Analysts downgrade Close Brothers’ ‘beaten up’ shares
Analysts have said Close Brothers shares are worth 340p – a 20p downgrade from their previous price target.
The lender suffered a profit hit in its half-year results, plunging to a £104m loss.
A £165m provision for motor finance payouts drove the bank’s woes, with shares falling as much as 24 per cent on Tuesday.
RBC Capital Markets analysts said Close Brothers shares were “beaten up”.
“In our view, the bank has enough capital to muddle through the motor and premium finance issue without raising new equity.
“There is a risk that the shares drift until we get more clarity from the courts,” the analysts said.
‘High degree of uncertainty’ for lender
However, the analysts reiterated their ‘overperform’ rating on the bank, meaning they expect the stock to materially outperform sector average over 12 months.
Whilst this suggests a bounceback for Close Brothers may be hopeful, they slapped a ‘speculative risk’ qualifier on the rating, citing a “high degree of uncertainty regarding future earnings”.
The Supreme Court will hear arguments in early April on the Court of Appeal’s October ruling that it was unlawful for banks to pay a commission to a car dealer without the customer’s informed consent.
RBC analysts ranked motor finance as a top risk to the lender’s price target and rating.
“Higher-than-anticipated remediation costs related to motor finance commissions could lead the bank to have to boost capital by pulling a number of levers with potential implications for returns,” they added.
The analysts said they were “particularly concerned” about the Financial Conduct Authority’s (FCA) review of the premium finance pricing and discretionary commission arrangements in the sector given the “volume of potential complaints that the bank may have to deal with”.
They said Close Brothers was also “slightly negatively geared” to falling interest rates in the UK.