Risk Management in Brewin Dolphin Holdings plc - Essay Example

 Contents “Corporate and financial actions” 5 Financial trends 8 Profitability 8 BDHP displays a general increasing net profit margin. Year 2011 shows a very thin profit margin compared to the 2009 & 2010, 2012 and 2013. One of the reasons is the decrease of gross profit margin in 2011. Net profit decreases due to increase in tax rates and interest charges that reduce net profit for the BDHP in 2011. BDHP is able to maintain good net profit margin in the year 2012, and 2013 is mainly due to controlling the interest costs , payment of steady dividends , prudent provision for taxes , absence of any abnormal business transactions had helped BDHP to maintain a steady Net Profit margin (Siddiqui & Siddiqui 2010:651). 10 Liquidity 10 Introduction Throughout the UK, Channel Islands, the Republic of Ireland and Eire, Brewin Dolphin Holding PLC (hereinafter will be referred as BDHP) offers a wide variety of investment management, execution confined and financial advisory services targeting families and individuals. Being a holding company, BDHP’s main business activity is investment management. BDHPs main aim is to assist its clients to earn the most from their money. BDHP is in the business since 1762 and is having a client base of in excess of 100,000 members, and it is renowned for its trustworthy and stable advising function. A major chunk of its customers and their families have been with BDHP for generations together and this being a testimony for the high-quality services they offer. BDHP is having a unique business model which helps it to earn the confidence of its clients, and thereby it is able to establish long-run and loyal customer relationships. With the help of expertise of its professionally qualified advising staff, BDHP is able to make a personal approach in their client service. BDHP is having about 35 offices in UK, and its employee strength is around 1877 employees as of 31st December 2013. On behalf of its clients, BDHP is managing about £28.2 billion of investments annually as of date. The market capitalisation of BDHP is £728.94m and its net income in 2013 was £33.59m and it is being one of the leading businesses in financial industry of UK. Business and Key Market Study The main business of BDHP is investment and financial advisory services. If we analyse the above graph, BDHP has attained a steady gross revenue growth in the past five years as its gross revenues soared to £ 284.1m in 2013 from £212.3m in 2009, an increase of 33.38% over the period of five years. This growth demonstrates that BDHP is able to manage its business in spite of the worst financial crisis witnessed in UK in recent years. If we analyse the net income of BDHP for the last five years, in the year 2013, it posted a net revenue of “£ 21.1 m “in 2013 as against £ 21.6 m in 2010. This demonstrates that BDHP should concentrate on reducing its overheads to improve its net income as in the year 2013, it incurred £83.1m as other operating expenses as compared to just £0.6m in the year 2010. During the year 2013, BDHP is able to maintain the vibrant client relationships with a long-run past performance of personalised services to its customers. BDHP visualises that it has a very good potential growth market with long-run future prospects. BDHP has reorganised its management team with infusion of clear aims and a strategy to accomplish them. BDHP main focus and strategy is that it will usher higher value for all of its stakeholders. “Corporate and financial actions” BDHP is one of the largest personalised investment service providers in the UK, and they are in the management of portfolios on a discretionary and advisory basis. Individuals are their major chunk of client base, and also their client base includes institutions, charities and trusts. Now, they started to offer financial planning services in addition to investment management services. They are also in the stock broking business for the last 250 years. Their prime business is now discretionary investment management services, which had attained a predominant growth as its discretionary assets now make up 76% of its managed assets, as contrasted to just 40% in 2004 (BDHP Annual Report 2013:9). “UK GDP Growth” 2011 2012 2013 2014 GDP Growth 1.1 0.3 1.7 2.6 Sources: Business Monitor International UK’s GDP growth has been impacted very badly in the year 2012 due to economic recession that started in 2008, Eurozone crisis that started in 2009 and in worst weather scenarios like unprecedented floods in UK in the year 2012, 2013 had impacted the investment climate market very badly in UK. However, BDHP is able to post good revenues in these periods which demonstrate that it has loyal customers and BDHP is taking care of their investments by offering them with adequate returns. Brewin Dolphin Holding Plc and its Important Competitors market position Revenue £ in m Net Income £ in m Market cap £ in m Brewin Dolphin Holding Plc 291.01 33.59 728.94 International Capital Groups Plc 434.6 137.2 1.75 bn Jupiter Fund Management Plc 389.9 79.2 1.65 bn Tullet Prebon Plc 724.2 28.2 546.09 Rathbone Brothers Plc 203.36 41.16m 916.77 Source: http://markets.ft.com/research/Markets/Tearsheets/Business-profile?s=BRW:LSE If we go through the above table, we can understand that BDHP is standing in the 4th place in revenue earning capacity as compared to its competitors. Thus, BDHP is still needed to work hard to come up to the first position by taking over Tullet Prebon Plc. For this, it has to concentrate on UKs pension funds’ business as it has vast potential to create a new avenue of income as total assets of the pension market at the end of 2013 stood at US$3263 bn as shown in the following table: Total assets (US$b) at the end2003 Total assets (US$b) at the end2013 Growth Rate (US$) UK Pension Market 1,261 3,263 10% Source: Global Pension Study 2014, Towers Watson Market Environment For BDHP, personal financial services continue as a growth market with very bright long-run outlook. As per MDRC UK High Networth 2013 Report, UK has about two million individuals with liquid assets in excess of £100,000. As per the City UK, Fund Management 2013 Report, about £ 548 bn was managed by the UK wealth management industry at the close of 2012. (BDHP Annual Report 2013:10). From the above graph, we can understand that BDHP is occupying second place in the UK market at the close of 2012 for managing the large volume of client’s funds in UK. “Corporate and Financial Actions” Some salient financial accomplishments made by BDHP in 2013 Increased by Stood at Total Income +9% £283.7m Adjusted Revenue before tax +22% £52.3m Adjusted revenue margin From 16.5% to 18.5% - Discretionary Funds under Management +17% £21.3m Adjusted Earnings per Share by19.2% at 14.9 p Full year dividend Increased by 20% to 8.6p - Total Shareholder return Remained at 63% - (Source: BDHP Annual Report 2013:1) Financial trends In this section, the financial trends of BDHP will be analysed in terms Profitability, Efficiency, Liquidity, and Investment return. Year 2013 2012 2011 2010 2009 Sales (£m) 284.10 269.50 264.00 240.00 212.30 Cost of sales (£m) 246.20 239.90 241.20 210.20 188.70 Gross profit (£m) 37.90 29.60 22.80 29.80 23.60 Gross Profit Margin 13.34% 10.98% 8.64% 12.42 11.12 Net Profit (£m) 21.1 18.4 14.1 21.6 15.5 Net Profit Margin 7.43% 6.83% 5.34% 9% 7.30% Current Assets (£m) 447.03 247,60 286.20 381.10 486.10 Current Liabilities (£m) 137.46 273.15 307.10 384.80 497.90 Current Ratio 3.25 0.91 0.93 0.99 0.98 Profitability “Gross profit margin” From the graphical representation above, one can understand that there has been an upsurge in company’s gross profit. The gross profit rose steadily from year 2009 to 2010 and then met a fall in 2011 and again reached the peak in 2013. However, in 2011 financial year, gross profit fell by 8.1 % as compared to 2010 figures. The continuous rise in gross profit is due to reduced cost of sales, but in 2011 the increase in overheads resulted in the fall of gross profits. In the year 2012 and 2013, BDHP is able to control its cost of sales. Consequently, in the following years, more efficacious usage of resources is anticipated to engender higher gross profit margin (Gildersleeve 1999:9). BDHP Net Profit Ratio for the last 5 years BDHP displays a general increasing net profit margin. Year 2011 shows a very thin profit margin compared to the 2009 & 2010, 2012 and 2013. One of the reasons is the decrease of gross profit margin in 2011. Net profit decreases due to increase in tax rates and interest charges that reduce net profit for the BDHP in 2011. BDHP is able to maintain good net profit margin in the year 2012, and 2013 is mainly due to controlling the interest costs , payment of steady dividends , prudent provision for taxes , absence of any abnormal business transactions had helped BDHP to maintain a steady Net Profit margin (Siddiqui & Siddiqui 2010:651). Liquidity Current ratio This denotes to the relationship between current liabilities and current assets. Generally, the current ratio of the BDHP was negative from 2009to 2012. The management of current ratio is a significant task for any business. A company should always strive for a balance in managing its current ratio. For instance, a negative current ratio may offer a warning indication about the inability to pay creditors in time. (Gibson 2010:230). Continuous negative current ratio for the consecutive three years in BDHP denotes that it has to rely on credit from banks to tide over its liquidity crisis. As a result, it would enhance the interest cost to the company and will have an impact on net revenues. There has been a decrease trend in company’s liquidity since 2009. This is because the decrease of the current assets and increase of current liabilities of the company. However, in 2013, BDHP had a positive current ratio which denotes that it is having sufficient liquidity to meet the creditors’ payments in time. Investment Return “Return on Equity” Return on equity ratio helps to evaluate the performance of the company against the aggregate stockholders’ equity in the company. For instance, if BDHP has £500 million in net worth and earns £100 profits, then, the BDHP is making 5% ROE. This would be more fruitful for BDHP since this ratio helps to indicate how better BDHP turns its assets into income. This ratio may be beneficial to investors, but distortions may present due to the financial structure of the company. For instance, if a company that is more heavily debt financed may have a higher return on equity which might be created artificially as compared to a company that is more funded by equity. Preferably, higher investment in the company should bring more returns on equity because the company is able to divert the additional equity received and employ the same in the projects where profits can be made (Albrecht, Stice &Stice 2007:679). Except in the year 2010, in all the years, BDHP has falling ROE which indicates that it might have undertaken merger and acquisition and this might have funded the merger and acquisition, by issue of more equity shares. For example, in 2013 and 2012, BDHP invested £ 191 m and £ 186 m in subsidiaries and hence, its ROE has remained at “11.07% and 11.59% “respectively during these years (Rezaee 2011:157). Risk Management BDHP has following business risks from its usage of financial instruments. Some of these risks include market risk, liquidity risk, credit risk and operational risk, which are not easy for the group to control (BDHP Annual Report 2013:103). These risks offer challenges to the organization and its future if it is not well administered. As a result, the group has established means to overcome and administer these risks. BDHP’s risk management policies are aimed to make sure that risks are recognised, assessed and subject to continuing overseeing and reduction where it is possible. The risk polices are aimed to establish the necessary controls, the effectiveness and adequacy of which is also subject to review and testing periodically (Duckert 2010:1) Market Risks: BDHP carries on stockbroking and investment management activities on behalf of their clients on an agency basis. BDHP is vulnerable to market risk that refers to changes in market prices such as interest rates, foreign exchange rates and equity prices, which is likely to impact the Group’s income or the value of its investments in financial instruments (Adams 2005 :125). “Foreign Exchange Risk” The management of foreign-currency risk has become more significant for investment management companies to safeguard them from the loss due to change in foreign currency. (Papadopoulos 2011:1).BDHP deals in foreign currencies on a matched basis as per the directions given by its clients, thereby restricting the foreign exchange exposure. As of 29 September 2013, BDHP’s aggregate net foreign exchange exposure due to income yet to be converted into sterling was a debtor of £119,000 (£ 421,000). One of its subsidiaries namely, Tilman Brewin Dolphin Ltd owned assets worth of £ 4 m in 2013 (2012: £ 2.8m) which is denominated in its local currency namely Euros. However, BDHP group does not hold any derivatives. “Equity Price Risk” BDHP is vulnerable to equity risk emanating from those securities’ held-for-trading and those available-for-sale investments. Equity investments named as “available-for-sale” are being held for strategic objectives instead of trading purposes, and BDHP is not actively involved in these investments. BDHP’s sensitivity to equity prices has not transformed meaningfully from the earlier period (BDHP Annual Report 2013:106). “Interest Rate Risks” As regards to Group’s cash and client deposits, the group is vulnerable to interest- rate risk. In case of client deposits, the risk arises due to the interest rate paid to its customers on their deposits, which is associated to the base rate of Bank of England. With the variable interest rates, the Group is carrying deposits on demand. As on 29th September, 2013, it is estimated that a one-percent increase in the base rate would have enhanced the profitability by £722,000. (2012£328,000) (BDHP Annual Report 2013:106). Credit Risk BDHP is vulnerable to credit risk that if a counterpart or a client will default on his contractual commitments thereby causing financial loss to the Group. From the market transactions, cash deposited in banks and from the settlement of client, BDHP is exposed to credit risk. BDHP holds collateral against credit risk in the form of gilts and equity quoted on recognised stock exchanges together with the cash balances. To avoid credit risk, BDHP is executing all transactions on current settlement or a delivery versus payment (DVP) basis. BDHP’s vulnerability to large trades is restricted with a mean bargain size in the present period of £12,200. For the high-value trades, BDHP is having some additional controls. Deposits are being held with three major banks with credit ratings of “A” for the managing the credit risks of cash and cash equivalent (BDHP Annual Report 2013:107). Liquidity Risk Liquidity risk connotes to the risk that if the BDHP is not able to cater its financial commitments at all times. On demand, BDHP is capable of repaying of its deposits made by its clients. As the BDHP normally deals with the market on a cash against document basis, liquidity is supervised with the help of daily exception reports of unmatched items in the past settlement date and monitored by the Finance and Credit Control Departments (BDHP Annual Report 2013:108). Operational Risks This risk connotes the risk of loss arising out of failed or inadequate internal processes, systems and people or from external incidents. Under this category, the risks that are covered will be regulatory and legal risk, which connotes the risk due to not adherence with laws and failure to maintain contractual commitments and ethical standards. BDHPs approach to administer operational risk is to recognise, evaluate and supervise operational risks in a manner, which balances stakeholder and commercial interests. For risk management, the risk -management framework adopts the “three lines of defence model.” This model guarantees clear accountabilities by allocating specific responsibilities to each of the “lines” and hence, each line occupies a significant role in guaranteeing effective risk management (BDHP Annual Report 2013:109). Capital Risk BDHP manages its capital to make sure that subsidiaries in the group will be able to continue to function as a going concern. Further, BDHP also carries out an internal Capital Adequacy Assessment Process (ICAAP) as needed by the Financial Conduct Authority (FCA) for earmarking the required amount of regulatory capital to be maintained by BDHP. BDHP’s Board is following the Pillar II assessment of ICAAP’s level of capital to the Group which is to be held as a cushion against the risks which the BDHP is exposed. BDHP employs the simplified approach to Credit Risk to evaluate Pillar1 requirements, which is shown in the following table: (BDHP Annual Report 2013:104). Source: (BDHP Annual Report 2013:104). As a part of Risk management practices, BDHP is having a committee of Board namely Risk Management Committee. The committee will supervise the risk- management framework of the Group and particularly, in its effectiveness of governance, risk management within the group. The committee will recommend to the board the process of establishing the Risk Appetite and associated tolerances (Moeller 2011:244). During every quarter, the risk management committee meets to review compliance and risk management progress and information efforts (BDHP Annual Report 2013:45). The present structure of the Risk Committee of BDHP is detailed as below: Source: (BDHP Annual Report 2013:45) Conclusion and Recommendations On behalf of its clients, BDHP is managing about £28.2 billion of investments annually as of date. From the above analysis of the certain risks, BDHP is vulnerable to the risks in the ordinary course of its business, and it is having adequate techniques to withstand and defend the organization from such risks. BDHP’s risk management policies are aimed to make sure that risks are recognised, assessed and subject to continuing overseeing and reduction where it is possible. BDHP is vulnerable to market risk that refers to changes in market prices such as interest rates, foreign exchange rates and equity prices, which is likely to impact the Group’s income or the value of its investments in financial instruments. As a part of Risk management practices, BDHP is having a committee of Board namely Risk Management Committee. The committee will supervise the risk- management framework of the Group and particularly, in its effectiveness of governance, risk management within the group. Thus, by having adequate internal controls and having an effective risk management policy, BDHP is able to manage its risk more prudently. List of References Adams, A T. (2005) The Split Capital Investment Trust Crisis. London: John Wiley & Sons Albrecht W, Stice J & Stice E. (2007) Accounting Concepts and Applications. London: John Wiley & Sons Duckert G H. (2010) Practical Enterprise Risk Management: A Business Process. London: John Wiley & Sons Gibson, C. (2010) Financial Reporting and Analysis. New York: Cengage Learning Gildersleeve, R. (1999) Winning Business: Use Financial Analysis and Benchmarks. Dubai: Gulf Professional Publishing Moller, R R. (2011).Management: Establishing Effective Governance. London: John Wiley & Sons Papadopoulos, P. (2011).Role of Currency Futures in Risk Management. London: Green Verlag. Siddiqui S A & Siddiqui A S. (2010) Comprehensive Accountancy XII. India: Laxmi Publications Read More