Annual Financial Report and AGM documents
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Close Brothers Group plc Annual Financial Report and AGM documents |
17 October 2014
Documents: Annual Report & Accounts 2014, Notice of Annual General Meeting and Form of Proxy
Close Brothers Group plc ("the group" or "Close Brothers") announces that copies of the above documents have 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
These documents have been sent to shareholders. The 2014 Annual General Meeting of Close Brothers will be held at 10 Crown Place, London EC2A 4FT on Thursday 20 November 2014 at 11.00 a.m. Full details of the proposed resolutions are set out in the Notice of Annual General Meeting.
The Annual Report for the year ended 31 July 2014 is now available for download from the group's website at:
The Notice of Annual General Meeting and Form of Proxy are also available for download from the group's website at:
http://www.closebrothers.com/investor-relations/shareholder-information/annual-general-meeting
This announcement also contains additional information solely for the purposes of compliance with the DTR 6.3.5 (1) of the Disclosure and Transparency Rules, being a statement of directors' responsibilities, principal risks and uncertainties and related party transactions. This information is extracted, in full unedited text, from the Annual Report 2014. Further information was contained within the preliminary announcement of Close Brothers' final results released to the market on Tuesday 23 September 2014.
Enquiries: Nicholas Jennings, Company Secretary 020 7655 3100
About Close Brothers
Close Brothers is a leading UK merchant banking group providing lending, deposit taking, wealth management services, and securities trading.
Established in 1878, we believe our traditional merchant banking values, based on service and integrity, continue to be relevant today. We define our approach to business as 'Modern Merchant Banking' - values that are embedded in our culture and that underpin everything we do.
Today, Close Brothers Group plc employs 2,800 people, principally in the UK. We are listed on the London Stock Exchange and are a member of the FTSE 250.
Appendix
Statement of directors' responsibilities
The Annual Report contains the following statements regarding responsibility for the financial statements and the management report included in the Annual Report.
Each of the directors confirms that to the best of their knowledge:
• The financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and
• The strategic report includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Principal risks and uncertainties
The Annual Report contains the following statement on principal risks and uncertainties faced by the group.
A summary of 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 is set out below. The risks identified remain broadly unchanged from the prior year.
This summary should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties faced by the group but rather those risks which the group currently believes may have a significant impact on the group's performance and future prospects.
Credit losses
Risk
The group is exposed to credit and counterparty risk particularly in the Banking division.
The Banking division has a loan book of £5.3 billion to a range of small businesses and individuals and remains exposed to credit losses if these customers are unable to repay loans and any outstanding interest and fees.
The group is also exposed to counterparties with which it places deposits or trades and has limited derivative contracts to hedge interest rate, foreign exchange and equity exposures.
Mitigation
The Banking division's loan book is predominately secured with conservative loan-to-values. Average
loan size remains small with short average tenor. The portfolio is diversified with a limited number of
individual deals which could materially impact the group's earnings.
Control and governance is exercised both within the business and through oversight by a central team. Strict lending criteria are applied when testing the credit quality and covenant of the underlying borrower and significant emphasis is placed on the quality of the underlying security. Rigorous and timely collections and arrears management processes are also in place.
The Banking division currently places the majority of its liquidity requirements and surplus funding with the Bank of England. The credit quality of the counterparties with whom it places deposits or trades is continuously monitored and all trading is performed within approved limits. Interest rate and foreign exchange derivatives are held for hedging purposes only and material exposures are cash collateralised.
Our Securities businesses predominately trade in exchange traded instruments with regulated counterparties on a delivery against payment basis. Counterparty exposure and settlement failure monitoring controls are also in place.
Change
No change
The Banking division's loan book impairment rate is at a 10 year low reflecting our strong lending discipline, favourable market conditions and the improved credit quality of our borrowers. However, against a backdrop of a recovering economy and the potential for rising interest rates the outlook for our customers remains challenging.
At 31 July 2014 the Banking division's liquidity requirements and surplus funding was placed with the Bank of England or held in UK gilts.
Economic environment
Risk
Despite the improved outlook, any downturn in economic conditions could impact the group's performance through:
• Lower demand for the group's product and services;
• Lower investor risk appetite as a result of financial markets instability; and
• Higher bad debts as a result of customers' inability to service debt and lower asset values on which loans are secured.
Mitigation
The group operates in specialist areas where staff have significant expertise of the market and our products along with an in depth understanding of our clients' requirements. Across our businesses we aim to build long-term relationships with clients improving our resilience in difficult economic conditions.
Regular stress testing on our performance and financial position is performed to test our resilience in adverse economic conditions.
Change
No change
Whilst the UK outlook has improved, we are yet to see a sustained global recovery particularly in the Eurozone.
Legal and regulatory
Risk
The evolving legal and regulatory environment has the ability to impact materially the group's performance, capital and liquidity, the markets in which we operate, the behaviour and expectations of our clients and the way we conduct our business.
Not treating customers fairly, failing to adequately safeguard client assets or providing advice and products which are not in our customer's best interest or fit for purpose, whether in the future or in respect of past business, has the potential to damage the group's reputation, impact performance and may lead to legal or regulatory sanctions including litigation and customer redress.
Failure to identify, interpret and comply with relevant legal requirements, or obligations has the potential to impact significantly on the group's performance.
Mitigation
We continue to invest significantly in both staff and operating systems to ensure the group remains well placed to respond to changes in regulation.
Our staff review key legal and regulatory developments in order to anticipate their potential impact on our performance and our business model. This is supported by a constructive dialogue with regulatory bodies and strong compliance procedures across the group to ensure we remain well placed to meet current regulatory and legislative requirements.
Across the group we are committed to providing straightforward and transparent products and services to our clients. New products and services are subject to our business initiatives policy and both new and existing products and services are regularly reviewed by risk and compliance committees to ensure they remain fit for purpose.
The conduct of our employees is a priority and the group has developed a robust framework to control, monitor and report conduct risk. During the year we have looked to embed fully the organisations culture and traditional values of service and integrity through initiatives such as the "Vision and Values" programme and the "Banking Customer Service Programme".
Change
Risk increased
Following changes to the UK regulatory regime in April 2013 and recent well publicised focus on the financial services industry, the risk of legal or regulatory action resulting in fines, penalties, censure or other sanction from failure to identify or meet regulatory and legislative requirements has increased.
Competition
Risk
The group operates in highly competitive markets and as the UK economy improves we expect to see
increased competition particularly in the Banking division which may impact the group's performance.
Mitigation
The group has a strong track record of operating in specialist areas where we aim to be market leaders. Across the group we value our clients and build strong long-term relationships which result in high levels of repeat business.
Our differentiated proposition, strong financial position and prudent financial management allows us to support our clients and trade profitably through the economic cycle and is based on the following key principles:
• Speed and flexibility of service;
• Local presence with experienced and knowledgeable staff; and
• Tailored product offerings.
Change
Risk increased
We continue to see increased competition in parts of our Banking division. Competition in Securities and Asset Management has remained high.
Technology
Risk
Maintaining robust and secure IT infrastructure, systems and software is fundamental to allow the group to operate effectively, respond to new technology, protect client and company data and counter the evolving cyber threat.
Failure to keep up with technological innovation and changing customer expectations has the potential to impact group performance.
Mitigation
We continued to invest in IT infrastructure, information security and software during the year which has included the replacement of legacy systems and the enhancement of front end technology. The progress of major IT projects is regularly reviewed and all systems are subjected to rigorous testing before going live.
The UK Government and Bank of England has highlighted cyber threat as an issue across the financial sector. The group's audit and risk functions have carried out cyber threat reviews which included testing our internal controls framework and reviewing planned investment on cyber risk to ensure we remain well placed to detect and resist threats.
We have well established and regularly tested business continuity and disaster recovery plans. These plans are subject to periodic external review to ensure they remain robust.
Change
Risk increased
The group maintains a robust IT infrastructure and remains well placed to respond to new technology.
However, the risk of new technology impacting our business model or a cyber threat to data or our services is increasing.
Employees
Risk
The calibre, quality and expertise of 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 operates in specialist areas and across our businesses we are committed to developing staff. Key roles have succession planning in place and through the Emerging Leaders Programme we aim to develop a strong pipeline of future leaders throughout the group. During the year we also launched a graduate scheme which follows the Aspire programme for school leavers created last year.
The group's performance management framework ensures remuneration structures are competitive and recognise and reward performance.
Change
No change
As competition increases we expect our highly skilled employees to be targeted. However, we remain confident in our ability to retain key employees, a view supported by the bi-annual employee survey carried out last year which identified 90% of employees surveyed were either satisfied or very satisfied working at Close Brothers.
Funding
Risk
The Banking division's access to funding remains key to support its lending activities and the liquidity requirements of the group.
Mitigation
At 31 July 2014 the group's funding position was strong with total funding 135% of the loan book. This surplus provides a significant liquidity risk reserve.
Our funding sources remain diversified and during the year we accessed the following markets:
• Retail funding;
• Corporate deposits;
• Interbank facilities;
• Securitised funding; and
• Debt capital markets.
The Banking division assesses liquidity on a daily basis and weekly tests are performed to ensure adequate liquidity is held for stressed situations. At 31 July 2014 high quality liquid assets accounted for all of the group's treasury assets.
Change
Risk decreased
The group remains well funded, retains sufficient liquidity and is well placed to access further funding if required.
Exposure to markets
Risk
Volatility or a sudden dislocation in financial markets may impact the group's profitability particularly in the Securities division.
Changes in interest rates have the potential to impact the group's earnings particularly interest income.
While the majority of the group's activities are located in the UK and are transacted in sterling there is limited foreign exchange exposure principally arising on deposits, lending and funding balances in the Banking division.
Mitigation
Our Securities division primarily act as market-makers in exchange traded cash securities. Trading positions are monitored on a real time basis and both individual and book limits are set to limit exposure.
The group's policy is to match fixed and variable interest rate assets and liabilities using swaps where appropriate. The group's capital and reserves are not hedged as a matter of policy.
Foreign exchange exposures in the Banking division are hedged using currency swaps with exposures monitored daily against approved limits. The group does not speculate on foreign currency movements.
Stress tests are regularly performed on market risks to ensure we maintain adequate liquidity and capital even under extreme downside scenarios.
Change
No change
The group's approach to managing exposure to markets is consistent with prior year and the associated risks remain unchanged.
Related party transactions
The Annual Report discloses the following related party transactions with key management and an associate.
Transactions with key management
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:
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Emoluments Salaries and fees Benefits and allowances Performance related awards in respect of the current year: Cash Deferred
Share-based awards Company pension contributions
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2014 £ million 3.6 0.6
3.2 3.1 10.5 5.4
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15.9 |
2013 £ million 3.5 0.6
2.7 2.8 9.6 4.4
0.1
14.1 |
Gains upon exercise of options by key management personnel, expensed to the income statement in previous years, totalled £16.2 million (31 July 2013: £3.2 million).
Key management have banking relationships with group entities which are entered into in the normal course of business. Amounts included in deposits by customers at 31 July 2014 attributable, in aggregate, to key management were £2.6 million (2013: £1.2 million).
This information is provided by RNS
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