We have long favoured Close Brothers (CBG) for its ability to grow its loan book steadily, and its current undemanding share rating makes this a good time to join the party. At its last set of results in September, chief executive Preben Prebensen highlighted two things: the 11.5 per cent average growth rate in its loan book over the past 10 years, and the steadily increasing dividend - "new start-ups don't pay dividends," he boasted. Recent share price weakness means that payout produces a 4 per cent yield on this year's forecast payout and Close Brothers is likely to continue its record of making profitable loans through the business cycle. Both those prospects set it apart from the big commercial banks.
- Long-term growth in its loan book
- Decent dividend yield
- Strong loan demand from small businesses
- Rising return on equity
- Stock market volatility
- Banks' profits surcharge
Shares in Close Brothers have been marked down due to the impact of falling stock markets on the group's securities and asset management businesses. There will no doubt be more short-term pain if stock markets don't revive soon. But, looking beneath the market falls, there is a longer-term growth trend in assets under management and in the year to the end of July these rose a tenth to £10.8bn, pulling up fees and profits. Analysts at broker Peel Hunt think there will be further growth in assets managed, even with the equity market falls - but we will have to wait until a trading update next month to assess any damage.
In the short term, volatility should be counterbalanced by an uptick in lending to small businesses, which has been a core feature of the UK's stuttering economic recovery. Demand for car loans, property development and asset finance drove adjusted profit in the group's banking division up 15 per cent to £209m in the 2015 financial year. This was Close Brothers' sixth consecutive year of double-digit growth, and helped the lender deliver a claimed return on equity of 19.5 per cent, from 17.9 per cent the year before.
Although competition is growing, management is resolute that the business will not chase bad loans to keep or increase this momentum, and therein lies the longer-term strength of the business. The bank's net interest margin crept up last year from 8.6 per cent to 8.8 per cent, while its bad-debt ratio fell slightly from 0.9 per cent to 0.8 per cent of loans outstanding. Further improvements to debt quality will of course help it further. Close Brothers has also been investing in its banking division's technology to serve clients more efficiently. This has pushed up its costs as a proportion of its income by one percentage point to 50 per cent.
The group has taken advantage of the benign environment to shore up its financial position. It added the government's 'Funding for Lending Scheme' to its funding sources, and managed to boost its tier one capital ratio to 13.7 per cent at the end of July, from 13.1 per cent a year earlier. It also received a credit rating upgrade from agency Moody's.
There is a cloud on the horizon: the banking profit surcharge imposed in the summer Budget will hit the banking division from 2016-17, although this has been absorbed into City analysts' forecasts.
| CLOSE BROTHERS (CBG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,459p | MARKET VALUE: | £2.18bn | |
| TOUCH: | 1,457-1,459p | 12-MONTH HIGH: | 1,707p | LOW: 1,344p |
| DIVIDEND YIELD: | 4.2% | PE RATIO: | 12 | |
| NET ASSET VALUE: | 671p | LEVERAGE RATIO: | 9 | |
| Year to 31 Jul | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2013 | 583 | 167 | 83 | 44.5 |
| 2014 | 659 | 201 | 103 | 49.0 |
| 2015 | 690 | 225 | 119 | 53.5 |
| 2016* | 720 | 238 | 126 | 58.0 |
| 2017* | 770 | 253 | 124 | 61.5 |
| % change | +7 | +7 | -2 | +6 |
Normal market size: 1,500 Matched bargain trading Beta: 0.5 *Peel Hunt forecasts (profits and EPS underlying figures) | ||||
