REG - Close Bros Grp PLC - Trading Statement

Close BrothersAnnouncement

21/11/2024 07:00

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RNS Number : 0430N  Close Brothers Group PLC  21 November 2024

 

Press Release
 

 Scheduled Trading Update
 21 November 2024

Embargoed for release until 7.00 am on 21 November 2024.

Close Brothers Group plc ("the group" or "Close Brothers") today issues its
scheduled trading update relating to the first quarter of its 2025 financial
year from 1 August 2024 to 31 October 2024.

Mike Morgan, Group Finance Director, said:

"The group delivered a robust performance in the first quarter. In our Banking
division, customer demand remained healthy, alongside a strong net interest
margin and a resilient credit quality. Whilst Winterflood continued to
experience unfavourable market conditions, it remains well positioned to
benefit when investor appetite returns."

"We are confident in our underlying business, supported by our strong balance
sheet and liquidity position, and remain committed to driving it forward.
Notwithstanding the significant uncertainty resulting from the FCA's review of
historical motor finance commission arrangements and the recent Court of
Appeal judgment, our focus is on protecting our valuable franchise. Our core
Banking business model remains as relevant as ever as we continue to offer
excellent and specialist service to our customers, while maintaining our
pricing and underwriting discipline."

Performance in the three months to 31 October 2024

In Banking, the loan book increased 0.6% in the quarter to £10.2 billion (31
July 2024: £10.1 billion). We saw continued demand from our customers, which
was partly offset by the actions taken to selectively grow the loan book as we
optimise risk weighted assets. We delivered good growth in our Commercial
businesses, which was partly offset by a modest increase in the level of
 repayments in Property. New business volumes were lower in Retail, primarily
driven by the temporary pause in new lending in our UK motor finance business
following the Court of Appeal ("the Court") judgment in respect of the
Hopcraft case in October 2024. We have now resumed writing new business for a
significant portion of our UK motor finance book.

The annualised year-to-date net interest margin was strong at 7.3%, reflecting
our ongoing focus on pricing discipline and optimising funding costs in the
higher interest rate environment. We remain well positioned to sustain the net
interest margin delivered in the second half of the 2024 financial year of
7.2%.

Our focus on costs and improving future efficiency continues. We have
continued to make progress on the cost management actions previously outlined
and are on track to deliver annualised savings of c.£20 million, reaching the
full run rate by the end of the 2025 financial year.

The annualised year-to-date bad debt ratio remained below our long-term
average of 1.2%, reflecting the resilient underlying credit quality of our
lending(1). We remain confident in the quality of our loan book, which is
predominantly secured, prudently underwritten, diverse, and supported by the
deep expertise of our people.

Close Brothers Asset Management ("CBAM") delivered solid year-to-date
annualised net inflows of 4% (FY 2024: 8%). In the quarter, managed assets
increased slightly to £19.5 billion (31 July 2024: £19.3 billion) and total
assets increased to £20.6 billion (31 July 2024: £20.4 billion). As outlined
in the Full Year 2024 results, following a comprehensive strategic review, the
group announced that it had entered into an agreement to sell CBAM to funds
managed by Oaktree Capital Management, L.P. The transaction is expected to
complete in early 2025 calendar year and CBAM will be classified as
'discontinued operations' in the group's consolidated income statement going
forward(2).

Winterflood's performance continued to be impacted by unfavourable market
conditions, resulting in an operating loss of £0.7 million in the first
quarter (Q1 2024: operating loss of £2.5 million).

The Group (central functions)(3) reported net expenses of £14.2 million in
the quarter (Q4 2024: £12.7 million; Q1 2024: £9.5 million). We continue to
expect Group (central functions) net expenses to be in line with the guidance
provided at the FY 2024 results, primarily reflecting an elevated level of
professional fees and expenses associated with the FCA's review of historical
motor finance commission arrangements.

Strong balance sheet

Our funding base remained stable at £13.0 billion (31 July 2024: £13.0
billion) this quarter. We adhere to a conservative "borrow long, lend short"
funding strategy, with the average maturity of funding allocated to the loan
book three months longer than the average loan book maturity as at 31 October
2024 (31 July 2024: 4 months). We maintained our prudent liquidity position,
with a 12-month average liquidity coverage ratio ("LCR") of 964%,
substantially above regulatory requirements, as at 31 October 2024. The
group's funding and liquidity positions have remained stable since the
publication of the Court judgment.

Our Common Equity Tier 1 ("CET1") capital and Total Capital ratios were 13.2%
and 16.9%, respectively, at 31 October 2024 (31 July 2024: 12.8% and 16.6%).
The increase in the quarter was primarily driven by retained profit and a
reduction in risk weighted assets(4).

The group has a number of actions in progress to further strengthen its
capital position. These include the agreed sale of CBAM announced in September
2024, which is expected to increase the group's CET1 capital ratio by
approximately 100 basis points, a potential significant risk transfer of motor
finance loans, selective loan book growth and cost actions. As outlined in our
Full Year 2024 results, we have completed preparations for a significant risk
transfer of assets in Motor Finance. We continue to analyse any adjustments to
the timing and structure of a potential transaction in light of the recent
Court judgment. With the benefit from these management actions and continued
capital generation, we remain confident that the group's CET1 capital ratio
will be between 14% and 15% at the end of the 2025 financial year (excluding
any potential redress or provision related to the FCA's review of historical
motor finance commission arrangements or the Court judgment).

In addition, the group continues to evaluate a range of other potential
management actions previously outlined to further optimise risk weighted
assets, including potential risk transfer of other portfolios, a continuous
review of our businesses and portfolios and other tactical actions.

Outlook

We are encouraged by the robust performance delivered in the first quarter. At
this stage, we are maintaining our previously communicated guidance for the
2025 financial year. However, we anticipate there may be some financial impact
from measures taken in response to the Court judgment, including potential
further increases in professional and legal fees and associated operational
costs.

Our priority remains to protect our valuable business franchise while we
navigate the current period of uncertainty.

CEO leave of absence

Further to the group's announcement on 16 September 2024, Adrian Sainsbury
remains on medical leave of absence from the business. The group intends to
continue the existing temporary cover arrangements during this period with
Mike Morgan, Group Finance Director, supported by Mike Biggs, Chairman, and
members of the senior management team.

Developments since the Court of Appeal's motor commissions judgment

On 25 October 2024, the Court published its judgment which upheld the motor
commission appeals brought against Close Brothers Limited ("CBL") and
FirstRand Bank Limited. It remains our position that the group disagrees with
the Court's findings and that the judgment raises important issues of law and
general public importance that should be determined by the Supreme Court. The
group intends to submit an application for permission to appeal the Court's
decision directly to the Supreme Court imminently. Given the judgment's
broader relevance and potential impact on the group, we intend to request that
the Supreme Court considers our application for permission on an expedited
basis. The group considers that it meets the relevant criteria required for
the Supreme Court to grant permission but that will be a matter for the
Supreme Court to determine.

The range of outcomes and potential financial impact on the group remain
uncertain. Subject to the Supreme Court appeal, the overall cost to the group
of this development in the law, the FCA's ongoing review of motor finance
commissions, any customer complaints and claims and related costs and
liabilities will depend on a range of factors. These include the application
of the Court's ruling and the outcome of the Supreme Court appeal, the number
of claims and complaints received, the facts and circumstances of each
individual claim, any extension to the complaints pause initiated by the FCA
and the level of compensation, if any, due to affected customers. Our
accounting assessment in relation to these matters remains under review.

As previously announced, we temporarily paused UK motor finance lending on 25
October. Since 2 November, we have restarted a significant portion of this
business and expect full resumption in the very near future. We are updating
our documentation and processes to ensure disclosure of commission amounts on
finance agreements and obtain full customer consent for all necessary issues,
including credit broker commissions, before customers enter into credit
agreements. We have also implemented necessary measures to verify credit
brokers' compliance with these new requirements.

While the potential future applicability of the judgment to other
intermediated lending businesses remains unclear, we are reviewing
documentation and processes and continue to collaborate with brokers and other
intermediaries to update disclosures and procedures where appropriate.

The group operates various distribution models across our business. In Retail,
most of our Motor and Premium Finance businesses are intermediated. In
Commercial and Property Finance, we operate predominantly direct through our
own sales teams.

 

 

 

Footnotes

1 At 31 October 2024, there was a 30% weighting to the strong upside, 32.5%
weighting to the baseline, 20% weighting to the mild downside, 10.5% weighting
to the moderate downside and 7% weighting to the protracted downside
(unchanged from 31 July 2024). Moody's October unemployment forecast for Q4
2024 under the baseline scenario is 4.4%, 4.1% under the upside scenario and
ranges between 4.6% and 4.9% in the downside scenarios. Moody's October
inflation forecast for Q4 2024 under the baseline scenario is 2.4%, 2.5% for
the upside scenario and ranges between 1.5% and 1.9% in the downside
scenarios. Moody's October forecast for the Bank of England base rate for Q4
2024 is 4.9% in the baseline scenario, 4.9% in the upside scenario and ranges
from 4.7% to 4.8% in the downside scenarios.

2 On 19 September 2024, the group announced the agreed sale of CBAM to funds
managed by Oaktree Capital Management, L.P. The business is expected to fulfil
the requirements of IFRS 5 and be classified as 'discontinued operations' in
the group's income statement. The profit from discontinued operations is
expected to include the estimated gain on disposal (which we anticipate will
not be taxable). The transaction is conditional upon receipt of certain
customary regulatory approvals.

3 Group consists of central functions (such as finance, legal and compliance,
risk and human resources) as well as the non-trading head office company and
consolidation adjustments and is set out in order that the information
presented reconciles to the consolidated income statement.

4 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 and Total capital
ratios would be 13.1% and 16.9%, respectively. The applicable minimum CET1 and
Total capital ratio regulatory requirements, excluding any applicable PRA
buffer, were 9.7% and 13.7% at 31 October 2024. The group's capital ratios are
unaudited and include Q1 2025 unverified profits net of foreseeable dividends
and charges.

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
H/Advisors
Maitland
07827 254561

 

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.

Cautionary Statement

Certain statements included or incorporated by reference within this
announcement may constitute "forward-looking statements" in respect of the
group's operations, performance, prospects and/or financial condition. All
statements other than statements of historical fact are, or may be deemed to
be, forward-looking statements. Forward-looking statements are sometimes, but
not always, identified by their use of a date in the future or such words as
"anticipates", "aims", "due", "could", "may", "will", "should", "expects",
"believes", "intends", "plans", "potential", "targets", "goal" or "estimates".
By their nature, forward-looking statements involve a number of risks,
uncertainties and assumptions and actual results or events may differ
materially from those expressed or implied by those statements. There are also
a number of factors that could cause actual future operations, performance,
financial conditions, results or developments to differ materially from the
plans, goals and expectations expressed or implied by these forward-looking
statements and forecasts. These factors include, but are not limited to, those
contained in the group's annual report (available at:
https://www.closebrothers.com/investor-relations
(https://www.closebrothers.com/investor-relations) ). Accordingly, no
assurance can be given that any particular expectation will be met and
reliance should not be placed on any forward-looking statement. Additionally,
forward-looking statements regarding past trends or activities should not be
taken as a representation that such trends or activities will continue in the
future.

Except as may be required by law or regulation, no responsibility or
obligation is accepted to update or revise any forward-looking statement
resulting from new information, future events or otherwise. Nothing in this
announcement should be construed as a profit forecast. Past performance cannot
be relied upon as a guide to future performance and persons needing advice
should consult an independent financial adviser.

This announcement does not constitute or form part of any offer or invitation
to sell, or any solicitation of any offer to subscribe for or purchase any
shares or other securities in the company or any of its group members, nor
shall it or any part of it or the fact of its distribution form the basis of,
or be relied on in connection with, any contract or commitment or investment
decisions relating thereto, nor does it constitute a recommendation regarding
the shares or other securities of the company or any of its group members.
Statements in this announcement reflect the knowledge and information
available at the time of its preparation. Liability arising from anything in
this announcement shall be governed by English law. Nothing in this
announcement shall exclude any liability under applicable laws that cannot be
excluded in accordance with such laws.

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