Close Brothers Group PLC (CBGPY) (Q4 2024) Earnings Call Transcript Highlights: Strong ...
Adjusted Operating Profit: Increased 50% to GBP171 million.
Return on Tangible Equity: Up 8.3%.
Loan Book Growth: 6%, reaching GBP10 billion.
Net Interest Margin: Strong at 7.4%.
CET1 Capital Ratio: 12.8% as of July 31.
Asset Management Net Inflows: Strong at 8%.
Assets Under Management: Grew to GBP19.3 billion.
Operating Profit (Statutory Basis): Up 27% to GBP142 million.
Impairment Charges: Decreased to GBP99 million from GBP204 million in the prior year.
Banking Division Income: Increased 2% to GBP725 million.
Commercial Loan Book Growth: 6%, reaching GBP5 billion.
Retail Loan Book Growth: 1%, with a margin of 8.7%.
Property Loan Book Growth: 15%, reaching GBP2 billion.
Winterflood Business Services Assets Under Administration: Grew to GBP15.6 billion.
Total Funding: Increased to GBP13 billion.
Liquidity Coverage Ratio: Over 1,000%.
Average Cost of Funds: Increased to 5.5%.
Managed Assets in Asset Management: Increased 18% to GBP19.3 billion.
Total Client Assets: Up 18% to GBP20.4 billion.
Winterflood Operating Loss: GBP2 million.
Release Date: September 19, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
Close Brothers Group PLC (CBGPY) delivered a resilient performance in an uncertain environment, with key metrics in line with guidance for the full year 2024.
The banking division achieved growth in income, maintained focus on costs and pricing discipline, and grew the loan book by 6%.
The sale of the asset management division, CBAM, is expected to strengthen the group's capital position and simplify the business, allowing a focus on core lending.
Customer demand remained strong, with healthy levels of new business written and the acquisition of Close Brothers Motor Finance in Ireland.
The company maintained strong capital, funding, and liquidity positions, with a CET1 capital ratio of 12.8% as of July 31, 2024.
Negative Points
Winterflood's performance was negatively impacted by unfavorable market conditions, resulting in an operating loss of GBP2 million.
The FCA's review of historical motor finance commissions introduced significant uncertainty for the industry and the group.
Expenses rose by 10% due to increased staff costs and continued investments in banking, with banking costs increasing in line with guidance.
Impairment charges of GBP99 million were incurred, although down from the previous year's GBP204 million.
The decision not to pay a dividend in FY24 was made to retain around GBP100 million of CET1 capital, impacting shareholder returns.
Q & A Highlights
Q: Your guidance for corporate and expenses of GBP55 million to GBP60 million in 2025 is above consensus expectations. How much of this guidance is one-off in nature and could reverse? Also, when are you expecting to hear about any changes to your Pillar 2A requirements? A: The majority of the costs related to motor commission sit within the businesses, but at a group center, we require guidance from various organizations and support consultancies. These costs are one-off in nature and should go away after the next 12 months. Regarding Basel 3.1, we expect the requirement to be taken down through Pillar 2A, and discussions are ongoing. Once we have worked through this, we will then come to a conclusion on whether the 12% to 13% capital guidance is still appropriate.
Q: Why have you not put the temporary costs in the corporate center below the line, whereas you chose to put some others below the line? A: There are strict accounting definitions about what can go below the line and what should stay above the line. Although we've only put GBP6.9 million of motor commissions costs below the line, there have been other costs incurred that link to that but haven't gone below the line. That's the reason for the decision to treat them within the GBP55 million to GBP60 million.
Q: Can you explain the rationale behind the sale price of the asset management business, which seems low compared to similar disposals? A: We believe it's a competitive valuation. While the sale price might seem low at less than 1% of AUM, it represents 27 times earnings, which is favorable compared to other transactions in the sector. We think GBP200 million with GBP172 million upfront is a good deal for our shareholders.
Q: Given the declining trend in NIM over the last couple of years, what gives you confidence in maintaining a 7.2% NIM for the year ahead? A: We exited the year at 7.2%, and given that interest rates have peaked, we should see them start to come down over the next 12 months to two years. This will help reduce stress on our SME customers, allowing us to maintain a NIM of 7.2%. The demand for our products and services also gives us confidence.
Q: How will the future diversification of the group be impacted by the sale of CBAM? A: We set out in March that we needed to raise GBP400 million of capital, and the sale of CBAM came out of that review. We will continue to review all of our businesses and make decisions as appropriate. Right now, we like our businesses, but we will continue to review them in the current market.
Q: Can you provide some color on the progress made with the regulator in relation to your Phase 2 IRB application? A: We have moved into Phase 2 over the course of this year and are making progress. However, I don't feel able to give timescales on when we might receive acceptance and approval of the application.
Q: How should we treat CBAM as we look into 2025? Will it be considered a discontinued business? A: We only signed the deal at 4:00 AM this morning, so we haven't worked through the accounting technicalities yet. However, it will clearly be moved to one side in some shape or form.
Q: What is the expected contribution of the Close Brothers Motor Finance business in Ireland to the banking division's operating profit in the medium term? A: We don't split out contributions from various businesses in detail, but the opportunities in Ireland are strong. We had a big presence there before, and in time, we would want to see the business get back to over half a billion in loan book.
Q: Why have you not included a provision estimate for the FCA's review on motor commissions, while other banks have? A: There is no constructive obligation to make a provision at the moment, and there is no certainty that redress will be required. Even if it were, estimating a reliable provision is challenging. Therefore, it is sensible and practical not to make a provision at this stage.
Q: Could you comment on shorter-term trading conditions in Winterflood and if falling interest rates and inflation could stimulate a recovery in volumes? A: Short-term trading at Winterflood is quite volatile. We have seen a slowdown recently due to the upcoming budget and discussions around inheritance tax and pension reforms. Lower interest rates should be beneficial, and there is a generally more positive view on UK markets from international investors, which should help.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
This article first appeared on GuruFocus.