Despite Close Brothers’ victory in the Supreme Court over motor finance last month, analysts have downgraded the bank’s stock.
The FTSE 250-listed bank saw its stock rating reduced to ‘Sector Perform’, a step down from previous ‘Outperform’ expectations, as reported by City AM.
Shares in Close Brothers fell by more than four per cent in early trading to 494.80.
This follows the bank’s successful challenge of the Court of Appeal’s motor finance ruling last month, which had caused its stock to plummet to lows of 185.00.
Since then, shares have recovered losses, with a significant boost from the Supreme Court’s ruling resulting in a 110 per cent gain for the year-to-date.
Equity analyst Benjamin Toms stated: “Our thesis that there would be a positive motor finance Supreme Court outcome played out, and we have run out of upside.”
Toms anticipates that the FTSE 250 bank will revise profit targets at its full-year results in September.
He highlighted that the firm is trading at a substantial discount compared to its peers. Close Brothers’ Price-to-Tangible-Book-Value (P/TBV), a measure of how its stock price compares to the value of its physical assets, is 0.48, lower than that of other UK banks, indicating that the market values its rivals much more highly.
Ahead of the Supreme Court judgment, Toms noted that the bank’s shares were “beaten up.”
Close Brothers overhaul
Close Brothers is currently undergoing a major operational overhaul in an effort to streamline operations and reduce costs.
Over recent months, the firm has divested its brewery division and execution services specialist Winterflood.
Last month, financial services company Marex purchased Winterflood in a deal worth £100m, with completion expected in 2026.
In March, Close Brothers offloaded its US-based Oaktree Capital Management for an equity value of up to £200m.
In July, Close Brothers announced plans to reduce lending in its premium finance division by moving away from personal lines, such as car and home insurance, to concentrate on areas like property and liability insurance for businesses.
RBC predicts that the group’s total income will increase by one per cent in the upcoming financial year to £762m, before falling five per cent in 2026 and 10 per cent in 2027.
Costs are anticipated to decrease concurrently, with analysts forecasting a 17 per cent reduction for 2027.
Motor finance hits the brakes
Following the Supreme Court’s ruling, the Financial Conduct Authority (FCA) confirmed it would consult on an industry compensation scheme, estimated to cost between £9bn and £18bn.
These costs, while still substantial, alleviated fears of over £30bn previously suggested by analysts.
Close Brothers has allocated £165m for this issue, with RBC predicting an impact broadly in line with provisions.
While the verdict was a “clearing event,” Toms stated there was only “further upside” should the FCA permit claims dating back to 2014.
The City watchdog has announced it will accept claims dating back to 2007, a decision that has provoked strong criticism from trade associations who have labelled it “impractical.”
In a discussion with the Financial Times, Nikhil Rathi, Chief Executive of the regulator, implored lenders: “Now is not the time to haggle with us but to help put things right for consumers.”
