Annual Financial Report

RNS Number : 4193S

Close Brothers Group PLC

02 October 2017

 

Close Brothers Group plc Annual Financial Report

Close Brothers Group plc ("the group" or "Close Brothers") announces that it has today published its Annual Report and Accounts 2017 (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 12 October 2017, together with the Notice of Annual General Meeting and Form of Proxy. The 2017 Annual General Meeting will be held at 10 Crown Place, London EC2A 4FT on 16 November 2017, 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 2017, which was released on 26 September 2017 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 and Corporate Counsel

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.  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

Page 53 of the Annual Report contains the following statement regarding responsibility for the financial statements and the management report included in the Annual Report.

The directors, who are named on pages 46 and 47, are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors are required to prepare the group financial statements in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union and Article 4 of the IAS Regulation. The directors have elected to prepare the parent company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), including FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland". Under company law the directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period.

In preparing the 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 UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
·	prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

In preparing the group financial statements, International Accounting Standard 1 requires that directors:

·	properly select and apply accounting policies;
·	present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
·	provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance; and
·	make an assessment of the company's ability to continue as a going concern.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the 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 UK 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 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;
·	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 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; 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's performance, business model and strategy.

Principal risks and uncertainties

Pages 16 to 19 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 10 to 13;
·	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 59 and 60. Risk management is overseen by the Board Risk Committee and its key areas of focus over the last year are set out on pages 62 and 63. We believe the key risks facing the group now are how current economic uncertainty, including that arising from the departure of the UK from the EU, will impact our customers and in particular their ability to repay loans, the regulatory landscape and how it may impact some or all of our businesses, the competitive environment and maintaining operational resilience particularly given growing cyber threats.

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 emerging risks, the group's activities, business model and strategy are unchanged as set out on the previous pages. As a result the principal risks and uncertainties the group faces and our approach to mitigating them remain broadly unchanged. The consistency of both our business model and risk management approach has underpinned the group's track record of trading successfully and supporting our clients in all market conditions.

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

Credit losses

Risk/uncertainty  

As a lender to small businesses and individuals, the group is exposed to credit losses if customers are unable to repay loans and outstanding interest and fees. At 31 July 2017 the group had loans and advances to customers amounting to £6.9 billion.

The group also has exposure to counterparties with which it places deposits or trades, and also has 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:

·	Conservative management of our liquidity requirements and surplus funding with £0.8 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 and being settled on a delivery versus payment basis. Counterparty exposure and settlement failure monitoring controls are also in place.

Change

Risk increased

Bad debts have remained low during the year to 31 July 2017 and our other counterparty exposures are broadly unchanged with the majority of our liquidity requirements and surplus funding placed with the Bank of England.

However, we are monitoring the uncertainty over Brexit combined with rising consumer debt levels and potential increases in interest rates closely. This uncertainty, combined with the low level of current credit losses, increases the risk of higher credit losses.

Further commentary on the credit quality of our loan book is outlined on pages 26 to 31. Further details on loans and advances to customers and debt securities held are in notes 10 and 11 on pages 120 and 121 of the Financial Statements.

Our approach to credit risk management and monitoring is outlined in more detail in note 27 on page 143.

Economic environment

Risk/uncertainty 

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 customers inability 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 others pull back and hence build 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

Economic uncertainty remains elevated in our view. While the performance of the UK economy has been resilient following the 2016 referendum, the current period of uncertainty is likely to continue reflecting both the outcome of Brexit negotiations and wider global events.

Further commentary on the attributes and resilience of the group's business model is shown on pages 10 to 13.

Legal and regulatory  

Risk/uncertainty 

Changes to the existing legal, regulatory and tax environments and failure to comply with existing requirements may materially impact 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 including litigation and 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:

·	Providing straightforward and transparent products and services to our clients;
·	Governance and control processes to review and approve new products and services;
·	Maintaining a prudent capital position with headroom to minimum capital requirements;
·	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;
·	Continuous monitoring of key legal, regulatory and tax developments to anticipate their potential impact; and
·	Maintaining constructive and positive relationships and dialogue with regulatory bodies and tax authorities.

Change

Risk increased

Financial services businesses remain the subject of significant regulatory scrutiny. Minimum capital requirements are increasing as regulatory buffers are phased in while global consultations over capital levels continue. There has also been growing regulatory focus on consumer borrowing, particularly around motor finance, and also on the Asset Management industry. For further details on this and our response please see page 22.

Further information on our approach to conduct risk can be found in the Sustainability Report on page 39.

Competition

Risk/uncertainty 

The group operates in highly competitive markets and we expect to see continued high levels of competition particularly within our asset and motor finance businesses in the Banking division.

Elevated levels of competition may impact demand for the group's products and services.

Mitigation  

The group has a long track record of trading successfully in all types of competitive environment.

We value our clients and build long-term relationships offering a differentiated proposition based on:

·	Speed and flexibility of service;
·	Local presence;
·	Experienced and expert people; and
·	Tailored, client driven product offerings.

This differentiated proposition combined with the consistent application of our business model helps build long-term relationships and generate high levels of repeat business.

Change

No change

We continue to experience high levels of competition across each of our businesses, particularly in certain areas of the Banking division. 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 26. Our business model is set out on pages 10 to 13.

Technology and operational resilience

Risk/uncertainty 

Providing robust, contemporary and secure IT services is fundamental to enabling the group to:

·	Provide a high quality customer experience across our businesses;
·	Respond to new technology;
·	Protect client and company data; and
·	Counter the evolving cyber threat.

Failure to keep up with changing customer expectations or provide reliable, secure IT services has the potential to impact group performance.

Mitigation  

The group continues to invest in its IT services. Currently there are major investment projects across a number of our businesses to enhance our customer offering. Asset Management has recently successfully completed the conversion of our clients on to a single technology platform to enhance the customer experience and increase operating efficiency. The group has strong governance in place to oversee its major projects.

We also continue to invest in strengthening our cyber capabilities including the appointment of a new chief information security officer. We conducted a test scenario with the senior executive team during the year.

We have in place, and regularly test, operational resilience capabilities, including crisis management, business continuity and disaster recovery plans.

Change

No change

Operational resilience remains a key area of focus for the group, particularly as the rate of technology-driven disruption, including the impact and severity of cyber attacks, within the financial services industry continues to increase. We continue to invest and upgrade our IT infrastructure to improve our customer proposition, simplify our technology architecture and enhance resilience to cyber attacks.

For further information on our response to cyber threats see page 63 of the Risk Committee Report.

Employees

Risk/uncertainty 

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;
·	Implementing succession planning for key roles;
·	Improving our talent pipeline via our graduate and school leavers programmes, and training academy in asset finance;
·	Investing in training and development for all staff; and
·	Delivering leadership development programmes to develop current and future leaders for the group.

Change

No change

Our highly skilled people are likely to be targeted but we are confident we are able to retain key employees.

Further detail on the employee survey and our investment in our people is outlined in the Sustainability Report on pages 36 to 39.

Funding and liquidity

Risk/uncertainty 

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 conservative based on the principle of "borrow long, lend short". The average maturity of funding allocated to the loan book was

21 months at 31 July 2017. This compares to our weighted average loan maturity of 14 months.

Our funding is well 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 2017 the group's funding position was strong with total available funding equal to 127% of the loan book. This provides a prudent level of liquidity to support our lending activities.

Change

No change

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

We have further diversified our funding during the year. The diversity of funding combined with relatively long tenor when compared to the average duration of our lending means we are well placed.

Further commentary on funding and liquidity is provided on pages 24 and 25. Further financial analysis of our funding is shown in note 18 on page 127 of the Financial Statements.

Market risk

Risk/uncertainty 

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 using swaps where appropriate. The group's capital and reserves are not hedged.

Similarly 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. Our trading is predominantly short-term with most transactions settling within three days. Trading positions are monitored on a real time basis and both individual and trading book limits are set to control exposure. Trading exposures on foreign securities are also hedged and monitored against limits.

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 27 on pages 145 to 147 of the Financial Statements.

The sensitivity analysis on interest rate exposures shown in note 27 on page 145 demonstrates the limited level of exposure to interest rate and foreign exchange movements.

Related party transactions

Page 131 of the Annual Report discloses the following related party transactions.

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:

Emoluments Salaries and fees  Benefits and allowances  Performance related awards in respect of the current year: Cash  Deferred  Share-based awards

2017 £ million 4.6 0.7 4.6 2.5 12.4 4.2 16.6

2016 £ million 3.9 0.7 3.4 2.9 10.9 4.5 15.4

Gains upon exercise of options by key management personnel, expensed to the income statement in previous years, totalled £10.3 million (2016: £14.8 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 2017 attributable, in aggregate, to key management were £0.1 million (31 July 2016: £1.8 million). A member of key management has a holding of 500,000 of the company's 4.25% subordinated loan notes.

 

END

 

 

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