UPDATE 3-Rathbones profits hit by falling interest income

Wed Jul 29, 2009 2:47pm IST

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* Warns interest income could halve during H2

* H1 pretax falls to 14.1 million pounds, shares drop

* Funds under management up in IM, down at Unit Trusts

* Interim div kept at 16 pence (Adds comment from CEO on M&A, broker cut to target price)

By Joel Dimmock

LONDON, July 29 (Reuters) - British fund firm Rathbone Brothers (RAT.L) on Wednesday warned of a further sharp drop in interest income in the second half after a dip pushed profits for the first six months below market expectations.

Pretax profit from continuing operations for the first six months was 14.1 million pounds ($23.32 million), down from 23.9 million pounds a year earlier. House broker Cannacord Adams had forecast pretax at 16.2 million pounds.

Rathbones said interest income "fell sharply in the second quarter as earned rates on treasury assets fell considerably," while chief executive Andy Pomfret told Reuters interest income could halve during the second half.

The company had seen a margin boost in the first quarter as interest payments to clients fell alongside Bank of England base rates while cash balances were still paying up to 5-6 percent.

The market had been watching for news on the impact of a decline in interest income and the shares fell 4.39 percent to 745.5 pence by 0818GMT. The FTSE 250 .FTMC was flat.

Altium Securities cut its price target to 780 pence from 810 with a Hold rating. Arden Partners, with a 680 pence target, initiated coverage with a Reduce, but called Rathbones "a high quality business performing defensively in challenging times."

Numis was upbeat, echoing Arden's comment and raising its recommendation to Add after a period of weakness for the shares.

FUNDS TO GROW

Funds under management rose 3.2 percent to 9.7 billion pounds during the first half in the Investment Management business but fell to 836 million pounds from just over 1 billion pounds in the Unit Trust business.

Pomfret predicted the full year would see overall funds under management maintain growth at 4-5 percent.

He said the Unit Trust business had a "difficult first half" including 180 million pounds in net redemptions. Pomfret -- who has put in place a recovery plan at the business -- said he expected the division to post net outflows for the full year.

Rathbones is split into three units. Investment Management manages money in mainly discretionary mandates for individuals and charities, while Unit Trust Management sells funds to the retail market through independent financial advisers.

The Trust company offers advice on services including tax planning, trust formation and family office management.

Wealth managers like Rathbones are facing up to a new regulatory environment in the wake of the credit crisis.

Pomfret played down the impact: "It's no big deal," he said. He added the firm was still weighing the implications, but was keeping costs in check with changes to pension and supplier arrangements predicted to save 2 million pounds in 2010.

Pomfret said Rathbones was still concentrating on organic growth, or on bringing in teams of fund managers who could be woven into the company's existing structure at minimal cost.

However, he also left the door open for an acquisition as fund industry consolidation gather pace.

"We are always looking... There is less around than you might think, (even if) there are some well-publicised sale processes," Pomfret said.

"We've got a pretty strong balance sheet, we've got plenty of capital and no core borrowings. Frankly we're sitting here in a pretty good place if something comes along," he said.

The interim dividend was maintained at 16 pence. (Editing by John Stonestreet) (For the Hedge Hub blog: blogs.reuters.com/hedgehub) (For Global Investing: here)

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