Close Brothers hunkers down

Diversification has many benefits for companies seeking to spread risk along their growth line, with the hope that profits will keep growing during difficult parts of the business cycle. Close Brothers (CBG) is a prime example of a highly diversified financial services company that combines banking with broking and asset management, and which experienced a year of highly volatile performance. It was Close’s bad luck that its July year-end coincided with some of the worst quarters for equities trading seen in many years, which undermined an otherwise solid performance from its specialist banking arm.

The banking division, like all banks, is benefiting from higher interest rates and the slow pass through of these to depositors. The net interest margin edged up to 7.8 per cent for the year, alongside a marginally higher bad debt ratio of 1.2 per cent on £9.1bn of total loans. This solid performance meant the bank’s operating revenues rose by 10 per cent for the year. The worst performing segment was the Winterflood broking and trading business. This was hit hard by negative market movements and investors pulling funds from equities, causing trading fees to crater – profits were down 77 per cent to £14.1mn. This also impacted the group’s return on equity, which was 10.6 per cent, down from 14.5 per cent last time.

Analysts have been trimming their forecasts for 2023 on the back of these numbers. Panmure Gordon pared back its EPS forecasts by 3p to 121.4p, giving a price/earnings ratio of just eight. For a specialist bank that is too cheap, particularly as interest rates are floating the sector. Buy.

Last IC View: Buy, 1,132p, 15 Mar 2022