Close Brothers Group plc
Annual Financial Report
3 October 2016
Document: Annual Report & Accounts 2016
Close Brothers Group plc ("the group" or "Close Brothers") announces that copies of the above document 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
The Annual Report for the year ended 31 July 2016 is now available for download from the group's website at:
This document will be sent to shareholders on or around 13 October 2016, together with the Notice of Annual General Meeting and Form of Proxy.
This announcement also contains additional information solely for the purposes of compliance with the DTR 6.3.5 (1) of the Disclosure Guidance 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 2016. Further information was contained within the preliminary announcement of Close Brothers' final results released to the market on Tuesday 27 September 2016.
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. 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.
Statement of directors' responsibilities
The Annual Report contains the following statement 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;
• 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; 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
The Annual Report contains the following statement on principal risks and uncertainties faced by the group.
The group faces a number of risks in the normal course of business providing a range of financial services to small businesses and individuals. The group seeks to manage these risks are by:
• Adhering to our established and proven business model;
• Implementing an integrated risk management approach based on the concept of "three lines of defence"; and
• Setting clearly defined risk appetites monitored with clearly defined metrics within set limits.
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 list of risks and uncertainties is unchanged from the prior year reflecting the
group's consistent strategy and approach.
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 its performance and future prospects.
UK Referendum on EU Membership
Following the outcome of the UK referendum there is likely to be an extended period of uncertainty as the UK negotiates its exit from the EU.
As a predominantly UK lender we expect the direct impact on the group to be relatively limited. However the overall impact on the group and its customers of the expected prolonged period of uncertainty is difficult to predict. Therefore while the outcome of the referendum vote is not considered a principal risk for the group in itself, we believe a number of the principal risks and uncertainties have increased relative to the prior year as outlined below.
At 31 July 2016 the group had loans and advances to customers totalling £6.4 billion. The group is exposed to credit losses if customers are unable to repay loans and outstanding interest and fees.
In addition the group 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.
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 tenor;
• 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 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 against payment basis. Counterparty exposure and settlement failure monitoring controls are also in place.
The loan impairment rate has remained low reﬂecting our lending discipline as well as favourable market conditions.
The group's other counterparty exposures are broadly unchanged with the majority of our liquidity
requirements and surplus funding placed with the Bank of England.
However, we believe the heightened uncertainty for the UK economy following the referendum
vote has increased the potential risk of higher credit losses.
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 bad debts as a result of customers' inability to service debt and lower asset values on which
loans are secured; and
• Increased volatility in funding markets.
The majority of the group's activities are in specialist areas where our people have significant experience and expertise. Our long-standing commitment to our proven business model and strong financial position has enabled us to support our clients in all economic conditions. This assists us in our aim of developing long-term relationships with our clients.
The group carries out regular stress testing on its performance and financial positions to test resilience in the event of adverse economic conditions.
While the performance of the UK economy has been resilient, a period of prolonged uncertainty is likely following the UK referendum vote.
Legal and regulatory
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 performance, capital and liquidity and the markets in which we operate.
The group seeks to manage these risks by:
• Commitment to provide straightforward and transparent products and services to our clients;
• Governance and control processes to review and approve new products and services;
• Significant investment in both staff and operating systems to ensure the group is well placed to respond to changes in regulation;
• Investment in training for all staff including anti-money laundering, bribery and corruption, 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.
While financial services businesses remain subject to significant scrutiny, we believe the risks are
unchanged from the prior year.
The group operates in highly competitive markets and we expect to see continued high levels of competition particularly in the Banking division.
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.
We continue to experience increasing levels of competition across each of our business areas.
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 changing customer expectations or manage upgrades to existing technology has the potential to impact group performance.
The group continues to invest in its IT infrastructure, information security and software as well as our technology teams to ensure we maximise the benefits of our investment across the group. We also continue to invest strategically in cyber defence processes and tools, customer experience improvements and further strengthening of core systems.
The group has strong governance in place to oversee its major projects.
We have in place business continuity, crisis management and disaster recovery plans which are regularly tested.
The group continues to invest and upgrade its IT infrastructure to simplify our technology architecture and reduce exposure to cyber attack. However, the risk of cyber threats or new technology impacting our business model remains.
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.
The group seeks to attract, retain and develop staff by:
• Operating remuneration structures which are competitive and recognise and reward performance;
• Implement 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.
Our highly skilled people are likely to be targeted but we are confident we are able to retain key employees.
The Banking division's access to stable funding remains key to support its lending activities and the
liquidity requirements of the group.
At 31 July 2016 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. The group's funding and liquidity positions were prudently positioned ahead of the UK referendum vote.
Our funding is well diversified both by source, type and tenor. Liquidity in our Banking division is
assessed on a daily basis to ensure adequate liquidity is held and readily accessible in stressed conditions.
Our funding approach is conservative based on the principle of "borrow long, lend short". Over half of our total funding is repayable after more than one year with an average duration of 31 months. This compares to our weighted average loan maturity of 14 months.
We have further diversified our funding during the year with our first public securitisation. The diversity of funding combined with relatively long tenor when compared to the average duration of our lending
means we are well placed.
While economic uncertainty has the potential to impact funding markets, overall the group remains
well funded and continues to have good access to a wider range of funding sources.
Market volatility and/or changes in interest and exchange rates have the potential to impact
the group's performance.
Although the majority of the group's activities are carried out in the UK, there is foreign exchange
exposure on deposits, lending and funding balances as part of our banking activities as well as
trading in foreign securities.
Winterflood primarily act as a market-maker in a broad range of exchange traded cash securities reducing exposure to market volatility. In addition trading positions are monitored on a real time basis and both individual and trading book limits are set to control exposure.
The group matches fixed and variable interest rate assets and liabilities both naturally, and using swaps where appropriate. The group's capital and reserves are not hedged.
Foreign exchange exposures in the Banking division are hedged using foreign exchange forwards or currency swaps with exposures monitored daily against approved limits. Trading exposures on foreign securities are also hedged and monitored against 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.
The group's approach and the underlying risks are unchanged.
Related party transactions
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:
Salaries and fees
Benefits and allowances
Performance related awards in respect of the current year:
Gains upon exercise of options by key management personnel, expensed to the income statement in previous years, totalled £14.8 million (2015: £20.3 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 2016 attributable, in aggregate, to key management were £1.8 million (31 July 2015: £2.3 million).
This information is provided by RNS