Close Brothers Group (CBG) shares fell sharply on Monday after a damning broker downgrade warned the lender faces deep uncertainty over the motor finance scandal.
The FTSE 250 bank’s stock dropped nearly nine per cent in early trading to 401.70p, as investors rushed to cut their exposure.
RBC revised its outlook on the stock, now expecting it to match the sector average over the next 12 months, rather than outperform as previously anticipated.
Benjamin Toms, RBC equity analyst, wrote that “the motor finance issue has, again, become increasingly uncertain, protracted, with a wider impact range (in both directions).”
The renewed uncertainty is expected to weigh heavily on shareholder returns, with Close Brothers tipped to hold back on dividend payments for at least another year.
Chief executive Mike Morgan told City AM in March: “Until we have clarity around what the capital position of the group is, then it would be very difficult to restart the dividend.”
Those comments followed the bank’s announcement of plans to cut 600 full-time roles as part of an aggressive cost-reduction drive.
RBC’s analysis projects Close Brothers will deliver “the lowest value-creation across 50 European banks over the next three years,” stalling at just two per cent by 2028 on a metric combining net worth growth and dividend payments.
The figure represents a steep fall from its track record as an outperformer since 2014, when it delivered value creation of ten per cent against a sector average of three per cent.
Close Brothers is now projected to trail far behind the European banking average of 15 per cent over the same three-year period.
The negative assessment from RBC follows an upgrade issued just days earlier by Shore Capital, which assigned the stock a buy rating and lifted its target price to 495p from 490p, implying upside of around 21 per cent.
Gary Greenwood, banking analyst at Shore Capital, noted the stock had drifted towards 400p without any “meaningful deterioration” in its underlying position, a view that sent shares seven per cent higher on Friday.
Greenwood added that investors were “adequately compensated” for the risks associated with new developments in the ongoing car loan mis-selling saga.
The UK’s financial watchdog has suspended parts of its £9bn redress scheme after facing three legal challenges from the industry and one from Consumer Voice.
Close Brothers was one of two banks to take the motor finance case to the Supreme Court, with the scandal centring on undisclosed commissions paid between dealers and lenders that left consumers uninformed.
Lenders received a narrow win from the Supreme Court, but the ruling left sufficient room for the Financial Conduct Authority to introduce an industry-wide redress scheme.
Should the scheme be overturned in the latest legal challenge, the FCA estimates lenders would face an additional £6.3bn in administrative costs.
RBC calculates Close Brothers’ share of those additional costs could reach nearly £200m, potentially stripping 230 basis points from its CET1 capital ratio, a critical measure of financial health.
Close Brothers had previously described itself as “well-positioned” after provisioning £300m to cover potential payouts under the scheme.
The FCA also wrote letters earlier this month to more than 100 motor finance firms raising concerns about how the sector intended to implement the redress programme, adding fresh regulatory pressure to an already turbulent situation.