Close Brothers Annual Report 2005 Close Brothers PROFILE Close Brothers Group plc is an independent merchant banking group founded in the City of London over 125 years ago. The group’s activities comprise asset management, corporate finance and market-making, together investment banking, and banking. Close Brothers is amongst the 200 largest companies by market capitalisation listed on the London Stock Exchange and employs some 2,400 people. Close Brothers’ strategy is to provide a diverse range of specialist financial services adding value for our clients as a result of our particular expertise. We are dedicated to developing continuity in our relationships with clients through excellent service, objective advice and uncompromising professionalism. Our aim is to deliver to our shareholders, over time, a consistent and increasing stream of profits and dividends. Close Brothers’ major shareholders are large financial investors including investment groups, insurance companies and pension funds. The group’s directors, management and staff also have holdings directly, in share ownership, option and incentive schemes, and through minority interests in certain subsidiaries. In addition, nearly 3,000 private individuals hold shares directly in the group. HIGHLIGHTS 2005 2004 Profit before taxation and goodwill amortisation £131.7m £118.9m Earnings per share before goodwill amortisation 63.1p 57.3p Profit before taxation £108.6m £101.3m Earnings per share 47.2p 45.1p Dividends per share 28.5p 27.0p Shareholders’ funds £540m £509m Total assets £4.5bn £3.9bn CONTENTS 2Group and Management Boards 27 Consolidated Profit and Loss Account 3Historical Trends 28 Consolidated Balance Sheet 4 Chairman’s Statement 29 Company Balance Sheet 6 Chief Executive’s Report 30 Consolidated Statement of Total 13 Report of the Directors Recognised Gains and Losses 15 Corporate Governance 30 Consolidated Cash Flow Statement 18 Corporate Social Responsibility 31 The Notes 19 Report of the Board on Directors’ 54 Additional Information Remuneration 56 Group Operations 26 Report of the Auditors 1 Close Brothers GROUP AND MANAGEMENT BOARDS Board Members’ Biographies R.D. Kent, M.B.A., M.S.I. (58) # Joined Close Brothers in 1974 and led the Sir David Scholey, C.B.E. (70) # management buy-out in 1979. Managing director Chairman from August 1984 until October 2002 when he Previously chairman of the SG Warburg Group and became a non-executive director and consultant. is a senior adviser to UBS AG and a non-executive Non-executive chairman of Grosvenor Limited and director of The Chubb Corporation. He retired from Bradford & Bingley Group plc and non-executive Anglo American plc and Vodafone Group plc during director of Whitbread plc. the year. Appointed a director in March 1999 and , M.B.A. (57) # chairman in October 1999. Chairman of the P.S.S. Macpherson Formerly a director of Flemings and executive Nomination and Governance Committee. deputy chairman of Misys. Chairman of Tribal C.D. Keogh, M.B.A., Barrister, A.T.I.I. (52) + * Group plc and non-executive director of AXA UK Chief Executive PLC and Kleinwort Benson Private Bank Limited. Joined Close Brothers in May 1985 having Appointed a director in March 2003 and senior previously been employed by Saudi International independent director in September 2004. Bank and Arthur Andersen. Appointed a director in (44) # August 1995 and chief executive in November M.G.A. McLintock Chief executive of M&G and a director of Prudential 2002. plc. Previously worked for Barings and Morgan M.J. Barley, A.C.I.B. (48) * Grenfell. Appointed a director in May 2001. Chief executive of the asset financing division. Chairman of the Remuneration Committee. Joined Close Brothers in June 1999 having ,F.C.A. (61) # previously been chief executive of Wagon Finance D.G.J. Paterson Formerly a senior partner in the banking and capital and an executive manager at Abbey National. markets division of PricewaterhouseCoopers. Non- Appointed to the management board in August executive director of Goldman Sachs International 2003. Bank. Appointed a director in July 2004. Chairman P.N. Buckley, C.A. (63) # of the Audit and Compliance Committee. Chairman of Caledonia Investments plc. Other , A.C.A. (49) + * directorships include Offshore Logistics Inc. and D.C. Pusinelli Having qualified with Coopers and Lybrand he Kerzner International Hotels Limited. Appointed a joined the corporate finance division of Close director in November 1995. His alternate is Michael Brothers in July 1986. Appointed a director in Wyatt (68), a former director of Caledonia September 2002 with responsibility for corporate Investments plc. development. R.S. Grainger, A.C.A. (45) * (39) * Chief executive of the corporate finance division. J.S. Sieff Chief executive of the asset management division. Joined Close Brothers in May 1996 on its Joined Close Brothers in May 2003 having acquisition of Hill Samuel corporate finance, which previously been employed by Old Mutual and he joined in April 1987 after qualifying with Price HSBC. Appointed to the management board in Waterhouse. Appointed to the management board July 2004. in August 2003. J.P. Williams (55) # M.A. Hines, F.S.I. (56) + * With Baring Asset Management until retirement in Joined Close Brothers in April 1993 on the 2002. Non-executive director of J P Morgan acquisition of Winterflood Securities, of which he is Fleming America Investment Trust plc and The Pan chief executive. Appointed a director in March Asian Special Opportunities Fund. Appointed a 2002. Previously with Bisgood Bishop. director in July 2004. S.R. Hodges, Barrister (51) + * , F.C.A., A.T.I.I., M.S.I. (57) + * Joined Close Brothers in August 1985 having P.L. Winkworth Employed by KPMG and Barings, before joining previously been employed by Hambros. Appointed Close Brothers in 1977. Partner in the a director in August 1995 with responsibility for the management buy-out of Close Brothers in 1979 banking division. Appointed joint managing director and was appointed a director in August 1984 with in November 2002. responsibility for finance. Appointed joint managing director in November 2002. Secretary R.D. Sellers, A.C.A. # non-executive director + executive director * management board member 2 HISTORICAL TRENDS Pence Pence 80 30 70 25 60 20 50 40 15 30 10 20 5 10 96 97 98 99 00 01 02 03 04 05 96 97 98 99 00 01 02 03 04 05 Earnings per share before Dividends per share goodwill amortisation £m 160 140 120 100 80 60 40 20 96 97 98 99 00 01 02 03 04 05 Profit before goodwill amortisation and taxation 3 Close Brothers CHAIRMAN’S STATEMENT RESULTS The increasing momentum in our asset management division that we reported last year The operating profit on ordinary activities before has continued. We have achieved much in the taxation and goodwill amortisation was £131.7 past twelve months resulting in a divisional profit million compared to £118.9 million last year, an improvement of 83 per cent. We have increase of 11 per cent., producing earnings per focused our operations on private clients and share of 63.1p compared to 57.3p, an increase funds and we have completed the recruitment of of 10 per cent. our top management team. On the funds side, After deducting a charge for goodwill we have recently made the small but strategically amortisation of £23.1 million (2004 — £17.6 important acquisition of Escher, a process-driven million), the operating profit on ordinary activities manager-of-managers business, now renamed before taxation was £108.6 million (2004 — Close TEAMS. £101.3 million) and earnings per share were An important event during the year for our 47.2p (2004 — 45.1p). market-making division was the purchase of The board recommends a final dividend of 19p Seydler for an initial €25 million (£17 million), per share which, together with the interim approximately net asset value. This business has dividend, makes a total dividend for the year of some 75 staff, most of whom are located in 28.5p per share (2004 — 27p) with pre-goodwill Frankfurt, and provides an interesting entry to a cover of 2.2 times (2004 — 2.1 times). This potentially growing market. affirms our dividend growth whilst continuing to On the banking side, we acquired a motor rebuild dividend cover. vehicle loan book for the benefit of running it off and a commercial asset finance business. OVERVIEW 2005 was another successful year with improved TRADING results being achieved in quite difficult conditions. Investment Banking Our investment banking activity posted profit growth of 19 per cent., on top of the 77 per Asset Management cent. achieved in 2004. Our banking activity did The division achieved another year of significant well to show a small increase in profit in a growth with record pre-tax profit of £31.8 million challenging year. compared to £17.4 million last year. The pre-tax The profit before taxation and goodwill operating margin was 27 per cent. and funds amortisation once again reflected an under management grew from £5.5 billion to impressive return on operating income, of 29 per £7.1 billion. cent. (2004 — 30 per cent.) and on opening Our private client business has some £2.7 billion shareholders’ funds, of 26 per cent. (2004 — 25 of investment funds under management. It also per cent.). administers some £5.2 billion of trust assets and The table below demonstrates the overall has £0.7 billion of deposits offshore. balance of our businesses. The growing Our private banking operations in Jersey, proportion of our mix coming from the asset Guernsey and Isle of Man now have a single management division accords with our strategy management structure. This group, together with and we expect this to continue in the future: our mass affluent business, Close Wealth Analysis of Operating Profit Management, and our onshore bespoke (before central costs) business for high net worth individuals, form the 2003 2004 2005 building blocks of our private client business.