Berenberg downgrades Close Bros to 'hold', says valuation is now fair

Merchant bank Close Brothers was under the cosh on Monday as Berenberg cut the stock to 'hold' from 'buy', saying the valuation is now fair.

The bank initiated coverage of Close Bros with a 'buy' rating last November as it felt the market was punishing the group unfairly for its strategy of targeting longer-term profitability, maintaining margins and underwriting discipline instead of chasing loan volumes at any price.

It said the first half results showed solid profits growth, with the performance from both asset management and securities helping to increase operating profit by 6% on the year, earnings by 7% and the interim dividend by 5%.

"While these results do not change our positive view of this approach, we feel that the valuation is fair, so we downgrade to hold."

Berenberg said Close's recent investment in the asset management division has paid off, with annualised net inflows to its managed assets of 13%, driving total assets up to £11.8bn and profits up by 25% year-on-year.

"Close Brothers is a consistent, high-margin, high-return business. The company has delivered loan book growth through the cycle, including taking share in times of reduced credit supply such as 2009-12.

"The banking division is a best-in-class niche business, which generates net interest margins above 8% through a focus on service and expertise and not price alone."

Berenberg upped its price target on the stock to 1,530p from 1,515p.

At 1255 GMT, the shares were down 1.8% to 1,469p.