Litigation arm weighs down Close Brothers

The merchant banking group Close Brothers has rattled its investors by warning that it expects to take a hit of as much as £183 million from its troubled litigation funding business.

Shares in the FTSE 250-listed group fell 110½p, or 10.5 per cent, to 937½p yesterday after it disclosed mounting provisions at its Novitas Loans arm, which is in the midst of being wound down.

There was also bad news from the company’s Winterflood Securities division, a leading market-maker in UK equities that has been hit by subdued trading activity by clients in recent months.

The news comes as a blow to Adrian Sainsbury, who took charge of the London-based lender in 2020 after the its veteran chief executive, Preben Prebensen, stood down after more than a decade at the helm.

Close Brothers can trace its roots back to 1878, when its three founding siblings started the business to offer farm mortgages in Iowa. The modern group has a banking division focused on specialist lending to small and medium-sized businesses and an asset management arm, as well as Winterflood.

The Novitas unit is a provider of loans to fund legal proceedings that was acquired by Close Brothers in 2017. The lender’s foray into legal services has proved short-lived, however, with the group deciding to withdraw from the market in July 2021 and put Novitas into run-off.

However, the potential losses associated with the unit continue to rise.

Close Brothers said yesterday that it had set aside a further £24.8 million for possible impairments in the Novitas loan book in the five months to the end of December.

It also anticipates another provision of as much as £90 million being booked in its forthcoming half-year results. All of this means that the total net provision for Novitas could reach £183 million. Ian Gordon, an analyst at Investec, the stockbroker, said it was “another dreadful update on the Novatis loan portfolio”.

Close also disclosed that Winterflood generated operating profits of only £1.7 million during the five-month period. Rae Maile of Panmure Gordon, the investment bank, said this was “far off the pace” expected by the City.

Sainsbury maintained that Close Brothers had put in a “resilient” performance. “Our financial strength leaves us well placed to absorb the anticipated additional provisions and to continue to deliver on our long-term track record of disciplined growth and returns to shareholders,” he said.

Original article here: https://www.thetimes.co.uk/article/litigation-arm-weighs-down-close-brothers-h97vx5kvt

Author: Ben Martin, Banking Editor, The Times

Rae Maile

Managing Director, Research Analyst, Financials & Tobacco