Final Results
Close Brothers Group PLC
25 September 2006
Embargoed for release 7.00 am on Monday 25th September, 2006
CLOSE BROTHERS GROUP plc
The specialist merchant banking group
FINAL RESULTS 2006
(under International Financial Reporting Standards)
Financial Highlights
2005 2006
* Profit before goodwill and taxation £129m £157m +21%
* Earnings per share before goodwill 62.0p 74.1p +19%
* Profit before taxation £112m £157m +41%
* Earnings per share 49.8p 74.1p +49%
* Dividends per share 28.5p 32.5p +14%
* Shareholders' funds £578m £662m +15%
* Total assets £4.8bn £4.8bn
Operational Highlights
* Asset Management profit up 21% to £38 million. FuM up 16% to £8.2 billion.
* Corporate Finance record profit of £17 million.
* Securities profit up 34% to £48 million.
* Banking record profit of £74 million and bad debts remained well contained.
Colin Keogh, Chief Executive, commenting on the results said:
"We achieved a record profit in 2006 in a year in which the economic climate was
relatively benign and stock markets performed well.
Looking forward, the general UK political and economic outlook is becoming
somewhat opaque, with risks perhaps more on the downside (interest rates,
inflation and consumer debt) than the upside.
All our businesses have started the new year in good shape and, regardless of
the short term economic climate, our confidence in our long term growth
prospects remains strong."
Enquiries to:
Colin Keogh Close Brothers Group plc 020 7426 4000
Rupert Young Brunswick Group LLP 020 7404 5959
Webcast video interview with Colin Keogh, Chief Executive, Close Brothers Group
plc at www.closebrothers.co.uk and www.cantos.com
CLOSE BROTHERS GROUP plc
PRELIMINARY ANNOUNCEMENT OF AUDITED GROUP RESULTS
AND CHAIRMAN'S AND CHIEF EXECUTIVE'S STATEMENT
FOR THE YEAR ENDED 31ST JULY, 2006
The following is the full text of the preliminary announcement of results for
the financial year ended 31st July, 2006. The financial information in relation
to 31st July, 2006 has been extracted from the statutory accounts of the
company, which have yet to be adopted by shareholders at general meeting and
have yet to be filed with the Registrar of Companies.
CHAIRMAN'S AND CHIEF EXECUTIVE'S STATEMENT
2006 was an excellent year for Close Brothers with group profit before goodwill
and taxation of £157 million (2005: £129 million), up 21%, and earnings per
share before goodwill up 19% to 74.1p (2005: 62.0p). There was no goodwill
impairment this year (2005: £18 million).
In the light of these results, the board, which continues to pursue a
progressive dividend policy, recommends an increased final dividend of 22.0p per
share which, together with the interim dividend, makes a total dividend for the
year of 32.5p per share (2005: 28.5p).
These financial statements reflect for the first time the application of
International Financial Reporting Standards. Comparative figures have been
adjusted accordingly. The effect on our opening balance sheet was not material.
Our profit now includes a charge for share-based remuneration of £3 million
(2005: £2 million) but no charge for goodwill amortisation.
OVERVIEW
After four consecutive years of earnings growth we were delighted to achieve the
group's best ever profit. Asset management, corporate finance and banking all
exceeded previous records whilst the securities division produced its highest
contribution since the dot com era. Operating income increased 20%, operating
margin remained high at 29% and costs remained under firm control with the
expense/income ratio steady at 67%. Overall pre-tax return before goodwill
impairment on opening capital was 27% (2005: 24%).
In broad terms, market conditions were favourable for our investment banking
businesses but were more challenging for banking although the credit quality of
our loan book remained good.
The divisional mix of our operating profit before central costs is shown in the
table below.
04 05 06
% % %
Asset Management 13 21 22
Corporate Finance 7 7 9
Securities 28 24 27
Banking 52 48 42
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100 100 100
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To continue to achieve our goal of delivering long term profit and dividend
growth to our shareholders, we have continued to invest in new initiatives.
Our asset management division is implementing a major re-shaping and re-branding
exercise following some significant recruitment. The banking division has also
recruited further specialist teams and is developing new products to exploit the
mortgages market.
On the acquisition front, after an active 2005, this year has been quieter, the
only transaction completed being the purchase of a 70% holding in Fortune, a
London based fund of hedge funds business, from its management. Whilst a number
of opportunities became available during the year, we maintain a disciplined
approach to valuation and will only invest where we see real future value. We
were encouraged this year by the successful integration of, and strong
performances from, all of the deals completed in the previous year with
exceptional results being achieved by our new broker dealer in Frankfurt.
Our strategic priorities are to continue to build on the recent strong progress
in asset management and to return the growth rate in our banking division to its
long term trend. Our securities businesses have strong positions in their
respective markets and we see continuing demand for the independent advice
offered by our corporate finance business.
We constantly look for acquisition opportunities to strengthen our existing
market positions and to take the group into new areas of growth.
Asset Management
Our asset management division had another good year with further profit growth
and pleasing strategic progress. Profit rose by 21% to £38 million and our funds
under management by 16% to £8.2 billion.
On the private client side we saw good growth in profit both on and off shore as
we continued to reap the benefits of the earlier reorganisation of our business
units. We strengthened our new business development capability and we bolstered
our team of private client fund managers. Over the coming year we will be
bringing together our private client businesses on and off shore under one
brand, Close Wealth Management Group. This will create a solid platform for
further growth.
Considerable progress was made in our funds business this year. We announced in
April 2006 that we had acquired 70% of Fortune. This acquisition broadens our
exposure to alternative asset and multi-manager classes, an important strategic
objective, as well as taking us into an area which we believe will be of
increasing interest and importance to both private and institutional clients. In
the coming year we will be regrouping certain of our funds' activities together
under the Close Investments banner. We expect this to result in more productive
and cost-effective distribution.
Our private equity business had a record year and we expect continued strong
performance in this area.
We remain excited by the prospects for this division.
Corporate Finance
Corporate finance had an excellent year with profit up 67% to £17 million.
London, Frankfurt and Paris all delivered record performances. The major part of
this growth came from mergers and acquisitions work where markets have been
buoyant. The other two areas of our business, debt advice and restructuring,
have also been busy with our market position and expertise in the latter now
recognised as amongst the best in Europe. The division has also won a number of
industry awards for successfully completed transactions.
Our opening pipeline is, once again, healthy.
Securities
Our securities businesses did well with operating profit up 34% to £48 million.
Winterflood Securities, our UK market-making business which sits at the heart of
retail equity and bond trading in London, had a successful year in generally
strong markets. Bargain numbers were up significantly on last year although the
profit per bargain decreased somewhat. Nevertheless, operating margin held
steady at 37% on increased income.
Close Brothers Seydler, our Frankfurt based broker dealer, had an outstanding
first full year in the group, with pre-tax profit of £9 million. This was an
excellent return on our cost of £21 million. Our business has thrived as German
investor interest has recovered strongly on the back of rising equity markets
and as the new issues market has returned to life.
Our new financial year has got off to a reasonable start, better in London than
Frankfurt, but trading levels are lower than last year.
Banking
Banking profit was up 6% to £74 million on a loan book of £1.9 billion which was
slightly down on last year. Bad debts remained well contained and provisions as
a percentage of the average loan book were 1.0%, an historically low level.
Banking continues to provide a high divisional operating margin, which remained
steady at 37%.
The planned and profitable run off of a motor finance book acquired last year
was the principal cause of this small reduction in our loan book. Good growth in
a number of areas, particularly property finance and invoice finance, helped to
mitigate the effect of insurance premium deflation and the contraction of our
print finance business.
We are not anticipating any immediate improvement in our premium finance
business where cyclical premium deflation continues, albeit at a reduced rate.
In the meantime, we can see attractive growth prospects in several of our other
specialist financing businesses and we have a number of interesting new
initiatives under way.
BOARD CHANGES
As previously announced Sir David Scholey will be retiring from the board at the
conclusion of our forthcoming Annual General Meeting. After a thorough selection
process assisted by external consultants, Sir David will be succeeded as
chairman by Mr. Roderick Kent, who served as managing director of Close Brothers
for 28 years until 2002 and as a non-executive director since then.
Mr. Strone Macpherson, the senior independent director, will be appointed deputy
chairman following our forthcoming Annual General Meeting.
Mr. Bruce Carnegie-Brown was appointed a non-executive director of the company
on 22nd June, 2006. We are pleased to welcome him to the board.
Following these changes the board will comprise five executive directors and six
independent non-executive directors, in addition to Mr. Kent as chairman.
OUTLOOK
We achieved a record profit in 2006 in a year in which the economic climate was
relatively benign and stock markets performed well.
Looking forward, the general UK political and economic outlook is becoming
somewhat opaque, with risks perhaps more on the downside (interest rates,
inflation and consumer debt) than the upside.
All our businesses have started the new year in good shape and, regardless of
the short term economic climate, our confidence in our long term growth
prospects remains strong.
Sir David Scholey
Chairman
C.D. Keogh
Chief Executive
CONSOLIDATED INCOME STATEMENT
for the year ended 31st July, 2006
2006 2005
£'000 £'000
Interest and similar income 281,926 282,841
Interest expense and similar charges 137,624 140,320
------------------------------------------------------------------------------
Net interest income 144,302 142,521
------------------------------------------------------------------------------
Fees and commissions income 302,919 228,055
Fees and commissions expense (48,913) (36,396)
Gains less losses arising from dealing in securities 122,339 96,285
Other operating income 15,627 17,019
------------------------------------------------------------------------------
Other income 391,972 304,963
------------------------------------------------------------------------------
Operating income 536,274 447,484
------------------------------------------------------------------------------
Administrative expenses 346,256 285,799
Depreciation and amortisation 14,083 12,145
Impairment losses on loans and advances 18,621 20,044
------------------------------------------------------------------------------
Total operating costs 378,960 317,988
------------------------------------------------------------------------------
Operating profit on ordinary activities before impairment
losses on goodwill and taxation 157,314 129,496
Impairment losses on goodwill - 17,735
------------------------------------------------------------------------------
Operating profit on ordinary activities before taxation 157,314 111,761
Taxation 45,280 37,152
------------------------------------------------------------------------------
Profit on ordinary activities after taxation 112,034 74,609
Profit attributable to minority interests 3,436 2,212
------------------------------------------------------------------------------
Profit attributable to the shareholders of the company 108,598 72,397
------------------------------------------------------------------------------
Basic earnings per share on profit attributable to
shareholders 74.1p 49.8p
Earnings per share before impairment losses on goodwill 74.1p 62.0p
Diluted earnings per share 73.8p 49.6p
Dividends per share 32.5p 28.5p
All income and profits are in respect of continuing operations.
CONSOLIDATED BALANCE SHEET
at 31st July, 2006
2006 2005
£'000 £'000
Assets
Cash and balances at central banks 1,272 1,244
Settlement accounts 628,305 604,692
Loans and advances to customers 1,862,023 1,939,203
Loans and advances to banks 510,691 786,330
Money market securities 1,156,768 797,498
Debt securities - long positions 67,066 61,345
Equity shares - long positions 49,623 40,377
Loans to money brokers against stock advanced 156,420 158,553
Investment securities 43,682 27,384
Intangible assets - goodwill 109,807 95,711
Intangible assets - other 2,623 1,672
Property, plant and equipment 42,549 38,277
Share of gross assets of joint ventures 21,743 21,624
Share of gross liabilities of joint ventures (20,818) (20,914)
Share of net assets of joint ventures 925 710
Other receivables 87,549 108,949
Deferred taxation assets 25,362 28,976
Prepayments and accrued income 63,135 64,398
Derivative financial instruments 5,093 -
------------------------------------------------------------------------------
Total assets 4,812,893 4,755,319
------------------------------------------------------------------------------
Liabilities
Settlement accounts 573,671 561,173
Deposits by customers 1,843,074 1,818,187
Deposits by banks 168,378 108,101
Debt securities - short positions 54,554 49,628
Equity shares - short positions 21,684 20,424
Loans from money brokers against stock advanced 157,356 142,371
Non-recourse borrowings 150,000 200,000
Loans and overdrafts from banks 363,205 494,363
Promissory notes and other debt securities in issue 358,014 367,130
Other liabilities 219,673 182,817
Current taxation liabilities 16,766 19,297
Accruals and deferred income 136,791 138,444
Subordinated loan capital 75,000 75,000
Derivative financial instruments 12,370 -
------------------------------------------------------------------------------
Total liabilities 4,150,536 4,176,935
------------------------------------------------------------------------------
Equity
Called up share capital 36,603 36,168
Share premium account 259,783 252,210
Profit and loss account 346,714 279,044
Other reserves 11,887 5,092
Minority interests 7,370 5,870
------------------------------------------------------------------------------
Total equity 662,357 578,384
------------------------------------------------------------------------------
Total liabilities and equity 4,812,893 4,755,319
------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31st July, 2006
2006 2005
£'000 £'000
Called up share capital
Opening balance 36,168 36,066
Exercise of options 435 102
------------------------------------------------------------------------------
Closing balance 36,603 36,168
------------------------------------------------------------------------------
Share premium account
Opening balance 252,210 250,430
Exercise of options 7,573 1,780
------------------------------------------------------------------------------
Closing balance 259,783 252,210
------------------------------------------------------------------------------
Profit and loss account
Opening balance 279,044 242,637
Retained profit for the year 108,598 72,397
Dividends (42,524) (39,240)
IAS 39 adjustments at 1st August, 2005 (1,589) -
Other reserve movements 3,185 3,250
------------------------------------------------------------------------------
Closing balance 346,714 279,044
------------------------------------------------------------------------------
Other reserves:
ESOP trust reserve
Opening balance (3,786) (3,962)
Shares purchased at cost (4,926) -
Shares released at cost 410 176
------------------------------------------------------------------------------
Closing balance (8,302) (3,786)
------------------------------------------------------------------------------
Share-based awards reserve
Opening balance 7,614 4,285
Charge to the income statement 3,307 1,940
Movement relating to deferred share awards 887 1,389
------------------------------------------------------------------------------
Closing balance 11,808 7,614
------------------------------------------------------------------------------
Exchange movements reserve
Opening balance 1,264 -
Currency translation differences (326) 1,264
------------------------------------------------------------------------------
Closing balance 938 1,264
------------------------------------------------------------------------------
Cash flow hedging reserve
Opening balance recorded for derivatives under
IAS 39 at 1st August, 2005 (1,843)
Movement on derivatives during the year 1,976
--------------------------------------------------------------------
Closing balance 133
--------------------------------------------------------------------
Available-for-sale reserve
Opening balance under IAS 39 at 1st August, 2005 3,431
Movement on available-for-sale investments 3,879
--------------------------------------------------------------------
Closing balance 7,310
--------------------------------------------------------------------
Total other reserves 11,887 5,092
------------------------------------------------------------------------------
Minority interests
Opening balance 5,870 4,538
Movement during the period 1,500 1,332
------------------------------------------------------------------------------
Closing balance 7,370 5,870
------------------------------------------------------------------------------
Total equity 662,357 578,384
------------------------------------------------------------------------------
CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31st July, 2006
2006 2005
Note £'000 £'000
Net cash inflow from operating activities 4(a) 153,418 307,161
------------------------------------------------------------------------------
Net cash outflow from investing activities:
Dividends paid to minority interests (1,669) (934)
Purchase of assets let under operating leases (13,865) (11,213)
Purchase of property, plant and equipment (8,121) (6,920)
Sale of property, plant and equipment 4,155 1,685
Purchase of intangible assets (2,447) (1,175)
Purchase of equity shares held for investment (9,911) (7,523)
Sale of equity shares held for investment 11,168 19,091
Minority interests acquired for cash (2,853) (5,134)
Purchase of loan book - (130,530)
Purchase of subsidiaries 4(b) (11,258) (29,506)
------------------------------------------------------------------------------
(34,801) (172,159)
------------------------------------------------------------------------------
Net cash inflow before financing 118,617 135,002
Financing activities:
Issue of ordinary share capital including premium 8,008 1,882
Repayment of subordinated loan capital - (21,937)
Equity dividends paid (42,524) (39,240)
Interest paid on subordinated loan capital (5,616) (7,743)
------------------------------------------------------------------------------
Net increase in cash 78,485 67,964
------------------------------------------------------------------------------
In the directors' view, cash is an integral part of the group's operating
activities, since it is a bank's stock in trade. Nevertheless, as required by
International Accounting Standard No. 7, cash is not treated as cash flow from
operating activities but is required to be shown separately in accordance with
the format above.
THE NOTES
1. Accounting policies
(a) Adoption of International Financial Reporting Standards
The consolidated financial statements are prepared, for the first time, in
accordance with all relevant International Financial Reporting Standards
("IFRS") adopted for use in the European Union and therefore comply with Article
4 of EU Regulation. The date of transition to IFRS and the date of the opening
IFRS balance sheet was 1st August, 2004. As allowed by IFRS 1, the group has not
restated its comparative consolidated income statement and balance sheet to
comply with IAS 32 and IAS 39.
The company financial statements are prepared in accordance with Section 226 of,
and Schedule 4 to, the Companies Act 1985 and with all relevant UK accounting
standards. Any differences in these standards from their IFRS counterparts are
stated in the remainder of this note.
(b) Accounting convention
The consolidated financial statements have been prepared under the historical
cost convention, modified by the revaluation of financial assets and liabilities
held at fair value through profit or loss, available-for-sale financial assets
and all derivative contracts.
The preparation of financial statements in accordance with IFRS requires the use
of certain critical accounting estimates. It also requires management to
exercise judgement in the process of applying the group's accounting policies.
These notes set out areas involving a higher degree of judgement or complexity
or areas where assumptions are significant to the financial statements. These
areas are the fair value of financial assets and liabilities, impairment losses
on loans and advances and goodwill.
(c) Basis of consolidation
The consolidated financial statements incorporate the individual financial
statements of Close Brothers Group plc, the company, and entities it controls
(its subsidiaries). Control exists where the company has the power to govern the
financial and operating policies of the entity.
The acquisition method of accounting has been adopted for subsidiaries. Under
this method the assets, liabilities and contingent liabilities of a subsidiary
are measured at their fair values at the date of acquisition with the interest
of minority shareholders stated at the minority's proportion of these amounts.
Any excess of the cost of acquisition over these net assets is booked as
goodwill. The results of subsidiaries are included in the consolidated income
statement up to the date of disposal.
The consolidated financial statements consolidate the individual financial
statements of its associates using the equity method.
All intra-group balances, transactions, income and expenses are eliminated on
consolidation. As allowed by IFRS 1, the group has not restated business
combinations that took place before 1st August, 2004.
(d) Net interest income
Interest on loans and advances made by the group, and fee income and expense and
other direct costs relating to loan origination, restructuring or commitments
are recognised in the income statement using the effective interest rate method.
This method applies a rate that discounts estimated future cash payments or
receipts to the net carrying amount of the financial instrument. When
calculating the effective interest rate, the cash flows take into account all
contractual terms of the financial instrument including transaction costs and
all other premiums or discounts but not future credit losses.
Interest on impaired financial assets is recognised at the original effective
interest rate applied to the carrying amount as reduced by an allowance for
impairment.
(e) Fees and commissions net income
Where fees, that have not been included within the effective interest rate
calculation as described in note 1(d), are earned on the execution of a
significant act, such as fees arising from negotiating or arranging a
transaction for a third party, they are recognised as revenue when that act has
been completed. Fees and corresponding expenses in respect of other services are
recognised in the income statement as the right to consideration or payment
accrues through performance of services. To the extent that fees and commissions
are recognised in advance of billing they are included as accrued income or
expense.
(f) Gains less losses arising from dealing in securities
This includes the net gains arising from both buying and selling securities and
from positions held in securities, including related interest income and
dividends.
(g) Loans and advances
Loans and advances are recognised when cash is advanced to borrowers at cost
including any transaction costs. They are then amortised using the effective
interest rate method as explained in note 1(d). Loans and advances are stated
net of provisions for impairment losses.
Impairment provisions are made if there is objective evidence of impairment as a
result of one or more events regarding a significant loan or portfolio of loans
("loans") occurring after its initial recording and which has an impact that can
be reliably estimated by management.
For loans that are not considered individually significant, the group adopts a
formulaic approach which allocates a loss rate which is dependent on the overdue
period. Loss rates are based on the discounted expected future cash flows from
loans and are regularly benchmarked against actual outcomes to ensure that they
remain appropriate.
The amount of the loss is measured as the difference between the loan's carrying
amount and the present value of estimated future cash flows, excluding future
credit losses that have not been incurred, discounted at original effective
interest rate. As the loan or portfolio amortises over its life, so the
impairment loss may amortise. All impairment losses are reviewed at least at
each reporting date. If subsequently the amount of the loss decreases as a
result of a new event, the outstanding impairment loss is correspondingly
reversed.
(h) Finance leases, operating leases and instalment finance
A finance lease is a lease or hire purchase contract that transfers
substantially all the risks and rewards incidental to ownership of an asset to
the lessee. Finance leases are recognised as loans at an amount equal to the
gross investment in the lease discounted at its implicit interest rate. Finance
charges on finance leases are taken to income in proportion to the net funds
invested.
Rental costs under other leases and hire purchase contracts are charged to the
income statement in equal annual amounts over the period of the leases.
(i) Equity shares and debt securities
The long and short positions in equity shares and debt securities are classified
as held for trading and represent the aggregate of trading positions in
individual securities arising respectively from a net bought and net sold
position. They are valued at the dealers' bid and offer prices respectively at
the close of business.
Other investments designated at inception under the fair value option are fair
valued through profit or loss at mid-market values if listed and at directors'
valuation if unlisted, with gains and losses being included directly in the
income statement.
Investments with fixed or determinable payments that are held with the intention
and ability to hold to maturity are classified as held-to-maturity. They are
initially recognised at fair value including direct and incremental transaction
costs and subsequently valued at amortised cost, using the effective interest
rate method as explained in note 1(d).
Investments classified as available-for-sale are recognised at fair value with
changes being accounted for through equity. If such an asset is sold or there is
objective evidence that it is impaired, the cumulative gains and losses
recognised in equity are recycled to the income statement. Fair values are
obtained from independent open market sources, discounted cash flow models based
on market rates or option pricing models.
Equity shares held by the employee benefit trust are deducted in arriving at
equity and realised surpluses and deficits are not taken to the income
statement.
(j) Depreciation
Property, plant and equipment, including freehold investment properties held for
long term investment, and intangible assets other than goodwill, are stated at
cost less accumulated depreciation or amortisation and less provisions for
impairment, if any. The provision for depreciation or amortisation on these
assets is calculated to write off their cost over their estimated useful lives
by equal annual instalments as follows:
Fixtures, fittings and equipment 10% to 33%
Motor vehicles 25%
Freehold and long leasehold property 2.5%
Short leasehold property over the length of the lease
Intangible assets - other 10% to 25%
No depreciation is provided in respect of freehold land, which is stated at
cost.
(k) Foreign currencies
For the company and those subsidiaries whose balance sheets are denominated in
sterling, monetary assets and liabilities denominated in foreign currencies are
translated into sterling at the closing rates of exchange at the balance sheet
date. Foreign currency transactions are translated into sterling at the average
rates of exchange over the year and exchange differences arising in these cases
are taken to the income statement.
The balance sheets of subsidiaries denominated in foreign currencies are
translated into sterling at the closing rates. The income statements for these
subsidiaries are translated at the average rates and exchange differences
arising in these cases are taken to the exchange movements reserve.
As allowed by IFRS 1, cumulative foreign exchange differences up to 31st July,
2004 have not been recognised in the exchange movements reserve.
(l) Deferred taxation
Deferred taxation is provided in full on temporary timing differences, at the
rates of taxation expected to apply when these differences crystallise. Deferred
taxation assets are recognised only to the extent that it is probable that
sufficient taxable profits will be available against which temporary differences
can be set.
(m) Intangible assets - goodwill
Goodwill arising on the acquisition of business assets before 1st August, 1998
has been written off to reserves. From that date such goodwill arising has been
capitalised as an intangible asset and amortised, in equal annual instalments,
unless there has been impairment, over its estimated useful life of up to 20
years. From 1st August, 2004, amortisation of goodwill has ceased, negative
goodwill is credited to the income statement and the net book value of goodwill
is subject to impairment review at least annually.
(n) Pensions
Contributions to defined contribution schemes are charged in the income
statement when they become payable.
For the group's one defined benefits scheme, which was closed to new entrants in
1996 and involved at 31st July, 2006 only 105 active and deferred members,
scheme liabilities are measured on an actuarial basis using the projected credit
method and discounted at a rate that reflects the current rate of return on a
high quality corporate bond of equivalent term and currency to the scheme
liabilities. Actuarial gains and losses arising from experience adjustments and
changes in actuarial assumptions are charged or credited to the income statement
over the members' expected average remaining working lives.
(o) Share-based awards
The group has for many years operated long term incentive arrangements. These
include the 2004 Long Term Incentive Plan, the 1995 Executive Share Option
Scheme and the Inland Revenue approved Savings Related Share Option Scheme,
together "Incentive Schemes". The group has applied IFRS 2 "Share-based Payment"
to all grants of equity instruments under these Incentive Schemes after 7th
November, 2002.
The expense for these Incentive Schemes is measured by reference to the fair
value of the shares or share options granted on the date of grant. Such fair
values are determined using option pricing models which take into account the
exercise price of the option, the current share price, the risk free interest
rate, the expected volatility of the company's share price over the life of the
option/award and other relevant factors. Vesting conditions are not taken into
account when measuring fair value, but are reflected by adjusting the number of
equity instruments included in the measurement of the transaction such that the
amount recognised reflects the number that actually vest. The fair value is
expensed in the income statement on a straight line basis over the vesting
period.
(p) Derivative financial instruments ("derivatives") and hedge accounting
Derivatives are used within the group only to minimise the impact of interest
and currency rate changes on financial assets and liabilities and meet the IAS
39 criteria for hedge accounting. They are carried on the balance sheet at fair
value which is obtained from quoted market prices in active markets, including
recent market transactions, and discounted cash flow models.
On acquisition, a derivative is designated as a hedge and the group formally
documents the relationship between the derivative and the hedged item. The group
also documents its assessment, both at hedge inception and on an ongoing basis,
of whether the hedge derivative is highly effective in offsetting changes in
fair values or cash flows of hedged items. If a hedge was deemed wholly or
partially ineffective, the amount of the ineffectiveness, taking into account
the timing of the expected cash flows where relevant, would be recorded in the
income statement.
For fair value hedges, changes in fair value are recognised in the income
statement, together with changes in the fair value of the hedged item.
For cash flow hedges, the fair value gain or loss associated with the effective
proportion of the cash flow hedge is recognised initially directly in equity and
recycled to the income statement in the period when the hedged item affects
income.
2. Consolidated income statement reconciliation
The table below compares the consolidated income statement for the year ended
31st July, 2005, now reported under IFRS, with that previously reported under UK
Generally Accepted Accounting Practice ("UK GAAP"):
UK GAAP Adjustments IFRS
Note 6 £'000 £'000 £'000
Interest and similar income (i) 280,827 2,014 282,841
Interest expense and similar charges 140,320 - 140,320
------------------------------------------------------------------------------
Net interest income 140,507 2,014 142,521
------------------------------------------------------------------------------
Fees and commissions income (i) 230,019 (1,964) 228,055
Fees and commissions expense (i) (35,834) (562) (36,396)
Gains less losses arising from dealing in
securities 96,285 - 96,285
Other operating income 17,019 - 17,019
------------------------------------------------------------------------------
Other income 307,489 (2,526) 304,963
------------------------------------------------------------------------------
Operating income 447,996 (512) 447,484
------------------------------------------------------------------------------
Administrative expenses (i) and (ii) 283,763 2,036 285,799
Depreciation and amortisation 12,145 - 12,145
Impairment losses on loans and
advances (i) 20,349 (305) 20,044
------------------------------------------------------------------------------
Total operating costs 316,257 1,731 317,988
------------------------------------------------------------------------------
Operating profit on ordinary
activities before impairment
losses on goodwill and taxation 131,739 (2,243) 129,496
Impairment losses on goodwill (iii) 23,120 (5,385) 17,735
------------------------------------------------------------------------------
Operating profit on ordinary activities
before taxation 108,619 3,142 111,761
Taxation (iv) 37,865 (713) 37,152
------------------------------------------------------------------------------
Profit on ordinary activities after taxation 70,754 3,855 74,609
Profit attributable to minority interests (v) 2,177 35 2,212
------------------------------------------------------------------------------
Profit attributable to the shareholders of
the company 68,577 3,820 72,397
------------------------------------------------------------------------------
3. Consolidated balance sheet reconciliation
The table below compares the consolidated balance sheet, as at 31st July, 2005,
now reported under IFRS, with that previously reported under UK GAAP:
UK GAAP Adjustments IFRS
Note 6 £'000 £'000 £'000
Assets
Cash and balances at central banks 1,244 - 1,244
Settlement accounts 604,692 - 604,692
Loans and advances to customers (i) 1,953,031 (13,828) 1,939,203
Loans and advances to banks 786,330 - 786,330
Money market securities 797,498 - 797,498
Debt securities - long positions 61,345 - 61,345
Equity shares - long positions 40,377 - 40,377
Loans to money brokers against stock
advanced 158,553 - 158,553
Investment securities (vi) 26,730 654 27,384
Intangible assets - goodwill (iii) 88,863 6,848 95,711
Intangible assets - other (vii) - 1,672 1,672
Property, plant and equipment (vii) 39,949 (1,672) 38,277
Share of gross assets of joint ventures 21,624 - 21,624
Share of gross liabilities of joint
ventures (20,914) - (20,914)
Share of net assets of joint ventures 710 - 710
Other receivables (i)and(vi) 108,639 310 108,949
Deferred taxation assets (iv) 21,591 7,385 28,976
Prepayments and accrued income (i) 49,600 14,798 64,398
------------------------------------------------------------------------------
Total assets 4,739,152 16,167 4,755,319
------------------------------------------------------------------------------
Liabilities
Settlement accounts 561,173 - 561,173
Deposits by customers 1,818,187 - 1,818,187
Deposits by banks 108,101 - 108,101
Debt securities - short positions 49,628 - 49,628
Equity shares - short positions 20,424 - 20,424
Loans from money brokers against stock
advanced 142,371 - 142,371
Non-recourse borrowings 200,000 - 200,000
Loans and overdrafts from banks 494,363 - 494,363
Promissory notes and other debt
securities in issue 367,130 - 367,130
Other liabilities (i), (ix) and (x) 211,167 (28,350) 182,817
Current taxation liabilities 19,297 - 19,297
Accruals and deferred income (i) 126,019 12,425 138,444
Subordinated loan capital 75,000 - 75,000
------------------------------------------------------------------------------
Total liabilities 4,192,860 (15,925) 4,176,935
------------------------------------------------------------------------------
Equity
Called up share capital 36,168 - 36,168
Share premium account 252,210 - 252,210
Profit and loss account 255,729 23,315 279,044
ESOP trust reserve (3,786) - (3,786)
Share-based awards reserve (ii) - 7,614 7,614
Exchange movements reserve (viii) - 1,264 1,264
Minority interests (v) 5,971 (101) 5,870
------------------------------------------------------------------------------
Total equity 546,292 32,092 578,384
------------------------------------------------------------------------------
Total liabilities and equity 4,739,152 16,167 4,755,319
------------------------------------------------------------------------------
4. Consolidated cash flow statement reconciliation
UK GAAP Adjustments IFRS IFRS
2005 2005 2005 2006
£'000 £'000 £'000 £'000
(a) Reconciliation of operating
profit on ordinary activities
before taxation to net cash
inflow from operating
activities
Operating profit on ordinary
activities before taxation 108,619 3,142 111,761 157,314
(Increase)/decrease in:
Interest receivable and
prepaid expenses (13,375) (8,976) (22,351) 1,886
Net settlement accounts 21,535 - 21,535 (11,115)
Net equity shares held for
trading 3,904 - 3,904 (7,986)
Net debt securities held for
trading (10,038) - (10,038) (795)
Increase in interest payable
and accrued expenses 17,064 8,701 25,765 (1,877)
Depreciation, amortisation and
goodwill impairment losses 35,265 (5,385) 29,880 14,083
------------------------------------------------------------------------------
Net cash inflow from trading
activities 162,974 (2,518) 160,456 151,510
(Increase)/decrease in:
Debt securities held for
liquidity (11,483) 10,065 (1,418) (10,890)
Loans and advances to customers (195) (155) (350) 77,180
Loans and advances to banks
not repayable on demand 190,802 (186,604) 4,198 5,716
Other assets less other
liabilities (22,821) 2,673 (20,148) 83,350
Increase/(decrease) in:
Deposits by banks 28,913 - 28,913 60,277
Customer accounts 137,035 - 137,035 24,887
Bank loans and overdrafts (180,834) - (180,834) (131,158)
Non-recourse borrowings (50,000) - (50,000) (50,000)
Promissory notes and other
debt securities in issue 267,130 - 267,130 (9,116)
Taxation paid (37,821) - (37,821) (48,338)
------------------------------------------------------------------------------
Net cash inflow from
operating activities 483,700 (176,539) 307,161 153,418
------------------------------------------------------------------------------
(b) Analysis of net cash
outflow in respect of the
purchase of subsidiaries
Cash consideration in respect
of current year purchases (38,900) - (38,900) (6,797)
Loan stock redemptions and
deferred consideration paid
in respect of prior year
purchases (791) - (791) (4,847)
Net movement in cash balances 10,185 - 10,185 386
------------------------------------------------------------------------------
(29,506) - (29,506) (11,258)
------------------------------------------------------------------------------
(c) Analysis of changes in
financing
Share capital (including premium)
and subordinated loan capital:
Opening balance 383,433 - 383,433 363,378
Shares issued for cash 1,882 - 1,882 8,008
Repayment of subordinated
loan capital (21,937) - (21,937) -
------------------------------------------------------------------------------
Closing balance 363,378 - 363,378 371,386
------------------------------------------------------------------------------
Movement
in the
period
£'000
(d) Analysis of cash balances
Cash and balances at central
banks 1,244 - 1,244 1,272 28
Loans and advances to banks
repayable on demand 380,638 1,185,785 1,566,423 1,644,880 78,457
--------------------------------------------------------------------------------
381,882 1,185,785 1,567,667 1,646,152 78,485
--------------------------------------------------------------------------------
Except for the above adjustments the comparative consolidated cash flow
statement is otherwise unchanged.
5. Consolidated equity reconciliation
31st July, 1 August,
2005 2004
Note 6 £'000 £'000
Profit and loss account reserve previously
reported under UK GAAP 255,729 226,730
------------------------------------------------------------------------------
Income recognition adjustments (i) (14,913) (14,310)
Expense recognition adjustments (i) 1,200 900
Recognition of share-based awards (ii) (2,736) (796)
Goodwill adjustments (iii) 6,836 1,451
Taxation effect of above items (iv) 8,573 7,658
Minority interest effect of above items (v) 101 136
Moving exchange adjustments to exchange
movements reserve (viii) (1,264) -
Recognition of pension deficit (ix) (1,783) (4,736)
Dividend recognition adjustments (x) 27,301 25,604
------------------------------------------------------------------------------
23,315 15,907
------------------------------------------------------------------------------
Profit and loss account reserve reported
under IFRS 279,044 242,637
------------------------------------------------------------------------------
Total equity at 31st July, 2004 previously
reported under UK GAAP 509,264
Above profit and loss account reserve
adjustments 15,907
Recognising share-based awards reserve 4,285
Including minority interests in equity 4,538
------------------------------------------------------------------------------
Total equity at 1st August, 2004 under IFRS 533,994
------------------------------------------------------------------------------
6. Comparison of the 2005 consolidated income statement, balance sheet and cash
flow statement as now reported under IFRS with those previously reported under
UK GAAP
(i) The effective interest rate method has now been applied. Accordingly certain
interest, fees and commissions are now spread, also impacting impairment losses.
(ii) Share-based awards are now accrued in the balance sheet and expensed in the
income statement.
(iii) Goodwill is now subject to impairment testing, rather than to annual
amortisation, and negative goodwill is no longer capitalised.
(iv) Many of the adjustments referred to in this note have related tax effects,
nearly all of which are deferred.
(v) Minority interests are recognised as equity rather than as a liability and
some of the adjustments to the profit and loss account and opening reserves
referred to in this note have related minority interest effects.
(vi) Some investments previously classified as "other receivables" have been
reclassified as "investment securities" and valued at fair value rather than
cost.
(vii) Certain assets previously classified as "tangible assets" are now
classified as "intangible assets - other".
(viii) Exchange adjustments are recognised through the exchange movements
reserve rather than the profit and loss account.
(ix) The defined benefit pension scheme deficit is now recognised in equity.
(x) Dividends are now recognised in the period in which they are declared rather
than in the period in which earnings are generated to cover the dividend.
7. Earnings per share
Basic earnings per share on profit attributable to shareholders of the company
is based on profit after taxation and minority interests of £108,598,000 (2005:
£72,397,000) and on 146,594,000 (2005: 145,348,000) ordinary shares, being the
weighted average number of shares in issue and contingently issuable during the
year excluding those held by the employee benefit trust.
Diluted earnings per share is based on this same profit, but on 147,100,000
(2005: 145,829,000) ordinary shares, being the weighted average number of shares
in issue disclosed above, plus the weighted dilutive potential on ordinary
shares of exercisable employee share options in issue during the year.
8. Dividend
The final dividend of 22.0p per share is proposed to be paid on 3rd November,
2006 to holders of ordinary shares on the register at the close of business on
6th October, 2006.
9. Basis of preparation
The financial information contained in this announcement does not constitute
statutory accounts for the year ended 31st July, 2006 within the meaning of
section 240 of the Companies Act 1985, but is derived from those accounts, on
which the auditors have yet to sign their report.
Whilst the financial information included in this preliminary announcement has
been computed in accordance with IFRS, this announcement does not itself comply
with IFRS. The company expect to publish full financial statements that comply
with IFRS on 3rd October, 2006.
The UK GAAP statutory accounts for the year ended 31st July, 2005 have been
reported on by Deloitte & Touche LLP and filed with the Registrar of Companies.
The report of the auditors on those accounts was unqualified and did not contain
a statement under section 237(2) or (3) of the Companies Act 1985. The financial
information contained in this announcement for the year ended 31st July, 2005
has been derived from those statutory accounts, adjusted for the impact of IFRS,
and is therefore unaudited.
This information is provided by RNS
The company news service from the London Stock Exchange
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