Close Brothers leans on the tripod

  • Volatility Leads to 223% Increase in Business Line Operating Profits
  • CEO remains cautious about the outlook for credit losses

Close brothersThe decades-long track record of uninterrupted rising dividends (CBGs) may have come to an end last year, but with the help of its tripod-like business model, the group appears to have emerged from the pandemic on the front. of the stage in 2021.

Interim figures for the six months to January exceeded market expectations, thanks to an exceptional performance from the market maker division Winterflood Securities. The division, which provides execution services to brokers, wealth managers and large investors, saw a 223% increase in operating income to £ 34.2million, with fees doubling as a result of increased transaction volumes exceeding a 71% increase in overheads.

This translated into a 69.3% return on opening equity, outperforming the stable asset management division as a slight contraction in margins and initial advisory fees produced a still respectable yield of 32.5%.

Given the choice, however, managing director Adrian Sainsbury sees the best use of capital in growing Close’s loan portfolio. Despite further declines in home loans and high-end personal loans, the period ended with lending up 4.2% to £ 8.17 billion, largely thanks to the participation of the bank to the Coronavirus Business Interruption Loan Scheme (CBILS).

While this has led to some cannibalization of SME lending opportunities, government loan guarantees mean that the £ 730million of CBILS credit that Close has extended to date is largely risk-free.

That doesn’t mean the bank thinks the broader credit risks have eased, however. “We don’t think the challenges for SMEs and consumers have played out yet,” Sainsbury warned, as Close increased its depreciation charges over the period to £ 52.8million from £ 36.7m million pounds in the first half of FY2020. In turn, this increased provision coverage from 3 to 3.3 percent of outstanding loans, although the bad debt ratio declined significantly compared to last summer’s peak.

Close’s diverse model and industry-leading 7.5% net interest margin make comparisons with larger competitors difficult. At first glance, an 88 percent premium on tangible forward book value seems expensive, although this is broadly in line with the five-year average. During this period, the relative strength of the dividend also meant that the stocks generated a total return of 8.8% per year, higher than the FTSE All-Share.

Even though investors assume a moderation in business activity at Winterflood, the banking division’s 15.7% return on tangible equity in the first half of the year indicates that group-wide earnings growth is achievable. Peel Hunt analysts believe revisions to the 2021 consensus earnings forecast of 114p per share may soon follow. Buy.

Last seen IC: Buy, 993p, 22 Sep 2020

CLOSED BROTHERS (CBG)
ORDER PRICE: 1.617p MARKET VALUE: £ 2.44 billion
TO TOUCH: 1 616-1 618 UP TO 12 MONTHS: 1702p LOW: 849p
DIVIDEND RETURN: 3.6% P / E RATIO: 22
NET ASSET VALUE: 982p LEVERAGE 9.8
6 months on January 31 Total operating income (£ m) Profit before tax (£ m) Earnings per share (p) Dividend per share (p)
2020 420 124 63.0 nothing
2021 474 127 63.2 18.0
% change +13 +2 +0.3
Ex-div: March 25
Payment: April 28

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