TIDMCBG
RNS Number : 3314N
Close Brothers Group PLC
20 January 2023
This announcement contains inside information
Press Release
Scheduled Trading Update and Update on Novitas Loans
-------------------------------------------------------
20 January 2023
Embargoed for release until 7.00 am on 20 January 2023.
Close Brothers Group plc ("the group" or "Close Brothers") today
issues its scheduled pre-close trading update ahead of its 2023
half year end, as well as an update in respect of Novitas Loans
("Novitas"). Close Brothers will release its half year results for
the six months ending 31 January 2023 on 14 March 2023.
All statements in this release relate to the five months to 31
December 2022 ("the period") unless otherwise stated.
Adrian Sainsbury, Chief Executive Officer
"We have delivered a resilient performance so far this financial
year, despite the uncertain market backdrop. We saw good demand and
strong margins in Banking and delivered healthy net inflows in
CBAM, though trading activity remained subdued at Winterflood.
While our underlying credit performance remains strong, as we
accelerate our efforts to resolve the issues surrounding the
Novitas loan book, we will be increasing further provisions in the
H1 2023 financial statements to a level that will adequately cover
the remaining risk of credit losses for the current Novitas loan
book. The financial strength of the group leaves us well placed to
absorb the anticipated additional provisions and to continue to
deliver on our long-term track record of disciplined growth and
returns to shareholders".
Performance in the five months to 31 December 2022
We have maintained our strong capital, funding and liquidity
position, in line with our prudent and conservative approach. Our
Common Equity Tier 1 ("CET1") ratio was 14.4% at 31 December 2022
(31 July 2022: 14.6%), significantly above the applicable minimum
regulatory requirement of 8.5%(1) and also above the group's CET1
capital ratio target range of 12-13%.
In Banking , the loan book increased 1.5% in the period to
GBP9.23 billion (31 July 2022: GBP9.10 billion)(2) as we have seen
a pick-up in overall demand since the Q1 2023 trading update. This
was primarily driven by continued demand in the Commercial
businesses, as well as an increase in the Premium and Property
Finance books, partly offset by a moderation in business volumes in
Motor Finance compared to the prior financial year.
The annualised year-to-date net interest margin remained strong,
as we continued to focus on our pricing discipline in the higher
interest rate environment.
Our focus on rigorous management of costs remains unchanged,
whilst we continue to be mindful of inflationary pressures.
Excluding Novitas, the annualised year-to-date bad debt ratio
increased to 1.1% (FY 2022: 0.5%, Q1 2023: 1.0%), primarily
reflecting the recognition of further provisions to take into
account worsening macroeconomic variables and outlook(3) .
Including Novitas, the annualised year-to-date bad debt ratio
increased to 1.7% (FY 2022: 1.2%, Q1 2023: 1.2%), reflecting an
additional GBP24.8 million provision. The group anticipates the
recognition of further provisions against this loan book will be
required in the H1 2023 financial statements, as set out in the
separate update on Novitas below.
Close Brothers Asset Management ("CBAM") has continued to
attract client assets and delivered year-to-date annualised net
inflows of 6% (FY 2022: 5%), despite the impact of challenging
market conditions on investor sentiment. In the period, managed
assets decreased to GBP15.2 billion (31 July 2022: GBP15.3 billion)
and total client assets decreased to GBP16.3 billion (31 July 2022:
GBP16.6 billion), reflecting negative market movements.
As highlighted at the Q1 2023 trading update, Winterflood's
performance has been adversely impacted by the continued
market-wide slowdown in trading activity in higher margin sectors.
As a result, operating profit in the period was GBP1.7 million.
Notwithstanding the challenging trading conditions in the period,
the team's experience and focus on managing risk resulted in only
one loss day.
Update on Novitas Loans
We acquired Novitas Loans, a provider of finance for the legal
sector, in 2017. As previously announced, following a strategic
review, 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.
Since that time, the Novitas loan book has been in run-off, and
the business has continued to work with solicitors and insurers,
with a focus on supporting existing customers and managing the
existing book to ensure good customer outcomes, where it is within
Novitas' ability to do so. The group has been reviewing its
assumptions for the case failure and recovery rates in this
business to reflect experienced credit performance and ongoing
dialogue with customers' insurers.
The group has initiated formal legal action against one of the
After the Event ("ATE") insurers regarding the potential
recoverability of funds in relation to failed cases and is
considering its position in respect of other insurers. As a result,
an increased provision to reflect the expectation of a longer time
frame to recovery for related loans was included in the GBP24.8
million of provisions taken in the first five months of the 2023
financial year.
In addition, Novitas is reviewing its options with respect to
certain cases being funded which now have limited prospects of
successfully progressing through the courts. Subject to the outcome
of this review, the group anticipates that it will recognise an
additional provision in the H1 2023 financial statements against
the Novitas loan book of up to GBP90 million(4) . The higher end of
this range assumes a material increase in the Probability of
Default ("PD") and Loss Given Default ("LGD") assumptions and that
no further interest is receivable on the relevant loans. We expect
net income related to Novitas will reduce from c.GBP36 million in
FY 2022 to c.GBP8 million by FY 2024. This will be partially
mitigated by lower impairment charges in future years. These
assumptions will be reviewed as part of the group's half year
results process.
The impact of the anticipated increased provision would be
equivalent to a reduction of up to c.80bps in the CET1 capital
ratio on a pro-forma basis at 31 December 2022. The financial
strength of the group leaves us well placed to absorb this and to
continue to deliver on our long-term track record of disciplined
growth and returns to shareholders. Despite the additional
anticipated charge in relation to Novitas, we remain committed to
paying a progressive and sustainable dividend, in line with the
group's dividend policy.
While we will continue to review provisioning levels in light of
future developments, including the experienced credit performance
of the book and the outcome of the group's initiated legal action,
we believe the anticipated additional provisions to be recognised
in H1 2023 will adequately cover the remaining risk of credit
losses for the current Novitas loan book. The group remains focused
on maximising the recovery of remaining loan balances, either
through successful outcome of cases or recourse to the customers'
ATE insurers, whilst complying with its regulatory obligations and
always focusing on ensuring good customer outcomes.
The group will provide a detailed update at its half year
results on 14 March 2023.
Outlook
We are confident that our proven and resilient model leaves us
well positioned to navigate the economic uncertainty, as we
continue supporting our customers and clients and delivering on our
long track record of profitability and disciplined growth.
Footnotes
1 The group's capital ratios are presented on a transitional
basis after the application of IFRS 9 transitional arrangements
which allows banks to add back to their capital base a proportion
of the IFRS 9 impairment charges during the transitional period.
Without their application, the CET1 capital ratio would be 13.9%
(31 July 2022: 13.8%). The applicable minimum regulatory
requirement, excluding any applicable PRA buffer, was 8.5% at 31
December 2022.
2 The loan book is presented including operating lease
assets.
3 At 31 December 2022, there was a 32.5% weighting to the
baseline scenario, 30.0% to the upside and 37.5% to the downside
scenarios (unchanged from 31 July 2022). Moody's December
unemployment forecast for 2023 under the baseline scenario is 4.2%,
3.8% under the upside scenario and ranges between 4.6% and 6.0% in
the downside scenarios. Moody's December inflation forecast for
2023 under the baseline scenario is 7.3%, 6.9% for the upside
scenario and ranges between 5.8% and 2.9% in the downside
scenarios. Moody's December forecast for the Bank of England base
rate for 2023 is 4.4% in the baseline scenario, 4.3% under the
upside scenario and ranges from 4.8% to 5.4% in the downside
scenarios.
4 At 31 July 2022, Novitas had a net loan book of GBP159.4
million, net of an aggregate impairment provision of GBP113.3
million, representing coverage of 42% across the book as a whole.
Year-to-date, GBP24.8 million of impairment provision charges were
recognised in relation to the Novitas loan book. Assuming the
anticipated additional impairment provision of up to c.GBP90
million is recognised in the group's H1 2023 financial statements,
this would result in an aggregate impairment provision, net of
write offs, of up to GBP183 million. On a pro-forma basis at 31
December 2022, this would represent a coverage of up to c.75% with
a net loan book of c.GBP60 million.
Inside Information
This announcement contains inside information for the purposes
of Article 7 of the Market Abuse Regulation (EU) 596/2014 as it
forms part of UK domestic law by virtue of the European Union
(Withdrawal) Act 2018. For the purposes of Article 2 of the UK
version of the Commission Implementing Regulation (EU) 2016/1055,
this announcement is made by Penny Thomas, Company Secretary for
Close Brothers Group plc.
Enquiries
Sophie Gillingham Close Brothers Group plc 020 3857 6574
Camila Sugimura Close Brothers Group plc 020 3857 6577
Kimberley Taylor Close Brothers Group plc 020 3857 6233
Irene Galvan Close Brothers Group plc 020 3857 6217
Sam Cartwright Maitland 07827 254561
About Close Brothers
Close Brothers is a leading UK merchant banking group providing
lending, deposit taking, wealth management services and securities
trading. We employ approximately 4,000 people, principally in the
United Kingdom and Ireland. Close Brothers Group plc is listed on
the London Stock Exchange and is a member of the FTSE 250.
Cautionary Statement
Certain statements included within this announcement may
constitute "forward-looking statements" in respect of the group's
operations, performance, prospects and/or financial condition.
Forward-looking statements are sometimes, but not always,
identified by their use of a date in the future or such words as
"anticipates", "aims", "due", "could", "may", "will", "should",
"expects", "believes", "intends", "plans", "potential", "targets",
"goal" or "estimates". By their nature, forward-looking statements
involve a number of risks, uncertainties and assumptions and actual
results or events may differ materially from those expressed or
implied by those statements. Accordingly, no assurance can be given
that any particular expectation will be met and reliance should not
be placed on any forward-looking statement. Additionally,
forward-looking statements regarding past trends or activities
should not be taken as a representation that such trends or
activities will continue in the future. Except as may be required
by law or regulation, no responsibility or obligation is accepted
to update or revise any forward-looking statement resulting from
new information, future events or otherwise. Nothing in this
announcement should be construed as a profit forecast. This
announcement does not constitute or form part of any offer or
invitation to sell, or any solicitation of any offer to subscribe
for or purchase any shares or other securities in the company or
any of its group members, nor does it constitute a recommendation
regarding the shares or other securities of the company or any of
its group members. Past performance cannot be relied upon as a
guide to future performance and persons needing advice should
consult an independent financial adviser or other professional.
Statements in this announcement reflect the knowledge and
information available at the time of its preparation. Liability
arising from anything in this announcement shall be governed by
English law. Nothing in this announcement shall exclude any
liability under applicable laws that cannot be excluded in
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