Unaudited results for the six months to 30/06/2024

23 July 2024

For immediate release

ARBUTHNOT BANKING GROUP PLC ("Arbuthnot", "the Company", "the Group" or "ABG")

Unaudited results for the six months to 30 June 2024

Arbuthnot Banking Group PLC today announces a half yearly profit before tax of £20.8m.

Arbuthnot Banking Group PLC is the holding company for Arbuthnot Latham & Co., Limited.

FINANCIAL HIGHLIGHTS

OPERATIONAL HIGHLIGHTS

Commenting on the results, Sir Henry Angest, Chairman and Chief Executive of Arbuthnot, said: "The Group made good progress in the first half of the year, again delivering strong profits in an evolving interest rate environment.

The balance sheet evolution and growth achieved in the period demonstrates the ongoing success of our 'Future State 2' strategic plan, with its focus on diversifying the loan book whilst continuing to enhance our value proposition to relationship clients.

While an expected fall in interest rates in the second half will have a short-term impact on profit growth, the Group is well positioned to take advantage of the market opportunities we anticipate over the near, medium and long term."

Notes

*Details of the calculation of underlying profit before tax can be found in note 6

The Directors of the Company accept responsibility for the contents of this announcement.

The information contained within this announcement is deemed to constitute inside information as stipulated under the retained EU law version of the Market Abuse Regulation (EU) No. 596/2014 (the "UK MAR") which is part of UK law by virtue of the European Union (Withdrawal) Act 2018. The information is disclosed in accordance with the Company's obligations under Article 17 of the UK MAR. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

Chairman's Statement

I am pleased to report that the Group has recorded a profit before tax for the first six months of the year of £20.8m, compared to £26.4m in the same period last year.

The reported profit is lower, as expected, due to the previously explained time lag between rises in the Bank of England base rate and the ageing of the existing fixed rate deposits. It takes 12 months for the cost of our deposits to rise to their resting rate.

This has been the case during the first half of 2024 with the average cost of deposits being 3.19% compared to 1.92% in the same period in the prior year. This increase when applied to customer deposit balances in excess of £3bn, has increased the cost to the Group by £35.2m, being the main reason for the reduction in profits in the first half of 2024. This trend will continue into the second half.

As previously set out in the strategic plan "Future State 2", the Group is focussed on diversifying the loan books by increasing the proportion represented by the specialist lending divisions.

This continued with success in the first half, with the specialist divisions reaching £861.1m of lending balances, which is growth of 12% during 2024 and 29% in the last 12 months. This now represents 36% of the total lending portfolio compared to 30% in June 2023.

The success the Bank had in growing relationship deposits continued into 2024. As expected, we saw the usual seasonal outflow of balances as tax payments were made by clients. We also encouraged non-relationship, expensive fixed term deposits to mature away from the Bank, without competing on price to retain these balances. Finally, we marketed an investment opportunity for our Private Banking clients to earn higher returns through a gilt investment product. In combination, the impact of these three factors resulted in a reduction in deposits of £235m.

However, despite this, total deposit balances have increased by £103.6m or by 3% since the start of the year and by 19% since June 2023. As part of the strategy to grow our deposit base, we have been focussing on the underserved SME current account market, where we have found that private bank style client service resonates well with the finance professionals of our commercial clients. So much so that the transactional SME deposits grew by £121m in the first half of 2024, an increase of 9% and nearly 20% from the prior year.

I would also like to draw attention to the performance of our Wealth Management division. Many wealth managers across the sector are struggling to grow organically, but we continue to make great strides, growing our Funds Under Management and Administration in the first half by £256m, an increase of 15% and 43% since the prior year.

As previously indicated, I was pleased that we were able to complete the renewal of our subordinated loan with P Capital Partners at the beginning of June. This will ensure that the diversity and strength of our regulatory capital base remains robust. We are delighted that our relationship with P Capital Partners has been extended and value that they share the vision we have for the prospects of the Group.

Reflecting on the success that the Group has enjoyed over the past 18 to 24 months, the Board of directors considered that our shareholders should be rewarded for their loyalty by declaring a further special dividend of 20p per share, which was paid on 20 June.

At the same time, the Board announced the interim dividend for the year, which was also 20p per share, an increase of 1p per share over the prior year interim dividend. This was paid on the same day as the special dividend.

On 2 July we announced Richard Gabbertas was joining the Board of ABG, having already served for over three and a half years on the Board of our bank, Arbuthnot Latham, where he was previously the Chair of the audit committee and had recently become the Chair of the risk committee. I am delighted to welcome him to our Board and wish him well for his future tenure.

Banking

Net client growth across Private and Commercial Banking has increased year on year following the investment into new segments over the last 12 to 18 months. Total deposits grew 3% from the year end and 19% over the previous twelve months to finish the period at £3.9bn.

Private Banking deposits seasonally reduced in the first quarter due to client tax payments. However, client growth and acquisition has led to balances being largely replenished over the second quarter to finish the half year at £0.95bn. 

The strategy continues to focus on low-cost relationship deposits. Commercial Banking deposits increased across a wide spread of target segments with growth of 30% over a twelve-month period. Conversely, non-relationship balances have reduced as these were more expensive to maintain. 

The Banking loan book finished the half year with loans of £1.54bn, flat compared to the previous twelve months and year end. Lower than expected repayments over and above contractual repayments, coupled with on-plan gross lending, has led to higher lending balances generating higher interest income throughout the period, which has only been partially offset by a higher interest expense. 

Loan book quality remains strong given the macroeconomic environment. The Bank's cautious underwriting approach with low LTVs is resulting in new defaults being exited with little or no loss.

Wealth Management

Funds Under Management and Administration at the end of June were £1.96bn, up 15% from the start of the year and growth of 43% year on year (30 June 2023: £1.38bn).

Year to date gross inflows were £247m compared to £116m over the same period last year, of which a third were from existing clients and two thirds from new clients. Net flows for the period were £170m, representing a four-fold increase versus the same period in 2023. Additionally, the Direct Gilt Service, launched in February 2024, has raised £82m across twenty-one portfolios.

Arbuthnot Commercial Asset Based Lending ("ACABL")

ACABL reported a profit of £4.4m (30 June 2023: £4.0m) and finished the first half with a loan book of £263.8m, compared to £241.1m for the same period in the prior year and £239.8m at the year end.

ACABL has continued to support existing clients with renewals, additional facilities and acquisitions, particularly where clients have a buy and build strategy. However, macro-economic inflationary pressures, and the higher interest rate environment along with ongoing supply chain challenges have resulted in a reduction in the number of event-driven transactions and fewer Private Equity backed buy-outs in early 2024.  However, at the half the year, the business is seeing signs of improving market conditions with falling inflation and the prospect of lower interest rates on the horizon.

The business continues to observe a higher number of watch cases compared to prior years. However, the loss rate remains very low due to the high quality, liquid assets, as well as close monitoring of the collateral.

Renaissance Asset Finance ("RAF")

RAF reported a profit of £2.2m (30 June 2023: £0.7m) and finished the first half with a loan book of £234.3m, equating to annual growth of 49% when compared to £156.7m for the same period in the prior year and 18% up from the year end (31 December 2023: £198.8m). In the month of June the business generated profit before tax in excess of £0.5m for the first time.

The business continued to broaden its offerings in the wholesale funding sector whilst developing a specialist finance portfolio, securing new and additional funding through block discounting facilities and revolving credit facilities to businesses with successful track records, with Block Discounting balances of £30.9m following the launch of the business in late 2021.

Asset Alliance Group ("AAG")

AAG reported a profit before tax of £25k (30 June 2023: £2.5m loss). Whilst the business has only just achieved break even, this is partly caused by the stage of development of the business, whereby since acquisition we have more than doubled the size of the fleet in a short period of time. The benefit of this will mainly be felt as the portfolio matures.

As at 30 June 2024 the business had assets available for lease and finance leases totalling £363.1m (30 June 2023: £258.8m) with growth of 11% since the year end and 40% over the previous 12 months.

Despite the current economic headwinds, AAG has generated a strong flow of originations in the 6 months to 30 June 2024. Yields, whilst under pressure in certain areas, have improved in others, with an average yield on new business of 8.2% for the first half of the year.

All new assets delivered for the new Bus Rental Division are being fully utilised with current yields in excess of 10%. The Commercial Vehicle sector is experiencing high levels of customer uncertainty coupled with significant pricing pressure from competitors; however, larger, stronger fleets confirm to be targetting annual fleet replacements.

Trading for used truck sales remains challenging. Margins have tended to be maintained, although demand and stock turnover has yet to fully recover from the post-Covid lull.

Operations

The Bank has continued to see good momentum in pursuing its strategy for client growth in its target markets.  Net new client growth was 3% compared to the year end with a trend towards larger and more complex commercial clients.

Total number of card app users is 25% higher than the same period for the previous year and the total number of transactions through Apple Pay and Google Pay increased by 131% year on year.

The Bank continues to develop its digital roadmap to improve the customer experience and organisational efficiency, including progress in upgrading and transforming the Bank's online and mobile banking offering.

Outlook

We now have a new Labour government, and we await to hear how its plans will be implemented. While the outlook for this remains uncertain, we believe there will be opportunities that we remain well positioned to benefit from.

It is expected that interest rates will start to fall from their current highs, and as disclosed, this will inevitably have a short-term impact on our profits. However, we remain focussed on implementing our growth strategy and we are fortunate to have more than sufficient market opportunities to continue to deliver on this.

Consolidated Statement of Comprehensive Income

Consolidated Statement of Financial Position

Consolidated Statement of Changes in Equity

Consolidated Statement of Cash Flows

Notes to the Consolidated Financial Statements

1.  Basis of preparation

The interim financial statements have been prepared on the basis of accounting policies set out in the Group's 2023 statutory accounts as amended by UK-adopted standards and interpretations effective during 2024 as set out below and in accordance with IAS 34 "Interim Financial Reporting" as adopted for use in the UK. The directors do not consider the fair value of the assets and liabilities presented in these financial statements to be materially different from their carrying value.

The statements were approved by the Board of Directors on 22 July 2024 and are unaudited. The interim financial statements will be available on the Group website (www.arbuthnotgroup.com) from 23 July 2024.

2.  Risks and Uncertainties

The Group regards the monitoring and controlling of risks and uncertainties as a fundamental part of the management process.  Consequently, senior management are involved in the development of risk management policies and in monitoring their application.  A detailed description of the risk management framework and associated policies is set out in Note 4.

The principal risks inherent in the Group's business are reputational, macroeconomic and competitive environment, climate change, strategic, credit, market, liquidity, operational, cyber, residual value, conduct, financial crime and, regulatory and capital.

Reputational risk

Reputational risk is the risk to the Group from a failure to meet reasonable stakeholder expectations as a result of any event, behaviour, action or inaction by ABG itself, its employees or those with whom it is associated. This includes the associated risk to earnings, capital or liquidity.

ABG seeks to ensure that all of its businesses act consistently with the seven corporate principles as laid out on page 3 of the Annual Report and Accounts. This is achieved through a central Risk Management framework and supporting policies, the application of a three lines of defence model across the Group and oversight by various committees. Employees are supported in training, studies and other ways and encouraged to live out the cultural values within the Group of integrity, energy and drive, respect, collaboration and empowerment. In applying the seven corporate principles, the risk of reputational damage is minimised as the Group serves its shareholders, customers and employees with integrity and high ethical standards. 

Macroeconomic and competitive environment

The Group is exposed to indirect risk that may arise for the macroeconomic and competitive environment.

In recent years there have been a number of global and domestic events which have had significant implications on the Group's operating environment, namely: Russia's War in Ukraine, the Israel-Hamas war in Gaza, Coronavirus and Brexit. The culmination of these events has led to significant turmoil in both global and domestic markets.  The most significant economic effect from these events includes record inflation, leading to sharp and significant increases in the cost of borrowing. It is expected that interest rates will start to fall from their current highs, however geo-political volatility and uncertainty remains high with the potential to adversely affect the UK economy, as well as the Group's customers and assets.

Climate change

Climate change presents financial and reputational risks for the banking industry. The Board consider climate change a material risk as per the Board approved risk appetite framework which provides a structured approach to risk taking within agreed boundaries. The assessment is proportional at present but will develop over time as industry consensus emerges. The assessment is maintained by the Chief Risk Officer and has been informed by the ICAAP review and workshops for employees.

Whilst it is difficult to assess how climate change will unfold, the Group is continually assessing various risk exposures. The UK has a legally binding target to cut its greenhouse gas emissions to "net zero" by 2050. There is growing consensus that an orderly transition to a low-carbon economy will bring substantial adjustments to the global economy which will have financial implications while bringing risks and opportunities.

The risk assessment process has been integrated into existing risk frameworks and will be governed through the various risk governance structures including review and recommendations by the Arbuthnot Latham Risk Committee. Arbuthnot Latham has been assessed against the Task Force on Climate-related Financial Disclosures' ("TCFD") recommended disclosures and where appropriate the FCA/PRA guidance as per the Supervisory Statements.

In accordance with the requirements of the PRA's Supervisory Statement 'Enhancing banks' and insurers' approaches to managing the financial risks from climate change', the Group has allocated responsibility for identifying and managing the risks from climate change to the relevant existing Senior Management Function. The Bank is continuously developing a suitable strategic approach to climate change and the unique challenges it poses.

The FCA have issued 'Climate Change and Green Finance: summary of responses and next steps'. In addition to the modelling of various scenarios and various governance reviews, the Group will continue to monitor requirements through the relationship with UK Finance.

Strategic risk

Strategic risk is the risk that the Group's ability to achieve its corporate and strategic objectives may be compromised. This risk is particularly important to the Group as it continues its growth strategy. However, the Group seeks to mitigate strategic risk by focusing on a sustainable business model which is aligned to the Group's business strategy. Also, the Directors normally meet once a year outside a formal Board setting to ensure that the Group's strategy is appropriate for the market and economy.

Credit risk

Credit risk is the risk that a counterparty (borrower) will be unable to pay amounts in full when due. This risk exists in Arbuthnot Latham, which currently has a loan book of £2.2bn (30 June 2023: £2.2bn). The lending portfolio in Arbuthnot Latham is extended to clients, the majority of which is secured against cash, property or other high quality assets. Credit risk is managed through the Credit Committee of Arbuthnot Latham. 

Market risk

Market risk arises in relation to movements in interest rates, currencies, property and equity markets.

Interest rate and currency risk

The Group's treasury function operates mainly to provide a service to clients and does not take significant unmatched positions in any market for its own account. As a result, the Group's exposure to adverse movements in interest rates and currencies is limited to interest earnings on its free cash and interest rate re-pricing mismatches. The Group actively monitors its exposure to future changes in interest rates. However, at the current time the Group does not hedge the earnings from the free cash which currently totals £553m. The cost of hedging is prohibitive. Cash is held at the BOE and with the general consensus in the market that rates are expected to fall, the Group has shifted its focus to longer term fixed rate lending products and also started to invest some of the excess liquidity into high quality short dated fixed income assets, such as gilts.

Property and equity market risk

The Group is exposed to changes in the market value of its properties. The current carrying value of Investment Property is £6.0m (31 December 2023: £6.0m), property held for sale £3.2m (31 December 2023: £3.3m) and properties classified as inventory are carried at £14.8m (31 December 2023: £14.7m). Any changes in the market value of the property will be accounted for in the Income Statement for the Investment Property and could also impact the carrying value of inventory, which is at the lower of cost and net realisable value. As a result, it could have a significant impact on the profit or loss of the Group. The Group is also exposed to changes in the value of equity investments. The current carrying value of financial investments is £4.2m (31 December 2023: £3.9m). Any changes in the value of financial investments will be accounted for in Other Comprehensive Income.

Liquidity risk

Liquidity risk is the risk that the Group, although solvent, either does not have sufficient financial resources to enable it to meet its obligations as they fall due, or can only secure such resources at an excessive cost. The Group takes a conservative approach to managing its liquidity profile. Retail client deposits, together with drawings from the Bank of England Term Funding Scheme and capital fund the Bank. The loan to deposit ratio is maintained at a prudent level, and consequently the Group maintains a high level of liquidity. The Arbuthnot Latham Board annually approves the Internal Liquidity Adequacy Assessment Process ("ILAAP"). The Directors model various stress scenarios and assess the resultant cash flows in order to evaluate the Group's potential liquidity requirements. The Directors firmly believe that sufficient liquid assets are held to enable the Group to meet its liabilities in a stressed environment.

Operational risk

Operational risk is the risk that the Group may be exposed to financial losses from conducting its business. The Group's exposures to operational risk include its Information Technology ("IT") and Operations platforms. There are additional internal controls in these processes that are designed to protect the Group from these risks. The Group's overall approach to managing internal control and financial reporting is described in the Corporate Governance section of the Annual Report.

In line with guidance issued by the Regulator, the Bank has continued to focus on ensuring that the design of systems and operational plans are robust to maintain operational resilience in the face of unexpected incidents.

Cyber risk

Cyber risk is an increasing risk for the Group within its operational processes. It is the risk that the Group is subject to some form of disruption arising from an interruption to its IT and data infrastructure. The Group regularly tests the infrastructure to ensure that it remains robust to a range of threats and has continuity of business plans in place including a disaster recovery plan.

Residual value risk

Residual value risk equals the difference in the residual value of a leased asset set at lease inception and the lower salvage value realised upon its disposal or re-lease at the end of the lease term. The Group is exposed to residual value risk in its AAG business. Normal residual value risk is managed through the process set out below, and it should be noted that the transition to greener technology may further impact residual values in two ways. Firstly, residual values could decrease due to assets becoming obsolete; climate related regulations might change, which could result in legal restrictions on the use of assets or technological advances could lead to preferred environmental technologies. Secondly, the lack of historical information on green vehicles could lead to inaccurate measurement of residual values at inception of leases.

The AAG business manage Residual Value setting through its Residual Value Committee that comprises representatives from its Asset Management, Procurement, Sales and Leasing divisions and is chaired by the Residual Value Manager. Assets are valued using either an approved Residual Value matrix or individually, dependent upon the nature of the asset and current market conditions. The strategy for Residual Value setting and oversight of the Residual Value Committee is conducted by the AAG Residual Risk Committee, which in turn reports into Asset Alliance Group Holdings Limited board. The Residual Risk Committee, chaired by the AAG Group Risk Director, includes AAG CEO, AL Group Risk Director, AAG Managing Director, AAG Finance Director and heads of Asset Management, Sales and Leasing divisions in AAG.

Conduct risk

As a financial services provider the Group faces conduct risk, including selling products to customers which do not meet their needs, failing to deal with clients' complaints effectively, not meeting clients' expectations, and exhibiting behaviours which do not meet market or regulatory standards.

The Group adopts a low risk appetite for any unfair customer outcomes. It maintains clear compliance guidelines and provides ongoing training to all employees. Periodic spot checks, compliance monitoring and internal audits are performed to ensure these guidelines are followed. The Group also has insurance policies in place to provide some cover for any claims that may arise.

Financial Crime

The Group is exposed to risk due to financial crime including money laundering, sanctions evasion, bribery and corruption, market abuse, tax evasion and fraud.  The Group operates policies and controls which are designed to ensure that financial crime risks are identified, appropriately mitigated and managed.

Regulatory and capital risk

Regulatory and capital risk includes the risk that the Group will have insufficient capital resources to support the business and/or does not comply with regulatory requirements. The Group adopts a conservative approach to managing its capital. The Board of Arbuthnot Latham approves an ICAAP annually, which includes the performance of stringent stress tests to ensure that capital resources are adequate over a three year horizon. Capital and liquidity ratios are regularly monitored against the Board's approved risk appetite as part of the risk management framework.

Regulatory change also exists as a risk to the Group's business. Notwithstanding the assessments carried out by the Group to manage regulatory risk, it is not possible to predict how regulatory and legislative changes may alter and impact the business. Significant and unforeseen regulatory changes may reduce the Group's competitive situation and lower its profitability.

3.  Critical accounting estimates and judgements in applying accounting policies

The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. For a full list of critical accounting estimates and judgements, please refer back to the Annual Report and Accounts for 2023. Assumptions surrounding credit losses are discussed in more detail below, while other critical accounting estimates and judgements have remained unchanged from what was previously reported.

Estimation uncertainty - Expected credit losses ("ECL") on financial assets

The Group reviews its loan portfolios and debt security investments to assess impairment at least on a quarterly basis. The measurement of ECL required by IFRS 9, necessitates a number of significant judgements. Specifically, judgements and estimation uncertainties relate to assessment of whether credit risk on the financial asset has increased significantly since initial recognition, incorporation of forward-looking information ("FLI") in the measurement of ECLs and key assumptions used in estimating recoverable cash flows. These estimates are driven by a number of factors that are subject to change which may result in different levels of ECL allowances.

The Group incorporates FLI into the assessment of whether there has been a significant increase in credit risk. Forecasts for key macroeconomic variables that most closely correlate with the Bank's portfolio are used to produce five economic scenarios, comprising of a Baseline, which is the central scenario, developed internally based on public consensus forecasts, and four less likely scenarios, one upside and three downside scenarios (Downside 1, Downside 2 and Extreme Downside), and the impacts of these scenarios are then probability weighted. The estimation and application of this FLI will require significant judgement supported by the use of external information.

12-month ECLs on loans and advances (loans within Stage 1) are calculated using a statistical model on a collective basis, grouped together by product and geographical location. The key assumptions are the probability of default, the economic scenarios and loss given default ("LGD") having consideration for collateral. Lifetime ECLs on loans and advances (loans within Stage 2 and 3) are calculated based on an individual valuation of the underlying asset and other expected cash flows.

For financial assets in Stage 2 and 3, ECL is calculated on an individual basis and all relevant factors that have a bearing on the expected future cash flows are taken into account. These factors can be subjective and can include the individual circumstances of the borrower, the realisable value of collateral, the Group's position relative to other claimants, and the likely cost to sell and duration of the time to collect. The level of ECL is the difference between the value of the recoverable amount (which is equal to the expected future cash flows discounted at the loan's original effective interest rate), and its carrying amount.

The Group considered the impact of various assumptions on the calculation of ECL (changes in GDP, unemployment rates, inflation, exchange rates, equity prices, wages and collateral values/property prices) and concluded that collateral values/property prices, UK GDP and UK unemployment rate are key drivers of credit risk and credit losses for each portfolio of financial instruments.

The five macroeconomic scenarios modelled on future property prices were as follows:

•              Baseline

•              Upside

•              Downside 1

•              Downside 2

•              Extreme downside

The tables below therefore reflect the expected probability weightings applied for each macroeconomic scenario:

The tables below show the five-year forecasted average for property prices growth, UK unemployment rate and UK real GDP growth:

The tables below list the macroeconomic assumptions at 30 June 2024 used in the base, upside and downside scenarios over the five-year forecast period. The assumptions represent the absolute percentage unemployment rates and year-on-year percentage change for GDP and property prices.

The graphs below plot the historical data for HPI, Commercial real estate price, unemployment rate and GDP growth rate in the UK as well as the forecasted data under each of the five scenarios.

Management have assessed the impact of assigning a 100% probability to each of the economic scenarios, which would have the following impact on the Profit or Loss of the Group:

4.  Financial risk management

Strategy

By their nature, the Group's activities are principally related to the use of financial instruments. The Directors and senior management of the Group have formally adopted a Group Risk and Controls Policy which sets out the Board's attitude to risk and internal controls.  Key risks identified by the Directors are formally reviewed and assessed at least once a year by the Board, in addition to which key business risks are identified, evaluated and managed by operating management on an ongoing basis by means of procedures such as physical controls, credit and other authorisation limits and segregation of duties. The Board also receives regular reports on any risk matters that need to be brought to its attention. Significant risks identified in connection with the development of new activities are subject to consideration by the Board. There are budgeting procedures in place and reports are presented regularly to the Board detailing the results of each principal business unit, variances against budget and prior year, and other performance data.

The principal non-operational risks inherent in the Group's business are credit, macroeconomic, market, liquidity and capital.

Credit risk

The Company and Group take on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Significant changes in the economy, or in the health of a particular industry segment that represents a concentration in the Company and Group's portfolio, could result in losses that are different from those provided for at the balance sheet date. Credit risk is managed through the Credit Committee of the banking subsidiary.

The Committee regularly reviews the credit risk profile of the Group, with a clear focus on performance against risk appetite statements and risk metrics. The Committee considered credit conditions during the period.

The Company and Group structure the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to products, and one borrower or groups of borrowers. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. The limits are approved periodically by the Board of Directors and actual exposures against limits are monitored daily.

Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral, and corporate and personal guarantees.

The Group has attempted to leverage stress test modelling insights to inform ECL model refinements to enable reasonable estimates. Management review of modelling approaches and outcomes continues to inform any necessary adjustments to the ECL estimates through the form of in-model adjustments, based on expert judgement including the use of available information. Management considerations included the potential severity and duration of the economic shock, including the mitigating effects of government support actions, as well the potential trajectory of the subsequent recovery.

The Group employs a range of policies and practices to mitigate credit risk.  The most traditional of these is the taking of collateral to secure advances, which is common practice.  The principal collateral types for loans and advances include, but are not limited to:

•              Charges over residential and commercial properties;

•              Charges over business assets such as premises, inventory and accounts receivable;

•              Charges over financial instruments such as debt securities and equities;

•              Charges over other chattels; and

•              Personal guarantees

Upon initial recognition of loans and advances, the fair value of collateral is based on valuation techniques commonly used for the corresponding assets.  In order to minimise any potential credit loss the Group will seek additional collateral from the counterparty as soon as impairment indicators are noticed for the relevant individual loans and advances. Repossessed collateral, not readily convertible into cash, is made available for sale in an orderly fashion, with the proceeds used to reduce or repay the outstanding indebtedness, or held as inventory where the Group intends to develop and sell in the future. Where excess funds are available after the debt has been repaid, they are available either for other secured lenders with lower priority or are returned to the customer.

Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards.

The Group incorporates forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL. The key inputs into the measurement of the ECL are:

•              assessment of significant increase in credit risk

•              future economic scenarios

•              probability of default

•              loss given default

•              exposure at default

The IFRS 9 impairment model adopts a three stage approach based on the extent of credit deterioration since origination.