Close Brothers Shares Drop 18% Amid Motor Finance Struggles and Margin Squeeze
Shares of Close Brothers Group (CBRO) experienced a significant decline following the release of their half-year results. Concerns over rising provisions for motor finance liabilities and shrinking margins have negatively impacted investor confidence.
Key Takeaways:
- Close Brothers shares plunged 18% after half-year results.
- £165 million provision for motor finance liabilities.
- Net interest margin (NIM) guidance lowered to around 7%.
- Pre-tax loss of £104 million reported.
- Analysts highlight potential need for a capital raise.
Motor Finance Liabilities
The company has allocated a substantial £165 million to address the ongoing regulatory review of historic motor finance commission arrangements. This figure was initially disclosed in a trading update earlier in the year.
Complaints Handling Costs
An additional £8 million has been earmarked for handling complaints and covering associated operational and legal expenses. Projections indicate that these costs could reach approximately £22 million for the entire year, exceeding previous estimates.
Net Interest Margin (NIM) Revision
Close Brothers has revised its NIM forecast downward to approximately 7% for the full year, citing temporary factors and competitive pricing pressures. This reduction, combined with limited loan book growth, has raised concerns about the company's future performance.
Financial Performance
The company's financial results revealed a pre-tax loss of £104 million, primarily due to the provision for motor finance liabilities. In contrast, the same period last year saw an adjusted profit of £87 million. The cost-to-income ratio also increased sharply to 114.3%.
Capital Position
Despite the challenges, Close Brothers' capital position remains relatively stable, with a CET1 ratio of 13.4%. However, analysts suggest that the current stock valuation reflects worries about a potential capital raise, although the company has not announced any plans.
Asset Management Arm Sale
Earlier in the month, Close Brothers announced the sale of its asset management division, Close Brothers Asset Management (CBAM), to Oaktree. While this transaction is expected to positively impact the company's capital position, it has not alleviated investor concerns regarding the core banking operations.
Regulatory Uncertainty
The timing of regulatory clarity remains uncertain, with the FCA expected to provide further updates within six weeks of a Supreme Court decision anticipated by the end of June.
Analyst Outlook
RBC Capital Markets analysts suggest that the stock's valuation indicates potential concerns about a capital raise, even though Close Brothers hasn't signaled immediate intentions. The analysts also noted the risk of share price decline due to ongoing uncertainty surrounding the regulator’s final decision and legal ramifications.