Close Brothers Group plc (LON: CBG) today issued its scheduled trading update relating to the third quarter of its 2022 financial year. All statements in this release relate to the period from 1 February 2022 to 30 April 2022 unless otherwise indicated.
Adrian Sainsbury, Chief Executive Officer
“We have performed well in the quarter, with continued good momentum across our lending businesses and robust demand in our core markets. We continue to support our customers and clients and maintain our strategic discipline against a backdrop of rising inflation and heightened uncertainty. We are confident that our proven and resilient business model will allow us to continue delivering on our long-term track record of growth and profitability.”
Group and divisional performance
Close Brothers group performed well in the quarter with continued loan book growth in the Banking division at strong margins. Client assets reduced in Close Brothers Asset Management (“CBAM”), reflecting negative market movements and Winterflood saw an improvement in trading income.
Our Common Equity Tier 1 (“CET1”) ratio was 14.9% at 30 April 2022 (31 January 2022: 15.1%), well above the applicable minimum regulatory requirement1.
In Banking, the loan book increased 1.8% in the quarter to £8.8 billion (31 January 2022: £8.6 billion, 31 July 2021: £8.4 billion), corresponding to 3.7% growth year-to-date. This was driven by continued good new business volumes in Commercial and Motor Finance, and in Property, loan book growth resumed, reflecting increased drawdowns from our strong pipeline.
The annualised year-to-date net interest margin was strong at 7.8% (H1 2022: 7.9%), reflecting our continued focus on pricing discipline and a reduction in our cost of funds.
The impact of interest rate floors of 1% in certain businesses will gradually fall away given recent rises in interest rates. Once the UK base rate is above 1%, we expect no further impact from these floors.
Whilst we are not yet seeing a direct impact of the deteriorating economic conditions, in particular rising inflation, on our customers, the year-to-date bad debt ratio increased marginally to 1.2% (0.5% excluding Novitas), which reflects the recognition of higher IFRS 9 provisions to take into account the cautious outlook for the external environment2 (H1 2022: 1.1%, 0.2% excluding Novitas). We continue to closely monitor the performance of the book and incorporate updated macroeconomic scenarios.
We continue to progress our strategic investment programmes, including our Internal Ratings Based (“IRB”) application and have received confirmation from the Prudential Regulation Authority (“PRA”) that our application has successfully transitioned to Phase 2.
CBAM achieved year-to-date annualised net inflows of 5% (H1 2022: 8%) and has a strong pipeline of new business. In the quarter, managed assets decreased to £15.4 billion (31 January 2022: £15.8 billion) and total client assets decreased to £16.7 billion (31 January 2022: £17.2 billion), reflecting negative market movements.
Winterflood’s trading income improved in the quarter, although trading conditions remain volatile. The team’s experience and focus on managing risk resulted in only one loss day in the quarter despite extreme market volatility.
Outlook
Against a backdrop of rising inflation and heightened uncertainty, our proven and resilient model, strong financial position and deep expertise leave us well positioned to continue to support our customers and clients. We remain committed to delivering against our strategy to protect, grow and sustain the business.
Footnotes
1 The group’s capital ratios are presented on a transitional basis after the application of IFRS 9 transitional arrangements which allows banks to add back to their capital base a proportion of the IFRS 9 impairment charges during the transitional period. Without their application, the CET1 capital ratio would be 14.0%. The applicable minimum regulatory requirement, excluding any applicable PRA buffer was 7.6% at 30 April 2022.
2 Since the Half Year 2022 results, we have updated the macroeconomic scenarios and the weightings assigned to them. At 30 April 2022, there was a 40% weighting to the baseline scenario, 20% to the upside and 40% to the downside scenarios (31 January 2022: 40% baseline, 30% upside, 30% downside). Moody’s unemployment forecast for 2022 under the baseline scenario is 4.3%, 4.0% under the upside scenario and ranges between 4.6% and 5.3% in the downside scenarios. Moody’s inflation forecast for 2022 under the baseline scenario is 7.5%, 7.2% for the upside scenario and ranges between 8.3% and 11.0% in the downside scenarios.
Close Brothers is a leading UK merchant banking group providing lending, deposit taking, wealth management services and securities trading. We employ over 3,700 people, principally in the UK. Close Brothers Group plc is listed on the London Stock Exchange and is a member of the FTSE 250.
