While economic recovery is good news for all banks - it keeps bad debts low and boosts demand for credit - it's nonetheless the case that mainstream lenders are still generally cautious about lending. To a considerable extent, that reflects regulatory issues: they've been under pressure to boost capital which can constrain banks' capacity to lend. That caution, however, has provided a great opportunity for smaller specialist lenders, and Close Brothers (CBG) looks especially well placed to benefit. Indeed, its loan book has more than doubled since 2009, yet the shares look undemandingly rated compared to those of other rival lenders.
- Benefiting from banks' reluctance to lend
- Economic recovery will buoy credit demand
- Well capitalised
- Shares cheaply rated for the sector
- Some evidence of margin pressure
- Competition could grow
The group's banking division, which now generates over 80 per cent of profits, is performing particularly well. That unit is focused on motor finance business and also undertakes property-related lending and secured lending to small- and medium-sized enterprises. Growth here has been impressive and broker Liberum estimates that, in the five years to end-July 2014, profits will have jumped by more than 230 per cent. While, at the third-quarter stage, Close reported that its loan book had risen a further 10 per cent in the year to date to £5.1bn. With the UK's economic recovery now well under way - the International Monetary Fund expects the economy to grow nearly 3 per cent this year - improving demand for credit should keep the growth flowing, too. Broker Numis Securities, for example, expects group earnings to grow around 20 per cent over the two years to end-July 2016.
Despite that growth, "credit quality remains exceptionally strong", says Numis Securities, and at the half-year stage impairment losses represented a mere 1 per cent of the net loan book. That said, there are signs of a pick-up in competition - which led to a slight decline in the banking division's net interest margin at the third-quarter stage. Close's capital position is also robust. Its Basel III-basis core tier-one capital ratio (which compares a bank's highest quality capital to its assets, weighted for risk) was 13.2 per cent at the half-year stage, leaving Close better capitalised than almost all of the UK's big high street banks. HSBC's (HSBA) ratio, for instance, is 10.7 per cent.
CLOSE BROTHERS (CBG) | ||||
|---|---|---|---|---|
| ORD PRICE: | 1,237p | MARKET VALUE: | £1.84bn | |
| TOUCH: | 1,236-1,238p | 12-MONTH HIGH: | 1,503p | LOW: 1,106p |
| FORWARD DIVIDEND YIELD: | 4.1% | FORWARD PE RATIO: | 11 | |
| NET ASSET VALUE: | 579p | |||
| Year to 31 Jul | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|
| 2011 | 78.5 | 29.6 | 40.0 |
| 2012 | 135 | 68.6 | 41.5 |
| 2013 | 163 | 81.6 | 44.5 |
| 2014* | 196 | 102.5 | 48.0 |
| 2015* | 212 | 110.9 | 51.0 |
| % change | +8 | +8 | +6 |
*Liberum forecasts Normal market size: 1,500 Matched bargain trading Beta: 0.997 | |||
True to its history as a traditional 'merchant bank', Close also boasts a securities division and an asset management arm. The securities unit is dominated by UK market maker Winterflood, but also includes Frankfurt-based broker-dealer Seydler. Close has a 16.3 per cent stake in Mako, too, which is a market-maker in equities, fixed income and commodity derivatives. Reflecting such factors as improved equity market conditions and a big hike in recent IPO activity, the securities business saw adjusted operating profit at the half-year stage jump 58 per cent year-on-year to £16.6m. Stronger trading volumes in lower-margin large cap and international stocks during the third-quarter stage, however, has led to a slight decline in income per bargain. Meanwhile, the asset management arm has seen good momentum in fund inflows amid robust market conditions, and total assets under management grew a further 4 per cent in the third quarter to £9.6bn.
Close has a reputation for having stuck to its core niche markets and, as a result, it "avoided the excesses of the bubble years and performed relatively well through the credit crisis," notes Numis. The lender is therefore well placed to exploit the strengthening economic recovery without any of the legacy issues that continue to afflict the more mainstream lenders. Certainly, as conditions improve, the big banks will slowly begin to return to more normal levels of lending and there are also plenty of other specialist lenders to compete with - so margins could well face some pressure in time.
