Close Bros Regulatory News (CBG)

Close Brothers Group plc announces

Half year results for the six months to 31 January 2013

A good result in the first half

·; The group reports a good result with adjusted operating profit up 26% to £80 million and adjusted basic earnings per share up 31% to 41.8p

·; The Banking division performed strongly with a 26% increase in adjusted operating profit, reflecting solid loan book growth of 6% and an improved bad debt ratio of 1.2%

·; In Securities, Winterflood remained consistently profitable in difficult trading conditions with adjusted operating profit of £7 million

·; Asset Management is on track and delivered a 6% increase in AuM to £8.9 billion

·; The group maintained a strong funding, liquidity and capital position with a core tier 1 capital ratio of 12.7%

·; Interim dividend per share increased 7% to 15.0p

A presentation to analysts and investors will be held today at 9.30 am GMT at our offices at 10 Crown Place, London EC2A 4FT. A listen-only dial-in facility will be available by dialling 0845 401 0012, or +44 203 059 8125. A recording of this call will be available for replay for two weeks by dialling +44 121 260 4861, access code 5565422#.

About Close Brothers:

Close Brothers is a specialist financial services group which makes loans, trades securities and provides advice and investment management solutions to a wide range of clients.

Close Brothers' Banking division provides specialist lending to small and medium-sized businesses and individuals across a diverse range of asset classes, and also offers deposit taking services.

The Securities division provides trading services to retail brokers and institutions principally through Winterflood, a leading market-maker in the UK.

Close Brothers Asset Management provides a full range of advice, investment management and self directed services to private and corporate clients and professional advisers.

Close Brothers was established in 1878 and today employs over 2,500 people, principally in the UK. Close Brothers Group plc is listed on the London Stock Exchange and is a member of the FTSE 250.

OVERVIEW

Chairman's and Chief Executive's Statement

We are pleased to report a good result for Close Brothers for the first half of the year. The Banking division has achieved strong profit growth with a solid increase in the loan book and improved credit performance. In Securities, Winterflood remained consistently profitable in continued difficult market conditions. Asset Management has made progress in the first half and we remain focused on our medium term targets for the division. We have maintained our strong capital, funding and liquidity position, and are well placed for the remainder of the 2013 financial year.

Good performance in the first half

Overall, adjusted operating profit increased 26% to £79.8 million (2012: £63.2 million) resulting in a 31% increase in adjusted basic earnings per share to 41.8p (2012: 31.9p). This reflects a strong performance in Banking, modestly lower profitability in Securities and a small profit in Asset Management.

There were no exceptional items in the period. After charges for amortisation of intangible assets on acquisition of £2.5 million (2012: £2.3 million) and exceptional income of £5.9 million in the prior year period only, operating profit before tax increased 16% to £77.3 million (2012: £66.8 million). Basic earnings per share also increased 16% to 40.4p (2012: 34.8p).

We continue to access a diverse range of funding sources and have maintained a strong funding position. During the period, our customer deposit base continued to grow, increasing total available funding to £6.2 billion (31 July 2012: £5.9 billion). We also strengthened the maturity of our funding through the renewal of several facilities and maintained a prudent maturity profile, with 72% (31 July 2012: 67%) of the loan book covered by term funding over one year at the balance sheet date.

Our capital position has remained strong and at 31 January 2013, our core tier 1 capital ratio was 12.7% (31 July 2012: 12.8%), and the leverage ratio was 9.3% (31 July 2012: 9.7%). The capital position is comfortably above current and proposed regulatory requirements and is not expected to be materially affected by Basel lll.

As a result of the strong performance in the period, the group's return on opening equity increased to 16% (2012: 11%).

The board has declared an interim dividend of 15.0p (2012: 14.0p) per share, an increase of 1.0p, or 7%, reflecting the strong profit growth in the period.

Strong profit growth in Banking

The Banking division has delivered another period of strong profit growth with a 26% increase in adjusted operating profit to £77.7 million (2012: £61.8 million).

The strategic priority in the Banking division is to capture sustainable growth while maintaining our distinctive specialist lending model and the quality of our loan book. The loan book increased 6% to £4.4 billion at 31 January 2013 (31 July 2012: £4.1 billion), corresponding to 16% growth over the last 12 months. Although growth in the period has been slightly lower, it remains solid across Retail, Commercial and Property. Given our strong market share, high repeat business levels and established customer relationships, we continue to see solid prospects for further growth.

Our niche, specialist lending serves the financing needs of UK SMEs across a diverse range of assets including heavy commercial vehicles, plant and machinery, agricultural equipment and invoice receivables. In addition, we lend to property companies for residential developments as well as providing insurance premium and car financing to retail and commercial borrowers through intermediaries. This breadth, together with our local expertise, means we remain confident of the market opportunities in the UK for our core lending. We also continue to explore new growth opportunities which share the strong risk and return profile of our core lending activities, such as structured finance to the middle ticket market. Overall, this leaves us well positioned to continue making the most of the operating environment through the cycle.

We remain focused on maintaining strong returns and in the period the return on net loan book increased further to 3.7% (2012: 3.4%), slightly above the ten year average of 3.6%. Our consistently strong returns reflect our discipline in maintaining our lending model and the combination of a strong net interest margin, which was 8.9% (2012: 9.6%) in the period, and low bad debt ratio, which improved further to 1.2% (2012: 1.7%). We remain focused on managing and controlling the business as it grows, and have significantly strengthened our infrastructure and systems in order to be well positioned to manage future growth.

Difficult market conditions continued for Securities

The strategic priority for the Securities division is to maintain its leading market position and maximise profitability in all trading conditions. However, performance in the period has continued to be impacted by difficult market conditions. As widespread macro-economic uncertainty and risk aversion amongst retail investors continued, Winterflood remained consistently profitable with adjusted operating profit of £7.4 million (2012: £8.4 million). Overall adjusted operating profit for Securities reduced to £10.5 million (2012: £13.2 million) reflecting a lower contribution from Mako.

In the recent difficult trading conditions, average bargains per day reduced, reflecting low retail investor risk appetite, while income per bargain has increased slightly. Despite some periods of increased market activity during January and February, we are not yet seeing signs of any sustained shift in risk appetite.

Winterflood has retained its strong market position as a leading market-maker to UK retail brokers. It has maintained its sales and trading capacity and delivered a consistent performance with only one loss day (2012: six loss days) in 128 trading days (2012: 128 trading days) in the period. We remain confident that Winterflood's core business is well positioned to capture any sustainable increase in retail trading activity. We have also made progress with Winterflood Business Services, although it remains at an early stage, as we capture increased demand for outsourced dealing and custody services.

Adjusted operating profit at Seydler improved to £2.2 million (2012: loss of £0.9 million), an increase on the prior year reflecting higher capital markets activity, although trading volumes in Germany also remained low. Seydler has retained strong relationships with German mid-cap corporates and remains well positioned in its market.

The contribution from Mako reduced to £0.9 million (2012: £5.7 million) largely reflecting low market volatility in the period, and a lower shareholding of 27.3% compared to the prior year.

Progress in Asset Management

The Asset Management division has made progress towards its objective of moving into profitability during the course of the 2013 financial year. It has achieved good revenue growth, with an increase in the revenue margin to 84 basis points (2012: 73 basis points), as well as a stable cost base year on year. Underlying performance improved and overall the division delivered adjusted operating profit of £1.1 million (2012: loss of £2.6 million) including the benefit of a small profit on the sale of our residual investment in a private equity fund.

During the period we have achieved good sales to new private clients both through our own advisers and fund managers, and through third party IFAs, and inflows increased on the prior year. However, these were offset by outflows including redemptions from institutional clients and the maturity of a legacy structured fund. In the period, we benefited from positive market movements and as a result overall Assets under Management ("AuM") increased 6% to £8,854 million at 31 January 2013 (31 July 2012: £8,320 million).

We remain focused on driving revenue margin expansion, partly by increasing the proportion of our assets which are both managed and advised by us. In the period, these increased to £2,052 million (31 July 2012: £1,651 million) as we progressed with sales of our integrated proposition to existing clients, including clients previously acquired. We are pleased that our range of investment products has been well received by both existing and new clients, and further endorsed by our advisers and third party IFA sales channels.

Our business model provides high quality advice and investment management to private clients and remains well positioned in the current market and regulatory environment. We remain focused on our medium-term targets, as set out in the 2012 preliminary results, to achieve a revenue margin of around 100 basis points and an operating margin of at least 15% by the 2015 financial year.

Outlook

Performance in the first half of the 2013 financial year was good, and our businesses are well placed for the remainder of the year.

In Banking, we continue to see solid prospects for loan book growth and expect a similar performance in the second half.

In Securities, Winterflood remains well positioned to benefit from any sustained recovery in market conditions.

Asset Management continues to make progress and remains on track.

Overall, we look forward with confidence and expect a good result for the year as a whole.

FINANCIAL REVIEW

Overview

Close Brothers has delivered a good result for the first half of the 2013 financial year driven by continued strong profit growth in the Banking division, supported by consistent profitability at Winterflood and an improved result in Asset Management. Overall, adjusted operating profit increased 26% to £79.8 million (2012: £63.2 million).

Group Income Statement

Note: Adjusted operating income, expenses, operating profit and earnings per share exclude the effect of exceptional items and amortisation of intangible assets on acquisition, and the tax effect of such adjustments.

Strong profit growth

Total adjusted operating income rose 8% to £283.0 million (2012: £261.8 million) in the first half of the financial year. This was driven by good income growth in the Banking division and an increase in income on AuM in the Asset Management division, although Securities income reduced slightly in continued difficult market conditions.

The group remains committed to managing costs carefully, whilst maintaining the capacity and flexibility to support growth in its businesses. Adjusted operating expenses increased 5% to £177.4 million (2012: £168.7 million), principally driven by higher costs in the Banking division reflecting strong loan book growth in the last year. Asset Management costs were stable as the division substantially completed its restructuring in the last financial year, while expenses in the Securities division reduced slightly. Overall, the group's expense/income ratio improved to 63% (2012: 66%) and the compensation ratio (total staff costs on adjusted operating income excluding associate income) was stable at 38% (2012: 38%).

Impairment losses on loans and advances ("bad debts") reduced to £25.8 million (2012: £29.9 million) reflecting strong credit performance across the portfolio. As a result, the bad debt ratio improved to 1.2% (2012: 1.7%).

Total adjusted operating profit for the group increased 26% to £79.8 million (2012: £63.2 million), principally driven by profit growth in the Banking division. The loan book has grown 6% in the first half of the year and 16% over the last 12 months, which together with the reduction in bad debts led to adjusted operating profit growth of 26% to £77.7 million (2012: £61.8 million). The Asset Management division delivered a small adjusted operating profit of £1.1 million (2012: loss of £2.6 million), partially offsetting a £2.7 million decrease in Securities adjusted operating profit to £10.5 million (2012: £13.2 million) principally reflecting a lower contribution from Mako. The net of group income and expenses was substantially unchanged at £9.5 million (2012: £9.2 million) for the first half. Overall, the group's operating margin was enhanced by 6% to 28% (2012: 22%) and return on opening equity increased to 16% (2012: 11%).

There were no exceptional items in the period. Exceptional income of £5.9 million was recorded in the prior year period principally relating to foreign exchange gains realised on the reduction of our investment in Mako during that period. In line with our normal accounting policy, we recorded a charge for amortisation of intangible assets on acquisition of £2.5 million (2012: £2.3 million).

Operating profit before tax, after exceptional income and amortisation of intangible assets on acquisition, increased 16% to £77.3 million (2012: £66.8 million).

The tax charge for the period was £17.9 million (2012: £15.5 million), corresponding to an effective tax rate of 23% (2012: 23%), broadly in line with the UK corporation tax rate of 24% (2012: 26%).

Profit attributable to shareholders increased 16% to £58.8 million (2012: £50.5 million) and basic earnings per share also increased 16% to 40.4p (2012: 34.8p). Excluding exceptional income in the prior year and amortisation of intangible assets on acquisition, adjusted basic earnings per share increased 31% to 41.8p (2012: 31.9p).

Dividend per share

The board has declared an interim dividend per share of 15.0p (2012: 14.0p), representing a year on year increase of 7%. This reflects strong profit growth in the period which has enabled the group to increase the dividend in line with our progressive dividend policy, whilst strengthening our dividend cover. The dividend will be paid on 24 April 2013 to shareholders on the register at 22 March 2013.

Divisional Adjusted Operating Profit/(Loss)

Balance Sheet

Group Balance Sheet

Strong balance sheet maintained

The group has maintained its simple and transparent balance sheet which is principally made up of customer loans, trading assets and liabilities and the group's funding and liquidity holdings. During the period, total assets increased by 10% to £6,963.3 million (31 July 2012: £6,355.8 million) driven by growth in the loan book as well as a higher level of liquid assets and settlement balances at the balance sheet date.

Loans and advances to customers accounted for 63% (31 July 2012: 65%) of the group's total assets and increased by 6%, or £247.3 million, to £4,373.2 million (31 July 2012: £4,125.9 million). The group continues to apply prudent and consistent criteria to lending decisions and the loan book remains small ticket, predominantly secured, on prudent loan-to-value ("LTV") ratios and short-term, with an average maturity of 13 months (31 July 2012: 14 months).

Cash and loans and advances to banks principally relate to Bank of England deposits held for liquidity purposes by the group's Treasury function. The balance increased 36% to £1,111.4 million (31 July 2012: £816.8 million), as a result of the timing of new funding which was not deployed in the loan book at the balance sheet date.

The group has now substantially completed the process of optimising balance sheet efficiency through the reduction in our holding of less liquid floating rate notes ("FRNs") which reduced slightly in the period. Our holding of certificates of deposits ("CDs") also reduced and gilts remained broadly stable, with the result that total non-trading debt securities were lower at £204.5 million (31 July 2012: £353.0 million).

Settlement balances, long and short trading positions and loans to and from money brokers reflect the market-making activity at Winterflood and Seydler around the balance sheet date. As a result of higher trading activity at 31 January 2013, these increased to £794.3 million (31 July 2012: £598.5 million) on the asset side and to £707.3 million (31 July 2012: £501.7 million) on the liability side, although the net balance reduced modestly to £87.0 million (31 July 2012: £96.8 million).

Total liabilities increased in the period reflecting an increase in the group's funding, as deposits by customers grew by £485.3 million to £3,933.4 million (31 July 2012: £3,448.1 million). Borrowings, which relate to the group's wholesale funding, decreased slightly to £1,228.1 million (31 July 2012: £1,322.3 million) reflecting lower drawdowns on debt facilities as a result of the strong liquidity position at the period end.

Total equity increased to £800.4 million (31 July 2012: £769.8 million) reflecting profit for the period of £59.4 million and other positive reserve movements, partly offset by the 2012 final dividend payment of £39.7 million.

Funding and liquidity

The objective of the group's Treasury function is to fund the loan book with a focus on diversity and maturity, while maintaining a sound level of high quality liquidity.

Diverse range of funding sources

Group Funding Overview

1Includes £257.8 million (31 July 2012: £331.9 million) of undrawn facilities and excludes £17.4 million (31 July 2012: £13.0 million) of non-facility overdrafts included in borrowings.

The group maintained a strong funding position in the period with good access to a diverse range of funding sources. Total group funding at 31 January 2013 increased 6% to £6,202.3 million (31 July 2012: £5,859.1 million), principally driven by an increase in customer deposits. This continues to represent a good level of funding to support growth in the loan book, equating to 142% (31 July 2012: 142%) of the loan book at 31 January 2013, unchanged from the prior year end.

The group has built up a strong and reliable retail deposit base over the last three years and through a number of recent successful savings product campaigns, we raised over £400 million new retail term deposits in the first half. The group also has long standing, established relationships with corporate customers for deposit taking and these deposits also increased in the period. As a result total customer deposits increased to £3,933.4 million (31 July 2012: £3,448.1 million).

Wholesale funding includes the group bond of £204.8 million (31 July 2012: £204.5 million) and drawn and undrawn facilities of £1,263.7 million (31 July 2012: £1,436.7 million) at the balance sheet date. During the period the group renewed three facilities totalling £575 million that were approaching maturity, including the £350 million securitisation on the premium finance loan book.

Prudent maturity profile

Group Funding Maturity Profile

1Includes £257.8 million (31 July 2012: £331.9 million) of undrawn facilities and excludes £17.4 million (31 July 2012: £13.0 million) of non-facility overdrafts included in borrowings.

The group remains committed to maintaining a prudent maturity profile of funding relative to the loan book. Renewals of wholesale funding and an increase in term deposits in the first half of the year led to an increase in the group's term funding, with a residual maturity greater than one year, to £3,136.3 million (31 July 2012: £2,758.7 million). This continues to represent a prudent level relative to the loan book, which was 72% (31 July 2012: 67%) covered by term funding at the balance sheet date.

The weighted average maturity of this term funding, excluding equity, was broadly unchanged at 28 months (31 July 2012: 27 months) and continues to significantly exceed the average loan book maturity of 13 months (31 July 2012: 14 months).

Sound level of high quality liquidity

The group's liquidity position remains comfortably ahead of regulatory requirements. The group's Treasury function continually monitors the level and quality of the group's liquid assets to ensure it maintains a sound level of liquidity.

Treasury Assets

At the balance sheet date, the group had high quality liquid assets of £1,079.4 million (31 July 2012: £806.9 million). The balance fluctuates depending on the timing of new funding raised, and increased in the first half as a result of new funding not yet deployed in the loan book at the balance sheet date. This increase was primarily reflected in higher Bank of England deposits which rose to £981.3 million (31 July 2012: £706.8 million) while gilts remained broadly stable at £98.1 million (31 July 2012: £100.1 million). At the same time, the CD portfolio reduced to £25.0 million (31 July 2012: £130.3 million).

We have now substantially completed the run-off of our holding of less liquid securities, with the FRN portfolio reducing further to £81.4 million (31 July 2012: £122.6 million) in the period. The portfolio had an average residual maturity of 11 months (31 July 2012: 12 months) at the balance sheet date.

Credit ratings

The credit ratings for Close Brothers Group plc and Close Brothers Limited ("CBL"), the group's regulated banking subsidiary, from Fitch Ratings ("Fitch") and Moody's Investors Services ("Moody's") were unchanged in the first half of the year. In November 2012 Fitch reaffirmed its ratings for Close Brothers Group and CBL at A/F1, both with stable outlooks. Moody's ratings for Close Brothers Group and CBL are unchanged since the financial year end at Baa1/P2 and A3/P2 respectively, both with negative outlooks.

Maintained strong capital position

Group Capital Position

1Core tier 1 capital as a percentage of total balance sheet assets, adjusting for intangible assets and certain off balance sheet exposures.

Despite several years of strong loan book growth, the group has maintained its strong capital position and comfortably continues to meet all regulatory capital requirements.

In the first half of the 2013 financial year, the group's core tier 1 capital ratio was largely unchanged at 12.7% (31 July 2012: 12.8%), reflecting strong profitability in the period and continued loan book growth. We do not expect our core tier 1 capital ratio to be materially affected by Basel III, given that we do not have complex trading book exposures which give rise to higher credit and counterparty risk charges, or material deferred tax assets which are subject to new capital deductions.

In the first half of the year our core tier 1 capital increased to £648.4 million (31 July 2012: £620.8 million), as profit attributable to shareholders and other reserve movements were partly offset by the payment of the 2012 final dividend of £39.7 million. Risk weighted assets increased 5% to £5,105.7 million (31 July 2012: £4,859.7 million), principally due to an increase in credit and counterparty risk as a result of loan book growth.

The group has also maintained a strong leverage ratio, which is a transparent measure of capital strength not affected by risk weightings. In the first half this ratio reduced slightly to 9.3% (31 July 2012: 9.7%), reflecting growth in total balance sheet assets of 10%, through a combination of loan book growth, a higher liquidity position and higher settlement balances at the balance sheet date. Taken together with the core tier 1 capital ratio, this ratio continues to demonstrate the strength of the group's capital position.

BUSINESS REVIEW

Banking

1 Includes £144.2 million (2012: £127.2 million) net interest income and £45.1 million (2012: £45.5 million) other income. Other income includes net fees and commissions, operating lease income, and other miscellaneous income.

2 Net interest and fees on average net loans and advances to customers.

3 Impairment losses on average net loans and advances to customers.

4 Adjusted operating expenses on adjusted operating income.

5 Adjusted operating profit after tax and non-controlling interests on opening equity.

Strong performance in the first half of 2013

The Banking division has delivered another strong performance with solid loan book growth and improved credit performance leading to an increase in adjusted operating profit of 26% to £77.7 million (2012: £61.8 million). As a result, the return on opening equity improved to 24% (2012: 20%).

Adjusted operating income increased 11% to £195.7 million (2012: £176.5 million) reflecting growth across the portfolio in net interest and fees on the loan book, which increased 10%. Treasury and other non-lending income increased to £6.4 million (2012: £3.8 million) reflecting one-off income from the settlement of a long standing legal case.

Adjusted operating expenses increased 9% to £92.2 million (2012: £84.8 million), largely reflecting costs associated with the strong loan book growth over the last year, including additional staff costs particularly in asset finance and motor finance. Overall, the expense/income ratio improved slightly to 47% (2012: 48%) and the compensation ratio remained unchanged at 27% (2012: 27%).

Given the strong credit performance across the portfolio, bad debt charges reduced to £25.8 million (2012: £29.9 million) in the period.

Continued solid loan book growth

In the six months to 31 January 2013, the loan book increased 6% to £4.4 billion (31 July 2012: £4.1 billion) corresponding to 16% growth over the last 12 months. Overall, growth has remained solid albeit slower than the prior year, reflecting a moderation in demand in some of our markets. Our priority remains to maintain the discipline of our lending criteria to protect our business model and the strong returns of our loan portfolio.

The Retail loan book increased 7% to £1,820.6 million in the six months to 31 January 2013 (31 July 2012: £1,707.8 million). The motor finance loan book increased 7% to £1,164.4 million (31 July 2012: £1,086.8 million). It continues to benefit from strong relationships with existing and new motor dealers across the UK, notwithstanding a slowdown in demand for second hand cars in the period. The premium finance loan book increased 6% to £656.2 million (31 July 2012: £621.0 million) reflecting continued modest growth in personal, and seasonal growth in commercial lines.

The Commercial loan book increased 5% to £1,724.0 million (31 July 2012: £1,635.9 million) driven by asset finance which increased 7% to £1,420.9 million (31 July 2012: £1,327.2 million) with good growth in manufacturing and middle ticket lending. Invoice finance remained broadly unchanged at £303.1 million (31 July 2012: £308.7 million) reflecting the continued discipline of our lending criteria in a competitive market.

In Property, the loan book increased 6% to £828.6 million (31 July 2012: £782.2 million), corresponding to 24% growth over the last 12 months. Whilst new loan growth in the period has remained strong, this was partly offset by a higher level of repayments following exceptionally strong growth in the prior year.

Consistent lending model and strong returns

As we continue to lend with consistent, prudent criteria, the quality of the loan book and returns from our lending remain strong. Our niche, specialist lending businesses serve a wide range of SMEs and individuals across different asset types, and vary by maturity, size and LTV, but share a similar risk and return profile. Our overall loan book remains predominantly secured, on conservative LTVs, and short-term with an average maturity of 13 months (31 July 2012: 14 months). In the first half, the return on net loan book improved further to 3.7% (2012: 3.4%), slightly above the ten year average of 3.6%.

The net interest margin, which includes net interest income and other lending related income, remained strong in the period at 8.9% (2012: 9.6%), although lower than the prior year. This principally reflects changes in mix over the last year including growth in lower margin areas such as middle ticket lending and larger motor dealerships, as well as lower income from settlement fees and default fees as a result of improved credit performance. Other income, which principally includes net fees and commissions related to our lending activities, accounted for 24% (2012: 26%) of total net interest and fee income in the period, broadly consistent with prior years.

The bad debt ratio has continued to improve to 1.2% (2012: 1.7%) in the period reflecting our credit discipline during the strong loan book growth over the last 12 months. Bad debt improved in Property and Commercial, and remains at historically low levels in Retail.

The Banking division remains well positioned and continues to see solid prospects for loan book growth while remaining focused on protecting its distinctive lending model.

BUSINESS REVIEW

Securities

Key Financials

1 Adjusted operating profit on adjusted operating income after excluding associate income.

2 Adjusted operating profit excluding associate income after tax and non-controlling interests on opening equity.

First half of 2013 performance impacted by continued difficult market

The difficult market conditions which affected the Securities division's performance during most of the previous financial year continued in the first half of the 2013 financial year. Low trading volumes across the market impacted both Winterflood and Seydler, with Winterflood's performance in particular continuing to be affected by low retail investor risk appetite. Notwithstanding the market conditions, Winterflood was consistently profitable, maintaining its trading capacity and market leading position, and remaining well placed to benefit from any market recovery.

Adjusted operating income reduced 7% to £47.9 million (2012: £51.6 million) due to continued low trading income at Winterflood, with a lower contribution from Mako offset by improved performance from Seydler. Adjusted operating expenses reduced slightly to £37.4 million (2012: £38.4 million) and as a result the expense/income ratio reduced to 80% (2012: 84%) and the compensation ratio was 45% (2012: 47%). Overall, adjusted operating profit reduced to £10.5 million (2012: £13.2 million) although return on opening equity, which excludes Mako associate income after tax, was higher at 16% (2012: 11%).

Winterflood consistently profitable

Market sentiment during the period continued to be characterised by low risk appetite, particularly amongst retail investors, and trading activity remained subdued. In spite of the difficult conditions, Winterflood remained consistently profitable, having just one loss day (2012: six loss days) out of 128 trading days (2012: 128 trading days) in the six month period.

Winterflood's adjusted operating income decreased slightly to £34.7 million (2012: £37.6 million). Average bargains per day fell to 41,583 (2012: 48,202) reflecting low client trading activity, partly offset by a small rise in income per bargain to £6.52 (2012: £6.09). However, income per bargain continues to reflect difficult trading conditions and low volumes in higher margin AIM and small-cap stocks.

The low fixed cost structure of Winterflood enabled the business to reduce costs to reflect the reduction in trading income in the period. Adjusted operating expenses decreased 7% to £27.3 million (2012: £29.2 million) reflecting a reduction in volume and performance related costs. At the same time, Winterflood has maintained its sales and trading capacity, reflecting our continued confidence in our business model. Overall, Winterflood delivered an adjusted operating profit of £7.4 million (2012: £8.4 million) in the period.

Increased capital markets activity in Seydler

Adjusted operating income for Seydler increased £4.0 million, or 48%, to £12.3 million (2012: £8.3 million) reflecting higher capital market fees, although trading volumes remained low. Adjusted operating expenses increased 10% to £10.1 million (2012: £9.2 million), resulting in a small adjusted operating profit of £2.2 million (2012: loss of £0.9 million). Seydler maintains a strong position in the German small and mid-cap market, with a strong capital markets transaction pipeline.

Associate income from Mako of £0.9 million (2012: £5.7 million) reduced, due to lower market volatility and the group's reduced shareholding compared to the prior year period. The group's current holding in Mako is unchanged since the year end at 27.3% (31 January 2012: 33.3%).

BUSINESS REVIEW

Asset Management

Note: Prior year income numbers have been re-presented to reflect the division's increased focus on the managed and advised private client business.

1 Income from financial advice and self directed services, excluding investment management income.

2 Interest income and expense, income on investment assets and other income.

3 First half 2012 relates to assets previously reported in the Private Clients segment only.

4 Income from advice and other services and investment management over average AuM.

5 Adjusted operating profit after tax and non-controlling interests on opening equity.

Progress in the first half of 2013

The Asset Management division has made progress towards its objective of moving into profitability during the course of the 2013 financial year and we remain focused on our medium-term targets for the division.

In the first half, adjusted operating income increased 10% to £37.2 million (2012: £33.9 million) as we expanded the revenue margin, principally through an increase in higher margin private client assets.

Following the last few years of restructuring and investment we are now focused on optimising the division's cost base, and in the period we held adjusted operating expenses broadly flat at £36.1 million (2012: £36.5 million). This corresponded to an improved expense/income ratio of 97% (2012: 108%) and a compensation ratio of 63% (2012: 65%).

The underlying performance of the division has improved in the period. Overall we reported a small profit of £1.1 million (2012: loss of £2.6 million) including a gain on the sale of our residual investment in a private equity fund, reported in other income. As a result, the operating margin improved to 3% (2012: (8)%) and the return on opening equity increased to 4% (2012: (8)%).

Good sales momentum

Movement in Assets under Management

During the period we achieved good sales both through our own financial advisers and fund managers, and through third party IFAs. As a result, inflows were ahead of the prior year period at £506 million (2012: £467 million) with a good proportion of new advice business also moving into our discretionary fund management and onto our platform. However, we also recorded outflows including redemptions from institutional clients and the maturity of a legacy structured fund, and as a result net new funds were modestly negative overall.

This was offset by positive market movements of £601 million, benefiting from strong financial market performance, particularly in January, resulting in overall AuM increasing 6% to £8,854 million (31 July 2012: £8,320 million).

In the six months to 31 December 2012, the performance of our five directly invested funds was mixed with the balanced and growth funds outperforming respective IMA sector benchmarks, although the income focused and conservative funds underperformed, reflecting their defensive positioning in a rising market. The average performance of our bespoke portfolios outperformed respective ARC peer groups in all risk profiles over the same period.

Increase in revenue margin reflecting improved AuM mix

Assets under Management by type

1 All personal and corporate advised and self directed client assets, including those which are also managed by Close Brothers.

2 All client assets which are invested in Close Brothers' investment products, including funds, separately managed accounts and bespoke high net worth client portfolios.

Overall income on AuM increased 9% to £36.0 million (2012: £32.9 million) corresponding to an improved revenue margin on total assets of 84 basis points (2012: 73 basis points), principally reflecting the greater proportion of higher margin private client assets relative to the prior year.

We remain focused on improving the mix of AuM towards higher margin assets, particularly increasing the proportion which are both managed and advised. In the period, these increased to £2,052 million (31 July 2012: £1,651 million), corresponding to 42% (31 July 2012: 36%) of advised client assets. This was achieved through sales of our integrated proposition to new clients as well as transitioning existing advised clients, including those previously acquired, into our integrated proposition. As we continue to increase assets that are both managed and advised, the revenue margin will benefit over time.

Total advised AuM increased 7% to £4,942 million (31 July 2012: £4,639 million) reflecting positive market movements and good new business levels. Income from advice and other services increased 14% to £16.6 million (2012: £14.5 million) reflecting the benefit of acquisitions in the prior year and higher initial fees. Overall, the revenue margin on total advised assets increased to 70 basis points (2012: 65 basis points).

Managed AuM increased to £5,964 million (31 July 2012: £5,332 million) reflecting sales to new and existing clients and positive market movements, partly offset by the outflow of lower margin institutional client assets. As a result of the improved mix, investment management income increased 5% to £19.4 million (2012: £18.4 million) and the revenue margin on managed assets increased to 69 basis points (2012: 60 basis points).

Going forward, we remain focused on driving revenue and profit growth through sales of our integrated proposition, and streamlining and optimising the cost base.

Principal Risks and Uncertainties

The group seeks to achieve an appropriate balance between taking risk and achieving an acceptable return for shareholders by:

·; Closely following the well established business model;

·; Clearly defining and monitoring its risk appetite; and

·; Maintaining an integrated risk management approach.

During the six months to 31 January 2013, there has been no significant change to our business model, risk appetite or risk management approach. The group has not identified any new principal risks and uncertainties that it is likely to face in the second half of the financial year.

A detailed description of the principal risks and uncertainties the group faces and its approach to managing and mitigating those risks is set out on pages 24 to 27 of the Annual Report 2012 which can be accessed via the link on the home page of the group's website at www.closebrothers.com.

The summary below highlights the principal risks and uncertainties the group expects to face in the second half of the financial year. It should not be regarded as a comprehensive list of all the risks and uncertainties the group may face.

Directors' Responsibility Statement

We confirm that to the best of our knowledge:

·; The condensed set of consolidated financial statements has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting";

·; The Interim Report 2013 includes a fair review of the information required by Disclosure and Transparency Rule 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

·; The Interim Report 2013 includes a fair review of the information required by Disclosure and Transparency Rule 4.2.8R (disclosure of related parties' transactions and changes therein).

On behalf of the board

12 March 2013

Independent Review Report

Independent Review Report to Close Brothers Group plc

We have been engaged by the company to review the condensed set of consolidated financial statements in the Interim Report 2013 for the six months ended 31 January 2013 which comprises the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Statement of Changes in Equity, the Consolidated Cash Flow Statement and related notes 1 to 17. We have read the other information contained in the Interim Report 2013 and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of consolidated financial statements.

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The Interim Report 2013 is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Interim Report 2013 in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The condensed set of consolidated financial statements included in this Interim Report 2013 has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of consolidated financial statements in the Interim Report 2013 based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of consolidated financial statements in the Interim Report 2013 for the six months ended 31 January 2013 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

Deloitte LLP

Chartered Accountants and Statutory Auditor

London, United Kingdom

12 March 2013

Consolidated Income Statement

for the six months ended 31 January 2013

Consolidated Statement of COMPREHENSIVE INCOME

for the six months ended 31 January 2013

Consolidated Balance Sheet

at 31 January 2013

Consolidated Statement of CHANGES IN EQUITY

for the six months ended 31 January 2013

Consolidated Cash Flow Statement

for the six months ended 31 January 2013

THE NOTES

1. Basis of preparation and accounting policies

The interim financial information has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and in accordance with the International Financial Reporting Standards ("IFRS") issued by the International Accounting Standards Board ("IASB") and endorsed by the European Union ("EU"). These include International Accounting Standard ("IAS") 34, Interim Financial Reporting, which specifically addresses the contents of condensed interim financial statements. The consolidated financial statements incorporate the individual financial statements of Close Brothers Group plc and the entities it controls, using the acquisition method of accounting. The accounting policies used are consistent with those set out on pages 65 to 70 of the Annual Report 2012.

After making enquiries, the directors have a reasonable expectation that the company and the group as a whole have adequate resources to continue in operational existence for the foreseeable future, a period of not less than 12 months from the date of this report. For this reason, they continue to adopt the going concern basis in preparing the condensed consolidated interim financial statements.

The preparation of the Interim Report requires management to make estimates and assumptions that affect the reported income and expense, assets and liabilities and disclosure of contingencies at the date of the Interim Report. Although these estimates and assumptions are based on the management's best judgement at that date, actual results may differ from these estimates.

The Interim Report is unaudited and does not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006. However, the information has been reviewed by the company's auditor, Deloitte LLP.

The financial information for the year ended 31 July 2012 contained within this Interim Report does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. A copy of those statutory accounts has been reported on by Deloitte LLP and delivered to the Registrar of Companies. The report of the auditor on those statutory accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

2. Segmental analysis

The directors manage the group primarily by class of business and present the segmental analysis on that basis. The group's activities are organised in three primary divisions: Banking, Securities and Asset Management.

Divisions charge market prices for services rendered to other parts of the group. Funding charges between segments are determined by the Banking division's Treasury operation taking into account commercial demands. More than 90% of all the group's activities, revenue and assets are located in the UK.

Summary Income Statement for the six months ended 31 January 2013