Close Brothers Group plc

Ladies and gentlemen, welcome to the Close Brothers Group Half Year Results 2024 presentation. My name is Torben and I will be the operator for your call this morning. If you would like to ask a question during the question and answer session on today's call, you can do so by pressing star followed by one on your telephone keypad. We are now going live to the presentation room where you may hear silence or background noise until the call begins.

Good morning and welcome to the presentation of Close Brothers first half 2024 results. I'll start with a brief reflection on our performance in the first half. Mike will then cover our financials. I'll come back and talk about recent development, the FCA's announcement of the review into motor finance and also our strategy update. At the end we welcome your questions which you can submit either by the telephone conference line or over the webcast, either submitted during the presentation. Our businesses delivered around the first half. In banking, the loan book increased 4%, with discipline and improved credit performance. CBAN delivered net inflows of 9%, although winter floods performance remains affected by weakness in retail trading activity. we maintained our strong balance sheet and conservative approach to managing our financial resources, a long-standing priority for us. Our CE2 on capital ratio was 13%, significantly above our applicable requirements of 9.5%. Finally, the FCA's review of motor finance commissions is ongoing, with significant uncertainty arising for the industry and the group. At this very early stage, it would be premature to predict the outcome of this review or estimate the potential impact on the group. However, the Board recognizes the paramount importance of preparing for a range of outcomes from this review, and we're taking decisive actions to strengthen our capital position materially. We've identified management actions which combined could strengthen the Group CET1 capital by approximately $400 million by the end of the next financial year. I'll set these actions out during the presentation. While we're working through this period of uncertainty, we're confident that the group will emerge well positioned to take advantage of future opportunities. These steps are being taken whilst continuing to provide excellent service to all our customers and protect our valuable franchise. This is our key priority. I will come back to talk about the enduring strength of our model after Mike's presentation. I'll now hand over to Mike to talk through our financials, and I'll come back afterwards to update on our strategy and the motor finance review.

Thank you, Adrian, and good morning, everyone. Firstly, I'd like to run through the underlying performance highlights and draw out some key items that impact the year-on-year comparisons. In banking, the prior year income benefited from mark-to-market swaps and novitas, so excluding these items, we achieved income growth of 6%. We also saw higher costs in line with our previous guidance. We delivered loan book growth of 9% year-on-year with healthy demand across our businesses. Our NIM remains strong and broadly stable on an underlying basis. We also saw a reduction in impairment charges with an annualized bad debt ratio of 0.9%. Overall, the significant year-on-year increase in profit reflects the impact of Novitas-related impairment charges in the prior period. Turning to the income statement, our businesses delivered a resilient income performance with growth in both banking and asset management offset by a decline in winter flood and interest expense on the group bond. Expenses increased 12% from higher staff costs, as well as continued investment. On a pre-provision basis, profit was down 22% to $136 million. Impairment charges were $42 million, down significantly from the prior year, which included $115 million of Novitas-related charges. And as a result, adjusted operating profit increased materially to $94 million. In banking, profit was $112 million, with the increase with Novitas-related charges in the prior period, which generated strong annualized net inflows of 9%, although profit reduced to 6%. as investment in our hiring strategy more than offset income growth. Winterflood's performance reflected lower trading income and unfavorable market conditions, with an operating loss of 3 million. We also saw an increase in group net expenses to 21 million, primarily due to interest on the group's 250 million pound bond. As we announced in February, we took the difficult decision to not pay any dividends for this financial year as we further strengthen the group's capital position in light of the significant uncertainty arising from the FCA's review of the motor finance industry. Moving to the banking division, income grew modestly to $365 million, although excluding the benefits of Novitas and the swaps I previously called out, Income was up 6%, reflecting good loan book growth and strong margins. Expenses rose by 13% to $212 million, reflecting higher staff costs and spend on our strategic investment programs. Pre-provisions, profit declined 13% to $154 million. Impairment charges decreased to $42 million. remaining below our long-term average of 1.2%. Overall, adjusted operating profit increased to $112 million. Now, highlighting the key metrics from across the banking division, excluding Novitas. We saw income growth of 3% and year-on-year loan book growth of 9%, taking the loan book to $9.8 billion. The net interest margin was strong at 7.5%. Expenses grew 15% from increased staff costs and investment. The bad debt ratio was 0.8%. And profit was down 7% to $112 million. Moving on to commercial, income was down 3%, notwithstanding the loan book growth of 11% to $5 billion. As the NIM declined to 6.7%, as we sought to balance the repricing of new business written with our focus on maintaining support to our customers. Expenses grew 13% from higher staff costs and investment spend on our asset transformation program, which we completed in the period. The bad debt ratio was broadly stable at 0.5%, and AOP was down 29% to 51 million. Moving on to retail, where income was up 7%, reflecting year-on-year growth in the premium finance book, and our strong margin of 8.7% as we maintained our pricing discipline. Expenses rose 15%, driven by the handling of elevated complaint volumes in motor, as well as higher staff costs and the acquisition of Bluestone Motor Finance in Ireland. Our debt ratio reduced to 1.5%, reflecting an improvement in the macroeconomic outlook, and profit increased 29% to 19 million. And finally, in property, income grew 11%, reflecting strong loan book growth of 21% year-on-year to 1.8 billion, although the NIM decreased to 7.3%, reflecting lower fee yields. Expenses were up 22%, reflecting higher sales. ratio reduced to 0.6%, largely improved or profit was up 25 to 42 million. Moving on to the loan book, we saw 4% loan book in the first half on a basis. And 5% excluding the businesses in runs and our legacy our finance book a commercial percent and reached five billion despite the impact to be bills lending asset finance was a six percent particularly strong new beams in the least business global as we saw in the island. Contracted one to normal seasonality, despite the record levels in the first half. And property delivered 8% growth with strong drawdowns and a healthy new business pipeline. We continue to see good growth from our initiatives across the businesses, such as the recently hired teams in asset finance and our regional expansion in property. And looking forward, we expect to broadly sustain the underlying loan book growth in the second half of FY24. Turning now to our net interest margin, our specialist relationship-driven model and disciplined pricing have enabled us to maintain a strong net interest margin. As I've mentioned previously, the main drivers of the year-on-year reduction in NIM are the mark-to-market swaps, and Novitas, which benefited the prior year period. So whilst NIM reduced around 50 basis points to 7.5% on a reported basis, this was broadly stable at 7.6% on an underlying basis. In line with our model, we remain focused on pricing discipline, on new lending, and we benefited from optimizing our liability mix and funding costs in the higher rate environment. Looking forward, we remain well positioned to maintain a strong net interest margin, broadly aligned with the reported NIN in the first half. Moving on to costs in the banking division. Although expenses were up 13% year-on-year, on a consecutive hards basis, they increased only 4%. This was mainly due to the timing of investment spend. The overall increase reflected higher staff costs from inflation-related salary rises and new hires, as well as the investment spend in our strategic programs and cost-saving initiatives. Other increases came from volume and activity-driven growth and the acquisition of Bluestone Motor Finance. We also incurred costs related to the handling of heightened complaint volumes in Motor Finance. from our tactical and strategic cost initiatives. We expect the drivers of growth over the full year to be aligned to the categories previously outlined and will include 10 million of costs to most complaints. For all, we remain on track to deliver in line with the guidelines of 10% banking for the full year 24. And as noted previously, This guidance is net of costs related to Bluestone, which we expect to be approximately $7 million for the full year. We are redoubling our efforts to enhance cost efficiency in banking. We've already made good progress in our strategic development initiatives in the technology space. With our technology transformation program, which we initiated A part of this, we've already removed 83 IT applications. our head approximately with people. We have also mobilized for the cost of the initiative. There we go. So it impacts income. It's a reasonable capital base. With the aim of supporting the ongoing profitability of the business, protect or franchise. With the benefit of these additional measures, we will move to more income and cost growth in FY20, excluding any restructuring costs. and delivering positive operating leverage over the medium term. Turning now to our credit performance, the annualized bad debt ratio was 0.9% as we recognized 42 million of impairment charges, primarily reflecting the improved macroeconomic outlook, loan book growth, and the ongoing review of provisions and coverage. We continue to closely monitor the evolving impacts of 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. Over the second half of 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 8% in the first half to $17.7 billion, driven by strong net inflows, particularly from our bespoke investment managers and positive market performance. Total client assets were up 7% to $18.5 billion. Operating income also increased 7% to 76 million, driven by both positive net inflows and market movements, resulting in higher investment management income. And the revenue margin increased marginally to 84 basis points. Costs rose 12% to 70 million, reflecting inflation-driven salary increases and the recruitment of bespoke investment managers, which accounted for 5 million of costs. And so whilst the operating margin reduced to 8%, this would have been 15% when excluding the costs related to bespoke investment manager hiring. Overall, profit decreased 2 million to 6 million. Looking forward, we continue to target net inflows in the range of 6% to 10%, notwithstanding our move to selective hiring of bespoke investment managers. We expect our operating margin to increase from 2025 onwards towards a longer-term target of above 20%. And now on to Winterflood, where the challenging market environment continued to impact investor confidence. Income was down 12% to $34 million, with the decline in trading revenue more than offsetting growth in Winterflood's business services. And whilst we saw average daily bargains decrease to 52,000 in the first half, we've maintained our market-leading position in terms of volume traded. Winterblood Business Services with dealing and custodians saw good momentum and assets under administration increasing to $13 billion. we expect to benefit from annualized performance group in the second quarter. Looking assets by the 2020 managing we maintained a strong balance and increased our total funding and we lend short and we hold 2.2 billion of liquidity with our liquidity coverage ratio over 1,000%. Funding base is diverse, covering both wholesale markets and a mix of retail and non-retail deposits. We have continued to build and diversify our deposit base, with retail deposits up 16% in the first half, now around 60% of our total deposits. Our deposits are predominantly termed, with only 5% of deposits available on demand. And we have seen no significant changes to our deposit base since the end of January. Although our average cost of funds increased to 5.4% due to the higher base rate and deposit pricing, we took actions to optimize our liability mix and mitigate this pressure. Looking forward, we expect cost of funds to be nearing the peak of the current interest rate cycle. Close Brothers Limited continues to be rated AA3 by Moody's. Turning to our capital position, our CET1 capital ratio was 13%, with the reduction since the year end mainly driven by loan book growth offset by capital generation from profit. We maintained a headroom of circa 350 basis points above both our applicable CET1 and and total requirements of 9.5% and 13.4% respectively. It is worth highlighting that no foreseeable dividend on ordinary shares has been deducted from CET1 capital in line with our decision to not pay any dividends this financial year. While we start from a strong capital position, we are implementing a number of actions to further build capital strength in light of the FCA review which Adrian will cover shortly. In line with our strategy and capital management framework, we issued 200 million of additional Sphere 1 securities in November, optimizing our capital structure. Our leverage ratio increased to 12.7%. On BAL 3.1, we are waiting for further clarity on the potential removal of the SME supporting factor which is the main driver of the expected increase in risk-weighted assets of up to 10%. This update is due by 30 June 2024. Finally, on IRB, our application remains in Phase 2 of the process, and engagement with the regulator continues. In conclusion, we have seen a strong underlying business performance, and our liquidity and capital strength positions us well.