Close Brothers Group plc

Good morning and welcome to the presentation of Close Brothers' full year 2023 results. I'll start with a brief reflection on our performance. Mike will then take us through our financials. I'll then come back to talk about our business and strategy. Afterwards, you can submit your questions either via the telephone line or during the webcast, which you can submit during the presentation or afterwards. We've had a challenging market backdrop. where mixed economic conditions in the UK have created substantial uncertainty for our consumer and SME customers. Our financial results were impacted by the provisions we took in relation to Novitas in the first half, resulting in a material reduction in operating profit. We're clearly disappointed with these developments and the impact they've had on our financial performance this year. However, we've seen good momentum in banking and CBAM in the second half, and we're encouraged with our good start to the 2024 financial year. and we're well-placed to move forward on the delivery of our strategy. In banking, we've been encouraged by the acceleration of our loan book in half two, with growth of 5%, or 8% excluding our businesses in runoff, with strong margins. We've accelerated our growth strategy in CBAM and attracted more clients, which led to strong net inflows of 9%, with a significant contribution from talented staff who joined the team. Woods Fullett's performance was impacted by a continued slowdown in trading activity, albeit with strong growth in WBS. We've maintained strong capital, funding and liquidity positions, with our CE2 on capital ratio of 13.3%, significantly ahead of our minimum regulatory requirements. And we're pleased to propose a final dividend of 45 pence, resulting in a full-year dividend of 67.5 pence. This reflects our underlying performance and our confidence in the group's outlook. We're confident that we've the right model to support our customers during these uncertain times by leveraging our long-term relationships, the deep expertise of our people, and our customer-centric approach. The consistency of our lending model gives us confidence in the quality of our loan book. We have a strong balance sheet, which stems from our prudent management of our financial resources, and the events impacting the global banking sector earlier this year have highlighted the benefits of our approach. We apply our business model consistently through the cycle. This means we're always there for our customers, even when others may pull back and have a long track record of delivering loan book growth. In turn, this allows us to deliver progressive and sustainable dividend growth. We're well positioned to build on the second half momentum and the good start to the 2024 financial year. I'll now hand over to Mike to talk us through the financials, and then I'll come back to talk about our business and strategy.

Thank you, Adrian, and good morning, everyone. As you can see, this year's headline numbers have been materially impacted by the provisions taken against Novitas. This was the primary driver of the reduction in adjusted operating profit to 114 million and the decline in adjusted earnings per share to 55.1 pence. Excluding Novitas, we performed well in the current environment. Since the first half, we've been encouraged by the positive momentum seen in the loan book with strong margins and stable credit performance. Income was broadly stable as 3% growth in the banking division offset reductions in both market-facing businesses. Costs increased 3% as higher staff costs and ongoing investment in banking and asset management more than offset lower variable costs in winter flood. And on a pre-provision basis, profit was down 6% to 318 million. We generated a return on tangible equity of 12%, excluding the impact of Novitas, which I'll refer to as the underlying basis throughout this presentation. And as Adrian mentioned, the board has proposed a 45 pence final dividend, taking the full year dividend up 2% on last year to 67.5 pence. Although the proposed level of dividend cover for 2023 is below our historical range, driven primarily by the adverse impact of the Novitas provisions on our profitability, the proposed dividend reflects our underlying performance and the Board's confidence in our outlook. We remain committed to our dividend policy, which aims to provide sustainable dividend growth year on year while maintaining a prudent level of dividend cover. Turning to the divisional performance. In banking, performance was significantly impacted by higher impairment charges in relation to Novitas, as well as forward-looking provisions reflecting the uncertain macroeconomic outlook. As a result, profit reduced 47% to 120 million. Profits were down in the three banking businesses, notwithstanding strong new business volumes. In asset management, we generated strong net inflows of 9%, although profit reduced 27% to 16 million, reflecting challenging market conditions and investment in accelerating our hiring strategy. Winterflood's performance was impacted by the continued market-wide slowdown in trading activity, particularly in high-margin sectors, with profit down 75% to £4 million. Moving to the banking division, although we have experienced a challenging market backdrop this year, we have maintained our commitment to lending through the cycle and retained our pricing discipline. We saw 3% growth in income to £714 million, reflecting good loan book growth and strong margin. The net interest margin decreased marginally to 7.7%, mainly reflecting the reduction in Novitas income. Costs rose by 7% to £390 million, reflecting salary increases and spend on progressing our strategic investment programmes. Pre-provisions, profits declined 2%. Impairment charges increased to £204 million, mainly driven by Novitas, which corresponds to a bad debt ratio of 2.2%. Overall, profit was down 47% to £120 million. Now, highlighting the key metrics from across the banking division on an underlying basis. We saw income growth of 6% as well as loan book growth of 6%. The net interest margin was strong at 7.6% as we maintained our pricing discipline. Costs grew 9% reflecting increased staff costs and investments in our strategic programmes. The bad debt ratio was 0.9% below our long-term average and pre-provisions AOP was up 2% to 314 million. Moving on to commercial, we saw income growth of 7% driven by good loan book growth of 8% with strong new business volumes. whilst the marginal decline in NIM reflected the timing lag in passing through higher rates to customers, partly offset by increased fees. Costs grew 12% from higher staff costs and investment spend on our asset transformation programme. The bad debt ratio increased to 0.5% to take into account the weaker external environment. And pre-provisions, AOP was up 1% to 143 million. Moving on to retail, where income was up 5%, reflecting growth in the UK motor book and our strong margin of 8.2% as we adhered to our model of pricing discipline. Costs rose 8% as we invested in the retail simplification programme and incurred higher staff costs. The bad debt ratio increased to 1.6%, reflecting the weaker macroeconomic outlook and increased arrears in motor. And pre-provision, profit was down 2% to $84 million. And finally in property, income grew 5%, reflecting strong loan book growth as well as higher fee income. With the NIM down marginally to 7.4%, reflecting higher cost of funds. Costs were stable as we maintained strict cost discipline. We also saw a rise in bad debt ratio to 1.1% to reflect the weaker environment, particularly projected lower house prices. And pre-provisions, profit was up 6% to 87 million. Moving on to the loan book, we saw 5% growth on a reported basis, and 8% when excluding the businesses in runoff, Novitas, and our Irish Motor Finance book. 7% of this growth was in the second half. Our commercial book grew 8% on an underlying basis, despite the impact of CBIL's lending running off, with asset finance up 5% and invoice and specialty finance up 16%. Our retail book grew 4% when excluding the Irish motor finance business, with the UK motor book up 3% and premium finance up 4%. And property delivered strong growth of 16%. We're encouraged by the acceleration seen in half two and expect to broadly sustain this growth momentum this year. Overall, 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. Turning now to our net interest margin. Our specialist relationship-driven model and disciplined approach to pricing have enabled us to maintain a strong net interest margin. On an underlying basis, we achieved a NIM of 7.6%, reflecting our pricing discipline on new lending and the optimisation of our liability mix and funding costs in the rising rate environment. While we expect cost of funds to increase further in the next financial year, we remain focused on prioritising our margin and are well positioned to maintain strong margins in FY24. Moving on to costs in the banking division. There was a 7% increase overall, reflecting both salary increases and continued spend on our investment programs. Business as usual costs rose 18 million with over half of the increase driven by higher staff costs. This reflected both inflation related salary rises as well as growth driven hires and was partly offset by lower performance link compensation due to the reduction in profit in the year. Investment costs also increased 11 million, driven by spend on our strategic growth initiatives and cost management programmes, with depreciation charges related to our investment projects rising 4 million. Looking forward, we expect our full year 24 cost base to increase by circa 8 to 10%. The main driver of this increase will be the higher average salary awards at the end of the 2023 financial year and a normalization of performance-linked compensation. This will also be driven by volume and activity-driven growth as we look to build momentum in the loan book growth seen in half two, as well as continued investment in our strategic cost management programs. which will be partly offset by efficiency savings coming through from our tactical and strategic cost initiatives. For full year 25, we expect cost growth to more closely align with income growth as we remain focused on achieving positive operating leverage over the medium term, with lower inflationary pressures projected and our investment spend expected to stabilise and further efficiency gains coming through. Delving further into our investment approach, which we see as critical to protect our business model, future-proof our income generation, and reduce costs. Firstly, we are investing to support income generation and growth. Our relationship-based model and focus on niche markets enables us to generate a consistently strong NIM through the cycle, whilst achieving high customer satisfaction scores. Our growth initiatives have made a significant contribution to loan book growth this year, and our multi-year investment programmes are delivering ongoing tangible benefits, with retail deposits up 80% since the implementation of our deposit platform, and the UK motor loan book growing 30% following the launch of our motor finance transformation programme. We're also investing to maintain operational resilience and regulatory compliance. We have made enhancements to our credit risk management framework as part of our preparations for IRB, and we've implemented a programme directly aligned to the requirements of the FCA's consumer duty, as well as continuing to strengthen our cyber and operational resilience. Finally, as I mentioned on the previous slide, we're also investing to generate operational efficiency and cost savings. with strategic cost management programmes in progress and further opportunities being evaluated. One such initiative is our technology transformation programme, which is focused on our strategic IT services. This will see us move to a single third-party provider and reduce costs through outsourcing and offshoring, as well as reducing the number of IT applications in our estates. Through these initiatives and our focus on cost discipline, we are creating capacity to accommodate growth, inflation and investment to support our high-touch model, whilst also reducing our cost base. Turning now to our credit performance. The bad debt ratio was 2.2% as we recognised 117 million of impairment charges in relation to Novitas, of which 115 were incurred in the first half. The underlying bad debt ratio of 0.9% was driven by forward-looking provisions to reflect weaker macroeconomic variables, as well as higher arrears in motor finance, which have stabilised since the first half. We continue to closely monitor the evolving impacts of rising inflation and cost of living on our customers, but have not seen a significant impact on credit performance at this stage. We remain confident in our loan book, which is predominantly secured or structurally protected, prudently underwritten and diverse. For FY24, we expect our bad debt ratio to remain below our long-term average of 1.2% based on current market conditions. Turning to asset management, managed assets increased 7% over the year to $16.4 billion, driven by strong net inflows, partly offset by negative market performance. Total client assets were up 5% to $17.3 billion, We delivered annualized net inflows of 9% with a strong contribution from new hires. Operating income decreased 2% to 145 million, reflecting the impact of difficult market conditions on client assets and a reduction in client activity. This was partially offset by an increase in investment management income, resulting from growth in AUM delivered by our bespoke investment manager hires. The revenue margin decreased to 84 basis points, primarily due to flows into our lower margin investment management and non-advised products. Costs increased 2% to 129 million, primarily reflecting inflationary-driven salary increases and the onboarding of new hires, as we have accelerated investment for future growth. As a result, profit decreased 27% to $16 million and the operating margin decreased to 11%. And now on to winter flood. Income was down 21% to $75 million, driven by lower trading revenue reflecting a market-wide slowdown in trading activity, particularly in our higher margin sectors. Over the year, average daily bargains decreased to 60,000, marginally above pre-pandemic levels, as macroeconomic uncertainty impacted retail trading activity. Nevertheless, we maintained our market-leading position. Diversification across trading sectors has also helped to mitigate the difficult market conditions with fixed income benefiting from volatility in bond markets. And Winterflood's business services grew significantly, with income up 45% and assets under administration increasing to 12.9 billion. Costs reduced by 11% to 72 million, reflecting lower variable staff costs. As a result, operating profit declined 75% to 4 million. Moving on to our balance sheet. where our prudent approach to managing financial resources served us well during the recent market dislocation. We maintained a strong balance sheet and increased our total funding to £12.4 billion, 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 16 months. We manage liquidity conservatively with our liquidity coverage ratio at over 1000%. We have 2.2 billion of treasury assets at the 31st of July, with the majority held with the Bank of England. We have a diverse funding base with an established presence across wholesale markets, along with our mix of retail and non-retail deposits. Although market rates increased materially, we were able to mitigate this in part through actions taken to optimise our liability mix, resulting in an average cost of funds of 3.2%. We successfully issued a £250 million senior unsecured bond out of our holding company earlier this year. And we increased our total deposit base to 7.7 billion, with 35% growth in retail deposits, which now make up 54% of all deposits. Our credit ratings remain strong, with Moody's rating Close Brothers Limited at AA3, helping to support our ongoing issuance plans. Turning now to our capital position. Our transitional CET1 capital ratio was 13.3%, down from 14.6% at 31 July 2022. The movement mainly reflects the impact of Novitas, as well as loan book growth and underlying profitability. We maintained headroom of 380 basis points above our minimum CET1 regulatory requirement of 9.5%. Our leverage ratio remains strong at 11.4%. And on IRB, we continue to engage with the regulator and have submitted additional documentation as part of the Phase 2 process, although the timing remains under the direction of the PRA. And finally, turning to our capital framework, which articulates how we are thinking about excess capital. We are targeting a CET1 capital ratio range of 12% to 13% over the medium term, which will allow us to maintain a buffer to minimum regulatory requirements while also retaining flexibility for growth. We remain encouraged by the available opportunities to deploy capital to deliver disciplined growth, which remains one of our key strategic priorities. 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 assessed based on future opportunities. We remain committed to further optimising our capital structure, including the issuance of debt capital market securities, if appropriate. Thank you, and I will now hand back over to Adrian.

Thanks, Mike. Despite the challenging market backdrop, the UK economy is still growing. However, uncertainty and challenges for SMEs firms persist, with interest rate rises and cost of funds remaining a key concern for many business owners. We recently published the Close Brothers Asset Finance Business Sentiment Index, which gives us interesting insights about our core customers' plans for the future. The survey shows that SME business confidence continues to recover, a continued reversal of last year's downward trend. Overall, the appetite to invest remains stable, with three-quarters of SME firms surveyed aiming to seek funding for investment in the next 12 months. Demand this year also remains robust, particularly in our commercial and property businesses, and we're encouraged to see cautious optimism slowly returning for UK SMEs. While sticking to our underwriting and pricing criteria, we continue to support customers in the current and certain economic environments and are consistently there when they need us the most. Our customers value that consistency, our specialism and excellent service, and we have a strong balance sheet to support them I firmly believe that we can thrive in this environment, which will create further opportunities for us to lean in and support consumers and SME businesses. We're well positioned to deliver our strategic priorities to protect, grow and sustain our valuable business model. And I'll now take you through the progress we've made this year. Looking ahead, by continuing to focus on disciplined growth, cost efficiency and capital optimisation, I'm confident that we can resume our long-term track record of earnings growth and returns. We're continuing to drive our strategic growth agenda, and I'm pleased to see a significant contribution from our growth initiatives this year. In banking, we remain excited about the opportunity to broaden our sustainable finance offering, as the UK heads towards a net zero carbon economy. At the start of full year 2023, we set an initial green finance ambition to provide a billion pounds of funding for battery electric vehicles by 2027. And we've lent over 164 million pounds in the first year. Our recently hired materials handling and agricultural equipment teams are executing deals and have built strong pipelines. We continue to grow in the asset based lending space and participated in our first syndication deal. Our newly hired team, which provides bespoke term loan structures for SMEs for growth and investment finance, closed their first deal this year. Our specialist buy-to-let extension pilot, with existing customers in our property business, has proven successful and wrote healthy levels of business during the year. We're delighted to have recently announced our agreement to acquire Bluestone Motor Finance, We see Ireland as a strategic market, and this acquisition provides a platform for us to build our Irish motor finance business. We're excited to be re-entering a market we understand well and where we've been successful in the past. In asset management, we accelerated our growth strategy and delivered net inflows of 9%, with a significant contribution from new hires. We also continue to build our pipeline of infill acquisitions to support long-term growth potential of the business. We continue to see significant growth potential in winter flood business services. Assets under administration reached £12.9 billion, exceeding our £10 billion target for this year. And with a strong pipeline, we expect to see WPS grow to AUA of over £20 billion by full year 2026. These are all examples of our relationships, expertise and relentless focus on customer service being utilised to deliver disciplined growth. and we'll continue to actively evaluate new potential opportunities that are aligned with our business model. I'll now give you a brief update on each of our businesses and provide some of the highlights of the year. In our commercial business, we lend directly via our expert sales team and indirectly to over 25,000 SMEs. We lend against a diverse range of assets and are specialists in refinancing second-hand assets. These include trucks, vans, excavators, machinery and building equipment, essential assets for small businesses. We also provide debt factoring, invoice discounting and asset-based lending, providing crucial working capital to 6,000 small businesses in our invoice finance business. We continue to see good demand this year, and loan book growth of 8% excluding NovusVas. This is despite the roll-off of CBILs and supported by the new growth initiatives I just covered. Average new business volumes were up 15% in the year. In asset finance, the loan book grew 5%, as we saw strong new business volumes, particularly from our contract hire and energy books, as well as good demand for our agricultural offerings. Despite the competitive market, we remained focused on pricing, actively choosing to pass through higher rates on new lending where appropriate. In invoice and speciality finance, we saw record new business volumes and higher utilisation levels in invoice finance, with good growth in our Irish business and continued progress in the ABL space. Excluding Novitas, the invoice and speciality finance loan book increased 16%. In our retail businesses, we lend to consumers and small businesses through our dealer partners and intermediary brokers across motor and premium finance. The second-hand car market remains in excellent shape. Our motor finance products support customers who tend to be in the low to middle income brackets. To these customers, their car is an essential and the second biggest commitment behind their rental mortgage. In premium finance, we provide a simple lending proposition that helps make insurance more affordable, allowing 2.6 million consumers and small businesses to pay in installments rather than through a single upfront payment. Our products can help customers with the continued inflationary pressures in the current environment. We were encouraged by the recovery in new business volumes since the first half, with average new business volumes up 4% year on year, excluding the Irish Motor Finance runoff book. In motor finance, we completed our transformation programme, which created better digital capabilities and a stronger proposition for dealers and customers, as well as enabling us to explore additional routes to market. This supported the growth scene in our UK business. Throughout the year, we prioritised our margins, with four rate rises passed on via our dealer partners. In premium finance, we continue to focus on our digital capabilities. to enhance our offering and to support brokers' decisioning. Following a decline in the premium loan book in the first half, we've seen an increase in new business volumes from individuals and larger premium sizes reflecting inflation, resulting in the premium finance loan book returning to growth. In property, we specialise in short-term residential development finance through property finance and also offer refurbishment and bridging loans through commercial acceptances. We operate in London, the South East and selected regional locations, lending to around 700 professional property developers. We focus on small to medium sized residential developments with an average unit price sold of around £600,000. This is the sweet spot in the market given the structural demand for family housing in the UK. This year has seen a slowdown across the UK property market with buyer sentiment impacted by rising interest rates. and we've seen a fall in house building levels and some contraction in house prices. Despite this, our property finance business performed well, with record drawdowns, growth in active customer numbers, and our pipeline remaining healthy at over £1 billion. We're also seeing good demand for the new offerings in property finance, such as our specialist buy-to-let proposition to existing bridging finance customers, and our enhanced loan-to-value product for select customers. We continue to focus on growing our regional loan book, which makes up over 50% of our portfolio. We've accelerated our efforts to grow CBAM. Our hiring strategy is proving successful, with new bespoke investment managers significantly contributing to the debt inflows of 9% achieved this year. We increased our rate of hiring, recruiting 15 new portfolio managers in a year, and opened new offices in Birmingham and Cheltenham We remain confident that our vertically integrated, multi-channel business model positions us well for the structural growth opportunity available to the wealth management industry. Our focus remains on providing excellent service, building on the strength of our client relationships while investing in new hires and building our pipeline of acquisitions to support the long-term growth potential of our business. While CBAM is sensitive to financial market conditions, we remain committed to driving growth in our business. Performance of winter flood reflected the continuation of challenging market conditions. Investors turned away from the higher margin AIM and small cap sectors, either to safer and better performing sectors such as fixed income and ETFs, or withdrew from the market completely as they await more certainty in the macroeconomic environment. This sentiment is inevitably led to fewer retail-driven trading situations and a fall in our volumes. Nevertheless, we've maintained our market-leading position and we're number one by volume traded in the year. We remain confident in the track record of our trading business and are well positioned to benefit when investor appetite returns. Winterflood has made good progress on the diversification of its revenue streams and is exploring growth opportunities to balance the cyclicality seen in the trading business. WBS, our in-house developed business, has continued its positive trajectory. AUA grew to £12.9 billion despite declines in equity markets, with net inflows increasing to £5.5 billion following the successful migration of custody assets from Fidelity International in the first quarter, resulting in WBS growing income by 45%. We're confident that WBS is well positioned for future growth. and expect AUA to grow to over 20 billion by full year 2026. While the risk off market sentiment continues to impact the number of IPOs coming to the market, our investment trust corporate business is well positioned to benefit from a recovery in capital market activity. We're also at the forefront of initiatives to simplify UK retail investor participation in capital markets and launch collaborations with Primary PID and JP Jenkins alongside our proprietary solution, Windsor Flood Retail Access Platform. We're well-placed for when the market activity returns and are exploring growth opportunities as they present themselves. We recognise the important role we play in enabling the transition to a low-carbon economy. We're supportive of the goals of the Paris Agreement and last year became signatories to the Net Zero Bank Alliance and Net Zero Asset Managers initiatives. We're making good initial progress, as you can see on the slide, and I look forward to sharing our initial immediate net zero targets and roadmaps for carbon intensive sectors in our loan book during the year. We also recognise the significant growth opportunities for green asset lending. As a specialist adaptable lender with deep understanding of our customers' needs, we can support our clients in their transition to new, cleaner technologies to meet their own sustainability targets. Our inclusion agenda remains very active, with a number of initiatives focused on diversity, inclusion and social mobility. In summary, We're making the most of opportunities and are encouraged by the momentum generated in banking and CBAM in the second half, which has continued into the start of the 2024 financial year. We're well positioned to maintain stable returns this year as we sustain growth momentum and pricing discipline with a resilient credit performance despite near-term cost pressure. Our strengths are our strong relationships, deep expertise and our commitment to excellent service. These strengths have been evidenced through many cycles and remain unchanged. I strongly believe that we have the right model to thrive in this environment. I'm confident in the opportunity it creates for us, and we're well-placed to resume our long-term track record of growth and returns. Thank you, and we'd now like to take any questions you may have. And we're going to start with some questions on the call.