Close Brothers has been a challenger bank since long before the term was invented. The niche banking, securities trading and asset management group has succeeded in remaining independent for 140 years, the past 34 of which were as a publicly-listed company.
Close runs itself in a way that is not pressured by a need for growth at any price. Instead, it sticks to maintaining its profit margin and return on equity, which can mean that its businesses shrink if conditions are unfavourable. That happened in Close’s car financing business in the six months to the end of January, with loans falling 2.6 per cent to £1.7 billion.
The overall lending business grew by 1.7 per cent, while Close’s bad debt ratio was 1.1 per cent, the same as in the second half of last year. Investors are perennially worried about the credit quality of Close’s motor business. Yesterday it said that it was “comfortable” with the book, which is less at risk of plunging valuations if an economic downturn hits than some rivals because it lends against a lot of used cars, whose prices are more stable.
The dip was balanced by growth in other parts of Close’s banking business, and it maintained its net interest margin at 8.2 per cent. Close’s return on equity was 17.3 per cent, slightly down from 18 per cent but far above the level of most other banks, where hitting double digits is a struggle.
Overall profits rose 6 per cent, driven by a strong performance at its Winterflood Securities share trading business, whose profit rose 2 per cent to almost £15 million. Winterflood thrives when demand for equities is high and less so when it is not. That may make it exposed to the vicissitudes of the stock market, but Close has owned the market maker for 24 years, during which time it has lost money in only one month.
Asset management has also driven growth, with profits up by a quarter after its approach of integrating advice with investment management has started to pay off. Client inflows have reached 13 per cent at an annualised rate.
While there is little debate about how well Close runs itself, there are questions about its growth prospects and valuation.
Close has a large business providing loans for small and medium-sized companies to buy equipment they need. Its loans grew 2 per cent in the period, in a tough market. Demand among SMEs for credit has not really changed for some time and is unlikely to against a backdrop of Brexit-related economic uncertainty.
At the same time there has been a flow of credit available on the supply side, which also shows little sign of abating. Those are the conditions Close is adept at managing, but it does mean its prospects for growth in some parts of its banking business are limited.
While Close is seen by some as a challenger, its overlap with that rapidly emerging sector is limited. Close can do asset finance through brokers or directly with customers, reflecting its distributution network, while most challengers have to rely on brokers. Close also avoids big-ticket business such as mortgages, which are hard to compete in for anyone other than the biggest.
The shares in Close jumped in January when it issued a pre-close trading statement that took a more optimistic tone about the future than previously, saying it was “confident of delivering an increase in profit in the first half, and remain well positioned for the full 2018 financial year”.
Yesterday it said nothing had changed for the rest of the year. After its strong run, Close’s shares fell 51p to £15.24. The business is trading at about twice its net asset value, which suggests its many strong points are priced in.
ADVICE Hold
WHY Little room for Close to overshoot expectations as it is already highly valued
TP Icap
Strip away all the talk of strategy and the merger of Tullett Prebon and Icap’s interdealer broking businesses came down to one thing: costs.
Shares in TP Icap, the business created from the combination, lost nearly a tenth of their value yesterday after the world’s largest interdealer broker said that it was spending more to achieve the expected synergies from the integration than it had forecast.
TP Icap said that the stripping away costs had meant spending £79 million, close to double the £40 million it had budgeted for in 2017. If you want to save £100 million, which is the company’s 2020 target, then you are going have to spend a bit, and so far savings are ahead of schedule.
Certainly, yesterday’s full-year statutory pre-tax profits were disappointing, down more than half year-on-year at £72 million. Even on an underlying basis, the broker’s preferred measure, pre-tax profits at £233 million were £11 million off the City’s consensus figure — a miss to be sure, but not the end of the world.
So why is the City outlook suddenly apparently so gloomy for TP Icap? Looked at on a one-year view the stock has barely budged.
The pessimism is partly down to TP Icap’s guidance. Despite a spike in volatility earlier this year during the market correction, the broker is not guiding for a great improvement in business conditions. Interdealer brokers such as TP Icap should do better when markets are in churn because clients are more likely to be trading, but its conservative outlook has dampened hopes on this front.
With little in the way of a material improvement in business conditions then the only moving part left for investors to play with is costs. It is no surprise that those analysts who appear more optimistic on the outlook for TP Icap are those that forecast greater than expected integration synergies.
As this column noted only a couple of months ago, the TP Icap investment case essentially comes down to a view on costs and its ability to transform itself into an institutional money platform providing not just traditional voice broking, but an increasing array of data services. That has not changed.
ADVICE Buy
WHY Cost reductions remain on track
