S M E HEALTH CHECK I N D E X

#SMEhealth REPORT 1 S M E HEALTH CHECK I N D E X CAPTURING SME HEALTH ACROSS THE UK #SMEhealth SEPTEMBER Compiled by Cebr, in association with CYBG

DISCLAIMER Whilst every effort has been made to ensure the accuracy of the material in this document, none of Centre for Economics and Business Research Ltd ( Cebr ), CYBG PLC ( CYBG ), or any of their group companies, directors or employees will be liable for any loss or damages incurred through the reliance on or use of this report. This report does not constitute an investment or research recommendation, or any form of investment advice. This report may contain forward looking statements, based on assumptions and/or targets. Actual results may differ. Authorship and acknowledgements This report has been compiled by Cebr, an independent economics and business research consultancy established in 1992. The views expressed herein are those of the Cebr only and are based upon independent research by it. The report does not necessarily reflect the views, financial position, business strategy or intentions of CYBG, its group companies, or its directors or employees. All lending decisions are subject to status. London, September

3 #SMEhealth REPORT CONTENTS Page FOREWORD DAVID DUFFY, CEO 4 INFOGRAPHIC 6 EXECUTIVE SUMMARY 8 1 UK MACROECONOMIC ENVIRONMENT 10 2 SME BUSINESS HEALTH SHOWS MARKED IMPROVEMENT IN 11 Index Indicators Regional breakdown 3 CONCLUSIONS 19 4 METHODOLOGY 20 5 REGIONAL REPORTS 22

4 #SMEhealth REPORT FOREWORD DAVID DUFFY CEO, CYBG PLC Managing a successful small or medium size business is always a challenge, particularly in today s uncertain economic environment. Across the UK, SMEs are constantly overcoming a number of obstacles a general lack of advice and information; cash flow and late payment terms and red tape being the most pressing. This is often coupled with difficulties in accessing funding, cyber security worries, managing regulatory pressures and problems finding, hiring and retaining the right talent. Added into this mix are the current political and economic uncertainties. Following the EU referendum and the recent General Election, the UK economy is showing mixed signals. UK growth is slowing as higher inflation takes its toll on consumer spending power, but manufacturing is benefiting from a low pound, with confidence in the industry running at the highest level in 30 years. All of this paints a picture of just how much there is to think about when it comes to running a successful small or medium sized company. These challenges are reflected in the indicators we are watching carefully in our quarterly SME Health Check Index and it is encouraging that data for shows that some of these barriers may be easing a little. Most indicators have improved since the previous quarter, with the number of bankruptcies falling markedly, while lending to SMEs increased. Moreover, business costs faced by SMEs seem to have almost plateaued, which is a welcome development. The challenges SMEs face are significant and we need to be offering our support and expertise to help move our country through these unprecedented times. While business confidence is down a fraction on Q1, our report suggests SME confidence remains higher than it was throughout the whole of 2016, adding to hopes that the UK economy may pick up some pace throughout the remainder of the year.

#SMEhealth REPORT 5 The future prospects of our regional economies are in no small measure dependent on the successful growth of those SMEs. We greet these results with cautious optimism; however there is no room for complacency. The UK s future economic success will depend in no small part on the strength and general health of our SME businesses. Securing a path to sustained and stronger growth will be critically dependent on unlocking improvements in the UK s productivity and business competitiveness. As the UK government has recognised, spreading economic growth more evenly across the country is vital to future economic prosperity, particularly post Brexit. The future prospects of our regional economies are in no small measure dependent on the successful growth of those SMEs. The Northern Powerhouse and Midlands Engine are a vital part of delivering higher economic growth in the regions and there is encouraging momentum from stakeholders all over the North of England and the Midlands to ensure its success. However, as this Index suggests, it s not an easy task while the North East is showing an improvement and tops our regional table, Yorkshire and the Humber is down slightly on the highs of Q1, with business confidence and capacity both taking a knock. While in the North West conditions have improved the region finds itself at the bottom of the rankings. In contrast, both the East and West Midlands have shown significant improvement this quarter. The results reinforce the need for the Government to continue its commitment to the Northern Powerhouse and Midlands Engine strategies and keep pushing the issues, ideas and ambitions to the forefront. Despite the challenges, there are good reasons for SMEs in the regions to feel confident about the future and the prospects for their businesses. As banks we have a duty to help promote this confidence and ensure that we play our part in supporting local businesses to grow. We need to understand how businesses are performing across the whole of the UK to build a prosperous future for Britain. This is why CYBG has collaborated with the Centre of Economic and Business Research (Cebr) to compile the SME Health Check Index and we hope this ongoing quarterly research will aid our understanding of the current state of the industry, as well as demonstrating how the dynamics in regional economies differ and what trends are emerging. This insight cannot be underestimated and will be hugely beneficial during these uncertain times. David Duffy

SMES ARE THE ENGINE ROOM OF THE UK ECONOMY small to medium sized enterprises 15.7m 60% 47% people employed by SMEs of private sector employment of total business revenue Taking the temperature of the UK s SME performance SME Health Check Index GDP Overall Index Score 58.9 Q1 46.9 Index mirrors trend of GDP growth 2016/17 52.6 63.6 74.9 74.3 66.9 67.5 72.8 66.1 77.4 45.6 49.6 52.5 54.8 46.9 58.9 Q1 2014 2014 Q3 2014 Q4 2014 Q1 2015 2015 Q3 2015 Q4 2015 Q1 2016 2016 Q3 2016 Q4 2016 Q1

Regional SME Health Check Index Scotland* 52 UP North East 68 13 19 UP Northern Ireland* 52 UP 26 Yorkshire & the Humber* 55 DOWN 1 North West 52 UP 10 East Midlands* 59 UP 10 West Midlands 56 UP 24 East of England* 56 UP 2 Wales 64 UP 2 London* 57 UP 14 South West 58 UP 9 South East 58 UP 11 Index Score by sub-component Bankruptcy 72 ( 59) Business Costs 51 ( 3) Capacity 56 ( 7) Employment 76 ( 1) GDP 70 ( 2) Lending 41 ( 31) Revenue 45 (0) Confidence 60 ( 7) Six indicators have improved this quarter, with the falling number of business bankruptcies and increased lending to SMEs having a particularly positive impact. Weaker business confidence exerted some downward pressure on the headline number, but SME business confidence, while experiencing a slight dip, remains higher than it was throughout 2016. * Please note the Q1 figure has been updated from an earlier estimate due to recent revisions in the official data included in the index.

8 #SMEhealth REPORT EXECUTIVE SUMMARY The UK economy depends on the success of its 5.5 million small and medium sized enterprises (SMEs) as these businesses contribute 47% of the total revenue across all UK businesses, equating to 1.8trillion a year 1. The sector has grown considerably in recent years, with figures revealing that SMEs account for 99.9% of the total number of businesses in the private sector. With such a strong influence on the economy, they are also an important employer. It s estimated that around 15.7million people work for a private sector SME, which is roughly 60% of the UK s total employment. This quarterly report for CYBG, owner of Clydesdale and Yorkshire Banks, analyses the health of SMEs in the UK. The result of the analysis is the SME Health Check Index, which combines various statistics and indicators to evaluate the health of the business and macroeconomic environment SMEs are operating in. The SME Health Check Index takes on values between 0 and 100. A score of 100 would indicate maximum improvements across the SME Health Check Index s eight indicators 2 while a score of 0 would point to major declines in the indicators. The report finds that: The SME Health Check Index rose from 46.9 3 in the opening quarter of to 58.9 in. This is the highest reading since the final quarter of 2015. Six out of the eight indicators of the SME Health Check Index have improved since the previous quarter. A falling number of business bankruptcies and increased lending to SMEs had a particularly positive impact on the Index. Weaker business confidence exerted some downward pressure on the headline figure. However, SME business confidence remains higher than it has been throughout 2016. The North East leads the regional rankings in the second quarter, while Wales drops one place into second. The largest rises in the regional SME Health Check Index were seen in the West Midlands and Northern Ireland. Scotland s SME Health Check Index has improved markedly since the first quarter, with accelerated employment growth, increased lending and improved business confidence. Despite a solid improvement in its SME Health Check Index, Northern Ireland is still placed towards the bottom of the regional ranking, while the North West dropped into last position. 1 Data come from the Federation of Small Businesses - Business Population Estimates for the UK and Regions in 2016 2 The eight sub-components are: bankruptcies, business costs, capacity, confidence, employment, GDP, lending and revenue. 3 Please note, the Q1 figure has been updated from an earlier estimate of 46.5 due to recent revisions in the official data included in the Index

THE UK ECONOMY DEPENDS ON THE SUCCESS OF ITS SMALL AND MEDIUM SIZED ENTERPRISES 5.5M small and medium sized enterprises in the UK private sector 1.8T SME s annual contribution to the UK economy 99.9% of the total number of businesses in the UK are SMEs

10 #SMEhealth REPORT 1 UK MACROECONOMIC ENVIRONMENT 0.5% 1.3% services sector growth over slight uptick of 0.1% in growth of GDP from Q1 retail sales volumes increase The preliminary estimate of UK GDP for the second quarter of showed a slight uptick in growth to 0.3% quarter-on-quarter, up from 0.2% in Q1. This increase was almost entirely driven by stronger growth in the services sector. Services expanded by 0.5% on the quarter following particularly weak growth of only 0.2% quarter-on-quarter in the first three months of the year. Production and construction both acted as a drag on growth in the three months to June, contracting by 0.4% and 0.9% respectively. 4 Although international trade strength was of some benefit to UK exporters in early, the impact of the weak pound has failed to meaningfully materialise. ONS data showed that the UK s trade deficit in goods and services stood at 4.6 billion in June, the widest deficit in nine months. The disappointing trade data dampens hope that net trade could prop up UK GDP growth in. The widened deficit was attributed to a surge in imports, increasing by 1.7 billion compared to May. The combination of rising inflation and subdued wage growth will result in falling real incomes in and Cebr believes that consumer spending growth will slow to 1.7% this year compared to 2.8% in 2016. The latest set of results from the YouGov/Cebr Consumer Confidence Index sheds further light on the slowdown. While this index rose from June s 107.1 to 107.3 in July, the last time the index was below 108 for two consecutive months was in the summer of 2013. Moreover, data from the Office for National Statistics showed that retail sales volumes increased by just 1.3% in the year to July, down from 2.8% in the previous period. Looking at the three month moving average of the annual growth rate paints an even bleaker picture. On this measure, retail sales volumes increased at the slowest pace since late in 2013. 5 On the monetary policy front, Cebr expects the Bank of England to look past rising inflation and keep the Bank Rate at its current 0.25% level until at least late 2018. This view is supported by Bank of England Governor, Mark Carney s, recent dovish remarks, as well as our expectations of an economic slowdown over the coming two years. Cebr projects inflation on the CPIH measure to peak at 3.0% in the second half of the year, with the annual average at 2.6%. 4 https://www.ons.gov.uk/economy/grossdomesticproductgdp/bulletins/grossdomesticproductpreliminaryestimate/aprtojune. 5 https://www.ons.gov.uk/businessindustryandtrade/retailindustry/bulletins/retailsales/july.

#SMEhealth REPORT 11 2 SME BUSINESS HEALTH SHOWS MARKED IMPROVEMENT IN THE SECOND QUARTER Accounting for over 99% of all UK businesses, SMEs are crucial to the UK economy and this section seeks to explore the health of SMEs across the country. We are not only analysing different variables that can be directly linked to the performance of SMEs, such as confidence and revenue, we are also investigating the business and macroeconomic environment in which SMEs are operating. The following section begins by presenting the overall results of the SME Health Check Index and its indicators, before turning to regional comparisons. Following a challenging start to the year for the UK s SMEs, this quarter brings some relief, highlighted by the SME Health Check Index rising from 46.9 in Q1 to 58.9 this quarter. The index reached an 18 month high and points to an improving business and economic environment for SMEs in the UK. Most indicators have improved since the previous quarter and it is especially encouraging that the number of bankruptcies fell markedly, while lending to SMEs increased. The following section analyses the indicators of the SME Health Check Index in more detail. Figure 1: SME Health Check Index SME Health Check Index Score 100 UK GDP quarter-on-quarter change 1.0% 90 0.9% 80 0.8% 70 0.7% 60 0.6% 50 0.5% 40 0.4% 30 0.3% 20 0.2% 10 0.1% 0 Q1 2014 2014 Q3 2014 Q4 2014 Q1 2015 2015 Q3 2015 Q4 2015 Q1 2016 2016 Q3 2016 Q4 2016 Q1 0.0% SME Health Check Index GDP Sources: FSB, ONS, BBA, Cebr analysis

12 #SMEhealth REPORT 2.1 INDEX INDICATORS Bankruptcies The bankruptcies measure improved markedly in, rising to its highest value in over two years. Data from the Insolvency Service 6 shows that an estimated 4,475 companies across the UK entered insolvency in the second quarter of. However, 1,131 of these insolvencies were caused by a one-off effect, following changes to claimable expense rules. When omitting this one-off effect, the number of companies entering insolvency fell 11% on the same quarter a year ago, with the estimated underlying number of company insolvencies falling to its lowest quarterly level since comparable records began in 2000. Business Costs Business costs faced by the UK s SMEs remained elevated in 7. Average costs rose 2.7% in the second quarter, which is little changed from the rates recorded in the previous two quarters and among the strongest since data collection for the SME Health Check Index began in Q1 2014. Higher utility bills and increased prices for physical inputs such as chemicals and metals exerted particular upward pressure on inflation. Meanwhile, labour costs rose at the slowest pace over the past two and a half years, mirroring the trend of subdued earnings growth. Ultimately, SMEs will have to decide on whether to pass higher input costs on to their clients in order to protect their profit margins or to accept lower profits in an attempt to maintain market share. Capacity A smaller proportion of SMEs operated below capacity in the second quarter of. In theory, spare capacity is a key determinant of the future path of interest rates, as set by the Bank of England, and falling spare capacity supports the case that interest rates should start being normalised. With a smaller proportion of SMEs operating below capacity, a larger share of firms may have to raise employment levels if demand picks up, thereby suggesting that the UK economy will continue to add jobs in the coming months. The fall in the proportion of SMEs operating below capacity contributed positively to the SME Health Check Index in the second quarter. Confidence Business confidence 9, as measured by the Federation of Small Businesses (FSB) Voice of Small Business Index, dropped for the first time since the EU referendum in the second quarter of and is the only indicator of the SME Health Check Index that has fallen since Q1. Although, the decline was only slight and the business confidence indicator remains higher than it was throughout 2016, the drop means that business confidence had a negative impact on the SME Health Check Index. 6 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/632527/insolvency_statistics -_web.pdf. 7 The basket includes 33 different inputs such as physical inputs, services and employment. 8 The data can be accessed here: https://www.bba.org.uk/news/statistics/sme-statistics/bank-support-for-smes-4th-quarter-2016/#.wtgjtpirk00.

#SMEhealth REPORT 13 Employment Latest UK labour market data from the ONS showed that the unemployment rate fell to 4.4% in the three months to June, its lowest since 1975. The number of people in employment meanwhile rose by 126,000 over the second quarter, up slightly from the 121,000 rise seen in Q1 and the strongest quarterly gain in a year. The employment indicator scores close to its long-term average. GDP UK GDP growth remained subdued in the second quarter of, standing at a quarterly rate of just 0.3% as construction and manufacturing contracted. Although economic growth remained underwhelming, the slight uptick in the quarterly growth rate resulted in a marginal improvement in the GDP indicator and therefore positively contributed to the SME Health Check Index in the second quarter. Lending to SMEs Latest data from the British Bankers Association (BBA) highlighted that lending to SMEs in the UK stood at 94.6 billion in the first quarter of 8, up 0.2% from 94.4 billion in the previous quarter. The data highlights the strongest increase in lending to the UK s SMEs in 18 months. It is also plausible to assume that some firms are taking advantage of the relatively low interest rates offered by lenders as the Bank of England base rate remains at its historic low. The lending indicator reached its highest score since late 2015 and had a positive impact on the SME Health Check Index. Revenue The data that the revenue indicator is based on is released only twice a year therefore on this occasion it takes in the same value as in the previous quarter. The index remained below its average since data collection for the SME Health Check Index began in Q1 2014. Companies that are struggling to generate revenue could be linked to rising business costs putting pressure on margins. 9 https://www.fsb.org.uk/docs/default-source/fsb-org-uk/fsb-sbi-q2--final.pdf?sfvrsn=0.

14 #SMEhealth REPORT 2.1 INDEX INDICATORS Most indicators have improved since the previous quarter and it is especially encouraging that the number of bankruptcies fell markedly, while lending to SMEs increased. Figure 2: Indicators of the SME Health Check Index 100 90 80 70 60 50 40 30 20 10 0 SME Health Check Index Bankruptcies Business Costs Capacity Confidence Employment GDP Revenue Lending Q1 Sources: FSB, ONS, BBA, Cebr analysis

#SMEhealth REPORT 15 2.2 REGIONAL BREAKDOWN OF THE SME HEALTH CHECK INDEX While the previous section of the report analysed the indicators of the UK SME Health Check Index, this part investigates regional differences in order to understand which parts of the UK currently present a more favourable business and macroeconomic environment for SMEs. We divide the UK into nine English regions as defined by the Government office for the regions (East Midlands, East of England, London, North East, North West, South East, South West, West Midlands and Yorkshire and the Humber) as well as Northern Ireland, Scotland and Wales. Figure 3: Regional SME Health Check Index 70 60 50 40 30 20 10 0 North East Wales East Midlands South West South East London West Midlands East of England Yorkshire & the Humber Scotland Northern Ireland North West Sources: FSB, ONS, BBA, Cebr analysis Q1 The data for shows that the health of SMEs across the UK improved quarteron-quarter, with 11 of the 12 regions showing an increase in their score. Only SMEs in Yorkshire and the Humber experienced a slight dip.

16 #SMEhealth REPORT 2.2 REGIONAL BREAKDOWN OF THE SME HEALTH CHECK INDEX The North East and Wales take the top two spots in the regional rankings in the second quarter. The North East moved up four ranks and leads for the first time since data collection for the SME Health Check Index began in Q1 2014. The North East SME Health Check Index gained 18.5 points since Q1, with six of the eight indicators improving since the previous quarter. Lending to SMEs in the North East rose 0.7% over the first quarter 10, which was the strongest rate of growth in nearly two years. The declining number of business bankruptcies across the UK and a solid improvement in the capacity indicator also contributed positively to the region s SME Health Check Index. Wales secured a top three ranking for the fourth consecutive quarter, dropping just one place from first into second position, despite the region s SME Health Check Index rising from 62.3 to an 18 month high of 63.8. Business confidence with Welsh SMEs has risen slightly since Q1 and remains at a historically high level, boding well for the coming months. Official regional trade statistics suggest that the weakness of the pound is translating into stronger demand for Welsh exports. Although lending continued to fall, the rate of decline has eased substantially since the previous quarter, thereby contributing positively to the Welsh SME Health Check Index. Meanwhile, the largest downward trend came from the employment indicator, with official data from the ONS showing a 1.6% decline in employment figures over the second quarter. The East Midlands and South West follow in third and fourth position, with both regions recording improvements in their respective SME Health Check Index. The East Midlands moved from sixth into third position, with the region s SME Health Check Index recording a 9.6 point increase since Q1. Meanwhile, lending was a particularly bright spot in the South West, rising at a quarterly rate of 1.1%, following a 0.5% decline in the previous quarter and the strongest increase since data collection for the SME Health Check Index started in Q1 2014. Business confidence also improved in, despite employment figures falling slightly, helping the South West to retain its fourth spot in the regional rankings. SMEs in the South East witnessed particularly strong improvements in the lending and employment indicators, helping the region to move into fifth position. Although lending was roughly unchanged in first quarter 11, this followed three consecutive quarters of contraction. Moreover, employment figures in the region increased at the fastest pace since late 2015. Meanwhile, business confidence was little changed since Q1 and remained below most other regions. 10 Latest available data from the BBA refer to Q1. 11 Latest available data from the BBA refer to Q1.

#SMEhealth REPORT 17 PLACE REGION SCORE SHIFT No. 1 North East 67.9 +18.5 No. 2 Wales 63.8 +1.5 No. 3 East Midlands 58.9 +9.6 No. 4 South West 58.1 +8.6 No. 5 South East 57.5 +11.1 No. 6 London 57.3 +14.3 No. 7 West Midlands 56.3 +23.9 No. 8 East of England 56 +2.1 No. 9 Yorkshire & the Humber 54.5-1.4 No. 10 Scotland 52.1 +12.6 No. 11 Northern Ireland 51.8 +25.8 No. 12 North West 51.6 +10 London s SME Health Check Index rose 14.3 points in the second quarter, with the capital moving up two spots in the regional rankings to sixth place. Confidence was little changed since Q1, but improved markedly from the recent low recorded after last year s unexpected result of the EU referendum. UK GDP figures highlighted a rebound in service sector growth, which is likely to have benefited London s service-driven economy. Although the capital may be particularly exposed to Brexit risks given its large number of finance jobs, employment continued to rise during the second quarter. Notably, ONS data signalled the strongest increase in London workforce numbers in three years.

18 #SMEhealth REPORT 2.2 REGIONAL BREAKDOWN OF THE SME HEALTH CHECK INDEX The West Midlands take seventh position, up four places since Q1, with its SME Health Check Index rising 23.9 points. The substantial improvement in business and economic conditions for SMEs in the West Midlands was largely driven by rising employment and increased lending. Figures from the BBA showed that lending increased for the first time in almost two years - the quarterly increase was up 1.2%, the strongest since early 2015. Employment levels rose 1.2% in, following two consecutive quarters of declines. The East of England dropped five places and ranks eighth in the second quarter of despite the regional SME Health Check Index rising 2.1 points since Q1. A number of indicators have deteriorated since the previous quarter, with lower business confidence and a decrease in lending exerting particularly strong downward pressure on the East of England SME Health Check Index. Lending fell for the first time in three quarters, while small business confidence was at the lowest since Q3 2016. The largest downward movement in the regional ranking was recorded for Yorkshire and the Humber, falling from second place in Q1 into ninth position in the second quarter. It was the only region that saw a deterioration in the SME Health Check Index level between Q1 and, with three of the eight indicators declining since the opening quarter. Employment numbers fell for the first time in nearly two years, while business confidence weakened. Despite Scotland s SME Health Check Index gaining 12.6 points since the opening quarter of, the region failed to move up in the rankings, retaining its tenth place. Although this is disappointing, there are a number of bright spots in the underlying data. Lending to Scottish SMEs rose for the first time in a year, while business confidence was the highest since the start of 2016, suggesting that we may see further improvements in the business and economic environment that Scottish SMEs are operating in. Employment growth also picked up, rising at the fastest pace in a year. The largest improvement in the SME Health Check Index was recorded in Northern Ireland. The index has risen 25.8 points since Q1, helping the region to move from twelfth into eleventh position. A solid increase in workforce numbers was one of the drivers behind the overall improvement in the region. Employment levels are estimated to have risen 1.2% in, following a 2.5% decline in Q1 this marks the strongest increase in 18 months. The North West fell to the bottom of the regional ranking, dropping three positions in the second quarter despite the region s SME Health Check Index rising 10 points since the opening quarter of. Although there was a further decline in lending to SMEs in the North West, the rate of decline was the weakest in over a year. Therefore, the lending indicators contributed positively to the SME Health Check Index. Business confidence weakened and latest labour market data points to only a marginal rise in employment figures, with indicators negatively contributing to the region s SME Health Check Index.

#SMEhealth REPORT 19 3 CONCLUSIONS Despite falling since the previous quarter, SME business confidence remained robust in, thereby adding to hopes that the UK economy will pick up some pace throughout the remainder of the year. The SME Health Check Index, which analyses SMEs performance, as well as the business and macroeconomic environment they operate within, rose from 46.9 in the opening quarter of to an 18 month high of 58.9 in, highlighting an improving environment for the UK s SMEs. Employment levels continue to rise across the UK and lending to SMEs rose at the fastest pace since late 2015. Moreover, business costs faced by SMEs seem to have marginally plateaued in, which is a welcome development for businesses. Despite falling since the previous quarter, SME business confidence remained robust in, thereby adding to hopes that the UK economy will pick up some pace throughout the remainder of the year. The regional breakdown of the SME Health Check Index revealed that SMEs in the North East and Wales fared better than those in other regions. At the bottom end of the regional rankings were Northern Ireland and the North West, despite the business and economic environment for SMEs in these regions having become more favourable since the first quarter of.

20 #SMEhealth REPORT 4 METHODOLOGY The SME Health Check Index is designed to measure small business performance and the business and macroeconomic environment within which SMEs operate. The index includes measures that can be directly linked to SME performance as well as components that relate to the wider economy. Specifically, the following measures are included: Bankruptcies The data comes from the Insolvency Service Statistics and measures the number of The data come from the Insolvency Service Statistics and measure the number of total new company insolvencies in the UK on a quarterly basis. Instead of including the raw figures in our calculation, we use the quarterly change in the number of new company insolvencies. The higher the change in the number of bankruptcies, the lower the score. Business costs The index measures the annual change in costs faced by a typical SME and the main data source for this measure is the Office for National Statistics. Higher costs are associated with a deteriorating business environment as companies will either have to pass these on to their clients in order to protect profit margins or accept lower profit margins in order to secure market share. Capacity The data for capacity comes from the Federation of Small Businesses (FSB) and measures the proportion of SMEs operating below capacity. If firms operate below capacity, this could have negative implications for hiring and investments intentions. Therefore, a higher proportion of SMEs reporting to operate below capacity will have a negative impact on the overall SME Health Check Index. Confidence SME business confidence data also come from the FSB. The index indicates how confident businesses are about their short-term prospects over the next three months. Higher business confidence has a positive effect on the SME Health Check Index. Employment Data for this sub-component is taken from the ONS and measure the quarterly change in absolute employment figures. Higher employment figures are associated with an improving macroeconomic environment and may signal improved confidence about future workloads. Gross domestic product Gross domestic product figures are taken from the ONS and measure the quarterly percentage change in economic growth. For the regional breakdown, we estimated the quarterly figures based on the previous relationships between a region s GVA and overall UK GDP growth.

#SMEhealth REPORT 21 Lending For the lending indicator, we used data from the British Bankers Association and calculate the quarterly change in lending balances. The following measures are included: Value of overdrawn balances and value of loan balances. Revenue Data come from the FSB and measure the net percentage balance of SMEs reporting an increase in revenues. Following the data collection we calculate the average of each individual series (such as employment, GDP etc.). In a second step, we calculate how many standard deviations a single data point (for example the employment data point for Q1 ) deviates from its long-run mean. We then apply a scoring system ranging from 0 to 100. A score of zero is assigned to the lowest observed value while the highest observation receives a value of 100. This means, the more standard deviations a data point is below the mean, the lower its score and the more standard deviations is above the mean, the higher its score. This exercise is repeated for each of the eight indicators. The eight individual scores are the combined with an equal weight to the SME Health Check Index. A summary table of the subcomponents can be found below: Sub-component Source Measure Latest score Bankruptcies UK Insolvency Service Quarterly percentage change in number of bankruptcies 72 ( ) Business Costs Various, including Office for National Statistics Annual change in business costs faced by SMEs 51 ( ) Capacity Federation of Small Businesses Net balance of SMEs operating below capacity 56 ( ) Confidence Federation of Small Businesses FSB Small Business Small Business Index 60 ( ) Employment Office for National Statistics Quarterly percentage change in employment numbers 76 ( ) GDP Office for National Statistics Quarterly percentage change in gross domestic product 70 ( ) Lending British Bankers' Association Quarterly percentage change in lending to SMEs 41 (Q1 ) Revenue Federation of Small Businesses Net balance of SMEs reporting rise in revenue 45 (Q1 )

SME HEALTH CHECK INDEX REGIONAL REPORTS

East of England Overall Index Scores National 59 East of England 56 The East of England dropped five places and ranks eighth in the second quarter of despite the region s SME Health Check Index rising 2.1 points since Q1. That said, the increase in the SME Health Check Index was much smaller than the average rise in the Index across the UK. A number of indicators have deteriorated since the previous quarter, with lower business confidence and a decrease in lending exerting particularly strong downward pressure on the East of England SME Health Check Index. Lending fell for the first time in three quarters, while small business confidence was at its lowest level since Q3 2016 and employment levels rose at a slightly slower pace. On a more positive note, the increase in business costs was weaker than that recorded in the opening quarter of. Indicator Scores denotes decline denotes improvement denotes no change Bankruptcy 72 ( 59) Business Costs 49 ( 3) Capacity 42 ( 2) Confidence 44 ( 19) Employment 51 ( 4) GDP 70 ( 1) Lending 76 ( 21) Revenue 44 (0)

East Midlands Overall Index Scores National East Midlands 59 59 The East Midlands moves from sixth into third spot in the second quarter, its best position in the regional rankings in over a year. The region s SME Health Check Index has risen 9.6 points since Q1 and, at 58.9, is equal to the UK average. Business confidence remained a bright spot despite falling slightly. Although lending continued to decline, the latest fall was considerably weaker than that recorded in the opening quarter, thereby positively contributing to the SME Health Check Index. Business costs also had a positive impact on the index, rising at a more subdued pace than in Q1 Indicator Scores denotes decline denotes improvement denotes no change Bankruptcy 72 ( 59) Business Costs 45 ( 3) Capacity 73 ( 37) Confidence 87 ( 6) Employment 0 ( 53) GDP 70 ( 1) Lending 36 ( 36) Revenue 88 (0)

London Overall Index Scores National 59 London 57 London s SME Health Check Index rose 14.3 points in the second quarter, with the capital moving up two spots in the regional rankings to sixth place. Confidence was little changed since Q1, but improved markedly from the low score recorded after last year s unexpected result of the EU referendum. UK GDP figures highlighted a rebound in service sector growth, which is likely to have benefited London s service-driven economy. Although the capital may be particularly exposed to Brexit risks given its large number of finance jobs, employment continued to rise during the second quarter. Notably, ONS data signalled the strongest increase in London workforce numbers in three years. London s SME Heath Check Index was higher than the UK average for the first time since Q1 2016. Indicator Scores denotes decline denotes improvement denotes no change Bankruptcy 72 ( 59) Business Costs 55 ( 1) Capacity 57 ( 20) Confidence 70 (0) Employment 74 ( 40) GDP 57 ( 2) Lending 44 ( 32) Revenue 29 (0)

North East Overall Index Scores National North East 59 68 The North East moved up four places in the second quarter and leads the regional rankings for the first time since data collection for the SME Health Check Index began in Q1 2014. The North East SME Health Check Index has gained 18.5 points since Q1, with six of the eight indicators improving since the previous quarter. Lending to SMEs in the North East rose 0.7% over the quarter, which was the strongest rate of growth in nearly two years. The declining number of business bankruptcies across the UK and a solid improvement in the capacity indicator also contributed positively to the region s SME Health Check Index. Employment continued to rise, although the rate of increase has slowed since the opening quarter. Indicator Scores denotes decline denotes improvement denotes no change Bankruptcy 72 ( 59) Business Costs 44 ( 3) Capacity 100 ( 96) Confidence 59 ( 41) Employment 54 ( 25) GDP 59 ( 1) Lending 55 ( 55) Revenue 100 (0)

Northern Ireland Overall Index Scores National 59 Northern Ireland 52 The largest improvement in the SME Health Check Index in terms of the index level was recorded in Northern Ireland. The index reached an 18 month high and has risen 25.8 points since Q1, helping the region to move from twelfth into eleventh position. A solid increase in workforce numbers was one of the drivers behind the overall improvement in the region. Employment levels are estimated to have risen 1.2% in, following a 2.5% decline in Q1 this marks the strongest increase in 18 months. Strong lending and bankruptcy data for the UK are also supportive of an improving economic environment for Northern Ireland s SMEs*. * Lending data are not available for Northern Ireland. We therefore applied the UK figure to calculate Northern Ireland s SME Health Check Index. Bankruptcy data also refer to the overall UK level... Indicator Scores denotes decline denotes improvement denotes no change Bankruptcy 72 ( 59) Business Costs 43 ( 2) Capacity 62 ( 62) Confidence 22 ( 11) Employment 61 ( 61) GDP 54 ( 2) Lending 41 ( 31) Revenue 59 (0)

North West Overall Index Scores National 59 North West 52 The North West fell to the bottom of the regional rankings, dropping three positions in the second quarter despite the region s SME Health Check Index rising 10 points since the opening quarter of. Although there was a further decline in lending to SMEs in the North West, the rate of decline was the slowest in over a year. Therefore, the lending indicator contributed positively to the SME Health Check Index. Business confidence weakened and latest labour market data points to only a marginal rise in employment figures, with both indicators negatively contributing to the region s SME Health Check Index. Despite falling to the bottom of the regional rankings, the North East SME Health Check Index reached an 18 month high and highlights improving economic conditions in the region. Indicator Scores denotes decline denotes improvement denotes no change Bankruptcy 72 ( 59) Business Costs 47 ( 3) Capacity 26 ( 17) Confidence 47 ( 16) Employment 49 ( 40) GDP 59 ( 2) Lending 55 ( 55) Revenue 58 (0)

Scotland Overall Index Scores National 59 Scotland 52 Despite Scotland s SME Health Check Index gaining 12.6 points since the opening quarter of, the region failed to move up in the rankings, retaining its tenth place. Although this is disappointing, there are a number of bright spots in the underlying data. Lending to Scottish SMEs rose for the first time in a year, while business confidence was the highest since the start of 2016, suggesting that we may see further improvements in the business and economic environment that Scottish SMEs are operating in. Employment growth also picked up, rising at the fastest pace in a year. Scotland s SME Health Check Index reached its highest level since Q1 2016, with six of the eight indicators improving since the previous quarter. Indicator Scores denotes decline denotes improvement denotes no change Bankruptcy 72 ( 59) Business Costs 45 ( 3) Capacity 42 ( 1) Confidence 36 ( 8) Employment 82 ( 23) GDP 61 ( 2) Lending 79 ( 7) Revenue 0 (0)

South East Overall Index Scores National 59 South West 58 The South East SME Health Check Index rose from 46.4 in Q1 to 57.5 in, helping the region to move into fifth position. SMEs in the South East witnessed particularly strong improvements in the lending and employment indicators. Although lending was roughly unchanged over the quarter compared to the previous quarter, this followed three consecutive quarters of contraction. Moreover, employment figures in the region increased at the fastest pace since late 2015, thereby contributing positively to the SME Health Check Index. Meanwhile, overall costs faced by SMEs in the region rose at the slowest pace since Q3 2016, while business confidence was little changed since Q1. Indicator Scores denotes decline denotes improvement denotes no change Bankruptcy 72 ( 59) Business Costs 52 ( 3) Capacity 44 ( 5) Confidence 40 ( 2) Employment 72 ( 26) GDP 78 ( 2) Lending 77 ( 6) Revenue 25 (0)

South West Overall Index Scores National 59 South West 58 The South West SME Health Check Index rose from 49.5 in Q1 to 58.1 in the second quarter, its highest reading in 18 months, helping the region to maintain its fourth position in the regional rankings. Lending was a particularly bright spot in the South West, rising at a quarterly rate of 1.1%, following a 0.5% decline in the previous quarter. This was the strongest increase since data collection for the SME Health Check Index started in Q1 2014. Business confidence also improved in, reaching a one-and-a-half year high. The only dark spot in the data is a 0.2% decline in employment levels, which had a negative impact on the SME Health check Index. Indicator Scores denotes decline denotes improvement denotes no change Bankruptcy 72 ( 59) Business Costs 45 ( 2) Capacity 86 ( 25) Confidence 63 ( 6) Employment 37 ( 43) GDP 63 ( 2) Lending 74 ( 18) Revenue 25 (0)

Wales Overall Index Scores National Wales 59 64 Wales secured a top three ranking for the fourth consecutive quarter, dropping just one place from first into second position, despite the region s SME Health Check Index rising from 62.3 to an 18 month high of 63.8. Business confidence among Welsh SMEs has risen slightly since Q1 and remains at a historically high level, boding well for the coming months. Official regional trade statistics suggest that the weakness in the pound is translating into stronger demand for Welsh exports. Although lending continued to fall, the rate of decline has eased substantially since the previous quarter, thereby contributing positively to the Welsh SME Health Check Index. Meanwhile, the largest downward trend came from the employment indicator, with official data from the ONS showing a 1.6% decline in employment figures over the second quarter. Indicator Scores denotes decline denotes improvement denotes no change Bankruptcy 72 ( 59) Business Costs 41 ( 3) Capacity 91 ( 9) Confidence 98 ( 7) Employment 11 ( 64) GDP 53 ( 2) Lending 51 ( 14) Revenue 93 (0)

West Midlands Overall Index Scores National 59 West Midlands 56 The West Midlands takes seventh position in the regional rankings, up four places since Q1, with its SME Health Check Index rising 23.9 points. The substantial improvement in business and economic conditions for SMEs in the West Midlands was largely driven by rising employment and increased lending. Figures from the BBA showed that lending increased for the first time in almost two years - the quarterly rise stood at 1.2%, the strongest since early 2015. Employment levels rose 1.2% in, following two consecutive quarters of decline. Meanwhile, SME business confidence remained subdued and was down slightly since the opening quarter of. Indicator Scores denotes decline denotes improvement denotes no change Bankruptcy 72 ( 59) Business Costs 46 ( 3) Capacity 59 ( 42) Confidence 40 ( 2) Employment 73 ( 68) GDP 74 ( 1) Lending 47 ( 20) Revenue 39 (0)

Yorkshire & the Humber Overall Index Scores National 59 Yorkshire & the Humber 55 The largest downward movement in the regional ranking was recorded for Yorkshire and the Humber, falling from second place in Q1 into ninth position in the second quarter. It was the only region that saw a deterioration in the SME Health Check Index level between Q1 and, with three of the eight indicators declining since the opening quarter. The index fell from 55.9 to 54.5, the lowest level in a year. Employment numbers fell for the first time in nearly two years, while business confidence weakened. A bright spot in the data was the first increase in SME lending in a year, with data from the BBA showing a 0.4% quarterly rise. Indicator Scores denotes decline denotes improvement denotes no change Bankruptcy 72 ( 59) Business Costs 45 ( 3) Capacity 63 ( 36) Confidence 67 ( 25) Employment 23 ( 29) GDP 55 ( 2) Lending 36 ( 15) Revenue 75 (0)

Corporate Affairs Christina Kelly christina.kelly@cybg.com 0141 242 3215 07484 905 358 Jennifer Devlin jennifer.devlin@cybg.com 0141 242 3314 07484 908 519 Jamie Maxton jamie.maxton@cybg.com 0141 242 3988 07867 537 033 @cybgplc #SMEhealth CYBG Plc Website: http://www.cbonline.co.uk/business/business-news/ http://www.ybonline.co.uk/business/business-news/

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