Final Results
Close Brothers Group PLC
26 September 2002
Embargoed for release 7.00 am on Thursday 26th September, 2002
CLOSE BROTHERS GROUP plc
The specialist merchant banking group
announces
results for the year to 31st July, 2002
HIGHLIGHTS
2002 2001
* Profit before taxation, exceptional costs and goodwill amortisation £78.5m £94.2m
* Earnings per share before exceptional costs and goodwill amortisation 38.9p 47.4p
* Profit before taxation £68.4m £89.5m
* Earnings per share 32.3p 44.0p
* Dividends per share 26.0p 26.0p
* Shareholders' funds £472m £408m
* Total assets £3.1bn £2.8bn
* Overview - another difficult year, yet second half profits steady with the
first half.
* Asset Management - funds under management were maintained at £3.1 billion.
* Corporate Finance - a very difficult year with profits sharply lower and
head count reduction.
* Banking - good progress with substantial profits growth (35 per cent.).
* Market-Making - a commendable result given the continued bear market.
Sir David Scholey, Chairman, said:
"The financial year 2002 was a difficult one and, as we move into 2003, the
short-term economic outlook remains neither clear nor particularly encouraging.
Whilst our banking division continues to grow, the current uncertainty of
sentiment in markets means that growth in our other divisions would be hard won.
However, the harsher environment may well provide us with some good development
opportunities and with our liquidity, which was recently augmented by a £55
million share placing, we will be well placed to take advantage of them. We
remain confident in our strategy for the longer term; in the short term our
stance remains one of continued caution."
Enquiries to:
Rod Kent/Colin Keogh Close Brothers Group plc 020 7426 4000
Sir David Scholey Close Brothers Group plc 020 7568 2402
John Sunnucks Brunswick Group Limited 020 7404 5959
Webcast video interview with Rod Kent, managing director, and Colin Keogh, chief
executive designate, Close Brothers Group plc at www.closebrothers.co.uk or
www.cantos.com
CLOSE BROTHERS GROUP plc
PRELIMINARY ANNOUNCEMENT OF AUDITED GROUP RESULTS
AND CHAIRMAN'S STATEMENT
FOR THE YEAR ENDED 31ST JULY, 2002
The following is the full text of the preliminary announcement of results for
the financial year ended 31st July, 2002. The financial information in
relation to 31st July, 2002 has been extracted from the statutory accounts of
the company, which have yet to be adopted by shareholders at general meeting
and have yet to be filed with the Registrar of Companies.
CONSOLIDATED PROFIT AND LOSS ACCOUNT
For the year ended 31st July, 2002 Year
Ordinary Exceptional Total ended
activities costs and ordinary 31st July,
before goodwill activities 2001
exceptional amortisation
costs and
goodwill
amortisation
£'000 £'000 £'000 £'000
Interest receivable 198,890 - 198,890 208,982
Interest payable (88,449) - (88,449) (112,598)
Net interest income 110,441 - 110,441 96,384
Dividend income 64 - 64 153
Fees and commissions 140,795 - 140,795 153,753
receivable
Fees and commissions payable (24,740) - (24,740) (21,542)
Net dealing income - 48,365 - 48,365 58,331
market-making
Other operating income 1,429 - 1,429 5,600
Other income 165,913 - 165,913 196,295
Operating income 276,354 - 276,354 292,679
Administrative expenses 170,937 3,446 174,383 173,732
Depreciation 7,614 - 7,614 6,861
Provisions for bad and 19,256 - 19,256 17,919
doubtful debts
Amortisation of goodwill - 6,681 6,681 4,671
Total operating expenses 197,807 10,127 207,934 203,183
Operating profit on ordinary 78,547 (10,127) 68,420 89,496
activities before taxation
Taxation on profit on 22,855 (1,016) 21,839 28,639
ordinary activities
Profit on ordinary activities 55,692 (9,111) 46,581 60,857
after taxation
Minority interests - equity 2,252 - 2,252 1,754
Profit attributable to 53,440 (9,111) 44,329 59,103
shareholders
Dividends:
Interim dividend 9.0p per 12,195 12,121
share (2001 - 9.0p)
Proposed final dividend 17.0p 24,214 22,927
per share (2001 - 17.0p)
Total dividends 26.0p per 36,409 35,048
share (2001 - 26.0p)
Retained profit for the year 7,920 24,055
Earnings per share before
exceptional costs and
amortisation of goodwill 38.9p 47.4p
Earnings per share on profit 32.3p 44.0p
attributable to shareholders
Diluted earnings per share 32.0p 43.6p
All income and profits are in respect of continuing operations.
CONSOLIDATED BALANCE SHEET
At 31st July, 2002
2002 2001
£'000 £'000
Assets
Cash and balances at central banks 671 586
Loans and advances to banks 443,175 593,894
Loans and advances to customers 1,410,998 1,189,405
Non-recourse borrowings (175,000) (33,000)
1,235,998 1,156,405
Debt securities - long positions 64,352 35,764
Debt securities - other 712,380 481,936
Settlement accounts 246,456 147,750
Equity shares - long positions 15,971 33,413
Equity shares - investments 28,484 27,529
Intangible fixed assets - goodwill 113,065 114,080
Tangible fixed assets 24,667 20,468
Share of gross assets of joint ventures 14,331 3,103
Share of gross liabilities of joint ventures (13,905) (2,675)
426 428
Other assets 134,684 119,060
Deferred taxation 10,345 11,507
Prepayments and accrued income 22,956 23,863
Total assets 3,053,630 2,766,683
Liabilities
Deposits by banks 83,159 55,643
Customer accounts 1,222,541 1,144,155
Bank loans and overdrafts 505,655 607,629
Debt securities - loan notes issued 100,000 18,140
Debt securities - short positions 52,231 38,182
Settlement accounts 202,343 114,174
Equity shares - short positions 7,589 9,594
Other liabilities 228,068 197,372
Accruals and deferred income 77,105 71,910
Subordinated loan capital 96,937 96,937
Minority interests - equity 6,079 5,056
2,581,707 2,358,792
Shareholders' funds
Called up share capital 35,920 34,055
Share premium account 248,456 193,253
Profit and loss account 187,547 180,583
Total equity shareholders' funds 471,923 407,891
Total liabilities and shareholders' funds 3,053,630 2,766,683
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31st July, 2002
2002 2001
£'000 £'000
Net cash (outflow)/inflow from operating activities (29,611) 243,901
Returns on investments and servicing of finance:
Interest paid on subordinated loan capital (7,825) (5,838)
Dividends paid to minorities (178) (1,703)
(8,003) (7,541)
Taxation:
Taxation paid (25,586) (47,608)
Capital expenditure and financial investment:
Purchase of tangible fixed assets (14,396) (8,243)
Sale of tangible fixed assets 2,416 2,073
Purchase of equity shares held for investment (5,173) (14,885)
Sale of equity shares held for investment 2,647 5,655
(14,506) (15,400)
Acquisitions and disposals:
Minority interests acquired for cash (1,194) (22,537)
Purchase of subsidiaries (6,685) (64,424)
(7,879) (86,961)
Equity dividends paid (35,122) (34,818)
Net cash (outflow)/inflow before financing (120,707) 51,573
Financing:
Issue of ordinary share capital including premium 57,068 2,455
Issue of subordinated loan capital - 45,000
(Decrease)/increase in cash (63,639) 99,028
In the directors' view, cash is an integral part of the operating activities
of the group, since it is a bank's stock in trade. Nevertheless, as
required by Financial Reporting Standard No. 1 (Revised), cash is not treated
as cash flow from operating activities but is required to be shown separately
in accordance with the format above.
THE NOTES
1. The calculation of earnings per share on profit attributable to
shareholders is based on profit after taxation and minority interests of
£44,329,000 (2001 - £59,103,000) and on 137,244,000 (2001 - 134,422,000)
ordinary shares, being the weighted average number of shares in issue
during the year excluding those held by the employee share benefit trust.
2. The final ordinary dividend of 17.0p per share is proposed to be paid on
5th November, 2002 to holders of ordinary shares on the register at the
close of business on 4th October, 2002.
3. The financial information included in this announcement does not constitute
the company's statutory accounts for the years ended 31 July, 2002 or 2001,
but is derived from those accounts. Statutory accounts for 2001 have been
delivered to the Registrar of Companies and those for 2002 will be
delivered following the company's Annual General Meeting. The auditors have
reported on those accounts; their reports were unqualified and did not
contain statements under section 237 (2) or (3) of the Companies Act 1985.
CHAIRMAN'S STATEMENT
RESULTS
The operating profit on ordinary activities before taxation, exceptional costs
and goodwill amortisation was £78.5 million, compared to £94.2 million last
year, and earnings per share, on the same basis, were 38.9p compared to 47.4p.
After deducting a charge for exceptional costs of £3.4 million (2001 - £Nil) and
goodwill amortisation of £6.7 million (2001 - £4.7 million), the operating
profit on ordinary activities before taxation was £68.4 million (2001 -
£89.5 million) and earnings per share, on the same basis, were 32.3p
(2001 - 44.0p).
The board is recommending a final dividend of 17p per share which, together with
the interim dividend, gives a total dividend for the year of 26p per share. This
is the same as last year's total dividend and, based on the above earnings per
share of 38.9p, is covered some 1.5 times.
OVERVIEW
The year ended 31st July, 2002 was another difficult one. The tragic events of
11th September, 2001 made for a turbulent start. Whilst stock markets appeared
to recover swiftly, the rebound was short lived. Confidence both in business
generally and, more particularly, in the City's financial markets continued to
suffer, exacerbated in the second half of our financial year as deteriorating
economic news and corporate scandals in the USA undermined stock markets.
It is a considerable achievement that in this climate the group has produced
consistent profits (before tax and goodwill amortisation) for the last three of
the previous four half years as illustrated below:
First Second First Second half 2002
half half half
2001 2001 2002
£57.9m £36.3m £37.4m £37.7m
This steadiness has been achieved through our strategy of building a portfolio
of diverse and distinct specialist activities. Thus, whilst the fall in equity
markets affected to varying degrees our corporate finance, asset management and
market-making businesses, this was counterbalanced by substantial growth in our
banking division.
External market events had the most severe effect on our corporate finance
division. Although the sharp downturn in M&A activity was offset to some extent
by the success of our debt advisory and restructuring activities we nevertheless
regretfully decided to reduce our headcount in the UK, in November, 2001 and
July, 2002, which gave rise to exceptional costs of £3.4 million. These aside,
the division managed to make a modest profit.
Our asset management and market-making divisions were, of course, not immune to
these cold winds. Despite a commendable net inflow of £417 million of new funds,
the decline in market values took its toll and over the year funds under
management were broadly unchanged. Furthermore this year we did not benefit from
performance fees in our technology funds, which suffered the severest downturn
in valuations. As a result, profits in asset management deteriorated by
approximately one third.
In market-making the green shoots that seemed to appear in late Autumn last year
swiftly withered and the year ended on a subdued note. However, despite profits
declining to £16.8 million this year from £27.4 million last year, Winterflood
Securities Limited ("WINS") more than maintained its market share and increased
its coverage substantially.
Our banking division produced substantial organic growth virtually across the
board with pre-tax profits rising by 35 per cent. and the loan book increasing
some 19 per cent. to over £1.4 billion. Bad debt levels continued to remain
under good control.
As a result of all of the above factors and in the face of the volatility in
financial markets, the mix of our operating profit has changed considerably over
the past three years, as shown in the table below:
2000 2001 2002
Asset Management 9% 23% 18%
Corporate Finance 6% 12% 2%
Banking 20% 39% 61%
Market-Making 65% 26% 19%
100% 100% 100%
TRADING
Asset Management
The asset management division had a disappointing year principally because the
success in gaining new funds to manage of £417 million net of withdrawals has
been eroded by the falls in the market. As a result of this, our funds under
management at the year end of some £3.1 billion have barely improved on the
level last year. Our specialist technology funds, while performing well in
relation to similar funds, have fallen sharply in absolute terms and we have not
benefited from performance fees this year. The upshot was a lower profit, of
£15.9 million, down from last year's £23.9 million, but ahead of that two years
ago.
A substantial part of our asset management business relates to our offshore and
unquoted operations, which are less vulnerable to the vagaries of the market
than our listed funds. In the past year, some of our Channel Islands businesses
have been going through a period of reorganisation and have moved premises,
which will be of long-term benefit.
We are confident that our strategy of focussing on specialist areas of asset
management, such as private equity, private clients, quant-based products and
technology and property funds, will prove to be rewarding over the medium term.
The immediate outlook, however, continues to be unexciting.
Corporate Finance
Our corporate finance division had a very difficult year with the initial
optimism reversed following 11th September, since when the market has been quiet
and declining. This led to a detailed review of our UK cost structure and
necessitated some, mainly voluntary, redundancies amongst our staff. By
contrast, our French and German businesses, while experiencing testing market
conditions, were able to recruit some new professional staff and since the year
end we have also doubled our shareholding in Atlas Capital (Spain) to 20 per
cent.
During the period we have been active on corporate restructuring work, which has
enabled us to declare a modest profit (excluding exceptional costs) for the year
of £2.1 million, albeit substantially lower than last year's £11.9 million.
Although corporate finance activity generally is currently at a low ebb we
believe that our strong focus on the mid market, our international reach and our
reputation for independent advice will stand us in good stead when the market
recovers.
Banking
Our banking division continued its good progress and profits grew substantially
to £55.1 million from £40.9 million. This growth was virtually across the board
with the loan book increasing to £1.4 billion from £1.2 billion. The climate for
bad debts in our markets was benign and we reduced our charge to 1.5 per cent.
(2001 - 1.7 per cent.) of our average loan book.
A particular high spot was our insurance premium financing activity which more
than doubled its profits and which financed more than £1.3 billion of insurance
premiums from 340,000 individual applications. Strong organic growth and the
successful integration of the previous year's acquisition were boosted by the
growth in our relatively new personal lines business. In addition the hardening
of insurance premium rates increased the size of our average advance for
commercial lines business and should continue to have a favourable impact during
the next year.
Our property and asset finance businesses also made good progress. The UK
property market has been strong and we continue to have a well-spread loan book
both geographically and by types of property. We have not relaxed our demanding
security requirements. On our asset finance side we benefited from the continued
development of our machine tool and healthcare businesses, from the revival in
fortunes of the UK used car market and from the relative buoyancy of our chosen
areas of the transport market. The printing machinery market, however, continued
to be patchy due to overcapacity problems and softness in machine values.
Our armed forces business moved into modest profit and the challenge is now to
develop it further. Our invoice finance and credit management businesses had
another good year, as did our mortgage network activity, which processed more
than 25,000 applications covering some £2.2 billion of mortgages.
During the year our treasury team was active and successful. We replenished and
expanded our banking facilities in order to be ready for the further organic
growth that we see ahead.
Provided that the UK economy does not slip into recession, the outlook for our
banking division continues to be encouraging.
Market-Making
Despite a fall in the FT All-Share Index of some 23 per cent. over our financial
year, WINS profits showed resilience. Whilst they fell by some 39 per cent.,
they showed a significant improvement from the low point in the second half of
last year, as set out in the table below:
First Second First Second half 2002
half half half
2001 2001 2002
£25.9m £1.5m £9.6m £7.2m
WINS traded profitably during every month in the period except September,
producing a 33 per cent. pre-tax return on its capital, which in the
circumstances was a commendable result.
The past year has seen continued development at WINS:
* the company moved to modern, open-plan offices, enabling more efficient
working, and it up-graded the computer system;
* Bondscape, the joint venture with Barclays to provide a 'yellow strip' for
UK gilt edged and other sterling fixed interest investments, has continued to
develop and expand its connections;
* trading in NYSE and NASDAQ stocks commenced electronically on WINNER
during the year; and
* trading in FTSE-100 SETS stocks commenced in December, 2001.
In addition, we have taken on a specialist investment trust team which, from
August, 2002, has been market-making as well as providing an integrated broking
and advisory service in its sector.
During this period of relatively lower stock market volumes WINS has chosen to
increase its market coverage substantially. Although the immediate outlook is
unclear, when the market returns to more normal trading this broadening of our
business base combined with our strength in electronic trading is expected to
enhance our position.
DIRECTORS AND MANAGEMENT
As previously announced, Rod Kent will be stepping down as group managing
director at the conclusion of our AGM on 31st October, 2002. We are delighted
that he will continue as a non-executive director and consultant. Colin Keogh
will become chief executive on 1st November, 2002 and Peter Winkworth and
Stephen Hodges will be appointed managing directors at that time, continuing
their respective duties as chief financial officer and head of banking. David
Pusinelli, who is responsible for group development, joined the board on 26th
September, 2002.
As we announced last year, Brian Winterflood retired from the board on 31st
January, 2002, his 65th birthday. We are pleased that he is continuing as the
non-executive chairman of WINS. Mike Hines, and David Macnamara as his
alternate, the joint chief executives of WINS, were appointed to the board on
4th March, 2002. John Llewellyn-Lloyd, who was head of corporate finance, left
the board on 31st December, 2001.
OUTLOOK
The financial year 2002 was a difficult one and, as we move into 2003, the
short-term economic outlook remains neither clear nor particularly encouraging.
Whilst our banking division continues to grow, the current uncertainty of
sentiment in markets means that growth in our other divisions would be hard won.
However, the harsher environment may well provide us with some good development
opportunities and with our liquidity, which was recently augmented by a £55
million share placing, we will be well placed to take advantage of them. We
remain confident in our strategy for the longer term; in the short term our
stance remains one of continued caution.
Sir David Scholey
Chairman
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