Close Brothers Group plc

Good morning and welcome to the presentation of Close Brothers half one results. I'll start with a brief review of the key highlights of our performance and then Mike will take you through our financials. I'll come back and cover our business and strategy updates and at the end of the presentation we'll be happy to take your questions either over the telephone line or over the webcast which you can submit during or after the presentation. In the first six months of the year, While we all continue to navigate the restrictions and disruptions caused by COVID-19, we also saw the UK economy start to recover following the successful vaccination programme. This translated into increased customer activity in banking and continued growth in asset management, but also a challenging market environment in the segments where Winterflood operates. Against this backdrop, we delivered a good financial performance with stable income and a strong ROE of 12.2%. In banking, income was up 12% as we delivered loan book growth of 8.2% year-on-year at a net interest margin of 7.9%. Our underlying credit performance was strong, benefiting from provision releases and reflecting our consistent underwriting criteria. Excluding Novitas, the bad debt ratio was 0.2%, As previously announced, in July 2021, the group decided to cease permanently the approval of lending to new customers across all of the products offered by Novitas and withdraw from the legal services financing market. In asset management, we saw positive momentum with net inflows of 8% and winter floods saw reduced trading opportunities following the exceptional highs experienced in the COVID-19 period. We've maintained a strong capital, funding and liquidity position, with our C2 on capital ratio of 15.1%, significantly above the minimum regulatory requirements. I'm also pleased to declare an interim dividend of 22 pence per share. Returning to the pre-pandemic level, this reflects our strong underlying performance and our continued confidence in the business model. The external environment is currently clearly volatile, directly impacting our market-facing businesses. Sea-bound and winter flood. Nevertheless, we are confident in the quality of our lending. Our banking loan book is predominantly secured, prudently underwritten and diverse. And we remain encouraged by both the short and medium-term growth opportunities across the group. At our investor event in June 2021, we set out how we plan to build on the core strengths of our business and take it forward responsibly. In the first half, we've made good progress against our strategic priorities to protect, grow and sustain our model. The disciplined application of our prudent underwriting and pricing is key, and evidenced by our strong underlying credit performance, as well as our high net interest margin. We also continue to invest to protect our business model and maintain our operational and financial resilience. Our multi-year investment programmes are progressing well and delivering tangible benefits across our businesses. In the first half, we continue to deliver disciplined growth at strong margins in bankings and increased AUM in CBAM. We remain focused on maximising the growth opportunities in each of our markets with an expanded offering in asset finance, new strategic partnerships in motor finance and continued growth in both income and client assets in WBS. We're also actively working to identify new opportunities to deliver disciplined growth. On our sustainability agenda, we've also made good progress, which supports our ambition of helping people and businesses transition towards a lower carbon future. I'll now hand over to Mike to take us through the financial results.

Thank you, Adrian, and good morning, everyone. As Adrian said, we have delivered a good first half performance. Group adjusted operating profit was up 1% to £130 million. reflecting strong top line growth in banking and positive momentum in asset management. This was offset by reduced trading opportunities in winter flood following the exceptional highs seen during COVID-19. We delivered adjusted earnings per share of 64 pence and a return on opening equity of 12.2%. We maintained a strong capital funding and liquidity position with a CET1 capital ratio of 15.1%, providing significant headroom against minimum regulatory requirements. And as Adrian mentioned, the Board has declared a 22 pence interim dividend, returning to the pre-pandemic level and reflecting our strong underlying performance and our continued confidence in our business model. In banking, we achieved 8.2% loan book growth year on year at a net interest margin of 7.9%, with an annualised bad debt ratio of 1.1%, primarily reflecting impairment charges related to Novitas. In Close Brothers Asset Management, we saw annualised net inflows of 8%, and in Winterflood, we incurred only one lost day despite extreme market volatility. Looking first at the income statement, income was broadly stable at £472 million, with strong growth across both banking and asset management, offset by a reduction in winter flood. Expenses were flat at £294 million, as the continued investment across banking and asset management was offset by lower variable costs in winter flood. Impairment charges reduced to 48 million, reflecting the benefit of provision releases and strong underlying credit performance across our businesses. And we achieved adjusted earnings per share of 64 pence, stable on the prior year. Moving on to the divisional performance. Overall, adjusted operating profit was marginally up at 130 million. In banking, profit was up 26% to £120 million, as 12% top-line growth more than offset the continued investment in our key strategic programmes, with lower impairment charges reflecting provision releases and strong underlying credit performance across our businesses. We saw significantly higher profits in both commercial and retail, with property marginally up. In asset management, we saw continued growth. We delivered strong net inflows and an 18% increase in profit to 15 million, with growth in income more than offsetting the cost of investment to support the long-term growth strategy. And winter flood saw reduced trading opportunities with profit down 74% to 9 million. And now onto the balance sheet. We maintained a strong balance sheet and remain focused on our prudent approach to managing financial resources. Our total funding increased to 11.3 billion and is well in excess of the loan book. We continued to borrow long and lend short with the average maturity of allocated funding at 23 months ahead of the loan book at 17 months. We manage liquidity conservatively with current levels higher than pre-COVID position. We had 1.7 billion of Treasury assets at the 31st of January, with the majority held with the Bank of England. Our established presence in all wholesale markets, along with our mix of retail and non-retail deposits, supports our diverse funding base. Our credit ratings remain strong, helping support our ongoing issuance plans. And we reduced our cost of funds down circa 30 basis points on last year, supported by our diversified funding strategy and continued access across both wholesale and retail markets. Our deposit platform continues to support the growth and diversification of our funding base. We now have balances of around 1.2 billion in our notice account product range and approximately 300 million in fixed rate ISAs. And we also have around 50% of our retail deposit customers registered for our online portal. Turning now to our strong capital position. Our business is highly capital generative with significant headroom above the minimum requirements. Looking at movements in the period, our CET1 capital ratio was 15.1%. down from 15.8% at the 31st of July 2021, reflecting the reversal of the 50 basis points benefit from the previous treatment of software assets and a partial unwind of IFRS 9 transitional arrangements. Excluding these regulatory changes, our CET1 ratio would have been flat at 14.2%. This gives us 750 basis points of headroom above the minimum requirement for CET1, although there are known headwinds to future requirements. Our leverage ratio remains strong at 12.2%. And following the submission of our initial IRB application in December 2020, we continue to engage with the PRA and await feedback before moving to Phase 2. Now on to the banking division, which delivered a strong performance overall and achieved positive operating leverage. We saw 12% growth in income to £346 million, driven by loan book growth at higher margins. We maintained our focus on pricing discipline, allowing us to deliver a NIM of 7.9%. Expenses increased 10% to £177 million as we continued to invest in strategic programmes to protect, grow and sustain the model whilst exercising rigorous control over business as usual costs. Impairment charges reduced to £48 million reflecting the benefits of provision releases and strong underlying credit performance across our businesses. The bad debt ratio was 1.1%, primarily reflecting impairment charges of 39 million related to Novitas. Excluding these, the bad debt ratio was 0.2%. As a result, adjusted operating profit increased 26% to 120 million. Moving on to the loan book, where we saw growth of 1.9% in the first half, and 8.2% year on year. Our commercial book was up 4%, reflecting good demand and new business volumes in asset finance, as well as increased utilisation in invoice finance. We also saw a 4% increase in motor finance, driven by strong new business levels, as demand for used cars continued, supported by benefits from our investment in the business. The premium book declined as we saw continued subdued demand for the funding of insurance policies from consumers exacerbated by seasonality. Property was also down as high repayments driven by the buoyant house market more than offset drawdowns. Although we continue to see strong new business volumes with our pipeline surpassing 1 billion in February, We remain well positioned to deliver disciplined growth and we are confident in the outlook for the loan book over both the short and medium term. Now on to our net interest margin. We reported a NIM of 7.9% as we maintained our pricing discipline and benefited from a reduction in our cost of funds to 1.1%. Our specialist relationship driven model and consistent disciplined pricing mean we are well positioned to maintain a strong NIM for the remainder of the year. However, we expect a slight negative impact from rising interest rates, mainly as a result of interest rate flaws within our property business. As such, the implications of a 50 basis point parallel upward shift in interest rates is a 9 million adverse impact on our profit until the reference rate reaches 1%. Moving on to costs in the bank. There was a 10% increase overall. as we continue to invest to support our strategic objectives of protecting, growing and sustaining our business model. We maintained rigorous control over our cost base with business as usual costs up 4%, reflecting increased performance related compensation, regulatory spend and growth in headcount. Investment costs increased to 41 million as we progressed our strategic programmes and incurred related depreciation. Adrian will touch more on how this investment is delivering tangible benefits across our businesses. Although we achieved positive operating leverage in the first half, we expect costs to be around 5% to 7% higher in the second half. due to the planned spend on investment programmes and depreciation, as well as wage inflation. We remain focused on delivering sustainable, positive operating leverage over the medium term. Turning now to our credit performance, we saw a strong underlying credit performance across our businesses. The bad debt ratio of 1.1% reflected significant charges relating to Novitas as we updated loss rate assumptions which were informed by experience of the credit performance in the business. Excluding Novitas, the bad debt ratio was 0.2%. This reflected the benefit of provision releases as we saw reduced foreborn balances and improved macroeconomic scenarios and weightings and strong underlying credit performance. As a result, our provision coverage ratio excluding Novitas was slightly down at 2.2%. While we consider this a prudent level of provision, we are mindful of the highly uncertain external environment and its potential impact on our customers and credit performance. Nevertheless, we remain confident in our loan book, which is predominantly secured or structurally protected, prudently underwritten, diverse, with approximately 99% of our loan book exposure to the UK, Republic of Ireland and the Channel Islands. Moving on to asset management, which saw continued growth and delivered positive operating leverage in the first half. We generated annualized net inflows of 8%, reflecting higher investment-only inflows, including those from our recent portfolio manager hires and financial advisors. These inflows were partially offset by negative market movements, primarily during the global equity market declines seen in January. As a result, managed assets were up 1% to $15.8 billion, with total client assets also up 1% to $17.2 billion. Operating income increased 14% to $77 million, reflecting favourable market conditions and higher investment management income from growth in our assets. The revenue margin decreased to 89 basis points as we saw higher flows into our investment-only products and lower advice and dealing fees. The growth in income more than offset the 13% rise in expenses to 62 million, which was primarily driven by increased staff costs and new hires to support our growth strategy. As a result, adjusted operating profit was up 18% to 15 million. The operating margin increased to 19%. Now turning to winter flood. where concerns in relation to inflation and rising interest rates, the emergence of the Omicron variant and global geopolitical events have all negatively impacted both market conditions and investor sentiment. Income was down 49% to 50 million, reflecting a moderation in trading activity and a change in the mix of trading volumes. Expenses reduced 36% to 41 million, driven by lower variable compensation following reduced activity. As a result, operating profit declined 74% to 9 million, reflecting reduced trading opportunities following the exceptional highs of the COVID period. Nevertheless, Winterflood navigated the period well. Despite the extreme market volatility, which saw the AIM market down 12.5% in the first half, there was only one lost day, demonstrating the expertise and experience of our traders and their focus on risk management. Staying with Winterflood, we can see the decline in monthly operating income over recent months, driven in part by the moderation in retail trading activity. with total bargains down 15% compared to the first half of 2021. Trading volumes have reduced since the highs experienced during the pandemic, but remain ahead of pre-COVID levels. However, as you can see on the charts, total bargains in the higher margin markets of AIM and small cap are down significantly on the prior year, reflecting the change in mix in our trading volumes. Winterflood are well placed to continue trading profitably and take advantage of returning investor appetite. So, as you can see, we delivered a good performance in the first half of the year. And I will now hand back over to Adrian. Thank you.

Thanks, Mike. Also at our June Investor Day, I talked in detail about what differentiates us and puts us in a very strong place to continue to deliver on our long-term track record. Our performance is supported by a consistent pricing and underwriting criteria, by the prudent management of our financial resources, and by our diversified portfolio of businesses with specialist expertise and focus on service and relationships in each of the sectors in which we operate. We've a distinctive culture at Close Brothers, a relentless customer focus and long-term approach to everything we do, which is embedded throughout our organisation. And I truly believe this is one of the most important strengths of our model. Once again, these strengths have supported our strong underlying performance in the first half, enabling us to maintain our long track record of excellence in customer service, loan book growth, profitability and dividend progression. The interim dividend of 22 pence has returned to the pre-pandemic level, reflecting our half-won performance and also the continued confidence in our business model. While dividend decisions in 2020 and 2021 financial years reflected the unprecedented uncertainty caused by COVID-19, we aim to return to delivering long-term, progressive and sustainable dividend growth into the future. It's essential that we continue to protect our model to ensure its core, differentiating strengths aren't compromised. As demonstrated by our strong balance sheet, liquidity and funding position, we remain committed to preserving our financial strength and the resources to fund our strategy. And we continue to invest to protect our business model and maintain our operational and financial resilience. As I mentioned, we're seeing our multi-year investment programmes deliver tangible benefits across our organisation, supporting our growth agenda. This includes the successful extended product offering of our savings franchise, following our investment in the customer deposit platform. With the total balance of our fixed rate ISAs now at circa £300 million, supporting lower cost of funds and funding diversification. In our motor finance business, following the deployment of a new underwriting platform as part of the Motor Transformation Programme, we've seen an increased customer acceptance rate from 54% to 56% and, most importantly, at our existing underwriting criteria and risk appetite. Whilst loan book growth remains an output of our model, we're confident in our outlook over both the short and medium term. I'll run through some of the opportunities we're seeing across the group as we continue to build on our long growth track record and take our business forward. And we're working hard behind the scenes on pursuing our growth agenda and further penetrating the markets where we operate. We're also actively working to identify new opportunities to deliver disciplined growth in line with the strategy set out for our investor event. I look forward to updating you on progress in due course. We continue to make good progress on helping to address the social, economic and environmental challenges facing our business, employees and our customers. We're focused on promoting an inclusive culture and engaging our employees, with our next employee opinion survey currently being conducted across the group. I look forward to updating you on the responses in the future. In line with our ambition to help people and businesses transition towards a lower carbon future, We're progressing well with the assessment of our indirect Scope 3 emissions. In the first half, we completed an initial assessment of the climate sensitivity of our loan book. And our risk standards and policies now have climate considerations embedded, which will be reviewed in line with our business strategy and transition plans. I'll now take you through an update on each of our banking businesses and how they're maximising the current market opportunities. We continue to see good demand across our SME businesses. In asset finance, following the Seville's opportunity closing in 2021, we've seen good new business volumes, particularly in transport, contract hire and energy. The business is well positioned to capitalise on continued demand for asset finance. Current growth initiatives include those aligned with the increasing focus on the renewable energy sector and electric car fleets, and we've also recently hired a specialist materials handling team. In invoice finance, we've seen strong sales volumes and increased utilisation as the economy started to reopen. Our number of SME customers has also increased, supporting loan book growth in the period. We continue to tap the opportunities in the asset-backed lending space, raising visibility with private equity sponsors and the wider intermediary community. In brewery rentals, our direct-to-outlet container rental product, EK+, has seen customer numbers doubling in the last three months, allowing the business to open up a market segment previously unavailable to us. Although invoice finance utilisation remains below the level seen prior to COVID, as the economy recovers, we expect growth in this business to closely follow economic activity. In motor finance, strong new business volumes continued into the first half, reflecting ongoing demand for finance in the second-hand car market and rising vehicle prices, as well as the benefits from our investment in the sales capability. Our investment in the Motor Finance Transformation Programme has enabled us to further develop our proposition, providing unique data insight to dealers and to take advantage of heightened demand for used cars. As illustrated on the chart, new business volumes have remained high and above the pre-COVID average, with record volumes achieved in Q2 2022. We continue to see strong fundamentals in the second-hand car market and are exploring opportunities for growth through the shift to alternatively-fuelled vehicles. We've also entered a new strategic partnership with Autotrader as we expand our routes to market. In premium finance, in addition to the usual January seasonality, we saw subdued activity in the consumer market as COVID-19 restrictions continue to impact demand for insurance policies in the first half. We expect demand for the funding of motor policies to recover following the removal of COVID-related restrictions. In property, the UK market remained buoyant, with heightened house sales volumes leading to higher repayments by our house builder customers. Although drawdowns were up on the prior year, this was upset by strong repayment levels. We continue to see strong new business levels and achieved a record undraw pipeline, surpassing £1bn in February. We focus on residential developments of family housing, where there's strong structural demand, and continue to see good demand in the regions outside of London and the South East, with the regional book making up around 50% of our development portfolio. Other growth initiatives include a focus on identifying and capturing the next generation of developers, as well as expanding our regional presence and bridging finance offerings. The Asset Management Division saw positive momentum in the first half, achieving an annualised net inflow rate of 8%. This reflected continued demand for our integrated advice and investment management services, despite the ongoing impact of COVID-19 weighting on client sentiment and inflows across the industry. We've seen net inflows from our advisors, third-party IFAs and our own portfolio managers, with strong contributions from our investment in new hires over recent years. Continued investment in systems and technology supports scalability of our back and middle office functions, with most of these technology investments expected to be behind us by the end of calendar year 2022. Sustainable investment management strategies remain a key area of focus across the industry, and we continue to broaden our range of sustainable investment propositions, with our sustainable funds gaining further traction. We've an attractive, virtually integrated and multi-channel distribution model, which underpins our success and positions us well to benefit from structural growth trends in the wealth management industry. will continue to drive growth both organically and through the continued selective hiring of advisors and investment managers and through infill acquisitions. I'd like to welcome Eddie Reynolds as the recently appointed chief executive of CBAM. Eddie has over 30 years experience in the fund and wealth management industries, bringing with him outstanding experience and knowledge and will lead CBAM through the next stage of its development. On behalf of the Executive Committee and Board, I would like to thank Martin Andrew for his significant contribution to the group during his 16 years at CBAN. And finally, Winterflow, which saw reduced trading opportunities following the exceptional highs experienced during the COVID-19 period. As Mike touched on earlier, trading volumes have moderated and there's also been a change in the composition of trading income. Winterflood continues to diversify its revenue streams and explore growth opportunities, balancing the volatility seen in the trading business. WBS, which provides outsourced dealing and custody services for asset managers and platforms, has delivered another strong performance, generating £5.1 million of income and growing its assets under administration to £6.8 billion. We're confident in accelerating the growth trajectory of WBS with a good pipeline of clients expected to support further significant growth in assets under administration and income in this business. As a daily trading business, Winterflood is highly sensitive to changes in the market environment, but remains well positioned to continue trading profitably, taking advantage of returning investment appetite. Looking ahead, we're mindful of the highly uncertain external environment. including the impact of increasing geopolitical tensions and rising inflation on our customers and wider financial market conditions. Nevertheless, we remain well-placed to continue delivering on our long-term track record of profitability and disciplined growth. Our proven and resilient model and strong balance sheet, combined with our deep experience in navigating a wide range of economic conditions, leave us well-placed and continue to support our colleagues, customers and clients over the long term. Thank you, and I'd now like to take any of your questions. We're going to start with a call on the telephone line.

If you wish to ask a question and are dialed into the conference line, please press star followed by one on your telephone keypad. If you change your mind and wish to remove your question, please press star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. To confirm, that's star followed by one to ask a question. If you're listening via the webcast, you will need to type out your question using the ask a question button. First telephone question today is from the line of Benjamin Toms from RBC. Please go ahead.

Good morning, both, and thank you for taking my questions. Two for me, please. Firstly, on costs, you gave banking cost guidance of 5% to 7% growth half on half, which I think implies full year 22 cost growth in the banking division of about 10% to 11%. Is the half to implied run rate of around 310 to 350 million the right base for 2023, or will a proportion of the increasing costs fall away? And then secondly, I noticed in your release that you mentioned there's no direct exposure to the Ukraine crisis. How are you thinking about the indirect exposure? I appreciate that it's quite early days, but is it potentially one of those environments where other banks step away and you lean into risk with an acceleration in lending? Thank you.

Thanks, Benjamin. I'll start with the UK in question and I'll then move on to costs and I'll ask Mike to build on that as well. You're quite correct. So as I mentioned on Ukraine, for the lending book that we have, 99% of our exposures are broadly in the UK, the Republic of Ireland and the Channel Islands with the remainder Western European countries. So second order effects are likely to be more significant in the bank for us. So I see that predominantly as inflationary and inflationary impacts on consumers and SMEs input costs going up that will impact consumer cash flows and SME cash flows in all likelihood. clearly dependent, and let's all hope that this is a quick resolution to the challenges and the horrors that are taking place in Ukraine at the moment. So those second order impacts will impact customers. The cash flows, the affordability, the repayment capability could be impacted in that area. We've talked about this a number of times on our calls previously on how Close Brothers prepares for those sort of potential credit events in the market. We run playbooks on how we would operate and how we've operated in the past, let's say in the GFC or the dot-com boom, where we looked very clearly and early when there were challenges, credit challenges in the market to protect the group's position and then to look at how we resource up in different areas and then lean in to take advantage of the opportunity by helping our customers in those challenging situations. Now, very clearly in past discontinuities in the market, we have relatively outperformed, and I'd expect us to do that again in such a scenario. That's partly because our loan books are largely secured or structurally protected. Over 90% is in those categories, whereas a number of other banks have more unsecured portfolios, and some of the recent startups don't have experience in operating in that sort of more challenged credit environment. So whilst I obviously don't wish for that sort of environment, it's our responsibility at Close Brothers to be well prepared for any scenario and to be able to deliver for our customers and shareholders at that time. If I move on to the costs, you're quite correct. In the bank, the cost guidance we're giving for half two is a 5% to 7% uplift. It is worth noting that in half one, we did have positive operating leverage of 2% in the bank. We have made an inflationary salary rise in the bank and for a lot of our group employees as well of about 3% at the time of February 2022. And we are continuing to invest in our major investments as well, the investment programmes. We have a long-term approach at Close Brothers, whether that's in terms of our dividend policy, supporting our customers, developing our culture, but also to our investment programmes. Stop starting those investment programs is not a good idea. And these investment programs, as we've said, are already giving us tangible benefits. So we're very rigid on BAU costs, well managed, but we will continue to invest in our major programs. Because the 5% to 7% is in half too, it won't have the scale of that uplift that I see, and we're not giving specific guidance for full year 23. Mike, would you like to build on that?

I think you've covered it off. The wages, inflation that you've spoken about, that will come through in the second half, and that will clearly form part of next year's cost base. And as you say, we will continue to invest in the business. We've had a lot of benefits coming out of that, and that would be our intention to continue. So those will effectively form part of the cost base going into next year. Thanks, Benjamin. We've got the next call.

Next question is from the line of Rahul Sinha from J.P. Morgan. Please go ahead. Next question is from Raul Cena from JP Morgan. Please go ahead.

Hi. Good morning. Can you hear me, Jim?

Thank you. Good morning.

Oh, great. I've got three questions, if that's okay. The first one is just a follow-up on the cost side, in particular on the investment spend. I was wondering if we could get a little bit more color in terms of the big projects that that are likely to drive the step up in inflation spend if there is one in the second half of the year. And also if you comment a little bit on the depreciation impact as that comes through over this year and into next year, hopefully that should be quite visible to you already. The second question is just around the very helpful disclosure on interest rate impact. uh due to the property flows thanks for that um i was wondering if you could give us a little bit more color on how the headwind from higher rates turns into a tailwind as rates go about one percent if perhaps if you could talk us through the mechanism of how that works through the deposit base that would be really interesting um and then thirdly i was wondering whether or not you've made any um assumption changes to our first nine models um for um higher inflationary impact on the economy and whether you have any thoughts of how they would react to perhaps more inflationary pressures on your customers.

Thank you. Thanks Roel. I'm going to do these in reverse order. So I'll start with the IFRS 9 one. So as you will have noticed, there are two aspects here. One is the weighting of the scenarios and you'll recognise that at 31st of January that we moved 10% from the downside scenarios to the upside. So we broadly have on the Moody scenarios 40% of the baseline scenario, 30% in upside and 30% in downside scenarios as well. So that was a 10% shift from the July year end. Clearly the world has moved on a little bit from the 31st of January. So we will recognise those changes when we meet as a credit committee in future periods going through half two. There is another side within the weightings because Moody's every month provides increased or more relevant data, more up-to-date data on areas like inflation and interest rate predictions as well. And those will feed in much more quickly than the change in the weightings that we have on the scenarios. On the interest rate impact, as Mike said in his presentation, broadly a 50 basis point increase or decrease has an impact of £9 million or 0.1% on NIM. And bear in mind our NIM moved from 7.7% a year ago to 7.9% now. So that equates broadly to a 0.1% NIM impact of 50 basis point move. That impact, as Mike indicated, is broadly impactful up to 1% of base rates because of some flaws we have in our property contracts. And after a 1% rises after then, we would more naturally move on to the customers as the base rate increases. It's also worth recognising within our books, the majority of our lending across the loan books is at fixed rates and is matched with our deposit base as well or our funding via swap. So, for example, we would enter in a higher purchase agreement with an SME customer for three years. That would be at a fixed rate throughout the term of the agreement. So a base rate rise wouldn't impact that customer and we would have match funded that position. So this is more an impact down the road as the book starts to get rewritten and we rewrite agreements at different rates in the market at that time. Clearly, as the tailwind there after 1% partly depends on what the market position is, the competitive position is at that time. In previous periods of this sort of area where interest rates have risen, we've been able to pass on the rates into the market as the base rate has increased as well. And I'd expect us to be able to do the same again largely and protect the NIMH. On the cost investment and the major programmes that you asked about, one of the slides shows some of these. And we're investing across our strategy of protect, sustain and grow. So in protect, we have an ongoing cyber investment programme. We have the data centre programme as well. Those are important investments to protect the business. Clearly cyber at the moment with some of the Russian dialogue is ever increasing importance. Also on the protect not driving revenue is our IRB programme which Mike touched on. We're in discussions, well progressing discussions with the PRA on our application and that will proceed in the coming periods and we'll talk to you about the progress of the IRB in time. The spend on that programme clearly is increasing during the programme. And then I move on to the programmes that are more about customer proposition and growth for the future. So we touched a few times during the presentation on the motor investment spend. That is coming towards conclusion and has given significant benefits in terms of the proposition to the car dealers that we offer the used car finance through and our end customers. And that's enabled us to increase the accept rate on those agreements or those proposals rather by around 2% at the same credit quality as we've had historically. In asset finance, the investment is proceeding and is more in the middle of the programme, I would describe it as, and the spend is therefore enhancing as we move through it. That spend has been very useful to increase the sales tooling, similar in the motor business as well for our sales force. and enabled us in the CBILS work that we did, the CBILS lending on the government scheme, where we lent around £1.2 billion to SMEs with 80% government support. We were able in a very agile way in April and May 20 to build a front end that enabled customers applying for a CBILS agreement to effectively self-validate their application, which is very good data for look back when the British Business Bank will look, have the scheme terms been properly followed all the way through. And the other major spend that we have is in the asset management business. That's been a transformation move to all of our systems onto IRIS, which is coming towards a conclusion towards the end of 2022, as well as offering propositional benefits to our customers and clients as well. And that's helped a little with the operating margin, which, as Mike mentioned, has improved about 1% in the latest period. We have another call on the webcast line.

As a reminder, if you'd like to ask a question, please press star followed by one on your touchtone telephone. The next question is from the line of Robert Sage from Peel Hunt. Please go ahead.

Yes, sir. Thank you for taking the questions. I've got two questions, if I can. The first of which concerns the securities business, which I suspect no surprise that the sort of the revenue is down. What I do notice, though, is that the efficiency ratio, of course, the percentage of income have gone up quite smartly in the first half of the year. Looking into the second half of the year, I was wondering what sort of management action you might be tempted to take here, whether there might be scope for further reducing variable costs, whether there's perhaps something more structural, or do you simply wait for the market conditions to improve in this segment? The second question, looking at the slowdown in lending growth in the first half of the year and given also the corresponding reduction in equity share prices, I was wondering whether sort of inorganic initiatives to stimulate growth might be coming more onto your radar screen at the moment or whether we should still be looking predominantly at an organic driven growth strategy?

Thank you, Robert. On winter flood first, I think it's worth putting in perspective how the markets have behaved in January and February. So January 2022 was the worst performance by the S&P since 2009. And AIM is broadly down 12.5% since July 21. So that's the sort of market that we've been operating in. It's also worth noting that WINS has only had one lost day in the half to January 2021, sorry, January 2022, which I see as reflective of the risk management approach that we have throughout the business. We have an expert team and a very good position in all of the markets that we trade in. And we want to protect that for the future. We see this as a highly valuable franchise and Winterflood has a very good leadership team, very good head traders and very good development throughout the business. On the cost profile, there is a very direct correlation in the variable pay of the team in winter flood with the revenue and profits that are generated. And that has fed straight through. So that's where the reduction in the variable costs has come from. Now, clearly, there are also some fixed costs in the business that we are mindful of, but we need those costs for the proprietary business that we have. The office we have, for example, in COVID, we opened a new contingency site in Brentwood rather than perhaps a more standard BCP site in Leatherhead, which is not such a good trading site. We have a second trading floor offering real resilience to the business. These things are important for the future, so those costs are important to support the future franchise of Winter Flood, whilst I'm mindful of the BAU costs, and that comes straight through in the variable pay. On the slowdown in lending growth in half one, 8.2% year-on-year I think is a reasonable number, whilst you quite rightly say in half one itself the loan book growth is 1.9% in the six months. I think it's worth looking at the split out of those businesses first when you interpret those numbers. So asset finance, invoice finance, motor finance all grew at 4%. And then the other two businesses, premium, partly seasonal, was down 2%. And we would expect that to bounce a bit more with people having access to more motor policy requirement. With COVID restrictions, there's been less demand for motor policies. And there could be some more premium inflation in future. Unfortunately, as people drive more, there are more accidents that could feed through the premium rates as well. In property, that's the real driver of the loan book being a bit lower at 1.9%, I'd say. It was down 3% or 51 million in the first six months. That's from the very high transaction levels of house sales. And as we've indicated, we have a very strong pipeline of undrawn commitments going through a billion for the first time. I think importantly, the reason I focused on the loan book growth there is because it's an output for us of maintaining the strong credit quality that we have, the underwriting criteria, and our pricing position. Those are the key reasons that we have the loan book output there. That does not drive me to say we should start doing inorganic opportunities. That should not be a driver of us looking at that sort of activity. However, of course, we look at all options in the market and I'm very keen that the executives in line with our investor day in June progress extensions of the model as well as driving their business in the best way possible in line with the model fit assessment we've discussed. We're now on to the webcast and the first webcast question. Thanks, Robert.

We have three questions from Jason Napier at UPS. If I take the first one, what's the trajectory for costs excluding winter flood beyond the second half of 22 given investment and growth plans?

Mike, do you want to take that? And broadly, I would say I answered that in the previous question in terms of the 5% to 7% being largely inflationary, feed-through of investments with programmes starting towards the second half as well. Areas such as travel and expenditure will naturally have increased. We've got a direct sales force. We've got an auditing force that go and see customers. With lockdown lifting, they'll be seeing more of them as well. Mike?

Yes, and we've always said over the long term, we would want to see operational leverage across the book. We've seen that in the first half. in the second half as those inflation increases come through, then that will change around. But over the long term, we want to make sure that our income and costs are growing in a commensurate manner.

Okay, and the second question, any areas of the loan book that would be at potentially higher risk from either 200 base points higher interest rates or elevated energy input costs?

Good question, Jason. Let me think through that one on my feet quickly. I'll just go through the portfolio and think about a 2% base rate rise and the energy input costs. As I mentioned, first of all, a lot of our book, the majority of our book is at fixed rates. So the interest rate doesn't feed through in terms of the cost of servicing the close brothers loan quickly for a premium finance customer, a motor finance customer, or an SME borrowing on an HP agreement in asset finance, as an example. However, consumers and SMEs could have other facilities elsewhere that will be impacted by an interest rate rise. I think as dramatic in my mind is the inflationary rise that will be the energy costs, the NI rise from April, the impact of other input costs for SMEs as well. All of those things I think could touch on consumer behaviour and consumer cash flows. On energy in particular, for SMEs, it will be heavier industries that will see more of the input costs from the energy rise. For example, we don't have a lot of fossil fuel extraction or mining or heavy industry like cement. Those aren't industries that we're largely in. However, we do have a significant truck, HGV funding business in the asset finance and also our vehicle hire business. Those customers will be buying diesel and clearly diesel as an input cost would go up as well. So I think there could be some impact in that business. I think consumers generally will see their cash flow stretched. I would say that some of the facilities we have are supporting, for example, insurance policies in the premium finance business and motor policy in the premium finance business. They're effectively mandatory spends. Those are important policies for consumers. So when they're faced with the choice of who to pay, they may elect to pay that rather than unsecured loan at that time as well. So I think the impact of the inflationary rise and interest rate rise and energy rise is hard to predict. There'll be second order on our businesses. And again, we're well prepared because we have largely a secured business, a structurally protected loan book. And this is the expertise I touched on that we've seen in other credit distress markets where the Close Brothers expertise in the front office and the credit teams has enabled us to relatively outperform. And that's what our playbooks are for. Shall we move on to the next question? Was there another one from Jason?

Yes, there's one more from Jason, which is, what's the rate of runoff to be expected in the Republic of Ireland book? Will existing customers automatically renew elsewhere? And what other potential options are there for the Republic of Ireland?

Thanks, Jason. So the book is largely around €400 million. Interestingly, in recent years, the Republic of Ireland book has been growing at a slower rate than our UK motor book. That's important because the UK motor book is at higher margin. So the agreement we've had with our partner in Ireland has been broadly since 2011 and will come to an end towards the end of June 2022. It's a relatively modest part of our loan book overall at around 5% of the bank's loan book and 19% of the motor finance book to put it in context. The runoff profile, the term of the loans, is very similar to the UK book. So that would be a natural runoff of three to four years that we would manage along the way. We're looking at a range of options on how we might continue in the Republic of Ireland motor industry. And the Republic of Ireland remains an important market to us. Broadly, when we've said 99% of our loan book is in the UK, the Republic of Ireland and the Channel Islands, 7.5% of that is the Republic. And we already also offer invoice finance, premium finance and asset finance as well as motor there. So I'm very keen that we continue to find a way to offer motor finance following the end of this partnership. We have another webcast question.

So this question comes from Gary Greenwood at Shore Capital. Can you remind us of the various headwinds that you see to capital going forward and are you able to quantify these? Notwithstanding those headwinds, would you consider a share buyback to take advantage of recent share price weakness?

Okay, I'll hand on to Mike. I'll start off on the changes that we've seen. So at 15.1% CET1, we're broadly 750 basis points over the regulatory minimum. And I recognise that's a significant headroom. I would say with the geopolitical tensions and the highly uncertain market that we've touched on, having significant headroom is a good thing as we stand today. I'm also mindful that we have a simple capital stack. So a lot of other banks have 81. We don't have 81 in our stack. So that's an option available to us if we consider it for the future. We've given a broad rule of thumb previously that loan book growth of around 7%, all things being equal in terms of mix, is broadly credit neutral. And we said we were 8.2% year on year, 1.9% in half. half one of this year as well. So that gives a guide from where we are. The transitional moves we've seen to move to 15.1 is from the software intangible, sorry, the software assets falling off in line with regulatory requirement, 50 basis points, and IFRS 9 transitional relief falling away at about 25 basis points. That equates for broadly 75 basis points of the 80 basis point reduction we've seen year on year. So those are the broad moves. And we also will have in coming periods in the future the impact of the benefit of IRB as well. Mike, would you like to build on that?

Yeah, I think, Gary, you touched on the headwinds there. Obviously, IFRS 9 transitional relief will continue to roll off, so we'll see that come through. But also, the regulator has made it clear that the capital conservation buffers will start to load back on. We believe there's going to be 1% this December and a further 1% next year. That broadly relates to about 75 basis points for each of those for us, we think. So you're looking at about another 1.5%. We expect those buffers to increase.

Thank you, and I look forward to seeing you hopefully in person for our four-year results in September. Thank you and have a good day.