Close Brothers in a close shave

The market had been well prepared for Close Brothers’ (CBG) scrappy half-year results after the diversified financial services group disclosed large losses on its Novitas loan book – Novitas was a legal services lender that financed litigation via intermediaries that the company acquired in 2017. The £90mn impairment charge Close Brothers took on the loan book was the main reason why reported profits were so drastically reduced. Management expects provisions to adequately cover any further charges related to Novitas as the loan book is run off.

The hybrid nature of Close Brothers banking/asset management/broking model can make evaluating its overall performance awkward. However, while the banking arm suffered from the Novitas write-down, the division's net interest margin was marginally higher at 8 per cent, aided by 14 basis points of one-off benefits generated by mark-to-market swaps.

Meanwhile, the asset management business saw positive net inflows of £474mn as assets under management rose by 3 per cent to £15.7bn. The company’s broking business Winterflood is still in the doldrums and a lack of deals meant operating profits were more than 70 per cent lower at £2.4mn.  

Analysts at Panmure Gordon said in a note: “At this stage in the cycle there should be much to commend Close, but trust in the model has inevitably taken a knock of late.” The broker’s forecasts for 2023 are skewed by impairments but these return to a more realistic looking nine times EPS forecasts for next year. A period of stagnation for the share price seems inevitable until Close Brothers proves that there are no more skeletons in the cupboard. On that basis, we downgrade our recommendation. Hold.

Last IC View: Buy, 996p, 27 Sep 2022