Close Brothers Group PLC reports strong profit growth, improved credit performance

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Close Brothers Group plc (LON:CBG) has announced its Half Year Results for the Six Months to 31 January 2024.

Adrian Sainsbury, Chief Executive, said:

“Performance in the first half of 2024 reflected continued loan book growth across our businesses in Banking at strong margins, and an improved credit performance. CBAM delivered strong net inflows and whilst Winterflood’s performance remains affected by weakness in retail trading activity, it remains well placed for a recovery in investor appetite.

The FCA’s review of the motor finance industry is ongoing and it would be premature to predict the outcome or estimate the potential impact on the group. The Board however recognises the paramount importance of preparing the group for a range of outcomes from this review. As part of this, the Board is taking a number of decisive actions to strengthen our capital position materially. These include the difficult decision taken last month not to pay dividends in respect of the current financial year. In addition, we are taking steps to optimise our risk weighted assets and reduce costs.

These steps are being taken whilst continuing to provide excellent service to all our customers and protect our valuable franchise. The distinctive strength of our through-the-cycle business model, our long-term relationships, the deep expertise of our people and our consistent service endure. While we are working through a current period of uncertainty, the Board is taking decisive actions and is confident that the group will emerge well positioned to take advantage of future opportunities.”

Key Financials¹

	First half2024	First half2023	Change%
Statutory operating profit before tax	£93.8m	£11.7m	702
Adjusted operating profit²	£94.4m	£12.6m	649
Adjusted basic earnings per share³	46.3p	6.1p
Basic earnings per share³	46.0p	5.6p

Ordinary dividend per share	–	22.5p
Return on opening equity	8.4%	1.1%
Return on average tangible equity	10.1%	1.3%
Net interest margin⁴	7.5%	8.0%
Bad debt ratio⁴	0.9%	3.6%

	31 January2024	31 July2023	Change%
Loan book⁵	£9.9bn	£9.5bn	4
Total client assets	£18.5bn	£17.3bn	7
NAV per share	£11.0	£11.0
TNAV per share	£9.2	£9.3
CET1 capital ratio (transitional)	13.0%	13.3%
Tier 1 capital ratio (transitional)	15.0%	13.3%
Total capital ratio (transitional)	16.9%	15.3%

Key Financials (Excluding Novitas)

	First half2024	First half2023	Change%
Statutory operating profit before tax	£93.6m	£116.6m	(20)
Adjusted operating profit	£94.2m	£117.5m	(20)

Net interest margin⁴	7.5%	7.8%
Bad debt ratio⁴	0.8%	1.1%

	31 January2024	31 July2023	Change%
Loan book⁵	£9.8bn	£9.5bn	4

1. Please refer to definitions on pages 25 to 27.

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2. Adjusted operating profit is stated before amortisation of intangible assets on acquisition, goodwill impairment, exceptional items and tax.

3. Refer to note 4 for the calculation of basic and adjusted earnings per share.

4. Net interest margin and bad debt ratio calculated on an annualised basis.

5. Loan book includes operating lease assets.

Financial performance

• Resilient operating income of £470.8 million (H1 2023: £474.3 million), down 1%, reflecting growth in Banking and Close Brothers Asset Management, offset by a reduction in Winterflood and higher Group (central functions) net expenses

• Operating expenses up 12% reflecting increases in staff costs and continued investment in Banking

• Statutory operating profit before tax of £93.8 million (H1 2023: £11.7 million), reflecting non-recurrence of prior year impairment charges of £114.6 million related to Novitas. Excluding Novitas, adjusted operating profit reduced to £94.2 million (H1 2023: £117.5 million), reflecting cost growth, a reduction in Winterflood income and higher Group (central functions) net expenses

• Group return on average tangible equity (“RoTE”) of 10.1% (H1 2023: 1.3%)

• In Banking, we delivered loan book growth of 4% to £9.9 billion (31 July 2023: £9.5 billion), driven by strong growth in Property and continued good demand in Asset Finance and the UK Motor Finance business, partly offset by the normal seasonal impact seen in the Premium and Invoice Finance businesses. We delivered a strong net interest margin of 7.5% (H1 2023: 8.0%; 2023: 7.7%). Our credit performance improved, with an annualised bad debt ratio of 0.9% (H1 2023: 3.6%)

• Close Brothers Asset Management delivered strong net inflows of 9% annualised, with a significant contribution from our bespoke investment management business. Total managed assets (“AuM”) increased 8% to £17.7 billion, driven by net inflows and positive market performance

• In Winterflood, market conditions have remained unfavourable; Winterflood Business Services (“WBS”) income was up 24% to £7.8 million and reflected an 11% year-on-year increase in assets under administration (“AuA”) to £13.8 billion

• Strong balance sheet position with our Common Equity Tier 1 (“CET1”) ratio of 13.0% at 31 January 2024 (31 July 2023: 13.3%), significantly above our applicable requirement of 9.5%

• Decision to suspend dividends in respect of current financial year announced on 15 February 2024

Decisive actions to further strengthen capital position

• The Board has concluded that no legal or constructive obligation exists at the half year in relation to the FCA review and therefore, no provision has been recognised in the period in accordance with the relevant accounting standards

• There is significant uncertainty about the outcome of the FCA’s review at this early stage, and the timing, scope and quantum of any potential financial impact on the group cannot be reliably estimated at present

• The Board considers it prudent for the group to further strengthen its capital position. The group has identified actions which, combined with the decision to not pay any dividend payments in the current financial year, could strengthen the group’s available CET1 capital by approximately £200 million. These actions include a combination of significant risk transfer of assets and selective loan book growth to optimise risk weighted assets, supported by additional cost management initiatives. We continue to evaluate a range of other potential management actions which could enhance available CET1 capital by at least another c.£100 million. Additionally, as our business continues to organically generate capital through 2025, the retention of earnings could potentially strengthen the group’s capital position by a further £100 million, if required. In all, these measures could strengthen the group’s available CET1 capital by approximately £400 million by the end of the 2025 financial year when compared to the group’s projected CET1 capital ratio for 31 July 2025, prior to any management actions. The Board is confident that these decisive actions will position the group well to withstand a range of scenarios and potential outcomes

Update on guidance

In Banking¸ we are encouraged by the performance in the first half, notwithstanding the significant uncertainty in relation to the FCA’s review of historical motor finance commission arrangements

• Expect to broadly sustain underlying loan book growth in the second half of the 2024 financial year

• Well positioned to maintain a strong net interest margin, broadly aligned with the reported NIM in the first half

• Continue to expect c.8-10% increase in Banking costs in 2024, excluding costs related to the recently announced acquisition of Bluestone Motor Finance (Ireland)

• We have mobilised additional cost management initiatives which are expected to generate annualised savings of c.£20 million by the 2026 financial year, partly offsetting the adverse impact on the group’s income as a result of the management actions

• We remain committed to more closely aligning income and cost growth for the 2025 financial year (excluding any restructuring costs) and delivering positive operating leverage over the medium term

• Expect the bad debt ratio to remain below our long-term average of 1.2% in H2 2024, based on current market conditions

In Close Brothers Asset Management (CBAM), we are well placed to consolidate our position and maximise opportunities to accelerate profitability

• Targeting net inflows of 6-10%

• Expect operating margin to increase from 2025 onwards towards a longer-term target of above 20%

In Winterflood, we are well placed to retain our leading market position and benefit when investor appetite returns

• Remain focused on diversifying revenue streams

• Expect to grow AuA in WBS to over £20 billion by 2026

As noted above, we have identified and continue to evaluate a number of management actions to continue to support our customers and protect our valuable franchise. Over the medium term, we remain committed to our previous CET1 capital target of 12% to 13% but expect to operate above this range in the near-term as a result of the identified management actions.

These actions will leave us well positioned to withstand a range of scenarios and potential outcomes and are expected to adversely impact the group’s operating profit in the next financial year. An update on our guidance for the 2025 financial year will be provided at our Full-Year results announcement.

Basis of Presentation

Results are presented both on a statutory and an adjusted basis to aid comparability between periods. Adjusted measures are presented on a basis consistent with prior periods and exclude amortisation of intangible assets on acquisition, to present the performance of the group’s acquired businesses consistent with its other businesses; and any exceptional and other adjusting items which do not reflect underlying trading performance. Please refer to note 2 for further details on items excluded from the adjusted performance metrics.

Financial Calendar (Provisional)

The enclosed provisional financial calendar below is updated on a regular basis throughout the year. Please refer to our website www.closebrothers.com for up-to-date details. As announced at the 2023 Preliminary Results, the group has decided to discontinue the issuance of pre-close trading updates in order to align more closely with prevailing market and industry practice.