14th Mar 2023 14:49
(Alliance News) - Close Brothers Group PLC on Tuesday reported its half-year profit declined significantly amid provisions at its litigation finance business Novitas.
Shore Capital research analyst Gary Greenwood said the sharp drop in profitability was "expected" due to the additional provisions taken in respect of Novitas.
However, Greenwood said that even excluding the impact of Novitas, profit was down year-on-year in all three divisions of Close Brothers, with asset management "particularly disappointing" against expectations.
The London-based merchant banking group reported pretax profit in the six months to January 31 plunged 91% to GBP11.7 million from GBP128.9 million.
Investment losses increased to GBP162.2 million from GBP48.3 million a year before, and Novitas provisions totalled GBP114.6 million.
Operating profit in the Banking division, which includes Novitas, was GBP15 million, down from GBP120.2 million a year before. Asset Management operating profit was GBP8.6 million, down from GBP14.5 million, and Winterflood operating profit was GBP2.4 million, down from GBP8.8 million.
Novitas was acquired by Close Brothers for around GBP31 million in 2017. It is a provider of loans for legal proceedings. In 2021, Close Brothers decided to permanently cease the approval of lending to new customers across all the products offered by Novitas and withdraw from the legal services financing market.
Excluding Novitas, adjusted operating profit decreased to GBP117.5 million from GBP160.5 million a year before.
Steve Clayton, head of equity funds at Hargreaves Lansdown, said though Close Brothers remains a "strongly capitalised bank", there is "no hiding" the difficulties Novitas has created for company.
"A relatively minor acquisition a few years ago has become a weeping sore for the group and total provisions taken so far amount to GBP183 million, most of them clocking up in the current financial year. This has totally overshadowed progress in other areas," he said.
"The group has potential but will always be a cyclical operator. It is hard for it to shine whilst dealing with a self-inflicted wound of such magnitude as Novitas."
Hargreaves Lansdown's Clayton added that Close Brothers' Winterflood brokerage also remains under a cloud, with the market-making division "struggling to rebuild profitability after the bonanza of lockdown ebbed away".
Shore Capital's Greenwood was more optimistic on the City broker: "[At Winterflood] the good news is that there was only 1 loss day during the period. In addition, Winterflood Business Services saw assets under administration increase to GBP12.4 billion (ahead of the GBP10 billion target) and contribute an increase in income of 24% to GBP6.3 million (16% of the divisional total). This is more recurring in nature than trading income and so should help improve the quality and quantity of earnings over time."
As a result, Shore Capital said its current forecasts for Winterflood assume a "partial recovery" performance in the second half of its financial year, though Greenwood admitted that forecasting the division is "always difficult".
For the Banking division of Close Brothers, Shore Capital expects its operating profit to "bounce back sharply" in the second half as it does not expect Novitas provisions to repeat.
Nonetheless, following the update, Shore Capital said it may need to "modestly trim" its forecasts for Close Brothers again "due to the weaker-than-expected result from the Asset Management business."
Shares in Close Brothers were down 3.9% at 976.00 pence on Tuesday afternoon in London. Over the past 12 months, the stock is down 19%.
Shore Capital currently rates the stock at 'buy' with a fair value of 1,170 pence, but noted there is the "least upside of any of the banks we cover" in the stock.
By Heather Rydings, Alliance News senior economics reporter
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