Interim Results
Close Brothers Group PLC
07 March 2005
Embargoed for release 7.00 am on Monday 7th March, 2005
CLOSE BROTHERS GROUP plc
The specialist merchant banking group
INTERIM RESULTS 2005
HIGHLIGHTS Six months ended Year ended
31st January, 31st January, 31st July,
2005 2004 2004
* Operating profit before taxation £65.1m £57.8m £118.9m
and goodwill amortisation
* Operating profit before taxation £60.9m £53.4m £101.3m
on ordinary activities
* Earnings per share (before 31.2p 27.7p 57.3p
amortisation of goodwill)
* Interim dividend per share 9.5p 9.0p n/a
* Shareholders' funds £538m £504m £509m
* Profits and earnings per share up 13%.
* Dividend up 6%.
* Investment Banking profits increased by 17%; group contribution 51%.
Asset Management growth continues. FUM up 22% to £6.1bn.
Corporate Finance improved revenues; higher contribution from M&A.
Market-Making activity slower in early months, picked up late autumn.
* Banking profits increased by 2%. Loan book (£2.0bn) up 6% organic. Lower bad
debts, but testing markets and increased regulatory costs.
Colin Keogh, Chief Executive, commenting on the results said:
"The first half results are satisfactory and again demonstrate the resilience of
our diversified business model. We expect that investment banking will continue
to move forward whilst banking will continue to find trading tough. Overall, we
are set fair for our second half."
Enquiries to:
Colin Keogh Close Brothers Group plc 020 7426 4000
Rupert Young Brunswick Group LLP 020 7404 5959
Webcast video interview with Colin Keogh, Chief Executive, Close Brothers Group
plc at www.closebrothers.co.uk or www.cantos.com
DIRECTORS' STATEMENT
Profit and Dividend
The operating profit on ordinary activities before taxation and goodwill
amortisation of £4.2 million was £65.1 million compared with £57.8 million last
year, an increase of 13 per cent. The earnings per share before goodwill
amortisation was 31.2p compared with 27.7p, also up 13 per cent.
After deducting the charge for goodwill amortisation, the operating profit on
ordinary activities before taxation was £60.9 million (2004 - £53.4 million), up
14 per cent. Earnings per share on this basis increased by 15 per cent. to 28.4p
(2004 - 24.6p).
The directors have declared an interim dividend of 9.5p per share, an increase
of 5.6 per cent. over the interim of 9p per share last year. This is payable on
13th April, 2005 to shareholders on the register at the close of business on
18th March, 2005 and is in line with our policy to grow dividends while
rebuilding cover.
Overall Business Review
The first half results are satisfactory and again demonstrate the resilience of
our diversified business model. As foreshadowed in our last Annual Report, good
growth came from our investment banking activity while the growth rate of our
banking activity slowed somewhat with the impact of testing markets and recent
regulatory changes. The divisional results are shown in the table below.
Investment Banking increased profits by some 17 per cent. compared to the same
period last year and contributed 51 per cent. (2004 - 48 per cent.) to the
group's operating result. Market-Making performed well given the quiet
conditions in the early part of the period and Corporate Finance completed a
pleasing number of transactions for clients. The key driver of growth in the
period was our burgeoning Asset Management division which is beginning to see
the benefits of groundwork laid in earlier years.
Banking had a busy period, raising €500 million of new funding and making two
in-fill acquisitions in January. Our loan book increased to £2.0 billion (2004 -
£1.7 billion) with an organic growth rate of some 6 per cent. Profits were 2 per
cent. higher compared with the same period last year.
Operating income Profit before taxation
First First First First
half half half half
£million 2004 2005 2004 2005
Investment
Banking
Asset Management 38.3 57.3 7.2 15.2
Corporate Finance 16.9 21.4 4.5 4.9
Market-Making 53.0 44.6 19.9 17.0
------- ------- ------- -------
108.2 123.3 31.6 37.1
Banking 85.5 90.4 34.4 35.2
Group 0.8 1.4 (8.2) (7.2)
------- ------- ------- -------
194.5 215.1
------- -------
Profit before goodwill amortisation 57.8 65.1
Goodwill amortisation (4.4) (4.2)
------- -------
Profit before taxation 53.4 60.9
------- -------
The divisional net assets have not changed materially during the first half year.
Divisional Business Review
Banking
While the organic growth rate of our banking profits has slowed, we continued to
achieve a high return on income (39 per cent.) and a high return on capital (31
per cent. annualised on opening shareholders' funds). These results had to
sustain increased regulatory cost but benefited from the stable conditions for
arrears levels and bad and doubtful debts, where our charge as a proportion of
average loan book fell to 1.0 per cent. (2004 - 1.3 per cent.).
The acquisitions of Singer & Friedlander's motor finance loan book, now being
run off, and Cattles' commercial assets lending business in Hull, together
amounted to some £200 million of loans. Consequently our gross loan book
expanded over the past 12 months to £1.98 billion (2004 - £1.68 billion),
analysed as follows:
31st January,
2004 2005
Motor vehicles 20% 24%
Insurance premiums 29% 22%
Transport, engineering and plant 15% 16%
Printing machinery 16% 13%
Healthcare, armed services and other 7% 10%
Property 8% 9%
Debt factoring 5% 6%
------ ------
100% 100%
------ ------
Our treasury, property lending and credit management businesses all increased
profits while other commercial assets and motor vehicle finance performed well
in flat markets.
In contrast and as expected, we have experienced a slowdown in our insurance
financing business, with continued premium deflation, and also in mortgages
arranged. During the period the new regulation of mortgage brokers and of the
sale of insurance has absorbed management time and led to increased costs. The
implications of this are likely to be felt for some time.
Planning for future growth, we have expanded the funding available to the bank
and have raised €500 million for three years under a medium-term note programme
at an attractive rate. We now have credit ratings from both Fitch and Moody's as
a result of which a wider funding market is open to us.
Investment Banking
Asset Management
Funds under management grew 22 per cent. over the past year to £6.1 billion from
£5.0 billion (as shown by the table below). However the timing of both new funds
taken on and prior year reorganisation and infrastructure charges contributed to
an increase in revenue and profits of 50 per cent. and 111 per cent.
respectively.
Funds under management
First First
half half
2004 2005
£bn £bn
New funds raised 0.5 0.6
Withdrawals and redemptions (0.2) (0.3)
------ ------
Net new funds 0.3 0.3
Market effect 0.1 0.3
Acquired funds 0.9 -
Total at start of period 3.7 5.5
------ ------
Total at end of period 5.0 6.1
------ ------
Our private client business (FUM £2.3 billion) continued to develop, with
earlier investment offshore bearing fruit and providing enhanced profits.
Furthermore our wealth management accounts processed in London have now been
migrated to our acquired business in Northwich which itself contributed for the
full period.
Our unquoted funds (FUM £1.8 billion) progressed, with private equity achieving
some notable realisations for us and our clients as well as making investments
for its new £360 million Fund VII, now fully on-stream. In addition, our
property funds and our award-winning VCT team continued to attract new
investors.
Our specialist funds (FUM £2.0 billion) did well and we continue to refine our
strategic plans for the future shape and development of this business.
With major share markets generally stronger than six months ago, the development
of this division continues.
Corporate Finance
Despite broadly flat activity in the mid-cap advisory market in the UK we
achieved some useful completions in each of our three main areas of business - M
&A, restructuring and debt advisory. This gave rise to an improvement in our
revenues and a higher contribution from the M&A area. Activity in our European
associates was encouraging and profits showed some improvement. We have been
awarded "European Restructuring House of the Year 2004" by International
Financing Review.
Market-Making
Our market-making income was some 16 per cent. lower than in the same period
last year, as business was slower during the earlier months. However activity
picked up in the late Autumn as the indices improved having been directionless
for some months. In addition, our net margin held up well with the period
benefiting from advisory activity in the investment trust sector. The firmer
tone to the market has continued into the new calendar year.
Outlook
The UK economy continues to grow but at a reducing rate. The UK stock market
ended 2004 on a positive note and has progressed in the early weeks of 2005, but
there is evidence of slowdown in the consumer finance market; for the time being
however the bad debt scenario for banks remains benign.
Against this background we expect that investment banking will continue to move
forward whilst banking will continue to find trading tough. Overall, we are set
fair for our second half.
7th March, 2005
CONSOLIDATED PROFIT AND LOSS ACCOUNT
Six months ended Year ended
31st January, 31st July,
2005 2004 2004
(Unaudited) (Unaudited) (Audited)
£'000 £'000 £'000
Interest receivable 137,410 116,243 240,348
Interest payable 68,849 50,828 106,757
-------- -------- --------
Net interest income 68,561 65,415 133,591
-------- -------- --------
Fees and commissions receivable 103,847 86,568 194,453
Fees and commissions payable (16,020) (13,675) (34,072)
Net dealing income - market-making 48,138 54,683 99,983
Other operating income 10,603 1,529 7,227
-------- -------- --------
Other income 146,568 129,105 267,591
-------- -------- --------
Operating income 215,129 194,520 401,182
-------- -------- --------
Administrative expenses 136,155 121,961 248,622
Depreciation 5,099 4,387 10,833
Provisions for bad and doubtful debts 8,804 10,365 22,781
Amortisation of goodwill 4,160 4,451 17,603
-------- -------- --------
Total operating expenses 154,218 141,164 299,839
-------- -------- --------
Operating profit on ordinary activities
before taxation 60,911 53,356 101,343
Taxation on profit on ordinary
activities 18,740 16,794 33,925
-------- -------- --------
Profit on ordinary activities after
taxation 42,171 36,562 67,418
Minority interests - equity 982 1,092 2,209
-------- -------- --------
Profit attributable to shareholders 41,189 35,470 65,209
Interim dividend 13,636 12,875 38,479
-------- -------- --------
Retained profit 27,553 22,595 26,730
--------------------------------------------------------------------------------
Dividend per share 9.5p 9.0p 27.0p
-------- -------- --------
Earnings per share before
amortisation of goodwill 31.2p 27.7p 57.3p
-------- -------- --------
Earnings per share on profit
attributable to shareholders 28.4p 24.6p 45.1p
-------- -------- --------
Diluted earnings per share 28.3p 24.5p 45.0p
-------- -------- --------
All income and profits are in respect of continuing operations.
CONSOLIDATED BALANCE SHEET
31st January, 31st July,
2005 2004 2004
(Unaudited) (Unaudited) (Audited)
£'000 £'000 £'000
Assets
Cash and balances at central banks 923 970 844
Loans and advances to banks 715,399 631,192 733,029
Loans and advances to customers 1,978,149 1,684,206 1,757,074
Non-recourse borrowings (250,000) (225,000) (250,000)
1,728,149 1,459,206 1,507,074
Debt securities - long positions 55,966 50,297 54,521
Debt securities - other 862,809 790,760 777,509
Settlement accounts 544,330 437,675 366,213
Equity shares - long positions 41,184 41,338 34,714
Loans to money brokers against
stock advanced 139,222 106,175 113,116
Equity shares - investments 24,661 24,585 26,770
Intangible fixed assets - goodwill 97,566 104,413 98,628
Tangible fixed assets 36,285 32,607 32,855
Share of gross assets of joint ventures 21,826 21,637 21,855
Share of gross liabilities of
joint ventures (21,183) (21,079) (21,358)
643 558 497
Other assets 78,067 68,146 84,708
Deferred taxation 18,140 12,813 14,377
Prepayments and accrued income 46,860 32,072 35,589
-------- -------- --------
Total assets 4,390,204 3,792,807 3,880,444
--------------------------------------------------------------------------------
Liabilities
Deposits by banks 124,588 116,894 79,188
Customer accounts 1,752,796 1,527,004 1,681,152
Bank loans and overdrafts 545,047 621,275 621,360
Debt securities - loan notes issued 350,000 100,000 100,000
Debt securities - short positions 45,415 47,930 52,842
Settlement accounts 479,931 354,680 301,159
Equity shares - short positions 19,857 10,307 14,406
Loans from money brokers against
stock advanced 158,502 136,746 105,639
Other liabilities 171,953 176,772 207,615
Accruals and deferred income 101,735 93,226 106,208
Subordinated loan capital 96,937 96,937 96,937
Minority interests - equity 5,080 6,704 4,674
-------- -------- --------
Total liabilities 3,851,841 3,288,475 3,371,180
-------- -------- --------
Shareholders' funds
Called up share capital 36,135 36,033 36,066
Share premium account 251,642 249,935 250,430
ESOP trust reserve (3,868) (4,116) (3,962)
Profit and loss account 254,454 222,480 226,730
-------- -------- --------
Total equity shareholders' funds 538,363 504,332 509,264
-------- -------- --------
Total liabilities and shareholders' funds 4,390,204 3,792,807 3,880,444
--------------------------------------------------------------------------------
Memorandum items
Contingent liabilities - guarantees 5,606 3,083 5,889
Commitments - other 223,153 190,229 194,284
CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
Six months ended Year ended
31st January, 31st July,
2005 2004 2004
(Unaudited) (Unaudited) (Audited)
£'000 £'000 £'000
Profit attributable to shareholders 41,189 35,470 65,209
Exchange adjustment 94 (1,488) (1,554)
-------- -------- --------
Total recognised gains and losses 41,283 33,982 63,655
-------- -------- --------
--------------------------------------------------------------------------------
CONSOLIDATED CASH FLOW STATEMENT
Six months ended Year ended
31st January, 31st July,
2005 2004 2004
(Unaudited) (Unaudited) (Audited)
£'000 £'000 £'000
Net cash inflow from operating
activities (Note 1(a)) 345,639 180,985 113,868
-------- -------- --------
Returns on investments and
servicing of finance:
Interest paid on subordinated
loan capital (3,938) (3,917) (7,834)
Dividends paid to minorities (512) (743) (1,419)
-------- -------- --------
(4,450) (4,660) (9,253)
-------- -------- --------
Taxation:
Taxation paid (21,431) (12,063) (32,184)
-------- -------- --------
Capital expenditure and
financial investment:
Purchase of tangible fixed assets (8,731) (5,253) (18,613)
Sale of tangible fixed assets 1,180 223 630
Purchase of equity shares held
for investment (5,824) (763) (2,839)
Sale of equity shares held for
investment 14,843 2,377 5,677
-------- -------- --------
1,468 (3,416) (15,145)
-------- -------- --------
Acquisitions and disposals:
Minority interests acquired for
cash (2,622) (36) (2,950)
Purchase of loan book (130,530) - -
Purchase of subsidiaries (Note 1(b)) (16,623) (7,956) (11,772)
-------- -------- --------
(149,775) (7,992) (14,722)
-------- -------- --------
Equity dividends paid (25,604) (24,482) (37,357)
-------- -------- --------
Net cash inflow before financing 145,847 128,372 5,207
Financing:
Issue of ordinary share capital
including premium 1,281 438 966
-------- -------- --------
Increase in cash 147,128 128,810 6,173
-------- -------- --------
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,
2005 2004 2004
(Unaudited) (Unaudited) (Audited)
£'000 £'000 £'000
(a) Reconciliation of operating
profit on ordinary activities
before taxation to net cash
inflow from operating activities
Operating profit on ordinary
activities before taxation 60,911 53,356 101,343
(Increase)/decrease in:
Interest receivable and prepaid
expenses (11,196) (4,859) (8,376)
Net settlement accounts 655 (9,168) 8,773
Net equity shares held for trading (1,019) (26,017) (15,294)
Net debt securities held for trading (8,872) 4,264 4,952
(Decrease)/increase in interest
payable and accrued expenses (4,601) (3,423) 9,559
Depreciation and amortisation 9,259 8,838 28,436
-------- -------- -------
Net cash inflow from trading
activities 45,137 22,991 129,393
(Increase)/decrease in:
Debt securities held for liquidity (85,300) (246,934) (233,683)
Loans and advances to customers (25,065) (68,592) (141,460)
Loans and advances to banks not
repayable on demand 164,679 244,112 19,764
Other assets less other liabilities 9,242 41,148 10,067
Increase/(decrease) in:
Deposits by banks 45,400 9,022 (28,684)
Customer accounts 71,644 125,522 279,670
Bank loans and overdrafts (130,098) 3,716 3,801
Non-recourse borrowings - 50,000 75,000
Debt securities - loan notes issued 250,000 - -
-------- -------- -------
Net cash inflow from operating
activities 345,639 180,985 113,868
-------- -------- -------
(b) Analysis of net cash outflow in
respect of purchase of subsidiaries
Cash consideration in respect of
current year purchases (16,204) (9,563) (9,563)
Loan stock redemptions and
deferred consideration paid in
respect of prior year purchases (419) (4,992) (8,808)
Net movement in cash balances - 6,599 6,599
-------- -------- -------
(16,623) (7,956) (11,772)
-------- -------- -------
(c) Analysis of changes in financing
Share capital (including premium)
and subordinated loan capital:
Opening balance 383,433 382,467 382,467
Shares issued for cash 1,281 438 966
-------- -------- -------
Closing balance 384,714 382,905 383,433
-------- -------- -------
(d) Analysis of cash balances
Movement
in the period
£'000
Cash and balances
at central banks 79 923 970 844
Loans and advances
to banks repayable
on demand 147,049 283,584 259,046 136,535
--------- --------- --------- --------
147,128 284,507 260,016 137,379
--------- --------- --------- --------
--------------------------------------------------------------------------------
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 2004 annual accounts.
The figures shown for the full year ended 31st July, 2004 represent an abridged
version of the full accounts 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. 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
Earnings per share before amortisation of goodwill is based on profit of
£45,349,000 (2004 - £39,921,000), being profit after taxation and minority
interests but before goodwill amortisation, and on 145,162,000 (2004 -
144,272,000) ordinary shares, being the weighted average number of shares in
issue and contingently issuable during the period excluding those held by the
employee benefit trust. This earnings per share has been disclosed because, in
the opinion of the directors, it reflects operational performance.
Earnings per share on profit attributable to shareholders is based on profit
after taxation and minority interests of £41,189,000 (2004 - £35,470,000) and on
the same number of shares as above.
Diluted earnings per share is based on this same profit after taxation and
minority interests, but on 145,600,000 (2004 - 144,856,000) ordinary shares,
being the weighted average number of shares in issue 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, 2005 which comprises the profit and loss
account, the balance sheet, the statement of total recognised gains and losses,
the 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, 2005.
Deloitte & Touche LLP
Chartered Accountants
London
7th March, 2005
--------------------------------------------------------------------------------
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