TIDMRAT
RNS Number : 6706Q
Rathbone Brothers PLC
21 February 2019
Rathbone Brothers Plc 2018 Preliminary results
This is a preliminary statement of annual results published in
accordance with FCA Listing Rule 9.7A.
It covers the year ended 31 December 2018.
Highlights
- Total funds under management and administration were GBP44.1
billion at 31 December 2018, up 12.8% from GBP39.1 billion at 31
December 2017. The FTSE 100 Index decreased by 12.5% and the MSCI
WMA Private Investor Balanced Index decreased by 7.2% over the same
period.
- The total net annual growth rate of funds under management and
administration for Investment Management was 23.5% (2017: 3.9%).
This comprised GBP1.1 billion of net organic growth (2017: GBP0.9
billion) and GBP6.8 billion of acquired inflows (GBP6.7 billion
related to the acquisition of Speirs & Jeffrey) compared to
acquired growth of GBP0.3 billion in 2017. The underlying rate of
net organic growth was 3.4% in 2018 (2017: 3.0%).
- Underlying operating income in Investment Management totalled
GBP275.3 million for the year ended 31 December 2018 (2017:
GBP254.6 million) and includes GBP8.7 million of income in relation
to Speirs & Jeffrey. The average FTSE 100 Index was 7269 on
quarterly billing dates in 2018, compared to 7426 in 2017, a
decrease of 2.1%.
- Funds under management in Unit Trusts were GBP5.6 billion at
31 December 2018 (31 December 2017: GBP5.3 billion) and net inflows
totalled GBP543 million during 2018 (2017: GBP883 million).
Underlying operating income in Unit Trusts was GBP36.7 million in
the year ended 31 December 2018, an increase of 16.9% from GBP31.4
million in 2017 and the operating margin was stable at 34.6% (2017:
34.1%).
- Underlying operating expenses of GBP220.4 million (2017:
GBP198.5 million) increased 11.0% year-on-year, not only reflecting
GBP5.9 million of Speirs & Jeffrey operating costs in the year,
but also underlying investment in the business as additional
capability is added.
- Underlying profit before tax increased 4.7% from GBP87.5
million to GBP91.6 million for the year ended 31 December 2018.
Profits of GBP2.8 million from Speirs & Jeffrey are included
for the four month period since completion of the transaction.
Underlying profit margin remained strong at 29.4% (2017: 30.6%).
Underlying earnings per share increased 2.7% to 142.5p (2017:
138.8p). Profit before tax increased 4.1% from GBP58.9 million to
GBP61.3 million.
- Work to integrate Speirs & Jeffrey into Rathbones is
progressing well and the migration to common systems is planned to
be completed by mid 2019 as previously guided.
Declaration of final dividend
- The board recommends a final dividend of 42p for 2018 (2017:
39p), making a total of 66p for the year (2017: 61p), an increase
of 8.2% on 2017.
Board changes
- Philip Howell will retire as chief executive by 9 May 2019 and
Paul Stockton, current group finance director and managing director
of Rathbone Investment Management, will take on the role of chief
executive.
- Jennifer Mathias will take on the role of group finance
director when she joins the company on 1 April 2019.
Ends
Issued on 21 February 2019
For further information contact:
Rathbone Brothers Plc
Tel: 020 7399 0000
Email: shelly.patel@rathbones.com
Philip Howell, Chief Executive
Paul Stockton, Group Finance Director/Managing Director,
Rathbone Investment Management
Shelly Patel, Head of Investor Relations
Camarco (Communications adviser to Rathbones)
Tel: 020 3757 4984
Email: ed.gascoigne-pees@camarco.co.uk
Ed Gascoigne-Pees
Hazel Stevenson
Rathbone Brothers Plc
Rathbone Brothers Plc ("Rathbones"), through its subsidiaries,
is a leading provider of high-quality, personalised investment and
wealth management services for private clients, charities and
trustees. Our services include discretionary investment management,
unit trusts, banking and loan services, financial planning,
unitised portfolio services, and UK trust, legal, estate and tax
advice.
Rathbones has over 1,400 staff in 15 UK locations and Jersey;
its headquarters is 8 Finsbury Circus, London.
rathbones.com
Chairman's statement
A review of 2018
Despite weaker investment markets in the final quarter of the
year, 2018 was a good year financially for Rathbones. During the
year we also implemented considerable regulatory changes associated
with MiFID II, the Asset Management Market Study and General Data
Protection Regulation successfully. These changes had a significant
impact on our clients and across the business.
Rathbones continues to grow organically but our growth in 2018
was dominated by the completion of the Speirs & Jeffrey
acquisition in August. The business is a strong cultural fit,
adding GBP6.7 billion of funds under management and administration
at the time of acquisition, and creating a leading presence in
Scotland. We are enjoying working with the Speirs & Jeffrey
team and look forward to welcoming their clients on to our systems
in mid-2019.
Our financial results reflected the relatively strong investment
markets that featured for most of the year but the final quarter of
2018 was a poor one for investors and asset managers alike. Despite
weak markets at the end of the year, our funds under management and
administration reached GBP44.1 billion at 31 December 2018, up
12.8% from GBP39.1 billion last year. Profit before tax for the
year of GBP61.3 million increased 4.1% year on year (2017: GBP58.9
million) and reflected the impact of a number of non-underlying
items, including costs associated with the acquisition of Speirs
& Jeffrey. Basic earnings per share of 88.7p represented a
decrease of 4.3% from 92.7p in 2017.
Our overall growth helped deliver underlying profit before tax
of GBP91.6m (2017: GBP87.5 million), resulting in an underlying
operating profit margin of 29.4% for the year (2017: 30.6%).
Underlying earnings per share of 142.5p represented an increase of
2.7% from 138.8p in 2017. In line with our progressive dividend
policy, the board is recommending a final dividend of 42p per
share. This brings the total dividend for the year to 66p per
share, an increase of 8.2% over last year.
Governance and culture
Rathbones' culture (based on professionalism, putting clients
first, a collegiate approach and integrity) remains a priority of
the board and at the heart of our success. We have ongoing
discussions at board level about how we measure and monitor our
culture. As our business grows, the board recognises the continued
importance of good communication and will ensure that the strong
client-centric behaviours that are embedded within the business
continue to thrive. Throughout 2018, the board had particular focus
on the impact of growth on our culture. Outside of board meetings,
non-executive directors have held a number of constructive
meetings, both individually and as a whole, with groups of
employees across the business to share experiences more
directly.
Corporate governance and stewardship continue to be important in
Rathbones. We believe that the active approach we take on corporate
governance and stewardship issues arising in the companies we
invest in is in the best interests of our clients. It also helps us
strive for high standards in our own corporate governance and
disclosure, and we are supportive of the 2018 UK Corporate
Governance Code changes which we plan to adopt in full by the end
of 2019.
Risk and regulation
The past year has involved considerable work to implement
changes driven by continued regulatory developments. The effects of
these changes will be felt for some time. Our risk management
processes continue to play an important role in decision-making and
managing the business. In 2018 we paid particular attention to the
risks associated with cybercrime and business resilience, and the
operational risks of implementing GDPR and MiFID II. Non-executive
members of the board have also participated in a number of training
and operational exercises associated with these risks. We will
continue to see the impacts of regulatory change in 2019.
At the beginning of June we significantly reduced our exposure
to property risk when we successfully assigned all legacy Curzon
Street leases to a third party. This has resulted in a net
write-back of non-underlying head office relocation costs of GBP2.8
million (2017: net costs of GBP16.2 million) in the year.
The board also recognises the additional operational risks
associated with the integration of Speirs & Jeffrey and will
ensure these are managed to within a sensible risk appetite.
Brexit
Brexit is likely to be one of the most significant political and
economic events to impact the United Kingdom in our lifetimes. The
lack of consensus on the United Kingdom's strategy for the future
creates unprecedented levels of uncertainty and the longer term
implications will not be clear for some time.
For these reasons we continue to monitor Brexit-related
developments closely. As a UK business with no operations in other
European Union countries, no material dependencies on goods or
people from other European Union countries and a predominantly UK
client base, we anticipate that the operational impacts on our
business will be relatively small. In particular Brexit will bring
no changes to the basis or nature of the services we provide to the
vast majority of our clients and investors who are based in the UK.
However, we recognise the impact of Brexit more generally could
affect the value of our funds under management and
administration.
Investors in the Luxembourg SICAV funds managed by Rathbone Unit
Trust Management will see some changes to the basis on which these
funds are delivered. It is also possible that there may be some
implications for our private clients based in other EEA countries
depending on the exact nature of the services they receive and
regulatory framework agreed in the transitional period or in the
event of an exit from the EU without agreement.
We continue to devote considerable resources to the investment
implications of Brexit for client portfolios and our range of
funds, and communicate through formal and informal briefings from
our research team to clients and advisers regularly on our
views.
Board changes and succession
As part of our normal succession planning, the board continues
to monitor its capabilities and assesses what new skills are
necessary to strengthen both the board and the wider business over
time, taking into account the existing balance of knowledge,
experience and diversity. This year, we have implemented a number
of changes in accordance with our succession plans which place us
in a strong position to lead the business successfully in the
future.
Taking these in order, in July 2018 we welcomed Terri Duhon to
the board. Terri has wide experience in the financial services
industry and was appointed chair of the risk committee on the
departure of Kathryn Matthews after nine years of excellent
service. We were also delighted to welcome Colin Clark to the board
in October 2018. Colin's considerable experience in the investment
management industry will be of great value to Rathbones in the
years ahead.
Following a rigorous recruitment process, we announced the
appointment of Jennifer Mathias to the group finance director role
in October 2018. Jennifer's knowledge and experience in the wealth
management and private banking sectors will be welcome and she will
join us on 1 April 2019.
Finally, in November 2018, we announced that Philip Howell would
be retiring from his role as chief executive by our Annual General
Meeting on 9 May 2019 having achieved a successful period of
considerable growth. Under Philip's leadership, Rathbones has
firmly established itself as the leading independent UK wealth
manager and, on behalf of the board, I would like to thank him for
the strong direction, unfailing commitment and dedication he has
provided to Rathbones during his tenure.
Philip is to be succeeded by Paul Stockton, currently group
finance director and managing director of Rathbone Investment
Management. Having worked with Paul for many years, I am delighted
with his promotion to the role of chief executive. Paul has both
considerable experience and a deep knowledge of Rathbones, its
values and culture. I wish him every success as he takes on his new
responsibilities.
Strategy
When we set our five-year strategy in 2014, we had the ambition
to reach GBP40 billion of funds under management by the end of
2018. A combination of organic growth, earnings-enhancing
acquisitions, positive investment performance and favourable
markets has helped us to realise this ambition and we now manage
GBP44.1 billion (2014 opening funds: GBP22.0 billion). We expect to
update the market on the next phase of our growth during the second
half of 2019.
Supporting our employees
We support the broader initiatives in the 2018 Corporate
Governance Code which include workforce engagement, diversity and
cultural issues. We believe that these require separate but related
initiatives and we are actively considering how best to give them
impetus. The board holds a strong desire for Rathbones to be a
business where every employee has the opportunity to build a
successful career and find the right balance between work and
personal life. This has been our broad goal for some time and, over
the past year, we have made specific improvements including signing
the Women in Finance Charter and rolling out training programmes
covering diversity, inclusion and unconscious bias across the
firm.
The board recognises that the securing of true diversity is not
an overnight change and will take time, but we are committed to
tackling the underlying causes of our gender imbalance in
particular. This will involve attracting talented people, enabling
their career paths to senior management, removing any unconscious
bias in our behaviours and actively creating a culture of inclusion
across the company.
Engaging with shareholders
We are fortunate to have many supportive long-term shareholders
with whom we engage on a regular basis. In 2018 and at the
beginning of 2019 we have consulted with them on executive
remuneration and we continue to hold an open and constructive
dialogue in analyst and investor meetings. Shareholder support was
evidenced this year by the success of our GBP60 million share
placing to support the acquisition of Speirs & Jeffrey.
Outlook
Our priorities for 2019 will be the successful integration of
Speirs & Jeffrey, the roll-out of the next phase of our growth
and the smooth transition of our executive management team.
Despite political and economic uncertainties, we remain
confident in the underlying strength of our business and its
longer-term prospects.
Mark Nicholls
Chairman
20 February 2019
Chief executive's review
A resilient year
The wealth management industry continues to grow with sector
assets reaching close to GBP1 trillion according to a recent
Compeer study. The case for independent wealth managers providing
discretionary investment management through a personalised client
relationship model continues to be compelling. A discretionary
service can respond dynamically to volatile market conditions and
deliver a quality outcome. Capitalising on the market opportunity
requires continuous investment in technology and professional
talent which in turn calls for the advantages of scale. In this
environment, Rathbones is well-positioned.
Markets during the first half of 2018 were slow to react to the
growing economic and political uncertainties that were widely
reported. They did however begin to reflect sentiment more closely
during the second half of the year when we saw the considerable
falls in asset levels that have perhaps reset expectations for
2019. Our own funds under management and administration grew to
GBP44.1 billion at 31 December 2018 (2017: GBP39.1 billion).
The year was characterised by some additional demands placed
upon the business. On the one hand, we needed to adapt to new
regulatory regimes and navigate increasingly complex investment
conditions. On the other, we continued to progress our five-year
strategic initiatives and completed the most significant
acquisition in our history. Our positive financial results despite
this significant level of activity demonstrate the resilience of
our business.
A strong 2018 financial performance and the completion of the
acquisition of Speirs & Jeffrey
The 12.8% growth in our total funds under management and
administration in 2018 reflected continued net organic growth and
the completion of our acquisition of Speirs & Jeffrey in August
2018 which added funds of GBP6.7 billion at the time of completion.
Total funds in our Investment Management business were GBP38.5
billion (2017: GBP33.8 billion), whilst our Unit Trusts business
totalled GBP5.6 billion (2017: GBP5.3 billion). This growth helped
deliver underlying profit before tax of GBP91.6 million (2017:
GBP87.5 million), resulting in an underlying operating profit
margin of 29.4% for the year (2017: 30.6%). Underlying earnings per
share of 142.5p, increased 2.7% from 138.8p in 2017. Profit before
tax of GBP61.3 million (2017: GBP58.9 million) reflected a number
of non-underlying items including costs associated with the
acquisition of Speirs & Jeffrey.
Net new organic inflows totalled GBP1.1 billion in 2018,
representing a growth rate of 3.4% (2017: 3.0%). This was a
relatively steady performance compared to last year. Outflows
reflected the ongoing use of funds for lifestyle and property, as
well as the departure of a small number of investment managers over
the past year.
Net flows into Unit Trusts totalled GBP543 million in the year
(2017: GBP883 million) representing 10.1% of opening funds under
management. Encouragingly this meant Rathbones funds ranked 11th
overall for net retail sales in 2018 according to numbers published
in the February 2019 Pridham report.
Our balance sheet remains stable with a consolidated Common
Equity Tier 1 ratio at 31 December 2018 of 20.6% compared with
20.7% at 31 December 2017. We remain very lightly geared with a
consolidated leverage ratio at 31 December 2018 of 8.9% compared
with 7.8% at 31 December 2017. Our underlying return on capital
employed was lower at 16.9% as a result of the GBP60 million share
placing to part fund the acquisition of Speirs & Jeffrey (2017:
19.5%).
Performance against our strategy
Our aim to build trusted relationships with our clients and be
accountable for the outcome of their portfolios is as relevant
today as it was five years ago.
The combination of organic growth, earnings-enhancing
acquisitions, positive investment performance and effective cost
management has helped Rathbones create and maintain value for
shareholders and employees alike. In an environment of continued
growth and favourable markets we have delivered underlying
operating profit margins at around the 30% mark over a period of
significant change. This has been achieved while investing in our
infrastructure, managing regulatory developments and pursuing a
number of growth initiatives.
Market growth has not been particularly strong over the last
five years with the FTSE 100 Index average of 7269 for 2018
representing only a 13.2% increase over the average in 2014 of
6419. In spite of this, our underlying profits over that period
have grown 81.4% to GBP91.6 million in the year ended 31 December
2018 (31 December 2013: GBP50.5m).
Funds under management and administration in the Investment
Management business have grown 90.6% to GBP38.5 billion at 31
December 2018 from GBP20.2 billion five years ago. While our
average net organic growth of 3.3% did not meet the 5% expectation
we aimed for, it does reflect somewhat the headwinds of a sustained
period of low yields and a continuing client appetite to invest
away from public investment markets and into property.
Our strategic focus on distribution of our discretionary fund
management services through UK IFA networks continues to positively
contribute to organic growth.
Our charity and Greenbank specialist mandate businesses have
continued to perform strongly. Rathbones is the fourth largest
charity investment manager in the UK with GBP5.3 billion of charity
related funds at 31 December 2018 and now competes for some of the
largest charity business in the country. Our ethical business,
Rathbone Greenbank Investments, has also benefited from momentum in
this period, growing funds to GBP1.2 billion at 31 December
2018.
The Unit Trusts business in particular has gained considerable
momentum and is now a GBP5.6 billion business (funds under
management at 31 December 2018) in its own right and importantly
does not rely on internal funds for growth. We now manage three
funds of over GBP1 billion and have launched several new funds and
strategies to keep up with growing demand and the ever-changing
investment market.
Some other growth initiatives have been slower to bear fruit.
Our in-house financial planning business has been restructured
recently. It will require investment in the short-term to ensure
that all of our key offices have an appropriate level of access to
financial advisers to support business development. We will
continue to invest selectively in financial planning talent in
2019. The Rathbone Private Office has also recently been
restructured to simplify its proposition and build closer links
with private client discretionary managers. We will continue to
leverage the professional network it has established to add to
growth.
Supplementing our growth through acquisitions
Our growth strategy has always been supported by the acquisition
of teams and businesses, and our approach here has and will remain
opportunistic. Our acquisitions and recruitment have added 137
investment professionals over the past five years. In 2014, we
acquired Deutsche Bank's London and Jupiter's private client
businesses (GBP2.6 billion) and in 2018 we acquired Speirs &
Jeffrey (GBP6.7 billion). This was in addition to the acquisition
of Vision Independent Financial Planning in 2015.
Our acquisition of Speirs & Jeffrey makes Rathbones the
largest independent discretionary wealth manager in Scotland and
further reinforces our long-held commitment to the region. Like
Rathbones, Speirs & Jeffrey has a long-standing heritage and
client-centric philosophy and our combined scale enables greater
financial and organisational capacity to invest in our people,
technology and processes. Work to bring the business into Rathbones
is progressing well and the migration to our systems is intended to
complete by mid-2019. Our commitment to keeping clients at the
forefront of what we do will remain as we bring our two businesses
together.
We will continue to focus on our key competencies to take
advantage of industry trends, driving organic growth, while also
seeking out acquisition opportunities that fit our culture.
Steady investment in our infrastructure
Capital expenditure excluding property costs was relatively
stable at GBP9.7 million in 2018 (GBP9.3 million in 2017) but as an
overall trend it has been increasing in recent years. Our
investment systems remain market-leading and these have been
enhanced by an ability to deal more efficiently, manage asset
allocation and measure investment performance. The roll-out of our
asset allocation modelling software across Rathbone Investment
Management five years ago was an exciting step for us and enabled
each of our investment managers to better manage client portfolios
through the ability to actively compare them to model strategies.
This tool is now a critical part of our infrastructure. Over the
same period we have steadily grown our research skills and
capability which now represents a strong backbone to our investment
process and a considerable source of investment intellectual
property.
Like many other businesses we continue to strive to make all our
desired improvements to our client relationship management systems
and will continue to work diligently this year to achieve our
goals. Our other operational systems remain well controlled,
supported by a technology infrastructure that is considerably more
resilient than it was five years ago.
Managing the impacts of greater regulation
2018 was a year in which significant new regulation was
implemented, adding to both capital and operating costs and
involving some considerable internal resource. We were not alone as
many industry participants wrestled with MiFID II and GDPR
implementation projects whilst continuing to pursue a busy change
agenda. Notwithstanding a sustained period of heavy regulatory
change in 2018, we expect the impact to continue to be felt in
2019. Income in 2018 for example continued to benefit from the
generation of 'risk-free' managers box dealing profits (GBP3.4
million in the year ended 31 December 2018 and GBP3.1 million in
2017) in our Unit Trust business, but such profits will not recur
in 2019. Alongside the wider asset management industry, we also
expect to face greater public scrutiny of costs and charges
following the implementation of MiFID II. We remain confident in
our value proposition but will continue to improve our services to
clients.
Employees
Our employees remain the most valuable part of our business and
without them we would not be the leading wealth manager we are
today. We explained last year that current employee share ownership
had been falling and we are pleased to have addressed this during
the year with our new Staff Equity Plan. From May 2018, this adds
GBP4.5 million per annum over five years to operating expenses. We
also continue to support the Share Incentive Plan (SIP) and it is
encouraging to see that 1,055 (nearly 80%) of employees now
actively participate in that plan. The increased employee share
ownership provided by all of these plans ensures employees are
directly incentivised by, and motivated to ensure, the positive
performance of the group and its continuing long-term success.
Training and career development is important to us and we strive
to provide a high-quality learning and development experience for
all of our employees to ensure they are well-informed and to help
them achieve both their professional and personal potential. In
2019, we also expect our emphasis to move away from the
considerable amount of regulatory training completed in recent
years to pay greater attention to other areas such as leadership
development and succession planning.
Outlook and succession
We have made some significant progress over the last five years,
but there is still work to do to develop our services and strive
for greater operational efficiency. This year will be a busy one,
with strategic investment decisions being made amid the heightened
uncertainties in investment markets. During 2019, we will not only
focus on ensuring that the transfer of Speirs & Jeffrey clients
to our platform is successful, but we will also improve our
customer relationship management systems and client reporting
tools, while continuing to develop other systems and processes as
we progress our digital agenda and continue to grow. We will
continue to maintain our cost discipline, investing as market
conditions allow and ensuring that our infrastructure supports the
business and manages operational risks appropriately.
On 27 November 2018 we announced that I will be retiring from my
role as chief executive by the Annual General Meeting in May 2019.
When I joined Rathbones in 2013, we were a business with GBP22.0
billion of funds under management, 41,000 clients and around 800
people. Back then, I could not have imagined the opportunities and
challenges that we would face along the way but five years later we
have emerged as the largest independent discretionary fund
management provider in the UK with GBP44.1 billion of funds under
management and administration, some 60,000 clients and over 1,400
people at the end of 2018. These achievements are down to the many
talented employees who compose Rathbones.
Paul Stockton will take on the role of chief executive and,
having worked closely with him for several years, I believe he is
the right person to lead the company into the next chapter of its
history.
I leave Rathbones with great confidence that the business is
well-positioned for the next phase of growth which will be
announced in the second half of 2019. It has been my privilege to
lead Rathbones and I thank you all for your support over the last
five years.
Philip Howell
Chief Executive
20 February 2019
Financial Performance
Table 1. Group's overall performance
2018 2017
GBPm GBPm
(unless (unless
stated) stated)
-------------------------------- -------- --------
Underlying operating income 312.0 286.0
Underlying operating expenses (220.4) (198.5)
Underlying profit before tax(1) 91.6 87.5
Underlying operating margin(2) 29.4% 30.6%
Profit before tax 61.3 58.9
Effective tax rate 24.6% 20.5%
Taxation (15.1) (12.1)
Profit after tax 46.2 46.8
Underlying earnings per share 142.5p 138.8p
Earnings per share 88.7p 92.7p
Dividend per share(3) 66.0p 61.0p
Return on capital employed4 16.9% 19.5%
-------------------------------- -------- --------
1. A reconciliation between underlying profit before tax and
profit before tax is shown in table 2
2. Underlying profit before tax as a % of underlying operating income
3. The total interim and final dividend proposed for the financial year
4. Underlying profit after tax (note 8) as a % of average equity at each quarter end
Overview of financial performance
Our financial results in 2018 were reasonably strong, as
underlying profit before tax grew by 4.7% to GBP91.6 million. The
underlying operating margin, which is calculated as the ratio of
underlying profit before tax to underlying operating income, was
29.4% for the year; in line with our target of 30% over the cycle
(2017: 30.6%). Profit before tax increased by 4.1% to GBP61.3
million.
Profits from Speirs & Jeffrey are included for the four
month period since completion of the transaction on 31 August 2018,
together with all of the associated acquisition related profit and
loss charges.
Underlying operating income
Fee income of GBP233.4 million in 2018 increased 7.3% compared
to GBP217.5 million in 2017, reflecting organic and acquired new
business over the period. Fees represented 74.8% of total
underlying operating income in 2018, lower than the 76.0% in 2017,
largely reflecting a higher proportion of commissions in Speirs
& Jeffrey and increased interest margins. Net commission income
increased 7.0% to GBP41.4 million (2017: GBP38.7 million) in 2018.
Net interest income increased 31.9% to GBP15.3 million, reflecting
higher interest rates and a longer average duration in treasury
assets.
Underlying operating expenses
Underlying operating expenses increased by 11.0%, not only
reflecting GBP5.9 million of Speirs & Jeffrey operating costs,
but also underlying growth in the business as well as additional
research costs totalling GBP2.3 million now borne by the company
rather than our investment funds following the adoption of MiFID
II.
Planned additions to headcount increased fixed staff costs
by 5.5% to GBP92.6 million, with Speirs & Jeffrey adding a
further GBP3.3 million of fixed staff costs and 156 heads. In
total, average headcount increased by 15.9% to 1,329 in 2018.
Total variable staff costs increased by 3.4% to GBP55.1 million,
reflecting improved performance pay levels and the additional cost
of share incentives to staff. Variable staff costs in 2018
represented 17.7% of underlying operating income (2017: 18.6%) and
37.6% of underlying profit before variable staff costs and tax
(2017: 37.9%).
Group underlying profit before tax/operating margin
Underlying profit before tax and earnings per share are
considered by the board to be a better reflection of true business
performance than reviewing results on a statutory basis only. These
measures are widely used by research analysts covering the group.
Underlying results exclude income and expenditure falling into the
four categories explained below.
Table 2. Reconciliation of underlying profit before tax to
profit before tax
2018 2017
GBPm GBPm
---------------------------------------------------------- ------ ------
Underlying profit before tax 91.6 87.5
Gain on plan amendment of defined benefit pension schemes - 5.5
Charges in relation to client relationships and goodwill (13.2) (11.7)
Acquisition-related costs (19.9) (6.2)
Head office relocation costs 2.8 (16.2)
---------------------------------------------------------- ------ ------
Profit before tax 61.3 58.9
---------------------------------------------------------- ------ ------
Charges in relation to client relationships and goodwill
As explained in note 3.1, client relationship intangible assets
are created when we acquire a business or a team of investment
managers. The charges associated with these assets represent a
significant non-cash item and they have, therefore, been excluded
from underlying profit, which represents largely cash-based
earnings more directly relates to the financial reporting period.
Charges for amortisation of client relationship intangibles in the
year ended 31 December 2018 were GBP13.2 million (2017: GBP11.7
million), reflecting the Speirs & Jeffrey and other
acquisitions.
Acquisition-related costs
Acquisition-related costs are significant costs which arise from
strategic investments to grow the business rather than its trading
performance and are therefore excluded from underlying results.
Net costs of GBP18.4 million were incurred in 2018 in relation
to the acquisition of Speirs & Jeffrey. These amounts are
largely capital in nature but, in accordance with IFRS 3, any
deferred consideration payments to shareholders of the acquired
business who remain in employment with the group must be treated as
remuneration. During 2018, GBP14.7 million of deferred
consideration payments were expensed to the income statement and
are considered separately for executive remuneration purposes.
Deferred costs of GBP1.5 million (2017: GBP1.3 million) were
incurred in relation to the acquisitions of Vision Independent
Financial Planning and Castle Investment Solutions, which were
completed on 31 December 2015. These amounts include the cost of
payments to vendors of the business who remain in employment with
the group. The final payment for this acquisition of GBP7.0 million
is due at the end of 2019.
As announced on 31 August 2017, we incurred professional
services costs of GBP4.9 million in relation to the merger
discussions with Smith & Williamson during 2017.
Head office relocation costs
During February 2017, we relocated our London head office to new
premises following a nine-month fit out period. Charges incurred in
relation to the double running of both London premises and the
relocation amounted to GBP16.2 million in 2017. This included the
recognition of a provision for the cost of the surplus property
until the end of the existing lease, net of any expected rental
income from sub-letting the space.
On 6 June 2018, our legacy lease was assigned, several months
earlier than anticipated, triggering a release of the unused
element of the provision. Professional costs were also incurred in
2018 and, consequently, a net credit of GBP2.8 million has been
recognised in the result for 2018.
These items represent an investment to expand our operating
capacity in a key location and are not expected to recur in the
short to medium term; they have therefore been excluded from
underlying results.
Gain on plan amendment of defined benefit pension schemes
All defined benefit schemes were closed with effect from 30 June
2017, ceasing all future accrual and breaking the link to salaries.
These changes resulted in a plan amendment gain of GBP5.5 million,
which was recognised in operating income in 2017. This gain was a
significant one-off item which does not directly relate to the
trading performance of the business and it has, therefore, been
excluded from underlying results.
Taxation
The corporation tax charge for 2018 was GBP15.1 million (2017:
GBP12.1 million) and represents an effective tax rate of 24.6%
(2017: 20.5%). The effective tax rate in 2018 reflects the
disallowable costs of the deferred consideration payments in
relation to the acquisition of Speirs & Jeffrey. The effective
tax rate in 2019 and 2020 is expected to remain elevated as the
group continues to recognise these costs. Thereafter, the group
expects it to return to 1-2% above the statutory rate.
A full reconciliation of the income tax expense is provided in
note 5.
The Finance Bill 2016, which included provisions for the UK
corporation tax rate to be reduced to 17% in April 2020, from 19%
in April 2017, gained royal assent in September 2016. Deferred tax
balances have therefore been calculated based on these reduced
rates where timing differences are forecast to unwind in future
years.
Basic earnings per share
Basic earnings per share for the year ended 31 December 2018
were 88.7p compared to 92.7p in 2017. This reflects the full impact
of non-underlying income and charges as well as the issue of 3.9
million shares to partially finance the acquisition of Speirs &
Jeffrey and to satisfy share based remuneration scheme awards. On
an underlying basis, earnings per share increased by 2.7% to 142.5p
in 2018 (see note 8).
Dividends
We operate a generally progressive dividend policy.
In determining the level of any proposed dividend, the board has
regard to current and forecast financial performance. Any proposal
to pay a dividend is subject to compliance with the Companies Act,
which requires that the company must have sufficient distributable
reserves from which to pay the dividend. The company's
distributable reserves are primarily dependent on:
- compliance with regulatory capital requirements for the minimum level of own funds;
- the level of profits earned by the company, including
distributions received from trading subsidiaries (some of which are
subject to minimum regulatory capital requirements themselves);
- actuarial changes in the value of the pension schemes that are
recognised in the company's other comprehensive income, net of
deferred tax.
At 31 December 2018 the company's distributable reserves were
GBP68.9 million (2017: GBP63.9 million).
In light of the results for the year, the board has proposed a
final dividend for 2018 of 42.0p. This results in a full year
dividend of 66.0p, an increase of 5.0p on 2017 (8.2%). The proposed
full year dividend is covered 1.3 times by basic earnings and 2.2
times by underlying earnings.
Capital expenditure
Overall, capital expenditure of GBP11.0 million in 2018 was down
GBP0.3 million compared to 2017, a fall of 2.8%. As planned,
expenditure on software increased by GBP0.7 million as we continued
with the IT change programme announced in 2017. These activities
are expected to continue in to 2019 with a similar level of capital
expenditure.
Premises related capital expenditure fell by GBP1.0 million
following the completion of our Head Office relocation in 2017.
Return on capital employed
The board monitors the return on capital employed (ROCE) as a
key performance measure, which forms part of the assessment of
management's performance for remuneration purposes. For monitoring
purposes, ROCE is defined as underlying profit after tax expressed
as a percentage of quarterly average total equity across the
year.
Consideration of the return on capital is a key consideration of
all investment decisions, particularly in relation to acquired
growth.
In 2018, ROCE was 16.9%, a decrease of 2.6% on 2017. Quarterly
average total equity increased by GBP73 million in 2018 compared to
2017, reflecting the issue of GBP60 million of new share capital in
2018 and the impact of retained earnings.
Outlook
The group's profitability remains closely linked with the
performance in investment markets, which are expected to
be more volatile in 2019. In 2019, the group's results will
reflect
a full year of profits from Speirs & Jeffrey, together with
the associated costs of acquisition and integration. Client
migration to Rathbones' systems is expected to complete towards the
middle of 2019.
Staff costs in 2019 will reflect the full impact of hiring
activity in 2018 in addition to salary inflation of 3.6% and the
cost of five year share based awards made in May 2018, which will
be spread on a straight line basis over five years from launch.
Following the announcement of Philip Howell's planned retirement
from the role of chief executive in May 2019, the cost of his
outstanding deferred awards are being accelerated to recognise the
full cost over the shorter service period.
Following publication of the final rules associated with the
FCA's Asset Management Market Study, we have converted our unit
trust funds to single priced units from 21 January 2019. The GBP3.4
million of associated managers' box dealing profits earned in 2018
(2017: GBP3.1 million) are not expected to recur in 2019.
We will continue to maintain our cost discipline, investing as
market conditions allow to support our growth strategy and ensure
that our infrastructure supports the business and manages
operational risks appropriately.
Other financial impacts
The group is required to adopt IFRS 16, a new accounting
standard for leases, with effect from 1 January 2019. As described
in note 1, IFRS 16 requires a change in the accounting requirements
for operating leases which accelerates the charge to profit or loss
associated with the leases. In 2019, we expect this change will add
approximately GBP0.3 million to the group's net charge for
leases.
Deferred consideration payments to former shareholders of Speirs
& Jeffrey will be made in 2019 to 2022. The ultimate amounts
payable are conditional on performance against certain operational
targets. The final payment to the sellers of Vision Independent
Financial Planning and Castle Investment Solutions will be made at
the end of 2019. We currently expect to recognise a non-underlying
charge of approximately GBP31 million in 2019 in relation to these
deferred payments.
Segmental review
The group is managed through two key operating segments,
Investment Management and Unit Trusts.
Investment Management
The results of the Investment Management segment described below
include the trading results of Speirs & Jeffrey for the last
four months of the year, following their acquisition on 31 August
2018.
Investment Management income is largely driven by revenue
margins earned from funds under management and administration.
Revenue margins are expressed as a basis point return, which
depends on a mix of tiered fee rates, commissions charged for
transactions undertaken on behalf of clients and the interest
margin earned on cash in client portfolios and client loans.
Year-on-year changes in the key performance indicators for
Investment Management are shown in table 3.
Table 3. Investment Management - key performance indicators
2018 2017
------------------------------------------------------------- --------- ---------
Funds under management and administration at 31 December(1) GBP38.5bn GBP33.8bn
Underlying rate of net organic growth in Investment
Management funds under management and administration(1) 3.4% 3.0%
Underlying rate of total net growth in Investment Management
funds under management and administration(1) 23.5% 3.9%
Average net operating basis point return(2) 71.4 bps 72.7 bps
Number of Investment Management clients 60,000 50,000
Number of investment managers 327 277
------------------------------------------------------------- --------- ---------
1. See table 4
2. See table 7
During 2018, Investment Management has continued to attract new
clients both organically and through acquisitions. The total number
of clients (or groups of closely related clients) increased from
50,000 in 2017 to approximately 60,000 during the year. During
2018, the total number of investment managers increased to 327 at
31 December 2018 from 277 at the end of 2017. Of these,
approximately 8,500 clients and 38 investment managers joined the
group with the acquisition of Speirs & Jeffrey on 31 August
2018.
Funds under management and administration
Investment Management funds under management and administration
increased by 13.9% to GBP38.5 billion at 31 December 2018 from
GBP33.8 billion at the start of the year. This increase is analysed
in table 4.
Table 4. Investment Management - funds under management and
administration
2018 2017
GBPbn GBPbn
--------------------------------------- ------ ------
As at 1 January 33.8 30.2
Inflows 10.6 3.4
--------------------------------------- ------ ------
* organic(1) 3.8 3.1
* acquired(2) 6.8 0.3
--------------------------------------- ------ ------
Outflows(1) (2.7) (2.2)
Market adjustment(3) (3.2) 2.4
--------------------------------------- ------ ------
As at 31 December 38.5 33.8
--------------------------------------- ------ ------
Net organic new business4 1.1 0.9
--------------------------------------- ------ ------
Underlying rate of net organic growth5 3.4% 3.0%
--------------------------------------- ------ ------
Underlying rate of total net growth6 23.5% 3.9%
--------------------------------------- ------ ------
1. Value at the date of transfer in/(out)
2. Value at date of acquisition
3. Represents the impact of market movements and investment performance
4. Organic inflows less outflows
5. Net organic new business as a % of opening funds under management and administration
6. Net organic new business and acquired inflows as a % of
opening funds under management and administration
Net organic growth in our Investment Management business was
3.4% (2017: 3.0%). Total gross organic inflows grew 22.6% to GBP3.8
billion, approximately half coming from existing client
relationships.
Charity funds under management and administration continued to
grow strongly and reached GBP5.3 billion at 31 December 2018, up
12.8% from GBP4.7 billion at the start of the year.
Funds under management and administration in accounts linked to
independent financial advisers and provider panel relationships
increased by GBP0.1 billion during 2018, ending the year at GBP7.8
billion.
The acquisition of Speirs & Jeffrey on 31 August 2018 added
GBP6.7 billion to funds under management and administration.
Outflows of funds under management and administration during the
year were 8% of the opening balance (2017: 7%) largely reflecting
some recent losses of investment managers.
In total, net organic and acquired growth added GBP7.9 billion
to Investment Management funds under management and administration
in 2018 (2017: GBP1.2 billion), representing 23.5% of opening funds
under management and administration (2017: 3.9%).
As at 31 December 2018, Vision advised on client assets of
GBP1.54 billion, up 10.0% from 2017.
2018 was an extremely testing year for UK investors, beset by
Brexit concerns. This was exacerbated in the final quarter as
investors worried about the impact on global growth of the US
Federal Reserve raising interest rates more quickly. The ongoing
trade dispute between the US and China also hit sentiment later in
the year. Reflecting these factors, the MSCI WMA Balanced index
finished the year down 7.18%.
Against this backdrop, the average investment return across all
Investment Management client portfolios slightly outperformed the
WMA index by 0.2%. This outperformance was largely driven by UK
equities, which have benefitted from the weakness in Sterling, and
more defensive alternative asset classes as well as UK property and
gold. Overall performance against other competitor indices, such as
the Private Client Indices published by ARC, was robust.
Financial performance
Table 5. Investment Management - financial performance
2018 2017
GBPm GBPm
---------------------------------------------- ------- -------
Net investment management fee income(1) 200.5 189.5
Net commission income 41.4 38.7
Net interest income 15.3 11.6
Fees from advisory services2 and other income 18.1 14.8
---------------------------------------------- ------- -------
Underlying operating income 275.3 254.6
Underlying operating expenses3 (196.5) (177.8)
---------------------------------------------- ------- -------
Underlying profit before tax 78.8 76.8
---------------------------------------------- ------- -------
Underlying operating margin4 28.6% 30.2%
---------------------------------------------- ------- -------
1. Net investment management fee income is stated after
deducting fees and commission expenses paid to introducers
2. Fees from advisory services includes income from trust, tax
and financial planning services (including Vision)
3. See table 8
4. Underlying profit before tax as a percentage of underlying operating income
Net investment management fee income increased by 5.8% to
GBP200.5 million in 2018, benefiting from positive markets for most
of the year as well as organic and acquired growth in funds under
management and administration. Fee income in Speirs & Jeffrey
in the period post acquisition totalled GBP4.3 million.
Fees are applied to the value of funds on quarterly charging
dates. Average funds under management and administration on these
billing dates in 2018 were GBP36.6 billion, up 8.3% from 2017 (see
table 6).
Table 6. Investment Management - average funds under management
and administration
2018 2017
GBPbn GBPbn
---------------------------- ------ ------
Valuation dates for billing
* 5 April 32.4 31.5
* 30 June 34.1 32.0
* 30 September1 41.3 32.5
* 31 December 38.5 33.8
---------------------------- ------ ------
Average 36.6 32.4
---------------------------- ------ ------
Average FTSE 100 level2 7269 7426
---------------------------- ------ ------
1. Funds under management and administration at 30 September
2018 included GBP6.7 billion in Speirs & Jeffrey, for which
only one month's fees accrued to the group post their
acquisition.
2. Based on the corresponding valuation dates for billing
In 2018, net commission income of GBP41.4 million, an increase
of 7.0% on 2017, including GBP4.2 million earned by Speirs &
Jeffrey during the last four months of the year. Excluding the
acquisition, commission levels were GBP1.5 million lower than 2017,
reflecting the continued trend towards to our fee only tariff as
well as challenging investment markets.
Net interest income increased 32.1% to GBP15.3 million in 2018
as a result of higher interest rates during 2018, coupled with an
increase in both the average maturity of the treasury book and the
level of exposure to higher yielding asset classes. Cash held at
the Bank of England reduced from GBP1.4 billion at 31 December 2017
to GBP1.2 billion at the end of 2018.
The investment management loan book grew to GBP131.7 million by
the end of the year and contributed GBP3.5 million to net interest
income in 2018 (2017: GBP3.1 million). Also included in net
interest income is GBP1.3 million (2017: GBP1.3 million) of
interest payable on the Tier 2 notes which are callable in August
2020.
As shown in table 7, the average net operating basis point
return on funds under management and administration has decreased
by 1.3 bps to 71.4 bps in 2018.
Table 7. Investment Management - revenue margin
2018 2017
bps bps
---------------------------------------------------------------- ---- ----
Basis point return(1) from:
* fee income 56.5 58.4
* commission 11.7 11.9
* interest 3.2 2.4
---------------------------------------------------------------- ---- ----
Basis point return on funds under management and administration 71.4 72.7
---------------------------------------------------------------- ---- ----
1. Underlying operating income (see table 5), excluding interest
on own reserves, interest payable on Tier 2 notes issued, fees from
advisory services and other income, divided by the average funds
under management and administration on the quarterly billing dates
(see table 6). Speirs & Jeffrey funds under management and
administration have been included pro-rata for the period of
ownership.
Fees from advisory services and other income increased 22.3% to
GBP18.1 million. This largely reflects a higher level of retained
advisory fees earned by Vision and growth in trust administration
revenues.
Underlying operating expenses in Investment Management for 2018
were GBP196.5 million, compared to GBP177.8 million in 2017, an
increase of 10.5%. This is highlighted in table 8.
Table 8. Investment Management - underlying operating
expenses
2018 2017
GBPm GBPm
-------------------------------- ----- -----
Staff costs(1)
* fixed 66.5 59.5
* variable 37.7 40.2
-------------------------------- ----- -----
Total staff costs 104.2 99.7
Other operating expenses 92.3 78.1
-------------------------------- ----- -----
Underlying operating expenses 196.5 177.8
-------------------------------- ----- -----
Underlying cost/income ratio(2) 71.4% 69.8%
-------------------------------- ----- -----
1. Represents the costs of investment managers and teams
directly involved in client-facing activities
2. Underlying operating expenses as a % of underlying operating income (see table 5)
Fixed staff costs of GBP66.5 million increased by 11.8%
year-on-year, principally reflecting an 11% increase in average
headcount, including c. 1% from Speirs & Jeffrey, and salary
inflation.
Variable staff costs of GBP40.2 million in 2017 include GBP5.1
million for the cost of variable awards for new teams who had been
in situ for longer than 12 months. Following the adoption of IFRS
15, such costs are now capitalised (see note 2). Excluding these
costs from 2017, variable staff costs increased by 7.4% to GBP37.7
million in 2018, reflecting both the higher profitability in the
period and the introduction of the Staff Equity Plan in May
2018.
Other operating expenses of GBP92.3 million include property,
depreciation, settlement, IT, finance and other central support
services costs. The year-to-year increase of GBP14.2 million
(18.2%) reflects increased investment in the business, recruitment
and higher variable awards in support departments in line with
overall business performance.
Unit Trusts
Table 9. Unit Trusts - funds
2018 2017
GBPm GBPm
------------------------------------------- ----- -----
Rathbone Global Opportunities Fund 1,351 1,168
Rathbone Ethical Bond Fund 1,236 1,100
Rathbone Income Fund 1,091 1,433
Rathbone Multi Asset Portfolios 965 736
Rathbone Active Income Fund for Charities 179 173
Rathbone Strategic Bond Fund 145 108
Rathbone Global Alpha Fund 111 127
Rathbone High Quality Bond Fund 52 -
Rathbone UK Opportunities Fund 48 61
Rathbone Blue Chip Income and Growth Fund1 - 78
Other funds 464 383
------------------------------------------- ----- -----
5,642 5,367
------------------------------------------- ----- -----
1. The Rathbone Blue Chip Income and Growth Fund was merged into
the Rathbone Income Fund on 5 October 2018
Unit Trusts' financial performance is principally driven by the
value and growth of funds under management. Year-on-year changes in
the key performance indicators for Unit Trusts are shown in table
9.
Table 9. Unit Trusts - key performance indicators
2018 2017
--------------------------------------------------------- ----- -----
Funds under management at 31 December(1) 5.6 5.3
Underlying rate of net growth in Unit Trusts funds under
management(1) 10.1% 21.8%
Underlying profit before tax(2) 12.7 10.7
--------------------------------------------------------- ----- -----
1. See table 10
2. See table 12
Funds under management
Net retail sales in the asset management industry totalled
approximately GBP7 billion in 2018, as reported by the Investment
Association (IA), down around GBP41 billion on 2017. Fixed income
funds saw significant outflows in the final quarter, as did UK
equity funds throughout the year, reflecting signs of faster US
interest rate hikes and the potential for a disorderly Brexit.
Global equity was the best-selling sector overall during 2018 and
mixed asset funds were also strong sellers, attracting net sales in
every month during 2018.
Industry-wide funds under management dropped 6.5% to GBP1.15
trillion at the end of the year. In total, the IA sectors in which
we manage funds saw net inflows of GBP0.8 billion, down 93% from
GBP11.9 billion in 2017. However, gross sales in those sectors were
up 28.7% at GBP128.4 billion in 2018.
Against this backdrop, overall positive momentum in sales of our
funds continued through 2018, with gross sales up 11.8% in the year
to GBP1.9 billion. However, redemptions also increased markedly to
GBP1.4 billion (2017: GBP0.8 billion), reflecting experience across
the industry.
Net inflows of GBP0.5 billion (2017: GBP0.9 billion) continued
to be spread across the range of funds. The multi asset portfolios,
Global Opportunities fund and Ethical Bond fund attracted
particularly strong net flows in the year, the latter notably
contrasting with the industry trend in its sector. This level of
net retail sales ranked as the 11(th) highest in the UK according
to the Pridham Sales Report for 2018.
Unit Trusts funds under management closed the year up 5.7% at
GBP5.6 billion (see table 10). Included within this was GBP464
million managed through Luxembourg-based feeder funds; up 8.4% from
GBP428 million at the end of 2017.
Table 10. Unit Trusts - funds under management
2018 2017
GBPbn GBPbn
--------------------------------- ------ ------
As at 1 January 5.3 4.0
Net inflows 0.5 0.9
--------------------------------- ------ ------
* inflows(1) 1.9 1.7
* outflows(1) (1.4) (0.8)
--------------------------------- ------ ------
Market adjustments(2) (0.2) 0.4
--------------------------------- ------ ------
As at 31 December 5.6 5.3
--------------------------------- ------ ------
Underlying rate of net growth(3) 10.1% 21.8%
--------------------------------- ------ ------
1. Valued at the date of transfer in/(out)
2. Impact of market movements and relative performance
3. Net inflows as a % of opening funds under management
Reflecting the general market trends, the Ethical Bond and UK
Opportunities funds under-performed their peers during the year.
The more defensive positioning of the Income and Strategic Bond
funds helped relative performance and the funds out performed their
peers over the year. The Global Opportunities Fund's overweight
position in the US equity market helped it to generate top quartile
performance for the year, despite a weaker performance in the final
quarter. Long term performance for most of our retail funds remains
strong and the funds are performing in line with expectations given
their investment mandates.
Our multi asset funds posted negative overall returns in 2018,
although risk-adjusted returns remained relatively strong compared
to peers. Longer term performance of the multi asset funds remains
ahead of benchmark.
Table 11. Unit Trusts - performance1, 2
2018/(2017) Quartile ranking(3) over 1 year 3 years 5 years
------------------------------------- ------ ------- -------
Rathbone Ethical Bond Fund 4 (1) 1 (1) 1 (1)
Rathbone Global Opportunities Fund 1 (1) 1 (1) 1 (1)
Rathbone Income Fund 2 (4) 3 (3) 1 (3)
Rathbone UK Opportunities Fund 4 (1) 4 (1) 4 (2)
Rathbone Strategic Bond Fund 1 (2) 1 (2) 2 (2)
------------------------------------- ------ ------- -------
1. Quartile ranking data is sourced from FE Trustnet
2. Excludes multi-asset funds (for which quartile rankings are
prohibited by the IA), non-publicly marketed funds and segregated
mandates. Funds included in the above table account for 72% of the
total FUM of the Unit Trusts business.
3. Ranking of institutional share classes at 31 December 2018
and 2017 against other funds in the same IA sector, based on total
return performance, net of fees (consistent with investment
performance information reported in the funds' monthly
factsheets)
As at 31 December 2018, 92% of holdings in Unit Trusts' retail
funds were in institutional units (31 December 2017: 88%).
During 2018, the total number of investment professionals in
Unit Trusts increased to 14 at 31 December 2018 from 13 at the end
of 2017.
Financial performance
Unit Trusts' income is primarily derived from:
- annual management charges, which are calculated on the daily
value of funds under management, net of rebates and trail
commission payable to intermediaries
- net dealing profits, which are earned on the bid-offer spread
from sales and redemptions of units and market movements on the
stock of units that are held on our books overnight.
Net annual management charges increased 17.5% to GBP32.9 million
in 2018, driven principally by the rise in average funds under
management. Net annual management charges as a percentage of
average funds under management and administration fell to 58 bps
(2017: 60 bps) reflecting the increased proportion of holdings in
institutional units and the continued growth in the fixed income
mandate funds, which levy a lower rate of annual management
charges.
Table 12. Unit Trusts - financial performance
2018 2017
GBPm GBPm
--------------------------------- ------ ------
Net annual management charges 32.9 28.0
Net dealing profits 3.4 3.1
Interest and other income 0.4 0.3
--------------------------------- ------ ------
Underlying operating income 36.7 31.4
Underlying operating expenses(1) (24.0) (20.7)
--------------------------------- ------ ------
Underlying profit before tax 12.7 10.7
--------------------------------- ------ ------
Operating % margin(2) 34.6% 34.1%
--------------------------------- ------ ------
1. See table 13
2. Underlying profit before tax divided by underlying operating income
Net dealing profits of GBP3.4 million were marginally higher
than the previous year (2017: GBP3.1 million). These revenues will
no longer be earned following the conversion of all funds to single
priced units, with effect from 21 January 2019, in compliance with
the final rules published by the FCA following its Asset Management
Market Study.
Underlying operating income as a percentage of average funds
under management and administration fell to 65 bps in 2018 from 67
bps in 2017 reflecting reduced revenue margins.
Table 13. Unit Trusts - underlying operating expenses
2018 2017
GBPm GBPm
-------------------------------- ----- -----
Staff costs(1)
* Fixed 3.3 3.0
* Variable 7.6 7.2
-------------------------------- ----- -----
Total staff costs 10.9 10.2
Other operating expenses 13.1 10.5
-------------------------------- ----- -----
Underlying operating expenses 24.0 20.7
-------------------------------- ----- -----
Underlying cost/income ratio(1) 65.4% 65.9%
-------------------------------- ----- -----
1. Underlying operating expenses as a % of underlying operating income
(see table 12)
Fixed staff costs of GBP3.3 million for the year ended 31
December 2018 were 10% higher than 2017, reflecting salary
inflation and growth in headcount in response to regulatory
changes.
Variable staff costs of GBP7.6 million were 5.6% higher than
GBP7.2 million in 2017 as higher profitability and growth in gross
sales drove increases in profit share and sales commissions.
Other operating expenses have increased by 24.8% to GBP13.1
million, reflecting an increase in third party administration costs
in line with growth in the business, the absorption of GBP0.9
million of research costs, which were previously charged to the
funds, and project costs related to the high level of regulatory
change during the year.
Financial position
Table 14. Group's financial position
2018 2017
GBPm GBPm
(unless (unless
stated) stated)
----------------------------------------------- -------- --------
Capital resources:
* Common Equity Tier 1 ratio(1) 20.6% 20.7%
* Total Own Funds ratio(2) 22.0% 22.2%
* Total equity 464.1 363.3
* Tier 2 subordinated loan notes 19.8 19.7
* Risk-weighted assets 1,141.8 977.2
* Return on assets(3) 1.6% 1.8%
* Leverage ratio4 8.9% 7.8%
----------------------------------------------- -------- --------
Other resources:
* Total assets 2,867.7 2,738.9
* Treasury assets5 2,351.7 2,303.9
* Investment management loan book 131.7 120.5
* Intangible assets from acquired growth6 160.1 151.7
* Tangible assets and software7 30.2 26.7
----------------------------------------------- -------- --------
Liabilities:
* Due to customers8 2,225.5 2,170.5
* Net defined benefit pension liability 11.2 15.6
----------------------------------------------- -------- --------
1. Common Equity Tier 1 capital as a proportion of total risk exposure amount
2. Total own funds (see table 15) as a proportion of total risk exposure amount
3. Profit after tax divided by average total assets
4. Common Equity Tier 1 capital as a % of total assets,
excluding intangible assets, plus certain off balance sheet
exposures
5. Balances with central banks, loans and advances to banks and investment securities
6. Net book value of acquired client relationships and goodwill
7. Net book value of property, plant and equipment and computer software
8. Total amounts of cash in client portfolios held by Rathbone Investment Management as a bank
Capital resources
Rathbones is classified as a banking group for regulatory
capital purposes and is therefore required to operate within the
restrictions on capital resources and banking exposures prescribed
by the Capital Requirements Regulation, as applied in the UK by the
Prudential Regulation Authority (PRA).
At 31 December 2018, the group's regulatory capital resources
(including verified profits for the year) were GBP251.4 million
(2017: GBP216.8 million).
Table 15. Regulatory capital resources
2018 2017
GBPm GBPm
--------------------------------------------- ------- -------
Share capital and share premium 233.0 145.7
Reserves 263.9 222.5
Less:
* Own shares (32.7) (4.9)
* Intangible assets(1) (229.3) (161.3)
--------------------------------------------- ------- -------
Total Common Equity Tier 1 capital resources 234.9 202.0
Tier 2 capital resources 16.5 14.8
--------------------------------------------- ------- -------
Total own funds 251.4 216.8
--------------------------------------------- ------- -------
1. Net book value of goodwill, client relationship intangibles
and software are deducted directly from capital resources, less any
related deferred tax
Common Equity Tier 1 capital (CET1) resources increased by
GBP32.9 million during 2018, largely due to the inclusion of
verified profits for the 2018 financial year and the capital raised
from the placing of 2.4 million shares on 18 June 2018, net of
dividends paid in the year and the intangible assets acquired
through the acquisition of Speirs & Jeffrey.
The CET1 ratio was 20.6%, inline with 20.7% at the previous year
end. Our consolidated CET1 ratio remains higher than the banking
industry norm, reflecting the low risk nature of our banking
activity.
The leverage ratio was 8.9% at 31 December 2018, up from 7.8% at
31 December 2017. The leverage ratio represents our CET1 capital as
a percentage of our total assets, excluding intangible assets, plus
certain off balance sheet exposures.
The business is primarily funded by equity, but also supported
by GBP20 million of 10 year Tier 2 subordinated loan notes. The
notes introduce a small amount of gearing into our balance sheet as
a way of financing future growth in a cost-effective and
capital-efficient manner. They are repayable in August 2025, with a
call option for the issuer in August 2020 and annually thereafter.
Interest is payable at a fixed rate of 5.856% until the first call
option date and at a fixed margin of 4.375% over six-month LIBOR
thereafter.
The consolidated balance sheet total equity was GBP464.1 million
at 31 December 2018, up 27.7% from GBP363.3 million at the end of
2017, primarily reflecting the issue of new share capital and
retained profits for the year.
Own funds and liquidity requirements
As required under PRA rules, we perform an Internal Capital
Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy
Assessment Process (ILAAP) annually, which include performing a
range of stress tests to determine the appropriate level of
regulatory capital and liquidity that we need to hold. In addition,
we monitor a wide range of capital and liquidity statistics on a
daily, monthly or less frequent basis as required. Surplus capital
levels are forecast on a monthly basis, taking account of proposed
dividends and investment requirements, to ensure that appropriate
buffers are maintained. Investment of proprietary funds is
controlled by our treasury department.
We are required to hold capital to cover a range of own funds
requirements, classified as Pillar 1 and Pillar 2.
The group's own funds requirements were as follows:
Table 16. Group's own funds requirements(1)
2018 2017
GBPm GBPm
----------------------------------------------------- ----- -----
Credit risk requirement 44.6 39.5
Market risk requirement 0.4 0.4
Operational risk requirement 46.3 38.4
----------------------------------------------------- ----- -----
Pillar 1 own funds requirement 91.3 78.3
Pillar 2A own funds requirement 48.4 46.1
----------------------------------------------------- ----- -----
Total Pillar 1 and 2A own funds requirements 139.7 124.4
CRD IV buffers:
* capital conservation buffer (CCB) 28.5 18.3
* countercyclical buffer (CCyB) 8.9 0.1
----------------------------------------------------- ----- -----
Total Pillar 1 and 2A own funds requirements and CRD
IV buffers 177.1 142.8
----------------------------------------------------- ----- -----
1. Own funds requirements stated above include the impact of
trading results and changes to requirements and buffers that were
known as at 31 December and which became effective prior to the
publication of the preliminary results.
Pillar 1 - minimum requirement for capital
Pillar 1 focuses on the determination of a total risk exposure
amount (also known as "risk-weighted assets") and expected losses
in respect of the group's exposure to credit, counterparty credit,
market and operational risks and sets a minimum requirement for
capital.
At 31 December 2018, the group's total risk exposure amount was
GBP1,142.7 million (2017: GBP977.2 million).
Pillar 2 - supervisory review process
Pillar 2 supplements the Pillar 1 minimum requirement with a
firm-specific Individual Capital Guidance (Pillar 2A) and a
framework of regulatory capital buffers (Pillar 2B).
The Pillar 2A own funds requirement (which is set by the PRA)
reflects those risks, specific to the firm, which are not fully
captured under the Pillar 1 own funds requirement.
Our Pillar 2A own funds requirement was reviewed by the PRA
during 2017.
Pension obligation risk
The potential for additional unplanned capital strain or costs
that the group would incur in the event of a significant
deterioration in the funding position of the group's defined
benefit pension schemes.
Interest rate risk in the banking book
The potential losses in the non-trading book resulting from
interest rate changes or widening of the spread between Bank of
England base rates and LIBOR rates.
Concentration risk
Greater loss volatility arising from a higher level of loan
default correlation than is assumed by the Pillar 1 assessment.
The group is also required to maintain a number of Pillar 2B
regulatory capital buffers, all of which must be met with CET1
capital.
Capital conservation buffer (CCB)
The CCB is a general buffer, designed to provide for losses in
the event of a stress and is being phased in from 1 January 2016 to
1 January 2019. As at 31 December 2017, the buffer rate was 1.25%
of risk-weighted assets. On 1 January 2018, it increased to 1.875%
of risk-weighted assets and it finally increased to 2.5% of risk
weighted assets from 1 January 2019.
Countercyclical capital buffer (CCyB)
The CCyB is designed to act as an incentive for banks to
constrain credit growth in times of heightened systemic risk. The
amount of the buffer is determined by reference to rates set by the
FPC from time to time, depending on prevailing market conditions,
for individual countries where the group has credit risk
exposures.
The buffer rate is currently set at 1.0% for the UK. The group
also has some small, relevant credit exposures in Canada and
Australia, both of whom have applicable buffer rates of 0%,
resulting in a weighted buffer rate of 0.78% of the group's total
risk exposure amount as at 31 December 2018.
PRA buffer
The PRA also determines whether any incremental firm-specific
buffer is required, in addition to the CCB and the CCyB. The PRA
requires any such buffer to remain confidential between the group
and the PRA.
The surplus of own funds (including verified profits for the
full year) over total Pillar 1 and 2A own funds requirements and
CRD IV buffers was GBP74.1 million, up from GBP74.0 million at the
end of 2017.
In managing the group's regulatory capital position over the
next few years, we will continue to be mindful of:
- future volatility in pension scheme valuations which affect
both the level of CET1 own funds and the value of the Pillar 2A
requirement for pension risk;
- regulatory developments; and
- the demands of future acquisitions which generate intangible
assets and, therefore, directly reduce CET1 resources.
We keep these issues under constant review to ensure that any
necessary capital raising activities are carried out in a planned
and controlled manner.
The group's Pillar 3 disclosures are published annually on our
website
(rathbones.com/investor-relations/results-and-presentations) and
provide further details about regulatory capital resources and
requirements.
Total assets
Total assets at 31 December 2018 were GBP2.9 billion (2017:
GBP2.7 billion), of which GBP2.2 billion (2017: GBP2.2 billion)
represents the investment in the money markets of the cash element
of client portfolios that is held as a banking deposit.
Treasury assets
As a licensed deposit taker, Rathbone Investment Management
holds our surplus liquidity on its balance sheet together with
clients' cash. Cash in client portfolios as held on a banking basis
of GBP2.2 billion (2017: GBP2.2 billion) represented 5.8% of total
Investment Management funds at 31 December 2018 compared to 6.4% at
the end of 2017. Cash held in client money accounts was GBP3.0
million (2017: GBP4.5 million).
The treasury department of Rathbone Investment Management,
reporting through the banking committee to the board, operates in
accordance with procedures set out in a board-approved treasury
manual and monitors exposure to market, credit and liquidity risk.
It invests in a range of securities issued by a relatively large
number of counterparties. These counterparties must be single
'A'-rated or higher by Fitch and are regularly reviewed by the
banking committee.
During the year, we reduced the share of treasury assets held
with the Bank of England to GBP1.2 billion from GBP1.4 billion at
31 December 2017 and increased the balance invested in certificates
of deposit with maturities of up to one year. Interest rates paid
by those assets had increased during the year, enabling us to
increase the interest margin earned whilst maintaining a consistent
appetite for credit risk.
Loans to clients
Loans are provided as a service to Investment Management clients
who have short to medium term cash requirements. Such loans are
normally made on a fully secured basis against portfolios held in
our nominee name, requiring two times cover, and are usually
advanced for up to one year. In addition, charges may be taken on
property held by the client to meet security cover
requirements.
All loans (and any extensions to the initial loan period) are
subject to review by the banking committee. Our ability to provide
such loans is a valuable additional service, for example, to
clients who require bridging finance when moving home.
Loans advanced to clients totalled GBP131.7 million at the end
of 2018 (2017: GBP120.5 million).
Intangible assets
Intangible assets arise principally from acquired growth in
funds under management and administration and are categorised as
goodwill and client relationships. Intangible assets reported on
the balance sheet also include purchased and developed
software.
At 31 December 2018, the total carrying value of intangible
assets arising from acquired growth was GBP225.6 million (2017:
GBP151.7 million). On 31 August 2018, the group completed the
purchase of Speirs & Jeffrey, which resulted included the
acquisition of GBP28.1 million of goodwill and GBP54.3 million of
client relationship intangible assets.
During the year, further client relationship intangible assets
of GBP1.3 million were capitalised (2017: GBP2.7 million) in
relation to awards to newly joined investment teams for new client
relationships introduced. As described in note 2, the adoption of
IFRS 15 in the year required us to change the accounting policy for
these awards. Historically, the cost of awards for funds introduced
by investment managers who have been in situ for more than 12
months were charged to profit or loss (2017: GBP5.1 million). Under
the new accounting standard, these amounts are also capitalised.
Consequently, the opening balance of client relationship intangible
assets was increased by GBP8.3 million.
Client relationship intangibles are amortised over the estimated
life of the client relationship, generally a period of 10 to 15
years. When client relationships are lost, any related intangible
asset is derecognised in the year. The total amortisation charge
for client relationships in 2018, including the impact of any lost
relationships, was GBP12.9 million (2017: GBP11.4 million).
Goodwill, which arises from business combinations, is not
amortised but is subject to a test for impairment at least
annually. During the year, the goodwill relating to the trust and
tax business was found to be impaired as the growth forecasts for
that business have not kept pace with cost inflation. An impairment
charge of GBP0.3 million was recognised in relation to this element
of goodwill (2017: GBP0.3 million).
Capital expenditure
During 2018, we have broadly maintained the level of investment
in the development of our premises and systems, with capital
expenditure for the year totalling GBP11.0 million (2017: GBP11.3
million). Capital expenditure in 2017 included GBP2.8 million for
the completion of the fit out of our London Head Office. In 2018,
property related spend of GBP3.2 million included the cost of
moving to a new office in Birmingham and the fit out of addition
space in Liverpool.
The level of spend on our systems has increased slightly in
2018, as we have continued with the IT change programme announced
in 2017. Total costs for the purchase and development of software
were GBP7.7 million in the year (2017: GBP7.1 million). Key areas
of investment during the year included continuing the development
of our new client relationship management system and work to
streamline the client journey.
Overall, new investment accounted for approximately 77% of total
capital expenditure in 2018, broadly consistent with 79% in 2017.
The balance of total spend has been incurred for the maintenance
and replacement of existing software and equipment.
Defined benefit pension schemes
We operate two defined benefit pension schemes, both of which
have been closed to new members for several years. With effect from
30 June 2017, we closed both schemes, ceasing all future benefit
accrual and breaking the link to salary. The closure of the schemes
resulted in a GBP5.5 million improvement in the reported position
of the schemes in 2017.
At 31 December 2018 the combined schemes' liabilities, measured
on an accounting basis, had fallen to GBP146.5 million, down 10.7%
from GBP164.1 million at the end of 2017. Reflecting the
performance of the schemes' assets over the course of the year, the
reported position of the schemes at 31 December 2018 was a deficit
of GBP11.2 million (2017: deficit of GBP15.6 million).
Triennial funding valuations form the basis of the annual
contributions that we make into the schemes. During 2018, funding
valuations of the schemes as at 31 December 2016 were finalised,
resulting in committed annual contributions to the schemes
totalling GBP12.0 million, paid at a rate of GBP3.1 million per
year until 2022.
Liquidity and cash flow
Table 17. Extracts from the consolidated statement of cash
flows
2018 2017
GBPm GBPm
------------------------------------------------- ------- -------
Cash and cash equivalents at the end of the year 1,408.5 1,567.8
Net cash inflows from operating activities 111.1 351.5
Net change in cash and cash equivalents (159.2) 304.7
------------------------------------------------- ------- -------
Fees and commissions are largely collected directly from client
portfolios and expenses, by and large, are predictable;
consequently, we operate with a modest amount of working capital.
Larger cash flows are principally generated from banking and
treasury operations when investment managers make asset allocation
decisions about the amount of cash to be held in client
portfolios.
As a bank, we are subject to the PRA's ILAAP regime, which
requires us to hold a suitable Liquid Assets Buffer to ensure that
short term liquidity requirements can be met under certain stressed
scenarios. Liquidity risks are actively managed on a daily basis
and depend on operational and investment transaction activity.
Cash and balances at central banks was GBP1.2 billion at 31
December 2018 (2017: GBP1.4 billion).
Cash and cash equivalents, as defined by accounting standards,
includes cash, money market funds and banking deposits, which had
an original maturity of less than three months (see note 11).
Consequently, cash flows include the impact of capital flows in
treasury assets.
Net cash flows from operating activities include the effect of a
GBP54.2 million increase in banking client deposits (2017: GBP282.6
million increase) and a GBP10.5 million increase in the component
of treasury assets placed in term deposits for more than three
months or lent to clients (2017: GBP16.6 million increase).
Cash flows from investing activities also included a net outflow
of GBP203.8 million from the purchase of longer dated certificates
of deposit (2017: GBP4.0 million).
The most significant non-operating cash flows during the year
were as follows.
- net outflows of GBP72.9 million in relation to the acquisition
of Speirs & Jeffrey, being cash consideration of GBP88.4
million less cash balances of GBP15.5 million in the acquired
entity;
- net cash inflows of GBP57.4 million from the issue of shares
during the year to partially finance the acquisition of Speirs
& Jeffrey;
- outflows relating to the payment of dividends of GBP32.7
million (2017: GBP29.4 million);
- outflows relating to payments to acquire intangible assets
(other than as part of a business combination) of GBP15.1 million
(2017: GBP11.9 million); and
- GBP3.2 million of capital expenditure on property, plant and
equipment (2017: GBP4.2 million).
Risk management and control
In 2018, we have continued to evolve our risk management
framework in support of our 'three lines of defence' model. Our
approach to risk governance, risk processes and risk infrastructure
ensures that the management of risk across the group considers
existing and emerging challenges to our values and strategy. Going
forward into 2019, we will continue our approach to ensure that
effective risk management is in place to protect our
stakeholders.
Risk culture
We believe an embedded risk culture enhances the effectiveness
of risk management and decision making across the group. The board
is responsible for setting the right tone which supports a strong
risk culture and, through our senior management team, encouraging
appropriate behaviours and collaboration on managing risk across
the business. Risk management is accepted as being part of
everyone's day-to-day responsibilities and activities; it is linked
to performance and development, as well as to the group's
remuneration and reward schemes. Our approach through this is to
create an open and transparent working environment, encouraging
employees to engage positively in risk management and support the
effective achievement of our strategic objectives.
Risk appetite
We define risk appetite as both the amount and type of risk the
group is prepared to accept or retain in pursuit of our
strategy.
Our appetite is subject to regular review to ensure it remains
aligned to our strategic goals. Our risk appetite framework
contains some overarching parameters, alongside specific primary
and secondary measures for each principal risk. At least annually,
the board, executive committee and group risk committee will
formally review and approve the group's risk appetite statement and
at each meeting, risks are reported which have triggered key risk
indicators or risk appetite measures so that risk mitigation can be
reviewed and strengthened if appropriate.
Notwithstanding the continued expectations for business growth,
along with a strategic and regulatory change programme for 2018,
the board remains committed to having a relatively low overall
appetite for risk, ensuring that our internal controls mitigate
risk to appropriate levels. The board recognises that the business
is susceptible to fluctuations in investment markets and has the
potential to bear losses from financial and operational risks from
time-to-time, either as reductions in income or increases in
operating costs.
Managing risk
The board is ultimately accountable for risk management and
regularly considers the most significant risks and emerging threats
to the group's strategy. The board, audit and group risk committees
exercise further oversight and challenge of risk management and
internal control. Day to day, the group chief executive and
executive committee are responsible for managing risk and the
regular review of key risks facing the group.
In 2018, we merged our conduct and operational risk management
committees to form a new executive risk committee, which
complements the banking committee that oversees financial risk
management.
Throughout the group, all employees have a responsibility for
managing risk and adhering to our control framework.
Three lines of defence
Our three lines of defence model supports the risk management
framework and the expectations of all employees, with
responsibility and accountability for risk management broken down
as follows:
First line: Senior management, business operations and support
are responsible for managing risks, by developing and maintaining
effective internal controls to mitigate risk.
Second line: The risk, compliance and anti-money laundering
functions maintain a level of independence from the first line.
They are responsible for providing oversight and challenge of the
first line's day-to-day management, monitoring and reporting of
risks to both senior management and governing bodies.
Third line: The internal audit function is responsible for
providing independent assurance to both senior management and
governing bodies as to the effectiveness of the group's governance,
risk management and internal controls.
Identification and profiling of principal risks
Our risks are classified using a hierarchical approach which is
regularly reviewed to ensure we identify all known material risks
to the business and consider emerging risks which may impact future
performance. Our highest level of risk analysis (Level 1) comprises
financial, conduct and operational risks. This year we have made
some adjustments to our next level (Level 2) which contains 17 risk
categories, each allocated to a Level 1 risk. The changes reflect
the future risk landscape and profile of the group. Detailed risks
(Level 3) continue to be identified as sub-sets of Level 2 risks.
Level 3 risks are captured and maintained within our group risk
register, which is the principal tool for monitoring risks. We
recognise that some Level 2 and Level 3 risks have features which
need to be considered under more than one Level 1 risk, and this is
facilitated in our framework through a system of primary and
secondary considerations.
Our risk exposures and overall risk profile are reviewed and
monitored regularly, considering the potential impact, existing
internal controls and management actions required to mitigate the
impact of emerging issues and likelihood of future events. To
ensure we identify and manage our principal risks, reviews take
place with risk owners, senior management and business units across
the group. The risk function conducts these reviews and risk
workshops regularly during the year.
A watch list is maintained to record any current, emerging or
future issues, threats, business developments and regulatory or
legislative change, which will or could have the potential to
impact the firm's current or future risk profile and therefore may
require active risk management, usually through process changes,
systems development or regulatory changes. The group's risk
profile, risk register and watch list are regularly reviewed by the
executive committee, senior management, board and group risk
committee.
This year we have reviewed our risk assessment approach and
adjusted our scoring system to a 1-5 matrix. Each Level 3 risk is
assessed for the inherent likelihood of its occurrence in a
three-year period (a reduction from five years) and against a
number of different impact criteria, including financial, client,
operations, reputation, strategy and regulation indicators. A
residual risk exposure and overall risk profile rating of high,
medium, low or very low is then derived for the three-year period
by taking into account an assessment of the internal control
environment or insurance mitigation. The assessment of our control
environment, undertaken by senior management within the firm,
includes contributions from first, second and third line people,
data, monitoring and/or assurance activity.
Risk assessment process
The board and senior management are actively involved in a
continuous risk assessment process as part of our risk management
framework, supported by the annual Internal Capital Adequacy
Assessment Process (ICAAP) and Internal Liquidity Adequacy
Assessment Process (ILAAP) work, which assesses the principal risks
facing the group.
Stress tests include consideration of the impact of a number of
severe but plausible events that could impact the business. The
work also takes account of the availability and likely
effectiveness of mitigating actions that could be taken to avoid or
reduce the impact or occurrence of the underlying risks.
Day-to-day, our risk assessment process considers both the
impact and likelihood of risk events which could materialise,
affecting the delivery of strategic goals and annual business
plans. A top-down and bottom-up approach ensures that our
assessment of key risks is challenged and reviewed on a regular
basis. The board, executive and executive risk committees receive
regular reports and information from senior management, operational
business units, risk oversight functions and specific risk
committees.
The executive risk committee, executive committee, group risk
committee and other key risk-focused committees consider the risk
assessments and provide challenge, which is reported through the
governance framework and ultimately considered by the board.
Profile and mitigation of principal risks
As explained above, our risks are classified hierarchically in a
three-level model. There are three Level 1 risks, 17 Level 2 risks
and 47 Level 3 risks, all of which form the basis of the group's
risk register. Our approach to managing risk continues to be
underpinned by an understanding of our current risk exposures and
consideration of how risks change over time. The underlying risk
profile and ratings for the majority of Level 2 risks have remained
reasonably stable during 2018. However, there have been some
changes to risk ratings and the following table summarises the most
important of these.
Based upon the risk assessment processes identified above, the
board believes that the principal risks and uncertainties facing
the group which could impact the delivery of our strategic
objectives have been identified below. These reflect the impact of
the acquisition of Speirs & Jeffrey, the increased and evolving
cyber threat landscape, increasing political risk including Brexit
and global trends impacting market volatility, and continuing focus
on client suitability. 2018 also saw two material regulatory
changes come into effect, MiFID II and the General Data Protection
Regulation, which remain areas of focus for the firm. The board
remains vigilant to the risks associated with the pension schemes'
deficit. The other key risks are operational risks that arise from
growth and regulatory risks that may arise from the continuing
development of law, regulation and standards in our sector.
Our overall risk profile and control environment for principal
risks are described below. The board receives assurance from first
line senior management that the systems of internal control are
operating effectively and from the activities of the second line
and third line that there are no material control issues which
would affect the board's view of its principal risks and
uncertainties.
In line with current and developing guidance, we also include in
the tables the potential impacts (I) the firm might face and our
assessment of the likelihood (L) of each principal risk
crystallising in the event it materialises. These assessments take
into account the controls in place to mitigate the risks. However,
as is always the case, should a risk materialise, a range of
outcomes (both in scale and type) might be experienced. This is
particularly relevant for firms such as Rathbones where the outcome
of a risk event can be influenced by market conditions as well as
internal control factors.
We have used ratings of high, medium and low in this risk
assessment. We perceive as high-risk items those which have the
potential to impact the delivery of strategic objectives, with
medium- and low-rated items having proportionately less impact on
the firm. Likelihood is similarly based on a qualitative
assessment.
Emerging risks and threats
Emerging risks, including legislative and regulatory change,
have the potential to impact the group and its strategy. These risk
factors are monitored through our watch list. During the year, the
executive committee continued to recognise a number of emerging
risks and threats to the financial services sector as a whole and
to our business. We also recognise that the risk profile associated
with outsourced activities can change over time and this will be an
area of continued focus in 2019.
The group's view is that we can reasonably expect current market
conditions and uncertainties to remain throughout 2019 given the
implications of Brexit, and the UK political environment. Other
developing risks include, for example, cyber threats, regulatory
change and further scenarios potentially arising from geopolitical
developments and increasing tensions around global trade.
We are continuing to monitor the potential consequences of
Brexit very closely. Our current assessment is that the direct
impacts of Brexit as currently proposed are manageable given our
largely UK based business model. However, we are conscious that the
position is uncertain, has the potential to change and raise
unexpected challenges and implications for the firm, possibly
extending to our supply chain. The firm's income is correlated to
market levels, which are expected to be impacted by Brexit and
other areas of political uncertainty.
Key changes to risk profile
Risk change
Risk Description of change in 2018
------------------- ---------------------------------------------------- -----------
Business model This risk includes the impacts arising from
(including Brexit) changing market conditions, which are impacted
in turn by political uncertainty and the global
economy.
Although the firm does not have operations in
other European Union countries, or material
dependencies on goods or people from other European
Union countries and has a predominantly UK client
base, any impact of Brexit on investment markets
will also affect the value of our funds under
management and advice.
------------------- ---------------------------------------------------- -----------
Suitability and Our forward-looking risk assessment increased
advice during the year, largely reflecting regulatory
drivers. In addition to changes delivered in
2017/8, we plan to improve our processes further
in 2018 through systems enhancements designed
to simplify the workflows involved for our clients
and employees.
------------------- ---------------------------------------------------- -----------
Change We increased our risk assessment to reflect
the firm's change plans, including the integration
programme for Speirs & Jeffrey.
------------------- ---------------------------------------------------- -----------
Data Integrity We have increased our risk rating in this area
and security based on our assessment of the increasing external
threat profile, despite continuing investment
in technology improvements.
------------------- ---------------------------------------------------- -----------
People Our forward-looking risk assessment increased
further during the year, reflecting industry-wide
trends. We also recognise the importance of
addressing the drivers behind our gender pay
gap over the coming years.
------------------- ---------------------------------------------------- -----------
Pension The funding deficit decreased materially due
to the closure of the schemes in 2017 with a
significant number of members transferring benefits
out of the schemes. However, this remains an
important risk for the firm to manage.
------------------- ---------------------------------------------------- -----------
Principal risks
The most significant risks which could impact the delivery of
our strategy and annual business plans are detailed below.
Residual
rating
----------
Level 2 risk How the risk arises I L Control environment
-------------------- --------------------- ---- ---- -----------------------------------------------------------
Credit This risk can High Very
The risk that one arise from placing low * Banking committee oversight
or more funds with other
counterparties banks and holding
fail to fulfil interest-bearing * Counterparty limits and credit reviews
contractual securities. There
obligations, is also a limited
including level of lending * Treasury policy and procedures
stock settlement to clients
* Active monitoring of exposures
* Client loan policy and procedures
* Annual ICAAP
-------------------- --------------------- ---- ---- -----------------------------------------------------------
Pension This risk can High Med
The risk that the arise through * Board, senior management and trustee oversight
cost of funding a sustained deficit
our defined benefit between the schemes'
pension schemes assets and * Monthly valuation estimates
increases, liabilities.
or their valuation A number of factors
affects dividends, impact a deficit, * Triennial independent actuarial valuations
reserves and capital including increased
life expectancy,
falling interest * Investment policy
rates and falling
asset values
* Senior management review and defined management
actions
* Annual ICAAP
-------------------- --------------------- ---- ---- -----------------------------------------------------------
Business model This risk can High Med
The risk that the arise from strategic * Board and executive oversight
business model does decisions which
not respond in an fail to consider
optimal manner to the current operating * A documented strategy
changing market environment, or
conditions such can be influenced
that sustainable by external factors * Annual business targets, subject to regular review
growth, market share such as material and challenge
or profitability changes in regulation
is adversely or legislation
affected within the financial * Regular reviews of pricing structure
services sector
* Continued investment in the investment process,
service standards and marketing
* Trade body participation
* Regular competitor benchmarking and analysis
-------------------- --------------------- ---- ---- -----------------------------------------------------------
Suitability and This risk can High Med
advice arise through * Investment governance and structured committee
The risk that failure to oversight
clients appropriately
receive understand the
inappropriate wealth management * Management oversight and segregated quality assurance
financial, trust needs of our clients, and performance teams
or investment or failure to
advice, apply suitable
inadequate advice or investment * Performance measurement and attribution analysis
documentation strategies
or unsuitable
portfolios. * Know your client (KYC) suitability processes
* Weekly investment management meetings
* Investment manager reviews through supervisor
sampling
* Compliance monitoring
-------------------- --------------------- ---- ---- -----------------------------------------------------------
Regulatory This risk can High Med
The risk of failure arise from failures * Board and executive oversight
by the group or by the business
a subsidiary to to comply with
fulfil regulatory existing regulation * Active involvement with industry bodies
requirements and or failure to
comply with the identify and react
introduction of to regulatory * Compliance monitoring programme to examine the
new, or changes change control of key regulatory risks
to existing,
regulation
* Separate anti-money laundering function with specific
responsibility
* Oversight of industry and regulatory developments
* Documented policies and procedures
* Staff training and development
-------------------- --------------------- ---- ---- -----------------------------------------------------------
Change This risk can High Med
The risk that the arise if the business * Executive and board oversight of material change
planning or is too aggressive programmes
implementation and unstructured
of change is in its change
ineffective programme to manage * Dedicated change delivery function, use of internal
or fails to deliver project risks, and, where required, external subject matter experts
desired outcomes, or fails to make
the impact of which available the
may lead to capacity and * Documented business plans and IT strategy
unmitigated capabilities
financial exposures to deliver business
benefits * Two-stage assessment, challenge and approval of
project plans
* Documented project and change procedures
-------------------- --------------------- ---- ---- -----------------------------------------------------------
Data integrity and This risk can High Med
security arise from the * Data security committee oversight
The risk of a lack firm failing to
of integrity of, maintain and keep
inappropriate access secure sensitive * Data protection policy and procedures
to or disclosure and confidential
of client or data through its
company-sensitive operating * System access controls and encryption
information infrastructure,
including the
activities of * Penetration testing and multi-layer network security
employees, and
through the
management * Training and employee awareness programmes
of
cyber threats
* Physical security
-------------------- --------------------- ---- ---- -----------------------------------------------------------
People This risk can High Med
The risk of loss arise across all * Executive oversight
of key staff, lack areas of the business
of skilled resources as a result of
and inappropriate resource management * Succession and contingency planning
behaviour or failures or from
actions. external factors
This could lead such as increased * Transparent, consistent and competitive remuneration
to lack of capacity competition or schemes
or capability material changes
threatening in regulation
the delivery of * Contractual clauses with restrictive covenants
business objectives,
or behaviour leading
to complaints, * Continual investment in staff training and
regulatory development
action or litigation
* Employee engagement survey
* Appropriate balanced performance measurement system
-------------------- --------------------- ---- ---- -----------------------------------------------------------
Assessment of the company's prospects
The board prepares or reviews its strategic plan annually,
completing the ICAAP and ILAAP work which form the basis for
capital planning and regular discussion with the Prudential
Regulation Authority (PRA).
During the year, the board has considered a number of stress
tests and scenarios which focus on material or severe but plausible
events that could impact the business and company's financial
position. The board also considers the plans and procedures in
place in the event that contingency funding is required to
replenish regulatory capital. On a monthly basis, critical capital
projections and sensitivities have been refreshed and reviewed,
taking into account current or expected market movements and
business developments.
The board's assessment considers all the principal risks
identified by the group and assesses the sufficiency of our
response to all Pillar 1 risks (credit, market and operational
risks) to the required regulatory standards. In addition, the
following risks were focused on for enhanced stress testing: equity
market risk, interest rate risk, a loss of business/competition
risk, business expansion risk and pension obligation risk.
The group considers the possible impacts of serious business
interruption as part of its operational risk assessment process and
remains mindful of the importance of maintaining its reputation.
Although the business is almost wholly UK-situated, it does not
suffer from any material client, geographical or counterparty
concentrations.
Whilst this review does not consider all of the risks that the
group may face, the directors consider that this stress
testing-based assessment of the group's prospects is reasonable in
the circumstances of the inherent uncertainty involved.
Viability statement
In accordance with the UK Corporate Governance Code, the board
has assessed the prospects and viability of the group over a
three-year period taking into account the risk assessments. The
directors have taken into account the firm's current position and
the potential impact of the principal risks and uncertainties set
out above. As part of the viability statement, the directors
confirm that they have carried out a robust assessment of both the
principal risks facing the group, and stress tests and scenarios
that would threaten the sustainability of its business model,
future performance, solvency or liquidity.
The board considers five-year projections as part of its annual
regulatory reporting cycle, which includes strategic and investment
plans and its opinion of the likelihood of risks materialising.
However, given the uncertainties associated with predicting the
future impact of investment markets on the business over this
longer period, the directors have determined that a three-year
period to 31 December 2021 continues to constitute an appropriate
period over which to provide its viability statement. This is more
closely aligned to its detailed capital planning activity.
Stress testing analysis shows that under scenarios such as a 45%
fall in FTSE 100 levels or a 0% interest rate environment for two
years, the group would remain profitable and is able to withstand
the impact of such scenarios. We see this scenario as also
incorporating the potential adverse indirect impact of Brexit on
the firm. An example of a mitigating action in such scenarios would
be a reduction in dividend.
Based on this assessment, the directors confirm that they have a
reasonable expectation that the company will be able to continue in
operation and meet its liabilities as they fall due over the period
to 31 December 2021.
Going concern
Details of the group's business activities, results, cash flows
and resources, together with the risks it faces and other factors
likely to affect its future development, performance and position
are set out in the chairman's statement, chief executive's review,
strategic report and group risk committee report.
The group companies are regulated by the PRA and FCA and perform
annual capital adequacy assessments, which include the modelling of
certain extreme stress scenarios. The company publishes Pillar 3
disclosures annually on its website, which provide detail about its
regulatory capital resources and requirements. In July 2015,
Rathbone Investment Management issued GBP20 million of 10-year
subordinated loan notes to finance future growth. The group has no
other external borrowings.
The directors believe that the company is well placed to manage
its business risks successfully despite the continuing uncertain
economic and political outlook. As the directors have a reasonable
expectation that the company has adequate resources to continue in
operational existence for the foreseeable future, they continue to
adopt the going concern basis of accounting in preparing the annual
financial statements.
Consolidated statement of comprehensive income
for the year ended 31 December 2018
2018 2017
Note GBP'000 GBP'000
------------------------------------------------------------ ---- --------- ---------
Interest and similar income 20,968 13,501
Interest expense and similar charges (5,647) (1,907)
------------------------------------------------------------ ---- --------- ---------
Net interest income 15,321 11,594
------------------------------------------------------------ ---- --------- ---------
Fee and commission income 314,013 292,034
Fee and commission expense (22,903) (22,715)
------------------------------------------------------------ ---- --------- ---------
Net fee and commission income 291,110 269,319
------------------------------------------------------------ ---- --------- ---------
Net trading income 3,405 3,071
Gain on plan amendment of defined benefit pension
schemes - 5,523
Other operating income 2,127 2,065
Operating income 311,963 291,572
------------------------------------------------------------ ---- --------- ---------
Charges in relation to client relationships and goodwill (13,188) (11,716)
Acquisition-related costs (19,925) (6,178)
Head office relocation costs 2,861 (16,248)
Other operating expenses (220,405) (198,529)
------------------------------------------------------------ ---- --------- ---------
Operating expenses (250,657) (232,671)
------------------------------------------------------------ ---- --------- ---------
Profit before tax 61,306 58,901
Taxation 5 (15,137) (12,072)
------------------------------------------------------------ ---- --------- ---------
Profit after tax 46,169 46,829
------------------------------------------------------------ ---- --------- ---------
Profit for the year attributable to equity holders
of the company 46,169 46,829
------------------------------------------------------------ ---- --------- ---------
Other comprehensive income:
Items that will not be reclassified to profit or
loss
Net remeasurement of defined benefit liability 1,219 17,288
Deferred tax relating to net remeasurement of defined
benefit liability (207) (2,939)
Items that may be reclassified to profit or loss
Revaluation of available for sale investment securities:
------------------------------------------------------------ ---- --------- ---------
* net gain from changes in fair value - 163
* net profit on disposal transferred to profit or loss
during the year - (43)
------------------------------------------------------------ ---- --------- ---------
- 120
Deferred tax relating to revaluation of available
for sale investment securities - (20)
------------------------------------------------------------ ---- --------- ---------
Other comprehensive income net of tax 1,012 14,449
------------------------------------------------------------ ---- --------- ---------
Total comprehensive income for the year net of tax
attributable to equity holders of the company 47,181 61,278
------------------------------------------------------------ ---- --------- ---------
Dividends paid and proposed for the year per ordinary
share 6 66.0p 61.0p
Dividends paid and proposed for the year 35,204 30,429
Earnings per share for the year attributable to equity
holders of the company: 8
* basic 88.7p 92.7p
* diluted 86.2p 91.9p
------------------------------------------------------------ ---- --------- ---------
Consolidated statement of changes in equity
for the year ended 31 December 2018
Available
Share Share Merger for sale Own Retained Total
capital premium reserve reserve shares earnings equity
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------- -------- -------- -------- --------- -------- --------- --------
At 1 January 2017 2,535 139,991 31,835 150 (6,243) 156,545 324,813
Profit for the year 46,829 46,829
----------------------------------- -------- -------- -------- --------- -------- --------- --------
Net remeasurement of defined
benefit liability 17,288 17,288
Revaluation of available
for sale investment securities:
net gain from changes in
fair value 163 163
net profit on disposal
transferred to profit or
loss during the year (43) (43)
Deferred tax relating to
components of other comprehensive
income (20) (2,939) (2,959)
----------------------------------- -------- -------- -------- --------- -------- --------- --------
Other comprehensive income
net of tax - - - 100 - 14,349 14,449
Dividends paid (29,420) (29,420)
Issue of share capital 31 3,098 3,129
Share-based payments:
* value of employee services 3,591 3,591
* cost of own shares acquired (441) (441)
* cost of own shares vesting 1,820 (1,820) -
* own shares sold -
* tax on share-based payments 328 328
----------------------------------- -------- -------- -------- --------- -------- --------- --------
At 31 December 2017 2,566 143,089 31,835 250 (4,864) 190,402 363,278
Adjustment on initial application
of IFRS 9 (net of tax) (250) 102 (148)
Adjustment on initial application
of IFRS 15 (net of tax) 8,443 8,443
Adjusted balance at 1 January
2018 2,566 143,089 31,835 - (4,864) 198,947 371,573
Profit for the year 46,169 46,169
----------------------------------- -------- -------- -------- --------- -------- --------- --------
Net remeasurement of defined
benefit liability 1,219 1,219
Deferred tax relating to
components of other comprehensive
income (207) (207)
----------------------------------- -------- -------- -------- --------- -------- --------- --------
Other comprehensive income
net of tax - - - - - 1,012 1,012
Dividends paid (32,691) (32,691)
Issue of share capital 194 87,134 87,328
Share-based payments:
* value of employee services 20,279 20,279
* cost of own shares acquired (29,888) (29,888)
* cost of own shares vesting 2,015 (2,015) -
* tax on share-based payments 358 358
----------------------------------- -------- -------- -------- --------- -------- --------- --------
At 31 December 2018 2,760 230,223 31,835 - (32,737) 232,059 464,140
----------------------------------- -------- -------- -------- --------- -------- --------- --------
Consolidated balance sheet
as at 31 December 2018
2018 2017
GBP'000 GBP'000
------------------------------------------------------------ --------- ---------
Assets
Cash and balances with central banks 1,198,479 1,375,382
Settlement balances 39,754 46,784
Loans and advances to banks 166,200 117,253
Loans and advances to customers 138,959 126,213
Investment securities:
* fair value through profit or loss 79,797 -
* amortised cost 907,225 -
* available for sale - 109,312
* held to maturity - 701,966
Prepayments, accrued income and other assets 81,552 74,445
Property, plant and equipment 16,838 16,457
Net deferred tax asset - 9,061
Intangible assets 238,918 161,977
------------------------------------------------------------- --------- ---------
Total assets 2,867,722 2,738,850
------------------------------------------------------------- --------- ---------
Liabilities
Deposits by banks 491 1,338
Settlement balances 36,692 54,452
Due to customers 2,225,536 2,170,498
Accruals, deferred income, provisions and other liabilities 103,393 108,391
Current tax liabilities 5,985 5,598
Net deferred tax liability 481 -
Subordinated loan notes 19,807 19,695
Retirement benefit obligations 11,197 15,600
------------------------------------------------------------- --------- ---------
Total liabilities 2,403,582 2,375,572
------------------------------------------------------------- --------- ---------
Equity
Share capital 2,760 2,566
Share premium 230,223 143,089
Merger reserve 31,835 31,835
Available for sale reserve - 250
Own shares (32,737) (4,864)
Retained earnings 232,059 190,402
------------------------------------------------------------- --------- ---------
Total equity 464,140 363,278
------------------------------------------------------------- --------- ---------
Total liabilities and equity 2,867,722 2,738,850
------------------------------------------------------------- --------- ---------
Consolidated statement of cash flows
for the year ended 31 December 2018
2018 2017
Note GBP'000 GBP'000
------------------------------------------------------------- ---- ----------- ---------
Cash flows from operating activities
Profit before tax 61,306 58,901
Net profit on disposal of available for sale
investment securities - (43)
Change in fair value through profit or loss 185 -
Net interest income (15,321) (11,594)
Impairment losses on financial instruments 44 1
Net (credit)/charge for provisions (1,498) 16,728
Loss/(profit) on disposal of property, plant
and equipment 1 -
Depreciation, amortisation and impairment 21,673 19,415
Foreign exchange movements (2,297) 1,480
Defined benefit pension scheme charges 491 (2,948)
Defined benefit pension contributions paid (3,673) (3,619)
Share-based payment charges 19,838 3,871
Interest paid (5,175) (1,663)
Interest received 21,362 13,084
------------------------------------------------------------- ---- ----------- ---------
96,936 93,613
Changes in operating assets and liabilities:
* net increase in loans and advances to banks and
customers (10,482) (16,643)
* net decrease/(increase) in settlement balance debtors 7,030 (8,997)
* net increase in prepayments, accrued income and other
assets (3,887) (8,318)
* net increase in amounts due to customers and deposits
by banks 54,191 282,647
* net (decrease)/increase in settlement balance
creditors (17,760) 15,163
* net (decrease)/increase in accruals, deferred income,
provisions and other liabilities (222) 8,146
------------------------------------------------------------- ---- ----------- ---------
Cash generated from operations 125,806 365,611
Tax paid (14,697) (14,087)
------------------------------------------------------------- ---- ----------- ---------
Net cash inflow from operating activities 111,109 351,524
------------------------------------------------------------- ---- ----------- ---------
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired (72,914) -
Purchase of property, plant, equipment and intangible
assets (18,338) (16,123)
Proceeds from sale of property, plant and equipment - -
Purchase of investment securities (1,051,150) (746,566)
Proceeds from sale and redemption of investment
securities 847,323 742,581
------------------------------------------------------------- ---- ----------- ---------
Net cash used in investing activities (295,079) (20,108)
------------------------------------------------------------- ---- ----------- ---------
Cash flows from financing activities
Issue of ordinary shares 57,440 2,688
Dividends paid 6 (32,691) (29,420)
------------------------------------------------------------- ---- ----------- ---------
Net cash generated from/(used in) financing activities 24,749 (26,732)
------------------------------------------------------------- ---- ----------- ---------
Net (decrease)/increase in cash and cash equivalents (159,221) 304,684
Cash and cash equivalents at the beginning of
the year 1,567,758 1,263,074
------------------------------------------------------------- ---- ----------- ---------
Cash and cash equivalents at the end of the year 11 1,408,537 1,567,758
------------------------------------------------------------- ---- ----------- ---------
Notes to the preliminary announcement
1 Accounting policies
In preparing the financial information included in this
statement the group has applied accounting policies which are in
accordance with International Financial Reporting Standards as
adopted by the EU at 31 December 2018. The accounting policies have
been applied consistently to all periods presented in this
statement, except as detailed below.
Rathbone Brothers Plc ('the company') is a public company
incorporated and domiciled in England and Wales under the Companies
Act 2006.
Developments in reporting standards and interpretations
Standards and interpretations affecting the reported results or
the financial position
This is the first set of the group's financial statements where
IFRS 9 and IFRS 15 have been applied. These new standards were
adopted from 1 January 2018. Under the transition methods chosen,
comparative information is not restated. Changes to significant
accounting policies are described in note 2.
The following amendments to standards have also been adopted in
the current period, but have not had a significant impact on the
amounts reported in the financial statements:
- Classification and Measurement of Share-based Payment
Transactions (Amendments to IFRS 2).
Future new standards and interpretations
A number of new standards are effective for annual periods
beginning after 1 January 2018 and earlier application is
permitted; however, the group has not early adopted the new or
amended standards in preparing the consolidated financial
statements.
Of those standards that are not yet effective, IFRS 16 is
expected to have a material impact on the group's financial
statements in the period of initial application.
IFRS 16 'Leases'
IFRS 16 is effective for periods commencing on or after 1
January 2019 and replaces existing lease guidance, including IAS 17
Leases, IFRIC 4 Determining whether an arrangement contains a
Lease, SIC-15 Operating Lease - Incentives and SIC-27 Evaluating
the Substance of Transactions Involving the Legal Form of a Lease.
The standard was endorsed by the EU during 2017. The group has not
adopted this standard early.
IFRS 16 eliminates the classification of leases as either
operating leases or finance leases for lessees. The group will be
required to recognise all leases with a term of more than 12 months
as a right-of-use lease asset on its balance sheet; the group will
also recognise a financial liability representing its obligation to
make future lease payments.
Transition
The group plans to apply IFRS 16 initially with effect from 1
January 2019, using the modified retrospective approach. Therefore,
the cumulative effect of adopting IFRS 16 will be recognised as an
adjustment to the opening balance sheet at 1 January 2019, with no
restatement of comparative information.
The group plans to apply the practical expedient to grandfather
the definition of a lease on transition. This means that it will
apply IFRS 16 to all contracts entered into before 1 January 2019
and identified as leases in accordance with IAS 17.
Lessee accounting
The group has assessed the impact of adopting the new standard,
based on its existing lease contracts.
The group's total assets and total liabilities will be increased
by the recognition of lease assets and liabilities. The lease
assets will be depreciated over the shorter of the expected life of
the asset and the lease term. The lease liability will be reduced
by lease payments, offset by the unwinding of the liability over
the lease term, which will be recognised in interest expense and
similar charges in the consolidated statement of comprehensive
income.
The most significant impact is in respect of its London head
office premises. Based on the information currently available, the
group estimates that it will recognise lease liabilities of
approximately GBP63 million to GBP67 million as at 1 January 2019
and related right-of-use assets with a value of approximately GBP50
million to GBP55 million, reflecting the impact of accrued rent
free periods up to 31 December 2018. We do not expect any impact on
the group's equity at the date of adoption.
On the group's statement of comprehensive income, the profile of
lease costs will be front-loaded, at least individually, as the
interest charge is higher in the early years of a lease term as the
discount rate unwinds. The total cost of the lease over the lease
term is expected to be unchanged.
In addition to the above impacts, recognition of lease assets
will increase the group's regulatory capital requirement.
Lessor accounting
The group is not required to make any adjustments for leases in
which it is a lessor except where it is an intermediate lessor in a
sub-lease. Based on the work completed by the group, it expects to
reclassify one sub-lease as a finance lease. This results in
recognition of a finance lease receivable of approximately GBP1
million to GBP2 million as at 1 January 2019.
2 Changes in significant accounting policies
The group has adopted IFRS 9 'Financial Instruments' and IFRS 15
'Revenue from Contracts with Customers' from 1 January 2018.
The effect of applying these standards is mainly attributed to
the following:
- an increase in impairment losses recognised on financial
assets (IFRS 9);
- an increase in client relationship intangibles in respect of
the additional capitalisation of payments made to investment
managers (IFRS 15); and
- earlier recognition of revenue in Rathbone Trust Company
Limited (IFRS 15).
IFRS 9 'Financial Instruments'
IFRS 9 governs the accounting treatment for the classification
and measurement of financial instruments and the timing and extent
of credit provisioning. The standard replaces IAS 39.
Transition
The group has taken advantage of the exemption from restating
comparative information for prior periods with respect to
classification and measurement (including impairment) requirements.
Differences in the carrying amounts of financial assets and
financial liabilities resulting from the adoption of IFRS 9 are
recognised in retained earnings and reserves as at 1 January 2018.
Accordingly, the information presented for 2017 does not generally
reflect the requirements of IFRS 9 but rather those of IAS 39.
Under the requirements of IFRS 9, the following assessments have
been made on the basis of the facts and circumstances that existed
at the date of initial application.
- The nature of the business model under which a financial asset is managed.
- Whether the SPPI (solely payments of principal and interest)
criterion is met.
- The designation of certain financial assets as measured at
fair value through profit or loss.
- If an investment in a debt instrument had a low credit risk
(e.g. 'investment grade' credit rating) at the date of initial
application of IFRS 9, then the group assumes that the credit risk
on the asset has not increased significantly since its initial
recognition.
The following table summarises the impact, net of tax, of
transition to IFRS 9 on the opening balance of reserves and
retained earnings:
Impact of adopting
IFRS 9 on opening
balance
--------------------
Available
for sale Retained
reserve earnings
GBP'000 GBP'000
--------------------------------------------------- --------- ---------
Recycle to retained earnings of available for sale
reserve (250) 250
Recognition of expected credit losses under IFRS 9 - (148)
--------------------------------------------------- --------- ---------
Impact at 1 January 2018 (250) 102
--------------------------------------------------- --------- ---------
The recognition of expected credit losses under IFRS 9 in
opening retained earnings of GBP148,000 is split out by balance
sheet line item in the table below.
The hedge accounting requirements of IFRS 9 have not been
applied, as the group was not party to any hedging relationships as
at 1 January 2018.
Classification and measurement of financial assets and financial
liabilities
The basis of classification for financial assets under IFRS 9 is
different from that under IAS 39. Financial assets are classified
into one of three categories: amortised cost, fair value through
profit or loss (FVTPL) or fair value through other comprehensive
income (FVOCI). The held to maturity, loans and receivables and
available for sale categories available under IAS 39 have been
removed.
The classification criteria for allocating financial assets
between categories under IFRS 9 require the group to document the
business models under which its assets are managed and review
contractual terms and conditions.
All of the group's financial assets as at 1 January 2018 were
managed within business models whose objective is solely to collect
contractual cash flows, except equity securities and money market
funds, which are equity instruments not held for trading and were
classified as fair value through profit or loss.
The following table explains the original measurement categories
under IAS 39 and the new measurement categories under IFRS 9 for
each class of the group's financial assets as at 1 January
2018.
Original
carrying
amount New carrying
under IAS amount under
Original classification 39 New classification IFRS 9
Financial assets under IAS 39 GBP'000 under IFRS 9 GBP'000
----------------------- ------------------------ ---------- ------------------ -------------
Cash and balances with
central banks Loans and receivables 1,375,382 Amortised cost 1,375,290
Loans and advances to
banks Loans and receivables 117,253 Amortised cost 117,250
Loans and advances to
customers Loans and receivables 126,213 Amortised cost 126,191
Available for Fair value through
Equity securities sale 2,565 profit or loss 2,565
Available for Fair value through
Money market funds sale 106,747 profit or loss 106,747
Debt securities Held to maturity 701,966 Amortised cost 701,935
Other financial assets Loans and receivables 112,483 Amortised cost 112,483
------------------------ ----------------------- ---------- ------------------ -------------
Total financial assets 2,542,609 2,542,461
-------------------------------------------------- ---------- ------------------ -------------
The effect of adopting IFRS 9 on the carrying amounts of
financial assets at 1 January 2018 relates solely to the new
impairment requirements.
The basis of classification for financial liabilities under IFRS
9 remains unchanged from under IAS 39. All financial liabilities
continue to be classified as amortised cost, with no financial
liabilities designated at fair value through profit or loss. There
was no change to carrying value of financial liabilities at 1
January 2018.
Impairment of financial assets
Under IFRS 9, an expected credit loss (ECL) model replaces the
incurred loss model, meaning there no longer needs to be a
triggering event in order to recognise impairment losses. A credit
loss provision must be made for the amount of any loss expected to
arise, whereas under IAS 39, credit losses are recognised when they
are incurred.
Impact of the new impairment model
The initial application of IFRS 9's impairment requirements at 1
January 2018 resulted in an additional impairment provision as
follows:
GBP'000
------------------------------------------------------- -------
Loss provision at 31 December 2017 under IAS 39 66
Additional impairment recognised at 1 January 2018 on:
------------------------------------------------------- -------
treasury book:
* cash and balances with central banks 92
* loans and advances to banks 3
* debt securities 31
loans and advances to customers:
* investment management loan book 1
* trust and financial planning debtors 21
------------------------------------------------------- -------
148
Loss provision at 1 January 2018 under IFRS 9 214
------------------------------------------------------- -------
Additional impairment recognised at 1 January 2018 relate to
financial assets classified and measured at amortised cost.
IFRS 15 'Revenue from Contracts with Customers'
IFRS 15 changes how and when revenue is recognised from
contracts with customers and the treatment of the costs of
obtaining a contract with a customer. The standard requires that
the recognition of revenue is linked to the fulfilment of
identified performance obligations that are enshrined in the
customer contract. It also requires that the incremental cost of
obtaining a customer contract should be capitalised if that cost is
expected to be recovered. The standard replaces existing revenue
recognition guidance, in particular under IAS 18.
Transition
The group has adopted IFRS 15 using the cumulative effect
method, with the effect of applying the standard recognised at the
date of adoption, with no restatement of the comparative period.
The following table summarises the impact, net of tax, of
transition to IFRS 15 on retained earnings at 1 January 2018.
Impact of adopting IFRS
15 on opening balance
GBP'000
------------------------------------------------------ -----------------------
Retained earnings
Net recognition of intangible assets under IFRS
15 8,268
Reduction in accruals 4,011
Recognition of provisions (4,075)
Impact of changes to timing of recognition of certain
time-based fees 296
Related tax (57)
------------------------------------------------------ -----------------------
Impact at 1 January 2018 8,443
------------------------------------------------------ -----------------------
The impact on transition is primarily due to a change in policy
for capitalising contract costs under IFRS 15 (see below). Client
relationship intangible assets with a carrying value of
GBP8,268,000 were recognised as a result of additional costs
capitalised under the new policy. There is also a reclassification
between accruals and provisions for amounts payable as at 1 January
2018 under these contracts.
Impact on financial statements for the year ended 31 December
2018
The group has considered the impact of adopting the standard, on
its existing revenue streams, as well as on its policy of
capitalising the cost of obtaining customer contracts.
Net fee and commission income
Included within net fee and commission income are initial fees,
charged by a number of group companies in relation to certain
business activities. Under IFRS 15, the group has made an
assessment as to whether the work performed to earn such fees
constitutes the transfer of services and, therefore, fulfils any
performance obligation(s). If so, then these fees can be recognised
when the relevant performance obligation has been satisfied; if
not, then the fees can only be recognised in the period in which
the services are provided.
The adoption of IFRS 15 has not had a significant impact on the
group's accounting policies for revenue recognition, as the
application of the new requirements does not change the treatment
under previous guidance, in particular IAS 18, apart from a small
change in how we recognise certain fees in Rathbone Trust
Company.
A breakdown of the timing of revenue recognition can be found in
note 4.
Contract costs
Under the group's previous policy under IAS 18 for capitalising
contract costs, incremental payments that were made to secure
investment management contracts were capitalised as client
relationship intangibles if they were separable, reliably
measurable and expected to be recovered. The period during which
such payments are capitalised was typically the 12 months following
the end of any non-compete period.
Under IFRS 15, the scope requirements are broader such that
costs to obtain any contract with a customer should be capitalised
if those costs are incremental and the entity expects to recover
them.
The group has assessed its previous policy and has removed the
12 month limit on capitalisation of payments to newly recruited
investment managers under the new standard. The policy is unchanged
in all other respects.
The group has also identified a number of other remuneration
schemes where awards are linked to obtaining client contracts and
has considered whether any meet the new criteria for capitalising
costs under IFRS 15. The group has determined that the adoption of
the new standard has not resulted in any awards made under these
schemes being capitalised. The costs of these awards continue to be
expensed through staff costs.
The following tables summarise the impacts of adopting IFRS 15
on the group's consolidated statement of comprehensive income for
the year ended 31 December 2018 and its consolidated balance sheet
as at that date for each of the line items affected. There was no
impact on the group's consolidated statement of cash flows for the
year ended 31 December 2018.
Impact on the consolidated statement of comprehensive income
(extract)
Amounts
As reported without
Year to adoption
31 December of IFRS
2018 Adjustments 15
GBP'000 GBP'000 GBP'000
------------------------------------------------------ ------------ ----------- ---------
Operating income 311,963 579 312,542
------------------------------------------------------ ------------ ----------- ---------
Charges in relation to client relationships and
goodwill (13,188) 836 (12,352)
Other operating expenses (220,405) (160) (220,565)
------------------------------------------------------ ------------ ----------- ---------
Operating expenses (250,657) 676 (249,981)
------------------------------------------------------ ------------ ----------- ---------
Profit before tax 61,306 1,255 62,561
Taxation (15,137) (238) (15,375)
------------------------------------------------------ ------------ ----------- ---------
Profit for the period attributable to equity holders
of the company 46,169 1,017 47,186
------------------------------------------------------ ------------ ----------- ---------
Other comprehensive income net of tax 1,012 - 1,012
------------------------------------------------------ ------------ ----------- ---------
Total comprehensive income for the period net
of tax attributable to equity holders of the company 47,181 1,017 48,198
------------------------------------------------------ ------------ ----------- ---------
The adjustments to the consolidated statement of comprehensive
income primarily relate to amortisation charged on the additional
client relationship intangibles recognised under the new policy for
capitalising contract costs (see below) and decrease in revenue in
Rathbone Trust Company as a result of the revised treatment under
IFRS 15.
Impact on the consolidated balance sheet (extract)
Amounts
without
As reported adoption
31 December of IFRS
2018 Adjustments 15
GBP'000 GBP'000 GBP'000
------------------------------------------------ ------------ ----------- ---------
Assets
Prepayments, accrued income and other assets 81,552 283 81,835
Intangible assets 238,918 (7,641) 231,277
------------------------------------------------ ------------ ----------- ---------
Total assets 2,867,722 (7,358) 2,860,364
------------------------------------------------ ------------ ----------- ---------
Liabilities
Accruals, deferred income, provisions and other
liabilities 103,393 (10) 103,383
Current tax liabilities 5,985 181 6,166
Total liabilities 2,403,582 171 2,403,753
------------------------------------------------ ------------ ----------- ---------
Equity
Retained earnings 232,059 (7,529) 224,530
------------------------------------------------ ------------ ----------- ---------
Total equity 464,140 (7,529) 456,611
------------------------------------------------ ------------ ----------- ---------
Total liabilities and equity 2,867,722 (7,358) 2,860,364
------------------------------------------------ ------------ ----------- ---------
The adjustments to the consolidated balance sheet reflect the
initial and subsequent application of the new policy for
capitalising contract costs under IFRS 15.
3 Critical accounting judgements and key sources of estimation and uncertainty
The group makes judgements and estimates that affect the
application of the group's accounting policies and reported amounts
of assets, liabilities, income and expenses within the next
financial year. Estimates and assumptions 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.
Both judgements and estimates are made in the following areas in
applying accounting policies, and care has been taken to
distinguish between the two.
3.1 Client relationship intangibles
Client relationship intangibles purchased through corporate
transactions
When the group purchases client relationships through
transactions with other corporate entities, a judgement is made as
to whether the transaction should be accounted for as a business
combination or as a separate purchase of intangible assets. In
making this judgement, the group assesses the assets, liabilities,
operations and processes that were the subject of the transaction
against the definition of a business combination in IFRS 3. In
particular, consideration is given to the scale of the operations
subject to the transaction and whether ownership of a corporate
entity has been acquired, among other factors.
Payments to newly recruited investment managers
The group assesses whether payments made to newly recruited
investment managers under contractual agreements represent payments
for the acquisition of client relationship intangibles or
remuneration for ongoing services provided to the group. If these
payments are incremental costs of acquiring investment management
contracts and are deemed to be recoverable (i.e. through future
revenues earned from the funds that transfer), they are capitalised
as client relationship intangibles. Otherwise, they are judged to
be in relation to the provision of ongoing services and are
expensed in the period in which they are incurred. Upfront payments
made to investment managers upon joining are expensed as they are
not judged to be incremental costs for acquiring the client
relationships.
Under the broader scope requirements of IFRS 15, judgement is no
longer required over the suitable period during which awards
accruing to new investment managers are capitalised. Instead,
payments are capitalised for the duration of the contractual
agreement.
Amortisation of client relationship intangibles
The group makes estimates as to the expected duration of client
relationships to determine the period over which related intangible
assets are amortised. The amortisation period is estimated with
reference to historical data on account closure rates and
expectations that these will continue in the future. During the
year, client relationship intangible assets were amortised over a
10 to 15 year period. Amortisation of GBP12,919,000 (2017:
GBP11,433,000) was charged during the year, which includes the
amortisation on the recently acquired Speirs & Jeffrey client
relationship intangible. A reduction in the average amortisation
period of one year would increase the amortisation charge by
approximately GBP1,303,000 (2017: GBP1,076,000). At 31 December
2018, the carrying value of client relationship intangibles was
GBP134,556,000 (2017: GBP88,511,000).
3.2 Retirement benefit obligations
The group makes estimates about a range of long term trends and
market conditions to determine the value of the surplus or deficit
on its retirement benefit schemes, based on the group's
expectations of the future and advice taken from qualified
actuaries. Long term forecasts and estimates are necessarily highly
judgemental and subject to risk that actual events may be
significantly different to those forecast. If actual events deviate
from the assumptions made by the group then the reported surplus or
deficit in respect of retirement benefit obligations may be
materially different.
3.3 Business combinations (note 9)
During the year, the group acquired the entire share capital of
Speirs & Jeffrey ("S&J"). The group has accounted for the
transaction as a business combination, as set out in note 9.
Treatment and fair value of consideration transferred
The purchase price payable in respect of the acquisition is
split into a number of different components. The payment of certain
elements has been deferred; the timing and value of these are
contingent on certain employment conditions and operational and
financial targets being met.
The proportion of the deferred payments that are contingent on
selling shareholders remaining employees of the group for a
specific period are accounted for as remuneration for ongoing
services in employment. The group's estimate of the amounts
ultimately payable will be expensed over the deferral period.
Those deferred payments accounted for as additional
consideration were assessed against the operational targets to
which they are subject. Based on performance against the
operational targets to date, the group has made an assessment of
the amount and timing of these payments. A provision for contingent
consideration has been made for the amount expected to be paid.
Identification of assets acquired and liabilities assumed
As at 31 August 2018, the date of acquisition, Speirs &
Jeffrey's identifiable assets, liabilities and contingent
liabilities have been recognised at their fair value.
In accordance with the process described in note 3.1, the group
has recognised a client relationship intangible of GBP54,337,000,
arising from Speirs & Jeffrey's relationship with clients whose
assets are managed by the business. Further detail on the sources
of estimation in the valuation is provided in note 9.
Goodwill of GBP28,087,000 has been recognised.
Carrying value of assets acquired
As at 31 December 2018, the carrying value for the client
relationship intangible arising from Speirs & Jeffrey was
GBP53,129,000 (2017: GBPnil). Amortisation in the year ended 31
December 2018 in relation to the client relationship intangible was
GBP1,207,000 (2017: GBPnil). A reduction in the amortisation period
by 1 year would increase the amortisation charge for the year by
approximately GBP87,000 (2017: GBPnil).
The carrying value of GBP28,087,000 for goodwill remains
unchanged at 31 December 2018 compared to the acquisition date.
4 Segmental information
For management purposes, the group is organised into two
operating divisions: Investment Management and Unit Trusts.
Centrally incurred indirect expenses are allocated to these
operating segments on the basis of the cost drivers that generate
the expenditure; principally, the headcount of staff directly
involved in providing those services from which the segment earns
revenues, the value of funds under management and administration
and the segment's total revenue. The allocation of these costs is
shown in a separate column in the table below, alongside the
information presented for internal reporting to the group executive
committee, which is the group's chief operating decision maker.
Investment Indirect
Management Unit Trusts expenses Total
31 December 2018 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------------------- ----------- ----------- --------- ---------
Net investment management fee income 200,530 32,865 - 233,395
Net commission income 41,439 - - 41,439
Net interest income 15,321 - - 15,321
Fees from advisory services and other income 18,019 3,789 - 21,808
--------------------------------------------- ----------- ----------- --------- ---------
Underlying operating income 275,309 36,654 - 311,963
--------------------------------------------- ----------- ----------- --------- ---------
Staff costs - fixed (66,512) (3,300) (26,152) (95,964)
Staff costs - variable (37,736) (7,552) (9,806) (55,094)
--------------------------------------------- ----------- ----------- --------- ---------
Total staff costs (104,248) (10,852) (35,958) (151,058)
Other direct expenses (27,629) (6,950) (34,768) (69,347)
Allocation of indirect expenses (64,596) (6,130) 70,726 -
--------------------------------------------- ----------- ----------- --------- ---------
Underlying operating expenses (196,473) (23,932) - (220,405)
--------------------------------------------- ----------- ----------- --------- ---------
Underlying profit before tax 78,836 12,722 - 91,558
Charges in relation to client relationships
and goodwill (13,188) - - (13,188)
Acquisition-related costs (16,228) - (3,697) (19,925)
--------------------------------------------- ----------- ----------- --------- ---------
Segment profit before tax 49,420 12,722 (3,697) 58,445
--------------------------------------------- ----------- ----------- --------- ---------
Head office relocation costs 2,861
---------
Profit before tax attributable to equity
holders of the company 61,306
Taxation (15,137)
--------------------------------------------- ----------- ----------- --------- ---------
Profit for the year attributable to equity
holders of the company 46,169
--------------------------------------------- ----------- ----------- --------- ---------
Investment
Management Unit Trusts Total
GBP'000 GBP'000 GBP'000
--------------------------------------------- ----------- ----------- --------- ---------
Segment total assets 2,786,718 81,004 2,867,722
Unallocated assets -
--------------------------------------------- ----------- ----------- --------- ---------
Total assets 2,867,722
--------------------------------------------- ----------- ----------- --------- ---------
Investment Indirect
Management Unit Trusts expenses Total
31 December 2017 GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------------------- ----------- ----------- --------- ---------
Net investment management fee income 189,465 28,020 - 217,485
Net commission income 38,729 - - 38,729
Net interest income 11,594 - - 11,594
--------------------------------------------- ----------- ----------- --------- ---------
Fees from advisory services and other income 14,831 3,410 - 18,241
--------------------------------------------- ----------- ----------- --------- ---------
Underlying operating income 254,619 31,430 - 286,049
--------------------------------------------- ----------- ----------- --------- ---------
Staff costs - fixed (59,457) (3,040) (25,294) (87,791)
Staff costs - variable (40,240) (7,246) (5,843) (53,329)
--------------------------------------------- ----------- ----------- --------- ---------
Total staff costs (99,697) (10,286) (31,137) (141,120)
Other direct expenses (21,893) (4,415) (31,101) (57,409)
Allocation of indirect expenses (56,188) (6,050) 62,238 -
--------------------------------------------- ----------- ----------- --------- ---------
Underlying operating expenses (177,778) (20,751) - (198,529)
--------------------------------------------- ----------- ----------- --------- ---------
Underlying profit before tax 76,841 10,679 - 87,520
Charges in relation to client relationships
and goodwill (11,716) - - (11,716)
Acquisition-related costs (1,273) - (4,905) (6,178)
--------------------------------------------- ----------- ----------- --------- ---------
Segment profit before tax 63,852 10,679 (4,905) 69,626
--------------------------------------------- ----------- ----------- --------- ---------
Gain on plan amendment of defined benefit
pension schemes 5,523
Head office relocation costs (16,248)
---------
Profit before tax attributable to equity
holders of the company 58,901
Taxation (12,072)
--------------------------------------------- ----------- ----------- --------- ---------
Profit for the year attributable to equity
holders of the company 46,829
--------------------------------------------- ----------- ----------- --------- ---------
Investment
Management Unit Trusts Total
GBP'000 GBP'000 GBP'000
--------------------------------------------- ----------- ----------- --------- ---------
Segment total assets 2,659,723 74,672 2,734,395
Unallocated assets 4,455
--------------------------------------------- ----------- ----------- --------- ---------
Total assets 2,738,850
--------------------------------------------- ----------- ----------- --------- ---------
The following table reconciles underlying operating income to
operating income:
2018 2017
GBP'000 GBP'000
---------------------------------------------------------- -------- --------
Underlying operating income 311,963 286,049
Gain on plan amendment of defined benefit pension schemes - 5,523
---------------------------------------------------------- -------- --------
Operating income 311,963 291,572
---------------------------------------------------------- -------- --------
The following table reconciles underlying operating expenses to
operating expenses:
2018 2017
GBP'000 GBP'000
--------------------------------------------------------- -------- --------
Underlying operating expenses 220,405 198,529
Charges in relation to client relationships and goodwill 13,188 11,716
Acquisition-related costs 19,925 6,178
Head office relocation costs (2,861) 16,248
--------------------------------------------------------- -------- --------
Operating expenses 250,657 232,671
--------------------------------------------------------- -------- --------
Geographic analysis
The following table presents operating income analysed by the
geographical location of the group entity providing the
service:
2018 2017
GBP'000 GBP'000
----------------- -------- --------
United Kingdom 301,029 280,892
Jersey 10,934 10,680
----------------- -------- --------
Operating income 311,963 291,572
----------------- -------- --------
The following is an analysis of the carrying amount of
non-current assets analysed by the geographical location of the
assets:
2018 2017
GBP'000 GBP'000
------------------- -------- --------
United Kingdom 251,429 173,496
Jersey 4,327 4,938
------------------- -------- --------
Non-current assets 255,756 178,434
------------------- -------- --------
Timing of revenue recognition
The following table presents operating income analysed by the
timing of revenue recognition of the operating segment providing
the service:
2018 2017
------------------------ ------------------------
Investment Investment
Management Unit Trusts Management Unit Trusts
GBP'000 GBP'000 GBP'000 GBP'000
--------------------------------------- ----------- ----------- ----------- -----------
Products and services transferred at a
point in time 44,392 3,431 42,036 3,104
Products and services transferred over
time 230,917 33,223 212,583 28,326
--------------------------------------- ----------- ----------- ----------- -----------
Underlying operating income 275,309 36,654 254,619 31,430
--------------------------------------- ----------- ----------- ----------- -----------
Major clients
The group is not reliant on any one client or group of connected
clients for generation of revenues.
5 Income tax expense
2018 2017
GBP'000 GBP'000
--------------------------------------------- -------- --------
Current tax:
* charge for the year 16,830 13,466
* adjustments in respect of prior years (1,599) (303)
Deferred tax:
* credit for the year (1,049) (1,034)
* adjustments in respect of prior years 955 (57)
--------------------------------------------- -------- --------
15,137 12,072
--------------------------------------------- -------- --------
The tax charge is calculated based on our best estimate of the
amount payable as at the balance sheet date. Any subsequent
differences between these estimates and the actual amounts paid are
recorded as adjustments in respect of prior years.
The tax charge on profit for the year is higher (2017: higher)
than the standard rate of corporation tax in the UK of 19.0% (2017:
19.2%). The differences are explained below:
2018 2017
GBP'000 GBP'000
--------------------------------------------------------- -------- --------
Tax on profit from ordinary activities at the standard
rate of 19.0% (2017: 19.2%) effects of: 11,650 11,338
* disallowable expenses 1,210 1,045
* share-based payments 211 (79)
* tax on overseas earnings (190) (230)
* adjustments in respect of prior year (644) (360)
* deferred payments to previous owners of acquired
companies 2,904 247
* other (36) (28)
Effect of change in corporation tax rate on deferred tax 32 139
--------------------------------------------------------- -------- --------
15,137 12,072
--------------------------------------------------------- -------- --------
The effect of disallowable expenses relate to certain operating
expenses, which are not deductible for tax purposes. The most
significant of these expenses relate to legal and professional fees
associated with the acquisition of Speirs & Jeffrey (tax impact
of GBP575,000) and client entertaining (tax impact of
GBP307,000).
6 Dividends
2018 2017
GBP'000 GBP'000
------------------------------------------------------------- -------- --------
Amounts recognised as distributions to equity holders
in the year:
* final dividend for the year ended 31 December 2017 of
39.0p (2016: 36.0p) per share 19,858 18,236
* interim dividend for the year ended 31 December 2018
of 24.0p (2017: 22.0p) per share 12,833 11,184
------------------------------------------------------------- -------- --------
Dividends paid in the year of 63.0p (2017: 58.0p) per
share 32,691 29,420
------------------------------------------------------------- -------- --------
Proposed final dividend for the year ended 31 December
2018 of 42.0p (2017: 39.0p) per share 22,371 19,245
------------------------------------------------------------- -------- --------
An interim dividend of 24.0p per share was paid on 2 October
2018 to shareholders on the register at the close of business on 7
September 2018 (2017: 22.0p).
A final dividend declared of 42.0p per share (2017: 39.0p) is
payable on 14 May 2019 to shareholders on the register at the close
of business on 20 April 2019. The final dividend is subject to
approval by shareholders at the Annual General Meeting on 9 May
2019 and has not been included as a liability in the financial
statements.
7 Distributable reserves
Reserves of Rathbone Brothers Plc available for distribution as
at 31 December were comprised as follows:
2018 2017
GBP'000 GBP'000
------------------------------------------------ --------- ---------
Net assets of Rathbone Brothers Plc 301,870 209,589
Less:
* share capital (2,760) (2,566)
* share premium (230,223) (143,089)
------------------------------------------------ --------- ---------
Distributable reserves of Rathbone Brothers Plc 68,887 63,934
------------------------------------------------ --------- ---------
8 Earnings per share
Earnings used to calculate earnings per share on the bases
reported in the financial statements were:
2018 2017
-------- -------- --------
Pre-tax Taxation Post-tax Pre-tax Taxation Post-tax
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------------------------- -------- -------- -------- -------- -------- --------
Underlying profit attributable to shareholders 91,558 (17,388) 74,170 87,520 (17,426) 70,094
Gain on plan amendment of defined benefit
pension schemes - - - 5,523 (1,063) 4,460
Charges in relation to client relationships
and goodwill (13,188) 2,506 (10,682) (11,716) 2,255 (9,461)
Acquisition-related costs (19,925) 289 (19,636) (6,178) 944 (5,234)
Head office relocation costs 2,861 (544) 2,317 (16,248) 3,218 (13,030)
----------------------------------------------- -------- -------- -------- -------- -------- --------
Profit attributable to shareholders 61,306 (15,137) 46,169 58,901 (12,072) 46,829
----------------------------------------------- -------- -------- -------- -------- -------- --------
Basic earnings per share has been calculated by dividing profit
attributable to shareholders by the weighted average number of
shares in issue throughout the year, excluding own shares, of
52,050,979 (2017: 50,493,984).
Diluted earnings per share is the basic earnings per share,
adjusted for the effect of contingently issuable shares under the
Executive Incentive Plan, employee share options remaining capable
of exercise and any dilutive shares to be issued under the Share
Incentive Plan, all weighted for the relevant period:
2018 2017
------------------------------------------------------------- ---------- ----------
Weighted average number of ordinary shares in issue during
the year - basic 52,050,979 50,493,984
Effect of ordinary share options/Save As You Earn 148,564 188,549
Effect of dilutive shares issuable under the Share Incentive
Plan 474 59,030
Effect of contingently issuable shares under the Executive
Incentive Plan 375,759 228,702
Effect of contingently issuable shares under S&J contingent
consideration 1,006,522 -
------------------------------------------------------------- ---------- ----------
Diluted ordinary shares 53,582,298 50,970,265
------------------------------------------------------------- ---------- ----------
2018 2017
-------------------------------------------------------- ------ ------
Earnings per share for the year attributable to equity
holders of the company:
* basic 88.7p 92.7p
* diluted 86.2p 91.9p
Underlying earnings per share for the year attributable
to equity holders of the company:
* basic 142.5p 138.8p
* diluted 138.4p 137.5p
-------------------------------------------------------- ------ ------
9 Business combinations
Speirs & Jeffrey
On 31 August 2018, the group acquired 100% of the ordinary share
capital of Speirs & Jeffrey Limited ('Speirs &
Jeffrey').
Speirs & Jeffrey has operated as an independent investment
management firm for over a century and has established many long
term client relationships, with nearly three quarters of clients
having been with the company for over 10 years. All of Speirs &
Jeffrey's current directors and investment managers have joined the
group.
The acquisition of Speirs & Jeffrey will enable Rathbones to
establish a much stronger presence in Scotland, with Glasgow
becoming the group's largest office after London following the
transaction. In turn, Speirs & Jeffrey's clients will benefit
from access to Rathbones' broader product and service offering
including lending, financial planning and dedicated specialist
offerings such as Rathbones' charities team and ethical investment
capability.
The group expects to capture scale benefits from ongoing
investment in technology and the management of regulatory change
for the benefit of its clients, staff and shareholders. Meaningful
revenue synergies are expected to be achieved over time by
leveraging the strength of Rathbones' brand and complementary
product offering and aligning the Speirs & Jeffrey service
proposition with that of Rathbones.
Consideration transferred
The following table summarises the acquisition date fair value
of each class of consideration transferred:
GBP'000
------------------------------------- -------
Cash consideration 88,374
Contingent consideration (see below) 1,050
------------------------------------- -------
Total consideration 89,424
------------------------------------- -------
Cash consideration comprises an initial cash payment of
GBP78,725,000, paid on 31 August 2018, and a payment for regulatory
capital surplus of GBP9,649,000, paid in two parts on 31 August
2018 and 25 October 2018.
Contingent consideration
Contingent consideration of GBP1,050,000 is payable during 2019
to vendors who are not required to remain in employment with the
group. The payment is subject to performance against certain
operational targets, and is either payable in full or not at all,
dependent on whether the targets are met. The amount capitalised
represents the maximum amount payable, as the group believe the
targets will be met.
As the payment is due within one year, the consideration has not
been discounted. The contingent consideration payment will be made
100% in shares.
Other deferred payments
The sale and purchase agreement details other deferred and
contingent payments to be made to vendors for the sale of the
shares of Speirs & Jeffrey. However, these payments require the
vendors to remain in employment with the group for the duration of
the respective deferral periods. Hence, they are being treated as
remuneration for post-combination services and the cost charged to
profit and loss over the respective vesting periods. Details of
each of these elements is as follows:
Grant date
Gross amount fair value Expected vesting
GBP'000 Grant date GBP'000 date
---------------------------- ------------ ---------- ----------- -------------------
31 August
Initial share consideration 25,000 2018 23,462 31 August 2021
31 August
Contingent consideration 13,950 2018 14,036 31 March 2019
31 August
Earn Out consideration 16,320 2018 16,570 31 December 2020/21
---------------------------- ------------ ---------- ----------- -------------------
All of these payments are to be made 100% in shares and are
being accounted for as equity-settled share-based payments under
IFRS 2.
- Initial share consideration of GBP25,000,000 was payable on
completion. However, although the shares were issued on the date of
acquisition, they do not vest until the third anniversary of the
acquisition date, subject to the vendors remaining employed until
this date.
- Contingent consideration of GBP13,950,000 is payable subject
to the performance against the same operational targets described
above, as well as the vendors remaining in employment with the
group until the targets are met.
- Earn Out consideration of GBP16,320,000 is payable in two
parts in the third and fourth years following the acquisition date.
Payment is subject to the delivery of certain operational and
financial performance targets. The gross amount represents
management's best estimate as to the extent to which these targets
will be achieved. The maximum amount payable under this element,
which represents a considerable stretch against the targets, is
GBP98,210,000.
Incentive plans are also in place for non-sellers, which are
subject to the same operational and financial performance targets
as the earn out consideration for the vendors.
The charge recognised in profit or loss for the year ended 31
December 2018 for the above elements is as follows:
GBP'000
-------------------------------------------------- -------
Initial share consideration 2,607
Contingent consideration 8,021
Earn Out consideration and incentivisation awards 4,086
-------------------------------------------------- -------
14,714
-------------------------------------------------- -------
These costs are being reported as staff costs within
acquisition-related costs.
Acquisition-related costs
Costs of GBP2,465,000 for legal and advisory fees and GBP653,000
for stamp duty have been recognised in acquisition-related costs in
the year in relation to this transaction.
Identifiable assets acquired and liabilities assumed
The acquired business' identifiable net assets at the
acquisition date were as follows:
Carrying Fair value Recognised
amounts adjustments values
31 August 2018 GBP'000 GBP'000 GBP'000
-------------------------------------------------- -------- ------------ ----------
Property, plant and equipment 943 - 943
Trade and other receivables 3,318 - 3,318
Intangible assets - 54,337 54,337
Loans and advances to banks 15,462 - 15,462
Loans and advances to customers 2,274 - 2,274
Investment securities - fair value through profit
or loss 1,254 - 1,254
Trade and other payables - - -
Accruals and other liabilities (6,850) - (6,850)
Deferred tax liabilities (140) (9,261) (9,401)
Contingent liabilities - - -
-------------------------------------------------- -------- ------------ ----------
Total net assets acquired 16,261 45,076 61,337
-------------------------------------------------- -------- ------------ ----------
The fair value of acquired trade and other receivables and loans
and advances to banks is equal to the contractual amounts
receivable, all of which were expected to be collected at the
acquisition date.
The fair value of Speirs & Jeffrey's client relationship
intangible assets has been measured using a multi-period excess
earnings method. The model uses estimates of client longevity,
investment performance and the level of activity driving commission
income to derive a forecast series of cash flows, which are
discounted to a present value to determine the fair value of the
client relationships acquired.
The fair value of all other net assets acquired were equal to
their carrying value.
Goodwill
Goodwill arising from the acquisition has been recognised as
follows:
GBP'000
----------------------------------------------------------- --------
Total consideration (see above) 89,424
Fair value of identifiable net assets acquired (see above) (61,337)
----------------------------------------------------------- --------
28,087
----------------------------------------------------------- --------
Goodwill of GBP28,087,000 arises as a result of the acquired
workforce, expected future growth as well as operational and
revenue synergies arising post integration. Any impairment of
goodwill in future periods is not expected to be deductible for tax
purposes.
During the 4 months to 31 December 2018, Speirs & Jeffrey
contributed to the group's operating income of GBP8,682,000 and
profit before tax of GBP2,846,000 to the group's consolidated
statement of comprehensive income for the year ended 31 December
2018.
If the group had made the acquisition on 1 January 2018, the
group operating income and profit before tax would have been
GBP332,626,000 and GBP64,925,000 respectively.
10 Related party transactions
Transactions with key management personnel
The remuneration of the key management personnel of the group,
who are defined as the company's directors and other members of
senior management who are responsible for planning, directing and
controlling the activities of the group, is set out below.
Gains on options exercised by directors during the year totalled
GBP19,000 (2017: GBPnil).
2018 2017
GBP'000 GBP'000
----------------------------- -------- --------
Short term employee benefits 12,434 10,951
Post-employment benefits 184 327
Other long term benefits 2,934 2,425
Share-based payments 5,640 2,187
----------------------------- -------- --------
21,192 15,890
----------------------------- -------- --------
Dividends totalling GBP247,000 were paid in the year (2017:
GBP408,000) in respect of ordinary shares held by key management
personnel and their close family members.
As at 31 December 2018, the group had outstanding interest-free
season ticket loans of GBPnil (2017: GBP6,000) issued to key
management personnel.
At 31 December 2018, key management personnel and their close
family members had gross outstanding deposits of GBP778,000 (2017:
GBP4,059,000) and gross outstanding banking loans of GBPnil (2017:
GBP728,000), all of which (2017: all) were made on normal business
terms. A number of the group's key management personnel and their
close family members make use of the services provided by companies
within the group. Charges for such services are made at various
staff rates.
Other related party transactions
At 31 December 2018, no amounts were outstanding with either the
Laurence Keen Scheme or the Rathbone 1987 Scheme (2017:
GBPnil).
One group subsidiary, Rathbone Unit Trust Management, has
authority to manage the investments within a number of unit trusts.
Another group company, Rathbone Investment Management
International, acted as investment manager for a protected cell
company offering unitised private client portfolio services. During
2018, the group managed 27 unit trusts, Sociétés d'Investissement à
Capital Variable (SICAVs) and open-ended investment companies
(OEICs) (together, 'collectives') (2017: 27 unit trusts and
OEICs).
The group charges each fund an annual management fee for these
services, but does not earn any performance fees on the unit
trusts. The management charges are calculated on the bases
published in the individual fund prospectuses, which also state the
terms and conditions of the management contract with the group.
The following transactions and balances relate to the group's
interest in the unit trusts:
2018 2017
Year ended 31 December GBP'000 GBP'000
---------------------------------- -------- --------
Total management fees 37,608 35,525
---------------------------------- -------- --------
2018 2017
As at 31 December GBP'000 GBP'000
---------------------------------- -------- --------
Management fees owed to the group 3,629 3,266
Holdings in unit trusts 3,205 2,565
---------------------------------- -------- --------
6,834 5,831
---------------------------------- -------- --------
Total management fees are included within 'fee and commission
income' in the consolidated statement of comprehensive income.
Management fees owed to the group are included within 'accrued
income' and holdings in unit trusts are classified as 'fair value
through profit or loss equity securities' in the consolidated
balance sheet. The maximum exposure to loss is limited to the
carrying amount on the balance sheet as disclosed above.
All amounts outstanding with related parties are unsecured and
will be settled in cash. No guarantees have been given or received.
No provisions have been made for doubtful debts in respect of the
amounts owed by related parties.
11 Consolidated statement of cash flows
For the purposes of the consolidated statement of cash flows,
cash and cash equivalents comprise the following balances with less
than three months until maturity from the date of acquisition:
2018 2017
GBP'000 GBP'000
-------------------------------------------------------- --------- ---------
Cash and balances at central banks 1,197,001 1,374,002
Loans and advances to banks 136,203 87,009
Fair value through profit or loss investment securities 75,333 106,747
-------------------------------------------------------- --------- ---------
At 31 December 1,408,537 1,567,758
-------------------------------------------------------- --------- ---------
Fair value thought profit or loss investment securities are
amounts invested in money market funds, which are realisable on
demand.
Cash flows arising from issuing ordinary shares comprise:
2018 2017
GBP'000 GBP'000
----------------------------------------------------------- -------- --------
Share capital issued 194 31
Share premium on shares issued 87,134 3,098
Shares issued in relation to share-based schemes for which
no cash consideration was received (29,888) (441)
57,440 2,688
----------------------------------------------------------- -------- --------
A reconciliation of the movements of liabilities to cash flows
arising from financing activities were as follows:
Liabilities Equity
------------ ------------------------------
Share
Subordinated capital/ Retained
loan notes premium Reserves earnings Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------------------- ------------ --------- -------- --------- --------
At 31 December 2017 19,695 145,655 27,221 190,402 382,973
Adjustment on initial application
of IFRS 9 (net of tax) - - (250) 102 (148)
Adjustment on initial application
of IFRS 15 (net of tax) - - - 8,443 8,443
-------------------------------------- ------------ --------- -------- --------- --------
At 1 January 2018 19,695 145,655 26,971 198,947 391,268
Changes from financing cash flows
Proceeds from issue of share capital - 87,328 - - 87,328
Proceeds from sale of treasury shares - - (27,873) (2,015) (29,888)
Dividends paid - - - (32,691) (32,691)
-------------------------------------- ------------ --------- -------- --------- --------
Total changes from financing cash
flows - 87,328 (27,873) (34,706) 24,749
-------------------------------------- ------------ --------- -------- --------- --------
The effect of changes in foreign
exchange rates - - - - -
-------------------------------------- ------------ --------- -------- --------- --------
Changes in fair value - - - - -
-------------------------------------- ------------ --------- -------- --------- --------
Other changes
Liability-related
Interest expense 1,283 - - - 1,283
Interest paid (1,171) - - - (1,171)
-------------------------------------- ------------ --------- -------- --------- --------
Total liability-related changes 112 - - - 112
-------------------------------------- ------------ --------- -------- --------- --------
Total equity-related other changes - - - 67,818 67,818
-------------------------------------- ------------ --------- -------- --------- --------
At 31 December 2018 19,807 232,983 (902) 232,059 483,947
-------------------------------------- ------------ --------- -------- --------- --------
Liabilities Equity
------------ -----------------------------------
Subordinated Share capital/ Retained
loan notes premium Reserves earnings Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------- ------------ -------------- -------- --------- --------
At 1 January 2017 19,590 142,526 25,742 156,545 344,403
Changes from financing cash flows
Proceeds from issue of share capital - 3,129 - - 3,129
Proceeds from sale of treasury
shares - - 1,379 (1,820) (441)
Dividends paid - - - (29,420) (29,420)
------------------------------------- ------------ -------------- -------- --------- --------
Total changes from financing cash
flows - 3,129 1,379 (31,240) (26,732)
------------------------------------- ------------ -------------- -------- --------- --------
The effect of changes in foreign
exchange rates - - - - -
------------------------------------- ------------ -------------- -------- --------- --------
Changes in fair value - - - - -
------------------------------------- ------------ -------------- -------- --------- --------
Other changes
Liability-related
Interest expense 1,276 - - - 1,276
Interest paid (1,171) - - - (1,171)
------------------------------------- ------------ -------------- -------- --------- --------
Total liability-related changes 105 - - - 105
------------------------------------- ------------ -------------- -------- --------- --------
Total equity-related other changes - - 100 65,097 65,197
------------------------------------- ------------ -------------- -------- --------- --------
At 31 December 2017 19,695 145,655 27,221 190,402 382,973
------------------------------------- ------------ -------------- -------- --------- --------
12 Events after the balance sheet date
There have been no material events occurring between the balance
sheet date and the date of signing this report.
13 Financial information
The financial information set out in this preliminary
announcement has been extracted from the Group's financial
statements, which have been approved by the Board of directors and
agreed with the Company's auditor.
The financial information set out above does not constitute the
Company's statutory financial statements for the years ended 31
December 2018 or 2017. Statutory financial statements for 2017 have
been delivered to the Registrar of Companies. Statutory financial
statements for 2018 will be delivered to the Registrar of Companies
following the Company's Annual General Meeting. The auditor has
reported on both the 2017 and 2018 financial statements. Their
reports were unqualified and did not draw attention to any matters
by way of emphasis. They also did not contain statements under
Section 498 of the Companies Act 2006.
14 Forward-looking statements
This announcement contains certain forward-looking statements,
which are made by the directors in good faith based on the
information available to them at the time of their approval of the
2018 annual report. Statements contained within this announcement
should be treated with some caution due to the inherent
uncertainties (including but not limited to those arising from
economic, regulatory and business risk factors) underlying any such
forward-looking statements. This announcement has been prepared by
Rathbone Brothers Plc to provide information to its shareholders
and should not be relied upon for any other purpose.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR PGUCGPUPBGBU
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