Key facts
- Close Brothers shares fell nearly 9% to 401.70p following an RBC downgrade.
- RBC analysts anticipate Close Brothers will deliver the lowest value-creation among Europe's top 50 banks over the next three years.
- The motor finance issue has become increasingly uncertain and protracted, impacting shareholder returns.
- Close Brothers is expected to delay dividend payouts for another year due to capital position clarity.
- The bank is implementing aggressive cost-cutting, including 600 job cuts.
- Shore Capital had recently upgraded the stock with a buy rating and a higher price target.
- The UK's financial watchdog suspended parts of its motor finance redress scheme due to legal challenges.
- Close Brothers has provisioned £300m for potential payouts, with RBC estimating a near £200m impact from additional costs.
Close Brothers shares experienced a significant decline on Monday morning, falling nearly 9% to 401.70p, following a critical downgrade from RBC Capital Markets. The brokerage warned that the bank is poised to deliver the "lowest value-creation" among Europe's top 50 banks over the next three years, citing renewed uncertainty surrounding the protracted motor finance issue.
RBC equity analyst Benjamin Toms noted the widening impact range of the motor finance problem, which is expected to dent shareholder returns. This uncertainty is likely to lead Close Brothers to postpone dividend payouts for another year, as stated by CEO Mike Morgan in March, who indicated that restarting dividends would be difficult until the group's capital position is clear. These cost-saving measures are part of an aggressive strategy that includes axing 600 full-time roles.
According to RBC's analysis, Close Brothers is projected to achieve only a 2% growth in net worth and dividend payments by 2028, a stark contrast to its previous outperformance since 2014. This forecast places it significantly below the average projected value creation of 15% for the next three years.
The bearish assessment from RBC comes shortly after Shore Capital had upgraded the stock, assigning a buy rating and lifting its target price to 495p. Shore Capital analyst Gary Greenwood suggested that investors were adequately compensated for the risks associated with the car mis-selling saga, especially as the stock had drifted towards 400p without significant deterioration.
The UK's financial watchdog, the Financial Conduct Authority (FCA), recently suspended parts of its £9bn redress scheme for motor finance after facing three legal challenges from the industry and one from Consumer Voice. Close Brothers, which has provisioned £300m for potential payouts, was one of two banks that took the issue to the Supreme Court. While lenders received a partial victory, the ruling allowed the FCA to implement an industry-wide scheme. RBC estimates that if the scheme is overturned in the current legal battle, Close Brothers could face an additional nearly £200m in costs, potentially reducing its CET1 ratio by 230 basis points.