Close Brothers Group plc · LSE:CBG
Close Brothers — Investor Presentation (June 2008)
34 slides from Close Brothers's investor presentation, Jun 30, 2008
Slide 1: Close Brothers Group Banking Division
Close Brothers Group Banking Division Presentation to investors and analysts 30 June 2008
Slide 2: Important notice
Important notice Certain statements included or incorporated by reference within this presentation may constitute "forward-looking statements". By their nature, forward looking statements involve a number of risks, uncertainties or assumptions that could cause actual results or events to differ mate
Slide 3: Agenda for the afternoon
Agenda for the afternoon 4.00 pm Welcome and introduction to the Group • Colin Keogh, Group Chief Executive Officer Banking Division • Stephen Hodges, Group MD, Head of the Banking Division • James Heath, Head of Finance, Banking Division Q&A 5.30 pm Drinks 30 June 2008 – Page 3
Slide 4: Close Brothers Group
Close Brothers Group Colin Keogh • Group Chief Executive Officer 30 June 2008 – Page 4
Slide 5: Close Brothers Group
Close Brothers Group • Strong management team with extensive experience in Group growing the business organically and via acquisitions • Strong range of niche asset management businesses with Asset good performance and opportunity to realise value from Management integration and expansion • Leading
Slide 6: Introduction
Introduction • Our Banking Division is high margin and well capitalised • Typically accounts for 40-50% of group operating profit • Current market environment creates exciting opportunities to build medium-term growth • A key component of our overall group strategy: “actively to manage our distincti
Slide 7: Banking Division
Banking Division Stephen Hodges • Group Managing Director and Head of the Banking Division James Heath • Head of Finance, Banking Division 30 June 2008 – Page 7
Slide 8: Banking Division
Banking Division “A specialist banking business with sustainable, high quality earnings – conservatively funded – with growth potential” 30 June 2008 – Page 8
Slide 9: A specialist, highly profitable banking business
A specialist, highly profitable banking business • High quality of earnings, consistent and above average returns through the economic cycle • Robust relationship between profit and bad debt charge • Disciplined lending approach - resilience during the recent credit boom • Strong niche businesses -
Slide 10: What we do
What we do Specialist secured lending to Central treasury operations SMEs, professionals and consumers • Deposit taking • Foreign exchange • Commercial asset finance • Funding for lending operations - Transport and engineering • Committed facilities - Printing machinery - Healthcare • Consumer asset
Slide 11: Current market conditions favour Close
Current market conditions favour Close Until July 2007 • Banks hungry for assets • “Easy credit” conditions • Market mispricing risk Since July 2007 • Credit crunch • Major reassessment of risk / reward • Banking Division well positioned for future growth • Our margins and volumes resilient 30 June
Slide 12: Income statement
Income statement (£m) 2005 2006 2007 2008 H1 Revenue 185.2 198.8 197.8 99.8 Expenses 95.2 106.2 104.6 52.5 Bad debt charges 20.3 18.6 21.5 9.6 Profit before tax 69.7 74.0 71.7 37.7 Loan book 1,939 1,862 1,962 2,006 Note: Income includes treasury operations and non-lending activities 30 June 2008 – P
Slide 13: Key performance indicators
Key performance indicators 2003 2004 2005 2006 2007 2008 H1 Operating income / average loans 10% 10% 10% 10% 10% 10% Cost / income ratio 45% 47% 52% 53% 53% 53% Bad debt charge / average loans 1.5% 1.4% 1.1% 1.0% 1.1% 1.0% Return on loan book 4.2% 4.0% 3.7% 3.8% 3.7% 3.8% Note: Income includes treas
Slide 14: Resilient performance based on disciplined lending approach
Resilient performance based on disciplined lending approach Loans (£bn) Customer deposits (£bn) 3.0 3.0 2.0 1.0 2.0 0.0 2003 2004 2005 2006 2007 2008 H1 Profit before tax (£m) 80 1.0 60 40 20 0 0.0 2003 2004 2005 2006 2007 2008 H1 2003 2004 2005 2006 2007 2008 H1 Source: All charts, CBG. Years to 31
Slide 15: Diverse loan book
Diverse loan book Analysis by asset class • Reduces concentration risk Printing machinery Transport, Healthcare and 7% engineering and plant • 465,000 borrowers other assets 11% 21% • Average loan size of £4,200 Invoice receivables 9% Insurance premiums 18% Property 16% Motor vehicles 18% Source: CB
Slide 16: Quality of earnings
Quality of earnings For every £100,000 that we lend… 10,100 = 10.1% income after finance costs (5,300) = 5.3% salaries / overheads 4,800 = 4.8% profit before bad debt (1,100) = 1.1% bad debt 3,700 = 3.7% pre-tax return on loan book • Favourable and robust relationship between profit and bad debt cha
Slide 17: Quality of earnings
Quality of earnings Comment Bad debt charge, % of gross loans 3.0% 80 • Excellent bad debt record 2.5% 70 60 • Six years of benign conditions 2.0% 50 1.5% 40 • Expecting bad debt to increase 30 1.0% 20 0.5% 10 0.0% 0 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 Profit before tax (£m)
Slide 18: Robust business model
Robust business model Specialist independent businesses Disciplined lending approach Underwriting and arrears management 30 June 2008 – Page 18
Slide 19: Specialist independent businesses
Specialist independent businesses What do we mean by this? What does this achieve? • Expert teams – experienced • Quality of assets and earnings specialists • Focus on underwriting and margin • Long-term, consistent senior and • Barriers to entry divisional management - people • Market knowledge – p
Slide 20: Disciplined lending approach
Disciplined lending approach • Focus on high margin business rather than chasing volume • Secured lending with low default rates • Diversified and balanced loan book with limited exposure to any given asset or sector • Risk appetite by activity is consistent throughout the cycle 30 June 2008 – Page
Slide 21: Underwriting and arrears management
Underwriting and arrears management • Local underwriting responsibility • Knowledge of asset / repossession value • Security – margin of advance • Debt – not mezzanine • Short term • Actively managed arrears 30 June 2008 – Page 21
Slide 22: Soundly financed
Soundly financed CBL balance sheet £m • No exposure to MBSs Shareholders funds 355 Customer deposits 2,435 Borrowings 1,137 • No exposure to CDOs Bank deposits 213 Other liabilities 306 Total liabilities 4,446 • No exposure to SIVs Loan book 2,006 Cash 392 Floating rate notes 777 Certificates of dep
Slide 23: Floating rate notes (FRNs)
Floating rate notes (FRNs) • High quality (almost exclusively AA) bank FRNs • Intention and ability to hold to maturity • Net mark to market adjustment circa £8m(1), 1% of portfolio, through equity not P&L Note: (1) At 31 January 2008 30 June 2008 – Page 23
Slide 24: Highly liquid
Highly liquid Funding vs. run off of loan book • Borrow long / lend short £2.5bn • Repayment of liabilities as they fall £2.0bn due £1.5bn £1.0bn £0.5bn £0.0bn Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Funding Loan book Source: CBG, as at 31 January 2008 30 June 2008 – Page 24
Slide 25: Depth of funding
Depth of funding • Long term committed funding Loan book more than twice covered - Long standing banking £5bn relationships - Syndicated £4bn - Bilateral £2.435bn £3bn - Securitisation - Private Placements £2bn - MTN programme • Deposit base £1bn £1.618bn £2.006bn - Stable and growing £0.355bn - Str
Slide 26: Regulatory capital and ratings
Regulatory capital and ratings Bank soundly capitalised Strong ratings Long Short Outlook • Total capital ratio at 14%(1) term term Moody’s A2 P1 Stable • Room for growth Fitch A F1 Stable • Basel 2 Note: Source: Moody’s, Fitch (1) As at 31 July 2007 30 June 2008 – Page 26
Slide 27: Insurance premiums
Insurance premiums • Commercial and personal insurance • Spreads payments over 10 months • On-line automated transaction processing • Security over underlying policy • Affected by insurance cycle • Premium deflation continues to slow • Resilience in downturn Insurance premiums 18% 30 June 2008 – Pag
Slide 28: Commercial asset finance
Commercial asset finance • Transport, contractors’ plant, print, machine tools/engineering • 11 regional UK offices • Specialist expertise in asset classes and markets • Reduced involvement in new print market • Regular addition of new specialist Printing Transport, teams Healthcare machinery engine
Slide 29: Consumer asset finance
Consumer asset finance • Cars and motorbikes • 12 regional UK offices • Distribution through dealer network • Loans to professionals • Increasing regulation Motor vehicles 18% 30 June 2008 – Page 29
Slide 30: Invoice finance
Invoice finance • Invoice discounting and factoring • High return on assets • Innovative technology • Fraud risk inherent in industry • Presence in Ireland and Germany • Voted best invoice discounter for last three years by Business Moneyfacts Invoice receivables 9% 30 June 2008 – Page 30
Slide 31: Property
Property • Primarily UK residential development • Specialist team • Short term lending • Established over 30 years ago • Typical LTV 65% • Well spread by region, type and size of development Property 16% 30 June 2008 – Page 31
Slide 32: Banking – Highlights
Banking – Highlights Quality • Sustainability and quality of earnings • High margin – return on loan book of 3.7% Conservative • In our approach to capital adequacy and liquidity Growth • Well positioned for growth - through acquisitions - organically 30 June 2008 – Page 32
Slide 33: Appendix
Appendix 30 June 2008 – Page 33
Slide 34: Banking – senior management experience
Banking – senior management experience • Stephen Hodges - Joined Close Brothers in 1985 and was appointed Managing Director of the bank in 1990 - Executive Chairman of Close Brothers Limited since 2002 • Mike Barley, Chief Executive Close Asset Finance - Joined Close Brothers in 1999 having previous
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