Close Brothers Group H2 Earnings Call Highlights

Key Points

• Restructuring is progressing: Close Brothers narrowed its statutory loss before tax to £60 million from £122 million, delivered £36 million in annualized savings—above its £25 million target—and expects to exceed £60 million in savings by the end of fiscal 2027.
• Underlying lending resumed growth: The £9.5 billion loan book grew 2% on an underlying basis, with all three divisions expanding in the fourth quarter. Management expects fiscal 2027 loan growth of 5%–10%, although margins are likely to decline slightly.
• Dividend remains suspended amid motor-finance uncertainty: The bank increased its motor-finance redress provision to about £320 million and withheld its fiscal 2026 dividend while legal challenges to the FCA scheme remain unresolved. Its CET1 ratio was 14.1%, expected to fall to about 13.3% after Basel 3.1 implementation.

Close Brothers Group LON: CBG reported a narrower statutory loss for fiscal 2026 as the specialist bank advanced its restructuring program, returned to underlying loan book growth and accelerated cost savings. The company said it would not pay a dividend for the year because of continued uncertainty surrounding the FCA’s Motor Finance Consumer Redress Scheme and related legal challenges.

Group Chief Executive Mike Morgan said the bank had been repositioned as a focused specialist lender operating through commercial, retail and property divisions. Close Brothers supported 1.6 million customers and had a £9.5 billion loan book at year-end, while lending about £6.5 billion to businesses and consumers in the UK and Ireland during the year.

“The business is now structurally different and capable of generating materially higher risk-adjusted returns,” Morgan said. He said the company expects loan book growth within its 5%-10% target range in fiscal 2027, with more substantial benefits from cost reductions, operating leverage and growth expected in fiscal 2028.

Profit Falls, Statutory Loss Narrows

Group CFO Fiona McCarthy said adjusted operating income declined 6% to £643 million, reflecting the company’s deliberate business repositioning, a lower net interest margin and a smaller average loan book. Adjusted operating expenses fell 3% to £431 million, while adjusted impairment losses were broadly unchanged at £92 million.

Adjusted operating profit declined to £120 million from £144 million a year earlier. However, statutory loss before tax narrowed to £60 million from £122 million, while the loss after tax from continuing operations was £65 million. Adjusted earnings per share were 47.5 pence and return on average tangible equity was 5.5%.

Adjusting items totaled £181 million, compared with £267 million in the prior year. The largest component was a £165 million increase in the motor finance commissions provision, bringing the total provision to about £320 million.

McCarthy said the provision was based on a single-scenario methodology using the FCA’s published redress scheme from March 2026. While Close Brothers disagrees with elements of the scheme, it decided not to challenge it. Four legal challenges are currently under way, with hearings expected in December 2026 or February 2027.

The company also reported £7.7 million of other motor finance commission-related costs, including legal expenses and the unwind of the provision’s time-value discount, partly offset by insurance recoveries. It expects a broadly similar cost in fiscal 2027.

Cost Program Runs Ahead of Plan

Close Brothers delivered about £36 million in annualized cost savings during fiscal 2026, exceeding its target of £25 million. The savings came from workforce efficiencies, increased outsourcing and offshoring, lower adviser and third-party spending, a smaller property footprint and lower variable compensation.

The company now expects to exceed £60 million in annualized savings from the current transformation program by the end of fiscal 2027. It expects group costs to remain broadly stable at about £430 million in fiscal 2027 as additional savings are offset by inflation and investment in growth, including front-office hiring.

For fiscal 2028, Close Brothers expects costs toward the lower end of its £410 million to £430 million guidance range. McCarthy said that, combined with loan book growth, the lower cost base should support an expense-to-income ratio below 60%.

Restructuring costs were £14.3 million in fiscal 2026, primarily for redundancies and associated expenses. The group expects restructuring costs of about £30 million to £40 million in fiscal 2027.

Loan Growth Returns Across Divisions

The reported loan book was broadly unchanged year over year at £9.5 billion, including headwinds from the legacy Irish motor finance operation and the repositioning of premium finance toward commercial lines. On an underlying basis, the loan book grew 2% over the year and 4% in the second half. All three divisions grew during the fourth quarter.

Commercial lending increased 3% to £4.9 billion, with 6% growth in the second half. Invoice finance grew strongly in the latter half, while specialist asset finance businesses continued to expand. In response to an analyst question, McCarthy said invoice finance’s 26% second-half growth partly reflected recovery from a seasonal dip at the end of the first half.

In retail, motor finance grew in both the UK and Ireland. Morgan said the Irish business had achieved record new business volumes and increased market share to 13% from 8.5% in 2024. Premium finance is being repositioned toward commercial lines and larger, more complex transactions.

Property continued to face difficult build-to-sell market conditions, affecting its loan book, income and profit. However, the company said it was building diversification in build-to-rent and purpose-built student accommodation.

Credit performance remained stable overall, with the bad debt ratio at 1%, below the company’s long-term average of 1.2%. McCarthy said a fourth-quarter increase in impairments related to a small number of property cases, including legacy facilities. Property coverage was 5.6%, with Stage 3 coverage at 35%, while overall group coverage increased to 2.7% from 2.6%.

Capital, Funding and Dividend Outlook

Net interest margin across lending divisions was 6.9%, down from 7.2%, reflecting changes in business mix, the premium finance repositioning and the wind-down of Novitas. Close Brothers expects net interest margin to be slightly lower in fiscal 2027, including an additional roughly 0.1 percentage point effect from mix changes.

Total funding stood at £11.4 billion, down from £12.7 billion, with retail deposits accounting for 57% of the funding base. The group held £3 billion in liquidity resources, while the average cost of funds declined to 4.6%. It raised £500 million during the year through a Tier 2 refinancing and its first senior unsecured bond issuance since 2020.

The CET1 ratio was 14.1% after the motor finance provision increase. The company estimated that Basel 3.1 implementation from Jan. 1, 2027 would reduce the ratio by about 80 basis points to 13.3% on a pro forma basis, while reducing its regulatory minimum requirement to 9.9%.

Close Brothers said it remains committed to resuming shareholder distributions when appropriate, but the board withheld a final ordinary dividend for fiscal 2026 pending greater clarity on motor finance legal and financial outcomes. The company continues to target double-digit returns on tangible equity by fiscal 2028, rising thereafter.

About Close Brothers Group (LON:CBG)

Close Brothers Group plc, a merchant banking company, engages in the provision of financial services to small businesses and individuals in the United Kingdom. It operates through five segments: Commercial, Retail, Property, Asset Management, and Securities. The company offers banking services comprising of debt factoring, invoice discounting, asset-based lending; financing for SMEs, residential housing, transport, industrial equipment, renewable energy, motorcycle, used car, and commercial vehicle financing; insurance, refurbishment, and bridging financing, savings products for individuals and corporates, hire purchase, lease, and loan related services.

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