Shares in Close Brothers Group PLC (LSE:CBG) fell 4% on Wednesday after the specialist lender reported a dip in loan growth for the third quarter, prompting concern that its cautious outlook on lending could weigh on performance into the year-end.
The group’s loan book shrank by 0.9% in the three months to April and is now down 3.5% for the financial year to date. Management had previously guided for flat loan growth over the full year, but now expects to end July at around £9.8 billion, below the earlier £10.1 billion forecast.
Several factors contributed to the softer result. Repayments in the property lending division were higher than expected, activity in asset finance was subdued, and the premium finance business is facing stiff competition. In short, Close is finding it harder to grow its loan book in a tougher market.
That said, the company’s net interest margin, the difference between what it earns on lending and pays to borrow, held firm at an annualised 7.1%, slightly ahead of guidance. Bad debts also remain low, with impairment charges at just 0.9%, suggesting borrowers are still managing repayments well.
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On the plus side, Close’s capital position improved, with its core capital ratio rising to 14%. This was helped by slower loan growth, which reduces risk-weighted assets, and a one-off gain from the sale of its asset management business.
Winterflood, Close’s securities arm, returned to modest profitability, generating £0.4 million in the quarter after a pick-up in trading volumes in April.
While Peel Hunt sees scope for only a small downgrade to forecasts, the combination of sluggish lending and elevated legal costs tied to motor finance issues has kept sentiment cautious. With a price target of 327p, the broker maintains a 'hold' rating.
The shares fell 14.46p to 355.74p.