Close Brothers slips as softer loan growth offsets capital boost

Close Brothers Group PLC shares fell 4% after reporting a 0.9% dip in loan growth for Q3, leading to revised full-year loan book expectations of £9.8 billion, below the previous £10.1 billion forecast due to higher property lending repayments and subdued asset finance activity. Despite the loan growth slowdown, the net interest margin remained strong at 7.1%, and impairment charges were low at 0.9%; however, elevated legal costs related to motor finance issues and the sluggish lending outlook have kept sentiment cautious, with Peel Hunt maintaining a 'hold' rating.

Analysis

Close Brothers Group PLC (LSE:CBG) experienced a 4% decline in its share price to 355.74p following the announcement of a 0.9% contraction in its loan book during the third quarter, which has also fallen 3.5% for the financial year to date. This performance prompted management to revise its full-year loan book forecast downwards to approximately £9.8 billion from the previously guided £10.1 billion, signaling a deviation from the initial expectation of flat loan growth. The reduction is attributed to several factors, including higher-than-anticipated repayments in the property lending division, subdued activity in asset finance, and intense competition within the premium finance sector. Despite these headwinds to loan growth, the group's net interest margin (NIM) demonstrated resilience, holding firm at an annualised 7.1%, slightly exceeding guidance. Furthermore, credit quality appears robust, with impairment charges remaining low at 0.9%. The company's capital position strengthened, evidenced by a core capital ratio increase to 14%, supported by the slower loan growth (which reduces risk-weighted assets) and a one-off gain from the disposal of its asset management business. Winterflood, the securities division, also contributed positively, returning to modest profitability with £0.4 million in the quarter due to improved trading volumes. However, Peel Hunt maintains a 'hold' rating with a 327p price target, reflecting cautious sentiment driven by the combination of sluggish lending and persistent elevated legal costs associated with motor finance issues, which are expected to weigh on performance.

Key Decisions for Investors

• Investors should monitor upcoming reports for any signs of recovery in loan origination, particularly in asset finance and property lending, as this is a key headwind.
• Given the stable net interest margin and low impairment charges against a backdrop of slowing loan growth, maintain a neutral stance but closely watch for any deterioration in these metrics or further negative revisions to guidance.
• Consider the impact of ongoing legal costs related to motor finance, as these could continue to suppress profitability and investor sentiment, potentially justifying the current 'hold' recommendation from analysts like Peel Hunt.
• Assess the sustainability of the improved capital ratio, particularly if loan growth initiatives regain traction, and how this might influence future dividend capacity or investment opportunities.