Shares of Close Brothers Group moved sharply lower after RBC Capital Markets reduced its rating on the UK-focused merchant bank and trimmed its valuation outlook. RBC shifted its recommendation to "sector perform" from "outperform" and cut its price target to 470p from 625p, citing fresh uncertainty stemming from developments in the motor finance redress process overseen by the Financial Conduct Authority (FCA).
The broker noted that Close Brothers' stock closed at 439.80 pence on July 3, representing a London-listed market value of A3658 million, and that the downgrade contributed to a decline of more than 5% in the share price on Monday.
RBC said it was "surprised" the Upper Tribunal granted permission for a judicial review of the FCA's motor finance redress scheme. That tribunal decision - confirmed last week - pushes the likely hearing window to December 2026 or February 2027. RBC highlighted that this schedule represents at least a three-month delay versus the FCA's previous guidance that a hearing was unlikely "before Oct'26."
The broker also signalled that the Court of Appeal's decision the prior Tuesday to allow motor finance mass omnibus claims "scans negatively," a phrase RBC used to describe the implications for lenders. Despite these developments, the FCA has maintained its position that if the scheme is upheld, payments would begin in 2027.
Close Brothers currently carries a A3320 million provision tied to the existing scheme, RBC said, and the broker expects the bank to leave that provision unchanged in the near term. The FCA has advised firms to prepare for a complaints-led approach, including "making the necessary provisions and ensuring appropriate capital is maintained," language RBC reiterated in its note.
RBC drew attention to broader cost implications should the scheme be scrapped. The FCA has estimated incremental administrative costs of A36.3 billion across lenders; RBC apportioned roughly A3200 million of that total to Close Brothers, which it said equates to about 230 basis points of core tier 1 capital for the bank.
Given the ongoing uncertainty, RBC said it now expects Close Brothers to postpone declaring a dividend when it reports fiscal 2026 results, and the broker has removed a previously modelled 5 pence dividend from its forecasts.
In its competitiveness and capital assessment, RBC stated it expects Close Brothers to deliver the lowest value-creation across a group of 50 European banks over the coming three years and cautioned that "we believe the shares could drift from here."
RBC's revised price target is derived from a linear residual income model, using an average of its adjusted 2027 and 2028 estimates discounted back to fiscal 2026 and applying a cost of equity of 13.75%. The broker outlined scenario outcomes: an upside case of 700 pence assumes a reduction in Close Brothers' cost of equity to levels more in line with larger UK peers, while a downside case of 250 pence assumes a larger-than-expected hit from the FCA's motor finance review.
RBC listed several risks that could influence its rating and valuation, including litigation outcomes related to motor finance, further falls in net interest margin, the possibility of a UK recession that could raise default rates in Close Brothers' small and medium-sized enterprise (SME) lending book, execution risk around cost-saving initiatives, and the chance that Close Brothers never secures approval for the internal ratings-based approach to capital.
Context for market participants
- Analysts and investors will watch how the firm manages capital and provisioning as regulatory and legal uncertainty persists.
- Close Brothers' exposure to SME lending and motor finance considerations places the bank at the intersection of consumer redress and corporate credit risk.