close brothers limited · close brothers limited is a member of close brothers group plc...

Close Brothers Limited Annual Report 2015

COMPANY NUMBER: 195626

Close Brothers Limited

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CONTENTS

Profile …..…………………………………………………………………………............. 2

Highlights …………………………………………………………………………............. 2

Company information …………………………………………………………................ 3

Strategic Report....................................................................................................... . 4

Directors’ Report…………………………………………….......................................... 10

Report of the independent auditor ...……………………………………………............ 12

Consolidated profit and loss account …………………………………………….......... 14

Consolidated statement of total recognised gains and losses …………………….... 14

Consolidated balance sheet ………………………………………………………......... 15

Company balance sheet ……………………………………………………………....... 16

The notes …………………………………………………………………………............ 17

Cautionary Statement…………………………………………………………………….. 48


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PROFILE

Close Brothers Limited is a member of Close Brothers Group plc (‘‘CBG’’), a specialist financial services group which makes loans, trades securities and provides investment management services. Close Brothers Limited (‘‘the group’’) provides specialist lending to small and medium-sized businesses and individuals across a diverse range of asset classes, and also offers deposit taking services. The group provides specialist finance solutions through three lending business units: Retail, which provides point of sale finance for cars, motorcycles and light commercial vehicles through motor dealers and specialist financing of 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. The Treasury function provides funding for the group’s lending activities through corporate deposits and retail savings products, as well as wholesale funding.

HIGHLIGHTS

2015 2014 Profit on ordinary activities before taxation and amortisation of goodwill

£218.3m

£190.5m

Profit on ordinary activities before taxation £216.6m £188.7m Loans and advances to customers £5,738m £5,290m Deposits by customers £4,481m £4,510m Shareholders’ funds £688m £586m Total assets £7,285m £6,857m


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COMPANY INFORMATION

DirectorsP. Prebensen* Chairman

S.R. Hodges* Chief Executive Officer

J.A.G. Howell* Director

S.P. Bishop Director

R.C. Golden Director

M.P. Hook Director

M.B. Morgan Director

F.D. Pennal Director

A.J. Sainsbury Director

* Director of Close Brothers Group plc

SecretaryJ. E. Hudspith

AuditorDeloitte LLP

Registered Office

10 Crown Place

London EC2A 4FT

Telephone: 020 7655 3100

Fax: 020 7655 8967

Website: www.closebrothers.com

Registered Number195626


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STRATEGIC REPORT Business Review

The group’s strategy remains unchanged, to deliver sustainable growth and strong returns throughout the economic cycle. To do this, we continually invest in our business model to maintain our local presence and leading position in our chosen specialist markets, in order to build long-term client relationships. This strategy has driven very strong performance for the business which has delivered its sixth consecutive year of double-digit profit growth in 2015. Delivering sustainable growth and strong returns over the long term

In recent years, the group has benefited from reduced credit supply and achieved exceptionally strong growth. At the same time, improving economic conditions have reduced the level of impairments, helping to drive increasingly strong returns. As we continue to see a gradual increase in the supply of credit and a return of competition in some of our key markets, we will remain focused on maintaining the high quality of the loan book and ensure that we price risk appropriately. This will enable us to continue our long track record of delivering strong returns and sustainable growth through the cycle. Overview of Financial Performance

Key Financials 2015 2014 £m £m

Operating income 508.2 455.6

Net interest and fees on loan book 485.2 427.3

Retail 181.1 164.5 Commercial 207.3 187.4 Property 96.8 75.4

Treasury and non-lending income 23.0 28.3

Adjusted operating expenses1 (248.0) (221.0)

Impaired losses on loans and advances

(41.9) (44.1)

Adjusted operating profit1 218.3 190.5

1. Adjusted to exclude amortisation of goodwill.

Key performance indicators

2015 2014

% %

Operating margin1

43

42

Expense/income ratio2 49 49

Compensation ratio3 26 26

Return on opening capital4 30 28

Return on net loan book5 4.0 3.8

1. Profit on ordinary activities before taxation, excluding

amortisation of goodwill, on operating income. 2. Expenses, being administrative expenses and depreciation,

on operating income. 3. Total staff costs on operating income. 4. Profit on ordinary activities after taxation and non-controlling

interests, excluding amortisation of goodwill, on opening total equity shareholders funds.

5. Profit on ordinary activities before taxation, excluding amortisation of goodwill, on the average net loan book.

Distinctive business model drives strong financial performance

The group has again delivered solid growth and strong returns in 2015. Adjusted operating profit increased 15% to £218.3 million (2014: £190.5 million) due to a 12% increase in adjusted operating income and lower impairment losses. As a result, the group’s return on opening equity improved to 30% (2014: 28%) and the return on net loan book increased to 4.0% (2014: 3.8%). Operating income increased 12% to £508.2 million (2014: £455.6 million) driven by increases across all our businesses, with particularly strong growth in Property which increased 28% to £96.8 million (2014: £75.4 million). The net interest margin remained broadly stable at 8.8% (2014: 8.6%), reflecting our focus on maintaining our margins and pricing risk appropriately as competition increases and supported by a modest decline in funding costs. Treasury and other income declined slightly to £23.0 million (2014: £28.3 million).

The bad debt ratio has improved steadily in recent years and declined further in 2015 to 0.8% (2014: 0.9%). The improvement in the period was principally driven by lower impairment charges in Commercial and Property, and reflects our ongoing focus on credit quality and the favourable economic conditions. Adjusted operating expenses increased in line with income, up 12% to £248.0 million (2014: £221.0 million) reflecting an increase in volume related costs and continued investment in our service led business model to deliver further growth and consistent returns over the long term. Specifically, higher staff costs reflect increased headcount in our operational and control functions to support loan book growth and ensure we operate effectively in our regulated environment. IT costs also increased to meet the continued need to invest in our systems and technology to enhance our speed to market and customer focused service proposition.

Continued Loan Book Growth

We have a track record of achieving consistent growth through the cycle and delivered further growth across our loan book despite a gradual increase in the supply of credit and increasing competition in some of our key markets. In the 12 months to 31 July 2015, the overall loan book increased 8.5% to £5.7 billion (2014: £5.3 billion). Most importantly this growth was achieved with no change to our strict risk and return criteria and its key characteristics remained unchanged, with an average duration of 14 months (2014: 14 months) and around 90% secured. Asset finance continues to deliver good growth due to our strong customer relationships and direct lending capabilities, despite the wider market becoming increasingly competitive. In motor, strong demand in the overall car market has allowed us to deliver further loan book growth whilst maintaining


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our robust margins in the face of increasing competition. Property remains the area of highest growth in the period with continued strong demand for development finance. Loan Book Analysis

2015 £m

2014 £m

Retail 2,266.0 2,092.8 Motor finance 1,600.3 1,458.9 Premium finance 665.7 633.9 Commercial 2,172.8 2,047.2 Asset finance 1,796.2 1,656.0 Invoice finance 376.6 391.2 Property 1,299.0 1,149.7 Closing loan book 5,737.8 5,289.7

Overall, the Retail loan book increased 8.3% to £2,266.0 million in the 12 months to 31 July 2015 (2014: £2,092.8 million). The motor finance loan book increased 9.7% to £1,600.3 million (2014: £1,458.9 million) as underlying growth in car market volumes and successful sales campaigns in the second half offset increased competition. The premium finance book increased 5.0% to £665.7 million (2014: £633.9 million) reflecting new business from both new and existing customers. The Commercial loan book increased 6.1% to £2,172.8 million (2014: £2,047.2 million) driven by an 8.5% increase in asset finance to £1,796.2 million (2014: £1,656.0 million) due to good levels of new business across all sectors and the benefits of our growth initiatives in Ireland and energy finance. Invoice finance reduced by 3.7% to £376.6 million (2014: £391.2 million) in a market that continues to be highly competitive. In Property, we continue to benefit from our strong positioning in the residential development market as we continued to see solid loan book growth in 2015 of 13.0% to £1,299.0 million (2014: £1,149.7 million). We have maintained our strict and consistent lending criteria throughout this period of increased demand and continue to lend at conservative LTVs focusing primarily on residential property development in the South East. Well positioned for further growth at attractive margins

We remain confident in the outlook for the group and its ability to deliver further growth and good returns over the long term. To do this we will continue to invest in our tried and tested business model, which is built upon strong customer relationships and expertise in our chosen markets which deliver high levels of repeat business. We will also deliver further investment in both people and technology to adapt to changes in the wider regulatory and market environments as they continue to evolve. We continue to see opportunities for growth for the group. Just as we have in the past, we will continue to maximise opportunities for growth by looking at new initiatives in adjacent markets and by investing in our people to extend our reach and distribution capacity. Whilst at the same time remaining

focused on the quality of our lending to support strong returns over the long term. Diverse and conservative funding position

Our conservative approach to funding and liquidity is a core part of our business model. Our Treasury function provides funding for the group from a diverse range of sources, including customer deposits, secured and unsecured loan facilities and debt securities and maintains a prudent maturity profile at all times. As a result, we expect to comfortably meet the requirements for the new funding and liquidity ratios proposed under the Capital Requirements Directive (“CRD IV”) when they come into force. In 2015 we have taken advantage of favourable market conditions to strengthen our funding position whilst at the same time reducing the overall funding costs for our business. We have further diversified our funding sources by drawing down £375 million from the government’s Funding for Lending Scheme, renewed £945 million of wholesale funding and since the year end we have completed a private placement of a €25 million bond. Total funding increased £405.7 million or 6% in the period to £7,185.8 million (2014: £6,780.1 million) and accounted for 125% of the loan book (2014: 128%). This reflects a £321.0 million increase in drawn and undrawn facilities increasing to £1,512.2 million (2014: £1,191.2 million), reflecting participation in the government’s Funding for Lending Scheme.

Customer deposits, including both corporate and retail, remained broadly stable at £4,481.4 million (2014: £4,510.3 million) as did the senior unsecured bond at £311.2 million (2014: £300.2 million). 2015 2014 £m £m

Deposits by customers 4,481.4 4,510.3

Drawn and undrawn facilities1 1,512.2 1,191.2

Senior Unsecured Bonds 311.2 300.2

Intercompany 192.7 192.6

Equity 688.3 585.8

Total available funding 7,185.8 6,780.1

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Includes £245.0 million (31 July 2014: £265.0 million) of

undrawn facilities and excludes £5.3 million (31 July 2014: £3.3 million) of non-facility overdrafts included in borrowings.

Term funding (funding with a maturity greater than 12 months) increased by 10% to £3,497.7 million (2014: £3,168.7 million) due to participation in the Funding for Lending Scheme, which runs for four years and is secured against a portion of the asset finance loan book, and the loan facility renewals. At 31 July 2015, the loan book was 61% covered by term funding (2014: 60%) with the average maturity of 32 months (2014: 30 months), more than double that of the maturity of the loan book of 14 months (2014: 14 months).


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1Includes £245.0 million (31 July 2014: £265.0 million) of

undrawn facilities excludes £5.3 million (31 July 2014: £3.3 million) of non-facility overdrafts included in borrowings. Prudent approach to managing liquidity

The group takes a conservative approach to liquidity management, and the majority of our liquidity requirements and surplus funding are held in the form of high quality liquid assets. At 31 July 2015, our treasury assets totalled £1,173.4 million, of which £1,058.1 million comprised high quality liquid assets, principally in the form of deposits with the Bank of England. From time to time we also place surplus funding in certificates of deposits (“CDs”) or other liquid securities to maximise yield. At the year end, we held £115.3 million in CDs (2014: £nil). We regularly assess our long and short-term liquidity requirements including extensive stress testing, with a clearly defined risk appetite. Therefore, we hold a prudent liquidity position at all times relative to both internal and external requirements, and expect to comfortably meet the Liquidity Coverage Ratio requirements under CRD IV when they come into force. Treasury Assets 2015

£m 2014 £m

Gilts 20.1 45.6 Bank of England deposits 1,038.0 1,171.7 High quality liquid assets 1,058.1 1,217.3 Certificates of deposit 115.3 -

Total treasury assets 1,173.4 1,217.3

In May 2015, Moody’s Investor Services (“Moody’s”) upgraded our long-term rating for Close Brothers Group (“CBG”) and Close Brothers Limited (“CBL”) to A3/P2 from Baa1/P2 and Aa3/P1 from A3/P2, respectively, both with stable outlooks. Earlier in the year, Fitch Ratings (“Fitch”) reaffirmed its ratings for CBG and CBL at A/F1, both with stable outlooks. The rating upgrade reflects our proven business model, consistent track record through the cycle and prudent approach to funding and capital management, as well as the implementation of Moody’s new bank

rating methodology.

<1 year 1-2

years >2

years Total £m £m £m £m

Deposits by customers

3,330.9 851.2 299.3 4,481.4

Drawn and undrawn facilities

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152.2 643.4 717.3 1,512.2

Senior unsecured bonds

12.3 - 298.9 311.2

CBG bond 192.7 - - 192.7 Equity - - 688.3 688.3

31 July 2015 3,688.1 1,494.6 2,003.1 7,185.8

31 July 2014 3,611.4 1,777.1 1,391.6 6,780.1


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Risk and Control Framework Principal Risks and Uncertainties

The group faces a number of risks in the normal course of business providing a range of financial services to small businesses and individuals. These risks are managed by: • Adhering to our established and proven

business model; • Implementing an integrated risk management

approach; and • Setting clearly defined risk appetites

monitored with specific metrics within set limits.

A summary of the principal risks and uncertainties which may impact the group’s ability to deliver its strategy, how we seek to mitigate these risks and the change in the perceived level of risk over the year is set out below. The risks identified remain broadly unchanged from the prior year reflecting the group’s consistent strategy and adherence to its established business model. This summary should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties faced by the group but rather those risks which the group currently believes may have a significant impact on the group’s performance and future prospects. Economic environment

Any downturn in economic conditions could impact the group’s performance through: • Lower demand for the group’s products and

services; • Lower investor risk appetite as a result of

financial markets instability; • Higher bad debts as a result of customers

inability to service debt and lower asset values on which loans are secured; and

• Increased volatility in funding markets.

The majority of the group’s activities are in specialist areas where our people have significant experience and expertise. Our long standing commitment to our proven business model and strong financial position has enabled us to support our clients in all economic conditions. This assists us in our aim of developing long term relationships with our clients. The group carries out regular stress testing on its performance and financial positions to test resilience in the event of adverse economic conditions. While the UK economy has proven resilient and the outlook appears stable, significant global uncertainty remains. Credit losses At 31 July 2015 the group had loans totalling £5.7 billion. The group is exposed to credit losses if

customers are unable to repay loans and outstanding interest and fees. In addition the group has exposure to counterparties with which it places deposits or trades, and also has limited derivative contracts to hedge interest rate and foreign exchange exposures.

We seek to minimise our exposure to credit losses from our lending by:

• Applying strict lending criteria when testing the credit quality and covenant of the borrower;

• Maintaining consistent and conservative loan to value ratios with low average loan size and short term tenor;

• Lending on a predominantly secured basis with significant emphasis placed on the underlying security;

• Maintaining rigorous and timely collections and arrears management processes; and

• Operating strong control and governance both within our lending businesses and with oversight by a central credit risk team.

Our exposures to counterparties are mitigated by:

• Conservative management of our liquidity requirements and surplus funding with £1.0 billion or c.85% placed with the Bank of England;

• Continuous monitoring of credit quality of our counterparties within approved set limits; and

• Trading predominantly in exchange traded instruments with regulated counterparties on a delivery against payout basis with counterparty exposure and settlement failure monitoring controls also in place

The loan impairment rate has remained very low reflecting our lending discipline as well as favourable market conditions. In the short-term the outlook remains benign. The group’s other counterparty exposures are broadly unchanged with the majority of our liquidity requirements and surplus funding placed with the Bank of England. Legal and regulatory change

Changes to the existing legal, regulatory and tax environments and failure to comply with existing requirements may materially impact the group. Failing to treat customers fairly, safeguard client assets or provide advice/products contrary to clients’ best interest has the potential to damage our reputation and may lead to legal or regulatory sanctions including litigation and customer redress. This applies to current, past and future business.


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Similarly changes to regulation and taxation can impact our performance and the markets in which we operate. The group seeks to manage these risks by: • Commitment to provide straightforward and

transparent products and services to our clients;

• Governance and control processes to review and approve new products and services;

• Significant investment in both staff and operating systems to ensure the group is well placed to respond to changes in regulation;

• Investment in training for all staff including anti money laundering, bribery and corruption, data protection and information security. Additional tailored training for relevant employees is provided in key areas such as complaint handling;

• Continuous monitoring of key legal, regulatory and tax developments to anticipate their potential impact; and

• Maintaining constructive and positive relationships and dialogue with regulatory bodies and tax authorities.

Financial services businesses remain subject to significant scrutiny. We believe the potential risks from legal and regulatory changes continue to increase. Competition The group operates in highly competitive markets and as the UK economy improves we expect to see competition continue to increase. The group has a long track record of trading successfully in all types of competitive environment. We value our clients and build long term relationships offering a differentiated proposition based on:

• Speed and flexibility of service; • Local presence; • Experience and expertise; and • Tailored, client driven product offerings.

We continue to experience increasing levels of competition.

Employees The calibre, quality and expertise of employees is critical to the success of the group. The loss of key individuals or teams may have an adverse impact on the group’s operations and ability to deliver its strategy.

The group seeks to retain and develop staff by: • Operating remuneration structures which are

competitive and recognise and reward performance;

• Implementing succession planning for key roles;

• Running programmes to develop all staff and our future leaders; and

• Developing our staff including our new sales academy in asset finance and graduate and school leaver programmes.

Our highly skilled people are likely to be targeted but we are confident we are able to retain key employees. Technology Maintaining robust and secure IT infrastructure, systems and software is fundamental to allow the group to operate effectively, respond to new technology, protect client and company data and counter the evolving cyber threat. Failure to keep up with changing customer expectations or manage upgrades to existing technology has the potential to impact group performance. The group continues to invest in its IT infrastructure, information security and software. We also continue to invest in our IT resources including the appointment of a chief information officer in the group with extensive relevant experience in the financial services sector. The group has strong governance in place to oversee its major projects. We have in place business continuity and disaster recovery plans which are regularly tested. The group continues to invest and upgrade its IT infrastructure. However the risk of cyber threats or new technology impacting our business model remains. Funding The group’s access to stable funding remains key to supporting its lending activities and the liquidity requirements of the group.

At 31 July 2015 the group’s funding position was strong with total funding 125% of the loan book. This provides a prudent level of liquidity to support our lending activities. Our funding is well diversified both by source and tenor. Liquidity in our group is assessed on a daily basis and tested weekly to ensure adequate liquidity is held and readily accessible in stressed conditions. Our funding approach is conservative based on the principle of “borrow long and lend short”. Over 50% of our total funding is repayable after more than one year with an average duration of 32 months. This compares to our weighted average loan maturity of 14 months. The group remains well funded, retains sufficient liquidity and is well placed to access further funding as required. Exposure to markets Market volatility and/or changes in interest and exchange rates have the potential to impact the group’s performance.


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Although the majority of the group’s activities are carried out in the UK, there is foreign exchange exposure on deposits, lending and funding balances. The group matches fixed and variable interest rate assets and liabilities using swaps where appropriate. The sensitivity analysis on interest rate exposures shown in note 29 on page 45 shows the expected impact of interest rate changes. The group’s capital and reserves are not hedged. Foreign exchange exposures in the group are hedged using currency swaps with exposures monitored daily against approved limits. The group does not speculate on foreign currency movements. Stress tests are regularly performed on market risks to ensure we maintain adequate liquidity and capital even under extreme downside scenarios. The group’s approach and the underlying risks are unchanged.

By order of the board

J. E. Hudspith

Company Secretary

17th

September, 2015


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DIRECTORS’ REPORT

The directors are responsible for preparing the annual report and the financial statements in accordance with applicable laws and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law).

The financial statements are required by law to give a true and fair view of the state of affairs of the group and the company and of the profit or loss of the group for that period. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the company and of the profit or loss of the company for that period. In preparing those financial statements, the directors are required to:

select suitable accounting policies and apply them consistently;

make judgements and accounting estimates that are reasonable and prudent;

state whether applicable UK accounting standards have been followed; and

prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company’s transactions and disclose with reasonable accuracy at any time the financial position of the group and the company and to enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the group and company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

In accordance with the provisions of section 418 of the Companies Act 2006, each of the directors at the date of approval of this report confirms that so far as the director is aware there is no relevant audit information of which the company’s auditors are unaware; and the director has taken all the steps that he ought to have taken as a director in order to make himself aware of any relevant audit information and to establish that the company’s auditors are aware of the information. Words and phrases used in this confirmation should be interpreted in accordance with section 418 of the Companies Act 2006.

Directors’ Indemnity

The company has granted indemnities to all of its directors on terms consistent with the applicable statutory provisions. Qualifying third party indemnity provisions for the purposes of section 234 of the Companies Act 2006 were accordingly in force during the course of the financial year ended 31 July 2015, and remain in force at the date of this report.

Employees

The group seeks to treat all employees fairly, promoting a culture of integrity and strong employee engagement. The aim is to create a work environment which encourages talent retention and provides opportunities for talent development.

The Head of HR and the group’s Chief Executive have overall oversight for employee related matters. Employee related key risk indicators are produced by each business and reviewed at local Risk and Compliance Committees and reported to the group’s Risk and Compliance Committee on a monthly basis. As a result, the group believes it has adequate measures in place to monitor and manage potential related risks. Further detail on the mitigation and management of employee risks is set out in the Principal Risks and Uncertainties in the Strategic Report on page 7.

Diversity and Equal Opportunity

The group is committed to providing equal opportunities throughout its recruitment processes and to existing employees, promoting a culture of diversity amongst the workforce. The group has a Recruitment and Equal Opportunity policy which provides a framework for consistent fair treatment of employees regardless of race, gender, age, disability, sexual orientation or religion. The group seeks to eliminate any harassment or bullying from the workplace and additionally fair consideration is given to all applications for employment. Feedback from staff in the group’s recent Employee Opinion Survey indicates its approach is working well in practice with positive responses to questions about fair treatment of staff and a culture that does not tolerate bullying or harassment.

Training and Education

The group’s focus remains on maintaining the expertise and skill of its people and it encourages training and education to all staff throughout their career. All employees receive annual performance reviews and as part of the programme for skills management, line managers develop training plans with their direct reports to address skill gaps or to strengthen existing skills. A suite of management development programmes is available to ensure that staff with line management responsibility have the skills they need to perform that role effectively and a core curriculum of personal and soft skills training is available to support staff in developing their capability in the role. In addition, our customer facing staff receive regular update training to ensure they are aware of the latest regulatory developments which affect their


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business areas. The group also has a mentoring programme which offers career mentoring and advice from a more senior member of staff, often in a different part of the group.

Our school leavers’ initiative, ASPIRE, continues to build on the success of its first year in 2013. Its structured training programme and opportunities for career progression are attracting high calibre individuals to the group. We already run a successful graduate scheme and our school leavers programme, ASPIRE, is now in its third year. Employees also have the opportunity to be mentored by senior colleagues, building one to one relationships to coach people through their careers. During the year we have launched the Close Brothers Training Academy, a two year programme aimed to develop the next generation of sales professionals, initially in our asset finance business. The first intake of 34 candidates started in September 2015 who will experience a development programme delivered by external partners, internal subject matter experts and a group of experienced business mentors. The programme will use portal based network learning as well as facilitated classroom and on the job learning.

Responsible Finance

The group seeks to ensure that all its stakeholders including customers, shareholders, employees and suppliers are treated fairly, and with the highest ethical standards. Due to the nature of the group’s businesses, the group has direct relationships with many stakeholders and therefore there is a risk that negative behaviour could affect the group’s reputation and the outcome for its customers. In order to manage and mitigate this, the group seeks to instil a culture of treating customers and other stakeholders fairly, and that all employees recognise their responsibilities towards this objective. The group has a wide range of policies to establish a framework for best practice for our businesses, and for employee conduct and behaviour ensuring strong relationships characterised by trust, transparency and integrity. Consistent with a responsible approach to finance, the board has adopted a tax policy governing all group businesses. A key tenet of this policy is that tax liabilities should reflect the commercial substance of the group’s activities. By taking this approach, the group seeks to maintain a low-risk tax profile. Substantially all the group’s trading is within the UK and so in principle subject to UK corporation tax. The group’s corporation tax balances fully reflect this, and for each of the past five financial years the group’s tax expense has been inline or above the headline UK corporation tax rate (after adjustments for impairments and business disposals). It is the responsibility of all employees to adhere to the group’s policies on treating customers fairly. The CBG Head of Compliance is responsible for

establishing group policies and maintaining overall oversight of issues. The Head of Compliance within the group is responsible for implementing and monitoring relevant policies and ensuring that they are followed by all employees. Training is delivered by a variety of methods, including online and face to face, across many areas including anti-money laundering, anti bribery and corruption, market abuse and conduct risk. Records of attendance and completion are maintained by Compliance.

Conduct risk

Treating Customers Fairly (“TCF”) principles continue to be fully embedded within the group’s culture. In light of the FCA’s increased focus on the front end processes firms use to create and issue new products, the group has ensured that relevant policies, for example the Business Initiatives Policy, are robust and are followed properly. These consider the client associated risks that can arise across a product lifecycle, including ensuring the documentation is clear, fair and not misleading and pricing is fair. Product design and governance is managed through the group’s Risk and Compliance Committees which seeks to ensure that customer’s interests are appropriately protected. Additionally, existing products are reviewed on a regular basis to ensure that they remain fit for purpose. The board and executive management receive comprehensive information to enable them to determine that new products are being developed in an appropriate manner and that trends identified through complaints are investigated.

Complaint handling

The group operates a transparent complaints handling process which is accessible to all customers. It endeavours to address all concerns promptly and effectively and seeks to identify the root cause of complaints to ensure any ‘lessons learnt’ are suitably addressed.

Anti-bribery and corruption

The group conducts its business to the highest ethical standards and seeks to mitigate the risks of financial crime. The group’s Anti-Bribery and Corruption policy applies to all employees and sets out minimum standards and best practice for business conduct. This policy is communicated to staff at induction and update training is provided periodically. The group adheres to the Bribery Act 2010 and compliance, risk and internal audit ensure compliance across the group.


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Whistleblowing

The group’s whistleblowing policy aims to protect employees who expose wrongdoing. It seeks to ensure transparency in dealing with all stakeholders and encourage high standards of openness and accountability.

Anti-money laundering

The group complies with all applicable anti-money laundering regulations and all staff are given regular training to raise awareness of their responsibilities. The group has a dedicated money laundering reporting officer who is responsible for overseeing best practice and reporting any issues

appropriately.

Going concern

The group’s business activities, together with the factors likely to affect its future development, performance and its summarised financial position are set out in the previous pages. The principal risks and uncertainties the group currently faces are described along with the ways the group seeks to manage those risks.

The group has a strong, proven and conservative business model. Its performance has been resilient in the difficult trading conditions currently being experienced, and in previous downturns. The directors also believe the group has a sound funding and liquidity position and adequate capital resources.

After making enquiries, the directors have a reasonable expectation that the company and the group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report.

Auditor

Resolutions to reappoint Deloitte LLP as the company’s auditor and give the directors the authority to determine the auditor’s remuneration will be proposed at the forthcoming Annual General Meeting.

Directors

The present members of the board are set out on page 3.

Company Secretary

By order of the board

J. E. Hudspith

Company Secretary

17th

September, 2015


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INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF CLOSE BROTHERS LIMITED We have audited the financial statements of Close Brothers Limited for the year ended 32 July 2015 which comprise the Consolidated Profit and Loss Account, the Consolidated and Parent Company Balance Sheets, the Consolidated Statement of Total Recognised Gains and Losses and the related notes 1 to 32. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.

Respective responsibilities of directors and auditor

As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.

Opinion on financial statements

In our opinion the financial statements:

give a true and fair view of the state of the group’s and of the parent company’s affairs as at 31 July 2015 and of the group’s profit for the year then ended;

have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and

have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matter prescribed by the Companies Act 2006

In our opinion the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements. Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:

adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or

the parent company financial statements are not in agreement with the accounting records and returns; or

certain disclosures of directors’ remuneration specified by law are not made; or

we have not received all the information and explanations we require for our audit. Simon Stephens, FCA (Senior statutory auditor)

for and on behalf of Deloitte LLP Chartered Accountants and Statutory Auditor London, United Kingdom 17

th September 2015


CONSOLIDATED PROFIT AND LOSS ACCOUNT

14

CONSOLIDATED PROFIT AND LOSS ACCOUNT

For the year ended 31st July, 2015

2015 2014

Continuing operations Note £m £m

Interest receivable 4 537.0 499.1

Interest payable 4 (131.0) (137.3)

Net interest income 406.0 361.8

Fees and commissions receivable 4 83.3 78.1

Fees and commissions payable 4 (23.8) (20.2)

Other operating income 42.7 35.9

Other income 102.2 93.8

Operating income 508.2 455.6

Administrative expenses 2 214.6 194.7

Depreciation 13 33.4 26.3

Impairment losses on loans and advances 9 41.9 44.1

Amortisation of goodwill 12 1.7 1.8

291.6 266.9

Profit on ordinary activities before taxation 216.6 188.7

Taxation on profit on ordinary activities 5 43.8 43.2

Profit on ordinary activities after taxation 172.8 145.5

Profit attributable to non controlling interest - 0.3

Profit attributable to shareholders 172.8 145.2

CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES

For the year ended 31st July, 2015 2015 2014

Note £m £m


Exchange adjustment (1.9) (1.8)

Cash flow hedging reserve 25 (5.7) 4.7

Taxation on movement of other reserves 1.1 (0.9)

Total recognised gains relating to the year 166.3 147.2

Total operating expenses


CONSOLIDATED BALANCE SHEET

15

At 31st July, 2015 2015 2014

Note £m £m

Assets

Cash and balances at central banks 1,038.0 1,171.7

Loans and advances to banks 8 42.8 53.4

Loans and advances to customers 9 5,737.8 5,289.7

Debt securities 11 135.4 45.6

Derivative financial instruments 10 19.7 27.4

Intangible assets - goodwill 12 13.1 14.8

Tangible fixed assets 13 178.6 142.9

Deferred taxation 20 36.7 29.9

Prepayments, accrued income and other assets 19 82.9 81.2

Total assets 7,285.0 6,856.6

Liabilities

Deposits by banks 14 35.1 49.6

Deposits by customers 15 4,481.4 4,510.3

Bank loans and overdrafts 16 377.9 3.3

Debt securities in issue 17 1,159.4 1,149.2


Amounts due to group undertakings 18 354.0 333.5

Subordinated loan capital 21 46.4 77.2

Accruals, deferred income and other liabilities 19 135.4 127.9

Total liabilities 6,596.7 6,270.5

Shareholders' funds

Called up share capital 22 82.5 82.5

Profit and loss account 24 608.9 500.7

Other reserves 25 (3.1) 2.6

Total equity shareholders' funds 688.3 585.8

Non-controlling interests - 0.3

Total liabilities and shareholders' funds 7,285.0 6,856.6

Memorandum items

Contingent liabilities - guarantees 26 22.7 0.1

Commitments 27 1,259.6 1,313.1

M.B. Morgan

Director

The financial statements of Close Brothers Limited, registration number 195626, were approved and authorised for

issue by the Board of Directors on 17th September, 2015 and signed on its behalf by:


COMPANY BALANCE SHEET

16

At 31st July, 2015 2015 2014

Note £m £m

Assets


Loans and advances to banks 8 15.4 21.5

Loans and advances to customers 9 4,508.8 4,146.9

Debt securities 11 135.4 45.6


Investments in subsidiaries 12 72.0 131.4

Intangible assets - goodwill 5.8 4.0

Amounts due from group undertakings 1,357.3 1,248.1

Tangible fixed assets 13 50.5 37.9

Deferred taxation 20 38.1 31.0

Prepayments, accrued income and other assets 19 72.9 71.3

Total assets 7,312.7 6,935.7

Liabilities

Deposits by banks 14 35.1 49.6

Deposits by customers 15 4,481.4 4,510.3

Bank loans and overdrafts 16 373.5 3.3

Derivatives financial instruments 10 7.1 19.4

Amounts due to group undertakings 18 1,535.8 1,576.4

Subordinated loan capital 21 46.4 77.2

Accruals, deferred income and other liabilities 19 118.4 112.5

Total liabilities 6,597.7 6,348.7

Shareholders' funds

Called up share capital 22 82.5 82.5

Profit and loss account 24 635.6 501.9

Other reserves 25 (3.1) 2.6

Total equity shareholders' funds 715.0 587.0

Total liabilities and shareholders' funds 7,312.7 6,935.7

Memorandum items

Contingent liabilities - guarantees 26 1.6 0.1

Commitments 27 718.7 737.1

M.B. Morgan

Director

The financial statements of Close Brothers Limited, registration number 195626, were approved and

authorised for issue by the Board of Directors on 17th September, 2015 and signed on its behalf by:


THE NOTES

17

1. Accounting policies

The principal accounting policies are summarised below. They have all been applied consistently throughout the year and the preceding year.

(a) Format of financial statements

The group and company financial statements are prepared in accordance with the special provisions of Schedule 2 of SI2008 No. 410 of the Companies Act 2006 relating to banking groups and are prepared in accordance with applicable accounting standards and Statements of Recommended Practice issued by the British Bankers’ Association and the Finance and Leasing Association.

(b) Basis of preparation

The financial statements have been prepared under the historical cost convention, except for the revaluation of assets and liabilities held at fair value through profit or loss, available for sale financial assets and all derivative contracts. The preparation of financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (“UK GAAP”) requires the use of certain critical accounting estimates. It also requires management to exercise judgement in the process of applying the group’s accounting policies. These notes set out areas involving a higher degree of judgement or complexity or areas where assumptions are significant to the financial statements. These areas include the fair value of financial assets and liabilities and impairment losses on loans and advances.

The financial statements have been prepared as a going concern as set out in the going concern section in the Directors’ Report.

(c) Consolidation

The consolidated accounts incorporate the financial statements of the company and the entities it controls (“subsidiaries”) using the acquisition method of accounting. Control exists where the company has the power to govern an entity’s financial and operating policies. Subsidiaries are fully consolidated from the date on which the group effectively obtains control. They are de-consolidated from the date that control ceases. Special purpose entities (“SPEs’’) are consolidated when the substance of the relationship between the group and its entity indicates control by the group.

Under the acquisition method of accounting, with some limited exceptions, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. The non-controlling interest is measured either at fair value or at the non-controlling interest’s proportion of the net assets acquired. Any excess of the cost of acquisition over net assets is capitalised as goodwill. All intra-group balances, transactions, income and expenses are eliminated.

(d) Net interest income

Interest on loans and advances made by the group, and fee income and expense and other direct costs relating to loan origination, restructuring or commitments are recognised in the consolidated profit and loss account using the effective interest rate (“EIR”) method. The EIR method applies a rate that discounts estimated future cash payments or receipts relating to a financial instrument to its net carrying amount. The cash flows take into account all contractual terms of the financial instrument including transaction costs and all other premiums or discounts but not future credit losses.

(e) Fees and commissions

Where fees that have not been included within the EIR method are earned on the execution of a significant act, such as fees arising from negotiating or arranging a transaction for a third party, they are recognised as revenue when that act has been completed. Fees and corresponding expenses in respect of other services are recognised in the consolidated profit and loss account as the right to consideration or payment accrues through performance of services. To the extent that fees and commissions are recognised in advance of billing they are included as accrued income or expense.


THE NOTES

18

1. Accounting policies continued

(f) Financial assets and liabilities (excluding derivatives)

Classification

Financial assets are classified into the following measurement categories: a) loans and receivables; b) available for sale. No fair value through profit and loss financial assets are owned by the group with the exception of derivatives, the details of which are included in note 1(r) below.

Financial liabilities are classified as other liabilities, and with the exception of derivatives, are recognised initially at fair value plus transaction costs directly attributable to the acquisition or issue of those financial liabilities. After initial recognition they are measured at amortised cost using the EIR method.

Management determines the classification of its financial assets and liabilities at initial recognition.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market where it is expected that substantially all of the initial investment will be recovered, other than because of credit deterioration. Loans and receivables are subsequently carried at amortised cost using the EIR method and recorded net of provisions for impairment losses.

Available for sale

Available for sale assets are those non-derivative financial assets intended to be held for an indefinite period of time, which may be sold in response to liquidity requirements or changes in interest rates, exchange rates or equity prices. Available for sale financial assets are subsequently carried at fair value, with gains and losses arising from changes in fair value taken to a separate component of equity until the asset is sold, or is impaired, when the cumulative gain or loss is transferred to the consolidated profit and loss account.

The fair values of quoted financial assets or financial liabilities in active markets are based on current prices. If the market for a financial asset or financial liability is not active, and for unlisted securities, the group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants.

Derecognition

Financial assets are derecognised when the rights to receive cashflows from the financial assets have expired or where the group has transferred substantially all risks and rewards of ownership. If substantially all the risks and rewards have been neither retained nor transferred and the group has retained control, the assets continue to be recognised to the extent of the group’s continuing involvement. Financial liabilities are derecognised when they are extinguished.

(g) Impairment of financial assets

The group assesses at each balance sheet date whether there is any objective evidence that a financial asset or group of financial assets classified as available for sale or loans and receivables, is impaired. A financial asset or group of financial assets is impaired, and an impairment loss incurred, if there is objective evidence that an event or events since initial recognition of the asset have adversely affected the amount or timing of future cash flows from the asset.

Financial assets at amortised cost

If there is objective evidence that an impairment loss on a financial asset or group of financial assets classified as loans and receivables has been incurred, the group measures the amount of the loss as the difference between the carrying amount of the asset or group of assets and the present value of estimated future cash flows from the asset or group of assets discounted at the EIR of the instrument at initial recognition.

Impairment losses are assessed individually for financial assets that are individually significant and collectively assessed for assets that are not. In making collective assessment of impairment, financial assets are grouped into portfolios on the basis of similar risk characteristics.

The amount of the loss is measured as the difference between the loan’s carrying amount and the present value of estimated future cash flows, excluding future credit losses that have not been incurred, discounted at the original EIR. As the loan amortises over its life, the impairment loss may amortise. All impairment losses are reviewed at least at each reporting date. If subsequently the amount of the loss decreases as a result of a new event, the relevant element of the outstanding impairment loss is reversed. Interest on


THE NOTES

19

1. Accounting policies continued

impaired financial assets is recognised at the original EIR applied to the carrying amount as reduced by an allowance for impairment.

For loans that are not considered individually significant, the group adopts a formulaic approach which allocates a loss rate dependent on the overdue period. Loss rates are based on the discounted expected future cash flows and are regularly benchmarked against actual outcomes to ensure they remain appropriate.

Financial assets carried at fair value

When a decline in the fair value of a financial asset classified as available for sale has been recognised directly in equity and there is objective evidence that the asset is impaired, the cumulative loss is removed from equity and recognised in the consolidated profit and loss account. The loss is measured as the difference between the amortised cost of the financial asset and its current fair value. Impairment losses on available for sale equity instruments are not reversed through the consolidated profit and loss account, but those on available for sale debt instruments are reversed, if there is an increase in fair value that is objectively related to a subsequent event.

(h) Sale and repurchase agreements and other secured lending and borrowings

Securities may be sold subject to a commitment to repurchase them. Such securities are retained on the consolidated balance sheet when substantially all the risks and rewards of ownership remain with the group. The transactions are treated as collateralised borrowing and the counterparty liability is included within loans and overdrafts from banks. Similar secured borrowing and the counterparty transactions including securities leading transactions and collateralised short-term notes are treated and presented in the same way. These secured financing transactions are initially recognized at fair value, and subsequently valued at amortised cost, using the effective interest method.

(i) Securitisation transactions

Where the group securitises its own financial assets, this is achieved via the sale of these assets to an SPE, which in turn issues securities to investors. All financial assets continue to be held on the group’s consolidated balance sheet, and debt securities in issue are recognised for the proceeds of the funding transaction.

(j) Finance leases, operating leases and hire purchase

A finance lease is a lease or hire purchase contract that transfers substantially all the risks and rewards incidental to ownership of an asset to the lessee. Finance leases are recognised as loans at an amount equal to the gross investment in the lease discounted at its implicit interest rate. Finance charges on finance leases are taken to income in proportion to the net funds invested.

Rental costs under operating leases and hire purchase contracts are charged to the consolidated profit and loss account in equal instalments over the period of the leases. Rental income from operating leases is recognised in equal instalments over the period of the leases and included in other operating income in the consolidated profit and loss account.

(k) Tangible fixed assets

Tangible fixed assets is stated at cost less accumulated depreciation and less provisions for impairment. Depreciation is calculated to write off their cost on a straight line bases over their estimated useful lives as follows:

Fixtures, fittings and equipment 3 to 5 years Assets held under operating leases 1 to 15 years Motor vehicles 5 years Long leasehold property 40 years Short leasehold property Over the length of the lease

(l) Foreign currency translation

For the company and those subsidiaries whose balance sheets are denominated in sterling, which is the company’s functional and presentation currency, monetary assets and liabilities denominated in foreign currencies are translated into sterling at the closing rates of exchange at the balance sheet date. Foreign currency transactions are translated into sterling at the average rates of exchange over the year and exchange differences arising are taken to the consolidated profit and loss account.

The balance sheets of subsidiaries denominated in foreign currencies are translated into sterling at the closing rates. The profit and loss accounts for these subsidiaries are translated at the average rates and exchange differences arising are taken to the exchange movements reserve. Such exchange differences are reclassified to the consolidated profit and loss in the period in which the subsidiary is disposed of.


THE NOTES

20

Accounting policies continued

(m) Current tax

Current tax is the expected tax payable on the taxable profit for the year. Taxable profit differs from net profit as reported in the consolidated profit and loss account because it excludes items of income and expense that are taxable or deductible in other years and items that are never taxable or deductible. The group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

(n) Deferred tax

Deferred tax is provided in full on material timing differences, at the rates of taxation expected to apply when these differences crystallise, arising from the inclusion of items of income and expenditure in taxation computations in periods different from those for which they are included in the financial statements. A net deferred tax asset is regarded as recoverable and therefore recognised only to the extent that, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.

(o) Provisions and contingent liabilities

Provisions are recognised in respect of present obligations arising from past events where it is probable that outflows of resources will be required to settle the obligations and they can be reliably estimated.

Contingent liabilities are possible obligations whose existence depends on the outcome of uncertain future events or those present obligations where the outflows of resources are uncertain or cannot be measured reliably. Contingent liabilities are not recognised in the financial statements but are disclosed unless they are remote.

(p) Goodwill

As required by FRS 10, such goodwill arising has been capitalised in intangible assets and is amortised in equal annual instalments, unless there is impairment, over its estimated useful life of up to 20 years.

(q) Pensions

Under the defined contribution scheme the group pays fixed contributions into a fund separate from the group’s assets. Contributions are charged in the consolidated profit and loss account when they become payable.

There is a defined benefit scheme, which was closed to new entrants in August 1996 and closed to further accrual during 2012. At 31 July 2015 this scheme had 61 (2014: 64) deferred members and 35 (2014: 34) pensioners and dependants. Further information is available in the financial statements of CBG.

(r) Derivative financial instruments (“derivatives”) and hedge accounting

In general, derivatives are used to minimise the impact of interest, currency rate and equity price changes to the group’s financial instruments. They are carried on the consolidated balance sheet at fair value which is obtained from quoted market prices in active markets, including recent market transactions, and discounted cash flow models.

On acquisition, certain derivatives are designated as a hedge and the group formally documents the relationship between these derivatives and the hedged item. The group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivative is highly effective in offsetting changes in fair values or cash flows of hedged items. If a hedge was deemed partially ineffective but continues to qualify for hedge accounting, the amount of the ineffectiveness, taking into account the timing of the expected cash flows where relevant, would be recorded in the consolidated profit and loss account. If the hedge is not, or has ceased to be, highly effective the group discontinues hedge accounting.

For fair value hedges, changes in the fair value are recognised in the consolidated profit and loss account, together with changes in the fair value of the hedged item. For cash flow hedges, the fair value gain or loss associated with the effective proportion of the cash flow hedge is recognised initially directly in equity and recycled to the consolidated profit and loss account in the period when the hedged item affects income.

Some contracts (‘‘hybrid contracts’’) contain both a derivative (the ‘‘embedded derivative’’) and a non-derivative (the ‘‘host contract’’). Where the economic characteristics and risks of the embedded derivatives are not closely related to those of the host contract, and the host contract itself is not carried at fair value through profit or loss, the embedded derivative is bifurcated and reported at fair value and gains and losses are recognised in the consolidated statement of profit and loss.


THE NOTES

21

Accounting policies continued

(s) Offsetting financial instruments

Financial assets and financial liabilities are offset and the net amount presented on the consolidated balance sheet if, and only if, there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise an asset and settle the liability simultaneously.

(t) Investment in subsidiaries

Investments in subsidiaries are stated at cost less provision for impairment.

(u) Share-based payments

Close Brothers Group plc (“CBG”), the ultimate parent company, operates long term incentive arrangements in which group employees have participated. These include, an annual bonus plan and four long term equity based incentive schemes ("Incentive Schemes"); the Share Matching Plan (“SMP”), the 2009 Term Incentive Plan ("LTIP"), the 1995 Executive Share Option Scheme and the Inland Revenue approved Save As You Earn (“SAYE”) scheme.

The costs of the annual bonus plan related awards (“DAB” / “DSA”) are based on the salary of the individual at the time the award is made. The value of the share award at the grant date is charged to the group’s income statement in the year to which the award relates.

The cost of the Incentive Schemes is based on the fair value of awards on the date of grant. Fair values are determined using a stochastic (Monte Carlo simulation) pricing model for the SMP and LTIP and the Black-Scholes pricing model for the others. Both models take into account the exercise price of the option, the current share price, the risk free interest rate, the expected volatility of the CBG share price over the life of the option award and other relevant factors. The stochastic pricing model is also used to calculate the fair value of the market related element of the SMP and LTIP awards. Vesting conditions are not taken into account when measuring fair value, but are reflected by adjusting the number of shares in each award such that the amount recognised reflects the number that are expected to, and then actually do, vest. CBG expense the fair value of the awards, including recharges to subsidiary companies where applicable, in their income statement on a straight line basis over the vesting period, with a corresponding credit to the share-based awards reserve. At the end of the vesting period, or upon exercise, lapse or forfeit if earlier, this credit is transferred to retained reserves. Further information on the group’s schemes is provided in note 23.

(v) Cash flow statement

The company has taken advantage of the exemption within FRS 1 (Revised) for 90 percent or more owned subsidiaries. Accordingly, a cash flow statement has not been presented.

2. Administrative expenses 2015 2014

£m £m

Staff costs:

Wages and salaries 109.2 96.3

Social security costs 16.9 15.3

Share based payments 3.1 2.9

Other pension costs 4.8 3.9

Total staff costs 134.0 118.4

Other administrative expenses 80.6 76.3

Total administrative expenses 214.6 194.7

The average number of persons employed by the group during the year was 1,910 (2014: 1,776) and by

the company was 1,512 (2014: 1,395).

Operating lease rentals payable by the group amounted to £4.6 million (2014: £4.7 million).


THE NOTES

22

3. Information regarding directors

4. Profit on ordinary activities before taxation 2015 2014

£m £m

The profit on ordinary activities before taxation is stated after charging:

Auditor's remuneration:

Audit of the company's annual accounts 0.5 0.4

Audit of the company's subsidiaries pursuant to legislation 0.2 0.2

Other services relating to taxation 0.1 0.1

Other fees 0.1 0.1

Total Auditor's remuneration 0.9 0.8

Interest income

Cash and balances at central banks 4.9 5.0

Loans and advances to banks - -

Loans and advances to customers 524.2 484.0

Income from group undertakings 6.7 8.9

Interest income arising from debt securities 1.2 1.2

Total interest receivable and similar income 537.0 499.1

Interest expense

Deposits by banks 0.3 0.4

Deposits by customers 83.5 93.7

Borrowings 39.3 29.6

Interest expense from group undertakings 6.8 12.8

Other interest expense 1.1 0.8

Total interest expense 131.0 137.3

Net interest income 406.0 361.8

Total fee income and expense (other than calculated using the effective interest rate method) on financial

instruments that are not at fair value through profit and loss were £83.3 million (2014: £78.1 million) and

£23.8 million (2014: £20.2 million), respectively.

Substantially all income, profits and net assets relate to banking activities located in the UK.

Directors’ fees were £nil (2014: £nil) and directors’ emoluments, excluding pension contributions, were

£5,876,475 (2014: £5,430,144).

The highest paid director received emoluments of £2,000,160 (2014: £1,965,380), pension contributions of

£nil (2014: £nil), exercised share options and received shares through long-term incentive schemes.

Contributions paid to money purchase pension schemes, of which seven (2014: five) directors were

members, amounted to £128,375 (2014: £123,500). No (2014: nil) director was a member of a defined

benefits pension scheme, and the company paid £nil (2014: £nil) to the scheme on their behalf. Five

(2014: five) directors exercised share options and received shares through long-term incentive schemes.

The above information includes directors' costs incurred by the group only.

All results are derived from continuing operations.


THE NOTES

23

5. Taxation on profit on ordinary activities 2015 2014

£m £m

UK corporation taxation 48.0 47.7

Foreign taxation 1.3 1.2

Adjustment in respect of previous years (0.2) 1.1

Current year taxation charge 49.1 50.0

Deferred taxation (note 20) (5.3) (6.8)

Taxation on profit on ordinary activities 43.8 43.2

Reconciliation to current year taxation charge:

Profit on ordinary activities before taxation 216.6 188.7

Taxation on above profit at 20.7% (2014: 22.3%) 44.8 42.1

Goodwill amortisation disallowed 0.4 0.4

Effect of different tax rates in other jurisdictions (0.7) (0.5)

Disallowable items and other permanent differences (1.1) (0.5)

Origination and reversal of timing differences 5.9 7.4

Prior year under (over) provision (0.2) 1.1

Current year taxation charge 49.1 50.0

6. Profit of parent undertaking

7. Dividends

2015 2014

For each ordinary share £m £m

35.0 76.1

Final dividend for current financial year paid in July 2015: 23p (2014: nil) 19.0 -

Deemed distribution 9.6 9.0

63.6 85.1

8. Loans and advances to banks

2015 2014 2015 2014

£m £m £m £m

Repayable:

On demand 24.1 40.1 14.0 21.5

Within three months 7.4 2.0 1.4 -

Between three months and one year - 3.8 - -

Between one year and two years 3.8 7.5 - -

Between two year and five years 7.5 - - -

Total loans and advances to banks 42.8 53.4 15.4 21.5

Loans and advances to banks are classified as loans and receivables under FRS 26.

The effective tax rate for the year is 20.2% (2014: 22.9%). This is broadly in line with the UK corporation tax

rate of 20.7% (2014: 22.3%). On 8 July 2015, the Government proposed reductions in the UK corporation tax

rate to 19% from April 2017 and 18% from April 2020, and an additional 8% tax surcharge on profits of

banking companies from January 2016. These proposals are expected to be enacted later in 2015.

Interim dividend for current financial year paid in January 2015: 42p (2014:

92p)

The deemed distribution relates to a fair value adjustment applied to certain intercompany loans in accordance

with FRS 26.

As permitted by Section 408(3) of the Companies Act 2006, the profit and loss account of the parent

undertaking is not presented as part of these financial statements. The parent undertaking's profit for the

financial year amounted to £197.0 million (2014: £143.6 million).

Group Company


THE NOTES

24

9. Loans and advances to customers

2015 2014 2015 2014

£m £m £m £m

Loans and advances to customers comprise:

Hire purchase agreement receivables 2,552.9 2,341.4 2,383.1 2,166.4

Finance lease receivables 473.0 466.5 311.7 338.9

Other loans and advances 2,711.9 2,481.8 1,814.0 1,641.6

Total loans and advances to customers 5,737.8 5,289.7 4,508.8 4,146.9

2015 2014 2015 2014

£m £m £m £m

Loans and advances to customers are repayable:

Within three months 1,588.9 1,524.2 986.3 927.9

Between three months and one year 1,797.8 1,660.8 1,492.8 1,363.4

Between one and two years 1,108.2 1,038.3 974.9 910.5

Between two and five years 1,254.1 1,093.3 1,077.2 969.4

More than five years 44.9 21.4 23.8 16.1

Impairment provisions (56.1) (48.3) (46.2) (40.4)

Total loans and advances to customers 5,737.8 5,289.7 4,508.8 4,146.9

2015 2014 2015 2014

£m £m £m £m

Impairment provisions on loans and advances:

Opening balance 48.3 61.9 40.4 52.5

Charge for the year 41.9 44.1 35.4 39.1

Amounts written off net of recoveries (34.1) (57.7) (29.6) (51.2)

Closing balance 56.1 48.3 46.2 40.4

At 31 July 2015, gross impaired loans were £162.3 million (2014 £159.9 million) and equate to 3% (2014: 3%) of the

gross loan book before impairment provisions. The majority of the group's lending is secured and therefore the gross

impaired loans quoted do not reflect the expected loss.

Group Company

Group Company

Group Company

The aggregate cost of assets acquired by the group for the purpose of letting under finance leases and hire purchase

agreements was £5,182.8 million (2014: £4,576.6 million). The aggregate cost of assets acquired by the company for

the purpose of letting under finance leases and hire purchase agreements was £4,236.9 million (2014: £4,236.9

million).

As at 31 July 2015, the fair value of the loans and advances to customers materially equates to their carrying value.


THE NOTES

25

10. Derivative financial instruments

Notional Assets Liabilities Notional Assets Liabilities

£m £m £m £m £m £m

Exchange rate contracts 170.1 0.8 0.9 254.6 4.8 0.3

Interest rate contracts 3,979.2 18.9 6.2 4,240.8 7.6 3.8

Equity derivatives - - - 128.1 15.0 15.4

Total derivative financial

instruments 4,149.3 19.7 7.1 4,623.5 27.4 19.5


£m £m £m £m £m £m

Exchange rate contracts 170.1 0.8 0.9 256.6 4.8 0.2


Equity derivatives - - - 128.1 15.0 15.4

Total derivative financial

instruments 3,649.3 18.5 7.1 4,125.5 26.3 19.4


£m £m £m £m £m £m

Cash flow hedges


Fair value hedges


Group

2015 2014

Company2015

Included in the above group and company figures are the following FRS 26 cash flow hedges and FRS 26 fair

value hedges:

2014

Notional amounts of interest rate contracts totalling £2,386.2 million (2014: £3,127.6 million) have a residual

maturity of more than one year. The group enters into derivative contracts with a number of financial institutions

as a principal only to minimise the impact of interest and currency rate changes to its financial instruments.

The cash flow hedges relate to exposure to future interest payments or receipts on recognised financial

instruments and on forecast transactions for periods of up to 8 years (2014: 8 years); there was immaterial

ineffectiveness. The cash flow hedge amounts that were removed from equity and included in profit and loss for

the years ended 31st July, 2015 and 2014 were immaterial. The loss recognised in equity for cash flow hedges

during the year was £5.7 million (2014: £4.7 million gain).

The fair value hedges hedge the interest rate risk in recognised financial instruments; the loss on the hedged

item was £14.9 million (2014: £5.2 million) which was largely offset by a gain of £15.0 million loss (2014: £5.3

million loss) on the hedging instrument.

2015 2014


THE NOTES

26

11. Debt securities

Available for

sale assets

Loans and

receivables Total

£m £m £m

2015

Certificates of deposit - 115.3 115.3

Gilts 20.1 - 20.1

20.1 115.3 135.4

Available for

sale assets

Loans and

receivables Total

£m £m £m

2014

Certificates of deposit - - -

Gilts 45.6 - 45.6

45.6 - 45.6

Movements on the book value of gilts and floating rate notes comprise:

Gilts

Available for

sale assets Loans for sale Total

£m £m £m

At 1st August, 2013 46.7 39.4 86.1

Disposals - (37.8) (37.8)

Redemptions at maturity - - -

Currency translation differences - (1.6) (1.6)

Changes in fair value (1.1) - (1.1)

At 31st July, 2014 45.6 - 45.6

Disposals - - -

Redemptions at maturity (25.0) - (25.0)

Currency translation differences - - -

Changes in fair value (0.5) - (0.5)

At 31st July, 2015 20.1 - 20.1

Fair value Carrying value Fair value Carrying value

£m £m £m £m

Subordinated loan capital 56.9 46.4 88.3 77.2

CBL bond 315.4 311.2 306.5 300.2

Group & Company

2015 2014

Group & Company


THE NOTES

27

12. Investments in subsidiaries

Air & General Finance Limited Close Invoice Finance Limited

Armed Services Finance Limited Close Leasing Limited

Brook Funding (No.1) Limited1

Close Motor Finance Limited

CBM Holdings Limited Close PF Funding I Limited1

CLL I Limited Close Trust Nominees Limited

Close Asset Finance Limited Colomberie Finance Limited

Close Brewery Rentals Limited Commercial Acceptances Limited

Close Brothers Asset Finance GmbH (Germany) Commercial Finance Credit Limited

Close Brothers Factoring GmbH (Germany) Commercial Vehicle Solutions Limited

Close Brothers Finance plc Ecasks Limited

Close Brothers Limited Kingston Asset Finance Limited

Close Brothers Military Services Limited Kingston Asset Leasing Limited

Close Business Finance Limited Metropolitan Factors Limited

Close Credit Management (Holdings) Limited Micgate Holdings (UK) Limited

Close Finance (CI) Limited (Jersey) Rodney Road Car Park Limited

Close International Bank Holdings Limited (Guernsey) Surrey Asset Finance Limited

The movement in the company's investments in subsidiaries was as follows:

£m

At 1st August, 2014 131.4

Movement during the year (59.4)

At 31st July, 2015 72.0

The movement of goodwill was as follows:

Group Company

£m £m

Original cost capitalised at 1st August, 2014 57.4 9.1

Amortisation in prior years (42.6) (2.3)

Net book value at 1st August, 2014 14.8 6.8

Amortisation for the year (1.7) (1.0)

Net book value at 31st July, 2015 13.1 5.8

In accordance with section 409 of the Companies Act 2006, below is a list of the company's subsidiaries

which are all wholly-owned and incorporated in the UK unless otherwise stated.

A value in use calculation uses discounted cash flow projections based on the most recent board

approved budgets and three year plans to determine the recoverable amount.

These cash flows are discounted using a pre-tax estimated weighted average cost of capital that reflects

current market rates appropriate to the group.

As at 31st July, 2015, the company had no principal subsidiaries as defined by Section 410(2) of The

Companies Act 2006.

Goodwill impairment reviews are carried out annually by assessing the recoverable amount of the group’s

goodwill, which is the higher of fair value less costs to sell and value in use. The recoverable amounts

were measured based on value in use.

1 The share capital of these securitisation vehicles is not owned by the group, but these vehicles are included in the consolidated financial

statements as they are controlled by the group.

The movement during the year is due to the company reducing capital balances in certain subsiduaries.

The largest of these capital reductions occurred in Close Asset Finance Limited and Close Motor Finance

Limited.


THE NOTES

28

13. Tangible fixed assets

Land and

buildings

Operating

leases

Fixtures,

fittings and

equipment

Motor

vehicles Total

£m £m £m £m £m

Group

Cost:

At 1st August, 2014 3.1 132.7 66.7 1.2 203.7

Additions 7.1 43.7 24.0 - 74.8

Disposals (0.1) (11.3) (7.9) (0.4) (19.7).

At 31st July, 2015 10.1 165.1 82.8 0.8 258.8

Depreciation:

At 1st August, 2014 1.8 28.9 29.5 0.6 60.8

Charge for the year 0.5 16.7 16.1 0.1 33.4

Disposals (0.1) (7.5) (6.2) (0.2) (14.0)

At 31st July, 2015 2.2 38.1 39.4 0.5 80.2

Net book value at 31st

July, 2015 7.9 127.0 43.4 0.3 178.6

Net book value at 31st July,

2014 1.3 103.8 37.2 0.6 142.9

Company

Cost:

At 1st August, 2014 1.9 3.1 60.2 0.5 65.7

Additions 7.0 1.4 22.2 - 30.6

Disposals (0.1) (0.8) (7.5) (0.3) (8.7)

At 31st July, 2015 8.8 3.7 74.9 0.2 87.6

Depreciation:

At 1st August, 2014 1.2 1.9 24.3 0.4 27.8

Charge for the year 0.4 0.4 15.4 0.1 16.3

Disposals (0.1) (0.6) (6.0) (0.3) (7.0)

At 31st July, 2015 1.5 1.7 33.7 0.2 37.1

Net book value at 31st

July, 2015 7.3 2.0 41.2 - 50.5

Net book value at 31st July,

2014 0.7 1.2 35.9 0.1 37.9

Fixtures, fittings and equipment includes software.

The net book value of land and buildings comprises:

2015 2014

£m £m

Group 7.9 1.3

Company 7.3 0.7

Short leashold

Assets held under operating leases are held for leasing to customers, these relate to the rentals businesses

within the group. In addition to the depreciation charged in the year of £16.7 million (2014: £14.0 million),

these assets generated other income of £39.1 million (2014: £32.4 million) and interest and fee expense of

£12.5 million (2014: £11.1 million).


THE NOTES

29

14. Deposits by banks

2015 2014 2015 2014

£m £m £m £m

Repayable:

On demand 11.5 21.1 11.5 21.0

Within three months 1.0 20.0 1.0 20.0

Between three months and one year 22.1 8.5 22.1 8.6

Between one and two years 0.5 - 0.5 -

Total deposits by banks 35.1 49.6 35.1 49.6

15. Deposits by customers

2015 2014 2015 2014

£m £m £m £m

Repayable:

On demand 154.8 161.6 154.8 161.6

Within three months 828.4 1,256.5 828.4 1,256.5

Between three months and one year 2,347.7 1,532.5 2,347.7 1,532.5

Between one and two years 851.2 1,399.3 851.2 1,399.3

Between two and five years 299.3 160.4 299.3 160.4

More than five years - - - -

Total deposits by customers 4,481.4 4,510.3 4,481.4 4,510.3

16. Bank loans and overdrafts

2015 2014 2015 2014

£m £m £m £m

Repayable:

On demand 5.3 3.3 0.9 3.3

Within three months 99.1 - 99.1 -

Between three months and one year 123.7 - 123.7 -

Between one and two years 59.9 - 59.9 -

Between two and five years 89.9 - 89.9 -

Total bank loans and overdrafts 377.9 3.3 373.5 3.3

The group has repurchase agreements whereby £375.0 million of Treasury Bills have been drawn and lent in

exchange for cash which is included within loans and overdrafts from bank.

Group Company

Group Company

Group Company


THE NOTES

30

17. Debt securities in issue

2015 2014

£m £m

Repayable:

On demand 11.2 -

Within three months 0.5 0.5

Between three months and one year 1.1 350.5

Between one and two years 548.4 227.8

Between two and five years 299.3 271.4

Over five years 298.9 299.0

1,159.4 1,149.2

18. Amounts due to group undertakings

2015 2014 2015 2014

£m £m £m £m

Amounts due to ultimate parent undertaking 354.0 333.5 353.4 333.0

Amounts due to fellow subsidiary undertakings - - 1,182.4 1,243.4

Total amounts due to group undertakings 354.0 333.5 1,535.8 1,576.4

19. Other assets and other liabilities

2015 2014 2015 2014

£m £m £m £m

Prepayments and accrued income 70.3 67.9 66.6 63.9

Trade debtors 12.6 13.3 6.3 7.4

Amounts owed by parent undertaking - - - -

Total other assets 82.9 81.2 72.9 71.3

£m £m £m £m

Accruals and deferred income 68.9 58.2 60.7 50.3

Current corporation taxation 18.0 24.2 15.7 21.5

Provisions 5.7 3.6 5.2 3.4

Other liabilities 42.8 41.9 36.8 37.3

Total other liabilities 135.4 127.9 118.4 112.5

Group

The group has securitised £1,164.8 million (2014: £1,134.1 million) of its insurance premium and motor

loan receivables in return for debt securities in issue of £847.7 million (2014: £848.6 million). As the group

has retained exposure to substantially all the credit risk and the rewards of the residual benefit of the

underlying assets, it continues to recognise these assets in loans and advances to customers on its

consolidated balance sheet.

Group Company

Group Company


THE NOTES

31

19. Other assets and other liabilities continued

Provisions movement in the year:

Property Other Total

Movement during the year: £m £m £m

At 1st August, 2014 2.4 1.2 3.6

Additions 2.6 0.2 2.8

Utilised - (0.4) (0.4)

Released (0.3) - (0.3)

At 31st July, 2015 4.7 1.0 5.7

Property Other Total

Movement during the year: £m £m £m

At 1st August, 2014 2.2 1.2 3.4

Additions 2.4 0.1 2.5

Utilised - (0.4) (0.4)

Released (0.3) - (0.3)

At 31st July, 2015 4.3 0.9 5.2

20. Deferred taxation

2015 2014 2015 2014

£m £m £m £m

Capital allowances 32.1 26.9 33.7 28.3

Employee benefits 3.1 2.6 2.7 2.3

Short term and other timing differences 1.5 0.4 1.7 0.4

Total deferred taxation asset 36.7 29.9 38.1 31.0

£m £m

Movement during the year:

Deferred taxation asset at 1st August, 2014 29.9 31.0

Credited to the profit and loss account 5.3 5.5

Other movements 1.5 1.6

Deferred taxation asset at 31st July, 2015 36.7 38.1

As the group has been and is expected to continue to be consistently profitable, it is appropriate to

recognise the full deferred tax asset.

CompanyGroup

Group

Company

Other items for which claims are made arise in the normal course of business. The timing and outcome of

these other items are uncertain. Property provisions are in respect of leaseholds where rents payable

exceed the value to the group in respect of potential dilpaidations and onerous leases. These property

provisions will be utilised and released over the remaining lives of the leases which range from one to 10

years.


THE NOTES

32

21. Subordinated loan capital

2015 2014

£m £m

2020 2015 7.39 - 30.8

2026 2021 7.42 15.5 15.5

2026 2021 7.62 30.9 30.9

Total subordinated loan capital 46.4 77.2

22. Share capital 2015 2014

£m £m

Authorised ordinary shares of £1 each 100.0 100.0

Allotted, issued and fully paid 82.5 82.5

23. Share-based awards

Number

Weighted

average

exercise

price Number

Weighted

average

exercise

price Number

Weighted

average

exercise

price Number

Weighted

average

exercise

price Number

Weighted

average

exercise

price

At 1st August, 2013 290,286 687.8p 569,305 552.9p 966,792 - 395,906 - 362,559 -

Granted - - 375,643 1023.6p 195,781 - 213,621 - 115,563 -

Exercised (6,639) 717.1p (202,855) 489.8p (239,793) - (197,081) - (127,539) -

Forfeited - - (71,243) 652.6p - - - - - -

Lapsed (173,075) 707.7p (5,817) 562.6p (63,591) - - - (20,727) -

At 31st July, 2014 110,572 654.9p 665,033 827.3p 859,189 - 412,446 - 329,856 -

Granted - - 139,694 1143p 240,843 - 182,416 - 96,965 -

Exercised (6,703) 654.5p (182,388) 557.1p (332,605) - (220,987) - (137,350) -

Forfeited - - (19,769) 1005.8p - - - - - -

Lapsed (103,869) 654.9p (36,882) 915p (28,630) - (12,427) - (4,736) -

At 31st July, 2015 - 654.9p 565,688 980.4p 738,797 - 361,448 - 284,735 -

Exercisable at:

31st July, 2015 - 654.9p - - - - - - - -

31st July, 2014 110,572 654.9p - - - - 412,446 - - -

The table below shows the weighted average market price at the date of exercise:

2015 2014

ESOS 1,426.0p 1,182.8p

SAYE 1,510.5p 1,336.0p

LTIP 1,498.5p 1,296.9p

DAB / DSA 1,473.2p 1,229.8p

Prepayment

date at company's option

Group and Company

The subordinated loan capital is denominated in sterling. If the company opts not to prepay at the prepayment date,

the interest rate is reset to a margin over the yield of 5 year UK Treasury securities.

There are no circumstances in which early repayment can be demanded of any issue other than upon the passing of

a winding-up order in respect of the company, in which case the loan capital is subordinated to the claims of all

unsubordinated creditors, including depositors.

Final maturity

date

Initial interest

rate (%)

ESOS SAYE LTIP SMPDAB / DSA

Share-based awards have been granted under the following Close Brothers Group plc share schemes: Save As You

Earn ("SAYE") Scheme, 2009 Long Term Incentive Plans ("LTIP"), Share Matching Plan (“SMP”), and the annual

bonus plan satisfied by deferred shares (“DAB” / “DSA”):


THE NOTES

33

23. Share-based awards continued

Weighted Weighted

average average

remaining remaining

contractual contractual

Number life Number life

Exercise price range outstanding Years outstanding Years

ESOS

Between £6 and £7 - - 110,572 0.2

Between £7 and £8 - - - -

SAYE

Between £5 and £6 35,506 1.2 202,587 1.1

Between £6 and £7 79,989 1.1 107,577 1.9

Between £9 and £10 168,646 2.2 189,927 3.2

Between £11 and £12 281,547 3.1 164,942 4.2

LTIP

Nil 738,797 2.2 859,189 2.0

DAB/ DSA

Nil 361,448 1.0 412,446 1.6

SMP

Nil 284,735 2.3 329,856 2.1

Total 1,950,668 2.1 2,377,096 2.0

Options

outstanding 2015

Options

outstanding 2014

The range of exercise prices and weighted average remaining contractual life of awards and options outstanding are

as follows:

Following the payment of a special dividend by Close Brothers Group plc on 6 November 2007, options under that

company’s 1995 Executive Share Option Scheme (other than options under the HM Revenue and Customs approved

section of that Scheme) were adjusted by the Remuneration Committee of Close Brothers Group plc (“the

Committee”) to take account of the depreciatory effect of the special dividend.

Annual bonus plan related awards (“DAB”/“DSA”/”NDSA”) are at the discretion of the Committee, and are determined

in the light of the factors described in the Remuneration Policy set out in the Annual Report of Close Brothers Group

plc. A proportion of an employee’s performance related award may be deferred and satisfied in ordinary shares of the

company ("shares"). Performance related awards up to 100% of salary will be paid in cash without deferral. Awards

in excess of 100% of salary will be deferred in cash and shares which vest after two years for non-code staff and in

yearly tiers for three years for code staff ("the Deferred Element"). The Deferred Element will be forfeited if the

employee leaves employment in certain circumstances or is dismissed for cause before the relevant vesting date.

The number of shares comprised in the Deferred Element will be determined by reference to the market value of a

share shortly following the announcement of the Close Brothers Group plc results for the relevant financial year.

Following vesting, the “DAB” and “DSA” shares are called for within twelve months. The “NDSA” are held for six

months after grant after which they are released to employees. When the shares are called for, the employee is

entitled to the value of dividends in respect of the shares under the Deferred Element accumulated over the period of

deferral. The exercise price of each Deferred Share Award issue is 0.0p.

The aggregate amount payable on exercise of these options and the latent gain per share will be unaltered, subject

to normal market factors.

Close Brothers Group plc (the “Group”) operates long-term performance related incentive arrangements. These

include the SMP, 2009 LTIP, the 1995 Scheme, the DAB/DSA and the SAYE Scheme. Grants under the SMP, 2009

LTIP, DAB/DSA arrangement and the SAYE Scheme are made annually and are expected to continue for the

foreseeable future. No further grants will be made under the 1995 Scheme.


THE NOTES

34

23. Share-based awards continued

Expected Risk free

Share price Exercise Expected option life Dividend intere

Exercise period at issue price volatility in years yield rate

SAYE

1 Dec 2017 to 31 May 2018 1,428.0p 1,143.0p 21.0% 3 3.4% 1.0%

1 Dec 2019 to 31 May 2020 1,428.0p 1,143.0p 22.0% 5 3.4% 1.5%

LTIP

1 Oct 2017 to 30 Sep 2018 1,431.0p - 21.0% 3 3.4% 1.3%

30 Sep 2019 to 29 Sep 2020 1,446.0p 0.0% 4 0.0% 0.0%

30 Sep 2020 to 29 Sep 2021 1,446.0p 0.0% 5 0.0% 0.0%

DSA

1 Oct 2015 to 30 Sep 2018 1,431.0p - - - - -

1 Oct 2014 to 30 Sep 2017 1,576.0p - - - - -

15 Jun 2016 to 15 Jun 2019 1,576.0p - - - - -

SMP

1 Oct 2017 to 30 Sep 2018 1431.0p - 21.0% 3 3.4% 1.3%

For each SAYE, SMP and 2009 LTIP issue, the exercise end date is respectively six months, twelve months

and twelve months after the exercise start date. All eligible employees are entitled to participate in the SAYE

Scheme on the same terms and options are granted for a fixed contract period of three or five years, usually at

an exercise price at a discount of 20 per cent to the mid-market price at the date of invitation to participate.

The exercise price of each SMP and 2009 LTIP issue is 0.0p.

The 2009 LTIP is based on a conditional award of free shares subject to performance conditions. Grants are

restricted to a maximum of twice an individual’s salary in any one year. The SMP matching awards also have

performance conditions which are generally aligned to those of the 2009 LTIP, with a maximum of 100% of

base salary allowed to be “invested” and a maximum of two “matching” shares awarded for each invested

share. Performance conditions for SMP and LTIP are determined by the Committee at the time of each grant.

Performance is generally measured over a single period of three years with no re-testing, although the

Committee has the discretion to adjust the vesting period and the period over which the performance is

measured, subject to these not being less than three years beginning not earlier than the start of the Financial

Year in which the Award is granted. Where this discretion has been exercised, the vesting period and the

performance period have exceeded three years.

Expected volatility was determined mainly by reviewing share price volatility for the expected life of each option

up to the date of grant.

The performance conditions under the SMP and 2009 LTIP consist a mix of earnings per share (“EPS”) growth,

absolute Total Shareholder Return (“TSR”) growth and a balanced scorecard of strategic goals for grants prior

to 31 July 2012 and risk management objectives for grants after 31 July 2012. The Committee considers that

this mix of targets provides an appropriate balance between rewarding improvements in the Group’s financial

performance, while also recognising relative stock market performance. Performance criteria will be calculated

by the Committee. Please refer to the Group’s Annual Report 2014 for full details of the schemes.

For the share-based awards granted during the year, the weighted average fair value of those options at 31

July, 2015 was 925.9p (2014: 674.6p). The main assumptions for the valuation of these share-based awards

comprised:


THE NOTES

35

24. Reserves Group Company

£m £m

Profit and loss account:

At 1st August, 2014 500.7 501.9

Retained profit for the year 109.2 133.6


Other movements (0.2) -

Taxation on movement of other reserves 1.1 1.1

At 31st July, 2015 608.9 635.6

Reconciliation of movements in shareholders' funds 2015 2014

£m £m


Retained profit for the year 172.8 60.1

Dividends paid (63.6) (85.1)


Other reserves (5.7) 4.7

Other movements (0.2) (5.0)

Taxation on movement of other reserves 1.1 (0.9)

Net addition to shareholders' funds 102.5 57.1

Opening shareholders' funds 585.8 528.7

Closing shareholders' funds 688.3 585.8

25. Other reserves Group and Company

2015 2014

£m £m

Cash flow hedging reserve:

At 1st August, 2014 2.6 (2.1)

Movement on derivatives (5.7) 4.7

At 31st July, 2015 (3.1) 2.6

Total other reserves (3.1) 2.6

Group

The cumulative goodwill written off directly to reserves since the formation of the group is £11.3 million (2014:

£11.3 million).

The other movements relate to the purchase of the non controlling interest from a subsidiary of the group.


THE NOTES

36

26. Contingent liabilities, guarantees and commitments

Contingent liabilities

Financial Services Compensation Scheme ("FSCS")

Guarantees

2015 2014 2015 2014

£m £m £m £m

Guarantees and irrevocable letters of credit 22.7 0.1 1.6 0.1

Where the group undertakes to make a payment on behalf of its subsidiaries for guarantees issued, such as

bank facilities or property leases or as irrevocable letters of credit for which an obligation to make a payment

to a third party has not arisen at the reporting date.

Group Company

Compensation has previously been paid out by the FSCS funded by loan facilities provided by HM Treasury to

FSCS in support of FSCS’s obligations to the depositors of banks declared in default. The facilities are

expected to be repaid wholly from recoveries from the failed deposit takers, except for an estimated shortfall of

£1.0 billion which the FSCS has announced it intends to collect in three equal instalments beginning in

2013/2014, in addition to the ongoing interest charges on the outstanding loans.

By virtue of being a regulated deposit taker, the group contributes to the FSCS which provides compensation

to customers of financial institutions in the event that an institution is unable, or is likely to be unable, to pay

claims against it. The FSCS raises levies on UK licensed deposit taking institutions to meet such claims based

on their share of UK deposits on 31st December of the year preceding the scheme year (which runs from 1st

April to 31st March). The group has accrued £1.8 million (2014: £2.2 million) for its share of levies that will be

raised by the FSCS.

The amount of future levies payable by the group depends on a number of factors including the potential

recoveries of assets by the FSCS, the group’s participation in the deposit-taking market at 31 December, the

level of protected deposits and the population of FSCS members.


THE NOTES

37

27. Commitments

2015 2014 2015 2014

£m £m £m £m

Memorandum items

within one year 1,163.8 1,250.4 654.1 674.4

over one year 95.8 62.7 64.6 62.7

Total commitments 1,259.6 1,313.1 718.7 737.1

Other commitments

Annual commitments under non-cancellable operating leases, at 31st July, 2015 were as follows:

Group Company Group Company

£m £m £m £m

Expiring:

Within one year 4.5 3.8 1.9 1.6

Between two and five years 18.3 16.7 2.5 1.9

More than five years 13.6 13.4 - -

Total annual commitments 36.4 33.9 4.4 3.5

28. Capital management

The group’s policy is to be well capitalised and its approach to capital management is driven by strategic and

organisational requirements, while also taking into account the regulatory and commercial environments in which it

operates. The PRA supervises the group on a consolidated basis and receives information on the capital adequacy of,

and sets capital requirements for, the group as a whole.

The aim of the capital adequacy regime is to promote safety and soundness in the financial system. It is structured around

three “pillars”: Pillar 1 on minimum capital requirements; Pillar 2 on the supervisory review process; and Pillar 3 on market

discipline. The group’s Pillar 1 information is presented in the following table. Under Pillar 2, the group completes an

annual self assessment of risks known as the “Internal Capital Adequacy Assessment Process” (“ICAAP”). The ICAAP is

reviewed by the PRA which culminates in the PRA setting “Individual Capital Guidance” (“ICG”) on the level of capital the

group and its regulated subsidiaries are required to hold. Pillar 3 requires firms to publish a set of disclosures which allow

market participants to assess information on that firm’s capital, risk exposures and risk assessment process. The Close

Brothers Group's Pillar 3 disclosures can be found on the group’s website www.closebrothers.com/investor-

relations/results-reports-presentations/ pillar-3-disclosures.

Premises Other

Group Company

Undrawn facilities, credit lines, other commitments to

lend:

The group has given commitments to provide funds to customers under undrawn facilities and credit lines. Some of the

commitments are expected to expire without being drawn.

The group had contracted capital commitments of £12.9 million (2014: £3.2 million) of which the company had £1.1

million contracted capital commitments (2014: £0.6 million).


THE NOTES

38

28. Capital management continued

2015 2014

£m £m

Common equity tier 1 capital1

711.3 601.4

Deductions from common equity tier 1 capital 1

(65.4) (61.7)

Common equity tier 1 capital after deductions1

645.9 539.7

Tier 2 capital2

31.5 60.0

Total regulatory capital 677.4 599.7

Risk weighted assets (notional) - unaudited:

Credit and counterparty risk 5,092.8 4,486.2

Operational risk3

367.8 333.0

Market risk3

8.2 8.3

Total risk weighted assets 5,468.8 4,827.5

Capital ratios: % %

Common equity tier 1 capital ratio2

11.8 11.2

Total capital ratio 12.4 12.4

29. Financial risk management

Common equity tier 1 capital increased to £645.9 million (2014: core tier 1 capital £539.7 million) due to an

increase in retained earnings.

A full analysis of the composition of regulatory capital and Pillar 1 risk weighted assets is shown in the following

table.

The group maintains a strong capital base to support the development of the business and to ensure the group

meets the Pillar 1 capital requirements and ICG at all times. As a result, the group maintains capital adequacy

ratios comfortably above minimum regulatory requirements. The group’s individual regulated entities and the

group as a whole complied with all of the externally imposed capital requirements to which they are subject for

the years ended 31 July 2015 and 2014.

At 31 July 2015, the group’s common equity tier 1 capital ratio increased to 11.8% (2014: core tier 1 ratio 11.2%).

Risk weighted assets increased to £5,468.8 million (2014: £4,827.5 million) as a result of growth in credit and

counterparty risk associated with the loan book, which was partly offset by an increase in operational risk

reflecting increased performance over recent years.

2. Under the Capital Requirement Regulation's transitional arrangements, 70% of the principal value of subordinated debt is recognised at 31st

July 2015 (31 July 2014: 80%).

3. Operational and market risk include a notional adjustment at 8% in order to determine notional risk weighted assets.

The group's financial risk management objectives are summarised in the Report of the Directors. Details of the

significant accounting policies and methods adopted, including the criteria for recognition, the basis of

measurement and the basis on which income and expenses are recognised, in respect of each class of financial

asset, financial liability and equity instrument are disclosed in note 1.

1. As the group's ultimate parent undertaking, Close Brothers Group plc, prepares accounts based on IFRS standards, regulatory capital is

calculated on the same basis. Deductions made are calculated in accordance with international standards rather than in accordance with UK

GAAP.

As a diversified group of financial services businesses, financial instruments are central to the group's activities.

The risks associated with financial instruments represent a significant component of the risks faced by the group

and are analysed in more detail below.


THE NOTES

39

29. Financial risk management (continued)

(a) Classification

At 31st July, 2015

Available for

sale

Other financial

instruments

amortised cost

Derivatives

held for

hedging Total

£m £m £m £m £m £m

Assets

- - 1,038.0 - - 1,038.0

Loans and advances to banks - - 42.8 - - 42.8

Loans and advances to customers - - 5,737.8 - - 5,737.8

Debt securities - 20.1 115.3 - - 135.4

Derivative financial instruments 2.3 - - - 17.4 19.7

Other financial assets - - 10.4 - - 10.4

2.3 20.1 6,944.3 - 17.4 6,984.1

Liabilities

Deposits by banks - - - 35.1 - 35.1

Deposits by customers - - - 4,481.4 - 4,481.4

Bank loans and overdrafts - - - 377.9 - 377.9

Debt securities in issue - - - 1,159.4 - 1,159.4


- - - 354.0 - 354.0

Subordinated loan capital - - - 46.4 - 46.4

Other financial liabilities - - - 73.1 - 73.1

2.9 - - 6,527.3 4.2 6,534.4

At 31st July, 2014Available for

sale

Other financial

instruments

amortised cost

Derivatives held

for hedging Total

£m £m £m £m £m £m

Assets

- - 1,171.7 - - 1,171.7

Loans and advances to banks - - 53.4 - - 53.4

- - 5,289.7 - - 5,289.7

Debt securities - 45.6 - - - 45.6


Other financial assets - - 13.0 - - 13.0

20.9 45.6 6,527.8 - 6.5 6,600.8

Liabilities

Deposits by banks - - - 49.6 - 49.6

Deposits by customers - - - 4,510.3 - 4,510.3

Bank loans and overdrafts - - - 3.3 - 3.3

Debt securities in issue - - - 1,149.2 - 1,149.2


- - - 333.5 - 333.5

Subordinated loan capital - - - 77.2 - 77.2

Other financial liabilities - - - 74.8 - 74.8

17.3 - - 6,197.9 2.2 6,217.4

Cash and balances at central banks

Loans and advances to customers

Amounts due to group undertakings

The tables below analyse the group's financial assets and liabilities in accordance with the categories of financial

instruments in FRS 26.

Loans and

receivables

Loans and

receivables

Held for trading

Held for trading

Cash and balances at central banks

Amounts due to group undertakings


THE NOTES

40

29. Financial risk management continued

(b) Valuation

Valuation Hierarchy

•

•

•

At 31st July, 2015

Level 1 Level 2 Level 3 Total

£m £m £m £m

Assets

Debt Securities:

20.1 - - 20.1

Derivative financial instruments - 19.7 - 19.7

20.1 19.7 - 39.8

Liabilities


- 7.1 - 7.1

At 31st July, 2014

Level 1 Level 2 Level 3 Total

£m £m £m £m

Assets

Debt Securities:

45.6 - - 45.6


45.6 27.4 - 73.0

Liabilities


- 19.5 - 19.5

Instruments classified as Level 1 comprise investments in G10 government securities.

Investments classified as Level 2 comprise over the counter derivatives.

There were no transfers between Level 1 and 2 in 2015 or 2014.

Gilts classified as available for sale

Level 2 fair value measurements are those derived from inputs other than quoted prices included within

Level 1 that are observable for the asset or liability, either directly, as prices, or indirectly, derived from

prices;

Level 3 fair value measurements are those derived from valuation techniques that include inputs for the

asset or liability that are not based on observable market data (“unobservable inputs”).

The group holds financial instruments that are measured at fair value subsequent to initial recognition. Each

instrument has been categorised within one of three levels using a fair value hierarchy that reflects the

significance of the inputs used in making the measurements. These levels are based on the degree to which

the fair value is observable and are defined as follows:

Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for

identical assets or liabilities where prices are readily available and represent actual and regularly occurring

market transactions on an arm's length basis. An active market is one in which transactions occur with

sufficient frequency to provide ongoing pricing information;

Gilts classified as available for sale

The tables below show the classification of financial instruments held at fair value in the valuation hierarchy

set out above as at 31st July, 2015 and 31st July, 2014.

The group believes that there is no reasonably possible change to the inputs used in the valuation of these

positions which would have a material effect on the group’s profit and loss account.


THE NOTES

41


(c) Credit risk

2015 2014

£m £m


Loans and advances to banks 42.8 53.4

Loans and advances to customers 5,737.8 5,289.7

Financial instruments classified as available for sale 20.1 45.6

Certificates of deposit classified as loans and receivables 115.3 0.0

Derivative financial instruments 19.7 27.4

Undrawn commitments 1,259.6 1,250.4

Guarantees 22.7 0.1

Total maximum exposure to credit risk 8,256.0 7,838.3

Loans and advances to customers: Exposure outside the UK

2015 2014

£m £m

304.5 252.6

Germany 26.4 35.1

330.9 287.7

The group’s lending activities are generally short-term in nature with low average loan size. In addition the

group applies consistent and prudent lending criteria mitigating credit risk.

Loans and advances are spread across asset classes, short-term and with a low average loan size in order

to avoid concentration risk in the loan book and associated collateral.

The credit quality of the counterparties with whom the group places deposits, enters into derivative contracts

or whose debt securities are held against established limits, is monitored. Whilst these amounts may be

material, the counterparties are all regulated institutions with high credit ratings assigned by international

credit rating agencies, and fall within the large exposure limits set by the regulatory requirements.

Credit risk is the risk of a reduction in earnings and/or value, as a result of the failure of a counterparty or

associated party with whom the group has contracted to meet its obligations in a timely manner.

The maximum exposure to credit risk arising from financial instruments at 31st July, 2015 before taking into

account any collateral, was:

The group has limited exposure outside the UK.

These relate to loans in the group’s Retail and Commercial businesses and are issued applying the same

lending criteria as applied to lending in the UK.

The group has no (2014: nil) other material exposure to Greece, Ireland, Italy, Portugal and Spain.

Ireland


THE NOTES

42


Assets pledged and received as collateral

Loans and advances to customers

Credit risk management and monitoring

Credit risk reporting

Loans and advances to customers within the group, as disclosed in note 9 on page 23, are segmented

between the following categories for credit risk reporting: neither past due nor impaired; past due but not

impaired; and impaired.

The lending businesses have a dual approach to mitigate credit risk by:

- Lending on a secured basis with significant emphasis on the quality of the underlying security to

minimise any loss should the customer not be able to repay; and

- Where the security collateralising a loan is less tangible, or in cases of higher LTVs, greater scrutiny is

applied both analytically and in terms of escalation of sanctioning authority.

Much of the group's lending is short term and average loan size is small with the result that few individual

loans have the capacity to materially impact the group’s earnings.

Within the group, the overall credit risk appetite is set by the group board. The monitoring of credit policy

is the responsibility of the group's risk and compliance committees. All large loans are subject to

approval by the group’s Credit Committee. The Retail, Commercial and Property divisions each use

credit underwriting and monitoring measures appropriate to the diverse and specialised nature of their

lending.

Retail is typically high volume secured lending with a small average loan size. Credit issues are identified

early via predominantly automated tracking processes. Remedial actions are implemented promptly to

restore customers to a performing status or recovery methods are applied to minimise potential loss.

The group has securitised £1,164.8 million (2014: £1,134.1 million) of its insurance premium and motor

loan receivables in return for debt securities in issue of £847.7 million (2014: £848.6 million). As the

group has retained exposure to substantially all the credit risk and rewards of the residual benefit of the

underlying assets it continues to recognise these assets in loans and advances to customers in its

consolidated balance sheet.

Property is a portfolio of higher value, low volume lending. Loans are continually monitored to determine

whether they are performing satisfactorily. Performing loans with elevated levels of credit risk may be

placed on watch lists depending on the perceived severity of the credit risk.

The vast majority of loans and advances to customers are secured against specific assets. The security

will correspond to the type of lending. Consistent and prudent lending criteria is applied across the whole

loan book with emphasis on the quality of the security provided.

The group pledges assets for repurchase agreements and securities borrowing agreements which are

generally conducted under terms that are usual and customary to standard securitised borrowing

contracts.

Commercial is a combination of several niche businesses with a diverse mix of loans in terms of assets

financed, average loan size and loan to valuation (''LTV'') percentage. Credit quality is assessed on an

individual loan by loan basis or a collective portfolio basis. Recovery activity is executed promptly by

experts in the specialised assets. This approach allows remedial action to be implemented at the

appropriate time to minimise potential loss.


THE NOTES

43


Neither past due nor impaired

Individually Collectively Individually Collectively

assessed assessed Total assessed assessed Total

£m £m £m £m £m £m

Within one month 512.0 269.4 781.4 389.9 254.0 643.9Between one and three

months 250.6 385.3 635.9 301.8 408.8 710.6Between three months

and one year 729.6 960.2 1,689.8 699.6 865.7 1,565.3

More than one year 642.4 1,660.4 2,302.8 536.6 1,514.4 2,051.0

2,134.6 3,275.3 5,409.9 1,927.9 3,042.9 4,970.8

Past due but not impaired



£m £m £m £m £m £m

Within one month 31.1 14.7 45.8 43.3 15.6 58.9

Between one and three

months 61.9 4.9 66.8 65.4 7.7 73.1

Between three months

and one year 41.9 24.7 66.6 17.3 18.7 36.0

More than one year 13.9 28.6 42.5 8.2 31.1 39.3

148.8 72.9 221.7 134.2 73.1 207.3

Impaired

The following table shows the ageing of loans and advances to customers split by credit assessment method which

are past due but for which no impairment provision has been raised:

2015 2014

Loans and advances to customers Loans and advances to customers

The factors considered in determining whether assets are impaired are outlined in the accounting policies in note 1

on page 17. Impaired loans and advances to customers are analysed according to whether the impairment

provisions are individually or collectively assessed.

These loans and advances reflect the application of consistent and conservative lending criteria on inception, and

the quality and level of security held. This demonstrates the short term nature of the lending, with £3,107.1 million

(2014: £2,919.8 million) having a contractual maturity of less than 12 months. The table below shows the ageing of

loans and advances to customers split by credit assessment method which are neither past due nor impaired:

Individually assessed provisions are determined on a case by case basis, taking into account the financial condition

of the customer and an estimate of potential recovery from the realisation of security. Typically this methodology is

applied by the Property lending businesses, invoice finance and leasing finance businesses within Commercial.

2015 2014


Loans and advances to customers are classified as past due but not impaired when the customer has failed to make

a payment when contractually due but there is no evidence of impairment. This includes loans which are individually

assessed for impairment but where the value of security or collateral is sufficient to meet the required repayments.

This also includes loans to customers which are past due for technical reasons such as delays in payment

processing or rescheduling of payment terms.


THE NOTES

44




£m £m £m £m £m £m

Gross impaired loans 69.7 92.6 162.3 89.6 70.3 159.9

Provisions (34.7) (21.4) (56.1) (32.2) (16.1) (48.3)

Net impaired loans 35.0 71.2 106.2 57.4 54.2 111.6

The amount of interest income accrued on impaired loans and advances to customers was £14.6 million

(2014: £13.4 million).

Whilst collateral is reviewed on a regular basis in accordance with credit policy, this varies according to the

type of lending, collateral involved and the status of the loan. It is therefore impractical to estimate and

aggregate current fair values for collateral.

The group’s collections and recoveries processes are designed to provide a fair, consistent and effective

operation for arrears management. The group seeks to engage in early communication with borrowers

experiencing difficulty in meeting their repayments, to obtain their commitment to maintaining or re-

establishing a regular payment plan.

The group maintains a forbearance policy to support customers in financial difficulty and ensures the

necessary processes and policies are in place to enable consistently fair treatment of each customer. At the

same time, the group ensures these processes and policies do not restrict the ability to manage customers

based on their individual circumstances. This includes considering whether it is appropriate to change the

terms and conditions of a loan, e.g. by extending its term, changing the type of loan, deferring interest or by

capitalising arrears to assist a customer in financial difficulties. The group seeks to ensure that any

forbearance results in a fair outcome for the customer and will not repossess an asset unless all other

reasonable attempts to resolve the position have failed. Total forborne loans were £81.6million at 31 July

2015.


Collectively assessed provisions are considered on a portfolio basis to reflect the homogeneous nature of the

assets. A percentage of the portfolio is impaired by evaluating the ageing of missed payments combined

with the historical recovery rates for that particular portfolio. Typically this methodology is applied by the

Retail businesses and the asset finance business within Commercial.

The gross impaired loans are quoted without taking account of any collateral or security held which could

reduce the potential loss. The application of conservative LTV ratios on inception and the emphasis on the

quality of the security provided is reflected in the low provision to gross impaired balance ratio (“coverage

ratio”) of 34% (2014: 30%).

The following table shows gross impaired loans and advances to customers and the provision thereon split

by assessment method:

2015 2014


THE NOTES

45


Gross loans and advances to customers where exposure at origination exceeded £1.0 million:

Asset Invoice Property Total

£m £m £m £m

LTV

Less than 70% 59.3 149.8 1,002.6 1,211.7

70% to 90% 75.5 126.9 20.3 222.7

Greater than 90% 88.2 2.3 - 90.5

At 31 July, 2015 223.0 279.0 1,022.9 1,524.9

Asset Invoice Property Total

£m £m £m £m

LTV

Less than 70% 45.9 156.5 850.3 1,052.7

70% to 90% 44.5 102.4 18.2 165.1

Greater than 90% 54.5 5.1 4.0 63.6

At 31 July, 2014 144.9 264.0 872.5 1,281.4

(d) Market risk

Interest rate risk

2015 2014

£m £m

Increase/(decrease) in annual net interest income

1.0% increase in interest rates (2014: 1.0% increase) 1.6 1.2

0.5% decrease in interest rates (2014: 0.5% decrease) (0.8) (0.6)

Increase/(decrease) in equity

1.0% increase in interest rates (2014: 1.0% increase) 9.1 10.4

0.5% decrease in interest rates (2014: 0.5% decrease) (4.6) (5.2)

Group

The sensitivities below are based upon reasonably possible changes in interest rate scenarios, including parallel

shifts in the yield curve. At 31st July, 2014 a change in interest rates compared to actual rates would

increase/(decrease) the group's annual net interest income and equity by the following amounts, prior to mitigation:

The group's exposure to interest rate fluctuations relates primarily to the returns from its capital and reserves which,

as a matter of policy, are not hedged. The group's policy is to match fixed and variable interest rate liabilities and

assets utilising interest rate swaps where necessary to secure the margin on its loans and advances to customers.

These interest rate swaps are disclosed in note 10.

Market risk is the risk that a change in the value of an underlying market variable such as interest or foreign

exchange rates will give rise to an adverse movement in the group’s assets.

The group holds collateral against loans and advances to customers in the form of residential and commercial

property, charges over business assets such as equipment, inventory and accounts receivable. Analysis by LTV

ratio is provided below based on the group's lending facilities to customers where the exposure at origination

exceeded £1.0 million, excluding Property facilities written pre 2009. Lending below this threshold has greater

homogeneity predominantly in the motor and premium finance businesses within typical LTV ratio between 80% to

90%. The value of collateral used in determining the LTV ratio is based upon data captured at loan origination, or

where available, a more recent updated version.


THE NOTES

46


Foreign currency risk

2015 2014

£m £m

Assets 395.6 482.0

Liabilities 393.1 483.9

Non trading financial instruments

Net gains and losses on debt securities are disclosed in note 11.

(e) Liquidity risk

On demand

Less than

three

months

More than

three

months but

not more

than six

months

More than

six months

but not

more than

one year

More than

one year but

not more

than five

years

More than

five years Total

At 31st July, 2015 £m £m £m £m £m £m £m

Financial liabilities

Deposits by banks 11.5 1.0 17.6 4.5 0.5 - 35.1

Deposits by customers 149.9 832.8 954.8 1,431.1 1,191.8 - 4,560.4

Bank loans and overdrafts 5.3 99.4 124.1 0.3 152.6 - 381.7

Debt securities in issue 0.0 3.6 9.3 12.8 911.2 311.6 1,248.5

Derivative financial instruments^ - 7.7 1.8 4.0 25.4 5.9 44.8

Subordinated loan capital - 1.7 - 1.7 13.6 65.4 82.4

Other financial liabilities 32.9 33.8 2.7 0.6 1.7 0.2 71.9

199.6 980.0 1,110.3 1,455.0 2,296.8 383.1 6,424.8

At 31st July, 2014

Financial liabilities

Deposits by banks 21.1 20.0 6.1 2.6 - - 49.8

Deposits by customers 162.0 1,263.5 370.2 1,203.6 1,601.0 - 4,600.3

Bank loans and overdrafts 3.3 - - - - - 3.3

Debt securities in issue - 4.1 10.0 362.8 558.1 323.4 1,258.4

Derivative financial instruments^ - 13.3 6.3 10.9 29.6 13.6 73.7

Subordinated loan capital - 2.8 - 2.8 22.5 103.3 131.4

Other financial liabilities 16.2 57.3 1.0 0.3 - - 74.8

202.6 1,361.0 393.6 1,583.0 2,211.2 440.3 6,191.7

The group has a prudent liquidity position with funding significantly in excess of its loans and advances to

customers. The group has a large portfolio of high quality liquid assets including cash placed on deposit with

the Bank of England, short dated certificates of deposit and gilts. The group measures liquidity risk with a

variety of measures including regular stress testing and regular cash flow monitoring, and reporting to both the

group Asset and Liability Commitee and Risk and Compliance Commitees.

The following table details the contractual maturities of the group's financial liabilities on an undiscounted cash

flow basis:

Group

The group has a small number of foreign currency investments in subsidiaries and has chosen not to hedge

these exposures. These investments are predominantly in euros. The impact of any reasonably expected

exchange rate fluctuations would be immaterial.

The group has additional material assets and liabilities denominated in foreign currencies, mainly euros and

US dollars, which are matched by currency using exchange rate derivative contracts where necessary:

Details of those contracts are disclosed in note 10. The group's exposure to foreign exchange risk is minimal

and as such the impact of any reasonably expected exchange rate fluctuations would not be material.

Liquidity risk is the risk of not being able to meet liabilities as they fall due or can only be met at an

uneconomic price.


THE NOTES

47

30. Pensions

Defined contribution scheme

Defined benefit scheme

31. Related party transactions

Transactions with directors

Transactions with group undertakings

32. Ultimate parent undertaking

The scheme was closed to new entrants in August 1996 and closed to further accrual during 2012. At 31

July 2015 this scheme had 61 (2014: 64) deferred members and 35 (2014: 34) pensioners and

dependants.

The group operates defined contribution pension schemes, for eligible employees and a defined pension

scheme, which is closed to new members and further accrual. Assets of all schemes are held seperately

from those of the group.

During the year the charge to the consolidated income statement for the group's defined contribution

pension schemes were £4.8 million (2014: £3.9 million) representing contributions payable by the group

and is included in administrative expenses.

The group’s only defined benefit pension scheme (“the scheme”) is a final salary scheme which operates

under trust law. The scheme is managed and administered in accordance with the scheme’s Trust Deed

and Rules and all relevant legislation by a trustee board made up of trustees nominated by both the

company and the members.

The parent undertaking of the largest and smallest group of undertakings for which the group is a member

is Close Brothers Group plc, the ultimate parent undertaking and controlling party which is a listed company

incorporated in the UK and registered in England and Wales. The immediate parent undertaking is Close

Brothers Holdings Limited, which is registered in England and Wales.

The consolidated financial statements of Close Brothers Group plc are available at 10 Crown Place,

London EC2A 4FT.

Key management have banking relationships with the company which are entered into in the normal course

of business. Amounts included in deposits by customers at 31st July, 2015 attributable, in aggregate, to

key management were £2.3million (2014: £2.5 million).

The company has taken advantage of one of exemptions conferred by FRS 8, whereby certain details

regarding transactions with group undertakings do not have to be disclosed providing they within a wholly

owned group. There are no other related party transactions that require disclosure.


THE NOTES

48

Cautionary Statement

Certain statements included or incorporated by reference within this report may constitute “forward-looking

statements” in respect of the group’s operations, performance, prospects and/or financial condition.

Forward-looking statements are sometimes, but not always, identified by their use of a date in the future or

such words as “anticipates”, “aims”, “due”, “could”, “may”, “will”, “should”, “expects”, “believes”, “intends”,

“plans”, “potential”, “targets”, “goal” or “estimates”. By their nature, forward-looking statements involve a

number of risks, uncertainties and assumptions and actual results or events may differ materially from

those expressed or implied by those statements. Accordingly, no assurance can be given that any

particular expectation will be met and reliance should not be placed on any forward-looking statement.

Additionally, forward-looking statements regarding past trends or activities should not be taken as a

representation that such trends or activities will continue in the future. No responsibility or obligation is

accepted to update or revise any forward-looking statement resulting from new information, future events or

otherwise. Nothing in this report should be construed as a profit forecast. This report does not constitute or

form part of any offer or invitation to sell, or any solicitation of any offer to purchase any shares or other

securities in the company, nor shall it or any part of it or the fact of its distribution form the basis of, or be

relied on in connection with, any contract or commitment or investment decisions relating thereto, nor does

it constitute a recommendation regarding the shares and other securities of the company. Past

performance cannot be relied upon as a guide to future performance and persons needing advice should

consult an independent financial adviser. Statements in this report reflect the knowledge and information

available at the time of its preparation. Liability arising from anything in this report shall be governed by

English Law. Nothing in this report shall exclude any liability under applicable laws that cannot be excluded

in accordance with such laws.

close brothers limited · close brothers limited is a member of close brothers group plc...

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