Annual Financial Report

RNS Number : 1881O

Close Brothers Group PLC

30 September 2019

 

Annual Financial Report

Close Brothers Group plc (the "group" or "Close Brothers") announces that it has today published its Annual Report and Accounts 2019 (the "Annual Report"). The document is available to view on the group's website at http://www.closebrothers.com/investor-relations/investor-information/results-reports-and-presentations. In accordance with Listing Rule 9.6.1, a copy of the document has also been submitted to the UK Listing Authority and will shortly be available for inspection on the National Storage Mechanism at http://www.morningstar.co.uk/uk/NSM

The Annual Report will be sent to shareholders on or around 17 October 2019, together with the Notice of Annual General Meeting and Form of Proxy. The 2019 Annual General Meeting will be held at 10 Crown Place, London EC2A 4FT on Thursday 21 November 2019, commencing at 11am.

The information included in the Appendix to this announcement has been extracted from the Annual Report and is reproduced here solely for the purposes of complying with the requirements of Disclosure Guidance and Transparency Rule ("DTR") 6.3.5 in respect of how to make annual financial reports available to the public.

The content of this announcement, including the Appendix, should be read in conjunction with the group's preliminary results announcement for the year ended 31 July 2019, which was released on 24 September 2019 and is available on the group's website at http://www.closebrothers.com/investor-relations/investor-information/results-reports-and-presentations

Together, these announcements constitute the material required by DTR 6.3.5 to be communicated in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the full Annual Report. Defined terms used in the Appendix refer to terms as defined in the Annual Report. Page numbers and cross references in the Appendix refer to pages and sections of the Annual Report.

Enquiries: Alex Dunn, Company Secretary & Corporate Counsel

020 3857 6057

About Close Brothers

Close Brothers is a leading UK merchant banking group providing lending, deposit taking, wealth management services and securities trading.  We employ over 3,000 people, principally in the UK. Close Brothers Group plc is listed on the London Stock Exchange and is a member of the FTSE 250.
 

Appendix

Directors' Responsibility Statement

The directors, whose names and functions are listed on pages 52 and 53, are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulation.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the group financial statements in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union and the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and applicable law). Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and parent company and of the profit or loss of the group and parent company for that period.

In preparing the group and parent company financial statements, the directors are required to:

·	select suitable accounting policies and then apply them consistently;
·	make judgements and accounting estimates that are reasonable and prudent;
·	state whether applicable IFRSs as adopted by the European Union have been followed for the group financial statements, and whether United Kingdom Accounting Standards, comprising FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland" and applicable law have been followed for the parent company financial statements, subject to any material departures disclosed and explained in the group and parent company financial statements; and
·	prepare the group and parent company financial statements on the going concern basis unless it is inappropriate to presume that the group and the parent company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the group and parent company's transactions and disclose with reasonable accuracy at any time the financial position of the group and parent company and enable them to ensure that the financial statements and Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the group and parent company and hence for taking reasonable steps for the prevention and detection of 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 United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the directors confirms that, to the best of their knowledge:

·	the group and parent company financial statements, prepared in accordance with the relevant financial reporting frameworks, give a true and fair view of the assets, liabilities, financial position and profit or loss of the group and parent company respectively;
·	the Strategic Report, together with the Directors' Report and the Corporate Governance Report, include a fair review of the development and performance of the business and the position of the group and parent company, together with a description of the principal risks and uncertainties that they face; and
·	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.

Principal Risks and Uncertainties

Pages 18 to 22 of the Annual Report contain the following statement on principal risks and uncertainties faced by the group.

Risk Management

The group faces a number of risks in the normal course of business providing lending, deposit taking, wealth management services and securities trading.

As set out in the strategy section on the previous pages, the protection of our established business model is a key strategic objective. As a result, the management of the risks we face is central to everything we do. The key elements to the way we manage risk are as follows:

·	adhering to our established and proven business model outlined on pages 14 and 15;
·	implementing an integrated risk management approach based on the concept of "three lines of defence"; and
·	setting and operating within clearly defined risk appetites, monitored with defined metrics and set limits.

Further details on our approach to risk management are set out on pages 66 and 67. Risk management is overseen by the Board Risk Committee and its key areas of focus over the last financial year are set out on pages 70 and 71. We believe the key risks facing the group include: the current economic uncertainty; the regulatory landscape and how it may impact some or all of our businesses; the competitive environment; and maintaining operational resilience in the face of growing cyber threats. The potential impact of the UK's anticipated departure from the EU and how it could impact our customers also continues to be closely monitored and managed through the firm's emerging risk framework.

Risks and Uncertainties

The following pages set out the principal risks and uncertainties which may impact the group's ability to deliver its strategy, how we seek to mitigate these risks and the change in the perceived level of risk over the year. While we constantly monitor our portfolio for emerging risks, the group's activities, business model and strategy remain unchanged. As a result, the principal risks and uncertainties which the group faces and our approach to mitigating them remain broadly consistent with prior years. This consistency in approach has underpinned the group's track record of trading successfully and supporting our clients over many years.

The summary below should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties faced by the group but reflect those which the group currently believes may have a significant impact on its performance and future prospects.

Credit risk

Risk

As a lender to businesses and individuals, the bank is exposed to credit losses if customers are unable to repay loans and outstanding interest and fees. At 31 July 2019 the group had loans and advances to customers amounting to £7.6 billion.

The group also has exposure to counterparties with which it places deposits or trades, and also has in place a small number of derivative contracts to hedge interest rate and foreign exchange exposures.

Mitigation  

We seek to minimise our exposure to credit losses from our lending by:

·	applying strict lending criteria when testing the credit quality and covenant of the borrower;
·	maintaining consistent and conservative loan to value ratios with low average loan size and short-term tenors;
·	lending on a predominantly secured basis against identifiable and accessible assets;
·	maintaining rigorous and timely collections and arrears management processes; and
·	operating strong control and governance both within our lending businesses and with oversight by a central credit risk team.

Our exposures to counterparties are mitigated by:

·	excess liquidity of £1.1 billion placed with the Bank of England;
·	continuous monitoring of the credit quality of our counterparties within approved set limits; and
·	Winterflood's trading relating to exchange traded cash securities being settled on a delivery versus payment basis. Counterparty exposure and settlement failure monitoring controls are also in place.

Change

No change

Credit losses have again remained low during the year to 31 July 2019 while other counterparty exposures are broadly unchanged with the majority of our liquidity requirements and surplus funding placed with the Bank of England.

We continue to monitor closely the uncertainty over Brexit and the UK economic outlook combined with rising consumer debt levels. These factors could increase the risk of higher credit losses in the future.

Further commentary on the credit quality of our loan book is outlined on pages 30 to 33. Further details on loans and advances to customers and debt securities held are in notes 11 and 12 on pages 125 to 128 of the financial statements.

Our approach to credit risk management and monitoring is outlined in more detail in note 28 on page 147.

Economic environment

Risk

Any downturn in economic conditions may impact the group's performance through:

·	lower demand for the group's products and services;
·	lower investor risk appetite as a result of financial markets instability;
·	higher credit losses as a result of the inability of our customers to service debt and lower asset values on which loans are secured; and
·	increased volatility in funding markets.

Mitigation  

The group's business model aims to ensure that we are able to trade successfully and support our clients in all economic conditions. By maintaining a strong financial position we aim to be able to absorb short-term economic downturns, continuing to lend when competitors pull back and in so doing building  long-term relationships by supporting our clients when it really matters.

We test the robustness of our financial position by carrying out regular stress testing on our performance and financial position in the event of adverse economic conditions.

Change

No change

Although UK economic performance has remained largely resilient to date, economic uncertainty and risk to the macroeconomic outlook remains elevated due to Brexit and wider global events. While a broadly stable macroeconomic backdrop is anticipated in our current base case scenario, stress testing and contingency planning continue to be employed to support preparedness for a range of possible scenarios. The potential economic impacts of the UK's planned departure from the EU continue to be closely monitored through the firm's emerging risk framework.

Further commentary on the attributes and resilience of the group's diversified business model is shown on pages 14 and 15.

Legal and regulatory  

Risk

Failure to comply with existing legal, regulatory or tax requirements, or to react to changes to these requirements, may have negative consequences for the group.  

Failing to treat customers fairly, to safeguard client assets or to provide advice and products which are in clients' best interests has the potential to damage our reputation and may lead to legal or regulatory sanctions, litigation or  customer redress. This applies to current, past and future business.

Similarly, changes to regulation and taxation can impact our financial performance, capital and liquidity and the markets in which we operate.

Mitigation  

The group seeks to manage these risks by:

·	the implementation of appropriate policies, standards and procedures and the use of risk-based monitoring programmes to test adherence;
·	the provision of clear advice on legal and regulatory requirements, including in relation to the scope of regulatory permissions;
·	responding in an appropriate, risk-based and proportionate manner to any changes to the legal and regulatory environment and those driven by any strategic initiatives;
·	investing in training for all staff including anti-money laundering, bribery and corruption, conduct risk, data protection and information security. Additional tailored training for relevant employees is provided in key areas such as complaint handling;
·	maintaining constructive and positive relationships and dialogue with regulatory bodies and tax authorities;
·	providing straightforward and transparent products and services to our clients;
·	reviewing and approving new products and services through a clear governance and approval process; and
·	maintaining a prudent capital position with headroom above minimum capital requirements.

Change

No change

Financial services businesses remain the subject of significant regulatory scrutiny. Minimum capital requirements are increasing as regulatory buffers are phased in and remain subject to change by regulators. In addition to the regulatory uncertainties associated with Brexit, there has been growing regulatory focus on consumer borrowing, particularly within motor finance, and on the customer experience within the asset management industry. For example, we continue to monitor the potential for regulatory change in the motor finance market following publication of the FCA's final report in March 2019.

Operational Risk

Risk

The group is exposed to various operational risks through its day-to-day operations, all of which have the potential to result in financial loss or adverse impact.

Losses typically crystallise as a result of inadequate or failed internal processes, people and systems, or as a result of external factors.

Adverse impacts to the business, customers, third parties and the markets in which we operate are considered within a developing focus on resilient end-to-end delivery of critical business services.

Mitigation  

The group seeks to maintain its operational resilience through:

·	sustaining robust operational risk management processes, governance and management information;
·	identifying key systems, third party relationships, processes and staff, to enable effective investment decisions;
·	investing in technology to provide reliable and contemporary customer service offerings;
·	investing in cyber security including expertise, tools and staff engagement;
·	maintaining focus on data protection;
·	adopting fraud prevention and detection capabilities aligned with our risk profile; and
·	testing recovery capabilities and planning communications approaches for possible scenarios.

Change

No change

Market and regulatory expectations continue to increase in relation to operational risk management and resilience. In line with this environment, the group continues to develop and evolve its capacity to reliably deliver key services.

We continue to invest in and upgrade our IT infrastructure, third party management framework, operational processes and cyber security capability to keep abreast of these risks.

For further information on our approach to operational resilience and also our response to cyber threats, see page 71 of the Risk Committee Report.

Competition

Risk

The group operates in competitive markets and experiences competition from traditional and new players, varying in both nature and extent across its divisions.

Currently we are experiencing particularly high levels of competition within the Motor Finance business and the intermediated part of the Asset Finance market.

Elevated levels of competition may impact the group's ability to write loans at its desired risk and return criteria, resulting in lower new business volumes and loss of market share.

Mitigation 

The group's long track record of successful trading is supported by a consistent and disciplined approach to pricing and credit quality, even in competitive markets. This allows us to lend profitably and continue to support our customers at all stages in the financial cycle.

We build long-term relationships with our clients and intermediaries based on:

·	the speed and flexibility of services;
·	our local presence and personal approach;
·	the experience of our people and subject matter experts; and
·	our offering of tailored and client-driven product solutions.

This differentiated approach and the consistency of our lending results in strong customer relationships and high levels of repeat business.

We are further protected by the diversity of our loan book and product portfolio, which provides resilience against competitive pressure in any one part of our markets.

Change

No change

Despite high levels of competition across each of our businesses, our approach remains unchanged as we focus on supporting our clients, maintaining underwriting standards and investing in our business.

Further commentary on the market environment of the Banking division is outlined on page 30. Our business model is set out on pages 14 and 15.

Employees

Risk

The quality and expertise of our employees is critical to the success of the group. The loss of key individuals or teams may have an adverse impact on the group's operations and ability to deliver its strategy.

Mitigation  

The group seeks to attract, retain and develop staff by:

·	operating remuneration structures which are competitive and recognise and reward performance;
·	creating an inclusive environment that embraces diversity;
·	listening to employee feedback through engagement surveys and developing actions plans;
·	implementing succession planning for key roles;
·	improving our talent pipeline via our graduate and school leavers programmes, and our sales training academy in Asset Finance;
·	investing in training and development for all staff; and
·	delivering leadership development programmes that identify current and future leaders for the group.

Change

No change

Our highly skilled people are likely to be targeted by competitors but we are confident in our ability to retain key employees.

Further detail on the employee survey and our investment in our people is outlined in the Sustainability Report on pages 42 to 51.

Funding and liquidity

Risk

The Banking division's access to funding remains key to support our lending activities and the liquidity requirements of the group.

Mitigation  

Our funding approach is based on the principle of "borrow long, lend short". The average maturity of funding allocated to the loan book was 20 months at 31 July 2019. This compares to our weighted average loan maturity of 14 months.

Our funding is diversified both by source and channel, and by type and tenor. Liquidity in our Banking division is assessed on a daily basis to ensure adequate liquidity is held and remains readily accessible in stressed conditions.

At 31 July 2019 the group's funding position was strong with total available funding equal to 129% of the loan book. This provides a prudent level of liquidity to support our lending activities.

Change

No change

While economic uncertainty always has the potential to impact funding markets, the group remains conservatively funded and continues to have access to a wide range of funding sources and products.

Our new customer deposit platform will further increase our funding resilience with access to a wider range of deposit and savings products, and an online distribution capability.

This diversity of funding, combined with relatively long tenor when compared to the average duration of our lending, means we are well placed to meet any future market challenges or constraints.

Further commentary on funding and liquidity is provided on pages 28 and 29. Further financial analysis of our funding is shown in note 19 on page 135 of the financial statements.

Market risk

Risk

Market volatility impacting equity and fixed income exposures and/or changes in interest and exchange rates have the potential to impact the group's performance.

Mitigation  

Our policy is to minimise interest rate risk by matching fixed and variable interest rate assets and liabilities, and using swaps where appropriate. The capital and reserves of the group do not have interest rate liabilities and as such are not hedged.

Foreign exchange exposures are generally hedged using foreign exchange forwards or currency swaps with exposures monitored daily against approved limits.

Winterflood is a market maker providing liquidity to its clients in equity and fixed income instruments. Our trading is predominantly short-term, with most transactions settling within two days. Trading positions are monitored on a real time basis.

Change

No change

The group's approach and the underlying risks are unchanged. Further detail on the group's exposure to market risk is outlined in note 28 on pages 154 and 155 of the financial statements.

The sensitivity analysis on interest rate exposures shown in note 28 on page 154 demonstrates the limited level of exposure to interest rate and foreign exchange movements.

Emerging Risks

The group utilises an established framework to monitor its portfolio for emerging risks, supporting organisational readiness for external volatility.

This incorporates input and insight from both a top-down and bottom-up perspective:

·	Top-down: Emerging risks identified by directors and executives at a group level via the Group Risk and Compliance Committee and the board.
·	Bottom-up: Emerging risks identified at a business level and escalated, where appropriate, via risk updates into the Group Risk and Compliance Committee and the board.

Group-level emerging risks are monitored by the Group Risk and Compliance Committee and the Risk Committee on an ongoing basis, with agreed actions tracked to ensure the group's preparedness should an emerging risk crystallise.

Current group-level emerging risks are detailed below:

Emerging Risk

Risk of economic and political uncertainty as a result of the UK's exit from the EU

Mitigating Actions

Brexit Forum established in 2016 to track ongoing developments and develop appropriate contingency plans. Appropriate preparations made for a potential "no deal" exit, including the establishment of a new Irish subsidiary and subsequent approval of a MoneyLender licence in the Republic of Ireland to support continuation of our continental Retail and SME Premium Finance business.

Emerging Risk

Risk of financial loss resulting from the physical or transitional impacts of climate change

Mitigating Actions

Climate Risk Working Group established in 2019 with responsibility for developing an appropriate and regulatory-compliant firm-wide climate risk framework. Senior management responsibility has been assigned to the group chief risk officer while the Risk Committee has assumed responsibility for overseeing and challenging the developing framework.

Related party transactions

Page 139 of the Annual Report discloses the following related party transactions.

Transactions with key management

Details of directors' remuneration and interests in shares are disclosed in the Directors' Remuneration Report on pages 76 to 96.

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of an entity; the group's key management are the members of the group's Executive Committee, which includes all executive directors, together with its non-executive directors.

The table below details, on an aggregated basis, key management personnel emoluments:

	2019 £ million	2018 £ million
Emoluments Salaries and fees  Benefits and allowances  Performance related awards in respect of the current year: Cash  Deferred	3.9 0.5 3.4 2.1	4.2 0.6 4.0 2.5
	9.9	11.3
Share-based awards	1.7	3.5
	11.6	14.8

Gains upon exercise of options by key management personnel, expensed to the income statement in previous years, totalled £4.1 million (2018: £6.3 million).

Key management have banking and asset management relationships with group entities which are entered into in the normal course of business. Amounts included in deposits by customers at 31 July 2019 attributable, in aggregate, to key management were £0.1 million (31 July 2018: £0.2 million). At 31 July 2019, no members of key management held any of the company's 4.25% subordinated loan notes. At 31 July 2018, a member of key management held 500,000 of the company's 4.25% subordinated loan notes.

 

END

 

 

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