Interim Results
Close Brothers Group PLC
03 March 2003
Embargoed for release 7.00 am on Monday 3rd March, 2003
CLOSE BROTHERS GROUP plc
The specialist merchant banking group
INTERIM RESULTS 2003
HIGHLIGHTS Six months ended Year ended
31st January, 31st January, 31st July,
2003 2002 2002
* Operating profit before taxation and
goodwill amortisation £39.7m £37.4m £75.1m+
* Operating profit before taxation on
ordinary activities £36.3m £34.1m £68.4m
* Earnings per share (before amortisation
of goodwill) 19.4p 18.6p 37.2p+
* Interim dividend per share 9.0p 9.0p n/a
* Shareholders' funds £483m £419m £472m
+After exceptional costs
* Profits at £36.3 million are 6 per cent. up on the first half of last year - and ahead of the
second half - a resilient performance.
* Banking profits up 20 per cent., loan book up 17 per cent. and no increase in bad debts rate.
* Investment Banking activity held up well in the face of falling markets.
Asset Management difficult period, FUM hold steady at £3.1 billion.
Corporate Finance held its own.
Market-Making a creditable result.
* Strone Macpherson joins the board as a non-executive director.
Sir David Scholey, Chairman, commenting on the results said:
"As expected, we have achieved continued growth in both assets and profits in
our specialist banking activity. Despite falling markets our investment banking
activity held up well.
Against a tough background the near term outlook for investment banking remains
uncertain though for banking it continues to be positive. We retain our
cautious stance overall. "
Enquiries to:
Colin Keogh Close Brothers Group plc 020 7426 4000
John Sunnucks Brunswick Group Limited 020 7404 5959
Webcast video interview with Colin Keogh, Chief Executive, Close Brothers Group
plc at www.closebrothers.co.uk or www.cantos.com.
Note to editor: CV of Strone Macpherson attached.
NOTE FOR EDITORS
STRONE MACPHERSON
Strone Macpherson (54) gained an MBA from INSEAD and joined Flemings in 1975. He
became a Director in 1979 and worked in London and New York till 1989 when he
joined the Board of Misys plc. He became Executive Deputy Chairman in 1991 and
stepped down from this role in the autumn of last year. He is a non-executive
Director of AXA UK plc, and British Empire Securities and General Trust plc and
is on the Investment Committee and General Council of the King's Fund. He is
Chairman of the Misys Charitable Foundation and of JP Morgan Fleming Smaller
Companies Investment Trust plc.
DIRECTORS' STATEMENT
Profit and Dividend
The operating profit on ordinary activities before taxation and goodwill
amortisation was £39.7 million compared with £37.4 million last year. The
earnings per share before goodwill amortisation was 19.4p compared with 18.6p.
After deducting a charge for goodwill amortisation of £3.4 million (2002 - £3.3
million), the operating profit on ordinary activities before taxation was £36.3
million (2002 - £34.1 million), up 6 per cent., and earnings per share increased
by 5 per cent. to 17.0p (2002 - 16.1p).
These results have benefited from the absence of exceptional costs in the period
although earnings per share growth has been constrained by the dilutive impact
of last Spring's share placing.
In the face of difficult market conditions, and over a six month period in which
the FTSE All Share Index fell by 16%, our performance continues to be resilient,
as demonstrated by comparison of the last four half-year periods:
Operating Profit before EPS*
income taxation*
£million £million P
July 01 135 36.3 18.5
January 02 137 37.4 18.6
July 02 139 37.7 18.6
January 03 148 39.7 19.4
*Before goodwill amortisation
The directors have declared an interim dividend of 9p net per share, the same
level as last year. This is payable on 16th April, 2003 to shareholders on the
register at the close of business on 14th March, 2003.
Overall Business Review
The results continue to be consistent with the statement made at our AGM in
October 2002, when we expressed caution about the current year.
We have achieved continued growth in both assets and profits in our specialist
Banking activity. The loan book at the end of the period increased 17 per cent.
over the past year, margins were maintained and there has been no deterioration
in the bad debt charge as a percentage of the average loan book. Our Investment
Banking activity held up well despite the falling markets although profits have
not moved forward since the previous half year. The results of our Asset
Management division suffered with the general market malaise, but Corporate
Finance held its own. Market-Making achieved a creditable result in a period of
continuing low levels of retail activity in trading outside the FTSE-100, with
the upturn in the market indices in late Autumn proving short lived.
The table below sets out our segmental analysis:
Operating income Profit before taxation
First Second First First Second First
half half half half half half
£million 2002 2002 2003 2002 2002 2003
Investment Banking
Asset Management 33.4 32.6 31.2 8.6 7.3 4.0
Corporate Finance 13.7 12.5 12.3 2.0 0.1 1.4
Market-Making 25.0 21.6 26.6 9.6 7.2 9.3
72.1 66.7 70.1 20.2 14.6 14.7
Banking 65.9 71.2 76.7 26.1 29.0 31.4
Group (0.8) 1.3 1.2 (8.9) (5.9) (6.4)
Total 137.2 139.2 148.0 37.4 37.7 39.7
Goodwill amortisation (3.3) (3.4) (3.4)
Total 34.1 34.3 36.3
The divisional net assets have not changed materially during the first half year.
Divisional Business Review
Banking
Our banking division, which utilises around 45 per cent. of our shareholders'
funds, had a strong six months, producing some 52 per cent. of our income and 68
per cent. of our operating profits before group central costs.
Profits were up 20 per cent. on the same period last year and the group loan
book increased by 17 per cent., to £1.5 billion from £1.3 billion a year ago.
This gratifying rate of growth was achieved without compromising our firm
underwriting criteria and, as a result our net bad debt charge, representing 1.5
per cent. of our average loan book, remained at the same level as last year.
The analysis of our specialist loan book at the half year stage indicates a
similar position to last year. We achieved excellent growth in our insurance
premium financing business, where the level of outstandings was up 35 per cent.
from a year ago. This reflected both significant organic growth and also the
hardening of insurance premiums. Our other process-driven operations, namely
our credit management businesses, performed satisfactorily although our debt
factoring side is operating in a harsh climate for its small and medium-sized
corporate clients.
The mix of assets by sector which we finance is shown in the table below:
31st January, 31st January,
2002 2003
Insurance premiums 23% 27%
Printing equipment 20% 18%
Cars 18% 19%
Transport and
engineering 14% 13%
Healthcare, armed
services and other 10% 9%
Property 9% 9%
Debt factoring 6% 5%
Our property lending business contributed another steady result but we remain
cautious, in view of the well publicised concerns about the residential property
market. Our asset finance businesses had a steady result and there was a
particularly pleasing performance from our motor finance operation.
Our healthcare, transport and engineering businesses also performed well, as did
our operation in the Channel Islands. However, the printing equipment market
continued to be weak and shows no signs of pick-up.
Our treasury operation had another good result and continues to have substantial
undrawn committed funding available to finance future loan book growth.
Overall the outlook for the division remains favourable.
Investment Banking
Asset Management
The past six months has been a difficult period. Falling markets have
restricted fund raising and have resulted in lower initial and recurring fees
from clients. In the circumstances we were pleased that our funds under
management remained steady at £3.1 billion.
Our private client businesses onshore and offshore were not immune to these
conditions. Offshore, margins in our deposit business suffered as a result of
continuing low interest rates. Furthermore, in the Channel Islands we are
making a significant investment in new premises and a new computer system. This
will increase our efficiency and capacity although in the short term
profitability is affected.
Our two businesses managing unquoted funds performed well, although the current
ISA/VCT fund raising season is muted. There was a particularly strong showing
from our private equity business, which had some good realisations in the
period. Our remaining businesses, largely managing quoted equities, had mixed
fortunes, our smaller units with relatively high fixed costs suffering the most.
As a result, although period turnover held up reasonably well, the operational
gearing of this division contributed to a significant fall in profits.
Although short term the outlook is sombre, we believe that we have the
appropriate building blocks to move forward when market conditions improve and
retail investor confidence returns.
Corporate Finance
For most of calendar 2002, our corporate finance division was at a low ebb as
the levels of activity reflected the falling stock market. However, towards the
end of that year, there was a small increase in our business levels and this,
together with a reduced cost base, has enabled us to report a modest first half
profit. The result is near to that for the first half last year and shows
improvement from that in the second half. The restructuring team is particularly
active in the troubled corporate climate. Looking forward, however, our
market-place continues to be subdued.
During the period we have continued to refocus our efforts and plan for the
future. In Europe we have doubled our shareholding in Atlas Capital Close
Brothers (Spain) to 20 per cent. and expanded our network of associates into
Switzerland and Italy. In the US we have also entered into associate
relationships with Harris Williams and Chanin Capital Partners covering,
respectively, M&A and corporate restructuring.
Market-Making
The UK stock market has now been in a bear phase for over three years and
suffered sharp falls both in Summer 2002 and in the early part of 2003. There
was a rally in late Autumn but, for the second year running, this soon fizzled
out.
In these circumstances we have achieved a creditable result, broadly in line
with that for the first half of last year and an improvement over the second
half. Over the period our costs, which now include those of the investment
trust team who joined us from HSBC last August, have been well controlled. This
new team is beginning to build up its business and at the half year end had been
appointed corporate broker to 26 investment trusts.
The market remains edgy and volatile, and the immediate outlook for this
business is unexciting. However the withdrawal of some firms from the market
should benefit us in an upturn.
Board
As previously announced at our AGM on 31st October, 2002 Colin Keogh was
appointed group chief executive on the retirement of Rod Kent, and Peter
Winkworth and Stephen Hodges were appointed group managing directors.
Strone Macpherson was appointed a non-executive director on 3rd March, 2003. Mr.
Macpherson has been a senior board member of Misys plc from 1989 until recently,
when he stepped down as executive deputy chairman. He is currently the chairman
of J P Morgan Fleming Smaller Companies Investment Trust plc and a non-executive
director of AXA UK plc and British Empire Securities and General Trust plc.
Outlook
The long bear market continues with the stock market notably weak since the turn
of the year and no sign of investor confidence returning. The political
situation in the Middle East and elsewhere is very concerning. This, coupled
with the deteriorating economic environment in the UK, may begin to undermine
consumer confidence.
Against this tough background, the near term outlook for our investment banking
activity remains uncertain although for our specialist banking activity it
continues to be positive. For the remainder of calendar 2003 we retain our
cautious stance overall.
CONSOLIDATED PROFIT AND LOSS ACCOUNT
Six months ended Year ended
31st January, 31st July,
2003 2002 2002
(Unaudited) (Unaudited) (Audited)
£'000 £'000 £'000
Interest receivable 109,931 100,491 198,890
Interest payable (47,747) (46,074) (88,449)
Net interest income 62,184 54,417 110,441
Fees and commissions receivable 65,760 69,945 140,795
Fees and commissions payable (10,652) (13,398) (24,740)
Net dealing income - market-making 28,014 25,680 48,365
Other operating income 2,709 543 1,493
Other income 85,831 82,770 165,913
Operating income 148,015 137,187 276,354
Administrative expenses 93,706 87,245 174,383
Depreciation 3,958 3,489 7,614
Provisions for bad and doubtful debts 10,669 9,058 19,256
Amortisation of goodwill 3,389 3,325 6,681
Total operating expenses 111,722 103,117 207,934
Operating profit on ordinary activities before
taxation 36,293 34,070 68,420
Taxation on profit on ordinary activities 11,377 11,060 21,839
Profit on ordinary activities after taxation 24,916 23,010 46,581
Minority interests - equity 665 1,258 2,252
Profit attributable to shareholders 24,251 21,752 44,329
Interim dividend 12,839 12,195 36,409
Retained profit 11,412 9,557 7,920
Interim dividend per share (net) 9.0p 9.0p 26.0p
Earnings per share before amortisation of
goodwill 19.4p 18.6p 37.2p*
Earnings per share on profit attributable to
shareholders 17.0p 16.1p 32.3p
Diluted earnings per share 16.9p 16.0p 32.0p
All income and profits are in respect of continuing operations.
*After exceptional costs
CONSOLIDATED BALANCE SHEET
31st January, 31st July,
2003 2002 2002
(Unaudited) (Unaudited) (Audited)
£'000 £'000 £'000
Assets
Cash and balances at central banks 759 619 671
Loans and advances to banks 679,307 499,190 443,175
Loans and advances to customers 1,520,476 1,300,524 1,410,998
Non-recourse borrowings (175,000) (100,000) (175,000)
1,345,476 1,200,524 1,235,998
Debt securities - long positions 53,643 44,365 64,352
Debt securities - other 521,750 552,184 712,380
Settlement accounts 238,166 271,957 246,456
Equity shares - long positions 30,419 27,821 15,971
Loans to money brokers against stock advanced 87,054 86,217 90,385
Equity shares - investments 27,439 26,537 28,484
Intangible fixed assets - goodwill 109,707 117,152 113,065
Tangible fixed assets 24,031 22,966 24,667
Share of gross assets of joint ventures 18,208 13,209 14,331
Share of gross liabilities of joint ventures (18,000) (12,772) (13,905)
208 437 426
Other assets 59,405 46,683 44,299
Deferred taxation 9,514 10,276 10,345
Prepayments and accrued income 25,071 25,980 22,956
Total assets 3,211,949 2,932,908 3,053,630
Liabilities
Deposits by banks 87,269 103,721 83,159
Customer accounts 1,317,314 1,150,345 1,222,541
Bank loans and overdrafts 585,802 483,843 505,655
Debt securities - loan notes issued 100,000 118,140 100,000
Debt securities - short positions 46,144 40,259 52,231
Settlement accounts 188,261 208,948 202,343
Equity shares - short positions 7,378 13,660 7,589
Loans from money brokers against stock advanced 85,679 90,438 84,299
Other liabilities 145,008 139,167 143,769
Accruals and deferred income 62,807 62,437 77,105
Subordinated loan capital 96,937 96,937 96,937
Minority interests - equity 5,881 5,717 6,079
Total liabilities 2,728,480 2,513,612 2,581,707
Shareholders' funds
Called up share capital 35,971 34,187 35,920
Share premium account 249,148 194,952 248,456
Profit and loss account 198,350 190,157 187,547
Total equity shareholders' funds 483,469 419,296 471,923
Total liabilities and shareholders' funds 3,211,949 2,932,908 3,053,630
Memorandum items
Contingent liabilities - guarantees 2,892 4,847 2,412
Commitments - other 160,481 158,094 166,512
CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
Six months ended Year ended
31st January, 31st July,
2003 2002 2002
(Unaudited) (Unaudited) (Audited)
£'000 £'000 £'000
Profit attributable to shareholders 24,251 21,752 44,329
Exchange adjustment (609) 17 (978)
Total recognised gains and losses 23,642 21,769 43,351
CONSOLIDATED CASH FLOW STATEMENT
Six months ended Year ended
31st January, 31st July,
2003 2002 2002
(Unaudited) (Unaudited) (Audited)
£'000 £'000 £'000
Net cash inflow/(outflow) from operating activities
(Note 1(a)) 41,729 (54,707) (29,611)
Returns on investments and servicing of finance:
Interest paid on subordinated loan capital (3,945) (3,945) (7,825)
Dividends paid to minorities (170) (133) (178)
(4,115) (4,078) (8,003)
Taxation:
Taxation paid (9,039) (13,828) (25,586)
Capital expenditure and financial investment:
Purchase of tangible fixed assets (3,608) (7,729) (14,396)
Sale of tangible fixed assets 248 1,666 2,416
Purchase of equity shares held for investment (2,475) (2,500) (5,173)
Sale of equity shares held for investment 5,253 2,381 2,647
(582) (6,182) (14,506)
Acquisitions and disposals:
Minority interests acquired for cash (1,467) (1,118) (1,194)
Purchase of subsidiaries (Note 1(b)) (1,775) (1,170) (6,685)
(3,242) (2,288) (7,879)
Equity dividends paid (24,214) (22,927) (35,122)
Net cash inflow/(outflow) before financing 537 (104,010) (120,707)
Financing:
Issue of ordinary share capital including premium 743 1,831 57,068
Increase/(decrease) in cash 1,280 (102,179) (63,639)
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. Consolidated cash flow statement Six months ended Year ended
31st January, 31st July,
2003 2002 2002
(Unaudited) (Unaudited) (Audited)
£'000 £'000 £'000
(a) Reconciliation of operating profit on ordinary
activities
before taxation to net cash inflow/(outflow)
from operating activities
Operating profit on ordinary activities before 36,293 34,070 68,420
taxation
(Increase)/decrease in:
Interest receivable and prepaid expenses (2,115) (2,117) 907
Net settlement accounts (5,792) (29,433) (10,537)
Net equity shares held for trading (14,659) 9,658 15,437
Net debt securities held for trading 4,622 (6,524) (14,539)
(Decrease)/increase in interest payable and (14,298) (9,473) 4,911
accrued expenses
Depreciation and amortisation 7,347 6,814 14,295
Net cash inflow from trading activities 11,398 2,995 78,894
(Increase)/decrease in:
Debt securities held for liquidity 190,630 (70,248) (230,444)
Loans and advances to customers (109,478) (111,119) (221,593)
Loans and advances to banks not repayable on (234,940) (7,508) 86,995
demand
Other assets less other liabilities 5,089 33,691 28,749
Increase/(decrease) in:
Deposits by banks 4,110 48,078 27,516
Customer accounts 94,773 6,190 78,386
Bank loans and overdrafts 80,147 (123,786) (101,974)
Non-recourse borrowings - 67,000 142,000
Debt securities - loan notes issued - 100,000 81,860
Net cash inflow/(outflow) from operating 41,729 (54,707) (29,611)
activities
(b) Analysis of net cash outflow in respect of
purchase of subsidiaries
Cash consideration in respect of current year - (648) (1,150)
purchases
Loan stock redemptions and deferred consideration
paid in respect of prior year purchases (1,775) (522) (6,865)
Net movement in cash balances - - 1,330
(1,775) (1,170) (6,685)
(c) Analysis of changes in financing
Share capital (including premium) and subordinated
loan capital:
Opening balance 381,313 324,245 324,245
Shares issued for cash 743 1,831 57,068
Closing balance 382,056 326,076 381,313
(d) Analysis of cash balances Movement
in the period
£'000
Cash and balances at central 88 759 619 671
banks
Loans and advances to banks
repayable on demand 1,192 159,210 119,530 158,018
1,280 159,969 120,149 158,689
THE NOTES
2. Basis of preparation
The interim accounts, which are unaudited, have been prepared on the basis of
the accounting policies set out in the Annual Report 2002. The figures shown
for the full year ended 31st July, 2002 represent an abridged version of the
audited financial statements of Close Brothers Group plc for that year, which
have been filed with the Registrar of Companies and on which the auditors have
given an unqualified report which did not contain statements under Section 237
(2) or (3) of the Companies Act 1985. The financial information contained in
this interim report does not constitute the group's statutory accounts within
the meaning of Section 240 of the Companies Act 1985.
3. Earnings per share
The calculation of earnings per share on profit attributable to shareholders is
based on profit after taxation and minority interests of £24,251,000 (2002 -
£21,752,000) and on 142,516,000 (2002 - 135,154,000) ordinary shares, being the
weighted average number of shares in issue during the period excluding those
held by the employee share benefit trust.
The diluted earnings per share is based on the same profit after taxation and
minority interests disclosed above, and on 143,114,000 (2002 - 136,265,000)
ordinary shares, being the weighted average number of shares in issue also
disclosed above, plus the weighted dilutive potential on ordinary shares of
exercisable employee share options in issue during the period.
INDEPENDENT REVIEW REPORT
Independent Review Report to Close Brothers Group plc
Introduction
We have been instructed by the company to review the financial information for
the six months ended 31st January, 2003 which comprises the consolidated profit
and loss account, the consolidated balance sheet, the consolidated cash flow
statement and related notes 1 to 3. We have read the other information
contained in the interim report and considered whether it contains any apparent
misstatements or material inconsistencies with the financial information.
This report is made solely to the company in accordance with Bulletin 1999/4
issued by the Auditing Practices Board. Our work has been undertaken so that we
might state to the company those matters we are required to state to them in an
independent review report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to anyone other than
the company, for our review work, for this report, or for the conclusions we
have formed.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority which require that the accounting
policies and presentation applied to the interim figures should be consistent
with those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with the guidance contained in Bulletin
1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A
review consists principally of making enquiries of group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the accounting policies and presentation
have been consistently applied unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with United Kingdom auditing standards and therefore
provides a lower level of assurance than an audit. Accordingly, we do not
express an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 31st January, 2003.
Deloitte & Touche
Chartered Accountants
London
3rd March, 2003
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