Jefferies says Close Brothers has no edge in this recession

Jefferies increased its price target for Close Brothers but kept its 'underperform' rating, arguing the bank lacks the competitive edge it had in the last recession.

Close Brothers increased lending and its net interest margin after credit markets seized up during the financial crisis but this will not be repeated, Jefferies' Julian Roberts said. The Covid-19 crisis has hit demand for loans whereas the financial crisis squeezed supply to Close Brothers benefit, he said.

The bank's net interest margin has narrowed since the March lockdown and continued to do so even as lending started to recover in June and July, Roberts said. Close Brothers continues to lend prudently without chasing growth over credit quality but few of its rivals have funding problems and credit markets are open, he said.

"Without the pricing power to compensate it for taking on more risk, we think CBG will not see the high growth of FY10-FY12, nor will it see significant NIM [net interest margin] improvement (although we would expect a slight improvement as lending volumes normalise)," Roberts wrote in a note to clients.

Jefferies increased its target price based on higher income forecasts after Close Brothers' loan book recovered in the past two months. The dividend could rise but will not reach full-year 2019 levels until full-year 2023, the broker said.