Berenberg lowers target price on Close Brothers

Analysts at Berenberg slightly lowered their target price on merchant bank Close Brothers from 1,170 to 1,100 on Thursday but stated the group appeared to be "weathering the storm".

Berenberg said for the last couple of years, Close has warned about cyclical risk, and had been preparing for it, and now that tougher times are here, it said the group did appear to be "coping well".

In the fourth quarter, the German bank highlighted that Close's loan book shrank, margins were squeezed due to lower fees, provisions were increased by £43m but still well below second-quarter levels, the market-facing business did well and regulatory capital ratios were strong.

The analysts still said Close was "a great business" and its shares were starting to look interesting, relative to their long-term average returns. But Berenberg also stated the roughly 30% valuation discount seemed to fairly price near-term risks and subdued returns.

"Close is trading at 1.2x forward book value, a circa 30% discount to its 10-year average of 1.7x. Its average RoE over that period has been 15%, which assuming a 10% cost of equity implies a book multiple of c1.5x," said Berenberg, which stood by its 'hold' rating on the firm.

"However, if returns do remain subdued over the forecast period then it is hard to understand why the shares are mispriced today."