Merchant banking group Close Brothers has reported an improvement in its market-facing businesses as it prepares to implement measures to deal with the fallout from a Financial Conduct Authority (FCA) review into unfair car loans.
The group said its asset management arm saw “positive market movements” as it posted net inflows of nine per cent in the financial year to date.
During the third quarter, from 1 February to 30 April 2024, its managed assets rose £0.8bn to £18.5bn and total assets swelled £1.1bn to £19.6bn.
Last November, Close Brothers said it would hire more staff and make acquisitions to drive growth in asset management, adding on Wednesday that it planned to “consolidate our position”.
Close Brothers said its market-making business Winterflood saw an operating profit of £1.7m in the quarter, from a £2.6m loss in the first half of the financial year, due to “marginally improved” trading conditions.
It added that the division remained “well placed to retain our market-leading position and benefit when investor appetite returns”.
The group’s banking loan book increased 1.5 per cent to £10bn during the quarter. This figure was 6.4 per cent when excluding its legal finance arm Novitas, which is in wind-down, and its legacy Irish Motor Finance business in run-off.
Close Brothers said the increase was mainly due to strong customer demand in property and continued growth in UK motor finance and invoice finance, partly offset by “selective loan book actions” announced in March to soften the blow from the FCA’s auto lending review.
Excluding the group’s recently acquired Irish motor finance unit, Close Brothers continued to expect around eight to 10 per cent growth in banking costs this financial year, including roughly £10m tied to the handling of motor finance complaints.
Following an FCA probe into borrowers in financial difficulty, Close Brothers said it expected to complete a past business review of customer forbearance tied to its auto lending by the end of the financial year, estimating any compensation costs to be in the single digits of millions.
Close Brothers is considered to be the most exposed lender in relative terms to a separate watchdog review into now-banned commission arrangements on car loans that analysts have estimated could cost the auto lending sector around £16bn in compensation payouts.
RBC analysts have estimated a potential bill of up to £350m for Close Brothers, which is nearly half of its current market capitalisation.
The potential fallout caused the group to scrap its 2024 dividend and place its 2025 dividend under review, with its shares still down 36 per cent since the FCA first announced the probe in January.
In March, Close Brothers outlined measures that could boost its capital position by around £400m in response to potential compensation costs.
It added on Wednesday that it had made “good progress” getting ready to implement the measures and remained confident that they would “position the group well to withstand a range of scenarios and potential outcomes”.
Chief executive Adrian Sainsbury said on Wednesday: “Notwithstanding moderation in some of our businesses, due to seasonality and selective loan book actions we identified at the half-year 2024 results, we are encouraged by the ongoing strength in overall customer demand and continue to focus on providing excellent service to our customers.”
He added: “While we are working through a period of uncertainty, we are committed to executing our strategy and protecting our valuable franchise. We are making good progress against the actions previously outlined to further strengthen our capital position and are focused on positioning the group to resume our track record of earnings growth and attractive returns.”