abrdn plc

Half year results 2022

Part 1 of 3

9 August 2022

For a PDF version of the full half year results announcement, please click here:

http://www.rns-pdf.londonstockexchange.com/rns/3287V_1-2022-8-8.pdf

abrdn plc's LEI Code is 0TMBS544NMO7GLCE7H90

Media

A conference call for the media will take place at 7:45 am (BST) on 9 August 2022. To access the conference call, you will need to pre-register at https://cossprereg.btci.com/prereg/key.process?key=PEDBGUXPT

Institutional investors and analysts

A presentation for analysts and investors will take place via webcast at 9:00am (BST) on 9 August 2022. To view the webcast live please go to www.abrdn.com

The Half year results 2022 are published on the Group's website at www.abrdn.com/hyresults

Details of forward-looking statements can be found on page 64.

Certain measures such as fee based revenue, cost/income ratio, adjusted operating profit, adjusted profit before tax and adjusted capital generation are not defined under International Financial Reporting Standards (IFRS) and are therefore termed alternative performance measures (APMs).

APMs should be read together with the Group's condensed consolidated income statement, condensed consolidated statement of financial position and condensed consolidated statement of cash flows, which are presented in the Financial information section of this report. Further details on APMs are included in Supplementary information.

See Supplementary information for details on AUMA, net flows and the investment performance calculation.

All movements shown are compared to H1 2021 unless otherwise stated.

"The half year Group results largely reflect the challenging global economic environment and market turbulence.

When I became CEO in late 2020 I said that we would pursue a strategy of diversification by refocusing our Investments business in to areas of strength, where we have scale and that lean into global growth trends and also significantly expand our reach into the higher growth UK wealth market. We are doing exactly that and the addition of interactive investor transforms our UK retail presence and future revenue streams. The strength of our balance sheet means that we can continue to invest and reward shareholders."

Stephen Bird

Chief Executive Officer

Markets impacting profitability

·      Fee based revenue 8% lower at £696m and adjusted operating profit 28% lower at £115m, driven by market movements.

·      Continued cost control delivered 2% reduction in adjusted operating expenses.

·      Cost/income ratio higher at 83% (H1 2021: 79%) as a result of lower revenue.

·      IFRS loss before tax of £320m (H1 2021: profit £113m), largely due to losses of £313m from the change in fair value of our significant listed investments in the period.

·      Net outflows were £3.8bn excluding LBG and liquidity¹ (H1 2021: £1.9bn), representing (1%) of opening AUMA.

·      Total net outflows were £35.9bn (H1 2021: £5.6bn) largely reflecting final LBG tranche withdrawal of £24.4bn.

·      AUMA was £508bn (FY 2021: £542bn) reflecting lower markets and final LBG tranche withdrawal, partly offset by inclusion of AUA from interactive investor (ii).

Diversification creating resilience and Investments being reshaped

·      Investments vector fee based revenue down 11% and adjusted operating profit down 40% mainly reflecting adverse market conditions.

·      Material rationalisation of funds to enable focus on our strongest and most relevant strategies.

·      Areas of strategic focus in Institutional and Wholesale such as real assets and alternatives delivering growth and supporting gross flows of £13.5bn (excluding liquidity).

·      Successfully retained c£7.5bn of LBG assets in Institutional quantitative funds.

·      Investment performance broadly stable with 63% of AUM above benchmark over three years (FY 2021: 67%).

·      Adviser continues to deliver in tough markets with fee based revenue up 6% and adjusted operating profit up 3%.

·      Net flows in Adviser of £1.4bn (H1 2021: £2.0bn) reflects customer activity in the current environment.

·      Personal includes one month result for ii, increasing fee based revenue by £13m and adjusted operating profit by £6m.

Focused on delivering returns for shareholders

·      Strong capital position, with regulatory surplus of £0.6bn (FY 2021: £1.8bn) after funding ii acquisition.

·      Value of significant listed investments at 30 June of £1.7bn (FY 2021: £2.3bn).

·      Initial phase of £300m shareholder return programme commenced with £150m share buyback launched.

·      Interim dividend of 7.3p in line with our dividend policy.

Outlook

·      Current market uncertainty means our ambitions for revenue growth and improved cost/income ratio are likely to take longer than originally expected.

·      In current markets we aim to deliver a similar percentage level of adjusted operating cost reduction in FY 2022 to that achieved in H1.

·      Targeting net cost savings in Investments vector of c£75m over the period to 2024, comprising gross cost savings of c£150m and c£75m investment in future growth and inflation.

·      Restructuring costs expected to be c£150m in FY 2022 (excluding corporate transaction costs). Additional restructuring costs associated with Investments vector cost actions expected to be broadly funded by proceeds from disposals of non-core assets.

·      ii performing ahead of our profit expectations in H1 2022 and on track to deliver double-digit earnings accretion based on adjusted diluted earnings per share.

·      With our disciplined approach to allocating capital to deliver shareholder returns, we will continue to return capital in excess of business needs as further stake sales are realised.

·      Our previously stated dividend policy remains unchanged.

1.     Excluding Institutional and Wholesale liquidity net outflows of £7.7bn (H1 2021: £3.7bn) and LBG tranche withdrawals of £24.4bn (H1 2021: £nil). Liquidity flows are low margin and volatile in nature. LBG tranche withdrawals relate to the settlement of arbitration with LBG.

2.     % of AUM above benchmark over three years. Further details on the calculation of investment performance are provided in Supplementary information.

3.     Comparative as at 31 December 2021.

Chief Executive Officer's statement

Our business model has been resilient in the first half of 2022 and we've seen the clear benefits of our diversified three vector model, with profits growing in Personal and Adviser. This is against the backdrop of a rapid downturn in the global economy and markets that has affected the sector and had an impact on the Investments vector and overall group performance.

Fee based revenue is 8% lower, adjusted operating profit is 28% lower and the fall in the value of our listed stakes has resulted in an IFRS loss before tax of £320m. The cost/income ratio is higher at 83% and AUMA was £508bn, 6% lower than the start of the year.

When I became CEO in late 2020 I said that we would pursue a strategy of refocusing our Investments business in to areas of strength and relative scale and that we would expand our reach in the higher growth and higher margin UK savings and wealth market by investing in and growing our Adviser and Personal vectors. Despite the challenging market context we are doing exactly that.

Investments

In the Investments vector our results have been impacted by industry-wide negative returns which has resulted in 11% lower fee based revenue and 40% lower adjusted operating profit.

The sharp rotation from growth to value has impacted our investment performance in equities and multi-asset, while performance in real assets, alternatives and fixed income is highly competitive over the medium and longer term. Our long-term quality focus should fare better in the natural next phase of rotation as recessionary concerns mount. Likewise, our Asia and China expertise represent a potential counter cyclical investment opportunity as the US slows.

In the context of heavy market turbulence, we saw net outflows of 1% of opening AUMA (excluding LBG and liquidity), demonstrating stability despite the conditions and impacts on investment performance. We have retained c£7.5bn of LBG assets in our Solutions business, Tritax AUM has increased from £5.9bn a year ago to £7.7bn, and we have over £1.7bn in the real estate acquisition pipeline including the student residence market.

Client interest in real assets continues to be high. Investment performance over the three-year period for real assets has now improved from 52% to 75% and our shift from traditional retail assets into next generation long term real assets is paying off with Tritax overseeing one of our top revenue generating funds in this half year.

New business activity in the first half is fully aligned to our chosen areas of focus. For example, recent fund development and launches include the MyFolio Sustainability Index, China Next Gen, Asian Sustainable Credit, Commercial Real Estate Debt, Core Infrastructure and Global Risk Mitigation.

Overall costs within the vector remain too high and a range of initiatives are underway to address this. We are continuing with fund rationalisation and non-core disposals. We have simplified management processes, progressed single middle office migration and transformed our equity and multi-asset solutions operations. We are committed to delivering gross cost savings of c£150m by the end of 2024.

We outlined our group and Investment vector strategy in March last year, and whilst the environment has changed substantially, we remain absolutely committed to delivery. We are substantially changing the shape of our Investments business and repositioning ourselves in higher margin asset classes that both play to existing abrdn strengths and lean into global growth trends. This will also position us optimally when broader global economic recovery starts by exposing us to the markets most critical to that recovery. Our core manufacturing pillars of fixed income, specialty equities and alternatives are being organised to deliver outcomes and solutions for clients aligned to global mega-trends that will dominate the investment landscape for the foreseeable future. We are pulling away from a broad waterfront offering as we focus the business on areas where we have strength and scale.

As our progress in the first half of 2022 demonstrates, we are rebasing this business and positioning it for sustainable higher margin growth with a significantly reduced cost base.

Adviser

The Adviser vector remains the number one adviser platform in the UK by AUA (Source: Fundscape), with over 50% of advisory businesses using our solutions and giving a 96% customer satisfaction score. In the first half of 2022 the business has performed robustly with growth in fee based revenue of 6% and adjusted operating profit up by 3%. We are continuing to invest in technological capabilities and platform integration that will further improve client experience and further enhance our leadership in this growing market.

Personal

The acquisition of interactive investor, completed in May, has transformed our position in the vibrant UK Wealth market and delivers a significant acceleration of group revenue diversification. ii's financial performance in the first half (of which a month is contributory to abrdn) was ahead of our expectations, driven by three fundamentals - customer acquisition, subscription revenue growth and improved operating leverage. ii has seen a 17% increase in revenue and 47% increase in adjusted operating profit on a full year 2021 run rate basis (excluding Share), while the cost/income ratio improved by 9 percentage points to 56%, highlighting ii's efficiency.

To maximise growth synergies, we are moving the existing Personal Wealth business - discretionary, digital advice and financial planning - under Richard Wilson, who has been appointed CEO of the entire Personal vector. This will enable us to deliver an 'end to end' customer proposition from simple online transactions to more complex financial advice and exploit further shared opportunities to fully serve this expanded customer group.

Taken together, growth in the Adviser and Personal vectors, which significantly increase exposure to the UK wealth market, will help transform the shape and source of group revenue in line with our stated strategic ambitions.

Strategic approach and outlook

We are continuing to deliver on our priorities and whilst the external market environment has worsened and it will likely take us longer to deliver our targets, it is the right strategy and we have the team and the capital resources to execute it well.

Looking forward into the second half, we will see revenue tailwinds from a full six months' contribution from ii and from performance fees. We are expecting continued positive flows in Adviser and Personal Wealth. Markets have shown some signs of improvement in July and if this trend continues it will provide a further revenue tailwind.

Even with the additional costs from ii and Tritax, for FY 2022 we have a clear pathway in current markets to lower overall group operating costs and we aim to deliver a similar year on year percentage level of adjusted operating cost reduction for FY 2022 to be similar to that seen in H1 2022 against the comparative half year period. This will be driven by cost actions within the Investments vector, a further reduction of headcount and continued cost control across the group.

We are targeting the delivery of net cost savings in the Investments vector of c£75m over the period to 2024. This comprises actions to deliver gross savings of c£150m over the period from 2022 to 2024, with the majority impacting 2023 and fully realised in 2024, and c£75m of costs invested for future growth which will also largely fall in 2023. Our actions to deliver cost savings are designed to enable investment in areas of growth and performance related compensation for our teams. Additional restructuring costs associated with these actions are expected to be broadly funded by proceeds from the disposal of non-core assets.

Our capital resources are strong, which will continue to enable investment in the business and support the dividend policy and the current £300m shareholder return programme. Now that the ii acquisition is complete and with our disciplined approach to allocating capital to deliver shareholder returns, we will continue to return capital in excess of business needs as further stake sales are realised.

We are continuing to execute on our client-led growth strategy first by improving the performance of each vector and then by extracting the value across all three. This approach will diversify earnings, improve efficiency, deliver our revenue and cost ambitions and ensure optimal use of capital. Now that the shape of the group is largely settled, we expect inorganic actions on a more modest scale. This may include both further divestments and selective reinvestment where we see capabilities we need and that offer compelling value.

Whilst the global economic outlook remains very uncertain, we are focusing on what we can control through the ongoing delivery of our strategy. This will provide diversification of revenue streams and put the group on a sustainable growth trajectory.

Stephen Bird

Chief Executive Officer

Introducing ii

"Against a backdrop of weak markets, ii's resilient subscription-based model enables us to report a progressive performance for the half year. Joining the abrdn family offers further opportunities to grow and we are already collaborating to harness the advice, wealth management and research capabilities as we work constantly to improve the services we offer our customers."

Richard Wilson

CEO of interactive investor

interactive investor (ii) is the UK's second largest investment platform for private investors and the number one flat-fee provider. ii offers ISA, SIPP, Junior ISA and general investing accounts, plus investment content, tools, choice and service. It is an award-winning platform with a wide choice, rated 'Excellent' on Trustpilot, and in July was named as a Which? recommended SIPP provider 2022.

AUA per customer is industry leading, customer numbers went up again in H1 and ii already has a highly scalable platform powered by modern digital and data infrastructure that will support margin expansion as those numbers grow further.

In H1, trading remained above pre-COVID levels. The business is seeing important growth in SIPP penetration, with over 49,000 customers holding a SIPP, up by almost 10,000 year-on-year. This has substantial customer retention benefits; lapse rates for SIPP customers are four times lower than for non-SIPP holding customers.

In February, ii expanded its pension offering, launching its low-cost, standalone Pension Builder SIPP. Further value enhancements include a reduction in ii's standard online dealing charge from 1 September.

There is a clear roadmap of further propositions to attract and retain customers and drive future growth, including; a fixed fee pension offer, new pricing bundles, a new website and extending into advice.

The acquisition substantially increases the scale of our Personal vector, adding over 400,000 customers. This represents a step change in our combined UK personal wealth offering and offers additional growth opportunities and diversification to abrdn's revenue streams. With Richard Wilson becoming CEO of abrdn's Personal vector, and assuming leadership of our wider personal wealth offering, we are well placed to accelerate delivery of identified growth synergies.

Financial performance ahead of our expectations

For comparative purposes, ii's results for the 12 months to 31 December 2021 and the six months to 30 June 2022 are set out in the table above.

Results for ii are included within abrdn's H1 2022 results only for the one month period to 30 June 2022 following the completion of the acquisition.

Recent performance highlights:

·      ii has continued to perform well against an uncertain market environment with profit performance ahead of our original projections.

·      Adjusted operating profit up 47% in H1 2022 compared to the 2021 run rate (being 50% of FY 2021).

·      Diverse revenue streams continue to drive growth, despite the current weak market conditions. This is underpinned by our subscription-based revenue model with H1 2022 subscription revenue up 13% compared to the 2021 run rate.

·      Revenue has benefited from interest rates increasing from the exceptionally low levels in 2021, with treasury income of £17m in H1 2022 compared to £9m for the whole of FY 2021.

·      Given the operating leverage, the cost/income ratio improved to 56% in H1 2022.

·      Total customer numbers increased to c408k at 30 June 2022.

·      AUA per customer of £128k at H1 2022 remains substantially above peers.

·      AUA market share has grown strongly from c16% at H1 2021 to c18% at H1 2022³.

·      Net inflows of £2.2bn (H1 2021: £3.6bn) represent 4% of opening AUA. The reduction in net inflows compared to H1 2021 reflects the exceptional trading conditions seen in Q1 2021 and the impact of market headwinds.

·      Daily average retail trades reduced to 20.2k, with peak trading levels in 2021 driven predominantly by COVID-19 market fluctuations.

1.     Adjusted operating profit has been presented to exclude losses relating to Share Limited ('Share') to provide a more meaningful comparison to the go-forward position. The FY 2021 adjusted operating profit of £45m excludes losses relating to Share of £9m while part of this business was wound down. Including losses from Share, the FY 2021 adjusted operating profit was £36m. The H1 2022 impact was £nil. See section 5.1.4 of Supplementary information for further details.

2.     Fee based revenue includes trading transactions, account fees and treasury income. See Section 5.1.4 of Supplementary information.

3.     Platforum Reports AUA Market Share: July 2022.

Results summary

The IFRS loss before tax was £320m (H1 2021: profit £113m) largely due to losses of £313m from the change in fair value of significant listed investments (HDFC Asset Management, HDFC Life and Phoenix) as a result of the fall in the share price of these companies in the period. Adjusted operating profit was 28% lower, largely due to the 8% reduction in revenue as a result of lower market levels which particularly impacted high yielding equities. The H1 2022 results include a contribution from ii for the one month to 30 June 2022 which benefited fee based revenue by £13m and adjusted operating profit by £6m.

Adjusting items were £419m and include the £313m loss from the change in the fair value of significant listed investments (H1 2021: loss £72m) and restructuring and corporate transaction expenses of £88m (H1 2021: £113m). H1 2021 benefited from the profit on disposal of subsidiaries and interests in associates of £152m.

Focusing on what we can control in period of adverse markets

Fee based revenue

Fee based revenue reduced by 8% reflecting:

·      Impact from net outflows excluding LBG of less than 1% (H1 2021: <0.5%)¹.

·      Performance fees of £10m (H1 2021: £22m), primarily generated from Asia Pacific and small cap equities.

·      Significant impact from adverse markets. Other movements include a £4m negative net impact from corporate actions during 2021 and 2022, with Parmenion and Bonaccord partly offset by ii and Tritax. H2 2022 will benefit from a full six months inclusion of ii.

Adjusted operating expenses

Adjusted operating expenses reduced by 2% reflecting:

·      Staff costs excluding variable compensation were flat with one month of ii expenses offset by underlying cost savings.

·      Lower accruals for variable compensation in line with overall business performance.

·      Increase in non-staff costs of £7m includes impact of higher outsourcing costs and regulatory driven change spend.

The cost/income ratio worsened to 83% (H1 2021: 79%) as a result of the lower revenue.

1.     Reflects the estimated impact on fee based revenue as a result of net outflows in both the current and prior period, as a percentage of prior period revenue.

2.     See Supplementary information for a reconciliation to IFRS staff and other employee related costs.

Investments

Investments vector faced headwinds

Adjusted operating profit

·      £50m (40%) lower than H1 2021, reflecting 11% lower revenue and 3% lower costs.

Fee based revenue

·      Lower than H1 2021 largely due to adverse market movements impacting average AUM.

·      Performance fees of £10m (H1 2021: £22m) reduced mainly due to the lower real assets performance fees compared with H1 2021.

Institutional and Wholesale

Fee based revenue

·      11% lower at £455m (H1 2021: £511m) driven by a £10bn decrease in average AUM to £239bn (H1 2021: £249bn). This is attributable to adverse market movements in equities, fixed income and multi-asset AUM. This is partly offset by a full six months revenue from Tritax, compared to three months in H1 2021, and growth in Tritax average AUM.

Revenue yield

·      2.3bps lower largely due to the decrease in the higher margin equities average AUM.

Gross flows

·      £6.5bn lower excluding liquidity (H1 2022: £13.5bn, H1 2021: £20.0bn) mainly within fixed income and equities. This includes the impact of the negative market environment resulting in lower gross flows compared to H1 2021 across the wider industry, as many clients are delaying investment decisions.

Net flows

·      £2.5bn higher net outflows of £3.3bn excluding liquidity, largely due to the lower level of gross inflows partly offset by a £4bn improvement in redemptions. H1 2021 benefited from net inflows into private markets of £3.2bn which are more lumpy in nature.

·      Net outflows represent 1% of opening AUM (excluding liquidity).

·      Liquidity net outflows of £7.7bn (H1 2021: £3.7bn) reflects clients using their cash balances.

1. Includes performance fees of £10m (H1 2021: £22m).

2. As at 31 December 2021.

3. Following completion of the LBG tranche withdrawals, the remaining LBG AUM of c£7.5bn which has been retained was reallocated to quantitatives in Institutional/Wholesale.

4. Institutional and Wholesale liquidity net flows excluded.

5. Flows excluding LBG do not include the tranche withdrawals of £24.4bn(H1 2021: £nil) relating to the settlement of arbitration with LBG.

Insurance

Fee based revenue

·      11% lower than prior year at £91m (H1 2021: £102m), including the impact of LBG tranche withdrawals of £24.4bn in H1 2022 and lower average AUM.

·      The largest client, Phoenix, represents c16% of the total Investments fee based revenue.

Revenue yield

·      Fee revenue yield remained broadly stable at 9.9bps.

·      Insurance asset allocation changes as a result of market conditions are a potential headwind for future margins and flows.

AUM

·      LBG AUM within Insurance is £nil (FY 2021: £34bn). This reflects the final tranche withdrawal of £24.4bn with c£7.5bn of assets retained under a new quantitatives mandate now included within Institutional to better reflect how the relationship is being managed.

Gross flows

·      Broadly in line with H1 2021.

Net flows

·      Net outflows of £1.9bn excluding LBG tranche withdrawals of £24.4bn, are lower than prior year reflecting lower redemptions in the closed book of business which is in long term run-off.

Investment performance

Investment performance over the key three-year time period has weakened, with 63% of AUM covered by this metric ahead of benchmark (FY 2021: 67%). The sharp rotation in equities from growth to value has impacted our equity investment performance in H1 2022. Asia Pacific, Emerging Markets and Small Cap equities were particularly challenged against this backdrop with underperformance resulting from our overweight positioning in long duration growth.

Over the key three-year time period, we have consistently delivered strong performance in alternatives and liquidity, with fixed income remaining positive. Real assets performance continued to improve over one, three and five years reflecting active fund positioning away from retail and further into logistics and accommodation sectors.

1. Calculations for investment performance are made gross of fees except where the stated comparator is net of fees. Benchmarks differ by fund and are defined in the investment management agreement or prospectus, as appropriate. These benchmarks are primarily based on indices or peer groups. Further details about the calculation of investment performance are included in the Supplementary information section.

Adviser

Solid performance from leading Adviser platforms

Adjusted operating profit

·      Profit was stable at £38m against a backdrop of challenging market conditions.

·      Cost/income ratio worsened to 59% (2ppts) reflecting the timing of outsourced expenses.

Fee based revenue

·      6% increase on H1 2021 reflecting higher average AUA.

Revenue yield

·      Stable over the period at 25.5bps.

·      Average AUA of £72bn, 5% higher than H1 2021.

AUA

·      10% decrease in H1 2022 due to adverse market movements in the period partly offset by net inflows.

·      Retained our number one position in UK adviser platform market by AUA².

·      Our ongoing Adviser Experience Programme will deliver enhancements which is expected to drive increased new business activity in H2, including from our Junior ISA which launched earlier this year.

Gross flows

·      Sales activity reduced by 13% on prior year reflecting lower client activity across the industry due to ongoing market uncertainty and focus on short term spending goals amongst the UK consumer base.

·      Number two position on gross flows².

Net flows

·      Reduction in net inflows to £1.4bn is mainly due to the lower gross flows. The reduction also included a £0.2bn impact from a client exit due to it being acquired by a consolidator business.

1.     As at 31 December 2021.

2.     Source: UK Adviser platform, Fundscape Q1 2022.

Personal

Accelerating revenue diversification through ii

Adjusted operating profit

·      Higher profit reflects the inclusion of £6m for the one month result for ii.

·      The H1 2021 Personal Wealth adjusted operating profit included a one-off benefit of c£3m. Excluding this one-off benefit in the prior period, the underlying performance was stable at £1m.

Fee based revenue

·      Includes £13m from ii and for Personal Wealth the benefit of higher average UK market levels in H1 2022 compared to H1 2021.

Revenue yield

·      Personal Wealth revenue yield increased to 60.0bps with average AUMA of £14bn, 1% higher than H1 2021.

AUMA

·      AUA for ii of £55bn at acquisition included as a corporate action in the period.

·      Personal Wealth AUM decreased to £13.3bn (FY 2021: £14.4bn) due to market falls between end 2021 and 30 June 2022.

·      Total discretionary client numbers remained constant at c16,000 (FY 2021: c16,000) and total ii customer numbers increased to c408,000 (FY 2021: c403,000).

Gross and net flows

·      Total net flows of £0.3bn included £0.2bn for the one month of ii flows. Lower levels of activity are expected during the summer period.

·      Reductions in gross and net flows for Personal Wealth include the impact of broader market uncertainty which has resulted in lower activity across the industry as individuals focus on shorter term spending needs in the near term. This included a more modest tax year-end period.

1. Fee revenue yield is shown for Personal Wealth only. Revenue for interactive investor is not aligned with AUA and therefore revenue yield is not presented.

2. Comparative as at 31 December 2021.

3. Results for interactive investor included following the completion of the acquisition on 27 May 2022.

Overall performance

Adjusted net financing costs and investment return

Adjusted net financing costs and investment return resulted in a loss of £16m (H1 2021: gain £3m):

·      Investment losses, including from seed capital and co-investment fund holdings, were £25m (H1 2021: gain £5m) due to adverse market conditions in the period.

·      Reduced net finance costs of £6m (H1 2021: £11m) reflecting a higher rate of return on cash and liquid assets.

·      Higher net interest credit relating to the staff pension schemes of £15m (H1 2021: £9m) reflecting an increase in the discount rate due to a rise in corporate bond yields.

1.     Investments net flows exclude Institutional/Wholesale liquidity and LBG tranche withdrawals.

2.     Adjusted operating profit consists of fee based revenue £nil (H1 2021: £14m) and adjusted operating expenses £6m (H1 2021: £21m). H1 2022 comprises of only certain corporate costs. H1 2021 also included the Parmenion business which was held for sale. The sale of Parmenion completed in June 2021.

Adjusting items

Profit on disposal of interests in associates of £6m relates to the sale of our stake in Origo Services Limited in May 2022. The H1 2021 profit of £68m related to a one-off accounting gain following the reclassification of our Phoenix shareholding from an associate to an investment measured at fair value.

Profit on disposal of subsidiaries and other operations was £nil compared with £84m in H1 2021 which primarily related to the sale of Parmenion.

Restructuring and corporate transaction expenses were £88m, primarily reflecting ongoing transformation costs including severance, platform transformation and business integration. H1 2022 also included £13m of ii corporate transaction deal costs.

Amortisation and impairment of intangible assets acquired in business combinations and through the purchase of customer contracts were £52m and are broadly in line with last year.

Change in fair value of significant listed investments of (£313m) from market movements is analysed in the table below:

HDFC Asset Management was classified as an associate in H1 2021.

Dividends from significant listed investments relates to our shareholdings in Phoenix (£26m), HDFC Asset Management (£15m) and HDFC Life (£1m). The £35m in H1 2021 relates to dividends received from Phoenix which was prior to the reduction in our shareholding from 14.4% to 10.4%.

Share of profit or loss from associates and joint ventures increased to a profit of £6m (H1 2021: loss £33m). Phoenix and HDFC Asset Management are no longer classified as associates and joint ventures. The reduction in HASL was due mainly to lower investment returns in H1 2022.

Loss on impairment of interests in associates of £9m relates to an impairment of Tenet Group Ltd.

Other adjusting items in H1 2021 included a one-off £25m net release of deferred income. See Note 4.9 for further details of other adjusting items.

Tax expense

The total IFRS tax credit attributable to the loss for the period was £31m (H1 2021: expense £11m), including a tax credit attributable to adjusting items of £44m (H1 2021: credit £2m), resulting in an effective tax rate of 10% on the total IFRS loss (H1 2021: 10%). The difference to the UK Corporation Tax rate of 19% is mainly driven by:

·      Dividends from significant listed investments not being subject to tax in the UK.

·      Movements in the fair value of our investment in HDFC Asset Management being tax effected at the Indian long-term capital gains tax rate, which is lower than the UK Corporation Tax rate.

·      Fair value movements relating to our investments in Phoenix and HDFC Life not being subject to tax.

The tax expense attributable to adjusted profit is £13m (H1 2021: £13m), an effective tax rate of 13% (H1 2021: 8%). This is lower than the 19% UK rate primarily due to the benefit of certain tax losses now being expected to arise after the UK Corporation Tax rate increases to 25% in 2023.

Earnings per share

·      Adjusted diluted earnings per share decreased to 3.7p (H1 2021: 7.0p) due to the decrease in adjusted profit after tax and the interest payment on the AT1 debt.

·      Diluted earnings per share decreased to a loss of 13.9p (H1 2021: profit 4.7p) reflecting the H1 2022 fair value losses of significant listed investments.

Dividends

The Board has declared an interim dividend for 2022 of 7.3p (H1 2021: 7.3p) per share which will be paid on 27 September 2022. The dividend payment is expected to be £153m.

As a result of the decline in revenue in the period, dividend cover on an adjusted capital generation basis fell to 0.70 times.

The adjusted capital generation trend and related dividend coverage is shown below:

It remains the Board's current intention to maintain the total annual dividend at 14.6p (with the interim and final both at 7.3p per share), until it is covered at least 1.5 times by adjusted capital generation, at which point the Board will seek to grow the dividend in line with its assessment of the underlying medium-term growth in profitability.

Capital and liquidity

Adjusted capital generation

Adjusted capital generation which shows how adjusted profit contributes to regulatory capital decreased by 39% to £107m.

Net movement in IFPR surplus regulatory capital

The indicative surplus regulatory capital at 30 June 2022 was £0.6bn (FY 2021: £1.8bn) following the acquisition of ii. Disposal of part of our Phoenix stake in February 2022 generated sale proceeds of £0.3bn.Key movements in surplus regulatory capital are shown in the table below.

1      The Group reported capital under CRD IV until 31 December 2021. 2021 figures are therefore indicative.

2      Acquisition price of £1.5bn less capital resources acquired.

The full value of the Group's significant listed investments is excluded from the capital position under IFPR.

Return of capital

On 6 July 2022, we announced a £300m return of capital to shareholders. The first phase, a share buyback of up to £150m, has commenced and is expected to complete by 30 December 2022.

Cash and liquid resources and distributable reserves

Cash and liquid resources remained robust at £1.7bn at 30 June 2022 (FY 2021: £3.1bn) following the £1.5bn ii acquisition. These resources are high quality and mainly invested in cash, money market instruments and short-term debt securities. Further information on cash and liquid resources, and a reconciliation to IFRS cash and cash equivalents, is provided in Supplementary information.

At 30 June 2022 abrdn plc had £2.7bn (FY 2021: £2.8bn) of distributable reserves.

IFRS net cash flows

·      Net cash inflows from operating activities were £56m (H1 2021: outflows £128m) which includes outflows from restructuring costs, net of tax, of £71m (H1 2021: £97m). H1 2021 inflows were reduced by working capital movements.

·      Net cash outflows from investing activities were £325m (H1 2021: inflows £243m) and primarily reflected a £1.4bn outflow from the purchase of ii (net of cash acquired) offset by £1.1bn net proceeds from the sale of financial investments (£0.8bn from the sale of money market instruments to fund the ii transaction, and £0.3bn from the Phoenix stake sale in February 2022). The H1 2021 inflow primarily related to maturing money market instruments. 

·      Net cash outflows from financing activities were £234m (H1 2021: £260m) with the reduction mainly due to the share buyback in H1 2021.

The cash inflows and outflows described above resulted in closing cash and cash equivalents of £1,395m as at 30 June 2022 (FY 2021: £1,875m).

IFRS net assets

IFRS net assets attributable to equity holders decreased to £6.8bn (FY 2021: £7.6bn) mainly due to losses, the fall in the pension scheme surplus discussed below and the full year 2021 dividend paid in the period:

·      Intangible assets increased to £2.1bn (FY 2021: £0.7bn) as a result of the ii acquisition. Further details are provided in Note 4.2.

·      The principal defined benefit staff pension scheme, which is closed to future accrual, continues to have a significant surplus of £1.2bn (FY 2021: £1.6bn). The reduction in the period primarily resulted from interest rate rises and that the investment strategy is different to the IAS 19 accounting basis. Further details are provided in Note 4.14.

·      Financial investments decreased to £2.9bn (FY 2021: £4.3bn) primarily due to the £0.8bn sale of money market instruments to fund the ii transaction, the £0.3bn Phoenix stake sale and the £0.3bn impact of market falls on our significant listed investments. At 30 June 2022 financial investments included £1.7bn (FY 2021: £2.3bn) in relation to significant listed investments (Phoenix £615m, HDFC Asset Management £646m and HDFC Life £451m).

Principal risks and uncertainties

The principal risks that we believe the Group will be exposed to in the second half of 2022 are the same as those set out in the Annual report and accounts 2021 comprising: Strategic risk; Financial risk; Conduct risk; Regulatory and legal risk; Process execution and trade errors; People; Technology; Business resilience and continuity; Fraud and financial crime; Change management; Third party management and Financial management process. However the nature of these has changed in the last few months as a result of the external environment where we have seen a confluence of inflation pressures, monetary tightening, weaker asset markets and geopolitical tensions. Overall, the asset management sector has been re-rated downwards as a result of market headwinds impacting revenue, continued margin pressure and higher inflation impacting input costs.

Key developments in relation to our principal risks

Looking to the second half of 2022 we would highlight the following trends and developments as important in relation to our principal risks:

·      The macroeconomic environment is particularly challenging and uncertain with inflation rising sharply and a growing risk of recession across the developed economies. Rising inflation and the consequent monetary policy response has resulted in tough market conditions for investors across all regions and asset classes. Rising prices also feed into the operational cost base for the group.

·      Political risk remains particularly elevated in view of the ongoing conflict between Russia and Ukraine, which has the potential to widen and trigger instability in other regions. The impact of the Russia-Ukraine conflict on the price of key commodities is also expected to be a continued source of inflationary pressure.

·      Amid difficult commercial and market conditions, the acquisition of ii will enable the group to diversify its activities and its revenue base and we are now focused on ways of working which preserve the operational independence of ii within the group structure.

·      Some short-term operational challenges remain as we approach completion of our transformation programme.

·      As a global active fund manager, climate change and ESG considerations in our investment activities remains an important area of focus. The proliferation of new standards internationally, particularly on disclosure and reporting, presents market-wide implementation challenges.

·      We maintain heightened vigilance for cyber intrusion and financial crime. Dedicated teams actively monitor and manage our cyber security risks as they evolve, with the support of external specialists.