Rating rationale

Assessment
* Our ratings for Close Brothers Limited (CBL) reflect its strong profitability, solid capitalisation, conservative funding base and generally good asset quality. 
* Pre-tax profits of the parent, Close Brothers Group plc (CBG), were also good, despite falling by 38% in 2000/01 largely due to sharply lower profits on the small/mid-cap market-making business. In our opinion, they are likely to fall further in the current financial year as market-making volumes have only slowly started to pick up and the corporate finance department has witnessed lower deal flows. However, the group has a high element of variable costs in its cost base, which will help to cushion the impact to some extent.
* CBL's margins are high and profits have been increasing due to growth in the balance sheet. Management's strategy has been to avoid competition with larger banks and instead to grow or acquire niche businesses. This strategy provides strong margins and a good return on equity.
* CBL's lending policy is conservative, with almost all loans secured against assets or receivables and the average loan size small. Recent asset quality problems in some parts of the business, notably second hand car financing and the loan portfolio inherited with the acquisition of Warrior, a provider of finance (mostly cars) to the Armed Forces, appear to have turned the corner.
* Loan loss provisions rose by 43% in 2000/01 (the loan book by 33%), but are comfortably covered by the strong margins earned. Non-performing loans are at an acceptable level and appear adequately reserved.

 

Assessment contd.