease payments is recognised as a receivable.
The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. Lease income is
recognised over the term of the lease using the net investment method, which reflects a constant periodic rate of return.
Assets leased to customers under agreements which do not transfer substantially all the risks and rewards of ownership are classified as operating
leases. When assets are held subject to operating leases, the underlying assets are held at cost less accumulated depreciation, The assets are
depreciated down to their estimated residual values on a straight line basis over the lease term. Lease rental income is recognised on a straight line
basis over the lease term.
(b) As a lessee
Rentals made under operating leases are recognised in the Statement of Comprehensive Income on a straight line basis over the term of the lease.
1.16. Cash and cash equivalents
For the purposes of the Statement of Cash Flows, cash and cash equivalents comprises cash on hand and demand deposits, and cash equivalents
comprise highly liquid investments that are convertible into cash with an insignificant risk of changes in value with a maturity of three months or
less at the date of acquisition, including certain loans and advances to banks and building societies and short-term highly liquid debt securities.
1.17. Employee benefits
(a) Post-retirement obligations
The Group contributes to a defined contribution scheme and to individual defined contribution schemes for the benefit of certain employees.
The schemes are funded through payments to insurance companies or trustee-administered funds at the contribution rates agreed with individual
employees.
Annual Report & Accounts 2011
39
1.17. Employee benefits continued
The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an employee benefit
expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments
is available.
There are no post-retirement benefits other than pensions.
(b) Share-based compensation
As set out in note 33, in 2008 and 2009 the Group awarded share options to two current and one former director under an equity settled share-
based compensation plan. No options were awarded in 2010. In 2011 share options were granted to employees in Secure Trust Bank PLC. Detail on
the share options granted to Group directors are set out in note 33. The fair value for the grant of the options is recognised as an expense. The total
amount to be expensed over the vesting period is determined by reference to the fair value of the options granted. At each Statement of Financial
Position date, the Group revises its estimates of the number of options that are expected to vest and recognises the impact of the revision to original
estimates, if any, in the Statement of Comprehensive Income, with a corresponding adjustment to equity.
The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the
options are exercised.
1.18. Taxation
Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits arise. Income tax recoverable
on tax allowable losses is recognised as an asset only to the extent that it is regarded as recoverable by offset against current or future taxable profits.
Deferred tax is provided in full on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in
the consolidated financial statements. However, deferred tax is not accounted for if it arises from the initial recognition of goodwill, the initial
recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting
nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that they probably will not reverse in the foreseeable
future. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the Statement of Financial Position
date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.
Deferred tax assets are recognised where it is probable that future taxable profits will be available against which the temporary differences can
be utilised.
1.19. Issued debt and equity securities
Issued financial instruments or their components are classified as liabilities where the contractual arrangement results in the Group having a
present obligation to either deliver cash or another financial asset to the holder, to exchange financial instruments on terms that are potentially
unfavourable. Issued financial instruments, or their components, are classified as equity where they meet the definition of equity and confer on
the holder a residual interest in the assets of the Company. The components of issued financial instruments that contain both liability and equity
elements are accounted for separately with the equity component being assigned the residual amount after deducting from the instrument as a whole
the amount separately determined as the fair value of the liability component.
Financial liabilities, other than trading liabilities at fair value, are carried at amortised cost using the effective interest method as set out in policy
1.6. Equity instruments, including share capital, are initially recognised at net proceeds, after deducting transaction costs and any related income
tax. Dividend and other payments to equity holders are deducted from equity, net of any related tax.
1.20. Share capital
(a) Share issue costs
Incremental costs directly attributable to the issue of new shares or options or the acquisition of a business by Arbuthnot Banking Group or its
subsidiaries, are shown in equity as a deduction, net of tax, from the proceeds.
(b) Dividends on ordinary shares
Dividends on ordinary shares are recognised in equity in the period in which they are approved.
(c) Share buybacks
Where any Group company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly
attributable incremental costs (net of income taxes) is deducted from equity attributable to the Company’s equity holders until the shares are
cancelled or reissued.
40
Arbuthnot Banking Group PLC
Principal Accounting Policies continued
1.21. Fiduciary activities
The Group commonly acts as trustees and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts,
retirement benefit plans and other institutions. These assets and income arising thereon are excluded from these financial statements, as they are not
assets of the Group.
1.22. Financial guarantee contracts
Financial guarantees represent undertakings that the Group will meet a customer’s obligation to third parties if the customer fails to do so.
Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit.
The Group is theoretically exposed to loss in an amount equal to the total guarantees or unused commitments, however, the likely amount of loss
is expected to be significantly less; most commitments to extend credit are contingent upon customers maintaining specific credit standards.
Liabilities under financial guarantee contracts are initially recorded at their fair value, and the initial fair value is amortised over the life of the
financial guarantee. Subsequently, the financial guarantee liabilities are measured at the higher of the initial fair value, less cumulative amortisation,
and the best estimate of the expenditure to settle obligations.
1.23. Forbearance
Forbearance is available to support customers who are in financial difficulty and help them re-establish their contractual payment plan. The main
option offered by the Group is an arrangement to clear outstanding arrears. If the forbearance request is granted the account is monitored in
accordance with the Group’s policy and procedures.
All debts however retain the customer’s normal contractual payment due dates. Arrears tracking and the allowance for impairment is based on the
original contractual due dates for both the secured and unsecured lending channels.
Annual Report & Accounts 2011
41
Notes to the Consolidated Financial Statements
2. Critical accounting estimates and judgements in applying accounting policies
The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates
and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances.
2.1. Estimation uncertainty
Credit losses
The Group reviews its loan portfolios and held-to-maturity investments to assess impairment at least on a half-yearly basis. The basis for evaluating
impairment losses is described in accounting policy 1.12. Where financial assets are individually evaluated for impairment, management uses
their best estimates in calculating the net present value of future cash flows. Management has to make judgements on the financial position of the
counterparty and the net realisable value of collateral, in determining the expected future cash flows.
In determining whether an impairment loss should be recorded in the Statement of Comprehensive Income, the Group makes judgements as to
whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans or
held-to-maturity investments with similar credit characteristics, before the decrease can be identified with an individual loan in that portfolio. This
evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national
or local economic conditions that correlate with defaults on assets in the Group. Management uses estimates based on historical loss experience
for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash
flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any
differences between loss estimates and actual loss experience.
Goodwill impairment
The accounting policy for goodwill is described in note 1.13 (a). The Company reviews the goodwill for impairment at least annually or when events
or changes in economic circumstances indicate that impairment may have taken place. Significant management judgements are made in estimations,
to evaluate whether an impairment of goodwill is necessary. Impairment testing is done at CGU level and the following two items, with judgements
surrounding them, have a significant impact on the estimations used in determining the necessity of an impairment charge:
•
•
Future cash flows – Cash flow forecasts reflect managements view of future business forecasts at the time of the assessment. A detailed three year
budget is done every year and management also uses judgement in applying a growth rate. The accuracy of future cash flows is subject to a high
degree of uncertainty in volatile market conditions. During such conditions, management would do impairment testing more frequently than
annually to ensure that the assumptions applied are still valid in the current market conditions.
Discount rate – Management also apply judgement in determining the discount rate used to discount future expected cash flows. The discount
rate is derived from the cost of capital for each CGU.
At the time of the impairment testing, if the future expected cash flows decline and/or the cost of capital has increased, then the recoverable amount
will reduce.
Taxation
The Group is subject to direct and indirect taxation in a number of jurisdictions. There may be some transactions and calculations for which the
ultimate tax determination has an element of uncertainty during the ordinary course of business. The Group recognises liabilities based on estimates
of the quantum of taxes that may be due. Where the final tax determination is different from the amounts that were initially recorded, such
differences will impact the income tax and deferred tax expense in the year in which the determination is made.
2.2. Judgements
Impairment of equity securities
A significant or prolonged decline in the fair value of an equity security is objective evidence of impairment. The Group regards a decline of more
than 20 percent in fair value as “significant” and a decline in the quoted market price that persists for nine months or longer as “prolonged”.
Valuation of financial instruments
Fair values of financial assets and financial liabilities that are traded in active markets are based on quoted market prices. If the market is not active
the Group establishes a fair value by using appropriate valuation techniques. These include the use of recent arm’s length transactions, reference to
other instruments that are substantially the same for which market observable prices exist, net present value and discounted cash flow analysis.
The objective of valuation techniques is to determine the fair value of the financial instrument at the reporting date as the price that would have been
agreed between active market participants in an arm’s length transaction.
42
Arbuthnot Banking Group PLC
Notes to the Consolidated Financial Statements continued
2.2. Judgements continued
The Group measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making measurements:
•
•
•
Level 1: Quoted prices in active markets for identical assets or liabilities
Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices).
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
The consideration of factors such as the magnitude and frequency of trading activity, the availability of prices and the size of bid/offer spreads, assist
in the judgement as to whether a market is active. If in the opinion of management, a significant proportion of the instrument’s carrying amount
is driven by unobservable inputs, the instrument in its entirety is classified as valued using significant unobservable inputs. ‘Unobservable’ in this
context means that there is little or no current market data available from which to determine the level at which an arm’s length transaction would
be likely to occur. It generally does not mean that there is no market data available at all upon which to base a determination of fair value (consensus
pricing data may, for example, be used).
The tables below analyses financial instruments measured at fair value by the level in the fair value hierarchy into which the measurement is
categorised:
At 31 December 2011
Derivative financial instruments
Financial investments
At 31 December 2010
Trading securities – long positions
Financial investments
Trading securities – short positions
Derivative financial instruments
Level 1
£000
–
330
330
Level 1
£000
3,232
2,070
5,302
775
–
775
Level 2
£000
951
–
951
Level 2
£000
–
–
–
–
184
184
There were no significant transfers between level 1 and level 2 during the year.
The following table reconciles the movement in level 3 financial instruments during the year:
Movement in level 3
At 1 January
Purchases
Disposals
Losses recognised in the profit and loss
At 31 December
Level 3
£000
–
2,746
2,746
Level 3
£000
–
2,887
2,887
–
–
–
2011
£000
2,887
–
–
(141)
2,746
Total
£000
951
3,076
4,027
Total
£000
3,232
4,957
8,189
775
184
959
2010
£000
3,524
130
(450)
(317)
2,887
Annual Report & Accounts 2011
43
3. Maturity analysis of assets and liabilities
The table below shows the maturity analysis of assets and liabilities as at 31 December 2011:
At 31 December 2011
ASSETS
Cash
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Debt securities held-to-maturity
Assets classified as held for sale
Current tax asset
Other assets
Financial investments
Intangible assets
Property, plant and equipment
Deferred tax asset
Total assets
LIABILITIES
Deposits from banks
Deposits from customers
Liabilities relating to assets classified as held for sale
Other liabilities
Deferred tax liability
Debt securities in issue
Total liabilities
Due within
one year
£000
243,183
892
66,961
257,033
30,573
3,674
457
6,311
–
–
–
–
609,084
8
616,531
1,291
11,838
–
–
629,668
Due after
more than
one year
£000
–
59
–
135,756
9,506
–
–
2,334
3,076
3,561
5,214
726
160,232
–
77,269
–
3,055
97
12,256
92,677
Total
£000
243,183
951
66,961
392,789
40,079
3,674
457
8,645
3,076
3,561
5,214
726
769,316
8
693,800
1,291
14,893
97
12,256
722,345
44
Arbuthnot Banking Group PLC
Notes to the Consolidated Financial Statements continued
3. Maturity analysis of assets and liabilities continued
The table below shows the maturity analysis of assets and liabilities as at 31 December 2010:
At 31 December 2010
ASSETS
Cash
Loans and advances to banks
Loans and advances to customers
Trading securities – long positions
Debt securities held-to-maturity
Other assets
Financial investments
Intangible assets
Property, plant and equipment
Deferred tax asset
Total assets
LIABILITIES
Deposits from banks
Trading securities – short positions
Derivative financial instruments
Deposits from customers
Current tax liability
Other liabilities
Deferred tax liability
Debt securities in issue
Total liabilities
Due within
one year
£000
73,772
12,080
211,063
3,232
127,114
14,284
–
–
–
–
441,545
3,706
775
184
496,964
751
9,387
–
–
511,767
Due after
more than
one year
£000
–
–
89,189
–
16,005
3,664
4,957
2,915
5,903
932
123,565
–
–
–
6,293
–
146
126
12,630
19,195
Total
£000
73,772
12,080
300,252
3,232
143,119
17,948
4,957
2,915
5,903
932
565,110
3,706
775
184
503,257
751
9,533
126
12,630
530,962
4. Financial risk management
Strategy
By their nature, the Group’s activities are principally related to the use of financial instruments. The Directors and senior management of the Group
have formally adopted a Group Risk and Controls Policy which sets out the Board’s attitude to risk and internal controls. Key risks identified by the
Directors are formally reviewed and assessed at least once a year by the Board, in addition to which key business risks are identified, evaluated and
managed by operating management on an ongoing basis by means of procedures such as physical controls, credit and other authorisation limits and
segregation of duties. The Board also receives regular reports on any risk matters that need to be brought to its attention. Significant risks identified
in connection with the development of new activities are subject to consideration by the Board. There are budgeting procedures in place and
reports are presented regularly to the Board detailing the results of each principal business unit, variances against budget and prior year, and other
performance data.
The principal non-operational risks inherent in the Group’s business are credit, market and liquidity risks.
(a) Credit risk
The Company and Group take on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due.
Impairment provisions are provided for losses that have been incurred at the balance sheet date. Significant changes in the economy, or in the health
of a particular industry segment that represents a concentration in the Company and Group’s portfolio, could result in losses that are different from
those provided for at the balance sheet date. Credit risk is managed through the Credit Committees of the banking subsidiaries, with significant
exposures also being approved by the Group Risk Committee.
The Company and Group structure the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower
or groups of borrowers. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. The limits are approved
periodically by the Board of Directors and actual exposures against limits are monitored daily.
Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital
repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining
collateral and corporate and personal guarantees.
Annual Report & Accounts 2011
45
4. Financial risk management continued
The Group employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of collateral to secure
advances, which is common practice. The principal collateral types for loans and advances include, but are not limited to:
•
•
•
•
•
Charges over residential and commercial properties;
Charges over business assets such as premises, inventory and accounts receivable;
Charges over financial instruments such as debt securities and equities;
Personal guarantees; and
Charges over other chattels
Upon initial recognition of loans and advances, the fair value of collateral is based on valuation techniques commonly used for the corresponding
assets. In order to minimise any potential credit loss the Group will seek additional collateral from the counterparty as soon as impairment
indicators are noticed for the relevant individual loans and advances. Repossessed collateral, not readily convertible into cash, is made available for
sale in an orderly fashion, with the proceeds used to reduce or repay the outstanding indebtedness. Where excess funds are available after the debt
has been repaid, they are available either for other secured lenders with lower priority or are returned to the customer.
Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit.
With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused
commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent
upon customers maintaining specific credit standards.
The Group’s maximum exposure to credit risk before collateral held or other credit enhancements is as follows:
Credit risk exposures relating to on-balance sheet assets are as follows:
Cash
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers – Arbuthnot Latham
Loan and advances to customers – Secure Trust Bank
Trading securities – long positions
Debt securities held-to-maturity
Financial investments
Other assets
Credit risk exposures relating to off-balance sheet assets are as follows:
Guarantees
Loan commitments and other credit related liabilities
At 31 December
The Company’s maximum exposure to credit risk before collateral held or other credit enhancements is as follows:
Credit risk exposures relating to on-balance sheet assets are as follows:
Due from subsidiary undertakings
Financial investments
Other debtors
Credit risk exposures relating to off-balance sheet assets are as follows:
Guarantees
At 31 December
2011
£000
243,183
951
66,961
238,204
154,585
–
40,079
3,076
3,108
803
21,841
772,791
2011
£000
24,848
218
1,175
2,500
28,741
2010
£000
73,772
–
12,080
210,753
89,501
3,232
143,119
4,957
8,727
485
23,469
570,095
2010
£000
15,545
330
2,386
2,500
20,761
The above table represents the maximum credit risk exposure (net of impairment) to the Group and Company at 31 December 2011 and 2010
without taking account of any collateral held or other credit enhancements attached. For on-balance-sheet assets, the exposures are based on the
net carrying amounts as reported in the Statement of Financial Position.
46
Arbuthnot Banking Group PLC
Notes to the Consolidated Financial Statements continued
4. Financial risk management continued
The table below represents an analysis of the loan to values of the property book for the Group:
Loan to value
Less than 60%
60% – 80%
80% – 100%
Greater than 100%
Total
31 December 2011
31 December 2010
Loan Balance
£000
105,907
62,259
21,013
25,551
214,730
Collateral
£000
309,328
89,972
23,572
21,596
444,468
Loan Balance
£000
103,320
47,642
12,060
15,081
178,103
Collateral
£000
284,285
65,821
13,578
11,357
375,041
Concentration risk
The Group is well diversified in the UK, being exposed to retail banking and private banking. Management assesses the potential concentration risk
from a number of areas including:
•
•
•
geographical concentration
product concentration; and
high value residential properties
Due to the well diversified nature of the Group and the significant collateral held against the loan book, the Directors do not consider there to be a
potential material exposure arising from concentration risk.
(b) Operational risk (unaudited)
The Group’s objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group’s reputation with
overall cost effectiveness and to avoid control procedures that restrict initiatives and creativity. Operational risk arises from all of the Group’s
operations.
The primary responsibility for the development and implementation of controls to address operational risk is assigned to the senior management
within each subsidiary.
Compliance with Group standards is supported by a programme of periodic reviews undertaken by Internal Audit. The results of the Internal Audit
reviews are discussed with the Company’s senior management, with summaries submitted to the Arbuthnot Banking Group Audit Committee.
(c) Market risk
Price risk
The Company and Group is exposed to equity securities price risk because of investments held by the Group and classified on the Consolidated
Statement of Financial Position either as available-for-sale or at fair value through the profit and loss. The Group is not exposed to commodity price
risk. To manage its price risk arising from investments in equity securities, the Group diversifies its portfolio. Diversification of the portfolio is done
in accordance with the limits set by the Group.
Based upon the financial investment exposure (in Note 20), a stress test scenario of a 10% (2010: 10%) decline in market prices, with all other
things being equal, would result in a £22,000 (2010: £33,000) decrease in the Group’s income and a decrease of £272,000 (2010: £364,000) in
the Group’s equity. The Group consider a 10% stress test scenario appropriate after taking the current values and historic data into account.
Based upon the financial investment exposure given in Note 20, a stress test scenario of a 10% (2010: 10%) decline in market prices, with all other
things being equal, would result in a £22,000 (2010: £33,000) decrease in the Company’s income and a decrease of £16,000 (2010: £24,000) in the
Company’s equity.
Annual Report & Accounts 2011
47
4. Financial risk management continued
Currency risk
The Company and Group takes on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position
and cash flows. The Board sets limits on the level of exposure for both overnight and intra-day positions, which are monitored daily. The table
below summarises the Group’s exposure to foreign currency exchange rate risk at 31 December 2011. Included in the table below are the Group’s
assets and liabilities at carrying amounts, categorised by currency.
At 31 December 2011
ASSETS
Cash
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Debt securities held-to-maturity
Other assets
Financial investments
LIABILITIES
Deposits from banks
Deposits from customers
Other liabilities
Debt securities in issue
Net on-balance sheet position
Credit commitments
GBP (£)
£000
242,981
951
59,431
338,574
40,079
8,643
330
690,989
8
663,653
14,891
–
678,552
12,437
22,290
USD ($)
£000
140
–
4,899
4,502
–
2
–
9,543
–
9,821
–
–
9,821
(278)
20
Euro (€)
£000
61
–
578
47,271
–
–
2,746
50,656
–
18,271
–
12,256
30,527
20,129
334
The table below summarise the Group’s exposure to foreign currency exchange risk at 31 December 2010:
At 31 December 2010
ASSETS
Cash
Loans and advances to banks
Loans and advances to customers
Trading securities – long positions
Debt securities held-to-maturity
Other assets
Financial investments
LIABILITIES
Deposits from banks
Trading securities – short positions
Derivative financial instruments
Deposits from customers
Other liabilities
Debt securities in issue
Net on-balance sheet position
Credit commitments
GBP (£)
£000
73,667
5,188
258,486
3,220
143,119
17,943
1,999
503,622
1,812
775
184
484,904
9,533
–
497,208
6,414
23,600
USD ($)
£000
32
4,945
5,090
12
–
4
71
10,154
10
–
–
9,947
–
–
9,957
197
20
Euro (€)
£000
73
427
36,676
–
–
1
2,887
40,064
13
–
–
6,873
–
12,630
19,516
20,548
334
Other
£000
1
–
2,053
2,442
–
–
–
4,496
–
2,055
–
–
2,055
2,441
–
Other
£000
–
1,520
–
–
–
–
–
1,520
1,871
–
–
1,533
–
–
3,404
(1,884)
–
Total
£000
243,183
951
66,961
392,789
40,079
8,645
3,076
755,684
8
693,800
14,891
12,256
720,955
34,729
22,644
Total
£000
73,772
12,080
300,252
3,232
143,119
17,948
4,957
555,360
3,706
775
184
503,257
9,533
12,630
530,085
25,275
23,954
48
Arbuthnot Banking Group PLC
Notes to the Consolidated Financial Statements continued
4. Financial risk management continued
A 10% strengthening of the pound against the US dollar would lead to a £16,000 (2010: £20,000) decrease in Group profits and equity, while a
10% weakening of the pound against the US dollar would lead to the same increase in Group profits and equity. Similarly a 10% strengthening of
the pound against the Euro would lead to a £8,000 (2010: £48,000) decrease in Group profits and equity, while a 10% weakening of the pound
against the Euro would lead to the same increase in Group profits and equity. The above results are after taking into account the effect of derivative
financial instruments (see Note 25), which covers most of the net exposure in each currency.
The table below summarise the Company’s exposure to foreign currency exchange rate risk at 31 December 2011:
At 31 December 2011
ASSETS
Due from subsidiary undertakings
Financial investments
Other debtors
Shares in subsidiary undertakings
LIABILITIES
Due to subsidiary undertakings
Debt securities in issue
Net on-balance sheet position
GBP (£)
£000
9,693
218
637
25,233
35,781
6,020
–
6,020
29,761
Euro (€)
£000
12,713
–
–
–
12,713
–
12,256
12,256
457
The table below summarise the Company’s exposure to foreign currency exchange rate risk at 31 December 2010:
At 31 December 2010
ASSETS
Due from subsidiary undertakings
Financial investments
Other debtors
Shares in subsidiary undertakings
LIABILITIES
Deposits from banks
Due to subsidiary undertakings
Debt securities in issue
Net on-balance sheet position
GBP (£)
£000
124
330
601
28,633
29,688
1,004
10,097
–
11,101
18,587
Euro (€)
£000
13,025
–
–
–
13,025
–
–
12,630
12,630
395
CHF
£000
2,442
–
–
–
2,442
–
–
–
2,442
CHF
£000
2,396
–
–
–
2,396
1,865
–
–
1,865
531
Total
£000
24,848
218
637
25,233
50,936
6,020
12,256
18,276
32,660
Total
£000
15,545
330
601
28,633
45,109
2,869
10,097
12,630
25,596
19,513
A 10% strengthening of the pound against the Euro would lead to £18,000 (2010: £11,000) decrease in the Company profits and equity, conversely
a 10% weakening of the pound against the Euro would lead to the same increase in the Company profits and equity. A 10% strengthening of the
pound against the Swiss Franc would lead to £38,000 (2010: £53,000) decrease in the Company profits and equity, conversely a 10% weakening
of the pound against the Swiss Franc would lead to the same increase in the Company profits and equity. The above results are after taking into
account the effect of derivative financial instruments (see Note 25), which covers most of the net Swiss Franc exposure.
Annual Report & Accounts 2011
49
4. Financial risk management continued
Interest rate risk
Interest rate risk is the potential adverse impact on the Company and Group’s future cash flows from changes in interest rates; and arises from the
differing interest rate risk characteristics of the Company and Group’s assets and liabilities. In particular, fixed rate savings and borrowing products
expose the Group to the risk that a change in interest rates could cause either a reduction in interest income or an increase in interest expense relative
to variable rate interest flows. The Group seeks to “match” interest rate risk on either side of the Statement of Financial Position. However, this is
not a perfect match and interest rate risk is present on: Money market transactions of a fixed rate nature, fixed rate loans and fixed rate savings
accounts. There is interest rate mismatch in Arbuthnot Latham and Secure Trust Bank. This is monitored on a daily basis in conjunction with
liquidity and capital. The interest rate mismatch is daily monitored, throughout the maturity bandings of the book on a parallel scenario for 50, 100
and 200 basis points movement. The Group consider the 50, 100 and 200 basis points movement to be appropriate for scenario testing given the
current economic outlook and industry expectations. This typically results in a pre-tax mismatch of £0.3m to £1.1m (2010: £0.6m to £2.4m) for the
Group, with the same impact to equity pre-tax. The Company has no fixed rate exposures, but a upward change of 50 basis points on variable rates
would increase pre-tax profits and equity by £4,000 (2010: reduce pre-tax profits and equity by £1,000).
(d) Liquidity risk
The new Liquidity regime came into force on the 1 October 2010. The FSA requires a firm to maintain at all times liquidity resources which are
adequate, both as to amount and quality, to ensure that there is no significant risk that its liabilities cannot be met as they fall due. There is also a
requirement that a firm ensures its liquidity resources contain an adequate buffer of high quality, unencumbered assets (i.e. Government securities in
the liquidity asset buffer); and it maintains a prudent funding profile. The liquid assets buffer is a pool of highly liquid assets that can be called upon
to create sufficient liquidity to meet liabilities on demand, particularly in a period of liquidity stress. The liquidity resources outside the buffer must
either be marketable assets with a demonstrable secondary market that the firm can access, or a credit facility that can be activated in times of stress.
The banking entities both prepared and approved their Individual Liquidity Assessment (ILA). The liquidity buffers required by the ILA have all
been put in place and maintained since. Liquidity resources outside of the buffer are made up of certificates of deposit and fixed rate notes (debt
securities). The Company and Group also maintain long-term committed bank facilities.
The table below analyses the contractual undiscounted cash flows for the Group into relevant maturity groupings at 31 December 2011:
At 31 December 2011
Non-derivative liabilities
Deposits from banks
Deposits from customers
Liabilities relating to assets classsified as held for sale
Other liabilities
Debt securities in issue
Issued financial guarantee contracts
Unrecognised loan commitments
Carrying
amount
£000
8
693,800
1,291
14,893
12,256
Gross
nominal
inflow/
(outflow)
£000
(8)
(707,428)
(1,291)
(15,056)
(15,054)
(803)
(21,841)
Not more than
3 months
£000
(8)
(344,558)
(1,291)
(14,821)
(140)
(803)
(21,841)
More than
3 months but
less than
1 year
£000
–
(275,998)
–
(109)
(420)
–
–
More than
1 year but
less than
5 years
£000
–
(86,872)
–
(126)
(2,238)
–
–
More than
5 years
£000
–
–
–
–
(12,256)
–
–
722,248
(761,481)
(383,462)
(276,527)
(89,236)
(12,256)
50
Arbuthnot Banking Group PLC
Notes to the Consolidated Financial Statements continued
4. Financial risk management continued
The table below analyses the contractual undiscounted cash flows for the Group into relevant maturity groupings at 31 December 2010:
At 31 December 2010
Non-derivative liabilities
Deposits from banks
Trading securities – short positions
Deposits from customers
Other liabilities
Debt securities in issue
Issued financial guarantee contracts
Unrecognised loan commitments
Derivative liabilities
Risk management:
– Inflows
– Outflows
Carrying
amount
£000
3,706
775
503,257
9,533
12,630
Gross
nominal
inflow/
(outflow)
£000
(3,710)
(775)
(503,671)
(8,294)
(15,143)
(485)
(23,469)
Not more than
3 months
£000
(3,710)
(775)
(323,077)
(8,039)
(126)
(485)
(23,469)
More than
3 months but
less than
1 year
£000
–
–
(174,267)
(109)
(377)
–
–
529,901
(555,547)
(359,681)
(174,753)
184
–
20,073
(20,257)
–
20,073
(20,257)
184
(184)
(184)
–
–
–
–
More than
1 year but
less than
5 years
£000
–
–
(6,327)
(146)
(2,010)
–
–
(8,483)
–
–
–
–
More than
5 years
£000
–
–
–
–
(12,630)
–
–
(12,630)
–
–
–
–
The table below analyses the contractual undiscounted cash flows for the Company into relevant maturity groupings at 31 December 2011:
At 31 December 2011
Non-derivative liabilities
Due to subsidiary undertakings
Accruals
Debt securities in issue
Issued financial guarantee contracts
Carrying
amount
£000
6,020
4,675
12,256
22,951
Gross
nominal
inflow/
(outflow)
£000
(6,020)
(4,675)
(15,054)
(2,500)
(28,249)
Not more than
3 months
£000
(6,020)
-
(140)
(2,500)
(8,660)
More than
3 months but
less than
1 year
£000
-
(4,675)
(420)
-
(5,095)
More than
1 year but
less than
5 years
£000
-
-
(2,238)
-
(2,238)
More than
5 years
£000
-
-
(12,256)
-
(12,256)
The table below analyses the contractual undiscounted cash flows for the Company into relevant maturity groupings at 31 December 2010:
At 31 December 2010
Non-derivative liabilities
Deposits from banks
Due to subsidiary undertakings
Accruals
Debt securities in issue
Issued financial guarantee contracts
Carrying
amount
£000
2,869
10,097
849
12,630
Gross
nominal
inflow/
(outflow)
£000
(2,869)
(10,097)
(848)
(15,143)
(2,500)
Not more than
3 months
£000
(2,869)
(10,097)
–
(126)
(2,500)
More than
3 months but
less than
1 year
£000
–
–
(848)
(377)
–
26,445
(31,457)
(15,592)
(1,225)
More than
1 year but
less than
5 years
£000
–
–
–
(2,010)
–
(2,010)
More than
5 years
£000
–
–
–
(12,630)
–
(12,630)
The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature are important factors
in assessing the liquidity of the Group and its exposure to changes in interest rates and exchange rates.
Annual Report & Accounts 2011
51
4. Financial risk management continued
Fiduciary activities
The Group provides trustee, investment management and advisory services to third parties, which involve the Group making allocation and
purchase and sale decisions in relation to a wide range of financial instruments. Those assets that are held in a fiduciary capacity are not included
in these financial statements. These services give rise to the risk that the Group may be accused of maladministration or underperformance. At the
balance sheet date, the Group had investment management accounts amounting to approximately £315m (2010: £225m). Additionally the Group
provides investment advisory services.
(e) Financial assets and liabilities
The tables below sets out the Group’s financial assets and financial liabilities into the respective classifications:
At 31 December 2011
Cash
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Debt securities held-to-maturity
Financial investments
Deposits from banks
Deposits from customers
Debt securities in issue
At 31 December 2010
Cash
Loans and advances to banks
Loans and advances to customers
Trading securities – long positions
Debt securities held-to-maturity
Financial investments
Deposits from banks
Trading securities – short positions
Derivative financial instruments
Deposits from customers
Debt securities in issue
Trading
£000
–
951
–
–
–
218
Held-to-
maturity
£000
–
–
–
–
40,079
–
Loans and
receivables
£000
243,183
–
66,961
392,789
–
–
1,169
40,079
702,933
–
–
–
–
Trading
£000
–
–
–
3,232
–
330
–
–
–
–
Held-to-
maturity
£000
–
–
–
–
143,119
–
–
–
–
–
Loans and
receivables
£000
73,772
12,080
300,252
–
–
–
Available-
for-sale
£000
–
–
–
–
–
2,858
2,858
–
–
–
–
Available-
for-sale
£000
–
–
–
–
–
4,627
Other
amortised
cost
£000
–
–
–
–
–
–
Total
carrying
amount
£000
243,183
951
66,961
392,789
40,079
3,076
Fair value
£000
243,183
951
66,961
392,789
40,079
3,076
–
747,039
747,039
8
693,800
12,256
8
693,800
12,256
8
693,800
12,256
706,064
706,064
706,064
Other
amortised
cost
£000
–
–
–
–
–
–
Total
carrying
amount
£000
73,772
12,080
300,252
3,232
143,119
4,957
Fair value
£000
73,772
12,080
300,252
3,232
143,119
4,957
3,562
143,119
386,104
4,627
–
537,412
537,412
–
775
184
–
–
959
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,706
–
–
503,257
12,630
3,706
775
184
503,257
12,630
3,706
775
184
503,257
12,630
519,593
520,552
520,552
52
Arbuthnot Banking Group PLC
Notes to the Consolidated Financial Statements continued
5. Capital management
The Group’s capital management policy is focused on optimising shareholder value. There is a clear focus on delivering organic growth and ensuring
capital resources are sufficient to support planned levels of growth. The Board regularly reviews the capital position.
In accordance with the EU’s Capital Requirements Directive (CRD) and the required parameters set out in the FSA Handbook (BIPRU 2.2), the
Individual Capital Assessment Process (ICAAP) is embedded in the risk management framework of the Group and is subject to ongoing updates and
revisions when necessary. However, at a minimum, the ICAAP is updated annually as part of the business planning process. The ICAAP is a process
that brings together management framework (i.e. the policies, procedures, strategies, and systems that the Group has implemented to identify, manage
and mitigate its risks) and the financial disciplines of business planning and capital management. The Group’s regulated entities are also the principal
trading subsidiaries as detailed in Note 37.
Not all material risks can be mitigated by capital, but where capital is appropriate the Board has adopted a “Pillar 1 plus” approach to determine
the level of capital the Group needs to hold. This method takes the Pillar 1 capital formula calculations (standardised approach for credit, market
and operational risk) as a starting point, and then considers whether each of the calculations delivers a sufficient capital sum adequately to cover
managements’ anticipated risks. Where the Board considered that the Pillar 1 calculations did not reflect the risk, an additional capital add-on in
Pillar 2 is applied, as per the Individual Capital Guidance (ICG) issued by the FSA.
The Group’s regulatory capital is divided into two tiers:
•
•
Tier 1 comprises mainly shareholders’ funds, non-controlling interests, after deducting goodwill and other intangible assets.
Lower Tier 2 comprises qualifying subordinated loan capital and revaluation reserves. Lower Tier 2 capital cannot exceed 50% of tier 1 capital.
The following table shows the regulatory capital resources as managed by the Group:
Tier 1
Share capital
Share premium account
Retained earnings
Other reserves
Non-controlling interests
Goodwill
Other deductions
Total tier 1 capital
Tier 2
Revaluation reserve
Debt securities in issue
Total tier 2 capital
2011
£000
153
21,085
21,571
(1,976)
5,998
(1,991)
(1,570)
43,270
140
12,256
12,396
2010
£000
150
21,085
12,142
(1,493)
2,118
(1,991)
(924)
31,087
146
12,630
12,776
Total tier 1 & tier 2 capital
55,666
43,863
The ICAAP includes a summary of the capital required to mitigate the identified risks in its regulated entities and the amount of capital that the
Group has available. The latest version of the Group ICAAP is in the process of being approved by the Board. The FSA sets ICG for each UK
bank calibrated by references to its Capital Resources Requirement, broadly equivalent to 8 percent of risk weighted assets and thus representing
the capital required under Pillar 1 of the Basel II framework. The ICAAP is a key input into the FSA’s ICG setting process, which addresses
the requirements of Pillar 2 of the Basel II framework. The FSA’s approach is to monitor the available capital resources in relation to the ICG
requirement. Each entity maintains an extra internal buffer and capital ratios are reviewed on a monthly basis to ensure that external requirements
are adhered to. All regulated entities have complied with all of the externally imposed capital requirements to which they are subject.
Pillar 3 complements the minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2). Its aim is to encourage market
discipline by developing a set of disclosure requirements which will allow market participants to assess key pieces of information on a firm’s capital,
risk exposures and risk assessment processes. Our Pillar 3 disclosures for the year ended 31 December 2011 are published as a separate document on
the Group website under Investor Relations (Announcements & Shareholder Info).
Annual Report & Accounts 2011
53
6. Fee and commission income
Fee and commission income
Trust and other fiduciary fee income
Other fee income
7. Net impairment loss on financial assets
Impairment losses on loans and advances to customers (Note 18)
Impairment losses on available-for-sale investments
2011
£000
3,237
16,850
20,087
2011
£000
6,688
125
6,813
2010
£000
2,219
14,683
16,902
2010
£000
3,146
–
3,146
8. Other income
Other income mainly consist of a contribution of £1.1m (2010: £0.8m) towards the cost of the Swiss entity received from a possible investor.
9. Discontinued operations
On 18 November 2011, the Group entered into a conditional contract to sell its Investment Banking Division, Arbuthnot Securities Ltd, to
Westhouse Holdings PLC (“Westhouse”) subject to regulatory approval. Westhouse agreed to buy Arbuthnot Securities together with its
outstanding subordinated loan of £1.5m for a total of £1.9m. Also refer to note 40 for post balance sheet events.
Interest and similar income
Interest expense and similar charges
Net interest income
Fee and commission income
Fee and commission expense
Net fee and commission income
Gains less losses from dealing in securities
Operating income
Other income
Impairment of LTIP loans, illiquid stocks and outstanding receivable
Adjustment of carrying value to fair value less costs to sell
Operating expenses
(Loss)/profit before income tax
Income tax credit/(expense)
(Loss)/profit after income tax
Assets classified as held for sale
Loans and advances to banks
Trading securities – long positions
Other assets
Intangible assets
Property, plant and equipment
Deferred tax asset
Year ended
31 December
2011
£000
3
(147)
(144)
6,783
(273)
6,510
149
6,515
6
(3,716)
(1,556)
(14,447)
(13,198)
2,949
(10,249)
Year ended
31 December
2010
£000
2
(234)
(232)
12,949
(194)
12,755
4,456
16,979
89
–
–
(16,029)
1,039
(145)
894
2011
£000
241
206
1,674
17
36
1,500
3,674
54
Arbuthnot Banking Group PLC
Notes to the Consolidated Financial Statements continued
9. Discontinued operations continued
Liabilities relating to assets classified as held for sale
Trading securities – short positions
Other liabilities
10. Operating profit on ordinary activities before tax
Operating expenses comprise:
Staff costs, including Directors:
Wages and salaries
Social security costs
Pension costs
Amortisation of computer software (Note 21)
Depreciation (Note 22)
Profit on disposals of property, plant and equipment
Financial Services Compensation Scheme Levy
Charitable donations
Operating lease rentals
Restructuring costs
Other administrative expenses
Total operating expenses
2011
£000
46
1,245
1,291
2010
£000
16,000
1,698
791
403
1,193
–
30
55
2,370
262
8,801
31,603
2011
£000
16,259
1,839
800
324
736
(3)
157
126
2,079
–
12,208
34,525
The auditors’ remuneration for the audit of the Company’s accounts was £75,000 (2010: £75,000) and fees payable for the audit of the accounts of
subsidiaries of the Company was £216,000 (2010: £216,000). Remuneration of the auditors for non-audit services was: services related to taxation
£184,000 (2010: £163,000) and all other services £703,000 (2010: £70,000).
11. Average number of employees
Retail banking
Private banking
Group
2011
229
132
18
379
2010
201
125
17
343
Annual Report & Accounts 2011
55
12. Income tax expense
United Kingdom corporation tax at 26.5% (2010: 28%)
Current taxation
Corporation tax charge – current year
Corporation tax charge – adjustments in respect of prior years
Deferred taxation
Origination and reversal of temporary differences
Adjustments in respect of prior years
Income tax expense
Tax reconciliation
Profit before tax
Tax at 26.5% (2010: 28%)
Permanent differences
Tax rate change
Prior period adjustments
Corporation tax charge for the year
2011
£000
2010
£000
1,700
(99)
1,601
3
213
216
1,817
5,116
1,356
278
69
114
1,817
1,514
(201)
1,313
(166)
91
(75)
1,238
4,065
1,153
190
5
(110)
1,238
13. Earnings per ordinary share
Basic and fully diluted
Earnings per ordinary share are calculated on the net basis by dividing the loss attributable to equity holders of the Company of £5,014,000 (2010:
profit of £3,747,000) by the weighted average number of ordinary shares 15,046,364 (2010: 14,999,619) in issue during the year. There is no
difference between basic and fully diluted earnings per ordinary share.
14. Cash
Cash in hand included in cash and cash equivalents (Note 35)
2011
£000
2010
£000
243,183
73,772
In 2010 a reserve account was opened at the Bank of England (BoE) to comply with the new Liquidity regime that came into force on 1 October
2010. Surplus funds are now mainly held in the BoE reserve account, with the remainder held in certificates of deposit, fixed rate notes and money
market deposits in highly rated banks (the majority held in UK clearing banks). The Group took the prudent approach of moving the majority of
excess funds to the BoE reserve account, after the recent down grade of UK banks and the instability in the Euro Zone.
15. Loans and advances to banks
Placements with banks included in cash and cash equivalents (Note 35)
2011
£000
2010
£000
66,961
12,080
56
Arbuthnot Banking Group PLC
Notes to the Consolidated Financial Statements continued
15. Loans and advances to banks continued
The table below presents an analysis of loans and advances to banks by rating agency designation as at 31 December, based on Moody’s long
term ratings:
Aaa
Aa1
Aa2
Aa3
A1
A2
None of the loans and advances to banks is either past due or impaired.
16. Trading securities, all held at fair value through profit and loss
Unlisted equity securities:
Long positions
Listed equity securities:
Long positions
Short positions
2011
£000
52,936
581
–
10,575
2,257
612
66,961
2011
£000
–
–
–
2010
£000
–
–
4,633
7,447
–
–
12,080
2010
£000
65
3,167
(775)
The following table shows the Group’s trading book exposure to market price risk for the year ended 31 December 2011:
Equities:
Long
Short
Highest
exposure
£000
5,685
(1,668)
Lowest
exposure
£000
288
(21)
Average
exposure
£000
2,479
(433)
Exposure as at
31 December
£000
206
(46)
At year end these exposures were transferred to assets classified as held for sale.
The following table shows the Group’s trading book exposure to market price risk for the year ended 31 December 2010:
Equities:
Long
Short
17. Loans and advances to customers
Gross loans and advances
Less: allowances for impairment on loans and advances (Note 18)
For a maturity profile of loans and advances to customers, refer to Note 4.
Highest
exposure
£000
4,807
(2,247)
Lowest
exposure
£000
1,734
(137)
Average
exposure
£000
3,311
(987)
2011
£000
404,039
(11,250)
392,789
Exposure as at
31 December
£000
3,232
(775)
2010
£000
309,448
(9,196)
300,252
Annual Report & Accounts 2011
57
17. Loans and advances to customers continued
Loans and advances to customers include finance lease receivables as follows:
Gross investment in finance lease receivables:
– No later than 1 year
– Later than 1 year and no later than 5 years
– Later than 5 years
Unearned future finance income on finance leases
Net investment in finance leases
The net investment in finance leases may be analysed as follows:
– No later than 1 year
– Later than 1 year and no later than 5 years
– Later than 5 years
Loans and advances to customers can be further summarised as follows:
Neither past due nor impaired
Past due but not impaired
Impaired
Gross
Less: allowance for impairment
Net
(a) Loans and advances past due but not impaired
Gross amounts of loans and advances to customers that were past due but not impaired were as follows:
Past due up to 30 days
Past due 30 – 60 days
Past due 60 – 90 days
Over 90 days
Total
2011
£000
12,857
10,663
–
23,520
(6,518)
17,002
8,395
8,607
–
17,002
2011
£000
371,884
19,263
12,892
404,039
(11,250)
392,789
2011
£000
10,217
5,272
942
2,832
19,263
2010
£000
3,386
5,348
2
8,736
(3,407)
5,329
1,485
3,842
2
5,329
2010
£000
282,737
11,980
14,731
309,448
(9,196)
300,252
2010
£000
6,860
1,416
668
3,036
11,980
Loans and advances normally fall into this category when there is a delay in either the sale of the underlying collateral or the completion of
formalities to extend the credit facilities for a further period. Management have no material concerns regarding the quality of the collateral that
secures the lending.
(b) Loans and advances renegotiated
Restructuring activities include external payment arrangements, modification and deferral of payments. Following restructuring, a previously
overdue customer account is reset to a normal status and managed together with other similar accounts. Restructuring policies and practices are
based on indicators or criteria which, in the judgement of management, indicate that payment will most likely continue. These policies are kept
under continuous review. Renegotiated loans that would otherwise be past due or impaired totalled £nil (2010: £nil).
(c) Collateral held
An analysis of loans and advances to customers past due or impaired by reference to the fair value of the underlying collateral is as follows:
Past due but not impaired
Impaired
Fair value of collateral held
2011
£000
18,764
5,735
24,499
2010
£000
16,065
1,403
17,468
Collateral is shown at fair value less costs to sell. The fair value of the collateral held is £24,499,000 against £17,698,000 secured loans, giving an
average loan-to-value of 72% (2010: 34%).
58
Arbuthnot Banking Group PLC
Notes to the Consolidated Financial Statements continued
17. Loans and advances to customers continued
The gross amount of individually impaired loans and advances to customers before taking into account the cash flows from collateral held is
£12,892,000 (2010: £14,731,000).
Interest income on loans classified as impaired totalled £745,000 (2010: £1,919,000).
18. Allowances for impairment of loans and advances
A reconciliation of the allowance account for losses on loans and advances by class is as follows:
At 1 January
Impairment losses
Loans written off during the year as uncollectible
Amounts recovered during the year
At 31 December
A further analysis of allowances for impairment of loans and advances is as follows:
Loans and advances to customers – Arbuthnot Latham
Loan and advances to customers – unsecured – Secure Trust Bank
At 31 December
2011
£000
9,196
7,367
(4,634)
(679)
11,250
2011
£000
2,386
8,864
11,250
2010
£000
7,301
3,146
(1,251)
–
9,196
2010
£000
1,398
7,798
9,196
19. Debt securities held-to-maturity
Debt securities represent certificates of deposit. The Group’s intention is to hold them to maturity and, therefore, they are stated in the Statement of
Financial Position at amortised cost. Amounts include £nil (2010: £nil) with a maturity, when placed, of 3 months or less included in cash and cash
equivalents (Note 35).
The movement in debt securities held to maturity may be summarised as follows:
At 1 January
Additions
Redemptions
At 31 December
2011
£000
143,119
174,401
(277,441)
40,079
The table below presents an analysis of debt securities by rating agency designation at 31 December, based on Moody’s long term ratings:
Aaa
Aa2
Aa3
A1
None of the debt securities held-to-maturity are either past due or impaired.
20. Financial investments
Group:
Financial investments comprise:
– Securities (at fair value through profit and loss)
– Securities (available-for-sale)
Total financial investments
2011
£000
15,291
4,510
11,775
8,503
40,079
2011
£000
218
2,858
3,076
2010
£000
127,597
452,576
(437,054)
143,119
2010
£000
4,005
13,018
126,096
–
143,119
2010
£000
330
4,627
4,957
Unlisted securities
The Group has made equity investments in unlisted special purpose vehicles set up to acquire and enhance the value of commercial properties.
These investments are of a medium term nature. There is no open market for these investments therefore the Group has valued them using
appropriate valuation methodologies, which include net asset valuations and discounted future cash flows.
Annual Report & Accounts 2011
59
20. Financial investments continued
The Directors intend to dispose of these assets when a suitable buyer has been identified and when the Directors believe that the underlying assets
have reached their maximum value.
Company
Financial investments comprise:
– Listed securities (at fair value through profit and loss)
21. Intangible assets
Goodwill
Group
Opening net book amount
Closing net book amount
Computer software
Group
Cost
At 1 January 2010
Additions
At 31 December 2010
Additions
Disposals
Transfer to assets classified as held for sale
At 31 December 2011
Accumulated amortisation
At 1 January 2010
Amortisation charge
At 31 December 2010
Amortisation charge
Disposals
Transfer to assets classified as held for sale
At 31 December 2011
Net book amount
At 31 December 2010
At 31 December 2011
Total intangible assets
Goodwill
Computer software
Net book amount at 31 December
Refer to note 1.13 (a) for assumptions used in the impairment review of goodwill.
2011
£000
218
2011
£000
1,991
1,991
2011
£000
1,991
1,570
3,561
2010
£000
330
2010
£000
1,991
1,991
£000
3,725
426
4,151
1,004
(177)
(58)
4,920
(2,810)
(417)
(3,227)
(333)
177
33
(3,350)
924
1,570
2010
£000
1,991
924
2,915
60
Arbuthnot Banking Group PLC
Notes to the Consolidated Financial Statements continued
22. Property, plant and equipment
Group
Cost or valuation
At 1 January 2010
Additions
Disposals
At 31 December 2010
Additions
Disposals
Transfer to assets classified as held for sale
Freehold
land and
buildings
£000
4,850
–
–
4,850
–
–
–
Computer
and other
equipment
£000
11,494
286
(2)
11,778
205
(609)
(200)
At 31 December 2011
4,850
11,174
Accumulated depreciation
At 1 January 2010
Depreciation charge
Disposals
At 31 December 2010
Depreciation charge
Disposals
Transfer to assets classified as held for sale
At 31 December 2011
Net book amount
At 31 December 2010
At 31 December 2011
(529)
(78)
–
(607)
(78)
–
–
(685)
4,243
4,165
(8,997)
(1,154)
–
(10,151)
(731)
609
148
(10,125)
1,627
1,049
Operating
leases
£000
2,095
–
(2,095)
–
–
–
–
–
(468)
–
468
–
–
–
–
–
–
–
Motor
vehicles
£000
328
–
(118)
210
–
(210)
–
–
(221)
(30)
74
(177)
–
177
–
–
33
–
Total
£000
18,767
286
(2,215)
16,838
205
(819)
(200)
16,024
(10,215)
(1,262)
542
(10,935)
(809)
786
148
(10,810)
5,903
5,214
The Group’s freehold property at 1 Arleston Way, Solihull, B90 4LH, was valued on 17 December 2008 by an Independent external valuer, who is
a Fellow of the Royal Institute of Chartered Surveyors. The Valuation was in accordance with the requirements of the RICS Valuation Standards
6th Edition and the International Valuation Standards. The Valuation of the property was on the basis and assumption it is an Owner/Occupied
property, valued to Market Value assuming that the property will be sold as part of the continuing business. The Valuer’s opinion of Market Value
was primarily derived using comparable recent market transactions on arms-length terms. The Directors have assessed the value at year end through
comparison to current rental yields on similar properties in the area and do not believe that the fair value of freehold property is materially different
from the carrying value. All freehold land and buildings are occupied and used by Group companies. The carrying value of freehold land not
depreciated is £0.5 million (2010: £0.5 million).
The historical cost of freehold property included at valuation is as follows:
Cost
Accumulated depreciation
Net book amount
Motor vehicles include the following amounts where the Group is a lessee under a finance lease:
Cost – capitalised finance leases
Accumulated depreciation
Net book amount
2011
£000
4,792
(1,057)
3,735
2011
£000
–
–
–
2010
£000
4,792
(967)
3,825
2010
£000
306
(199)
107
Annual Report & Accounts 2011
61
22. Property, plant and equipment continued
Company
Cost or valuation
At 1 January 2010
Additions
At 31 December 2010
Additions
At 31 December 2011
Accumulated depreciation
At 1 January 2010
Depreciation charge
At 31 December 2010
Depreciation charge
At 31 December 2011
Net book amount
At 31 December 2010
At 31 December 2011
23. Other assets
Trade receivables
Repossessed collateral – held-for-sale
Prepayments and accrued income
24. Deposits from banks
Deposits from other banks
For a maturity profile of deposits from banks, refer to Note 4.
25. Derivative financial instruments
2011
£000
3,108
2,334
3,203
8,645
2011
£000
8
Currency swaps
Interest rate caps
Structured notes
Contract/
notional
amount
20,840
40,000
691
61,531
2011
Fair value
assets
325
59
567
951
Fair value
liabilities
–
–
–
–
Contract/
notional
amount
20,073
–
–
20,073
2010
Fair value
assets
–
–
–
–
Computer and
other equipment
£000
126
17
143
46
189
(48)
(7)
(55)
(7)
(62)
88
127
2010
£000
8,727
2,205
7,016
17,948
2010
£000
3,706
Fair value
liabilities
184
–
–
184
The principal derivatives used by the Group are exchange rate contracts and cash flow hedges. Exchange rate related contracts include currency
swaps and cash flow hedges include interest rate caps.
A forward foreign exchange contract is an agreement to buy or sell a specified amount of foreign currency on a specified future date at an agreed
rate. Currency swaps generally involve the exchange of interest payment obligations denominated in different currencies; exchange of principal can
be notional or actual. The currency swaps are settled net and therefore the fair value is small in comparison to the contract/notional amount.
62
Arbuthnot Banking Group PLC
Notes to the Consolidated Financial Statements continued
25. Derivative financial instruments continued
An interest rate cap is a option contract which puts an upper limit on a floating exchange rate. The writer of the cap has to pay the holder of the cap
the difference between the floating rate and the reference rate when that reference rate is breached. The holder pays a premium for the cap.
Also included in derivative financial instruments are structured notes. These notes contain embedded derivatives (embedded options to buy and sell
indicies) and non-derivative host contracts (discounted bonds). Both the host and embedded derivatives are presented net within derivative financial
instruments.
The Company only uses investment graded banks for derivative financial instruments.
The table below presents an analysis of derivative financial instruments contract/notional amounts by rating agency designation at 31 December,
based on Moody’s long term ratings:
Aa3
A1
26. Deposits from customers
Current/demand accounts
Term deposits
2011
£000
21,531
40,000
61,531
2011
£000
202,843
490,957
693,800
2010
£000
20,073
–
20,073
2010
£000
179,209
324,048
503,257
Included in customer accounts are deposits of £8,578,000 (2010: £10,035,000) held as collateral for loans and advances. The fair value of these
deposits approximates the carrying value.
For a maturity profile of deposits from customers, refer to Note 4.
27. Other liabilities
Trade payables
Finance lease liabilities
Accruals and deferred income
2011
£000
7,069
–
7,824
14,893
2010
£000
1,835
25
7,673
9,533
The Financial Services Compensation Scheme (‘FSCS’) has provided compensation to consumers following the collapse of a number of deposit
takers. The compensation paid out to consumers is currently funded through loans from the Bank of England and HM Treasury.
At 31 December 2011, the Group had accrued £355,000 (2010: £353,000) in respect of the levy, based on the bank’s estimated share of total
market protected deposits.
Annual Report & Accounts 2011
63
27. Other liabilities continued
a.) Finance lease liabilities
Lease liabilities are effectively secured as the rights to the leased asset revert to the lessor in the event of default.
Gross finance lease liabilities – minimum lease payments
Within 1 year
Future finance charges on finance leases
Present value of finance lease liabilities
The present value of finance lease liabilities is as follows:
Within 1 year
28. Debt securities in issue
Subordinated loan notes 2035
2011
£000
–
–
–
–
–
–
2011
£000
2010
£000
26
26
(1)
25
25
25
2010
£000
12,256
12,630
The subordinated loan notes 2035 were issued on 7 November 2005 and are denominated in Euros. The principal amount outstanding at
31 December 2011 was €15,000,000 (2010: €15,000,000). The notes carry interest at 3% over the interbank rate for three month deposits in euros
and are repayable at par in August 2035 unless redeemed or repurchased earlier by the Company.
The contractual undiscounted amount that will be required to be paid at maturity of the above debt securities is €15,000,000.
Given the fact that the Group has never been subject to a published credit rating by any of the relevant agencies and the notes in issue are not quoted,
it is not considered possible to approximate a fair value for these notes.
29. Deferred taxation
The deferred tax asset comprises:
Unrealised surplus on revaluation of freehold property
Accelerated capital allowances and other short-term timing differences
Movement in fair value of derivatives
Tax losses
Transfer to assets classified as held for sale
Deferred tax asset
At 1 January
Revaluation reserve
Available-for-sale securities
Movement in fair value of derivatives
Profit and loss account – accelerated capital allowances and other short-term timing differences
Profit and loss account – tax losses
Transfer to assets classified as held for sale
Deferred tax asset at 31 December
The above balance is made up as follows:
Deferred tax assets within the Group
Deferred tax liabilities within the Group
2011
£000
(97)
607
110
2,098
(2,089)
629
806
–
55
110
(217)
1,964
(2,089)
629
2011
£000
726
(97)
629
2010
£000
(126)
870
–
62
–
806
302
(70)
(55)
–
35
594
–
806
2010
£000
932
(126)
806
64
Arbuthnot Banking Group PLC
Notes to the Consolidated Financial Statements continued
29. Deferred taxation continued
Deferred tax assets are recognised for tax losses to the extent that the realisation of the related tax benefit through future taxable profits is probable.
During the year the Government substantively enacted a reduction in UK corporation tax rate to 26% with effect from 1 April 2011 and to
25% with effect from 1 April 2012. This will reduce the Group’s future current tax charge accordingly. Deferred tax has been calculated at the
corporation tax rates applicable to the financial years in which it is expected that the assets will be realised or the liabilities settled, being 25%.
On the 23 March 2011 the Government announced its intention to further reduce the UK corporation tax rate to 23% by April 2014. It has not
yet been possible to quantify the full anticipated effect of the announced further 2% reduction, although this will further reduce the Group’s future
current tax charge and reduce the Group’s deferred tax balances accordingly.
30. Contingent liabilities and commitments
Capital commitments
At 31 December 2011, the Group had capital commitments of £nil (2010: £nil) in respect of equipment purchases.
Credit commitments
The contractual amounts of the Group’s off-balance sheet financial instruments that commit it to extend credit to customers are as follows:
Guarantees and other contingent liabilities
Commitments to extend credit:
– Original term to maturity of one year or less
2011
£000
803
21,841
22,644
Operating lease commitments
Where a Group company is the lessee, the future aggregate lease payments under non-cancellable operating leases are as follows:
Expiring:
Within 1 year
Later than 1 year and no later than 5 years
Later than 5 years
2011
£000
1,877
5,324
43
7,244
2010
£000
485
23,469
23,954
2010
£000
1,798
151
57
2,006
Other commitments
At 31 December 2011 a commitment exists to make further payments with regard to the Financial Compensation Scheme Levy for 2011
and thereafter. Due to uncertainties regarding the calculation of the levy and the Group’s share thereof, the Directors consider this cost to be
unquantifiable.
31. Share capital
At 1 January 2011
Rights issue
At 31 December 2011
Number of
shares
14,999,619
279,703
15,279,322
Ordinary
share capital
£000
150
3
153
Share
premium
£000
21,085
–
21,085
During the year there was a rights issue of 279,703 shares, as shares were issued as part of a scrip dividend alternative (2010: no change in share
capital). All issued shares are fully paid.
At 31 December 2011 the Company held 380,274 shares (2010: 380,274) in treasury.
Annual Report & Accounts 2011
65
32. Reserves and retained earnings
Group
Foreign currency translation reserve
Revaluation reserve
Capital redemption reserve
Available-for-sale reserve
Cash flow hedging reserve
Treasury shares
Retained earnings
Total reserves at 31 December
2011
£000
(570)
140
20
–
(329)
(1,097)
21,571
19,735
2010
£000
(558)
146
20
142
–
(1,097)
12,142
10,795
The revaluation reserve represents the unrealised change in the fair value of properties.
The foreign exchange translation reserve represents the cumulative gains and losses on the retranslation of the Group’s and the Company’s net
investment in foreign operations, net of the effects of economic hedging.
The capital redemption reserve represents a reserve created after the Company purchased its own shares which resulted in a reduction of share
capital.
Company
Capital redemption reserve
Treasury shares
Retained earnings
Total reserves as 31 December
2011
£000
20
(1,097)
8,517
7,440
2010
£000
20
(1,097)
415
(662)
33. Share-based payment options
At 31 December 2011, the Company had the following equity settled share-based payment awards outstanding:
•
•
•
On 21 May 2008 Mr. Salmon was granted an option to subscribe for 100,000 ordinary 1p shares in the Company between May 2011 and
May 2015 at 337.5p. The fair value of the option at grant date was £nil.
On 5 November 2008 Mr. Cobb was granted an option to subscribe for 50,000 ordinary 1p shares in the Company between November 2011
and November 2015 at 320p. The fair value of the option at grant date was £nil.
On 22 December 2009 Dr. Turrell was granted an option to subscribe for 50,000 ordinary 1p shares in the Company at 380p which may be
executed in December 2012. The fair value of the option at grant date was £nil.
On 17 October 2011, the Secure Trust Bank Group established a Share Option Scheme that entitles key management personnel and senior
employees of Secure Trust Bank to purchase shares in that company. All options are non-transferable and there are no cash settlement alternatives.
Options are forfeited if they remain unexercised after a period of more than 10 years from the date of grant. If the participant ceases to be employed
by the Group by reason of injury, disability, ill-health or redundancy; or because his employing company ceases to be a shareholder of the Group;
or because his employing business is being transferred out of the Group, his option may be exercised within 6 months after such cessation. In the
event of the death of a participant, the personal representatives of a participant may exercise an option, to the extent exercisable at the date of death,
within 6 months after the death of the participant.
On cessation of employment for any other reason (or when a participant serves, or has been served with, notice of termination of such employment),
the option will lapse although the Remuneration Committee has discretion to allow the exercise of the option for a period not exceeding 6 months
from the date of such cessation.
In such circumstances, the performance conditions may be modified or waived as the Remuneration Committee, acting fairly and reasonably
and taking due consideration of the circumstances, thinks fit. The number of shares which can be acquired on exercise will be pro-rated on a
time elapsed basis, unless the Remuneration Committee, acting fairly and reasonably and taking due consideration of the circumstances, decides
otherwise. In determining whether to exercise its discretion in these respects, the Remuneration Committee must satisfy itself that the early exercise
of an option does not constitute a reward for failure.
66
Arbuthnot Banking Group PLC
Notes to the Consolidated Financial Statements continued
33. Share-based payment options continued
On 2 November 2011 934,998 share options were granted at an exercise price of 720p per share. Half of the share options are exercisable on
2 November 2014 with the remainder exercisable on 2 November 2016. At the grant date these share options had a fair value of £1,580,147.
The movement within reserves during the year was £70,000 (2010: £nil). Of the share options granted on 2 November 2011, the following were
to Group directors:
•
•
Mr. Lynam was granted an option to subscribe for 141,666 ordinary 40p shares in Secure Trust Bank PLC at 720p between 2 November 2014
and 1 November 2021 and a further 141,667 shares at 720p between 2 November 2016 and 1 November 2021.
Mr. Salmon was granted an option to subscribe for 141,666 ordinary 40p shares in Secure Trust Bank PLC at 720p between 2 November 2014
and 1 November 2021 and a further 141,667 shares at 720p between 2 November 2016 and 1 November 2021.
Subsequent to the year end the Secure Trust Bank Group Share Option Scheme was altered to allow cash rather than equity settlement.
34. Dividends per share
Final dividends are not accounted for until they have been approved at the Annual General Meeting. At the meeting on 16 May 2012, a dividend
in respect of 2011 of 13 pence per share (2010: actual dividend 12 pence per share) amounting to a total of £1.94m (2010: actual £1.75m) is
to be proposed. The financial statements for the year ended 31 December 2011 do not reflect the final dividend which will be accounted for in
shareholders’ equity as an appropriation of retained profits in the year ending 31 December 2012.
35. Cash and cash equivalents
For the purposes of the Statement of Cash Flows, cash and cash equivalents comprises of the following balances with less than three months
maturity from the date of acquisition.
Cash (Note 14)
Loans and advances to banks (Note 15)
2011
£000
243,183
66,961
310,144
2010
£000
73,772
12,080
85,852
36. Related-party transactions
Related parties of the Company and Group include subsidiaries, Key Management Personnel, close family members of Key Management Personnel
and entities which are controlled, jointly controlled or significantly influenced, or for which significant voting power is held, by Key Management
Personnel or their close family members.
Other than the directors’ remuneration, payment of dividends and transactions with subsidiaries, there were no related party transactions within
the Parent Company. A number of banking transactions are entered into with related parties in the normal course of business on normal commercial
terms. These include loans and deposits. Except for the directors’ disclosures, there were no other Key Management Personnel disclosures; therefore
the tables below relate to directors.
Loans
Loans outstanding at 1 January
Loans advanced during the year
Loan repayments during the year
Loans outstanding at 31 December
Interest income earned
Directors
2011
£000
2,952
98
(673)
2,377
167
2010
£000
2,936
17
(1)
2,952
143
The loans to directors are secured on property or shares and bear interest at rates linked to base rate. No provisions have been recognised in respect
of loans given to related parties (2010: £nil). Details of directors’ remuneration are given in the Remuneration Report. The Directors do not believe
that any other key management disclosures are required.
Annual Report & Accounts 2011
67
36. Related-party transactions continued
Deposits
Deposits at 1 January
Deposits placed during the year
Deposits repaid during the year
Deposits at 31 December
Interest expense on deposits
Directors
2011
£000
2,468
4,021
(5,216)
1,273
134
2010
£000
1,880
1,265
(677)
2,468
90
Details of principal subsidiaries are given in Note 37. Transactions and balances with subsidiaries are shown below:
ASSETS
Due from subsidiary undertakings
Shares in subsidiary undertakings
Total assets
LIABILITIES
Due to subsidiary undertakings
Total liabilities
Issued guarantee contracts
2011
2010
Subsidiaries
Highest balance
during the year
£000
Balance at
31 December
£000
Highest balance
during the year
£000
Balance at
31 December
£000
27,072
25,233
52,305
12,263
12,263
2,500
24,848
25,233
50,081
6,020
6,020
2,500
15,545
28,633
44,178
10,243
10,243
2,500
15,545
28,633
44,178
10,097
10,097
2,500
The disclosure of the year-end balance and the highest balance during the year is considered the most meaningful information to represent the
transactions during the year. The above transactions arose during the normal course of business and are on substantially the same terms as for
comparable transactions with third-parties.
37. Shares in subsidiary undertakings
Arbuthnot Banking Group PLC:
At 1 January 2010
Adjustment
At 31 December 2010
Allotment of shares in Arbuthnot Securities Limited
Impairment of investment in Arbuthnot Securities Limited
Sale of shares in Secure Trust Bank PLC
At 31 December 2011
Subsidiary undertakings:
Banks
Other
Total
Shares
at cost
£000
31,603
9
31,612
1,800
–
(1,897)
31,515
Impairment
provisions
£000
(2,979)
–
(2,979)
–
(3,303)
–
(6,282)
2011
£000
22,589
2,644
25,233
Net
£000
28,624
9
28,633
1,800
(3,303)
(1,897)
25,233
2010
£000
24,486
4,147
28,633
68
Arbuthnot Banking Group PLC
Notes to the Consolidated Financial Statements continued
37. Shares in subsidiary undertakings continued
The principal subsidiary undertakings of Arbuthnot Banking Group PLC at 31 December 2011 were:
Secure Trust Bank PLC
Arbuthnot Latham & Co., Limited
Arbuthnot AG
Arbuthnot Securities Limited (discontinued)
Country of
incorporation
UK
UK
Switzerland
UK
Interest %
75.5
100
100
78.7
Principal
activity
Retail banking
Private banking
Private banking
Investment banking
(i) All the above subsidiary undertakings are included in the consolidated financial statements and have an accounting reference date of 31 December.
(ii) All the above interests relate wholly to ordinary shares.
38. Operating segments
The Group is organised into three main operating segments, arranged over three separate companies with each having its own specialised banking
service, as disclosed below:
1) Retail banking – incorporating household cash management, personal lending and banking and insurance services.
2) UK Private banking – incorporating private banking and wealth management.
3) International Private banking – incorporating private banking and wealth management outside the UK.
Transactions between the operating segments are on normal commercial terms. Centrally incurred expenses are charged to operating segments
on an appropriate pro-rata basis. Segment assets and liabilities comprise operating assets and liabilities, being the majority of the balance sheet.
Year ended 31 December 2011
Interest revenue
Inter-segment revenue
Interest revenue from external customers
Fee and commission income
Revenue from external customers
Interest expense
Subordinated loan note interest
Segment operating income
Impairment losses
Segment profit/(loss) before tax
Income tax (expense)/income
Segment profit/(loss) after tax
Discontinued
operations
Investment
banking
£000
3
–
3
6,783
6,786
(147)
–
6,515
–
(13,198)
2,949
(10,249)
Continuing operations
UK Private
banking
£000
16,405
(139)
16,266
7,425
23,691
(5,811)
–
17,688
(2,212)
1,958
448
2,406
International
Private
banking
£000
–
–
–
–
–
(54)
–
(54)
–
(47)
–
(47)
Group
(reconciling
items)
£000
296
(154)
142
–
142
57
(573)
(636)
–
(5,856)
(24)
(5,880)
Retail
banking
£000
22,836
(11)
22,825
12,662
35,487
(5,609)
–
28,460
(4,601)
9,061
(2,241)
6,820
Total
£000
39,537
(304)
39,233
20,087
59,320
(11,417)
(573)
45,458
(6,813)
5,116
(1,817)
3,299
Group
Total
£000
(6,950)
Segment total assets
Segment total liabilities
7,859
2,791
307,935
284,025
554,935
532,591
85
2,542
(101,498)
(99,604)
761,457
719,554
769,316
722,345
Other segment items:
Capital expenditure
Depreciation and amortisation
(9)
(76)
(140)
(606)
(1,013)
(440)
–
(5)
(47)
(15)
(1,200)
(1,066)
(1,209)
(1,142)
The “Group” segment above includes the parent entity and all intercompany eliminations and fulfils the requirement of IFRS8.28.
Annual Report & Accounts 2011
69
38. Operating segments continued
Year ended 31 December 2011
Interest revenue
Inter-segment revenue
Discontinued
operations
Investment
banking
£000
2
–
Interest revenue from external customers
2
Fee and commission income
Revenue from external customers
Interest expense
Subordinated loan note interest
Segment operating income
Impairment losses
Segment profit/(loss) before tax
Income tax (expense)/income
Segment profit/(loss) after tax
12,949
12,951
(234)
–
16,979
–
1,039
(145)
894
Retail
banking
£000
15,883
–
15,883
11,489
27,372
(3,419)
–
23,953
(2,167)
8,511
(2,005)
6,506
UK Private
banking
£000
13,750
(315)
13,435
5,413
18,848
(4,370)
–
14,429
(979)
1,045
(49)
996
Continuing operations
International
Private
banking
£000
–
–
–
–
–
–
–
–
–
(100)
–
(100)
4
2,408
–
(74)
Group
(reconciling
items)
£000
356
(349)
7
–
7
317
(483)
(610)
–
(5,391)
816
(4,575)
Total
£000
29,989
(664)
29,325
16,902
46,227
(7,472)
(483)
37,772
(3,146)
4,065
(1,238)
2,827
Group
Total
£000
3,721
(45,583)
(36,928)
553,065
525,303
565,110
530,962
(57)
(10)
(630)
(1,596)
(712)
(1,679)
Segment total assets
Segment total liabilities
12,045
5,659
181,026
165,110
417,618
394,713
Other segment items:
Capital expenditure
Depreciation and amortisation
(82)
(83)
(301)
(961)
(272)
(551)
Segment profit is shown prior to any intra-group eliminations.
Other than the International private banking operations which are in Switzerland, all the Group’s other operations are conducted wholly within the
United Kingdom and geographical information is therefore not presented.
39. Ultimate controlling party
The Company regards Henry Angest, the Group Chairman and Chief Executive Officer, who has a beneficial interest in 53.6% of the issued share
capital of the Company, as the ultimate controlling party. Details of his remuneration are given in the Remuneration Report and Note 36 of the
consolidated financial statements includes related party transactions with Mr Angest.
40. Events after the balance sheet date
Regulatory approval was received for the sale of Arbuthnot Securities on 17 January 2012 and the sale completed on 20 January 2012. Also refer to
note 9. Except for the sale of Arbuthnot Securities, there were no other material post balance sheet events.
70
Arbuthnot Banking Group PLC
Five Year Summary
In the table below, all the figures are presented in accordance with IFRS.
Profit/(Loss) before tax *
Earnings per share
Basic (p) **
Dividends per share (p)
Net asset value per share (p)
2007
£000
8,579
23.8
33.0
283.2
2008
£000
(2,150)
3.5
21.0
229.4
2009
£000
5,050
23.4
22.0
227.6
2010
£000
5,104
25.0
23.0
227.7
2011
£000
5,116
(33.3)
24.0
312.2
* The profit before tax for 2011 is shown as the continuing operations results. The previous years have not been restated but the contribution of the
discontinued operation can be seen in the segmental analysis for those historical years.
** The earnings per share includes the effect of discontinued operations in 2011.
Annual Report & Accounts 2011
71
Response to Independent Commission on Banking Report
Where Vickers is Wrong
(Ring-Fencing doesn’t solve the problem of “too big to fail”)
The main feature of the Vickers Report which distinguishes it from attempts being made elsewhere to reform the banking system is its proposed
introduction of ring-fencing for the retail activities of complex banking groups. Politicians of all parties, and even some more knowledgeable
commentators, have been falling over themselves to embrace the Report. We are more sceptical.
Ring-Fencing
We believe that ring-fencing won’t solve the problem of “too big to fail” because it is based on two premises which we believe to be flawed. If we are
right, Vickers won’t help prevent a repeat of the banking collapse of 2008-09. These premises are as follows:-
Premise 1
That the banking crisis was caused by excessive risk-taking in the banks, especially investment banks. Whilst there was clearly – with the benefit of
hindsight – excessive risk-taking, you can’t say that this caused the banking crisis without explaining why banks suddenly started taking excessive
risks. They did so, we would argue, precisely because they did not think the risks excessive. They considered them to be sensible and well-judged.
For the most part, the banks taking these decisions did so within corporate governance structures which complied fully with practice. Institutional
shareholders put pressure on management to deliver growth – not just in profits, but also in revenues and market share. Regulators and rating
agencies were comfortable with the risks being taken. Why? In answering that question, perhaps we will come clearer to understanding what caused
the crisis and what needs to be done to ensure it doesn’t happen again.
Fifteen years of uninterrupted growth, with low inflation and cheap borrowing, had created the illusion that politicians and central bankers had
somehow found the way to break the cycle. There would be “no more boom and bust”. An intellectual climate had been created in which debt
levels – personal, corporate or sovereign – were discounted as a risk, asset bubbles viewed as genuine wealth creation and default or business failure
regarded as remote contingencies most likely to be associated with fraud or catastrophic management failure. As the economy overheated, politicians
were happy to take credit for the apparent economic miracle which their “wise policies” seemed to be producing.
In truth, they and the officials that they appointed (regulators, central bankers and others) bear a heavy responsibility for what happened. Instead of
stoking up bullish sentiment with complacent remarks on how well the economy was growing and how much better off the population was getting,
politicians entrusted with power should have used it more maturely and responsibly.
They should have paid heed to the warning signals which were flashing – particularly debt levels and the real estate asset bubble. How different
things might have been if politicians had been more interested in governing responsibly and less fixated on satisfying personal ambition. No wonder
they were so keen to fix responsibility for the whole debacle on the bankers!
How is this relevant to Vickers? Simply this – four major UK banking collapses in 2007-09 (Northern Rock, Bradford & Bingley, Alliance and
Leicester and HBoS) took place within the ring-fence. They were not caused by a rogue trader or by the proliferation of opaque, complex products
in the business mix. They were caused by a persistent, institutionalised misreading of risk, which permeated everywhere in the intellectual climate
which we have described above. If our politicians, central bankers and regulators are as complacent in the future as they were in the years leading up
to 2007/8, there is nothing in Vickers to prevent the same thing happening again. What is needed is the practical judgement to spot problems as they
develop and the political will to act to cool down overheating markets, even if that is electorally unpopular. As we saw, that proved to be too much
to ask in 2007/08.
Premise 2
That governments can allow investment banking businesses to fail. This is a highly dubious premise which Vickers takes as given without attempting
to justify it. In fact, all the weight of evidence is against this idea. Lehman had no retail business, yet its collapse proved disastrous for the global
banking system. Admittedly, many of its counterparties were banks with a retail component but the fact remains that the interconnectedness to
the financial system of investment banks and their products is profound and complicated, and goes well beyond counterparty relations with other
investment banks outside the ring-fence. Investment banks have connections to the underwriters of credit insurance for their products. Those
insurance underwriters have often a systemic status within the financial system, and are often also underwriting products sold to the retail market.
Investment banks’ connections extend also to industrial corporations of various kinds through derivatives and cash flow management products
which they run to manage risk. The last financial crisis demonstrated that interconnectedness is complex and unpredictable – the accountants
are still trying to quantify and unwind the trades entered into by Lehman three years after it collapsed! Once contagion starts to spread it is very
difficult to stop. We believe that the consequences of allowing an investment bank to fail can never really be understood by a government or
regulator until the event happens and the full ramifications unfold. It would be a reckless act by a government to allow this to happen without
understanding fully the impact of the collapse.
72
Arbuthnot Banking Group PLC
Response to Independent Commission on Banking Report
continued
If you want any further demonstration that ring-fencing is irrelevant, and that banking crises are grounded in the actions of governments, central
bankers and regulators, look at the current threat to the banking system – sovereign debt. A ring-fenced bank’s balance sheet would be as likely
(perhaps even more likely) to be full of Greek and other dubious government bonds as the most aggressive investment bank. And why? Because
central bankers and regulators treated these bonds as fungible with the bonds issued by serious countries, it made some sort of sense for banks to
invest heavily into these bonds even as their yields rose, given the lack of return available elsewhere. Thus was the global system presented with its
current existential threat.
How robust would a ring-fence be in separating retail and investment banking anyway? The ring-fence is an artificial division between the retail
and investment banks which relies on procedures, definitions and controls to ensure that products and activities remain on the intended side of
the divide. We can be sure that armies of highly intelligent investment bankers will be hard at work devising products and transactions which
cross over the ring-fence – because it is by crossing over the ring-fence that banks will maximise their return on capital. Ultimately Vickers intends
that the integrity of the ring-fence will be policed by non-executive directors and regulators. In the last crisis, both demonstrated their limitations
comprehensively.
Let us draw to a conclusion on the ring-fence. It is doubtful that it will make a material difference to the security of the banking system in a crisis.
Even taken together with the other measures being put in place by the Basel Committee on Banking Supervision, the EU and the UK, it is not
obvious the financial system will prove robust when subjected to extreme stress.
Capital
Vickers follows the approach of Basel, the EU and the UK regulatory authorities in calling for banks to hold more capital – specifically, that UK
ring-fenced banks be required to have a minimum equity – to – Risk-Weighted Assets (“RWA”) ratio of at least 10%. We have two criticisms to make
of this proposal. First, it is prescriptive, “one-size-fits-all”, and therefore bears no relation to the actual risks being taken by any one bank. We would
argue that some banks need more than 10%, (where Vickers agrees), but some banks need less capital – and not all RWA’s actually bear the risk
allocated to them by regulators, as the sovereign debt crisis is showing. Second, the size of the losses incurred – or likely to be incurred once banks
finally recognise them – by UK banks in the crisis is likely to be so great that no sensible capital base would have been capable of absorbing them.
So Vickers seems to be missing the point on capital, and if his proposals are implemented they will raise costs to banks, reduce lending in the
economy and raise barriers to entry for new banks, while perhaps not solving the problem! Vickers does have some positive ideas on the subject of
capital, though. We think it makes great sense to introduce overall “leverage” limits, and that the proposal to make quasi equity or subordinated
debt more truly risk–bearing through “bail-ins” is useful.
Competition
Turning now to another area touched on by Vickers – competition. It is clear from the language of the report that for Vickers competition means
mainly the creation of a fifth, sixth or seventh major national bank to challenge the big four, created probably by the acquisition of branches from
one or more of the majors. He does touch on the need to reduce the barriers to entry for new smaller banks but we would argue that this is a limited
view of competition.
One of the consequences of the financial crisis is that the major banks have withdrawn from a large number of specialised and niche lending markets
as part of their general policy of retrenchment. They have also taken a step back from the unsecured lending market and, in some cases, from the
mortgage market as well. The effect on consumers and on small businesses has not showed up as a readily identifiable component of the general
business gloom, but there can be little doubt that the withdrawal of lending capacity from these markets is having a negative effect on the overall
economy. Some niche lenders have been able to benefit from the opportunity that the withdrawal of the big banks has created.
It is our contention that a competition policy which encouraged and facilitated the growth of more small banks could be hugely beneficial both to
the economy and to the health and stability of the banking system. Although these small banks would compete in a limited way with the majors in
certain products, sectors or geographical area, they would have the vital function of providing lending in specific niches where the major banks had
reduced their exposure. If conditions were created which permitted such small banks to flourish, the result would be a major enhancement of both
competition within the sector and improved access to lending for businesses and consumers, through the introduction of players who represent no
systemic risk.
There is no shortage of entrepreneurs ready to create such small banks. The market opportunity which exists at the moment is widely understood.
The barriers to entry are very high. These barriers are represented by regulation which seeks to impose rules devised for large, complex, multinational
banks to all banks, irrespective of size and complexity. This “one size fits all” approach to regulation saddles prospective new entrants to the sector
with unnecessarily onerous capital requirements, high ongoing costs relating to compliance and governance and leads to interminable delays in
securing licences, launching products and hiring staff.
Annual Report & Accounts 2011
73
It is a pity that Vickers missed the opportunity to emphasise more the role of small banks in a healthy and stable financial system. The measures
needed to remove the regulatory barriers are easy to implement. What is required is not less regulation, but rather regulation which is more
tailored to the particular risks being taken. “Sensitive” regulation would be based around an understanding of the business model, and would take
account of management’s record and experience, the ownership structure of the business, and the Board’s overall attitude to risk. That approach to
regulation might be better for the major banks too!
Avoiding “Too Big to Fail”
We cannot leave the topic of ring-fencing, without considering the question of what approach would work to solve this problem. We have already
said that the role of government, central banks and regulators is key, but we recognise that bank executives are far from blameless, and we have
some suggestions to offer as to how the management of banks can be put on a more prudential footing.
The best solution, in an ideal world, would be to break the big banks up into many smaller players of manageable size. With many smaller banks, the
demise of any one would have no systemic impact on the financial system, and a wide choice would become available to bank customers. In other
business sectors the benefits of this approach have long been understood. We think of the breakup of the Rockefellers’ Standard Oil in the United
States into the “Seven Sisters”, and of the Bell Corporation into numerous “Baby Bells”. In banking, however, the trend has been in the opposite
direction, partly because of weak competition policy (allowing, for example, the disastrous takeover of HBoS by Lloyds Banking Group), partly as a
result of globalisation, and partly as a result of the collapse of some competitors during the banking crisis (e.g. Northern Rock, Alliance & Leicester
and Bradford & Bingley). Realistically, we have to acknowledge that breaking up of the big banks is politically unacceptable. It would certainly
precipitate the flight of some banking head offices and a large chunk of international banking business abroad, and destroy the eminence of London
as a global financial centre.
If we cannot de-risk the system by downsizing the banking juggernauts, we have to consider ways in which we can most effectively influence the
behaviour of banking executives to make them more responsible. We would suggest that the way to do this is not to hedge executives about with
ineffective corporate governance structures, but rather to align their interests more directly and more tightly to the long-term health and success of
the banks they lead. What we are suggesting is that they should be put into the position of proprietors – in a partnership sense – of the businesses
that they manage, to reverse the separation between ownership and management which we believe encourages irresponsible, short-termist behaviour.
Suppose we encouraged – even required – the senior executives of banks (including key officeholders like the Chairman) to purchase amounts of
equity substantial in personal terms in the banks which they run. These shareholdings would be financed by loans from the banks covered on
commercial terms. This arrangement would focus the mind of management wonderfully on not just the share price performance but also the security
of the banks of which they have charge, since a banking failure would have the effect of putting the directors at risk of personal bankruptcy. This
approach is completely against the grain of Vickers and all other attempts to regulate the banking sector, which emphasise the role of independent
non-executive directors and take the separation of ownership from management as a given. We believe the opposite approach stands a better chance
of working: placing reliance not on a myriad of controls but rather on aligning the personal interests of the executives with the objective of financial
stability. Their minds could be concentrated even further by introducing a criminal offence of creating a banking failure through irresponsible
management of a bank, adding the risk of prison to that of bankruptcy as a sanction.
Henry Angest and Atholl Turrell
Arbuthnot Banking Group PLC
74
Arbuthnot Banking Group PLC
Corporate Contacts & Advisers
Advisers
Auditors:
KPMG Audit Plc
Principal Bankers:
Barclays Bank PLC
Lloyds TSB plc
Stockbrokers:
Numis Securities Limited
Nominated Advisor:
Canaccord Genuity Hawkpoint
Registrars:
Capita Registrars
The Registry
34 Beckenham Road
Beckenham, Kent BR3 4TU
Group Address
Arbuthnot Banking Group
Arbuthnot House
20 Ropemaker Street
London EC2Y 9AR
T 020 7012 2400
E info@arbuthnotgroup.co.uk
www.arbuthnotgroup.com
Registered Office
One Arleston Way
Solihull B90 4LH
T 0121 693 9100
F 0121 693 9124
Corporate Contacts
Secure Trust Bank
One Arleston Way
Solihull B90 4LH
T 0121 693 9100
F 0121 693 9124
E banking@securetrustbank.com
www.securetrustbank.com
Arbuthnot Latham & Co
Arbuthnot House
20 Ropemaker Street
London EC2Y 9AR
T 020 7012 2500
F 020 7012 2501
E banking@arbuthnot.co.uk
www.arbuthnot.co.uk
17 Southernhay West
Exeter EX1 1PJ
T 01392 496061
F 01392 495313
Arbuthnot House
20 Ropemaker Street
London EC2Y 9AR
T 020 7012 2400
E info@arbuthnotgroup.com
www.arbuthnotgroup.com
Registration No. 1954085