Close Brothers Group plc · LSE:CBG
Close Brothers — Investor Presentation (November 2017)
66 slides from Close Brothers's investor presentation, Nov 22, 2017
Slide 1: Banking Division Investor seminar
Banking Division Investor seminar 22 November 2017
Slide 2: Disclaimer
Disclaimer Certain statements included or incorporated by reference within this presentation may constitute “forward-looking statements” in respect of the group’s operations, performance, prospects and/or financial condition. By their nature, forward-looking statements involve a number of risks, unc
Slide 3: Introduction
Introduction Preben Prebensen Chief Executive Officer
Slide 4: Agenda
Agenda 1. Introduction Preben Prebensen 2. Banking model in action Adrian Sainsbury 3. Financial delivery and investment Mike Morgan 5. Prudent funding and liquidity Malcolm Hook 6. Business presentations Asset Finance – Neil Davies Invoice Finance – David Thomson Premium Finance – Sharon Bishop Mot
Slide 5: Close Brothers model
Close Brothers model Established business model through the cycle 1 2 Build leading Generate strong positions in and sustainable specialist markets returns Expertise Our people are experts in their fields Relationships Service Building long-term Allowing us to provide relationships with clients exce
Slide 6: Active management of the model
Active management of the model Maximising the potential of our business model EXTEND • New initiatives • Growth in existing markets IMPROVE • Operating efficiency • People • Technology • Customer experience PROTECT • Prudent underwriting • Conservative funding, and strong margins capital and liquidi
Slide 7: Diversity of our businesses
Diversity of our businesses Three specialist lending segments Commercial Retail Property What we do NOT do Mortgages Asset Invoice Premium Motor Property Buy to Let Finance Finance Finance Finance Finance 29% 8% 13% 26% 24% Hire Invoice Finance for Point of sale Short-term Current purchase, discount
Slide 8: Diversity of our businesses
Diversity of our businesses Three specialist lending segments Commercial Retail Property What we do NOT do Mortgages Buy to Let Asset Invoice Premium Motor Property Finance Finance Finance Finance Finance 29% 8% 13% 26% 24% Current Property accounts Transport Invoice UK Commercial Motor UK finance I
Slide 9: Banking track record
Banking track record Long history of profitable growth through the cycle £ billion £ million 7.0 10 year Benign credit 240 Banking key metrics average FY 2017 2013 - 2017 RoE 22% 23% +7% - 14% 220 6.0 RoNLB 3.4% 3.6% 200 Bad debt ratio 1.4% 0.6% 180 5.0 Net interest margin 8.9% 8.1% Credit crunch 16
Slide 10: Consistent underwriting
Consistent underwriting Consistent lending criteria through the cycle Credit risk appetite unchanged Typical Average Typical loan Business • Strong risk culture – “cradle to grave” LTV loan size1 maturity • Predominantly secured lending Motor Finance 75 – 85% £6.5k 2 – 4 years • Funding assets we kn
Slide 11: Extending the model
Extending the model Actively seeking new niches 2017 2017 2016 Loan book 2015 Asset Financing Technology £bn Consumer Germany legal fees leasing 7.0 finance 2014 2008 2011 Renewable 6.0 Mid-ticket leasing Larger ticket energy Bridging / property invoice refurbishment 2009 5.0 Motor key 2012 2007 acc
Slide 12: Financial delivery and investment
Financial delivery and investment Mike Morgan Banking Division CFO
Slide 13: Pricing and underwriting discipline
Pricing and underwriting discipline Model supports strong and consistent returns through the cycle Consistent returns • Strong returns through the cycle 4.0% – FY17 RoNLB 3.6% 3.5% – 10 year average 3.4% Return on net loan book 3.0% 10 year avg 3.4% • NIM remains high at over 8% 2.5% – Prioritise ma
Slide 14: Cost discipline
Cost discipline Control costs while investing to protect, improve and extend the model Adjusted operating expenses • E/I ratio stable and remains below 50% 300 272 231 250 – Operating leverage neutral for FY17 250 111 – c.50% of cost increase investment driven 200 101 97 150 100 • High-touch people-
Slide 15: Investing in the model
Investing in the model Maximising the potential of our business model EXTEND • Novitas • Germany • Technology Services IMPROVE • Premium investment • AIRB • Treasury deposit platform • Motor customer proposition PROTECT • IT infrastructure • Prudent capital position • Control functions • Use of data
Slide 16: Actively managing capital
Actively managing capital Prudent capital position supported by strong profitability 2019 fully loaded capital requirements Prudent approach to capital 16.0% • Strong profitability supports growing CET1 15.2% capital base 180bps 14.0% 13.4% headroom • CET1 capital ratio provides significant 1.0% hea
Slide 17: IFRS 9
IFRS 9 Well positioned for implementation in FY 2019 • IFRS9 applies to Close Brothers for the financial year ending 31 July 2019 • Fundamental change in accounting for credit losses from “incurred” to “expected” basis – Use of models to estimate expected credit losses based on composition of loan b
Slide 18: Prudent funding and liquidity
Prudent funding and liquidity Malcolm Hook Group Treasurer
Slide 19: Diversity of funding
Diversity of funding Diversity of funding sources supports lending through the cycle Increase in funding to support loan book growth • Funding has been increased by £ billion £2.9bn since 2012 to support the 10 8.8 Bank’s lending 8 6.9 5.9 • Growth driven through increase in: 6 – Customer deposits 4
Slide 20: Prudent maturity and strong liquidity
Prudent maturity and strong liquidity “Borrow long, lend short” increases resilience Funding maturity 10.0 £ billion • High quality loan book with average 9.0 8.81 maturity of 14 months 8.0 7.9 1.2 7.0 2.8 • Borrow long and lend short, with 6.0 average maturity of loan book funding 3.5 at 21 months
Slide 21: Enhancing customer deposits
Enhancing customer deposits Reinvesting in the business to enhance our customer proposition Understanding our customers • c.60% of our retail depositors are 1. Analysis from older families with large savings • Customer surveys have evidenced 2. Observations steadily improving levels of satisfaction
Slide 22: Business presentations
Business presentations a Close Brothers
Slide 23: Asset Finance
Asset Finance Service, expertise, relationships Neil Davies
Slide 24: Diversity of our businesses
Diversity of our businesses Three specialist lending segments Commercial Retail Property What we do NOT do Mortgages Buy to Let Asset Invoice Premium Motor Property Finance Finance Finance Finance Finance 29% 8% 13% 26% 24% Current Property accounts Transport Invoice UK Commercial Motor UK Finance I
Slide 25: Asset Finance business overview
Asset Finance Business overview Asset Finance Overview of the business Hire purchase Core products Finance lease • Tailor-made finance to the UK SME Operating lease sector Staff c.440 – Specialised refinancing Locations 11 regional offices – Customised lending for second hand assets Distribution 55%
Slide 26: Specialist expertise driven model
Specialist expertise driven model Well established local footprint across a diverse range of assets Diverse range of niche businesses Diverse asset mix Transport Industrial General assets1 Wheeled Equipment Wheeled assets assets 15% Manufacturing Aviation & Aviation / Marine Construction Marine & Re
Slide 27: People and distribution
People and distribution Local expertise • Extensive geographic coverage via 11 regional offices • Industry leading direct sales force – Deep industry knowledge – Appropriately empowered Glasgow – Responsibly incentivised Dundonald Belfast • Safeguarding our sales force through retention and developm
Slide 28: Case Study
Case Study Applying the model • Well established plant hire SME • Yellow metal assets • Number of deals written, RELATIONSHIPS ongoing relationship • Most recent £3.5 million refinancing transaction • Number of banks engaged EXPERTISE • Understand the customer • Understand the asset • Make the proce
Slide 29: Extending the model
Extending the model New products and geographies Technology Services Asset Finance Germany • Residual and Non-RV leasing, HP, receivables, • UK-style proposition: bespoke lending on chattel mortgage asset classes we know well, speed of delivery • Targeting SME to mid-corporates with >£10m • Targetin
Slide 30: Summary: Asset Finance
Summary Asset Finance Loan book (£m) Key Messages 2,100 • Diverse portfolio of specialist businesses • Consistent delivery of service and expertise 1,400 through direct sales model delivers high customer value • Continue to build on an active history of innovation 700 • Market and competitive dynami
Slide 31: Invoice Finance
Invoice Finance Extending the model David Thomson
Slide 32: Diversity of our businesses
Diversity of our businesses Three specialist lending segments Commercial Retail Property What we do NOT do Mortgages Buy to Let Asset Invoice Premium Motor Property Finance Finance Finance Finance Finance 29% 8% 13% 26% 24% Current Property accounts Transport Invoice UK Commercial Motor UK Finance I
Slide 33: Extending the model – Technology and Product
Extending the model – Technology and Product Evolution
Slide 34: Business overview
Business overview Invoice Finance Invoice Finance1 Overview of the business Invoice discounting, invoice • Invoice discounting, factoring and asset based Products factoring and asset-based lending (ABL) lending (“ABL”) Customers c.1,300 SMEs • Finances SME working capital requirements Recruitment, m
Slide 35: Delivering the model
Delivering the model Product evolution Market leading technology • Seamless integration with over 250 accounting software • Instant cash transfers • Easy to use • Extracts sales ledger in real time • Automatic reconciliation • 24/7 online access • Dedicated relationship manager 35
Slide 36: Product evolution: ABL
Product evolution: ABL Strong demand for larger tickets and ABL Industry analysis: Loan book by client turnover (£bn) • Small ticket factoring market has remained static 25 20 • Growth focused in the larger ticket segment 15 15.8 12.3 13.3 13.6 Invoice/ ABL 10 10.7 • Enhanced ABL and Cash Flow produ
Slide 37: Extending the model – Acquisition
Extending the model – Acquisition
Slide 38: Product extension: Novitas Loans
Product extension: Novitas Loans Specialist market Product Typical loan metrics Business overview Family • Specialist lender to clients of UK law Funding solicitor fees Size: London c.£100k; firms for divorce and outside London £25-50k – Acquired by Close Brothers in May contested probate 2017 cases
Slide 39: Summary: Invoice Finance
Summary Invoice Finance Loan book (£m) Key Messages 600 • Differentiated proposition based on expertise, speed of service and market leading technology highly valued by our clients − Ability to deliver complex, bespoke 400 transactions − Average client life in excess of 5 years reflects strength of
Slide 40: Premium Finance
Premium Finance Improving the model Sharon Bishop
Slide 41: Diversity of our businesses
Diversity of our businesses Three specialist lending segments Commercial Retail Property What we do NOT do Mortgages Buy to Let Asset Invoice Premium Motor Property Finance Finance Finance Finance Finance 29% 8% 13% 26% 24% Current Property accounts Transport Invoice UK Commercial Motor UK Finance I
Slide 42: Business overview
Business overview Premium Finance Overview of the business Premium Finance Intermediated recourse and non- • Specialist, high margin business Product operating in a mature, intermediated recourse instalment finance market Customers 2.0m customers and 240k SMEs • Strong returns and high quality of Di
Slide 43: Market and Distribution
Market and Distribution Mature intermediated market UK insurance market* Product lines Close Brothers £3bn1 Personal lines • Motor and household insurance Non Financed financed £34 by others • Typically recourse to the broker £21bn billion £10bn • Predominantly refundable policies • Online is domina
Slide 44: What differentiates us
What differentiates us Distinctive proposition Long term, • Average broker relationship is 15 years ‘sticky’ broker • Majority of brokers on minimum 3 year contracts, with relationships Premium Finance as single provider of finance • We recruit experts from the insurance and banking industries Our P
Slide 45: Investing through the cycle
Investing through the cycle Improving our proposition Strategic priorities Benefits delivered Service • Major new broker wins 15% loan Enhancing our proposition • Faster, paperless customer sign-up book for brokers and customers growth • New tools to support brokers Expertise • Enhanced contact cent
Slide 46: Case study
Case study Supporting an online motor broker with pricing Cancellations Retention Income 46
Slide 47: Summary: Premium Finance
Summary Premium Finance Loan book (£m) Key Messages 1,000 • Stable, well understood niche market – Multi-year integrated broker relationships 750 • Extensive investment resulting in growth and improved operating efficiency – New broker wins 500 – Increased penetration of existing brokers • Strong pi
Slide 48: Motor Finance
Motor Finance Protecting the model James Broadhead
Slide 49: Diversity of our businesses
Diversity of our businesses Three specialist lending segments Commercial Retail Property What we do NOT do Mortgages Buy to Let Asset Invoice Premium Motor Property Finance Finance Finance Finance Finance 29% 8% 13% 26% 24% Current Property accounts Transport Invoice UK Commercial Motor UK Finance I
Slide 50: Motor Finance business overview
Motor Finance Business overview Motor Finance Overview of the business 81% Hire purchase • Point of sale finance distributed via Product 14% Personal Contract Purchase dealerships across the UK 5% Other • Distribution relationship with First 73% car, 18% LCV, 3% motorbike, 6% Auto Finance in Ireland
Slide 51: Motor Finance today
Motor Finance today A differentiated business model Focus on small and mid size dealers Prudent, manual underwriting Big Banks Dealer Large nationals Key Accounts Market share Mid size shifts up and down depending nationals on credit supply Vehicle Customer Core Small independents Majority of our de
Slide 52: Motor Finance today
Motor Finance today Dealer and customer profile Customer profile Dealer profile Convenience driven Stable Expert Enthusiastic Learner Car is an Very Small essential Loyal to Very Small asset dealer Typical customer profile Low / Informed Seller Determined Earner Full time middle Small Medium employm
Slide 53: Dealer case study
Dealer case study C.H. Render (Flaxton, York) 53
Slide 54: Product portfolio
Product portfolio Motor Finance HP 81% of loan book • Our core product Illustrative HP used car loan • Average advance: £8,000 20,000 • Typical LTV: 75-85% 18,000 • Average age of vehicle at origination: 5 years 16,000 • Term: 2 – 4 years 14,000 • Loan fully paid off by term end, at which point 12,0
Slide 55: Credit risk and underwriting
Credit risk and underwriting Prudent lending decisions and consistent risk appetite Loan book product split Conservative underwriting model 100% 350 300 • Local, predominantly manual underwriting CBMF credit score 80% % of loanbook 250 – Provides flexibility and early warning 60% 200 intelligence of
Slide 56: Investing through the cycle
Investing through the cycle Protecting the model • We continue to invest in the business in a Motor Finance investment programme rapidly changing market – Increased regulation Dealer Industry leading dealer – Changing customer preferences Service solutions to help dealers grow Proposition – Increase
Slide 57: Summary: Motor Finance
Summary Motor Finance Loan book (£m) Key messages 2,000 • Differentiated business model – Local branch network servicing small independent dealers underserved by big banks 1,500 – Prudent, manual underwriting approach based on a combined view of dealer, asset and customer 1,000 • Continued focus on
Slide 58: Property Finance
Property Finance Service, expertise, relationships Frank Pennal
Slide 59: Diversity of our businesses
Diversity of our businesses Three specialist lending segments Commercial Retail Property What we do NOT do Mortgages Buy to Let Asset Invoice Premium Motor Property Finance Finance Finance Finance Finance 29% 8% 13% 26% 24% Current Property accounts Transport Invoice UK Commercial Motor UK Finance I
Slide 60: Property Finance business overview
Property Finance Business overview Property Finance Overview of the business Residential / commercial developments • 2 distinct brands Products – Close Brothers Property Finance Bridging loans, trading / refurbishment – Commercial Acceptances Headcount c.85 Geography Predominantly London and South E
Slide 61: Strong customer relationships
Strong customer relationships Quality customers reinforce our brand Typical Property Finance client • Penn, Bucks • 8 houses: loan £3m • Longstanding branded developer – Client of 7 yrs Typical Commercial Acceptances client • Walthamstow refurbishment: loan £360k • Long term client of 18 years • Onl
Slide 62: Extending the model
Extending the model Regional growth initiative Manchester City Centre: 14 houses, £3.5m loan • Expanding into high quality regional locations as local economy improves – Locations with limited housing supply e.g. Bristol, Manchester, Edinburgh, Glasgow, West Midlands • Majority of regional developme
Slide 63: Experience and risk management
Experience and risk management Sticking to the model Key underwriting criteria Conservative underwriting criteria • Tightened criteria in 2009 and maintained since Secured senior debt only • Business has delivered a profit every year since Professional developers with track record founded more t
Slide 64: Summary: Property Finance
Summary Property Finance Loan book (£m) Key messages 1,800 • Success built on long term relationships underpinned by conservative underwriting and sector expertise – Market leaders in respective businesses – Disciplined approach to lending 1,200 – Staff critical • Well positioned for further but mor
Slide 65: Conclusion
Conclusion • Distinctive and established business model supports long track record of performance through the cycle • Experience and expertise supports confidence in credit quality and strong client relationships • Our business portfolio is diverse, specialised and differentiated – Creating resilien
Slide 66: Q&A
Q&A Aa Close Brothers
Close Brothers Group — Investor Presentation (November 2017) on 6ix