A strong second half of the year was not enough to stop merchant banking group Close Brothers’ profit halving compared to the year before due to provisions related to legal finance specialist Novitas.
In the year to July, operating pretax profit dropped 52 per cent to £112m, down from £232.8m the year before. This mainly related to the £114.6m set aside for bad loans from Novitas, which Close Brothers acquired in 2017.
Excluding the Novitas provisions, operating profit still fell year-on-year as its market making business Winterflood continued to struggle in difficult conditions. Adjusted profit was down 75 per cent in the division.
An uncertain macroeconomic environment also forced Close Brothers to put aside more funds in case it saw credit quality deteriorate. Impairment losses rose to £204.1m, including the provisions related to Novitas.
However, the bank stressed that it has “not seen a significant impact from the external environment on credit performance”.
Its shares were trading 3.6 per cent lower.
Despite the impact of the Novitas loans, boss Adrian Sainsbury was confident that the bank was moving in the right direction after a strong second half.
“We have performed well in the second half, with an acceleration of loan book growth, strong margins and a stable credit performance in our banking business,” Sainsbury said.
The loan book grew five per cent to £9.5bn with the bank saying it remains committed to “lending consistently to customers in all market conditions”.
Its asset management arm meanwhile saw net inflows of nine per cent across the year. Close Brothers has been hiring new staff for its asset management divisions and it suggested its “new bespoke investment managers” were contributing to the net inflows.
Close Brothers upped its full year dividend to 67.5p per share, slightly higher than the 66p distributed last year.
“Our proven model and financial strength leave us well placed to resume our track record of earnings growth and returns by focusing on disciplined growth, cost efficiency and capital optimisation,” the bank said.
Steve Clayton, Head of Equity Funds at Hargreaves Lansdown said: “All in all, the market should be relieved, if not excited, by these numbers. Close Bros. have not delivered any new bad news. Indeed, much of the news today is positive, but largely expected.”