Close Brothers learns ‘expensive lesson’ from Novitas acquisition

Firm recovered in Q3 after its failed lending arm had caused profits to plummet 90% in first half

Close Brothers CEO Adrian Sainsbury

Close Brothers Group reported an ‘upbeat’ third quarter as the firm aims to recover from a poor first half.

For the quarter to the end of April, the firm’s loan book increased 2.0% to £9.2bn. While no new update was given on Novitas, the merchant banking group’s failed lending arm, the firm said it believes the £114.6m impairment charges set aside in H1 “adequately reflect” the remaining risk of credit losses for the Novitas loan book.

The provision set aside to cover loans handed out by Novitas led to a 90% drop in adjusted operating profit for the six months to the end of January 2023.

Adrian Sainsbury (pictured), Close Brothers’ chief executive officer, said: “We performed well in the third quarter, with loan book growth accelerating, a strong net interest margin and stable credit performance in banking. The asset management division delivered increased net inflows, although trading activity remained subdued in Winterflood.

“We are seeing good demand in our banking business and the consistent application of our model, combined with our strong financial position, enables us to continue supporting our customers and clients. Following a difficult first half, we are well placed to make the most of opportunities in the current environment.”

See also: Novitas a ‘weeping sore’ as Close Brothers bleeds profits

Retail investor appetite restrained

The firm’s asset management arm reported annualised net inflows of 9%, up from 6% in the first half, while assets under management ticked up to £16.1bn from £15.7bn.

However, the firm said cyclical trends continued to hinder Winterflood’s performance, with appetite among retail investors remaining restrained.

Steve Clayton, head of equity funds at Hargreaves Lansdown, said: “We hold Close Brothers in our two HL Select UK funds because its core businesses are dependable, growing cash generators capable of supporting strong dividend flows.

“But it has not been an easy time of late; Novitas was a bad acquisition and Close Brothers have learned expensive lessons along the way.

“Today’s update is the first in a while not to bring new bad news from Novitas and the market may well be relieved. The core banking operations are in rude health and Close Brothers’ balance sheet has long been the envy of many other bankers. Their assets are strongly collateralised, earn rich margins and their liquidity is excellent.”

Clayton added: “It is a shame that Winterflood is still under a cloud, but it remains a fundamentally profitable business, with no loss days in the quarter. The trouble is that each profitable day is not very profitable, leaving divisional earnings stuck at relatively low levels.

“On balance though, the overall message from Close Brothers today is probably the most upbeat for a while. The bad news on UK inflation this morning may put the wider market under pressure, so we may not see too many signs of relief in Close Brothers shares today, even if the shares have edged up 1% in early trading.

“But hopefully the group have now put some of their problems behind them, which could allow the underlying progress in the core business to show through more clearly in the months ahead.”

See also: Close Brothers hires Investec Wealth investment manager

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