Motor finance woes could make Close Brothers the next takeover target
Close Brothers has fought tooth and nail in the motor finance battle but analysts have warned regulatory pressures may make the lender vulnerable to a takeover as banking juggernauts look to snap up the competition.
The bank has had a bruising 12 months with its stock sinking to lows of 185p in November.
Shares have since clawed back a chunk of gains to around 368p but remain down 15 per cent for the year.
The downturn has been driven by the lender’s exposure to the motor finance market, which has been at the centre of a regulatory storm.
Close Brothers took their fight to the highest court in the land in early April in a bid to overturn 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.
The bank tapped magic circle firm Slaughter and May for the legal show down, in a bid to ramp up its reinforcement after trading out Leeds-based Walker Morris.
Moody’s analysts Alessandor Roccati and Simon James Robin Ainsworth said the firm could be “taken over if regulatory investigations into its motor finance business were to result in financial penalties that weakened its solvency”.
A Close Brothers takeover would send shockwaves through the banking landscape, with the specialist lender’s loan book nearing £10bn alongside deposits of around £9bn.
Roccati and Ainsworth said an acquisition would “further reduce competitive pressure” and reinforce the dominance of the Big Five – which they referred to as Barclays, HSBC, Lloyds, Natwest and Nationwide.
Giants snapping up the market
Banking juggernauts have eyed scaling up their market share with a series of takeovers of challenger banks completed over the last year.
Tesco Bank was acquired by Barclays for £600m and Natwest snapped up Sainsbury’s for approximately £1.4bn.
Top names, including Barclays and Santander, are also speculated to be circling high street lender TSB.
Analysts suggest Close may be next on the takeover chopping block as pressures from the motor finance scandal weigh.
The bank has set aside £295m in provisions but RBC analysts projected a downside scenario could see costs climb to £450m.
RBC analysts project a 232 basis point hit to Close’s CET1 in a “base case” scenario – a blow which tops even the downside cases for its peers.
Should the ruling steer towards a worst case, analysts predict a hit of 422 basis points.
UK banks are expected to have a CET1 ratio of around nine per cent, which combines regulatory buffers laid out by the Prudential Regulation Authority.
A hit of over four per cent could put Close Brothers uncomfortably close to the edge of regulatory requirements.
Buyers may want court clarity
“Close Brothers’ specialist expertise could make it an attractive target and its high cost base would provide an opportunity for potential buyers to extract synergies,” Roccati and Ainsworth said.
The FTSE 250 firm’s central divisions include banking and securities.
Its Securities Arm – Winterflood – swung to a £400m profit in the third-quarter after benefiting from the market turbulence triggered by President Donald Trump’s erratic tariff agenda in April.
This was a swing from the £800m loss in the first half but a steep decline from the £1.7m in profit scored in the third-quarter of 2024.
Analysts noted a takeover would not be likely until the Supreme Court gives its ruling on motor finance, which is expected in July.
“The risk of potentially significant liabilities related to motor finance commissions would likely deter a prospective buyer until further clarity emerges.”