Close Brothers’ profits dropped by 90% in the six months to 31 January 2023 as the group set aside a further £114.6m of impairment charges to cover loans from Novitas, the failed legal lending arm of the business.
Novitas, which Close Brothers acquired in 2017, provided finance to the legal sector before ceasing lending to new customers in July 2021.
Steve Clayton, head of equity funds at Hargreaves Lansdown, said what had been a relatively minor acquisition a few years ago has become a “weeping sore for the group”, with total provisions thus far amounting to £183m.
In all, operating profit before tax fell from £129m to less than £12m, with Novitas itself posting a loss of £105m.
Novitas’ performance overshadowed the output from other areas of the group, including Close Brothers Asset Management (CBAM).
Total managed assets grew 3% across the six months, to £15.7bn, driven by £474m of net inflows. The interim report added that ongoing uncertainty continued to impact investor sentiment, and flows were down a quarter on the equivalent period last year.
CBAM’s total client assets, which include advised and managed assets, were up 2% since 31 July, hitting £16.9bn. However, adjusted operating profit fell 41% to £8.6m as a fairly stable cost base was eclipsed by a reduction in income.
Winterflood, the group’s market-making business, also suffered saw a 73% reduction in operating profit, bringing in just £2.4m. Hargreaves Lansdown’s Clayton said the arm was struggling to rebuild profitability as the bonanza of lockdown has ebbed away.
Despite the group’s difficulties, Clayton said: “Close Brothers remains a strongly capitalised bank, with a Tier 1 equity ratio of 14%, far above regulatory requirements. Their asset management division grew well in the period and the loan book inched forward, with bad debts still at low levels.”
The group’s chief executive, Adrian Sainsbury (pictured), called the half year a challenging period, but said that though the Novitas performance was disappointing, the underlying business remained resilient.
Underlying dividend grew to 22.5p, which the report said was a reflection of the firm’s underlying performance, and the board’s confidence.
Clayton added: “Underlying progress in the group is clear and with the dividend growing still, the yield of 7% will be all that many investors need to stay on board.
“Capital gains could be on hold for a while though, as the group needs to finish the Novitas surgery and have a clearer economic outlook ahead for investors to really regain interest in the Close Brothers growth story.”
The group’s share price fell 7% to £9.45 in the first half hour of trading this morning, but recovered to £9.77 by midday.