Treasury Management Financial Review 2003/2004

Report: 09
Date: 24 May 2004
By: Treasurer

Summary

This report presents the Annual Review of Treasury Management for the 12 – month period ended 31 March 2004.

A. Recommendation

That this annual report of the Treasury Management function be noted.

B. Supporting information

Background Information

1. The MPA operates in accordance with CIPFA’s Code of Practice on Treasury Management which requires that the Authority receives an annual report on treasury management after the year’s close.

Investment transactions

2. The Treasury Management Strategy for 2003/04 was approved by this Committee on 13 February 2003 and set out investment instruments available for receiving funds. The associated market sector investment limits were revised in February 2003 and advised to this Committee on 10 July 2003 enabling greater operational flexibility in placing funds. An analysis by market sector is shown at Table 1.

Table 1 – Investment portfolio. Market sectors 2003/04

3. The average size of the investment portfolio during 2003/04 was £366 million with a balance of £347 million invested at 31 March 2004. Throughout the year, balances have been fairly constant with an average size of £390 million in April 2003 compared to £386 million in March 2004.

4. A total of 368 investment transactions were undertaken (this does not include call money balances, see paragraph 6). The average size of investments was £15.4 million and average term 123 days.

5. The level of activity in the banking sectors (Table 1) reflects the number of opportunities available and the rates available. The local authority sector, money market funds and the Debt Management Account Deposit Facility (DMADF) rates are continuously monitored but did not offer competitive rates during 2003/04.

6. The portfolio balances include call money. These funds are instantly accessible (within certain parameters) in accounts with The Bank of Scotland, Abbey National and The Royal Bank of Scotland. During the first half of the year, these accounts gave a very competitive return compared to prevailing money market rates with the added benefit of high liquidity. Subject to investment limits high balances have been maintained in these accounts although as market conditions changed balances were reduced in favour of money market investments.

Risk assessment

7. Our Treasury Management Policy restricts lending to institutions with high credit ratings with such ratings provided to the MPA by Fitch Ratings. The selected minimum standards include ‘short-term’ of F1, indicating the strongest capacity for timely payment of financial commitments and ‘long term’ of A+, indicating a low expectation of credit risk.

8. Institutions meeting the credit rating criteria for inclusion on the lending list have an individual lending limit determined by the financial size of the institution. The highest limit is £30 million, and applies to most institutions in the two banking sectors. The Building Society limits range from £30 million for the largest society to £2 million for the smallest.

Compliance with agreed limits

9. Transactions were conducted within the criteria described above with sector and individual limits adhered to with one exception when an individual limit of £30 million was exceeded for one day by £2.7 million in order to place a late grant receipt. The risk from this additional exposure was evaluated and not considered significant but local procedures have been enhanced to reduce the possibility of similar future occurrences. Additionally constant monitoring of the lending list against Fitch Rating information ensured all institutions met the prescribed credit ratings.

Performance

10. Accrued interest received on investments in 2003/04 was £13.4 million against an original budget of £8.9 million. On 20 November 2003, this Committee was advised of additional income against budget of up to £2.1 million, due to a strengthening of balance sheet reserves and provisions in 2002/03 and the timing of large receipts and payments. Subsequently additional income was reflected in budget monitoring reports to the Committee.

11. The Bank of England Base Rate reached a low of 3.5% in the current interest rate cycle following a reduction of 25 basis points in July 2003. Shortly after this reduction, the market turned around and there were 25 basis point increases in both November 2003 and February 2004 giving a base rate of 4% at year-end. This gave additional opportunities to enhance return as the yield curve moved upwards with future increases predicted by the market.

12. Investment performance by market sector provides a measure of relative performance across the portfolio. The return achieved and interest accrued for each sector is shown at Table 2.

Table 2 – Rate of Return and Interest Accrued by Market Sector 2003/04

13. Differing rates of return between sectors reflect available dealing opportunities which are subject to lending criteria. The higher return of the building society sector, which has been utilised up to the sector limit, illustrates the generally longer term profile of deals in this sector. Investments in the banking sectors are shorter term and influenced by cash flow considerations although the attractive call account rates during the first half of the year (see paragraph 6) are reflected in the higher return.

14. Investment performance is monitored using the British Bankers Association London Interbank Offer Rate (LIBOR) for one week and one month. The 2003/04 MPA return of 3.66% compares with the one week BBA LIBOR figure of 3.70% and one month BBA LIBOR figure of 3.76%.

15. The MPA is a member of the IPF Treasury Management Benchmarking Club and investment activity for 2003/04 is submitted to IPF during May 2004. Draft analysis including comparison with selected larger local authorities will be available towards the end of July 2004. This comparison will be included in the six monthly update on treasury management presented to this committee later this year.

Debt Management Operations

16. In line with the Treasury Management Strategy, no borrowing took place during 2003/04. Maturing loans totalling £10 million were repaid, reducing the balance of debt at 31 March 2004 to £104.47 million (of which £12.98 million is held on behalf of the former Inner London Magistrates’ Courts Service and the former Inner London Probation Service).

17. The average size of the portfolio during 2003/04 was £112.8 million with an average rate of interest paid on the portfolio of 6.35%. All debt is held in fixed rate maturity loans with the PWLB.

C. Race and Equality impact

There are none specific to this report

D. Financial implications

The outturn figures discussed in this report are consistent with those previously advised.

E. Background papers

None

F. Contact details

Report author: Stephen Skirten, Treasury and Control Manager, MPS.

For more information contact:

MPA general: 020 7202 0202
Media enquiries: 020 7202 0217/18

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