Close Brothers’ half-year: resilient core, but FCA motor finance overhang keeps results in the red
Close Brothers Group has posted its Half Year Results to 31 January 2026. The numbers show sturdy underlying banking economics and tighter cost control, but the continuing impact of the FCA’s proposed redress for historical motor finance commission keeps the statutory line in loss territory.
Management is doubling down on simplification and cost reduction, bringing forward savings and signalling a clear path back to double‑digit returns by the 2028 financial year. In the meantime, dividends remain on hold pending FCA clarity.
Headline numbers you need to know
| Metric | H1 2026 | H1 2025 | Comment |
|---|---|---|---|
| Statutory operating loss before tax | £65.5 million | £102.2 million | Loss narrowed, still driven by motor finance provision |
| Adjusted operating profit | £65.2 million | £80.5 million | Down 19% |
| Net interest margin (NIM) | 7.1% | 7.3% | NIM expected to be slightly below 7% for FY26 |
| Bad debt ratio | 0.8% | 1.0% | Guided to remain below long‑term 1.2% |
| Expense/income ratio | 68% | 63% | Lower income pushed ratio higher |
| Loan book | £9.2 billion | £9.5 billion (31 Jul 2025) | Down 2% reported, 1% underlying |
| CET1 capital ratio | 14.3% | 13.8% (31 Jul 2025) | Headroom c.460bps above requirement |
| Adjusted basic EPS (cont.) | 27.1p | 33.8p | Lower with softer income |
| Basic EPS (cont.) | (51.0)p | (81.8)p | Statutory loss narrows |
| NAV per share | £9.8 | £10.3 (31 Jul 2025) | Down with provisions and sales |
| Ordinary dividend | Not declared | Not declared | Review after FCA outcome |
Quick jargon buster: NIM is the margin a lender earns on loans after funding costs. CET1 is the core equity capital ratio regulators focus on. RoTE is return on average tangible equity.
What drove the result
Provision for historical motor finance remains the swing factor
Close Brothers increased its motor finance commissions provision by £135.0 million in October, taking the total charge to date to £300.0 million. The balance sheet provision stood at £293.6 million at 31 January 2026 after some utilisation and discount unwind. Management still sees a wide range of potential outcomes until the FCA publishes final rules, expected in late March 2026.
On an adjusted basis, the bank earned £65.2 million, supported by a still‑healthy 7.1% NIM and lower impairments, but the statutory line remained negative because of the provision.
Income softer, credit quality solid
- Adjusted operating income fell 6% to £326.6 million, reflecting a smaller average loan book, especially in Property, and the repositioning of Premium Finance personal lines.
- Adjusted impairment losses improved to £39.5 million, taking the bad debt ratio down to 0.8%. An updated IFRS 9 model in Motor Finance helped, partly offset by higher individually assessed provisions in Property.
- Adjusted operating expenses were broadly flat at £221.9 million, which is decent cost discipline in an inflationary backdrop.
Divisional performance in brief
Commercial: steady margins, lower volumes
- Adjusted operating profit £40.7 million, down 19%.
- NIM 6.5%, bad debt ratio 0.7%.
- Loan book £4.63 billion, down 2%, with Invoice Finance utilisation lower and Novitas in wind‑down. Asset Finance grew 2%.
Retail: motor finance growing again, provision dominates statutory result
- Adjusted operating profit £17.5 million, up 4% as impairments fell to £8.2 million.
- Statutory operating loss £118.1 million due to the £135.0 million provision.
- NIM 8.3%; bad debt ratio down to 0.6%.
- Loan book £2.85 billion, broadly flat. Motor Finance up 4% to £2.08 billion, including record new business in Ireland. Premium Finance down 13% to £771.0 million after planned pruning of personal lines.
Property: demand subdued, credit costs higher on a handful of sites
- Adjusted operating profit £29.8 million, down 29%.
- NIM 6.8%; bad debt ratio 1.6% after increased individual provisions on a small number of developments.
- Loan book £1.76 billion, down 9% as repayments outpaced drawdowns.
Balance sheet, liquidity and capital: the good news
The CET1 ratio rose to 14.3% from 13.8% at July, benefiting from the sale of Winterflood, lower risk‑weighted assets and retained profits elsewhere, even after the additional provision. Headroom to applicable CET1 requirements is around 460bps. The leverage ratio improved to 13.5%.
Funding remains conservative. Customer deposits were £7.87 billion after planned optimisation, with the average maturity of funding allocated to the book at 18 months versus average loan book tenor of 15 months. Liquidity is strong, with a 12‑month average LCR of 1,141% and NSFR of 148.6%.
After the period end, Close Brothers issued £250 million of 6.125% Tier 2 notes due 2036 and tendered £191.4 million of 2031 Tier 2s, which should tidy up the stack and add flexibility.
Cost actions accelerated: why that matters
Management has brought forward savings and given sharper guidance:
- Annualised savings of about £25 million in FY26, rising to about £60 million by end FY27, one year earlier than previously planned.
- Adjusted operating expenses guided to about £450 million in FY26.
- Restructuring costs stepped up to £10‑15 million in FY26 and £30‑40 million in FY27.
- Headcount to reduce by around 600 FTE by end FY27.
Opinion: pulling forward savings is the right call. The group’s federated model carried duplication. Centralising shared services, outsourcing selectively and deploying automation should lift operating leverage when growth returns. The key is execution without denting service quality, which underpins Close Brothers’ franchise.
FCA motor finance redress: what’s priced in and what isn’t
The total provision charge to date is £300.0 million, with £293.6 million held at period end. Management stresses the final cost could be materially higher or lower until the FCA confirms the scheme design and scope. Close Brothers disagrees with elements of the FCA’s proposed redress methodology and believes the legal test for unfairness is fact specific, as per the Supreme Court’s Johnson ruling.
Why this matters: two investor questions dominate. First, does capital comfortably absorb a range of outcomes? With CET1 at 14.3% and stated intent to keep CET1 above the 12%‑13% medium‑term range near term, the buffer looks sensible. Second, when do dividends resume? The board will reassess once financial impact is clearer. Until then, payouts are off the table.
Outlook and guidance check
- Loan book growth target of 5%‑10% p.a. through the cycle remains, with the business now focused on segments offering stronger, sustainable returns.
- NIM expected to be slightly lower than 7% in FY26 and around that level medium term, reflecting mix.
- Bad debt ratio expected to remain below the 1.2% long‑term average in FY26 and medium term.
- Expense/income ratio targeted to fall below 60% by FY28 as adjusted operating expenses move to £410‑£430 million.
- RoTE on course to reach double‑digits by FY28, rising thereafter.
Opinion: the guidance is credible if loan growth resumes and cost saves land on time. The IRB journey, if achieved, could also improve capital efficiency. The swing factor remains the FCA redress quantum and timing.
The investment take
Positives
- Core lending franchises still earn robust margins, even with a slightly lower NIM ahead.
- Credit quality is resilient. The bad debt ratio of 0.8% is well below the long‑term average.
- Capital, funding and liquidity provide real resilience while uncertainty plays out.
- Cost programme accelerated, pulling forward £60 million of annualised savings by end FY27.
Watch‑outs
- Final FCA scheme rules could lead to a provision that is materially higher or lower than £293.6 million on balance sheet.
- Property remains soft and could weigh on near‑term income and impairments if market conditions do not improve.
- Expense/income ratio is elevated at 68% until savings flow through and income rebuilds.
- Dividend suspension continues until FCA clarity, which may limit income appeal near term.
What I’ll be watching next
- The FCA’s policy statement on motor finance commissions and any updates to Close Brothers’ provision range.
- Evidence of re‑acceleration in the loan book, especially continued growth in Motor Finance and Asset Finance, and stabilisation in Property drawdowns.
- Quarterly cost run‑rate as transformation actions bed in, and progress toward the £25 million FY26 savings.
- CET1 trajectory after the Tier 2 issue and any further capital optimisation steps.
Bottom line
Close Brothers is doing the heavy lifting to reshape the cost base and refocus on higher‑quality segments, while running with strong capital and liquidity. The underlying banking engine looks healthy. The unresolved FCA redress keeps a lid on statutory profitability and dividends for now, but if the eventual outcome sits within the current capital headroom and savings land as guided, the route back to double‑digit returns by FY28 is intact.
