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We are discontinuing coverage of Close Brothers. Our final recommendation was Hold, with a target price of 356p.
Close Brothers Group plc
We view the Winterflood disposal as good news, and it lifts our target price from 327p to 356p. The potentially imminent Supreme Court ruling is the key news flow to come. We see a wide range of outcomes for Close, and our rating remains Hold.
These minor changes to our forecasts will likely be overshadowed by the imminent supreme court rulings on motor finance commissions. Our valuation scenarios are unchanged, with a wide range of outcomes. We retain our base case 327p target price and our rating remains Hold.
The supreme court ruling on motor finance commissions redress remains the main event for Close Brothers. Our valuation scenarios are little changed, hence we retain our 327p TP and Hold recommendation.
Close Brothers’ shares still appear optically cheap, but even ignoring the motor finance provision, underlying returns are depressed at c.7% ROE for FY25, well below the cost-of-equity. We retain our 327p target price and Hold recommendation.
It might be the day of a “trading update” but the share price remains about something else, the outcome of the musings of the Supreme Court. No-one has any predictive ability over that, and it is utterly dishonest to suggest otherwise. That leaves the share price adrift … until it is not. In the meantime the company is seeing weaker loan book growth keeping pressure on revenue estimates, mitigated only in part by cutting costs. Estimates nudge down again.
The extent of these downgrades was a surprise to us. We believe the shares appear optically cheap, but the upcoming Supreme Court ruling on Hopcraft (1-3 April) is a key unknown. There is a broad range of valuation outcomes for Close Brothers. We transfer coverage of the company, and reinstate our recommendation as Hold, with a target price of 327p.
Close Brothers Group^ (CBG, Buy at 284p) - Facing difficult choices
Close Brothers Group plc RS Group PLC
The 1H25 performance was in line with expectations but guidance suggests modest downgrades. The key upcoming event is the Supreme Court ruling on Hopcraft, Wrench and Johnson (hearings are scheduled for 1-3 April). We intend to update our estimates, TP and recommendation shortly.
Close may be cheap but Motor Finance is not the only issue to be addressed by the group: costs are coming down but are still too high; Winterflood’s profitability is impaired and its continued position in the group looks anachronistic; there is a question whether the Bank’s once strengths have been compromised by competition and the need to husband capital. The sector is not short of cheap alternatives: Vanquis as a recovery play; Paragon for sleep-at-night quality; IPF for compounding earnings growth without the spectre of UK regulatory risk.
Close Brothers Group^ (CBG, Buy at 345p) - Weak NIM guidance but additional cost savings identified
Whilst only an estimate at this point, the smaller-than-expected provision increases the likelihood that Close can avoid an equity raise or further dismemberment of its business. The shares trade at 0.4x P/TNAV and could rise significantly, in our view, if this provision estimate is accurate. We remain Under Review.
While the company has decided to put an estimated provision for motor finance (£165m) into its results, we are still no closer to being certain that this is the “right” level. Even if it is other issues remain: insurance premium finance, costs, Winterflood, indeed the very positioning of the Bank, remain outstanding issues. The share price will remain volatile, and our conclusion from a year ago that the shares are as much a career decision as an investment decision is unchanged.
With trading broadly in line, the share price will be governed by how current legal and regulatory uncertainties are resolved. We keep our recommendation and TP Under Review at this point.
The announcement creates further uncertainty for CBG, which is already dealing with a separate FCA investigation into motor finance discretionary commissions. In our view CBG will continue to trade at low valuation multiples until there is clarity over redress. We place our recommendation and TP Under Review.
We are increasingly convinced by Close’s capital strengthening measures but might gain more conviction when earnings downgrades end. Close is lowly valued but in our view could remain so pending FCA clarification. Hold.
***Correction - Close Brothers Group (CBG, Buy at 447p) *** - A low conviction BUY
Close Brothers Group^ (CBG, Buy at 447p) - A low conviction BUY
Close Brothers is clearly demonstrating its ability to boost capital ahead of the completion of the FCA review, which is the key issue given the <0.6x P/TNAV ratio and double-digit medium term ROTE potential. However, we believe near-term earnings expectations are likely to fall. Hold, TP 519p.
2024 results are close enough to estimates, but there had been a pre-close statement. The sale of CBAM raises capital to be husbanded ahead of an eventual outcome of the Motor Finance review, but that review is only one part of the issue: the ownership of Winterflood looks ever more an anachronism with CBAM gone; costs are finally being addressed but remain too high; Premium Finance returns are difficult to square with Consumer Duty; the Bank’s competitive position is being pressured by others with lower NIM ambitions. Uncertainty remains elevated, which the valuation fairly reflects. There is more upside in Vanquis (BUY, TP 75p).
Close Brothers Group^ (CBG, Buy at 528p) - Final results and disposal of Asset Management
Close Brothers Group^ (CBG, Buy at 539p) - CEO takes temporary leave of absence
Earnings momentum remains negative for now, and uncertainties surrounding FCA reviews persist. Once the latter clear, potential share price upside is significant in our view, but until then we remain at Hold. Our TP rises from 500p to 519p on rallying peer valuations.
Another statement; another issue in Motor; another downgrade. There are parts of the Q3 statement which are a bit better (CBAM and Winterflood are both performing more strongly in stronger markets) but in the Bank the tone on NIM, bad debts and costs is a touch softer. In addition the Motor book has thrown up a further issue which will cost “single-digit millions this year” before considering the still unquantifiable impact of the review of past lending. The shares had rallied strongly from the 300p low but this statement highlights again the various issues which the company faced even before the FCA brought issues of its own. Q3 trading less good than bad – The good bits are that CBAM has continued to see AUM increase on the back of markets and flows (which is just as well given the acquisition of staff), and that Winterflood managed to turn a profit in the quarter of £1.7m having lost £(2.6)m in H1. In the Bank, however, there are a number of issues: NIM guidance has slipped fractionally to ~7.4% from ~7.5%; cost guidance is now more explicit at 8-10% growth plus another £7m for the Irish acquisition; bad debt guidance is still expected to be under 1.2% but a little less so. And another Motor review – The FCA’s market-wide review of “Borrowers in Financial Difficulty” has resulted in an on-going review of past lending in the Motor book. The company hopes to have finished the work required by the end of the financial year with a “total impact” of operating costs and potential compensation of “single-digit” millions. We have included £5m. This is not the FCA’s review into the Motor market, where we have not attempted to quantify the direct impact but have argued (see “The Rumsfeld Approach”, 19 February 2024) that by ceasing dividend payments, limiting lending growth and considering disposals the company should be able to deal with issues without recourse to long-suffering shareholders. Estimates – We have given the benefit of the doubt to Winterflood and to CBAM but moderated estimates for the Bank. Estimate risk remains elevated and not just because of the FCA. Valuation – The prospective PER might be only 6x but the UK market is not short of lowly-rated lending businesses, and those other businesses do not have the issues which Close faces. As we have described before, investing in Close as a new holder is as much a career choice as an investment call. Call the AA – Motor finance has thrown up a new niggle to add to the on-going uncertainty with respect to the FCA. Neither of these issues should distract, however, from the other issues which Close has been facing with respect to its costs, its structure and its direction of travel. While it must husband its resources, competitors can make hay. When the FCA issues are resolved, Close’s market position may well have been impaired.
CBG trades at low valuation multiples (0.5x TNAV), and the pace of bad news is moderating. If it can weather FCA costs without raising equity and end the earnings downgrade cycle, we see attractive medium-term upside potential. Our TP falls 3.5% to 500p and we reiterate Hold.
Close Brothers Group^ (CBG, Buy (from Hold) at 380p) - Preparing for a bumpy landing
Interim results had been flagged with the trading update of 15 February and so while there are bits and pieces in the detail the outcome is, inevitably, “in line”. The company has not established a provision for Motor, which should be less of a surprise than the fact that Lloyds Bank believed that it could. The company has already said it will not pay a dividend this year, it is seeking to “optimise” risk-weighted assets and will (finally) cut some costs in the Bank. The outcome is potentially £400m of “extra” capital by July 2025E, which we would hope is proven to be sufficient to deal with Motor issues in time. That leaves the other issues: neither Winterflood nor CBAM are obvious bedfellows for each other let alone the Bank; Premium Finance is likely to be a lower returning business in future; the competitive position of the Bank could be impacted from a prolonged period of introspection and capital husbandry; estimate risk from trading remains high. All of that said there could be value but, as we described before, many fund managers may believe that the career risk is greater than the potential return. Underlying operating profit £94.4m – The company had indicated that profit would be in the region of £94m and were £94.4m. Our estimate had been £91.3m but with so many individual lines to consider we can call that “in line”. The Bank reported operating profit of £111.7m (PGe £109.9m) with operating income in line, costs higher and provisions usefully lower. The comparable profit a year ago was £15.0m because of Novitas provisions: excluding provisions profit fell 13% or -10% excluding also Novitas. Loan Book growth was 4%. Asset Management profits fell to £6.3m (down 27%) with income +7% and costs +12% following extensive recruitment. Winterflood recorded a loss of £(2.6)m, a £5m deterioration year-on-year, with income -12% but costs +1%. Motor Finance – The company has not established a provision for potential exposure to the FCA’s Motor Finance review, but no-one should have expected it to. The fact that Lloyds Bank has managed to establish a (very heavily caveated) provision is the greater surprise. As we described in our note of 19 February 2024, The Rumsfeld Approach, there are too many known unknowns, and there has been no new information to allow any greater certainty since then. While the company believes it can generate £400m of capital by July 2025E, that is not an indication of potential exposure but, as per our earlier work, it does suggest that there is no reason for the company to seek support from long-suffering shareholders. Capital husbandry – The £400m estimate for capital generation is expected to be delivered from not paying a dividend (~£100m per annum), securitisation and other management of risk-weighted assets, and a long-overdue management of the cost base. While this should avoid recourse to shareholders, we doubt that the process of husbanding capital will be cost-free. We would imagine that the price of securitisation of Motor assets is rather higher than it was, while the need to manage loan book growth could impact on customer relationships over time when the business model had been built on being able to help customers at all times. Estimates – We have made some provisional estimate revisions with modestly lower expectations for the Bank over the next few years despite the efforts to control costs. We have also revised the presentation of the AT1 costs to pre-tax from a post-tax deduction, reducing PBT estimates but not EPS estimates. Valuation – We laid out in mid-February a view that the shares had a theoretical value of 530p based on CBAM and Winterflood having a realisable value of £300m, and a heavily discounted value of the Bank. We stand by that at this stage but estimate risk remains elevated and visibility low. We do not expect a dividend for 2024E or 2025E although possibly there is a payment in 2026E. So Far Away from Me – The results today are something and nothing: the company had already flagged the likely level of profits and so there is lots of box-filling of the spreadsheets (and a raft of restatements to boot), but there is – inevitably -- no greater clarity with respect to Motor. This should be no surprise to anyone, establishing a provision needs a basis for estimation. Quite how Lloyds managed to establish its provision is the greater question. In Close’s case we have previously tried to establish what capital it could generate internally to avoid any recourse to shareholders and that approach has been supported by today’s company commentary. This is not, however, the end of the issues. Premium Finance will surely be a lower returning business in future while there are risks to the franchise from a prolonged, but inevitable, period of introspection. Neither CBAM nor Winterflood is an obvious bedfellow for each other let alone the Bank. While things were “working” then this situation could be endured, but now things are different. Even allowing for all these issues we can suggest that there is a value for the business(es) above the prevailing share price, but with risks still high and clarity low, the issue is that it becomes a career call as much as an investment case. Make money and your colleagues will think you lucky, lose money and there are no obvious defences.
With profits in line and an increase in the potential amount of capital which could be released if necessary to absorb FCA motor review impacts, this update is incrementally positive for Close in our view.
In regard to motor finance commissions Close has concluded that no legal obligation exists at the half year in relation to the FCA review and therefore no provision has been taken for this. We would however highlight that the FCA is yet to publish it thinking on this subject and consequently the ri
Close’s share price halved from its high at the end of 2019 to the start of 2024. It has more than halved again since. We would like to be in a position of arguing that “it is in the price”, whatever “it” might be, but we simply cannot: there are too many known unknowns and even the things which are known are not helpful. Regulatory intervention in financial services has a long track record for material costs to shareholders, operating and restorative, and unintended consequences. In this case regulatory questions over Motor Finance and Premium Finance are unanswerable now and will remain so for some time to come, no-one should pretend otherwise. This only adds to our prior concerns of a loss of uniqueness in the Bank’s market positioning, higher fixed costs at Winterflood and whether CBAM’s operating model still works under Consumer Duty. But we can point to a possible £500m of capital generation over three years, and disposals to raise more. The company should not have to raise capital, especially if it wants to protect its remaining holders. The Known Knowns – Close’s Banking business has long been weighted to Motor Finance and Premium Finance. It was almost half of lending in 2003, and still one-third of lending two decades later. Margins have been rich, losses marginal and hence the optics poor, especially judging the past by today’s apparent standards. The Known Unknowns – The company cannot estimate any potential liability in the Motor book at this stage, so no-one else should pretend that they can, and we do not. We do not know timing either. Or what might happen to Premium Finance returns. Reduced estimates (and Target Price) but little confidence – With a need to husband capital, loan book growth is likely to be much slower and returns from Premium Finance must surely be lower in future. Winterflood continues to struggle, CBAM has paid up to deliver growth. Our Target Price falls, but we have no more confidence in that than in the estimates on which it is based. Investment Cases, Career Choices – We have the luxury of having a Hold recommendation, but we know shareholders do not. You could be a buyer, make a 100p or even more, but be deemed lucky rather than good in doing so. But lose 100p and no-one will have any sympathy whatsoever. We can see why many shareholders have sold, the situation deemed simply not being worth the risk.
Close Brothers Group^ (CBG, Hold at 398p) - Dividend cut
We have previously not provided an estimate for redress because accurately calculating this is impossible. Rather, we had adjusted up our COE estimate to reflect this risk in our valuation. We retain the higher COE estimate of 13.7% as the uncertainty remains but today we have factored in, what we
The announcement of positive management actions in the face of the FCA review is welcome but until the issue can be quantified and resolved, we think the stock is uninvestable for many. At this juncture we retain our Hold rating and 518p TP, but will refresh our assumptions at the time of the interim results.
Close Brothers Group^ (CBG, HOLD (from Buy) at 398p) - Unscheduled trading update sees dividend cut
Today Close Brothers provided a trading update and commentary regarding the FCA investigation of the motor finance industry. Given the uncertainty surrounding the FCA investigation Close has announced that it will not pay any dividends this year which will save the group £125m based on our previous
We believe uncertainties are unlikely to clear, until at least 3Q24, when the FCA plans to update on its review findings. Until then we view the upside for CBG shares as limited. We reduce our TP 34% to 518p and remain at Hold.
There are two motor related areas the FCA is engaged with, and we believe that Vanquis (its Moneybarn division provides motor finance) is exposed to neither while Close Brothers is exposed to both. We believe Vanquis isn't exposed as it has never offered variable commission rates. Following some su
Close Brothers Group plc Vanquis Banking Group PLC
Close has raised recently £200m of Additional Tier 1 capital at a coupon (pretax) of 11.125%. Although this provides extra capital it comes at material cost to EPS estimates, the latest in a long run of downgrades. Indeed the dilution entailed (~10%) in “optimising the capital stack” does raise questions as to why management should want, or need, to pursue more capital on such terms. This latest downgrade means that our 2025E EPS estimate is more than 25% lower than the estimate we first published for that year a year ago, broadly equivalent to the fall in the share price. It is also the case that our 2025E EPS estimate is now little different to the EPS reported for 2014. Those seeking to keep UK-exposure would be better served in Paragon, but for superior growth prospects at a lower rating International Personal Finance offers much more value.
Close has bolstered its capital position at the expense of the income statement. The AT1 issue supports the medium-term growth outlook of the company, although our target price declines 6% to 785p. We maintain our Hold recommendation.
While the loan book was positive and the net inflows better than forecast, increased group centre costs and the Winterflood loss have more than offset this. We have also factored in higher costs relating to the net inflows in Asset Management as these are being driven by staff hires. Our EPS foreca
Close Brothers Group^ (CBG, Buy at 789p) - Anotherdowngrade…
Our EPS estimates decline 6%/2%/2% for FY24/25/26E, and our TP falls 2% to 832p. Close is not expensive, trading at 0.85x TNAV, but in our view a sustained rally is only likely when momentum improves. Hold.
Another quarter, another set of downgrades. The Bank is fine albeit with lots of cost, the issues are elsewhere: CBAM is growing fast but has paid up to do so; Winterflood lost money in Q1; Central Costs are up due to debt issuance. In total there are downgrades of ~£20m from a base of £216m (consensus was £211m). While “investment” may pay back in time the market is rarely willing to take much, if anything, on trust. The PER may appear modest and the yield generous, but that is not helping many others in the sector.
Close Brothers Group^ (CBG, Buy at 789p) - Winterflood moves into loss
The loan book increased by 3% (3.4% excluding the Iris motor business and Novitas) in Q1 7.5% year-on-year to £9.8bn with the maintenance of a strong margin at 7.5% (excluding Novitas) compared to 7.6%. The loan book growth (this is always an output variable) saw continued demand for commercial fin
Close’s FY23 results combined accelerating growth trends with higher expenses. Our changed valuation methodology based on market-derived multiples suggests a reduced target price, from 961p to 854p and we retain a Hold recommendation.
Close Brothers Group^ (CBG, Buy at 893p) - Increased momentum coming at a cost
Following their results yesterday we have updated our forecasts. While we have upgraded our loan book growth given the material acceleration in growth in H2, this is more than offset by their increased cost guidance for the bank (8-10%). Consequently, ur EPS forecast for this year declines by 12% t
Performance has stabilised post Novitas and resumed loan growth with stable margins offsets higher costs in Banking. We will revisit estimates and our recommendation shortly.
The loan book increased 5% to £9.5bn (8% excluding Novitas and Irish motor) with the maintenance of a strong NIM at 7.7% (it was 7.8% in 2022). The loan book growth (this is always an output variable) saw continued demand for commercial finance and good demand for Property finance being offset by t
It feels like a while since Close has reported profits ahead of estimates, but it has today. Whether that translates into net upgrades for the current year is moot: the Banking business may have some momentum, but Winterflood is probably still struggling against market headwinds and the costs of recruiting so heavily from Investec will presumably weigh on profit development at CBAM even with flows being delivered. With CBAM the sibling most likely to be adopted by another this year, the question is whether the other two businesses make any sense as a family. The shares are not “expensive” on a PER under 8x but Paragon (BUY) or International Personal Finance (BUY) are cheaper still and have much stronger investment cases.
Close Brothers Group^ (CBG, Buy at 853p) - Better H2 performance drives modest FY beat
Close Brothers Group^ (CBG, Buy at 836p) - Acquisition of Irish motor finance business
Our Financials databook contains a summary of sector valuation metrics by subsector, key performance data, a summary of key fund performance for the asset managers, and some relevant economic data.
CBG CMCX FSG FCH GHE IGG ICG IPF MANO MAB1 N91 PHLL PLUS POLR PMI VANQ ASHM IPX JUP EMG NSF BRK STJ IHP TCAP BGEO OSB PAG STB TBCG VMUK SUS HRGLF
Rising deposit costs and inflationary impacts on expenses in conjunction with weak retail trading activity have negated decent lending growth, leading to single digit EPS downgrades. In our view, there is attractive long-term value in CBG, which might be realised when the earnings cycle turns. We reiterate our Hold rating but reduce our target price by 1.6%, from 977p to 961p.
Meeting Notes - Jul 24 2023
CBG TRUEB OCDO SFOR MONY CWK BME BPT CPG CRDA DATA GNC JTC MTO PAG RCH STEM TYMN UTG
Following today's trading update we have made a number of individually small changes which have amounted to the downgrade. We have factored in slightly higher costs, and a modest NIM reduction for the bank. While we have increased our net inflows for Asset Management a negative mark-to-market has o
Close Brothers Group has reported a solid pre-close update, with reassuring banking and asset management performance, although Winterflood continues to struggle given weak retail investor activity.
The loan book increased 3.7% (6.8% excluding Irish motor and Novitas) year-to-date to £9.4bn with the maintenance of a strong margin at 7.5% (excluding Novitas). The loan book growth (this is always an output variable) saw continued demand for commercial finance and good demand for Property finance
The Asset Management business of Close continues to have investment lavished upon it, with a string of new hires. Whether it remains part of the family is not covered in today’s statement, but within a business where the investment case turns on its banking exposure, it remains the largely overlooked child. Putting it up for adoption in a market looking for opportunities would make good sense, provided that new parents would pay for the expensive private education which the child has enjoyed for the last decade. In the meantime, the Bank has done well enough, but the higher-than-average-cost model is more costly still. And Winterflood is feeling the impact of winter more than of a flood of trading.
Our Financials databook contains a summary of sector valuation metrics by sub-sector, key performance data, a summary of key fund performance for the asset managers, and some relevant economic data.
CBG CMCX FSG FCH GHE IGG ICG IPF MANO MAB1 N91 PHLL PLUS POLR PMI VANQ
Close Brothers Group (CBG) - Buy at 940p - Post Q3 model update
By its own standards, CBG reported poor 1H23 results and it is reassuring that performance has stabilised in 3Q. The valuation reflects ongoing concerns which are not apparent in this update and we believe the potential for the shares to recover when conditions normalise is attractive.
Close Brothers trading update for Q3 showed an acceleration in loan book growth, growing 2% in the quarter to £9.2bn with continued demand for commercial and Property Finance. The margin was stable 7.8% (7.6% excluding Novitas) and credit quality remains robust, with the bad debt ratio at 2.6%, exc
The company’s Q3 trading update has none of the excitement of the earlier stages of this year, no doubt much to the relief of management and shareholders. This year’s results will bear the scars of the Novitas exit, previously disclosed, but at least trading now appears to have returned to a little more like “normal”: very modest growth in the loan book, decent growth in AUM at Asset Management but continued subdued trading at Winterflood. Overall consensus estimates are unlikely to change much we believe, although hopefully the impressively wide range of estimates will narrow. The rating is modest but that is true of most UK lending businesses but with Paragon or OSB there is faster growth, lower PERs and buybacks.
Close Brothers Group^ (CBG, Buy at 940p) - A more encouraging quarter
CBG CMCX FSG FCH GHE IGG ICG IPF MANO MAB1 N91 PHLL PLUS POLR PMI VANQ ASHM BGEO BPT BRK IPX IHP JUP LIO OSB PAG SUS STB STJ TBCG TCAP VMUK HRGLF
CBG CMCX FSG FCH GHE IGG ICG IPF MANO MAB1 N91 PHLL PLUS POLR PMI VANQ ASHM BGEO BPT BRK IPX IHP JUP LIO OSB PAG RAT SUS STB STJ TBCG TCAP VMUK HRGLF
Mixed results, reduced forecasts. Close Brothers Group (CBG) is operating in an environment of lacklustre loan growth, margin pressures and weak financial markets. Our TP falls 5% to 977p reflecting lower estimates, and our Hold recommendation balances longer-term upside against short-term pressures.
Close Brothers’ recent (14 March) H1 results to 31 January 2023 showed a sharp drop in profitability, primarily due to additional provisions taken in respect of Novitas, which had been well flagged. In addition, challenging market conditions impacted negatively on Asset Management and Winterflood. Following this update, we downgrade our adjusted EPS estimates for FY23F, FY24F and FY25F by 6%, 1% and 1% respectively. Following a sharp fall in the shares in recent days, there is now 35% upside to our revised fair value of 1240p. Hence, we reiterate our BUY recommendation.
After weak recent trading updates due to Novitas, these interim results for the 6M to end January 2023 appear robust and should be supportive for the shares.
Interim results may be “ahead of consensus” but the range was broad after the warning in January. There are elements of brightness: provisions excluding the Novitas debacle were modest (at £10m) and a restated commitment to trying to deliver efficiency from a deliberately higher-cost business model. Offsetting this the loan book was a touch lower than we had expected, forward-looking provisions are higher, the economic outlook is mixed and markets continue to impact Asset Management and Winterflood. After Novitas there will have to be some time for the market to rebuild trust in the model and the management. HOLD.
As expected the loan book (excluding Novitas) increased to £9.0bn, from £8.9bn at the July year-end. The NIM (excluding Novitas) expanded to 7.8% from 7.6% as Close starts to benefit from rate increases and the Cost:Income ratio remained stable at 51%. Following the H1 trading update we added the m
As we commented last month, the sector continues to offer good value, with results generally underpinning the view that earnings momentum has shifted to the upside.
13 - 17 March 2023
CBG COST GEN SBRE TCAP AMS BBY CHG FDM IGG MSLH SAFE TRN BPT ROO DFS HLMA HTWS MORE RTO SVS SUSE GYM TIFS BOY OSB 9L2 KYYWY MYE0 DIISF
Despite a stronger 4Q and good start to 2023, we continue to see the Financials sector as offering good value. In our view, yields are attractive and the sector is geared into improving investor sentiment.
We downgrade our recommendation from Add to Hold. The catalyst of accelerating lending demand is not currently materialising whilst earnings expectations are reducing and our target price has fallen c.18%, from 1,264p to 1,031p. We are positive on CBG’s business model and longer term prospects but see more limited upside in the short term.
Following the H1 trading update we have taken a prudent approach and assumed that the maximum £90m charge is taken in relation to Novitas. Consequently, we have reduced our EPS forecast for this year to 66.8p from 113.6p but with a small positive mark-to-market for the Asset Management business our
CBG clearly wishes to “draw a line” under the Novitas debacle. However, such is the scale of the additional charges signalled on Friday, “up to £90m” in H1 FY23 over and above the £24.8m provision taken for the 5 months to 31 Dec 2022, we expect the group to report a small loss in H1 FY23e (Fig 1, page 2). The group performance has also been impacted by a weak contribution from Securities division, only £1.7m in the 5 months to 31 Dec. We expect FY23e to represent its worst year ever (Fig 2, page 2); we forecast £7.0m/£12.3m for FY23/FY24e vs company-compiled consensus of £18m/£21m. With the Novitas portfolio to be written down to c.£60m at H1 FY23, we do not expect any further material provisions in subsequent periods. As such, we see the Banking division profitability bouncing back in FY24/FY25e. However, at a group level, we still see FY25e u/l PBT below FY22 (Fig 3, page 3). We expect the CET1 capital ratio to fall by c.100bps half-on-half to 13.6% in H1 FY23e, still above the group’s 12-13% target. As such, we would regard it as perfectly reasonable for management to “look through” weak FY23e earnings and pay a “maintained” 66.0p DPS in FY23e (Fig 4, page 3). We forecast 70.0p/74.0p in FY24/25e. With, we think credible, prospective dividend yields of 7.0%/7.5%/7.9% through FY23/FY24/FY25e we expect to see some level of “yield support” for the shares at the current level. CBG shares have fallen 17% in 10 trading days (Fig 7, page 5) and now trade on 1.0x FY23e tNAV which represents a sharp de-rating vs 2.5x during its “glory days” in FY15 (Fig 5, page 4). We forecast ROTEs of 5.6%/11.2%/11.5% through FY23/FY24/FY25e (Fig 6, page 4). We make EPS downgrades of 49%/3%/3% through FY23/FY24/FY25e; we are 52%/12%/19% below Bloomberg consensus. TP to 955p (from 1020p).
Two areas of weakness in 5M23 (Novitas and Winterflood) are in our view transitory. CBG remains a high quality bank with strong growth and profitability characteristics. At <10x PER we believe it represents attractive longer-term value, supported by a yield of >6%.
Share price underperformance YTD, but more to come… We acknowledge that Close Brothers shares have underperformed a buoyant UK banking sector ahead of today’s statement, down 7% in 2 weeks (Fig 6, page 4). Be that as it may, we think today’s pre-close trading update offers further challenge to the popular contention that CBG’s “premium rating” is still justified; we expect the shares to fall further today. Another dreadful update on the Novatis loan portfolio… Within the Banking division, after very weak loan growth in Q1 FY23 of £0.03bn (+0.03%), the overall performance reported today was slightly better in November/December 2022 with net growth of +£0.10bn (+1.0%), see Figs 1&2, page 2. NIM “remained strong”, while the CET1 capital ratio declined 20bps in the 5 months to Dec 2022 to 14.4%, above CBG’s 12-13% target. However, this is all overshadowed by marked deterioration in the impairment story, especially in relation to Novatis, the troubled legal services loan book acquired in 2017, but now in run-off. For the 5 months to Dec 2022, the annualised impairment charge ex-Novatis was 1.1% (vs 0.5% in FY22). Including Novatis, the charge was 1.7% (vs 1.2% in FY22), reflecting an additional £24.8m provision. However, CBG now guides to an additional provision against the Novatis loan book of “up to £90m” in H1 2023, which would take c.80bps off the CET1 capital ratio. Winterflood barely profitable in 5 months to December Trading conditions within the Securities business, Winterflood, have deteriorated still further. Operating profit for the 5 months to Dec 2022 was only £1.7m (vs £14.1m in FY22 and £60.9m in FY21 (Fig 3, page 3)). We believe that the Securities business is on track for its worst year ever, while consensus expects a positive rebound to £18m in FY23. That doesn’t appear likely. Within Asset Management, Total Client Assets fell £0.3bn in the 5 months to Dec 2022 to £16.3bn, due to market movements. On 1.1x FY23e tNAV for ROTEs of 10.5%/11.0%/11.3% FY23/FY24/FY25e, (Fig 5, page 4). Sell rec reaffirmed. Forecasts/TP under review. CBG’s H1 FY23 results are due to be released on 14 March 2023.
Every family has a troublesome member. In Close’s case it has been Novitas, a provider of finance to the legal sector, brought into the family in 2017 and then disinherited in July 2021. Today marks an attempt to write Novitas out of the will, albeit with an expensive charge. In theory taking the pain upfront should insulate future periods, but caution is likely to be increased and the sure-footed reputation of Close is inevitably impacted. In the meantime Winterflood is also struggling and Asset Management also impacted by markets. Family affairs can often be complicated.
Close Brothers trading update for H1 showed loan book growth of 1.5% to £9.23bn with an increase in demand since the Q1 statement. Commercial remained strong and there was a pickup in demand for Premium and Property finance which was partly offset by Motor. Close sustained a strong margin and CET1
As discussed in our note, Treading water? (17 Nov), we regard CBG’s Q1 FY23 performance as underwhelming (albeit not particularly surprising), characterised by slowing loan growth, moderately elevated impairments and negative jaws within the Banking division, and ongoing market-related headwinds in both Asset Management and the Securities business. Ahead of the Q1 numbers, we thought consensus expectations were too high; we anticipate broad-based consensus downgrades, with the slowdown in loan growth to just 0.3% QoQ (vs +2.4% in Q1 FY22) particularly impactful. We forecast loan growth of 2%/3%/3% in FY23/FY24/FY25e (Fig 1, page 2). We continue to forecast very limited near-term recovery in the contributions from Asset Management and Securities (Fig 2, page 2), with a further 7% YoY reduction in u/l PBT within the Banking division. However, we make only 0.1-0.6% downgrades to our existing FY23-FY25e EPS forecasts. Indeed, in the context of CBG’s robust capital position (Q1 FY23 CET1 capital ratio: 14.6%), we expect it to maintain a progressive dividend. Our DPS forecasts of 70p/74p/78p through FY23/FY24/FY25e (Fig 3, page 3) imply a prospective dividend yield of 6.8%/7.2%/7.6%. Unlike most FTSE100 banks, CBG stood to usefully benefit from the “Truss plan” to cut UK corporation tax to 19% while raising the surcharge to 8%. Following the “coup”, with “25+3” reinstated in place of “19+8”, CBG’s £100m surcharge “allowance” is less valuable, but otherwise, perhaps the Autumn Statement was (at least for banks) no worse than expected? On 1.0x FY24e tNAV for ROTEs of 10.5%/11.0%/11.3% FY23/FY24/FY25e, (Fig 4, page 3) we now see the shares as close to fair value. We trim our target price to 1020p (from 1025p) but upgrade our rec to Hold (from Sell).
The company describes the start to its financial year as “solid”. Loan book growth of £30m might be better described as “slow” but given heightened concerns on the macro-outlook, the company can hardly be criticised for husbanding resources. With slower loan book growth and a catch-up revision to our bad debt assumptions, our estimates fall back to a consensus which has itself been drifting lower for some time. The rating is not challenging, but other models which offer more interesting growth potential are cheaper still. We prefer LendInvest, Paragon or OSB.
A pretty “flat” performance in Q1 FY23… The CBG share price has fallen by 7% in the 3 days ahead of this morning’s somewhat lacklustre Q1 FY23 IMS. Customer loans (including operating lease assets) were broadly flat QoQ at £9.13bn (FY22: £9.10bn), vs an increase of +2.4% in Q1 FY22, (Fig 1, page 2). The impairment charge was stable at 1.2% (FY22: 1.2%), reflecting modest “underlying” deterioration driven by changes in macroeconomic assumptions offsetting a reducing drag from the Novatis portfolio (in run-off). The Net Interest Margin “remained strong” but was not quantified (we assume broadly flat). The CET1 capital ratio was also flat QoQ at 14.6%. As discussed in our report Oh what a lovely rally… (14 Nov), ahead of today’s statement, we were 10% below company-compiled consensus for FY23 u/l PBT, and we would expect confirmation of a flat loan book alongside an absence of recovery within the Securities business to trigger downward revisions to consensus. Headwinds persist in Securities and Asset Management… The statement indicates that the Securities business, Winterflood, “continued to be impacted by reduced trading activity”. No quantification is provided relative to prior periods, but we believe that this signals little or no immediate recovery. Within Asset Management, total client assets fell by £0.5bn (3%) QoQ to £16.1bn, with negative market movements more than offsetting the benefit of annualised net inflows of 7%. Still a premium valuation for fairly “ordinary” returns… CBG trades on 1.1x FY23e tNAV against our current ROTE forecasts of 10.6%/11.0%/11.4% through FY23/FY24/FY25e (Fig 2, page 2). As such, it continues to enjoy a premium rating vs all other UK banks, notwithstanding the fact that its return profile is now fairly ordinary in a sector context. No call today.
Close Brothers trading update for Q1 showed marginal loan book growth (this is always an output variable) with continued demand for commercial being partly offset by moderating motor volumes. The loan book increased to £9.13bn with a sustained strong margin and CET1 ratio at 14.6%. Credit quality r
Increasing risks and opportunities For the 12 months to July 2022 (FY22), Close Brothers Group (CBG) modestly missed consensus as deteriorating market conditions penalised Securities and Asset Management. As the UK economy weakens, we expect CBG will outperform weaker peers and emerge stronger as in previous cycles. Our TP falls 8% to 1,264p but we keep our Add recommendation as we think CBG’s opportunities are set to expand. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com, Ryan.Flight@peelhunt.com 10-page note
Close Brothers’ FY results to 31 July 2022 showed a fall in profitability, as expected, which was primarily due to the impact of volatile markets on Winterflood. The group also announced a new capital framework that will see it target a CET1 ratio of 12-13% over the medium-term, implying scope to free-up surplus equity. Given continued challenging economic and market conditions, we downgrade our adjusted EPS forecasts for FY23F and FY24F by 9% and 8% respectively. Our fair value reduces to 1,285p (from 1,400p) but with 36% upside, we reiterate our positive stance. BUY
Following the full year results we have updated our forecasts for Close Brothers. A combination of weaker equity markets, difficult trading conditions for Winterflood and the prospect of recession means we have reduced our EPS forecast for this year by 10% to 111.3p from 123.4p and by 2% for next y
Solid performance in Banking; weakness in Asset Management/Securities FY22 Adjusted EPS fell 21% YoY to 111.5p, a 3% miss against company-compiled consensus (115.2p). FY22 Adjusted Operating Profit of £234.8m represents a 13% YoY decline and a 3% miss against consensus, with a notably weaker performance in H2 FY22 (Fig 1, page 2). The performance in Banking was solid. Operating profit rose 7% YoY to £227.2m, 1% ahead of consensus. NIM remained strong at 7.8% (up 10bps YoY), while an impairment charge of 1.2% reflected a disproportionate drag from the discontinued Novatis business without which the charge would have been only c.0.5%. The Securities business (Winterflood) suffered a 77% YoY decline in operating profit to £14.1m, a 26% miss vs consensus, reflecting sharply lower trading volumes, which CBG characterises as ‘cyclical’. The Asset Management business saw an 8% YoY decline in Op Profit to £21.7m, a 13% consensus miss. Capital strength supports increased dividend with, we think, more to come… CBG reported a CET1 capital ratio of 14.6%, comfortably above its newly articulated target of 12-13%. Pleasingly, the FY22 full-year dividend was increased by 10% year-on-year to 66p (Fig 2, page 2) in line with us and 5% ahead of consensus. Moreover, the new 12-13% target, taken together with CBG’s stated intention to optimise its capital stack with AT1 issuance in due course, should, we believe, offer potential for additional capital return to shareholders over the coming years. A small but welcome tax benefit ahead… We note that, while last week’s cancellation of the planned Corporation Tax increase (from 19% to 25%) and cancellation of the planned surcharge reduction (from 8% to 3%) are largely a “wash”, the fact that small banks are set to retain an increased (£100m) surcharge “allowance” offers, we estimate, a c.1% benefit to the effective tax rate in FY23e and beyond. On 1.1x FY22 tNAV for FY22 ROTE of 12.2%, Buy rec reaffirmed, TP/forecasts under review.
It is an unfortunate time to be reporting results which are a touch light of consensus (despite the efforts with the preclose statement). Heightened market volatility has already impacted Winterflood and will further impact Asset Management. While these divisions generally feature little in the thinking of many commentators, pressure on these divisions cannot be made up by the Bank, especially given a deteriorating macro outlook. Consensus for 2023E prior to today was for profit of £255m, +£20m on the profits reported today. Our own revised estimate falls from £246m to £239m. HOLD.
Close Brothers reported 5% loan book growth to £9.1bn and they had perviously guided to an improved NIM, which duly increased to 7.8% from 7.7%. The CET1 ratio is strong at 14.6% and credit quality remains robust, despite the outlook for recession with the cost of risk broadly stable at 1.2% (again
It has been a pretty wonderful few weeks for the wider UK bank sector with share prices surging by 6-32% (Fig 1, page 2), led, perhaps inevitably, by TBC Bank Group (Buy) which reports Q2 2022 results on Friday (12 Aug). The scale of CBG’s valuation premium has been eroded in recent years, but it still maintains a significant P/tNAV premium over the resurgent FTSE100 banks (Fig 2, page 2) and trades broadly in-line with buy-to-let specialists, OSB/PAG (both Buys) despite their significantly stronger return profiles. The Banking Division remains dominant, contributing 84% of group underlying profit (ex central items) in H1 FY22 (Fig 3, page 3). However, with modest NIM erosion (7.8% for the 11 months to 30 June 2022 vs 7.9% in H1 FY22) and marginally higher impairments (1.2% for the 11 months to 30 June 2022 vs 1.1% in H1 FY22), we expect a slightly softer contribution in H2 FY22e. Winterfloods enjoyed exceptional trading volumes through H2 FY20-H2 FY21 helping to offset a sharply lower contribution from Banking during the lockdown crisis. However, that proved to be something of a “flash in the plan” and more recently, the FY22 pre-close trading update (21 July) referenced “reduced trading opportunities…exacerbated by falling markets and their impact on investor sentiment, particularly since the Q3 trading update”. We make downgrades to our EPS forecasts of 5-7% through FY22/FY23/FY24e, primarily reflecting (1) higher impairments in Banking, (2) lower trading volumes in Securities, and (3) lower AUM in Asset Management (reflecting market movements). On 1.2x FY22e tNAV (Fig 5, page 4) for ROTEs of 12.4%/12.7%/13.0% (Fig 6, page 4), we cut our target price to 1170p (from 1320p) and downgrade to Hold (from Buy). CBG’s FY22 results are due 27 September 2022.
CBG OSB PAG TBCG
Further to Close Brothers’ recent (21 July) FY pre-close trading update, we have trimmed our EPS forecasts by 2% in each of FY22F-FY24F to reflect the impact of recent stock market weakness on the performance of Close Brothers Asset Management (CBAM) and Winterflood. The much larger Banking division delivered resilient performance, in line with our expectations. Despite the modest earnings downgrade overall, we increase our fair value to 1,400p (from 1,325p) as we roll-forward to use FY23F as our base year for valuation purposes. With c.30% upside, we reiterate our BUY recommendation on this high-quality specialist bank, although we continue to see even better value elsewhere.
UK Real Estate Chartbook, Close Brothers, AJ Bell, Mitchells & Butlers, Go-Ahead, FRP, Trident Royalties, Mining LOWdown, Market Highlights
CBG AJB MAB FRP TRR HSV FGP GHGUY
UK Real Estate Chartbook, Close Brothers, AJ Bell, Mitchells & Butlers, Go-Ahead, FRP, Trident Royalties, Mining LOWdown, SMID Market Highlights
CBG AJB MAB FRP TRR FGP GHGUY
The Close Brothers pre-close trading update for 11 months to 30 June 2022 highlighted that the banking business was strong. Market-facing businesses were negatively impacted by falling markets but there continues to be healthy net inflows in CBAM. Heightened market uncertainty has also had an impact on investor sentiment at Winterflood, particularly since the 3Q22 trading update. In banking, the loan book has grown by 5% YoY to £8.9bn, with NIM remaining strong at 7.8% (FY21:7.7%). The CET1 ratio also remained healthy at 14.8%. We marginally reduce our forecasts to reflect the lower levels of AUM at CBAM but maintain our BUY and TP of 1,435p. CBG trades on FY22E P/E and P/TBV of 9.4x and 1.1x for RoTE of 12.4%.
Pre close update: solid performance despite market pressures For the 11M to June 2022 (11M22) Close Brothers (Close) has maintained the 9M22 momentum in Banking, whilst both Asset Management and Securities were adversely impacted by market conditions. We make modest adjustments to earnings but the future potential of the group is unaffected and share price upside when momentum is re-asserted should be significant. We reduce our target price by 1.3%, from 1,395p to 1,377p and maintain our Add recommendation. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com 5-page note
The company’s pre-close trading update has highlighted a continued decent performance from the Bank, albeit a touch slower than we might have hoped, and inevitable impacts from markets on Asset Management and Winterflood. Our estimates, which were already on the cautious side of consensus, slip a little but consensus is likely to slip by a little more. While the concentration of downgrades will be in business areas not really considered so important, the pressure on estimates is unlikely to spur share price performance. HOLD.
A solid trading update
“Solid” YTD performance, negatively impacted by falling markets… Overall, CBG’s FY22 pre-close trading update describes a “solid performance” for the 11 months to 30 June 2022, with progress within the Banking division that appears largely consistent with market expectations, but market-related weakness within Asset Management and the Winterflood Securities business, which we expect to trigger fresh consensus downgrades. Steady progress in Banking… The statement describes a “strong” performance in the Banking division. YTD net loan growth of £0.4bn (5%) to £8.9bn is consistent with our full-year expectation. YTD NIM of 7.8% remained stable vs Q3 FY22. The YTD bad debt ratio was also stable at 1.2% (or only 0.6% ex-Novitas) and the CET1 capital ratio remains strong at 14.8%, down 0.1% through May/June. Further deterioration in Winterflood trading… The statement describes “reduced trading opportunities” for the Securities Business, “exacerbated by falling markets and their impact on investor sentiment, particularly since the Q3 trading update”. We already forecast a sharp drop in the Winterflood contribution from a record £60.9m in FY21 to £19.0m in FY22e (consensus £20m), then recovering to £20.8m in FY23e (consensus £24m). In the context of today’s weak update, we expect consensus expectations to decline. The Asset Management business reported YTD annualised net inflows of 5%, stable vs Q3 FY22, but (unsurprisingly) Total Client Assets declined by £0.7bn through May/June, to £16.0bn, reflecting negative market movements. On 1.0x FY24e tNAV against our existing ROTE forecasts of 13.0%/13.5%/13.3% through FY22/FY23/FY24e we maintain a Buy recommendation with the finer detail of our forecasts and our target price (1320p) placed under review. No call today; FY22 results due 27 September 2022.
The Banking division remains pivotal to the fortunes of CBG, routinely contributing over 80% of group earnings. As such, a resumption of loan growth in Q3 FY22 (+1.8% QoQ) was welcome (Fig 1, page 1), albeit our modelled expectations of 5%/3%/3% growth for FY22/FY23/FY24e (Fig 2, page 2) remain modest. After three exceptional half-years, in H1 FY22 the Securities Division posted its lowest contribution for six years, down 74% YoY to £8.8m (Fig 4, page 3). Although “trading income improved” in Q3 FY22, we cut our FY23/F24e Securities forecasts to c.7% of Group PBT (ex-Central Items) (Fig 3, page 3). An impairment charge of c.1.4% in Q3 FY22 was (for us) a negative surprise, albeit this primarily reflected applying a 40% weighting to its downside scenario (previously 30%). At H1 FY22, it had already increased its balance sheet provisions to £304.0m, some £187.4m (161%) above pre-lockdown levels (Fig 5, page 4). The fact that the YTD P&L impairment charge ex-Novatis was only 0.5% offers hope that CBG’s u/l provisioning may remain in check; we model P&L impairment charges of 1.1%/0.9%/0.8% through FY22/FY23/FY24e. With a solid CET1 capital ratio of 14.9% at Q3 FY22, we see little reason why a “generous” distribution policy should not be maintained. Our DPS forecasts of 66p/72p/78p for FY22/FY23/FY24e (Fig 6, page 4) imply a prospective dividend yield of 5.9%/6.5%/7.0%. Relative to history, CBG’s premium rating has sharply compressed. P/tNAV is down from 2.5x in FY15 to 1.2x/1.1x/1.0x FY22/FY23/FY24e tNAV (Fig 7, page 5). Although our ROTE expectations of 13.0-13.5% through FY22-FY24e (Fig 8, page 5) are, perhaps, unremarkable, in absolute terms the shares appear supported. Buy rec maintained, albeit we reduce our EPS forecasts by 6%/7%/5% through FY22/FY23/FY24e and cut our TP to 1320p (from 1430p).
Steady performance in a changing environment We reduce our EPS estimates by 6%/7%/8% for FY22/23/24E, primarily to reflect a higher cost of risk due to a less favourable economic outlook, which drives IFRS9 provisions. Underlying performance remains robust, and our TP, which falls 8% to 1,395p, is above the share price and supports our Add recommendation. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com 3-page note
Following their Q3 trading update we are modestly reducing our EPS forecasts for Close. As expected WINS was trading a little better that it did in H1 and the loan book growth was also in line with our forecasts. However, higher inflation has resulted in impairment increasing a little, and we assum
Close Brothers performed well in 3Q22 with loan book growth of 1.8% QoQ to £8.8bn highlighting good momentum and robust demand in their core markets. Net interest margin also remained strong at 7.8% YTD although the bad debt ratio increased marginally to 1.2% YTD (1H21: 1.1%) reflecting higher IFRS9 provisions due to a cautious macroeconomic outlook. As expected, client assets at CBAM reduced due to negative market movements although Winterflood’s trading income improved. We reduce our FY22 operating profit by 10.6% for the higher impairment charge and a reduction in assets at CBAM, which also leads a c.2% fall in FY23 and FY24 estimates, resulting in our TP falling to 1435p (from 1480p). However, with 33% upside and CBG trading at FY22E P/TBV and P/E of 1.2x and a P/E of 9.5x for RoTE of 12.5% rising to 14.0% in FY23, we maintain our BUY rating.
Close Brothers’ Q3 trading update to 30 April 2022 signalled that the group had “performed well during the quarter with continued momentum across our lending businesses and robust demand in our core markets”. However, we downgrade our FY22F adjusted EPS forecast by 8% to 116p primarily due to a higher IFRS 9 impairment charge, with future years broadly unchanged. Our sum-of-the-parts fair value reduces to 1325p (from 1380p), but with 24% upside we retain our BUY stance.
Meeting Notes - May 20 2022
CBG ONT BYG CREO 4556 KNOS 284620 KGF WINA DIISF
Mostly weaker in Q3 but WINS improves
Wincanton : YTD the shares are up 9% - there is more to go Analyst - Andy Smith +44 (0)20 7886 2760 The FY22 prelims confirmed Adj. PBT at £58.1m, representing growth of 23%. This is slightly ahead of our forecast of £57.0m and highlights Wincanton’s increased exposure to the e-fulfilment and Public and Industrial sectors which combined now account for c45% of revenues. EBIT margins increased to 4.5% (FY21: 4.2%) and demonstrate the ability to protect margins and to pass on inflationary cost increases (e.g. mainly drivers and fuel), with 72% of revenues now being sourced from open book contracts. Wincanton’s share price has outperformed in 2022, up 9% YTD and we argue there is more to go as the transition into higher margin warehouse services becomes better understood by investors. We keep our FY23 Adj. PBT unchanged at £62.1m representing growth of 7%, though with the shares trading on a FY23E PE rating of 10x and offering a dividend yield of 3.3% the valuation is by no means stretched. We maintain our BUY recommendation and target price of 500p. Read More... Kier : Initiation of coverage – Foundations complete Analyst - Adrian Kearsey +44 (0)20 7886 2763 Kier, the leading tier-1 contractor with key strengths in public sector and regulated industry construction, has restructured, refinanced and refocused its business. Consequently, it is well placed to benefit from the government’s supportive policy initiatives. However, due to its poor free cash flow record and historical leverage, the shares trade on a >55% P/E discount to its peers. As investors see the free cash conversion return to historical norms and see further reductions in leverage, confidence will undoubtedly grow, and the valuation discount should disappear. Please see our full report published this morning or contact your Panmure Gordon representative for further details. Read More... Close Brothers Group : Taxing Analysts - Phil Dobbin +44 (0)20 7886 2776 & Rae Maile +44 (0)20 7886 2860 The company’s Q3/22 statement (to end April) is a little mixed in terms of trading, with a single year sting when it comes to tax. The company believes that it has performed well in the quarter and there is certainly loan book growth, unlike in Q2/22. This is mitigated by modest drift in the NIM and a higher provisioning rate (on forward looking macro) and so consensus Banking estimates are likely to slip. Few mark Asset Management to market (we are also guilty) and so weak markets will cause downgrades here too, albeit less important to sentiment, while much less was already expected of Winterflood. Changes to the bank surcharge will crystalise a deferred tax impact in H2/22E, and so while there is modest downward pressure on PBT estimates, for this year there will be a bigger impact on EPS. There is little here to re-rate the shares we feel, LendInvest (BUY) is a much more compelling specialist play. Read More... Knights : Year end trading update Analyst - Robert Plant +44 (0)20 7886 2784 The company has issued a trading statement for the year end April 2022 which seems slightly positive to us, given the context of the profit warning in March. We have maintained our underlying EPS forecasts for FY22/3/4 but then added a contribution for the acquisition of Coffin Mew, announced today, in FY23 and FY24, so in these years our EPS rises by 1% and 2% respectively. Read More...
CBG KIE KGH WINA
The company’s Q3/22 statement (to end April) is a little mixed in terms of trading, with a single year sting when it comes to tax. The company believes that it has performed well in the quarter and there is certainly loan book growth, unlike in Q2/22. This is mitigated by modest drift in the NIM and a higher provisioning rate (on forward looking macro) and so consensus Banking estimates are likely to slip. Few mark Asset Management to market (we are also guilty) and so weak markets will cause downgrades here too, albeit less important to sentiment, while much less was already expected of Winterflood. Changes to the bank surcharge will crystalise a deferred tax impact in H2/22E, and so while there is modest downward pressure on PBT estimates, for this year there will be a bigger impact on EPS. There is little here to re-rate the shares we feel, LendInvest (BUY) is a much more compelling specialist play.
Although Russia’s invasion of Ukraine may lead to lower economic growth in the short-term, with the market expecting the UK base rate to rise to 2.0% by year-end, banks are at long last set to benefit from economic tailwinds. This, coupled with the potential for further COVID-19 provision releases, should lead to earnings beating estimates, which remain conservative. We continue to prefer the specialist lenders, as they have carved out niches and are becoming leaders in their respective markets, such as BTL mortgages and SME lending. They also offer higher growth and returns at attractive valuations of FY22E PE and P/TBV of 7.6x and 1.2x for RoTE of 16.7%, compared to large UK banks on 9.0x and 0.8x for RoTE of 8.4%. Among the challenger banks we prefer Virgin Money UK, as we estimate it to benefit the most from interest rate rises and believe there remains scepticism regarding its digital investment and returns potential. Metro Bank has improved its product mix and margins but we continue to believe its model remains challenged, with no profits in sight. We upgrade CBG to a BUY (from HOLD), as we believe the recent share price fall is overdone and increase our TP for OSB to 790p (from 645p) and Paragon to 650p (from 630p) while maintaining BUY.
CBG DFCH MTRO OSB PAG VMUK
1H22 results in line, macro headwinds are building Close Brothers Group (CBG) is facing growing pressures on growth and costs, but continues to generate strong returns (ROTE of 14% in 1H22) and is well positioned to grow when conditions allow. We reduce EPS estimates by 3%/10%/9% for FY22/23/24E, and our TP falls 8% to 1,517p, but we retain our Add recommendation given the stock’s medium-term potential. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com 8-page note
Following the first half results we have modestly adjusted our forecasts. The largest change is to our forecast for Winterflood, which saw its income per bargain decline to the lowest level we have ever seen in H1 this year. However, with recent market volatility we believe WINS will have a better
Close Brothers’ H1 results to 31 January 2022 showed flat earnings as growth in Banking and Asset Management was offset by a sharp fall at Winterflood. Despite this, the group announced a 22% increase in the interim dividend, reflecting confidence in the strength of the business model and balance sheet. Although we have trimmed our earnings forecasts by another 4-6%, the c.23% fall in the share price year-to-date (including a c.11% drop on the results) feels overdone to us and has created a rare investment opportunity in a quality lender that is all too often priced at a premium. We upgrade to BUY (from Hold) with a revised fair value of 1,380p (previously 1,465p) while noting the attractive >6% prospective dividend yield.
In its trading update in January the company stated that it expected to deliver a ‘solid’ first half. However, we noted that its loan book growth was mitigated by repayments in Property Finance, and we needed to increase our provision estimate for its Novitas book. We also reduced estimates to reflect moderating activity at Winterflood. First half results today report adjusted PBT at £128.9m compared to our £122.1m. Banking was modestly ahead and Winterflood below our estimates. Market estimates need to reflect inflationary pressures in Banking and a ‘slight’ negative impact for it from rising interest rates. The company states that it remains well placed to deliver on a track record of profitability and disciplined growth. However, to us its access to funding post periods of stress is no longer unique. Hold.
1H22 results: robust performance in challenging conditions Close Brothers Group’s (CBG) profits for 1H22 were flat on 1H21 and c.50% of FY22 consensus expectations. Stronger margins entering 2H22 should offset weakening lending growth, cost inflation and a more challenging market environment. The valuation has in our view adjusted to reflect shorter-term pressures and we retain our Add recommendation. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
1% u/l PBT consensus beat… A mixed bag. In aggregate, underlying profit before tax of £129.8m is +1% year-on-year (Fig 3, page 3) and a small (1%) beat against Bloomberg consensus. Relative to our own divisional forecasts, we see a better-than-expected performance in Banking, primarily reflecting a welcome NIM expansion from 7.7% to 7.9%. Asset Management also performed well with u/l PBT +18% YoY, though the contribution from the Securities business (Winterflood) was even worse than prior guidance, with u/l PBT down 74% YoY. Positive Banking and Asset Management performances offset pronounced Winterflood weakness… Within the key Banking division, u/l PBT was up 26% YoY to £120.2m, ahead of our expectations. The highlight was a NIM expansion from 7.7% to 7.9%, reflecting a combination of pricing discipline, mix and lower funding costs. (Note that, unlike the “high street” banks, CBG is not positively geared to rising interest rates). However, net loan book growth was lacklustre, +1.9% HoH to £8.6bn (Fig 2, page 2), with a small retrenchment in January. The impairment charge improved to 1.1% (H1 FY21: 1.3%) or just 0.2% excluding the Novatis portfolio (in run-off). Asset Management delivered a robust performance, with u/l PBT of £14.5m (+18%). The Securities business recorded a sharp 74% YoY fall in u/l PBT to £8.8m reflecting a “normalisation” in trading volumes but with a weaker mix. This is Winterflood’s lowest contribution since H1 FY16 (Fig 1, page 2). Dividend ahead of expectations… The capital position remains robust with a CET1 capital ratio of 15.1% and the Interim Dividend of 22p is up 4p YoY and 10% ahead of consensus (20.1p). Our current forecasts imply a prospective yield of 5.5%/6.0%/6.5% through FY22/FY23/FY24e. Call at 09:30. On 1.3x FY22e tNAV (Fig 4, page 3) Buy rec reaffirmed. TP and the finer detail of our forecasts now under review.
Close Brothers Group^ (CBG, Hold at 1208p) - H1 results show flat profits but dividend up 22%
Strong banking and AM growth offset by WINS
As discussed in our report, A worse-than-expected slowdown (21 Jan), CBG’s pre-close trading update disappointed, guiding to a sharply lower Winterflood contribution, weak loan growth and slightly elevated impairments. As such, we are not unduly surprised that CBG has been (by far) the worse performing UK-headquartered bank in 2022 year-to-date (Fig 1, page 2 of full report), and the shares have now de-rated from 2.5x tNAV in FY15 to 1.3x FY22e (Fig 2, page 2). Sharply lower trading volumes at WInterflood are now guided to trigger a c.70% YoY decline in the Securities division contribution in H1 FY22 (Fig 3, page 3). The performance and outlook of the Asset Management division remains positive (Fig 4, page 3) but this is too small to “move the dial”. The Banking division is a “mixed bag”. Encouragingly, NIM “remained strong” (FY21: 7.7%). Also, perhaps unsurprisingly, the “underlying credit performance of the loan book was strong”, but guidance to an annualised bad debt ratio of c.1.1% in H1 FY22 reflects a further (hopefully non-recurring) charge in relation to the Novatis loan book which is already in run-off. We expect Banking PBT to reach a new high by FY24e (Fig 5, page 4) despite a slowing pace of loan growth; we model 6%/3%/3% through FY22/FY23/FY24e (Fig 6, page 4). In aggregate, although we forecast a small decline in profits in FY22e (Fig 7, page 5) due to a sharp “normalisation” of the Securities division contribution, we see reasonable underlying momentum. Our EPS forecasts of 125.5p/135.9p/140.3p imply strong coverage for DPS of 66p/72p/78p through FY22/FY23/FY24e (Fig 8, page 5), a prospective FY24e dividend yield of 6.2%. CBG boasts a strong capital position; a CET1 capital ratio at 31 Dec 2021 of 15.7% vs a minimum regulatory requirement of 7.6% (Fig 9, page 6). On 1.3x FY22e for ROTEs of 13.6%/13.9%/13.5% in FY22/23/24e (Fig 10, page 6), we upgrade to Buy (from Hold). TP cut to 1430p (from 1510p).
CBG CCC ENT N91 PTEC DELRF
Meeting Notes - Jan 24 2022
CBG VOD UTG IPO ATG MARS MAB TIFS DELRF
As discussed in our report, A worse-than-expected slowdown (21 Jan), CBG’s pre-close trading update disappointed, guiding to a sharply lower Winterflood contribution, weak loan growth and slightly elevated impairments. As such, we are not unduly surprised that CBG has been (by far) the worse performing UK-headquartered bank in 2022 year-to-date (Fig 1, page 2), and the shares have now de-rated from 2.5x tNAV in FY15 to 1.3x FY22e (Fig 2, page 2). Sharply lower trading volumes at WInterflood are now guided to trigger a c.70% YoY decline in the Securities division contribution in H1 FY22 (Fig 3, page 3). The performance and outlook of the Asset Management division remains positive (Fig 4, page 3) but this is too small to “move the dial”. The Banking division is a “mixed bag”. Encouragingly, NIM “remained strong” (FY21: 7.7%). Also, perhaps unsurprisingly, the “underlying credit performance of the loan book was strong”, but guidance to an annualised bad debt ratio of c.1.1% in H1 FY22 reflects a further (hopefully non-recurring) charge in relation to the Novatis loan book which is already in run-off. We expect Banking PBT to reach a new high by FY24e (Fig 5, page 4) despite a slowing pace of loan growth; we model 6%/3%/3% through FY22/FY23/FY24e (Fig 6, page 4). In aggregate, although we forecast a small decline in profits in FY22e (Fig 7, page 5) due to a sharp “normalisation” of the Securities division contribution, we see reasonable underlying momentum. Our EPS forecasts of 125.5p/135.9p/140.3p imply strong coverage for DPS of 66p/72p/78p through FY22/FY23/FY24e (Fig 8, page 5), a prospective FY24e dividend yield of 6.2%. CBG boasts a strong capital position; a CET1 capital ratio at 31 Dec 2021 of 15.7% vs a minimum regulatory requirement of 7.6% (Fig 9, page 6). On 1.3x FY22e for ROTEs of 13.6%/13.9%/13.5% in FY22/23/24e (Fig 10, page 6), we upgrade to Buy (from Hold). TP cut to 1430p (from 1510p).
Ready and waiting Close Brothers Group (CBG)’s trading update for 5M22 demonstrates it remains well positioned for growth. Although underlying momentum is positive in many areas, however, growth in Banking and Securities is below consensus. Our estimates reduce slightly and our TP falls 1% to 1,644p, but the investment case and our Add recommendation are unchanged. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com 6-page note
Following the pre-closed update we have modestly adjusted our forecasts. The largest change is to our forecast for Winterflood, which has seen its run-rate revenues decline to pre-Covid levels. Our Winterflood H1 pre-tax profit forecast declines from £13.8m (down 60% on H1 last year) to £10.8m, (do
Housekeeping: We update our forecasts to reflect the recovery momentum seen in customer volumes during 3Q21 and our expectation that this continued through 4Q21 despite the residual Covid-19 disruption to customer production. FY21E upgrades: We increase our FY21E adjusted EBITA estimate by 8.1% to $190.3m, driven by a 9.8% increase in our revenue forecast (to $1,432m, up $127m) partly offset by a minor 20bps decrease in our adjusted EBITA margin to 13.5%. These changes reflect a continuation of volume recovery (+6% in Jan-Oct 2021 versus the 2019 comparative period) in 4Q21 versus our previous estimate and the benefit of higher selling prices as cost inflation (mainly raw materials, energy and freight) is passed through. Minor changes to finance and tax charges result in our FY21E adjusted EPS increasing 11.1% to 6.5c. Outer year upside risk: The higher FY21E revenue base also lifts our outer years by 10% (FY22E up to $1,494m and FY23E to $1,543m). This higher revenue is mostly offset by our assumptions of increased operating costs and lower Performance Materials (PM) margins, reflecting the current US labour cost inflation and availability headwinds. Our FY22E adjusted EPS increases by 1.8% to 7.2c, and FY23E by 2.1% to 7.7c. There is scope for PM margins to improve more quickly if the company accelerates its automation plans or US labour market restrictions ease. Stronger balance sheet: Our cashflow estimates now reflect an assumption that pension contributions reduce in outer years. This is due to the deficit on the main UK pension scheme declining significantly in FY21, thereby increasing the likelihood of a lower company contribution agreement at the next tri-annual review (due by end-2022). Our FY23E net debt reduces by $44m to $128m or 0.5x our FY23E adjusted EBITDA, giving significant capital for organic investment, further bolt-on M&A, and dividend growth. Prelims due 3 March.
CBG COA RTN WRKS
Winterflood contribution set to fall c.70% in H1 FY22 vs H1 FY21… Close Brothers had previously flagged a slowdown in trading within its Securities Business, Winterflood. However, today’s statement goes further, guiding to an H1 FY22 operating profit “broadly in line with the H1 FY20 run-rate (£10.6m)”. Recall that in H1 FY21, Winterflood benefitted from exceptionally strong trading conditions, achieving an operating profit of £34.2m for the period. As such, it appears that CBG is now guiding to a c.70% YoY fall in H1 FY22. This will, we expect, lead to meaningful downgrades to the existing company-compiled divisional consensus of £31m for FY22. Banking: net loan growth continues to slow, with impairments higher than our existing forecast… As we expected, loan growth slowed further through November/December 2021, with the loan book increasing by a net c.£40m (0.5%) to £8.69bn in the two months to 31 Dec 2021 (Fig 1, page 2). This equates to an annualised run-rate of c.3% vs 11% achieved in FY21, which was flattered by CBG’s extensive participation in the Government-backed CBILS scheme which has since closed. The statement (once again) references “continued high repayments in the Property business”. The annualised impairment charge was “broadly in line with the previous financial year (FY21: 1.1%)”, slightly worse than our existing forecast of 0.9% for H1 FY22e. The statement references a “strong” underlying credit performance, but seemingly this is balanced by further charges against the Novitas business, which represents c.2.1% of group loans and is in run-off. The CET1 capital ratio remains strong at 15.7%, down 0.1% vs FY21. (The ratio on a “fully loaded” basis is 14.3%). Robust Asset Management performance and a “solid” outlook statement… The Asset Management division performance offers some encouragement with annualised net inflows of 8% (FY21: 7%) and a £1.0bn increase in total client assets to £18.0bn over the 5 months to 31 Dec 2021 (benefitting from rising equity markets). The outlook statement anticipates a “solid first half performance across our businesses”; H1 FY22 results are due 15 March. CBG has been the worst performing UK headquartered bank in our coverage YTD (Fig 2, page 2). Hold rec maintained; TP/forecasts under review.
Resilient performance in less constructive markets For the 5M to December 2022 Close Brothers Group (CBG) has performed resiliently, though growth has slowed in the Banking and Securities divisions. Likely modest estimate downgrades will in our view provide a headwind for the share price in the short term, although the longer-term prospects are undiminished and the stock deserves its premium rating of 1.5x TNAV. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
Close expects to deliver a “solid” first half performance but consensus estimates were looking for rather more we believe. Loan book growth in the Bank is running below our estimate for the half year (having increased our assumption after Q1/22) and Winterflood’s trading performance has normalised rather more quickly than consensus has been expecting. The company’s balance sheet is strong, but the argument at this stage should have been about accelerating loan book growth we believe. Lower estimates for the Bank and for Winterflood will not help the rating. At best Close is a HOLD.
Slightly light of our estimates
We make no changes to our existing forecasts; see our report, Enough! (25 Nov) when we “opportunistically” turned positive on the stock. Our EPS forecasts of 138.1p/143.8p/149.0p through FY22/FY23/FY24e are ahead of current Bloomberg consensus by just 3.0%/1.4%/0.1% respectively. However, we suspect that the primary difference in FY22e relates to our relatively constructive assumptions on the outlook for impairments. CBG enjoys a premium valuation relative to all UK peers within our existing coverage, now trading on 1.6x/1.5x/1.4x/1.3x FY21/FY22/FY23/FY24e tNAV (Fig 1, page 1). We regard this as “generous” in relative terms, albeit “supportable” in absolute terms, in the context of our ROTE forecasts of 14.9%/14.4%/14.0% through FY22/FY23/FY24e, (Fig 2, page 2). We expect a slowing pace of loan growth in FY22. After a small net contraction in FY20, CBG achieved net loan growth of 10.9% in FY21. However, this was entirely driven by CBG’s enthusiastic participation in the Government-backed CBILS programme, which is now closed to new applications. Existing approvals provided a tailwind at the start of FY22, though we model net loan growth of only 6.3%/3.6%/3.5% for FY22/FY23/FY24e (Fig 3, page 3). CBG’s FY21 outturn was broadly flat vs FY19, with an exceptional contribution from the Securities business offsetting the impact of elevated impairments within the Banking division. Looking ahead, we anticipate only modest EPS growth (3.4% CAGR through FY22-FY24e) with a recovery in the Banking division substantially offset by a fading contribution from Securities (Fig 4, page 3). CBG is due to release a pre-close statement on 21 January 2022, ahead of H1 FY22 ending on 31 January 2022. We would anticipate few surprises. On 9.7x FY24e EPS we downgrade to Hold (from Buy).
As discussed in our report, Slowing Down (18 Nov), the most notable feature of CBG’s Q1 FY22 IMS was a sharp reduction in the contribution from Winterflood, its Securities business. Messaging in relation to the Banking division (on loan growth, NIM and credit) and for Asset Management, was broadly consistent with our expectations. After four months of pronounced underperformance (Fig 1, page 1), CBG’s premium rating has started to erode (Fig 2, page 3). Indeed, after trading on a P/tNAV of 2.5x in FY15 we now see CBG on 1.4x/1.3x/1.2x FY22/23/24e (Fig 3, page 3). Underlying profit before tax in FY21 marginally exceeded FY19, courtesy of an outsized contribution from Winterflood (Fig 4, page 3). We do forecast further moderate growth in u/l PBT through FY22-FY24e, (Fig 5, page 4) primarily driven from normalisation of the impairment charge, which remained elevated at 1.3% in FY21. We expect loan growth to slow (Fig 6, page 4) after an impressive 10.9% growth in FY21, heavily supported by CBILS. The evolution of CBG’s provisioning through the lockdown crisis has been unusual. Coverage has increased from 1.3% in H2 FY18 to 3.0% in H1 FY21 and then to 3.2% in H2 FY21. CBG’s stock of balance sheet provisions increased to a record £280.4m in H2 FY21 (Figs 7/8, page 5) at a time when most other banks were starting to write back excess provisions. With a Q1 FY22 CET1 capital ratio of 15.7% we forecast DPS of 66p/72p/78p through FY22/23/24e (Fig 9, page 6), a prospective yield of 4.9%/5.4%/5.8%. On 1.4/1.3/1.2x FY22/23/24e tNAV for ROTEs of 14.9%/14.4%/14.0% through FY22/23/24e (Fig 10, page 6), we upgrade to Buy (from Hold). TP reduced to 1510p (from 1545p).
Close Brothers Group plc OSB Group PLC
Reduced estimates, unchanged investment case Slower volumes in Securities and a revision to our expectations for Banking have led us to reduce our EPS estimates (6% for FY22, 11.5% for FY23 and 9.8% for FY24). We reduce our target price by 9%, from 1,826p to 1,660p. However, in our view the investment case is unchanged and we retain our Add recommendation. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com 4-page note
We were not anticipating a change of view from FY21 results, reported at the end of September. The company’s outlook at that point was fairly non-committal, stating that 'looking ahead, we are encouraged by the improvement in the economic outlook although the trajectory remains uncertain'. In today’s Q1 trading update the company is encouraged by performance at this stage of the year. The bank loan book has progressed slightly ahead of our 6% growth rate, net flow in Asset Management at 8% of AUM is also ahead, and NIM and credit quality are strong. Winterflood, however, saw a further moderation of activity to pre-Covid levels, which impacts our profit estimates and reduces our TP modestly. Our view remains unchanged, that what made Close unique among specialist lenders emerging from the financial crisis is no longer the case. The rating is fair for the balance of risk and opportunity we believe. Hold.
Securities trading softens… Winterflood enjoyed an exceptional FY21, achieving an underlying profit before tax of £60.7m, more than three times its contribution of £20.0m in FY19, (Fig 2, page 2). As such, today’s news that it has “experienced a further moderation in trading” is directionally unsurprising. That said, the fact that income in the quarter has reverted to “close to pre-COVID19 levels” is, we think, slightly disappointing; certainly it represents a sharper pace of normalisation than management anticipated at the time of its capital markets day on 15 June 2021. Banking loan growth starts to slow… After robust +10.9% loan growth in FY21, (following on from a 0.2% contraction in FY20), the pace of growth has started to moderate; +2.4% QoQ in Q1 FY22 to £8.6bn, (Fig 1, page 2). This is unsurprising, with growth in this quarter still supported by conversion of the tail-end of Close Brothers’ CBILS pipeline. However, without this transitory Government support, it remains our expectation that growth will slow from here; we currently forecast only 6.3% YoY growth in FY22e. Resilient… Elsewhere, most metrics exhibit characteristic Close Brothers’ resilience. The CET1 capital ratio declined by only 0.1% QoQ, still standing at a robust 15.7%. NIM is said to have “remained strong”, albeit this is unquantified. The Asset Management business achieved annualised net inflows of 8% (vs 7% in FY21) with total client assets rising by £0.4bn QoQ to £17.4bn. CBAM’s highly regarded CEO Martin Andrews is to step down after 13 years at the helm. Close Brothers has been the worst performing share within our UK banks coverage over the past four months, but it continues to enjoy a premium rating, trading on 1.5x FY22e tNAV for ROTEs of 15.4%/14.6%/13.9% through FY22/FY23/FY24e. No call today. Hold rec maintained, with forecasts and target price under review.
1Q22: moderation in Securities volumes Trading in Banking and Asset Management in 1Q22 has been strong, although lower volumes and mix changes have reduced Winterflood income. We anticipate modest consensus estimate reductions but the wider investment case is unchanged. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
Despite the end of CBILS lending, which we believe brought forward borrowing, the loan book increased by a very respectable 2.4% in the quarter to £8.6bn, with invoice, motor and asset finance driving growth. The NIM has remained robust and credit quality and the CET1 ratio (slightly down to 15.7%
Close Brothers’ full year results to 31 July 2021 (published on 28 September) showed a sharp recovery in profitability driven by lower impairments in the Banking division and supernormal performance from Winterflood. However, they were slightly overshadowed by the decision to close Novitas, the legal services lending business that was acquired in 2017, due to performance issues. This was a surprise to us and we wonder whether it could be an early sign of model stretch. Looking forward, the group is facing a couple of headwinds, namely a normalisation of the trading environment for Winterflood and higher interest rates, to which Close is unusually (for a bank) negatively correlated. We update our model, making only minor changes to our forecasts, and increase our fair value to 1,560p (from 1500p) on roll-forward. With just 5% upside, we reiterate our HOLD recommendation.
Good progress, positive outlook For the year to July 2021 (FY21) Close Brothers Group (CBG) comfortably beat consensus expectations and it is now set to deliver attractive growth in future periods whilst trading at undemanding valuation multiples. We increase our target price by 1.7% to 1,826p and keep our Add recommendation. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com 7-page note
FY21 earnings per share of 134.8p were marginally (0.1%/0.4%) ahead of FY18/FY19 levels (Fig 6 of the full report). This reflected the support of a record £60.9m contribution from the Securities Division (Fig 1), up £40.9m (205%) vs FY19, broadly offsetting the impact of higher expenses and elevated impairments. The Securities Division performance in FY21 was exceptional, but transaction volumes fell steadily through H2 FY21, and its contribution declined by 22% HoH in H2 FY21 (Fig 4). Seemingly, norrmalisation has begun? The other particularly bright spot in CBG’s performance in FY21 was a jump in loan growth to 10.9%, after a 0.4% net contraction in FY20 (Fig 2). However, this primarily reflected the impact of £1.14bn of lending under Government-backed lending schemes (Fig 3), the contribution from which is now likely to fade; we model net loan growth of only 6.3% in FY22e. In contrast to most UK bank peers, CBG’s stock of balance sheet provisions continued to build in H2 FY21 (Fig 9) albeit in large part reflecting higher charges in relation to the group’s Novitas lending, which has been discontinued. Coverage has now risen to 3.2% vs only 1.3% in H2 FY19. The group impairment charge remained elevated at 1.1% in FY21 (Fig 8) although, with Novitas issues thought to be well provisioned, we model steady improvement to 0.8%/0.7%/0.7% through FY22/FY23/FY24e. The group remains well capitalised (CET1 capital ratio 15.8% at 31 July 2021), and we model a progressive FY22/FY23/FY24e dividend of 64c/69c/74c, a prospective dividend yield of 4.1%/4.4%/4.7%. However, with the shares already enjoying a premium valuation of 1.8x FY21 tNAV (Fig 10) for ROTEs of 15.4%/14.6%/13.9%, we retain a HOLD rec.
CBG GNC IOM JDW
FY21 earnings per share of 134.8p were marginally (0.1%/0.4%) ahead of FY18/FY19 levels (Fig 6, page 4). This reflected the support of a record £60.9m contribution from the Securities Division (Fig 1, page 1), up £40.9m (205%) vs FY19, broadly offsetting the impact of higher expenses and elevated impairments. The Securities Division performance in FY21 was exceptional, but transaction volumes fell steadily through H2 FY21, and its contribution declined by 22% HoH in H2 FY21 (Fig 4, page 3). Seemingly, norrmalisation has begun? The other particularly bright spot in CBG’s performance in FY21 was a jump in loan growth to 10.9%, after a 0.4% net contraction in FY20 (Fig 2, page 2). However, this primarily reflected the impact of £1.14bn of lending under Government-backed lending schemes (Fig 3, page 3), the contribution from which is now likely to fade; we model net loan growth of only 6.3% in FY22e. In contrast to most UK bank peers, CBG’s stock of balance sheet provisions continued to build in H2 FY21 (Fig 9, page 6) albeit in large part reflecting higher charges in relation to the group’s Novitas lending, which has been discontinued. Coverage has now risen to 3.2% vs only 1.3% in H2 FY19. The group impairment charge remained elevated at 1.1% in FY21 (Fig 8, page 5) although, with Novitas issues thought to be well provisioned, we model steady improvement to 0.8%/0.7%/0.7% through FY22/FY23/FY24e. The group remains well capitalised (CET1 capital ratio 15.8% at 31 July 2021), and we model a progressive dividend of 64c/69c/74c through FY22/FY23/FY24e, a prospective dividend yield of 4.1%/4.4%/4.7%. However, with the shares already enjoying a premium valuation of 1.8x FY21 tNAV (Fig 10, page 7) for ROTEs of 15.4%/14.6%/13.9%, we retain a HOLD rec.
Following its FY results, we have made some modest changes to our forecasts for Close. Our EPS for this year moves to 135.5p from 139.4p and for next to 152.0p from 154.5p. Close is being valued at 11.1x historic earnings, and Close traditionally trades very strongly coming out of recessionary peri
Premium performance justifies premium rating For the year to July 2021 (FY21), Close Brothers Group (CBG) soundly beat consensus estimates, due especially to a strong credit performance in Banking, and the attractive growth outlook is intact. We remain positive on the shares. Buy, TP 1,795p Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
Adjusted PBT for the year to July 2021 was well ahead of consensus and our own expectations after the company was able to write back provisions taken last year. Unfortunately such a performance is not the kind of thing to be extrapolated and so estimates for the current year are little changed. Close is a prudent, well-managed business with an enviable track record of that there is no doubt. The issues currently are that the outlook for the economy remains unclear as Government support schemes fall away while what made Close unique among specialist lenders emerging from the financial crisis is no longer the case. The rating is fair for the balance of risk and opportunity we believe. HOLD.
Profit increases 88% as recovery commences
Marginal 0.5% u/L PBT “beat” vs INVe in H2 FY21… Relative to our forecasts, u/l PBT of £142.2m in H2 FY21 represents a very small (0.5%) “beat”, with lower impairments fully compensating for a slight disappointment on revenues. Relative to Bloomberg u/l PBT consensus, the H2 FY21 outturn notionally represents a 12.3% “beat”, albeit we would caution that both company-compiled and Bloomberg consensus figures appear “stale” to us. With broadly “in line” performances in Asset Management and Winterflood, the consensus beat is largely attributable to lower impairments within the Banking division. Robust capital position and normalised dividend… The CET1 capital ratio has strengthened from 14.1% in FY20 to 15.8% in FY21, largely reflecting (1) a combination of retained earnings following a return to profit (after recording a loss in H2 FY20) and (2) lower risk-weighted assets due to the de facto “substitution” of lending under the Government-backed CBILS scheme for traditional commercial lending. Loan book growth, from £7.6bn in FY20 to £8.4bn in FY21 was primarily driven by CBILS, and represented CBG’s best year for growth since FY16. Without fresh support from Government-backed lending schemes, we expect the pace of loan growth to moderate in FY22e and beyond. A final dividend of 42.0p (INVe: 44.0p, Bloomberg consensus: 40.5p) represents a 5% YoY increase vs FY20 and the FY21 dividend of 60p equates to a dividend yield of 3.8%. Call at 09:30 today… Call at 09:30, dial-in: +44 (0)20 3059 5875 (registration required) or via webcast. Trading on 1.7x FY22e tNAV against our current ROTE forecasts of 15.5%/14.6%/14.1% for FY22/FY23/FY24e, CBG continues to enjoy a very significant valuation premium relative to peers. HOLD rec maintained, forecasts/TP under review.
We forecast u/l profit before tax of £270.0m in FY21e, broadly in line with £270.5m in FY19, and a strong rebound from £144.0m in FY20. The key positive has been a sharp jump in contribution from Securities, to £73.1m in FY21e vs £47.9m in FY20 and just £20.0m in FY19 (Fig 1, page 2). The contribution from Banking has only partly recovered vs FY19, reflecting a lower NIM and higher costs and impairments. Despite this, we still expect the Banking division to contribute 67% of u/l PBT (ex Central Items) in FY21e. NIM has stabilised (reflecting a benefit from lower retail funding costs and CBG’s £490m TFSME drawings in the second half of 2020), and impairment charges have been less severe than FY20. However, the real story has been a resumption of net loan growth. After a 0.4% YoY decline in FY20, we forecast growth of £0.8bn (10.3%) in FY21e, (Fig 2, page 2). The return to growth is entirely due to drawings under Government-backed lending schemes (primarily CBILS) which reached £1.1bn at 30 June (13% of an £8.3bn loan book) with a further £0.2bn credit-approved. Without this boost, we believe lending would have remained anaemic, and we continue to expect a slowdown in net lending in FY22/FY23e. The CET1 capital ratio reached 15.9% at 30 June (or 14.2% ex-transitory reliefs), partly reflecting a lower RWA density, again due to the CBILS lending. We raise our EPS forecasts by 0.3-0.6% through FY21-23e and we introduce our FY24e forecasts. Our DPS forecasts are >2x covered and represent prospective dividend yields of 4.1%/4.3%/4.6%/4.9% through FY21/FY22/FY23/FY24e, (Fig 3, page 3). On 1.4x FY24e tNAV for a 16.9% ROTE in FY21e (flattered by a low tax rate) and 15.5%/14.6%/14.1% through FY22/FY23/FY24e, Hold rec maintained.
Finessing numbers: steady progress continues Close Brothers Group (CBG) provided a trading update for the 11M to June 2021, showing a strong performance across all divisions. Our TP reduces 1% to 1,795p, but prospects remain attractive and we retain our Add recommendation. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com 5-page note
The pre-close trading update confirms the Q3 view from the company that it has ‘continued to perform strongly’ in the period. However, for the first time in a while we find no reason to make significant changes to our estimates. To us the company remains a well-managed business, however, the business model in its key division, Banking, is no longer unique and a key driver of its loan growth this year has been the government CBIL programme which has limited volumes still in pipeline. Hold.
Following their pre-close trading update, we have, as promised, modestly upgraded our forecasts. Our EPS forecast for the year to July 2020 increases 5% to 133.2p from 126.9p, for next year, it increases 5% to 139.4p from 132.7p and for the year after it increases 1% to 154.5p from 153.4p. Close is
11M21 trading update: more of the same Close Brothers Group has reported a reassuring trading update for the 11m to the end of June 2021. Banking and Asset Management continue to grow and Winterflood volumes have moderated in line with expectations. Estimates are unlikely to move significantly and we remain positive on the shares. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
A strong pre-close statement, upgrade to Buy
Multiple growth drivers justify premium valuation Close Brothers Group’s investor event heralded no changes to the company’s already successful strategy, but revealed a plethora of opportunities for all divisions, which reinforce the diversified, sustainable growth credentials of the business. CBG’s premium rating is well supported and we retain our Add recommendation and 1,815p TP. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
One of the great things about the Close Brothers' banking model is that it is both the right one, and it doesn't change. Therefore, we are pleased to say that our key takeaway from the CMD is that the Close model remains unchanged. Close highlighted the consistency of the model, in terms of returns
Close Brothers had endured a slowing pace of loan growth through FY17-FY20 (Fig 1, page 2). However, the scale of its use of Government-backed lending programmes has significantly exceeded our expectations. By 30 April 2021, it had advanced £966m under these schemes (mainly CBILS), representing c.12% of the loan book (Fig 2, page 2). As such, after slight loan book contraction in FY20 we now forecast 9% YoY growth in FY21e. The “mix-shift” translates into lower RWA density and a stronger CET1 capital ratio of 15.5% at Q3 FY21e (Fig 3, page 3), albeit flattered by transitory reliefs. The scale of improvement in the contribution from the Securities division has been extraordinary. We now expect Close to achieve slight growth in underlying profit before tax FY21e vs FY19, with the Securities business fully compensating for a lower contribution from the Banking Division, (reflecting lower NIM and higher costs and impairments) (Fig 4, page 3). We now forecast a Securities division contribution of £73.8m in FY21e (FY19: £20.0m, FY20: £47.9m) with revenues increasing by 123% FY21e vs FY19. No Interim Dividend was paid in FY20, but Close declared an 18p H1 FY21 dividend (H1 FY19: 22p). We forecast 62p/66p/70p for FY21/FY22/FY23e, (Fig 6, page 4), a prospective dividend yield of 3.9%/4.2%/4.5%. Close Brothers has an enviable record of sustained “through the cycle” profitability and on 1.8x/1.7x/1.5x FY21/FY22/FY23e tNAV (Fig 5, page 4) it enjoys a material “valuation premium” vs every other UK bank in our coverage. We forecast a ROTE of 16.8% in FY21e albeit flattered by the exceptional Securities division contribution and a low effective tax rate. However, we forecast a more “normal” ROTE of 14.6% in FY23e, in the context of which we believe that valuation remains somewhat “full”.
3Q21: good across the board, brilliant in places In 3Q21, Close Brothers Group (CBG) registered business growth in all its divisions, which supports and augments revenue and profit expectations both for the current and future years. Our target price rises 1.7% to 1,815p and we see further upside potential as the UK economy emerges from recession. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com 6-page note
Q3 21: progress on all fronts Winterflood has provided another stand-out performance in Q3 21 but progress is also ahead of our estimates in Banking (notably in loan growth) and Asset Management (AUM growth), and we expect estimates will rise. Performance is justifying Close’s premium rating and we see further upside for the shares. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
Its Q3 trading update states that the company 'continued to perform strongly' in the period with 'positive signs of economic recovery'. The Banking loan book increased 3.2% in the period and is now up 7.7% year to date, driven by loans issued under the CBILS programme. Winterflood continues to deliver 'very' strong trading with profitability already above FY2020's ~£48m. Our 2021 estimates increase, driven by Winterflood but by less so into 2022. Close remains a well-managed business to us, however, the business model in Banking is no longer the unique play it was post the GFC. Hold.
A strong Q3 performance
1H21: remaining prudent as Securities surge Close Brothers Group (CBG) reported 1H21 results running comfortably ahead of FY21E consensus expectations, as the Securities divisions continues to exploit favourable trading opportunities. Management has built further reserves in Banking, despite default levels remaining low. We raise our TP 15% to 1,785p and retain our Add recommendation. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com 10-page note
Close Brothers published interim results for the half year to 31st January 2021 that were in line with our expectations, with a sharp increase in profitability at Winterflood (driven by increased in retail trading activity) more than offsetting a decline in profitability in the Banking division (due to higher impairment charges). Following this update, we have upgraded our adjusted EPS forecast for FY21 and FY22 by 4% and 5% respectively, as we factor in a longer period of elevated trading at Winterflood and think at least some of the recent uplift in activity may now be structural. We also increase our fair value to 1,500p (from 1,260p) as we roll-forward and materially upgrade our valuation for Winterflood. However, even after ‘squeezing the pips’ we struggle to justify the current share price but retain a ‘Hold’ recommendation given the lack of an obvious catalyst to turn negative.
There is much to admire about the resilient Close Brothers operating model. In H2 2020, despite a very high impairment charge within the Banking division, the group still remained modestly profitable (Fig 1, page 2). Perhaps the most eye-catching dynamic over the past twelve months has been a material increase in WInterflood’s average daily bargains, up from 57k in H1 FY20 to 107k in H2 2020, and 97k in H1 FY21, supported by increased market volatility. The translation into increased profitability is transparent; profit before tax increased by 223% YoY in FY21, and over the past twelve months, Winterflood has contributed £71.5m (50%) of group profit before tax (Fig 2, page 2), providing a meaningful offset to weakness in the Banking division. Our forecasts envisage a modest recovery in group profit before tax through FY21/22/23e (Fig 3, page 3), with a recovering contribution for the Banking Division (driven by lower impairments and a resumption of loan growth) largely offset by an assumed “partial normalisation” in the Winterflood contribution (Fig 4, page 3). Indeed, we expect FY23e PBT to marginally exceed the FY18 peak. However, appearances can be deceptive. As for most UK banks, we expect FY21e ROTE to be “flattered” by a DTA “write-up” in H2 FY21e following the Budget increase in the corporation tax rate from 19% to 25%, effective 2023. But with (1) some Winterflood normalisation and (2) a higher effective tax rate, we expect ROTE to decline to 14.2% by FY23e (Fig 6, page 4). Close Brothers is a fine business. An “underlying” 7.5% NIM combined with consistent credit discipline, augmented by contributions from Winterflood and Asset Management translates into robust profitability despite a less attractive 62% cost:income ratio. However, on 2.1x/1.9x/1.8x/1.7x FY20/21/22/23e tNAV we simply see valuation as too rich. Sell reaffirmed; TP to 1420p (from 1240p).
Given the ongoing positive trading environment we have significantly upgraded our H2 revenue forecast for Winterflood and there is also a mark to market benefit for Asset Management. While the bank impairment charge was higher than forecast in H1, we believe Close has taken a prudent approach, and
1H21: Winterflood drives upgrades The performance of Close Brothers Group (CBG) in 1H21 is running ahead of FY21 expectations in reflecting buoyant trading in Securities and solid performances in other divisions. We anticipate increases to consensus expectations for FY21 and believe that these results again justify the company’s premium valuation. We maintain our Add recommendation and 1,533p target price. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
Winterflood excels again, but loan book contracts in January… EPS of 63.2p misses Bloomberg consensus by 0.3%. Adjusted Op Profit £128.5m is +2% YoY, +12% at pre-provision level. CBG’s H1 FY21 results today essentially provide a one-month update since its (strong) 21 Jan pre-close trading statement. After a significant boost from CBILs through August/September/October, loan growth had already slowed sharply in November/December and reversed in a lockdown-impacted January, with net loans down c.2% month-on-month to £7.95bn. More encouragingly, NIM was reported at 7.7% for H1 FY21 (H1 FY20: 7.8%, H2 FY20: 7.2%), with some benefit from lower funding costs already evident. However, management guides to an underlying NIM of 7.5%. Consistent with sector peers, the credit story is broadly reassuring. After an outsized 3.9% charge in H2 FY20 (February-July 2020), credit costs ran at 0.9% through August-December 2020, though stepped up to 1.3% for H1 FY21 as a whole, implying a notably weaker performance in January. However, the outlook statement appears comfortable. Once again, Winterflood provides the key highlight, contributing an operating profit of £34.2m (+223% YoY) with no loss days in the half, only a shade below the record £37.3m achieved in H2 FY20. Market volatility may continue to provide support. Bolstered by the Winterflood result, CBG has delivered a strong ROTE of 15.7% for H1 FY21. DPS of 18p (H1 FY20: nil, H1 FY19: 22p) is below our 22p forecast (no consensus available).The CET1 capital ratio of 15.1% remains strong. Outlook statement: “The group is navigating this unprecedented environment well and our model is performing as we would expect at this stage of the cycle”. An “extreme” P/tNAV premium remains… On 2.0x FY21e tNAV against our existing ROTE forecasts of 12.3%/13.1%/13.6% through FY21/22/23e, our Sell rec is reaffirmed; forecasts and target price under review. Specialist bank peer OneSavings Bank (Buy) is due to report FY20 results on Thursday (18 March). In stark contrast to CBG, it trades on just 1.2x 2021e tNAV for u/l ROTEs of 20.3%-20.6% through 2021-23e. Call at 09:30.
Profit up 2%, despite Winterflood being up 223%
We have reduced our impairment charge forecasts for this year given the strong update combined with the increasing prevalence of CBILS loans. We have also upgraded our forecasts for Winterflood although we continue to forecast a significant decline in customer trading in H2. Consequently, our EPS f
Trading update: progress across the board Close Brothers Group (CBG) has provided a positive trading update for 5M21, demonstrating robust a performance across all divisions. We raise our FY21E estimates for group operating profits 48% to £215m and increase our TP 5.6% to 1,533p. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com 6-page note
Following yesterday’s upbeat pre-close trading update (covering the five months to 31 st December 2021) we have upgraded our y/e July 2021F adjusted EPS by 27% to 124p primarily due to a lower than expected impairment charge in the Banking division and continued high levels of activity at Winterflood. We view these as relatively short-term benefits and hence our adjusted EPS forecasts for 2022F and 2023F increase by just 2%. We have also upgraded our 2021F dividend by 10% to 55p but leave our future forecasts unchanged. We continue to view Close Brothers as a high-quality operator in the specialist banking space but see this as already more than fairly reflected in the share price. Our sum-of-the-parts increases to 1,260p (from 1,220p) which implies 13% downside. This is not quite enough for us to downgrade our current ‘Hold’ stance given positive business momentum, but we would point investors to ‘Buy’ rated OneSavings Bank or Secure Trust Bank as better value alternatives in the specialist lending space.
Following the upbeat 1H21 trading update yesterday, driven by a significantly lower bad debt ratio in banking (than our and market expectations) and a very strong trading performance at Winterfloods, we increase our FY2021E operating PBT and EPS for Close Brothers by 38% to £246m and 124p respectively. However, given continued uncertainty regarding further lockdowns, the impact of Brexit and the end of government support schemes, we keep our FY2022E and FY2023E estimates largely unchanged. We increase our target price by 3% to 1,480p but maintain our HOLD rating. Close Brothers trades on FY2021E P/E and P/TBV of 11.6x and 1.7x for RoTE of 15.1%.
Trading update for 5M21: strong start to the year Close Brothers Group (CBG) has provided a trading update for the five months to December 2020 full of incremental positives including significantly lower levels of impairment than are reflected in consensus and continuing strong performance from Winterflood. We expect upgrades to consensus. Robert.Sage@peelhunt.com, Stuart.Duncan@peelhunt.com
Banking: Solid November/December ahead of likely New Year pause… Customer loans grew by only c.£70m in November/December 2020 to £8.1bn, (after c.£430m of net growth through August/September/October) primarily reflecting the pipeline of approved CBILs reported in the Q1 FY21 IMS (19 Nov). However, progress across conventional product lines was muted, with growth within Invoice Financing and Motor fully offset by net contraction in Property, and we think that the outlook statement is consistent with more limited net growth in H2 FY21. The disclosed pipeline at 31 December 2020 is £205m. (Recall that the loan book contracted in FY20, in large part reflecting the impact of “Lockdown 1”). Encouragingly, NIM nudged up to 7.6% (FY20: 7.5%) which we attribute to a likely benefit from cheaper retail funding, and impairments “normalised” at 0.9%, broadly consistent with H1 FY20 (after a “spike” of 3.9% in H2 FY20). Securities: “very strong” trading performance We assumed that Winterflood would be a strong performer, and today’s statement suggests a likely consensus upgrade for H1 FY21 for the Securities business. After 83k in Q1 FY20, YTD average daily bargains moved up to 92k (H1 FY20: 57k, H2 FY20: 107k) so not quite as high as the record H2 FY20, but this suggests a very strong contribution in H1 FY21. (Recall that, reflecting the operational gearing of the business, Operating Profit jumped from £10.6m in H1 FY20 to a record £37.3m in H2 FY20). Asset Management: solid progress… Net inflows slowed in November/December, but remained solid, with annualised inflows of 5.4% for the 5 months to December 2020. Total Client Assets rose sharply from £13.8bn in October to £15.0bn in December 2020, primarily reflecting favourable market movements. Overall, we would characterise this as a strong trading statement, enjoying significant tailwinds from CBILS and trading volumes in Winterflood. We currently expect a meaningful slowdown in H2 FY20. Sell rec maintained, but TP and forecasts placed under review. Trading on 1.7x FY21e tNAV against our existing ROTE forecasts of 12.3%/13.1%/13.6%, Close Brothers already enjoys a very material premium rating relative to sector peers.
A strong first half performance, particularly from Winterflood
Close Brothers’ Q1 trading update for the three months to 31 st October 2020 showed strong new business volumes in the Banking division (ahead of our forecasts), continued net inflows in Asset Management (albeit slightly lower than we had expected) and continued elevated trading volumes in Winterflood (in line with our expectation). We expect this update to drive full year consensus profit forecast upgrades, particularly for the Banking division, albeit with our high-end forecasts largely unchanged. That said, the shares are up almost 40% since we upgraded to Buy in September and are now trading above our modestly upgraded fair value of 1,235p (previously 1,220p). Consequently, we downgrade our recommendation back to Hold. We currently see better value elsewhere and would recommend a switch into OneSavings Bank or Secure Trust Bank.
We like the Close Brothers model which has successfully “delivered” over several decades. It is primarily a specialist bank, and although, relative to OneSavings Bank or Paragon Banking Group, it operates in higher risk asset classes, it has a number of key defensive qualities. Its Banking Division recorded a small (£16.2m) loss in H2 FY20, primarily reflecting front-loaded impairment charges equivalent to 3.9% of the average loan book. However, with a NIM of 7.2% and a divisional cost:income ratio of 53.3%, it was largely able to absorb such losses through the income statement. The loan book contracted by 0.4% in FY20 (Fig 3, page 3) though growth resumed in July following the end of the UK national lockdown. Moreover, benefiting from market volatility, the Securities business demonstrated the benefit of business diversification, recording an increase in pre-tax contribution from £10.6m in H1 FY20 to £37.3m in H2 FY20. As a consequence, at group level, Close Brothers remained modestly profitable. Close is scheduled to trade ex-div in relation to the 40p FY20 final dividend on 15 October. Our (unchanged) 970p target price already anticipates this, i.e. it has been set on an ex-rights basis. As such, we only anticipate quite modest absolute downside for the Close Brothers share price, but we do see considerably better value elsewhere. On 1.4x FY20 tNAV, or 1.3x FY21e tNAV (Fig 1, page 2) for ROTEs of 9.1%/11.1%/12.9% through FY20/21/22e (Fig 2, page 2), we retain a 970p target price, but downgrade to Sell (from Hold). By contrast, OneSavings Bank (Buy) trades on just 0.85x 2020e tNAV or 0.76x 2021e tNAV, yet we expect it to deliver u/l ROTEs of 18.8%/19.6%/19.3% through 2020/21/22e. We recommend a switch.
CBG OSB PAG
Close Brothers’ recently announced (22nd September) full year results to 31st July 2020 marked the first day in charge for new CEO, Adrian Sainsbury. When asked on the results call about his strategic ambition for the group, he replied that he was keen to see the existing model progressed in order to maintain the group’s premium rating. As such, it seems unlikely to us that we will see a material divergence from the proven conservative and disciplined strategy that has served it so well in the past. While the results themselves saw profits fall sharply due to higher forward-looking impairments (Covid-related), there was some offset due to supernormal (volatility driven) trading at Winterflood during H2. There was also a welcome resumption of dividend payments, following the decision to withhold the interim earlier in the year. Our updated model sees EPS trimmed by 2-3%, but our fair value increases to 1,220p (from 1,030p) on roll-forward to a normalised year (2022F). With 22% upside, we upgrade to BUY (from Hold) but continue to prefer OneSavings Bank (Buy) and Secure Trust (Buy) which currently offer even greater upside.
Living in the shadow of lockdown… The Close Brothers share price has fallen sharply, down 19% in 6 weeks, largely (we think) in response to market expectations that the UK economy will face renewed pressure from further lockdown measures. The “UK coronavirus alert level” was raised to “4” from “3” yesterday which appears likely to lead to new restrictions, set to be announced later today. The Prime Minister will “address the nation” at 8pm tonight. A “beat” in H2 FY20 and a welcome dividend… After H1 FY20 Adj. Operating Profit of £125.7m, the H2 FY20 outturn was only £18.3m, primarily due to elevated impairments. There is an element of the “law of small numbers” here, but this represents a £6.1m (50%) beat against our forecast (£12.2m) and an £8.0m (78%) “beat” against company-compiled consensus (£10.3m). However, the outperformance was entirely attributable to an exceptional contribution from the Securities business; for FY20, operating profit jumped by 140% to £47.9m, and this accounted for £9.9m (124%) of the consensus beat. There was a £1.8m miss in Banking, a £2.6m miss in Asset Management and a £2.5m beat in central costs. The CET1 capital ratio strengthened to a robust 14.1% (benefiting from transitional relief) against a minimum requirement of 8%. As such, we certainly believe that a dividend is eminently affordable. Analyst forecasts for the dividend ranged between 0-44p, with an average expectation of 8.3p. As such, the 40p declared represents a “positive surprise”, and should offer fresh encouragement that other well capitalised and profitable specialist UK banks such as OneSavings Bank (Buy) and Paragon Banking Group (Buy) may also choose to pay 2020 dividends. CBG enjoyed a better finish to FY20 and the outlook statement references “good momentum through August and September”. Share price correction now sufficient? Yesterday’s sharp sell-off took the share price below our existing 995p target price, but CBG continues to enjoy a premium rating of 1.1x FY21e tNAV. Our forecasts, TP and current Sell rec are now all under review. Webcast at 09:30 via https://webcasts.closebrothers.com/results/PrelimResults2020
Close Brothers is scheduled to publish preliminary results for the year to 31st July 2020 on 22nd September ahead of which we have (belatedly) updated our forecasts to reflect the trends set out in the July pre-close trading update. Overall, this results in downgrades to our adjusted EPS forecasts for 2020F and 2021F of 8% (to 70.5p) and 2% (to 98.8p) respectively, with 2022F broadly unchanged (at 134.6p). The downgrades are primarily driven by a slightly more cautious net interest margin forecast within the Banking division, as well as a slight moderation to our Asset Management division profit forecasts due to lower fee income and ongoing investment. We retain our forecast for a 2020F final dividend of 44p as we see no good financial reason why the group should continue to withhold payments (as it did with the interim) and believe the Board may want to avoid disrupting the group’s track record of having never missed a full year dividend payment. We retain a HOLD stance with a slightly reduced fair value of 1,030p (previously 1,055), and continue to see better value in Secure Trust Bank (BUY) and OneSavings Bank (BUY).
It might not feel like it, but, in relative terms, 2020 has, thus far, been a great year for Close Brothers’ shareholders! The stock has outperformed against every other UK bank in our coverage (Fig 9, page 6), down “only” 26% YTD. Close’s operational performance in FY20e (Fig 1, page 2) reflects a variety of headwinds; lower revenues (negative loan growth and NIM compression), negative “jaws” (in part due to planned investment spend) and sharply higher impairments as the UK’s “lockdown recession” bites. Over the past decade, Close’s business mix has evolved, with the banking division contributing 86% of operating profit (ex central items) in FY19 (Fig 2, page 2). We forecast a £150m (59%) YoY drop in FY20e with only a relatively modest offset from the smaller Securities and Asset Management divisions. Close enjoyed 18-23% p.a. loan growth through 2010-2012 (Fig 3, page 3), but we forecast a 3% contraction in FY20e, and just 2/3% p.a. growth in FY21/22e. Moreover, Net Interest Margin has steadily declined from a high of 9.8% in FY11 to 7.6% in FY20e (Fig 4, page 3). “Jaws” remain negative too. As such, while Close’s FY20e P/tNAV multiple of 1.5x (Fig 5, page 4) is low relative to history, we see the outlook for ROTE as substantially “rebased”; we forecast ROTEs of 8.6%/10.1%/12.4% through FY20/21/22e (Fig 6, page 4) vs a peak of 22.7% in FY15. While Close trades on 1.5x FY20e tNAV, all other UK banks in our coverage trade on just 0.2-0.9x (Fig 8, page 5). Close “fell into line” with substantially all UK bank peers and cancelled its FY20 interim dividend earlier this year; it will consider declaring a final dividend in relation to FY20 in September. Despite capital strength (CET1 capital ratio 14.2% at 30 June 2020) we anticipate fresh “regulatory encouragement” to defer. We forecast no FY20 div, but 68p/70p in FY21/22e (Fig 7, page 5).
CBG MTRO OSB PAG TBCG VMUK
PAG is still in the early stages of a planned “pivot” towards commercial lending. At 30 Sep 2019, some £10.1bn (82.9%) of the loan book was still in buy-to-let, (Fig 1, page 2) where we expect loan losses to be exceptionally low. However, we do model a £35.3m (721%) increase in the impairment charge in H1 FY20e; we see the risks as primarily within the asset finance, motor finance and development finance portfolios, collectively £1.3bn (10.7%) of the loan book. During the Global Financial Crisis, PAG recorded a “peak” impairment charge of £62.2m (68bps) in 2009 within which the charge against the buy-to-let portfolio was just 32bps. We forecast an H1-weighted charge of £57.8m (46bps) in FY20e. We expect this to trigger a 46% YoY decline in Operating Profit in H1 FY20e (Fig 2, page 2), but with a sharp recovery in H2 FY20e. PAG’s unscheduled 14 April trading update confirmed strong new business volumes in Q2 FY20, albeit these are balanced by a continuing run-off of the Idem Capital portfolio. Despite a strong 31 March 2020 buy-to-let pipeline, we expect new business volumes to soften, and the pivot to commercial to “pause”. This presents a NIM headwind which should be balanced by lower funding costs; over the past 12 months, Paragon has cut savings rates on 1year bonds by 70bps and by 85bps on the 2-year. Paragon trades on 0.9x 2020e tNAV (Fig 4, page 3), a premium rating against all stocks within our coverage except Close Brothers (Sell). In the context of “resilient” ROTEs of 9.3%/10.3%/11.1% through FY20/21/22e (Fig 3, page 3), after 14.1% in FY19, we believe that this is justified. PAG has already signalled that it will pass the H1 FY20 dividend and we do not currently expect it to pay one for H2 FY20e. We trim our target price to 415p (from 430p) but maintain a Buy recommendation. We prefer OneSavings Bank.
CBG’s valuation premium has expanded significantly (Fig 1, page 2). It trades on 1.31x FY20e tNAV vs Paragon/OneSavings (both Buys) on 0.86x/0.76x respectively. CBG shares have outperformed all other UK banks in our coverage in 2020 year-to-date (Fig 2, page 2). We expect CBG to remain profitable through FY20-FY22e (Fig 3, page 3) despite a sharp fall in the Banking division contribution (Fig 4, page 3). We forecast a peak impairment charge of “only” 1.9% in FY20e vs 2.6% in FY09, (Fig 5, page 4) largely due to a lower risk property portfolio. We forecast a 53% YoY increase in the Securities division FY20e contribution (Fig 6, page 4). One perennial “bull” argument for which we give little credit is the idea that CBG is a counter-cyclical lender for which the forthcoming recession should represent an opportunity rather than a threat. History is supportive of this view; the loan book enjoyed a 20% CAGR through 2010-13 as competitors fell apart. Our simplistic view is that while various non-banks may become unable to fund new lending, this time, bank sector peers are well capitalised, liquid, and prudently positioned. We think CBG’s loan growth will remain weak; we forecast a 1.7% contraction in FY20e and growth of 2.5%/2.8% in FY21/22e (Fig 7, page 5). We suspect that consensus is currently evolving to “process” the likely timing of impairment recognition. We cut our EPS forecasts by 10%/7%/5% through FY20/21/22e which leaves us 5% below consensus in FY20e, but 22%/4% above in FY21/22e. We expect dividends to resume in FY21e (Fig 8, page 5). On 1.31x FY20e tNAV (Fig 9, page 6) for ROTEs of 10.6%/11.3%/12.1% through FY20/21/22e (Fig 10, page 6), we cut our TP to 1010p (from 1110p) and downgrade to Sell (from Hold).
We like Close Brothers as a business, believing it to be conservatively run and relatively well-diversified. These factors provide it with defensive characteristics that have been reflected in recent share price performance, which has seen it outperform specialist banking peers in the face of Covid-19 uncertainty. While this is a relative positive, the shares have still fallen by 34% since the start of the year versus a 21% fall in the FTSE AllShare Index. So, if you are a holder, what should you do? Well, if you are bearish on the economy then Close will still be impacted, but just a bit less than other banks, and if you are bullish, then it will probably go up, but again, less than other banks. So, for the bears we would suggest selling your stock and for the bulls we would suggest buying something more levered into a recovery (e.g. Secure Trust Bank or OneSavings Bank). Trading on 1.3x TNAV for a c10% RoTE in 2020F rising to c15% by 2022F does not seem like obvious value to us. Our SOTP is lowered to 1,055p (from 1,315p). HOLD
Ignoring the Banking Division (which, unfortunately, represents c.85% of the group) there are some strong performances buried within today’s Q3 IMS. The Securities business (Winterflood) enjoyed daily average trading volumes of almost twice the level seen in H1 FY19, which suggests upside to existing divisional consensus expectations for FY20, (albeit small in a group context). The Asset Management business was (obviously) impacted by adverse market movements, (we estimate c.8%, in-line with the market), hence a £0.9bn QoQ decline in managed assets to £11.8bn. YTD net inflows have been strong (+10%) albeit we think the Q3 performance (c.+2%) is more in-line with peers. Within Banking, we think the further £0.09bn (1.3%) QoQ contraction in the loan book (Fig 1, page 2 of full report) is relatively unsurprising in the context of the lockdown (motor dealerships closed, lower invoice finance volumes etc), albeit some modest pick-up in Q4 FY20 is possible. The impairment charge of £86.7m for Q3 FY20 takes the annualised impairment charge to c.2.1%, still below the 2009 peak which feels consistent with an improved asset mix. Despite the uncertain outlook, we continue to believe that Close Brothers will remain profitable (Fig 2, page 2), but we do expect the scale of impairments to trigger fresh FY20 consensus downgrades We continue to regard Close Brothers’ capital position as “bullet-proof”. The CET1 capital ratio rose 0.5% QoQ to 13.9% vs a minimum regulatory requirement of 8.1%, and its liquidity position remains extremely robust. On 1.3x FY20e tNAV, (Fig 3, page 3), Hold rec maintained, but our TP/forecasts are placed under review. Close Brothers has been the top performing UK bank in our coverage in 2020 year-to-date (Fig 4, page 3) which we see as unsustainable; we see materially better value elsewhere.
CBG FUTR HEAD OTB SXS UU/ GHGUY
Ignoring the Banking Division (which, unfortunately, represents c.85% of the group) there are some strong performances buried within today’s Q3 IMS. The Securities business (Winterflood) enjoyed daily average trading volumes of almost twice the level seen in H1 FY19, which suggests upside to existing divisional consensus expectations for FY20, (albeit small in a group context). The Asset Management business was (obviously) impacted by adverse market movements, (we estimate c.8%, in-line with the market), hence a £0.9bn QoQ decline in managed assets to £11.8bn. YTD net inflows have been strong (+10%) albeit we think the Q3 performance (c.+2%) is more in-line with peers. Within Banking, we think the further £0.09bn (1.3%) QoQ contraction in the loan book (Fig 1, page 2) is relatively unsurprising in the context of the lockdown (motor dealerships closed, lower invoice finance volumes etc), albeit some modest pick-up in Q4 FY20 is possible. The impairment charge of £86.7m for Q3 FY20 takes the annualised impairment charge to c.2.1%, still below the 2009 peak which feels consistent with an improved asset mix. Despite the uncertain outlook, we continue to believe that Close Brothers will remain profitable (Fig 2, page 2), but we do expect the scale of impairments to trigger fresh FY20 consensus downgrades We continue to regard Close Brothers’ capital position as “bullet-proof”. The CET1 capital ratio rose 0.5% QoQ to 13.9% vs a minimum regulatory requirement of 8.1%, and its liquidity position remains extremely robust. On 1.3x FY20e tNAV, (Fig 3, page 3), Hold rec maintained, but our TP/forecasts are placed under review. Close Brothers has been the top performing UK bank in our coverage in 2020 year-to-date (Fig 4, page 3) which we see as unsustainable; we see materially better value elsewhere.
One of the key reasons why we expect specialist banks in general to see a benefit from the crisis is the policy response. Put simply, the TFSME scheme offers proportionately greater benefit to small, growing banks with higher funding costs than to mainstream/high street banks. For this reason, we see OneSavings Bank as the key winner, although we do expect TFSME to support stabilisation in Close Brothers’ NIM after a decade of decline. It only took £500m under “TFS1”; it would be sensible to be more “greedy” this time! In terms of resilience, we see the specialist buy-to-let mortgage banks (OneSavings Bank and Paragon Banking Group) as preferred plays. As discussed in our report, And if you know your history… (9 April), Paragon’s peak BTL impairment (in 2009) was just 34bps. It would have remained profitable in FY19 even if its 7bps impairment charge had been twenty times higher. For OneSavings, make that twenty-four times! Put simply, we think the coronavirus crisis will merely impose a temporary pause to their sustained growth profiles. For Close Brothers, the position is less clear-cut. It is a high-margin business (NIM 7.8% in H1 FY20) so it is perfectly able to absorb higher levels of impairment and remain profitable. However, it operates in more cyclical “higher risk” markets than OSB/PAG. Its impairment charge rose to 95bps in H1 FY20 and we forecast a step-up to 214bps in H2 FY20e. We still expect it to remain profitable; we see c.400bps of impairment as “break-even”, but profitability and returns are likely to be impacted to a much greater degree than for OSB/PAG. We note that CFO Mike Morgan bought 4,941 shares @ £10.50 last week. Our forecasts and 1110p target price are unchanged. As such, after a 20% rally, with minimal residual upside and trading on 1.3x FY20e tNAV for ROTEs of 11.7%/11.9%/12.4% through FY20/21/22e, we cut to Hold (from Buy).
Our caution on Close Brothers shares over the past year has primarily reflected a scale of valuation premium that we felt unable to justify in relative or absolute terms. It was frequently justified by others with reference to CBG’s long-standing “counter-cyclical” credentials, though we are unconvinced that similar opportunities to accelerate growth and widen margins will occur “this time”. The weak H1 FY20 performance, cancellation of the H1 FY20 dividend and wider events have triggered a “correction” which we now see as somewhat overdone. Close Brothers is well capitalised (CET1 capital ratio 13.4%), highly liquid, and although it was not a significant user of TFS1 (only £500m drawn), as an absolute minimum we would expect it to “term out” using TFS2 (now available on more favourable terms), supporting greater NIM stability. In contrast to the mainstream banks, a lower base rate is overtly positive for NIM within the Property Division and, we believe, a net positive for the group. Operating Profit fell 8% YoY in H1 FY20 and will fall much further in H2 FY20e (Fig 1, page 2) with planned investment spend and elevated impairments. We expect EPS to fall 49% HoH to 32.6p in H2 FY20e (Fig 7, page 5). The key element of decline is inevitably within the Banking Division. We forecast a 32% YoY decline in FY20e u/l PBT (Fig 2, page 2) and, after a 0.4% HoH decline in loans in H1 FY20e, we forecast a drop of 1.6% in H2 FY20e, and growth of only 3.9%/3.0% in FY21/FY22e (Fig 3, page 3). Looking through H2 FY20, we see a resilient outlook for Close Brothers. We model flat “jaws” in FY21/FY22 (Fig 4, page 3) and broadly stable earnings. Our target price falls to 1110p (from 1395p) reflecting EPS downgrades of 14-27% for FY20-22e. However, on 1.1x FY20e tNAV (Fig 5, page 4) for ROTEs of 11.7%/11.9%/12.4% through FY20/FY21/FY22e (Fig 6, page 4), with prospective dividend yields of 7.1%/7.3% for FY21/FY22e, we upgrade to Buy (from Hold).
Close Brothers delivered a disappointing set of interim results to 31 st January 2020, with a sharp fall in Banking division profitability only partly offset by profit growth in the group’s market-facing businesses. The outlook for the Banking division is likely to remain challenging in the near-term given macro-economic uncertainty, although this business has historically weathered a downturn better than rivals. Elsewhere, the sharp fall in stock markets post period end will weigh on the profitability of the Asset Management business, although the associated increase in volatility is acting to boost activity in the Securities division. Overall, this sees us put through downgrades to both our forecasts and fair value. With greater upside on offer elsewhere in the sector (e.g. Secure Trust Bank), we retain a neutral stance. HOLD
Loan growth turned negative, down £30.5m (0.4%) HoH, which was primarily driven by a 4.2% contraction of the Property book, partially offset by 2.5% growth within Commercial, (Fig 1, page 2). Indeed, while loan growth had already slowed to 7%/6%/5% through FY17/18/19, after growth of just 0.9% in Q1 FY20, CBG suffered a net contraction of 1.3% in Q2 FY20. A decline in NIM from 8.1% in H1 FY19 to 7.8% in H1 FY20 was consistent with the pre-close statement, in the context of which negative “jaws” within the Banking division were (as guided) inevitable (income +1%, costs +3%). The impairment charge rose by £14.8m (68%) YoY to £36.7m, or 0.9% vs 0.6% in FY19, in the context of which Banking profit before tax fell by £15.7m (12%) YoY to £115.4m, (Fig 2, page 2). The Asset Management and Securities businesses are small in a group context, but both offered significantly greater encouragement. Asset Management reported an impressive 12% net inflows (of £672m) and Operating Profit recovered by 17% YoY to £12.6m. Securities also saw a 14% YoY recovery in Operating Profit, and the outlook statement (unsurprisingly) references a “significant increase in volumes since the period end”. Overall, underlying profit before tax declined by 9% YoY in H1 FY20 (Fig 3, page 3), entirely attributable to a lower contribution from the Banking division, for which the outlook statement is (as one might reasonably expect) notably cautious. ROTE fell from 18.8% in H1 FY19 to 16.0% in H1 FY20. On 1.3x FY20e tNAV for ROTEs of 15.9%/15.0%/14.3% through FY20/21/22e (Fig 4, page 3), with a prospective dividend yield of 6.1%/6.3%/6.6%, Hold rec maintained; our target price (1395p) and forecasts are placed under review. Presentation at 09:30 at 60 Victoria Embankment, London, EC4Y 0JP, or via https://webcasts.closebrothers.com/results/halfyearresults2020
We cut our FY20e EPS forecast by a further 0.2%, purely to capture the impact of adverse market movements in the short period since publication of our report, Those were the days… (27 Jan), to Close Brothers’ H1 FY20 period end on 31 January 2020. As discussed in that report, Close suffered negative loan growth through November/December 2019, and in its recent pre-close trading statement (22 Jan) it guided to another year of negative “jaws” for FY20. Within our forecasts, this reflects a combination of continuing revenue pressure from (gradual) NIM decline (to 7.7% in FY20e vs 9.8% in FY11), and anaemic FY20e loan growth, together with ongoing project-related spend within the Banking Division. We also model a gentle pace of “upward normalisation” of impairments, consistent with the trends reported for the first five months of FY20. Taken together, we forecast a 2.9% YoY decline in EPS to 130.3p in FY20e. Thereafter, we continue to forecast marginally positive “jaws” of 0.5%/0.7% in FY21/22e, contributing to EPS growth of 1.4%/1.8% to 132.2p in FY21e and 134.6p in FY22e. On 1.7x/1.5x/1.5x FY20/21/22e tNAV for ROTEs of 15.9%/15.0%/14.3% and prospective dividend yields of 4.9%/5.1%/5.3%, we upgrade to Hold (from Sell). Our 1395p TP is unchanged. H1 FY20 results are due to be published on 10 March 2020.
Close Brothers’ slowing pace of loan growth is hardly a new phenomenon (Fig 1, page 2). As illustrated, it enjoyed growth of 18-23% p.a. through FY10-FY12 when competition was slight. It is now relatively intense and so, maintaining its discipline in terms of risk appetite and pricing, has translated into lacklustre loan growth of only 0.4% for the five months to December 2019. The Banking Division has seen sustained margin pressures for a decade (Fig 2, page 2), primarily driven by weaker Other Income (which Close includes within its definition of NIM). We see little prospect of any near-term relief. Close has now formally guided to another year of negative jaws in FY20 (Fig 3, page 3), primarily driven by investment spend within the Banking division. We see Banking division PBT flat/down through FY20-FY22e (Fig 4, page 3). Close Brothers runs with a ”structurally high” group cost:income ratio (60.9% in FY19) which we expect to rise to 61.7% in FY20e (Fig 5, page 4). We expect comparatively little relief in the Securities division (78.6% in FY19) or Asset Management (81.8%) and so, in aggregate, we see group underlying profit before tax as flat/down through FY20-22e (Fig 6, page 4). After EPS of 134.2p in FY19, we forecast a 2.7% decline to 130.6p in FY20e, (1% below Bloomberg consensus of 131.3p). Thereafter, we model a recovery to 134.8p by FY22e (2% below Bloomberg consensus of 137.6p). However, with incremental capital generation and adequate cover, we still forecast DPS growth to 69.0p/72.0p/75.0p through FY20/21/22e (Fig 7, page 5). Close trades on a “premium” 1.9x FY19 tNAV. ROTE has been in decline since FY15 (Fig 8, page 5) and reflecting (1) ongoing NM erosion, (2) negative jaws, (3) upward normalisation of impairments and (4) a slight equity build, we forecast 15.9%/15.0%/14.3% through FY20/21/22e.
Close Brothers’ H1 pre-close trading update, which covered the five months to 31st December 2019, signalled a note of caution around the Banking division due to stagnant loan book growth, modest net interest margin compression, higher impairments and continued investment in the business. By contrast, the Asset Management division and Winterflood both benefited from the recovery in markets towards the end of the period, which provides some counterbalance to the weaker than expected performance in Banking but not enough to prevent us putting through modest (c4%) earnings forecast downgrades. As a result, we have also reduced our fair value to 1510p (from 1565p). Close Brothers currently offers the least value among our specialist banking coverage universe and we would recommend a switch into Secure Trust Bank as a much better value alternative. HOLD
As discussed in our report, Priced for perfection? (17 Dec), loan growth had slowed to 0.9% in Q1 FY20, and CBG now reports a net reduction of 0.5% for Nov/Dec 2019, with the Property segment accounting for the net decline. NIM has fallen to 7.8%, which is unsurprising in the context of a sustained decline from 9.8% in FY11 to 7.9% in FY19. Given levels of competition in a number of Close Brothers’ markets, we continue to see further (albeit more moderate) downside risk to NIM through FY20-FY22e. As already signalled in the Q1 FY20 IMS (21 Nov), credit costs have increased, albeit from low levels, rising to c.80bps vs 60bps in FY19. Profit before tax in the Securities business fell by 29% YoY in FY19 and we retain our view that the consensus expectation of a 10% positive rebound looks slightly ambitious. That said, after a poor start to the year, “Winterflood experienced an improvement in trading activing towards the end of 2019”. Within Asset Management, in the five months to 31 December 2019, total client assets increased by £0.7bn (5%) to £14.0bn, benefitting, as we expected, from strong net inflows and positive market movements. Close remains committed to ongoing investment in strategic initiatives, and in the context of the weak Banking Division performance and a challenging revenue environment more generally, it (perhaps unsurprisingly) is now guiding to a further year of negative “jaws” in FY20. It is difficult to justify CBG’s valuation premium in the context of slowing loan growth, broadly stable earnings (Fig 1, page 2) and falling returns (Fig 2, page 2). It trades on 2.0x FY19 tNAV against our current ROTE forecasts of 16.4%/15.4%/14.6% through FY20/21/22e. We retain our strong preference for OneSavings Bank (Buy) which is our top pick in the sector.
After a tricky year, with challenging conditions for the Securities and Asset Management businesses, and ongoing NIM pressure in the Banking division, the shares have re-rated to 2.1x FY19 tNAV (Fig 1, page 2). This is in the context of an ongoing decline in Return on Tangible Equity to 17.6% in FY19, and we forecast 16.4%/15.4%/14.6% through FY20/21/22e (Fig 2, page 2). The Banking Division remains dominant, contributing 86% of group underlying profit before tax (ex-central items) in FY19 (Fig 3, page 3). However, loan growth slowed to 5.7% ex-IFRS 9 in FY19) and to just 0.9% in Q1 FY20. Pressure on the Net Interest Margin has continued, falling to 7.9% in FY19, contributing to negative “jaws” of -2.2% in FY19 (Fig 4, page 3). Impairments “increased modestly” in Q1 FY20, albeit from low levels. Earnings per share fell 0.3% YoY in FY19, and we forecast growth of only 0.5%/1.4%/1.4% through FY20/21/22e (Fig 5, page 4). We do not envisage any material reduction in competition in Close Brothers’ chosen markets and, as such, we anticipate little prospect for any material re-acceleration of loan growth or NIM expansion in the coming years. With slower growth, we do anticipate the CET1 capital ratio expanding from 13.0% in FY19 to 13.3%/13.4%/13.5% through FY20/21/22e and, as such, we think it is perfectly reasonable to anticipate the continuation of Close’ progressive dividend policy. Our forecasts equate to a prospective dividend yield of 4.1%/4.3%/4.5% through FY20/21/22e. We note that outgoing CEO Preben Prebensen sold 150,000 shares @ 1443p per share on 22 Nov. The shares have since appreciated by a further 15%. We raise our target price to 1420p (from 1415p), but downgrade our recommendation to Sell (from Hold). We prefer OneSavings Bank (Buy).
Loan growth of 0.9% QoQ to £7.7bn in Q1 FY20 was soft vs 1.9% in Q1 FY19, albeit unsurprising in the context of relatively slow market conditions in Close Brothers’ chosen markets. The Commercial segment contributed substantially all the growth, with Retail and Property broadly flat. After c.20% CAGR through the “glory years” of FY10-FY12 and after 5.7% in FY19, we currently forecast growth of 5.2/4.6/4.2% through FY20/21/22e (Fig 2, page 2). The Net Interest Margin has seen a sustained decline from 9.8% in FY11 to 7.9% in FY19, but is described as “broadly stable” in the quarter. The impairment charge in FY19 was only 0.6% and, near-term, we anticipate only limited upward normalisation. It “increased modestly” in Q1 FY20. After a 29% YoY fall in contribution from the Securities business in FY19, it “continued to see subdued investor activity”. This is unsurprising, albeit more broadly market volumes did recover in October. The divisional cost:income ratio rose to 79% in FY19; we do not expect any material recovery in FY20e. More encouragingly, Asset Management net inflows in Q1 FY20 are described as “strong”, and with a partial offset from negative market movements, total client assets rose £0.1bn QoQ to £13.4bn. There is no comment on profitability or efficiency metrics; given significant investment spend, the divisional cost:income ratio rose to 82% in FY19. Hold rec reaffirmed while our 1415p target price and forecasts are under review. We expect today’s statement to trigger further relatively modest cost-led consensus downgrades. However, the Conservative Party’s proposed cancellation of the previously announced cut in the rate of UK Corporation Tax from 19% to 17% will (presumably) trigger c.2.5% downgrades to EPS consensus in FY21/22. No conference call today.
It has been a slow, but relatively brutal de-rating, from 2.5x FY15 tNAV (at 31 July 2015) to 1.8x FY19 tNAV at yesterday’s close. This can be explained with reference to declining ROTEs, balanced by strong tNAV growth and (more recently) a gradual build in the CET1 capital ratio. Many investors wonder whether Close Brothers’ new business pipeline may have softened in the context of political obstruction to the “delivery of Brexit”. Business hates uncertainty. However, our favourite forward-looking data-point seemingly reinforces the management commentary; undrawn commitments of <1 year increased to £1,100.6m at 31 July 2019, the second highest year-end total on record. We think that constitutes a “resilient” outlook. The FY19 outturn reflected negative jaws across all divisions, partially offset by low impairments. Underlying EPS declined by 2% YoY to 136.7p, but with strong dividend cover and an increasing CET1 ratio, we still model DPS of 69p/72/75p for FY20/21/22e; a FY22e yield of 5.3%. Loan growth (5.7% YoY) was “solid” in FY19 and we now model growth of 5.2/4.6/4.2% through FY20/21/22e. Weakness in the FY19 outturn was largely confined to the (relatively small) Securities and Asset Management divisions. The Banking Division remained resilient. Our EPS forecasts are virtually unchanged, and on 1.6x FY20e tNAV for ROTEs of 16.7/15.9/14.9% through FY20/21/22e, our TP moves to 1415p (from 1410p); we retain a Hold recommendation.
CBG MKS OSB SMWH STAN ULE
Close Brothers’ final results to 31 st July 2019 marked the end of an era, with the announcement that CEO Preben Prebensen will be stepping down after a decade at the helm. During his tenure, the group has seen adjusted earnings per share increase by 127%, dividend per share increase by 69% and the share price more than double. Notable achievements include a significant restructuring of the Asset Management business to create a much more cohesive and profitable operation. Of course, any change of leadership brings uncertainty, but we hope that a new CEO (yet to be announced) will be able to sustain the high quality, disciplined and successful business model that has been established under previous leaderships. Following this update, we have made minor changes to our earnings forecasts. While the shares are beginning to offer value, we continue to see better upside elsewhere in the sector and hence retain our HOLD stance.
We see today’s “in-line” results as somewhat overshadowed by the announcement of Preben’s intention to stand down after ten years; he is to remain in-post for the next 12 months whilst a successor is found. Close Brothers trades at a significant premium to “peers” which reflects the high regard in which the existing management team is held, and long-term consistency in execution of a “counter-cyclical” participation strategy. There is no intention to change this. FY19 has been a challenging year with weaker revenues in the Securities business, symptomatic of market pressures which we broadly expect to continue into FY20e. The lower contribution from Asset Management partly reflects higher investment spend in the business, as well as an adverse impact from market movements. This somewhat masks notably strong net inflows of £0.9bn representing 9% of opening managed assets. The performance in the Banking Division was reasonably solid. Loan growth of 5.7% was in-line with our expectations, with growth across all product groups. However, slight NIM pressure (down from 8.0% in FY18 to 7.9%) reflects a flat performance in the Property segment, balanced by a low (0.6%) impairment charge reflecting continuing benign operating conditions. More detailed forecasts under review, but on 1.6x FY20e tNAV for ROTEs of 16.8/15.9% in FY20/21e, Hold rec and 1410p TP reaffirmed. Presentation at 9:30am at 10 Crown Place, London, EC2A 4FT or via webcast at https://webcasts.closebrothers.com/results/PrelimResults2019
Our prior caution in relation to Close Brothers had simply been an issue of valuation yet, after trading on 2.1-2.5x tNAV through FY13-FY18, it now stands at 1.6/1.5/1.4x FY19/20/21e tNAV (Fig 9, page 6). A material de-rating. Following Close Brothers’ FY19 pre-close statement 3 weeks ago, we have made downgrades of only 1% to our FY20/21e EPS forecasts. Bloomberg consensus has moved down by 1.5/1.95% for FY20/21 (Fig 8, page 5). The shares are down 12%. We recognise that Close Brothers is (primarily) a bank; we forecast that the Banking division will contribute 86% of underlying profit before tax in FY19e (Fig 1, page 2), yet we see these as resilient earnings shielded from the any material adverse impact from declining UK interest rate expectations (in stark contrast to the high street banks). Loan growth remains steady (Fig 2, page 2), while credit conditions are benign (Fig 3, page 3). Close is also capital accretive; we forecast a CET1 capital ratio of 13.4% by FY21e versus its minimum requirement of 9% (Fig 4, page 3). Given such capital strength, we see little risk to the sustainability of a progressive dividend policy (Figs 5/6, page 4). We continue to model 66/69/72p through FY19/20/21e, which gives a decent prospective dividend yield of 5.2/5.4/5.6%. We cut our TP to 1420p (from 1430p). According to Bloomberg, our TP remains the lowest on the street. Be that as it may, on 1.4x FY21e tNAV for ROTEs of 17.1/16.9/16.0% through FY19/20/21e (Fig 7, page 5), with strong defensive credentials plus consistent dividend support, we upgrade to Buy (from Hold).
Close Brothers Group plc VanEck Bionic Engineering UCITS ETF Accum -A- USD
Close Brothers has published a scheduled pre-close trading update covering the 11 months to 30th June 2019. Overall the group is said to have delivered a “solid performance” despite “mixed trading conditions”. However, the general tone of the statement reads cautiously and, consequently, we trim our profit forecasts by 1-2%, with a slightly larger downgrade anticipated to consensus, which appears to have been a little slower to respond to the disappointing Q3 update published in May. Our sum-of-the-parts also edges also down to 1580p (from 1610p). HOLD
Close Brothers’ scheduled Q3 trading update, published on 22nd May, stated that the group expects to deliver a “solid result for the full financial year”. However, looking into the finer wording it would appear to us that there is a slight moderation to guidance with the group specifically highlighting continued investment in the Banking division, subdued client activity in the Asset Management division and low trading volumes at Winterflood. In addition, loan book growth in the Banking division is tracking slightly below our previous full year expectation. Consequently, we have trimmed our adjusted EPS estimates for 2019F-2021F by 2% across the board and reduce our SOTP to 1610p (from 1635p). The shares have fallen sharply in recent weeks and now offer 14% upside, but with better value alternatives on such as Secure Trust Bank (STB, Buy at 1500p), we retain a HOLD stance.
Overall profit in the first half of the year was in line with our estimates but with slightly better profits in the Bank than we had expected. Given that this is by far the most important part of the business, that is no bad thing. The company continues to do what is does best – controlling its loan book expansion carefully and making sure that its market-geared businesses do not offer undue risk to shareholders. It has been a successful model for many years, and at a time when many “challenger banks” appear to have, well, challenges Close continues to deliver. At reasonable earnings multiples for Winterflood and Asset Management, the Bank is valued at 10.5x for calendar 2019E we estimate while the current financial year yield is an estimated 4.5%. There is value in the security which Close offers.
Close expects a “solid performance overall”. With Winterflood suffering lower volumes and trading income “significantly lower” and Asset Management suffering from lower markets (like everyone else) then it is down to the Bank to carry the period's performance, as so often. Loan book growth of 3.1% to the end of December has taken the loan book to £7.5bn, a touch ahead of our estimate for the actual half year end this month, while impairments continue to be low and the net interest margin stable. There might be market-related wobbles elsewhere but in this, the most important part of the business, performance continues. We are shaving estimates to be on the safe side, but with the estimated PER at 11.4x for the current year, the stock is modestly valued for the quality of the operations.
What with the preclose statement and the recent announcement of the disposal of the nascent Retail point-of-sale business, there would have been an issue if results had been anything other than “in line”. Overall the group results are exactly that. There are variations within the divisions – Banking a bit light, Securities and Asset Management offsetting – but we could get delusions of modelling accuracy. The same sentiment applies to estimates, which are unchanged overall. The stock has performed much more strongly over the last year when we thought that a PER of 10x was discounting too much. Now at 12x with modest growth on offer the rating arguably needs a bit more from earnings upside. That is quite possible in due course, but management will no doubt seek to keep a lid on optimism at this early stage of the year. This is a class business and probably closer now to fair value but certainly not a company to bet against.
Close's pre-close statement confirms earlier comments that it expects to deliver a “good result for the full year, in line with market expectations”. Our adjusted operating profit of £278m compares with the company's consensus of £276m and so we are not changing estimates and we doubt that the consensus will either. Momentum in the business, especially in Banking, is slightly better than we might have hoped which is encouraging but there seems little point in trying to encapsulate that in estimates prior to the company reporting this year's results on 25 September 2018. The stock remains rock solid value on a prospective PER for the year to July 2019E of under 11x and a prospective yield of 4.3% given the long and strong track record of the business for successfully managing through business cycles.
Close has delivered a good performance in its most recent quarter (to 30 April) and there is modest upward pressure on our estimates in each division. Loan book growth in the quarter means that our FY18E for the size of the book has been exceeded but with no weakening in net interest margin or bad debt performance. Winterflood has seen the benefit of higher activity while Asset Management has benefitted from good inflows and will have benefitted from recent market levels. Uncertainties remain, of course, but Close has delivered again. With estimates solidly underpinned the PER for the next financial year (to July 2019E) of 11.4x is modest enough, and the yield of 4.1% well based. There might be companies that threaten to deliver higher growth, but Close has the track record for consistency in delivering.
Close Brothers has foreshadowed a decent H1/18 performance with its preclose statement and has duly delivered. Adjusted operating profit was +6%, adjusted EPS +7% and the interim DPS +5%. The Bank, as ever, was the main driver of profit growth but both Securities and Asset Management played useful supporting roles, which has not always been the case in the past. Management commentary remains quietly confident and our estimates are increased to reflect the H1 performance delivered leaving, therefore, some scope for further modest upgrades in due course if performance is maintained. We upgraded to BUY when the PER rating was too low at just 10.0x last November. The rally in the share price, mitigated by our upgrades, has taken the current year back to 11.6x but 11.2x for next year. That can sustain a BUY recommendation, albeit less obviously than when we upgraded unless we can further upgrade estimates in due course. We continue to like the company, the model, the strategy and the management but we may need to consider valuation again before long.
Banks & Specialist Financials : Niches lead to Riches
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Banking net loan book growth was 2.6% in the 5 months to Dec and we remain happy with our FY forecast of 5.2% y/y growth for now. Bad debts and the NIM appear to be slightly better than we expected. Winterflood is continuing to perform strongly and positive momentum in AM continues. Close indicates that it is "confident of delivering an increase in profit in the first half." Consensus reflects a sub-1% increase in adjusted operating profit y/y, and therefore we expect small single digit upgrades. Close trades at 11.1x FY18 EPS falling to 10.8x and 1.7x P/BV for an FY18E ROE of 15.4%.
The Q1/18 statement is suitably short and restates that management believes that the business is well positioned for the remainder of the financial year. We agree. We are increasing modestly our Asset Management divisional estimate to reflect the increase in AUM in the year to date, but otherwise leave estimates unchanged. Our expected EPS growth over the next few years remains modest (3% CAGR from 2017-2020E) but the rating has now fallen to a level where we feel that has been adequately discounted. Last May at the time of 2017’s FY preclose statement the PER for 2018E was 12.2x but that has now fallen to just 10.0x with no real change to estimates. We have always liked the business and the approach to managing the cycle, now we like the valuation too. We upgrade our recommendation to BUY from Hold.
Close has reported results close to estimates and we doubt that expectations for the current year will vary much. Loan book growth across various segments has been modest and that is a good thing – the company has a long and successful track record for calling the cycle to the benefit of shareholders. Although the company says that there are no immediate signs of change in the business environment it is sensibly anticipating a period of uncertainty. Our estimates anticipate the same and so expectations for EPS growth, and hence DPS growth, are modest. The rating on the shares is not challenging for the quality of the business and the track record which has been established, but at a PER of 11.5x for the current financial year and a prospective yield of 4.1% it is also probably high enough for now. Holders of the shares should be reassured by these results and by the on-going commitment to the business model but fresh buyers may be scarce.
Close’s preclose statement for the year to July 2017 confirms that the business is on course for a “good result” and we have modestly increased our estimates to reflect this. In PBT terms the company looks set to deliver some 12% growth in the year, driven as usual by the Bank but with a much stronger supporting role played this year by both Winterflood (on the back of higher levels of market activity) and Asset Management (on higher levels of markets). Unfortunately the impact of the bank tax mitigates the progress in adjusted EPS to just 2%. The slightly better than expected size of loan book at the end of June aids future period estimates, but questions over the direction of the economy (and stock markets) inevitably increases uncertainty. We have no doubts on the ability of the company to cope with more difficult lending conditions but the rating of the shares may well be constrained. We like the company, its positioning and its delivery but cannot get beyond a HOLD recommendation.
Close’s trading statement is reassuringly short and confirms that the company is on track for a “good result” for the full year. Our estimates are marginally increased to reflect good trading at Winterflood in the period and slightly stronger markets in Asset Management. We continue to believe that the business model of Close is strong as borne out by the operating performance. Unfortunately in the shorter term EPS growth, and therefore DPS progression, is more modest through a combination of appropriately slower growth in the Bank and the Bank Tax levy. The company can continue to deliver a progressive dividend but at a slower rate than we believe possible at, for example, Provident Financial where both expected dividend growth and the estimated yield are higher. Close is a solid investment, but there is better value elsewhere. HOLD.
Close’s pre-close statement had presaged a “strong” performance in H1 and it has duly delivered, aided by £1.6m of disposal gains (in Asset Management) and a write-back of provisions in its Property Banking sub-division (+£2.2m, and a +£4.2m benefit to profit compared with last year). With Winterflood making the most of more buoyant market conditions and lower than expected Central Costs the group profit performance (£134.2m) was materially ahead of our estimate (£120.0m) for the HY. The question is to what extent this performance can be extrapolated to the full year and beyond given that the loan book saw a modest contraction in Q2. While the company comments that the macro environment remains benign, as shown by the bad debt performance, but it continues to monitor developments carefully and with good reason. Our estimates are increased to reflect the H1 performance, with a lesser benefit to subsequent years given on-going uncertainty. The interim DPS (20p, +1p) was in line with our estimates and assuming 60p for the FY gives a yield of 3.9%. That is adequate for what remains a very high quality franchise, but we see greater upside at Provident Financial.
Close’s regular preclose statement should support current market estimates with the company expecting a “strong” H1 performance and a “good” (ie slower than H1) outcome for the full year. This is in line with our own estimates too. Growth continues to be driven by the Bank with loan book growth consistent with our H1 estimate although the company does highlight that repayments were higher towards the end of the period. Whether this is due to heightened competition or a slowing economy is not clear at this stage. We do not debate that Close is a high quality franchise with an impressive track record, the issue is simply that growth in the Bank, group earnings and hence the dividend is likely to be more modest for a period while the recent issue of Tier 2 capital has highlighted that capital requirements tend only to go one way. The estimated PER of 11.4x for the current year is not challenging and the estimated yield of 4.2% is fine but growth in the dividend is likely to be ~5% per annum. The combination of yield and growth underpins a solid total return, but we prefer Provident Financial within the sub-sector.
We have updated our model and valuation post the Q1 trading update. Our operating profit forecast is broadly in line with consensus for FY17E, but our more cautious stance on loan book growth in the banking division and lower estimates of trading activity at Winterfloods mean that we are below consensus by c4%/c8% in FY18E/FY19E respectively. We therefore retain our Hold recommendation but reduce our price target to 1450p (prev. 1500p), which equates to PTB of 1.8x and a PE ratio of 12x.
A slight miss at the top level is compensated by strong operating performance with both operating profit and adjusted diluted EPS ahead of expectations. We retain our hold recommendation pending valuation and model update.
In a land of opportunity the growth rate is below that of peers due to the cautious approach. Results are in line with expectations, with forecast pressure on the upside. Following a recent recovery in the share price the shares are up with events. We move from BUY to HOLD.
Half year end update exhibits the trends we would expect.
Tightening margins at the bank and challenging conditions at Winterflood suggest this is the wrong point in the cycle to be buying this stock.
Group adjusted PBT for FY15 was 2% over consensus at £224.9m (+16%). Banking remains the principal driver of growth with 15% growth but Winterflood had a good H2. The outlook is for lower loan growth in future but with improving securities and asset management profits, subject to market conditions. The shares currently trade on 11.2x FY16E earnings and 2.1x book value which looks in line with the trading performance. We retain a Hold recommendation with a 1400p SOTP based target.
Following the year end pre-close update we have cut our EPS forecasts for FY15/16/17 by 3/5/11% on slower expected loan growth and the higher tax rate in FY17. We have lowered our price target to 1400p (from 1650p) and retain a hold recommendation.
At the year-end bank lending increased to £5.7bn (+8% YOY) which is a little shy of our estimate and reflects the slowdown in loan growth. Winterflood had a better Q4 than the previous quarter on improved market conditions. Asset management total AUM fell marginally to £10.4bn but still had positive inflows. We will review our above-consensus FY16 forecasts which look too aggressive including the higher tax rate. We are keeping our Hold recommendation and 1650p target.
