All our programmes, with the exception of the grant funding and operating costs element for Start Up Loans, count towards our financial return target. The Bank targets achieving a return on capital at least equivalent to the Government’s medium-term cost of capital. We have a target for the end of March 2019 of 2.525%.
Adjusted return on capital employed
The British Business Bank achieved a 3.6% adjusted return on capital employed in 2018/19, which was higher than our target for the year. However, it is lower than the return achieved in the previous year. This has been caused by three key drivers: (a) lower returns in the year from legacy VC funds of £7.2m (2017/18 £22.8m), (b) write down in the value of assets distributed by a single Enterprise Capital Fund (£17.1m), and (c) increased operating costs as the Bank has continued to invest in order to deliver on the new objectives it was set last year. The Bank has also continued to invest in systems, controls and processes. While not material for the results, the Bank has seen an increase in credit losses in several of its debt programmes and continues to monitor this area closely.
Average capital employed has increased from £1,530m to £1,829m, an increase of £299m as the Bank continues to invest in UK smaller businesses.
Adoption of IFRS 9
The group adopted the International Financial Reporting Standard IFRS 9 for the first time in 2018/19. The return for the 2017/18 financial year has been adjusted to account for the impact of the transition to the new basis of accounting for the Group’s financial instruments. This transition adjustment has resulted in a £2.8m reduction in the reported return for 2017/18. As indicated in the 2017/18 Annual Report, the Bank has restated all of its historic return calculations to take into account the impact of IFRS 9. This means that historic changes in fair value that impacted Other Comprehensive Income (both the assets on the Bank’s balance sheet and assets on the BEIS balance sheet that are managed by the Bank) have now been included in the historic Adjusted Return on Capital Employed as set out later in this section.