Close Brothers shares fall as motor finance scandal threatens worst returns in Europe
Close Brothers shares tumbled on Monday morning after a damning broker downgrade warned the bank was poised to deliver the “lowest value-creation” of Europe’s top 50 banks.
The FTSE 250 bank’s stock was down nearly nine per cent in early trading to 401.70p as investors scurried for the exit door.
The loss came on the back of RBC anticipating the stock’s performance in the next 12 months would match the sector average, after previously expecting it to outperform.
“The motor finance issue has, again, become increasingly uncertain, protracted, with a wider impact range (in both directions),” Benjamin Toms, RBC equity analyst, wrote.
Renewed uncertainty is expected to make a dent on shareholder returns, with Close Brothers tipped to hold back on dividend payouts for another year.
Mike Morgan, the bank’s top boss, told City PM in March: “Until we have clarity around what the capital position of the group is, then it would be very difficult to restart the dividend”.
Morgan’s comments followed the lender revealing plans to axe a staggering 600 full-time roles as it ploughed ahead with an aggressive cost-cutting strategy.
The conservative dividend policy will tee Close Brothers up to deliver “the lowest value-creation across 50 European banks over the next three years,” according to RBC analysis.
The firm is expected to stall at just two per cent by 2028, based on a metric of growing its net worth and dividend payments. This will send it tumbling down the rankings after previously serving as an out-performer since 2014 with value creation of ten per cent, ahead of the average three per cent.
Close Brothers is projected the trail behind the average for the next three years of 15 per cent.
Close Brothers gets upgrade and downgrade in space of three days
The bruising assessment from RBC comes just days after Close Brothers was handed an upgrade from Shore Capital, which slapped a buy rating on the stock.
The broker lifted its target price to 495p from 490p, where it implied an upside of around 21 per cent.
Gary Greenwood, banking analyst, pointed to the stock having drifted towards 400p, without any “meaningful deterioration”. The bullish note helped send the stock seven per cent higher on Friday.
Greenwood added investors were “adequately compensated” for the risks associated with new developments in the car mis-selling saga.
The UK’s financial watchdog suspended parts of its £9bn redress scheme after facing three legal challenges from the industry as well as one from Consumer Voice.
Renewed uncertainty in the long-running saga follows Close Brothers stating it was “well-positioned” after provisioning £300m for any payouts.
Close Brothers was one of two banks to head to the Supreme Court as part of the motor finance scandal, which relates to the use of ‘secret’ commission dealers between dealers and lenders that left consumers in the dark.
Lenders were handed a lukewarm win by the highest court in the land, but the ruling left enough room for the Financial Conduct Authority to introduce an industry-wide redress scheme.
Should the scheme be overturned in the latest legal battle, the FCA estimates lenders will be on the hook for an additional £6.3bn in admin costs. RBC estimates Close Brothers share of this would amount to nearly £200m, which could wipe 230 basis points off the bank’s CET1 ratio – a key metric of its financial health.
The City watchdog sent letters, seen by City PM, to more than 100 motor finance firms earlier this month raising concerns with how the sector planned to implement the redress program.