Close Brothers: How the motor finance scandal reshaped one of ‘Europe’s least cost-efficient lenders’
Nearly two years ago Close Brothers chief executive said the bank would take “decisive actions” to strengthen its financial standing.
The bold overhaul of the lender’s capital structure came amid the Financial Conduct Authority’s (FCA) review into the motor finance industry – a sector which made up 20 per cent of its £9.5bn loan book in 2025.
“The board recognises the paramount importance of preparing the group for a range of outcomes from this review,” said Close Brothers’ chief Adrian Sainsbury – who would go on to exit in January 2025 for health reasons before being replaced by finance director Mike Morgan.
Sainsbury added the bank would take a “number of decisive actions to strengthen [its] capital position materially,” ahead of dropping dividend payments for the 2024 financial year.
Over the last 20 months, the bank has taken the chop to operations in a bid to strip back costs with a target of adding £400m to its CET1 ratio, a crucial measure of a bank’s financial strength.
This included scaling back lending in its premium finance division, dropping its brewery arm and offloading its asset management firm.
At the bank’s earnings update for the 2025 financial year, Close Brothers pledged to go further. After nailing £25m in annual cost savings the bank said it would deliver another £20m for the next three years.
Yet for all the bank’s belt-tightening, the market remains skeptical.
Close Brothers is the ‘laggard’ of mid-cap banks
“Close Brothers has a cost problem, and the £20m of cost savings identified at full-year results fell short, in our view,” say RBC analysts Benjamin Toms and Pablo de la Torres Cuevas.
The analysts said the bank could wipe out around seven per cent of its total costs over the next 12 months amounting to near £32m in savings.
This includes tearing down Close Brothers’ management structure of 25 separate business units with unique management layers, in a move that could save £5m. Toms and Cuevas said a five per cent reduction in headcount – which could generate £9m in savings – would also help address the bank’s “very low” loans-per-employee ratio compared to peers.
Should it adopt this more aggressive path, the analysts believe the bank could drive its cost-to-income ratio – a key profitability metric – down to 56 per cent, below the current target of 59 per cent.
This would also come with a leaner cost base of £402m.
Among a crowded field of challenger and mid-sized banks, Close Brothers is under pressure to tighten its cost base.
“Compared to other UK small and mid-cap lenders, Close Brothers’ efficiency materially lags that of OSB and Paragon (best-in class) and Metro’s,” analysts said, adding that the bank “stands out as one of Europe’s least cost-efficient lenders.”
Pressure to tighten up comes as consolidation sweeps the sector, with challengers finding themselves snapped up by the industry’s giants.
Analysts at Moody’s warned should the motor finance scandal impose financial penalties that cripple Close Brothers’ solvency, it may find itself caught in the takeover frenzy.
Moving into high gear
In October Close Brothers almost doubled its motor finance provisions to £300m after the FCA provided new details into its contentious redress scheme.
The bank took a swipe at the financial watchdog, stating its approach to assessing “unfairness” did not align with the Supreme Court ruling in August.
Close Brothers, along with South African lender Firstrand, took their fight to the top Court after the Court of Appeal handed down a ruling in October that discretionary commission arrangements – ‘secret’ commission deals with car brokers and lenders – were illegal.
The move sent banking stocks tumbling, with Close Brothers shares sinking over 30 per cent between the Court of Appeal ruling and the Supreme Court case kicking off in April.
Whilst the Supreme Court handed the banks a lukewarm win – siding with them on two out of three cases – the door was opened for a redress scheme on the grounds of unfairness.
The City watchdog pushed back the consultation on its redress proposals after Lloyds, Santander and Barclays joined Close Brothers in opposition. But it also came with rising unease on the consumer side with the All-Party Parliamentary Group on Fair Banking accusing the regulator of favouring lenders. The full and final publication of its redress is expected in early 2026.
Speaking with City PM in September, Close Brothers boss Mike Morgan said it was “encouraging” to see the FCA acknowledge the need for a “fully functioning motor market”.
“Common sense should prevail” on the redress, Morgan said, as he set his sights on “accelerating” after motor finance uncertainty led to the bank holding back £700m of risk weighted assets.
“We have opened the taps now and it’s back on,” he said.
Should new boss Mike Morgan take up the mantle of going further in cost-cutting endeavours, analysts don’t doubt that Close Brothers could roar back to life.
Toms and Cuevas upgraded the bank’s stock to ‘Outperform’ – an indicator that the bank would materially storm above the sector average, subject to it going beyond consensus on costs.
Striking an optimistic tone for the bank’s year ahead they said: “We think the bank has more fat that it can trim on costs, which is not reflected in consensus.
“It’s tight, but we think that Close Brother’s CET1 ratio can absorb a full top-up for motor finance, incremental restructuring and mid-to-high single digit loan growth.”