25th Sep 2006 07:04
Close Brothers Group PLC25 September 2006 Embargoed for release 7.00 am on Monday 25th September, 2006 CLOSE BROTHERS GROUP plc The specialist merchant banking group FINAL RESULTS 2006 (under International Financial Reporting Standards) Financial Highlights 2005 2006 * Profit before goodwill and taxation £129m £157m +21% * Earnings per share before goodwill 62.0p 74.1p +19% * Profit before taxation £112m £157m +41% * Earnings per share 49.8p 74.1p +49% * Dividends per share 28.5p 32.5p +14% * Shareholders' funds £578m £662m +15% * Total assets £4.8bn £4.8bn Operational Highlights * Asset Management profit up 21% to £38 million. FuM up 16% to £8.2 billion. * Corporate Finance record profit of £17 million. * Securities profit up 34% to £48 million. * Banking record profit of £74 million and bad debts remained well contained. Colin Keogh, Chief Executive, commenting on the results said: "We achieved a record profit in 2006 in a year in which the economic climate wasrelatively benign and stock markets performed well. Looking forward, the general UK political and economic outlook is becomingsomewhat opaque, with risks perhaps more on the downside (interest rates,inflation and consumer debt) than the upside. All our businesses have started the new year in good shape and, regardless ofthe short term economic climate, our confidence in our long term growthprospects remains strong." Enquiries to: Colin Keogh Close Brothers Group plc 020 7426 4000 Rupert Young Brunswick Group LLP 020 7404 5959 Webcast video interview with Colin Keogh, Chief Executive, Close Brothers Groupplc at www.closebrothers.co.uk and www.cantos.com CLOSE BROTHERS GROUP plc PRELIMINARY ANNOUNCEMENT OF AUDITED GROUP RESULTS AND CHAIRMAN'S AND CHIEF EXECUTIVE'S STATEMENT FOR THE YEAR ENDED 31ST JULY, 2006 The following is the full text of the preliminary announcement of results forthe financial year ended 31st July, 2006. The financial information in relationto 31st July, 2006 has been extracted from the statutory accounts of thecompany, which have yet to be adopted by shareholders at general meeting andhave yet to be filed with the Registrar of Companies. CHAIRMAN'S AND CHIEF EXECUTIVE'S STATEMENT 2006 was an excellent year for Close Brothers with group profit before goodwilland taxation of £157 million (2005: £129 million), up 21%, and earnings pershare before goodwill up 19% to 74.1p (2005: 62.0p). There was no goodwillimpairment this year (2005: £18 million). In the light of these results, the board, which continues to pursue aprogressive dividend policy, recommends an increased final dividend of 22.0p pershare which, together with the interim dividend, makes a total dividend for theyear of 32.5p per share (2005: 28.5p). These financial statements reflect for the first time the application ofInternational Financial Reporting Standards. Comparative figures have beenadjusted accordingly. The effect on our opening balance sheet was not material.Our profit now includes a charge for share-based remuneration of £3 million(2005: £2 million) but no charge for goodwill amortisation. OVERVIEW After four consecutive years of earnings growth we were delighted to achieve thegroup's best ever profit. Asset management, corporate finance and banking allexceeded previous records whilst the securities division produced its highestcontribution since the dot com era. Operating income increased 20%, operatingmargin remained high at 29% and costs remained under firm control with theexpense/income ratio steady at 67%. Overall pre-tax return before goodwillimpairment on opening capital was 27% (2005: 24%). In broad terms, market conditions were favourable for our investment bankingbusinesses but were more challenging for banking although the credit quality ofour loan book remained good. The divisional mix of our operating profit before central costs is shown in thetable below. 04 05 06 % % %Asset Management 13 21 22Corporate Finance 7 7 9Securities 28 24 27Banking 52 48 42------------------------------------------------------------------------------ 100 100 100------------------------------------------------------------------------------ To continue to achieve our goal of delivering long term profit and dividendgrowth to our shareholders, we have continued to invest in new initiatives. Our asset management division is implementing a major re-shaping and re-brandingexercise following some significant recruitment. The banking division has alsorecruited further specialist teams and is developing new products to exploit themortgages market. On the acquisition front, after an active 2005, this year has been quieter, theonly transaction completed being the purchase of a 70% holding in Fortune, aLondon based fund of hedge funds business, from its management. Whilst a numberof opportunities became available during the year, we maintain a disciplinedapproach to valuation and will only invest where we see real future value. Wewere encouraged this year by the successful integration of, and strongperformances from, all of the deals completed in the previous year withexceptional results being achieved by our new broker dealer in Frankfurt. Our strategic priorities are to continue to build on the recent strong progressin asset management and to return the growth rate in our banking division to itslong term trend. Our securities businesses have strong positions in theirrespective markets and we see continuing demand for the independent adviceoffered by our corporate finance business. We constantly look for acquisition opportunities to strengthen our existingmarket positions and to take the group into new areas of growth. Asset ManagementOur asset management division had another good year with further profit growthand pleasing strategic progress. Profit rose by 21% to £38 million and our fundsunder management by 16% to £8.2 billion. On the private client side we saw good growth in profit both on and off shore aswe continued to reap the benefits of the earlier reorganisation of our businessunits. We strengthened our new business development capability and we bolsteredour team of private client fund managers. Over the coming year we will bebringing together our private client businesses on and off shore under onebrand, Close Wealth Management Group. This will create a solid platform forfurther growth. Considerable progress was made in our funds business this year. We announced inApril 2006 that we had acquired 70% of Fortune. This acquisition broadens ourexposure to alternative asset and multi-manager classes, an important strategicobjective, as well as taking us into an area which we believe will be ofincreasing interest and importance to both private and institutional clients. Inthe coming year we will be regrouping certain of our funds' activities togetherunder the Close Investments banner. We expect this to result in more productiveand cost-effective distribution. Our private equity business had a record year and we expect continued strongperformance in this area. We remain excited by the prospects for this division. Corporate Finance Corporate finance had an excellent year with profit up 67% to £17 million.London, Frankfurt and Paris all delivered record performances. The major part ofthis growth came from mergers and acquisitions work where markets have beenbuoyant. The other two areas of our business, debt advice and restructuring,have also been busy with our market position and expertise in the latter nowrecognised as amongst the best in Europe. The division has also won a number ofindustry awards for successfully completed transactions. Our opening pipeline is, once again, healthy. Securities Our securities businesses did well with operating profit up 34% to £48 million. Winterflood Securities, our UK market-making business which sits at the heart ofretail equity and bond trading in London, had a successful year in generallystrong markets. Bargain numbers were up significantly on last year although theprofit per bargain decreased somewhat. Nevertheless, operating margin heldsteady at 37% on increased income. Close Brothers Seydler, our Frankfurt based broker dealer, had an outstandingfirst full year in the group, with pre-tax profit of £9 million. This was anexcellent return on our cost of £21 million. Our business has thrived as Germaninvestor interest has recovered strongly on the back of rising equity marketsand as the new issues market has returned to life. Our new financial year has got off to a reasonable start, better in London thanFrankfurt, but trading levels are lower than last year. Banking Banking profit was up 6% to £74 million on a loan book of £1.9 billion which wasslightly down on last year. Bad debts remained well contained and provisions asa percentage of the average loan book were 1.0%, an historically low level.Banking continues to provide a high divisional operating margin, which remainedsteady at 37%. The planned and profitable run off of a motor finance book acquired last yearwas the principal cause of this small reduction in our loan book. Good growth ina number of areas, particularly property finance and invoice finance, helped tomitigate the effect of insurance premium deflation and the contraction of ourprint finance business. We are not anticipating any immediate improvement in our premium financebusiness where cyclical premium deflation continues, albeit at a reduced rate.In the meantime, we can see attractive growth prospects in several of our otherspecialist financing businesses and we have a number of interesting newinitiatives under way. BOARD CHANGES As previously announced Sir David Scholey will be retiring from the board at theconclusion of our forthcoming Annual General Meeting. After a thorough selectionprocess assisted by external consultants, Sir David will be succeeded aschairman by Mr. Roderick Kent, who served as managing director of Close Brothersfor 28 years until 2002 and as a non-executive director since then. Mr. Strone Macpherson, the senior independent director, will be appointed deputychairman following our forthcoming Annual General Meeting. Mr. Bruce Carnegie-Brown was appointed a non-executive director of the companyon 22nd June, 2006. We are pleased to welcome him to the board. Following these changes the board will comprise five executive directors and sixindependent non-executive directors, in addition to Mr. Kent as chairman. OUTLOOK We achieved a record profit in 2006 in a year in which the economic climate wasrelatively benign and stock markets performed well. Looking forward, the general UK political and economic outlook is becomingsomewhat opaque, with risks perhaps more on the downside (interest rates,inflation and consumer debt) than the upside. All our businesses have started the new year in good shape and, regardless ofthe short term economic climate, our confidence in our long term growthprospects remains strong. Sir David ScholeyChairman C.D. KeoghChief Executive CONSOLIDATED INCOME STATEMENT for the year ended 31st July, 2006 2006 2005 £'000 £'000 Interest and similar income 281,926 282,841Interest expense and similar charges 137,624 140,320------------------------------------------------------------------------------ Net interest income 144,302 142,521------------------------------------------------------------------------------ Fees and commissions income 302,919 228,055Fees and commissions expense (48,913) (36,396)Gains less losses arising from dealing in securities 122,339 96,285Other operating income 15,627 17,019------------------------------------------------------------------------------ Other income 391,972 304,963------------------------------------------------------------------------------ Operating income 536,274 447,484------------------------------------------------------------------------------ Administrative expenses 346,256 285,799Depreciation and amortisation 14,083 12,145Impairment losses on loans and advances 18,621 20,044------------------------------------------------------------------------------ Total operating costs 378,960 317,988------------------------------------------------------------------------------ Operating profit on ordinary activities before impairment losses on goodwill and taxation 157,314 129,496Impairment losses on goodwill - 17,735------------------------------------------------------------------------------ Operating profit on ordinary activities before taxation 157,314 111,761Taxation 45,280 37,152------------------------------------------------------------------------------ Profit on ordinary activities after taxation 112,034 74,609Profit attributable to minority interests 3,436 2,212------------------------------------------------------------------------------ Profit attributable to the shareholders of the company 108,598 72,397------------------------------------------------------------------------------ Basic earnings per share on profit attributable to shareholders 74.1p 49.8p Earnings per share before impairment losses on goodwill 74.1p 62.0p Diluted earnings per share 73.8p 49.6p Dividends per share 32.5p 28.5p All income and profits are in respect of continuing operations. CONSOLIDATED BALANCE SHEET at 31st July, 2006 2006 2005 £'000 £'000AssetsCash and balances at central banks 1,272 1,244Settlement accounts 628,305 604,692Loans and advances to customers 1,862,023 1,939,203Loans and advances to banks 510,691 786,330Money market securities 1,156,768 797,498Debt securities - long positions 67,066 61,345Equity shares - long positions 49,623 40,377Loans to money brokers against stock advanced 156,420 158,553Investment securities 43,682 27,384Intangible assets - goodwill 109,807 95,711Intangible assets - other 2,623 1,672Property, plant and equipment 42,549 38,277Share of gross assets of joint ventures 21,743 21,624Share of gross liabilities of joint ventures (20,818) (20,914)Share of net assets of joint ventures 925 710Other receivables 87,549 108,949Deferred taxation assets 25,362 28,976Prepayments and accrued income 63,135 64,398Derivative financial instruments 5,093 ------------------------------------------------------------------------------- Total assets 4,812,893 4,755,319------------------------------------------------------------------------------ LiabilitiesSettlement accounts 573,671 561,173Deposits by customers 1,843,074 1,818,187Deposits by banks 168,378 108,101Debt securities - short positions 54,554 49,628Equity shares - short positions 21,684 20,424Loans from money brokers against stock advanced 157,356 142,371Non-recourse borrowings 150,000 200,000Loans and overdrafts from banks 363,205 494,363Promissory notes and other debt securities in issue 358,014 367,130Other liabilities 219,673 182,817Current taxation liabilities 16,766 19,297Accruals and deferred income 136,791 138,444Subordinated loan capital 75,000 75,000Derivative financial instruments 12,370 ------------------------------------------------------------------------------- Total liabilities 4,150,536 4,176,935------------------------------------------------------------------------------ EquityCalled up share capital 36,603 36,168Share premium account 259,783 252,210Profit and loss account 346,714 279,044Other reserves 11,887 5,092Minority interests 7,370 5,870------------------------------------------------------------------------------ Total equity 662,357 578,384------------------------------------------------------------------------------ Total liabilities and equity 4,812,893 4,755,319------------------------------------------------------------------------------ CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31st July, 2006 2006 2005 £'000 £'000 Called up share capitalOpening balance 36,168 36,066Exercise of options 435 102------------------------------------------------------------------------------Closing balance 36,603 36,168------------------------------------------------------------------------------ Share premium accountOpening balance 252,210 250,430Exercise of options 7,573 1,780------------------------------------------------------------------------------Closing balance 259,783 252,210------------------------------------------------------------------------------ Profit and loss accountOpening balance 279,044 242,637Retained profit for the year 108,598 72,397Dividends (42,524) (39,240)IAS 39 adjustments at 1st August, 2005 (1,589) -Other reserve movements 3,185 3,250------------------------------------------------------------------------------Closing balance 346,714 279,044------------------------------------------------------------------------------ Other reserves:ESOP trust reserveOpening balance (3,786) (3,962)Shares purchased at cost (4,926) -Shares released at cost 410 176------------------------------------------------------------------------------Closing balance (8,302) (3,786)------------------------------------------------------------------------------ Share-based awards reserveOpening balance 7,614 4,285Charge to the income statement 3,307 1,940Movement relating to deferred share awards 887 1,389------------------------------------------------------------------------------Closing balance 11,808 7,614------------------------------------------------------------------------------ Exchange movements reserveOpening balance 1,264 -Currency translation differences (326) 1,264------------------------------------------------------------------------------Closing balance 938 1,264------------------------------------------------------------------------------ Cash flow hedging reserveOpening balance recorded for derivatives under IAS 39 at 1st August, 2005 (1,843)Movement on derivatives during the year 1,976--------------------------------------------------------------------Closing balance 133-------------------------------------------------------------------- Available-for-sale reserveOpening balance under IAS 39 at 1st August, 2005 3,431Movement on available-for-sale investments 3,879--------------------------------------------------------------------Closing balance 7,310-------------------------------------------------------------------- Total other reserves 11,887 5,092------------------------------------------------------------------------------ Minority interestsOpening balance 5,870 4,538Movement during the period 1,500 1,332------------------------------------------------------------------------------Closing balance 7,370 5,870------------------------------------------------------------------------------ Total equity 662,357 578,384------------------------------------------------------------------------------ CONSOLIDATED CASH FLOW STATEMENT for the year ended 31st July, 2006 2006 2005 Note £'000 £'000 Net cash inflow from operating activities 4(a) 153,418 307,161------------------------------------------------------------------------------ Net cash outflow from investing activities:Dividends paid to minority interests (1,669) (934)Purchase of assets let under operating leases (13,865) (11,213)Purchase of property, plant and equipment (8,121) (6,920)Sale of property, plant and equipment 4,155 1,685Purchase of intangible assets (2,447) (1,175)Purchase of equity shares held for investment (9,911) (7,523)Sale of equity shares held for investment 11,168 19,091Minority interests acquired for cash (2,853) (5,134)Purchase of loan book - (130,530)Purchase of subsidiaries 4(b) (11,258) (29,506)------------------------------------------------------------------------------ (34,801) (172,159)------------------------------------------------------------------------------ Net cash inflow before financing 118,617 135,002 Financing activities:Issue of ordinary share capital including premium 8,008 1,882Repayment of subordinated loan capital - (21,937)Equity dividends paid (42,524) (39,240)Interest paid on subordinated loan capital (5,616) (7,743)------------------------------------------------------------------------------ Net increase in cash 78,485 67,964------------------------------------------------------------------------------ In the directors' view, cash is an integral part of the group's operatingactivities, since it is a bank's stock in trade. Nevertheless, as required byInternational Accounting Standard No. 7, cash is not treated as cash flow fromoperating activities but is required to be shown separately in accordance withthe format above. THE NOTES 1. Accounting policies (a) Adoption of International Financial Reporting Standards The consolidated financial statements are prepared, for the first time, inaccordance with all relevant International Financial Reporting Standards("IFRS") adopted for use in the European Union and therefore comply with Article4 of EU Regulation. The date of transition to IFRS and the date of the openingIFRS balance sheet was 1st August, 2004. As allowed by IFRS 1, the group has notrestated its comparative consolidated income statement and balance sheet tocomply with IAS 32 and IAS 39. The company financial statements are prepared in accordance with Section 226 of,and Schedule 4 to, the Companies Act 1985 and with all relevant UK accountingstandards. Any differences in these standards from their IFRS counterparts arestated in the remainder of this note. (b) Accounting convention The consolidated financial statements have been prepared under the historicalcost convention, modified by the revaluation of financial assets and liabilitiesheld at fair value through profit or loss, available-for-sale financial assetsand all derivative contracts. The preparation of financial statements in accordance with IFRS requires the useof certain critical accounting estimates. It also requires management toexercise judgement in the process of applying the group's accounting policies.These notes set out areas involving a higher degree of judgement or complexityor areas where assumptions are significant to the financial statements. Theseareas are the fair value of financial assets and liabilities, impairment losseson loans and advances and goodwill. (c) Basis of consolidation The consolidated financial statements incorporate the individual financialstatements of Close Brothers Group plc, the company, and entities it controls(its subsidiaries). Control exists where the company has the power to govern thefinancial and operating policies of the entity. The acquisition method of accounting has been adopted for subsidiaries. Underthis method the assets, liabilities and contingent liabilities of a subsidiaryare measured at their fair values at the date of acquisition with the interestof minority shareholders stated at the minority's proportion of these amounts.Any excess of the cost of acquisition over these net assets is booked asgoodwill. The results of subsidiaries are included in the consolidated incomestatement up to the date of disposal. The consolidated financial statements consolidate the individual financialstatements of its associates using the equity method. All intra-group balances, transactions, income and expenses are eliminated onconsolidation. As allowed by IFRS 1, the group has not restated businesscombinations that took place before 1st August, 2004. (d) Net interest income Interest on loans and advances made by the group, and fee income and expense andother direct costs relating to loan origination, restructuring or commitmentsare recognised in the income statement using the effective interest rate method.This method applies a rate that discounts estimated future cash payments orreceipts to the net carrying amount of the financial instrument. Whencalculating the effective interest rate, the cash flows take into account allcontractual terms of the financial instrument including transaction costs andall other premiums or discounts but not future credit losses.Interest on impaired financial assets is recognised at the original effectiveinterest rate applied to the carrying amount as reduced by an allowance forimpairment. (e) Fees and commissions net income Where fees, that have not been included within the effective interest ratecalculation as described in note 1(d), are earned on the execution of asignificant act, such as fees arising from negotiating or arranging atransaction for a third party, they are recognised as revenue when that act hasbeen completed. Fees and corresponding expenses in respect of other services arerecognised in the income statement as the right to consideration or paymentaccrues through performance of services. To the extent that fees and commissionsare recognised in advance of billing they are included as accrued income orexpense. (f) Gains less losses arising from dealing in securities This includes the net gains arising from both buying and selling securities andfrom positions held in securities, including related interest income anddividends. (g) Loans and advances Loans and advances are recognised when cash is advanced to borrowers at costincluding any transaction costs. They are then amortised using the effectiveinterest rate method as explained in note 1(d). Loans and advances are statednet of provisions for impairment losses.Impairment provisions are made if there is objective evidence of impairment as aresult of one or more events regarding a significant loan or portfolio of loans("loans") occurring after its initial recording and which has an impact that canbe reliably estimated by management. For loans that are not considered individually significant, the group adopts aformulaic approach which allocates a loss rate which is dependent on the overdueperiod. Loss rates are based on the discounted expected future cash flows fromloans and are regularly benchmarked against actual outcomes to ensure that theyremain appropriate. The amount of the loss is measured as the difference between the loan's carryingamount and the present value of estimated future cash flows, excluding futurecredit losses that have not been incurred, discounted at original effectiveinterest rate. As the loan or portfolio amortises over its life, so theimpairment loss may amortise. All impairment losses are reviewed at least ateach reporting date. If subsequently the amount of the loss decreases as aresult of a new event, the outstanding impairment loss is correspondinglyreversed. (h) Finance leases, operating leases and instalment finance A finance lease is a lease or hire purchase contract that transferssubstantially all the risks and rewards incidental to ownership of an asset tothe lessee. Finance leases are recognised as loans at an amount equal to thegross investment in the lease discounted at its implicit interest rate. Financecharges on finance leases are taken to income in proportion to the net fundsinvested. Rental costs under other leases and hire purchase contracts are charged to theincome statement in equal annual amounts over the period of the leases. (i) Equity shares and debt securities The long and short positions in equity shares and debt securities are classifiedas held for trading and represent the aggregate of trading positions inindividual securities arising respectively from a net bought and net soldposition. They are valued at the dealers' bid and offer prices respectively atthe close of business. Other investments designated at inception under the fair value option are fairvalued through profit or loss at mid-market values if listed and at directors'valuation if unlisted, with gains and losses being included directly in theincome statement. Investments with fixed or determinable payments that are held with the intentionand ability to hold to maturity are classified as held-to-maturity. They areinitially recognised at fair value including direct and incremental transactioncosts and subsequently valued at amortised cost, using the effective interestrate method as explained in note 1(d). Investments classified as available-for-sale are recognised at fair value withchanges being accounted for through equity. If such an asset is sold or there isobjective evidence that it is impaired, the cumulative gains and lossesrecognised in equity are recycled to the income statement. Fair values areobtained from independent open market sources, discounted cash flow models basedon market rates or option pricing models. Equity shares held by the employee benefit trust are deducted in arriving atequity and realised surpluses and deficits are not taken to the incomestatement. (j) Depreciation Property, plant and equipment, including freehold investment properties held forlong term investment, and intangible assets other than goodwill, are stated atcost less accumulated depreciation or amortisation and less provisions forimpairment, if any. The provision for depreciation or amortisation on theseassets is calculated to write off their cost over their estimated useful livesby equal annual instalments as follows: Fixtures, fittings and equipment 10% to 33%Motor vehicles 25%Freehold and long leasehold property 2.5% Short leasehold property over the length of the lease Intangible assets - other 10% to 25% No depreciation is provided in respect of freehold land, which is stated atcost. (k) Foreign currencies For the company and those subsidiaries whose balance sheets are denominated insterling, monetary assets and liabilities denominated in foreign currencies aretranslated into sterling at the closing rates of exchange at the balance sheetdate. Foreign currency transactions are translated into sterling at the averagerates of exchange over the year and exchange differences arising in these casesare taken to the income statement. The balance sheets of subsidiaries denominated in foreign currencies aretranslated into sterling at the closing rates. The income statements for thesesubsidiaries are translated at the average rates and exchange differencesarising in these cases are taken to the exchange movements reserve.As allowed by IFRS 1, cumulative foreign exchange differences up to 31st July,2004 have not been recognised in the exchange movements reserve. (l) Deferred taxation Deferred taxation is provided in full on temporary timing differences, at therates of taxation expected to apply when these differences crystallise. Deferredtaxation assets are recognised only to the extent that it is probable thatsufficient taxable profits will be available against which temporary differencescan be set. (m) Intangible assets - goodwill Goodwill arising on the acquisition of business assets before 1st August, 1998has been written off to reserves. From that date such goodwill arising has beencapitalised as an intangible asset and amortised, in equal annual instalments,unless there has been impairment, over its estimated useful life of up to 20years. From 1st August, 2004, amortisation of goodwill has ceased, negativegoodwill is credited to the income statement and the net book value of goodwillis subject to impairment review at least annually. (n) Pensions Contributions to defined contribution schemes are charged in the incomestatement when they become payable. For the group's one defined benefits scheme, which was closed to new entrants in1996 and involved at 31st July, 2006 only 105 active and deferred members,scheme liabilities are measured on an actuarial basis using the projected creditmethod and discounted at a rate that reflects the current rate of return on ahigh quality corporate bond of equivalent term and currency to the schemeliabilities. Actuarial gains and losses arising from experience adjustments andchanges in actuarial assumptions are charged or credited to the income statementover the members' expected average remaining working lives. (o) Share-based awards The group has for many years operated long term incentive arrangements. Theseinclude the 2004 Long Term Incentive Plan, the 1995 Executive Share OptionScheme and the Inland Revenue approved Savings Related Share Option Scheme,together "Incentive Schemes". The group has applied IFRS 2 "Share-based Payment"to all grants of equity instruments under these Incentive Schemes after 7thNovember, 2002. The expense for these Incentive Schemes is measured by reference to the fairvalue of the shares or share options granted on the date of grant. Such fairvalues are determined using option pricing models which take into account theexercise price of the option, the current share price, the risk free interestrate, the expected volatility of the company's share price over the life of theoption/award and other relevant factors. Vesting conditions are not taken intoaccount when measuring fair value, but are reflected by adjusting the number ofequity instruments included in the measurement of the transaction such that theamount recognised reflects the number that actually vest. The fair value isexpensed in the income statement on a straight line basis over the vestingperiod. (p) Derivative financial instruments ("derivatives") and hedge accounting Derivatives are used within the group only to minimise the impact of interestand currency rate changes on financial assets and liabilities and meet the IAS39 criteria for hedge accounting. They are carried on the balance sheet at fairvalue which is obtained from quoted market prices in active markets, includingrecent market transactions, and discounted cash flow models. On acquisition, a derivative is designated as a hedge and the group formallydocuments the relationship between the derivative and the hedged item. The groupalso documents its assessment, both at hedge inception and on an ongoing basis,of whether the hedge derivative is highly effective in offsetting changes infair values or cash flows of hedged items. If a hedge was deemed wholly orpartially ineffective, the amount of the ineffectiveness, taking into accountthe timing of the expected cash flows where relevant, would be recorded in theincome statement. For fair value hedges, changes in fair value are recognised in the incomestatement, together with changes in the fair value of the hedged item.For cash flow hedges, the fair value gain or loss associated with the effectiveproportion of the cash flow hedge is recognised initially directly in equity andrecycled to the income statement in the period when the hedged item affectsincome. 2. Consolidated income statement reconciliation The table below compares the consolidated income statement for the year ended31st July, 2005, now reported under IFRS, with that previously reported under UKGenerally Accepted Accounting Practice ("UK GAAP"): UK GAAP Adjustments IFRS Note 6 £'000 £'000 £'000 Interest and similar income (i) 280,827 2,014 282,841Interest expense and similar charges 140,320 - 140,320------------------------------------------------------------------------------ Net interest income 140,507 2,014 142,521------------------------------------------------------------------------------Fees and commissions income (i) 230,019 (1,964) 228,055Fees and commissions expense (i) (35,834) (562) (36,396)Gains less losses arising from dealing in securities 96,285 - 96,285Other operating income 17,019 - 17,019------------------------------------------------------------------------------ Other income 307,489 (2,526) 304,963------------------------------------------------------------------------------ Operating income 447,996 (512) 447,484------------------------------------------------------------------------------ Administrative expenses (i) and (ii) 283,763 2,036 285,799Depreciation and amortisation 12,145 - 12,145Impairment losses on loans and advances (i) 20,349 (305) 20,044------------------------------------------------------------------------------ Total operating costs 316,257 1,731 317,988------------------------------------------------------------------------------ Operating profit on ordinary activities before impairment losses on goodwill and taxation 131,739 (2,243) 129,496 Impairment losses on goodwill (iii) 23,120 (5,385) 17,735------------------------------------------------------------------------------ Operating profit on ordinary activities before taxation 108,619 3,142 111,761Taxation (iv) 37,865 (713) 37,152------------------------------------------------------------------------------ Profit on ordinary activities after taxation 70,754 3,855 74,609Profit attributable to minority interests (v) 2,177 35 2,212------------------------------------------------------------------------------ Profit attributable to the shareholders of the company 68,577 3,820 72,397------------------------------------------------------------------------------ 3. Consolidated balance sheet reconciliation The table below compares the consolidated balance sheet, as at 31st July, 2005,now reported under IFRS, with that previously reported under UK GAAP: UK GAAP Adjustments IFRS Note 6 £'000 £'000 £'000AssetsCash and balances at central banks 1,244 - 1,244Settlement accounts 604,692 - 604,692Loans and advances to customers (i) 1,953,031 (13,828) 1,939,203Loans and advances to banks 786,330 - 786,330Money market securities 797,498 - 797,498Debt securities - long positions 61,345 - 61,345Equity shares - long positions 40,377 - 40,377Loans to money brokers against stock advanced 158,553 - 158,553Investment securities (vi) 26,730 654 27,384Intangible assets - goodwill (iii) 88,863 6,848 95,711Intangible assets - other (vii) - 1,672 1,672Property, plant and equipment (vii) 39,949 (1,672) 38,277Share of gross assets of joint ventures 21,624 - 21,624Share of gross liabilities of joint ventures (20,914) - (20,914)Share of net assets of joint ventures 710 - 710Other receivables (i)and(vi) 108,639 310 108,949Deferred taxation assets (iv) 21,591 7,385 28,976Prepayments and accrued income (i) 49,600 14,798 64,398------------------------------------------------------------------------------ Total assets 4,739,152 16,167 4,755,319------------------------------------------------------------------------------ LiabilitiesSettlement accounts 561,173 - 561,173Deposits by customers 1,818,187 - 1,818,187Deposits by banks 108,101 - 108,101Debt securities - short positions 49,628 - 49,628Equity shares - short positions 20,424 - 20,424Loans from money brokers against stock advanced 142,371 - 142,371Non-recourse borrowings 200,000 - 200,000Loans and overdrafts from banks 494,363 - 494,363Promissory notes and other debt securities in issue 367,130 - 367,130Other liabilities (i), (ix) and (x) 211,167 (28,350) 182,817Current taxation liabilities 19,297 - 19,297Accruals and deferred income (i) 126,019 12,425 138,444Subordinated loan capital 75,000 - 75,000------------------------------------------------------------------------------ Total liabilities 4,192,860 (15,925) 4,176,935------------------------------------------------------------------------------ EquityCalled up share capital 36,168 - 36,168Share premium account 252,210 - 252,210Profit and loss account 255,729 23,315 279,044ESOP trust reserve (3,786) - (3,786)Share-based awards reserve (ii) - 7,614 7,614Exchange movements reserve (viii) - 1,264 1,264Minority interests (v) 5,971 (101) 5,870------------------------------------------------------------------------------ Total equity 546,292 32,092 578,384------------------------------------------------------------------------------ Total liabilities and equity 4,739,152 16,167 4,755,319------------------------------------------------------------------------------ 4. Consolidated cash flow statement reconciliation UK GAAP Adjustments IFRS IFRS 2005 2005 2005 2006 £'000 £'000 £'000 £'000 (a) Reconciliation of operating profit on ordinary activities before taxation to net cash inflow from operating activitiesOperating profit on ordinary activities before taxation 108,619 3,142 111,761 157,314(Increase)/decrease in:Interest receivable and prepaid expenses (13,375) (8,976) (22,351) 1,886Net settlement accounts 21,535 - 21,535 (11,115)Net equity shares held for trading 3,904 - 3,904 (7,986)Net debt securities held for trading (10,038) - (10,038) (795) Increase in interest payable and accrued expenses 17,064 8,701 25,765 (1,877)Depreciation, amortisation and goodwill impairment losses 35,265 (5,385) 29,880 14,083------------------------------------------------------------------------------ Net cash inflow from trading activities 162,974 (2,518) 160,456 151,510 (Increase)/decrease in:Debt securities held for liquidity (11,483) 10,065 (1,418) (10,890)Loans and advances to customers (195) (155) (350) 77,180Loans and advances to banks not repayable on demand 190,802 (186,604) 4,198 5,716Other assets less other liabilities (22,821) 2,673 (20,148) 83,350 Increase/(decrease) in:Deposits by banks 28,913 - 28,913 60,277Customer accounts 137,035 - 137,035 24,887Bank loans and overdrafts (180,834) - (180,834) (131,158)Non-recourse borrowings (50,000) - (50,000) (50,000)Promissory notes and other debt securities in issue 267,130 - 267,130 (9,116) Taxation paid (37,821) - (37,821) (48,338)------------------------------------------------------------------------------ Net cash inflow from operating activities 483,700 (176,539) 307,161 153,418------------------------------------------------------------------------------ (b) Analysis of net cash outflow in respect of the purchase of subsidiariesCash consideration in respect of current year purchases (38,900) - (38,900) (6,797)Loan stock redemptions and deferred consideration paid in respect of prior year purchases (791) - (791) (4,847)Net movement in cash balances 10,185 - 10,185 386------------------------------------------------------------------------------ (29,506) - (29,506) (11,258)------------------------------------------------------------------------------ (c) Analysis of changes in financingShare capital (including premium) and subordinated loan capital:Opening balance 383,433 - 383,433 363,378Shares issued for cash 1,882 - 1,882 8,008Repayment of subordinated loan capital (21,937) - (21,937) ------------------------------------------------------------------------------- Closing balance 363,378 - 363,378 371,386------------------------------------------------------------------------------ Movement in the period £'000(d) Analysis of cash balancesCash and balances at central banks 1,244 - 1,244 1,272 28Loans and advances to banks repayable on demand 380,638 1,185,785 1,566,423 1,644,880 78,457-------------------------------------------------------------------------------- 381,882 1,185,785 1,567,667 1,646,152 78,485-------------------------------------------------------------------------------- Except for the above adjustments the comparative consolidated cash flowstatement is otherwise unchanged. 5. Consolidated equity reconciliation 31st July, 1 August, 2005 2004 Note 6 £'000 £'000 Profit and loss account reserve previously reported under UK GAAP 255,729 226,730------------------------------------------------------------------------------ Income recognition adjustments (i) (14,913) (14,310)Expense recognition adjustments (i) 1,200 900Recognition of share-based awards (ii) (2,736) (796)Goodwill adjustments (iii) 6,836 1,451Taxation effect of above items (iv) 8,573 7,658Minority interest effect of above items (v) 101 136Moving exchange adjustments to exchange movements reserve (viii) (1,264) -Recognition of pension deficit (ix) (1,783) (4,736)Dividend recognition adjustments (x) 27,301 25,604------------------------------------------------------------------------------ 23,315 15,907------------------------------------------------------------------------------ Profit and loss account reserve reported under IFRS 279,044 242,637------------------------------------------------------------------------------ Total equity at 31st July, 2004 previously reported under UK GAAP 509,264Above profit and loss account reserve adjustments 15,907Recognising share-based awards reserve 4,285Including minority interests in equity 4,538------------------------------------------------------------------------------ Total equity at 1st August, 2004 under IFRS 533,994------------------------------------------------------------------------------ 6. Comparison of the 2005 consolidated income statement, balance sheet and cashflow statement as now reported under IFRS with those previously reported underUK GAAP (i) The effective interest rate method has now been applied. Accordingly certaininterest, fees and commissions are now spread, also impacting impairment losses. (ii) Share-based awards are now accrued in the balance sheet and expensed in theincome statement. (iii) Goodwill is now subject to impairment testing, rather than to annualamortisation, and negative goodwill is no longer capitalised. (iv) Many of the adjustments referred to in this note have related tax effects,nearly all of which are deferred. (v) Minority interests are recognised as equity rather than as a liability andsome of the adjustments to the profit and loss account and opening reservesreferred to in this note have related minority interest effects. (vi) Some investments previously classified as "other receivables" have beenreclassified as "investment securities" and valued at fair value rather thancost. (vii) Certain assets previously classified as "tangible assets" are nowclassified as "intangible assets - other". (viii) Exchange adjustments are recognised through the exchange movementsreserve rather than the profit and loss account. (ix) The defined benefit pension scheme deficit is now recognised in equity. (x) Dividends are now recognised in the period in which they are declared ratherthan in the period in which earnings are generated to cover the dividend. 7. Earnings per share Basic earnings per share on profit attributable to shareholders of the companyis based on profit after taxation and minority interests of £108,598,000 (2005:£72,397,000) and on 146,594,000 (2005: 145,348,000) ordinary shares, being theweighted average number of shares in issue and contingently issuable during theyear excluding those held by the employee benefit trust. Diluted earnings per share is based on this same profit, but on 147,100,000(2005: 145,829,000) ordinary shares, being the weighted average number of sharesin issue disclosed above, plus the weighted dilutive potential on ordinaryshares of exercisable employee share options in issue during the year. 8. Dividend The final dividend of 22.0p per share is proposed to be paid on 3rd November, 2006 to holders of ordinary shares on the register at the close of business on 6th October, 2006. 9. Basis of preparation The financial information contained in this announcement does not constitutestatutory accounts for the year ended 31st July, 2006 within the meaning ofsection 240 of the Companies Act 1985, but is derived from those accounts, onwhich the auditors have yet to sign their report. Whilst the financial information included in this preliminary announcement has been computed in accordance with IFRS, this announcement does not itself comply with IFRS. The company expect to publish full financial statements that comply with IFRS on 3rd October, 2006. The UK GAAP statutory accounts for the year ended 31st July, 2005 have beenreported on by Deloitte & Touche LLP and filed with the Registrar of Companies.The report of the auditors on those accounts was unqualified and did not containa statement under section 237(2) or (3) of the Companies Act 1985. The financialinformation contained in this announcement for the year ended 31st July, 2005has been derived from those statutory accounts, adjusted for the impact of IFRS,and is therefore unaudited. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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