Close Brothers to scale back lending after motor finance hit
Close Brothers is set to scale back its premium finance division in a bid to cut costs and focus on its offerings for businesses.
The lender said on Wednesday it would begin to prioritise insurance products designed for businesses in its commercial lines, which the firm said offered better risk-adjusted returns and long-term growth potential.
This will result in a shift away from personal lines, such as home, car, and travel insurance, to instead focus on the likes of property, cyber, and liability insurance for firms.
Shares in Close Brothers tumbled over seven per cent in early trading to 379.60p.
The FTSE 250 bank‘s premium finance loan book is expected to shrink 30 per cent over the next three years as part of the strategy, whilst operating profit is expected to take a short-term hit.
In the long term, the group has eyed higher income per case and improved profitability and returns.
Close Brothers said it expects to save £20m annually by 2030, but the manoeuvers are set to cost £15m.
In its half-year update, the bank recorded 2.3m customers and a £958m loan book. The split between personal and commercial lines was broadly even at £441m and £517m.
The premium finance market has begun to serve a series of headaches to the lender, with the firm noting “rising costs… broker consolidation and increased operational complexity” having made personal lines less attractive compared to other parts of its portfolio.
Analysts at Panmure Liberum said: “There is a hope that growth in Commercial premium finance will, over time, take up the slack.
“Modelling exactly how this plays out over time will be tricky, but the point is that there is another headwind to estimates and compared with consensus profit before tax for 2027 estimate of £156m this looks to be a material downgrade.”
“It remains the case that the outcome of the Supreme Court process with respect to Motor Finance remains the most important, and potentially binary, outcome for the company but this is a reminder that even should the Supreme Court outcome be “positive” there are still issues to address.”
Close Brothers to bulk up tech
The bank said as part of the “strategic repositioning” it would optimise the division’s cost base to modernise its tech offering.
Mike Morgan, Close Brother’s chief executive, said: “As outlined previously, my priorities remain to simplify the group, improve operational efficiency, and drive sustainable growth. This decision brings us closer to a more sharpened portfolio of core businesses positioned to deliver attractive risk adjusted returns.”
The update comes as Close Brothers, along with the broader banking industry, waits for the landmark motor finance ruling from the Supreme Court.
The bank took its fight to overturn the Court of Appeal’s October ruling, which found it unlawful for banks to pay a commission to a car dealer without the customer’s informed consent, to the highest court in the land in April.
The court is expected to deliver its verdict in the coming weeks.
The bank has set aside £165m in provisions, but RBC analysts project that a downside scenario could see costs climb.