Keith James, Chairman
I am pleased to present the Julian Hodge Bank Limited results for the year ended 31 October 2016.
The Bank has enjoyed an exceptional year, making a pre-tax profit of £22.8 million (2015: £1.6 million). The results for this year reflect the transition to FRS101 and the prior year figures have been restated to be comparable.
FRS 101 creates much greater volatility within the Bank’s income statement as it is now required to fair value certain assets previously held at amortised cost, as well as bringing hedging instruments on to the balance sheet.
Accordingly, to arrive at an assessment of operating performance which is better aligned to the Bank’s key performance indicators, it is necessary to eliminate from the profit before tax, those items which distort year on year comparisons and arise primarily from changes in asset values, which have a tendency to fluctuate, particularly in the current environment.
Adjusted net operating income, which is explained in more detail in note 3 to the financial statements, is a more meaningful measure against which to assess the Bank’s performance and it is this measure on which we now concentrate.
In this respect, performance for the year has been particularly gratifying, with a marked improvement in this measure.
- Adjusted net operating income has increased by 86%.
- Tier 1 capital ratio of 19.1%.
- Increase in loans and advances to customers of 13%.
- Increase in deposits (customer accounts) of 17%.
The economic environment during 2016 can be characterised by general concerns over global growth, interspersed by two major events, namely Brexit and the outcome of the US presidential election, neither of which was foreseen by financial markets. Furthermore, markets were wrong-footed in their expectations of the consequences.
With respect to Brexit, dire predictions were made as to the likely effect on stock markets, interest rates, exchange rates and GDP growth and whilst there have been some marked fluctuations, only the devaluation of sterling has yet come to pass.
In similar vein, Donald Trump was seen as both unpredictable and an advocate for protectionist policies which could have adverse consequences for global growth. Yet US stock markets have reached record levels and the dollar has strengthened markedly against the yen and euro.
What is evident however is that both events are seen by financial markets as creating more uncertainty at a time when confidence is fragile.
Whilst the Bank’s activities are UK-based, it is not immune to market factors, influenced by global events. This is particularly so in the case of interest rates, which plumbed record lows in August, albeit, there has been a significant rally since.
The market consensus is that Brexit will be inflationary, driven primarily by the drop in sterling’s trade-weighted index, which will increase the cost of imports. Donald Trump’s election has also increased inflation expectations in the US; with his plans for significant infrastructure spending.
After many false starts the Federal Reserve raised interest rates in December, which allied to the inflationary pressures referred to above, might be the catalyst for a “normalisation” of interest rates over the next few years.
If this is the case, the Bank is well-placed to benefit significantly from such a move, provided it is not so extreme as to impact adversely on commercial and real estate residential values, which underpin the bulk of the Bank’s lending.
Setting aside the impact of the adoption of FRS101, the Bank’s underlying performance has been positive with a strong performance within Commercial Lending and solid growth within Hodge Lifetime, which has expanded its product range
Net interest income has seen a marked improvement, increasing by 97% on our core lending products, reflecting a combination of growth in our loan book and margin improvement.
Administrative expenses have increased due to substantial investment in people, premises and systems to enable us to carry out our plans to grow the business over the coming years.
This investment has already started to bear fruit. This trend will be more evident as we increase the breadth of our services, expand our product range and develop our digital offering to provide our customers with more ways to engage with us.
|Profit before tax||22.8||1.6||4.3||3.5||3.1|
|Adjusted net income or operating profit||14.3||7.7||0.2||(4.6)||(3.9)|
|Loans and advances to customers||706.9||624.8||440.8||384.0||358.8|
Our Commercial Lending business has made excellent progress this year, writing over £100 million of new business, materially improving operating margins, generating recurring fee income of £3m and delivering a substantial increase in operating profit.
Impairment has been well-controlled, a testimony to our focus on risk management and the quality of lending.
It is pleasing to note that these results were achieved with a relatively minor increase in overheads, justifying our investment in this business in recent years.
Our strategy is to be highly selective in our asset origination approach, focussing on the quality of clients and proposals, rather than a volume-led lending target. We provide bespoke and specialist real estate funding for a client base of proven and experienced property investors and developers. Our specialist, private bank proposition resonates well in this market and a significant amount of our business comes from existing client referrals.
As our business grows we continue to invest in risk systems and processes to maintain our emphasis on quality. Our client base is predominantly spread across the southern part of the UK across a mix of real estate categories, which provides diversification both geographically and in type of lending.
We have a proven strategy and see no reason to change this over the coming year.
Hodge Lifetime is the group’s brand covering the retirement market. Our core products are pension annuities and “later life lending”. Some of the business is conducted by the Bank with the rest being conducted by our subsidiary, Hodge Life Assurance Company Limited. This market offers significant growth potential, underpinned by strong demographic trends.
Over the past two years, we have added to our range of ‘later life lending’ services with two new products – a Retirement Mortgage (a hybrid lifetime mortgage) and 55+ Mortgage (a standard residential mortgage). These products are offered by the Bank and are expected to be an area of significant growth in future.
This strategic development means that Hodge Lifetime is the only business currently offering a full range of later life mortgage lending products, and puts us in a strong position to capitalise on this growing market.
We are also very pleased to have agreed an external funding arrangement, which allows us to increase the level of equity release lending we undertake, over and above our own requirements.
As at 31 October 2016 the Bank had £758 million of equity release mortgage assets under management including £447 million for other financial institutions.
Treasury and Funding
We implemented a new banking system during the year, which will enable us to develop our on-line capability to complement our existing telephone and postal operations.
We anticipate being able to provide our first on-line products in the second half of 2017. This will be a major new initiative for the Bank and our aim will be to provide the same first- class service to our customers, regardless of how they choose to do business with us.
Even without the option of an on-line service we were able to grow our deposit book by 17% to just under £1 billion at the end of the year. We now have over 33,000 customers, an increase of over 10% on the prior year.
This is a tremendous performance given that interest rates have been at record lows for much of the year which creates a massive disincentive to save. However, interest rates have started to rise in recent weeks and it may be that 2017 will at last provide some relief for savers.
For our part, the Bank remains committed to developing its product range and the channels through which it serves its customers so that it can offer them a range of products to suit their particular needs.
To support our business growth we now have 142 staff, an increase of 25% over the financial year. As anticipated last year, the increase in staff complement has necessitated a move to new premises, in the heart of Cardiff’s newest and most vibrant business location.
The Board believes that the Bank, as a key contributor to the burgeoning financial services sector in Cardiff, now has the right accommodation to attract the additional staff that it needs to build on its success in recent years.
I must again commend our staff for the commitment and enthusiasm they have displayed during what has been a year of substantial change for the Bank. We have implemented a new banking system and relocated our business whilst at the same time navigating a turbulent economic environment, culminating with Brexit and its aftermath.
The economic environment continues to be uncertain, with Brexit, the US presidential election and the Italian referendum all contributing to a climate of uncertainty, which shows little sign of abating.
Uncertainty is anathema to financial markets and whilst the Bank can control to some extent its own destiny, it is in thrall to the markets with respect to those factors which most affect its business, namely interest rates and residential and commercial real estate prices.
This has been heightened by the requirement for the Bank to adopt FRS101, which has the effect of generating much greater volatility within its reported results.
However, I have no doubt that the Bank has the resources to deal with these issues and the appropriate strategy to generate good returns for its shareholders.
15 December 2016