* Year operating profit 121 million pounds
* Loan book grows 23 percent
* Asset management unit set for small loss
* Shares up 0.8 percent, ahead of sector index
(Adds comments by CEO, analyst; background)
By Sarah White
LONDON, Sept 28 (Reuters) - British merchant bank Close Brothers posted a 7 percent rise in underlying profits on Tuesday on the back of a 23 percent rise in its loan book and said it expects further growth in lending this year.
Close shares were up 0.8 percent at 729.5 pence at 1024 GMT, valuing the group at 1.1 billion pounds, while the Stoxx 600 European banking sector index was 0.7 percent lower.
"The figures were as expected. Banking was the standout area, driven by the fact the big banks have encountered problems. Smaller entities are enjoying a spate of growth," said Keith Baird, an analyst at Oriel Securities.
The group said its underlying operating profit rose by 7.6 million pounds to 121.3 million pounds in the year to July 31, before impairments totalling 21.5 million pounds related to a revaluation of two investment assets and a writedown on its asset management business, which is being restructured. But the banking division business contributed an adjusted operating profit of 79.5 million pounds, up 47 percent as it expanded its reach in retail and commercial lending.
"Although all lending has been down, there have been opportunities for specialist lenders like ourselves to step up," Chief Executive Preben Prebensen said, adding he expected growth in the loan book to continue.
The group's core tier 1 capital adequacy ratio dipped 0.9 percentage points from a year ago to 13.9 percent but it said a modest improvement in economic conditions saw a reduction in loan impairment losses as a percentage of the average loan book to 2.4 percent from 2.6 percent at the end of July 2009.
The securities division saw a 9 percent drop in its operating profit to 59.3 million pounds, with the reduction attributed to a sharp fall in profits at derivatives trader Mako after a bumper year in 2009 which was only partly offset by "an improved performance" at its Winterflood brokerage and Close Brothers Seydler Bank.
Close, one of the few remaining independent British merchant banks, recorded a goodwill impairment of 6.5 million pounds in its asset management division, which posted an adjusted operating profit of 3.3 million pounds for the year.
The firm said the division was likely to make a small loss in the current year.
Close, said its "subdued" asset management division was undergoing a period of transformation, with a focus on British private client business.
Some of its funds still showed net inflows, Prebensen said, but profits collapsed partly because Close had incurred costs in developing its new strategy.
"This year we have spent a third of the development expenditure that we will spend in total," he said.
The asset management business is not expected to be profitable for about three years, but the firm's other divisions would easily absorb expenditure costs.
"At the moment it's the poor relation to the other two," said Baird. "It may have long term value, provided they can build it out successfully."
The final dividend was maintained at 25.5 pence a share to give a total payout for the year of 39 pence, also unchanged, on earnings per share from continuing operations up 5.5 percent at 46 pence. ($1=0.6318 pounds) (Editing by Greg Mahlich)