Close Brothers Group plc (CBG) Earnings Call Transcript & Summary

Good morning, and welcome to the presentation of Close Brothers' 2021 Half Year Results. I'll start with a brief reflection on the key elements of our performance in the first half, and how I'm planning to take us through the next stage of our strategic development, building on the core strengths of our successful model. Mike will then take you through our financial performance. And then I'll come back to give you an update on our strategy and business performance. Current circumstances have dictated that this is a prerecorded presentation. But as usual, we'll be happy to take your questions afterwards, both via the telephone conference line and over the webcast, which you can submit either during or after the presentation. It's been another challenging period, with the impact of COVID-19 and lockdown restrictions continuing to affect our customers and businesses. Our priority has been to successfully navigate this challenging environment while continuing to support our people, customers and clients. Against this backdrop, we delivered strong results, and we're pleased with our financial and operational performance in this period, achieving a strong ROE of 13.2%. Income grew across all of our divisions, and adjusting operating profit increased by 2%. We saw strong new business volumes in the lending business and delivered growth of 4% in our high-quality loan book while maintaining a net interest margin of 7.7%. Asset Management achieved solid net inflows and grew managed assets. And Winterflood delivered a very strong trading performance, capitalizing on the significantly higher trading volumes across the equity markets. We've maintained a strong capital, funding and liquidity position, which provides us flexibility for growth. Following a resilient financial operational performance in the first half, we declared an interim dividend of 18p per share. This reflects the group's strong performance in the first half and continued confidence in our business model and financial position. This remains a highly uncertain environment, and the full impact of COVID-19 is yet to be seen. However, we remain very confident in the quality of our loan book, which is predominantly secured and prudently underwritten and in the expertise of our people. We're well placed, both operationally and financially to navigate this challenging environment and maximize the opportunities available to us. Our purpose is to help the people and businesses of Britain thrive over the long term, which is backed up by our strategy, culture and responsibility. Our purpose continues to convey the important role we have to play in supporting small businesses and individuals. Last September, I introduced our responsibility as a core component of our model. And as we continue to navigate the impact of COVID-19, our responsibility to help address the social, economic and environmental challenges facing our business, employees, customers and clients remains more important than ever. This has been a challenging period for our stakeholders. We continue to support them throughout with over 120,000 customer payment deferrals and other COVID-19-related concessions offered and have lent GBP 730 million under the government support schemes for SMEs as well as expanded our efforts to support charities, helping to address disadvantages in the wake of COVID-19. As we emerge from the unprecedented circumstance of the past year, I'd like to share with you how we're evolving our strategy and how it will guide us in the future. The fundamental strengths of our business model remain unchanged and have been evident throughout the current crisis. Our strategic approach will, therefore, focus on 3 objectives: to protect, grow and sustain our successful business model. I'll come back after Mike's presentation to talk a little bit more about each of these strategic objectives and how they apply to our business. To ensure that we're best placed to respond to opportunities and deliver on our strategy, I've made some changes to our executive team. These include bringing the leadership of the Motor Finance and Premium Finance businesses together under our recently appointed Retail CEO, Rebecca McNeil; as well as appointing Neil Davies as our Commercial CEO with responsibility for asset finance and invoice and specialty finance. Rebecca and Neil, along with Frank Pennal, our Property CEO, have joined our Group Executive Committee, with all of our businesses now represented at group level. I'd also ask you to save the date for our investor event on the 15th of June when a more detailed presentation on the group and each of our businesses will be provided, including presentations by each of our business CEOs. I'll now hand over to Mike for the financial update.

Thank you, Adrian, and good morning, everyone. As Adrian said, we delivered a strong performance in the current environment as the positive trends seen at the end of last financial year continued. It is worth highlighting that we are comparing our performance in the first half of '21 to the first half of 2020, which was a pre-COVID-19 period. Group adjusted operating profit was up 2% to GBP 129 million and pre-provisions, profit increased 12% to GBP 181 million, reflecting higher profits in Winterflood and strong new business volumes in banking. Overall, we delivered an adjusted earnings per share of 64p and a strong return on opening equity of 13.2%. We maintained a strong capital liquidity and funding position as our CET1 capital ratio increased to 15.3%, providing significant headroom against regulatory requirements. We achieved 4.4% loan book growth and a net interest margin of 7.7%, reflecting our focus on pricing discipline. And as Adrian mentioned, we have declared an 18p interim dividend, reflecting the group's strong performance in the first half and continued confidence in our business model and financial position. Looking first at the income statement. Income was up 13% to GBP 474 million with top line growth in all divisions and particularly strong trading income in Winterflood. Expenses increased 14% to GBP 293 million driven by higher variable costs in Winterflood and continued investment across the businesses. Impairment charges rose to GBP 53 million to take into account loan book growth and a review of staging and provision coverage for individual loans and portfolios. And after-tax, we delivered GBP 95 million of profit attributable to shareholders, stable on the prior year period. Moving on to the divisional performance. Overall, adjusted operating profit increased 2% to GBP 129 million, with lower profits in banking and asset management more than offset by a very strong performance from Winterflood. We saw high new business volumes in the Banking division with strong demand for CBILS, but profit reduced 18% to GBP 95 million as modest income growth was offset by higher impairment charges and continued investment. In Asset Management, profit was broadly flat on the prior year period at GBP 12 million as operating income grew despite the impact of COVID-19 on new business activity, and we continue to invest to support the long-term growth potential of the business. Profit in Winterflood increased 223% with a very strong performance, capitalizing on heightened trading volumes. Now on to our balance sheet. We maintain a strong balance sheet and remain focused on our prudent approach to managing financial resources. Our total funding increased to GBP 11.1 billion, well in excess of the loan book. We continue to borrow long and lend short with the average maturity of allocated funding at 24 months, ahead of the loan book at 16 months. We have GBP 2.2 billion of treasury assets at the 31st of January 2021 with the majority held with the Bank of England. Our funding base is well diversified and includes access to retail and non-retail deposits as well as secured and unsecured wholesale funding. We continue to strengthen our funding base with a GBP 350 million 10-year senior unsecured bond issue in December, and our customer deposit platform helped us grow our retail deposits to GBP 2.7 billion as we launched cash ISAs and a new notice account. Since the start of the COVID-19 pandemic, we have increased our funding and liquidity levels, enabling us to lean into current market opportunities. Liquidity levels increased further in the first half of 2021, reflecting the timing of our new debt issuance. However, we expect these to revert over time as uncertainty related to COVID-19 reduces. Our credit ratings remained strong with the banking subsidiary rated Aa3 by Moody's. And we have also continued to optimize our cost of funds through disciplined deposit pricing and the renewal of facilities. Turning to our capital position. Our CET1 capital ratio increased 120 basis points from the year-end position to 15.3% with significant headroom against minimum regulatory requirements. Our CET1 capital increased to GBP 1.4 billion. This was driven by higher profits and a circa 45 basis points benefit from regulatory changes to the treatment of software assets. The PRA is currently consulting on the potential reversal to the previous treatment, which would result in a future reversal of this benefit. Risk-weighted assets remained broadly flat at GBP 8.8 billion despite the loan book growth as CBILS loans have a lower risk weighting and the property loan book, which has the highest risk weighting in the portfolio, reduced. And our leverage ratio remained strong at 10.8%. We submitted our initial IRB application to the PRA in December and continue to work with the regulator to support their review. We have a strong capital base with significant headroom to minimum regulatory requirements. This provides flexibility as we lean into current opportunities and take the business forward. Moving on to the Banking division. We saw 1% growth in income to GBP 309 million driven by strong new business volumes and loan book growth. We maintained our focus on pricing discipline allowing us to deliver a net interest margin of 7.7%. Expenses increased 4% to GBP 161 million as costs continue to grow ahead of income in the current phase of investment. BAU costs remained flat, reflecting our strict control and cost discipline. Impairment charges increased, resulting in an annualized bad debt ratio of 1.3%, slightly up year-on-year but down significantly from 2.3% for the 2020 financial year. In the first half of 2021, impairment provisions increased to take into account loan book growth and a review of staging and provision coverage for individual loans and portfolios. As a result, adjusted operating profit decreased 18% to GBP 95 million. Now on to the loan book, which grew 4% to GBP 8 billion as we saw high levels of new business volumes and good opportunities for growth in Motor Finance and Commercial supported by strong demand on the government support schemes for SMEs. The Commercial loan book increased 15% overall. We saw strong growth in our Asset Finance business driven by demand for loans under CBILS. We also saw growth in Invoice Finance, reflecting good CBILS demand. However, overall utilization levels in this business remained subdued versus pre-COVID-19 levels. The Retail loan book remained flat. The Motor Finance loan book grew 4% as we saw record new business volumes driven by pent-up demand and an increase in used car finance as well as benefits from our Motor Finance transformation program. The Premium Finance loan book declined 6%, reflecting the impact of COVID-19 restrictions exacerbated by January seasonality. And the Property loan book decreased by 8%. This reflects lower drawdowns and higher repayment levels, reflecting delays in completion of developments due to COVID-19 restrictions and strong unit sales. Turning now to our net interest margin. Our specialist and relationship-driven model is built on pricing discipline, supporting a consistently strong net interest margin compared to our sector. The chart on the right shows the trajectory of NIM over the last year, excluding the impact of certain items, such as modification gains and losses and for day count. From this, you can see our underlying net interest margin stabilized at around 7.5% in the period. This reflects an improvement in fee income, high levels of customer activity during the period and a reduction in our cost of funds. Moving on to costs. There was a 4% overall increase as we continue to invest in our strategic programs. We continue to focus on cost discipline, and BAU costs remained flat despite an increase in variable compensation. Investment costs increased GBP 7 million to GBP 32 million as our strategic initiatives progress and we incur related depreciation charges. As this investment continues, costs are expected to grow ahead of income for the remainder of the year. Investing through the cycle remains a key strategic priority with a number of our ongoing investment programs delivering benefits. This investment has enabled us to adapt our business in response to changing conditions and evolving customer behavior, such as with the launch of our cash ISA product. Impairment charges increased to GBP 53 million, up from GBP 37 million in the pre-COVID-19 comparative period. We have revised the macroeconomic scenario weightings, with a 40% weighting remaining to the baseline and 10% moved to the upside scenario to reflect reduced Brexit uncertainty and the COVID-19 vaccination developments. The modeled impact of these changes in weightings has been mainly offset by judgmental management overlays to reflect the continued uncertainty in the U.K. economic outlook. Impairment provisions increased on the comparative period to take into account loan book growth and performance and a review of provision coverage for individual loans and portfolios. These factors resulted in an overall increase in provision coverage to 3.3%. We believe this represents an appropriate level of provision, reflecting the highly uncertain external environment and the fact that the full impact of COVID-19 has yet to be reflected on credit performance. We remain confident in our loan book, which is predominantly secured, prudently underwritten, diverse and supported by the deep expertise of our people. Since this time last year, we have offered a range of COVID-19 concessions to our customers. And these loans have been classified as forborne. Looking at the forborne loan book, the overall performance remains encouraging. Considering each book in turn, in Commercial, 20% of the loan book was classified as forborne and subject to COVID-19 forbearance measures at the 31st of January 2021. This is down from 26% of the book at the year-end. And of this 20%, 87% of customers by value had resumed payments at the 31st of January. In Retail, 6% of the loan book was classified as forborne and subject to COVID-19 forbearance measures at the 31st of January, down from 9% of the book at the end of the year. And of this 6%, 79% of those customers by value had resumed payments at the 31st of January. And then in Property, COVID-19 forbearance takes the form of extensions where we waive the fee and is not triggered by a sign of financial stress. And so we remain confident in the quality of these loans. This represented 13% of the loan book at the 31st of January, down from 18% at the year-end. Overall, we remain confident in the credit quality of our loan book and the underlying security we hold. Moving on to Asset Management. We delivered solid net inflows of 4%, reflecting continued demand for our integrated wealth management and investment management services and good inflows from recent portfolio manager hires. Managed assets increased at 10% to GBP 13.8 billion, and total client assets increased 9% to GBP 14.9 billion driven by positive market movements and net inflows. Adjusted operating profit was broadly flat at GBP 12 million as we saw a 2% increase in operating income despite COVID-19 restricting face-to-face meetings. The revenue margin remained broadly stable at 94 basis points. The 3% increase in expenses was driven by new hires and technology spend, reflecting our commitment to invest in the long-term growth potential of this business. And on to Winterflood, which delivered a very strong performance and continued to demonstrate its ability to lean into significant trading volumes. The business delivered a 223% increase in operating profit to GBP 34 million. Income increased to 105% to GBP 98 million, reflecting a very strong trading performance and continued elevated market activity. Expenses increased 71% to GBP 64 million, reflecting higher variable compensation and settlement costs as a result of increased trading activity. The expertise and experience of our traders meant that we're able to successfully manage risk with no loss days in the period. All of this contributed to Winterflood delivering its best start to the financial year in the last decade. So as you can see, we are pleased with the strong financial performance delivered in the current market conditions. And I will now hand over to Adrian.

Thank you. Thanks, Mike. A key point of difference at Close Brothers is our long-term approach and the rigorous discipline behind our proven and resilient business model, which supports our long-term track record of growth, profitability and dividend progression over the years. Our success is supported by our consistent pricing and underwriting criteria, by the prudent management of our financial resources and by the diversification of our businesses with specialist expertise in each of the sectors we operate in. These are the fundamental strengths of our model, and my responsibility is to ensure we continue to protect them whilst taking the business forward. I mentioned at the start, how we're evolving our strategy to protect, grow, sustain. I'll now talk through each of these strategic objectives and how they position us well for long-term success. Our first strategic objective is to keep our business safe by maintaining and enhancing our model's key strengths. This will allow us to continue to deliver for all our stakeholders in a wide range of market conditions. We remain focused on the prudent management of our financial resources and on the disciplined application of our underwriting and pricing criteria. And to protect the key attributes of our high-touch relationship model, it's essential that we continue to invest in our businesses. We've maintained this discipline throughout this challenging period, which has helped us navigate this environment and emerge in the strongest possible shape. Another important strategic objective for us is disciplined growth, and we'll deliver disciplined growth by leaning into the current environment and by maximizing future opportunities. Importantly, this doesn't mean we'll achieve growth at any cost as loan book growth in the lending businesses will absolutely continue to be an output of our business model. Our immediate priority is to continue to successfully navigate this challenging environment and to make the most of the opportunities as the economy starts to recover. Looking ahead, we'll proactively assess any incremental growth opportunities that fit with our successful model across our businesses in existing and new markets. And to do this, we'll continue to evolve our offering as well as improving our operational and digital capabilities. Market conditions have continued to be dominated by COVID-19. We benefited from implementing the playbooks we developed in 2019 in preparation for a downturn. And our immediate priority is to be ready to maximize the opportunities available if and when a credit event happens. At our full year '20 results back in September, I said this credit event had not yet happened. Since then, we've entered another national lockdown and the government has extended their support schemes for consumers and SMEs, which has helped to delay increases in company insolvencies and unemployment. There remains a lot of uncertainty. And while we still can't know how the next phase of the cycle will play out, we do know that we're in a strong position to make the most of any opportunity it presents. Finally, our third strategic objective, sustain. Our long-term approach is genuinely embedded in everything we do and is a key differentiator of Close Brothers. That's why it's important that we secure the future of our business, customers and the world we operate in and that we do it responsibly. We'll achieve this by focusing on the needs of our customers, our people, our community and the environment by evolving our business to recognize and support the priorities of each of these groups. I'll now take you through an update on the activities seen by the various segments of the bank and how each of our businesses are maximizing the current market opportunities. Within Commercial, we've seen good demands under CBILS, particularly in Asset Finance. The chart on the right shows how strong levels of both CBILS and non-CBILS lending have contributed to the record period of new business volumes in Asset Finance as the business leans into the current demand from SMEs. As at the 31st of January 2021, we'd lent GBP 730 million across 3,418 loans, predominantly under CBILS with minimal amounts lent under the Bounce Back Loan Scheme. In Invoice Finance, utilization levels remained subdued and continue to track below those seen prior to COVID as lockdown restrictions impact customer activity and sales volumes. Most importantly, the Commercial business remains well positioned to support customers as they emerge from the crisis. In Motor, we've seen strong new business volumes, reflecting pent-up demand and increasing use of finance in the secondhand car market and also the benefits from our investment in sales capability. This investment allowed our sales teams to adapt and become more agile during this challenging period. It maximized our remote lending capability, so we can continue supporting motor dealers during lockdown, capitalizing on the strong demand for secondhand car financing. As illustrated on the chart, new business volumes have remained resilient throughout the November and January lockdowns, notably ahead of the volume seen in lockdown 1 in March 2020. In Premium Finance, we've seen reduced demand for car insurance policies as COVID-19 restrictions have led to the suspension of driving tests and a decline in the new car market. In Premium Finance's commercial market, we've seen an increase in deal size as customers look to ease their cash flow. Both retail businesses continue to support customers as they need to change and evolve throughout the crisis. In Property, we saw a rebound in sales activity following the easing of first lockdown restrictions, heightened by the stamp duty holiday. We focus on residential developments of family housing where there's strong structural demand as reflected in the mix of our Property loan book. We continue to see good demand in the regions outside of London and the Southeast. The strong sales activity we've seen by new housebuilders has led to higher repayments, and we've also seen lower drawdowns in the Property book as development completions have taken longer due to COVID-19 restrictions. We're now seeing an uptick in drawdowns and have a solid undrawn pipeline of more than GBP 1 billion as we look to capture the strong demand that remains throughout the residential construction sector. The Asset Management division has maintained excellent client service during challenging market conditions reflected in continued demand for our integrated advice and investment management services with an attractive, virtually integrated and multichannel distribution model, which underpins our success. This leaves us well positioned to benefit from the proven ongoing demand for our services and the structural long-term growth opportunity in the wealth management industry. The division has achieved good net inflow rates over several years and, in the first half, delivered solid annualized net inflows of 4%, a slowdown in flows compared to the prior period due to the impact of COVID-19 on client interactions. We see net inflows from our advisers, third-party IFAs and our own portfolio managers with strong contributions from our investment in new hires over recent years. Ongoing investment in systems and technology continues to enhance our operating efficiency and increase the scalability of our back- and middle-office functions. We also continue to hire additional advisers and fund managers while remaining open to selective incremental acquisitions to aid long-term growth. Sustainable investment management strategies remain a key area of focus across the industry. Our socially responsible proposition continues to be well received with 2 new sustainable funds launched and with good traction. And finally, Winterflood, which once again delivered a very strong trading performance and demonstrated its ability to lean into the significant market activity. The continued extraordinary market conditions saw Winterflood record its highest ever daily bargains in November. Winterflood's operational responsiveness allowed it to maintain uninterrupted trading throughout the period of elevated trading volumes. The experience and expertise of our traders and their ability to manage risk enable them to deliver a very strong trading performance in extremely challenging market conditions with no loss days in the first half. Winterflood remains a long-established leading U.K. market-maker for retail stockbrokers and institutions and is well positioned to continue to maximize daily trading opportunities and provide continuous liquidity in all market conditions. Winterflood also continues to make good progress in expanding its relationships with institutional clients and continues to grow its presence in the U.S. market. And Winterflood Business Services, which provides outsourced dealing and custody services for asset managers has continued to grow its client base with assets under administration of GBP 5 billion, up 21% in the first half. Overall, the group is navigating this unprecedented environment well, and our model is performing as we expect at this stage of the cycle. Despite the national lockdown restrictions and volatile macroeconomic environment, our credit performance has remained stable, reflecting the quality of our loan book and the ongoing government support schemes for consumers and SMEs. However, the full impact of COVID-19 still remains highly uncertain. Against this backdrop, we're committed to maintaining the discipline of our business model and our readiness to respond to opportunities and changes in market conditions. Our proven and resilient model, strong balance sheet, deep experience in navigating a wide range of economic conditions leave us well placed to continue supporting our colleagues, customers and clients now and over the long term. I look forward to seeing you at our investor event on the 15th of June. Thank you, and we'll now be happy to take any questions you may have.

And the first telephone question is from the line of Benjamin Toms of RBC Capital Markets.

I have two, please. How should we think about the dividend announced today and how it relates to your potential full year '21 dividend? Does the 1/3, 2/3 rule still apply in the current environment? And then secondly, you printed the CET1 ratio is down on a fully loaded basis and ex of intangible was about 13.6%. And that's about 600 bps ahead of your regulatory requirement. How much of that 600 bps does management see as excess? And how do you see it being allocated between growth investments and the potential to be returned to shareholders in the future?

Thanks, Benjamin. On your first question, on the dividend, you rightly point out that historically, we've had a continuous dividend policy, a progressive dividend policy that last -- that has been in place for the 34 years since Close Brothers has been quoted. It progressed all the way up until April last year when we withdrew our 22.7p dividend that we announced for half 1 '20 on COVID happening. So that's when the dividend fell away. And then we reintroduced a final dividend. It was for the full year, the full year period of '20 at 40p. We've had a strong performance, as we've described it in the results today. And management and the Board see that a dividend of 18p is reflective of that performance. Looking forward, there is still a high amount of uncertainty, as we say, in the RNS, and Mike and I highlight in the announcement this morning. So we will take account of the second half performance. We will take account of the outlook at that time, and that's when the Board will make the decision on the dividend. So we're not making any statement on whether it's 1/3, 2/3 going forward. We -- as I said, in 2020, in September, the dividend is a very important part of our investment thesis, and we will look to make the right payment of the full year. If I move on to the CET1 position and the fully loaded position, as you said, so the whole CET1 of 15.3% is broadly double the regulatory minimum, and the deductions you've made to take it down to the 13.6% still leave a very comfortable headroom. It is right in the current environment that we maintain a significant amount of headroom. The best use of our capital is growing our loan book and our very strong NIM reported at 7.7%, and you will have seen the slide, underlying at 7.5%. That is the best use of our capital to identify ways that we can sensibly grow the balance sheet in line with that NIM. We are going through the IRB process. That will take a while for accreditation, probably 2 years, but again will have an impact on our CET1. And we're still in the middle of investment programs that we highlighted, notably in Motor and Asset Finance as well as the IRB program itself. We see the level of capital we have as very sensible and prudent. It is not our plan as we stand today with the level of uncertainty in the market to consider any paybacks to shareholders as we speak.

I think that's fine, Adrian, you're absolutely right. The best use of the capital is to deploy it to the loan book. We also have made some small acquisitions in the past in the Asset Management business, and so that might be something that we could use it for. But overall, it's really to support the growth of the business.

The next question is from Robert Sage of Peel Hunt.

I have two questions as well, actually, the first of which is, in terms of the outlook for the bad debt, I know this is extremely difficult given uncertainties, but when a lot of the large quoted clearing banks were reporting their full year results for 2020, they were -- pretty much all of them are saying they're expecting a very substantial reduction in bad debt in 2021 relative to 2020 and some of them even suggesting that the bad debt rate -- ratio was going to fall down to sort of normalized levels. And I was wondering whether -- when you sort of look ahead into calendar 2021, whether you would particularly agree or disagree for whatever reasons with this prognosis. And the second unrelated question is that I was quite interested in seeing that you're bringing 2 of your divisions under a single management, i.e., Motor Finance and Premium Finance. And I was just wondering whether you could touch a little bit on the thinking behind this. Is this just a matter of convenience? Might there be synergies? Might there be big cost savings? Or how should we think about this?

Thanks, Robert. Firstly, on the bad debt, one of the first things to that, of course, is our different timing of our year-end relative to the banks that have a December calendar year-end. So to interpret our bad debt progression, I think it's worth looking at it half-on-half. So half 1 '20, we had 0.9%. And the full year for '20, we reported as 2.3%. Hence, half 2 '20 was 3.7%. So the progression is 0.9 half 1 '20, 3.7 half 2 '20, and then we've reported 1.3% today. so a significant fall in the bad debt from the half 2 last year. As we said in the presentation, we've done a full look, as we always do, at the portfolio and individual large loan level. We've looked at the macroeconomic overlay. And then we have management expertise judgment overlay as well. We see the level of provision as very prudent as we stand today, very sensible and the coverage level we have is at 3.3% which, if you compare to the other banks, is probably on the slightly higher side as well the banks mentioned. We see that as a very sensible level of provision. We're not giving guidance on what the half 2 number should be. We've highlighted a range of uncertainty, the lockdown, how that will play out; how consumers will -- how unemployment will progress after the job support scheme ends; insolvency after the loan support schemes end as well. So there's so much uncertainty that it is right that we maintain a sensible level of provision on the balance sheet, which is what we're doing. You asked an interesting question on the organizational change. If I answer it in a wider context first, what I wanted to do was to bring the customer closer to the group executive. So I've elevated customer-facing CEOs, namely Frank Pennal, Neil Davies and Rebecca McNeil, on to the group ex co. That helps decision-making and, obviously, had some immediate efficiency benefit at a senior level. In terms of putting the business together, they're both consumer businesses. They both have CCA interaction, so that's important. We broadly have 2.2 million consumers in the Premium business and about 250,000 in Motor, so there are some common issues there. We are essentially looking at the back offices of both businesses and where there are future chances to see optimization, we would look at those as well. Thanks, Robert.

[Operator Instructions] And the next question is from the line of Jens Ehrenberg of Citi.

I just had a very quick question on Winterflood, really. So I think the average targets today for the half year stood at 97,000. And I think, if I remember correctly, for the first quarter, they were a little bit lower at 83,000. I was just wondering, can you give any indication how you're seeing that going in the second quarter and if you sort of still see elevated bargains per day towards the end of the quarter and into the period that we are now? Any color there will be fully appreciated.

Thanks, Jens. If I can answer that question in a little bit of a wider context, so if you look at the half-on-half bargains for Winterflood, you'll see that in the 7 or 8 quarters pre-COVID, we were doing towards 54,000 to 73,000 bargains a day. That spiked quite significantly after COVID, on the first half after COVID, i.e., our second half last year, with 108,000 bargains a day. And as you rightly say, it's moved back slightly, it was 97,000 in the half. Now you may remember how the markets performed during that period. In October, there was quite a fall in equity markets generally. And then in November, there was quite a spike. And the day we quote, the 9th of November was the day that the Pfizer vaccine was shown to have 90% effectiveness, and that's when we had the truly exceptional day of 227,000 trades. So that's the strength that we saw in the second half of the half, i.e., the final quarter. I am willing to say that what we've seen since the reporting date at the 31st of January is broadly the same sort of trading levels in Winterflood. If I look at the wider picture there, I gave the trend over a long period. I was asked a question back in September when we did the full year, is this a structural change or is it cyclical. And I said at the time, it was too early to be structural. Well, now we've seen 11 months or so of very strong volumes in Winterflood. It's still too early to call that a full trend. But realistically, I don't think the volumes will fall all the way back to that level I quoted of sort of the 55,000 to 75,000 a day. What you may have seen from AJ Bell's and Hargreaves Lansdown's results, the big uptick in retail traders are not just customer numbers but also a younger demographic. Some of those traders will go back to work and not trade. Some of them won't. Some of them will continue trading. So there's probably some structural bit there. Clearly, it's been a largely cyclical piece still though with the volatility in the market as well.

The next question is from Freddie Sleiffer of KBW.

Just following on from the previous question on Winterflood, my question on income was answered, but what should we see as a sort of normalized cost-to-income ratio that you'd expect over the long term for that business since it has fluctuated a bit? And then secondly, I think you mentioned that you expect your IRB accreditation process to take about 2 years. Are you able to give an indication as to the expected impact? And is this only for one portion of your loan book to begin with?

Okay. Thanks, Freddie. On Winterflood first -- sorry, what was the first question?

First one was about the E/I ratio on Winterflood. And really, of course, the structure there is very much based on variable pay. So the E/I ratio will not move significantly as we write more or reduce less. Clearly, there are some fixed costs, so that will have an impact. But effectively, I ratio will stay broadly where it is at the moment.

Thank you. And on the IRB, so as you rightly say, Mike, the income went up broadly GBP 50 million, and the cost went up broadly GBP 26 million on Winterflood in the half, so it is a fairly direct correlation there. On IRB, the timescale I gave -- we put in the initial application around Christmas time. The timescale I gave is based on other banks that have been through IRB. And clearly, we are reliant on the PRA who we're working very well with. And they have, of course, their own pressures with COVID, so it's hard to be exact. We have submitted initial portfolios that you allude to. So we will look at initial portfolios to start with, and that's where we will see the benefit initially. But as I said, the likely time frame is about 2 years, and the benefit will come through after that. So we're not guiding on the capital benefit. That is within the PRA's gift to decide on the models we have, the level of conservatism we have. So that will be something that we will be finding out as we go through the process with the PRA. There are clearly other benefits in terms of risk management, in terms of assessing our books correctly given the level of security that we have on our books. Those are the spin-off benefits that we will get from IRB as well. We'll be talking about more about IRB as we go through the process.

I think the only point I would add just on the benefits is it clearly depends where you are in the cycle. As you move into a downturn, the benefits, you would think, would be slightly less than they would be as you might be in an upturn situation compared to a standardized approach. So I think it's important that, that is borne in mind as well.

Great. And sorry, can I just ask one more on the NIM quickly? I know you previously guided to 7.5% for the full year. Is that sort of still where you expect NIM to come out in the second half? Or is that -- do you have a greater ability to lower cost of funds still?

So the chart is on Slide 15, Freddie. I think that gives a very clear indication of the underlying NIM of 7.5%. So even though we reported 7.7% for the half, there are some one-offs in there. So 7.5%, I think, from that trend, I think, is a useful progression to look into half 2.

And we will now follow with the web questions.

First question comes from Raul Sinha at JPMorgan. Could you discuss what you are seeing in terms of loan demand across your customer base currently in light of the dip in January with the lockdown? Do you see increasing opportunities to grow your lending, with competitors receding in certain areas?

Thanks, Raul. That's quite an extensive question. Let me look at that in a range of ways. The diversity of our businesses is very important. We've talked about before how we have 17 businesses. That's a plus, and they're all in different markets, and they will have different opportunities as we come out of lockdown. I'll briefly talk through the 5 loan books that we're reporting and talk about how they performed in the most recent lockdown and the visibility that we have for them. So if I start with Motor, there's a useful slide that shows the Motor volumes. After the first lockdown in March last year, the volumes fell quite significantly as that chart showed. It's performed better in the most recent lockdown. Our Motor dealers who -- the Motor dealers that offer our finance have adapted very well and are now doing click-and-collect on used cars, et cetera, so the volumes have been good. And in fact, we had record volumes after the lockdown lifted last summer as well. So I would expect on Motor when lockdown lifts again that we would see some accretion in volumes as car dealers open again. And of course, the used car market that our business is based in has performed better than new car registrations significantly. So I've seen Motor performing well, and our investment there has helped again in terms of helping consumers to be able to apply for credit at home as an example. If I move into Premium Finance, Premium has seen some falloff in the most latest lockdown, particularly on motor policies. There have been less new car drivers as a result of not taking driving tests. And some people would have stopped having a car as a result of lockdown. So less demand for car policies there. I would expect that to pick up when lockdown lifts, and we talked about more positive signs on the commercial policies for SMEs spreading cash flow. Premium has been a fairly resilient loan book throughout this period, though, I would say. If I move on to Asset Finance, a significant part of the loan book growth in the first half of GBP 337 million has come from Asset Finance. There's a useful chart that splits out the amount that's come from the government-backed scheme on CBILS and the non-CBILS, so the more standard lending that we've had. Now we've had record new business in Asset Finance in the most recent half. It's hard to say how much of the standard business has migrated on to the government subsidized product and how much has just come from new business as a result of an interest-free period as an example. I expect to see as the lockdown lifts, the key parts are the CBILS scheme will end on the 31st of March, but there's a drawdown period of between 3 and 6 months depending on the product from there. So we have an established pipeline that we'll draw throughout half 2 on CBILS. And I would expect in businesses as well to think about the recent budget decision on investment, driving investment, the 130% allowance that could bring forward demand or increase it as well in Asset Finance. If I move on to Invoice Finance, that's been one of our more impacted businesses, largely through SME sales volumes, their own sales falling and, therefore, us having less invoices to discount. And the utilization has fallen there quite significantly. I expect, again, as lockdown lifts and life returns more to normal for SMEs that utilization will pick up in Invoice Finance. Importantly, we still have the same client base and we have the facilities available for them to draw. Property has been a very interesting market. The government intervention on stamp duty and the recent extension as well has clearly driven volumes and assisted with prices along the way. Help to Buy will change coming into April and be less favorable in the regions as well. What we've seen are very strong repayments from that sales activities but relatively modest drawdowns during COVID as developments have been protracted, typically taking 3 to 6 months longer than a normal period. I'd expect some of that to move away as we move out of lockdown for developments to accelerate again. And I would see the loan book, in line with that pipeline we described of GBP 1 billion, to pick up as well. So the loan book growth, to bring that to a conclusion, in half 1 of 4.4%. The loan book did fall in January itself, as you rightly point out. That was largely a seasonal impact and a bit of lockdown 3. So I would expect as lockdown lifts that the loan book would continue to grow from its current position.

The next question comes from Portia Patel at Canaccord. In the January trading update, the annualized bad debt ratio was 0.9% but reported at 1.3% today. Please, can you explain why this increase happened when including January?

Thanks, Portia. What I would say, first of all, is to look back at that trend I described where half-on-half, half 1 '20, 0.9%; half 2, 3.7%; and 1.3% for the full period. And then looking at the approach we've taken, we've looked as we always do at the end of the half at the portfolios, individual exposures, the macroeconomic scenario and management overlay, and that's where the number of 1.3% comes from. Mike, would you like to build on that as well?

I don't think there's anything. I think that's complete, Adrian.

Thanks, Portia.

And then we have a question from Ian Gordon at Investec. What further volumes are you expecting to achieve under CBILS and successor government-backed schemes? And a follow-on from that, please discuss the likely recovery process under these schemes. Will it be entirely managed in-house? And please comment on the auditing of bank's compliance with the government guarantee scheme. Has your own audit been completed? And have you received or disclosed your color coding?

Okay. Thanks, Ian. On the CBILS volumes and what we're likely to see, as the slide shows that, at the end of January, we've drawn broadly GBP 730 million. That was predominantly on CBILS itself with less than GBP 3 million on Bounce Back. That's important when I go into the recovery, the next part of the question that you asked. Looking forward, as I mentioned in the previous answer, there's broadly 3 to 6 months for the pipeline to draw that we have. So I'd expect there to be a good visibility of further CBILS lending closing out during the rest of the financial year for us. The replacement scheme, the recovery loan scheme, is less attractive for SMEs. It is an interest-free as an example. It still has the 80% guarantee and is most closely aligned with the existing CBILS scheme. So we would plan to apply under that scheme and offer that to our customers. I mentioned the Bounce Back scheme we've done less than GBP 3 million on, and there's clearly been a lot of coverage in the press of potential write-offs on that scheme. So the whole government-supported schemes come in at over GBP 62 billion now, and over GBP 40 billion of that broadly is on Bounce Back. We have less than GBP 3 million. That is the product where there seemed to be considerable potential for fraud and potential write-off under the government's guarantee. We have mainly the CBILS product, and that's on our standard approach. We took our standard credit approach. We lent predominantly to existing customers as well. So we will use our existing recovery processes there. We have no plan to use a potential utility, if there is to be one at an industry level, as we stand today. Although I am on the Board of U.K. Finance, there is no proposal at the moment for such a utility. And on the audit from the British Business Bank, I understand -- but although I'm not obviously employed by the British Business Bank, they have audited most parties. We have had an audit. And whilst we don't disclose the rating, I'm entirely comfortable with the findings that were in that audit, and we, of course, have suitably responded to them. Thanks, Ian. I think that's all the questions. Is it, Camila?

No more questions.

There are no more questions. In that case, thanks for your time this morning, and I very much hope to see you on the 15th of June when we have our investor seminar. Thank you, and good morning.

Thank you.