14 March 2023

Adrian Sainsbury, Chief Executive, said:

"It has been a challenging six months, with our half year results significantly impacted by the increased provisions in relation to Novitas, as announced previously in January 2023. While this is clearly disappointing, our underlying business remains resilient, enabling us to support almost three million customers, including over 360 thousand SMEs, as we continue to lend consistently through this period of uncertainty.

We are encouraged by the good demand and strong margins seen in Banking, as well as the underlying credit quality of our loan book. We continued to attract new client assets in CBAM, with healthy net inflows, and although trading activity remained subdued at Winterflood, WBS sustained its positive momentum. We are pleased to declare an increased interim dividend of 22.5p per share, reflecting our underlying performance and the Board's confidence in the group's outlook.

Our financial strength leaves us well placed to move forward and resume our track record of earnings growth and returns."

Financial performance in the first six months

·      As previously announced, we have taken steps to resolve the issues surrounding Novitas, resulting in an additional provision of £89.8 million, with the total provisions in relation to Novitas taken in H1 2023 at £114.6 million. As a result, statutory operating profit before tax decreased to £11.7 million (H1 2022: £128.9 million). Excluding Novitas, adjusted operating profit decreased to £117.5 million (H1 2022: £160.5 million)

·      We achieved 5% income growth in Banking with a strong net interest margin of 8.0% (H1 2022: 7.9%) and good levels of customer demand, particularly in Commercial. As a result, pre-provisions, adjusted operating profit in Banking increased 5% to £177.2 million (H1 2022: £168.5 million)

·      Although underlying credit performance remains resilient, the increased uncertainty in the economic outlook has been reflected in higher forward-looking impairment provisions and a rise in arrears in Motor Finance. As a result, the annualised bad debt ratio (excluding Novitas) was 1.1% (H1 2022: 0.2%)

·      The loan book excluding Novitas was £9.0 billion (31 July 2022: £8.9 billion), as we remain committed to lending consistently to our customers under responsible terms in all market conditions

·      We delivered healthy net inflows of 6%, with a strong contribution from new hires, as we continued to focus on growing Close Brothers Asset Management ("CBAM")

·      Winterflood's performance continued to reflect challenging market conditions

·      Total funding increased 3% to £11.9 billion (31 July 2022: £11.6 billion), as the diversity of our funding sources helped us optimise funding costs in an environment of rapid interest rate rises

·      Our Common Equity Tier 1 ("CET1") ratio was 14.0% at 31 January 2023 (31 July 2022: 14.6%), significantly above the applicable minimum regulatory requirement of 8.5% and the group's medium-term CET1 capital ratio target range of 12-13%

·      We are pleased to declare an interim dividend of 22.5p per share (H1 2022: 22.0p), reflecting our underlying performance and the Board's confidence in the group's outlook

Well placed to move forward on the delivery of our strategic priorities

·      We are continuing to focus on our strategic growth agenda, with over £90 million lent in the first half towards our ambition to provide £1 billion of funding for battery electric vehicles over five years and the successful piloting of a specialist buy-to-let extension to our existing Property bridging finance clients. In CBAM, we continued to attract new hires and we were pleased to announce that Winterflood Business Services ("WBS") exceeded the targeted £10 billion of total assets under administration ("AuA")

·      We have intensified our focus on cost discipline and efficiency, especially in light of recent inflationary pressures. We have a number of strategic cost management initiatives in progress and are evaluating additional opportunities for efficiency with a view to achieving positive operating leverage over the medium term

·      We remain committed to optimising further our capital structure, including the issuance of debt capital market securities if appropriate, targeting a CET1 capital ratio range of 12% to 13% over the medium term in line with our capital management framework

Outlook

·      Although we are alert to the impact of rising inflation and interest rates on our customers and wider financial market conditions, we are well placed to move forward on the delivery of our strategic priorities. We are confident we can resume our track record of earnings growth and returns by focusing on disciplined growth, cost efficiency and capital optimisation

1 Please refer to definitions below.

2 Adjusted operating profit is stated before amortisation of intangible assets on acquisition of £0.9 million (H1 2022: £0.9 million).

3 Refer to Note 4 for the calculation of basic and adjusted earnings per share.

4 Net interest margin and bad debt ratio calculated on an annualised basis.

Enquiries

A virtual presentation to analysts and investors will be held today at 9.30 am GMT followed by a Q&A session. A webcast and dial-in facility will be available by registering at https://webcasts.closebrothers.com/results/HalfYearResults2023.

Basis of Presentation

Results are presented both on a statutory and an adjusted basis to aid comparability between periods. Adjusted measures are presented on a basis consistent with prior periods and exclude amortisation of intangible assets on acquisition, to present the performance of the group's acquired businesses consistent with its other businesses; and any exceptional and other adjusting items which do not reflect underlying trading performance. The loan book figure was re-presented for 31 January 2022 to incorporate closing loans and advances to customers and operating lease assets, previously shown separately. The Asset Finance and Invoice and Speciality Finance loan books have also been re-presented for 31 July 2022 to reflect the recategorisation of Close Brothers Vehicle Hire ("CBVH") from Invoice and Speciality Finance to Asset Finance. The condensed consolidated interim financial statements from page 34 to 70 are not impacted by these re-presentations.

About Close Brothers

Close Brothers is a leading UK merchant banking group providing lending, deposit taking, wealth management services and securities trading. We employ approximately 4,000 people, principally in the United Kingdom and Ireland. Close Brothers Group plc is listed on the London Stock Exchange and is a member of the FTSE 250.

CHIEF EXECUTIVE'S STATEMENT

It has been a challenging six months but our underlying business remains resilient, enabling us to support almost three million customers, including over 360 thousand small and medium-sized enterprises ("SMEs"), as we continue to lend consistently through this period of uncertainty. We are encouraged by the good demand and strong margins seen in Banking, as well as the underlying credit quality of our loan book. We continued to attract new client assets in CBAM, with healthy net inflows, though trading activity remained subdued at Winterflood.

We are pleased to declare an increased interim dividend of 22.5p per share (H1 2022: 22.0p per share), reflecting our underlying performance and the Board's confidence in the group's outlook. We remain committed to the group's dividend policy, which aims to provide sustainable dividend growth year-on-year, while maintaining a prudent level of dividend cover.

While developments at Novitas are disappointing, we are confident that the group is in a strong position to navigate the current environment and make the most of available opportunities. We remain well placed to continue to leverage our long-term relationships, the deep expertise of our people and our commitment to excellent customer service. Alongside the fundamental strengths of our model, which have been evidenced through many cycles, we are well positioned to move forward on the delivery of our strategic priorities, with a focus on delivering disciplined growth, cost efficiency and optimisation of our capital structure. I am confident that we are well placed to resume our track record of earnings growth and returns.

Financial performance

This period has seen a challenging market backdrop, with the weaker UK macroeconomic outlook creating significant uncertainty for both our individual and SME customers. Although we continued to see good levels of customer demand and a resilient underlying credit performance, the volatile external environment has been reflected in higher forward-looking impairment provisions and  challenging market conditions in CBAM and Winterflood. Against this backdrop, we have maintained our through-the-cycle approach, retaining our pricing discipline whilst lending consistently to our customers. Our diverse funding model has also benefited us, allowing the group to optimise its funding mix and cost of funding in an environment of rapid interest rate rises.

The financial results were impacted by a significant increase in provisions in relation to the Novitas loan book, as we have taken steps to resolve the issues surrounding that business. As a result, statutory operating profit before tax decreased to £11.7 million (H1 2022: £128.9 million).

In Banking, excluding Novitas, performance reflected growth in income, offset by higher forward-looking provisions to take into account the weaker macroeconomic outlook and a rise in arrears in Motor Finance. CBAM delivered healthy net inflows although profit reduced year-on-year reflecting wider market conditions and performance at Winterflood reflected the continuation of challenging trading conditions. 

We have maintained our strong capital, funding and liquidity position, in line with our prudent and conservative approach. Our Common Equity Tier 1 ("CET1") ratio was 14.0% at 31 January 2023 (31 July 2022: 14.6%), significantly above the applicable minimum regulatory requirement of 8.5% and the group's medium-term CET1 capital ratio target range of 12-13%.

Novitas

The decision to wind down Novitas, a provider of finance for the legal sector we acquired in 2017, and to withdraw from the legal services financing market, followed a strategic review in July 2021 which concluded that the business was not aligned with the Close Brothers model. Some of the key attributes of our model such as in-house lending expertise, a strong track record of performance and underlying security of the loans have proven not to be evident in Novitas.

The business continues to work with solicitors and insurers, to support existing customers and manage the existing book to ensure good customer outcomes. As announced in January 2023, we have accelerated our efforts to resolve the issues surrounding this business, including the initiation of formal legal action against one of the After the Event ("ATE") insurers, and are considering our position in respect of other insurers. We have recognised additional provisions of £114.6 million in the first half, taking the overall credit provisions against Novitas to £183.2 million. We are confident that this level of provisions adequately reflects the remaining risk of credit losses for the Novitas loan book and are focused on maximising the recovery of remaining loan balances.

We evaluate continuously our businesses and initiatives against a set of criteria, our "Model Fit Assessment Framework", to ensure they are aligned with the key attributes of our model that have and will continue to generate long-term value. We are confident that there is no read-across from Novitas to other books in our portfolio and our prudent underwriting continues to be reflected in the asset quality and performance of the rest of our loan book. The financial strength of the group leaves us well placed to move forward on the delivery of our strategic priorities.

Protecting, Growing and Sustaining our business model

We have made good progress against our strategic priorities and remain dedicated to resuming our track record of returns. Our approach to investing through the cycle continues to provide tangible benefits and protect our strong margins. I am pleased to announce the conclusion of the Motor Finance transformation programme, which enabled us to make the most of growth opportunities in the second hand car market, enhance our digital capabilities and evolve our compelling dealer and customer proposition.

While investment to maintain the strengths of our high-touch model in Banking is critical, we have intensified our focus on cost discipline and efficiency, especially in light of recent inflationary pressures. We have a number of strategic cost management initiatives in progress, including the rationalisation of IT infrastructure and operational enhancements in Retail, which aim to create capacity to accommodate growth, inflation and investment to support our business. We continue to evaluate additional opportunities for efficiency with a view to achieving positive operating leverage over the medium term.

We remain committed to optimising further our capital structure, including the issuance of debt capital market securities if appropriate. In line with the group's Capital Management framework, we are targeting a CET1 capital ratio range of 12% to 13% over the medium term, which will allow the group to maintain a buffer to minimum regulatory requirements while also retaining the flexibility for growth.

We are focused on delivering disciplined growth and continue to actively review a range of opportunities in line with our model. In the first half, our recently hired specialist lending teams in Asset Finance executed new deals and have a healthy pipeline for the remainder of the year. Following the announcement last year of our first green growth ambition of providing funding for £1.0 billion of battery electric vehicles over five years, we are pleased to have funded over £90 million in the first six months. In addition, Winterflood Business Services exceeded the targeted £10 billion of total AuA following the onboarding of Fidelity International as a new client.

I am encouraged by the ongoing progress of our sustainability strategy. Earlier this year we set our group wide climate commitment, becoming signatories to the Net Zero Banking Alliance and Net Zero Asset Managers initiative. We are focused on improving the quality, granularity and accuracy of the data utilised across our emissions reporting, including our financed emissions. Our drive towards a net zero company car fleet by 2025 has continued, with over 40% of our car fleet now being fully electric.

Outlook

Although we are alert to the impact of rising inflation and interest rates on our customers and wider financial market conditions, we are well placed to move forward on the delivery of our strategic priorities. We are confident we can resume our track record of earnings growth and returns by focusing on disciplined growth, cost efficiency and capital optimisation.

OVERVIEW OF FINANCIAL PERFORMANCE

SUMMARY GROUP INCOME STATEMENT¹

1 Adjusted measures are presented on a basis consistent with prior periods and exclude amortisation of intangible assets on acquisition, to present the performance of the group's acquired businesses consistent with its other businesses. Further detail on the reconciliation between statutory and adjusted measures can be found in Note 2.

2 Refer to Note 4 for the calculation of basic and adjusted earnings per share.

FINANCIAL PERFORMANCE

Operating profit and returns

Adjusted operating profit decreased 90% to £12.6 million (H1 2022: £129.8 million), mainly driven by higher impairment charges in relation to Novitas. Excluding Novitas, adjusted operating profit reduced 27% to £117.5 million (H1 2022: £160.5 million), primarily reflecting an increase in impairment charges and a reduction in income in Winterflood.

Statutory operating profit before tax decreased to £11.7 million (H1 2022: £128.9 million). Return on opening equity reduced to 1.1% (H1 2022: 12.2%) and return on average tangible equity was 1.3% (H1 2022: 14.2%). The loss after tax recorded by Novitas in the first half reduced the group's RoTE by 11.2%.

Adjusted operating profit in the Banking division decreased by 88% to £15.0 million (H1 2022: £120.2 million), primarily reflecting higher impairment charges related to Novitas, with income growth partially offset by increased costs. In the Asset Management division, adjusted operating profit declined by 41% to £8.6 million (H1 2022: £14.5 million) as stable costs were more than offset by the reduction in income. Winterflood saw a 73% reduction in operating profit to £2.4 million (H1 2022: £8.8 million), with performance adversely impacted by the continued market-wide slowdown in trading activity in higher margin sectors and difficult market conditions. Group net expenses, which include the central functions such as finance, legal and compliance, risk and human resources, were broadly stable on the prior year period at £13.4 million (H1 2022: £13.7 million).

Operating income

Operating income increased 1% to £474.3 million (H1 2022: £471.6 million), with growth in Banking offsetting a reduction in income in Asset Management and Winterflood. Income in the Banking division increased by 5%, reflecting a strong net interest margin of 8.0% (H1 2022: 7.9%) and continued loan book growth year-on-year. Income in the Asset Management division reduced 7%, mainly due to negative market movements and lower client activity. Income in Winterflood reduced by 21%, primarily driven by lower trading revenues following a market-wide slowdown in activity.

Operating expenses

Operating expenses rose 2% to £299.5 million (H1 2022: £293.5 million) as increased investment and higher staff costs in Banking more than offset lower variable costs in Asset Management and Winterflood.

In Banking, costs increased 5% as we progressed our key investment programmes and continued to exercise rigorous control of our costs, notwithstanding the current inflationary environment. Costs were broadly stable in Asset Management as lower variable compensation offset higher fixed staff costs, new hires and technology spend. Winterflood's costs fell by 10% primarily driven by lower variable staff costs accrued in the period to reflect the reduction in income.

Overall, the group's expense/income ratio increased marginally on the prior year period to 63% (H1 2022: 62%), whilst the group's compensation ratio reduced marginally to 36% (H1 2022: 37%).

Statutory operating expenses increased to £299.5 million (H1 2022: £293.5 million).

Impairment charges and IFRS 9 provisioning

Impairment charges increased significantly to £162.2 million (H1 2022: £48.3 million), corresponding to an annualised bad debt ratio of 3.6% (H1 2022: 1.1% annualised). This increase primarily reflected provisions of £114.6 million taken in relation to Novitas (H1 2022: £39.2 million), in line with the announcement in January 2023. As a result, there was an increase in provision coverage to 4.3% (31 July 2022: 3.1%).

Excluding Novitas, the increase in impairment charges was primarily driven by higher provisions as a result of weaker macroeconomic variables and outlook and a rise in arrears in Motor Finance, as well as an ongoing review of provisions and coverage across our loan portfolios and model refinements. The bad debt ratio, excluding Novitas, increased to 1.1% annualised (H1 2022: 0.2%) and the coverage ratio increased to 2.3% (31 July 2022: 1.9%).

Since the previous financial year end, we have updated the macroeconomic scenarios to reflect the weaker macroeconomic environment and outlook, although the weightings assigned to them remain unchanged. At 31 January 2023, there was a 30% strong upside, 32.5% baseline, 20% mild downside, 10.5% moderate downside and 7% severe downside.

Whilst we have not seen a significant impact on credit performance at this stage, with actual realised losses, excluding Novitas, equivalent to c.£10 million in the period, we continue to monitor closely the evolving impacts of rising inflation and cost of living on our customers. We remain confident in the quality of our loan book, which is predominantly secured, prudently underwritten, diverse, and supported by the deep expertise of our people.

Tax expense

The tax expense in the first half of the year was £3.3 million (H1 2022: £33.8 million), which corresponds to an effective tax rate of 28.2% (H1 2022: 26.2%) for the period, representing the best estimate of the annual effective tax rate expected for the full year.

The standard UK corporation tax rate for the financial year is 21.0% (six months ended 31 January 2022: 19.0%; year ended 31 July 2022: 19.0%). However, an additional 6.3% surcharge applies to the profits of banking companies as defined in legislation (and only above a threshold amount). The effective tax rate is above the UK corporation tax rate primarily due to the surcharge applying to the majority of the group's profits.

Earnings per share

Adjusted basic earnings per share ("EPS") was 6.1p (H1 2022: 64.0p) and basic EPS was 5.6p (H1 2022: 63.5p). The loss after tax recorded by Novitas in the first half reduced both the group's adjusted and basic EPS by 52.9p.

Dividend

We are pleased to declare an interim dividend of 22.5p (H1 2022: 22.0p), reflecting our underlying performance and the Board's confidence in the group's outlook. We remain committed to our dividend policy, which aims to provide sustainable dividend growth year-on-year, while maintaining a prudent level of dividend cover. The interim dividend is due to be paid on 26 April 2023 to shareholders on the register at 24 March 2023.

SUMMARY GROUP BALANCE SHEET

1 Includes operating lease assets of £199.6 million (31 July 2022: £185.4 million) that relate to Asset Finance and £56.7 million (31 July 2022: £54.6 million) to Invoice and Speciality Finance.

2 Treasury assets comprise cash and balances at central banks, certificates of deposit and sovereign and central bank debt.

3 Market-making assets and liabilities comprise settlement balances, long and short trading positions and loans to or from money brokers.

4 Borrowings comprise debt securities in issue, loans and overdrafts from banks and subordinated loan capital.

The group maintained a strong balance sheet and a prudent approach to managing its financial resources. The fundamental structure of the balance sheet remains unchanged, with most of the assets and liabilities relating to our Banking activities. Loans and advances make up the majority of assets. Other items on the balance sheet include treasury assets held for liquidity purposes, and settlement balances in Winterflood. Intangibles, property, plant and equipment, and prepayments are included as other assets. Liabilities are predominantly made up of customer deposits and both secured and unsecured borrowings to fund the loan book.

Total assets increased 2% to £12.9 billion (31 July 2022: £12.7 billion), mainly reflecting higher Treasury assets due to an increased cash balance, an increase in other assets driven by market movements due to higher interest rates, and a reduction in market-making assets. Total liabilities were also 2% higher at £11.3 billion (31 July 2022: £11.0 billion), driven primarily by higher customer deposits, partly offset by a reduction in market-making liabilities.

Total equity reduced 3% to £1.6 billion (31 July 2022: £1.7 billion), with profit in the first half more than offset by dividend payments of £65.6 million (31 January 2022: £62.7 million). The group's return on assets decreased to 0.1% (H1 2022: 1.5%).

GROUP CAPITAL¹

1 The impact of Novitas on the CET1 capital ratio was -c.125bps, of which -c.90bps relates to retained earnings, -c.45bps relates to the IFRS 9 transitional arrangements and c.10bps relates to RWAs.

2 The leverage ratio is calculated as tier 1 capital as a percentage of total balance sheet assets excluding central bank claims, adjusting for certain capital deductions, including intangible assets, and off-balance sheet exposures, in line with the UK leverage framework under CRR.

Movements in capital and other regulatory metrics

The CET1 capital ratio reduced from 14.6% to 14.0%, mainly driven by the impact of the IFRS 9 transitional arrangements (-c.45bps) and profits net of dividends paid and foreseen (-c.35bps), partly offset by a decrease in risk weighted assets (c.30bps). The impact of Novitas on the CET1 capital ratio was -c.125bps, of which -c.75bps related to the increased provision against Novitas taken in January.

CET1 capital decreased 6% to £1,310.7 million (31 July 2022: £1,396.7 million), reflecting a decrease in the transitional IFRS 9 add-back to capital of £49.0 million, the regulatory deduction of dividends paid and foreseen of £33.5 million and an increase in the intangible assets deducted from capital of £8.4 million. This was partially offset by the capital generation through profit of £8.4 million.

Total capital decreased 5% to £1,510.7 million (31 July 2022: £1,596.7 million).

RWAs fell by 2% to £9.4 billion (31 July 2022: £9.6 billion), mainly driven by a reduction in risk weighted assets related to derivatives held for hedging purposes and the IFRS 9 transitional adjustment, partly offset by an increase in the loan book.

As a result, CET1, tier 1 and total capital ratios were 14.0% (31 July 2022: 14.6%), 14.0% (31 July 2022: 14.6%) and 16.1% (31 July 2022: 16.6%), respectively.

At 31 January 2023, the applicable minimum CET1, tier 1 and total capital ratio requirements, excluding any applicable Prudential Regulation Authority ("PRA") buffer, were 8.5%, 10.2% and 12.4%, respectively. Accordingly, we continue to have headroom significantly above the applicable minimum regulatory requirements of 550bps in the CET1 capital ratio, 380bps in the tier 1 capital ratio and 365bps in the total capital ratio.

The group applies IFRS 9 regulatory transitional arrangements which allows banks to add back to their capital base a proportion of the IFRS 9 impairment charges during the transitional period. Our capital ratios are presented on a transitional basis after the application of these arrangements. On a fully loaded basis, without their application, the CET1, tier 1 and total capital ratios would be 13.7%, 13.7% and 15.8%, respectively.

The leverage ratio, which is a transparent measure of capital strength not affected by risk weightings, remains strong at 12.0% (31 July 2022: 12.0%).

The PRA Consultation Paper 16/22 on Basel 3.1 standards was published in November, with changes expected to be implemented or phased in from 2025-2030. Following initial analysis, we estimate that if implemented in its current form, it would represent an increase of up to c.10% in the group's RWAs calculated under the standardised approach. This is primarily as a result of the proposed removal of the SME supporting factor and the proposed approach to the classification of Retail SMEs and associated risk weights.

We continue to make positive progress in our preparations for a transition to the Internal Ratings Based ("IRB") approach. Following the submission of our initial application to the PRA in December 2020, our application has successfully transitioned to Phase 2 of the process. Additional documentation has been submitted to the regulator and engagement continues. Our Motor Finance, Property Finance and Energy portfolios, where the use of models is most mature, were submitted with our initial application, with work on subsequent portfolios in progress.

Capital management framework

The prudent management of the group's financial resources is a core part of our business model. Our primary objective is to deploy capital to support disciplined loan book growth in Banking and to make the most of strategic opportunities. These include strategic initiatives and small acquisitions in existing or adjacent markets that fit with our business model.

The Board remains committed to the group's dividend policy, which aims to provide sustainable dividend growth year-on-year, while maintaining a prudent level of dividend cover. Further capital distributions to shareholders will be considered depending on future opportunities.

We remain committed to optimising further our capital structure, including the issuance of debt capital market securities if appropriate, targeting a CET1 capital ratio range of 12% to 13% over the medium term. This will allow the group to maintain a buffer to minimum regulatory requirements while also retaining the flexibility for growth.

GROUP FUNDING¹

1 Numbers relate to core funding and exclude working capital facilities at the business level.

2 Unsecured funding excludes £31.0 million (31 July 2022: £22.1 million) of non-facility overdrafts included in borrowings and includes £274.7 million (31 July 2022: £295.0 million) of undrawn facilities.

3 Total funding as a % of loan book has been re-presented to include £256.3 million (31 July 2022: £240.0 million) of operating lease assets in the loan book figure. The revised definition is total funding as a % of loan book including operating lease assets.

4 Average maturity of total funding excluding equity and funding held for liquidity purposes.

Our Treasury function is focused on managing funding and liquidity to support the Banking businesses, as well as interest rate risk. This incorporates our Savings business, which provides simple and straightforward savings products to both individuals and businesses at consistently competitive rates, whilst being committed to providing the highest level of customer service.

Our diverse funding sources enable us to adapt our position through the cycle, based on market conditions and demand.

Our conservative approach to funding is based on the principle of "borrow long, lend short", with a spread of maturities over the medium and longer term, comfortably ahead of a shorter average loan book maturity. We do this through drawing on a wide range of wholesale and deposit markets including several public debt securities at both group and operating company level, as well as public and private secured funding programmes and a diverse mix of customer deposits.

We increased total funding in the first half by 3% to £11.9 billion (31 July 2022: £11.6 billion) which accounted for 132% (31 July 2022: 127%) of the loan book at the balance sheet date. Although the average cost of funding increased to 2.6% (2022: 1.3%) due to rapidly rising interest rates, we took actions to mitigate this pressure by optimising the group's liability mix based on funding needs, customer demand and market pricing. While we are well positioned to continue benefiting from our diverse funding base, we expect cost of funds to remain elevated in the next financial year as a result of higher interest rates and customer deposit pricing pressure, particularly in notice accounts.

Customer deposits increased 7% to £7.3 billion (31 July 2022: £6.8 billion) with non-retail deposits broadly stable at £3.7 billion (31 July 2022: £3.7 billion) and retail deposits increasing by 14% to £3.5 billion (31 July 2022: £3.1 billion), as we actively sought to grow our retail deposit base and optimise our funding mix in light of market conditions.

The Savings business continues to benefit from the investment made in our customer deposit platform, with the scalable platform and broadened proposition enabling us to adapt our offering and pricing. The new Notice Account range launched for our retail, corporate, pension and SME customers has gained good traction, with balances currently at c.£900 million. We are focused on identifying further opportunities to expand our product range, which will support us in growing and diversifying our retail deposit base and further optimise our cost of funding and maturity profile.

Secured funding remained broadly stable at £1.6 billion (31 July 2022: £1.6 billion) as we maintained our current drawings under the Term Funding Scheme for Small and Medium-sized Enterprises ("TFSME") at £600 million (31 July 2022: £600 million).

Unsecured funding, which includes senior unsecured and subordinated bonds and undrawn committed revolving facilities, remained broadly stable at £1.5 billion (31 July 2022: £1.5 billion).

We have maintained a prudent maturity profile. The average maturity of funding allocated to the loan book was 18 months (31 July 2022: 21 months), ahead of the average loan book maturity at 16 months (31 July 2022: 17 months). This is in line with our "borrow long, lend short" principle, reflecting the timing and mix of funding raised in the period.

Our credit ratings remain strong, reflecting the group's profitability, capital position, diversified business model and consistent risk appetite. Moody's Investors Services ("Moody's") reaffirmed their rating for Close Brothers Group as "A2/P1" and Close Brothers Limited as "Aa3/P1", whilst upgrading the outlook from "negative" to "stable" for both in November 2022. Fitch Ratings ("Fitch") reaffirmed their rating for both Close Brothers Group and Close Brothers Limited as ''A-/F2'', whilst downgrading the outlook from ''stable'' to "negative" in March 2023.

GROUP LIQUIDITY

1 There was £nil million encumbered sovereign and central bank debt at 31 January 2023 (31 July 2022: £216.9 million).

The group continues to adopt a conservative stance on liquidity, ensuring it is comfortably ahead of both internal risk appetite and regulatory requirements.

We continued to maintain higher liquidity relative to the pre-Covid-19 position to provide additional flexibility given the uncertain UK economic outlook, whilst enabling us to maximise any opportunities available. In the first half, treasury assets increased 15% to £2.1 billion (31 July 2022: £1.9 billion) and were predominantly held on deposit with the Bank of England.

We regularly assess and stress test the group's liquidity requirements and continue to meet the liquidity coverage ratio ("LCR") regulatory requirements, with a 12-month average to 31 January 2023 LCR of 1034% (31 July 2022: 924%). In addition to internal measures, we monitor funding risk based on the CRR rules for the net stable funding ratio ("NSFR") which became effective on 1 January 2022. The NSFR at 31 January 2023 was 124.4% (31 July 2022: 118.1%).

BUSINESS REVIEW

BANKING

Key Financials¹

Key Financials (Excluding Novitas)¹      

1 Adjusted measures are presented on a basis consistent with prior periods and exclude amortisation of intangible assets on acquisition, to present the performance of the group's acquired businesses consistent with its other businesses; and any exceptional and other adjusting items which do not reflect underlying trading performance. Further detail on the reconciliation between statutory and adjusted measures can be found in note 2.

2 Related ongoing costs resulting from investment projects are recategorised from investment costs to BAU costs after one year. For comparison purposes, £4.1 million has been recategorised from investment costs to BAU costs in the 2022 financial year to adjust for investment projects' ongoing costs that commenced prior to the 2023 financial year. Costs related to Novitas were £4.3 million in H1 2023 (H1 2022: £9.5 million).

Performance reflected significant increase in impairments related to Novitas

This period has seen a challenging market backdrop, with rising inflation and interest rates in particular, creating significant uncertainty for both our individual and SME customers. The deterioration in the external environment has also adversely impacted the economic variables our businesses are sensitive to, which has been reflected in higher forward-looking impairment provisions. Nevertheless, we have maintained our through-the-cycle approach, retaining our pricing discipline whilst continuing to support our customers.

Banking adjusted operating profit reduced 88% to £15.0 million (H1 2022: £120.2 million), primarily reflecting higher impairment charges, which more than offset income growth. Nevertheless, we maintained our strong margin and pricing discipline, saw a resilient underlying credit performance overall and made progress in delivering our investment programmes. Statutory operating profit decreased to £14.9 million (H1 2022: £120.1 million) and return on opening equity decreased to 1.1% (H1 2022: 13.6%).

On a pre-provision basis, adjusted operating profit increased 5% to £177.2 million (H1 2022: £168.5 million), reflecting good income growth and cost discipline.

Excluding Novitas, Banking adjusted operating profit reduced 21% to £119.9 million (H1 2022: £150.9 million), primarily driven by higher impairment charges, particularly in the Retail business, and increased costs, which more than offset income growth.

The loan book declined 1% in the six months to 31 January 2023 to £9.0 billion (31 July 2022: £9.1 billion) and grew 2% year-on-year to £9.0 billion (31 January 2022: £8.8 billion), primarily driven by continued good demand in the Commercial businesses and growth in the Property Finance book. This was offset by a seasonal decline in Premium Finance and a reduction in the Motor Finance loan book as the Republic of Ireland business runs off, as well as the reduction in the Novitas net loan book.

Excluding Novitas, the loan book increased marginally in the first half and 4% year-on-year to £9.0 billion (31 July 2022: £8.9 billion, 31 January 2022: £8.7 billion).

The net interest margin increased on the prior year period to 8.0% (H1 2022: 7.9%). This reflected both pricing discipline on new lending and actions taken to optimise the group's liability mix and funding costs in a rising rate environment. In addition, our net interest margin was supported by 14bps of one-off benefits from mark-to-market swaps resulting from higher interest rates. While we are well positioned to maintain a strong net interest margin, we expect cost of funds to remain elevated in the next financial year.

Excluding Novitas, the net interest margin increased on the prior year period to 7.8% (H1 2022: 7.6%)

Operating income increased 5%, to £363.9 million (H1 2022: £345.7 million), reflecting the strong net interest margin and year-on-year loan book growth. Excluding Novitas, operating income grew 7%.

Adjusted operating expenses grew in line with income, increasing 5% to £186.7 million (H1 2022: £177.2 million) as we progressed our key investment programmes and continued to exercise rigorous control of our costs, notwithstanding the inflationary pressures. As we kept the growth in our cost base commensurate with income growth, the expense/income ratio was stable at 51% (H1 2022: 51%). The compensation ratio was also flat on the prior year period at 29% (H1 2022: 29%).

Business-as-Usual ("BAU") costs increased by 5% to £147.6 million (H1 2022: £140.1 million), primarily driven by salary increases in the current inflationary environment and new hires focused on compliance, regulation, and IT security. Costs related to Novitas reduced to £4.3 million in the first half (H1 2022: £9.5 million) as we continue to wind down the business. Investment costs rose 26% to £34.8 million (H1 2022: £27.6 million) and included spend on our multi-year investment projects, strategic initiatives and operational resilience of £16.5 million (H1 2022: £10.8 million) and related depreciation charges of £18.3 million (H1 2022: £16.8 million). We expect costs related to our existing investment programmes to stabilise over the next financial years, with depreciation charges related to these programmes continuing to increase.

We continue to see investment through the cycle as vital in protecting our model, enhancing efficiency and future-proofing our income generation capabilities. Our investments in cyber and data centres are part of a programme to enhance continually our business and operational resilience, and preparations for the upcoming implementation of the FCA's new Consumer Duty regime continue. We have recently concluded our Motor Finance transformation programme and our investment in Asset Finance systems has added new functionality and improved customer insights. Our previous investment in our Customer Deposit platform has enabled us to grow our Savings proposition and achieve good customer satisfaction scores, whilst also supporting growth in our retail deposits.

We have intensified our focus on cost efficiency, particularly in light of recent inflationary pressures. We have a number of strategic cost management initiatives in progress, with more in the pipeline, which aim to create capacity to accommodate growth, inflation and investment to support our business. These include a multi-year technology transformation programme focused on strategic IT services, and a Retail operations simplification programme that will create efficiencies whilst delivering customer and control benefits. We continue to evaluate additional opportunities for efficiency with a view to achieving positive operating leverage over the medium term.

Impairment charges increased significantly to £162.2 million (H1 2022: £48.3 million), equating to an annualised bad debt ratio of 3.6% (H1 2022: 1.1%). This includes a charge in relation to Novitas of £114.6 million (H1 2022: £39.2 million). As a result, there was an increase in overall provision coverage to 4.3% (31 July 2022: 3.1%).

A further £47.6 million of impairment charges were recognised to take into account weaker macroeconomic variables and outlook, which have impacted the Retail business' provisioning models in particular, as well as a rise in arrears in the Motor Finance business as a result of cost of living pressures on customers. They also reflect an ongoing review of provisions and coverage across our loan portfolios and model refinements. Excluding Novitas, the bad debt ratio increased to 1.1% annualised (H1 2022: 0.2%) and the coverage ratio increased to 2.3% (31 July 2022: 1.9%).

Whilst we have not seen a significant impact on credit performance, with actual realised losses, excluding Novitas, equivalent to c.£10 million in the period, we continue to monitor closely the evolving impacts of rising inflation and cost of living on our customers. We remain confident in the quality of our loan book, which is predominantly secured, prudently underwritten, diverse, and supported by the deep expertise of our people.

Accelerating our efforts to resolve issues surrounding Novitas

As announced at the pre-close trading update in January 2023, the group has initiated formal legal action against one of the After the Event ("ATE") insurers regarding the potential recoverability of funds in relation to failed cases and is considering its position in respect of other insurers. As a result, an increased provision to reflect the expectation of a longer time frame to recovery for related loans was included in the £24.8 million of provisions taken in the first five months of the 2023 financial year.

Furthermore, an additional provision of £89.8 million has been recognised following a review of certain cases being funded which now have limited prospects of successfully progressing through the courts. This assumes a material increase in the Probability of Default ("PD") and Loss Given Default ("LGD") assumptions and a longer time frame to recovery across the majority of the portfolio. It also assumes reassessed estimates for recoverability of interest on the relevant loans, in line with accounting requirements.

While we will continue to review provisioning levels in light of future developments, including the experienced credit performance of the book and the outcome of the group's initiated legal action, we believe the anticipated additional provisions adequately reflect the remaining risk of credit losses for the Novitas loan book (c.£62 million net loan book at 31 January 2023). In addition, in line with IFRS 9 requirements, a proportion of the expected credit loss is expected to unwind, over the estimated time to recovery period, to interest income. The group remains focused on maximising the recovery of remaining loan balances, either through successful outcome of cases or recourse to the customers' ATE insurers, whilst complying with its regulatory obligations and always focusing on ensuring good customer outcomes.

As outlined previously, we expect net income related to Novitas to reduce from c.£36 million in FY 2022 to c.£8 million in FY 2024.

Continued focus on disciplined growth

Loan book growth continues to be an output of our business model, as we focus on delivering disciplined growth whilst prioritising our margins and credit quality. We continue to actively work to identify incremental and new opportunities in both our existing and adjacent markets and overall, we remain confident in the growth outlook for the loan book over both the short and medium term.

As highlighted at our 2022 full year results, we recognise a significant opportunity in broadening our financing of green and transition assets, as the UK aligns towards a net zero economy, and we will continue to build our expertise in green and transition assets. We remain committed to our ambition of providing funding for £1.0 billion of battery electric vehicles over five years and have lent over £90 million in the first half.

The Asset Finance business remains well positioned to capitalise on continued demand for finance from SMEs. The recently hired agricultural equipment and materials handling teams have both built healthy pipelines and executed a number of deals, as we expand our coverage into adjacent asset classes and markets.

In Invoice Finance, we expect the growth trajectory to follow the economic conditions. We remain focused on taking advantage of opportunities in the asset-based lending ("ABL") space, including via syndication partnerships and larger loans. We have also hired a new team providing bespoke term loan structures to SMEs requiring growth and investment capital, which complements our existing Invoice Finance and ABL offerings.

The Motor Finance transformation programme, which is now complete, has created the digital capabilities for us to enhance our proposition for dealers, partners and customers. Our partnership with AutoTrader provides dealers with data and insights to effectively manage their forecourts and we will evolve further our forecourt offering over the coming months. Our partnership with iVendi has driven an uplift in proposal volumes as we offer our finance at various points of the customer journey. In addition, we have expanded our credit policy to provide broader coverage of Alternatively Fuelled Vehicles ("AFVs") as they become more prevalent in the second hand car market.

In Premium Finance, we continue to focus on our digital, data and insight capabilities to enhance our offering, with our Foresight model helping to support brokers' decisioning by providing unique customer behaviour insights. We anticipate demand for the funding of insurance policies could increase given the uncertain macroeconomic conditions.

In Property, we have successfully piloted a specialist buy-to-let extension to our existing bridging finance customers, and continue to offer this product. We are also looking to expand further our partnership with Travis Perkins, which enables SME housebuilders to access discounted building supplies and materials directly via a credit facility. In addition, we continue to build out our bridging finance proposition by offering term funding against rental investment properties to existing high quality clients. Although the economic uncertainty is expected to continue to impact activity in the property market, our pipeline of undrawn commitments remains strong.

Loan Book Analysis

1 The Asset Finance and Invoice and Speciality Finance loan books have been re-presented for 31 July 2022 to reflect the recategorisation of Close Brothers Vehicle Hire ("CBVH") from Invoice and Speciality Finance to Asset Finance.

2 The Motor Finance loan book includes £293 million (31 July 2022: £367 million) relating to the Republic of Ireland Motor Finance business, which is in run-off following the cessation of our previous partnership in the Republic of Ireland from 30 June 2022.

3 Operating lease assets of £199.6 million (31 July 2022: £185.4 million) relate to Asset Finance and £56.7 million (31 July 2022: £54.6 million) to Invoice and Speciality Finance.

Ongoing demand across our Banking businesses with continued loan book growth

The loan book declined 1% in the six months since 31 July 2022 to £9.0 billion (31 July 2022: £9.1 billion). This reflected continued demand in the Commercial businesses and growth in the Property loan book, offset by the typical seasonal declines seen in the Premium and Invoice Finance businesses, the reduction in the Novitas net loan book and the run-off of the Republic of Ireland Motor Finance loan book.

Excluding Novitas, the loan book increased marginally in the first half to £9.0 billion (31 January 2022: £8.7 billion, 31 July 2022: £8.9 billion).

The Commercial loan book was broadly stable at £4.6 billion (31 July 2022: £4.6 billion), despite the roll-off of government supported lending under schemes such as the Coronavirus Business Interruption Loan Scheme ("CBILS"). We saw steady new business volumes across the businesses, which were offset by seasonality in Invoice Finance and the reduction in the Novitas net loan book. Excluding Novitas, the Commercial book increased 2% to £4.5 billion (31 July 2022: £4.4 billion).

Asset Finance grew 3% as we continued to see good demand from customers. Invoice and Speciality Finance contracted by 8% as higher provisions against Novitas led to a reduction in the net loan book. Excluding Novitas, the Invoice and Speciality Finance loan book reduced by 1%, with a seasonal decline in the first half more than offsetting growth in the Irish business.

The Retail loan book contracted 3% to £3.0 billion (31 July 2022: £3.1 billion), driven in part by a 4% reduction in Motor Finance, with the decline in the Republic of Ireland loan book following the cessation of our previous partnership, offsetting a stable UK book. We also saw a 2% reduction in the Premium Finance book, in part reflecting first half seasonality. The Republic of Ireland Motor Finance business accounted for 15% of the Motor Finance loan book (31 July 2022: 18%) and 7% of the Banking loan book (31 July 2022: 7%). As previously announced, from 30 June 2022, we ceased writing new business in Motor Finance under our previous partnership in that country. We remain committed to the Irish market and are considering our long-term options.

The Property loan book grew 3% as we saw strong drawdowns from our healthy pipeline and repayment levels began to normalise, as the buoyant UK property market in the prior year period had resulted in heightened unit sales by developers and therefore higher repayments.

Banking: Commercial¹

Commercial key metrics excluding Novitas¹

1 Adjusted measures are presented on a basis consistent with prior periods and exclude amortisation of intangible assets on acquisition, to present the performance of the group's acquired businesses consistent with its other businesses; and any exceptional and other adjusting items which do not reflect underlying trading performance. Further detail on the reconciliation between statutory and adjusted measures can be found in note 2.

2 Commercial, Asset Finance and Invoice and Speciality Finance loan books have been re-presented for 31 January 2022 to include £229.9 million of operating lease assets (£178.4 million in Asset Finance and £51.5 million in Invoice and Speciality Finance).

3 Operating lease assets of £199.6 million (31 January 2022: £178.4 million) relate to Asset Finance and £56.7 million (31 January 2022: £51.5 million) to Invoice and Speciality Finance.

Good demand in Commercial, as we continue to support our SME customers

The Commercial businesses provide specialist, predominantly secured lending principally to the SME market and include Asset Finance and Invoice and Speciality Finance. We finance a diverse range of sectors, with Asset Finance offering commercial asset financing, hire purchase and leasing solutions across a broad range of assets including commercial vehicles, machine tools, contractors' plant, printing equipment, company car fleets, energy project finance, and aircraft and marine vessels, as well as our Vehicle Hire business. The Invoice and Speciality Finance business provides debt factoring, invoice discounting and asset-based lending, as well as covering our specialist businesses such as Brewery Rentals and Novitas. As previously announced, Novitas ceased lending to new customers in July 2021.

Despite the economic uncertainty during the period, we have seen continued good customer demand, with increased new business volumes and utilisation levels in Invoice Finance remaining steady at c.55%. However, supply chain issues continue to impact certain sectors of the market. We have focused on asset pricing discipline, actively choosing to pass through higher rates on new lending where appropriate.

A significant increase in impairment charges related to Novitas was the main driver for an adjusted operating loss in Commercial of £(33.1) million (H1 2022: profit of £37.7 million), despite the business achieving positive operating leverage. The statutory operating loss was £(33.2) million (H1 2022: profit of £37.6 million).

On a pre-provision basis, adjusted operating profit increased 14% to £89.4 million (H1 2022: £78.7 million), reflecting continued customer demand and positive operating leverage. 

Excluding Novitas, adjusted operating profit increased 5% to £71.8 million (H1 2022: £68.4 million) as strong income growth more than offset higher costs and impairment charges.

Operating income increased 9% to £182.3 million (H1 2022: £167.8 million), reflecting good loan book growth and increased activity-driven income in Asset Finance. The net interest margin increased to 8.0% (H1 2022: 7.9%) as we continued to focus on asset pricing discipline, generated higher fees in the Asset Finance business and benefited from central funding mix actions taken in light of the rising interest rate environment.  

Excluding Novitas, the net interest margin increased to 7.6% (H1 2022: 7.3%).

Adjusted operating expenses grew 4% to £92.9 million (H1 2022: £89.1 million), reflecting higher staff costs to reflect the inflationary environment, as well as investment spend in relation to the Asset Finance transformation programme. This was partly offset by lower advisory costs in relation to Novitas. The expense/income ratio reduced to 51% (H1 2022: 53%) as the strong income growth more than offset higher costs.

Impairment charges rose significantly to £122.5 million (H1 2022: £41.0 million), with £114.6 million incurred in relation to Novitas, in line with the update provided in January 2023. As a result, there was an increase in provision coverage to 5.6% (31 July 2022: 4.0%).

Excluding Novitas, impairment charges rose to £7.9 million (H1 2022: £1.8 million), corresponding to a bad debt ratio of 0.4% annualised (H1 2022: 0.1%). This increase primarily reflected additional provisions to take into account weaker macroeconomic variables and outlook. The coverage ratio remained broadly stable at 1.7% (31 July 2022: 1.6%), excluding Novitas.

Banking: Retail

1 The Motor Finance loan book includes £293 million (31 July 2022: £367 million) relating to the Republic of Ireland Motor Finance business, which is in run-off following the cessation of our previous partnership in the Republic of Ireland from 30 June 2022.

Remain focused on prioritising our margins and underwriting discipline

The Retail businesses provide intermediated finance, principally to individuals and small businesses, through motor dealers and insurance brokers.

Although consumers have faced significant uncertainty in the period from rising inflation and interest rates, we have continued to see a solid market backdrop. In Motor Finance, we are adhering to our model of pricing discipline, passing through higher rates on new lending. As expected in the current environment and in line with comparable trends observed across the wider industry, we have seen an increase in arrears in our Motor Finance loan book reflecting cost of living pressures on our customers. Nonetheless, we remain comfortable with the quality of our portfolio, underpinned by our underwriting discipline and prudent level of provisions. Volumes and credit performance have remained solid in Premium Finance in the period, although we anticipate the demand from customers seeking funding for insurance policies may increase as the cost of living pressures continue.

Operating profit for Retail reduced to £14.7 million (H1 2022: £42.5 million), as income growth was more than offset by higher costs and increased impairment charges to reflect a deterioration in the macroeconomic outlook and a rise in arrears. Statutory operating profit also reduced to £14.7 million (H1 2022: £42.5 million).

Operating income increased 3% to £123.2 million (H1 2022: £119.7 million), reflecting growth in the UK Motor Finance loan book year-on-year and an increase in the net interest margin to 8.2% (H1 2022: 8.0%) despite higher funding costs, as we continued to focus on pricing discipline and benefited from central funding mix actions taken in light of the rising interest rate environment. 

Operating expenses rose 10% to £79.1 million (H1 2022: £71.9 million), driven mainly by ongoing investment in the Retail businesses to create efficiencies whilst delivering customer and control benefits, including depreciation related to our investments, as well as higher staff costs, particularly in legal and compliance. In Premium Finance, we have continued to invest in further enhancing our processes in line with regulatory requirements. As a result, the expense/income ratio increased to 64% (H1 2022: 60%).

Impairment charges increased to £29.4 million (H1 2022: £5.3 million), resulting in an annualised bad debt ratio of 1.9% (H1 2022: 0.4%). This was driven by the weakening macroeconomic outlook and the rise in Motor Finance arrears, as well as an ongoing review of provisions and coverage and model refinements. As a result, the provision coverage ratio increased to 3.0% (31 July 2022: 2.2%).

We remain confident in the credit quality of the Retail loan book. The Motor Finance loan book is predominantly secured on second hand vehicles which are less exposed to depreciation or significant declines in value than new cars. Our core Motor Finance product remains hire-purchase contracts, with less exposure to residual value risk associated with Personal Contract Plans ("PCP"), which accounted for c.10% of the Motor Finance loan book at 31 January 2023. The Premium Finance loan book benefits from various forms of structural protection including premium refundability and, in most cases, broker recourse for the personal lines product.

Banking: Property

Strong drawdowns from our healthy pipeline driving loan book growth

Property comprises Property Finance and Commercial Acceptances. The Property Finance business is focused on specialist residential development finance to established professional developers in the UK. Commercial Acceptances provides bridging loans and loans for refurbishment projects.

This half has seen a slowdown across the UK property market following a period of heightened activity and strong unit sales. Housebuilding levels are falling, and house prices are starting to contract, with home buyers impacted by rising interest rates. Nevertheless, we have maintained our healthy pipeline at c.£1.0 billion and seen strong drawdowns from clients, whilst retaining our margin and pricing discipline.

Operating profit decreased 17% to £33.4 million (H1 2022: £40.0 million), as higher impairment charges more than offset a reduction in operating expenses. On a pre-provision basis, adjusted operating profit increased 4% to £43.7 million (H1 2022: £42.0 million), as we achieved positive operating leverage.

Operating income was stable at £58.4 million (H1 2022: £58.2 million) as we saw good fee income in the period, although the net interest margin decreased marginally to 7.8% (H1 2022: 7.9%), reflecting higher cost of funds and the benefit of interest rate floors in the prior year period.

Operating expenses reduced 9% to £14.7 million (H1 2022: £16.2 million) as we maintained our rigorous focus on cost discipline. As a result, the expense/income ratio reduced to 25% (H1 2022: 28%).

Impairment charges increased to £10.3 million (H1 2022: £2.0 million), resulting in an annualised bad debt ratio of 1.4% (H1 2022: 0.3%), as we recognised additional provisions to reflect weakening macroeconomic variables and outlook, in particular lower projected house prices, and an ongoing review of provisions and coverage. As a result, the provision coverage ratio increased to 3.0% (31 July 2022: 2.4%).

The Property loan book is conservatively underwritten, with typical LTVs below standard market levels. We work with experienced, professional developers, with a focus on mid-priced family housing, and have minimal exposure to the prime central London market, with our regional loan book making up over 50% of the Property Finance portfolio. Our long track record, expertise and quality of service ensure the business remains resilient to competition and continues to generate high levels of repeat business.

ASSET MANAGEMENT

Key Financials¹

1 Adjusted measures are presented on a basis consistent with prior periods and exclude amortisation of intangible assets on acquisition, to present the performance of the group's acquired businesses consistent with its other businesses; and any exceptional and other adjusting items which do not reflect underlying trading performance. Further detail on the reconciliation between statutory and adjusted measures can be found in note 2.

2 Income from advice and self-directed services, excluding investment management income.

3 Other income includes net interest income and expense, income on principal investments and other income.

Well placed to continue our long-term track record of growth

Close Brothers Asset Management provides personal financial advice and investment management services to private clients in the UK, including full bespoke management, managed portfolios and funds, distributed both directly via our advisers and investment managers, and through third party financial advisers.

Adjusted operating profit in CBAM decreased 41% to £8.6 million (H1 2022: £14.5 million), as stable costs were more than offset by the reduction in income. The operating margin reduced to 12% (H1 2022: 19%). Statutory operating profit before tax was £7.8 million (H1 2022: £13.7 million).

Total operating income declined by 7% to £71.0 million (H1 2022: £76.6 million), reflecting a lower average AuM due to markets and lower client activity. The revenue margin reduced to 83bps (H1 2022: 89bps) primarily due to flows into lower margin investment management products.

Adjusted operating expenses were broadly flat at £62.4 million (H1 2022: £62.1 million), despite the current inflationary environment, as lower variable compensation offset higher fixed staff costs, new hires and technology spend. However, the expense/income ratio grew to 88% (H1 2022: 81%) with the compensation ratio also increasing to 58% versus the prior year (H1 2022: 56%), reflecting the reduction in income.

Our technology projects continue to focus on increasing efficiency and operational resilience, improving client experience by using best-of-breed applications, digital technology and selective in-house development. We have also recently completed a major adviser re-platforming project to rationalise legacy systems and increase efficiency.

Healthy net inflows despite challenging market conditions

Equity markets have experienced a mixed performance during the first half of the year. Although ongoing uncertainty continued to impact investor sentiment, we saw net inflows of £474 million (H1 2022: £634 million) and delivered a net inflow rate of 6% (H1 2022: 8%) with a strong contribution from new hires. During the first half, we recruited five new client facing colleagues, as we continue to invest in new hires to support the long-term growth potential of CBAM.

Total managed assets increased 3% to £15.7 billion (31 July 2022: £15.3 billion), driven by positive net inflows, slightly offset by negative market performance. Total client assets, which includes advised and managed assets, increased by 2% overall to £16.9 billion (31 July 2022: £16.6 billion).

1 Total client assets include £5.8 billion of assets (31 July 2022: £5.9 billion) that are both advised and managed.

2 Net flows as % of opening managed assets calculated on an annualised basis.

Fund performance

Our funds and segregated bespoke portfolios are designed to provide attractive risk-adjusted returns for our clients, consistent with their long-term goals and investment objectives. Fund performance over the six months period has been mixed, reflecting volatile markets across asset classes which has been the case throughout the holding period.

Our approach to ESG and sustainability

ESG integration in our investment research and stewardship remains a key area of focus. Our Sustainable Balanced fund, which launched in 2020, continues to attract inflows and in March 2023, we are merging our existing Select Fixed Income fund and Sustainable Bond fund to create the Sustainable Select Fixed Income fund.

This new fund utilises an updated Sustainable Investment methodology, which makes use of CBAM's experience and understanding of sustainable investment strategies gained over recent years to target an active reduction in CO₂ emissions. This is made explicit by a commitment to have the fund portfolio at less than 50% of the CO₂ emissions of its 2019 benchmark by 2030 and always under the benchmark in the period.

In line with our commitment to actively contribute towards the UK government's net zero climate goals, CBAM is now a signatory of the Net Zero Asset Managers initiative.

Well positioned for future growth                                                                     

We remain confident that our vertically integrated, multi-channel business model positions us well for ongoing demand for our services and the structural growth opportunity presented by the wealth management industry.

Our focus remains on providing excellent service to our clients whilst investing in new hires to support the long-term growth potential of our business. While CBAM is sensitive to financial market conditions, we remain committed to driving growth both organically and through in-fill acquisitions.

WINTERFLOOD

Key Financials

Performance impacted by continued slowdown in trading activity

Winterflood is a leading UK market maker, delivering high quality execution services to platforms, stockbrokers, wealth managers and institutional investors, as well as providing corporate advisory services to investment trusts and outsourced dealing and custody services via Winterflood Business Services ("WBS").

We experienced difficult market conditions as recession concerns, inflationary pressures, an elevated UK interest rate environment, economic policy instability and global geopolitical issues all had an adverse impact on market sentiment and investor appetite.

Operating income decreased to £39.0 million (H1 2022: £49.5 million), primarily driven by lower trading revenues, with all sectors reporting a decline against the prior year, with the exception of Fixed Income which benefitted from volatility in bond markets.

Low investor confidence, compounded by macroeconomic uncertainty, interest rates at a 14 year high and inflationary pressures, led to reduced retail trading volumes, with average daily bargains at 61k in the period, a decline from H1 2022 levels (83k) and marginally above pre-pandemic levels (2019: 56k). In particular, we saw a significant reduction in total bargains in our higher margin sectors, AIM and Small Cap. As a result, trading income declined to £31.7 million for the period (H1 2022: £42.7 million).

Nevertheless, we benefited from the expertise of our traders and our strong focus on risk management, which resulted in only one loss day in the period (H1 2022: one loss day). The diversification of our trading desk enabled us to take advantage of the increased retail investor interest in Fixed Income markets.

Our Investment Trusts Corporate team, who are corporate broker to over 50 Investment Trusts and generate additional fees through corporate finance activity, delivered revenue of £1.3 million (H1 2022: £1.2 million). This was largely driven by retainer fee income, as the risk-off market sentiment impacted capital markets activity, with no Investment Trust IPOs launched across the market in 2022. Nonetheless, we are well placed for when market activity returns.

WBS has had a positive start to the year, growing AuA to £12.4 billion (H1 2022: £6.8 billion) despite declining equity markets. Net inflows were £4.8 billion (H1 2022: £0.7 billion) including the successful planned migration of custody assets for Fidelity International in Q1. Against this backdrop WBS generated income of £6.3 million which represents an increase of 24% (H1 2022: £5.1 million). We see significant further growth potential with WBS supported by a solid pipeline of clients.

Operating expenses fell by 10% to £36.6 million (H1 2022: £40.7 million) primarily driven by lower variable staff costs accrued in the period to reflect the reduction in income.

Operating profit decreased by 73% to £2.4 million (H1 2022: £8.8 million). Against a backdrop of sustained market declines in the period, this represents a resilient performance in difficult market conditions.

Winterflood has a long track record of trading profitably in a range of conditions and remains well positioned to retain our market position, taking advantage when investor confidence recovers from the low levels seen in the past 12 months. We continue to diversify our revenue streams and explore growth opportunities, such as through WBS, balancing the cyclicality seen in the trading business.

DEFINITIONS

Adjusted: Adjusted measures are presented on a basis consistent with prior periods and exclude amortisation of intangible assets on acquisition, to present the performance of the group's acquired businesses consistent with its other businesses; and any exceptional and other adjusting items which do not reflect underlying trading performance

Assets under administration: Total assets for which Winterflood Business Services provide custody and administrative services

Bad debt ratio: Impairment losses in the year as a percentage of average net loans and advances to customers and operating lease assets

Bargains per day: Average daily number of Winterflood's trades with third parties

Business as usual ("BAU") costs: Operating expenses excluding depreciation and costs related to strategic initiatives or investment programmes

Capital Requirements Regulation ("CRR"): Capital Requirements Regulation as implemented in the PRA Rulebook CRR Instrument and the PRA Rulebook CRR Firms: Leverage Instrument (collectively known as "CRR")

CET1 capital ratio: Measure of the group's CET1 capital as a percentage of risk weighted assets, as required by CRR

Common equity tier 1 ("CET1") capital: Measure of capital as defined by the CRR. CET1 capital consists of the highest quality capital including ordinary shares, share premium account, retained earnings and other reserves, less goodwill and certain intangible assets and other regulatory adjustments

Compensation ratio: Total staff costs as a percentage of adjusted operating income

Cost of funds: Interest expense incurred to support the lending activities divided by the average net loans and advances to customers and operating lease assets

Credit impaired: Where one or more events that have a detrimental impact on the estimated future cash flows of a loan have occurred. Credit impaired events are more severe than SICR triggers. Accounts which are credit impaired will be allocated to Stage 3

Discounting: The process of determining the present value of future payments

Dividend per share ("DPS"): Comprises the final dividend proposed for the respective year, together with the interim dividend declared and paid in the year

Earnings per share ("EPS"): Profit attributable to shareholders divided by number of basic shares

Effective tax rate ("ETR"): Tax on operating profit/(loss) as a percentage of operating profit/(loss) on ordinary activities before tax

Expected credit loss ("ECL"): The unbiased probability-weighted average credit loss determined by evaluating a range of possible outcomes and future economic conditions

Expense/income ratio: Total adjusted operating expenses divided by operating income

Funding allocated to loan book: Total funding excluding equity and funding held for liquidity purposes

Funding as % loan book: Total funding divided by net loans and advances to customers and operating lease assets

Gross carrying amount: Loan book before expected credit loss provision

Independent financial adviser ("IFA"): Professional offering independent, whole of market advice to clients including investments, pensions, protection and mortgages

Internal ratings based ("IRB") approach: A supervisor-approved method using internal models, rather than standardised risk weightings, to calculate regulatory capital requirements for credit risk

International Financial Reporting Standards ("IFRS"): Globally accepted accounting standards issued by the IFRS Foundation and the International Accounting Standards Board

Investment costs: Includes all depreciation and other costs related to investments (including multi-year projects), strategic initiatives, pilots and cyber resilience. Excludes IFRS 16 depreciation and long term BAU license depreciation

Leverage ratio: Tier 1 capital as a percentage of total balance sheet assets, adjusted for certain capital deductions, including intangible assets, and off-balance sheet exposures

Liquidity coverage ratio ("LCR"): Measure of the group's HQLAs as a percentage of expected net cash outflows over the next 30 days in a stressed scenario

Loan to value ("LTV") ratio: For a secured or structurally protected loan, the loan balance as a percentage of the total value of the asset

Loss day: Where aggregate gross trading book revenues are negative at the end of a trading day

Managed assets or assets under management ("AUM"): Total market value of assets which are managed by Close Brothers Asset Management in one of our investment solutions

Net carrying amount: Loan book value after expected credit loss provision

Net flows: Net flows as a percentage of opening managed assets calculated on an annualised basis

Net interest margin ("NIM"): Operating income generated by lending activities, including interest income net of interest expense, fees and commissions income net of fees and commissions expense, and operating lease income net of operating lease expense, less depreciation on operating lease assets, divided by average net loans and advances to customers and operating lease assets

Net stable funding ratio ("NSFR"): Regulatory measure of the group's weighted funding as a percentage of weighted assets

Net zero: Target of completely negating the amount of greenhouse gases produced by reducing emissions or implementing methods for their removal

Operating leverage: Operating income percentage growth less adjusted operating expenses percentage growth

Operating margin: Adjusted operating profit divided by operating income

Personal Contract Plan ("PCP"): PCP is a form of vehicle finance where the customer defers a significant portion of credit to the final repayment at the end of the agreement, thereby lowering the monthly repayments compared to a standard hire-purchase arrangement. At the final repayment date, the customer has the option to: (a) pay the final payment and take the ownership of the vehicle; (b) return the vehicle and not pay the final repayment; or (c) part-exchange the vehicle with any equity being put towards the cost of a new vehicle

Prudential Regulation Authority ("PRA"): A financial regulatory body, responsible for regulating and supervising banks and other financial institutions in the UK

Recovery Loan Scheme: Launched in April 2021 as a replacement to CBILS. Under the terms of the scheme, businesses of any size that have been adversely impacted by the Covid-19 pandemic can apply to borrow up to £10 million, with accredited lenders receiving a government-backed guarantee of 80% on losses that may arise

Return on assets: Adjusted operating profit attributable to shareholders divided by total closing assets at the balance sheet date

Return on average tangible equity: Adjusted operating profit attributable to shareholders divided by average total shareholder's equity, excluding intangible assets

Return on net loan book ("RoNLB"): Adjusted operating profit from lending activities divided by average net loans and advances to customers and operating lease assets

Return on opening equity ("RoE"): Adjusted operating profit attributable to shareholders divided by opening equity, excluding non-controlling interests

Revenue margin: Income from advice, investment management and related services divided by average total client assets. Average total client assets calculated as a two-point average

Risk weighted assets ("RWAs"): A measure of the amount of a bank's assets, adjusted for risk in line with the CRR. It is used in determining the capital requirement for a financial institution

Strategic initiatives: Acquisitions or ventures into existing/adjacent markets that are anticipated to support business growth, or initiatives where a strategic decision has been made to exit the business or market

Subordinated debt: Represents debt that ranks below, and is repaid after claims of, other secured or senior debt owed by the issuer

Term funding: Funding with a remaining maturity greater than 12 months

Term Funding Scheme ("TFS"): The Bank of England's Term Funding Scheme

Term Funding Scheme for Small and Medium-sized Enterprises ("TFSME"): The Bank of England's Term Funding Scheme with additional incentives for SMEs

Total client assets ("TCA"): Total market value of all client assets including both managed assets and assets under advice and/or administration in the Asset Management division