Adrian Sainsbury, Chief Executive, said:
“We have performed well in the second half, with an acceleration of loan book growth, strong margins and a stable credit performance in our Banking business. We continued to attract new client assets in CBAM, with strong net inflows, although Winterflood’s performance remains impacted by subdued trading activity. Despite the second half momentum, our financial results for the full year were significantly impacted by provisions in relation to Novitas announced in our Half Year 2023 results in March.
Our through-the-cycle business model and financial strength mean we can support customers even during these uncertain times. By leveraging our long-term relationships, the deep expertise of our people and our customer-centric approach we can deliver disciplined growth and are well positioned to resume our long-term track record of earnings growth and returns, building on the second half’s momentum and a good start to the 2024 financial year.”
Financial performance in the year
• Statutory operating profit before tax decreased to £112.0 million (2022: £232.8 million), including £114.6 million of provisions in relation to Novitas already reported in the first half. Excluding Novitas, adjusted operating profit decreased to £220.1 million (2022: £274.1 million) reflecting forward-looking impairment provisions and lower income from Winterflood
• We achieved 3% income growth in Banking reflecting good loan book growth and a strong net interest margin of 7.7% (2022: 7.8%). Pre-provisions, adjusted operating profit in Banking decreased 2% (up 2% excluding Novitas) to £324.1 million as income growth was offset by inflationary pressures and continued investment in the business
• Whilst we have not seen a significant impact from the external environment on credit performance, this uncertainty is reflected in higher forward-looking impairments. As a result, the bad debt ratio (excluding Novitas) was 0.9% (2022: 0.5%), slightly below our long-term average. The bad debt ratio including Novitas increased to 2.2% (2022: 1.2%)
• The loan book grew 5% to £9.5 billion (31 July 2022: £9.1 billion), with growth of 8% excluding our businesses in run-off, as we remained committed to lending consistently to customers in all market conditions
• We accelerated our growth strategy in Close Brothers Asset Management (“CBAM”) and delivered strong net inflows of 9%, with a significant contribution from new hires
• Winterflood’s performance was impacted by a continued slowdown in trading activity and challenging market conditions, but it remains well positioned to benefit when market conditions improve
• Total funding increased 7% to £12.4 billion (31 July 2022: £11.6 billion), as we sought to grow our retail deposit base and optimise our funding mix
• Our Common Equity Tier 1 (“CET1”) ratio was 13.3% at 31 July 2023 (31 July 2022: 14.6%), significantly above our minimum regulatory requirement of 9.5%
• We propose a final dividend of 45.0p per share, resulting in a full-year dividend per share of 67.5p (2022: 66.0p). This reflects our underlying performance and the Board’s confidence in the group’s outlook
Moving forward on the delivery of our strategic priorities
• Our growth initiatives are delivering a significant contribution to loan book growth. We lent £164 million in the first year against our ambition to provide £1 billion of funding for battery electric vehicles by 2027. Our initiatives in the Commercial business are progressing well, with the recently hired specialist lending teams having written healthy levels of new business and building strong pipelines. We saw good demand for new offerings in Property Finance, including our specialist buy-to-let proposition to existing bridging finance customers
• In CBAM, our hiring strategy is proving successful with a strong pipeline and new bespoke investment managers significantly contributing to net inflows. Winterflood Business Services (“WBS”) continued to grow with total assets under administration (“AuA”) up 79% to £12.9 billion, above the previous £10 billion target
• We have a number of strategic cost management initiatives in progress and are evaluating further opportunities to improve efficiency. We remain focused on achieving positive operating leverage over the medium term
• We remain committed to optimising further our capital structure, targeting a CET1 capital ratio range of 12% to 13% over the medium term, in line with our capital management framework. The Board will assess the potential for further distributions to shareholders based on future opportunities
Outlook
We are making the most of opportunities and are encouraged by the momentum generated in Banking in the second half. We have seen a good start to the 2024 financial year and our underlying business is well positioned to maintain stable returns this year, as we sustain growth momentum and pricing discipline, with a resilient credit performance, despite the near-term cost pressure.
Our proven model and financial strength leave us well placed to resume our track record of earnings growth and returns by focusing on disciplined growth, cost efficiency and capital optimisation.
Key Financials1
| Full year2023 | Full year2022 | Change% | |
| Adjusted operating profit2 | £113.5m | £234.8m | (52) |
| Adjusted operating profit, pre provisions | £317.6m | £338.1m | (6) |
| Statutory operating profit before tax | £112.0m | £232.8m | (52) |
| Adjusted basic earnings per share3 | 55.1p | 111.5p | (51) |
| Basic earnings per share3 | 54.3p | 110.4p | (51) |
| Ordinary dividend per share | 67.5p | 66.0p | 2 |
| Return on opening equity | 5.0% | 10.6% | |
| Return on average tangible equity | 5.9% | 12.2% | |
| Net interest margin | 7.7% | 7.8% | |
| Bad debt ratio | 2.2% | 1.2% | |
| 31 July2023 | 31 July2022 | Change% | |
| Loan book | £9.5bn | £9.1bn | 5 |
| Total client assets | £17.3bn | £16.6bn | 5 |
| CET1 capital ratio (transitional) | 13.3% | 14.6% | |
| Total capital ratio (transitional) | 15.3% | 16.6% |
Key Financials (Excluding Novitas)
| Full year2023 | Full year2022 | Change% | |
| Adjusted operating profit | £220.1m | £274.1m | (20) |
| Adjusted operating profit, pre provisions | £307.4m | £316.7m | (3) |
| Net interest margin | 7.6% | 7.5% | |
| Bad debt ratio | 0.9% | 0.5% | |
| 31 July2023 | 31 July2022 | Change% | |
| Loan book | £9.5bn | £8.9bn | 6 |
1. Please refer to definitions on pages 22 to 24.
2. Adjusted operating profit is stated before amortisation and impairment of intangible assets on acquisition, goodwill impairment, exceptional item and tax.
3. Refer to note 4 for the calculation of basic and adjusted earnings per share.
Enquiries
| Sophie Gillingham | Close Brothers Group plc | 020 3857 6574 |
| Camila Sugimura | Close Brothers Group plc | 020 3857 6577 |
| Kimberley Taylor | Close Brothers Group plc | 020 3857 6233 |
| Ingrid Diaz | Close Brothers Group plc | 020 3857 6088 |
| Sam Cartwright | Maitland | 07827 254 561 |
A virtual presentation to analysts and investors will be held today at 9.30 am BST followed by a Q&A session. A webcast and dial-in facility will be available by registering at https://webcasts.closebrothers.com/results/PrelimResults2023.
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. Going forward, 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.
| Event | Date |
| First quarter trading update | November 2023 |
| Annual General Meeting | 16 November 2023 |
| Final dividend payment | 24 November 2023 |
| Half year end | 31 January 2024 |
| Interim results | March 2024 |
| Third quarter trading update | May 2024 |
| Financial year end | 31 July 2024 |
| Preliminary results | September 2024 |
About Close Brothers
Close Brothers is a leading UK merchant banking group providing lending, deposit taking, wealth management services and securities trading. We employ approximately 4,000 people, principally in the United Kingdom and Ireland. Close Brothers Group plc is listed on the London Stock Exchange and is a constituent of the FTSE 250.
Chief Executive’s Statement
We have performed well in the second half, with an acceleration of loan book growth, strong margins and a stable credit performance in our Banking business. We continued to attract new client assets in CBAM, with strong net inflows, although Winterflood’s performance remains impacted by subdued trading activity. Despite the second half momentum, our financial results for the full year were significantly impacted by provisions in relation to Novitas announced in our Half Year 2023 results in March.
This year has been marked by a challenging market backdrop, where mixed economic conditions in the UK have created substantial uncertainty for our consumer and SME customers. Although demand levels have remained robust, the uncertain external environment led to higher forward-looking impairment provisions and difficult conditions for our market-facing businesses, CBAM and Winterflood.
Whilst headwinds facing SME firms have abated somewhat, uncertainty and challenges for these firms persist, with interest rates rises and cost of funds remaining a key concern for many business owners. We recently published the Close Brothers Asset Finance Business Sentiment Index, which provides insights about our core customers’ plans for the future. The research shows that SME business confidence continues to recover, and we are reassured to see a reversal of 2022’s downward trends, with a cautious optimism continuing to return. Overall, the appetite to invest remained stable, with three-quarters of the firms aiming to seek funding for investment in the next 12 months.
We are confident that we have the right model to thrive in this environment and are confident in the opportunity it creates for us to lean in and support consumers and SME businesses.
Our through-the-cycle business model and financial strength mean we can support customers even during these uncertain times. By leveraging our long-term relationships, the deep expertise of our people and our customer-centric approach we can deliver disciplined growth and are well positioned to resume our long-term track record of earnings growth and returns, building on the second half’s momentum and a good start to the 2024 financial year.
Financial Performance
The financial results were impacted by a significant increase in provisions in relation to Novitas incurred in the first half, as we have taken measures to address the issues relating to that business. As a result, statutory operating profit before tax decreased to £112.0 million (2022: £232.8 million). While we are disappointed with these developments and the impact they have had on our performance this year, the financial strength of the group leaves us well placed to move forward on the delivery of our strategic priorities. We evaluate continuously our businesses and initiatives against a set of criteria, our “Model Fit Assessment Framework”, to ensure they are aligned with the key attributes of our model that have and will continue to generate long-term value. We are confident that there is no read-across from Novitas to other books in our portfolio and our prudent underwriting continues to be reflected in the asset quality and performance of the rest of our loan book.
In Banking, excluding Novitas, profit performance primarily reflected good loan book growth of 6% and strong net interest margin of 7.6%, more than offset by higher impairment charges to take into account the uncertain macroeconomic outlook and increased costs related to our investment programmes and inflation, including wage awards. Our Asset Management division delivered strong net inflows of 9%, although profit reduced, reflecting wider market conditions and costs related to our successful hiring strategy, as we accelerated our efforts to grow CBAM. Although performance at Winterflood reflected the continuation of challenging trading conditions, we remain confident in the track record of our trading business and are well positioned to retain our market position and benefit when investor appetite returns. Winterflood has made good progress on the diversification of its revenue streams and is exploring growth opportunities to balance the cyclicality seen in the trading business.
Our capital, funding and liquidity positions remained strong. The events impacting the global banking sector earlier this year highlighted the benefits of our prudent approach to managing financial resources, with our diverse funding base enabling us to adapt our position, based on market conditions and demand. Our funding base was further strengthened by the successful issuance of a £250 million senior unsecured bond in June 2023, and we maintained our prudent liquidity position, with the 12-month average liquidity coverage ratio (“LCR”) of 1,143% substantially above regulatory requirements. Our common equity tier 1 (“CET1”) capital ratio was 13.3% at 31 July 2023 (31 July 2022: 14.6%), significantly above the applicable minimum regulatory requirement of 9.5%. We remain committed to optimising further our capital structure, targeting a CET1 capital ratio range of 12% to 13% over the medium term. This will allow the group to maintain a buffer to minimum regulatory requirements while also retaining flexibility to grow the business. We remain encouraged by the available opportunities to deploy capital to deliver disciplined growth, which remains a key strategic priority. We will continue to assess the potential for further distributions to shareholders based on future opportunities.
We are pleased to propose a final dividend of 45.0p per share, resulting in a full-year dividend per share of 67.5p (2022: 66.0p). This reflects our underlying performance and the Board’s confidence in the group’s outlook. We remain committed to our dividend policy, which aims to provide sustainable dividend growth year-on-year, while maintaining a prudent level of dividend cover.
Well placed to resume our track record of earnings growth and returns
We have made good progress against our strategic priorities and remain committed to resuming our track record of earnings growth and returns.
Our investment programmes are progressing well and enable us to protect the key attributes of our business model, maintain regulatory compliance and enhance efficiency, as well as future-proof our income generation capabilities. We continue to see tangible benefits from these investments. We advanced our strategic cost management initiatives, including our technology transformation programme focused on the rationalisation of IT infrastructure, as well as making operational enhancements in Retail. These actions aim to create capacity to accommodate growth, inflation and investment to support our business. We continue to evaluate additional opportunities for efficiency with a view to achieving positive operating leverage over the medium term. Furthermore, we undertook work across our businesses to ensure readiness for the implementation of the FCA’s Consumer Duty, which came into force on 31 July, completing product reviews and enhancing frameworks to incorporate the new requirements.
We remain focused on delivering disciplined growth and continue to review a range of opportunities in line with our model, with our growth initiatives delivering a significant contribution to loan book growth in the year. Our recently hired agricultural equipment and materials handling teams in Asset Finance have written healthy levels of new business and are building strong pipelines. In Invoice Finance, we participated in our first syndication deal and the newly hired team, providing bespoke term loan structures to SME clients, closed their first deal this year. We saw good demand for the new initiatives in Property Finance, including our specialist buy-to-let proposition to existing bridging finance customers. We are delighted to have recently announced our agreement to acquire Bluestone Motor Finance (Ireland) DAC, which is aligned to our commitment to Ireland as a strategic market and provides a platform for us to build our Irish Motor Finance business. Following last year’s announcement of our initial green growth ambition of providing funding for £1.0 billion of battery electric vehicles by 2027, we are pleased to have funded £164 million in the first year. These achievements are examples of our relationships, expertise and customer-centric approach being utilised to deliver disciplined growth.
In CBAM, our hiring strategy is proving successful, with a strong pipeline of new hires and significant contribution from new portfolio managers to the inflows. We also continue to build our pipeline of in-fill acquisitions to support the long-term growth potential of the business. In addition, WBS exceeded the targeted £10 billion of total AuA and is well positioned for further growth, both organically and supported by a solid pipeline of clients. We expect WBS to grow AuA to over £20 billion by 2026.
We continued to make progress against the group’s sustainability agenda. We set our group-wide climate commitment, becoming signatories to the Net Zero Banking Alliance and Net Zero Asset Managers initiatives in September 2022, and I look forward to sharing our initial intermediate 2030 targets for the most carbon-intensive sectors in our loan book over the coming months. We remain focused on improving the quality of our emissions reporting, including our financed emissions.
Our people
We consistently focus on employee engagement to support the wellbeing and needs of our colleagues. I am delighted with the positive scores achieved in our most recent employee opinion survey, reflecting our teams’ strong sense of belonging and our distinctive culture. I am particularly impressed that we have retained our high engagement score of 86%. Our colleagues play a key role in driving our organisation towards lasting success, and I would like to extend my gratitude to all our people for their dedication and resilience, especially in the face of the financial pressures brought about by higher inflation and the cost of living. Together, I am confident that we will continue to deliver on our purpose to help the people and businesses of Britain thrive over the long term.
Outlook
We are making the most of opportunities and are encouraged by the momentum generated in Banking in the second half. We have seen a good start to the 2024 financial year and our underlying business is well positioned to maintain stable returns this year, as we sustain growth momentum and pricing discipline, with a resilient credit performance, despite the near-term cost pressure.
Our proven model and financial strength leave us well placed to resume our track record of earnings growth and returns by focusing on disciplined growth, cost efficiency and capital optimisation.
Overview of Financial Performance
Summary Group Income Statement1
| 2023£ million | 2022£ million | Change% | |
| Operating income | 932.6 | 936.1 | – |
| Operating expenses | (615.0) | (598.0) | 3 |
| Impairment losses on financial assets | (204.1) | (103.3) | 98 |
| Adjusted operating profit | 113.5 | 234.8 | (52) |
| Banking | 120.1 | 227.2 | (47) |
| Commercial | 15.9 | 91.0 | (83) |
| Of which: Novitas | (106.6) | (39.3) | (171) |
| Retail | 34.7 | 61.0 | (43) |
| Property | 69.5 | 75.2 | (8) |
| Asset Management | 15.9 | 21.7 | (27) |
| Winterflood | 3.5 | 14.1 | (75) |
| Group | (26.0) | (28.2) | (8) |
| Amortisation and impairment of intangible assets on acquisition | (1.5) | (2.0) | (25) |
| Statutory operating profit before tax | 112.0 | 232.8 | (52) |
| Tax | (30.9) | (67.6) | (54) |
| Profit after tax | 81.1 | 165.2 | (51) |
| Profit attributable to shareholders | 81.1 | 165.2 | (51) |
| Adjusted basic earnings per share2 | 55.1p | 111.5p | (51) |
| Basic earnings per share2 | 54.3p | 110.4p | (51) |
| Ordinary dividend per share | 67.5p | 66.0p | (2) |
| Return on opening equity | 5.0% | 10.6% | |
| Return on average tangible equity | 5.9% | 12.2% |
1. 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. Further detail on the reconciliation between operating and adjusted measures can be found in note 2.
2. Refer to note 4 for the calculation of basic and adjusted earnings per share.