Arbuthnot Banking - Audited results for the year ended 31/12/2020
RNS Number : 4186T
Arbuthnot Banking Group PLC
25 March 2021
 

25 March 2021

For immediate release

 

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

Audited Final Results for the year to 31 December 2020

 

Strong financial resources have allowed the Group to accelerate strategy via acquisition.

 

Arbuthnot Banking Group today announces its audited results for the year ended 31 December 2020.

 

Arbuthnot Banking Group PLC is the holding company for Arbuthnot Latham & Co., Limited.

 

FINANCIAL HIGHLIGHTS

·      (Loss)/Profit Before Tax (£1.1m) (2019: £7.0m) - excluding acquisition costs, the business broke even in 2020*

·      Operating income steady at £72.5m (2019: £72.5m)

·      Earnings per share negative 8.9p (2019: 41.2p)

·      No dividend declared for 2020**

·      Net assets £194m (2019: £208m)

·      Net assets per share 1270p (2019: 1364p)

·      Total capital ratio 18.7% (2019: 17.3%)

 

OPERATIONAL HIGHLIGHTS

 

Arbuthnot Latham

·      Profit before tax and group recharges of £8.3m (2019: £16.2m), a decrease of 49%

·      Average net margin at 4.1% (2019: 4.5%)

·      Customer loans decreased 1% to £1,588m (2019: £1,599m)

·      Customer deposits increased 13% to £2,365m (2019: £2,085m)

·      Assets under management increased 4% to £1,147m (2019: £1,107m) driven by both strong net inflows and investment performance

·      Arbuthnot Commercial Asset Based Lending profit has paid back start-up losses incurred; a strong year of progress saw it grow customers by 60%, drawn balances by 50% and facility limits by 82% in 2020

·      All employees successfully worked remotely as the Bank operated well during the pandemic

·      Installed new CRM system, linked to upgraded website in support of digital marketing initiatives

·      Agreed acquisition of commercial truck leasing business, Asset Alliance, which incurred £1m of transaction costs accounted for in 2020***

 

During First Quarter 2021

·      Completed sale of £55m residential mortgage portfolio generating a gain of £2.2m

·      Took the decision to close Dubai representative office. Relationships will be managed from London

·      Declared special dividend of 21p, paid on 19 March 2021, in respect of the withdrawn 2019 final dividend

 

 

Commenting on the results, Sir Henry Angest, Chairman and Chief Executive of Arbuthnot, said: "In a year in which the pandemic and associated lockdowns impacted businesses, Arbuthnot delivered a resilient performance and continued to make good operational progress. After a positive start to 2020, growth in lending balances and profits paused from the onset of the lockdown, as historically low base rates and a prudent reduction in the Bank's credit appetite took their toll. It was however pleasing to see that whilst our growth may have paused, the bank did not. Our technology enabled us to serve clients remotely, whilst we also relaunched our website linked to a newly-developed CRM system, and delivered a well-received evolution of the Arbuthnot Latham brand.

 

We also had considerable success in growing our client base, with the Bank opening a significant number of new accounts in 2020, which in turn contributed to the good growth in deposits. This progress, together with growing demand for lending and the increased diversity of our business following the acquisition of Asset Alliance, leaves us well placed to resume our growth."

 

Note:      *              The results include £1m of transaction costs related to acquisition of Asset Alliance.

**           On 18 February 2021 the Board declared a special dividend of 21p in lieu of the final dividend for 2019 that had been withdrawn after guidance from the Regulators.

***         Clearance was received from the FCA on 2 March 2021 and the acquisition is expected to complete on 31 March

                2021.

 

The Directors of the Company accept responsibility for the contents of this announcement.

 

ENQUIRIES:




Arbuthnot Banking Group

0207 012 2400

Sir Henry Angest, Chairman and Chief Executive


Andrew Salmon, Group Chief Operating Officer


James Cobb, Group Finance Director




Grant Thornton UK LLP (Nominated Adviser and AQSE Exchange Corporate Adviser)

0207 383 5100

Colin Aaronson


Samantha Harrison


Seamus Fricker




Numis Securities Ltd (Joint Broker)

0207 260 1000

Stephen Westgate




Shore Capital Stockbrokers Ltd (Joint Broker)

0207 408 4090

Hugh Morgan


Daniel Bush




Maitland/AMO (Financial PR)

0207 379 5151

Neil Bennett


Sam Cartwright


 

The 2020 Annual Report and Notice of Meeting will be available on the Arbuthnot Banking Group website http://www.arbuthnotgroup.com on or before 16 April 2021. Copies will then be available from the Company Secretary, Arbuthnot Banking Group PLC, Arbuthnot House, 7 Wilson Street, London, EC2M 2SN, when practicable.

 

 

Consolidated statement of comprehensive income

 




Year ended 31 December




2020

2019


Note


£000

£000

Interest income

8


75,082

76,870

Interest expense



(17,024)

(18,233)

Net interest income



58,058

58,637

Fee and commission income

9


14,735

13,935

Fee and commission expense



(293)

(107)

Net fee and commission income



14,442

13,828

Operating income



72,500

72,465

Net impairment loss on financial assets

10


(2,849)

(867)

Other income

11


678

5,599

Operating expenses

12


(71,419)

(70,186)

(Loss) / profit before tax



(1,090)

7,011

Income tax expense

13


(242)

(835)

(Loss) / profit after tax



(1,332)

6,176






Other comprehensive income





Items that will not be reclassified to profit or loss





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

(12,826)

10,707

Tax on other comprehensive income



(69)

(77)

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



(12,895)

10,630

Total comprehensive (loss) / income for the period



(14,227)

16,806






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

15


(8.9)

41.2






Diluted earnings per share

15


(8.9)

41.2

 

Consolidated statement of financial position

 




At 31 December




2020

2019


Note


£000

£000

ASSETS





Cash and balances at central banks

16


636,799

325,908

Loans and advances to banks

17


110,267

46,258

Debt securities at amortised cost

18


344,692

442,960

Assets classified as held for sale

19


3,285

7,617

Derivative financial instruments

20


1,843

1,804

Loans and advances to customers

21


1,587,849

1,599,053

Current tax asset



205

Other assets

23


96,288

86,443

Financial investments

24


18,495

30,919

Deferred tax asset

25


1,009

1,815

Intangible assets

26


23,646

20,082

Property, plant and equipment

27


4,905

5,813

Right-of-use assets

28


17,703

19,944

Investment property

29


6,550

6,763

Total assets



2,853,536

2,595,379

EQUITY AND LIABILITIES





Equity attributable to owners of the parent





Share capital

36


154

154

Retained earnings

37


207,839

209,171

Other reserves

37


(13,970)

(990)

Total equity



194,023

208,335

LIABILITIES





Deposits from banks

30


230,090

230,421

Derivative financial instruments

20


649

319

Deposits from customers

31


2,365,207

2,084,903

Current tax liability



633

Other liabilities

32


7,606

13,500

Lease liabilities

33


18,305

20,431

Debt securities in issue

34


37,656

36,837

Total liabilities



2,659,513

2,387,044

Total equity and liabilities



2,853,536

2,595,379

 

Chairman's statement

 

Arbuthnot Banking Group ("ABG" or "The Group") has reported a loss before tax of £1.1m in a year that has been like no other in living memory. The Group had started the year on the front foot, with businesses enjoying the "Boris Bounce" after his emphatic General Election victory in late 2019. Lending balances increased by £62m from the prior year end - and then the pandemic struck.

 

The base rate reduction on its own caused a decline in revenues of £10.3m and further growth opportunities were lost as the Group tightened its lending criteria. This was both a precautionary measure, to limit the risks of the pandemic and to conserve capital for opportunities that we believed might arise. This caused customer loan balances to fall over the remainder of the year, to end at approximately the same level as the prior year. Thus, the Group has in fact missed a year of growth and its associated increased revenue. The pandemic's immediate impact on revenue has been in part offset by not awarding bonus payments to employees.

 

In my Chairman's report of 2019, I noted that the Group was well placed in terms of capital and liquidity to take advantage of any opportunities that the turmoil would present. I said this after noting that the Group prospered significantly following the financial crisis at the end of the previous decade. The Group was at that time able to successfully complete several acquisitions, at values that reflected the dislocation in the market, caused by the withdrawal of liquidity by the major banks to the non-bank lending market. Most notable of these was the acquisition of Everyday Loans that the Group purchased for £1 and subsequently sold for a gain of £117m three and a half years later. Therefore, I was pleased that we were able to exchange contracts in December of 2020, to acquire the entire share capital of Asset Alliance Group Holdings Limited ("Asset Alliance"). I expect this acquisition to complete on 31 March 2021 as we have recently received approval from the regulatory bodies regarding our change of control application.

 

I am delighted that Willie Patterson, the CEO of Asset Alliance, and his Senior Management team will join the Group soon and I look forward to working with them to grow the business, now that it will no longer be constrained by its previous funding limits.

 

Asset Alliance is a market leading provider of leasing solutions mainly in the commercial truck sector. This acquisition will continue our strategy of diversification of Arbuthnot Latham & Co., Limited ("Arbuthnot Latham" or "the Bank"), while remaining true to our core values that are embedded in our Private Bank.

 

Asset Alliance provides us another niche within the specialist Commercial Banking markets that we have been developing to complement the Commercial Bank, Renaissance Asset Finance, Arbuthnot Commercial Asset Based Lending and Arbuthnot Specialist Finance. These all combine to bring together the "Future State" vision that we are working towards, led by the core bank which will maintain access to low-cost retail deposits that can be deployed through our higher yielding lending businesses.

 

Highlights

Despite the decline in profitability caused by the pandemic, I would like to note a number of highlights and also the continued progress made by the Group during the year.

 

From the moment that the lockdown was declared the entire bank moved to remote working without missing a beat. Clients continued to receive their bespoke personal service, payments continued to be transacted and investment decisions remained clear and decisive.  Meanwhile, fraud protection and second line monitoring maintained the safety and soundness of the operations of the Group.  Throughout the whole of this time the Group has played its role within society, not taking advantage of any of the Government's schemes and paying all of its liabilities, including all tax related items, on time. The Group was quickly accredited to the Government sponsored lending schemes and extended £21m of Coronavirus Business Interruption Loans ("CBILs") and £12m Bounce Back Loans ("BBLs") to our clients to help them navigate their way through the cash flow issues that lockdowns bring. We also assisted our clients with payment holidays. We have supported employees and avoided using any of the furlough schemes. Their morale and dedication to servicing our clients has remained at the highest level, despite the long days working remotely and alone.

 

The fact that all our employees were working remotely was not an impediment that was going to prevent our IT and change teams from continuing to deliver on our ambitious programme of enhancing the Bank's infrastructure and service propositions. In August, we moved over to the newly implemented CRM systems provided by SalesForce. This Bank-wide effort now gives our services teams the ability to view all our clients' balances in one single place. 

 

Finally, in December we switched our faster payment provider from Lloyds to NatWest, while at the same time extending our proposition to allow clients to instruct and make payments at any hour of any day that they so choose. This was the last significant enhancement needed to make our transactional banking capabilities equivalent of other market leading brands.

 

From the onset of the pandemic the business focused on maintaining its growth of deposits. While the recession was largely in the real economy, we feared that it might quickly spread to the financial sector and create a liquidity squeeze. I have often commented that the strength of a bank should not only be judged on its capital or quality of its loan book but by the solidity and diversity of its deposit base. Thus, I have noted the creditable performance of the Bank in gathering deposits during the 2020. The end of the year deposit balance showed growth of 13%, while at the same time the average cost of these deposits fell from 66bps to 54bps, which shows the Bank has not chased deposits at any cost. This strength and diversification of the deposit base will enable us to continue our growth trajectory once activity levels return.

 

Given the turmoil in the investment markets and uncertainty in the real economy I feel that the performance of our Investment Management division should also be noted. The FTSE 100 index fell by 14% during 2020, however, our balance of Assets Under Management increased by 4% suggesting that the investment performance outperformed the market even when excluding the net flow of funds.

 

Brexit and Regulation

In my Chairman's report for 2019 I noted that business activity had been reduced in the lead up to the General Election and the implications that had for the conditions of the UK's withdrawal from the European Union. It has always been clear to me that businesses are mainly weighed down by a lack of clarity of the future when making investment decisions. The political situation had created much uncertainty in the UK and across Europe. So I am now pleased that this uncertainty has been removed and it appears that the UK has struck a good trade deal.

 

However, Brexit will only be successful if the Government is bold and takes full advantage of the freedoms gained. For a start, it must substantially reduce the stifling bureaucracy and plethora of regulation that the UK has been forced to adopt over the years.

 

The Civil Service must also play their part in bringing about such transformation, a once in a lifetime opportunity. Out must go the bad habit of gold plating every rule and every new regulation must be tested against a rigorous impact assessment and should have a sunset clause. Furthermore, we should introduce a "one in, one out" principle to contain this proliferation of rules.

 

Board Changes and Personnel

During the year there were no changes to the Board. I would like to thank my colleagues on the Board for their continued helpful and committed collaboration despite only being able to meet virtually.

 

As always, and especially this year, the progress of the Group reflects the hard work and commitment of all the members of staff. I believe that all our employees have responded particularly well in these difficult circumstances in continuing to provide high quality client service and in ensuring that their colleagues' wellbeing was prioritised. On behalf of the Board I extend our thanks to all of them for their dedicated efforts in 2020.

 

Dividend

The Board announced on 18 February 2021 that it intended to pay a special dividend of 21p in-lieu of the dividend relating to 2019 that was cancelled following strong guidance from the PRA. This dividend has already been paid and you should all be in receipt of the monies. 

 

Given the impact the pandemic has had on the Group's earnings, the Board is not recommending a final dividend for the year of 2020, but will assess the dividend strategy of the Group, as profitability is restored, in 2021.

 

Outlook

The macro economic outlook is currently uncertain, the rollout of the vaccine in the UK appears to be powering ahead like a "speedboat" and soon all adults should have been offered the opportunity to protect themselves from the virus. The Government recently published a roadmap out of the lockdown, but the emergence of new variants could change the data and put this at risk.

 

Any further delay will push back the recovery, which appears to be poised for a potentially strong rebound. However, in the meantime, the Government appears committed to supporting the economy and, so far, the valuations and demand in our sectors of business have held up.

 

The acquisition of Asset Alliance, a growing demand in our lending pipelines and the diversity of the Group places us in a good position to deliver strong growth and results once the restrictions on the economy are lifted.

 

 

Strategic Report






Business Review



 

Arbuthnot Latham & Co., Ltd




2020

2019

Operating income

£75.1m

£74.2m

Other income

£1.5m

£5.0m

Operating expenses

£65.5m

£62.2m

Profit before tax (before Group recharges)

£8.3m

£16.2m

Customer loans

£1,587.8m

£1,599.1m

Customer deposits

£2,365.2m

£2,084.9m

Total assets

£2,855.0m

£2,584.7m

Assets under management

£1,147.5m

£1,107.3m

Average net margin

4.1%

4.5%

Loan to deposit ratio

67.1%

76.7%

 

Arbuthnot Latham

Arbuthnot Latham & Co., Limited has reported a profit before tax and Group recharges of £8.3m (2019: £16.2m profit).

 

The decline in profit against the prior year can largely be attributed to two factors. Firstly, the fall in the Bank of England Base Rate from 0.75% to a historic low of 0.1% in March resulted in a reduction of interest generated from the loan book of £6.7m as loans for the majority of the portfolio repriced to lower rates. Secondly, this was compounded further by Arbuthnot Latham's cautious approach to liquidity; by maintaining high levels of cash reserves at the Bank of England as opposed to placing them in the higher yielding wholesale money markets or operating at higher loan to deposit ratios. This strategy cost the Bank a further £3.6m. Whilst this cautious approach means that we may forgo a small amount of potential revenues, it has protected the bank during periods of economic uncertainty and we continue to favour maintaining strong capital and liquidity positions to generate and protect value over the long-term. Additionally, in response to the emergence of the pandemic the Bank significantly reduced its credit appetite due to uncertainty in the global economy. In the third quarter the Bank re-instated its credit appetite to pre-pandemic levels and re-entered the lending markets, underwriting deals with strong fundamentals and where it could place certainty on valuations. As a result of the fall in profitability, management has responded by not awarding any discretionary bonus payments to employees.

 

Other Income reduced by £3m from the prior year. In 2020 the Group started a significant refurbishment programme on one of its properties carried as inventory, King Street, which is expected to complete in the middle of 2021. This resulted in reduced rental income of £1.5m compared to the prior year. The prior year also included £1.5m for the adjustment of the RAF management earn out liability.

 

Despite the reduced lending activity, the Bank grew its deposit balances by 13% in the year. A strong deposit base with balances in excess of £2bn was maintained throughout 2020 with the Commercial business exceeding £1bn in deposits for the first time during the year. Assets Under Management ("AUM") also increased by 4% in the year.

 

The average net margin for the Bank fell by 40bps from 4.5% to 4.1%. This was as a result of reduced yields from lending linked to BOE base rate, somewhat offset by the average cost of deposits falling from 0.66% to 0.54%.

 

In support of the Government's unprecedented financial assistance package in response to the global pandemic, Arbuthnot Latham and Arbuthnot Commercial Asset Based Lending ("ACABL") became accredited lenders for the British Business Bank's CBIL and BBL schemes. A total of £20.8m of CBIL and £12.3m of BBL loans were issued across the Group during 2020 to 301 existing and new to bank SME clients.

 

Credit provisions increased to £2.8m for the year (2019: £0.9m). £1.2m of the charge was in Renaissance Asset Finance ("RAF") mainly as a result of its exposure to the London Taxi market, which has experienced significant slow-down from the pandemic. In response to wider economic uncertainty, the Bank also revised its future economic scenarios as part of its IFRS9 expected credit losses assessment. The Bank has applied an average net decline of 5.5% compared to 1.8% in 2019 for its UK property-based lending, which resulted in an increase in provisions of £0.3m.

 

The Bank's strategy to maintain strong levels of capital and liquidity allowed it to take advantage of the opportunity to acquire Asset Alliance, a business based in Wolverhampton that specialises in leasing commercial trucks, buses and coaches across various sectors, with a current portfolio of around 4,000 vehicles. The Bank has received all necessary regulatory approval and the acquisition is planned to complete on 31 March 2021.

 

During the year, the Bank also launched its rebranded website and observed internet traffic of up to 20,000 visitors a month. The brand evolution and the current digital marketing campaign have been shown to boost the Bank in the search rankings and is generating more client introductions to the business.

 

Banking

During the year the Group changed the way it manages and reports the Banking sector, combining the Private Banking and Commercial Banking sector into a single Banking sector. This is the level at which management decisions are made and how the Group will manage the overall business sectors going forward with the anticipated growth in subsidiary businesses.

 

The Private Bank's loan book returned to growth in 2020 reporting a modest increase of 1.3% to finish the year at £576m. The Bank continued to develop its strategy for a relationship-led service for clients who value the proposition. It continued to deepen existing relationships, as well as acquiring new criteria clients, with the latter continuing at the same pace as pre-pandemic levels.  The Bank refused to compromise on its pricing models to attract new or retain existing lending, as well as taking a conservative stance on credit decisions given the economic uncertainty.

 

Private Banking deposits increased 4% to £1,080m. Following the base rate reduction in 2020, the business deployed a strategy to effectively manage the cost of deposits down whilst growing overall balances from existing and new clients.

 

The Commercial Bank loan book increased by 6% to £557m. This was against the backdrop of the pandemic and strategically moving the emphasis away from commercial real estate towards professional buy to let landlords. At the outset of the pandemic the immediate focus of the relationship teams was to support existing clients with payment deferrals or additional finance, to support them during short-term difficulties. As part of its accreditation to the Government's Coronavirus Business Support Schemes the business issued 278 BBL loans totalling £12.3m.

 

Commercial Banking deposits increased by £255m in 2020 to exceed £1bn and finish the year with balances totalling £1,079m.  The cost of deposits was closely managed by growing existing relationships as well as attracting new criteria clients to the Commercial Bank.

 

Wealth Management

Assets under Management ("AUM") increased by 4% during 2020 in part due to record gross inflows nearly 10% higher than the prior year and representing 14% of AUM at the start of the year.

 

Despite volatility in global equity markets, Wealth Management continued to attract new criteria clients requiring Wealth Planning and Investment Management services. The Investment Management division saw net inflows of client assets (excluding market movement) increase AUM to close the year at a record £1.15bn.

 

Wealth planning fees were £0.8m supporting £54m of gross AUM inflows. The business completed its first full year providing event based financial planning with clients paying for each piece of specific advice on a transactional basis with no ongoing advice fees attached.

 

The business continued to offer bespoke advice with client services delivered through virtual client meetings. The online client experience has been well received and clients have responded positively with over 600 client consultations taking place in the year.

 

Investment returns for 2020 recovered steadily from the March lows, with strong gains in the final quarter. All investment services recorded positive absolute returns for the calendar year.

 

The business also launched its Investor Visa Service in the fourth quarter, which comprised a series of risk managed discretionary portfolios specifically designed to comply with the Home Office's requirements for Tier 1 Investor Visas.

 

The number of Banking clients grew in 2020, with 789 new clients which was approximately the same level as seen in 2019. Similarly, the number of Investment Management clients grew by 5.6% in the year.

 

Dubai

Following a strategic review of its international representation, the Bank concluded that in the current market the Dubai office no longer fitted with its future growth plans and so consequently took the decision to close the Dubai office.

 

The business has generated a good volume of client relationships for the Bank. However, its contribution versus its high cost base makes it unviable for the Bank's future growth aspirations. Existing client assets have always been held in London and clients will now be serviced from the London office. The office is scheduled to close at the end of May 2021.

 

Mortgage Portfolios

The Santiago mortgage portfolio acquired in August 2019 performed as expected, generating a gross yield of 3.5% consistent with the prior year (2019: 3.8%). Customers taking advantage of payment holidays as a result of the pandemic peaked at 27% during the year, falling to 1.7% at the year end.

 

After being approached by Charter Court Financial Services Limited (a subsidiary of OneSavings Bank), who provide the third party servicing of the portfolio, the Bank decided to sell the Tay portfolio as the yield had declined and it was becoming uneconomical to service. The sale completed on 26 February 2021 and generated a net gain of £2.2m for the 2021 financial year.

 

Renaissance Asset Finance ("RAF")

Renaissance Asset finance reported a profit of £2.1m (2019: £1.9m). The combined effects of a decline in vehicle and capital equipment demand from the SME sector, together with a tightened approach to risk resulted in customer loan balances falling to £91.9m (2019: £102.2m) as amortisation of the existing loans exceeded new lending.  It is expected that the decline will stabilise and then reverse as increased levels of new business activity return and as business sectors such as those involved in food distribution, internet delivery, the essential services and IT sectors experience an increased demand for asset finance facilities.

 

At the peak of the pandemic RAF saw 71% of its loan balances under forbearance measures. This fell to 16.7% at the year end. It is apparent that business sectors such as the London taxi market, which alone accounts for 86% of loan balances under forbearance, along with hospitality and media have been more impacted than others and are taking a longer time to recover. As a consequence, credit provisions have increased to £1.2m for the year compared to £0.7m for the previous year due to increased IFRS 9 Stage 2 provisions.

 

Despite the reduction in loan book and additional provisions required under IFRS 9 the business remained profitable. Lead indicators have continued to show good performance with no erosion of margin on new business written, remaining stable at 8% (2019: 8%). Credit quality of new originations has improved due to a revised credit appetite and reduced competition from other asset finance providers - especially those independent non-bank owned funders.

 

Arbuthnot Commercial Asset Based Lending ("ACABL")

ACABL continued to generate monthly profits throughout 2020 and during the year recovered all start-up costs incurred since its establishment in 2019.

 

The business completed 21 new transactions with facilities totalling £92m. In addition, following the accreditation by the British Business Bank in June to provide CBILs, the business wrote 23 CBIL loans totalling £20.8m to both existing clients and as part of financing structures to attract new clients.

 

The client base at the year end stood at 55, representing a 60% increase on 2019, with total facility limits of £244m, an 87% increase against the prior year. Since inception, the business has generated clients from 29 different sectors, underlining the spread and diverse nature of the book.

 

At the year end, the business reported drawn balances of £87.3m with a further £60.4m available for draw down. This is an increase of 50% from £103.4m at the end of 2019.

 

During the year, the business made 5,500 payments to clients totalling £750m, a 66% increase.

 

Maintaining a low client to portfolio manager ratio has enabled the team to support clients effectively throughout the pandemic, responding quickly to individual circumstances and challenges, while ensuring prudent risk management. This personal, service-driven approach is supported by an advanced technology-led front end system that has allowed clients to provide data from their accounting systems daily, enabling them to view their available funds and draw down remotely, throughout the lockdown.

 

Arbuthnot Specialist Finance Limited ("ASFL")

ASFL was only established in 2019 and then due to the economic environment resulting from the pandemic, ASFLs credit appetite was severely curtailed, which significantly supressed new lending volumes.

 

The business restored its credit appetite early in the fourth quarter and received a strong level of new business enquiries month on month, which converted into a pipeline of business expected to draw in early 2021.

 

Operations & Technology

As a result of the pandemic, the Bank responded with a rapid move to remote working in March 2020. Due to a number of years of continuing investment in IT systems, with a focus on ensuring strong levels of resilience and the ability to respond quickly to incidents, the Bank was able to move quickly to all employees working remotely.

 

The Bank continued to invest in new IT systems and upgrading the underlying IT infrastructure and networks. In July 2020 a new Salesforce CRM platform was launched, providing employees with easier access to client information and providing automated case management for a large number of the operational processes used to fulfil clients' requests.

 

Despite the extended period of people working remotely, a high level of operational performance over the year continued to be maintained, with an effective control environment and a strong focus on supporting clients through the significant period of disruption.

 

Non card payments increased by 13.1% and, as a result, the Bank processed nearly 390,000 transactions, which is attributed to changes in customer behaviour as a result of the pandemic. Over 85% of these transactions were instructed via the online banking system. Unsurprisingly, due to the more limited access to high street retailers, there were 126,796 fewer card transactions made in 2020 when compared to 2019 and spending levels on cards still show little sign of returning to pre-pandemic levels. To support card holders, a new card app was launched in the Spring of 2020, providing clients with functionality to manage their cards online.

 

To improve the client experience when using online and mobile banking, an upgrade to the Mobile Banking App was delivered in the Autumn of 2020 and in December the Bank upgraded its payment systems, enabling clients to send and receive faster payments at all times, having previously only offered this service within traditional banking business hours. To support this, access to client support teams was extended beyond standard banking hours.

 

Strategic Report - Financial Review

 

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

 

The Group provides a range of financial services to clients and customers in its chosen markets of Banking, Wealth Management, Asset Finance, Asset Based Lending and Specialist Finance. The Group's revenues are derived from a combination of net interest income from lending, deposit taking and treasury activities, fees for services provided and commission earned on assets under management. The Group also earns rental income on its properties and receives dividends from financial investments.

 

Highlights




2020

2019

Summarised Income Statement

£000

£000

Net interest income

58,058

58,637

Net fee and commission income

14,442

13,828

Operating income

72,500

72,465

Other income

678

5,599

Operating expenses

(71,419)

(70,186)

Impairment losses - loans and advances to customers

(2,849)

(867)

(Loss) / profit before tax

(1,090)

7,011

Income tax expense

(242)

(835)

(Loss) / profit after tax

(1,332)

6,176




Basic earnings per share (pence)

(8.9)

41.2

 

Underlying profit/(loss) reconciliation

Arbuthnot Latham & Co.

Group Centre

Arbuthnot Banking Group

31 December 2020

£000

£000

£000

Profit before tax and group recharges

8,316

(9,406)

(1,090)

Exceptional reduction in BoE Base Rate

10,335

 -  

10,335

Suspension of discretionary bonus payments

(4,498)

(1,611)

(6,109)

Loss of STB dividend

168

1,360

1,528

Cost of establishing new ventures

1,012

 -  

1,012

Loss of rental income during refurbishment work

1,494

 -  

1,494

Costs relating to the acquisition of Asset Alliance

991

 -  

991

Underlying profit

17,818

(9,657)

8,161





Underlying basic earnings per share (pence)



57.2

 

Underlying profit reconciliation

Arbuthnot Latham & Co.

Group Centre

Arbuthnot Banking Group

31 December 2019

£000

£000

£000

Profit before tax and group recharges

16,156

(9,145)

7,011

Cost of establishing new ventures

1,208

 -  

1,208

RAF deferred consideration adjustment

(1,495)

 -  

(1,495)

Subordinated debt charge as if applicable from 1 January 2019*

 -  

(924)

(924)

Underlying profit

15,869

(10,069)

5,800





Underlying basic earnings per share (pence)



32.8

* - Subordinated debt charge accounted for as if from 1 January, rather than 3 June (date of issue).




 

The Group has reported a loss before tax of £1.1m (2019: profit of £7.0m). The underlying profit before tax was £8.2m (2019: profit of £5.8m).

 

The results for the year were overshadowed by the impact of COVID-19, which negatively impacted the Group in four ways.  Firstly, the Bank of England Base Rate reduction from 0.75% to historical lows of 0.1% cost the Group an estimated £10.3m. The majority of loans to customers repriced to lower rates reducing interest income by £6.7m. At the same time the Group continued its cautious approach to liquidity, maintaining low loan to deposit ratios and keeping high levels of cash reserves at the Bank of England. At the start of the pandemic, the Group made the conscious decision to further increase liquidity while economic uncertainty remains. Surplus liquidity resources above the minimum Regulatory requirement increased from £300m at the end of March to in excess of £600m at the end of December, which in turn exacerbated the impact of the reduction in the Bank of England Base Rate. The reduced income on excess liquidity resources made up the remaining £3.6m of lost revenue.

 

Secondly, in response to the emergence of the pandemic, in the second quarter, the Bank significantly reduced its credit appetite due to uncertainty in the global economy. As a result, the loan book remained flat from 2019 at £1.6bn.

 

Thirdly, credit provisions required under IFRS 9 increased by £2m from the prior year. £1.1m of the charge was recorded in Renaissance Asset Finance, mainly as a result of its exposure to the London taxi market, as the sector experienced significant slow-down due to the pandemic. Due to wider economic uncertainty caused by the COVID-19 outbreak, the probability weighting of the future economic scenarios modelled in the IFRS 9 expected credit loss assessment were revised. This resulted in an average net decline in property prices of 5.5% compared to 1.8% in 2019, increasing provisions by £0.3m.

 

Lastly, following the PRA's statement in 2020, Secure Trust Bank did not pay a dividend in 2020, reducing income on our financial investment by £1.5m compared to 2019.

 

As highlighted in the Interim Report, the Group has prudently implemented cost control measures to offset the lost revenue caused by the pandemic, which included the cancellation of discretionary employee bonuses for 2020. However, no employees have been placed on furlough or been made redundant in 2020.

 

Other than the impacts from COVID-19 on the Group listed above, there were also one-off items included that need further explanation to understand the movement in the underlying results.

 

Further investment into ASFL lowered the reported profits by £1.0m (2019: £1.2m). The pandemic also significantly reduced credit appetite in this business unit and as a result lending volumes were subdued and customer balances reduced by £1.4m from 2019. In the fourth quarter credit appetite returned with strong levels of new business enquiries received, which converted into pipeline business expected to draw in early 2021.

 

In 2020 the Group started a significant refurbishment programme on one of its properties carried as inventory, King Street, which is expected to complete in the middle of 2021. This resulted in reduced rental income of £1.5m compared to the prior year.

 

Strong levels of capital and liquidity allowed the Group to take advantage of the opportunity to acquire Asset Alliance Group Holdings Limited, which is expected to complete on 31 March 2021. This business is expected to significantly contribute to Group profitability. The current year results include £1m of costs relating to the acquisition.

 

Finally, the prior year underlying profit reconciliation includes £1.5m relating to the adjustment of the RAF management earn out liability and also a £0.9m reduction in profit to reflect the full year impact of the interest payable on the subordinated debt issued on 3 June 2019.

 

The Group's Basic Earnings per share ("EPS") was negative 8.9p (2019: positive 41.2p) or on an underlying basis the EPS was 57.2p (2019: 32.8p).

 

Total operating income earned by the Group remained flat at £72.5m. The average net margin on lending was 4.1%, down from the 4.5% recorded in 2019. This was as a result of reduced yields on lending linked to the BoE base rate, partly offset by the cost of deposits falling from 0.66% to 0.54%. Fees and commissions increased by £0.6m to £14.4m, due to growth in ACABL. During the course of the year Assets Under Management ("AUM") increased £40m to £1.15bn (2019: £1.11bn).

 

The Group's operating expenses increased by £1.2m or 2% from 2019. This is largely as a result of the full year impact from 2019 employee hires and 2020 employee hires, together with the acquisition costs of £1m associated with Asset Alliance Group Holdings Limited.

 

Overall the return on equity for the Group was negative 0.6% (2019: positive 3.0%). The target return on equity remains in the mid-teen range when the surplus capital has been deployed, the cost income ratio is reduced as the benefits of scale are realised by the additional lending, and once the exceptional Base Rate cut is reversed.

 

Balance Sheet Strength




2020

2019

Summarised Balance Sheet

£000

£000

Assets



Loans and advances to customers

1,587,849

1,599,053

Liquid assets

1,091,758

815,126

Other assets

173,929

181,200

Total assets

2,853,536

2,595,379




Liabilities



Customer deposits

2,365,207

2,084,903

Other liabilities

294,306

302,141

Total liabilities

2,659,513

2,387,044

Equity

194,023

208,335

Total equity and liabilities

2,853,536

2,595,379

 

Total assets increased to £2.9bn (2019: £2.6bn), which was mainly as a result of the growth of customer deposits with the resultant excess funds placed on deposit at the Bank of England. The Group maintained its conservative funding policy of relying only on retail deposits and targeting a loan to deposit ratio of between 65-80%. Included in other assets is the Group's investment property, which is held at fair value of £6.6m (2019: £6.8m). Also included in other assets are £88m of properties classified as inventory (2019: £75.2m). These properties are being refurbished with a view to sell. Other assets and other liabilities also include £17.7m (2019: £19.4m) and £18.3m (2019: £19.8m) respectively relating to right-of-use assets and lease liabilities. This is as the result of the implementation of IFRS 16 (leases) in 2019.

 

The net assets of the Group now stand at £12.70 per share (2019: £13.64). The decrease is mainly attributable to the £13.2m fall in the value of the Secure Trust Bank ("STB") shares (held as a financial investment) recorded through Other Comprehensive Income.

 

Segmental Analysis

The segmental analysis is shown in more detail in Note 43. The Group is organised into seven operating segments as disclosed below:

 

1)   Banking - Includes Private and Commercial Banking. Private Banking - Provides traditional private banking services as well as offering financial planning and investment management services and includes services provided in the Dubai branch.  Commercial Banking - Provides bespoke commercial banking services and tailored secured lending against property investments and other assets.

2)   Mortgage Portfolios - Acquired mortgage portfolios.

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

4)   ACABL - Provides finance secured on either invoices, assets or stock of the borrower.

5)   ASFL - Provides short term secured lending solutions to professional and entrepreneurial property investors.

6)   All Other Divisions - All other smaller divisions and central costs in Arbuthnot Latham & Co., Ltd (Investment property and Central unallocated items)

7)   Group Centre - ABG Group management.

 

During the year the Group changed the way it manages and reports the Banking sector, combining the Private Banking and Commercial Banking sector into a single Banking sector. This is the level at which management decisions are made and how the Group will manage the overall business sectors going forward with the anticipated growth in subsidiary businesses. The comparative numbers for the Banking division have therefore been restated to include Private and Commercial Banking.

 

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.

 

Banking




2020

2019

Summarised Income Statement

£000

£000

Net interest income

42,039

45,258

Net fee and commission income

11,369

11,801

Operating income

53,408

57,059

Operating expenses - direct costs

(18,839)

(21,910)

Operating expenses - indirect costs

(30,668)

(24,775)

Impairment losses - loans and advances to customers

(1,576)

(165)

Profit before tax

2,325

10,209

 

Banking reported a profit before tax of £2.3m (2019: £10.2m). This is a decrease of £7.9m or 77%. This decrease is largely due to lower interest income earned on lending balances and excess customer deposits placed at the Bank of England, due to the reduction in the Bank of England Base Rate.

 

AUM remained flat at £1.1bn and as a result, fee and commission income remained fairly flat year on year at £11.4m (2019: £11.8m).

 

An increase in indirect costs of £5.9m was partially offset by a decrease in direct costs as a result of the suspension of bonus payments of £2.4m. Indirect costs from support departments increased due to the full year impact of 2019 and 2020 staff hires and the costs associated with various IT projects. The average customer yield was 4.1% (2019: 4.5%).

 

The customer loan balances increased by £27m to £1,134m and customer deposits also increased to £1,904m (2019: £1,863m).  The average loan to value was 53.4% (2019: 54%).

 

The Dubai office is scheduled to close at the end of May following a strategic review. The business introduced a good number of new client relationships to the Bank, but it was decided that the high cost base could be applied more effectively in other areas of the Group to contribute towards the future growth plans.

 

Mortgage Portfolios




2020

2019

Summarised Income Statement

£000

£000

Net interest income

5,951

4,113

Operating income

5,951

4,113

Operating expenses - direct costs

(1,624)

(807)

Impairment losses - loans and advances to customers

(115)

 -  

Profit before tax

4,212

3,306

 

The Mortgage Portfolios reported a profit of £4.2m (2019: £3.3m). This is an increase on the prior year of 27%, mainly as a result of the full year impact of the Santiago mortgage portfolio acquired in August 2019. The Santiago mortgage portfolio performed as expected generating a gross yield of 3.5% (2019: 3.8%). Customers taking advantage of payment holidays as a result of COVID-19 peaked at 27% in the year and closed the year at 1.7%.

 

On 26 February 2021, the Group agreed terms to sell the Tay mortgage portfolio to a subsidiary of OneSavings Bank. The portfolio was reaching the point of becoming subscale in terms of servicing and the yield had declined. The sale generated a net gain of £2.2m, although future revenues will be forgone.

 

RAF




2020

2019

Summarised Income Statement

£000

£000

Net interest income

6,021

5,873

Net fee and commission income

130

207

Operating income

6,151

6,080

Other income

73

64

Operating expenses - direct costs

(2,975)

(3,577)

Impairment losses - loans and advances

(1,154)

(708)

Profit before tax

2,095

1,859

 

Renaissance Asset Finance recorded a profit before tax of £2.1m (2019: £1.9m), which is an increase of 13% from the previous year and includes a number of early redemption fees as loans were settled early as borrowers switched to the government lending schemes to lower their cost of funding.

 

Net interest income increased by £0.1m while costs decreased by £0.6m. Impairments increased from £0.7m to £1.2m due to increased IFRS 9 provisions, mainly as a result of the exposure to the London taxi market. Due to the pandemic loan balances under forbearance measures peaked at 71% during the year and closed at 17% at year-end.

 

The customer loan balances decreased by 11% to close the year at £91.9m (2019: £102.9m) and the average yield for 2020 was 8.9%, compared to 9.1% for 2019. The reduction in customer loan balances was the combined result of lower demand from the SME sector together with revised credit appetite as a result of the pandemic. Reduced competition from other asset finance providers, the return of business activity in affected sectors as well as new business activity from business sectors experiencing growth, for example food distribution, internet delivery, the essential services and IT sectors, are all expected to stabilise and contribute to future growth of the loan book.

 

Arbuthnot Commercial Asset Based Lending ("ACABL")




2020

2019

Summarised Income Statement

£000

£000

Net interest income

2,732

1,345

Net fee and commission income

2,403

1,377

Operating income

5,135

2,722

Operating expenses - direct costs

(3,130)

(2,708)

Impairment losses - loans and advances to customers

 -  

10

Profit / (loss) before tax

2,005

24

 

ACABL recorded a £2m profit before tax (2019: £24k) and also during the year achieved positive cumulative reserves.

 

Customer loan balances increased to £87.3m (2019: £75.9m) at the end of the year, with issued facilities increasing to £243.8m from £130.1m in 2019.

 

Arbuthnot Specialist Finance ("ASFL")




2020

2019

Summarised Income Statement

£000

£000

Net interest income

536

71

Net fee and commission income

3

 -  

Operating income

539

71

Operating expenses - direct costs

(1,547)

(1,275)

Impairment losses - loans and advances to customers

(4)

(4)

Loss before tax

(1,012)

(1,208)

 

ASFL recorded a loss before tax of £1.0m (2019: loss of £1.2m), as the Group continues to fund the start-up costs for this business.

 

Customer loan balances closed the year at £6.0m (2019: £7.4m). Higher interest income from the full year impact of 2019 drawn balances, was partly offset by increased costs. Reduced credit appetite due to the pandemic resulted in lower than expected customer balances, but revised appetite in Q4 has led to increased business enquiries, which are expected to draw down in early 2021.

 

Other Divisions




2020

2019

Summarised Income Statement

£000

£000

Net interest income

3,389

3,738

Net fee and commission income

537

443

Operating income

3,926

4,181

Other income

1,445

4,955

Operating expenses - direct costs

(6,680)

(7,170)

(Loss) / Profit before tax

(1,309)

1,966

 

The aggregated loss before tax of other divisions was £1.3m (2019: profit of £2.0m). 

 

Reported within the other divisions in other income was rental income on our Property portfolio of £0.5m (2019: £2.1m). £1.5m of the reduction in rental income from the prior year is due to the King Street property being vacant while extensive refurbishment works are carried out. In the prior year other income also included a £1.5m adjustment to the RAF management earn out liability.

 

Group Centre




2020

2019

Summarised Income Statement

£000

£000

Net interest income

(146)

(141)

Subordinated loan stock interest

(2,464)

(1,620)

Operating income

(2,610)

(1,761)

Other income

 -  

1,420

Operating expenses

(6,796)

(8,804)

Loss before tax

(9,406)

(9,145)

 

The Group costs increased to £9.4m (2019: £9.1m). The full year impact of the subordinated loan issued in 2019, increased costs by £0.8m.

 

No dividends were received from STB during the year due to the ongoing pandemic, which reduced other income by £1.4m

 

The increased costs and loss of other income was partially offset by the suspension of bonuses, which reduced operating expenses by £1.5m.

 

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 and the individual banking operation, are authorised by the Prudential Regulation Authority ("PRA") and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and are subject to EU Capital Requirement Regulation (EU No.575/2013) ("CRR") which forms part of the retained EU legislation (EU legislation which applied in the UK before 11.00 p.m. on 31 December 2020 has been retained in UK law as a form of domestic legislation known as 'retained EU legislation') and the PRA Rulebook for CRR firms. One of the requirements for the Group and the individual banking operation is that capital resources must be in excess of capital requirements at all times. 

 

In accordance with the parameters set out in the PRA Rulebook, the Internal Capital Adequacy Assessment Process ("ICAAP") is embedded in the risk management framework of the Group. The ICAAP identifies and assesses the risks to the Group, considers how these risks can be mitigated and demonstrates that the Group has sufficient resources, after mitigating actions, to withstand all reasonable scenarios.  

 

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 requirement for credit, market and operational risk as a starting point, and then considers whether each of the calculations delivers a sufficient amount of capital to cover risks to which the Group is, or could be, exposed. Where the Board considers that the Pillar 1 calculations do not adequately cover the risks, an additional Pillar 2A capital requirement is applied. The PRA will set a Pillar 2A capital requirement in light of the calculations included within the ICAAP. The Group's Total Capital Requirement, as issued by the PRA, is the sum of the minimum capital requirements under the CRR (Pillar 1) and the Pillar 2A requirement.

 

The ICAAP document will be updated at least annually, or more frequently if changes in the business, strategy, nature or scale of the Group's activities or operational environment suggest that the current level of capital resources are no longer adequate. The ICAAP brings together the management framework (i.e. the policies, procedures, strategies, and systems that the Group has implemented to identify, manage and mitigate its risks) and the financial disciplines of business planning and capital management.  The Group's regulated entity is also the principal trading subsidiary as detailed in Note 42.

 

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

•     Common equity Tier 1 ("CET1"), which comprises shareholder funds less regulatory deductions for intangible assets, including goodwill, deferred tax assets that do not arise from temporary differences, and, if in excess of the CRR thresholds, a portion of the Group's non-significant investment in a financial institution, Secure Trust Bank ("STB").

•     Tier 2 comprises qualifying subordinated loans.

 

Capital ratios are reviewed on a monthly basis to ensure that external requirements are adhered to.  All regulated trading entities have complied with all of the externally imposed capital requirements to which they are subject.

 


2020

2019

Capital ratios

£000

£000

CET1 Capital Instruments*

195,979

219,627

Deductions

(15,393)

(41,983)

CET1 Capital after Deductions

180,586

177,644

Tier 2 Capital

37,656

36,837

Own Funds

218,242

214,481




CET1 Capital Ratio (CET1 Capital/Total Risk Exposure)

15.4%

14.4%

Total Capital Ratio (Own Funds/Total Risk Exposure)

18.7%

17.3%

* Includes year-end audited result.



 

Risks and Uncertainties

The Group regards the monitoring and controlling of risks and uncertainties as a fundamental part of the management process.  Consequently, senior management are involved in the development of risk management policies and in monitoring their application.  A detailed description of the risk management framework and associated policies is set out in note 6.

 

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

 

Reputational risk

Reputational risk is the risk to the Group from a failure to meet reasonable stakeholder expectations as a result of any event, behaviour, action or inaction by ABG itself, its employees or those with whom it is associated. This includes the associated risk to earnings, capital or liquidity.

 

ABG seeks to ensure that all of it businesses act consistently with the seven corporate principles as laid out on page 1 of the Annual Report and Accounts. This is achieved through a central Risk Management framework and supporting policies, the application of a three-lines of defence model across the Group and oversight by various committees. Employees are supported in training, studies and other ways and encouraged to live out the cultural values within the Group of integrity, energy and drive, respect, collaboration and empowerment. In applying the seven corporate principles, the risk of reputational damage is minimised as the Group serves its shareholders, customers and employees with integrity and high ethical standards.  

 

Macroeconomic and competitive environment

The Group is exposed to indirect risks that may arise from the macroeconomic and competitive environment.

 

Coronavirus

The COVID-19 pandemic has had, and continues to have, a material impact on all businesses around the world and the markets in which they operate. There are a number of factors associated with the pandemic and its impact on global economies that could have a material adverse effect on (among other things) the profitability, capital and liquidity of financial institutions.

 

To ensure an appropriate response to the pandemic, management scrutinised key risks emerging from the crisis and their impact on the Group's risk profile. The Board's discussions focused on operational resilience, liquidity and funding considerations, customer vulnerability, and the impact of material increases in forbearance requests on the Group's credit portfolios and on its operational capacity.

 

The pandemic has caused disruption to the Group's clients, suppliers and employees globally. The markets in which the Group operates have implemented severe restrictions on the movement of their respective populations, with a resultant significant impact on economic activity. These restrictions are being determined by the governments of individual jurisdictions (including through the implementation of emergency powers) and impacts (including the timing of implementation and any subsequent lifting of restrictions) may vary from jurisdiction to jurisdiction.

 

Schemes have been initiated by the Bank of England, national governments and regulators to provide financial support to parts of the economy most impacted by the COVID-19 pandemic. These schemes have been designed and implemented at pace, which has allowed the Group to continue meeting clients' requirements with employees monitoring operational issues which may arise in their implementation.

 

Furthermore, the Group relies on models to support a broad range of business and risk management activities, including informing business decisions and strategies, measuring and limiting risk, valuing exposures (including the calculation of impairment), conducting stress testing and assessing capital adequacy. Management regularly meet to discuss the impact of COVID-19 and review data to mitigate any potential negative effects.

 

The details of how these schemes will impact the Group's clients in the long term remains uncertain at this stage. However, certain actions (such as the introduction of payment holidays for certain lending products or the cancellation or waiver of fees associated with certain products) may impact the effective interest rate earned on certain of the Group's portfolios and fee income being earned on certain products.

 

The significant business risks that may arise from the economic shock in addition to the reduction in interest rates as detailed in the Strategic Report are:

a)    Increased credit risk as borrowers are unable to continue to meet their interest obligations as they fall due. It is also currently unclear precisely how the withdrawal of the Government's announced package of measures will affect this clear risk.

b)    The uncertainty in the economy could result in a significant fall in the collateral values of our security held against the loans. At the beginning of the pandemic the Royal Institute of Charter Surveyors ("RICS") issued a statement suggesting that any valuations they may produce in the current environment would be subject to a warning that the values vary significantly. However, property prices have held up and transaction volumes and other relevant evidence is starting to return to levels adequate to base valuation opinions on. Also, the average loan to value of our property backed lending book is 53.4%, so to have a material impact, this fall in collateral values would have to be severe and prolonged.

c)     A prolonged reduction in business activity will affect our ability to generate new business opportunities, in which case repayments in our current lending portfolios will be greater than new originations, which will lead to an overall fall in the Group's customer lending balances and the associated revenue that this generates. At the start of the pandemic the Group significantly reduced its credit appetite due to uncertainty in the global economy, which resulted in the loan book remaining flat from the prior year. However, since re-instating credit appetite to pre-pandemic levels in the third quarter, the Group has generated a significant pipeline of business.

d)    The economic shock could also lead to a fall in valuations in the Groups investment properties and those properties held in inventory. As mentioned under point (b) above, transaction volumes are starting to return and property prices have held up since the start of the pandemic more than a year ago.

e)     As the revenues earned by the Group's Investment Management business are directly linked to the balances managed on behalf of our clients, any reduction in these values due to market movements will have a corresponding impact on these revenues. AUM initially reduced to close the first half 3% down from what was reported at 31 December 2019, however, despite market volatility, the Wealth Management team continued to attract criteria clients and AUMs closed the year 4% ahead of the prior year.

 

Brexit

The Brexit transition period came to an end on 31 December 2020 and the EU and UK agreed the Trade and Cooperation Agreement on 24 December 2020, which is provisionally applicable from 1 January 2021. There is still some uncertainty around the long term consequences of Brexit. The Group's only overseas operation in Dubai is in the process of being closed, so the vast majority of the Group's income and expenditure is based in the UK. The Group will continue to monitor the implications of Brexit on the wider economy as the future relationship with the EU develops.

 

Climate change

Climate change presents financial and reputational risks for the banking industry. The Board consider Climate change a material risk as per the Board approved risk appetite framework which provides a structured approach to risk taking within agreed boundaries. The assessment is proportional at present but will develop over time as the Group generates further resources and industry consensus emerges. The assessment is maintained by the Chief Risk officer and has been informed by the ICAAP review and workshops for employees.

 

Whilst it is difficult to assess how climate change will unfold, the Group is continually assessing various risk exposures. The UK has a legally binding target to cut its greenhouse gas emissions to "net-zero" by 2050. There is growing consensus that an orderly transition to a low-carbon economy will bring substantial adjustments to the global economy which will have financial implications while bringing risks and opportunities.

 

The risk assessment process has been integrated into existing risk frameworks and will be governed through the various risk governance structures including review and recommendations by the Arbuthnot Latham Risk Committee. Arbuthnot Latham has been assessed against the Task Force on Climate-related Financial Disclosures' ("TCFD") recommended disclosures and where appropriate the FCA/PRA guidance as per the Supervisory Statements.

 

In accordance with the requirements of the PRA's Supervisory Statement 'Enhancing banks' and insurers' approaches to managing the financial risks from climate change', the Group has allocated responsibility for identifying and managing the risks from climate change to the relevant existing Senior Management Function. The Bank is continuously developing a suitable strategic approach to climate change and the unique challenges it poses.

 

The FCA have issued 'Climate Change and Green Finance: summary of responses and next steps'. In addition to the modelling of various scenarios and various governance reviews, the Group will continue to monitor requirements through the relationship with UK Finance.

 

Strategic risk

Strategic risk is the risk that the Group's ability to achieve its corporate and strategic objectives may be compromised. This risk is particularly important to the Group as it continues its growth strategy. However, the Group seeks to mitigate strategic risk by focusing on a sustainable business model which is aligned to the Group's business strategy. Also, the Board of Directors usually 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 (borrower) will be unable to pay amounts in full when due. This risk exists in Arbuthnot Latham, which currently has a loan book of £1,588m (2019: £1,599m). The lending portfolio in Arbuthnot Latham is extended to clients, the majority of which is secured against cash, property or other high quality assets. Credit risk is managed through the Credit Committee of Arbuthnot Latham.

 

Market risk

Market risk arises in relation to movements in interest rates, currencies, property and equity markets. The Group's treasury function operates mainly to provide a service to clients and does not take significant unmatched positions in any market for its own account.  As a result, the Group's exposure to adverse movements in interest rates and currencies is limited to interest earnings on its free cash and interest rate re-pricing mismatches. The Group actively monitors its exposure to future changes in interest rates.

 

The Group is exposed to changes in the market value of its properties. The current carrying value of Investment Property is £6.6m and properties classified as inventory are carried at £88m. Any changes in the market value of the property will be accounted for in the Income Statement for the Investment Property and could also impact the carrying value of inventory, which is at the lower of cost and net realisable value. As a result, it could have a significant impact on the profit or loss of the Group.

 

The Group has a 9.76% interest in Secure Trust Bank. This is currently recorded in the Group's balance sheet as a Financial Investment.  The carrying value is adjusted to market value at each balance sheet date, according to the share price of Secure Trust Bank. Any gains or losses that arise are recorded in Other Comprehensive Income.

 

Liquidity risk

Liquidity risk is the risk that the Group, although solvent, either does not have sufficient financial resources to enable it to meet its obligations as they fall due, or can only secure such resources at an excessive cost. The Group takes a conservative approach to managing its liquidity profile. Retail client deposits and drawings from the Bank of England Term Funding Scheme fund the Group. The loan to deposit ratio is maintained at a prudent level, and consequently the Group maintains a high level of liquidity. The Arbuthnot Latham Board annually approves the Internal Liquidity Adequacy Assessment Process ("ILAAP"). The Directors model various stress scenarios and assess the resultant cash flows in order to evaluate the Group's potential liquidity requirements. The Directors firmly believe that sufficient liquid assets are held to enable the Group to meet its liabilities in a stressed environment.

 

Operational risk

Operational risk is the risk that the Group may be exposed to financial losses from conducting its business. The Group's exposures to operational risk include its Information Technology ("IT") and Operations platforms. There are additional internal controls in these processes that are designed to protect the Group from these risks. The Group's overall approach to managing internal control and financial reporting is described in the Corporate Governance section of the Annual Report.

 

During the year there was significant focus on the potential operational risks arising from the change in working practices due to the pandemic, particularly the move to home-working in order to protect employees and support clients through the crisis. Management attention also focused heavily on operational resilience to ensure that planning, controls and operational activities remained robust and appropriate. The Bank ensured that all employees had access to equipment to complete their work with all employees working from home for the majority of the year.

 

The Group's control environment was continually monitored to ensure that the challenges posed by adapting to the impact of COVID-19 were safely addressed. There was also continued oversight of the Group's preparations for the end of the transition period, following the UK's exit from the EU, to ensure that processes and systems are appropriate to ensure continuity of service for customers.

 

Cyber risk

Cyber risk is an increasing risk for the Group within its operational processes. It is the risk that the Group is subject to some form of disruption arising from an interruption to its IT and data infrastructure. The Group regularly tests the infrastructure to ensure that it remains robust to a range of threats, and has continuity of business plans in place including a disaster recovery plan.

 

Conduct risk

As a financial services provider we face conduct risk, including selling products to customers which do not meet their needs, failing to deal with clients' complaints effectively, not meeting clients' expectations, and exhibiting behaviours which do not meet market or regulatory standards.

 

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

 

Regulatory and capital risk

Regulatory and capital risk includes the risk that the Group will have insufficient capital resources to support the business and/or does not comply with regulatory requirements. The Group adopts a conservative approach to managing its capital. The Board of Arbuthnot Latham approves an ICAAP annually, which includes the performance of stringent stress tests to ensure that capital resources are adequate over a three year horizon. Capital and liquidity ratios are regularly monitored against the Board's approved risk appetite as part of the risk management framework.

 

Regulatory change also exists as a risk to the Group's business. Notwithstanding the assessments carried out by the Group to manage the regulatory risk, it is not possible to predict how regulatory and legislative changes may alter and impact the business. Significant and unforeseen regulatory changes may reduce the Group's competitive situation and lower its profitability.

 

Stakeholder Engagement and S. 172 (1) Statement

This section of the Strategic Report describes how the Directors have had regard to the matters set out in section 172 (1) (a) to (f) of the Companies Act 2006 when making decisions. It forms the Directors' statement required by Arbuthnot Banking Group as a large-sized company under section 414CZA of the Act.

 

The Directors have acted in a way that they considered, in good faith, to be most likely to promote the success of the Company for the benefit of its members as a whole, and in doing so had regard, amongst other matters, to:

•      the likely consequences of any decision in the long term;

•      the interests of the Company's employees;

•      the need to foster the Company's business relationships with suppliers, customers and others;

•      the impact of the Company's operations on the community and the environment;

•      the desirability of the Company maintaining a reputation for high standards of business conduct; and

•      the need to act fairly as between members of the Company.

 

The stakeholders we consider in this regard are our shareholders, employees, customers, suppliers, regulators and the environment in which we operate.

 

The Arbuthnot Principles and Values set out on page 1 explain the Board's approach to its stakeholders.  Details of how the Directors had regard to the interests of its key stakeholders during the year are set out below, in the Group Directors Report on page 25 and in the Corporate Governance Report on page 32.

 

Likely consequences of any decision in the long term

The Directors make their decisions to ensure that long-term prospects are not sacrificed for short term gain, reflecting the values and support of Sir Henry Angest, Chairman and Chief Executive and majority shareholder, which have proved successful in creating and maintaining value for all shareholders for over 40 years.  This was demonstrated in the year by a number of Board decisions.

 

In November 2020, notwithstanding the uncertainties arising from the pandemic and Brexit, the Board approved the acquisition of Asset Alliance Group Holdings. It judged this to be complementary to the Group's strategy to diversify its income stream with higher yielding assets, whilst not affecting its risk profile. It was also seen as a typical Arbuthnot opportunistic moment to buy a good business, constrained by external uncertainties and by funding which the Bank is able to supply. 

 

Secondly the Board reaffirmed its decision, taken as part of the annual budget, to maintain significant investment in modern technology in order to grow the Group's businesses, principally the new integrated Client Relationship Management (CRM) platform introduced in July. Investment in technology continued with the roll out ahead of the first national lockdown of Microsoft 365, including Teams for meetings, which enabled efficient remote working. Amortisation of this investment began at a time of pressure on the Group's profitability due to the shortfall in income resulting from the impact on margins of the Bank of England base rate cuts in March 2020. Income was further reduced by the absence of growth in lending as a result of the decision to tighten credit appetites which was relaxed in September once the impact of the unprecedented extent of Government intervention in the economy became known. This typically cautious long-term approach led to a slower recovery from the damaging impact of the base rate cuts than would have otherwise occurred, whilst also limiting the extent of bad debts.

 

A further illustration of the balancing of the interests of our stakeholders in their long-term interest was the decision to withdraw the dividend declared in March 2020 in response to the statement by the PRA on deposit takers' approach to dividends. Following the relaxation of this position by the PRA in December 2020, advising that it is for bank boards to determine the appropriate level of distributions, the Board decided in February 2021 to pay the withdrawn dividend which related to 2019 profits and also not to recommend a final dividend for 2020. The Board will continue to consider any future dividends to shareholders in a prudent manner, ensuring they are properly planned in line with business growth and potential bad debt experience.

 

Interests of the Company's employees

The Company has fewer than 20 employees, all of whom have direct access to Board members. As such, it has not been deemed necessary to appoint an employee representative to the Board, nor a formal workforce advisory panel, nor a designated non-executive Director. As explained in the section 172 (1) Statement of Arbuthnot Latham, the Company's operating subsidiary, one of that company's non-executive directors and its Whistleblowing Champion, has been designated by its board as the director to engage with the Group's workforce.  Employees are able to raise concerns in confidence with the HR Team, with grievances followed up in line with a specified process which satisfies all legal requirements. There is also protection for employees deriving from the Public Interest Disclosure Act 1998. Any material whistleblowing events are notified to the Board and to the applicable regulator.

 

The Board receives an update on human resource matters at each of its meetings. Early on in the pandemic, the decision was taken to prioritise job retention and not to furlough any employees, whilst awarding no bonuses for 2020, in order to protect the business. There were regular communications during the year including two Employee Surveys undertaken in order to support employees, reassure them over job security and to seek their views on the eventual return to office working. Each survey showed high engagement and positive responses, reflecting the efforts made to reassure employees by communicating the decisions made to look after them during the period of remote working. In the first survey in April, 94% of employees responded with 90% satisfied. 89% per cent of employees agreed that they had been provided with the necessary IT support to work remotely, within a reasonable timeframe. From the comments received, there was a strong sense that communication had been clear, regular and consistent and had a strong focus on employee wellbeing. There were similarly good responses to the second survey in September which included questions on interest in remote working in future with 92% of employees proud to work for the Group, up from 83% in 2019.

 

Company's business relationships with suppliers, customers and others

The Directors attach great importance to good relations with customers and business partners.  In particular, our clients are integral to our business and forging and maintaining client relationships are core to Arbuthnot Latham's business and crucial for client retention. Regular contact was maintained with clients during the year providing support where possible, mainly by telephone following the closure of offices and some via Microsoft Teams.  In the summer months, our bankers were able to meet some clients in their gardens.  It was decided that the Bank should apply for approval into the Government Loan Schemes (BBLs and CBILs), administered by the British Business Bank, as this was important in being able to meet client expectations.

 

As their needs and expectations change, clients now demand access to their bank and relationship managers through a variety of channels and expect efficient and streamlined processes supported by state of the art technology.  Hence the decision in 2019 to invest in the adoption of modern and integrated CRM technology with the potential to improve significantly front-office operations and help support existing and new clients better. This project was delivered during 2020 with all the training material both created and consumed remotely. 

 

In July the Board of Arbuthnot Latham approved a new relationship with a clearing bank as part of the move to an Extended Hours Service which was launched in December whereby customers are now able to send and receive faster payments 24 hours a day, seven days a week, with the Banking Support team on hand for longer to assist with online banking-related queries.

 

The Company is committed to following agreed supplier payment terms. There is a Supplier Management Framework in place covering governance around the Company's procurement and supplier management activities. For due diligence and compliance purposes, suppliers are assessed through an external registration system. The Modern Slavery Statement, approved by the Board each March as part of its annual review of the Company's stance and approach to the Modern Slavery Act, explains the risk-based approach that the Company has taken to give assurance that slavery and human trafficking are not taking place in its supply chains or any part of its business. 

 

Other stakeholders include the Company's Regulators, the PRA and the FCA, with whom open and regular dialogue is maintained including regular fortnightly calls by the Group Finance Director and Arbuthnot Latham's Chief Risk Officer with the PRA Supervisory team throughout the pandemic.

 

Impact of the Company's operations on the community and the environment

As a financial services company our impact on the environment is limited. Nevertheless, there is growing consensus that an orderly transition to a low-carbon economy will bring structural adjustments to the global economy which will have financial implications, bringing both risks and opportunities. Accordingly, in September, the Board of Arbuthnot Latham considered a report on the Strategic Review of Climate Change Opportunities Report produced, following consideration by its executive directors of the Group's strategic response to climate change as part of the annual strategy and budget process. This year, the Board has approved a new energy and carbon report meeting the requirements of the Streamlined Energy and Carbon Reporting standards, as set out on pages 26 and 27 of the Directors Report.

 

Desirability of the Company maintaining a reputation for high standards of business conduct

The Directors believe that the Arbuthnot culture set out in the Arbuthnot Principles and Values on page 1 manifests itself at Board level and in the external view of the Group as a whole. The importance of the Group's reputation is considered at each Board meeting.  During the year these Principles were encapsulated in five Group values, embedded into day-to-day activities. These values are integrity, respect, empowerment, energy and drive, and collaboration.

 

Acting fairly as between members of the Company

The majority shareholder, Sir Henry Angest, is the Company's Chairman and Chief Executive. There is continuing engagement with other major shareholders and the Directors make their decisions on behalf of all shareholders. In June, the Company made contact with five institutional shareholders in order to understand why they had voted against the resolution at the AGM authorising the making of political donations and incurring of political expenditure, as explained on page 32 of the Corporate Governance Report. The Board continues to believe that it is in the interests of shareholders that it has the flexibility to make political donations in light of prevailing political circumstances over the next few years. It was encouraged by the continued support of its major shareholders. It welcomes engagement with them and will continue to maintain communications via one-to-one meetings as appropriate.

 

Group Directors' Report

 

The Directors present their report for the year ended 31 December 2020.

 

Business Activities

The principal activities of the Group are banking and financial services. The business review and information about future developments, key performance indicators and principal risks are contained in the Strategic Report on pages 4 to 22.

 

Corporate Governance

The Corporate Governance report on pages 29 to 36 contains information about the Group's corporate governance arrangements, including in relation to the Board's application of the UK Corporate Governance Code.

 

Results and Dividends

The results for the year are shown on page 47 of the financial statements. The loss after tax for the year of £1.3m (2019: profit of £6.2m) is included in reserves. The Directors do not recommend the payment of a final dividend (2019: Nil). Since no interim dividend (2019: 16p) was paid in the year, this makes a total dividend per share for the year of Nil (2019: 16p). The second interim dividend of 21p declared by the Directors in last year's Annual Report was withdrawn on 2 April 2020, prior to the finalisation of the resolutions in last year's Notice of Meeting, following the publication by the Prudential Regulation Authority ("PRA") of a statement on deposit takers' approach to dividends. This dividend of 21p per share was paid as a special interim dividend on 19 March, 2021, following the PRA statement in December 2020, advising that it is for bank boards to determine the appropriate level of distributions and removing its request not to make shareholder distributions.

 

Directors

The names of the Directors of the Company at the date of this report, together with biographical details, are given on page ##GBOARD of this Annual Report. All the Directors listed on those pages were directors of the Company throughout the year.

 

Mr. J.R. Cobb and Mr. I.A. Dewar being eligible, offer themselves for re-election under Article 78 of the Articles of Association. Mr. Cobb has a service agreement terminable on twelve months' notice. Mr. Dewar, an independent non-executive director, has a letter of appointment terminable on three months' notice.

 

Viability Statement

In accordance with the UK Corporate Governance Code, the Directors confirm that there is a reasonable expectation that the Group will continue to operate and meet its liabilities, as they fall due, for the three-year period up to 31 December 2023. A period of three years has been chosen because it is the period covered by the Group's strategic planning cycle and also incorporated in the Individual Capital Adequacy Assessment Process ("ICAAP"), which forecasts key capital requirements, expected changes in capital resources and applies stress testing over that period.

 

The Directors' assessment has been made with reference to:

•     the Group's current position and prospects - please see the Financial Review on pages 10 to 22;

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

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

 

The Group's strategy and three-year plan are evaluated and approved by the Directors annually. The plan considers the Group's future projections of profitability, cash flows, capital requirements and resources, and other key financial and regulatory ratios over the period. The ICAAP is embedded in the risk management framework of the Group and is subject to ongoing updates and revisions when necessary. The ICAAP process is used to stress the capital position of the Group over the three-year planning period. It is updated at least annually as part of the business planning process.

 

Going Concern

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

 

Share Capital

The Company has in issue two classes of shares, Ordinary shares and Ordinary Non-Voting shares. The Non-Voting shares rank pari passu with the Ordinary shares, including the right to receive the same dividends as the Ordinary shares, except that they do not have the right to vote in shareholder meetings.

 

Authority to Purchase Shares

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 issued Ordinary and Ordinary Non-Voting share capital. The Directors will keep the position under review in order to maximise the Company's resources in the best interests of shareholders. Details of the resolution renewing this authority are included in the Notice of Meeting on page ##NOAGM. During the year the Company purchased 7,730 Ordinary Non-Voting shares to be held in Treasury. The maximum number of Treasury shares held at any time during the year was 390,274 Ordinary shares and 19,040 Ordinary Non-Voting shares of 1p each.

 

Financial Risk Management

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

 

Directors' Interests

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

 

Beneficial Interests - Ordinary shares

1 January 2020

31 December 2020

24 March 2021

%

Sir Henry Angest

8,351,401

8,351,401

8,351,401

56.1

N.P.G. Boardman

 -  

7,270

11,348

0.1

J.R. Cobb

6,000

6,000

6,000

 -  

A.A. Salmon

51,699

51,699

51,699

0.3






Beneficial Interests - Ordinary Non-Voting shares

1 January 2020

31 December 2020

24 March 2021

%

Sir Henry Angest

83,513

83,513

86,674

64.9

J.R. Cobb

60

60

60

 -  

A.A. Salmon

516

516

516

0.4

 

Substantial Shareholders

The Company was aware at 8 March 2021 of the following substantial holdings in the Ordinary shares of the Company, other than those held by one director shown above:

 

Holder


Ordinary Shares

%

Liontrust Asset Management

1,464,851

9.8

Slater Investments


585,638

3.9

Mr. R Paston


529,130

3.6

Unicorn Asset Management


484,522

3.3

M&G Investment Management


482,010

3.2

 

Significant Contracts

No Director, either during or at the end of the financial year, was materially interested in any contract with the Company or any of its subsidiaries, which was significant in relation to the Group's business. At 31 December 2020, one Director had a loan from Arbuthnot Latham & Co., Limited amounting to £501k (2019: £503k) and four directors had deposits with Arbuthnot Latham amounting to £3,928k (2019: £3,065k), all on normal commercial terms as disclosed in Note 41 of the financial statements.

 

Directors' Indemnities 

The Company's Articles of Association provide that, subject to the provisions of the Companies Act 2006, the Company may indemnify any Director or former Director in respect of liabilities (and associated costs and expenses) incurred in connection with the performance of their duties as a Director of the Company or any subsidiary and may purchase and maintain insurance against any such liability. The Company maintained directors and officers liability insurance throughout the year.

 

Employee Engagement

The Company gives due consideration to the employment of disabled persons and is an equal opportunities employer.  It also regularly provides employees with information on matters of concern to them, consults on decisions likely to affect their interests and encourages their involvement in the performance of the Company through regular communications and in other ways. Further information on employee engagement is given in the Strategic Report on page 21.

 

Engagement with Suppliers, Customers and Others

Information on engagement with suppliers, customers and other stakeholders is given in the Strategic Report on pages 21 and 22 under the S. 172 statement.

 

Streamlined Energy & Carbon Reporting

From 2020 large unquoted companies that have consumed more than certain amounts of energy in the reporting period are required to include energy and carbon information. This requirement is due to the Companies (Directors' Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018. These Regulations implement the Government's policy on Streamlined Energy and Carbon Reporting (SECR) to support businesses in understanding their Carbon emissions and to help them establish plans to become Net Zero by 2050.

 

The Company has worked with a specialist energy management consultancy, Carbon Decoded, to gather the information to be reported:

 

•      All energy in line with Greenhouse Gas Reporting (GHG): Scope One - gas and owned transport, Scope Two - electricity and Scope Three - non-owned transport used for business.

•      An intensity metric to enable year on year improvements to be tracked.

•      A brief methodology explaining information sources and calculations used.

•      The energy saving actions taken in the year to help the Group reduce its environmental impact.

 

Reporting Methodology

•      Data has been collected for electricity, gas and transport.

•      GHG Protocol Corporate Accounting and Reporting Standard has been followed where relevant.

•      Data was collected specifically for the purpose of SECR reporting.

•      The 2019 and 2020 Government conversion factors for company reporting were used for all calculations of carbon emissions.

•      Data was estimated where landlords do not provide separate energy data.  This was based on floor areas and industry benchmarks.

 

The baseline year for comparison purposes to show improvements in emissions has been chosen as 2019 due to COVID-19 disruptions to the business in 2020.

 


2020


Baseline 2019

Scope One

kWh

Carbon Tonnes   tCO2e

Intensity    Ratio


kWh

Carbon Tonnes   tCO2e

Intensity    Ratio

Gas - Intensity Ratio kWh/m2

355,415

65

61.5


359,672

66

62.2

Company Vehicles

27,314

7

1.0


88,810

22

1.0

Total

382,729

72



448,482

88


Scope Two








Electricity kWh/m2

1,027,760

240

134.8


1,443,054

369

189.3

Total

1,027,760

240



1,443,054

369


Scope Three








Grey Fleet Vehicles

59,196

14

1.4


168,093

41

1.3

Total

59,196

14



168,093

41


 

Notes:

The reported 2020 figures are not representative of normal business energy use and the reductions compared to the 2019 figures do not reflect actual energy savings, but are as a result of suspending work in office buildings to protect employees during the COVID-19 pandemic and the further decarbonisation of the UK electricity grid.

 

The figures reported have been calculated and independently verified by Carbon Decoded a specialist energy management consultancy.

 

Intensity Ratio

The standard for office energy use is kilowatt-hour per square metre (kWh/m²). These results were compared to Action Energy's Energy Consumption Guide Benchmarks. Transport has been set at kilowatt-hour per mile (kWh/mile).

 

Energy Efficiency Actions

Progress was made in 2020 to understand where energy is specifically used and to increase the number of LED lights, though assessing energy use has proved challenging, given that employees have been working remotely since March 2020. The Head Office in Wilson Street contributes 70% electricity emissions or 167 tonnes of carbon and this is the area that will be the focus in 2021.

 

Political Donations

The Company made political donations of £10,000 to the Conservative Party during the year (2019: £77,000).

 

Branches outside of the UK

During the year Arbuthnot Latham & Co., Limited operated a branch in Dubai which is regulated by the Dubai Financial Services Authority. This office is closing on 31 May 2021.

 

Events after the Balance Sheet Date

In addition to the special interim dividend payment set out above, details of other material post balance sheet events are given in Note 46.

 

Annual General Meeting ("AGM")

The Company's AGM will be held on Wednesday 26 May 2021 at which Ordinary Shareholders will be asked to vote on a number of resolutions. Given the continuing restrictions due to the COVID-19 pandemic, the Board is proposing to hold the Meeting with the minimum attendance required to form a quorum and with the format of the meeting being purely functional. It is assumed that it will not be possible for shareholders to attend in person. Shareholders are requested therefore to submit their votes in respect of the business to be discussed via proxy, appointing the Chairman of the meeting as their proxy. The resolutions, together with explanatory notes about voting arrangements, are set out on pages 139 to 142.

 

Auditor

A resolution for the re-appointment of Mazars LLP as auditor will be proposed at the forthcoming AGM in accordance with section 489 of the Companies Act 2006.

 

Disclosure of Information to the Auditor

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

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

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

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

 

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

 

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

The Directors are responsible for preparing the Strategic Report, the Directors' Report and the Financial Statements in accordance with applicable law and regulations. Company Law requires the Directors to prepare Group and Parent Company Financial Statements for each financial year. As required by the AIM Rules for Companies and in accordance with the Rules of the AQSE Growth Market, they are required to prepare the Group Financial Statements in accordance with International Financial Reporting Standards ("IFRSs") in conformity with the requirements of the Companies Act 2006 and have elected to prepare the Parent Company Financial Statements on the same basis.

 

Financial Statements

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

 

•      select suitable accounting policies and then apply them consistently;

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

•      state whether they have been prepared in accordance with IFRSs in conformity with the requirements of the Companies Act 2006;

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

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

 

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

 

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

 

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

 

 

By order of the Board

 

 

 

 

N D Jennings

Secretary

24 March 2021

 

 

Corporate Governance

 

Introduction and Overview

Arbuthnot Banking Group has a strong and effective corporate governance framework. The Board endorses the principles of openness, integrity and accountability which underlie good governance and takes into account the provisions of the UK Corporate Governance Code, published by the Financial Reporting Council in July 2018 ("the FRC Code"), in so far as they are considered applicable to and appropriate for it, given its size and circumstances, and the role and overall shareholding of its majority shareholder. The Group's banking subsidiary, Arbuthnot Latham & Co., Limited, is authorised by the Prudential Regulatory Authority (the "PRA") and regulated by the Financial Conduct Authority ("FCA") and by the PRA and its Dubai Branch is regulated by the Dubai Financial Services Authority. One of its subsidiaries, Renaissance Asset Finance Limited, is regulated by the FCA. Accordingly, the Group operates to the high standards of corporate accountability and regulatory compliance appropriate for such a business.

 

The Board has decided to report against the FRC Code. This decision was made in light of the requirement in the AIM Rules for Companies that AIM listed companies state which corporate governance code they have decided to apply, how the company complies with that code, and where it departs from its chosen code an explanation of the reasons for doing so. The Rules of the AQSE Growth Market also require the Company to adopt, as far as possible, the principles and standards set down in a recognised UK corporate governance code. This information is published on the Company's website and the Company reviews it each year as part of its annual reporting cycle.  This section of the Annual Report summarises how the Company applies the FRC Code and in broad terms how it has complied with its provisions throughout the year, giving explanations where it has chosen not to do so.

 

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

 

Since 2016, when an independent Board Effectiveness Review was carried out by an external consultant, the annual Board Effectiveness Review has been conducted internally. The 2020 evaluation took the form of a confidential questionnaire which assessed the performance of the Board and its Committees.  The questions were set to explore the themes developed over recent years, including Board effectiveness, Board composition, Board dynamics, alignment of the Board and executive team, interaction with major shareholders, induction, performance and training, Board Committees and the Secretariat.  The feedback was collated by the Company Secretary and discussed by the Board in November 2020 and proposed actions arising were considered in February 2021. The responses were positive, confirming that the Board was of the view that it receives the correct level of insight into and oversight of the Company, both directly to it and in terms of management information and oral updates provided during meetings. Directors also agreed that the Arbuthnot culture set out in the Arbuthnot Principles and Values manifests itself at Board level and in the external view of the Group as a whole.

 

Leadership and Purpose

The Board has for many years led a company which focuses on sustainability and growth over the longer-term with a culture to match. Investment in resources has been strong and has continued where and as appropriate (including during the COVID-19 pandemic for example), with the focus on the benefit this will bring to bear for stakeholders over time. The aim continues to be for a culture of openness among the workforce which combines with the prudent and effective technological and individual controls in place across the business to ensure strong risk management in the Company's continued long-term success.

 

The Group's cultural values were embedded during the year through a brand values document linking the Arbuthnot Principles to the Group's culture as a way of communicating culture across the business. This followed a formal rebranding process whereby these cultural Principles are now encapsulated in five Group values, themselves embedded into day-to-day activities. These are integrity, respect, empowerment, energy and drive, and collaboration.

 

The Board

A number of key decisions are reserved for the Board. The Schedule of Matters Reserved to the Board is reviewed annually and is published on the Company's website at http://www.arbuthnotgroup.com/corporate_governance.html. The Board met regularly throughout the year, including since March 2020 via video conference. It held six scheduled meetings as well as three ad-hoc meetings respectively to withdraw the second interim dividend, to approve the Notice of AGM and jointly with the Board of Arbuthnot Latham to approve the acquisition of Asset Alliance Group Holdings Limited. It decided not to hold a separate off-site strategy meeting because of its impracticability during the pandemic. Substantive agenda items have briefing papers, which are circulated in a timely manner before each meeting. The Board ensures that it is supplied with all the information that it requires and requests in a form and of a quality to fulfil its duties. Since February 2021, the Directors have participated in regular Board meetings of Arbuthnot Latham as attendees.

 

The Board was kept fully informed of the arrangements made by management to run the business during the pandemic. In March 2020 the executive directors considered interim support and succession arrangements relating to Arbuthnot Latham directors and designated holders of PRA/FCA approved Senior Management Functions during the COVID-19 outbreak, in anticipation of the likelihood that travel would be restricted and that the Group would need to be managed and run remotely for an unspecified period of time. It was determined to continue with the overall succession plan and at the peak of the first lockdown Arbuthnot Latham's executive directors held a daily call so that all would be fully appraised of the matters under consideration by the others within the executive team. This was to ensure that had there been individual illness all relevant work could continue, calling on the services of other key staff within the business. The Chairman and Chief Executive continued to be kept fully informed of all material matters through regular discussions with senior management during the continuing period of remote working.

 

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

 

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

 

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

 

Overview of Compliance with the FRC Code, together with Exceptions

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

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

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

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

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

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

 

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

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

 

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

 

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

 

Provision 5 - The Board has regard to the interests of all its key stakeholders in its decision making. The Company has fewer than 20 employees, all of whom have direct access to Board members. As such, it has not been deemed necessary to appoint an employee representative to the Board, nor a formal workforce advisory panel, nor a designated non-executive Director. As stated in the s.172 Statement on page 21, one of the non-executive directors of Arbuthnot Latham and its Whistleblowing Champion, has been designated by its board as the director to engage with the Group's workforce.

 

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

 

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

 

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

 

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

 

Provision 18 - For the purposes of stability and continuity, the Company continues to offer Directors for re-election on a three-year rolling basis in accordance with the Company's Articles of Association and company law. The Directors seeking re-election at the 2020 AGM are James Cobb and Ian Dewar, who have served on the Board for 12 years and 5½ years respectively. The contribution of Mr. Cobb as the Group Financial Director has been invaluable in managing the capital and liquidity requirements of the Group. He has also played a pivotal role in sourcing and delivering the acquisitions that have shaped the strategy of the Group. Mr. Dewar, with a wealth of experience as a partner in a major accounting firm, has successfully chaired the Audit Committee.  Accordingly, the Board fully supports the resolutions for their reappointment.

 

Provision 19 - Sir Henry Angest's role as Chairman has extended over nine years and is expected to continue indefinitely, given his key role as majority shareholder both in protecting the stability of his and other shareholder interests and in overseeing a balanced and risk-managed approach to growing the business with a view to the longer-term. For this reason he is surrounded by a strong team of non-executives who ensure the protection of all shareholders' interests.

 

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

 

Internal Control and Financial Reporting

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

 

The Directors and senior management of the Group review and approve the Group's Risk Management Policy and Risk Appetite framework. The Risk Management Policy describes and articulates the risk management and risk governance framework, methodologies, processes and infrastructure required to ensure due attention to all material risks for Arbuthnot Latham, including compliance with relevant regulatory requirements.

 

The Risk Appetite framework sets out the Board's risk attitude for the principal risks through a series of qualitative statements and quantitative risk tolerance metrics.   These guide decision-making at all levels of the organisation and form the basis of risk reporting.  The key business risks and emerging risks are continuously identified, evaluated and managed by means of limits and controls at an operational level by Arbuthnot Latham management, and are governed through Arbuthnot Latham committees. In November 2020, the Board received a report from the Arbuthnot Latham Chief Risk Officer enabling it to carry out its annual review of the effectiveness of the Group's risk management and internal control systems. The report explained the Risk Management Policy, together with principal risks, risk appetite, policies, three lines of defence, systems, processes, procedures and controls and a new risk board dashboard.

 

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

 

Shareholder Communications

The majority shareholder is Sir Henry Angest, Chairman and Chief Executive. The Company maintains communications with its major external shareholders via one to one meetings, as appropriate, by the Chairman and Chief Executive, the Group Chief Operating Officer or the Group Finance Director on governance and other matters. When practicable it also makes use of the AGM to communicate with shareholders in person. 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.  

 

In accordance with the FRC Code, the Company made contact with five institutional shareholders in order to understand why they voted against the resolution at the AGM held in June 2020 authorising the making of political donations and incurring of political expenditure. The total votes received in favour of this resolution were 74.6% and the five institutional shareholders comprised almost all of the significant minority of votes of those which it identified as not supporting the resolution. This resolution provided that, in the four years beginning on 17 June 2020, the individual and aggregate amount donated or expended would not exceed £250,000. In 2019, the Company made political donations of £77,000 to the Conservative Party in view of the significant adverse impact that a Labour government would have had on the Group's clients and business.

 

Two institutional shareholders did not take up the offer of a meeting with the Directors, one of which explained that their policy on corporate governance is not to support resolutions in respect of political donations. Of the three shareholders with which the Company engaged successfully, each of the respective fund managers expressed their support for the Company, but explained that they generally follow the advice of their proxy voting advisers in respect of corporate governance matters and which, on this occasion, recommended that they voted against the resolution. One institution, whilst understanding of the reasoning behind the proposal of the resolution, indicated their own reluctance to support it due to their generally not liking companies in which they invest to make political donations. Another suggested that, if given more of an explanation as to why the resolution was being proposed, they believed that a proxy voting adviser might recommend support in which case they would likely vote in favour. In summary the response to the consultation with the Company's major institutional shareholders was that, given their commitment to follow "best practice" in relation to corporate governance, they are reluctant unless there are special circumstances to go against their corporate governance/proxy voting adviser's recommendation as to how they vote. This was announced to the wider market in accordance with the FRC Code.

 

The Board continues to believe that it is in the interests of shareholders that it has the flexibility to make political donations in accordance with the Companies Act 2016, in light of prevailing political circumstances over the next few years. Going forward it will seek to provide a more detailed explanation in relation to specific shareholder resolutions which corporate governance advisers are likely to regard as non-conforming or outside best practice. The Board was encouraged by the continued support of its major shareholders. It welcomes engagement with them and will continue to maintain communications via one-to-one meetings as appropriate.

 

Board Committees

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

 

Audit Committee

Membership and meetings

Membership of the Audit Committee is restricted to non-executive Directors and comprises Ian Dewar (as Chairman), Sir Christopher Meyer and Sir Alan Yarrow.  Mr. Dewar has recent and relevant financial experience and the Committee as a whole has competence relevant to the financial sector in which the Company operates. The Company Secretary acts as its Secretary. The Committee met four times during the year.

 

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

 

External Audit

The external auditors, Mazars LLP, have held office since their appointment in 2019 following a competitive tender. The Committee assesses the independence and objectivity, qualifications and effectiveness of the external auditors on an annual basis as well as making a recommendation to the Board on their reappointment. The Committee received a report showing the level of non-audit services provided by the external auditors during the year and members were satisfied that the extent and nature of these did not compromise auditor independence. The Committee has concluded that Mazars are independent and that their audit is effective.

 

Activity in 2020

 

Internal Audit

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

 

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

 

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

 

The Committee received a self-assessment report on Internal Audit from the Head of Internal Audit in September 2020 and it is satisfied with Internal Audit arrangements during 2020.

 

Integrity of Financial Statements and oversight of external audit

The Committee:

 

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

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

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

•      Monitored arrangements put in place to ensure all the necessary work on the Financial Statements could be undertaken remotely in light of the Government guidance to work from home;

 •     In addition the Committee reviewed closely the detailed work carried out by management in respect of Going Concern and Viability in light of the impact on the business of the continued pandemic.

 

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

 

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

 

Significant areas of judgement and estimation

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

 

Impairment of loans and advances to customers

The Committee reviewed presentations from management detailing the provisioning methodology across the Group as part of the full year results process. The Committee considered and challenged the provisioning methodology applied by management, including timing of cash flows, valuation and recoverability of supporting collateral on impaired assets.  For those loans in default, where collateral valuations provide the greatest sensitivity it was assured that, where reliance is placed on the collateral, all assumptions are supported by recent professional valuations. It focused particular attention on RAF's exposure to the London Purpose Built Taxi sector where many clients have obtained payment holidays. It also discussed the different economic scenarios under which expected credit losses had been estimated, including the assumptions of falls in property values which compared with an overall market that had grown. The Committee concluded that the impairment provisions, including management's judgements and estimates, were appropriate.

 

The charge for impaired loans and advances totalled £2.8m for the year ended 31 December 2020. The disclosures relating to impairment provisions are set out in Note 4.1(a) to the financial statements.

 

Property Portfolio

The Group owns three commercial office properties and four repossessed properties, two of which were taken on in the year. Of these properties, five are held as inventory, one is held for sale and one as an investment property. The properties held as inventory and for sale are held at the lower of cost and net realisable value on the basis of internal discounted cash flow models. The investment property is held at fair value on the basis of an internal discounted cash flow valuation, using yields, rental income and refurbishment costs. The Committee discussed the bases of valuation with management and with the auditors who had engaged an outside expert to review management's valuations.

 

As at 31 December 2020, Arbuthnot Latham's total property portfolio totalled £94.6m. The disclosures relating to the carrying value of the investment property and the properties held as inventory and for sale are set out in Notes 4.1(c), 4.1(d), 19, 23 and 29 to the financial statements.

 

Effective Interest rate

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

 

The Committee considered and challenged the EIR methodology applied by management and specifically in relation to acquired loan portfolios. The Committee considered management assumptions including expected future customer behaviours and concluded that the EIR methodology was appropriate as at 31 December 2020.

 

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

 

Going Concern and Viability Statement

The financial statements are prepared on the basis that the Group and Company are each a going concern. The Audit Committee reviewed management's assessment, which incorporated analysis of the ICAAP and ILAAP approved by the Board of Arbuthnot Latham and of relevant metrics, focusing on liquidity, capital, and the stress scenarios in the light of the economic impact of the pandemic. It is satisfied that the going concern basis and assessment of the Group's longer-term viability is appropriate.

 

Other Committee activities

In November 2020, Committee members contributed to the review of the Committee's effectiveness as part of its evaluation by the Board. There were no issues or concerns raised by them in regard to discharging their responsibilities.

 

On behalf of the Board, the Committee reviewed the financial statements as a whole in order to assess whether they were fair, balanced and understandable. The Committee discussed and challenged the balance and fairness of the overall report with the executive directors and also considered the views of the external auditor. The Committee was satisfied that the Annual Report could be regarded as fair, balanced and understandable and that it provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy. It proposed that the Board approve the Annual Report in that respect.

 

Nomination Committee

Membership and meetings

The Nomination Committee is chaired by Sir Henry Angest and its other members are Sir Christopher Meyer and Sir Alan Yarrow.  The Group General Counsel acts as its Secretary. The Committee meets once a year and otherwise as required.

 

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

 

Activity in 2020

The Committee met once during the year when it was involved in the identification, assessment and appointment of an additional independent non-executive director of Arbuthnot Latham to serve as Chairman of its Audit Committee.

 

The Committee assessed and confirmed the collective and individual suitability of Board members. The contribution of Sir Henry Angest remains invaluable in the successful development of the Company. As regards the non-executive Directors' skill sets, Nigel Boardman's credibility, knowledge and reputation to the Board has been a real benefit both in terms of collective and individual suitability and when third parties are considering dealings with the wider group. Ian Dewar, with a wealth of experience as a partner in a major accounting firm, has successfully chaired the Audit Committee. Sir Christopher Meyer's wide-ranging experience including as a diplomat at the highest level has provided an important independent measure of challenge to executive management. The Board has benefitted from Sir Alan Yarrow's wise counsel, challenge to management and many years' banking experience in the City of London.  

 

In terms of individual performance, the Chairman confirmed that his assessment of all Directors was that they were performing well, with the Executive Directors additionally being formally reviewed in the context of the Senior Managers' Regime applicable to Arbuthnot Latham which confirmed continued strong performance. The Committee agreed with this assessment individually in relation to all members of the Board. Collectively, it was agreed that the Board had operated effectively with a wide range of experience and knowledge. The Executive had performed notably well in the context of COVID-19 and, as noted, in the responses to the Board Effectiveness Questionnaire, Non-Executives had provided appropriate challenge and guidance.

 

In terms of the performance of the Company's Board generally, the Committee noted that it takes into account the provisions of the Board Diversity Policy and the Board Suitability Policy. It reviewed the summary of training carried out by each Director during 2020 and noted that, notwithstanding COVID-19, Directors had been able to carry out sufficient training. 

 

In November 2020, the Committee confirmed that the Board's current composition provides the Company with a balanced, knowledgeable, diverse and informed group of directors, bringing strategic acumen, foresight and challenge to the executive, commensurate with the size of the business.  The Committee reviewed succession planning and agreed that a sensible and strong plan remained in place. It also agreed that it continued to operate effectively and, as such, no changes to its membership, composition or activities were proposed to the Board.

 

Remuneration Committee

Membership and meetings

Membership is detailed in the Remuneration Report on page 37. The Committee meets once a year and otherwise as required.

 

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

 

The Committee also deals with remuneration-related issues under the Prudential Regulation Authority's Remuneration Code applicable to the Company. The Remuneration Report on pages 37 and 38 gives further information and details of each Director's remuneration.

 

Donations Committee

Membership and meetings

The Donations Committee is chaired by Sir Henry Angest and its other members are Sir Christopher Meyer and Sir Alan Yarrow. The Committee considers any political donation or expenditure as defined within sections 366 and 367 of the Companies Act 2006. It meets as necessary.

 

Activity in 2020

The Committee met once during the year. It agreed that the Committee was constituted and continued to operate efficiently with its overall performance and the performance of its individual members effective throughout the year. As such, no changes to its membership or activities were proposed to the Board. It further agreed, in the context of the AGM voting and the subsequent shareholder consultation thereon, that it would be appropriate to hold a review of the Committee's constitution and effectiveness on an annual basis.

 

Policy Committee

Membership and meetings

The Policy Committee is chaired by Andrew Salmon and its other members are James Cobb and Nicole Smith, General Counsel who also acts as its Secretary. It normally meets four times a year. Amongst its responsibilities, the Committee reviews the content of policy documentation to ensure that it meets legal and regulatory requirements and approves it on behalf of the Board.

 

 

Remuneration Report

 

Remuneration Committee

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

 

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

 

Remuneration Policy

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

 

Activity in 2020

The Remuneration Committee met once during the year, undertaking its regular activities including reviewing the operation of the Remuneration Policy, having regard to the performance of the Company during the year.

 

In relation to executive directors' pay reviews, the Committee approved a proposal that variable remuneration would not be awarded to them in 2020, due to the decision to protect profitability during the pandemic, in line with the approach for all staff. As regards their salaries, these were unchanged in 2020, following consideration of comparable market rates and the low rate of increase in annual inflation.  No decision was taken by the Committee on salary increases for 2021, but any pay rises for all staff in the current year will only be awarded where an individual's pay is out of line with the market rate for the role or due to career promotion to new and more responsible jobs.  

 

The Committee decided not to change the fees for non-executive directors, reflecting the appropriate level of fee to continue to secure the services of a high level non-executive director.

 

Directors' Service Contracts

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

 

Long Term Incentive Schemes

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

 

Under this Scheme, Mr. Salmon and Mr. Cobb were granted a phantom option to acquire 200,000 and 100,000 ordinary 1p shares respectively in the Company. The fair value of these options at the grant date was £1m. The second tranche of the share options will remain unvested as the performance conditions have not been met, due to the non payment of dividends. The first tranche of share options remained outstanding at 31 December 2020. The fair value of the options as at 31 December 2020 was £0.1m (2019: £0.3m).

 

 

Directors' Emoluments




2020

2019


£000

£000

Fees (including benefits in kind)

265

240

Salary payments (including benefits in kind)

3,172

4,334

Pension contributions

70

70


3,507

4,644

 







Total

Total


Salary

Bonus

Benefits

Pension

Fees

2020

2019


£000

£000

£000

£000

£000

£000

£000

Sir Henry Angest

1,200

 -  

81

 -  

 -  

1,281

1,293

NPG Boardman

 -  

 -  

 -  

 -  

60

60

35

JR Cobb

650

 -  

17

35

 -  

702

1,252

IA Dewar

 -  

 -  

 -  

 -  

75

75

75

Sir Christopher Meyer

 -  

 -  

 -  

 -  

60

60

60

AA Salmon

1,200

 -  

24

35

 -  

1,259

1,859

Sir Alan Yarrow

 -  

 -  

 -  

 -  

70

70

70


3,050

 -  

122

70

265

3,507

4,644

 

Details of any shares or options held by directors are presented on page 37 and 127.

 

The emoluments of the Chairman were £1,281,000 (2019: £1,293,000). The emoluments of the highest paid director were £1,281,000 (2019: £1,859,000) including pension contributions of £nil (2019: £35,000).

 

Retirement benefits are accruing under money purchase schemes for two directors who served during 2020 (2019: two directors).

 

 

Independent Auditor's Report

 

Opinion

We have audited the financial statements of Arbuthnot Banking Group PLC (the 'Parent Company') and its subsidiaries (the 'Group') for the year ended 31st December 2020 which comprise: Consolidated Statement of Comprehensive Income; Consolidated Statement of Financial Position; Company Statement of Financial Position; Consolidated Statement of Changes in Equity; Company Statement of Changes in Equity; Consolidated Statement of Cash Flows; Company Statement of Cash Flows; and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and international accounting standards in conformity with the requirements of the Companies Act 2006.

 

In our opinion, the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and:

•       give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 31 December 2020 and of the Group's loss for the year then ended; and

•       have been properly prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

 

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard, as applied to listed entities and public interest entities and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

 

Conclusions relating to going concern

In auditing the Financial Statements, we have concluded that the Directors' use of the going concern basis of accounting in the preparation of the Financial Statements is appropriate. Our audit procedures to evaluate the directors' assessment of the Group's and the Parent Company's ability to continue to adopt the going concern basis of accounting included but were not limited to:        

•       Undertaking an initial assessment at the planning stage of the audit to identify events or conditions that may cast significant doubt on the Group's and the Parent Company's ability to continue as a going concern;           

•       Making enquiries of the directors to understand the period of assessment considered by them, the assumptions they considered and the implication of those when assessing the Group's future financial performance;    

•       Evaluating management's Going Concern assessment of the Group and Parent Company;

•       Evaluating stress tests applied to the main subsidiary's liquidity and regulatory capital;

•       Evaluating the Group's Recovery and Resolution Plan which includes possible cost saving measures that could be taken in the event circumstances prevent forecast results from being achieved;

•       Assessing and challenging key assumptions and mitigating actions put in place in response to COVID-19;           

•       Considering the consistency of the directors' forecasts with other areas of the Financial Statements and our audit; and   

•       Evaluating the appropriateness of the directors' disclosures in the Financial Statements on going concern.

 

Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Parent Company and Group's ability to continue as a going concern for a period of at least twelve months from when the Financial Statements are authorised for issue.

 

In relation to the Group's and the Parent Company's reporting on how it has applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors' statement in the financial statements about whether the director's considered it appropriate to adopt the going concern basis of accounting.

 

Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.

 

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and, directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

 

We summarise below the key audit matters in forming our audit opinion above, together with an overview of the principal audit procedures performed to address each matter and, where relevant, key observations arising from those procedures.

 

These matters, together with our findings, were communicated to those charged with governance through our Audit Completion Report.

 

Loan Loss Provisions

Group - £4.6m; 2019: £4.8m (See note 22)

 

Risk

The determination of expected credit loss ('ECL') under IFRS 9 is an inherently judgmental area due to the use of subjective assumptions and a high degree of estimation. ECL relating to the Group's loan portfolio requires the Directors to make judgements over the ability of the Groups' customers to make future loan repayments.

 

The most significant risk relates to loans and advances to customers where the bank is exposed to secured and unsecured lending to private and commercial customers.

 

As set out in note 3.4, ECL is measured based on a three-stage model.  For loans with no signification deterioration in credit risk since origination (stage 1), ECL is determined through the use of a model.

 

The model used by the Group to determine expected losses requires judgement to the input parameters and assumptions.  In particular, the ongoing economic impact of COVID-19 has increased uncertainty around macro-economic assumptions.

 

For loans that have experienced a significant deterioration in credit risk since origination (stage 2) or have defaulted (stage 3) the ECL is determined based on probability of default ('PD') and the present value of future cash flows arising primarily from the sale or repossession of security which determines the loss given default ('LGD').  

 

The most significant areas where we identified greater levels of management judgement and estimate are:

•       staging of loans and the identification of significant increase in credit risk including assessment of the impact of COVID driven actions such as payment holidays;

•       key assumptions in the model including PD and LGD including the present value of future cash flows from collateral;

•       use of macro-economic variables reflecting a range of future scenarios.

 

Our response

 

Planning

We have performed a risk assessment over the Group's loan portfolio to identify areas of heightened risk, with consideration for the impact of COVID-19.

 

We have assessed the methodology of identifying significant increase in credit risk.

 

Controls testing

We have tested the design and operating effectiveness of the key controls operating across the Group in relation to credit processes (including underwriting, monitoring, collections and provisioning).  This also included attendance at a Potential & Problem Debt Management Committee meeting, missed payments monitoring, credit reviews at origination and annual review, watch list movements through the year, and revaluation controls.

 

Test of detail

We have reviewed credit files in order to verify data used in the determination of PD and LGD assumptions.  This was performed for all loans in Stage 3 and Stage 2 and for a sample of loans in Stage 1 with characteristics of heightened credit risk (e.g. high Loan-to-Value secured exposures and unsecured exposures).

Expected credit loss models

We have assessed the models used by management to determine expected loss calculations. We have:

•       considered the methodology used by management;

•       tested the data inputs used in applying the methodology adopted and assessed for reasonableness;

•       tested the completeness of the loan portfolio applied to the model;

•       tested the process in place to allocate loans to the respective risk categories (staging);

•       reviewed the key assumptions applied to determine probability of default and loss given default;

•       we have included in-house credit risk specialists and economists in the assessment of model approach and assumptions, including macro-economic scenarios and the impact on house prices.

 

Disclosures

We evaluated whether the disclosures are a clear, true and fair reflection of managements approach to classification and measurement under IFRS 9 and key assumptions made.

 

Conclusion

We found the approach taken in respect of loan loss provisions to be consistent with the requirements of IFRS 9 and judgements made were reasonable.  Disclosures were appropriate.

 

Revenue recognition - effective interest rate

 

Group - £75.1m; 2019: £76.9m (See note 8)

 

Risk

The financial reporting fraud risk over revenue recognition specifically relates to income recognised on an effect interest method (EIR) on Loans and Advances to Customers including originated and acquired loan portfolios.

 

The EIR takes into account cash flows that are an integral part of the instrument's yield including: premiums, discounts and acquisition costs which are spread over the expected life of the loan.

 

Models used to calculate EIR are prepared manually and therefore have an increased risk of error or fraud.

 

Judgement is required to determine whether fees are recognised as EIR or recognised when a service has been performed.

 

The most significant areas where we identified greater levels of management estimation are:

•       unwinding of the discount on acquired portfolios where estimations are made with respect to future cash flows;

•       assumptions over the timing of cash flows used in revenue recognition of originated exposures.

 

Our response

 

Acquired portfolios

We have assessed the basis for recognising revenue of acquired portfolios against the requirements of IFRS 9. This included assessing the allocation and unwind of the discount.

 

We have assessed key judgements over expected future cash flows including estimated economic life.

 

We have performed tests of detail relating to loan information and security valuations on a sample of exposures in the acquired portfolios.

 

We have assessed the data inputs into models relating to acquired portfolios. 

 

Originated portfolios

We confirmed that the methodology applied in the EIR model was consistent with the prior year.

 

We have re-performed model data inputs to identify instances of error. Over a sample of loans we have verified details to underlying agreements.

 

We have assessed the EIR model calculation for compliance with IFRS 9. Where approximations have been adopted in the EIR model we have assessed the impact.

 

Conclusion

We found the approach taken in respect of EIR to be consistent with the requirements of IFRS 9 and judgements made were reasonable. 

 

Property valuations and classification

Group:

Inventory: £84.7m (2019: £75.2m) (note 23)

Investment properties: £6.6m (2019: £6.8m) (note 29)

Assets classified as held for sale: £3.3m (2019: £7.6m) (note 19)

 

Risk

The Group recognises commercial property as either investment property under IAS 40 or, where commercial property is being developed for future sale, as inventory under IAS 2.  

 

The Parent Company may come into ownership of property originally designated as security by borrowers under lending arrangements. These are recognised by the Parent Company as either inventory under IAS 2, where the property is being developed for future sale, or under IFRS 5 when held for sale criteria is met. 

 

The Group has an accounting policy to hold investment properties at fair value and other property held as inventory or for sale at cost and net realisable value.

 

Management engage third party experts to provide observations and market data e.g. property rental yields. This data is included in models built in-house to determine fair value or recoverable amount.

 

The outcome of the model is highly sensitive to assumptions made.

 

Our response

 

Planning

We have assessed the accounting classification of all commercial property, held as either investment property or within inventory of all property security repossessed by the Group during workout of defaulted loans, held either within inventory or as held for sale.

 

We have held meetings property developers and legal representatives engaged by the Group in relation to repossessed property security.

 

Controls testing

We have tested the design of controls around valuation models prepared by management.

 

Valuation models

We have engaged with external property valuation specialists as audit experts to assist us in our review of the valuation approach and assumptions.  We have compared property valuations determined by management against our own independent valuation ranges. 

 

We have tested data inputs and the sources of management assumptions within the valuation models, including but not limited to:

•       contractual rental income and incentives;

•       yield rates;

•       forecast maintenance and development costs; and

•       fees and contingencies.

 

Conclusion

We found the approach taken in respect property valuations to be consistent with the requirements of the relevant accounting standards and judgements made were reasonable. 

 

Our application of materiality and an overview of the scope of our audit

The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

 

Overall materiality

Group: £547,000 (2019: £1,042,000)

 

Parent: £273,500 (2019: £800,000)

 

How we determined it

Based on 0.5% of net assets.  However, this has been capped at materiality levels applied to the main component to recognise its relative significance in the Group. Parent Company materiality has also been reduced to aggregate component materiality below permitted thresholds.

 

Rationale for benchmark applied

We have selected a net assets benchmark because the principal activity of the Group and Parent Company is the investment of Capital.

 

Performance materiality

Group: £328,000

 

Parent Company: £164,000

 

Reporting threshold

We agreed with the Directors that we would report to them misstatements identified during our audit above £16,000 (Group) and £8,000 (Parent Company) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.

 

As part of designing our audit, we assessed the risk of material misstatement in the financial statements, whether due to fraud or error, and then designed and performed audit procedures responsive to those risks. In particular, we looked at where the Directors made subjective judgements such as making assumptions on significant accounting estimates. We tailored the scope of our audit to ensure that we performed sufficient work to be able to give an opinion on the financial statements as a whole. We used the outputs of a risk assessment, our understanding of the Group and the Parent Company, its environment, controls and critical business processes, to consider qualitative factors in order to ensure that we obtained sufficient coverage across all financial statement line items.

 

We performed a full scope audit on all entities within the Group which is consistent with the prior year. All audits were performed directly by the Group audit team and executed at levels of materiality applicable to each individual entity which were lower than Group materiality and ranged from £0.04million to £0.5million (2019: £0.1million to £1.4million). These account for 100% (2019: 100%) of the Group's net interest income. 100% (2019: 100%) of the Group's profit before tax, 100% (2019: 100%) of the Group's net assets, and 100% (2019: 100%) of the Group's total assets. At the Parent Company entity level we have also performed testing over the consolidation process of Group entities.

 

Other information

The other information comprises the information included in the annual report other than the financial statements and our auditor's report thereon. The Directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

 

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained during audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

 

We have nothing to report in this regard.

 

Opinions on other matters prescribed by the Companies Act 2006

In our opinion, based on the work undertaken during the audit:

•       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; and

•       the Strategic Report and the Directors' Report have been prepared in accordance with applicable legal requirements.

 

Matters on which we are required to report by exception

In light of the knowledge and understanding of the Group and the Parent Company and its environment obtained during the audit, we have not identified material misstatements in the Strategic Report or the Directors' Report.

We have nothing to report in respect of the following matters in relation to which 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.

 

We are required to review the directors' statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to the Group's compliance with the provisions of the UK Corporate Governance Statement specified for our review.

 

Corporate Governance Statement

Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements or our knowledge obtained during the audit:

 

•       directors' statement with regards the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified as set out on page 24;

•       directors' explanation as to its assessment of the entity's prospects, the period this assessment covers and why they period is appropriate as set out on page 24.

•       directors' statement on fair, balanced and understandable as set out on page 28;

•       board's confirmation that it has carried out a robust assessment of the emerging and principal risks as set out on page 24;

•       the section of the annual report that describes the review of effectiveness of risk management and internal control systems as set out on page 32; and;

•       the section describing the work of the audit committee as set out on page 32.

 

Responsibilities of Directors

As explained more fully in the Directors' Responsibilities statement set out on page 27, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

 

In preparing the financial statements, the Directors are responsible for assessing the Group's and the Parent Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.

 

Auditor's responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

 

Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below.

 

Based on our understanding of the Group and the Parent Company and its industry, we identified that the principal risks of non-compliance relate to regulations and supervisory requirements of the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), laws and regulations, such as the Companies Act 2006, that have a direct impact on the preparation of the financial statements, and UK tax legislation.

 

In identifying and assessing risks of material misstatement in respect to irregularities including non-compliance with laws and regulations, our procedures included but were not limited to:

•       at the planning stage of our audit, gaining an understanding of the legal and regulatory framework applicable to the Group and the Parent Company, the structure of the Group, the industry in which they operate and considered the risk of acts by the Group and the Parent Company which were contrary to the applicable laws and regulations;

•       discussing with the Directors and management the policies and procedures in place regarding compliance with laws and regulations;

•       inclusion of audit specialists and experts in the risk assessment of complex audit areas such as financial models and the IT infrastructure;

•       discussing amongst the engagement team, who have extensive experience of working with banks, the risks of fraud such as opportunities for fraudulent manipulation of financial statements, and determined that the principal risks were related to posting manual journal entries to manipulate financial performance, management bias through judgements and assumptions in significant accounting estimates, in particular in relation to Expected Credit Loss models and provisioning for defaulted loans (see 'Loan Loss Provisions' Key Audit Matter above) and Effective Interest Rate recognition (see 'Revenue Recognition' Key Audit Matter above), and remaining alert to any indications of non-compliance; and

•       assessing the design of controls to consider: the ethical cultural framework set by senior management, status of control functions, lines of reporting control deficiencies and suspicions of misdoings, segregation of duties, and IT controls to prevent fraudulent access and manipulation of data.

 

Our procedures in relation to fraud included but were not limited to:

•       making enquiries of the Directors and management on whether they had knowledge of any actual, suspected or alleged fraud, including independent inspection of complaints logs;

•       inspection of the Parent Company's and Group's regulatory and legal correspondence and review of minutes of Directors' meetings in the year;

•       testing effectiveness of controls designed to prevent or detect fraudulent activity;

•       comparing certain balances to external sources;

•       being sceptical to the potential of management bias in key judgements and assumptions;

•       introducing elements of unpredictability in to our audit testing; and

•       addressing the risks of fraud through management override of controls by performing journal entry testing.

 

The primary responsibility for the prevention and detection of irregularities including fraud rests with both the Directors and management. As with any audit, there remained a risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations or the override of internal controls.

 

The risks of material misstatement that had the greatest effect on our audit, including fraud, are discussed under "key audit matters" within this report.

A further description of our responsibilities is available on the Financial Reporting Council's website at

www.frc.org.uk/auditorsresponsibilities

 

Other matters which we are required to address

Following the recommendation of the audit committee, we were appointed by the Board of Directors on 6 December 2019 to audit the financial statements for the year ending 31 December 2019 and subsequent financial periods. The period of total uninterrupted engagement is 2 years, covering the years ending 31 December 2019 to 31 December 2020.

 

The non-audit services prohibited by the FRC's Ethical Standard were not provided to the Group or the Parent Company and we remain independent of the Group and the Parent Company in conducting our audit.

 

Our audit opinion is consistent with the additional report to the audit committee.

 

Use of the audit report

This report is made solely to the Parent 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 Parent 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 Parent Company and the Parent Company's members as a body for our audit work, for this report, or for the opinions we have formed.

 

 

 

 

 

Greg Simpson

(Senior Statutory Auditor)

for and on behalf of Mazars LLP

Chartered Accountants and Statutory Auditor

Tower Bridge House, St Katharine's Way

London, E1W 1DD

24 March 2021

 

 

Company statement of financial position

 




At 31 December




2020

2019


Note


£000

£000

ASSETS





Loans and advances to banks

17


15,162

15,316

Debt securities at amortised cost

18


24,308

24,239

Financial investments

24


14,171

25,913

Current tax asset



438

 -  

Deferred tax asset

25


395

391

Intangible assets

26


4

5

Property, plant and equipment

27


161

184

Other assets

23


103

115

Interests in subsidiaries

42


133,904

134,004

Total assets



188,646

200,167

EQUITY AND LIABILITIES





Equity





Share capital

36


154

154

Other reserves

37


(13,444)

(1,618)

Retained earnings

37


160,721

161,556

Total equity



147,431

160,092

LIABILITIES





Current tax liability



 -  

175

Other liabilities

32


3,559

3,063

Debt securities in issue

34


37,656

36,837

Total liabilities



41,215

40,075

Total equity and liabilities



188,646

200,167






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

 

 

Consolidated statement of changes in equity

 


Attributable to equity holders of the Group



Share capital

Capital redemption reserve

Fair value reserve

Treasury shares

Retained earnings

Total


£000

£000

£000

£000

£000

£000

Balance at 31 December 2019

154

19

205

(1,214)

209,171

208,335








Total comprehensive income for the period







Loss for 2020

 -  

 -  

 -  

 -  

(1,332)

(1,332)








Other comprehensive income, net of tax







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

 -  

 -  

(12,825)

 -  

 -  

(12,825)

Tax on other comprehensive income

 -  

 -  

(70)

 -  

 -  

(70)

Total other comprehensive income

 -  

 -  

(12,895)

 -  

 -  

(12,895)

Total comprehensive income for the period

 -  

 -  

(12,895)

 -  

(1,332)

(14,227)








Transactions with owners, recorded directly in equity







Contributions by and distributions to owners







Purchase of own shares

 -  

 -  

 -  

(85)

 -  

(85)

Total contributions by and distributions to owners

 -  

 -  

 -  

(85)

 -  

(85)

Balance at 31 December 2020

154

19

(12,690)

(1,299)

207,839

194,023

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

 


Attributable to equity holders of the Group



Share capital

Capital redemption reserve

Fair value reserve

Treasury shares

Retained earnings

Total


£000

£000

£000

£000

£000

£000

Balance at 31 December 2018

153

20

(12,169)

(1,131)

209,083

195,956








Total comprehensive income for the period







Profit for 2019

 -  

 -  

 -  

 -  

6,176

6,176








Other comprehensive income, net of tax







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

 -  

 -  

10,707

 -  

 -  

10,707

Tax on other comprehensive income

 -  

 -  

(77)

 -  

 -  

(77)

Total other comprehensive income

 -  

 -  

10,630

 -  

 -  

10,630

Total comprehensive income for the period

 -  

 -  

10,630

 -  

6,176

16,806








Transactions with owners, recorded directly in equity







Contributions by and distributions to owners







Unwind Employee Trust

 -  

 -  

 -  

 -  

1,083

1,083

Sale of Secure Trust Bank shares

 -  

 -  

1,744

 -  

(1,744)

 -  

Issue non-voting shares

1

(1)

 -  

 -  

(44)

(44)

Purchase of own shares

 -  

 -  

 -  

(83)

 -  

(83)

Final dividend relating to 2018

 -  

 -  

 -  

 -  

(2,978)

(2,978)

Interim dividend relating to 2019

 -  

 -  

 -  

 -  

(2,405)

(2,405)

Total contributions by and distributions to owners

1

(1)

1,744

(83)

(6,088)

(4,427)

Balance at 31 December 2019

154

19

205

(1,214)

209,171

208,335

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

 

Company statement of changes in equity

 


Attributable to equity holders of the Company



Share capital

Capital redemption reserve

Fair value reserve

Treasury shares

Retained earnings

Total


£000

£000

£000

£000

£000

£000

Balance at 1 January 2019

153

20

(7,022)

(1,131)

162,729

154,749








Total comprehensive income for the period







Profit for 2019

 -  

 -  

 -  

 -  

3,170

3,170








Other comprehensive income, net of income tax

-

-

-

-

-

-

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

 -  

 -  

6,599

 -  

 -  

6,599

Total other comprehensive income

 -  

 -  

6,599

 -  

 -  

6,599

Total comprehensive income for the period

 -  

 -  

6,599

 -  

3,170

9,769















Transactions with owners, recorded directly in equity







Contributions by and distributions to owners







Unwind Employee Trust

 -  

 -  

 -  

 -  

1,083

1,083

Issue of non-voting shares

1

(1)

 -  

 -  

(43)

(43)

Purchase of own shares

 -  

 -  

 -  

(83)

 -  

(83)

Final dividend relating to 2018

 -  

 -  

 -  

 -  

(2,978)

(2,978)

Interim dividend relating to 2019

 -  

 -  

 -  

 -  

(2,405)

(2,405)

Total contributions by and distributions to owners

1

(1)

 -  

(83)

(4,343)

(4,426)

Balance at 31 December 2019

154

19

(423)

(1,214)

161,556

160,092








Total comprehensive income for the period







Loss for 2020

 -  

 -  

 -  

 -  

(835)

(835)








Other comprehensive income, net of income tax

-

-

-

-

-

-

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

 -  

 -  

(11,741)

 -  

 -  

(11,741)

Total other comprehensive income

 -  

 -  

(11,741)

 -  

 -  

(11,741)

Total comprehensive income for the period

 -  

 -  

(11,741)

 -  

(835)

(12,576)








Transactions with owners, recorded directly in equity







Contributions by and distributions to owners







Purchase of own shares

 -  

 -  

 -  

(85)

 -  

(85)

Total contributions by and distributions to owners

 -  

 -  

 -  

(85)

 -  

(85)

Balance at 31 December 2020

154

19

(12,164)

(1,299)

160,721

147,431

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








 

Consolidated statement of cash flows

 




Year ended 31 December

Year ended 31 December




2020

2019


Note


£000

£000

Cash flows from operating activities





Interest received



99,308

63,500

Interest paid



(19,264)

(15,088)

Fees and commissions received



14,685

13,757

Other income



678

5,599

Cash payments to employees and suppliers



(88,564)

(63,887)

Taxation paid



(237)

(841)

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



6,606

3,040

Changes in operating assets and liabilities:





 - net decrease in derivative financial instruments



291

173

 - net decrease/(increase) in loans and advances to customers



11,366

(372,612)

 - net increase in other assets



(5,513)

(10,123)

 - net increase in amounts due to customers



280,304

370,617

 - net decrease in other liabilities



(5,894)

(5,049)

Net cash inflow/(outflow) from operating activities



287,160

(13,954)

Cash flows from investing activities





Acquisition of financial investments



(420)

(182)

Disposal of financial investments



 -  

15,330

Purchase of computer software

26


(6,392)

(5,552)

Purchase of property, plant and equipment

27


(683)

(1,950)

Proceeds from sale of property, plant and equipment

27


23

 -  

Purchase of investment property

29


 -  

(2,901)

Purchase of debt securities



(695,614)

(815,223)

Proceeds from redemption of debt securities



791,242

719,737

Net cash inflow/(outflow) from investing activities



88,156

(90,741)

Cash flows from financing activities





Purchase of treasury shares



(85)

 -  

Issue subordinated debt



 -  

25,000

Decrease in borrowings



(331)

(2,254)

Dividends paid



 -  

(5,383)

Net cash (outflow)/inflow from financing activities



(416)

17,363

Net increase/(decrease) in cash and cash equivalents



374,900

(87,332)

Cash and cash equivalents at 1 January



372,166

459,498

Cash and cash equivalents at 31 December

40


747,066

372,166

 

Company statement of cash flows

 




Year ended 31 December

Year ended 31 December




2020

2019


Note


£000

£000

Cash flows from operating activities





Dividends received from subsidiaries



385

3,766

Interest received



51

65

Interest paid



(2,664)

(1,829)

Other income



9,537

10,605

Cash payments to employees and suppliers



(7,965)

(8,129)

Taxation paid



(21)

(370)

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



(677)

4,108

Changes in operating assets and liabilities:





 - net decrease/(increase) in group company balances



2,087

(742)

 - net decrease/(increase) in other assets



12

(73)

 - net (decrease)/increase in other liabilities



(1,591)

481

Net cash (outflow)/inflow from operating activities



(169)

3,774

Cash flows from investing activities





Receipt on dissolution of insurance cell

42


100

 -  

Issue of subordinated debt to Arbuthnot Latham



 -  

(25,000)

Net cash inflow from investing activities



100

(25,000)

Cash flows from financing activities





Purchase of treasury shares



(85)

(83)

Issue subordinated debt



 -  

25,000

Dividends paid



 -  

(5,383)

Net cash used in financing activities



(85)

19,534

Net decrease in cash and cash equivalents



(154)

(1,692)

Cash and cash equivalents at 1 January



15,316

17,008

Cash and cash equivalents at 31 December

40


15,162

15,316

 

Notes to the Consolidated Financial Statements

 

1.  Reporting entity

Arbuthnot Banking Group PLC is a company domiciled in the United Kingdom. The registered address of Arbuthnot Banking Group PLC is 7 Wilson Street, London, EC2M 2SN. The consolidated financial statements of Arbuthnot Banking Group PLC as at and for the year ended 31 December 2020 comprise Arbuthnot Banking Group PLC and its subsidiaries (together referred to as the "Group" and individually as "subsidiaries"). The Company is the holding company of a group primarily involved in banking and financial services.

 

2.  Basis of preparation

(a) Statement of compliance

The Group's consolidated financial statements and the Company's financial statements have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. 

 

The consolidated financial statements were authorised for issue by the Board of Directors on 24 March 2021.

 

(b) Basis of measurement

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

 

(c) Functional and presentational currency

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

 

(d) Use of estimates and judgements

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

 

(e) Going concern

After making appropriate enquiries which assessed strategy, profitability, funding, risk management (see Note 6) and capital resources (see Note 7), the directors are satisfied that the Company and the Group have adequate resources to continue in operation for the foreseeable future. The Group reported a loss before tax of £1.1m in 2020, however, this result included a number of short-term items as highlighted in the Strategic Report. The Directors expect that the Group will return to profitability in 2021, with strong pipeline business as a result of re-instating credit appetite and the acquisition of the Asset Alliance Group contributing towards future earnings. The Audit Committee reviewed management's assessment, which incorporated analysis of the ICAAP and ILAAP approved by the Board of AL and of relevant metrics, focusing on liquidity, capital, and the stress scenarios in the light of the economic impact of the pandemic. It is satisfied that the going concern basis and assessment of the Group's longer-term viability is appropriate. The financial statements are therefore prepared on the going concern basis.

 

(f) Accounting developments

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

 

COVID-19 amendments on lease modifications - Amendments to IFRS 16 - Leases (IFRS 16)

The IASB published 'amendments to IFRS 16 covering COVID-19-Related Rent Concessions'. These provide lessees with an exemption from assessing whether a COVID-19 related rent concession is a lease modification. The amendment is effective for annual reporting periods beginning on or after 1 June 2020. The effect of the amendment on the Group's financial statements is immaterial and will be adopted from 1 January 2021. There will be no adjustment to retained earnings as of 1 January 2020 since the amendments only apply to rent concessions granted in 2020.

 

3.  Significant accounting policies

 

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

 

3.1.  Consolidation

(a)  Subsidiaries

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

 

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

 

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

 

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

 

(b) 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.

 

3.2.  Foreign currency translation

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

 

3.3.  Financial assets and financial liabilities

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

 

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

 

(a) Financial assets measured at amortised cost

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

 

Loans and advances

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

 

Debt securities at amortised cost

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

 

(b) Financial assets and financial liabilities at FVPL

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

 

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

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

 

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

 

(c) Financial assets at FVOCI

These include investments in special purpose vehicles and equity investments. They may be sold in response to liquidity requirements, interest rate, exchange rate or equity price movements. Financial investments are initially recognised at cost, which is considered as the fair value of the investment including any acquisition costs. The securities are subsequently measured at fair value in the statement of financial position.

 

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

 

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

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

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

 

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

 

For debt instruments, changes in fair value are recognised in OCI. The assets are subject to impairment testing under IFRS 9 and a loss allowance provision is recognised for such assets. The portion of changes in fair value which reflect ECL are taken to the profit or loss.

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

 

(d)  Financial guarantees and loan commitments

Financial guarantees represent undertakings that the Group will meet a customer's obligation to third parties if the customer fails to do so. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. The Group is 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, where the amount of loss exceeds the total unused commitments an ECL is recognised. 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 ECL of the obligations.

 

(e) Financial liabilities at amortised cost

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

 

Basis of measurement for financial assets and liabilities

Amortised cost measurement

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

 

Fair value measurement

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

 

When available, the Group measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if quoted prices are readily and regularly available and represent actual and regularly occurring market transactions on an arm's length basis.

 

If a market for a financial instrument is not active, the Group establishes fair value using a valuation technique. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same for which market observable prices exist, net present value and discounted cash flow analysis.

 

Derecognition

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

 

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

 

Offsetting

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

 

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

 

3.4 Impairment for financial assets and liabilities

IFRS 9 impairment model adopts a three stage expected credit loss approach ("ECL") based on the extent of credit deterioration since origination.

 

The three stages under IFRS 9 are as follows:

•      Stage 1 - if, at the reporting date, the credit risk on a financial instrument has not increased significantly since initial recognition, an entity shall measure the loss allowance for that financial instrument at an amount equal to 12-month expected credit losses.

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

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

 

Measurement of ECL

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

 

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

 

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

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

 

Use of COVID-19 relief mechanisms (for example, payment holidays, CBILS and BBLS) will not automatically merit identification of SICR and trigger a Stage 2 classification in isolation. Where, an individual borrower received COVID-19 relief, which were primarily in the form of payment holidays. The individual borrower was assessed to be a significant increase in credit risk where they were considered to have suffered long term financial difficulty. An individual borrower was considered to have suffered long term financial difficulty based on individual circumstances or where they had received more than two payment holidays or where a payment holiday given was in excess of 6 months.

 

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

 

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

 

Definition of default (movement to Stage 3)

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

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

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

 

A borrower will move out of Stage 3 when their credit risk improves such that they are no longer past due and remain up to date with a period of good conduct and the improvement in the borrower's situation to the extent that credit risk has receded sufficiently and a full repayment of the loan, without recourse to the collateral, is likely.

 

Forward looking macroeconomic scenarios

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

COVID-19 has already had a significant impact on the forward-looking economic information used by the IFRS 9 models in calculating ECL. While the central scenario used previously implied the most significant macroeconomic factor related to property prices, the central scenarios assumed now forecast deterioration in conditions on a magnitude typically observed for severe stresses but with the deterioration and subsequent recovery compressed into a much shorter time frame than typical economic cycles.

 

To account for these limitations caused by the uncertainty of the pandemic, a number of refinements and changes have been applied to the respective model components to ensure that the ECL outcome is reasonable and with regard to the timing in which deteriorating economics translate into default and loss outcomes.

 

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

 

Expected life

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

 

Government guarantees

During March and April 2020, the UK government launched a series of temporary schemes designed to support businesses deal with the impact of COVID-19. The BBLs, CBILs and CLBILs lending products are originated by the Group but are covered by government guarantees. These are to be set against the outstanding balance of a defaulted facility after the proceeds of the business assets have been applied. The government guarantee is 80% for CBILs and CLBILs and 100% for BBLs. Arbuthnot Latham  recognises lower LGDs for these lending products as a result, with 0% applied to the government guaranteed part of the exposure.

 

3.5.  Impairment of non-financial assets

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

 

3.6.  Fiduciary activities

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

 

3.7.  New standards and interpretations not yet adopted

There are no standards, interpretations or amendments to existing standards that have been published and are mandatory for the Group's accounting periods beginning on or after 1 January 2021 or later periods, that will have any material impact on the Group's financial statements. 

 

4.  Critical accounting estimates and judgements in applying accounting policies

 

The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

 

4.1 Estimation uncertainty

(a) Expected credit losses ("ECL") on financial assets

The Group reviews its loan portfolios and debt security investments to assess impairment at least on a quarterly basis. The basis for evaluating impairment losses is described in note 10. The measurement of ECL required by IFRS 9, necessitates a number of significant judgements. Specifically judgements and estimation uncertainties relate to assessment of whether credit risk on the financial asset has increased significantly since initial recognition, incorporation of forward-looking information ("FLI") in the measurement of ECLs and key assumptions used in estimating recoverable cash flows. These estimates are driven by a number of factors that are subject to change which may result in different levels of ECL allowances.

 

The Group incorporates FLI into the assessment of whether there has been a significant increase in credit risk. Forecasts for key macroeconomic variables that most closely correlate with the Bank's portfolio are used to produce five economic scenarios, comprising of a no change, upside case, downside case, moderate decline and severe decline, and the impacts of these scenarios are then probability weighted. The estimation and application of this FLI will require significant judgement supported by the use of external information.

 

12-month ECLs on loans and advances (loans within Stage 1) are calculated using a statistical model on a collective basis, grouped together by product and geographical location. The key assumptions are the probability of default, the economic scenarios and loss given default ("LGD") having consideration for collateral. Lifetime ECLs on loans and advances (loans within Stage 2 and 3) are calculated based on an individual valuation of the underlying asset and other expected cash flows.

 

For financial assets in Stage 2 and 3, ECL is calculated on an individual basis and all relevant factors that have a bearing on the expected future cash flows are taken into account. These factors can be subjective and can include the individual circumstances of the borrower, the realisable value of collateral, the Group's position relative to other claimants, and the likely cost to sell and duration of the time to collect. The level of ECL is the difference between the value of the recoverable amount (which is equal to the expected future cash flows discounted at the loan's original effective interest rate), and its carrying amount.

 

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

 

If time to collect increased by six months across all client exposures, this would lead to a negative £0.7m (2019: negative £0.6m) impact through the Profit or Loss. A six month reduction in time to collect would lead to a £0.3m favourable (2019: £0.1m favourable) impact on Profit or Loss. 

 

If the collateral valuations increased by 10% across client exposures, this would lead to a positive £1m (2019: positive £1.4m) impact through Profit or Loss. If the collateral valuations decreased by 10% across all client exposures, this would lead to a £1.8m adverse (2019: £2.1m adverse) impact on Profit or Loss. 

 

Five economic scenarios were modelled. A probability was assigned to each scenario to arrive at an overall weighted impact on ECL. Management judgment is required in the application of the probability weighting for each scenario.

 

The Group considered the impact of various assumptions on the calculation of ECL (changes in GDP, unemployment rates, inflation, exchange rates, equity prices, wages and collateral values/property prices) and concluded that only collateral values/property prices have a material impact on ECL.

 

The five macroeconomic scenarios modelled on future property prices and asset values were as follows:

•      Severe decline

•      Moderate decline

•      Decline

•      No change

•      Growth

 

Other than collateral/property prices for Arbuthnot Latham and collateral/asset values for its subsidiary Renaissance Asset Finance, no other assumptions were assessed to have a material impact on ECL. The tables below therefore reflect the expected changes in collateral/property prices and collateral/asset values in each of the macroeconomic scenarios and the probability weighting applied for each scenario.

 

Another of the key judgements concerns the probability of the economic scenarios in the measurement of the ECL. The probability weighting and forward-looking economic scenarios are as follows for the Arbuthnot Latham and Renaissance Asset Finance:

 


Arbuthnot Latham


Probability weighting


Change in property price


2020

2019


2020

2019

Economic Scenarios












Severe decline

2.0%

1.0%


(40.0%)

(40.0%)

Moderate decline

15.0%

3.0%


(20.0%)

(20.0%)

Decline

70.0%

50.0%


(2.5%)

(1.5%)

No Change

9.0%

26.0%


 -  

 -  

Growth

4.0%

20.0%


0.5%

0.5%

Weighted average change in property price




(5.5%)

(1.8%)














Renaissance Asset Finance


Probability weighting


Change in asset values


2020

2019


2020

2019

Economic Scenarios












Severe decline

6.0%

2.0%


(15%) to (60%)

(10%) to (40%)

Moderate decline

20.0%

8.0%


(7.5%) to (30%)

(5%) to (20%)

Decline

40.0%

30.0%


(2.5%) to (15%)

(2.0%)

No Change

31.0%

30.0%


 -  

 -  

Growth

3.0%

30.0%


2.0%

2.0%

Weighted average change in asset values




(9.6%)

(1.9%)







 

The above tables reflect the 5 year average expected change in collateral values in each economic scenario for Arbuthnot Latham and its subsidiary Renaissance Asset Finance, which were applied over the full term the Group is exposed to credit risk (also an average of 5 years). The expected change in property prices under each scenario, were weighted according to the probability of each scenario, to arrive at a probability weighted change in property prices for Arbuthnot Latham and asset values for Renaissance Asset Finance. These adjusted property and asset values are then used to assess the future expected cash flows, which are considered along with the loan exposures at default to calculate the expected credit loss. No other long-term averages are used in the calculation of ECL, as the above changes are in effect modelled over the full term of the Group's exposure to credit risk.

 

The economic scenarios were updated as a result of the impact of COVID-19 on the economy, at 31 December 2020 the weighted average change in property price is a 5.5% decline compared to a 1.8% decline for the Company and weighted average change in asset values is a 9.6% decline compared to a 1.9% decline for Renaissance Asset Finance at 31 December 2019. The table below compares the 31 December 2020 ECL provision using the 31 December 2020 economic scenarios and the 31 December 2020 ECL provision using the 31 December 2019 economic scenarios.

 


Arbuthnot Latham


Renaissance Asset Finance


Economic scenarios as at


2020

2019


2020

2019


£000

£000


£000

£000

ECL Provision












Stage 1

 427

 259


 249

 136

Stage 2

 180

 40


 353

 123

Stage 3

 3,025

 2,943


 345

 335

At 31 December 2020

 3,632

 3,242


 947

 594







Additionally, management have assessed the impact of assigning a 100% probability to each of the economic scenarios, which would have the following impact on the Profit or Loss of the Group:








Arbuthnot Latham


Renaissance Asset Finance


2020

2019


2020

2019


£m

£m


£m

£m

Impact of 100% scenario probability












Severe Decline

(46.4)

(23.9)


(4.6)

(2.1)

Moderate Decline

(5.1)

(5.9)


(0.9)

(0.3)

Decline

0.3

 -  


0.1

(0.1)

No Change

0.4

0.3


0.4

(0.1)

Growth

0.5

0.5


0.4

0.1







 

(b) Effective Interest Rate

Acquired loan books are initially recognised at fair value. Subsequently, they are measured under the effective interest rate method. Management review the expected cash flows against actual cash flows to ensure future assumptions on customer behaviour and future cash flows remain valid. If the estimates of future cash flows are revised, the gross carrying value of the financial asset is recalculated as the present value of the estimated future contractual cash flows discounted at the original effective interest rate, or in the case of the acquired books the credit-adjusted effective interest rate. The adjustment to the carrying value of the loan book is recognised in the Statement of Comprehensive Income.

 

The accuracy of the effective interest rate is affected by unexpected market movements resulting in altered customer behaviour, inaccuracies in the models used compared to actual outcomes and incorrect assumptions.

 

In 2020 the Group recognised £0.1m additional interest income to reflect a revision in the timing of expected cash flows on the originated book, reflecting a shortening of the expected life of originated loan book.

 

If customer loans repaid 6 months earlier than anticipated on the originated loan book, interest income would increase by £0.5m (2019: £0.4m), due to acceleration of fee income.

 

In 2020 the Group recognised £0.1m reversal of (2019: £0.4m additional) interest income to reflect actual cash flows received on the acquired mortgage books being less than forecast cash flows.

 

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

 

If the acquired loan books were modelled to accelerate cash flows by 6 months, it would increase interest income in 2020 by £0.2m (2019: £0.3m) while a 10% increase in principal repayments will increase interest income in 2020 by £0.5m (2019: £0.8m) through a cash flow reset adjustment.

 

(c) Investment property

The valuations that the Group places on its investment properties are subject to a degree of uncertainty and are calculated on the basis of assumptions in relation to prevailing market rents and effective yields. These assumptions may not prove to be accurate, particularly in periods of market volatility.

 

Following the uncertainty due to Brexit, which had the effect of reducing the activity in the property market in 2019, the impact of COVID-19 combined with the ongoing complexities of Brexit had the impact of further significantly reducing the activity in the property market, particularly during the first half of 2020. There were signs of the level of activity increasing in the second half of 2020, though well below the overall levels of 2019. This has in turn resulted in less market evidence being available for Management in making its judgement on the key assumptions of property yield and market rent. The Group currently owns one (2019: one) investment property, as outlined in note 29.

 

During 2019, two properties were reclassified to inventory due to being under development with the intention to sell.

 

Management valued the investment property utilising externally sourced market information and property specific knowledge. The valuations were reviewed by the Group's in-house surveyor.

 

Crescent Office Park in Bath with value of £6.6m (2019: £6.8m)

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

 

The property was initially recognised as held for sale under IFRS 5. In 2018 the launch of the property fund was placed on hold and as a result it was reclassified as an investment property as the property no longer met the IFRS 5 criteria. The property remained occupied as at 31 December 2020 with the Group receiving rental income.

 

In accordance with IAS 40, the property is recognised at fair value, with its carrying value at year end of £6.6m equal to its fair value. A fair value loss of £0.2m was recognised during the year.

 

The valuation of the property has the following key inputs:

•      yield: 6.50%

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

 




Revised fair value gain / (loss)


Variable


£'m

%

Model Yield

6.50%




 - Yield 0.25% lower

6.25%


0.3

5.3%

 - Yield 0.25% higher

6.75%


(0.3)

(3.9%)






Model Future Rent Increases (Every 5 Years)

4.00%




- Positive +25%

5.00%


0.2

3.7%

- Negative -25%

3.00%


(0.2)

(2.4%)






 

(d) Inventory

The Group owns two commercial properties and four repossessed properties, classified as inventory. During 2019, the two commercial properties were reclassified from investment property to inventory due to being under development with the intention to sell. The three repossessed properties were initially recognised as inventory. The commercial properties on reclassification to inventory were initially recognised at fair value and have been subsequently measured at the lower of cost and net realisable value ("NRV") less costs to sell. Cost is deemed to be fair value on the date of transfer or initial recognition. The properties are assessed at the reporting date for impairment.

 

The internal valuations that the Group places on its properties are subject to a degree of uncertainty and are calculated on the basis of assumptions in relation to prevailing market rents and effective yields. These assumptions may not prove to be accurate, particularly in periods of market volatility.

 

Following the uncertainty due to Brexit, which had the effect of reducing activity in the property market in 2019, the impact of COVID-19 combined with the ongoing complexities of Brexit has resulted in further reductions in activity within the property market, particularly during the first half of 2020. There have been signs of the level of activity increasing in the second half of 2020, though well below the overall level of 2019. This has in turn resulted in less market evidence being available for Management in making its judgement on the key assumptions of property yield and market rent.

 

Management valued the property utilising externally sourced market information and property specific knowledge. The valuations were reviewed by the Group's in-house surveyor.

 

The Group also make use of external valuations on its properties that are subject to a degree of uncertainty and are calculated on the basis of assumptions in relation to prevailing market conditions and subject to comparable properties for sale. These valuations are therefore susceptible to uncertainty particularly where there is a limited level of activity in the property market.

 

Management have assessed that should the net realisable value less cost to sell of each of the combined property inventory reduce by 5% this would impact profit or loss by £1.75m (or 2.1% of cost) and a reduction of 10% would impact profit or loss by £6.1m (or 7.2% of cost).

 

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 2020:


Due within one year

Due after more than one year

Total

At 31 December 2020

£000

£000

£000

ASSETS




Cash and balances at central banks

636,799

636,799

Loans and advances to banks

110,267

110,267

Debt securities at amortised cost

199,002

145,690

344,692

Assets classified as held for sale

3,285

3,285

Derivative financial instruments

202

1,641

1,843

Current tax asset

205

205

Loans and advances to customers

533,856

1,053,993

1,587,849

Other assets

96,180

108

96,288

Financial investments

1,754

16,741

18,495

Deferred tax asset

1,009

1,009

Intangible assets

13,895

9,751

23,646

Property, plant and equipment

3,113

1,792

4,905

Right-of-use assets

2,793

14,910

17,703

Investment property

6,550

6,550


1,601,351

1,252,185

2,853,536

LIABILITIES




Deposits from banks

5,090

225,000

230,090

Derivative financial instruments

188

461

649

Deposits from customers

2,170,339

194,868

2,365,207

Other liabilities

7,606

7,606

Lease liabilities

2,798

15,507

18,305

Debt securities in issue

37,656

37,656


2,186,021

473,492

2,659,513

 

The table below shows the maturity analysis of assets and liabilities of the Group as at 31 December 2019:


Due within one year

Due after more than one year

Total

At 31 December 2019

£000

£000

£000

ASSETS




Cash and balances at central banks

325,908

325,908

Loans and advances to banks

46,258

46,258

Debt securities at amortised cost

337,807

105,153

442,960

Assets classified as held for sale

7,617

7,617

Derivative financial instruments

105

1,699

1,804

Loans and advances to customers

659,176

939,877

1,599,053

Other assets

86,262

181

86,443

Financial investments

3,203

27,716

30,919

Deferred tax asset

1,815

1,815

Intangible assets

7,037

13,045

20,082

Property, plant and equipment

1,458

4,355

5,813

Right-of-use assets

2,757

17,187

19,944

Investment property

6,763

6,763


1,477,588

1,117,791

2,595,379

LIABILITIES




Deposits from banks

5,421

225,000

230,421

Derivative financial instruments

101

218

319

Deposits from customers

1,873,326

211,577

2,084,903

Current tax liability

633

633

Other liabilities

13,500

13,500

Lease Liabilities

63

20,368

20,431

Debt securities in issue

36,837

36,837


1,893,044

494,000

2,387,044

 

The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2020:


Due within one year

Due after more than one year

Total

At 31 December 2020

£000

£000

£000

ASSETS




Loans and advances to banks

7

7

Loans and advances to banks - due from subsidiary undertakings

15,155

15,155

Debt securities at amortised cost

24,308

24,308

Financial investments

14,171

14,171

Current tax asset

438

438

Deferred tax asset

395

395

Intangible assets

4

4

Property, plant and equipment

161

161

Other assets

102

102

Interests in subsidiaries


133,904

133,904


15,702

172,943

188,645

LIABILITIES




Other liabilities

3,559

3,559

Debt securities in issue

37,656

37,656


3,559

37,656

41,215





The table below shows the maturity analysis of assets and liabilities of the Company as at 31 December 2019:


Due within one year

Due after more than one year

Total

At 31 December 2019

£000

£000

£000

ASSETS




Loans and advances to banks

6

6

Loans and advances to banks - due from subsidiary undertakings

15,310

15,310

Debt securities at amortised cost

24,239

24,239

Financial investments

25,913

25,913

Deferred tax asset

391

391

Intangible assets

5

5

Property, plant and equipment

25

159

184

Other assets

115

115

Interests in subsidiaries

134,004

134,004


15,456

184,711

200,167

LIABILITIES




Current tax liability

175

175

Other liabilities

3,063

3,063

Debt securities in issue

36,837

36,837


3,238

36,837

40,075

 

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, macroeconomic, market, liquidity and capital.

 

(a) Credit risk

The Company and Group take on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Significant changes in the economy, or in the health of a particular industry segment that represents a concentration in the Company and Group's portfolio, could result in losses that are different from those provided for at the balance sheet date. Credit risk is managed through the Credit Committee of the banking subsidiary.

 

The Committee regularly reviews the credit risk profile of the Group, with a clear focus on performance against risk appetite statements and risk metrics. The Committee considered credit conditions during the year, and in particular the impact of the COVID-19 crisis on performance against both credit risk appetite and a range of key credit risk metrics.

 

The Company and Group structure the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to products, and one borrower or groups of borrowers. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. The limits are approved periodically by the Board of Directors and actual exposures against limits are monitored daily.

 

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral, and corporate and personal guarantees.

 

The economic environment remains uncertain and future impairment charges may be subject to further volatility (including from changes to macroeconomic variable forecasts) depending on the longevity of the COVID-19 pandemic and related containment measures, as well as the longer term effectiveness of central bank, government and other support measures.

 

COVID-19 has created an unprecedented challenge for ECL modelling, given the severity of economic shock and associated uncertainty for the future economic path coupled with the scale of government and central bank intervention and COVID-19 relief mechanisms that have altered the relationships between economic drivers and default.

 

The Group has attempted to leverage stress test modelling insights to inform ECL model refinements to enable reasonable estimates. Management review of modelling approaches and outcomes continues to inform any necessary adjustments to the ECL estimates through the form of in-model adjustments, based on expert judgement including the use of available information. Management considerations included the potential severity and duration of the economic shock, including the mitigating effects of government support actions, as well the potential trajectory of the subsequent recovery. The Group also considered differential impacts on asset classes, including pronouncements from regulatory bodies regarding IFRS 9 application in the context of COVID-19, notably on significant increase in credit risk (SICR) identification.

 

The Group employs a range of policies and practices to mitigate credit risk.  The most traditional of these is the taking of collateral to secure advances, which is common practice.  The principal collateral types for loans and advances include, but are not limited to:

 

•      Charges over residential and commercial properties;

•      Charges over business assets such as premises, inventory and accounts receivable;

•      Charges over financial instruments such as debt securities and equities;

•      Charges over other chattels; and

•      Personal guarantees

 

Upon initial recognition of loans and advances, the fair value of collateral is based on valuation techniques commonly used for the corresponding assets.  In order to minimise any potential credit loss the Group will seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. Repossessed collateral, not readily convertible into cash, is made available for sale in an orderly fashion, with the proceeds used to reduce or repay the outstanding indebtedness, or held as inventory where the Group intends to develop and sell in the future. Where excess funds are available after the debt has been repaid, they are available either for other secured lenders with lower priority or are returned to the customer.

 

Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards.

                                                                                                                                                                                                                   

The Group incorporates forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL. The key inputs into the measurement of the ECL are:

•      assessment of significant increase in credit risk

•      future economic scenarios

•      probability of default

•      loss given default

•      exposure at default

 

The IFRS 9 impairment model adopts a three stage approach based on the extent of credit deterioration since origination, see note 10.

 

The Group's maximum exposure to credit risk (net of impairment) before collateral held or other credit enhancements is as follows:

 










2020

Group

Banking

Mortgage Portfolios

RAF

ABL

ASFL

All Other Divisions

Total

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

£000

£000

£000

£000

£000

£000

£000

On-balance sheet:








Cash and balances at central banks

 -  

 -  

 -  

 -  

 -  

636,631

636,631

Loans and advances to banks

 -  

 -  

 -  

 -  

 -  

110,267

110,267

Debt securities at amortised cost

 -  

 -  

 -  

 -  

 -  

344,692

344,692

Derivative financial instruments

 -  

 -  

 -  

 -  

 -  

1,843

1,843

Loans and advances to customers (net of ECL)

1,122,299

268,827

91,927

87,331

5,964

11,501

1,587,849

   Stage 1

1,019,470

223,800

74,542

87,331

5,964

11,501

1,422,608

   Stage 2

72,626

36,794

16,394

 -  

 -  

 -  

125,814

   Stage 3

30,203

8,233

991

 -  

 -  

 -  

39,427

Other assets

 -  

 -  

 -  

 -  

 -  

5,458

5,458

Financial investments

 -  

 -  

 -  

 -  

 -  

18,495

18,495









Off-balance sheet:








Guarantees

6,248

 -  

 -  

 -  

 -  

 -  

6,248

Loan commitments and other credit related liabilities

152,972

 -  

 -  

155,300

155

 -  

308,427

At 31 December

1,281,519

268,827

91,927

242,631

6,119

1,128,887

3,019,910

 










2019

Group

Banking

Mortgage Portfolios

RAF

ABL

ASFL

All Other Divisions

Total

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

£000

£000

£000

£000

£000

£000

£000

On-balance sheet:








Cash and balances at central banks

 -  

 -  

 -  

 -  

 -  

325,800

325,800

Loans and advances to banks

 -  

 -  

 -  

 -  

 -  

46,258

46,258

Debt securities at amortised cost

 -  

 -  

 -  

 -  

 -  

442,960

442,960

Derivative financial instruments

 -  

 -  

 -  

 -  

 -  

1,804

1,804

Loans and advances to customers (net of ECL)

1,095,387

306,044

102,888

75,871

7,352

11,511

1,599,053

   Stage 1

1,003,738

306,044

100,981

75,871

7,352

11,511

1,505,497

   Stage 2

65,570

 -  

755

 -  

 -  

 -  

66,325

   Stage 3

26,079

 -  

1,152

 -  

 -  

 -  

27,231

Other assets

 -  

 -  

 -  

 -  

 -  

4,625

4,625

Financial investments

 -  

 -  

 -  

 -  

 -  

30,919

30,919









Off-balance sheet:








Guarantees

6,401

 -  

 -  

 -  

 -  

 -  

6,401

Loan commitments and other credit related liabilities

135,598

 -  

 -  

53,494

972

 -  

190,064

At 31 December

1,237,386

306,044

102,888

129,365

8,324

863,877

2,647,884

 

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



2020

2019


£000

£000

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



Loans and advances to banks

15,162

15,316

Debt securities at amortised cost

24,308

24,239

Financial investments

14,171

25,913

At 31 December

53,641

65,468

 

The above tables represent the maximum credit risk exposure (net of impairment) to the Group and Company at 31 December 2020 and 2019 without taking account of any collateral held or other credit enhancements attached. For financial assets, the balances are based on gross carrying amounts as reported in the Statement of Financial Position. For guarantees and loan commitments, the amounts in the table represent the amounts for which the group is contractually committed.

 

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





2020




Banking


Mortgage Portfolios


Total





Loan Balance

Collateral


Loan Balance

Collateral


Loan Balance

Collateral

Group




£000

£000


£000

£000


£000

£000

Less than 60%




691,787

1,445,062


130,773

315,099


822,560

1,760,161

   Stage 1




649,958

1,379,681


108,766

262,939


758,724

1,642,620

   Stage 2




27,119

48,259


18,483

42,591


45,602

90,850

   Stage 3




14,710

17,122


3,524

9,569


18,234

26,691

60%-80%




370,629

567,337


96,372

122,956


467,001

690,293

   Stage 1




308,860

480,511


82,443

101,641


391,303

582,152

   Stage 2




44,340

60,221


10,659

15,783


54,999

76,004

   Stage 3




17,429

26,605


3,270

5,532


20,699

32,137

80%-100%




8,046

9,425


28,170

34,090


36,216

43,515

   Stage 1




8,046

9,425


24,115

29,003


32,161

38,428

   Stage 2




 -  

 -  


3,572

4,313


3,572

4,313

   Stage 3




 -  

 -  


483

774


483

774

Greater than 100%*




16,010

12,530


13,694

13,849


29,704

26,379

   Stage 1




16,010

12,530


8,546

8,376


24,556

20,906

   Stage 2




 -  

 -  


4,172

4,163


4,172

4,163

   Stage 3




 -  

 -  


976

1,310


976

1,310













Total




1,086,472

2,034,354


269,009

485,994


1,355,481

2,520,348

 

*In addition to property, other security is taken, including charges over Arbuthnot Latham Investment Management portfolios, other chattels and personal guarantees. The increase in loan to values greater than 100% is due to an increase in exposures collateralised by other assets. Additionally under the government scheme for BBLs, collateral is not required as the loans are 100% backed by the government.

 

Loans in the Banking segment with a loan to value of greater than 100% have additional collateral of £10.0m in the form of cash deposits and security over Arbuthnot Latham Investment Management Portfolios and personal guarantees of £5.0m. Non-property collateral reduces loan to value below 100% for all such exposures in the Banking segment.

 

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





2019




Banking


Mortgage Portfolios


Total





Loan Balance

Collateral


Loan Balance

Collateral


Loan Balance

Collateral

Group




£000

£000


£000

£000


£000

£000

Less than 60%




594,528

1,312,963


93,454

318,010


687,982

1,630,973

   Stage 1




566,348

1,252,288


93,454

318,010


659,802

1,570,298

   Stage 2




18,653

38,270


 -  

 -  


18,653

38,270

   Stage 3




9,527

22,405


 -  

 -  


9,527

22,405

60%-80%




402,705

622,889


46,333

67,372


449,038

690,261

   Stage 1




372,559

577,165


46,333

67,372


418,892

644,537

   Stage 2




28,488

43,125


 -  

 -  


28,488

43,125

   Stage 3




1,658

2,599


 -  

 -  


1,658

2,599

80%-100%




38,508

43,105


56,967

66,421


95,475

109,526

   Stage 1




25,541

28,260


56,967

66,421


82,508

94,681

   Stage 2




9,862

11,550


 -  

 -  


9,862

11,550

   Stage 3




3,105

3,295


 -  

 -  


3,105

3,295

Greater than 100%*




26,400

13,252


108,276

69,235


134,676

82,487

   Stage 1




6,383

3,150


108,276

69,235


114,659

72,385

   Stage 2




4,775

2,000


 -  

 -  


4,775

2,000

   Stage 3




15,242

8,102


 -  

 -  


15,242

8,102













Total




1,062,141

1,992,209


305,030

521,038


1,367,171

2,513,247













*In addition to property, other security is taken, including charges over Arbuthnot Latham Investment Management portfolios, other chattels and personal guarantees. The increase in loan to values greater than 100% is due to an increase in exposures collateralised by other assets. Additionally under the government scheme for BBLs, collateral is not required as the loans are 100% backed by the government.

 

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








2020








Loan Balance

Collateral

Group







£000

£000

Less than 60%







52,990

123,660

60%-80%







62,323

95,602

80%-100%







7,608

9,180

Greater than 100%







5,502

4,758

Total







128,423

233,200

















2019








Loan Balance

Collateral

Group







£000

£000

Less than 60%







83,517

379,255

60%-80%







11,629

17,953

80%-100%







1,587

1,623

Greater than 100%







958

827

Total







97,691

399,658

 

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.

 

Customers seeking COVID-19 related support, including payment holidays, who were not subject to any wider SICR triggers and who are assessed as having the ability in the medium-term, post-crisis to be viable and meet credit appetite metrics, were not considered to have been granted forbearance.

 

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

 

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

 

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

 

For financial assets modified as part of the Group's forbearance policy, the estimate of PD reflects whether the modification has improved or restored the Group's ability to collect interest and principal and the Group's previous experience of similar forbearance action. As part of this process, the Group evaluates the borrower's payment performance against the modified contractual terms and considers various behavioural indicators. Whilst the customer is under forbearance, the customer will be classified as Stage 2 and the Group recognise a lifetime ECL. The customer will transfer to Stage 1 and revert to a 12 month ECL when they exit forbearance. This is conditional upon both a period of good account conduct and the improvement to the client's situation to the extent the credit risk has receded sufficiently and full repayment of the loan, without recourse to the collateral, is likely.

 

Forbearance is a qualitative indicator of a SICR (see notes 3.3 and 3.4)

 

As at 31 December 2020, loans for which forbearance measures were in place totalled 5.0% (2019: 3.1%) of total value of loans to customers for the Group. These are set out in the following table:

 


2020


Stage 1


Stage 2


Stage 3


Total


Number

Loan Balance


Number

Loan Balance


Number

Loan Balance


Number

Loan Balance



£000



£000



£000



£000

Interest capitalisation

 -  

 -  


4

564


 -  

 -  


4

564

Time for asset sale

 -  

 -  


7

10,496


3

11,110


10

21,606

Term extension

 -  

 -  


3

8,084


 -  

 -  


3

8,084

Switch to interest only

 -  

 -  


4

519


 -  

 -  


4

519

Reduced monthly payments

 -  

 -  


10

1,100


 -  

 -  


10

1,100

Payment holiday

19

507


333

45,954


2

1,193


354

47,654

More than one measure

 -  

 -  


2

12,740


 -  

 -  


2

12,740

Total forbearance

19

507


363

79,457


5

12,303


387

92,267

 


2019


Stage 1


Stage 2


Stage 3


Total


Number

Loan Balance


Number

Loan Balance


Number

Loan Balance


Number

Loan Balance



£000



£000



£000



£000

Assistance with property sale

 -  

 -  


4

231


 -  

 -  


4

231

Move historic arrears to capital

 -  

 -  


1

1,719


 -  

 -  


1

1,719

Covenant waived

 -  

 -  


6

7,473


 -  

 -  


6

7,473

Term extension

 -  

 -  


18

32,780


 -  

 -  


18

32,780

Payment holiday

 -  

 -  


32

6,795


 -  

 -  


32

6,795

Total forbearance

 -  

 -  


61

48,998


 -  

 -  


61

48,998

 

Concentration risk

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

 


Loans and advances to customers


Loan Commitments


2020

2019


2020

2019


£000

£000


£000

£000

Concentration by product






   Asset based lending*

87,331

75,871


155,300

53,494

   Asset finance

87,529

103,193


155

972

   Cash collateralised

13,905

11,526


5,952

1,781

   Commercial lending

255,891

269,590


17,484

3,941

   Investment portfolio secured

29,051

40,127


781

2,984

   Residential mortgages

1,056,022

1,035,395


110,938

93,749

   Mixed collateral*

30,442

45,432


4,705

17,282

   Unsecured**

27,678

17,919


13,112

15,861

At 31 December

1,587,849

1,599,053


308,427

190,064







Concentration by location






   East Anglia

44,304

39,997


2,925

10

   London

573,188

554,183


89,796

77,960

   Midlands

102,504

108,635


8,117

4,392

   North East

37,499

53,294


1,170

641

   North West

111,793

111,500


4,017

1,826

   Northern Ireland

9,222

9,061


 -  

 -  

   Scotland

25,611

28,197


50

1,064

   South East

232,311

224,915


7,370

7,188

   South West

171,581

169,343


14,130

4,513

   Wales

17,403

18,493


848

98

   Overseas

1,000

11,150


 -  

 -  

   Non-property collateral

261,433

270,285


180,004

92,372

At 31 December

1,587,849

1,599,053


308,427

190,064

 

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

**     Included within unsecured are £8.4m of loans which are backed by the government guarantee scheme for BBLs.

 

(b) Operational risk (unaudited)

The Group's objective is to manage operational risk so as to balance the avoidance of financial losses and damage to the Group's reputation with overall cost effectiveness and to avoid control procedures that restrict initiatives and creativity. The Group is exposed to operational risks from its Information Technology and Operations platforms. There are additional internal controls in these processes that are designed to protect the Group from these risks. The Group's overall approach to managing internal control and financial reporting is described in the Corporate Governance section of the Annual Report.

 

During the year there was significant focus on the potential operational risks arising from the change in working practices due to the pandemic, particularly the move to home-working in order to protect staff and support clients through the crisis. Management attention also focused heavily on operational resilience to ensure that planning, controls and operational activities remained robust and appropriate. The Bank ensured that all staff had access to equipment to complete their work with all staff working from home for the majority of the year.

 

The Group's control environment was continually monitored to ensure that the challenges posed by adapting to the impact of COVID-19 were safely addressed. There was also continued oversight of the Group's preparations for the end of the transition period, following the UK's exit from the EU, to ensure that processes and systems are appropriate to ensure continuity of service for customers.

 

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

 

Cyber risk

Cyber risk is an increasing risk that the Group is subject to within its operational processes. This is the risk that the Group is subject to some form of disruption arising from an interruption to its IT and data infrastructure. The Group regularly tests the infrastructure to ensure that it remains robust to a range of threats, and has continuity of business plans in place including a disaster recovery provision.

 

Conduct risk

As a financial services provider we face conduct risk, including selling products to customers which do not meet their needs; failing to deal with customers' complaints effectively; not meeting customers' expectations; and exhibiting behaviours which do not meet market or regulatory standards.

 

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

 

(c) Macroeconomic and competitive environment

COVID-19

The COVID-19 pandemic has had, and continues to have, a material impact on all businesses around the world and the markets in which they operate. There are a number of factors associated with the pandemic and its impact on global economies that could have a material adverse effect on (among other things) the profitability, capital and liquidity of financial institutions such as Arbuthnot Latham.

 

To ensure an appropriate response to the pandemic, management scrutinised key risks emerging from the crisis and their impact on the Group's risk profile. The Board's discussions focused on operational resilience, liquidity and funding considerations, customer vulnerability, and the impact of material increases in forbearance requests on the Group's credit portfolios and on its operational capacity.

 

The pandemic has caused disruption to the Group's customers, suppliers and staff globally. The markets in which the Group operates have implemented severe restrictions on the movement of their respective populations, with a resultant significant impact on economic activity. These restrictions are being determined by the governments of individual jurisdictions (including through the implementation of emergency powers) and impacts (including the timing of implementation and any subsequent lifting of restrictions) may vary from jurisdiction to jurisdiction.

 

Schemes have been initiated by the Bank of England, national governments and regulators to provide financial support to parts of the economy most impacted by the COVID-19 pandemic. These schemes have been designed and implemented at pace, which has allowed the Group to continue meeting clients' requirements with staff monitoring operational issues which may arise in their implementation.

 

Furthermore, the Group relies on models to support a broad range of business and risk management activities, including informing business decisions and strategies, measuring and limiting risk, valuing exposures (including the calculation of impairment), conducting stress testing and assessing capital adequacy. Management regularly meet to discuss the impact of COVID-19 and review data to mitigate any potential negative effects.

 

The details of how these schemes will impact the Group's clients in the long term remains uncertain at this stage. However, certain actions (such as the introduction of payment holidays for certain consumer lending products or the cancellation or waiver of fees associated with certain products) may impact the effective interest rate earned on certain of the Group's portfolios and fee income being earned on certain products.

 

The significant business risks that may arise from the economic shock in addition to the reduction in interest rates as detailed in the Strategic Report are:

 

•       Increased credit risk as borrowers are unable to continue to meet their interest obligations as they fall due. It is also currently unclear precisely how the withdrawal of the Government's announced package of measures will affect this clear risk.

•       The uncertainty in the economy could result in a significant fall in the collateral values of our security held against the loans. Valuations are likely to vary significantly due to the inherent uncertainty. However the average loan to value of the property backed lending book is 53.4%, so to have any material impact; this fall in collateral would have to be severe and prolonged.

•       A prolonged reduction in business activity will affect the Bank's ability to generate new business opportunities and it is likely that repayments in the lending portfolio will be greater than new originations, which could lead to an overall fall in the Group's lending balances and an associated fall in revenue.

•       The economic shock could lead to a fall in valuations in the Group's investment properties and the properties held in inventory.

•       As the revenues earned by the Group's Investment Management business are directly linked to the balances managed on behalf of our customers, any reduction in these values due to market movements will have a corresponding impact on these revenues.

 

Brexit

The Brexit transition period came to an end on 31 December 2020 and the EU and UK agreed the Trade and Cooperation Agreement on 24 December 2020, which is provisionally applicable from 1 January 2021. There is still some uncertainty around the long term consequences of Brexit. The Group's only overseas operation in Dubai is in the process of being closed down, so the vast majority of the Group's income and expenditure is based in the UK. The Group will continue to monitor the implications of Brexit on the wider economy as the future relationship with the EU develops.

 

Climate change

Climate change presents financial and reputational risks for the banking industry. The Board consider Climate change a material risk as per the Board approved risk appetite framework which provides a structured approach to risk taking within agreed boundaries. The assessment is proportional at present but will develop over time as the Group generates further resources and industry consensus emerges. The assessment is maintained by the Chief Risk officer and has been informed by the ICAAP review and numerous workshops for staff.

 

Whilst it is difficult to assess how climate change will unfold, the Group is continually assessing various risk exposures. The UK has a legally binding target to cut its greenhouse gas emissions to "net-zero" by 2050. There is growing consensus that an orderly transition to a low-carbon economy will bring substantial adjustments to the global economy which will have financial implications while bringing risks and opportunities.

 

The risk assessment process has been integrated into existing risk frameworks and will be governed through the various risk governance structures including review and recommendations by the AL Risk Committee. Arbuthnot Latham governance has been assessed against the Task Force on Climate-related Financial Disclosures' (TCFD) recommended governance disclosures and where appropriate the FCA/PRA guidance as per the Supervisory statements.

 

In accordance with the requirements of the PRA's Supervisory Statement 'Enhancing banks' and insurers' approaches to managing the financial risks from climate change', the Group has allocated responsibility for identifying and managing the risks from climate change to the relevant existing Senior Management Function. The Bank is continuously developing a suitable strategic approach to climate change and the unique challenges it poses.

 

The FCA have issued 'Climate Change and Green Finance: summary of responses and next steps'. In addition to the modelling of various scenarios and various governance reviews, Arbuthnot Latham will continue to monitor requirements through the relationship with UK Finance.

 

(d) Market risk

Price risk

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

 

Based upon the financial investment exposure in Note 24, a stress test scenario of a 10% (2019: 10%) decline in market prices, would result in a £14k (2019: £16k) decrease in the Group's income and a decrease of £1.8m (2019: £3.1m) in the Group's equity. The Group considers a 10% stress test scenario appropriate after taking the current values and historic data into account.

 

Based upon the financial investment exposure given in Note 24, a stress test scenario of a 10% (2019: 10%) decline in market prices, would result in a £nil (2019: £nil) decrease in the Company's income and a decrease of £1.4m (2019: £2.6m) in the Company's equity.

 

Currency risk

The Company and Group take on exposure to the effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. This is managed through the Group entering into forward foreign exchange contracts. The Board sets limits on the level of exposure for both overnight and intra-day positions, which are monitored daily. The table below summarises the Group's exposure to foreign currency exchange rate risk at 31 December 2020. Included in the table below are the Group's assets and liabilities at carrying amounts, categorised by currency.

 


GBP (£)

USD ($)

Euro (€)

Other

Total

£000

£000

£000

£000

£000

ASSETS






Cash and balances at central banks

636,688

41

64

6

636,799

Loans and advances to banks

46,152

26,005

25,415

12,695

110,267

Debt securities at amortised cost

234,112

110,580

 -  

 -  

344,692

Derivative financial instruments

1,768

6

 -  

69

1,843

Loans and advances to customers

1,564,148

1,611

22,192

(102)

1,587,849

Other assets

6,490

 -  

 -  

(1,033)

5,457

15,921

2,436

138

 -  

18,495


2,505,279

140,679

47,809

11,635

2,705,402

LIABILITIES






Deposits from banks

230,090

 -  

 -  

 -  

230,090

Derivative financial instruments

581

 -  

 -  

68

649

Deposits from customers

2,163,484

140,786

50,438

10,499

2,365,207

Other liabilities

2,444

 -  

(495)

 -  

1,949

24,308

 -  

13,348

 -  

37,656


2,420,907

140,786

63,291

10,567

2,635,551

Net on-balance sheet position

84,372

(107)

(15,482)

1,068

69,851

Credit commitments

308,427

 -  

 -  

 -  

308,427

 

The table below summarises the Group's exposure to foreign currency exchange risk at 31 December 2019:








GBP (£)

USD ($)

Euro (€)

Other

Total

£000

£000

£000

£000

£000

ASSETS






Cash and balances at central banks

325,844

20

41

3

325,908

Loans and advances to banks

5,364

10,028

18,892

11,974

46,258

Debt securities at amortised cost

336,079

106,881

 -  

 -  

442,960

Derivative financial instruments

1,713

1

3

87

1,804

Loans and advances to customers

1,563,536

7,957

27,574

(14)

1,599,053

Other assets

4,625

 -  

 -  

 -  

4,625

29,113

1,637

169

 -  

30,919


2,266,274

126,524

46,679

12,050

2,451,527

LIABILITIES






Deposits from banks

230,421

 -  

 -  

 -  

230,421

Derivative financial instruments

233

 -  

2

84

319

Deposits from customers

1,897,857

126,220

49,049

11,777

2,084,903

Other liabilities

2,023

 -  

 -  

 -  

2,023

24,239

 -  

12,598

 -  

36,837


2,154,773

126,220

61,649

11,861

2,354,503

Net on-balance sheet position

111,501

304

(14,970)

189

97,024

Credit commitments

190,064

 -  

 -  

 -  

190,064

 

Derivative financial instruments (see note 20) are in place to mitigate foreign currency risk on net exposures for each currency. A 10% strengthening of the pound against the US dollar would lead to a £11k increase (2019: £30k decrease) in Group profits and equity, while a 10% weakening of the pound against the US dollar would lead to the same decrease in Group profits and equity. Additionally the Group holds £3.3m of properties classified as assets held for sale (2019: £7.6m) and £12.3m classified as inventory (2019: £7.6m). These properties are located in the EU and relate to Euro denominated loans where the properties were repossessed and are either being held for sale or being developed with a view to sell. Including these Euro assets, the net Euro exposure is positive £125k (2019: £431k).

 

Due to the global nature of the pandemic, the Group's risk management strategy has not substantially changed due to COVID-19.

 

The table below summarises the Company's exposure to foreign currency exchange rate risk at 31 December 2020:







GBP (£)

Euro (€)

Total

At 31 December 2020

£000

£000

£000

ASSETS




Loans and advances to banks

1,565

13,597

15,162

Debt securities at amortised cost

24,308

 -  

24,308

Financial investments

14,171

 -  

14,171


40,044

13,597

53,641

LIABILITIES




Other liabilities

3,132

 -  

3,132

Debt securities in issue

24,308

13,348

37,656


27,440

13,348

40,788

Net on-balance sheet position

12,604

249

12,853

 

The table below summarises the Company's exposure to foreign currency exchange rate risk at 31 December 2019:







GBP (£)

Euro (€)

Total

At 31 December 2019

£000

£000

£000

ASSETS




Loans and advances to banks

2,414

12,902

15,316

Financial investments

24,239

 -  

24,239

Other assets

25,913

 -  

25,913


52,566

12,902

65,468

LIABILITIES




Other liabilities

1,113

 -  

1,113

Debt securities in issue

24,239

12,598

36,837


25,352

12,598

37,950

Net on-balance sheet position

27,214

304

27,518

 

A 10% strengthening of the pound against the Euro would lead to £31k (2019: £11k) decrease in the Company profits and equity, conversely a 10% weakening of the pound against the Euro would lead to a £37k (2019: £13k) increase in the Company profits and equity.

 

Interest rate risk

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

 

Interest rate risk is measured throughout the maturity bandings of the book on a parallel shift scenario for a 200 basis points movement.  Interest rate risk is managed to limit value at risk to be less than £0.5m capped at negative 0.1%. The current position of the balance sheet is such that it results in a favourable impact on the economic value of equity of £2.4m (2019: £3.1m) for a positive 200bps shift and an adverse impact of £0.1m (2019: £1.2m) for a negative 200bps movement capped at negative 0.1%. The Company has no fixed rate exposures, but an upward change of 50bps on variable rates would increase pre-tax profits and equity by £8k (2019: increase pre-tax profits and equity by £13k), while a downward change of 50bps (capped at 10bps) would increase pre-tax profits and equity by £1k.

 

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

 

Group

Within 3 months

More than 3 months but less than 6 months

More than 6 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

Non interest bearing

Total

As at 31 December 2020

£000

£000

£000

£000

£000

£000

£000

ASSETS








Cash and balances at central banks

636,799

 -  

 -  

 -  

 -  

 -  

636,799

Loans and advances to banks

109,936

331

 -  

 -  

 -  

 -  

110,267

Debt securities at amortised cost

269,014

41,957

15,677

18,044

 -  

 -  

344,692

Derivative financial instruments

202

 -  

 -  

1,641

 -  

 -  

1,843

Loans and advances to customers

1,343,863

17,463

19,946

193,122

13,455

 -  

1,587,849

Other assets*

 -  

 -  

 -  

 -  

 -  

160,077

160,077

Financial investments

 -  

 -  

 -  

 -  

 -  

18,495

18,495


2,359,814

59,751

35,623

212,807

13,455

178,572

2,860,022

LIABILITIES








Deposits from banks

230,090

 -  

 -  

 -  

 -  

 -  

230,090

Derivative financial instruments

649

 -  

 -  

 -  

 -  

 -  

649

Deposits from customers

1,531,104

182,703

249,828

401,562

10

 -  

2,365,207

Other liabilities**

 -  

 -  

 -  

 -  

 -  

34,215

34,215

Debt securities in issue

37,656

 -  

 -  

 -  

 -  

 -  

37,656

Equity

 -  

 -  

 -  

 -  

 -  

192,205

192,205


1,799,499

182,703

249,828

401,562

10

226,420

2,860,022

Impact of derivative instruments

25,292

 -  

 -  

(25,292)

 -  

 -  


Interest rate sensitivity gap

585,607

(122,952)

(214,205)

(214,047)

13,445

(47,848)










Cumulative gap

585,607

462,655

248,450

34,403

47,848

 -  










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

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

 

Group

Within 3 months

More than 3 months but less than 6 months

More than 6 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

Non interest bearing

Total

As at 31 December 2019

£000

£000

£000

£000

£000

£000

£000

ASSETS








Cash and balances at central banks

325,908

 -  

 -  

 -  

 -  

 -  

325,908

Loans and advances to banks

45,836

188

234

 -  

 -  

 -  

46,258

Debt securities held-to-maturity

287,608

151,555

3,797

 -  

 -  

 -  

442,960

Derivative financial instruments

105

 -  

 -  

1,699

 -  

 -  

1,804

Loans and advances to customers

1,351,549

11,101

25,963

209,811

629

 -  

1,599,053

Other assets

 -  

 -  

 -  

 -  

 -  

148,477

148,477

Financial investments

 -  

 -  

 -  

 -  

 -  

30,919

30,919


2,011,006

162,844

29,994

211,510

629

179,396

2,595,379

LIABILITIES








Deposits from banks

230,421

 -  

 -  

 -  

 -  

 -  

230,421

Derivative financial instruments

319

 -  

 -  

 -  

 -  

 -  

319

Deposits from customers

1,403,728

233,716

211,956

235,503

 -  

 -  

2,084,903

Other liabilities

 -  

 -  

 -  

 -  

 -  

34,564

34,564

Debt securities in issue

36,837

 -  

 -  

 -  

 -  

 -  

36,837

Equity

 -  

 -  

 -  

 -  

 -  

208,335

208,335


1,671,305

233,716

211,956

235,503

 -  

242,899

2,595,379

Impact of derivative instruments

25,531

 -  

 -  

(25,531)

 -  

 -  


Interest rate sensitivity gap

365,232

(70,872)

(181,962)

(49,524)

629

(63,503)










Cumulative gap

365,232

294,360

112,398

62,874

63,503

 -  










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

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

 

Company

Within 3 months

More than 3 months but less than 6 months

More than 6 months but less than 1 year

More than 1 year but less than 5 years

More than 5 years

Non interest bearing

Total

As at 31 December 2020

£000

£000

£000

£000

£000

£000

£000

ASSETS








Debt securities at amortised cost

24,308

 -  

 -  

 -  

 -  

 -  

24,308

Loans and advances to banks

15,113