Close Brothers shares drop as motor finance arm deals with two FCA reviews
Shares in merchant banking group Close Brothers fell as much as 6.6 per cent on Wednesday morning as its motor finance business faces compensation costs tied to two market-wide reviews from the Financial Conduct Authority (FCA).
Close Brothers said in a trading update on Wednesday that following a past business review of customer forbearance in its motor finance business, it estimated any compensation costs to be “single-digit millions”.
The voluntary review, due to be completed by the end of the financial year, was triggered by discussions with the FCA as part of its “borrowers in financial difficulty” project.
It comes on top of a more well-known probe by the regulator into unfair car loans, announced in January, that has weighed heavily on the FTSE 250 firm’s share price this year.
Close Brothers is considered to be the most exposed lender in relative terms to the review into now-banned discretionary commission arrangements (DCAs) on car loans that analysts have estimated could cost the auto lending sector around £16bn in compensation payouts.
RBC analysts have estimated a potential bill of up to £350m for Close Brothers, which is nearly half of its current market capitalisation.
The potential fallout caused the group to scrap its 2024 dividend and place its 2025 dividend under review. In March, Close Brothers outlined measures that could boost its capital position by around £400m in response to the review.
It added on Wednesday that it had made “good progress” getting ready to implement the measures and remained confident that they would “position the group well to withstand a range of scenarios and potential outcomes”.
Excluding the group’s recently acquired Irish motor finance unit, Close Brothers continued to expect around eight to 10 per cent growth in banking costs this financial year, including roughly £10m tied to the handling of DCA complaints.
Close Brothers added that its asset management arm saw “positive market movements” as it posted net inflows of nine per cent in the financial year to date.
During the third quarter, from 1 February to 30 April 2024, its managed assets rose £0.8bn to £18.5bn and total assets swelled £1.1bn to £19.6bn.
Close Brothers said its market-making business Winterflood saw an operating profit of £1.7m in the quarter, from a £2.6m loss in the first half of the financial year, due to “marginally improved” trading conditions.
The group’s banking loan book increased 1.5 per cent to £10bn during the quarter. This figure was 6.4 per cent when excluding its legal finance arm Novitas, which is in wind-down, and its legacy Irish Motor Finance business in run-off.
Close Brothers said the increase was mainly due to strong customer demand in property and continued growth in UK motor finance and invoice finance, partly offset by “selective loan book actions” announced in March to soften the blow from the FCA’s review into DCAs.
Chief executive Adrian Sainsbury said: “Notwithstanding moderation in some of our businesses, due to seasonality and selective loan book actions we identified at the half-year 2024 results, we are encouraged by the ongoing strength in overall customer demand and continue to focus on providing excellent service to our customers.”
He added: “While we are working through a period of uncertainty, we are committed to executing our strategy and protecting our valuable franchise. We are making good progress against the actions previously outlined to further strengthen our capital position and are focused on positioning the group to resume our track record of earnings growth and attractive returns.”
Updated with shares