By Charlie Conchie
Merchant banking group Close Brothers is hoping to win back the confidence of the City this week after a bruising few months in which legal lending division Novitas has delivered a hefty blow to profits.
The FTSE 250 firm will issue a trading update to the City on Wednesday and is looking to soothe investor jitters after its profits cratered nearly 90 per cent at its half year update in March.
The firm said in March it had set aside £100m to cover bad loans from Novitas, dragging its adjusted operating profits down to £12.6m in the six months ending January 2023.
Close Brothers acquired Novitas in 2017 but ceased lending from the business in 2021, with the division now in run-off.
Analysts are expecting adjusted operating profits for the full year to come in at £115m, less than half of the £235m racked up last year, according to a company-compiled consensus.
Analysts at Hargreaves Lansdown said there was now a “lot riding on this trading statement” as the firm looks to win back the faith of investors.
“The group has been testing investors’ patience in recent quarters with an increasingly large write-down being incurred against their Novitas lending division, now in run-off,” said Steve Clayton, head of equity funds at Hargreaves Lansdown.
“At the same time, Winterflood, their market-making business has been struggling to cope with a downturn in trading volumes.”
The firm needs to “reassure [investors] that they have a better grip on both of these issues” and that trading in the rest of its banking business and asset management division are “holding up robustly,” Clayton added.
Shares in the firm are down nearly 15 per cent in the year to date.
Investors were spooked in January when bosses first revealed the scale of provisions it would have to set aside for Novitas loans, with shares falling 13 per cent on the day of the update.
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