TIDMCBG
RNS Number : 6863N
Close Brothers Group PLC
22 May 2020
Scheduled Trading Update
-------------------------
22 May 2020
Close Brothers Group plc ("the group" or "Close Brothers") today
issues its trading update relating to the third quarter from 1
February 2020 to 30 April 2020 ("the quarter") and the impact of
Covid-19 on its businesses and operations.
Highlights
Q3 2020 * Close Brothers' Q3 2020 performance reflects the
performance forward-looking recognition of impairment charges
under IFRS 9 as at 30 April to incorporate the impact
of Covid-19, partially offset by a strong performance
in Winterflood
* In Banking, the loan book reduced by 1.2% to GBP7.53
billion in the third quarter (31 January 2020:
GBP7.62 billion) and the net interest margin
decreased slightly to 7.7% year-to-date (H1 2020:
7.8%), reflecting the impact of Covid-19 on new
business levels and lower fee income, particularly in
April
* The bad debt charge was GBP86.7 million in the third
quarter (H1 2020: GBP36.7 million), with a bad debt
ratio of 2.1% year-to-date (H1 2020: 0.9%),
reflecting the application of expert judgement to
determine the appropriate staging of the loan
portfolio, to the incorporation of updated
macroeconomic scenario assumptions, and to the review
of provision coverage at the individual portfolio
level
* Asset Management continued to achieve good annualised
net inflows of 10% year-to-date (H1 2020: 12%), while
managed assets were impacted by negative market
movements, reducing to GBP11.8 billion (31 January
2020: GBP12.7 billion)
* Winterflood experienced a substantial increase in
trading volumes since the COVID-19 outbreak recording
third quarter daily average volumes almost double
those in the first half
Strong * We have a resilient business model with diverse
financial businesses, a strong net interest margin and a
and operational predominantly secured and prudently underwritten loan
position book
* The group maintains a strong capital, funding and
liquidity position
* Our Common Equity Tier 1 capital ratio of 13.9% (31
January 2020: 13.4%) provides 580bps headroom above
the minimum requirement
* Strong operational resilience has allowed us to
successfully continue to operate effectively
-------------------------------------------------------------
Outlook * We have a long track record of navigating a range of
economic conditions, with a strong financial and
operational position, and we remain committed to
supporting our colleagues, customers and clients
throughout this challenging period
* While the effects of Covid-19 on the UK economic
outlook remain highly uncertain, we are confident
that our prudent and disciplined business model, and
the deep expertise of our people, leave us well
prepared to respond to the challenges and
opportunities ahead
-------------------------------------------------------------
Preben Prebensen, Chief Executive Officer
"Our purpose is to help the people and businesses of Britain
thrive over the long term, and I am pleased that in this
challenging period our colleagues have continued to focus on
helping our customers and clients and would like to thank them for
their dedicated service.
Our prudent and resilient business model has served us well in
challenging times over many years, and we have successfully adapted
to the unique circumstances we face in this environment and have
continued operating effectively. Our loan book is predominantly
secured and conservatively underwritten, with a deep expertise and
relationship driven approach present throughout our lending,
trading and investment management businesses. We have a strong
capital, funding and liquidity position and are well placed, both
operationally and financially, to navigate this rapidly evolving
environment.
While it remains too early to know the full impact that Covid-19
will have on the UK economy, we are confident that our tried and
tested business model and the deep experience of our people leave
us well prepared to respond to the challenges and opportunities
ahead, protect our colleagues, and continue supporting our
customers and clients."
COVID-19
While Covid-19 has had a significant impact upon consumers,
businesses and the economy, our strong operational resilience has
allowed the group to continue to operate effectively during this
time.
The safety and wellbeing of our colleagues is of the utmost
importance to us, and we have supported them through flexible
working arrangements, seeking regular feedback and making
adjustments so that they can conduct their roles safely. The vast
majority of our staff have successfully been set up to work from
home, and our robust systems and technology have enabled them to
continue to perform their roles with minimal disruption and to
serve our customers and clients effectively.
We have a long history of supporting individuals and SMEs across
the UK, and have introduced a range of forbearance and other
measures to support customers and clients who find themselves in
difficulty. Our Commercial and Property businesses account for the
vast majority of the value of our forborne loans, and we remain in
close contact with customers who have been granted forbearance to
discuss their position and tailor the most appropriate financing
solution for them. To maximise our assistance for small businesses
we are participating in the support schemes introduced by the UK
government and are accredited to lend under the Coronavirus
Business Interruption Loan Scheme(1) .
Strong capital, funding and liquidity
Close Brothers has entered this period of economic uncertainty
with a strong capital and liquidity position and is prudently
funded.
The group's Common Equity Tier 1 capital ratio increased by 50
bps to 13.9% in the third quarter (31 January 2020: 13.4%) and is
580bps above the current minimum regulatory requirement of 8.1%.
The impact of higher impairment charges was largely offset by the
capital add-back under transitional IFRS 9 arrangements with a
reduction in risk weighted assets, due to lower volume of new
loans, further contributing to an increase in the group's CET1
capital ratio. The leverage ratio remained very strong at 11.0% (31
January 2020: 11.3%).
Our conservative approach to funding is based on the principle
of "borrow long, lend short", with a spread of maturities over the
medium and longer term, comfortably ahead of a shorter average loan
book maturity. It is also prudent and diverse, drawing on a wide
range of wholesale and deposit markets. As at 30 April 2020, the
group's total funding was GBP10.0 billion (31 January 2020: GBP9.8
billion), with GBP5.7 billion (31 January 2020: GBP5.6 billion) of
customer deposits.
We have further increased our liquid assets in the period. As at
30 April 2020, the group had GBP1.5 billion of treasury assets (31
January 2020: GBP1.3 billion), of which over GBP1.2 billion (31
January 2020: GBP0.9 billion) was held with central banks. Our
strong liquidity position remained comfortably ahead of both our
internal risk appetite and regulatory requirements, with an average
liquidity coverage ratio in the first nine months of 754%.
Dividend
As previously announced on 2 April 2020, the Board decided to
cancel the payment of the 2020 interim dividend, recognising the
significant challenges currently faced by businesses and
individuals, and consistent with our purpose of helping the people
and businesses of Britain. The Board will consider the payment of a
full year dividend in respect of the financial year to 31 July 2020
in September, taking into account the group's performance and
prevailing conditions at the time.
At the time of the decision to cancel the 2020 interim dividend
payment the group also decided to make a GBP1 million donation to
NHS Charities Together, in support of the vital role NHS frontline
and support staff have in combating Covid-19, and to match fund
donations from employees to this charity. Additionally, the
Executive Directors, together with a number of Non-Executive
members of the Board and members of the Group Executive Committee,
have made the personal decision to donate an element of their
salary or fee to NHS Charities Together.
Group and divisional performance
The group's financial performance in the third quarter reflects
the impact of the forward-looking recognition of impairment charges
under IFRS 9 as at 30 April 2020 to incorporate the impact of
Covid-19, partially offset by a strong performance in
Winterflood.
In the Banking division, we have focused on supporting our
customers and continuing to lend under our consistent and prudent
credit terms. The loan book reduced slightly in the quarter,
decreasing 1.2% to GBP7.53 billion (31 January 2020: GBP7.62
billion) reflecting the impact of the pandemic on new business
levels, particularly in April.
The Commercial loan book experienced a slight decline overall,
reflecting modest new business levels in Asset Finance and
progressively lower utilisation levels in Invoice Finance. In
Retail, the UK lockdown has resulted in the temporary closure of
motor dealerships with a reduction in new business for Motor
Finance while dealers adapt to trading remotely. Premium Finance
continues to see solid demand for insurance finance, particularly
for commercial lines. Property has experienced fewer drawdowns on
lending facilities during the current reduction in construction
activity, but the pipeline for new developments remains robust.
We continue to focus on disciplined pricing, but lower activity
levels and fee income in April due to the impact of Covid-19
resulted in a slight reduction in the net interest margin to 7.7%
year-to-date (H1 2020: 7.8%).
While we continued to invest in our key strategic programmes to
protect, improve and extend our business model, given the current
conditions we are carefully reviewing the timing and prioritisation
of investment spend and continue to focus on cost discipline.
The bad debt charge mainly related to the forward-looking
recognition of impairment charges under IFRS 9 as at 30 April 2020
to incorporate the impact of Covid-19, resulting in an increased
charge of GBP86.7 million in the quarter (H1 2020: GBP36.7
million), with a bad debt ratio of 2.1% year-to-date (H1 2020:
0.9%).
This increase predominantly reflects the application of expert
judgement to determine the appropriate allocation of loan balances
between stages 1 and 2, to the incorporation of updated
macroeconomic scenario assumptions(2) , and to the review of
provision coverage at the individual portfolio level. Provisions
for expected credit losses increased in all businesses, with the
largest increase in Commercial.
The charge incurred in the period represents a forward-looking
estimate of credit losses under IFRS 9, based on information
available at 30 April 2020 and taking into account the expert
judgement of our businesses. We will continue to refine our
assumptions as revised economic forecasts become available and
visibility on the performance of the loan book evolves.
While there is considerable uncertainty on how the current
environment will impact credit losses across the market, we remain
confident in the quality of our loan book, which is predominantly
secured, prudently underwritten and diverse(3) , and supported by
the deep expertise of our people, many of whom have experience
through previous downturns.
The Asset Management division delivered a resilient performance
in the period and continued to achieve good new business levels
with an annualised net inflow rate of 10% year-to-date (H1 2020:
12%). Managed assets were impacted by negative market movements,
consistent with experience across the wealth management sector,
reducing to GBP11.8 billion at 30 April 2020 (31 January 2020:
GBP12.7 billion) and total client assets decreased to GBP13.0
billion (31 January 2020: GBP14.0 billion).
Winterflood has experienced a substantial increase in trading
volumes since the Covid-19 outbreak, recording third quarter
average daily volumes almost double those in the first half. The
strong performance highlights the expertise and experience of our
traders as they navigate extraordinary market movements. However,
as a daily trading business, performance will continue to reflect
the challenges and opportunities presented by the current market
environment.
Outlook
We have a long track record of navigating a range of economic
conditions, with a strong financial and operational position, and
we remain committed to supporting our colleagues, customers and
clients throughout this challenging period.
While the effects of Covid-19 on the UK economic outlook remain
highly uncertain, we are confident that our prudent and disciplined
business model, and the deep expertise of our people, leave us well
prepared to respond to the challenges and opportunities ahead.
Footnotes
(1 Close Brothers' participation in the UK Government support
schemes:) Our Invoice Finance, Asset Finance and Brewery Rentals
businesses are accredited to lend under the Coronavirus Business
Interruption Loan Scheme ("CBILS"). We have applied for
accreditation for Invoice Finance to lend under the Coronavirus
Large Business Interruption Loan Scheme ("CLBILS") for larger
companies and are reviewing the opportunity for each of our other
businesses. Our CBILS accredited businesses are eligible to utilise
the government's Bounce Back Loan scheme for small business loans,
and we have applied and await approval for accreditation to lend
within this scheme. We have not made use of the Coronavirus Job
Retention Scheme as none of our employees have been furloughed.
(2 Macro scenario and weightings:) Expected credit losses
reflect the application of macroeconomic scenarios and weightings,
updated in April to include substantially more conservative
economic scenarios from Moody's and an increase in weightings
toward downside scenarios (as at 30 April 2020 40% weighted to
baseline scenario and 60% to downside scenarios; previously 5%
upside, 40% baseline and 55% downside scenarios). Moody's GDP
forecast for Q2 2020 under the baseline scenario is -4.2% and
ranges between -9.3% and -14.4% in the downside scenarios. The
modelled impact of macroeconomic scenarios and their respective
weightings is overlaid with expert judgment in relation to stage
allocation and coverage ratios at the individual portfolio level,
incorporating our experience and knowledge of our customers, the
sectors in which they operate, and the assets which we finance.
These weightings will be reviewed as updated macroeconomic
forecasts become available.
(3 Sectoral concentration of the loan book as at 30 April 2020:)
The group's largest single sector exposure is to Residential
Property Development (c.20%) through its Property business. The
Property business is focused on residential developments and our
credit criteria are deliberately conservative to include no
pre-planning and vacant land and a maximum Loan-to-Value of 60% for
developments, with average loan size of GBP1.4 million. Transport
(excluding the Motor Finance business), Manufacturing and
Construction comprise c.10% each. Motor Finance (23%) and Premium
Personal Lines (7%) comprise exposure to consumers. Sector exposure
to Retail, Hospitality, Leisure, Air Transport, Oil and Gas, are
minimal.
Enquiries
Close Brothers Group
Sophie Gillingham plc 020 3857 6574
Close Brothers Group
Camila Sugimura plc 020 3857 6577
Close Brothers Group
Matt Bullivant plc 020 3857 6576
Andy Donald Maitland 07738 346 460
About Close Brothers
Close Brothers is a leading UK merchant banking group providing
lending, deposit taking, wealth management services and securities
trading. We employ over 3,000 people, principally in the UK. 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
accordance with such laws.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
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