Annual Report 2013 Close Brothers Group plc Close Brothers Close Brothers Group plc Annual Report 2013 Close Brothers makes loans, trades securities and provides financial advice and investment management services. Corporate Overview 1 Financial Highlights 2 Our Business 4 Chairman’s and Chief Executive’s Statement 8 Business Model 10 Strategy and Key Performance Indicators Business Review 12 Financial Overview 18 Banking 20 Securities 22 Asset Management 24 Principal Risks and Uncertainties Governance 28 Board of Directors 30 Executive Committee 31 Report of the Directors 33 Corporate Governance 44 Corporate Responsibility 47 Report of the Board on Directors’ Remuneration Financial Statements 61 Report of the Auditor 62 Consolidated Income Statement 63 Consolidated Statement of Comprehensive Income 64 Consolidated Balance Sheet 65 Consolidated Statement of Changes in Equity 66 Consolidated Cash Flow Statement 67 Company Balance Sheet 68 The Notes 112 Investor Relations 112 Cautionary Statement Close Brothers Group plc 1 Annual Report 2013 Corporate Overview Financial Highlights for the year ended 31 July 2013 Adjusted operating profit £166.5m 8 3.1p £ million (2012: £134.2m) (2012: 67.3 p) 200 166.5 1 2 160 Adjusted operating profit Adjusted basic earnings 131.2 134.2 113.7 116.5 per share 120 80 40 0 £16 3.1m 81.6p 2009 2010 2011 2012 2013 (2012: £134.9m) (2012: 68.6p) Adjusted basic earnings per Operating profit before tax Basic earnings per share share pence 90 83.1 67.3 60.5 64.8 £119.4m 44.5p 60 58.2 30 (2012: £99.7m) (2012: 41.5p) 0 Profit attributable to shareholders Ordinary dividend per share3 2009 2010 2011 2012 2013 Ordinary dividend per share 1 Stated before exceptional items and amortisation of intangible assets on acquisition. pence 2 Stated before exceptional items and amortisation of intangible assets on acquisition and the tax effect of such adjustments. 3 Represents the final dividend proposed for the respective years together with the 50 44.5 interim dividend declared and paid in those years. 40.0 41.5 40 39.0 39.0 30 20 10 0 2009 2010 2011 2012 2013 Book 1.indb 1 24/09/2013 17:14 2 Close Brothers Group plc Annual Report 2013 Corporate Overview Our Business Close Brothers makes loans, trades securities and provides financial advice and investment management services. We were established in 1878 and since then have held true to the principles of merchant banking – supporting small businesses and individuals through all conditions. Today we employ over 2,500 people, principally in the UK. We are listed on the London Stock Exchange and a member of the FTSE 250. Banking The Banking division provides specialist The Treasury function provides funding finance solutions through our three lending for the group’s lending activities through The Banking division provides specialist business units: Retail, which provides corporate deposits and retail savings lending to small and medium-sized point of sale finance for cars, motorcycles products, as well as wholesale funding. businesses and individuals across a and light commercial vehicles through diverse range of asset classes, and also motor dealers and specialist financing of offers deposit taking services. insurance premiums through brokers; Commercial, which provides asset finance across a broad range of asset classes including commercial vehicles, plant, machinery and construction equipment as well as invoice factoring and discounting; and Property, which provides short-term financing principally for residential property development and bridging loans. Securities Winterflood is a leading market-maker to Close Brothers Seydler Bank AG, based the UK private client broker community, in Frankfurt, offers securities and capital The Securities division provides trading serving over 450 brokers and financial markets services focused on German services to retail brokers and institutions institutions. We deal in over 15,000 UK and mid-sized companies. principally through Winterflood, a leading international securities and have access to market-maker in the UK. all major exchanges and Multilateral Trading Facilities as well as our own internal liquidity pool, and offer guaranteed best execution to our clients. The experience and expertise of our traders along with prudent and conservative risk limits allow us to provide continuous liquidity to our clients and trade profitably in all market conditions. Asset Management We employ around 130 advisers and Our investment management follows a 50 investment professionals and service global, multi-asset investment approach. The Asset Management division provides clients either through personal face-to- We offer a broad range of directly invested, advice, investment management and self face relationships or via telephone or multi-manager and passive funds, directed services to private and corporate online support. separately managed accounts and fully clients and professional advisers. bespoke portfolio management through Our financial advice helps clients to both our own advisers and third party IFAs. achieve their specific financial and lifestyle goals by covering areas such as Our self-directed investment portal investment strategy, tax efficiency, pension enables investors to manage their own and retirement planning, protection and investments using our technology intergenerational planning. platform. Book 1.indb 2 24/09/2013 17:14 Close Brothers Group plc 3 Annual Report 2013 Banking adjusted operating profit £ million 160 157.8 135.0 128 106.3 96 79.5 64 54.0 32 0 2009 2010 2011 2012 2013 Securities adjusted operating profit £ million 80 64.9 64 59.3 54.8 48 32 24.5 25.7 16 0 2009 2010 2011 2012 2013 Asset Management adjusted operating profit/(loss) £ million 15 12.0 10 5 4.0 (1.5) (8.6) (4.3) 0 -5 -10 2009 2010 2011 2012 2013 Book 1.indb 3 24/09/2013 17:14 4 Close Brothers Group plc Annual Report 2013 Corporate Overview Chairman’s and Chief Executive’s Statement Strone Macpherson, Chairman We are pleased to report another year of significant progress Strong Financial Performance The financial year was again shaped by for the group. We have delivered a strong set of financial a subdued economic environment, with slow growth and events in the Eurozone results, reflecting the strength and stability of our simple, continuing to impact sentiment. Against prudent business model in a period of continued economic this challenging backdrop we had a strong year with good growth in both revenues uncertainty. We have continued to build on our successful and profit. Adjusted operating income track record of earnings growth, supporting our strong capital increased 10% to £582.9 million (2012: £531.7 million) and adjusted operating position and enabling us to continue to grow the dividend. profit increased 24% to £166.5 million (2012: £134.2 million), reflecting strong growth in Banking and a return to profitability in Asset Management. Adjusted basic earnings per share increased 23% to 83.1p (2012: 67.3p), while basic earnings per share increased 19% to 81.6p (2012: 68.6p). Overall the group’s return on opening equity improved to 16% (2012: 12%). Book 1.indb 4 24/09/2013 17:14 Close Brothers Group plc 5 Annual Report 2013 Preben Prebensen, Chief Executive The group has maintained a strong capital Simple Business Model and Clear, achieving consistently high returns. During and funding base to support growth, Consistent Strategy the 2013 financial year, the loan book with all ratios remaining well ahead of We continue to benefit from our focus on increased 13% to £4.6 billion (31 July regulatory requirements. During the year, our core business activities in areas where 2012: £4.1 billion), the net interest margin our core tier 1 capital ratio improved to we have significant expertise, and we have remained strong at 8.8% (2012: 9.4%) and 13.3% (31 July 2012: 12.8%), and our always set ourselves apart through our the bad debt ratio continued to improve to leverage ratio also increased slightly to 9.8% prudent and conservative approach to 1.2% (2012: 1.5%). As a result we (31 July 2012: 9.7%). We expect to meet managing our balance sheet and capital maintained a good return on net loan all regulatory requirements of the Basel III position. We have continued to support book of 3.6% (2012: 3.6%). The division capital framework being implemented in our customers through a range of continues to generate strong profit growth Europe under CRD IV. economic conditions and overall our with adjusted operating profit increasing strategy has remained unchanged. 17% to £157.8 million (2012: £135.0 million) Dividend in the year. Recognising our strong financial Our Banking division continues to maintain performance in the year and continued its distinctive, specialist, local lending Our Securities division has remained confidence in our longer-term prospects, model and our loan book is differentiated consistently profitable throughout the the board is recommending a 2.0p by being predominantly secured, small cycle, demonstrating its resilience in increase in the final dividend to 29.5p (2012: ticket and short term. By staying focused difficult trading conditions. In the year, 27.5p) per share. This results in a full year on this model in all market conditions, we despite continued low investor risk dividend per share of 44.5p (2012: 41.5p), have maintained good growth while appetite, the division’s adjusted operating up 7%. Book 1.indb 5 24/09/2013 17:14 6 Close Brothers Group plc Annual Report 2013 Corporate Overview Chairman’s and Chief Executive’s Statement continued profit increased 5% to £25.7 million (2012: Over the years we have remained In Asset Management we have built a £24.5 million) and Winterflood’s adjusted differentiated through our distinctive client strong national presence, having fully operating profit increased 6% to £16.9 proposition, and the way we do business integrated the regional businesses acquired million (2012: £16.0 million).