Close Brothers Group plc

Good morning and welcome to the presentation of Close Brothers 2022 four-year results. I'll start with some brief reflections on our four-year performance. I'll then hand over to Mike, who will take you through our financials. I'll then come back and provide our business and strategy updates. After that, Eddie Reynolds, our CEO of CBAM, will provide some insights on our continued growth aspirations for that business. You can ask a question at the end of the session, either via the webcast or over the telephone link. And you can provide the question on the webcast during or after the session. We're now transitioning to a post pandemic world and adapting to a more flexible work environment. At the same time, our customers and colleagues are facing an uncertain set of economic circumstances. Against this backdrop, we've delivered a solid performance overall, with a return on opening equity of 10.6% and a return on average tangible equity of 12.2%. The banking division has performed well, with a strong interest net margin of 7.8% and loan book growth of 5% year on year. In the second half, we saw loan book growth of 3% as momentum picked up. In asset management, we generated net inflows of 5%, despite volatile market conditions, which benchmarked us above the majority of our peers. Winterflood's performance has been impacted by cyclicality in the trading business, following an exceptionally strong trading performance in 2021. We've maintained strong capital funding and liquidity positions, with a C2 on capital ratio of 14.6% at 31 July 2022. We're also pleased to propose a four-year dividend of 66p per share, up 10% on the prior year, returning to the pre-pandemic level. We continue to successfully deliver against our strategic priorities to protect, grow and sustain our business model. The disciplined application of our prudent underwriting and pricing is key. This is demonstrated by our strong underlying credit performance, as well as our high net interest margin. The prudent management of the Group's financial resources is a core part of our business model. We're considering the further optimisation of our capital structure, including the issuance of debt capital market securities if appropriate, targeting a CET1 capital ratio of 12% to 13% over the medium term. We remain committed to investing to protect our business model through the cycle. Our multi-year investment programmes are progressing well and delivering tangible benefits across our businesses. We remain focused on maximising disciplined growth and have achieved over £400 million of loan book growth in the year, with strong margins in banking. We've made significant progress in identifying both incremental and new growth areas. On our sustainability agenda, we've also further developed our climate strategy, which supports our ambition of helping people and businesses transition towards a lower carbon future. We've enhanced our understanding of our impact on the environment, covering not just our operational missions, but also the implications across our finance activities. I'm pleased to say that we've recently joined as a signatory to the Net Zero Banking Alliance. I'll now hand on to Mike to talk us through our financial results.

Thank you, Adrian, and good morning, everyone. Looking firstly at the income statement, income was marginally down at $936 million with growth across banking and asset management offset by a reduction in winter flood. Expenses were broadly stable at $598 million as lower variable costs in winter flood were offset by continued investment in banking and higher staff costs in both the bank and asset management to reflect the inflationary environment. Impairment charges increased to 103 million, corresponding to a bad debt ratio of 1.2%, which is broadly in line with our long-term average and the prior year's ratio. And this included the impact of updated assumptions for Novitas. The affected tax rate increased to 29%, reflecting the impact from revaluations of the deferred tax assets. and we achieved adjusted earnings per share of 112 pence, down 21% on the prior year. The Board is proposing a 44 pence final dividend, resulting in a full-year dividend of 66 pence per share, and this reflects our solid performance, strong capital position, and continued confidence in our business model. Moving on to the divisional performance. Overall adjusted operating profit was down 13% at £235 million. In banking, profit was up 7% to £227 million, as 10% income growth more than offset the continued investment in our key strategic programmes, higher staff costs and impairment charges. We saw significantly higher profits in commercial, which benefited from particularly strong loan book growth, with retail and property down year on year. In asset management, we generated positive net inflows, although profit reduced 8% to 22 million, as income was impacted by falling markets and staff costs increased as we continued to grow the business. And Winterflood's performance was impacted by cyclicality, as we saw a 77% reduction in profit to £14 million, following a market-wide slowdown in trading activity and falling markets. Turning to the banking division, we saw 10% growth in income to £693 million, reflecting good loan book growth and a strong margin. The net interest margin of 7.8% increased marginally on the prior year, primarily driven by the lower cost of funds. Expenses also rose by 10% to £363 million as we continued to invest in strategic programmes, increased salaries and saw higher performance-driven compensation. Impairment charges increased to £103 million, which corresponds to a bad debt ratio of 1.2%, broadly in line with our long-term average. This included the impact of updated assumptions for Novitas. Excluding Novitas, the bad debt ratio was 0.5%, reflecting the release of COVID-19 provisions and the ongoing review of provisions and coverage across our loan portfolios. As a result, adjusted operating profit increased 7% to $227 million. Moving on to the loan book, which reached $9.1 billion as we continue to see good demand across our businesses. The 2% growth we saw in the first half was supplemented by 3% in half two as momentum picked up. Our commercial book saw growth of 9% overall, reflecting strong new business volumes in asset finance, as well as increased utilisation in invoice finance, with our core invoice finance book up 29%. Motor finance increased by 7%, with high new business levels reflecting continued demand for used cars and supported by benefits from our investment in the business. The premium book declined as we saw lower demand for the funding of insurance policies from consumers. Property also contracted overall, despite growing in the second half of the year, as high repayments more than offset drawdowns driven by the buoyant UK housing market. We're actively working to identify incremental and new opportunities in both our existing and adjacent markets. We are confident in the outlook for the loan book over both the short and medium term and remain well positioned to deliver disciplined growth. Now on to our net interest margin. Our specialist relationship-driven model and focus on pricing over volume growth support our strong net interest margin. We reported a NIM of 7.8%, a marginal increase on the prior year, primarily reflecting a reduction in our cost of funds to 1.3%. And with the UK base rate now above 1%, no further impact is expected from the property floors in respect of future rate rises. Looking forward, we are well positioned to maintain a strong net interest margin. although the trajectory of our NIM will depend on our ability to pass on further rate increases to our customers. We also expect our cost of funds to continue to rise in light of the increasing cost of customer deposits to reflect higher interest rates. Moving on to costs in the bank, there was a 10% increase overall as we continue to progress our investment programs to support our strategic objectives to protect, grow and sustain our business model. Business as usual costs were up 7% driven by higher staff costs as we increase increased wages in light of the inflationary environment and reflecting performance driven compensation. Investment costs increased 22% to $84 million as we progressed our strategic programs and incurred related depreciation. And Adrian will talk more about these programs shortly. Whilst we remain mindful of inflationary pressures, we continue to exercise rigorous cost discipline. We expect costs related to existing investment programmes to stabilise over the next financial years, although depreciation charges related to these programmes will continue to increase. Turning now to our credit performance, the bad debt ratio of 1.2% was broadly in line with our long-term average and included the impact of updated assumptions for Novitas. Excluding Novitas, the bad debt ratio was 0.5%, This reflected the release of COVID-19 provisions and the ongoing review of provisions and coverage across our portfolios, as well as higher provisions to take into account the outlook. Our provision coverage ratio, excluding Novitas, was slightly down at 1.9%. Whilst we are not yet seeing a significant impact from rising inflation and interest rates on our customers' credit performance, we are alert to the highly uncertain external environment. Nevertheless, we remain confident in our loan book, which is predominantly secured or structurally protected, prudently underwritten and diverse. Moving on to asset management. Operating income increased 6% to $148 million, reflecting positive net inflows and market performance in the first half of the year, despite falling markets and its impact on wider sentiment in the second half. The revenue margin decreased to 87 basis points as we saw a higher proportion of flows into our lower margin products. Expenses rose 9% to $126 million, reflecting higher staff costs and new hires to support our growth strategy. As a result, adjusted operating profit decreased 8% to 22 million, and the operating margin decreased to 15%. Over the year, we continued to attract client assets, generating net inflows of 5%, despite volatile market conditions. Managed assets decreased 2% to $15.3 billion as negative market movements more than offset net inflows. Total client assets were down 3% to $16.6 billion. Now turning to winter flood where cyclicality in the trading business negatively impacted performance. Income was down 48% to £95 million, reflecting a market-wide slowdown in trading activity and a change in the mix of trading volumes, which has been exacerbated by falling markets. WBS delivered another strong performance, with income up 12% to £10 million. Expenses reduced significantly by 33% to 81 million, reflecting lower variable compensation following reduced activity. And as a result, operating profit declined 77% to 14 million, following the exceptional highs of the prior year. We also navigated the market volatility well, benefiting from the expertise of traders and their strong focus on risk management, which resulted in eight loss days for the year, seven of which were in the second half. Building on this market volatility, we saw the AIM index down 24% this year and the worst period for US stocks in more than 50 years. This exacerbated the decline in monthly operating income seen over the last year, which was also driven in part by the market-wide slowdown in retail trading activity. Trading volumes have reduced since the highs experienced during the pandemic, but remain ahead of pre-COVID levels. However, total bargains in our higher margin markets of AIM and small cap remained down significantly on the prior year, reflecting the change in mix in our trading volumes. Nevertheless, Winterflood is well placed to continue trading profitably and take advantage of returning investor appetite. Moving now on to our balance sheet, we maintained a strong balance sheet and continued to adopt our prudent approach to managing financial resources. Our total funding increased to £11.6 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 21 months ahead of the loan book at 17 months. We manage liquidity conservatively with our liquidity coverage ratio at 924%. We had 1.9 billion of treasury assets at the 31st of July, with the majority held with the Bank of England. Our established presence across wholesale markets, along with our mix of retail and non-retail deposits, supports our diverse funding base. And our credit ratings remain strong, helping support our ongoing issuance plans. We reduced our cost of funds down around 10 basis points on last year, but an increase on the half-year position as the cost of customer deposits has increased. Our deposit platform continues to support the growth and diversification of our funding base. We have grown retail deposits by 16% year-on-year and now have approximately $350 million in fixed-rate ISAs. Looking now at our strong capital position where we have a significant headroom above the minimum requirements. Our transitional CET1 capital ratio was 14.6% down from 15.8% at the 31st of July 2021. The movement mainly reflected a 75 basis point reduction relating to regulatory impacts and an increase in RWAs due to loan book growth. and this was partly offset by retained profit. Our leverage ratio remains strong at 12%, and following the submission of our initial IRB application in December 2020, we have transitioned to phase two of the process. The next phase commences in October, although the timing remains under the direction of the PRA. And finally, turning to our capital framework. The prudent management of our financial resources is a core part of our business model. Our primary objective is to deploy capital and to support disciplined loan book growth in banking and to make the most of strategic growth opportunities. The Board remains committed to our dividend policy, which aims to provide sustainable dividend growth year on year while maintaining a prudent level of dividend cover. Further capital distributions to shareholders will be considered depending on future opportunities. We are considering the further optimisation of our capital structure, including the issuance of debt capital market securities, if appropriate, and are targeting a CET1 capital ratio range of 12% to 13% over the medium term. However, in the short term, we would expect to operate above this target range in light of the heightened macroeconomic uncertainty and potential growth opportunities available to us. So thank you, and I will now hand back over to Adrian.

Thank you, Mike. Our proven and resilient business model differentiates us and puts us in a very strong position 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. We have a distinctive culture at Close Brothers, a relentless customer focus and long-term approach to everything we do are embedded throughout our organisation. And I truly believe that this is one of the most important strengths of our model. Once again, these strengths have supported our solid performance against the backdrop of continued market uncertainty. The proposed full-year dividend of 66p marks a return to the pre-pandemic level. We see it as essential to invest through the cycle, to protect our model and enhance its strengths, and we're seeing our multi-year investment programmes deliver tangible benefits across the organisation. We view these programmes through two lenses. First, those focused on maximising our income generation. For example, in motor finance, our investment in digital and technology has allowed us to make the most of opportunities in the second-hand car market. We've launched a unique proposition in partnership with Autotrader and have developed APIs to provide our finance offering at various points of the customer journey. Our asset finance transformation programme enabled us to build, test and launch our Seavills portal within 10 days. And we're developing a new customer portal. In asset management, our improved client portal and mobile app have enhanced client experience, driving a substantial reduction in the amount of paper we use. Similarly, our customer deposit platform has enabled us to broaden our savings product offering, driving significant growth in our retail deposits and supporting lower cost of funds, whilst also delivering excellent service for our customers. Our second investment lens focuses on resilience and efficiency. In asset management, we've automated a number of key processes, improving capacity and scalability whilst also reducing risk. In asset finance, we're developing a solution which enables integration directly into service providers, such as credit reference agencies. Our investment in IRB will help further enhance our credit risk management and governance, and will optimise our capital efficiency, helping to provide strategic flexibility in the longer term. Finally, our investments in cyber and data centres are part of a programme to continue to enhance our business and operational resilience. We remain focused on maximising discipline and growth in our existing and adjacent markets. This year, we conducted a further review of potential growth opportunities and have a strong pipeline of identified target areas that are aligned and fit well with our business model. In banking, we recognise the significant opportunity in broadening our sustainable finance offering as the UK heads towards a net zero carbon economy, building on the success of the renewables finance team we established in 2014. In particular, we're seeing growth across a range of battery electric vehicles, predominantly through our commercial business, as the UK's economy moves to electrify all forms of transport. We've set ourselves an initial green finance ambition to provide a billion pounds of funding for battery electric vehicles over the next five years. we're exploring a number of incremental and adjacent growth opportunities across our banking businesses. For example, in property, we're piloting a specialist buy-to-let extension to our existing property bridging finance customers, and have extended our sector coverage in asset finance with the addition of specialist materials handling and agricultural equipment teams. In invoice finance, we continue to grow in the asset-based lending space, including identifying syndication opportunities and partnering with other lenders. In asset management, we're well aligned with the long-term trends in the wealth management space and will continue to invest to support its growth potential. We remain committed to building on our excellent track record of increasing client assets organically through our successful hiring strategy as well as through infill acquisitions. We also see significant growth potential in WBS, a business built on our award-winning and highly scalable proprietary technology. We have a solid pipeline of clients to support continued growth in income and assets under administration in this business. Our responsibility is fundamental to our purpose, strategy and culture. with an important role to play in helping people and businesses transition to a lower carbon future. And I'm particularly pleased with the significant progress we've made this year in developing our climate strategy. We've carried out a comprehensive assessment of our indirect scope three emissions across all categories of operational emissions, as well as an initial assessment of financed emissions, focusing on our loan book. As highlighted previously, we're supportive of the goals of the Paris Agreement to achieve net zero by 2050, and we've set ourselves ambitious targets for our operational emissions. We're now setting ourselves a wider and long-term ambition to align our operational attributable greenhouse gas emissions from our lending and investment portfolios with pathways to net zero by 2050. I'm pleased to say that we've recently joined 116 banks globally as a signatory to the Net Zero Banking Alliance. We've also made excellent progress in CBAM. Having recently become a signatory to the UK Stewardship Code, CBAM will also be making a commitment to join the Net Zero Asset Managers Initiative soon. I'll now take you through an update on each of our banking businesses and how they're maximising current market opportunities. We've achieved industry-leading growth rates in both asset and invoice finance, naturally at our price point and underwriting standards. I'm pleased to say that our asset finance business recently won the annual Asset Finance Connect Award for the strongest loan book growth in one year. In addition, our invoice finance business won a Business Money Facts Award for the ninth consecutive year. In asset finance, we continue to see strong new business volumes, particularly in transport, broker, contract hire and energy. Our asset finance business is well positioned to capitalise on continued demand for asset finance. We've recently expanded our coverage with the hiring of expert agricultural and materials handling teams and are increasing our focus on financing green and transition assets, such as the battery energy storage system pictured on this slide. In invoice finance, we've seen high sales volumes and improved utilisation, with SME customer numbers increasing, supporting strong loan book growth in the core invoice finance business, as well as record profit years delivered by our Irish commercial finance business and brewery rentals. Invoice finance utilisation has improved, but remains slightly below those levels seen prior to COVID-19. We expect growth in this business to closely follow economic conditions. In motor finance, high new business volumes have continued, reflecting ongoing demand in the used car market, as well as the benefits from our investment in the sales capability. The motor finance transformation programme has enabled us to broaden our offering, as I mentioned previously. Our award-winning four core insights proposition provides dealers with real-time data and market insights in partnership with Autotrader. and we've developed APIs that connect us with strategic partners, including Ivendi and Autotrader, so that we can provide our finance offering at various points in the customer's journey. We also continue to explore opportunities for growth through the shift to alternatively fuelled vehicles, as they've become more prevalent over time, although penetration of AFEs currently remains low in the second-hand car market. In premium finance, we've seen lower demand for the funding of insurance policies from consumers, although new business volumes have been strong from our commercial customers. We've launched new insight tools in the premium business, which have enhanced our offering for brokers and helped support their decision making. We expect demand for the funding for insurance policies to increase given the current macroeconomic environment. In property, the UK market remains buoyant with strong house sales volumes leading to high repayments by our customers. Despite strong new business levels, drawdowns were more than offset by high levels of repayments. Our undrawn pipeline is strong at over a billion pounds and we've continued to see good demand in the regions outside of London and the South East. We've made good progress building out our bridging finance offering and have partnered with Travis Perkins to establish a facility allowing SMEs to access supplies and materials directly. And we're also piloting a specialist buy-to-let extension for our existing property bridging finance customers, which is a natural evolution of our expertise in the property finance space and well aligned with our banking business model and risk appetite. Winterflood continues to diversify its revenue streams, balancing the volatility seen in the trading business. WBS, our in-house developed business, has delivered another strong performance, generating £10.2 million of income and growing its assets under administration to £7.2 billion, with impressive net inflows of £1.3 billion in the year. Our award-winning proprietary technology is highly scalable and we see significant growth potential in WBS. We have a solid pipeline of clients expected to increase assets under administration to in excess of £10 billion in the 2023 financial year. I'd also like to welcome Bradley Dyer as our recently appointed Chief Executive of Winterflood. Bradley joined Winterflood in 2004, is highly experienced and has outstanding knowledge of the business. He's well placed to lead Winterflood in the next phase of its growth and development. I'd like to also thank Phil Yarrow for his significant contribution to the Group and Winterflood following his decision to retire after 22 years at Winterflood. Close Brothers Asset Management is an example of the high-quality expertise of our people and their specialist fields, which underpins our success in wealth management. We see significant potential to continue CBAM's growth development, which further supports the Group's resilience and growth over the longer term. I'd now like to introduce you to Eddie Reynolds, CBAM's chief executive. Eddie took over the leadership of our asset management division from Martin Andrew in March and brings with him outstanding experience and knowledge to lead our talented team at CBAM. He'll now take you through how we're planning to build on the strong track record of growth of our wealth management business. Eddie.