Close Brothers has agreed to sell its asset management division, Close Brothers Asset Management (CBAM), to funds managed by Oaktree Capital Management for £200 million.
The transaction is set to be finalised in early 2025, pending regulatory approvals, and aims to bolster Close Brothers’ capital base amidst financial challenges.
Close Brothers’ Strategic Divestment
Close Brothers has finalised a strategic decision to sell its asset management division, Close Brothers Asset Management (CBAM), to Oaktree Capital Management. The transaction is valued at £200 million. The move aims to enhance the group’s capital position amidst the financial strain caused by a regulatory review into its former car loan practices.
The deal is expected to be completed in early 2025, contingent on regulatory approvals. Close Brothers plans to retain the upfront cash proceeds, which amount to approximately £172 million. By doing so, the firm aims to strengthen its capital base to better navigate the current uncertain environment.
Implications of the Deal
Chairman Mike Biggs stated that this sale represents significant progress towards simplifying the group and focusing on its core lending business. This decision aligns with the bank’s broader strategy to enhance financial stability following the Financial Conduct Authority (FCA) review.
The FCA’s investigation focuses on whether customers were unfairly charged through now-banned discretionary commission arrangements on car loans. This probe has placed considerable financial pressure on Close Brothers, necessitating decisive actions like the divestment of CBAM.
Financial Impact and Regulatory Challenges
Close Brothers’ shares have declined by approximately a third since the announcement of the FCA review in January. Analysts project that the auto lending sector may face up to £16 billion in compensation fees, with Close Brothers being notably exposed.
The bank has suspended its 2024 dividend and is reviewing its 2025 dividend due to the potential financial impact of the review. Retaining the 2024 dividend alone has conserved around £100 million of common equity tier 1 capital.
Financial Performance and Adjustments
Close Brothers reported a statutory pre-tax operating profit of £142 million for the fiscal year ending 31 July 2024, marking a 27 percent increase from the previous year. This jump is noteworthy given that the bank had allocated £114.6 million in 2023 for bad loans linked to Novitas, its now-defunct legal funding specialist.
However, excluding the provisions for Novitas, the bank’s profit was £218.6 million last year. In contrast, the adjusted operating profit fell by 22 percent to £170.8 million, highlighting the ongoing financial challenges. The bank also identified £28.6 million in adjusting items, mainly related to operational costs from the FCA’s motor finance review and a broader industry investigation into borrowers facing financial difficulties.
Projected Costs and Market Reactions
For the 2025 fiscal year, Close Brothers anticipates operational costs for the motor finance review to be between £10 million and £15 million. Additionally, the bank expects group net expenses to range between £55 million and £60 million due to increased professional fees and the lower income resulting from falling interest rates.
RBC has forecasted that Close Brothers could face up to £350 million in total provisions, nearly half of its current market capitalisation. This projection underscores the severe financial ramifications of the FCA review. Lloyds Banking Group, owner of Black Horse, the UK’s largest auto lender, has already set aside £450 million for the review.
CEO’s Medical Leave and Interim Management
In a related development, Close Brothers’ CEO Adrian Sainsbury has taken a temporary medical leave of absence. Mike Morgan, the group finance director, has assumed Sainsbury’s responsibilities during his absence. This change in leadership comes at a critical time for the bank as it navigates these financial and regulatory challenges.
Despite these difficulties, Close Brothers’ shares rose by up to 5.2 percent in early trading on Thursday. This increase reflects a cautiously optimistic market reaction to the bank’s recent financial results and strategic decisions.
The sale of CBAM to Oaktree represents a strategic move by Close Brothers to strengthen its capital position amidst ongoing financial and regulatory pressures.
This decision underscores the bank’s commitment to focusing on its core lending business while navigating the challenges presented by the FCA review.
