Close Brothers focuses on generating capital

Having dropped most of the bombshells in last month's trading update, the market breathed a sigh of relief that interim results for Close Brothers (CBG) contained no new regulatory shocks. The share price for the specialist finance house was poleaxed earlier this year by the initial repercussions from a Financial Conduct Authority (FCA) investigation into commission arrangements for car finance, with a view to compensating consumers who have inadvertently funded over-generous commission payments.

The company had already chopped its dividend prior to these results to build up capital to offset potential regulatory action. It has now outlined a £400mn plan to build up funds.

Management said that options under consideration for building this capital included securitising some of risks in its portfolios, which would add around £100mn to the core equity tier one (CET1) ratio, along with a similar sum from organic capital generation. In total, without a dividend to pay, the company is confident it will be able to strengthen its CET1 ratio by £400mn by the end of next year.

On a reported level, the results produced profit after no more impairments were reported for Novitas, the specialist legal finance arm of Close Brothers. Loan book growth of 9 per cent year on year to £9.89bn added to an expansion in the net interest margin to 7.5 per cent, with an improved bad debt ratio of 0.8 per cent.

However, this did not offset cost inflation for its operating expenses, which because of rising staff costs were 12 per cent higher at £335mn. Management expects to save about £20mn annually in costs by 2026. Meanwhile, banking, retail and property were the best performing divisions for Close, with property seeing 25 per cent revenue growth to £41.8mn, though market conditions still proved to be a drag on broker Winterflood as well as its asset management arm.

Broker Peel Hunt noted that the shares have fallen by 55 per cent over three months and now trade at 0.36 times tangible net assets, with an expected return on tangible equity in the low teens. The broker argues that should no capital raise be required, there could be a share price recovery over the medium term. There still a large element of uncertainty around the company's regulatory costs, which keeps us cautious for now. Hold.  

Last IC view: Hold, 826p, 26 Sep 2023