ARBUTHNOT BANKING GROUP PLC
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Annual Report & Accounts 2015
Arbuthnot Banking Group PLC
Report & Accounts 2015
The importance of history
and Sun Tzu
The importance of previous experience
cannot be overstated. “Those who
are not willing to learn from history
are doomed to repeat the mistakes of
previous generations.” A good place
to start, therefore, is with the famous
Chinese General, Sun Tzu and his
writings in “The Art of War” c. 2500
years ago. He established some basic
truths such as:
“ He whose ranks are united in
purpose will be victorious.”
“ The commander will surely choose
those who are most fortunate.”
“ The traits of a true commander are:
courage, wisdom, humanity and
integrity.”
Business Model
Board of Directors
Financial Highlights
Remuneration Report
Chairman’s Statement
Corporate Philosophy
Corporate Governance
Group Directors’ Report
Independent Auditor’s Report
Strategic Report – Business Review
Strategic Report – Financial Review
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2
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8
12
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27
29
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31
32
33
35
36
37
38 Notes to the Consolidated Financial Statements
101 Five Year Summary
102 Notice of Meeting
104 Corporate Contacts & Advisers
Consolidated Statement of Changes in Equity
Consolidated Statement of Financial Position
Company Statement of Changes in Equity
Company Statement of Financial Position
Consolidated Statement of Cash Flows
Company Statement of Cash Flows
Consolidated Statement of Comprehensive Income
1
Arbuthnot Banking Group PLC
Arbuthnot has a 183 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.
1. Arbuthnot serves its shareholders,
3. Arbuthnot is independent, and
Corporate philosophy
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.
profit and growth oriented while
maintaining a controlled risk profile.
6. Arbuthnot does not sacrifice long term
prospects for short term gains – nor
sacrifice stability for quick profits.
4. Arbuthnot’s approach is based on
diversification, a long-term view,
empowerment of management and
a culture of rewards for achievements.
7. Ultimately, the success of Arbuthnot
depends on the teamwork,
commitment, and performance of
its employees, combined with the
determination to win.
5. Arbuthnot’s business is conducted in an
innovative, flexible and entrepreneurial
manner, with an opportunistic and
counter-cyclical attitude.
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.
Sir Henry Angest
Chairman & CEO
16 March 2016
Arbuthnot Banking Group PLCReport & Accounts 2015 2
Business
Model
Private Banking
Arbuthnot Latham provides a high quality private banking, commercial
banking and wealth management service, consisting of four core elements:
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.
Our discretionary investment
management service
comprises asset management,
developing tailored investment
strategies to ensure that each client’s
specific investment objectives are met.
The wealth planning service
Commercial Banking
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.
offers entrepreneurs the ability to
deal with one bank for both their
personal and business banking needs.
The proposition combines the financing
and cash transaction requirements of
SMEs and the opportunity to address
their own wealth management needs
with the same Private Banker.
Retail Banking
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.
Business Finance
Consumer Finance
provides SME’s funding for Asset Finance,
Invoice Finance and Real Estate Finance.
offers its customers lending in the
following areas: Motor Finance, Retail
Finance and unsecured personal lending.
Current Account
Savings
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.
offers a combination of instant access
accounts, notice deposits and deposit
bonds with competitive interest rates.
Arbuthnot Banking Group PLCReport & Accounts 2015 Financial
Highlights
3
2015
£126.7m
2014
£92.0m
2013
£74.0m
2015
£22.6m
2014
£13.9m
2013
£11.8m
2015
£12.7m
2014
£8.6.m
2013
£7.9m
Operating income from
continuing operations
Profit before tax from
continuing operations
Profit attributable to Equity
holders of the Company
2015
29.0p
2014
27.0p
2013
44.0p
2015
£2.23bn
2014
£1.45bn
2013
£1.1bn
2015
£170.3m
2014
£146.9m
2013
£89.7m
Total dividend per share
Total assets
Regulatory capital
For over 183 years we have,
through determined teamwork,
nurtured the long-term view to
growth and prosperity.
Arbuthnot Banking Group PLCReport & Accounts 2015 4
Chairman’s
Statement
I am pleased to report that Arbuthnot Banking Group (‘ABG’ or
‘the Group’) has made a record profit before tax in 2015 of £34.2m
(2014: £22.5m), which is an increase of 52%.
Arbuthnot Banking Group PLCReport & Accounts 2015 5
Once again, I find myself bemused by the accounting rules.
As a result of agreeing the sale of our consumer finance
lending business, Everyday Loans (“ELL”), we are required
to show its profits as discontinued in the 2015 report and as
a result they are not included in the headline reported profit
before tax of £22.6m. It is my belief that it understates the
performance of the Group, as we have carefully managed this
business throughout the year and this should be reflected in
the headline profit measure.
The story of our ownership of ELL, I believe epitomises
the essence of Arbuthnot Banking Group. Our stable and
supportive shareholder register has enabled us, over time,
to take a long term view on our investment decisions and
business strategies. This approach was best demonstrated by
our cautious attitude to liquidity in the years leading up to
the financial crisis, which meant we remained strong while
others struggled to survive. At the height of the financial
credit boom, we also recognised that the economic risk and
reward had shifted in favour of brokers and introducers and
away from lenders that had put their balance sheets at risk.
Thus, contrary to the market, we ceased lending in the over
competitive unsecured markets and instead referred our
customers onto other lenders, including ELL.
When the banking crisis occurred, the Group was well
positioned not only to weather the storm, but more
importantly, to prosper as the lending markets reopened
at more appropriate levels of return.
We were able to complete two significant acquisitions of
non-bank lenders that had suffered as a result of the
withdrawal of liquidity from the market. In 2012 we were
able to acquire ELL for £1, as we had the liquidity to
refinance their book of approximately £64m. We returned
it to a phase of growth. This involved not only increasing
its balance sheet but also its geographical foot print, as it
opened new branches. Now, at the end of 2015, we have
agreed to sell the business to Non Standard Finance (“NSF”)
for £127m, realising an expected profit of £115m, which
will be recognised in 2016. This is on top of the earnings
the business has contributed to the Group over the past
three years.
We recognised that under our ownership ELL was not
maximising its potential, as we were careful to restrict the
interest rate levels charged to customers. The transaction
made sense to both parties with NSF more experienced
in this type of lending and better positioned to test other
demographics of the market.
Once the transaction is completed, the gain will significantly
increase the capital strength of the Group, which will allow
our more mainstream banking activities to continue to grow
at robust levels as our diversification strategy is maintained.
At the end of 2014, Arbuthnot Latham purchased a portfolio
of residential mortgages from the administrator of the
Dunfermline Building Society. This portfolio has been
successfully transferred to the ownership of the Bank and
a new servicer has been appointed and is operating well.
Recently, the portfolio was accepted into the Funding for
Lending Scheme (“FLS”). We believe this to be the first
acquired portfolio to be included in the scheme by the Bank
of England. However, more importantly, the portfolio has
performed according to our expectations.
Given the success of the transaction, we were keen to explore
further opportunities that may exist in the market to acquire
other portfolios. Accordingly, we had made good progress in
negotiations to acquire a larger mortgage book. This process
was brought to a sudden halt following the publication in
December by the Basel Committee of its second proposal to
revise the Standardised Capital Rules. Despite an extensive
consultation of its first proposal and with many leading
regulators stating that the intention of the revisions was not
to increase overall capital levels in the system, these new
proposals will not achieve this. In fact, the capital requirements
of the transaction we were contemplating would nearly
double under the new proposals.
I have always accepted that the Financial Services Industry
has been highly regulated and we have managed our business
accordingly. However, this example of how the regulatory
environment can impact the business has led me to believe
that, as new rules are developed, they should not be applied
retrospectively to the back book. Rather, they should only be
applicable to transactions or lending that takes place after
they are implemented. This would allow the industry to take
decisions with certainty on how rules will be applied without
having to second guess regulatory developments that may
take place in the future.
As a result of the decisive outcome of the General Election
in May, we have detected an upsurge in customer sentiment
across our businesses. However, this result also meant that a
referendum will be held to determine the United Kingdom’s
continued membership of the European Union. The City is
a resilient and dynamic industry and I have no doubt that
it will be able to flourish regardless of the final result of
the ballot.
Arbuthnot Banking Group PLCReport & Accounts 2015 6
Chairman’s
Statement continued
Private Banking – Arbuthnot Latham & Co., Ltd
The Private Bank has reported a profit of £6m (2014: £3.6m),
which represents an increase of 65%. However, importantly,
the business has also taken several additional significant steps
forward. The Bank originated £250m of new loans, an increase
of 45% on the previous year and a new record. Meanwhile,
it attracted on average 50 new clients per month, and our
Dubai office not only broke even, it returned a small overall
profit for the year, ahead of plan.
As part of the continued strengthening of the infrastructure
of the Bank, new premises were occupied in London and in
Exeter where we moved the business to larger and more
modern offices. We have signed contracts with our preferred
partner to implement our new banking system, which should
be largely completed during 2016.
Retail Banking – Secure Trust Bank PLC
Our Retail Banking business has delivered a pre-tax profit
including ELL of £36.8m (2014: £26.3m), which is an increase
of 40%. However, excluding the profits from ELL, the Bank
made £25.2m (2014: £ 17.8m), which is an increase of 42%.
This higher growth rate reflects well on our strategy to diversify
our business, in particular the investment we have made in
SME lending. At the end of 2015 the combined lending
balances of the SME divisions stood at £468m (2014: £143m),
which is a robust growth rate in excess of 200%.
Our management philosophy of exercising prudence in
respect of capital, funding and lending remains unchanged.
The Bank continues to be well capitalised and liquid, with
interest rate risk generally mitigated by matching the tenor
of our lending assets and customer deposits.
Board Changes and Personnel
During the year the following changes to the ABG Board
occurred. Ian Dewar joined on 1 August and Robert Wickham
retired on 31 December after 22 years of loyal and distinguished
service. I would like to thank my colleagues on the Board for
their generous and continued support and for the dedication
they have shown to the Group.
The results of the Group also reflect the hard work and
commitment of the members of staff. On behalf of the Board
I extend our thanks to all of them for their contribution
in 2015.
Dividend
The Board is proposing a final dividend of 17p per share, an
increase of 1p on last year. Along with the interim dividend
of 12p, this combines to give a total dividend for the year of
29p (2014: 27p), an increase of 2p.
If approved, the dividend will be paid on 13 May 2016 to
shareholders on the register at close of business on 15 April
2016.
The disposal of Everyday Loans is proceeding as expected.
Once it has completed, the Board is also proposing a special
dividend of 25p for 2016. This dividend is dependent on the
completion of the transaction, which includes regulatory
approval of changes of control, transfer of ownership and
inclusion of the gain within the Group’s capital resources.
Details of the arrangements to pay this dividend will be
announced once the transaction has been finalised.
Outlook
The global economic outlook has become increasingly
uncertain. The collapse in the commodities market, in
particular the oil price, has had a knock on impact in the
equity markets.
The Federal Reserve Bank in the US has increased interest
rates for the first time in ten years, but the other major
economies do not look like following suit at present.
On top of this, the UK has the uncertainty of the outcome of
the EU referendum. However, despite these headwinds, both
our banks are well capitalised and highly liquid. They remain
well positioned to continue their good progress and we are
optimistic about their prospects.
Sir Henry Angest
Chairman & CEO
16 March 2016
Arbuthnot Banking Group PLCReport & Accounts 2015 7
Headquartered
in London, the
traditional focus
towards the
South East is
expanding both
nationally and
internationally
Arbuthnot Banking Group PLCReport & Accounts 2015 8
Strategic Report
Business Review
Arbuthnot Latham & Co.
Arbuthnot Latham & Co., Limited (“AL”) has reported a
profit before tax of £6m (2014: £3.6m), which is a robust
rate of growth of 65%. Also, in line with the rapid expansion
of the business, the Bank commenced its programme of
enhancing its operational capabilities. The most significant
is the replacement of its banking technology platform. As a
result of this investment, the profits are stated after having
incurred in excess of £1m of costs related to this project.
The business momentum within the Bank remained strong
throughout the year, as it continued to take advantage of the
opportunities that exist to grow its client base and volumes
of business. The ability to offer a high quality relationship
led service is attractive to clients and this resulted in a flow
of, on average, over 50 new clients per month.
Customer loan balances closed the year at £619m (2014:
£536m), an increase of 15%. The bespoke nature of many
of the loan facilities reflects the objective of the Bank to
support clients in the development and realisation of their
entrepreneurial projects, where appropriate. The demand for
such lending reached record levels for the Bank, with gross
lending volumes reaching £250m (2014: £172m), which is
an increase of 45% on the prior year.
The Bank continues to be funded by retail deposits with
customer balances reaching £897m (2014: £586m), an increase
of 53%. Investment assets under management grew by 11%
to £739m (2014: £666m). The growth of each of these key
metrics demonstrates the success of the strategy to develop
the business against the background of a more stable
economic environment.
Developing a
wider footprint
with offices in
Manchester,
Exeter and
Dubai
Arbuthnot Banking Group PLCReport & Accounts 2015 9
In the latter part of the year, the Bank commenced an
initiative to build a wider commercial banking business,
initially driven by client demand to provide banking services
for the corporate structures of entrepreneurial clients in the
media sector. The Bank intends to broaden the initial focus
and develop its services for clients in the commercial real
estate and also the professional services sectors.
While the principal geographic focus of AL is towards London
and the South East, an increasing proportion of the Bank’s
business is being generated across the UK and particularly
through its offices in Exeter and Manchester.
In Exeter, the Bank moved into new premises during the
year, which has had a positive effect on the local profile.
In Manchester, the office was further strengthened with
additional recruitment and a healthy momentum is being
created in the local market. Overseas, the Dubai office
goes from strength to strength and the local Gulf market
offers significant opportunities for further growth in the
years ahead.
2015
£35.1m
2014
£28.9m
2015
£1.9m
2014
£2.1m
2015
£29.7m
2014
£24.0m
2015
£6.0m
2014
£3.6m
2015
£618.9m
2014
£536.5m
Operating income
Other income
Operating expenses
Profit before tax
Customer loans
2015
£896.8m
2014
£585.9m
2015
£1,004.4m
2014
£699.5m
2015
£738.8m
2014
£665.9m
2015
4.3%
2014
4.4%
2015
69%
2014
92%
Customer deposits
Total assets
Assets under
management
Customer net margin
Loan to deposit ratio
Arbuthnot Banking Group PLCReport & Accounts 2015 10
Strategic Report
Business Review continued
Secure Trust Bank
Secure Trust Bank (“STB”) has made profits of £36.8m (2014:
£26.3m), which includes £11.7m (2014: £8.6m) from Everyday
Loans (“ELL”). On a statutory basis STB has made profits on
its continuing operations of £25.2m (2014: £17.8m). We have
agreed to sell ELL to Non Standard Finance for £127m and it
is expected to be transferred by the end of April 2016, realising
an anticipated gain of £115m.
Following the IPO of STB in 2011, the acquisition of ELL was
the first significant transaction by the Group and set STB on its
current trajectory of growth. However, we were always aware
that despite its profitability, the ownership of ELL by STB
would ultimately slow its potential growth. Our conservative
approach to consumer lending was evident by the cap that we
imposed on the interest rates that the business could offer to its
borrowers. This resulted in a large demographic of potential
customers being excluded from its markets. The sale of the
business we believe will be beneficial to our shareholders, as
the additional capital that it will generate can be deployed in
our other businesses that have faster growth rates and larger
potential markets from which to gain their share of business.
The continuing businesses in STB have been proactively
managed to result in a good composition of portfolios, with
a balance between consumer and SME lending assets, and this
will be augmented in 2016 with a new mortgage offering that
we believe will be well received in the market place and still
deliver our required return on equity.
Once again, the growth in income for the Bank has been achieved
by significant increases in the lending businesses. In total new
business lending volumes grew by 65% to reach £903m (2014:
£546m). This resulted in an overall increase in customer lending
assets of 73%, with balances reaching £1.1bn (2014: £0.6bn).
This is another milestone in the Bank’s history as customer
balances have exceeded £1bn for the first time.
Within the consumer finance division, the Retail Finance
business led the way with balances increasing by 89% to £220m
(2014: £117m). This business has a very strong position
within the music and cycle sectors, but has been successfully
broadening its reach into the leisure and home furnishing
sectors. The business has also seen an increase in the volume
of interest bearing lending. This has naturally resulted in
higher levels of impairments, which were anticipated in the
pricing of the products.
The Motor Finance balances increased by 20% to £166m
(2014: £138m). This business, which focuses on the near
prime market segment, continues to service the majority of
the Top 100 UK car dealer groups and enjoys strong
relationships with a number of specialist motor intermediaries.
During the year the business tested the prime lending market,
and the initial results were positive. It is therefore anticipated
that activities in this area will increase during 2016.
The Group’s Commercial lending operations have grown as
planned. Real Estate Finance increased by 175% to £368m
(2014: £134m). This lending is split roughly between
residential development funding and residential investment
finance. To date, our experience in the residential development
lending has been that properties being developed are selling
faster and for higher prices than anticipated when the loans
were originated.
The residential investment lending is not a regulated mortgage
business and is not designed for amateur landlords. As such,
it is difficult to predict how the recent fiscal changes will affect
the market in the future, but it is our initial belief that it will
have a neutral impact.
In its first full year Secure Trust Commercial Services, the
invoice finance division, funded in excess of £220m of
customers’ invoices. Customer lending balances grew £24m
to £29m (2014: £5m). However, given the fact that the key
customer proposition for this business is built on long term
relationships, it will take a while longer before the business
reaches critical mass.
The Asset Finance partnership with Haydock Finance has
proved successful. Haydock is a long established and well
regarded asset finance company. They provide STB with a full
business process outsourcing service, while adhering to STB’s
credit policies and risk appetite. This business closed the year
with balances at £71m (2014: £5m), an increase of 1,457%.
STB maintained its principle of funding its lending mainly from
the retail deposit market, with balances increasing by 83% to
close the year at £1.0bn (2014: £0.6bn). Again, the Bank
attempted to minimise the interest rate risk by mainly offering
fixed term deposits and bonds. This strategy would appear to
be the most sensible, with current forecasts indicating that
interest rates will remain low for some time to come.
Finally, STB has been able to maintain its reputation with its
customers and staff. It was re-affirmed as the only bank to hold
the Customer Service Excellence Award. For the fourth year
running the Bank was awarded the four star mark by the Fair
Banking Foundation.
Arbuthnot Banking Group PLCReport & Accounts 2015 11
Successfully
meeting the
needs of SME
funding
2015
£92.1m
2014
£63.7m
2015
£50.1m
2014
£37.3m
2015
£25.2m
2014
£17.8m
2015
£960.6m
2014
£622.5m
Operating income
Operating expenses
Profit before tax from
continuing operations
Customer loans
2015
£1,033.1m
2014
£608.4m
2015
570,759
2014
429,507
2015
15.7%
2014
17.1%
2015
0.51
2014
0.57
Customer deposits
Customer numbers
Net interest margin
Cost income ratio
Arbuthnot Banking Group PLCReport & Accounts 2015 12
Strategic Report
Financial Review
Arbuthnot Banking Group (“ABG”) adopts a pragmatic approach to
risk taking and seeks to maximise long term revenues and returns.
Given its relative size, it is nimble and able to remain entrepreneurial
and capable of taking advantage of favourable market opportunities
when they arise.
The Group provides a range of financial services to customers
and clients in its chosen markets of Private Banking and
Retail Banking. The Group’s revenues are derived from a
combination of net interest income from lending, deposit
taking and treasury activities, fees for services provided to
customers and clients and commission earned on the sale
of financial instruments and products.
Highlights
Once again the Group has traded well during 2015.
The reported profit before tax is £22.6m (2014: £13.9m).
However, this number does not include the results from
Everyday Loans (“ELL”), which is reported as “discontinued”
due to the fact we reached agreement to sell this business to
Non Standard Finance on 4 December 2015. The business
was fully under the managerial influence of the Group during
the year, so if their results are included, the overall Group’s
profit before tax would be £34.2m (2014: £22.5m),
representing an increase of 52%. The overall result of £34.2m
would be another record year of earnings for the Group.
The tables opposite also give an indication of the underlying
momentum that exists in the Group’s earnings. The reported
results are adjusted for a small number of items that are
included but represent significant investments for the future
enhancement of the business or are accounting adjustments
required by IFRS rules.
In aggregate, the Group’s reported profit increases from
£22.6m to an underlying result of £26m (2014: £17.8m),
which shows an increase in profit of 46%. Arbuthnot Latham
returned an increase in underlying profit of 63%.
The total Basic Earnings per share (“EPS”) of the Group
have increased by 47% to 86.3p (2014: 58.6p), with the
underlying EPS closing the year at 101.2p (2014: 84.5p).
The Group exceeded £100m in operating income in 2014
(when ELL was included in the results). The continued
growth in the business, particularly driven by the
performance of the lending business, has resulted in the
operating income increasing by 38%. Net interest income
is now 82% of the overall Group operating income, which
is up from last year’s comparison of 74%.
Arbuthnot Banking Group PLCReport & Accounts 2015 13
Highlights
Summarised Income Statement
Underlying profit reconciliation
Net interest income
Net fee and commission income
Operating income
Operating expenses
Impairment losses - financial investments
Impairment losses - loans and advances to
customers
Profit before tax from continuing
operations
Income tax expense
Profit after tax from continuing operations
Profit from discontinued operations after tax
Profit after tax
Basic earnings per share (pence)
- Continuing operations
Basic earnings per share (pence)
- Discontinuing operations
Basic earnings per share (pence)
2015
£000
2014
£000
103,693
23,000
126,693
(86,059)
(34)
(18,032)
68,027
24,022
92,049
(66,165)
(347)
(11,606)
22,568
13,931
(5,436)
17,132
9,392
(3,444)
10,487
6,529
26,524
17,016
53.3
33.1
86.3
32.4
26.1
58.6
The Group’s expense base increased to £86.1m (2014: £66.2m),
an increase of 30% due to the full year impact of the SME
lending divisions, which commenced trading in 2014 and
also the investment spending by Arbuthnot Latham (“AL”),
mainly on the transformation project which is upgrading
operational processes and ultimately replacing its core
banking system.
However, despite this increased investment spending, the
overall Group’s operating leverage still increased by a
positive 8%.
Impairment losses rose to £18m (2014: £11.6m), an increase
of £6.4m, which is largely explained by three factors. Firstly,
the prior year results were artificially lowered by £1m due to
the provision releases that arose from a review of the carrying
value of written off loans. Secondly, the volume of the balance
sheet was increased, which in turn naturally leads to higher
levels of expected impairments, especially in the retail lending
business. Finally, our motor finance and retail lending divisions
have been exploring higher yielding opportunities in their
markets. This in turn leads to higher anticipated impairments.
Arbuthnot
Latham & Co.
£000
Secure
Trust Bank
£000
Arbuthnot
Banking Group
£000
5,998
25,174
22,568
31 December 2015
Profit before tax from
continuing operations
Investment in operating systems
AL commercial banking
investment
Acquisition costs
STB share options
V12 fair value amortisation
1,123
333
418
–
–
–
–
4
662
893
Underlying profit
7,872
26,733
Underlying basic earnings per share (pence)
- Continuing operations
Underlying basic earnings per share (pence)
Underlying profit reconciliation
31 December 2014
Profit before tax from
continuing operations
Dubai office investment
Regional office investment
STB acquisition costs
STB share options
V12 fair value amortisation
Arbuthnot
Latham & Co.
£000
Secure
Trust Bank
£000
Arbuthnot
Banking Group
£000
3,628
17,755
13,931
981
217
–
–
–
–
–
198
1,542
893
Underlying profit
4,826
20,388
Underlying basic earnings per share (pence)
- Continuing operations
Underlying basic earnings per share (pence)
1,123
333
422
662
893
26,001
65.5
101.2
981
217
198
1,542
893
17,762
46.3
84.5
Arbuthnot Banking Group PLCReport & Accounts 2015 14
Strategic Report
Financial Review continued
Overall the Return on Equity of the Group was 14.6% (2014:
13.2%), which is somewhat lower than the marginal returns
that the Group is capable of generating. This lower amount is
due to the fact that the Group has carried a significant surplus
of capital set aside for future growth, in particular for the
commercial lending businesses. If this surplus is excluded, the
Return on Equity deployed is 18.4% (2014: 18.3%).
Balance Sheet Strength
During 2015 the Group’s total assets exceeded £2bn for the
first time, closing the year at £2.2bn (2014: £1.4bn), an
increase of 54%. At the same time the Group’s lending to
customers reached £1.6bn (2014: 1.2bn), which is a growth
rate of 33%.
Once again the Group’s lending remains almost entirely
funded by customer deposits, which increased by 62% and
are now approaching £2bn. The Group has also developed
access to other sources of liquidity, most notably Funding for
Lending (“FLS”). Following the recent notification from the
Bank of England that the Dunfermline Building Society
mortgage portfolio is considered eligible collateral, the Group
has £198m of assets that may be used to generate further
liquidity.
The net assets of the Group now stand at £191m. This does
not include the impact of the gain that will be recognised
following the completion of the disposal of Everyday Loans.
This is anticipated to be £115m, so the Group’s net assets will
exceed £300m or the equivalent of approximately £20 per share.
Segmental Analysis
The segmental analysis in Note 40 of the consolidated
Financial Statements in the Annual Report highlights the
disclosures required under IFRS 8 “Operating Segments”.
The operating segments are Private Banking (Arbuthnot
Latham & Co., Limited) and Retail Banking (Secure Trust
Bank PLC). Group costs and intercompany elimination
journals are shown separately to reconcile back to the Group
consolidated results.
The analysis presented below, and in the business review, is
before any consolidation adjustments to reverse the impact
of the intergroup operating activities and also intergroup
recharges and is a fair reflection of the way the Directors
manage the Group.
Private Banking - Arbuthnot Latham
The profit before tax for the year was reported as £6m
(2014: £3.6m). This is an increase of 65%. As already
indicated publicly, the Bank has been carrying out an
investment project to transform the operational process
within the Bank. Accordingly, the results are after including
Balance Sheet Strength
Summarised Balance Sheet
Private Banking - Arbuthnot Latham
Summarised Income Statement
Assets
Loans and advances to customers
Liquid assets
Other assets
Total assets
Liabilities
Customer deposits
Other liabilities
Total liabilities
Equity
Total equity and liabilities
Net interest income
Net fee and commission income
Operating income
Other income
Operating expenses
Impairment losses - financial investments
Impairment losses - loans and advances to
customers
Profit after tax
2015
£000
2014
£000
25,283
9,793
35,076
1,894
(29,722)
–
(1,250)
19,387
9,508
28,895
2,088
(23,977)
(334)
(3,044)
5,998
3,628
2015
£000
2014
£000
1,579,512
484,917
167,130
1,158,983
239,465
48,174
2,231,559
1,446,622
1,929,838
110,317
2,040,155
191,404
1,194,285
78,768
1,273,053
173,569
2,231,559
1,446,622
Arbuthnot Banking Group PLCReport & Accounts 2015
15
not only £1.1m of costs for this project, but also £300k
start-up costs for the commercial banking business and
£400k of expenses for an aborted acquisition of a mortgage
portfolio. If these items are added back, the Private Bank
would have made £7.9m.
The proportion of the Bank’s income that is dependent on the
balance sheet has increased during the year, with net interest
income 72% of total operating income compared to 67% in
the prior year.
At the same time net customer margin remained consistent
with prior years at around 4.4% each month.
Operating expenses have increased by 24% to £29.7m as a
result of the items noted above and also the full year impact
of the hiring of new private bankers in the prior year. Also as
a result of the rapid expansion of employees, the Bank moved
into new premises in Exeter and agreed to occupy 9,839
square feet of new office space in the City, in addition to the
headquarters in Wilson Street.
Impairment losses on loans declined from £3m to below
£1.3m during the year, as the impact of the legacy credit
portfolio began to decline. This portfolio has now largely
been resolved.
It is worth noting that the Dubai office achieved break even in
July 2015 and overall returned a small profit for the whole year.
Total customer assets increased by 15% to close the year at
£619m (2014: £536m). However, the total volume of new
loans originated in 2015 was £250m (2014: £172m), which is
an increase of 45%. The actual balance sheet lagged behind
this volume growth as we experienced an uptick in redemptions
following the decisive result of the General Election in May
2015, which seemed to give confidence to the housing market
during the summer months. After this, the balance sheet
returned to good growth levels in the final quarter.
Overall the book remains well secured with an average LTV
of 46% (2014: 43%).
Following the hiring of a number of high quality private
bankers, the Bank is now able to gather robust levels of new
deposits and therefore the customer deposit book grew to
almost £900m (2014: £586m), an increase of 53%.
In total the Bank has surpassed £1bn in total assets for the
first time in its history.
The net assets of the Bank now stand at £52m (2014: £40m),
a 31% increase, as the Group made further capital contributions
to facilitate additional growth, on top of the organically
generated reserves that arise from net earnings. As a result,
the Private Bank had a total capital ratio of 10.4% (2014:
10.8%) and a core tier 1 ratio of 10.4% (2014: 9.4%).
Private Banking - Arbuthnot Latham
Summarised Balance Sheet
Retail Banking - Secure Trust Bank
Summarised Income Statement
Assets
Loans and advances to customers
Liquid assets
Other assets (including Group balances)
Total assets
2015
£000
2014
£000
618,902
344,856
40,691
536,488
122,198
40,786
1,004,449
699,472
Liabilities
Customer deposits
Other liabilities (including Group balances)
Total liabilities
Equity
896,766
55,330
952,096
52,353
585,867
73,636
659,503
39,969
Net interest income
Net fee and commission income
Operating income
Operating expenses
Impairment losses - loans and advances
to customers
Profit before tax from continuing
operations
Income tax expense
Profit after tax from continuing operations
Profit from discontinued operations after tax
Total equity and liabilities
1,004,449
699,472
Profit after tax
2015
£000
2014
£000
78,882
13,207
92,089
(50,133)
(16,782)
49,146
14,514
63,660
(37,255)
(8,650)
25,174
17,755
(5,557)
19,617
9,392
(3,618)
14,137
6,529
29,009
20,666
Arbuthnot Banking Group PLCReport & Accounts 2015
16
Strategic Report
Financial Review continued
Retail Banking - Secure Trust Bank
The reported profit before tax is £25.2m (2014: £17.8m),
which is an increase of 42%. These figures are the continuing
operations within Secure Trust Bank. If the results for
Everyday Loans are included, the Retail Bank made a profit
before tax of £36.8m (2014: £26.3m), an increase of 40%.
The largest increase in the components of revenue has been
derived from the Net Interest Income line, which has grown
by 60% to close the year at £78.9m (2014: £49.1m). Net
Interest Income is now 86% of revenues compared to 77% in
the prior year. Net interest margin was 15.7% (2014: 17.1%)
as the impact of the SME lending starts to add a counter
balance to the consumer finance lending from prior years.
Operating expenses increased 34% to £50.1m (2014:
£37.3m), largely due to the investments made in growing
the SME lending divisions. However, the overall cost income
ratio stands at 51% (2014: 57%). The operating leverage
grew by a positive 10%.
Impairment losses were £16.8m (2014: £8.7m), with the
increase due to three items. Firstly, the prior year was
artificially low due to the £1m provision release.
Secondly, the increase in the overall lending balances led
to higher impairment losses. Finally, the Retail and Motor
Finance operations have been lending to higher margin
sectors of the markets, which has in turn resulted in higher
levels of expected impairments.
Retail Banking - Secure Trust Bank
Summarised Balance Sheet
Assets
Consumer Finance
Personal Lending
STB
ELL
Motor Finance
Retail Finance
Business Finance
Asset Finance
Commercial Finance
Real Estate Finance
Additional Services
Debt Collection
Acquired Portfolios
One Bill
RentSmart
Pay4Later
Other
Total loans and advances to customers
Liquid assets
Other assets (incl. Group balances & ELL)
2015
£000
2014
£000
74,360
–
165,697
220,417
87,571
93,864
137,853
116,734
70,685
29,295
367,999
4,541
5,024
133,738
4,479
26
202
23,458
3,823
169
960,610
140,053
146,668
3,058
28
388
25,504
14,013
179
622,495
117,258
42,260
Total assets
1,247,331
782,013
Liabilities
Customer deposits
Other liabilities (incl. Group balances)
Total liabilities
Equity
Total equity and liabilities
1,033,073
73,074
1,106,147
141,184
608,418
48,734
657,152
124,861
1,247,331
782,013
Overall the customer lending balances closed the year at
£961m (2014: £622m), an increase of 54%. Once again the
Motor, Retail and Business Finance portfolios have all shown
good levels of growth. Motor Finance increased by 20% as it
started to widen its product offering across the risk spectrum
and including prime lending for the first time. The Retail
Finance business has grown by 59% due in some degree to
the additional strength the STB funding profile brings to the
proposition. This has enabled it to pitch and win new
business relationships that previously were beyond the V12
business. Secondly, the business has developed momentum
in interest bearing products as opposed to interest free.
This has resulted in higher expected impairments, but still at
levels lower than anticipated when the products were priced.
The Business Finance divisions have grown by more than
200% with good growth in all three segments.
Customer deposits grew by 70% to stand at £1bn (2014:
£608m). The Bank remains almost entirely funded by retail
deposits. These deposits have been sourced mainly via the
best buy tables and are largely in the form of fixed term
deposits and bonds. This has the additional benefit not
only of certainty of funding terms but also in managing the
interest rate basis risk that can arise with longer term fixed
rate lending business.
The net assets of the company have increased to £141m
(2014: £125m), which is before recognising the gain from
ELL. After this it is anticipated that the net assets of the
company will be in excess of £250m. The Bank is well
capitalised with a total capital ratio of 11.9% (2014: 16.3%)
and a core tier 1 ratio of 12.2% (2014: 16.6%).
Arbuthnot Banking Group PLCReport & Accounts 2015
17
Group & Other Costs
Total Group costs increased from £7.5m to £8.6m as a
result of an increase in staff costs due to higher salaries and
additional employees in the Group centre, to oversee the
growth within the wider Group and to manage the greater
requirements arising from regulation, compliance and
corporate governance.
Capital
The Group’s capital management policy is focused on
optimising shareholder value over the long term. There is a
clear focus on delivering organic growth and ensuring capital
resources are sufficient to support planned levels of growth.
The Board regularly reviews the capital position.
The Group’s lead regulator, the Prudential Regulation
Authority (‘PRA’), sets and monitors capital requirements
for the Group as a whole and for the individual banking
operations. The lead regulator adopted the Basel III capital
requirements with effect from 1 January 2014. As a result,
the Group’s regulatory capital requirements have been based
on Basel III since 2014.
In accordance with the EU’s Capital Requirements Directive
(CRD) and the required parameters set out in the PRA
Handbook (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 39.
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 I capital formula
calculations (standardised approach for credit, market and
operational risk) as a starting point, and then considers
whether each of the calculations deliver a sufficient capital
sum adequate to cover management’s anticipated risks.
Where the Board considers that the Pillar 1 calculations do
not reflect the risk, an additional capital add-on in Pillar 2
is applied, as per the Individual Capital Guidance (ICG)
issued by the PRA.
Group & Other Costs
Summarised Income Statement
Capital ratios
Net interest income
Subordinated loan stock interest
Operating income
Operating expenses
Impairment on financial investments
Profit after tax
2015
£000
2014
£000
(148)
(324)
(472)
(8,098)
(34)
(105)
(401)
(506)
(7,027)
81
(8,604)
(7,452)
Core Tier 1 capital
Deductions
Tier 1 capital after deductions
Tier 2 capital
Total capital
Core Tier 1 capital ratio (Net Core Tier 1
capital/Basel III Total Risk Exposure)
2015
£000
2014
£000
191,404
(33,921)
157,483
12,865
173,569
(40,153)
133,416
13,479
170,348
146,895
11.7%
14.0%
Total Capital Ratio (Capital/Basel III Total
Risk Exposure)
12.6%
15.4%
Arbuthnot Banking Group PLCReport & Accounts 2015 18
Strategic Report
Financial Review continued
The Group’s regulatory capital is divided into two tiers:
• Tier 1 comprises mainly shareholders’ funds, non-controlling
interests and revaluation reserves, after deducting goodwill
and other intangible assets.
• Lower Tier 2 comprises qualifying subordinated loan capital
and collective provisions. 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. All regulated
trading entities have complied with all of the externally
imposed capital requirements to which they are subject.
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 6 to the
financial statements.
The principal risks inherent in the Group’s business are
strategic, credit, market, liquidity, operational, cyber, conduct
and regulatory.
Strategic risk
Strategic risk is the risk that may affect the Group’s ability
to achieve its corporate and strategic objectives. This risk is
important to the Group as it continues its growth strategy.
However, the Group seeks to mitigate strategic risk by focusing
on a sustainable business model which is aligned to the Group’s
business strategy. Also, the Board of Directors meets once a
year to hold a two day board meeting to ensure that the
Group’s strategy is appropriate for the market and economy.
Credit risk
Credit risk is the risk that a counterparty will be unable to
pay amounts in full when due. This risk exists in Arbuthnot
Latham & Co., Limited and Secure Trust Bank PLC, which
currently have loan books of £619m and £961m respectively.
The lending portfolio in Arbuthnot Latham is extended to
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. However, the new Real Estate finance business
lends mainly secured on properties. Credit risk is managed
through the Credit Committees of each bank with significant
exposures also being approved by the Group Risk Committee.
Market risk
Market risk arises in relation to movements in interest rates,
currencies and equity markets. The Group’s treasury function
operates mainly to provide a service to clients and does not
take significant unmatched positions in any market for its
own account. As a result, the Group’s exposure to adverse
movements in interest rates and currencies is limited to
interest earnings on its free cash and interest rate re-pricing
mismatches.
Liquidity risk
Liquidity risk is the risk that the Group cannot meet its
obligations as they fall due. The Group takes a conservative
approach to managing its liquidity profile. It has placed no
reliance on the wholesale lending markets and is almost
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 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
Operational risk is the risk that the Group may be exposed
to financial losses from conducting its business. The Group is
exposed to operational risks from its Information Technology
and Operations platforms. There are additional internal
controls in these processes that are designed to protect the
Group from these risks. The Group’s overall approach to
managing internal control and financial reporting is described
in the Corporate Governance section of the Annual Report.
Cyber risk
An increasing risk that the Group is subject to within its
operational processes is cyber risk. This is the risk that the
businesses within the Group are subject to some form of
disruption arising from an interruption to its IT and data
infrastructure.
Conduct risk
As a financial services provider we face conduct risk,
including selling products to customers which do not meet
their needs; failing to deal with customers’ complaints
effectively; not meeting customers’ expectations; and
exhibiting behaviours which do not meet market or
regulatory standards.
The Group adopts a zero risk appetite for any unfair customer
outcomes. It maintains clear compliance guidelines and
provides ongoing training to all staff. Periodic spot checks
Arbuthnot Banking Group PLCReport & Accounts 2015 19
EU Referendum
At the time of issuing this Annual Report, the date for the
UK referendum on its membership of the European Union
(EU) has been set for 23 June 2016. It is currently difficult
to analyse the impacts that a vote to exit may have on the
Arbuthnot Banking Group. However, our only overseas
operation is in Dubai, so the vast majority of the Group’s
income and expenditure is based in the UK. It is therefore
anticipated that the financial impact would be minimal
assuming there were to be no significant macro economic
shock on the UK.
James Cobb
Group Finance Director
16 March 2016
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.
Regulatory risk
Regulatory compliance 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 three year horizon.
Regulatory change also exists as a risk to the Group’s business.
Not withstanding the assessments carried out by the Group to
manage the regulatory risk, it is not possible to predict how
regulatory and legislative changes may alter and impact the
business. Significant and unforeseen regulatory changes may
reduce the Group competitive situation and lower its
profitability.
Macroeconomic and competitive environment
The Group is also exposed to indirect risks that may arise
from the macroeconomic and competitive environment.
The economic environment is relatively stable within the UK.
However, the international landscape is increasingly uncertain.
The declining performance of the economies in the EU, Russia
and China may have an adverse affect on the UK. In particular
this may cause a softening of central London property prices,
which may spread out further to the South East.
Over the past year the reduction in oil prices has resulted in
a lowering of the interest rate yield curve and has pushed out
the time horizon for expectations of an increase in interest
rates.
The Group monitors its exposure to future interest rate rises
and currently has minimal lending to customers in products
that would be directly sensitive to interest rate rises. However,
at the current levels of interest rates, the affordability enjoyed
by the Group’s customers is beneficial.
Arbuthnot Banking Group PLCReport & Accounts 2015 20
Board
of Directors
Sir Henry Angest
James Cobb FCA
James Fleming
Paul Lynam
Andrew Salmon ACA
Ian Dewar
Ruth Lea CBE
Sir Christopher Meyer
Jeremy Robin Kaye FCIS
Arbuthnot Banking Group PLCReport & Accounts 2015 21
Sir Henry Angest
Paul Lynam
Sir Christopher Meyer
Independent non-executive director
since 1 October 2007. He had a
distinguished diplomatic career,
culminating in 1997 as Ambassador
to the USA. Between 1994 and 1996,
he was Press Secretary to Prime
Minister John Major. From 2003 to
2009 he was Chairman of the Press
Complaints Commission. He is also
on the International Advisory Board
of British American Business Inc. and
Chairman of the Advisory Board of
Pagefield.
Ian Dewar FCA
Ian became a Non-Executive Director
of the Arbuthnot Banking Group
on 1 August 2015 and also a
Non-Executive Director of Arbuthnot
Latham & Co., Limited.
He retired from KPMG in September
2012 having spent 32 years at the firm,
the last 19 as a Partner in the Financial
Services Practice. Since his retirement
he has become a Non-Exec Director
at Manchester Building Society and
Brewin Dolphin, at each of which he
chairs the Audit Committee.
Jeremy Robin Kaye FCIS
Group Company Secretary since
November 1987, having joined
predecessor company in 1972.
MA (Oxen), called to the Bar
(Inner Temple) 1962, Chartered
Secretary since 1967.
Sir Henry is Chairman and Chief
Executive of Arbuthnot Banking Group
PLC as well as Chairman of Arbuthnot
Latham & Co., Limited and Chairman
of Secure Trust Bank PLC. He gained
extensive national and international
experience as an executive of The Dow
Chemical Company and Dow Banking
Corporation. He was Chairman of the
Banking Committee of the London
Investment Banking Association and
a director of the Institute of Directors.
He is a past Master of the Worshipful
Company of International Bankers.
James Cobb FCA
James Cobb joined the Board on
1 November 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.
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.
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.
Ruth Lea CBE
Ruth Lea has been an independent
non-executive director of the Arbuthnot
Banking Group PLC since 2005 and the
Group’s Economic Adviser since 2007.
Ruth co-founded Global Vision in 2007
and was a Director until 2010, and was
previously the Director of the Centre for
Policy Studies (from 2004 to 2007),
Head of the Policy Unit at the Institute
of Directors (from 1995 to 2003) and
Economics Editor at ITN (from 1994
to 1995). Prior to ITN she was Chief
UK Economist at Lehman Brothers,
Chief Economist at Mitsubishi Bank,
worked for 16 years in the Civil Service
(the Treasury, the DTI, the Civil Service
College and the Central Statistical
Office) and was an economics lecturer
at Thames Polytechnic (now the
University of Greenwich).
She is the author of many papers and
articles on economic issues and has
been a Governor of the London School
of Economics and Council Member of
the University of London.
Arbuthnot Banking Group PLCReport & Accounts 2015 22
Group
Directors’ Report
The Directors submit their annual report and the audited
consolidated financial statements for the year ended 31
December 2015.
Principal Activities and Review
The principal activities of the Group are banking and
financial services. A strategic review in accordance with
Section 414 C of the Companies Act 2006 forming part
of this report is set out on pages 8 to 19.
£107m in cash and £20m in ordinary shares of the purchaser.
This transaction is subject to approval by Regulators and is
proceeding according to expectations and it is anticipated
that ownership will be transferred before 30 April 2016.
Financial Risk Management
Details of how the Group manages risk are set out in the
Strategic Report and in note 6.
Results and Dividends
The results for the year are shown on page 30. The profit after
tax for the year of £26.5m (2014: £17.0m) is included in reserves.
The Company was aware at 15 March 2016 of the following
substantial holdings in the ordinary shares of the Company,
other than those held by one director shown below:
Substantial Shareholders
The Directors recommend the payment of a final dividend of
17p on the ordinary shares which, together with the interim
dividend of 12p paid on 2 October 2015, represents total
dividends for the year of 29p (2014: 27p). The final dividend,
if approved by members at the Annual General Meeting, will
be paid on 13 May 2016 to shareholders on the register at
close of business on 15 April 2016.
The Board is also proposing to pay a special dividend of 25p
for 2016. This dividend is dependent on the completion of the
sale of ELL, which includes regulatory approval of change of
control, transferal of ownership and inclusion of the gain
within the Group’s capital resources. Following completion,
the Board would also review the financial position and prospects
of the Company before declaring the special dividend.
Going Concern
After making appropriate enquiries which assessed strategy,
profitability, funding, risk management (see note 6) and
capital resources (see note 7), the directors are satisfied that
the Company and the Group have adequate resources to
continue in operation for the foreseeable future. The financial
statements are therefore prepared on the going concern basis.
Share Capital
Shareholders will be asked to approve a Special Resolution
renewing 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.
Holder
Ordinary Shares
Liontrust UK Smaller Companies Fund
Prudential plc
Mr. R Paston
944,055
609,688
529,130
%
6.2
4.0
3.5
Directors
Sir Henry Angest
J R Cobb
I A Dewar
J W Fleming
Ms R J Lea, CBE
P A Lynam
Sir Christopher Meyer
A A Salmon
Chairman & CEO
Finance Director
Chief Operating Officer
All are currently directors and served throughout the year except
for Mr. I.A. Dewar who was appointed on 1 August 2015.
Mr. R.J.J. Wickham served as a director throughout 2015 and
retired on 31 December 2015. Ms R.J. Lea will retire at the
Annual General Meeting and does not seek re-election.
Mr. Dewar, who has wide ranging experience in finance and
as a senior statutory auditor, has been appointed chairman of
the Audit Committee in succession to Ms Lea and offers himself
for election under Article 75 of the Articles of Association.
Sir Henry Angest and Sir Christopher Meyer retire under
Article 78 of the Articles of Association and, being eligible,
offer themselves for re-election. Sir Henry Angest has a
service agreement terminable on twelve months’ notice.
Sir Christopher Meyer, a non-executive director who joined
the Board in October 2007, does not have a service agreement.
Sale of subsidiary
It was announced on 4 December 2015 that the Company’s
subsidiary, Secure Trust Bank PLC, has agreed the conditional
sale of its sub-prime consumer lending business, Everyday
Loans Holdings Limited, to Non Standard Finance plc for
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:
Arbuthnot Banking Group PLCReport & Accounts 2015
23
Beneficial
Interests
H Angest
J W Fleming
P A Lynam
A A Salmon
1 January
31 December
15 March
2015
2015
2016
8,200,901
4,500
10,000
51,699
8,200,901
4,500
10,000
51,699
8,200,901
4,500
10,000
51,699
%
53.7
–
0.1
0.3
At the year end Mr. Lynam held 9,110 and Mr. Salmon held
7,500 ordinary 40p shares in Secure Trust Bank PLC, a 52%
subsidiary of the Company.
On 16 April 2013 Mr. Salmon and Mr. Cobb were granted
options to subscribe between April 2016 and April 2021 for
100,000 and 50,000 ordinary 1p shares respectively in the
Company at 930p. The fair value of the options at grant date
was £125,000.
On 1 April 2014 Mr. Fleming was granted an option to
subscribe between April 2017 and April 2022 for 50,000
ordinary 1p shares in the Company at 1185p. The fair value
of the option at grant date was £53,000.
Mr. Lynam and Mr. Salmon continue to hold options granted
to them on 2 November 2011 to subscribe for 141,667 ordinary
40p shares in Secure Trust Bank PLC at 720p between
2 November 2016 and 2 November 2021. The fair value
of the options at grant date was £1m.
Mr. Lynam was granted phantom options on 23 March 2015
to acquire 187,500 ordinary 40p shares in Secure Trust Bank
PLC at £25 exercisable on or after 3 November 2018 when a
cash payment would be made equal to any increase in value.
Apart from the interests disclosed above, no director was
interested at any time in the year in the share capital of
Group companies.
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 2015 two directors had loans
from Arbuthnot Latham & Co., Limited amounting to £2,901,000
and one director had a loan from Secure Trust Bank PLC
amounting to £223,000, on normal commercial terms as
disclosed in note 38 to the financial statements. At 31 December
2015 five directors had deposits with Arbuthnot Latham &
Co., Limited amounting to £2,321,000 and two directors had
deposits with Secure Trust Bank PLC amounting to £371,000,
all on normal commercial terms as disclosed in note 38 to the
financial statements. The Company maintains insurance to
provide liability cover for directors and officers of the Company.
Board Committees
The report of the Remuneration Committee on pages 27 to 28
will be the subject of an Ordinary Resolution at the Annual
General Meeting.
Information on the Audit, Nomination, Risk and Political
Donations Committees is included in the Corporate
Governance section of the Annual Report on pages 24 to 26.
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.
Political Donations
The Company made political donations of £68,000 to the
Conservative Party during the year (2014: £48,000).
Branches outside of the UK
During the year Arbuthnot Latham & Co., Ltd operated a
branch in Dubai which is regulated by the Dubai Financial
Services Authority.
Events after the balance sheet date
On 15 January 2016 Arbuthnot Latham & Co., Ltd signed
a contract with Oracle to replace its current banking system.
The committed cost is £2m.
Auditors
A resolution for the re-appointment of KPMG LLP as auditor
will be proposed at the forthcoming Annual General Meeting
at a fee to be agreed in due course by the directors.
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 auditor is 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 auditor is
aware of that information.
This confirmation is given and shall be interpreted in accordance
with the provisions of section 418 of the Companies Act 2006.
By order of the Board.
J R Kaye
Secretary
16 March 2016
Arbuthnot Banking Group PLCReport & Accounts 2015 24
Corporate
Governance
Arbuthnot Banking Group has a strong and effective
Corporate Governance framework. The Board endorses the
principles of openness, integrity and accountability, which
underlie good corporate governance and take into account
the provisions of the UK Corporate Governance Code in so
far as they are considered 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, which are regulated
by the Prudential Regulation Authority and the Financial
Conduct 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 by an effective Board which comprises
five executive directors and three non-executive directors.
During 2015, the senior independent non-executive director,
and Deputy Chairman, was Robert Wickham. Mr. Wickham
retired from the Board on 31 December 2015. Ian Dewar was
appointed on 1 August 2015 as an independent non-executive
director of the Company and assigned the role of chairman
of the Audit Committee in succession to Ruth Lea, who will
retire from the Board at the Annual General Meeting.
The directors seeking re-election are Sir Henry Angest and
Sir Christopher Meyer, who have served on the Board for
30 years and eight years respectively. The contribution of
Sir Henry Angest, who beneficially owns more than 50% of
the issued share capital, has been invaluable in the successful
development of the Company. Sir Christopher Meyer’s
wide-ranging experience as a diplomat has provided an
important independent measure of challenge to executive
management. Accordingly, the Board fully supports the
resolutions for their re-appointment.
The Board
The Board held six formal meetings during the year as well
as a two day strategy meeting. 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, monitoring overall regulatory requirements of its
subsidiary companies, and their adherence thereto, 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 the
Board processes and procedures are appropriately followed
and support effective decision making. All directors have
access to the Company Secretary’s advice and services.
There is an agreed procedure for directors to obtain
independent professional advice in the course of their duties,
if necessary, and at the Company’s expense.
The Board has delegated certain of its responsibilities to
Committees. All Committees have written terms of reference
approved by the Board.
Audit Committee
Membership of the Audit Committee is restricted to non-
executive directors and comprises Ian Dewar (as Chairman),
Ruth Lea and Sir Christopher Meyer. The Committee met
four times during the year.
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.
These include 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, whistleblowing procedures 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.
The present auditors have held office since 2009, but the senior
statutory auditor changed in 2013. The Board is very satisfied
with the effectiveness of their audit. The Committee received a
report showing the level of non-audit services provided by the
external auditors during the year and members were satisfied
that this did not infringe auditor independence.
Arbuthnot Banking Group PLCReport & Accounts 2015 25
Remuneration Committee
Internal Control and Financial Reporting
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 Sir Henry Angest
and its other members are Sir Christopher Meyer and Ruth
Lea. The Committee met twice during the year. Before a
Board appointment is made the skills, knowledge and
experience required for a particular appointment are evaluated
and a recommendation made to the Board, with recruitment
consultants appointed if appropriate. The Committee has
under active consideration the appointment of an additional
independent non-executive director to succeed Ruth Lea on
her retirement from the Board.
Risk Committee
The Risk Committee is chaired by Sir Henry Angest and its
other members are James Cobb, James Fleming, Paul Lynam
and Andrew Salmon. The Committee met six times during the
year. The principal role of the Risk Committee is to approve
significant individual credits or other exposures.
Donations Committee
The Donations Committee is chaired by Sir Henry Angest and
its other members are Sir Christopher Meyer and Ruth Lea.
The Committee met three times during the year. 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
other General Meetings (when held) to communicate with
investors. The Company aims to present a balanced and
understandable assessment in all its reports to shareholders,
its regulators, other stakeholders and the wider public.
Key announcements and other information can be found
at www.arbuthnotgroup.com.
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,
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 EY during 2015.
The Audit Committee also receives reports from the external
auditors, KPMG LLP, which include details of internal control
matters that they have identified as part of the annual
statutory Financial Statement audit. The ICAAP and ILAAP
are considered key issues and are considered in detail by the
subsidiary Boards and their Risk Committees. The Board
receives reports on these by exception. Certain aspects of the
system of internal control are also subject to regulatory
supervision, the results of which are monitored closely by
the Board.
Arbuthnot Banking Group PLCReport & Accounts 2015 26
Corporate
Governance continued
Statement of Directors’ Responsibilities in Respect of
the Strategic Report and the Directors’ Report and the
Financial Statements
The Directors are responsible for preparing the Strategic
Report and the Directors’ Report and the financial statements
in accordance with applicable law and regulations. Company
law requires the Directors to prepare Group and Parent
Company financial statements for each financial year.
As required by the AIM Rules of the London Stock Exchange
they are required to prepare the Group financial statements in
accordance with 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:
• 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.
By order of the Board.
J R Kaye
Secretary
16 March 2016
Arbuthnot Banking Group PLCReport & Accounts 2015 Remuneration
Report
27
Remuneration Committee
Share Option and Long Term Incentive Schemes
Membership of the Remuneration Committee is limited
to non-executive directors together with Sir Henry Angest
as Chairman. The present members of the Committee are
Sir Henry Angest, Sir Christopher Meyer and Ruth Lea.
The Committee met four times during the year.
The Committee has responsibility for producing
recommendations on the overall remuneration policy
for directors for review by the Board and for setting the
remuneration of individual directors. Members of the
Committee do not vote on their own remuneration.
Remuneration Policy
The Remuneration Committee determines the remuneration
of individual directors having regard to the size and nature
of the business; the importance of attracting, retaining and
motivating management of the appropriate calibre without
paying more than is necessary for this purpose; remuneration
data for comparable positions, in particular the rising
remuneration packages at other challenger banks; the need
to align the interests of executives with those of shareholders;
and an appropriate balance between current remuneration
and longer-term performance-related rewards. The remuneration
package can comprise a combination of basic annual salary
and benefits (including pension), a discretionary annual bonus
award related to the Committee’s assessment of the contribution
made by the executive during the year and longer-term
incentives, including executive share options. Pension benefits
take the form of annual contributions paid by the Company
to individual money purchase schemes. The Remuneration
Committee reviews salary levels each year based on the
performance of the Group during the preceding financial
period. This review does not necessarily lead to increases
in salary levels. For the purposes of the FCA Remuneration
Code, all the provisions of which have been implemented.
The Group and its subsidiaries are all considered to be
Tier 3 institutions.
Directors’ Service Contracts
Sir 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 six months’
notice in writing by either party.
This part of the remuneration report is audited information.
At the Annual General Meeting in May 2015, shareholders
voted by Ordinary Resolution to extend the Company’s
Unapproved Executive Share Option Scheme for a further
period of 10 years.
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.
On 16 April 2013 Mr. Salmon and Mr. Cobb were granted
options to subscribe between April 2016 and April 2021 for
100,000 and 50,000 ordinary 1p shares respectively in the
Company at 930p. The fair value of the options at grant
date was £125,000.
On 1 April 2014 Mr. Fleming was granted an option to
subscribe between April 2017 and April 2022 for 50,000
ordinary 1p shares in the Company at 1185p. The fair value
of the options at the grant date was £53,000.
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 each for James Cobb and
James Fleming. 150,500 shares are held in the Arbuthnot
ESOP Trust.
Under the Unapproved Executive Share Option Scheme of the
Company subsidiary, Secure Trust Bank PLC, established in
November 2011, Paul Lynam and Andrew Salmon were
each granted options over 283,333 shares in that company.
The fair value of the options at the grant date was £1m.
On 2 November 2014 Mr. Lynam and Mr. Salmon each
exercised options granted to them on 2 November 2011 to
subscribe for 141,666 ordinary 40p shares in Secure Trust
Bank PLC at 720p and sold the shares at a price of £25.
Mr. Lynam and Mr. Salmon continue to hold options granted
to them on 2 November 2011 to subscribe for 141,667 ordinary
40p shares in Secure Trust Bank PLC at 720p between
2 November 2016 and 2 November 2021. The fair value
of the options at grant date was £0.5m.
On 23 March 2015 Mr. Lynam was granted phantom options
to acquire 187,500 ordinary 40p shares in Secure Trust Bank
PLC at £25 exercisable on or after 3 November 2016 when a
cash payment would be made equal to any increase in value.
Arbuthnot Banking Group PLCReport & Accounts 2015 28
Remuneration
Report continued
Directors’ Emoluments
This part of the remuneration report is audited information.
Fees (including benefits in kind)
Salary payments (including benefits in kind)
Pension contributions
Long term incentive
2015
£000
70
5,165
140
–
5,375
2014
£000
98
3,938
140
5,030
9,206
Sir Henry Angest
JR Cobb
IA Dewar
JW Fleming
Ms RJ Lea
PA Lynam
Sir Christopher Meyer
AA Salmon
RJJ Wickham
Salary
£000
Bonus
£000
Benefits
£000
Pension
£000
Fees
£000
900
450
29
450
60
900
55
900
60
–
200
–
100
–
500
–
400
–
87
16
–
16
–
21
–
21
–
–
35
–
35
–
35
–
35
–
3,804
1,200
161
140
–
–
–
–
70
–
–
–
–
70
Total
2015
£000
987
701
29
601
130
1,456
55
1,356
60
5,375
Total
2014
£000
632
526
–
576
125
3,671
50
3,571
55
9,206
Details of any shares or options held by directors are
presented on page 23.
The emoluments of the Chairman were £987,000
(2014: £632,000). The emoluments of the highest paid
director were £1,456,000 (2014: £3,671,000) including
pension contributions of £35,000 (2014: £35,000).
Mr. R J J Wickham was a director of Calando Finance
Limited which received an annual fee of £nil (2014: £14,000)
in respect of his services to the Group. This amount is
included in the table above. Retirement benefits are accruing
under money purchase schemes for five directors who served
during 2015 (2014: five directors).
Sir Henry Angest
Chairman of the Remuneration Committee
16 March 2016
Arbuthnot Banking Group PLCReport & Accounts 2015
29
Independent Auditor’s Report
to the Members of Arbuthnot Banking Group PLC
We have audited the financial statements of Arbuthnot
Banking Group PLC for the year ended 31 December 2015
set out on pages 30 to 100. 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.
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. 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 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 26, 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
Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements
is provided on the Financial Reporting Council’s website at
www.frc.org.uk/auditscopeukprivate.
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 2015 and of the Group’s profit 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.
Opinion on other matters prescribed by the Companies
Act 2006 and under the terms of our engagement
In our opinion the information given in the Strategic Report
and 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 matters
where the Companies Act 2006 requires us 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 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.
Richard Gabbertas (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square
London
E14 5GL
16 March 2016
Arbuthnot Banking Group PLCReport & Accounts 2015 30
Consolidated Statement
of Comprehensive Income
Note
8
9
10
12
14
11
Interest income
Interest expense
Net interest income
Fee and commission income
Fee and commission expense
Net fee and commission income
Operating income
Net impairment loss on financial assets
Operating expenses
Profit before tax from continuing operations
Income tax expense
Profit after tax from continuing operations
Profit from discontinued operations after tax
Profit for the year
Other comprehensive income
Items that are or may be reclassified to profit or loss
Revaluation reserve
– Amount transferred to profit and loss
Cash flow hedging reserve
– Net amount transferred to profit and loss
Available-for-sale reserve
Tax on other comprehensive income
Other comprehensive income for the period, net of tax
Total comprehensive income for the period
Profit attributable to:
Equity holders of the Company
Non-controlling interests
Profit for the year
Total comprehensive income attributable to:
Equity holders of the Company
Non-controlling interests
Total comprehensive income for the period
Year ended
31 December
2015
£000
Re-presented*
Year ended
31 December
2014
£000
133,032
(29,339)
103,693
26,866
(3,866)
23,000
126,693
(18,066)
(86,059)
22,568
(5,436)
17,132
9,392
26,524
–
–
1,559
(262)
1,297
27,821
12,726
13,798
26,524
14,023
13,798
27,821
87,398
(19,371)
68,027
25,841
(1,819)
24,022
92,049
(11,953)
(66,165)
13,931
(3,444)
10,487
6,529
17,016
(2)
378
(81)
–
295
17,311
8,634
8,382
17,016
8,677
8,634
17,311
32.4
26.1
58.6
28.6
24.2
52.8
Earnings per share for profit attributable to the equity holders of the Company during the year (expressed in pence per share):
Basic earnings per share - Continuing operations
Basic earnings per share - Discontinuing operations
53.3
33.1
15
15
Basic earnings per share
Diluted earnings per share - Continuing operations
Diluted earnings per share - Discontinuing operations
Diluted earnings per share
15
15
15
15
86.3
51.3
32.0
83.3
* Prior year numbers have been re-presented for discontinuing operations (see note 11).
The notes on pages 38 to 100 are an integral part of these consolidated financial statements
Arbuthnot Banking Group PLCReport & Accounts 2015
Consolidated Statement
of Financial Position
31
ASSETS
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Assets classified as held for sale
Derivative financial instruments
Loans and advances to customers
Other assets
Financial investments
Deferred tax asset
Investment in associate
Intangible assets
Property, plant and equipment
Total assets
EQUITY AND LIABILITIES
Equity attributable to owners of the parent
Share capital
Retained earnings
Other reserves
Non-controlling interests
Total equity
LIABILITIES
Deposits from banks
Derivative financial instruments
Deposits from customers
Liabilities relating to assets classified as held for sale
Current tax liability
Other liabilities
Debt securities in issue
Total liabilities
Total equity and liabilities
Note
At
31 December
2015
£000
At
31 December
2014
£000
16
17
18
11
19
20
22
23
24
25
26
27
33
34
34
28
19
29
11
30
31
368,611
28,578
87,728
118,456
1,490
1,579,512
16,894
2,685
1,784
943
10,874
14,004
2,231,559
153
123,330
34
67,887
191,404
55,305
135
1,929,838
8,700
3,366
31,977
10,834
2,040,155
2,231,559
115,938
31,844
91,683
–
2,707
1,158,983
16,866
1,277
2,588
943
11,318
12,475
1,446,622
153
114,641
(1,263)
60,038
173,569
27,657
1,067
1,194,285
–
3,612
34,984
11,448
1,273,053
1,446,622
The financial statements on pages 30 to 100 were approved and authorised for issue by the Board of directors on 16 March 2016 and
were signed on their behalf by:
Sir Henry Angest
Director
J R Cobb
Director
Registered Number: 1954085
The notes on pages 38 to 100 are an integral part of these consolidated financial statements
Arbuthnot Banking Group PLCReport & Accounts 2015
32
Company Statement
of Financial Position
ASSETS
Due from subsidiary undertakings – bank balances
Financial investments
Deferred tax asset
Intangible assets
Property, plant and equipment
Other assets
Investment in subsidiary undertakings
Total assets
EQUITY AND LIABILITIES
Equity
Share capital
Other reserves
Retained earnings
Total equity
LIABILITIES
Other liabilities
Debt securities in issue
Total liabilities
Total equity and liabilities
Note
23
24
26
27
22
39
33
34
34
30
31
At
31 December
2015
£000
At
31 December
2014
£000
12,444
125
418
–
204
991
46,466
60,648
153
(1,111)
46,537
45,579
4,235
10,834
15,069
60,648
19,244
158
406
4
127
5,472
39,966
65,377
153
(1,111)
50,755
49,797
4,132
11,448
15,580
65,377
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 loss for the Parent Company for the year is presented in the Statement of Changes in Equity.
The financial statements on pages 30 to 100 were approved and authorised for issue by the Board of directors on 16 March 2016 and
were signed on their behalf by:
Sir Henry Angest
Director
J R Cobb
Director
Registered Number: 1954085
The notes on pages 38 to 100 are an integral part of these consolidated financial statements
Arbuthnot Banking Group PLCReport & Accounts 2015
Consolidated Statement
of Changes in Equity
33
Attributable to equity holders of the Group
Share
capital
£000
Revaluation
reserve
£000
Capital
redemption
reserve
£000
Available-
for-sale
reserve
£000
Treasury
shares
£000
Retained
earnings
£000
Non-
controlling
interests
£000
Total
£000
Balance at 1 January 2015
153
98
20
(250)
(1,131)
114,641
60,038
173,569
Total comprehensive income for
the period
Profit for 2015
Other comprehensive income, net of tax
Revaluation reserve
Cash flow hedging reserve
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
Equity settled share based payment
transactions
Final dividend relating to 2014
Interim dividend relating to 2015
Total contributions by and distributions
to owners
Balance at 31 December 2015
–
–
–
–
–
12,726
13,798
26,524
–
–
–
–
–
–
–
153
–
–
–
–
–
–
–
98
–
–
–
–
–
–
–
20
1,297
1,297
1,297
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,297
1,297
12,726
13,798
27,821
132
(2,382)
(1,787)
87
(4,549)
(1,487)
219
(6,931)
(3,274)
(4,037)
(5,949)
(9,986)
1,047
(1,131)
123,330
67,887
191,404
The notes on pages 38 to 100 are an integral part of these consolidated financial statements
Arbuthnot Banking Group PLCReport & Accounts 2015
34
Consolidated Statement
of Changes in Equity continued
Attributable to equity holders of the Group
Share
capital
£000
Revaluation
reserve
£000
Capital
redemption
reserve
£000
Available-
for-sale
reserve
£000
Cash flow
hedging
reserve
£000
Treasury
shares
£000
Retained
earnings
£000
Non-
controlling
interests
£000
Total
£000
Balance at 1 January 2014
153
191
20
(169)
(378)
(1,131)
67,901
20,327
86,914
Total comprehensive income for
the period
Profit for 2014
Other comprehensive income, net of tax
Revaluation reserve
– Adjustment
– Amount transferred to profit and loss
Cash flow hedging reserve
– Adjustment
– Net 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
Equity settled share based payment
transactions
Issue of new shares Secure Trust Bank
Sale of shares Secure Trust Bank
Final dividend relating to 2013
Interim dividend relating to 2014
Total contributions by and distributions
to owners
Balance at 31 December 2014
–
–
–
–
–
–
–
–
–
–
–
–
–
–
153
–
(91)
(2)
–
–
–
(93)
(93)
–
–
–
–
–
–
98
–
–
–
–
–
–
–
–
–
–
–
–
–
–
20
–
–
–
–
–
(81)
(81)
–
–
8,634
8,382
17,016
–
–
124
254
–
378
–
–
–
–
–
–
91
–
(124)
–
–
(33)
–
–
–
124
–
124
–
(2)
–
378
(81)
295
(81)
378
–
8,601
8,506
17,311
–
–
–
–
–
–
(250)
–
–
–
–
–
–
–
–
–
–
–
–
488
23,810
17,712
(2,233)
(1,638)
3,393
24,949
6,615
(2,426)
(1,326)
3,881
48,759
24,327
(4,659)
(2,964)
–
38,139
31,205
69,344
(1,131)
114,641
60,038 173,569
The notes on pages 38 to 100 are an integral part of these consolidated financial statements
Arbuthnot Banking Group PLCReport & Accounts 2015
Company Statement
of Changes in Equity
35
Balance at 1 January 2014
153
20
81
(1,131)
31,325
30,448
Attributable to equity holders of the Company
Share
capital
£000
Capital
redemption
reserve
£000
Available-
for-sale
reserve
£000
Treasury
shares
£000
Retained
earnings
£000
Total
£000
Total comprehensive income for the period
Profit for 2014
Other comprehensive income, net of income tax
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
Equity settled share based payment transactions
Final dividend relating to 2013
Interim dividend relating to 2014
Total contributions by and distributions to owners
Balance at 1 January 2015
Total comprehensive income for the period
Loss for 2015
Other comprehensive income, net of income tax
Total comprehensive income for the period
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Equity settled share based payment transactions
Final dividend relating to 2014
Interim dividend relating to 2015
Total contributions by and distributions to owners
Balance at 31 December 2015
–
–
–
–
–
–
–
–
153
–
–
–
–
–
–
153
–
–
–
–
–
–
–
–
20
–
–
–
–
–
–
20
–
–
23,260
23,260
(81)
(81)
(81)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(81)
(81)
23,260
23,179
41
(2,233)
(1,638)
41
(2,233)
(1,638)
(3,830)
(3,830)
(1,131)
50,755
49,797
–
–
–
–
–
–
(87)
(87)
(87)
(87)
38
(2,382)
(1,787)
38
(2,382)
(1,787)
(4,131)
(4,131)
(1,131)
46,537
45,579
The notes on pages 38 to 100 are an integral part of these consolidated financial statements
Arbuthnot Banking Group PLCReport & Accounts 2015
36
Consolidated Statement
of Cash Flows
Note
Year ended
31 December
2015
£000
Year ended
31 December
2014
£000
Cash flows from operating activities
Interest received
Interest paid
Fees and commissions received
Cash payments to employees and suppliers
Taxation paid
Cash flows from operating profits before changes in operating
assets and liabilities
Changes in operating assets and liabilities:
– net decrease/(increase) in derivative financial instruments
– net increase in loans and advances to customers
– net (increase)/decrease in other assets
– net increase in amounts due to customers
– net increase in other liabilities
Net cash inflow/(outflow) from operating activities
Cash flows from investing activities
Disposal of financial investments
Purchase of computer software
Purchase of property, plant and equipment
Proceeds from sale of property, plant and equipment
Proceeds from sale of Secure Trust Bank shares
Purchase of debt securities
Proceeds from redemption of debt securities
Net cash from investing activities
Cash flows from financing activities
Increase in borrowings
Dividends paid
Proceeds from share placing by Secure Trust Bank
Proceeds from exercise of Secure Trust Bank share options
Net cash used in financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
26
27
27
37
171,956
(35,040)
15,615
(115,463)
(7,409)
29,659
285
(417,814)
(118,484)
735,553
5,693
234,892
44
(3,532)
(3,395)
–
–
(145,880)
149,835
(2,928)
27,648
(10,205)
–
–
17,443
249,407
147,782
397,189
116,675
(18,260)
27,692
(91,874)
(3,047)
31,186
(1,503)
(434,352)
401
236,494
3,967
(163,807)
243
(1,214)
(7,803)
42
24,327
(85,243)
13,026
(56,622)
25,654
(7,623)
48,758
3,315
70,104
(150,325)
298,107
147,782
The notes on pages 38 to 100 are an integral part of these consolidated financial statements
Arbuthnot Banking Group PLCReport & Accounts 2015
Company Statement
of Cash Flows
37
Note
Year ended
31 December
2015
£000
Year ended
31 December
2014
£000
Cash flows from operating activities
Dividends received from subsidiaries
Interest received
Interest paid
Net trading and other income
Cash payments to employees and suppliers
Cash flows from operating losses before changes in operating assets
and liabilities
Changes in operating assets and liabilities:
– net increase in group company balances
– net decrease/(increase) in other assets
– net increase/(decrease) in other liabilities
Net cash outflow from operating activities
Cash flows from investing activities
Repayment of loans from subsidiary companies
Increase investment in subsidiary
Disposal of shares in subsidiaries
Net cash from investing activities
Cash flows from financing activities
Dividends paid
(Decrease)/Increase in borrowings
Net cash used in financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
39
39
37
6,648
120
(599)
1,833
(8,718)
(715)
(66)
7
143
(631)
4,500
(6,500)
–
(2,000)
(4,169)
–
(4,169)
(6,800)
19,244
12,444
6,440
149
(661)
1,629
(7,866)
(309)
(4,950)
(3)
(1)
(5,263)
–
(10,500)
24,327
13,827
(3,871)
(2,000)
(5,871)
2,693
16,551
19,244
The notes on pages 38 to 100 are an integral part of these consolidated financial statements
Arbuthnot Banking Group PLCReport & Accounts 2015
38
Notes to the Consolidated
Financial Statements
1. Reporting entity
Arbuthnot Banking Group PLC is a company domiciled in the United Kingdom. The registered address of the Arbuthnot Banking
Group PLC is 7 Wilson Street, London, EC2M 2SN. The consolidated financial statements of the Arbuthnot Banking Group PLC as
at and for the year ended 31 December 2015 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.
2. Basis of presentation
(a) Statement of compliance
The Group’s consolidated financial statements and the Company’s financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRSs as adopted and endorsed by the EU) and the Companies Act 2006 applicable
to companies reporting under IFRS.
The consolidated financial statements were authorised for issue by the Board of Directors on 16 March 2016.
(b) Basis of measurement
The consolidated and company financial statements have been prepared under the historical cost convention, as modified by the
revaluation of land and buildings, available-for-sale financial assets, financial assets and financial liabilities at fair value through profit
or loss, and derivatives assets and liabilities.
(c) Functional and presentational currency
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic
environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Pound
Sterling, which is the Company’s functional and the Group’s presentational currency.
(d) Use of estimates and judgements
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also
requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher
degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements
are disclosed in Note 4.
(e) Accounting developments
The accounting policies adopted are consistent with those of the previous financial year. There were no new or amended standards or
interpretations that resulted in a change in accounting policy.
(f) Going concern
The financial statements have been prepared on the ‘going concern’ basis as disclosed in the Directors’ Report.
3. Significant accounting policies
The accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have
been consistently applied to all the years presented, unless otherwise stated.
3.1. Consolidation
(a) Subsidiaries
Subsidiaries are all investees (including special purpose entities) controlled by the Group. The Group controls an investee when it is
exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through
its power over the investee. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are
de-consolidated from the date that control ceases.
The acquisition method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition
is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange,
plus costs directly attributable to the acquisition. Identifiable assets acquired, liabilities and contingent liabilities assumed in a business
combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest.
The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as
goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised
directly in the Statement of Comprehensive Income as a gain on bargain purchase.
Arbuthnot Banking Group PLCReport & Accounts 2015 39
The Parent’s investments in subsidiaries are recorded at cost less, where appropriate, provisions for impairment in value.
Inter-company transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses
are also eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies
adopted by the Group.
(b) Changes in ownership and non-controlling interests
Changes in ownership interest in a subsidiary that do not result in the loss of control are accounted for as equity transactions and
no gain or loss is recognised. Adjustments to non-controlling interests are based on a proportionate amount of the net assets of
the subsidiary.
When control of a subsidiary is lost, the Group derecognises the assets, liabilities, non-controlling interest and all other components of
equity relating to the former subsidiary from the consolidated Statement of Financial Position. Any resulting gain or loss is recognised
in profit or loss. Any investment retained in the former subsidiary is recognised at its fair value when control is lost.
(c) Special purpose entities
Special purpose entities (“SPEs”) are entities that are created to accomplish a narrow and well-defined objective such as the
securitisation of particular assets or the execution of a specific borrowing or lending transaction. SPEs are consolidated when the
investor controls the investee. The investor would only control the investee if it had all of the following:
• power over the investee;
• exposure, or rights, to variable returns from its involvement with the investee; and
• the ability to use its power over the investee to affect the amount of the investor’s returns.
The assessment of whether the Group has control over an SPE is carried out at inception and the initial assessment is only reconsidered
at a later date if there were any changes to the structure or terms of the SPE, or there were additional transactions between the Group
and the SPE.
(d) Associates
Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies.
Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity.
Associates are accounted for using the equity method and are initially recognised at cost. The Group’s investment includes goodwill
identified on acquisition, net of any accumulated impairment losses. The consolidated financial statements include the Group’s share
of the total comprehensive income and equity movements of equity accounted investees, from the date that significant influence
commences until the date that significant influence ceases. When the Group’s share of losses exceeds its interest in an equity accounted
investee, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the
Group has incurred legal or constructive obligations or made payments on behalf of the investee.
3.2. Segment reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the Group Board. The Group Board,
which is responsible for allocating resources and assessing performance of the operating segments, has been identified as the chief
operating decision maker. All transactions between segments are conducted on an arm’s length basis. Income and expenses directly
associated with each segment are included in determining segment performance. There are three main operating segments:
• Retail Banking
• Private Banking
• Group Centre
3.3. Foreign currency translation
Foreign currency transactions are translated into the functional currency using the spot exchange rates prevailing at the dates of
the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such
transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies
are recognised in the Statement of Comprehensive Income. Foreign exchange differences arising from translation of available-for-sale
equity instruments are recognised in the Statement of Comprehensive Income.
Arbuthnot Banking Group PLCReport & Accounts 2015 40
Notes to the Consolidated
Financial Statements continued
3.4. Interest income and expense
Interest income and expense are recognised in the Statement of Comprehensive Income for all instruments measured at amortised
cost using the effective interest method.
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. The carrying amount of the financial asset
or financial liability is adjusted if the Group revises its estimates of payments or receipts. The adjusted carrying amount is calculated
based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income
continues to be recognised using the original effective interest rate applied to the impaired carrying amount.
3.5. 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.
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 on an accruals basis as the related services are performed. The same
principle is applied for financial planning and insurance services that are continuously provided over an extended period of time.
3.6. Discontinued operations
A discontinued operation is a component of the Group’s business, the operations and cash flows of which can be clearly distinguished
from the rest of the Group and which:
• represents a separate major line of business or geographical area of operations;
• is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or
• is a subsidiary acquired exclusively with a view to re-sale.
Classification as a discontinued operation occurs on disposal or when the operation meets the criteria to be classified as held for sale
(see note 3.13), if earlier. When an operation is classified as a discontinued operation, the comparative Statement of Comprehensive
Income is re-presented as if the operation had been discontinued from the start of the comparative year.
3.7. Financial assets and financial liabilities
The Group classifies 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 acquisition. A financial asset or financial liability is measured
initially at fair value plus, for an item not at fair value through profit or loss, transaction costs that are directly attributable to its
acquisition or issue.
(a) Financial assets and financial liabilities at 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 the date from which the Group becomes a party to the contractual provisions of the instrument.
Subsequent measurement of financial assets and financial liabilities held in this category are carried at fair value through profit or loss.
(b) Loans and receivables
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 has the positive intent and ability to hold to maturity and that has not been designated at fair value through profit or loss or
as available-for-sale investments. Held-to-maturity investments are carried at amortised cost using the effective interest method, less
any impairment loss.
Arbuthnot Banking Group PLCReport & Accounts 2015 41
(d) Available-for-sale
Available-for-sale (‘AFS’) investments are those not classified as another category of financial assets. These include investments in
special purpose vehicles and equity investments in unquoted vehicles. They may be sold in response to liquidity requirements, interest
rate, exchange rate or equity price movements. AFS investments are initially recognised at cost, which is considered as the fair value
of the investment including any acquisition costs. AFS securities are subsequently measured at fair value in the Statement of Financial
Position. Fair value changes on the AFS securities are recognised directly in equity (AFS reserve) until the investment is sold or
impaired. Once sold or impaired, the cumulative gains or losses previously recognised in the AFS reserve are recycled to the profit
or loss.
(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.
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, less any reduction for impairment.
Fair value measurement
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument.
A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market
transactions on an arm’s length basis.
If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. These include the use
of recent arm’s length transactions, reference to other instruments that are substantially the same for which market observable prices
exist, net present value and discounted cash flow analysis. In the instance that fair values of assets and liabilities cannot be reliably
measured, they are carried at cost.
For measuring derivatives that might change classification from being an asset to a liability or vice versa such as interest rate swaps,
fair values take into account both credit valuation adjustment (CVA) and debit valuation adjustment (DVA) when market participants
take this into consideration in pricing the derivatives.
Derecognition
Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or 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, cancelled, expire, are modified or exchanged.
3.8. 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) 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 immediately in the profit or loss.
Arbuthnot Banking Group PLCReport & Accounts 2015 42
Notes to the Consolidated
Financial Statements continued
3.8. Derivative financial instruments and hedge accounting (continued)
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.
(b) 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 or loss, the embedded derivative is bifurcated and
reported at fair value and gains or losses are recognised in the Statement of Comprehensive Income.
3.9. 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
contractual future cash flows of the financial asset or group of financial assets, and can be reliably estimated.
The criteria that the Group uses to determine 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.
The Group considers evidence of impairment for loans and advances at both a specific asset and collective level. All individually
significant loans and advances are assessed for specific impairment. Those found not to be specifically impaired are then collectively
assessed for any impairment that has been incurred but not yet identified. In assessing collective impairment the Group uses historical
trends of the probability of default, emergence period, the timing of recoveries and the amount of loss incurred, adjusted for
management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be
significantly different to historic trends.
When a loan is uncollectible, it is written off against the related provision for loan impairment. Such loans are written off after all
the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts
previously written off decrease the amount of the provision for loan impairment in the Statement of Comprehensive Income.
Arbuthnot Banking Group PLCReport & Accounts 2015 43
A customer’s account may be modified to assist customers who are in or have recently overcome financial difficulties and have
demonstrated both the ability and willingness to meet the current or modified loan contractual payments. Loans that have renegotiated
or deferred terms, resulting in a substantial modification to the cash flows, are no longer considered to be past due but are treated as
new loans recognised at fair value, provided the customers comply with the renegotiated or deferred terms.
(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 profit or loss. Impairment losses recognised in the profit or loss on equity instruments are reversed through other comprehensive income.
(c) Renegotiated loans
Loans that are neither 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.
(d) Forbearance
Under certain circumstances, the Group may use forbearance measures to assist borrowers who are experiencing significant financial
hardship. Any forbearance support is assessed on a case by case basis in line with best practice and subject to regular monitoring and
review. The Group seeks to ensure that any forbearance results in a fair outcome for both the customer and the Group.
3.10. Impairment of non-financial assets
The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each
reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable
amount is estimated. Impairment for goodwill is discussed in more detail under note 3.14.
3.11. Funding for Lending Scheme
Under the applicable International Accounting Standard, IAS 39, if a security is lent under an agreement to return it to the transferor,
as is the case for eligible securities lent by institutions to the Bank of England under the FLS, then the security is not derecognised
because the transferor retains all the risks and rewards of ownership. The UK Treasury Bills borrowed from the Bank of England under
the FLS are not recognised on the Statement of Financial Position of the institution until such time as they are subject to a repurchase
agreement with a third party, as they will not meet the criteria for derecognition by the Bank of England. When the UK Treasury Bills
are pledged as part of a sale and repurchase agreement with a third party, amounts borrowed from the third party are recognised on
the Statement of Financial Position.
3.12. Inventory
Land acquired through repossession of collateral which is subsequently held in the ordinary course of business with a view to develop
and sell is accounted for as inventory.
Inventory is measured at the lower of cost or net realisable value. The cost of inventories comprises all costs of purchase, costs of
conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the
estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to
make the sale.
3.13. Assets classified as held for sale
Non-current assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather
than through continuing use, are classified as held for sale. These assets and liabilities are subsequently measured at the lower of its
carrying amount and fair value less costs to sell. Once classified as held for sale, intangible assets and property, plant and equipment
are no longer amortised or depreciated.
3.14. Intangible assets
(a) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of
the acquired subsidiary or associate at the date of acquisition. Goodwill on acquisitions of subsidiaries or associates is included in
‘intangible assets’. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
Arbuthnot Banking Group PLCReport & Accounts 2015 44
Notes to the Consolidated
Financial Statements continued
3.14. Intangible assets (continued)
(a) Goodwill
The Group reviews the goodwill for impairment at least annually or more frequently when events or changes in economic
circumstances indicate that impairment may have taken place and 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 test for impairment involves comparing the carrying value of goodwill with the present
value of pre-tax cash flows, discounted at a rate of interest that reflects the inherent risks of the CGU to which the goodwill relates,
or the CGU’s fair value if this is higher.
(b) Computer software
Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software.
These costs are amortised on the basis of the expected useful lives (three to ten years).
Costs associated with maintaining computer software programs are recognised as an expense as incurred.
Costs associated with developing computer software which are assets in the course of construction, which management has assessed
to not be available for use, are not amortised.
(c) Other intangibles
Other intangibles include trademarks, customer relationships, broker relationships, technology and banking licences acquired.
These costs are amortised on the basis of the expected useful lives (three to ten years).
3.15. 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
Leasehold improvements are depreciated over the term of the lease (until the first break clause). Gains and losses on disposals are
determined by deducting carrying amount from proceeds. These are included in the Statement of Comprehensive Income. 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.
3.16. 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.
Arbuthnot Banking Group PLCReport & Accounts 2015 45
(b) As a lessee
Rentals made under operating leases are recognised in the Statement of Comprehensive Income on a straight line basis over the term
of the lease.
Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance
leases. Leased assets by way of finance leases are stated at an amount equal to the lower of their fair value and the present value of the
minimum lease payments at inception of the lease, less accumulated depreciation. Minimum lease payments are apportioned between
the finance charge and the reduction of the outstanding liability. The finance charge is allocated to each period during the lease term
so as to produce a constant periodic rate of interest on the remaining balance of the liability.
3.17. Cash and cash equivalents
For the purposes of the Statement of Cash Flows, cash and cash equivalents comprises cash on hand and demand deposits, and cash
equivalents are deemed highly liquid investments that are convertible into cash with an insignificant risk of changes in value with a
maturity of three months or less at the date of acquisition.
3.18. Employee benefits
(a) Post-retirement obligations
The Group contributes to a defined contribution scheme and to individual defined contribution schemes for the benefit of certain
employees. The schemes are funded through payments to insurance companies or trustee-administered funds at the contribution rates
agreed with individual employees.
The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as an
employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or
a reduction in the future payments is available.
There are no post-retirement benefits other than pensions.
(b) Share-based compensation
The fair value of equity settled share-based payment awards are calculated at grant date and recognised over the period in which the
employees become unconditionally entitled to the awards (the vesting period). The amount is recognised as personnel expenses in the
profit and loss, with a corresponding increase in equity. The Group adopts a Black-Scholes valuation model in calculating the fair value
of the share options as adjusted for an attrition rate of members of the scheme and a probability of pay-out reflecting the risk of not
meeting the terms of the scheme over the vesting period. The number of share options that are expected to vest are reviewed at
least annually.
The fair value of cash settled share-based payments is recognised as personnel expenses in the profit or loss with a corresponding
increase in liabilities over the vesting period. The liability is remeasured at each reporting date and at settlement date based on the fair
value of the options granted, with a corresponding adjustment to personnel expenses.
When share-based payments are changed from cash settled to equity settled and there is no change in the fair value of the replacement
award, it is seen as a modification to the terms and conditions on which the equity instruments were granted and is not seen as the
settlement and replacement of the instruments. Accordingly, the liability in the Statement of Financial Position is reclassified to equity
and the prospective charge to the profit or loss from the modification reflects the spreading of the initial grant date fair value of the
award over the remaining vesting period in line with the policy on equity settled awards.
3.19. 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.
Arbuthnot Banking Group PLCReport & Accounts 2015 46
Notes to the Consolidated
Financial Statements continued
3.19. Taxation (continued)
Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they
relate to taxes levied by the same tax authority on the same taxable entity, or on different tax entities, when they intend to settle
current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.
Deferred tax assets are recognised where it is probable that future taxable profits will be available against which the temporary
differences can be utilised.
3.20. 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 3.4. Equity instruments, including share capital, are initially recognised as net proceeds, after deducting transaction costs and
any related income tax. Dividend and other payments to equity holders are deducted from equity, net of any related tax.
3.21. 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.
3.22. Financial guarantee and loan commitments
Financial guarantees represent undertakings that the Group will meet a customer’s obligation to third parties if the customer fails to
do so. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or
letters of credit. The Group is theoretically exposed to loss in an amount equal to the total guarantees or unused commitments, however,
the likely amount of loss is expected to be significantly less; most commitments to extend credit are contingent upon customers
maintaining specific credit standards. Liabilities under financial guarantee contracts are initially recorded at their fair value, and the
initial fair value is amortised over the life of the financial guarantee. Subsequently, the financial guarantee liabilities are measured at
the higher of the initial fair value, less cumulative amortisation, and the best estimate of the expenditure to settle obligations.
3.23. 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.
3.24. New standards and interpretations not yet adopted
The following standards, interpretations and amendments to existing standards have been published and are mandatory for the
Group’s accounting periods beginning on or after 1 January 2016 or later periods, but the Group has not early adopted them:
• IFRS 9, ‘Financial instruments’ (effective from 1 January 2018). This standard deals with the classification and measurement of
financial assets and will replace IAS 39. Phase one of this standard deals with the classification and measurement of financial assets
and represents a significant change from the existing requirements in IAS 39. The standard contains three primary measurement
categories for financial assets: ‘amortised cost’, ‘fair value through other comprehensive income’ and ‘fair value through profit or
loss’ and eliminates the existing categories of ‘held to maturity’, ‘available for sale’ and ‘loans and receivables’. Phase two of the
Arbuthnot Banking Group PLCReport & Accounts 2015 47
standard covers impairment, with a new expected loss impairment model that will require expected credit losses to be accounted for
from when financial instruments are first recognised and lowers the threshold for the recognition of full lifetime expected losses.
Phase three covers general hedge accounting and introduces a substantially reformed model for hedge accounting with enhanced
disclosure about risk management activity. The new model aligns the accounting treatment with risk management activities.
• IFRS 15, ‘Revenue from contracts with customers’ (effective 1 January 2017). This standard establish the principles that an entity
shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of
revenue and cash flows arising from a contract with a customer. This standard is unlikely to have a material impact on the Group.
(This standard has not yet been endorsed by the EU.)
• IFRS 16, ‘Leases’ (effective from 1 January 2019). The standard sets out the principles for the recognition, measurement,
presentation and disclosure of leases for both parties to a contract i.e. the customer (‘lessee’) and the supplier (‘lessor’). IFRS 16
replaces the previous leases Standards, IAS 17 Leases, and related Interpretations. IFRS 16 eliminates the classification of leases as
either operating leases or finance leases for a lessee. Instead all leases are treated in a similar way to finance leases applying IAS 17.
Leases are ‘capitalised’ by recognising the present value of the lease payments and showing them either as lease assets (right-of-use
assets) or together with property, plant and equipment. If lease payments are made over time, a company also recognises a financial
liability representing its obligation to make future lease payments. The most significant effect of the new requirements in IFRS 16
will be an increase in lease assets and financial liabilities. Accordingly, for companies with material off balance sheet leases, there
will be a change to key financial metrics derived from the company’s assets and liabilities (for example, leverage ratios).
4. Critical accounting estimates and judgements in applying accounting policies
The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year.
Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations
of future events that are believed to be reasonable under the circumstances.
4.1. 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 3.9. 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 (where held), in determining the
expected future cash flows.
Any change in timing of estimated future cash flows (other than impairment) will adjust carrying value with gain or loss in profit or
loss. The revised carrying amount will be recalculated by discounting the revised estimated future cash flows at the portfolios original
effective interest rate.
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.
In assessing collective impairment the Group uses historical trends of the probability of default, the timing of recoveries and the
amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that
the actual losses are likely to be significantly different to historic trends. Default rates, loss rates and the expected timing of future
recoveries are regularly benchmarked against actual outcomes to ensure that they remain appropriate.
To the extent that the default rates differ from that estimated by 10%, the allowance for impairment on loans and advances would
change by an estimated £5.1m (2014: £3.2m).
Arbuthnot Banking Group PLCReport & Accounts 2015 48
Notes to the Consolidated
Financial Statements continued
4.2. Goodwill impairment
The accounting policy for goodwill is described in note 3.14 (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 management’s view of future business forecasts at the time of the assessment.
A detailed three year budget is done every year and management also uses judgement in applying a growth rate. The accuracy
of future cash flows is subject to a high degree of uncertainty in volatile market conditions. During such conditions, management
would 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.
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
three CGU’s (2014: three) with goodwill attached; the core Arbuthnot Latham CGU (£1.7m), the Music Finance CGU (£0.3m) and
the V12 Group CGU (£0.7m; subsidiary of Secure Trust Bank).
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 (2014: 5 years with a terminal value). The 5 year discounted cash flows 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 2018 as per the approved 3 year plan.
A growth rate of 19% (2014: 10%) was used for income and 16% (2014: 10%) for expenditure from 2016 to 2018 (these rates were
the best estimate of future forecasted performance), while a 3% (2014: 3%) growth rate for income and expenditure (a more
conservative approach was taken for latter years as these were not budgeted for in detail as per the three year plan approved by
the Board of Directors) was used for cash flows after the approved three year plan.
Management considers the value in use for the Music Finance CGU and V12 Group CGU to be the discounted cash flows over 5 years
(2014: 5 years). Income and expenditure were kept flat (2014: 0%) over the 5 year period.
Cash flows were discounted at a pre-tax rate of 12% (2014: 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.
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.
4.3. 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. Deferred tax assets on carried forward losses are recognised
where it is probable that future taxable profits will be available to utilise it. 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.
4.4. Acquisition of loan book
Acquired loan books are initially recognised at fair value. Significant judgement is exercised in calculating their effective interest rate
(“EIR”) using cash flow models which include assumptions on the likely macroeconomic environment, including HPI, unemployment
levels and interest rates, as well as loan level and portfolio attributes and history used to derive prepayment rates, the probability and
timing of defaults and the amount of incurred losses.
4.5. Effective Interest Rate
IAS 39 requires interest earned from lending to be measured under the effective interest rate method. The effective interest rate is the
rate that exactly discounts estimated future cash receipts or payments through the expected life of the financial instrument or, when
appropriate, a shorter period to the net carrying amount of the financial asset.
Arbuthnot Banking Group PLCReport & Accounts 2015 49
Management must therefore use judgement to estimate the expected life of each instrument and hence the expected cash flows relating
to it. The accuracy of the effective interest rate would therefore be affected by unexpected market movements resulting in altered
customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect assumptions.
4.6. Share option scheme valuation
The valuation of the Secure Trust Bank equity-settled share option scheme was determined at the original grant date of 2 November
2011 using Black-Scholes valuation models. In the opinion of the directors the terms of the scheme are such that there remain a
number of key uncertainties to be considered when calculating the probability of pay out, which are set out below. The directors
also considered the probability of option holder attrition prior to the vesting dates, details of which are also set out below.
Uncertainties in the regulatory environment continue. Any tightening of capital requirements will impact on the ability of Secure Trust
Bank to exploit future market opportunities and furthermore may inhibit its ability to maintain the required growth in distributions.
Taking these into account, the probability of pay-out has been judged as 100% for the remaining share options (SOS2) which vest
on 2 November 2016.
Although one participant in the Share Option Scheme left the Company during 2012 and was consequently withdrawn from the Scheme,
the directors consider that there is no further uncertainty surrounding whether the remaining participants will all still be in situ and
eligible at the vesting date. Therefore the directors have assumed no attrition rate for the remaining share options over the scheme period.
The valuation of the cash settled Share Option Scheme was determined at 31 December 2015 using Black-Scholes valuation models.
In the opinion of the directors the terms of the scheme are such that there remains a number of key uncertainties to be considered
when calculating the probability of pay-out, which are considered to be similar to those set out above.
4.7. 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”.
4.8. PPI provisions
The Group provides for its best estimate of redress payable in respect of historical sales of PPI, by considering the likely future uphold rate
for claims, in the context of confirmed issues and historical experience. The likelihood of potential new claims is projected forward to
2018, as management believe this to be an appropriate time horizon, recognising the significant decline in recent claims experience and the
increasing subjectivity beyond that. The accuracy of these estimates would be affected, were there to be a significant change in either the
number of future claims or, the incidence of claims upheld by the Financial Ombudsman. The amounts are included within accruals.
4.9. Valuation of financial instruments
The Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is
regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions.
If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. These include the use of
recent arm’s length transactions, reference to other instruments that are substantially the same for which market observable prices exist,
net present value and discounted cash flow analysis. The objective of valuation techniques is to determine the fair value of the financial
instrument at the reporting date as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. In the instance that fair values of assets and liabilities cannot be reliably measured, they are carried at cost.
The Group measures fair value using the following fair value hierarchy that reflects the significance of the inputs used in making
measurements:
• Level 1: Quoted prices in active markets for identical assets or liabilities
• Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in
active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than
active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data.
• Level 3: Inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not
based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes
instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or
assumptions are required to reflect differences between the instruments.
Arbuthnot Banking Group PLCReport & Accounts 2015 50
Notes to the Consolidated
Financial Statements continued
4.9. Valuation of financial instruments (continued)
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).
Visa Europe Limited investment
Following the public announcement on 2 November 2015 of the proposed sale of Visa Europe Ltd (“Visa Europe”) to Visa Inc.,
the fair value of the Group’s equity interest in Visa Europe has been established by reference to the consideration being offered
by Visa Inc. A gain has been recognised in other comprehensive income for the revised valuation.
The deal values Visa Europe at up to €21.2bn, payable as€€11.5bn in cash and €5bn in Visa Inc. preferred stock, plus a potential
future earn-out of up to €€4.7bn. The valuation of the Group’s investment includes a haircut on the preference share element to take
account of contingent legal liabilities of Visa Europe and uncertainty over the transferability of these shares. No value has been
attributed to the contingent earn-out due to uncertainty as its nature, valuation, and the Group’s share.
Other level 3 financial investments
For other financial investments measured at fair value, the Group uses proprietary valuation models which are developed from
recognised valuation techniques. Management judgement is usually required for the selection of the appropriate valuation model to
be used. Some or all of the significant inputs into these models may not be observable in the market. Valuation models that employ
significant unobservable inputs require a higher degree of management judgement and estimation in the determination of fair value.
The Group has established a valuation methodology for measuring level 3 financial investments which are categorised as available
for sale. Unobservable inputs used include: yield (5.75%), annual rental value (€265/m2) and occupancy rate (94.2%). Significant
increases in the yield or decreases in annual rental value or occupancy rate would result in lower fair values. Management analyse
and investigate any significant movements to the unobservable inputs which impact the valuation of level 3 instruments.
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 2015
ASSETS
Derivative financial instruments
Financial investments
Total assets
LIABILITIES
Derivative financial instruments
Total liabilities
At 31 December 2014
ASSETS
Derivative financial instruments
Financial investments
Total assets
LIABILITIES
Derivative financial instruments
Total liabilities
There were no transfers between level 1 and level 2 during the year.
Level 1
£000
–
137
137
–
–
Level 1
£000
–
171
171
–
–
Level 2
£000
1,490
–
1,490
135
135
Level 2
£000
2,707
–
2,707
1,067
1,067
Level 3
£000
–
2,548
2,548
–
–
Level 3
£000
–
1,106
1,106
–
–
Total
£000
1,490
2,685
4,175
135
135
Total
£000
2,707
1,277
3,984
1,067
1,067
Arbuthnot Banking Group PLCReport & Accounts 2015
51
The following table reconciles the movement in level 3 financial instruments measured at fair value (financial investments) during
the year:
Movement in level 3
At 1 January
Disposals
Movements recognised in other comprehensive income
Movements recognised in the profit and loss
At 31 December
2015
£000
1,106
(44)
1,559
(73)
2,548
2014
£000
1,796
(243)
–
(447)
1,106
The tables below analyses financial instruments not measured at fair value by the level in the fair value hierarchy into which the
measurement is categorised:
At 31 December 2015
ASSETS
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Assets classified as held for sale
Loans and advances to customers
Other assets
Total assets
LIABILITIES
Deposits from banks
Deposits from customers
Liabilities relating to assets classified as held for sale
Other liabilities
Debt securities in issue
Total liabilities
At 31 December 2014
ASSETS
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Loans and advances to customers
Other assets
Total assets
LIABILITIES
Deposits from banks
Deposits from customers
Other liabilities
Debt securities in issue
Total liabilities
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
–
–
–
–
–
–
–
–
–
–
–
–
–
368,611
28,578
87,728
–
–
–
484,917
55,305
–
–
–
–
55,305
–
–
–
118,456
1,579,512
2,625
1,700,593
–
1,929,838
8,700
14,581
10,834
1,963,953
368,611
28,578
87,728
118,456
1,579,512
2,625
2,185,510
55,305
1,929,838
8,700
14,581
10,834
2,019,258
Level 1
£000
Level 2
£000
Level 3
£000
Total
£000
–
–
–
–
–
–
–
–
–
–
–
115,938
31,844
91,683
106,285
–
345,750
27,657
–
–
–
27,657
–
–
–
1,052,698
5,522
1,058,220
–
1,194,285
12,024
11,448
1,217,757
115,938
31,844
91,683
1,158,983
5,522
1,403,970
27,657
1,194,285
12,024
11,448
1,245,414
Arbuthnot Banking Group PLCReport & Accounts 2015
52
Notes to the Consolidated
Financial Statements continued
5. Maturity analysis of assets and liabilities
The table below shows the maturity analysis of assets and liabilities of the Group as at 31 December 2015:
At 31 December 2015
ASSETS
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Assets classified as held for sale
Derivative financial instruments
Loans and advances to customers
Other assets
Financial investments
Deferred tax asset
Investment in associate
Intangible assets
Property, plant and equipment
Total assets
LIABILITIES
Deposits from banks
Derivative financial instruments
Deposits from customers
Liabilities classified as held for sale
Current tax liability
Other liabilities
Debt securities in issue
Total liabilities
Due within
one year
£000
368,611
28,578
56,145
118,456
59
691,315
16,544
–
–
–
–
–
1,279,708
55,305
135
1,373,297
8,700
3,366
28,319
–
1,469,122
Due after
more than
one year
£000
–
–
31,583
–
1,431
888,197
350
2,685
1,784
943
10,874
14,004
951,851
–
–
556,541
–
–
3,658
10,834
571,033
Total
£000
368,611
28,578
87,728
118,456
1,490
1,579,512
16,894
2,685
1,784
943
10,874
14,004
2,231,559
55,305
135
1,929,838
8,700
3,366
31,977
10,834
2,040,155
Arbuthnot Banking Group PLCReport & Accounts 2015
The table below shows the maturity analysis of assets and liabilities of the Group as at 31 December 2014:
At 31 December 2014
ASSETS
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Derivative financial instruments
Loans and advances to customers
Other assets
Financial investments
Deferred tax asset
Investment in associate
Intangible assets
Property, plant and equipment
Total assets
LIABILITIES
Deposits from banks
Derivative financial instruments
Deposits from customers
Current tax liability
Other liabilities
Debt securities in issue
Total liabilities
Due within
one year
£000
Due after
more than
one year
£000
115,938
31,844
62,839
1,209
444,594
16,516
–
992
–
–
–
673,932
27,657
1,067
911,579
3,612
30,679
–
974,594
–
–
28,844
1,498
714,389
350
1,277
1,596
943
11,318
12,475
772,690
–
–
282,706
–
4,305
11,448
298,459
The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2015:
At 31 December 2015
ASSETS
Due from subsidiary undertakings – bank balances
Financial investments
Deferred tax asset
Property, plant and equipment
Other assets
Shares in subsidiary undertakings
Total assets
LIABILITIES
Other liabilities
Debt securities in issue
Total liabilities
Due within
one year
£000
Due after
more than
one year
£000
12,444
–
–
–
641
–
13,085
4,235
–
4,235
–
125
418
204
350
46,466
47,563
–
10,834
10,834
53
Total
£000
115,938
31,844
91,683
2,707
1,158,983
16,866
1,277
2,588
943
11,318
12,475
1,446,622
27,657
1,067
1,194,285
3,612
34,984
11,448
1,273,053
Total
£000
12,444
125
418
204
991
46,466
60,648
4,235
10,834
15,069
Arbuthnot Banking Group PLCReport & Accounts 2015
54
Notes to the Consolidated
Financial Statements continued
5. Maturity analysis of assets and liabilities (continued)
The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2014:
At 31 December 2014
ASSETS
Due from subsidiary undertakings – bank balances
Financial investments
Deferred tax asset
Intangible assets
Property, plant and equipment
Other assets
Shares in subsidiary undertakings
Total assets
LIABILITIES
Other liabilities
Debt securities in issue
Total liabilities
Due within
one year
£000
Due after
more than
one year
£000
19,244
–
–
–
–
622
–
19,866
4,132
–
4,132
–
158
406
4
127
4,850
39,966
45,511
–
11,448
11,448
Total
£000
19,244
158
406
4
127
5,472
39,966
65,377
4,132
11,448
15,580
6. Financial risk management
Strategy
By their nature, the Group’s activities are principally related to the use of financial instruments. The Directors and senior management
of the Group have formally adopted a Group Risk and Controls Policy which sets out the Board’s attitude to risk and internal controls.
Key risks identified by the Directors are formally reviewed and assessed at least once a year by the Board, in addition to which key
business risks are identified, evaluated and managed by operating management on an ongoing basis by means of procedures such as
physical controls, credit and other authorisation limits and segregation of duties. The Board also receives regular reports on any risk
matters that need to be brought to its attention. Significant risks identified in connection with the development of new activities are
subject to consideration by the Board. There are budgeting procedures in place and reports are presented regularly to the Board
detailing the results of each principal business unit, variances against budget and prior year, and other performance data.
The principal non-operational risks inherent in the Group’s business are credit, market 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.
Arbuthnot Banking Group PLCReport & Accounts 2015
55
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, or held as inventory where the Group intends to develop and sell in the future. Where excess funds are available after
the debt has been repaid, they are available either for other secured lenders with lower priority or are returned to the customer.
Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters
of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to
the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments
to extend credit are contingent upon customers maintaining specific credit standards.
The Group’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 and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Assets classified as held for sale
Derivative financial instruments
Loans and advances to customers – Arbuthnot Latham
Loan and advances to customers – Secure Trust Bank
Other assets
Financial investments
Credit risk exposures relating to off-balance sheet assets are as follows:
Guarantees
Loan commitments and other credit related liabilities
At 31 December
2015
£000
368,611
28,578
87,728
118,456
1,490
618,902
960,610
2,625
2,685
2014
£000
115,938
31,844
91,683
–
2,707
536,488
622,495
5,522
1,277
56
178,863
2,368,604
714
139,423
1,548,091
Arbuthnot Banking Group PLCReport & Accounts 2015
56
Notes to the Consolidated
Financial Statements continued
6. Financial risk management (continued)
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 – bank balances
Financial investments
Other assets
At 31 December
2015
£000
12,444
125
891
13,460
2014
£000
19,244
158
5,365
24,767
The above tables represents the maximum credit risk exposure (net of impairment) to the Group and Company at 31 December 2015
and 2014 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.
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 2015
31 December 2014
Loan Balance
£000
486,256
340,781
80,762
36,486
944,285
Collateral
£000
1,256,642
507,852
98,792
25,738
1,889,024
Loan Balance
£000
300,384
179,527
28,176
23,497
531,584
Collateral
£000
824,044
269,673
29,899
18,382
1,141,998
The table below represents an analysis of the loan commitments compared to the values of the properties for the Group:
Loan commitments and other credit related liabilities
Less than 60%
60% – 80%
80% – 100%
Total
31 December 2015
31 December 2014
Committed
£000
74,576
56,702
2,278
133,556
Collateral
£000
171,108
81,765
2,848
255,721
Committed
£000
71,575
57,223
–
128,798
Collateral
£000
172,804
79,899
–
252,703
Arbuthnot Banking Group PLCReport & Accounts 2015
57
Renegotiated loans and forbearance
The contractual terms of a loan may be modified due to factors that are not related to the current or potential credit deterioration of
the customer (changing market conditions, customer retention, etc.). In such cases, the modified loan may be derecognised and the
renegotiated loan recognised as a new loan at fair value.
No forbearance measures were undertaken for Arbuthnot Latham & Co., Ltd in 2014. As at 31 December 2015, loans for which
forbearance measures were undertaken totalled 0.14% of total loans to customers for the Bank. Six loans with a total balance of
£764,000 were transferred to interest only, while historic arrears on one loan of £147,000, were moved to capital.
Secure Trust Bank (“STB”) does not reschedule contractual arrangements where customers default on their repayments. Under its
Treating Customers Fairly (“TCF”) policies, however, STB may offer the customer the option to reduce or defer payments for a short
period. If the request is granted, the account continues to be monitored in accordance with the Group’s impairment provisioning
policy. Such debts retain the customer’s normal contractual payment due dates and will be treated the same as any other defaulting
cases for impairment purposes. Arrears tracking will continue on the account with any impairment charge being based on the original
contractual due dates for all products.
The policy on forbearance for Everyday Loans is that a customer’s account may be modified to assist customers who are in or, have
recently overcome, financial difficulties and have demonstrated both the ability and willingness to meet the current or modified loan
contractual payments. These may be modified by way of a reschedule or deferment of repayments. Rescheduling of debts retains the
customers’ contractual due dates, whilst the deferment of repayments extends the payment schedule up to a maximum of four
payments in a twelve month period. As at 31 December 2015 the gross balance of rescheduled loans included in the Consolidated
Statement of Financial Position was £14.9m, with an allowance for impairment on these loans of £1.0m. The gross balance of deferred
loans was £3.4m with an allowance for impairment on these of £0.6m. (31 December 2014: the gross balance of rescheduled loans
was £14.7m, with an allowance for impairment of £1.0m. The gross balance of deferred loans was £3.0m with an allowance for
impairment of £0.4m).
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:
• product concentration
• geographical concentration; and
• high value residential properties
Arbuthnot Banking Group PLCReport & Accounts 2015 58
Notes to the Consolidated
Financial Statements continued
6. Financial risk management (continued)
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. The table below show the concentration in the loan book.
Loans and advances to customers
Loan Commitments
Concentration by product
Cash collateralised
Commercial Lending
Real estate finance
Asset finance
Commercial finance
Residential mortgages
Non-Performing
Other Collateral
Motor
Unsecured
Personal lending
Retail
Other
At 31 December
Concentration by location
East Anglia
East Midlands
London
Midlands
North East
North West
Northern Ireland
Scotland
South East
South West
Wales
West Midlands
Yorkshire & Humber
Overseas
Other
2015
£000
2014
£000
15,987
19,934
367,999
70,685
52,222
521,256
9,839
55,211
165,697
79,706
220,418
20,492
133,738
4,541
25,875
451,645
11,940
32,587
137,853
192,638
116,734
31,498
2015
£000
–
109,033
20,081
9,277
40,230
–
–
242
–
–
–
2014
£000
–
95,790
–
–
43,428
–
–
205
–
–
–
1,579,512
1,158,983
178,863
139,423
99,340
49,222
600,254
7,811
29,239
90,496
8,301
74,635
245,647
87,429
42,436
69,162
59,210
74,627
41,703
44,359
44,869
463,333
13,208
39,292
76,349
8,622
53,177
174,912
58,627
32,799
44,146
38,176
28,849
38,265
28,091
1,088
79,523
–
564
4,863
–
2,000
40,738
6,204
1,427
4,787
3,033
5,667
878
7,195
–
64,329
–
17,638
–
–
–
17,845
10,825
–
1,262
–
–
20,329
At 31 December
1,579,512
1,158,983
178,863
139,423
For unsecured lending, concentration by location is based on the customer’s country of domicile and for lending secured by property it
is based on the location of the collateral.
Arbuthnot Banking Group PLCReport & Accounts 2015
59
(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 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 in 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 23, a stress test scenario of a 10% (2014: 10%) decline in market prices, with
all other things being equal, would result in a £11,000 (2014: £127,000) decrease in the Group’s income and a decrease of £215,000
(2014: £103,000) 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 23, a stress test scenario of a 10% (2014: 10%) decline in market prices,
with all other things being equal, would result in a £11,000 (2014: £15,000) decrease in the Company’s income and a decrease of
£10,000 (2014: £13,000) in the Company’s equity.
Arbuthnot Banking Group PLCReport & Accounts 2015 60
Notes to the Consolidated
Financial Statements continued
6. Financial risk management (continued)
Currency risk
The Company and Group take on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its
financial position and cash flows. 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 2015.
Included in the table below are the Group’s assets and liabilities at carrying amounts, categorised by currency.
At 31 December 2015
ASSETS
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Assets classified as held for sale
Derivative financial instruments
Loans and advances to customers
Other assets
Financial investments
Total assets
LIABILITIES
Deposits from banks
Derivative financial instruments
Deposits from customers
Liabilities relating to assets classified as
held for sale
Other liabilities
Debt securities in issue
Total liabilities
Net on-balance sheet position
Credit commitments
GBP (£)
£000
USD ($)
£000
Euro (€)
£000
365,165
10,045
80,952
118,456
1,490
1,522,893
2,625
172
2,101,798
54,963
135
1,865,078
8,700
14,581
–
1,943,457
158,341
178,919
3,405
14,527
6,776
–
–
17,231
–
–
41,939
–
–
39,220
–
–
–
39,220
2,719
–
35
1,925
–
–
–
39,344
–
2,513
43,817
342
–
23,255
–
–
10,834
34,431
9,386
–
Other
£000
6
2,081
–
–
–
44
–
–
2,131
–
–
2,285
–
–
–
2,285
(154)
–
Total
£000
368,611
28,578
87,728
118,456
1,490
1,579,512
2,625
2,685
2,189,685
55,305
135
1,929,838
8,700
14,581
10,834
2,019,393
170,292
178,919
Arbuthnot Banking Group PLCReport & Accounts 2015
61
The table below summarises the Group’s exposure to foreign currency exchange rate risk at 31 December 2014:
At 31 December 2014
ASSETS
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Derivative financial instruments
Loans and advances to customers
Other assets
Financial investments
Total assets
LIABILITIES
Deposits from banks
Derivative financial instruments
Deposits from customers
Other liabilities
Debt securities in issue
Total liabilities
Net on-balance sheet position
Credit commitments
GBP (£)
£000
USD ($)
£000
Euro (€)
£000
Other
£000
Total
£000
115,891
22,381
76,124
2,707
1,107,440
5,522
158
1,330,223
27,489
1,067
1,147,299
12,024
–
1,187,879
142,344
140,137
17
5,428
15,559
–
8,437
–
–
29,441
168
–
28,081
–
–
28,249
1,192
–
28
3,099
–
–
43,106
–
1,119
47,352
–
–
18,146
–
11,448
29,594
17,758
–
2
936
–
–
–
–
–
938
–
–
759
–
–
759
179
–
115,938
31,844
91,683
2,707
1,158,983
5,522
1,277
1,407,954
27,657
1,067
1,194,285
12,024
11,448
1,246,481
161,473
140,137
A 10% strengthening of the pound against the US dollar would lead to a £3,000 decrease (2014: £1,000 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 £52,000 decrease (2014: £6,000 increase) in Group
profits and equity, while a 10% weakening of the pound against the Euro would lead to the same increase in Group profits and equity.
The above results are after taking into account the effect of derivative financial instruments (see note 19), which covers most of the net
exposure in each currency.
The table below summarises the Company’s exposure to foreign currency exchange rate risk at 31 December 2015:
At 31 December 2015
ASSETS
Due from subsidiary undertakings – bank balances
Financial investments
Other assets
Total assets
LIABILITIES
Other liabilities
Debt securities in issue
Total liabilities
Net on-balance sheet position
GBP (£)
£000
Euro (€)
£000
1,087
125
789
2,001
3,068
–
3,068
(1,067)
11,357
–
–
11,357
–
10,834
10,834
523
Total
£000
12,444
125
789
13,358
3,068
10,834
13,902
(544)
Arbuthnot Banking Group PLCReport & Accounts 2015
62
Notes to the Consolidated
Financial Statements continued
6. Financial risk management (continued)
The table below summarises the Company’s exposure to foreign currency exchange rate risk at 31 December 2014:
At 31 December 2014
ASSETS
Due from subsidiary undertakings – bank balances
Financial investments
Other assets
Total assets
LIABILITIES
Other liabilities
Debt securities in issue
Total liabilities
Net on-balance sheet position
GBP (£)
£000
Euro (€)
£000
7,276
158
5,365
12,799
3,028
–
3,028
9,771
11,968
–
–
11,968
–
11,448
11,448
520
Total
£000
19,244
158
5,365
24,767
3,028
11,448
14,476
10,291
A 10% strengthening of the pound against the Euro would lead to £52,000 (2014: £28,000) decrease in the Company profits and
equity, conversely a 10% weakening of the pound against the Euro would lead to the same increase in the Company profits and equity.
Interest rate risk
Interest rate risk is the potential adverse impact on the Company and Group’s future cash flows from changes in interest rates; and
arises from the differing interest rate risk characteristics of the Company and Group’s assets and liabilities. In particular, fixed rate
savings and borrowing products expose the Group to the risk that a change in interest rates could cause either a reduction in interest
income or an increase in interest expense relative to variable rate interest flows. The Group seeks to “match” interest rate risk on either
side of the Statement of Financial Position. However, this is not a perfect match and interest rate risk is present 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 shift 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 £0.4m to £1.8m (2014: £0.3m to £1.1m)
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 £7,000 (2014: increase pre-tax profits and equity by £60,000).
Arbuthnot Banking Group PLCReport & Accounts 2015
63
The following tables summarise the re-pricing periods for the assets and liabilities in the Company and Group, including derivative
financial instruments which are principally used to reduce exposure to interest rate risk. Items are allocated to time bands by reference
to the earlier of the next contractual interest rate re-price and the maturity date.
Group
As at 31 December 2015
ASSETS
Cash and balances at central banks
Loans and advances to banks
Assets classified as held for sale
Debt securities held-to-maturity
Derivative financial instruments
Loans and advances to customers
Other assets
Financial investments
Total assets
LIABILITIES
Deposits from banks
Derivative financial instruments
Deposits from customers
Liabilities relating to assets classified
as held for sale
Other liabilities
Debt securities in issue
Equity
Total liabilities
Impact of derivative instruments
Interest rate sensitivity gap
Cumulative gap
More than
3 months
but less than
6 months
£000
More than
6 months
but less than
1 year
£000
More than
1 year
but less than
5 years
£000
Within
3 months
£000
More than
5 years
£000
Non interest
bearing
£000
Total
£000
368,611
28,578
–
54,472
–
637,301
–
–
1,088,962
387
135
675,327
–
–
10,834
–
686,683
3,800
406,079
406,079
–
–
–
14,481
–
267,464
–
–
281,945
35,000
–
534,562
–
–
–
–
–
–
–
18,775
–
176,227
–
–
195,002
19,918
–
184,758
–
–
–
–
569,562
–
204,676
–
(287,617)
(9,674)
118,462
108,788
–
–
–
–
–
534,201
–
–
534,201
–
–
497,416
–
–
–
–
497,416
(3,800)
32,985
141,773
–
–
–
–
1,490
15
–
–
1,505
–
–
37,775
–
–
–
–
37,775
–
–
–
118,456
–
–
(35,696)
44,499
2,685
368,611
28,578
118,456
87,728
1,490
1,579,512
44,499
2,685
129,944
2,231,559
–
–
–
8,700
35,343
–
191,404
235,447
–
55,305
135
1,929,838
8,700
35,343
10,834
191,404
2,231,559
(36,270)
(105,503)
105,503
–
Arbuthnot Banking Group PLCReport & Accounts 2015
64
Notes to the Consolidated
Financial Statements continued
6. Financial risk management (continued)
Group
As at 31 December 2014
ASSETS
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Derivative financial instruments
Loans and advances to customers
Other assets
Financial investments
Total assets
LIABILITIES
Deposits from banks
Derivative financial instruments
Deposits from customers
Other liabilities
Debt securities in issue
Equity
Total liabilities
Impact of derivative instruments
Interest rate sensitivity gap
Cumulative gap
More than
3 months
but less than
6 months
£000
More than
6 months
but less than
1 year
£000
More than
1 year
but less than
5 years
£000
Within
3 months
£000
More than
5 years
£000
Non interest
bearing
£000
Total
£000
115,938
31,844
86,462
1,209
615,599
–
–
851,052
27,657
1,067
615,005
–
11,448
–
655,177
(16,200)
179,675
179,675
–
–
–
–
74,042
–
–
74,042
–
–
119,973
–
–
–
119,973
20,000
–
–
–
–
116,012
–
–
116,012
–
–
138,515
–
–
–
138,515
–
(25,931)
(22,503)
153,744
131,241
–
–
5,221
–
383,698
–
–
388,919
–
–
253,360
–
–
–
253,360
(3,800)
131,759
263,000
–
–
–
1,498
200
–
–
1,698
–
–
29,670
–
–
–
29,670
–
–
–
–
–
(30,568)
44,190
1,277
115,938
31,844
91,683
2,707
1,158,983
44,190
1,277
14,899
1,446,622
–
–
37,762
38,596
–
173,569
249,927
–
27,657
1,067
1,194,285
38,596
11,448
173,569
1,446,622
(27,972)
(235,028)
235,028
–
Arbuthnot Banking Group PLCReport & Accounts 2015
65
Total
£000
12,603
47,920
125
60,648
4,235
10,834
45,579
60,648
Total
£000
19,244
45,975
158
65,377
4,132
11,448
49,797
65,377
Company
As at 31 December 2015
ASSETS
Due from subsidiary undertakings –
bank balances
Other assets
Financial investments
Total assets
LIABILITIES
Other liabilities
Debt securities in issue
Equity
Total liabilities
Interest rate sensitivity gap
Cumulative gap
Company
As at 31 December 2014
ASSETS
Due from subsidiary undertakings –
bank balances
Other assets
Financial investments
Total assets
LIABILITIES
Other liabilities
Debt securities in issue
Equity
Total liabilities
Interest rate sensitivity gap
Cumulative gap
More than
3 months
but less than
6 months
£000
More than
6 months
but less than
1 year
£000
More than
1 year
but less than
5 years
£000
Within
3 months
£000
More than
5 years
£000
Non interest
bearing
£000
12,444
–
–
12,444
–
10,834
–
10,834
1,610
1,610
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,610
1,610
1,610
1,610
159
47,920
125
48,204
4,235
–
45,579
49,814
(1,610)
–
More than
3 months
but less than
6 months
£000
More than
6 months
but less than
1 year
£000
More than
1 year
but less than
5 years
£000
Within
3 months
£000
More than
5 years
£000
Non interest
bearing
£000
19,244
–
–
19,244
–
11,448
–
11,448
7,796
7,796
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
7,796
7,796
7,796
7,796
–
45,975
158
46,133
4,132
–
49,797
53,929
(7,796)
–
Arbuthnot Banking Group PLCReport & Accounts 2015
66
Notes to the Consolidated
Financial Statements continued
6. Financial risk management (continued)
(d) Liquidity risk
Liquidity risk is the risk that the Group will not be able to meet its obligations associated with its financial liabilities that are settled
by delivering cash or another financial asset.
The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its
liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the
Group’s reputation. The liquidity requirements of the Group are met through withdrawing funds from its Bank of England Reserve
Account to cover any short-term fluctuations and, longer term funding to address any structural liquidity requirements.
The Group has formal governance structures in place to manage and mitigate liquidity risk on a day to day basis. The Board of each
bank sets and approves the liquidity risk management strategy for each subsidiary. The Assets and Liabilities Committees (“ALCO”),
comprising senior executives of each Company, monitors liquidity risk. Key liquidity risk management information is reported by the
finance teams and monitored by the Chief Executive Officer and Chief Financial Officer on a daily basis. The ALCO meets monthly to
review liquidity risk against set thresholds and risk indicators including early warning indicators, liquidity risk tolerance levels and
Individual Liquidity Adequacy Assessment Process (“ILAAP”) metrics.
The PRA requires 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 liquidity 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.
Arbuthnot Latham & Co., Limited (“AL”) and Secure Trust Bank PLC (“STB”) have Board approved ILAAPs. The liquidity buffer
required by the ILAAP has been put in place and maintained since that time. Liquidity resources outside of the buffer are made up of
deposits placed at the Bank of England. The ILAAP is updated annually.
The Liquidity Coverage Ratio (“LCR”) regime has applied to the Group from 1 October 2015, requiring management of net 30 day
cash outflows as a proportion of high quality liquid assets. The actual LCR has significantly exceeded the regulatory minimum
throughout the year.
The Group is exposed to daily calls on its available cash resources from current accounts, maturing deposits and loan draw-downs.
The Group maintains significant cash resources to meet all of these needs as they fall due. The matching and controlled mismatching
of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks to
be completely matched, as transacted business is often of uncertain term and of different types.
The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest bearing liabilities as they mature are
important factors in assessing the liquidity of the Group and its exposure to changes in interest rates.
Arbuthnot Banking Group PLCReport & Accounts 2015 67
The tables below show the undiscounted contractual maturity analysis of the Group’s financial liabilities and assets as at
31 December 2015:
At 31 December 2015
Financial liability by type
Non-derivative liabilities
Deposits from banks
Deposits from customers
Other liabilities
Debt securities in issue
Liabilities relating to assets classified as
held for sale
Issued financial guarantee contracts
Unrecognised loan commitments
Derivative liabilities
Risk management:
– Outflows
Carrying
amount
£000
55,305
1,929,838
14,581
10,834
8,700
–
–
Gross
nominal
inflow/
(outflow)
£000
Not
more than
3 months
£000
More than
3 months
but less
than 1 year
£000
More than
1 year but
less than
5 years
£000
More than
5 years
£000
(55,305)
(2,059,721)
(14,581)
(12,442)
(8,700)
(56)
(178,863)
(35,387)
(1,099,222)
(12,992)
(80)
(8,700)
(56)
(178,863)
(19,918)
(376,705)
(125)
(241)
–
(540,890)
–
(1,287)
–
–
–
–
–
–
–
(42,904)
(1,464)
(10,834)
–
–
–
2,019,258
(2,329,668)
(1,335,300)
(396,989)
(542,177)
(55,202)
135
–
135
–
(135)
(135)
–
(135)
(135)
–
–
–
–
–
–
–
–
–
Carrying
amount
£000
368,611
28,578
87,728
118,456
1,579,512
2,625
2,685
At 31 December 2015
Financial asset by type
Non-derivative assets
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Assets classified as held for sale
Loans and advances to customers
Other assets
Financial investments
Derivative assets
– Inflows
Gross
nominal
inflow/
(outflow)
£000
Not
more than
3 months
£000
More than
3 months
but less
than 1 year
£000
More than
1 year but
less than
5 years
£000
More than
5 years
£000
368,611
28,578
88,887
(118,456)
1,913,124
2,625
2,685
368,611
28,578
29,333
(118,456)
245,450
2,625
2,561
558,702
2,188,195
2,286,054
1,490
1,490
1,490
1,490
59
59
–
–
27,302
–
506,808
–
–
534,110
–
–
–
–
32,252
–
1,093,755
–
124
1,126,131
–
–
–
–
–
–
67,111
–
–
67,111
1,431
1,431
Arbuthnot Banking Group PLCReport & Accounts 2015
68
Notes to the Consolidated
Financial Statements continued
6. Financial risk management (continued)
The tables below show the undiscounted contractual maturity analysis of the Group’s financial liabilities and assets as at
31 December 2014:
At 31 December 2014
Financial liability by type
Non-derivative liabilities
Deposits from banks
Deposits from customers
Other liabilities
Debt securities in issue
Issued financial guarantee contracts
Unrecognised loan commitments
Derivative liabilities
Risk management:
– Outflows
At 31 December 2014
Financial asset by type
Non-derivative assets
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Loans and advances to customers
Other assets
Financial investments
Derivative assets
Risk management:
– Inflows
Carrying
amount
£000
Gross
nominal
inflow/
(outflow)
£000
Not
more than
3 months
£000
More than
3 months
but less
than 1 year
£000
More than
1 year but
less than
5 years
£000
More than
5 years
£000
27,657
1,194,285
12,024
11,448
–
–
(27,657)
(1,227,753)
(18,674)
(13,248)
(714)
(139,423)
(12,627)
(510,423)
(17,084)
(90)
(714)
(139,423)
(15,030)
(382,230)
(125)
(270)
–
–
–
(299,841)
–
(1,440)
–
–
1,245,414
(1,427,469)
(680,361)
(397,655)
(301,281)
1,067
–
1,067
–
(1,067)
(1,067)
–
(1,067)
(1,067)
–
–
–
–
–
–
–
(35,259)
(1,465)
(11,448)
–
–
(48,172)
–
–
–
Gross
nominal
inflow/
(outflow)
£000
Not
more than
3 months
£000
More than
3 months
but less
than 1 year
£000
More than
1 year but
less than
5 years
£000
More than
5 years
£000
Carrying
amount
£000
115,938
31,844
91,683
1,158,983
5,522
1,277
1,405,247
115,938
31,843
92,511
1,353,592
5,522
1,277
1,600,683
2,707
–
2,707
–
2,707
2,707
115,938
31,843
50,832
205,066
5,522
–
409,201
–
1,209
1,209
–
–
12,359
319,221
–
1,119
332,699
–
–
–
–
–
29,320
800,860
–
158
830,338
–
–
–
–
–
–
28,445
–
–
28,445
–
1,498
1,498
Arbuthnot Banking Group PLCReport & Accounts 2015
69
The table below sets out the components of the Group’s liquidity reserves:
Liquidity reserves
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Undrawn credit lines
31 December 2015
31 December 2014
Amount
£000
368,611
28,578
87,728
38,500
523,417
Fair value
£000
368,611
28,578
87,594
38,500
523,283
Amount
£000
115,938
31,844
91,683
38,500
277,965
Fair value
£000
115,938
31,844
91,683
38,500
277,965
Assets pledged as collateral or encumbered
The total financial assets recognised in the Statement of Financial Position that had been pledged as collateral for liabilities at
31 December 2015 was £226.2m (2014: £159.3m).
Financial assets are pledged as collateral as part of sales and repurchases, securities borrowing and securitisation transactions under
terms that are usual and customary for such activities. In addition, as part of these transactions, the Group has received collateral
that it is permitted to sell or repledge in the absence of default.
The table below analyses the contractual maturity analysis of the Company’s financial liabilities and assets as at 31 December 2015:
At 31 December 2015
Financial liability by type
Non-derivative liabilities
Other liabilities
Debt securities in issue
At 31 December 2015
Financial asset by type
Non-derivative assets
Due from subsidiary undertakings –
bank balances
Financial investments
Other assets
Carrying
amount
£000
Gross nominal
inflow/
(outflow)
£000
Not
more than
3 months
£000
More than
3 months
but less
than 1 year
£000
More than
1 year but less
than 5 years
£000
More than
5 years
£000
3,068
10,834
13,902
(3,068)
(12,442)
(15,510)
(1,479)
(80)
(1,559)
(125)
(241)
(366)
–
(1,287)
(1,287)
(1,464)
(10,834)
(12,298)
Carrying
amount
£000
Gross nominal
inflow/
(outflow)
£000
Not
more than
3 months
£000
More than
3 months
but less
than 1 year
£000
More than
1 year but less
than 5 years
£000
More than
5 years
£000
12,444
125
891
12,569
12,444
125
891
12,569
11,965
–
891
11,965
–
–
–
–
–
125
–
125
479
–
–
479
Arbuthnot Banking Group PLCReport & Accounts 2015
70
Notes to the Consolidated
Financial Statements continued
6. Financial risk management (continued)
The table below analyses the contractual maturity analysis of the Company’s financial liabilities and assets as at 31 December 2014:
At 31 December 2014
Financial liability by type
Non-derivative liabilities
Other liabilities
Debt securities in issue
At 31 December 2014
Financial asset by type
Non-derivative assets
Due from subsidiary undertakings –
bank balances
Financial investments
Other assets
Carrying
amount
£000
Gross nominal
inflow/
(outflow)
£000
Not
more than
3 months
£000
More than
3 months
but less
than 1 year
£000
More than
1 year but less
than 5 years
£000
More than
5 years
£000
3,028
11,448
14,476
(3,028)
(13,248)
(16,276)
(1,438)
(90)
(1,528)
(125)
(270)
(395)
–
(1,440)
(1,440)
(1,465)
(11,448)
(12,913)
Carrying
amount
£000
Gross nominal
inflow/
(outflow)
£000
Not
more than
3 months
£000
More than
3 months
but less
than 1 year
£000
More than
1 year but less
than 5 years
£000
More than
5 years
£000
19,244
158
5,365
24,767
19,244
158
5,365
24,767
3,776
–
5,365
9,141
15,000
–
–
15,000
–
158
–
158
468
–
–
468
The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature are
important factors in assessing the liquidity of the Group and its exposure to changes in interest rates and exchange rates.
Fiduciary activities
The Group provides investment management and advisory services to third parties, which involve the Group making allocation and
purchase and sale decisions in relation to a wide range of financial instruments. Those assets that are held in a fiduciary capacity are
not included in these financial statements. These services give rise to the risk that the Group may be accused of maladministration or
underperformance. At the balance sheet date, the Group had investment management accounts amounting to approximately £739m
(2014: £666m). Additionally the Group provides investment advisory services.
Arbuthnot Banking Group PLCReport & Accounts 2015
71
(e) Financial assets and liabilities
The tables below set out the Group’s financial assets and financial liabilities into the respective classifications:
At 31 December 2015
ASSETS
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Assets classified as held for sale
Derivative financial instruments
Loans and advances to customers
Other assets
Financial investments
Total assets
LIABILITIES
Deposits from banks
Derivative financial instruments
Deposits from customers
Liabilities relating to assets classified
as held for sale
Other liabilities
Debt securities in issue
Total liabilities
At 31 December 2014
ASSETS
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Derivative financial instruments
Loans and advances to customers
Other assets
Financial investments
Total assets
LIABILITIES
Deposits from banks
Derivative financial instruments
Deposits from customers
Other liabilities
Debt securities in issue
Total liabilities
Fair value
through
profit or loss
£000
Held-to-
maturity
£000
Loans and
receivables
£000
Available-
for-sale
£000
Other
amortised
cost
£000
Total
carrying
amount
£000
Fair
value
£000
–
–
–
–
1,490
–
–
–
1,490
–
135
–
–
–
–
135
–
–
87,728
–
–
–
–
–
368,611
28,578
–
–
–
1,579,512
2,625
–
87,728
1,979,326
–
–
–
118,456
–
–
–
2,685
121,141
–
–
–
–
–
–
–
–
–
368,611
28,578
87,728
118,456
1,490
1,579,512
2,625
2,685
368,611
28,578
87,594
118,456
1,490
1,570,932
2,625
2,685
2,189,685
2,180,971
–
–
–
–
–
–
–
–
–
–
–
14,581
–
14,581
–
–
–
55,305
–
1,929,838
55,305
135
1,929,838
55,305
135
1,929,838
8,700
–
–
8,700
–
–
10,834
8,700
14,581
10,834
8,700
14,581
10,834
1,995,977
2,019,393
2,019,393
Fair value
through
profit or loss
£000
Held-to-
maturity
£000
Loans and
receivables
£000
Available-
for-sale
£000
Other
amortised
cost
£000
Total
carrying
amount
£000
Fair
value
£000
–
–
–
2,707
–
–
171
2,878
–
1,067
–
–
–
1,067
–
–
91,683
–
–
–
–
115,938
31,844
–
–
1,158,983
5,522
–
91,683
1,312,287
–
–
–
–
–
–
–
–
–
12,024
–
12,024
–
–
–
–
–
–
1,106
1,106
–
–
–
–
–
–
–
–
115,938
31,844
91,683
2,707
1,158,983
5,522
1,277
115,938
31,844
91,683
2,707
1,162,554
5,522
1,277
1,407,954
1,411,525
–
–
–
–
–
–
27,657
–
1,194,285
–
11,448
27,657
1,067
1,194,285
12,024
11,448
27,657
1,067
1,203,613
12,024
11,448
1,233,390
1,246,481
1,255,809
Arbuthnot Banking Group PLCReport & Accounts 2015
72
Notes to the Consolidated
Financial Statements continued
7. Capital management
The Group’s capital management policy is focused on optimising shareholder value. There is a clear focus on delivering organic growth
and ensuring capital resources are sufficient to support planned levels of growth. The Board regularly reviews the capital position.
The Group’s lead regulator, the Prudential Regulation Authority (‘PRA’), sets and monitors capital requirements for the Group as a
whole and for the individual banking operations. The lead regulator adopted the Basel III capital requirements with effect from
1 January 2014. As a result, the Group’s regulatory capital requirements were based on Basel III in 2014 and 2015.
In accordance with the EU’s Capital Requirements Directive (CRD) and the required parameters set out in the PRA Handbook
(BIPRU 2.2), the Individual Capital Adequacy Assessment Process (ICAAP) is embedded in the risk management framework of the
Group and is subject to ongoing updates and revisions when necessary. However, at a minimum, the ICAAP is updated annually
as part of the business planning process. The ICAAP is a process that brings together 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 39.
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 management’s 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 PRA.
The Group’s regulatory capital is divided into two tiers:
• Tier 1 comprises mainly shareholders’ funds, non-controlling interests and revaluation reserves, after deducting goodwill and other
intangible assets.
• Lower Tier 2 comprises qualifying subordinated loan capital and collective provisions. 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
Retained earnings
Other reserves
Non-controlling interests
Deduction for non-controlling interests
Goodwill
Deductions for other intangibles
Revaluation reserve
Total tier 1 capital resources
Tier 2
Collective provisions
Debt securities in issue
Total tier 2 capital resources
Total tier 1 & tier 2 capital resources
2015
£000
2014
£000
153
123,330
(1,111)
67,887
(23,047)
(2,695)
(8,179)
1,145
157,483
2,031
10,834
12,865
170,348
153
114,641
(1,111)
60,038
(28,835)
(2,695)
(8,623)
(152)
133,416
2,031
11,448
13,479
146,895
Arbuthnot Banking Group PLCReport & Accounts 2015
73
The ICAAP includes a summary of the capital required to mitigate the identified risks in its regulated entities and the amount of capital
that the Group has available. The PRA sets ICG for each UK bank calibrated by reference to its Capital Resources Requirement, broadly
equivalent to 8 percent of risk weighted assets and thus representing the capital required under Pillar 1 of the Basel III framework.
The ICAAP is a key input into the PRA’s ICG setting process, which addresses the requirements of Pillar 2 of the Basel III framework.
The PRA’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 2015 are
published as a separate document on the Group website under Investor Relations (Announcements & Shareholder Info).
8. Interest income
Cash and balances at central banks
Loans and advances to banks
Debt securities held-to-maturity
Loans and advances to customers
* Prior year numbers have been re-presented to exclude discontinuing operations (see note 11).
9. Fee and commission income
Banking commissions
Trust and other fiduciary fee income
Financial Planning fees and commissions
Structured product commissions
Other fee income **
2015
£000
1,351
240
567
130,874
133,032
2015
£000
1,666
5,946
1,969
–
17,285
26,866
Re-presented*
2014
£000
1,026
52
530
85,790
87,398
Re-presented*
2014
£000
5,014
5,210
1,557
1,218
12,842
25,841
* Prior year numbers have been re-presented to exclude discontinuing operations (see note 11).
** This mainly includes fee and commission income received on OneBill, insurance sales and commission earned on debt recovery activities
at Secure Trust Bank.
10. Net impairment loss on financial assets
Net Impairment losses on loans and advances to customers
Impairment losses on financial investments
* Prior year numbers have been re-presented to exclude discontinuing operations (see note 11).
2015
£000
18,032
34
18,066
Re-presented*
2014
£000
11,606
347
11,953
Arbuthnot Banking Group PLCReport & Accounts 2015
74
Notes to the Consolidated
Financial Statements continued
11. Discontinued operations
On 4 December 2015 Secure Trust Bank agreed to the conditional sale of its non-standard consumer lending business, Everyday Loans
Group (ELG), which comprises Everyday Loans Holdings Limited and subsidiary companies Everyday Lending Limited and Everyday
Loans Limited, to Non Standard Finance PLC (NSF) for £107 million in cash subject to a net asset adjustment and £20 million in NSF
ordinary shares. The Disposal is conditional on NSF shareholder approval of its equity fundraising, admission of the new NSF shares
to the main market of the London Stock Exchange, regulatory approval and satisfaction of the conditions to the NSF financing.
Completion is expected by 30 April 2016. On completion, NSF will repay the current intercompany debt of £108 million to STB.
Year ended
31 December
2015
£000
Year ended
31 December
2014
£000
Note
Income Statement for discontinued operations
Interest income
Net interest income
Fee and commission income
Fee and commission expense
Net fee and commission income
Operating income
Net impairment losses on loans and advances to customers
Operating expenses
Profit before tax
Tax expense
Profit after tax
Profit attributable to:
Equity holders of the Company
Non-controlling interests
Profit after tax
Earnings per share for profit attributable to the equity holders of the Company from discontinued operations during the year
(expressed in pence per share):
– basic
– diluted
33.1
32.0
15
15
Assets classified as held for sale
Loans and advances to banks
Loans and advances to customers
Other assets
Intangible assets
Property, plant and equipment
Deferred tax asset
Liabilities relating to assets classified as held for sale
Current tax liability
Other liabilities
39,230
39,230
1,523
(358)
1,165
40,395
(7,537)
(21,195)
11,663
(2,271)
9,392
4,876
4,516
9,392
30,226
30,226
4,122
(111)
4,011
34,237
(6,638)
(19,016)
8,583
(2,054)
6,529
3,390
3,139
6,529
26.1
24.2
2015
£000
1,661
114,266
509
1,182
448
390
118,456
2015
£000
3,383
5,317
8,700
Arbuthnot Banking Group PLCReport & Accounts 2015
75
Year ended
31 December
2015
£000
Year ended
31 December
2014
£000
40,595
1,165
(21,197)
(130)
20,433
(27,788)
654
7,027
326
(33)
(253)
(286)
40
1,621
1,661
2015
£000
43,094
4,195
1,663
1,889
1,824
1,323
160
3,167
422
28,322
86,059
33,727
4,511
(18,313)
–
19,925
(22,070)
60
3,010
925
(43)
(80)
(123)
802
819
1,621
Re-presented*
2014
£000
31,748
3,120
1,269
1,583
1,688
685
–
4,254
198
21,620
66,165
Cash flow from discontinued operations
Cash flows from operating activities
Interest received
Fees and commissions received
Cash payments to employees and suppliers
Taxation (paid)/received
Cash flows from operating profits before changes in operating assets and liabilities
Changes in operating assets and liabilities:
- net increase in loans and advances to customers
- net decrease in other assets
- net increase in other liabilities
Net cash inflow from operating activities
Cash flows from investing activities
Purchase of computer software
Purchase of property, plant and equipment
Net cash from investing activities
Cash flows from financing activities
Increase in borrowings
Dividends paid
Net increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
12. Operating expenses
Operating expenses comprise:
Staff costs, including Directors:
Wages and salaries
Social security costs
Pension costs
Share based payment transactions (note 35)
Amortisation of intangibles (note 26)
Depreciation (note 27)
Financial Services Compensation Scheme Levy
Operating lease rentals
Costs arising from acquisitions
Other administrative expenses
Total operating expenses from continuing operations
* Prior year numbers have been re-presented to exclude discontinuing operations (see note 11).
Details on Directors remuneration is disclosed in the Remuneration Report on page 28.
Arbuthnot Banking Group PLCReport & Accounts 2015
76
Notes to the Consolidated
Financial Statements continued
12. Operating expenses (continued)
Remuneration of the auditor and its associates, excluding VAT, was as follows:
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts
Fees payable to the Company’s auditor and its associates for other services:
Audit of the accounts of subsidiaries
Audit related assurance services
Taxation compliance services
Taxation advisory services
Other assurance services
Corporate finance services
Other non-audit services
Total fees payable
2015
£000
95
399
82
114
48
87
–
59
884
2014
£000
95
329
65
82
61
321
115
13
1,081
Other assurance services include regulatory assessments. Corporate finance services in 2014 include due diligence work on a potential
corporate transaction.
13. Average number of employees
Retail banking
Private banking
Group
2015
706
210
21
937
2014
608
175
17
800
Arbuthnot Banking Group PLCReport & Accounts 2015
77
2014
£000
3,318
43
3,361
366
(283)
83
3,444
13,931
2,995
630
59
(240)
3,444
2015
£000
5,492
648
6,140
(627)
(77)
(704)
5,436
22,568
4,570
288
8
570
5,436
14. Income tax expense
United Kingdom corporation tax at 20.25% (2014: 21.5%)
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 20.25% (2014: 21.5%)
Permanent differences
Tax rate change
Prior period adjustments
Corporation tax charge for the year
A tax charge of £0.3m was recognised in other comprehensive income during the year (2014: £nil) in respect of available-for-sale
financial investments.
Prior year adjustments mainly relate to the reallocation of costs between continuing and discontinuing operations.
The tax charge on discontinuing operations is disclosed in note 11.
The UK corporation tax rate reduced from 23% to 21% with effect from 1 April 2014 and to 20% with effect from 1 April 2015.
On 26 October 2015 the Government substantively enacted a further reduction to the UK corporation tax rate to 19% from 1 April
2017 and to 18% from 1 April 2020. In addition, the Chancellor announced the introduction of a corporation tax surcharge applicable
to banking companies with effect from 1 January 2016. The surcharge will be levied at a rate of 8% on the profits of banking
companies, after taking into account an annual allowance of £25m. This will increase the Group’s future current tax charge accordingly.
Arbuthnot Banking Group PLCReport & Accounts 2015
78
Notes to the Consolidated
Financial Statements continued
15. Earnings per ordinary share
Basic
Basic earnings per ordinary share are calculated by dividing the profit after tax attributable to equity holders of the Company by the
weighted average number of ordinary shares 14,738,548 (2014: 14,738,548) in issue during the year. The weighted average number of
ordinary shares has been restated for 2014 from 15,279,322, after taking into account treasury shares (390,274) and shares held in an
ESOP trust (150,500).
Diluted
Diluted earnings per ordinary share are calculated by dividing the dilutive profit after tax attributable to equity holders of the Company
by the weighted average number of ordinary shares in issue during the year, as well as the number of dilutive share options in issue
during the year. The number of dilutive share options in issue at the year end was 200,000 (2014: 187,500).
Profit attributable
Total profit after tax attributable to equity holders of the Company
Profit after tax from continuing operations attributable to equity holders of the Company
Profit after tax from discontinuing operations attributable to equity holders of the Company
Dilutive profit attributable
Total profit after tax attributable to equity holders of the Company
Profit after tax from continuing operations attributable to equity holders of the Company
Profit after tax from discontinuing operations attributable to equity holders of the Company
Basic Earnings per share
Total Basic Earnings per share
Basic Earnings per share from continuing operations
Basic Earnings per share from discontinuing operations
Diluted Earnings per share
Total Diluted Earnings per share
Diluted Earnings per share from continuing operations
Diluted Earnings per share from discontinuing operations
16. Cash and balances at central banks
Group
2015
£000
12,726
7,850
4,876
2015
£000
12,448
7,663
4,785
2015
£000
86.3
53.3
33.1
2015
£000
83.3
51.3
32.0
2015
£000
2014
£000
8,634
4,780
3,854
2014
£000
7,884
4,269
3,615
2014
£000
58.6
32.4
26.1
2014
£000
52.8
28.6
24.2
2014
£000
Cash and balances at central banks
368,611
115,938
Surplus funds are mainly held in the Bank of England reserve account, with the remainder held in certificates of deposit, fixed rate
notes and money market deposits in highly rated banks (the majority held in UK clearing banks).
Arbuthnot Banking Group PLCReport & Accounts 2015
17. Loans and advances to banks
Group
Placements with banks included in cash and cash equivalents (note 37)
2015
£000
28,578
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:
Group
Aa1
A1
A2
A3
Baa1
2015
£000
220
15,972
6,258
5,366
762
28,578
79
2014
£000
31,844
2014
£000
–
3,216
26,242
–
2,386
31,844
None of the loans and advances to banks are either past due or impaired.
18. 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.
The movement in debt securities held-to-maturity may be summarised as follows:
Group
At 1 January
Exchange difference on monetary assets
Additions
Redemptions
At 31 December
2015
£000
91,683
808
145,880
(150,643)
87,728
The table below presents an analysis of debt securities by rating agency designation at 31 December, based on Moody’s long
term ratings:
Group
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
None of the debt securities held-to-maturity are either past due or impaired.
2015
£000
42,618
23,317
8,913
1
6,311
4,554
2,000
14
87,728
2014
£000
19,466
188
85,244
(13,215)
91,683
2014
£000
48,714
22,284
5,001
3,747
3,922
3,507
–
4,508
91,683
Arbuthnot Banking Group PLCReport & Accounts 2015
80
Notes to the Consolidated
Financial Statements continued
19. Derivative financial instruments
Group
Currency swaps
Interest rate caps
Structured notes
2015
2014
Contract/notional
amount
£000
Fair value
assets
£000
Fair value
liabilities
£000
Contract/notional
amount
£000
Fair value
assets
£000
Fair value
liabilities
£000
34,459
–
1,607
36,066
59
–
1,431
1,490
135
–
–
135
81,898
20,000
1,607
103,505
1,209
–
1,498
2,707
1,067
–
–
1,067
The principal derivatives used by the Group are over the counter exchange rate contracts and interest rate caps (used for 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.
An interest rate cap is an 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 Group only uses investment graded banks as counterparties for derivative financial instruments. None of the contracts
are collateralised.
The table below presents an analysis of derivative financial instruments contract/notional amounts by rating agency designation
of counterparty bank at 31 December, based on Moody’s long term ratings:
Group
Aa3
A2
Baa1
20. Loans and advances to customers
Group
Gross loans and advances
Less: allowances for impairment on loans and advances (note 21)
2015
£000
34,459
–
1,607
36,066
2015
£000
1,615,208
(35,696)
1,579,512
2014
£000
81,898
20,000
1,607
103,505
2014
£000
1,197,394
(38,411)
1,158,983
On 18 December 2014 AL completed the purchase of a residential mortgage portfolio acquired from the administrators of the
Dunfermline Building Society (“DBS”) for a consideration of £106.3m. The portfolio is included in loans and advances to customers at
fair value. The portfolio has performed according to our expectations and at 31 December 2015 had a remaining balance of £95.1m.
For a maturity profile of loans and advances to customers, refer to note 6.
Arbuthnot Banking Group PLCReport & Accounts 2015
81
2014
£000
18,262
13,047
–
31,309
(5,799)
25,510
13,729
11,781
–
25,510
2014
£000
1,082,580
23,175
91,639
1,197,394
(38,411)
1,158,983
2014
£000
4,763
1,145
1,233
16,034
23,175
2015
£000
41,906
67,789
873
110,568
(18,996)
91,572
31,684
59,074
814
91,572
2015
£000
1,516,236
23,792
75,180
1,615,208
(35,696)
1,579,512
2015
£000
643
1,714
1,706
19,729
23,792
Loans and advances to customers include finance lease receivables as follows:
Group
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:
Group
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:
Group
Past due up to 30 days
Past due 30 – 60 days
Past due 60 – 90 days
Over 90 days
Total
Loans and advances typically 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 (2014: £nil).
Arbuthnot Banking Group PLCReport & Accounts 2015
82
Notes to the Consolidated
Financial Statements continued
20. Loans and advances to customers (continued)
(c) Collateral held
Collateral is measured at fair value less costs to sell.
Arbuthnot Latham & Co., Ltd
Most of the loans are secured by property with an average LTV of 46% (2014: 43%). The fair value of the collateral held against past
due but not impaired or impaired balances is £93.3m (2014: £89.5m) against loans of £43.2m (2014: £40.1m), giving an average
loan-to-value of 46% (2014: 45%). The weighted average loan-to-value is 63% (2014: 57%). The net amount of individually impaired
loans and advances to customers after impairment but before taking into account the cash flows from collateral held is £18.0m
(2014: £12.8m).
Secure Trust Bank PLC
The majority of the loans are unsecured personal loans with an average size at inception of £5,000; therefore the portfolio does not
have a significant concentration to any individuals, sectors or geographic locations. £0.2m (2014: £0.2m) relates to a standard mortgage
loan secured upon residential property and this is neither past due nor impaired. The residential property over which the mortgage loan
is secured has a fair value of £0.2m based on other recent property sales, and a loan to value ratio of 72% (2014: 76%).
£368.0m (2014: £133.7m) of the loans are secured upon residential or commercial property and these are neither past due nor
impaired. All loans secured are at a loan to value ratio of less than 80%.
£165.7m (2014: £137.9m) of the loans are secured against motor vehicles where the security is discharged when the buyer exercises an
option to buy the goods at a predetermined price at the end of the loan term. Management’s estimate of the fair value of the motor
vehicles was £127.1m (2014: £109.5m).
21. Allowances for impairment of loans and advances
Reconciliation of specific allowance for impairments:
Group
At 1 January
Adjustments for disposals
Impairment losses
Loans written off during the year as uncollectible
Amounts recovered during the year
At 31 December
Reconciliation of collective allowance for impairments:
Group
At 1 January
Impairment losses
At 31 December
A further analysis of allowances for impairment of loans and advances is as follows:
Group
Loans and advances to customers – UK Private Bank
Loan and advances to customers – Retail Bank
At 31 December
2015
£000
38,411
(5,812)
26,654
(23,590)
33
35,696
2015
£000
2,031
1,110
3,141
2015
£000
1,411
34,285
35,696
2014
£000
31,033
–
18,669
(11,003)
(288)
38,411
2014
£000
1,578
453
2,031
2014
£000
4,355
34,056
38,411
Arbuthnot Banking Group PLCReport & Accounts 2015
22. Other assets
Group
Trade receivables
Repossessed collateral – held as inventory
Prepayments and accrued income
83
2015
£000
2,625
5,226
9,043
16,894
2014
£000
5,522
3,742
7,602
16,866
Land acquired through repossession of collateral which is subsequently held in the ordinary course of business with a view to develop
and sell is accounted for as inventory.
Company
Trade receivables
Due from subsidiary undertakings
Prepayments and accrued income
23. Financial investments
Group
Financial investments comprise:
– Securities (at fair value through profit and loss)
– Securities (available-for-sale)
Total financial investments
2015
£000
732
159
100
991
2015
£000
112
2,573
2,685
2014
£000
732
4,633
107
5,472
2014
£000
145
1,132
1,277
Debt 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 and therefore the Group has
valued them using appropriate valuation methodologies, which include net asset valuations and discounted future cash flows.
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.
Unlisted securities
Arbuthnot Latham & Co., Ltd holds an equity interest in Visa Europe. Following the public announcement on 2 November 2015 of
the proposed sale of Visa Europe to Visa Inc., management has assessed the fair value of Group’s investment as £1.3m. The valuation
determined by management includes a haircut on the preference share element of the consideration, as referred to in Note 4.9.
Company
Financial investments comprise:
– Securities (at fair value through profit and loss)
– Securities (available-for-sale)
Total financial investments
2015
£000
112
13
125
2014
£000
145
13
158
Arbuthnot Banking Group PLCReport & Accounts 2015
84
Notes to the Consolidated
Financial Statements continued
24. Deferred taxation
The deferred tax asset comprises:
Group
Unrealised surplus on revaluation of freehold property
Accelerated capital allowances and other short-term timing differences
Tax losses
Transfer to assets classified as held for sale
Deferred tax asset
At 1 January
On acquisition of V12/ELL
Available-for-sale securities
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
Company
Accelerated capital allowances and other short-term timing differences
Deferred tax asset
At 1 January
Profit and loss account – accelerated capital allowances and other short-term timing differences
Deferred tax asset at 31 December
2015
£000
196
1,100
891
(403)
1,784
2,588
–
(262)
673
(812)
(403)
1,784
2015
£000
418
418
406
12
418
2014
£000
180
215
2,193
–
2,588
2,855
282
–
(549)
–
–
2,588
2014
£000
406
406
441
(35)
406
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.
The UK corporation tax rate reduced from 23% to 21% with effect from 1 April 2014 and to 20% with effect from 1 April 2015. On
26 October 2015 the Government substantively enacted a further reduction to the UK corporation tax rate to 19% from 1 April 2017
and to 18% from 1 April 2020. In addition, the Chancellor announced the introduction of a corporation tax surcharge applicable to
banking companies with effect from 1 January 2016. The surcharge will be levied at a rate of 8% on the profits of banking companies,
after taking into account an annual allowance of £25m. This will increase the Group’s future current tax charge accordingly.
Arbuthnot Banking Group PLCReport & Accounts 2015
85
2015
£000
943
2014
£000
943
25. Investment in associate
Group
Investment in associate
On 11 October 2013, Arbuthnot Latham & Co., Ltd together with Praxis (Holding) Limited, formed a special purpose vehicle in the
form of a separate legal entity (Tarn Crag Limited). The purpose of this legal entity is to refurbish and re-let a property in Glasgow,
with the intention to exit via a sale to an institutional investor in circa 5 years time. The investment is accounted for using the equity
method.
During the year the associate recorded a loss of £331,000. Due to the fact that the value of the outstanding loan notes (including
accrued interest) exceeded the investment in associate, no loss has been recorded at Group level and the carrying value was left at cost.
The summarised Statement of Financial Position of the associate is set out below:
At 31 December
ASSETS
Cash and balances at central banks
Other assets
Property, plant and equipment
EQUITY AND LIABILITIES
Deposits from banks
Other liabilities
Debt securities in issue
Revaluation reserve
Retained Earnings
2015
£000
2,236
1,010
15,412
18,658
12,014
667
1,400
4,995
(418)
18,658
2014
£000
1,724
8
10,416
12,148
9,970
865
1,400
–
(87)
12,148
(a) Significant restrictions
Praxis (Holding) Ltd receives £0.1m per annum in its capacity as property manager. Arbuthnot Latham & Co., Ltd subscribed to
£0.9m of loan notes and Praxis (Holding) Ltd subscribed to £0.5m of loan notes, which carry interest at 15% and is rolled up and
payable on redemption. The bank debt and interest and the loan notes and interest thereon as well as the property management fees
need to be repaid, before further distributions to shareholders can take place.
(b) Risks associated with interests
Arbuthnot Latham & Co., Ltd agreed to subscribe to a further £0.2m of loan notes when required to fund working capital.
Arbuthnot Banking Group PLCReport & Accounts 2015
86
Notes to the Consolidated
Financial Statements continued
26. Intangible assets
Group
Cost
At 1 January 2014
Additions
Disposals
At 31 December 2014
Additions
Transfer to assets classified as held for sale
At 31 December 2015
Accumulated amortisation
At 1 January 2014
Amortisation charge
Disposals
At 31 December 2014
Amortisation charge
Transfer to assets classified as held for sale
At 31 December 2015
Net book amount
At 31 December 2014
At 31 December 2015
Goodwill
£000
Computer
software
£000
Other
intangibles
£000
2,695
–
–
2,695
–
–
2,695
–
–
–
–
–
–
–
2,695
2,695
10,094
1,214
(1,838)
9,470
3,532
(349)
12,653
(5,024)
(1,482)
1,838
(4,668)
(1,627)
247
(6,048)
4,802
6,605
7,529
–
–
7,529
–
(5,115)
2,414
(2,191)
(1,517)
–
(3,708)
(1,167)
4,035
(840)
3,821
1,574
Total
£000
20,318
1,214
(1,838)
19,694
3,532
(5,464)
17,762
(7,215)
(2,999)
1,838
(8,376)
(2,794)
4,282
(6,888)
11,318
10,874
Included within 2015 Computer Software additions is an amount of £903,000 which relates to intangible assets in the course of
construction which management has assessed to not be available for use as at 31 December 2015 and are therefore not being amortised.
Company
Cost
Additions
At 31 December 2014
At 31 December 2015
Accumulated amortisation
At 1 January 2014
Amortisation charge
At 31 December 2014
Amortisation charge
At 31 December 2015
Net book amount
At 31 December 2014
At 31 December 2015
Refer to note 4.2 for assumptions used in the impairment review of goodwill.
Computer software
£000
40
40
40
(28)
(8)
(36)
(4)
(40)
4
–
Arbuthnot Banking Group PLCReport & Accounts 2015
27. Property, plant and equipment
Group
Cost or valuation
At 1 January 2014
Additions
Disposals
At 31 December 2014
Additions
Disposals
Transfer to assets classified as held for sale
At 31 December 2015
Accumulated depreciation
At 1 January 2014
Depreciation charge
Disposals
At 31 December 2014
Depreciation charge
Disposals
Transfer to assets classified as held for sale
At 31 December 2015
Net book amount
At 31 December 2014
At 31 December 2015
Freehold
land and
buildings
£000
Leasehold
improvements
£000
Computer
and other
equipment
£000
Motor
Vehicles
4,850
2,638
–
7,488
–
–
–
7,488
(840)
(89)
–
(929)
(108)
–
–
(1,037)
6,559
6,451
628
2,926
–
3,554
1,722
–
(590)
4,686
(247)
(234)
–
(481)
(399)
–
350
(530)
3,073
4,156
12,033
2,239
(541)
13,731
1,576
(2,417)
(447)
12,443
(10,902)
(485)
499
(10,888)
(891)
2,419
239
(9,121)
2,843
3,322
–
–
–
–
97
–
–
97
–
–
–
–
(22)
–
–
(22)
–
75
87
Total
£000
17,511
7,803
(541)
24,773
3,395
(2,417)
(1,037)
24,714
(11,989)
(808)
499
(12,298)
(1,420)
2,419
589
(10,710)
12,475
14,004
The Group’s opening freehold property is the Registered Office of Secure Trust Bank and is fully utilised for the Group’s own purposes.
In 2014, Secure Trust Bank acquired a further freehold property, Secure Trust House, Boston Drive, Bourne End SL8 5YS.
The majority of this property is used for the Group’s own purposes. However, the legacy tenant of the property has remained in situ.
The cost of the property was £2.7m.
The directors have assessed the value of the Group’s freehold property at the year end through comparison to current rental yields
on similar properties in the same area and do not believe that the fair value of freehold property is materially different from its
carrying value.
The carrying value of freehold land not depreciated is £1.7m (2014: £1.7m). The historical cost of freehold property included at
valuation is as follows:
Group
Cost
Accumulated depreciation
Net book amount
2015
£000
7,628
(1,305)
6,323
2014
£000
7,470
(1,153)
6,317
Arbuthnot Banking Group PLCReport & Accounts 2015
88
Notes to the Consolidated
Financial Statements continued
27. Property, plant and equipment (continued)
Company
Cost or valuation
At 1 January 2014
Additions
At 31 December 2014
Additions
At 31 December 2015
Accumulated depreciation
At 1 January 2014
Depreciation charge
At 31 December 2014
Depreciation charge
At 31 December 2015
Net book amount
At 31 December 2014
At 31 December 2015
28. Deposits from banks
Group
Deposits from other banks
For a maturity profile of deposits from banks, refer to Note 6.
29. Deposits from customers
Group
Current/demand accounts
Notice accounts
Term deposits
Computer
and other
equipment
£000
Motor
Vehicles
£000
203
1
204
5
209
(73)
(4)
(77)
(3)
(80)
127
129
–
–
–
97
97
–
–
–
(22)
(22)
–
75
2015
£000
Total
£000
203
1
204
102
306
(73)
(4)
(77)
(25)
(102)
127
204
2014
£000
55,305
27,657
2015
£000
499,022
579,877
850,939
2014
£000
354,095
295,347
544,843
1,929,838
1,194,285
Included in customer accounts are deposits of £5,938,000 (2014: £4,195,000) 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 6.
Arbuthnot Banking Group PLCReport & Accounts 2015
30. Other liabilities
Group
Trade payables
Accruals and deferred income
89
2015
£000
14,581
17,396
31,977
2014
£000
12,024
22,960
34,984
Within trade payables at 31 December 2015 there is £3.7m (2014: £4.3m) collateral held from RentSmart. STB buys assets which are
then leased to customers of RentSmart and STB pays RentSmart a commission, which is recognised within operating income. In return,
RentSmart continues to operate the agreement, retains the credit risk and provides STB with a collateral amount that is based upon the
balance of customer receivables and expected new agreements during the following month.
Within accruals and deferred income there is £nil relating to accrued interest payable (2014: £6.6m).
Financial Ombudsman Scheme accrual
Accruals include a provision for outstanding potential PPI claims of £2.6m as at 31 December 2015 (2014: £2.0m). The increase in
provision is a result of new claims emerging following an extension of the deadline for making claims. During 2015 £1.5m of PPI
provisions were utilised (2014: £0.3m).
The FCA is currently consulting on a proposed deadline for making PPI claims. The ruling is expected to come into force in Spring 2016
with a deadline of 2 years from the ruling, which would give consumers until Spring 2018 to make a claim.
Financial Services Compensation Scheme Levy
In common with all regulated UK deposit takers, AL and STB pay levies to the Financial Services Compensation Scheme (“FSCS”) to
enable the FSCS to meet claims against them. The FSCS levy consists of two parts: a management expenses levy and a more significant
compensation levy. The management expenses levy covers the costs of running the scheme and the compensation levy covers the amount
of compensation and associated interest the scheme pays, net of any recoveries it makes using the rights that have been assigned to it.
The Group’s FSCS provision reflects market participation up to the reporting date and the accrual of £0.3m (2014: £0.3m) relates to the
interest levy for the scheme year 2015/16 which is payable in September 2016. This amount was calculated on the basis of the Group’s
share of protected deposits and the FSCS’s estimate of total interest levies payable for each scheme year. The loan repayment relating to
the scheme year 2015/16 was paid by the Group in September 2015.
Company
Due to subsidiary undertakings
Accruals and deferred income
31. Debt securities in issue
Group and Company
Subordinated loan notes
2015
£000
3,068
1,167
4,235
2015
£000
2014
£000
3,028
1,104
4,132
2014
£000
10,834
11,448
The subordinated loan notes were issued on 7 November 2005 and are denominated in Euros. The principal amount outstanding at
31 December 2015 was €15,000,000 (2014: €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.
Arbuthnot Banking Group PLCReport & Accounts 2015
90
Notes to the Consolidated
Financial Statements continued
32. Contingent liabilities and commitments
Contingent liabilities
The Group is subject to extensive regulation in the conduct of its business. A failure to comply with applicable regulations could result
in regulatory investigations, fines and restrictions on some of the Group’s business activities or other sanctions. The Group seeks to
minimise this risk through the adoption of compliance and other policies and procedures, continuing to refine controls over business
practices and behaviour, employee training, the use of appropriate documentation, and the involvement of outside legal counsel where
appropriate.
Capital commitments
At 31 December 2015, the Group had capital commitments of £nil (2014: £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:
Group
Guarantees and other contingent liabilities
Commitments to extend credit:
– Original term to maturity of one year or less
2015
£000
56
178,863
178,919
2014
£000
714
139,423
140,137
Operating lease commitments
Where a Group company is the lessee, the future aggregate lease payments under non-cancellable operating leases are as follows:
Group
Expiring:
Within 1 year
Later than 1 year and no later than 5 years
Later than 5 years
2015
£000
3,710
9,974
7,790
21,474
2014
£000
3,766
8,715
8,876
21,357
In 2013, Arbuthnot Latham & Co., Ltd entered into a 16 year lease on 7 Wilson Street (the head office for Arbuthnot Banking Group
PLC, the principal location for Arbuthnot Latham & Co., Ltd and London offices for Secure Trust Bank PLC), with a break at
11 years and rent reviews after 5, 10 and 15 years. The initial rent is £1.75 million per annum. This lease forms the most significant
part of the operating leases disclosed in the table above.
33. Share capital
Group and Company
At 1 January 2014
At 31 December 2014 & December 2015
Number of
shares
15,279,322
15,279,322
Ordinary
share capital
£000
153
153
The Ordinary shares have a par value of 1p per share (2014: 1p per share). At 31 December 2015 the Company held 390,274 shares
(2014: 390,274) in treasury.
Arbuthnot Banking Group PLCReport & Accounts 2015
91
2015
£000
98
20
1,047
(1,131)
123,330
123,364
2014
£000
98
20
(250)
(1,131)
114,641
113,378
34. Reserves and retained earnings
Group
Revaluation reserve
Capital redemption reserve
Available-for-sale reserve
Treasury shares
Retained earnings
Total reserves at 31 December
The revaluation reserve represents the unrealised change in the fair value of properties.
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
2015
£000
20
(1,131)
46,537
45,426
2014
£000
20
(1,131)
50,755
49,644
35. Share-based payment options
Company
The Company had the following equity settled share-based payment awards outstanding at 31 December 2015:
• On 16 April 2013 Mr. Salmon was granted an option to subscribe for 100,000 ordinary 1p shares in the Company between
April 2016 and April 2021 at 930p. The fair value of the option at grant date was £83,000.
• On 16 April 2013 Mr. Cobb was granted an option to subscribe for 50,000 ordinary 1p shares in the Company between April 2016
and April 2021 at 930p. The fair value of the option at grant date was £41,000.
• On 1 April 2014 Mr Fleming was granted an option to subscribe for 50,000 ordinary 1p shares in the Company between April 2017
and April 2022 at 1185p. The fair value of these shares at grant date was £53,000.
There are no other vesting conditions for these awards. No share options were granted, forfeited, exercised or expired during the year.
ABG incurred an expense in relation to share based payments of £37,000 during 2015 (2014: £36,000), as disclosed in Note 12.
Measurement inputs and assumptions used in the Black-Scholes model are as follows:
Expected Stock Price Volatility
Expected Dividend Yield
Risk Free Interest Rate
Average Expected Life (in years)
2015
£000
17%
2.7%
1.20%
0.53
2014
£000
17%
2.7%
1.20%
1.53
Arbuthnot Banking Group PLCReport & Accounts 2015
92
Notes to the Consolidated
Financial Statements continued
35. Share-based payment options (continued)
Group – equity settled
Apart from the share-based payment awards for the Company listed above, the Group also include awards allocated under the Secure
Trust Bank (“STB”) Share Option Scheme, which was established on 17 October 2011 and entitles key management personnel and
senior employees of STB to purchase shares in that company.
The performance conditions of the Scheme are that for the duration of the vesting period, the dividends paid by STB must have
increased in percentage terms when compared to an assumed dividend of £8m in respect of the financial year ending 31 December
2012, by a minimum of the higher of the increase in the Retail Prices Index during that period or 5% per annum.
All dividends paid by STB each year during the vesting period must be paid from STB’s earnings referable to that year. Also from the
grant date to the date the Option is exercised, there must be no public criticism by any regulatory authority on the operation of STB
or any of its subsidiaries which has a material impact on the business of STB.
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 Ordinary Shares which can be acquired on
exercise will be pro-rated on a time elapsed basis, unless the Remuneration Committee, acting fairly and reasonably and taking due
consideration of the circumstances, decides otherwise. In determining whether to exercise its discretion in these respects, the
Remuneration Committee must satisfy itself that the early exercise of an option does not constitute a reward for failure.
On 2 November 2011 934,998 share options were granted at an exercise price of 720p per share. Approximately half of the share
options were exercisable on 2 November 2014 with the remainder being exercisable on 2 November 2016, being classed as share
option tranches SOS1 and SOS2 respectively. A total of 14,167 share options have been forfeited since their grant date. At the grant
date these share options had a fair value of £1.6m. Of the share options granted on 2 November 2011, the following remaining share
options (SOS2) were to Group directors:
• Mr. Lynam was granted an option to subscribe for 141,667 shares at 720p between 2 November 2016 and 1 November 2021.
• Mr. Salmon was granted an option to subscribe for 141,667 shares at 720p between 2 November 2016 and 1 November 2021.
The Share Option Scheme is an equity settled scheme. The original grant date valuation was determined to be £1.69 per option and
this valuation has been used in the calculation. An attrition rate of option holders has been assumed of nil for the second tranche of
share options. Due to the options being fully conditional knockout options, a probability of pay-out has been assigned based on the
likelihood of meeting the performance criteria, which is 100% for SOS2. STB incurred an expense in relation to share based payments
of £0.7m during 2015 (2014: £1.5m), as disclosed in Note 12.
Measurement inputs and assumptions used in the Black-Scholes model are as follows:
Expected Stock Price Volatility
Expected Dividend Yield
Risk Free Interest Rate
Average Expected Life (in years)
2015
£000
30%
6%
0.86%
0.9
2014
£000
30%
6%
0.86%
1.9
Arbuthnot Banking Group PLCReport & Accounts 2015
93
Summary details of the Secure Trust Bank Share Option Scheme are shown in the table below:
Key Management Personnel
Senior Management
Share Options in Issue
Exercise Price (£)
Value per option (£)
Total included in reserves (£000)
Probability of payout
Assumed value of share options on exercise date (£000)
Value of share options at 31 December (£000)
31 December 2015
31 December 2014
No.
SOS2
No.
SOS2
3
5
8
318,751
141,668
460,419
7.20
1.69
778
100%
739
468
3
5
8
318,751
141,668
460,419
7.20
1.69
778
95%
739
468
Group - cash settled
On 16 March 2015, a four year “phantom” share option scheme was established in order to provide effective long-term incentive to
senior management of the Group. Under the scheme, no actual shares would be issued by STB, but those granted awards under the
scheme would be entitled to a cash payment. The amount of the award is calculated by reference to the increase in the value of an
ordinary share in STB over an initial value set at £25 per ordinary share, being the price at which the shares resulting from the exercise
of the first tranche of share options under the Share Option Scheme were sold in November 2014.
As at 31 December 2015, 326,917 share options remained outstanding following the departure of one employee from the scheme.
An additional 14,000 share options should lapse following the expected departure of a further three employees following the conditional
sale of Everyday Loans Holdings Limited and its subsidiaries.
As at 31 December 2015, the estimated fair value has been prepared using the Black-Scholes model, which resulted in an expense being
recognised in relation to the phantom option scheme of £1.2m (2014: £nil). This has been included within staff costs as disclosed in
Note 12.
Measurement inputs and assumptions used in the Black-Scholes model are as follows:
Expected Stock Price Volatility
Expected Dividend Yield
Risk Free Interest Rate
Average Expected Life (in years)
2015
£000
27%
2%
0.72%
2.85
36. Dividends per share
Final dividends are not accounted for until they have been approved at the Annual General Meeting. At the meeting on 5 May 2016,
a dividend in respect of 2015 of 17p per share (2014: actual dividend 16p per share) amounting to a total of £2.53m (2014: actual
£2.38m) is to be proposed. The financial statements for the year ended 31 December 2015 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 2016.
Arbuthnot Banking Group PLCReport & Accounts 2015
94
Notes to the Consolidated
Financial Statements continued
37. Cash and cash equivalents
For the purposes of the Statement of Cash Flows, cash and cash equivalents are comprised of the following balances with less than
three months maturity from the date of acquisition.
Group
Cash and balances at central banks (Note 16)
Loans and advances to banks (Note 17)
Company
2015
£000
368,611
28,578
397,189
2015
£000
2014
£000
115,938
31,844
147,782
2014
£000
Due from subsidiary undertakings – bank balances
12,444
19,244
38. 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 (see Remuneration Report pages 27 to 28), 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.
Group
Loans
Loans outstanding at 1 January
Loans advanced during the year
Loan repayments during the year
Loans outstanding at 31 December
Interest income earned
2015
£000
5,503
726
(3,106)
3,123
143
2014
£000
5,188
1,083
(768)
5,503
255
The loans to directors are secured on property, shares or cash and bear interest at rates linked to base rate. No provisions have been
recognised in respect of loans given to related parties (2014: £nil). Details of directors’ remuneration are given in the Remuneration
Report. The Directors do not believe that any other key management disclosures are required.
Group
Deposits
Deposits at 1 January
Deposits placed during the year
Deposits repaid during the year
Deposits at 31 December
Interest expense on deposits
2015
£000
2,665
2,721
(2,694)
2,692
13
2014
£000
2,522
3,531
(3,388)
2,665
15
Arbuthnot Banking Group PLCReport & Accounts 2015
95
Details of principal subsidiaries are given in Note 39. 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
2015
2014
Highest balance
during the year
£000
Balance at
31 December
£000
Highest balance
during the year
£000
Balance at
31 December
£000
23,454
46,466
69,920
5,431
5,431
–
12,603
46,466
59,069
2,832
2,832
–
34,808
39,966
74,774
3,878
3,878
2,500
23,877
39,966
63,843
2,872
2,872
–
The disclosure of the year-end balance and the highest balance during the year is considered the most meaningful information to
represent the transactions during the year. The above transactions arose during the normal course of business and are on substantially
the same terms as for comparable transactions with third parties.
The Company undertook the following transactions with other companies in the Group during the year:
Arbuthnot Latham & Co., Ltd - Recharge of property and IT costs
Arbuthnot Latham & Co., Ltd - Recharge for costs paid on the Company’s behalf
Arbuthnot Latham & Co., Ltd - Group recharges for shared services
OBC Insurance Consultants Ltd - Dividend received
Secure Trust Bank PLC - Group recharges for shared services
Secure Trust Bank PLC - Dividends received
West Yorkshire Insurance Company Ltd - Legal fees settled
Total
39. Investment in subsidiary undertakings
Company
At 1 January 2014
Capital contribution in Arbuthnot Latham & Co., Limited
Sale of shares in Secure Trust Bank PLC
At 31 December 2014
Capital contribution in Arbuthnot Latham & Co., Limited
At 31 December 2015
Company
Subsidiary undertakings:
Banks
Other
Total
2015
£000
1,587
3,288
(1,421)
(132)
(412)
(6,517)
25
(3,582)
Investment
at cost
£000
Impairment
provisions
£000
33,559
10,500
(1,529)
42,530
6,500
49,030
(2,564)
–
–
(2,564)
–
(2,564)
2015
£000
44,166
2,300
46,466
2014
£000
2,089
3,218
(1,321)
–
(308)
(6,440)
55
(2,707)
Net
£000
30,995
10,500
(1,529)
39,966
6,500
46,466
2014
£000
37,666
2,300
39,966
Arbuthnot Banking Group PLCReport & Accounts 2015
96
Notes to the Consolidated
Financial Statements continued
39. Investment in subsidiary undertakings (continued)
(a) List of subsidiaries
The table below provides details of the significant subsidiaries of Arbuthnot Banking Group PLC at 31 December:
Arbuthnot Latham & Co., Limited
Secure Trust Bank PLC
Ownership interest %
Country of
incorporation
UK
UK
2015
100
52
2014
Principal activity
100
52
Private banking
Retail banking
The table below provides details of other subsidiaries and related undertakings of Arbuthnot Banking Group PLC at 31 December:
Country of
incorporation
Principal activity
Owned directly
Arbuthnot Fund Managers Limited
Arbuthnot Investments Limited
Arbuthnot Limited
Arbuthnot Properties Limited
Arbuthnot Unit Trust Management Limited
Gilliat Financial Solutions Limited
Peoples Trust and Savings Plc
West Yorkshire Insurance Company Limited
Windward Insurance Company PCC Limited
Owned indirectly via intermediate holding companies
Arbuthnot Latham (Nominees) Limited
Arbuthnot Securities Limited
Artillery Nominees Limited
Debt Managers (Services) Limited
Everyday Lending Limited *
Everyday Loans Holdings Limited *
Everyday Loans Limited *
John K Gilliat & Co., Limited
Secure Homes Services Limited
STB Leasing Limited
Tarn Crag Limited
V12 Finance Group Limited
V12 Personal Finance Limited
V12 Retail Finance Limited
* Included in assets classified as held for sale
UK
UK
UK
UK
UK
UK
UK
UK
Guernsey
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
Isle of Man
UK
UK
UK
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Dormant
Insurance
Dormant
Dormant
Dormant
Debt collection company
Provider of unsecured and secured loans
Holding company
Sourcing and servicing of secured and unsecured loans
Dormant
Property rental
Leasing
Property management
Holding company
Dormant
Sourcing and servicing of unsecured loans
All other subsidiary and related undertakings are unlisted and none banking institutions. The entities were all wholly owned via
Ordinary shares, except for Tarn Crag in which the Company indirectly holds 50% of the Ordinary shares. All entities are included
in the consolidated financial statements and have an accounting reference date of 31 December.
(b) Non-controlling interests in subsidiaries
The only subsidiary in the Group with non-controlling interests is Secure Trust Bank PLC, with external parties having 48.1%
(2014: 48.1%) ownership interests in the bank. Summary financial information on the subsidiary is shown in the table below.
Arbuthnot Banking Group PLCReport & Accounts 2015
97
Year ended
31 December
2015
£000
Year ended
31 December
2014
£000
132,484
29,009
29,009
13,798
97,897
20,455
20,831
8,382
31 December
2015
£000
31 December
2014
£000
960,610
286,721
(1,106,147)
141,184
67,887
Year ended
31 December
2015
£000
53,188
(3,397)
(12,552)
(6,036)
31,203
622,495
159,769
(657,402)
124,862
60,038
Year ended
31 December
2014
£000
(21,356)
(4,533)
52,073
(3,752)
22,432
Summary of profit
Operating income
Profit after income tax
Total comprehensive income
Profit allocated to non-controlling interests
Summary of assets and liabilities
Loans and advances to customers
Other assets
Liabilities
Net assets
Carrying amount of non-controlling interests
Summary of cash flows
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities, before dividends to non-controlling interests
Cash flows from financing activities – cash dividends to non-controlling interests
Net increase in cash and cash equivalents
(c) Significant restrictions
The Group does not have significant restrictions on its ability to access or use its assets and settle its liabilities other than those
resulting from the supervisory frameworks within which banking subsidiaries operate. The supervisory frameworks require banking
subsidiaries to keep certain levels of regulatory capital and liquid assets, limit their exposure to other parts of the Group and comply
with other ratios. The carrying amounts of banking subsidiaries’ assets and liabilities are £2,252m and £2,058m respectively
(2014: £1,452m and £1,268m respectively).
(d) Risks associated with interests
During the year Arbuthnot Banking Group PLC made a £6.5m (2014: £10.5m) capital contribution to Arbuthnot Latham & Co., Ltd.
The contribution was made to assist the Private Bank during a period of growth (which included the acquisition of a loan book in
2014 at fair value of £106m) to ensure that all regulatory capital requirements were met.
(e) Changes in ownership interest
On 9 July 2014, Secure Trust Bank PLC issued 2,083,333 new shares to external shareholders for £50m and at the same time
Arbuthnot Banking Group PLC sold 1,041,667 shares for £25m, thereby reducing its shareholding in Secure Trust Bank PLC from
67% to 53.3%. The effect of these transactions on the Group’s reserves can be seen in the Consolidated Statement of Changes in
Equity. As can been seen from the table under paragraph (b) above, the full year equivalent profit attributable to equity holders of
the Group had therefore reduced from £13.7m to £10.9m in 2014 due to these transactions.
On 4 November 2014, 460,416 share options issued by Secure Trust Bank, under its equity settled share option scheme were exercised
(see Note 35). This resulted in the shareholding in Secure Trust Bank PLC reducing from 53.3% to 51.9%. The effect of the exercise of
the share options on the Group’s reserves can be seen in the Consolidated Statement of Changes in Equity. As can been seen from the
table under paragraph (b) above, the full year equivalent profit attributable to equity holders of the Group had therefore reduced from
£10.9m to £10.6m in 2014 due to these shares being issued.
Arbuthnot Banking Group PLCReport & Accounts 2015
98
Notes to the Consolidated
Financial Statements continued
40. Operating segments
The Group is organised into three main operating segments, arranged over two 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) Group Centre – ABG Group Centre management.
Transactions between the operating segments are on normal commercial terms. Centrally incurred expenses are charged to operating
segments on an appropriate pro-rata basis. Segment assets and liabilities comprise operating assets and liabilities, being the majority
of the balance sheet.
Discontinued
operations
Continuing operations
Year ended 31 December 2015
Interest revenue
Inter-segment revenue
Interest revenue from external customers
Fee and commission income
Revenue from external customers
Interest expense
Add back inter-segment revenue
Subordinated loan note interest
Fee and commission expense
Segment operating income
Impairment losses
Other income
Operating expenses
Segment profit/(loss) before tax
Income tax (expense)/income
Segment profit/(loss) after tax
Loans and advances to customers
Other assets
Segment total assets
Customer deposits
Other liabilities
Segment total liabilities
Other segment items:
Capital expenditure
Depreciation and amortisation
ELL
£000
39,230
–
39,230
1,523
40,753
–
–
–
(358)
40,395
(7,537)
–
(21,195)
11,663
(2,271)
9,392
–
118,456
118,456
8,700
8,700
Retail
banking
£000
UK Private
banking
£000
Group
Centre
£000
100,442
(211)
100,231
16,867
117,098
(21,560)
211
–
(3,660)
92,089
(16,782)
–
(50,133)
25,174
(5,557)
19,617
960,610
168,655
1,129,265
1,033,073
64,827
1,097,900
32,974
(181)
32,793
9,999
42,792
(7,691)
181
–
(206)
35,076
(1,250)
1,894
(29,722)
5,998
109
6,107
618,902
385,547
1,004,449
896,766
55,330
952,096
(3,639)
(2,865)
(3,186)
(1,320)
126
(118)
8
–
8
236
(392)
(324)
–
(472)
(34)
(1,894)
(6,204)
(8,604)
12
(8,592)
–
(20,611)
(20,611)
–
(18,541)
(18,541)
(102)
(29)
Group
Total
£000
34,231
(7,707)
26,524
2,231,559
Total
£000
133,542
(510)
133,032
26,866
159,898
(29,015)
–
(324)
(3,866)
126,693
(18,066)
–
(86,059)
22,568
(5,436)
17,132
1,579,512
533,591
2,113,103
1,929,839
101,616
2,031,455
2,040,155
(6,927)
(4,214)
The “Group Centre” segment above includes the parent entity and all intercompany eliminations.
Arbuthnot Banking Group PLCReport & Accounts 2015
99
Group
Total
£000
22,514
(5,498)
17,016
1,446,622
Total
£000
87,774
(376)
87,398
25,841
113,239
(18,970)
–
(401)
(1,819)
92,049
(11,953)
–
(66,165)
13,931
(3,444)
10,487
1,158,983
287,639
1,446,622
1,194,285
78,768
1,273,053
1,273,053
(9,017)
(3,807)
Year ended 31 December 2014
Interest revenue
Inter-segment revenue
Interest revenue from external customers
Fee and commission income
Revenue from external customers
Interest expense
Add back inter-segment revenue
Subordinated loan note interest
Fee and commission expense
Segment operating income
Impairment losses
Other income
Operating expenses
Segment profit/(loss) before tax
Income tax (expense)/income
Segment profit/(loss) after tax
Loans and advances to customers
Other assets
Segment total assets
Customer deposits
Other liabilities
Segment total liabilities
Other segment items:
Capital expenditure
Depreciation and amortisation
Discontinued
operations
Continuing operations
ELL
£000
30,226
–
30,226
4,122
34,348
–
–
–
(111)
34,237
(6,638)
–
(19,016)
8,583
(2,054)
6,529
Retail
banking
£000
UK Private
banking
£000
Group
Centre
£000
63,316
(51)
63,265
16,082
79,347
(14,170)
51
–
(1,568)
63,660
(8,650)
–
(37,255)
17,755
(3,618)
14,137
622,495
159,504
781,999
608,418
48,719
657,137
(4,533)
(3,087)
24,303
(177)
24,126
9,759
33,885
(4,916)
177
–
(251)
28,895
(3,378)
2,088
(23,977)
3,628
209
3,837
536,488
162,984
699,472
585,867
73,639
659,506
(4,482)
(708)
155
(148)
7
–
7
116
(228)
(401)
–
(506)
75
(2,088)
(4,933)
(7,452)
(35)
(7,487)
–
(34,849)
(34,849)
–
(43,590)
(43,590)
(2)
(12)
Segment profit is shown prior to any intra-group eliminations.
The UK private bank opened a branch in Dubai in 2013, which generated £1.85m (2014: £0.61m) fee income and had operating costs
of £1.82m (2014: £1.59m). Other than the Dubai branch, all operations of the Group are conducted wholly within the United
Kingdom and geographical information is therefore not presented.
Arbuthnot Banking Group PLCReport & Accounts 2015
100
Notes to the Consolidated
Financial Statements continued
41. Country by Country Reporting
Article 89 of the EU Directive 2013/36/EU otherwise known as the Capital Requirements Directive IV (‘CRD IV’) was implemented
into UK domestic legislation through statutory instrument 2013 No. 3118, the Capital Requirements (Country-by-Country Reporting)
Regulations 2013 (the Regulations), which were laid before the UK Parliament on 10 December 2013 and which came into force on
1 January 2014.
Article 89 requires credit institutions and investment firms in the EU to disclose annually, specifying, by Member State and by third
country in which it has an establishment, the following information on a consolidated basis for the financial year: name, nature of
activities, geographical location, turnover, number of employees, profit or loss before tax, tax on profit or loss and public subsidies
received.
31 December 2015
Name
Nature of activity
Location
Arbuthnot Banking Group PLC Banking Services
Arbuthnot Banking Group PLC Banking Services
UK
Dubai
31 December 2014
Name
Nature of activity
Location
Arbuthnot Banking Group PLC Banking Services
Arbuthnot Banking Group PLC Banking Services
UK
Dubai
Turnover
(£m)
Number FTE
employees
167.1
–
924
13
Turnover
(£m)
Number FTE
employees
126.3
–
791
9
Profit/(loss)
before tax
(£m)
36.0
(1.8)
Profit/(loss)
before tax
(£m)
23.9
(1.4)
Tax paid
(£m)
7.4
–
Tax paid
(£m)
3.0
–
The Dubai branch income is booked through the UK branch, hence the turnover is nil in the above analysis. Reallocating this income
to the Dubai branch would result in a £33k profit (2014: £1m loss). No public subsidies were received during 2015 or 2014.
42. Ultimate controlling party
The Company regards Sir Henry Angest, the Group Chairman and Chief Executive Officer, who has a beneficial interest in 53.7% 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 38 of the consolidated financial statements includes related party transactions with Sir Henry Angest.
43. Events after the balance sheet date
On 15 January 2016 Arbuthnot Latham & Co., Ltd signed a contract with Oracle to replace its current banking system.
The committed cost is £2m.
Arbuthnot Banking Group PLCReport & Accounts 2015 101
Five year summary
Profit before tax from continuing operations
Total Earnings per share
Basic (p)
Earnings per share from continuing operations
Basic (p)
Dividends per share (p) – ordinary
Dividends per share (p) – special
Other KPI:
Net asset value per share (p)
2011
£000
5,116
2012
£000
2013
£000
2014
£000
2015
£000
11,146
11,780
13,931
22,568
(34.0)
54.6
37.1
24.0
–
2011
£000
312.2
47.0
25.0
–
2012
£000
449.3
53.8
44.1
26.0
18.0
2013
£000
58.6
86.3
32.4
27.0
–
2014
£000
53.3
29.0
–
2015
£000
570.5
1,136.0
1,252.7
Arbuthnot Banking Group PLCReport & Accounts 2015
102
Notice of Meeting
NOTICE IS HEREBY GIVEN that the thirtieth Annual General Meeting of Arbuthnot Banking Group PLC (the Company) will be held
at Arbuthnot House, 7 Wilson Street, London EC2M 2SN on Thursday, 5 May 2016 at 3pm for the following purposes:
Ordinary Business
To consider and, if thought fit, pass the following resolutions which will be proposed as ordinary resolutions:
1. To receive and adopt the report of the directors and the financial statements for the year ended 31 December 2015.
2. To receive the report of the Remuneration Committee.
3. To declare a final dividend in respect of the year ended 31 December 2015 which the directors propose should be 17p per Ordinary
Share, payable on 13 May 2016 to shareholders on the register of members at the close of business on 15 April 2016.
4. To elect Mr. I.A. Dewar as a Director who, having been appointed as a Director since the last annual general meeting, offers
himself for election in accordance with Article 75 of the Articles of Association.
5. To re-elect Sir Henry Angest as a Director who retires by rotation in accordance with Article 78 of the Articles of Association and
offers himself for re-election.
6. To re-elect Sir Christopher Meyer as a Director who retires by rotation in accordance with Article 78 of the Articles of Association
and offers himself for re-election.
7. To re-appoint KPMG LLP as Auditors of the Company and to authorise the Directors to fix their remuneration.
Special Business
To consider and, if thought fit, pass the following resolution which will be proposed as a special resolution:
8. That the Company be and is hereby generally and unconditionally authorised to make market purchases (as defined in section
693(4) of the Companies Act 2006) of Ordinary Shares of 1p each in the capital of the Company (“Ordinary Shares”) provided
that:
a. the maximum number of Ordinary Shares hereby authorised to be purchased shall be 1,488,000 (being approximately 10%
of the issued share capital of the Company as at 16 March 2016);
b. the minimum price which may be paid for an Ordinary Share shall be £0.01;
c.
the maximum price which may be paid for an Ordinary Share shall be 5 per cent. above the average of the closing middle
market price of the Ordinary Shares (as derived from the London Stock Exchange Daily Official List) for the 10 business days
prior to the day the purchase is made;
d. the authority hereby conferred shall expire on 31 May 2017 or, if earlier, on the conclusion of the next Annual General
Meeting of the Company unless such authority is renewed prior to such time; and
e.
the Company may enter into contracts to purchase Ordinary Shares under the authority hereby conferred prior to the expiry
of such authority, which contracts will or may be executed wholly or partly after the expiry of such authority, and may make
purchases of Ordinary Shares pursuant to any such contracts.
By order of the Board
J R Kaye
Secretary
6 April 2016
Registered Office
Arbuthnot House
7 Wilson Street
London
EC2M 2SN
Arbuthnot Banking Group PLCReport & Accounts 2015 103
NOTES:
1. In accordance with Regulation 41 of the Uncertificated Securities Regulations 2001, the Company gives notice that only those
shareholders entered on the relevant register of members (the Register) for certificated or uncertificated shares of the Company
(as the case may be) at 6 p.m. on 3 May 2016 (“the Specified Time”) will be entitled to attend or vote at the Annual General
Meeting in respect of the number of shares registered in their name at that time. Changes to entries on the Register after the
Specified Time will be disregarded in determining the rights of any person to attend or vote at the Annual General Meeting.
Should the Annual General Meeting be adjourned to a time not more than 48 hours after the Specified Time, that time will also
apply for the purpose of determining the entitlement of members to attend and vote (and for the purpose of determining the
number of votes they may cast) at the adjourned Annual General Meeting. Should the Annual General Meeting be adjourned for a
longer period, then to be so entitled, members must be entered on the Register at the time which is 48 hours before the time fixed
for the adjourned Annual General Meeting, or, if the Company gives notice of the adjourned Annual General Meeting, at the time
specified in the notice.
2. Members who want to attend and vote should either attend in person or appoint a proxy or corporate representative to attend,
speak and vote on his/her behalf. A member may appoint more than one proxy in relation to the Annual General Meeting provided
that each proxy is appointed to exercise the rights attached to a different share or shares of the member, but must attend the
meeting in person. A proxy need not be a member. A paper Form of Proxy is enclosed. Please read carefully the instructions on
how to complete the form. Forms of Proxy, together with the power of attorney or other authority (if any) under which it is signed
or a notarially certified copy of such power of attorney or other authority, must be lodged with the Registrars or submitted not
later than 48 hours before the time for which the Annual General Meeting is convened. Completion of the appropriate Form of
Proxy does not prevent a member from attending and voting in person if he/she is entitled to do so and so wishes.
3. A corporation which is a member can appoint one or more corporate representatives who may exercise, on its behalf, all its powers
as a member provided that no more than one corporate representative exercises power over the same share.
4. As at 6 April 2016 (being the last business day prior to the publication of the Notice of Annual General Meeting) the Company’s
issued share capital consists of 14,889,048 ordinary shares carrying one vote each.
5. There are no service contracts of Directors other than ones which may be terminated on up to 12 months’ notice at any time.
Copies of these service agreements will be available for inspection at the registered office during usual business hours on any
weekday (Saturdays, Sundays and public holidays excepted) from the date of this notice until the date of the Annual General
Meeting and at the place of the Annual General Meeting for 15 minutes prior to and during the Annual General Meeting.
Arbuthnot Banking Group PLCReport & Accounts 2015 Advisers
Auditors:
KPMG LLP
Principal Bankers:
Barclays Bank PLC
Lloyds TSB Bank plc
Stockbrokers:
Numis Securities Limited
Nominated Advisor:
Canaccord Genuity Limited
Registrars:
Capita Asset Services
The Registry
34 Beckenham Road
Beckenham, Kent BR3 4TU
104
Corporate contacts
& advisers
Group Address and Registered Office
Arbuthnot Banking Group PLC
Arbuthnot House
7 Wilson Street
London EC2M 2SN
T 020 7012 2400
E info@arbuthnotgroup.co.uk
www.arbuthnotgroup.com
Corporate Contacts
Secure Trust Bank PLC
One Arleston Way
Solihull B90 4LH
T 0121 693 9100
F 0121 693 9124
E banking@securetrustbank.com
www.securetrustbank.com
Arbuthnot Latham & Co., Limited
Arbuthnot House
7 Wilson Street
London EC2M 2SN
T 020 7012 2500
F 020 7012 2501
E banking@arbuthnot.co.uk
www.arbuthnotlatham.co.uk
Suite 2B South Central
11 Peter Street
Manchester M2 5QR
T 0161 413 0030
The Senate
Ground Floor
Southernhay Gardens
Exeter
Devon EX1 1UG
T 01392 496061
F 01392 413638
Dubai branch
PO Box 482007
Gate Precinct 4
Level 3
Office 308
Dubai International Financial Centre
Dubai
T +971 (4) 3770900
Arbuthnot Banking Group PLCReport & Accounts 2015 A
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Arbuthnot Banking Group PLC
Arbuthnot House
7 Wilson Street
London EC2M 2SN
T 020 7012 2400
E info@arbuthnotgroup.co.uk
www.arbuthnotgroup.com
Registration No. 1954085