Interim Results
Close Brothers Group PLC
03 March 2008
Embargoed for release 7.00 am on Monday 3 March 2008
CLOSE BROTHERS GROUP plc
The specialist merchant banking group
announces
INTERIM RESULTS 2008
Financial Highlights
for the six months ended 31 January 2008 First half First half
2008 2007
Operating profit before tax £69.8m £97.8m -29%
Basic earnings per share 31.4p 46.8p -33%
*Operating profit before exceptional items,
goodwill impairment and tax £75.3m £76.7m -2%
*Adjusted earnings per share 35.1p 36.8p -5%
Profit attributable to shareholders £46.7m £68.9m -32%
Dividend per share 13.5p 12.0p +13%
Shareholders' funds £0.7bn £0.7bn
Total assets £5.4bn £4.8bn +12%
*Reported for the first time is operating profit before exceptional items,
goodwill impairment and tax and the corresponding adjusted earnings per share
to enable consistent comparison of underlying performance with prior periods.
Detailed disclosure of adjusting items is given in the notes to the financial
statements at note 3 on segmental information, note 4 on exceptional items and
note 5 on earnings per share.
Operational Highlights
for the six months ended 31 January 2008
Asset Management profit of £18.0 million. FUM down 2% on last year end to £8.9
billion.
Corporate Finance profit of £4.6 million reflecting a quieter period in the UK.
Securities profit of £23.8 million. Strong contribution from Mako, our new
associate.
Banking profit of £37.7 million. Loan book up 8% on last year to £2.0 billion.
Deposits up 20% on last year to £2.4 billion.
Colin Keogh, Chief Executive commenting on the results said:
"The first half performance has been resilient against a backdrop of challenging
market and trading conditions."
Enquiries to:
Colin Keogh Close Brothers Group plc 020 7426 4000
Justin Clark Close Brothers Group plc 020 7426 4000
Emma Burdett Maitland 020 7379 5151
Anthony Silverman Maitland 020 7379 5151
Webcast video interview with Colin Keogh, Chief Executive and Jonathan
Howell, Finance Director, Close Brothers Group plc at www.closebrothers.co.uk
and www.cantos.com
Chairman and Chief Executive's Statement
INTRODUCTION
The first six months of our 2008 financial year has been an eventful period. The
group received an unsolicited takeover approach and our markets have been
impacted by the effects of the credit crunch. In addition, equity markets have
been volatile against a background of a deteriorating economic picture in the
US, the UK and Europe. Against this backdrop we are pleased to report a sound
set of results with no exposure to sub prime mortgages or structured products
such as Structured Investment Vehicles ("SIVs") and Collateralised Debt
Obligations ("CDOs").
THE RECENT OFFER PERIOD
On 8 November 2007 we received an unsolicited approach for the group. Since that
time we have been in an Offer Period as defined by the Takeover Code. During
this period we received a number of other approaches and have entered into
detailed discussions with several parties. These discussions were held against
the background of steadily deteriorating credit and stock markets and, as a
result, no bidder has been able to deliver a firm, fully financed, offer for the
board to consider or which we could put to our shareholders. This has been an
unsettling period for our employees, clients and customers and after this
prolonged period of uncertainty, the board decided to terminate all such
discussions.
RESULTS
Operating profit before exceptional items, goodwill impairment and tax for the
six months ended 31 January 2008 was £75.3 million (2007: £76.7 million), down
2%. Operating profit before tax was £69.8 million (2007: £97.8 million), down
29%.
Exceptional expense items for the period were £5.5 million relating to advisers'
fees incurred during the offer period. In the six months ended 31 January 2007
exceptional revenue items were £21.1 million in the Asset Management division
relating to investment gains and private equity performance fees.
Adjusted earnings per share for the period was 35.1p (2007: 36.8p), down 5%.
Basic earnings per share was 31.4p (2007: 46.8p), down 33%.
The directors have declared an interim dividend per share of 13.5p, an increase
of 13%, in accordance with our policy of sustainable and progressive dividend
growth. This is payable on 16 April 2008 to shareholders on the register at the
close of business on 14 March 2008.
STRATEGY REVIEW
During the offer period, the board, together with its financial advisers,
undertook a review of the group's strategy to identify the best options for
delivering shareholder value.
In this review, five main options were evaluated: the sale of the whole group; a
break-up and separate sale of each of the divisions of the group; sale of one or
more of the divisions; a return of capital to shareholders based on an increase
in gearing; and finally, further development as an independent broadly based
financial services group.
The first option, the sale of the whole group, offered shareholders an
opportunity to crystallise significant value with the least execution risk. As a
result it was fully pursued but no firm, fully financed, offer was forthcoming.
The second, total break-up option was rejected because, in the judgement of the
board and its advisers, this option carried extremely high execution risk and
was unlikely to yield a better financial result for shareholders.
The board concluded that the third option, the sale of one or more of our
divisions, was equally unattractive. In light of current market volatility, it
was felt that it would not be possible to establish competitive tension in any
business auction or reach close to fundamental value of any one business. The
board also considered it unattractive to reduce the overall size of the group,
at a time of considerable financial uncertainty and volatility.
The group is well capitalised and soundly financed with a strong balance sheet.
This is an important strength which provides both resilience and flexibility in
the current environment of reduced liquidity in the credit markets. Nonetheless,
the board considered the option of gearing up the balance sheet and returning
cash to shareholders. The board was not happy to increase the fundamental risk
profile of the group at this juncture, nor did it wish to restrict the
availability of capital to fund growth in the bank or attractively priced
acquisition opportunities of the sort current market conditions are expected to
provide. However, it will continue to keep the group's capital structure under
review.
For all these reasons the board came to the clear conclusion that it was in the
best interests of all shareholders that Close Brothers should continue to grow
and develop as a broadly based financial services group. The board reviews its
group strategy and structure on a regular basis.
THE WAY FORWARD
In the light of the events of the last few months it is important to reaffirm
our strategy. This remains clear and consistent: actively to manage our
distinctive, diverse, specialist and soundly financed businesses with a view to
generating growth in profit, dividends and long term shareholder value. We
believe strongly in the Close Brothers business model which has delivered good
value to shareholders over the long term.
We have some specific actions planned to enhance profit growth. These will
include:
• More rigorous capital management.
• Being more proactive in shifting capital from one division to another in
response to growth opportunities.
• Adjusting the risk profile of the group in the light of future growth
opportunities.
• Increasing the number and size of acquisitions of businesses both in the UK
and internationally. We have both the ambition and resource to do this and,
as expected in current market conditions, we are seeing an increasing number
of acquisition opportunities at attractive valuations.
• Bringing a greater focus on costs at all levels.
We have always relied on the motivational effect of equity and for some time we
have been considering whether existing remuneration arrangements, particularly
for key management in our divisions, are effective to deliver the right business
performance and behaviour and have sufficient retention effect. Recent events
have highlighted the need to implement incentive arrangements which link reward
to future increases in business value, provide significant staff retention
incentives and provide "currency" to enable businesses to attract new employees.
We are well advanced in the design of new equity type incentive arrangements.
OVERALL BUSINESS REVIEW
Against an exceptionally challenging background in both the overall trading
environment and our specific circumstances we have produced a solid set of
results. Divisional profit is shown in the table below:
Operating profit before
exceptional items,
goodwill impairment and tax
--------------------------------
First First
half half
2008 2007
£ million £ million
Asset Management 18.0 21.6
Corporate Finance 4.6 7.4
Securities 23.8 20.4
Banking 37.7 37.4
Group (8.8) (10.1)
--------------------------------------------------------------------------------
75.3 76.7
--------------------------------------------------------------------------------
Our key performance indicators excluding exceptional items and goodwill
impairment remained broadly steady.
First First Full
half half year
2008 2007 2007
% % %
Operating margin 30 29 30
Expense/income ratio 66 67 67
Compensation ratio 44 45 43
Bad debt ratio 1.0 1.0 1.1
These results reflect a strong maiden contribution from Mako Global Derivatives
Executive LLP ("Mako") which joined the group in October 2007 and which has had
a small favourable impact on the operating margin and expense income ratio.
The compensation ratio in the period includes a commitment to "lock-in" payments
in certain areas of the business necessitated by uncertainty caused by the offer
period.
DIVISIONAL BUSINESS REVIEW
Funding and Liquidity
The group has maintained its policy of financing its customer loan book with
capital and reserves, longer term deposits and committed facilities. We will
continue to borrow long and lend short. The group has a broad spread of
committed facilities with terms up to four years and has over £350 million of
these facilities undrawn.
Customer deposits represent 121% of our loan book and have grown 20% over the
last twelve months to £2.44 billion, compared with £2.03 billion at 31 January
2007.
We continue to operate a risk averse approach to treasury operations. Our
treasury counterparties have, almost exclusively, a credit rating of AA or
better. We have no exposure to sub prime mortgages, SIVs, CDOs or other
structured products.
The group remains soundly financed in these times of reduced market liquidity.
Banking
Operating profit for the six months was slightly ahead of last year at £37.7
million (2007: £37.4 million) with operating margin steady at 38% (2007: 38%).
Our loan book at 31 January 2008 was £2,006 million, 8% up on last year. We have
seen no sign of deterioration in bad debt in the last six months and our bad
debt charge remains steady at 1%.
There has been some increase in demand for our specialist lending services and
products together with a reduction in competitive pressure in some areas as a
result of the credit crunch.
Looking forward, we anticipate that there will be opportunities for both organic
and acquired growth.
Asset Management
First half profit of £18.0 million represents a good result in what has been a
turbulent six months for asset managers. Our broad spread of asset classes
provides useful protection from stock market falls and the effect of declines in
the property market has been blunted by the aggressive programme of sales
undertaken last year. Nonetheless this has been a difficult period for raising
new funds and the £0.7 billion of new funds raised was offset by a similar
amount of redemptions, withdrawals and realisations. Overall market movements
led to a 2% decline in FUM since 31 July 2007 to £8.9 billion.
We will continue to push ahead with our growth plans in this division whilst
seeking to extract the benefits of the recent restructuring of the business. In
addition, we will be looking to add scale where operational gearing benefits can
be obtained.
Corporate Finance
Corporate Finance profit for the period was £4.6 million (2007: £7.4 million)
reflecting a quieter period in the UK. Our French operation had an exceptionally
strong six months and this was backed by a solid performance from Germany, with
the UK more directly impacted by the market volatility and the uncertainty
created by the offer period. M&A continued to dominate the mix, although looking
forward we are seeing signs of an increase in restructuring activity.
This business has an excellent European mid-market position and is well
diversified both by activity and geography. Our specialist restructuring and
debt advisory business is well positioned to take advantage of the current
market slowdown. We continue to seek to increase our corporate client base in
all our geographies and to move towards a more unified business with a single,
strong European franchise. With this objective we have increased our equity
investment in our Spanish associate from 20% to 45% and in April 2008 we expect
to acquire the remaining 17% of our French subsidiary.
Securities
The overall outcome for this division was satisfactory at £23.8 million (2007:
£20.4 million). Weaker trading performances from Winterflood Securities
("Winterflood") and Close Brothers Seydler AG were compensated for by a strong
contribution from our new associate, Mako, in which we invested last October.
Bargain numbers at Winterflood were slightly up compared to last year but
volatile trading conditions in falling markets have led to a significant
reduction in profit per bargain.
The securities business remains competitive. Generating growth in our biggest
securities business, Winterflood, has been a challenge against a backdrop of
margin pressure. However Winterflood has a strong core business and there are
opportunities to diversify its franchise into other areas.
In December 2007 we launched Close Brothers Seydler Limited, a stock broking
company specialising in marketing small and mid-cap German securities to
London-based institutional investors. This business has got off to a good start
and we will continue to broaden our exposure in this interesting area.
BOARD CHANGES
Peter Buckley retired from the board on 31 December 2007 and with effect from 1
January 2008 Jamie Cayzer-Colvin joined the board. Peter Buckley was appointed
an alternate director to Jamie Cayzer-Colvin due to the latter convalescing
after an operation. It is expected that Jamie Cayzer-Colvin will be able to take
up his duties later this year.
We are pleased to welcome Jonathan Howell to the board as finance director. He
joined us on 4 February 2008 from the London Stock Exchange Group plc.
OUTLOOK
The first half performance has been resilient against a backdrop of challenging
market and trading conditions.
Ongoing difficult market conditions are likely to continue to affect business in
our Securities and Corporate Finance divisions. We take comfort from the broad
spread of our asset management activities although we expect raising new funds
and attracting new assets in this climate to be difficult. We expect a solid
second half performance from our banking businesses.
Overall, we expect the current trading performance to continue into the second
half.
Condensed Income Statement
for the six months ended 31 January 2008
Six months ended Year ended
31 January 31 July
----------------------- -----------
2008 2007 2007
Unaudited Unaudited Audited
Note £ million £ million £ million
Interest and similar income 180.2 149.2 313.0
Interest expense and similar charges 107.4 76.8 165.6
--------------------------------------------------------------------------------
Net interest income 72.8 72.4 147.4
--------------------------------------------------------------------------------
Fees and commissions income 140.8 159.4 360.8
Fees and commissions expense (21.8) (24.5) (54.1)
Gains less losses arising from
dealing in securities 45.1 56.1 115.5
Share of profit of associates 5.1 0.2 0.9
Other operating income 11.0 20.4 36.3
--------------------------------------------------------------------------------
Other income 180.2 211.6 459.4
--------------------------------------------------------------------------------
Operating income before exceptional
items 253.0 262.9 585.7
Exceptional income 4 - 21.1 21.1
--------------------------------------------------------------------------------
Operating income 253.0 284.0 606.8
--------------------------------------------------------------------------------
Administrative expenses 167.2 171.0 376.3
Impairment losses on loans and
advances 9.6 9.1 21.5
Depreciation and amortisation 6.4 6.1 15.1
Impairment losses on goodwill - - 3.7
--------------------------------------------------------------------------------
Total operating expenses before
exceptional items and goodwill
impairment 177.7 186.2 412.9
Exceptional expenses 4 5.5 - -
Impairment losses on goodwill - - 3.7
--------------------------------------------------------------------------------
Total operating expenses 183.2 186.2 416.6
--------------------------------------------------------------------------------
Operating profit before exceptional
items, goodwill impairment and tax 75.3 76.7 172.8
Exceptional items 4 (5.5) 21.1 21.1
Impairment losses on goodwill - - (3.7)
--------------------------------------------------------------------------------
Operating profit before tax 69.8 97.8 190.2
Tax 21.2 27.1 53.5
--------------------------------------------------------------------------------
Profit after tax 48.6 70.7 136.7
Profit attributable to minority interests 1.9 1.8 3.8
--------------------------------------------------------------------------------
Profit attributable to the
shareholders of the company 46.7 68.9 132.9
--------------------------------------------------------------------------------
Basic earnings per share 5 31.4p 46.8p 90.4p
Diluted earnings per share 5 31.1p 46.7p 89.8p
Ordinary dividend per share 6 13.5p 12.0p 37.0p
Special dividend per share 6 - - 25.0p
All income and profits are in respect of continuing operations.
Condensed Balance Sheet
at 31 January 2008
31 January 31 July
--------------------- ---------
2008 2007 2007
Unaudited Unaudited Audited
Note £ million £ million £ million
Assets
Cash and balances at central banks 1.8 1.4 1.6
Settlement accounts 392.4 551.0 624.9
Loans and advances to customers 2,005.8 1,863.2 1,962.5
Loans and advances to banks 447.3 736.6 577.9
Debt securities and equity shares -
long trading positions 85.0 100.5 116.7
Financial instruments classified as
available for sale 790.1 502.7 775.2
Certificates of deposit classified
as loans and receivables 1,107.6 551.5 823.6
Equity shares valued at fair value
through profit or loss 16.9 20.4 16.6
Floating rate notes held to maturity 30.8 25.8 27.9
Loans to money brokers against
stock advanced 132.2 130.1 114.3
Other receivables 55.1 77.8 56.4
Interests in associates 65.8 1.1 1.5
Property, plant and equipment 35.3 43.0 37.4
Intangible assets - goodwill 113.3 113.9 113.2
Intangible assets - other 6.7 9.0 7.3
Deferred tax assets 34.2 27.0 27.8
Prepayments and accrued income 89.1 77.8 82.4
Derivative financial instruments 6.1 5.7 7.7
--------------------------------------------------------------------------------
Total assets 5,415.5 4,838.5 5,374.9
--------------------------------------------------------------------------------
Liabilities
Settlement accounts 379.1 471.3 484.5
Deposits by customers 2,435.4 2,027.2 2,302.7
Deposits by banks 213.0 141.8 160.6
Debt securities and equity shares -
short trading positions 43.7 70.1 67.0
Loans and overdrafts from banks 973.9 371.0 457.8
Promissory notes and other debt
securities in issue 18.6 347.8 353.0
Loans from money brokers against
stock advanced 98.1 152.5 185.0
Non-recourse borrowings 167.0 150.0 150.0
Subordinated loan capital 75.0 75.0 75.0
Other liabilities 141.4 154.0 192.4
Current tax liabilities 14.4 27.5 29.3
Accruals and deferred income 126.2 124.1 145.0
Derivative financial instruments 8.8 24.6 20.0
--------------------------------------------------------------------------------
Total liabilities 4,694.6 4,136.9 4,622.3
--------------------------------------------------------------------------------
Equity
Called up share capital 37.3 36.8 36.8
Share premium account 272.9 263.0 264.6
Profit and loss account 411.9 386.3 432.4
ESOP trust reserve (22.9) (10.7) (17.1)
Other reserves 13.2 18.0 28.6
Minority interests 8.5 8.2 7.3
--------------------------------------------------------------------------------
Total equity 7 720.9 701.6 752.6
--------------------------------------------------------------------------------
Total liabilities and equity 5,415.5 4,838.5 5,374.9
--------------------------------------------------------------------------------
Condensed Statement of Recognised Income and Expense
for the six months ended 31 January 2008
Six months ended Year ended
31 January 31 July
--------------------- ----------
2008 2007 2007
Unaudited Unaudited Audited
£ million £ million £ million
Profit after tax 48.6 70.7 136.7
--------------------------------------------------------------------------------
Currency translation differences 2.3 (0.6) (0.7)
Cash flow hedging (4.4) (0.4) 1.4
Tax allowance on share option and
deferred share awards 2.2 0.9 0.4
Movements on available for sale
investments (12.5) (1.0) 4.8
--------------------------------------------------------------------------------
(12.4) (1.1) 5.9
--------------------------------------------------------------------------------
Total recognised income and expense 36.2 69.6 142.6
--------------------------------------------------------------------------------
Attributable to minority interests 1.9 1.8 3.8
Attributable to shareholders 34.3 67.8 138.8
--------------------------------------------------------------------------------
36.2 69.6 142.6
--------------------------------------------------------------------------------
Condensed Cash Flow Statement
for the six months ended 31 January 2008
Six months ended Year ended
31 January 31 July
--------------------- -----------
2008 2007 2007
Unaudited Unaudited Audited
Note £ million £ million £ million
Net cash inflow from operating
activities 8(a) 329.3 176.5 572.9
--------------------------------------------------------------------------------
Net cash outflow from investing
activities:
Dividends paid to minority interests (0.5) (0.5) (1.9)
Purchase of assets let under
operating leases (2.5) (4.1) (5.7)
Purchase of property, plant and
equipment (3.8) (5.9) (9.6)
Sale of property, plant and
equipment 4.2 2.3 6.9
Purchase of intangible assets (1.0) (0.5) (1.8)
Purchase of equity shares held for
investment (20.7) (8.9) (25.1)
Sale of equity shares held for
investment 6.4 26.8 45.3
Minority interests acquired for cash (0.5) (4.7) (10.2)
Purchase of subsidiaries and
associates 8(b) (65.3) (9.4) (12.4)
--------------------------------------------------------------------------------
(83.7) (4.9) (14.5)
--------------------------------------------------------------------------------
Net cash inflow before financing 245.6 171.6 558.4
Financing activities:
Issue of ordinary share capital
including premium 8.8 3.4 5.0
Equity dividends paid (72.8) (31.9) (49.3)
Interest paid on subordinated loan
capital (2.8) (2.8) (5.6)
--------------------------------------------------------------------------------
Net increase in cash 178.8 140.3 508.5
--------------------------------------------------------------------------------
Notes to the Financial Statements
This Interim Report for Close Brothers Group plc for the six months ended 31
January 2008 ("Interim Report 2008") was approved by its directors on 3 March
2008.
1. Basis of preparation and accounting policies
The interim financial information has been prepared in accordance with the
Disclosure and Transparency Rules of the Financial Services Authority and in
accordance with International Accounting Standard ("IAS") 34 - "Interim
Financial Reporting". The condensed financial statements are consolidated
incorporating the individual financial statements of Close Brothers Group plc
and the entities it controls, using the acquisition method of accounting.
The accounting policies used are consistent with those set out in the Annual
Report 2007. In addition an accounting policy to define exceptional items will
be included in the Annual Report 2008 as follows:
"Items of income and expense that are material by size and/or nature and are
non-recurring are classified as exceptional items on the face of the income
statement. The separate reporting of these items helps give an indication of the
group's underlying performance."
The preparation of the Interim Report requires management to make estimates and
assumptions that affect the reported income and expense, assets and liabilities
and disclosure of contingencies at the date of the Interim Report. Although
these estimates and assumptions are based on management's best judgement at that
date, actual results may differ from these estimates.
The Interim Report is unaudited and does not constitute statutory accounts
within the meaning of Section 240 of the Companies Act 1985. However, the
information has been reviewed by the company's auditors, Deloitte & Touche LLP,
and their report appears at the end of this report.
The financial information for the year ended 31 July 2007 contained within this
Interim Report does not constitute statutory accounts as defined in Section 240
of the Companies Act 1985. A copy of those statutory accounts has been reported
on by Deloitte & Touche LLP and delivered to the Registrar of Companies. The
report of the auditors on those statutory accounts was unqualified and did not
contain a statement under Section 237(2) or (3) of the Companies Act 1985.
2. Related party transactions
Transactions with key management during the period are consistent with the
disclosure in note 31 of the Annual Report 2007.
3. Segmental information
For the six months ended 31 January 2008
Asset Corporate
Management Finance Securities Banking Group Total
---------- --------- ---------- ------- --------- ---------
£ million £ million £ million £ million £ million £ million
Operating income
before exceptionals 69.0 26.2 55.8 99.8 2.2 253.0
Operating expenses
before exceptionals 51.0 21.6 32.0 62.1 11.0 177.7
--------------------------------------------------------------------------------
Operating profit
before exceptional
items, goodwill
impairment and tax 18.0 4.6 23.8 37.7 (8.8) 75.3
Exceptional items:
Advisers' fees - - - - (5.5) (5.5)
--------------------------------------------------------------------------------
Operating profit
before tax 18.0 4.6 23.8 37.7 (14.3) 69.8
--------------------------------------------------------------------------------
For the six months ended 31 January 2008, the operating income before
exceptionals and the operating profit before tax of the Securities division
included £4.5 million relating to its share of profit before tax of associates.
For the six months ended 31 January 2007
Asset Corporate
Management Finance Securities Banking Group Total
---------- --------- ---------- -------- --------- ---------
£ million £ million £ million £ million £ million £ million
Operating income
before exceptionals 74.6 27.8 60.4 97.8 2.3 262.9
Operating expenses
before exceptionals 53.0 20.4 40.0 60.4 12.4 186.2
--------------------------------------------------------------------------------
Operating profit
before exceptional
items, goodwill
impairment and tax 21.6 7.4 20.4 37.4 (10.1) 76.7
Exceptional items:
Investment gains
and private equity
performance fees 21.1 - - - - 21.1
--------------------------------------------------------------------------------
Operating profit
before tax 42.7 7.4 20.4 37.4 (10.1) 97.8
--------------------------------------------------------------------------------
For the six months ended 31 January 2007, the operating profit before tax of the
Asset Management division included investment gains and private equity
performance fees of £26 million of which £21.1 million are treated as
exceptional within the definition of the accounting policy for exceptional items
referred to in note 1 of this Interim Report.
For the year ended 31 July 2007
Asset Corporate
Management Finance Securities Banking Group Total
---------- --------- ---------- --------- --------- ---------
£ million £ million £ million £ million £ million £ million
Operating income
before exceptionals 177.5 77.2 128.0 197.8 5.2 585.7
Operating expenses
before exceptionals 120.9 54.7 83.9 126.1 27.3 412.9
--------------------------------------------------------------------------------
Operating profit
before exceptional
items, goodwill
impairment and tax 56.6 22.5 44.1 71.7 (22.1) 172.8
Exceptional items:
Investment gains
and private equity
performance fees 21.1 - - - - 21.1
Goodwill impairment - - - - (3.7) (3.7)
--------------------------------------------------------------------------------
Operating profit
before tax 77.7 22.5 44.1 71.7 (25.8) 190.2
--------------------------------------------------------------------------------
For the year ended 31 July 2007, the operating profit before tax of the Asset
Management division included investment gains and private equity performance
fees of £43 million of which £21.1 million are treated as exceptional within the
definition of the accounting policy for exceptional items referred to in note 1
of this Interim Report.
Substantially all of the group's activities and revenue are located within the
British Isles and the value of transactions between segments was minimal.
4. Exceptional items
Six months ended Year ended
31 January 31 July
--------------------- -----------
2008 2007 2007
Unaudited Unaudited Audited
£ million £ million £ million
Exceptional income
Investment gains and private equity
performance fees - 21.1 21.1
Exceptional expenses
Advisers' fees in respect of
potential offers for the group 5.5 - -
--------------------------------------------------------------------------------
Total exceptional items (5.5) 21.1 21.1
--------------------------------------------------------------------------------
5. Earnings per share
Earnings per share is presented on three bases: basic earnings per share;
diluted earnings per share; and adjusted basic earnings per share. Basic
earnings per share is in respect of all activities and diluted earnings per
share takes into account the dilution effects which would arise on the
conversion or vesting of share options and share awards in issue during the
period. Adjusted basic earnings per share excludes exceptional items and
impairment losses on goodwill to enable comparison of the underlying earnings of
the business with prior periods.
Six months ended Year ended
31 January 31 July
---------------------- ---------
2008 2007 2007
Unaudited Unaudited Audited
Basic earnings per share 31.4p 46.8p 90.4p
Diluted earnings per share 31.1p 46.7p 89.8p
Adjusted basic earnings per share 35.1p 36.8p 82.8p
£ million £ million £ million
Profit attributable to shareholders 46.7 68.9 132.9
Adjustments:
Exceptional items 5.5 (21.1) (21.1)
Tax effect of exceptional items - 6.3 6.3
Impairment losses on goodwill - - 3.7
--------------------------------------------------------------------------------
Adjusted profit attributable to
shareholders 52.2 54.1 121.8
--------------------------------------------------------------------------------
Weighted average number of shares (million) 148.9 147.1 147.1
Effect of dilutive share options and
awards (million) 1.2 0.4 0.9
--------------------------------------------------------------------------------
Diluted weighted average number of
shares (million) 150.1 147.5 148.0
--------------------------------------------------------------------------------
6. Dividends
Six months ended Year ended
31 January 31 July
---------------------- ----------
2008 2007 2007
Unaudited Unaudited Audited
£ million £ million £ million
Interim dividend for 2007 paid April
2007: 12p per ordinary share - - 17.4
Final dividend for 2007 paid
November 2007: 25p (2006: 22p) per 36.4 31.9 31.9
ordinary share
Special dividend for 2007 paid
November 2007: 25p 36.4 - -
--------------------------------------------------------------------------------
Total dividends 72.8 31.9 49.3
--------------------------------------------------------------------------------
An interim dividend relating to the six months ended 31 January 2008 of 13.5p,
amounting to an estimated £19.7 million is proposed. This interim dividend,
which is due to be paid in April 2008, is not reflected in this financial
information.
7. Condensed statement of changes in equity
Six months ended Year ended
31 January 31 July
---------------------- -----------
2008 2007 2007
Unaudited Unaudited Audited
£ million £ million £ million
Called up share capital
Opening balance 36.8 36.6 36.6
Exercise of options 0.5 0.2 0.2
--------------------------------------------------------------------------------
Closing balance 37.3 36.8 36.8
--------------------------------------------------------------------------------
Share premium account
Opening balance 264.6 259.8 259.8
Exercise of options 8.3 3.2 4.8
--------------------------------------------------------------------------------
Closing balance 272.9 263.0 264.6
--------------------------------------------------------------------------------
Profit and loss account
Opening balance 432.4 346.7 346.7
Profit attributable to shareholders 46.7 68.9 132.9
Dividends paid (72.8) (31.9) (49.3)
Transfer from share-based awards
reserve 3.4 1.7 1.7
Other movements 2.2 0.9 0.4
--------------------------------------------------------------------------------
Closing balance 411.9 386.3 432.4
--------------------------------------------------------------------------------
ESOP trust reserve
Opening balance (17.1) (8.3) (8.3)
Shares purchased (5.8) (2.6) (9.0)
Shares released - 0.2 0.2
--------------------------------------------------------------------------------
Closing balance (22.9) (10.7) (17.1)
--------------------------------------------------------------------------------
Other reserves:
Share-based awards reserve
Opening balance 14.8 11.8 11.8
Charge to income statement 2.6 2.0 4.1
Transfer to profit and loss account (3.4) (1.7) (1.7)
Movement relating to deferred share
awards - (0.4) 0.6
--------------------------------------------------------------------------------
Closing balance 14.0 11.7 14.8
--------------------------------------------------------------------------------
Exchange movements reserve
Opening balance 0.2 0.9 0.9
Currency translation differences 2.3 (0.6) (0.7)
--------------------------------------------------------------------------------
Closing balance 2.5 0.3 0.2
--------------------------------------------------------------------------------
Cash flow hedging reserve
Opening balance 1.5 0.1 0.1
Movement on derivatives (4.4) (0.4) 1.4
--------------------------------------------------------------------------------
Closing balance (2.9) (0.3) 1.5
--------------------------------------------------------------------------------
Available for sale reserve
Opening balance 12.1 7.3 7.3
Movement on available for sale
investments (12.5) (1.0) 4.8
--------------------------------------------------------------------------------
Closing balance (0.4) 6.3 12.1
--------------------------------------------------------------------------------
Total other reserves 13.2 18.0 28.6
--------------------------------------------------------------------------------
Minority interests
Opening balance 7.3 7.4 7.4
Charge to income statement 1.9 1.8 3.8
Other movements (0.7) (1.0) (3.9)
--------------------------------------------------------------------------------
Closing balance 8.5 8.2 7.3
--------------------------------------------------------------------------------
Total equity 720.9 701.6 752.6
--------------------------------------------------------------------------------
8. Condensed cash flow statement
Six months ended Year ended
31 January 31 July
---------------------- ----------
2008 2007 2007
Unaudited Unaudited Audited
£ million £ million £ million
(a)Reconciliation of operating profit on
ordinary activities before tax to net
cash inflow from operating activities
Operating profit on ordinary activities
before tax 69.8 97.8 190.2
(Increase)/decrease in:
Interest receivable and prepaid expenses (6.7) (14.7) (19.3)
Net settlement accounts 127.1 (25.1) (85.8)
Net debt securities and equity shares
held for trading 8.5 10.1 (9.3)
Increase/(decrease) in interest payable
and accrued expenses (18.8) (12.7) 6.6
Depreciation, amortisation and goodwill
impairment losses 6.4 6.1 18.8
--------------------------------------------------------------------------------
Net cash inflow from trading activities 186.3 61.5 101.2
(Increase)/decrease in:
Debt securities held for liquidity 6.0 11.0 3.0
Loans and advances to customers (43.3) (1.2) (100.4)
Loans and advances to banks not
repayable on demand 4.6 0.5 (3.2)
Other assets less other liabilities (158.4) (32.1) 83.4
Increase/(decrease) in:
Deposits by banks 52.4 (26.6) (7.8)
Customer accounts 132.7 184.1 459.6
Bank loans and overdrafts 516.1 7.7 94.6
Non-recourse borrowings 17.0 - -
Promissory notes and other debt
securities in issue (350.0) (10.2) (5.0)
Tax paid (34.1) (18.2) (52.5)
--------------------------------------------------------------------------------
Net cash inflow from operating activities 329.3 176.5 572.9
--------------------------------------------------------------------------------
(b) Analysis of net cash outflow in respect
of the purchase of subsidiaries and associates
Cash consideration in respect of current year
purchases (61.9) (4.9) (8.8)
Loan stock redemptions and deferred consideration
paid in respect of prior year purchases (3.4) (4.5) (6.1)
Net movement in cash balances - - 2.5
--------------------------------------------------------------------------------
(65.3) (9.4) (12.4)
--------------------------------------------------------------------------------
(c) Analysis of changes in financing
Share capital (including premium) and subordinated
loan capital:
Opening balance 376.4 371.4 371.4
Shares issued for cash 8.8 3.4 5.0
--------------------------------------------------------------------------------
Closing balance 385.2 374.8 376.4
--------------------------------------------------------------------------------
(d) Analysis of cash and cash equivalent
balances
Cash and balances at central banks 1.8 1.4 1.6
Loans and advances to banks repayable on
demand 446.9 735.3 573.0
Floating rate notes classified as
available for sale 777.2 498.3 756.5
Certificates of deposit classified as
loans and receivables 1,107.6 551.5 823.6
--------------------------------------------------------------------------------
2,333.5 1,786.5 2,154.7
--------------------------------------------------------------------------------
Principal Risks
The achievement of the group's strategic objectives is facilitated by its risk
management and internal control systems which are designed to identify, monitor,
measure and manage the principal financial and non-financial risks facing the
group. These are set out in the Annual Report 2007 and on the group's website at
www.closebrothers.co.uk/RiskManagement.asp.
The principal risks and uncertainties foreseen will include the following in the
second six months of the year.
The board is committed to re-establishing confidence in a stable independent
future for the group. In particular the group will continue to manage the
potential impact of recent uncertainty over its future ownership on employees,
clients, ongoing operations and new business opportunities.
Since the onset of reduced liquidity in the credit markets in August 2007, many
of the markets in which the group operates have experienced difficult conditions
and volatility. The group intends to maintain its well capitalised and soundly
financed balance sheet which should provide resilience in these difficult
markets.
Directors' Responsibility Statement
The directors confirm that this condensed set of financial statements has been
prepared in accordance with IAS 34 as adopted by the European Union, and that
the Interim Report 2008 includes a fair review of the information required by
sections 4.2.7 and 4.2.8 of the Disclosure and Transparency Rules.
The directors of Close Brothers Group plc are listed in the Annual Report 2007
with the exception of the following changes in the period: On 28 September 2007
Peter Winkworth stepped down from the board, on 1 November 2007 James Williams
retired from the board, on 31 December 2007 Peter Buckley retired from the board
although on 9 January 2008 he was appointed as an alternate director to Jamie
Cayzer-Colvin who was appointed to the board on 1 January 2008, and on 4
February 2008 Jonathan Howell was appointed to the board. A list of current
directors is maintained and is available for inspection at the registered office
of the company located at 10 Crown Place, London EC2A 4FT.
By order of the board
Independent Review Report
Independent Review Report to Close Brothers Group plc
We have been engaged by the company to review the condensed set of financial
statements in the Interim Report 2008 for the six months ended 31 January 2008
which comprises the condensed income statement, the condensed balance sheet, the
condensed statement of recognised income and expense, the condensed cash flow
statement and related notes 1 to 8. We have read the other information contained
in the Interim Report 2008 and considered whether it contains any apparent
misstatements or material inconsistencies with the information in the condensed
set of financial statements.
This report is made solely to the company in accordance with International
Standard on Review Engagements (UK and Ireland) 2410 issued by the Auditing
Practices Board. Our work has been undertaken so that we might state to the
company those matters we are required to state to them in an independent review
report and for no other purpose. To the fullest extent permitted by law, we do
not accept or assume responsibility to anyone other than the company, for our
review work, for this report, or for the conclusions we have formed.
Directors' responsibilities
The Interim Report 2008 is the responsibility of, and has been approved by, the
directors. The directors are responsible for preparing the Interim Report 2008
in accordance with the Disclosure and Transparency Rules of the United Kingdom's
Financial Services Authority.
As disclosed in note 1, the annual financial statements of the group are
prepared in accordance with International Financial Reporting Standards as
adopted by the European Union. The condensed set of financial statements
included in this Interim Report 2008 has been prepared in accordance with IAS
34, "Interim Financial Reporting", as adopted by the European Union.
Our responsibility
Our responsibility is to express to the company a conclusion on the condensed
set of financial statements in the Interim Report 2008 based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410, "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the Auditing
Practices Board for use in the United Kingdom. A review of interim financial
information consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK and Ireland) and
consequently does not enable us to obtain assurance that we would become aware
of all significant matters that might be identified in an audit. Accordingly, we
do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe
that the condensed set of financial statements in the Interim Report 2008 for
the six months ended 31 January 2008 is not prepared, in all material respects,
in accordance with IAS 34 as adopted by the European Union and the Disclosure
and Transparency Rules of the United Kingdom's Financial Services Authority.
Deloitte & Touche LLP
Chartered Accountants and Registered Auditor
London, UK
3 March 2008
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