Berenberg slashes Close Brothers price target amid ‘regulatory rollercoaster’

Berenberg slashed its price target on Close Brothers on Friday to 425p from 1,100p as it cut estimates after the merchant bank announced it was scrapping its dividend amid a regulator probe into car financing.

The Financial Conduct Authority said last month that it would investigate commission on historic car financing deals. The probe will look at deals going back a decade, on concerns that lenders and dealers were incentivised to increase interest rates for customers.

Close Brothers said on Thursday that there was "significant uncertainty about the outcome of the FCA's review, and the timing, scope and quantum of any potential financial impact on the group cannot be reliably estimated at present".

Close Brothers’ banking business provides credit to customers that are not well served by mainstream banks. This includes motor finance for customers purchasing cars through small retailers and finance to spread insurance policy payments across the year. As of mid-January, the FCA is reviewing the UK market for both of these segments.

Berenberg said UK regulators’ stance towards large parts of Close Brothers’ business has become "inhospitable".

"Uncertain costs related to the FCA’s review of motor finance led the company to announce on 15 February that it would not pay a dividend during FY 2024, to ensure capital strength," it said. "Our estimates now include a material charge for potential redress, as well as higher expenses and a retrenchment from motor and premium finance lending (circa 30% of loans)."

Berenberg now assumes consumer redress of £250m during FY 2025.

"This simplistically assumes redress equal to 5% of estimated gross loans made during the 10 years prior to 2021 (based on average loans of circa £1.5bn and an average loan term of about three years)," it said.

This equates to around 240 basis points of CET1 capital. After this, Berenberg expects the company to remain within its 12-13% CET1 ratio, with a buffer of around £100m to 12%.

Berenberg said its new price target is based on conservative earnings and a 20% cost of equity.

It maintained its ‘buy’ rating on the shares but conceded that even the 40% upside implied by the PT may be insufficient to compensate some investors for the risk of potential regulatory actions.