Close Brothers report an improving picture

by | May 24, 2023

Close Brothers, the UK merchant banking group, has issued an update on trading in the third quarter of its financial year, covering the period from 1 February to 30 April 2023. Chief Executive, Adrian Sainsbury described Close Brothers as “having performed well in the third quarter, with loan book accelerating, a strong net interest margin and stable credit performance in Banking.”

Details included 2% growth in the loan book, or 3.9% if business units in run-down are stripped out, and net interest margins stable at 7.8%. The asset management division grew assets by £400m to £16.1bn, with Close reporting strong net annualised inflows of 9%.

Winterflood remains in the doldrums with the group reporting another subdued quarter for the retail market-making operations. Close Brothers remain happy with their credit quality, which improved to 0.9%, excluding losses at Novitas for which provisions have already been made.

Steve Clayton, head of equity funds at Hargreaves Lansdown:

“We hold Close Brothers in our two HL Select UK funds because its core businesses are dependable, growing cash generators capable of supporting strong dividend flows. But it has not been an easy time of late; Novitas was a bad acquisition and Close Brothers have learned expensive lessons along the way. Today’s update is the first in a while not to bring new bad news from Novitas and the market may well be relieved. The core banking operations are in rude health and Close Brothers’ balance sheet has long been the envy of many other bankers. Their assets are strongly collateralised, earn rich margins and their liquidity is excellent.

It is a shame that Winterflood is still under a cloud, but it remains a fundamentally profitable business, with no loss days in the quarter. The trouble is that each profitable day is not very profitable, leaving divisional earnings stuck at relatively low levels.  On balance though, the overall message from Close Brothers today is probably the most upbeat for a while. The bad news on UK inflation this morning may put the wider market under pressure, so we may not see too many signs of relief in Close Brothers shares today, even if the shares have edged up 1% in early trading. But hopefully the group have now put some of their problems behind them, which could allow the underlying progress in the core business to show through more clearly in the months ahead.”

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