Close Brothers reports solid full-year growth

19th Sep 2024 07:30

(Sharecast News) - Close Brothers announced an agreement to sell its wealth management subsidiary, Close Brothers Asset Management (CBAM), to funds managed by Oaktree Capital Management, for an equity value of up to £200m on Thursday, alongside a solid set of full-year results.

The FTSE 250 company said the transaction would include £28m of contingent deferred consideration in the form of preference shares, valuing CBAM at a multiple of 27 times its statutory operating profit after tax for the 2024 financial year.

Close Brothers said it would retain all upfront cash proceeds from the sale, amounting to approximately £172m.

The sale was expected to be completed in early 2025, contingent on receiving customary regulatory approvals.

In its preliminary results, Close Brothers reported a 1% increase in operating income to £944.2m in its preliminary full-year results on Thursday, driven by growth in both its banking and Close Brothers Asset Management (CBAM) divisions, offsetting declines in Winterflood and higher central functions' interest expenses.

The FTSE 250 company said statutory operating profit before tax jumped 27% to £142m, benefiting from the non-recurrence of prior impairment charges related to Novitas.

Adjusted operating profit rose 50% to £170.6m on the back of robust income growth of 1% and reduced impairment charges, despite a 10% increase in operating expenses primarily due to higher staff costs and ongoing investments in the banking sector.

The group's return on average tangible equity (ROTE) improved to 8.3%, up from 5.9% the prior year.

In the banking division, Close Brothers said it achieved a 6% growth in its loan book, reaching £10.1bn, supported by strong performance in property, invoice finance, asset finance, and motor finance.

The division reportedly maintained a stable underlying credit performance with a bad debt ratio of 1%, down from 2.2% the previous year.

Adjusted operating profit for banking increased to £205.4 million, up from £120.1 million in 2023.

CBAM saw net inflows rise by 8%, with total assets under management (AuM) growing by 18% to £19.3bn, driven by both net inflows and positive market performance.

However, adjusted operating profit for CBAM declined by 23% to £12.2m due to higher costs from investment in new hires.

Winterflood reported an operating loss of £1.7m, compared to an operating profit of £3.5m a year earlier, amid unfavourable market conditions.

Nevertheless, Winterflood Business Services (WBS) saw income increase 17% to £17.3m and assets under administration (AuA) grow 21% to £15.6bn.

The group said it maintained a strong balance sheet with a Common Equity Tier 1 (CET1) ratio of 12.8%, well above the regulatory requirement of 9.7%.

In line with its previous announcement, Close Brothers said it would not pay a dividend for the 2024 financial year.

It also said it had implemented management actions projected to enhance available CET1 capital by around £400m by the end of the 2025 financial year.

Looking ahead, Close Brothers projected low single-digit growth in its banking loan book for the 2025 financial year, as it aimed to sustain a net interest margin of 7.2%.

The group also expected to achieve annualised cost savings of about £20m by the end of 2025 through ongoing cost management initiatives, with positive operating leverage anticipated by 2026.

It said the reinstatement of dividends would be considered in 2025 and beyond, pending the conclusion of the FCA's review of historical motor finance commission arrangements.

"This year's performance demonstrates the group's resilience," said chief executive officer Adrian Sainsbury.

"In banking, we grew our loan book with strong margins and stable underlying credit quality, while progressing our cost actions to improve future efficiency.

"Close Brothers Asset Management delivered strong net inflows, although Winterflood's performance remained impacted by unfavourable market conditions."

Sainsbury said the FCA's review of historical motor finance commission arrangements announced in January introduced significant uncertainty for the group.

"Against this backdrop, our top priority has been to further strengthen our capital position and protect our valuable franchise, whilst continuing to support our nearly three million customers, including around 350,000 SME businesses."

The company was making "significant progress" against the capital actions it had previously outlined, Adrian Sainsbury added.

"The strengths of our model, being our long-term relationships, the deep expertise of our people and our customer-centric approach, leave us well placed to navigate the current uncertainty.

"We continue to be encouraged by the strength of demand in our banking business and see good growth prospects for the group, as we focus on resuming our track record of earnings growth and attractive returns."

At 0804 BST, shares in Close Brothers Group were up 3.7% at 547p.

Reporting by Josh White for Sharecast.com.