Skip Header
Important information: The value of investments can go down as well as up so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. This is a third-party news feed and may not reflect Fidelity’s views.

Berenberg slashes Close Brothers price target amid 'regulatory rollercoaster'

(Sharecast News) - 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.

Share this article

Related Sharecast Articles

UPS tops Q1 profit forecasts but misses on revenue
(Sharecast News) - American transport and logistics giant United Parcel Service saw shares rise on Tuesday after quarterly profits beat analysts' forecasts, even though revenues fell more than expected.
Getir investors said to fund European exit with new cash injection
(Sharecast News) - Investors in grocery delivery app Getir, which at one point attained a valuation of almost £10bn, are reportedly set to inject yet more money into the company to fund its exit from the UK and Europe.
Bushveld updates Vametco mineral resources
(Sharecast News) - Bushveld Minerals updated the market on mineral resources and reserves for the Vametco vanadium mine near Brits on the Western Limb of the Bushveld Complex on Tuesday.
Power Metal Resources completes Molopo drillhole
(Sharecast News) - Power Metal Resources announced the completion of drillhole DDH1-14C at its Molopo Farms Complex project in southwestern Botswana on Tuesday.

Important information: This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Past performance is not a reliable indicator of future returns.

Award-winning online share dealing

Search, compare and select from thousands of shares.

Expert insights into investing your money

Our team of experts explore the world of share dealing.