Chairman's Statement

John Mitchell, Chairman
Keith James, Chairman

I am pleased to present the Julian Hodge Bank Limited results for the year ended 31 October 2015.

The Bank made a pre-tax profit of £5.0 million (2014: £4.3 million), showing good progress from the previous year as the benefits of our investment in the business over the past two years begin to bear fruit.


  • Pre-tax profit has increased by 18%.
  • Tier 1 capital ratio of 22%.
  • Increase in loans and advances to customers of 26%
  • Increase in deposits (customer accounts) of 34%.

Economic Environment

To a large extent, 2015 has mirrored 2014, with cautious optimism in the early part of the year that the recovery was well-founded and could be sustained. This was backed up by solid GDP growth in the UK and talk of interest rate rises both here and in the US.

As the year progressed, growth projections were revised down as the continuing turmoil in emerging markets, especially China, started to adversely affect confidence in the strength of the global recovery, which was seen to be unbalanced. Amongst developed countries, the US and UK stood apart, with reasonably robust growth, whilst the Eurozone struggled to make much progress as more quantitative easing took place in an attempt to generate some momentum to a stagnating economy.

The continuing reduction in global commodity prices has meant lower inflation expectations, with the Bank of England now seeming to be stepping away from any interest rate rise in the near term. Whether this will change when the US makes its move remains to be seen.

There is a concern, that unlike the US, the UK is less able to maintain its growth trajectory without help from its neighbours, especially the Eurozone, which remains mired in problems.

In the UK itself, falling unemployment and the re-appearance of real wage growth have combined to create a positive economic outlook, which unfortunately could be derailed by global factors.

Financial Performance

The bank has achieved a 7th consecutive year of profit growth, with the most recent performance highlighted in the five year summary below.

Whilst the low interest environment continues to put pressure on margins, net interest income has increased by 95%, replicating its 2014 performance, which is extremely satisfying.

Successful new business generation, particularly within our Commercial Lending division has been a key component of this improvement, which has also led to a 26% rise in fee income.

In addition, performance has been buoyed by further growth in commercial and residential property prices.

We have taken on more staff during the year which has increased costs, but this has been vital to ensure that we have the requisite skills to grow the business. Other overheads have been largely kept in check.

Five Year Summary
Profit before tax5.
Total assets999.0784.7726.5802.5710.9
Loans and advances to customers557.5440.8384.0358.8362.8
Customer deposits848.6633.2583.6658.9579.6
Shareholder’s funds133.7132.0128.2125.6124.7

Commercial Lending

Commercial Lending has had a very successful year, writing record new business of £112 million and generating fee income of £2.1 million. Additionally, frontline performance has been supplemented by good control of default.

During the year we have expanded our Lending Team and bolstered our credit assessment and risk control functions to enable us to service our existing client base and take advantage of the many opportunities that are currently available to us.

We concentrate on commercial real estate and offer a personalised service in a private bank environment, a concept which has gained a great deal of traction during the year. Our clients know what we do, and that we do it well, and our expertise and experience allows us to provide a bespoke service tailored to their specific requirements.

Hodge Lifetime

Hodge Lifetime is the group's brand covering the retirement market. Our core products are pension annuities and “lending in retirement”. Some of the business is conducted by the Bank with the rest being conducted by our wholly-owned subsidiary, Hodge Life Assurance Company Limited. We believe that this market offers significant growth potential, underpinned by strong demographic trends.

Pension freedoms were first announced in March 2014, and came into effect in April 2015. Throughout the financial year there has been great uncertainty as to how pension savings should be accessed most efficiently. Whilst it remains to be seen whether new products designed to enable retirees to benefit from these freedoms will gain traction, securing a guaranteed income for life from the use of some of their pension savings will remain a priority for many retirees such that annuities will continue to retain their appeal to some degree.

Residential property remains the principal form of saving for the majority of retirees and it is inevitable that a growing proportion will utilise their major asset to improve their retirement prospects through equity release. The need for equity release may also be heightened as those who use pension freedoms to withdraw lump sums from their pensions will be reducing the future level of their pension income.

Lending in retirement became a hot topic during 2015, with regular press coverage of creditworthy retirees being denied access to this type of financing. As the demography of the UK population continues to evolve, we are already seeing people entering the property market later, holding mortgage debt for longer, and working well beyond the standard retirement age. These trends are creating new demands for mortgage products.

Our Retirement Mortgage, a ‘hybrid' lifetime mortgage, is aimed at a different market segment from our other more traditional equity release products, and addresses some of the emerging demands of the ‘lending in retirement' market. This product is now gaining momentum, and we expect to introduce new products in this range in the next year.

As at 31 October 2015 the Bank also had £639 million of equity release mortgage assets under management including £416 million for other financial institutions.

We were extremely pleased to be named the Best Equity Release Provider for the third year running at the 2015 Moneyfacts Investment, Life and Pensions awards. At the 2015 Equity Release Awards, we were named the Best Provider for Adviser Support for the second year running, in recognition of our commitment to supporting the financial advice community in growing this market.

Hodge Life Assurance Company Limited, specialises in matching pension annuity liabilities with the long-term fixed rate returns offered by traditional equity release loans. It had a successful year reporting a much-increased profit before tax of £15.9 million (2014: £6.9 million), despite the fall in new business year on year due to the effects of pension freedoms (the results of Hodge Life Assurance Company Limited are not reported in these financial statements).

House prices remained strong across the year, which combined with an enhanced rate of maturity of reversion plans led to increased profits on sale of properties. Mortality experience against actuarial assumptions also remained favourable for legacy portfolios. Further, the margins emerging from the business written in previous years are considerably higher, reflecting the growth achieved over the past 5 years.

Treasury and Funding

We have had great success in raising deposits, increasing our book by 34% during the year. We now have over 30,000 customers. This has been despite the low interest environment, which does not encourage a savings culture.

Our success is founded on our commitment to customer service, which we aim to develop further during 2016 with a new banking system which will allow us to improve our online capability.

Our aim is to give our customers the option of dealing with us by post, telephone or online. Most importantly, they will always have the option of speaking to a member of staff based in our Cardiff office.

Our People

Our continued success is entirely due to the quality of our staff. Their commitment to excellence, particularly with respect to customer service remains undimmed. We now employ 120 people, the highest number since the height of the recession.

As a result we intend to relocate to new premises in Cardiff in the middle of 2016.

The Outlook

Whilst the general economic outlook for 2016 is tinged with uncertainty arising from global factors, the prospects for our key markets, commercial real estate and lending into retirement, remain strong and we now firmly believe we have the expertise and experience to take advantage of the growing demand for our products and services.

Keith James

17 December 2015