John Mitchell, Chairman
Chairman's Statement
I am pleased to present the Julian Hodge Bank results for the year ended 31st October 2010.
The Bank made a pre-tax profit of £2.1 million (2009: £1.2 million) which, in the current environment, is considered to be a satisfactory performance.
Highlights
- Tier 1 asset ratio of 21.2%.
- Customer deposits rose from £610.5 million to £696.2 million – an increase of 14%.
- Liquid assets increased substantially from £109.7 million to £230.9 million.
- Total assets increased by 12% to £825 million.
Economic Environment
The economic environment for the Bank remains extremely challenging. Global financial markets generally and European markets in particular have been unnerved by the financial crises enveloping Ireland and Greece and are looking for the next casualty. Uncertainty, which is the main threat to financial stability, remains and there is still a suspicion that not all the bad news has yet emerged. Until the issue surrounding the Eurozone economies is resolved, it will inevitably have an adverse impact on the U.K. financial system which cannot operate in isolation.
Within the U.K., the major concern is how the coalition government’s comprehensive spending review will impact on the nascent economic recovery and whether the medicine prescribed to cure the deficit is being applied too soon. On the other hand, in some quarters, inflation is seen as a problem, having been in excess of its 2% target for over a year and the Bank of England admitting that it is likely to stay above target until 2012. However, it seems that the Monetary Policy Committee is determined to keep base rate low, even though it has become detached from market rates generally with banks’ cost of funds no longer related to base rate to any significant degree.
Financial Performance
Although this year’s profit represents a welcome improvement on last year, the result does reflect the challenging trading environment within which the Bank has had to conduct business during 2010. The limited availability of new business at adequate margins has depressed fee income. Furthermore, the Bank’s prudent provisioning policy has had an adverse effect on our results but this has been offset by the profit derived from sales of equity release mortgages and other assets.
In order to recognise the lack of profitable new business opportunities the Bank addressed its cost base during the year. The benefits of the efficiency savings will not, however, be felt until 2011.
| 2010 | 2009 | 2008 | 2007 | 2006 | |
|---|---|---|---|---|---|
| £m | £m | £m | £m | £m | |
| (Loss)/profit before tax* | 2.1 | 1.2 | (0.9) | 7.1 | 6.5 |
| Total assets* | 825.3 | 738.0 | 629.2 | 465.9 | 441.8 |
| Loans and advances to customers* | 398.4 | 470.2 | 419.3 | 366.1 | 305.7 |
| Customer deposit balances | 696.2 | 610.5 | 503.4 | 317.5 | 316.5 |
| Shareholder’s funds | 124.1 | 122.1 | 124.2 | 126.5 | 123.0 |
*The figures for 2006 have been restated to remove the assets relating to the businesses disposed of during that year.
Commercial Lending
Our Commercial Lending division has endured another difficult and testing year. The absence of quality new business in our market place has meant that the opportunity to generate fee income has been limited. In addition, the Bank’s customers have suffered from weak occupier/tenant demand which has meant that asset realisations/lets on reasonable terms have been hard to come by. Whilst, on the face of it, yields within the sectors favoured by the Bank’s customers have stabilised over the year, the reality is that low transaction volumes have tended to undermine this apparent trend.
Acknowledging the issues faced by our customers and recognising that there is unlikely to be any material improvement in the short-term, the Bank has taken the prudent approach of increasing the level of provisions which it is holding against poor performing customer accounts. Problems within the commercial property sector have persisted for longer than we had anticipated and it is clear that there are issues to be resolved before a recovery can be established. However, I believe that the Board has taken appropriate action to enable the Bank to benefit from the upturn when it comes.
Hodge Lifetime
Hodge Lifetime is the umbrella brand for the Group’s equity release activities which are conducted through the Bank and its subsidiary, Hodge Life Assurance Company Limited (Hodge Life). Under the Hodge Lifetime brand, cash lump-sum equity release products are provided by the Bank. As far as Hodge Life is concerned it specialises in pension and purchased life annuities and annuity-based equity release products. Hodge Life is regulated separately from the Bank but also by the Financial Services Authority.
The Bank has in recent years embarked on a strategy of reducing its balance sheet exposure to equity release assets, largely driven by the adverse effect of new capital and liquidity requirements which tend to render such products less viable. Our approach is clearly being mirrored in other financial institutions to the extent that there are currently fewer banks and building societies undertaking equity release business in any material way.
The provision of equity release products is now largely the province of life assurance companies which have the long-term liabilities to match these assets. As noted last year, the Bank is in the fortunate position that Hodge Life continues to be an investor in this asset class. Indeed, during the year, Hodge Life acquired £15 million of lifetime mortgage from the Bank. The Bank also concluded a sale of £60 million of lifetime mortgages to a third party. Significant progress has, therefore, been made in delivering the Bank’s strategy for equity release assets and it is anticipated that this will continue during the forthcoming financial year.
One of the consequences of the Bank reducing its equity release exposure has been the need to match human resources with anticipated business volumes. Sadly, this resulted in a number of redundancies amongst Hodge Lifetime personnel and support functions. We now believe, however, that we have an organisational structure appropriate to our strategic aspirations.
As a Group, we remain committed to equity release business having been at the forefront of this market for over 40 years. The demographics for this business continue to be favourable as mortality rates improve, the need for long-term care becomes more prevalent and the inadequacy of individual pension provision hits home. However, it is clear that capital and liquidity constraints will prevent substantial volumes of such assets being retained on the Bank’s balance sheet. Accordingly, our Hodge Life subsidiary continues to develop its pension annuity business, such that it is able to acquire suitable equity release assets originated through the Bank. As at 31st October 2010 we had £440 million of equity release mortgage assets under management including £219 million for other financial institutions.
Treasury and Funding
Since 1st October 2010, the Bank has been subject to the new liquidity regime introduced by the Financial Services Authority. Ultimately, the Bank will be required to hold its liquid assets buffer primarily in the form of gilts, although the FSA has implemented a flight path to allow banks time to acquire the appropriate assets. In accordance with the flight path, the Bank has commenced the acquisition of gilts and established a portfolio in excess of £42 million as at 31st October 2010.
The exact value of the Bank’s required holding of liquid assets has yet to be determined by the FSA; however, the Bank has deemed it appropriate to adopt a conservative approach to liquidity by creating a portfolio of liquid assets substantially in excess of the total likely to be required.
The retail deposit market has remained extremely competitive during the year, driven by the need of some financial institutions to replace maturing wholesale funding, combined with the impact of the FSA’s new liquidity rules. Nevertheless, the Bank has been extremely successful in increasing its retail deposit base despite the level of competition. Our deposit balances rose from £611 million to £696 million, an increase of 14% over the year. It is appropriate here to thank those depositors who remained loyal to the Bank and to welcome the many new customers who have been attracted to join us.
As a financial institution, we remain committed to treating our customers fairly and putting the security of our depositors at the forefront of everything we do. Our aim is to continue to offer straightforward deposit products that are not only easy to understand but also do not prefer new as against existing customers.
Our People
I am happy to report that, in June 2010, the Bank appointed Adrian Piper as a non-executive director. Adrian had a long and distinguished career with the Bank of England, latterly as its Agent for Wales before his retirement in 2009. He has a lifetime’s experience in banking at a senior level, which, combined with his knowledge of the Welsh business community and economy, will serve the Bank extremely well over the coming years.
On behalf of the Board it is my pleasurable duty to thank all employees for their continued endeavour, commitment and loyalty not only just for 2010 but also for the past three years which have all been extremely difficult. During extraordinarily trying times our people have demonstrated energy and enthusiasm - their contribution to the Bank’s performance cannot be underestimated.
The Future
At the moment it is difficult to be too positive with respect to the medium-term outlook for the Bank’s two key markets, housing and commercial property. Whilst the government has announced elements of its comprehensive spending review and the savings it anticipates deriving there from, the real pain has yet to be felt. It may be that the actual outcome will be less severe than some fear but, sometimes, fear can drive behaviour. It is most likely that businesses and individuals will exhibit caution until they have a clearer idea of the impact of the proposed cuts.
The Bank has operated in the housing and commercial property markets for many years and has built up a substantial knowledge base which has protected it from the worst excesses of the past three years. Coupled with this we have substantial liquidity and capital strength to ensure that our depositors are protected to the fullest extent.
As and when our chosen markets recover, we believe we are well placed to take advantage of the opportunities that will inevitably arise.
John Mitchell
Chairman
23 December 2010