Close Brothers reports stable Q1 amid motor finance uncertainty

The FTSE 250 company said its banking loan book grew modestly by 0.6% to £10.2bn during the three months ended 31 October, with strong demand in the commercial division partly offset by higher repayments in property finance and lower new business volumes in retail.

It said the temporary pause in UK motor finance lending following the Court of Appeal’s judgement in the Hopcraft case affected growth, although lending resumed for a significant portion of the portfolio in early November.

The annualised net interest margin was 7.3%, which the board said reflected pricing discipline and optimised funding costs.

Close Brothers Asset Management (CBAM) meanwhile recorded annualised net inflows of 4%, with managed assets increasing slightly to £19.5bn.

The business was set to be sold to Oaktree Capital Management, a transaction expected to close in early 2025, which Close Brothers said would strengthen its capital position by adding around 100 basis points to its CET1 capital ratio.

Winterflood, the group's trading arm, continued to face difficult market conditions, posting an operating loss of £0.7m.

The group said it maintained a strong balance sheet, with stable funding at £13bn and a liquidity coverage ratio of 964%, well above regulatory requirements.

Its CET1 ratio increased to 13.2% from 12.8%, supported by retained profit and reduced risk-weighted assets.

Close Brothers said it expected its CET1 ratio to reach between 14% and 15% by the end of the financial year, aided by the CBAM sale, ongoing cost actions, and potential risk transfer of motor finance loans.

Cost management remained a priority, with the group on track to achieve £20m in annualised savings by the end of the 2025 financial year.

The bad debt ratio stayed below the long-term average of 1.2%, underpinned by the secured and prudently underwritten nature of the loan book.

Close Brothers said its outlook remained cautious, however, as it navigated the implications of the Court of Appeal’s judgement, which upheld customer appeals related to motor finance commission practices.

The group said it was planning to seek an expedited Supreme Court appeal, and had resumed motor finance lending with updated disclosures and compliance measures.

While the financial impact of the judgement remained uncertain, the group said it had outlined measures to mitigate potential liabilities and protect its franchise.

“The group delivered a robust performance in the first quarter,” said group finance director Mike Morgan.

“In our banking division, customer demand remained healthy, alongside a strong net interest margin and a resilient credit quality.

“Whilst Winterflood continued to experience unfavourable market conditions, it remains well positioned to benefit when investor appetite returns.”

Morgan said the company was “confident” in its underlying business, supported by a strong balance sheet and liquidity position, and remained committed to driving it forward.

“Notwithstanding the significant uncertainty resulting from the FCA's review of historical motor finance commission arrangements and the recent Court of Appeal judgement, our focus is on protecting our valuable franchise.

“Our core banking business model remains as relevant as ever as we continue to offer excellent and specialist service to our customers, while maintaining our pricing and underwriting discipline.”

At 0804 GMT, shares in Close Brothers Group were down 0.31% at 214.34p.

Reporting by Josh White for Sharecast.com.