Close Bros to scale back premium finance unit, shares fall

(Sharecast News) - Close Brothers is to scale back its premium finance offering, it confirmed on Wednesday, amid rising costs and increasing complexity. The London-listed merchant banking group said it planned to reduce its emphasis on personal lines insurance premium finance in favour of commercial lines.

It acknowledged personal lines had been an important part of its retail offering "for many decades".

But it continued: "The market environment has changed. Rising costs to serve customers, broker consolidation and increasing operational complexity have impacted the long-term attractiveness of personal lines relative to other parts of our portfolio."

As a result, the premium finance book is now set to decline by around 30% over the next three years. Operating profit is also expected to fall, on the back of lower loan balances and increased investment in the refocused offering.

Mike Morgan, chief executive, said: "Over time, we expect this business to operate with a smaller customer base, but with higher income per case and a reduced cost base, leading to improved profitability and returns."

As at 0915 BST, shares in the FTSE 250 firm were down 8% at 379.6p.

Gary Greenwood, analyst at Shore Capital, said: "This is not a full exit from personal lines, but a significant de-emphasis.

"Overall, we see this as an initial step in the group's process to review its business lines, identify those that are underperforming and take action to either improve performance or exit them and reallocate capital to better performing businesses to drive higher sustainable returns."

Shore Cap has a 'hold' rating on the stock, although it noted there was scope to upgrade its fair value of 370p "materially" should a Supreme Court ruling and subsequent regulator response be favourable, and if the group can "put in place a convincing strategy to improve returns in the core business, of which today's announcement is a first step".

Last October, the Court of Appeal ruled it was illegal for banks to pay commission to a car dealer without the customer's informed consent, sending shockwaves through the industry. Analysts predict it could eventually cost the sector billions.

Along with South Africa's FirstRand, Close Brothers challenged the ruling at the Supreme Court. It is due to publish its ruling this month having heard the case in early April.

The Financial Conduct Authority is considering introducing an industry-wide redress scheme for customers left out of pocket.