Close Brothers Down 5% Post RBC Downgrade

Close Brothers Down 5% Post RBC Downgrade

RBC Capital Markets downgraded Close Brothers Group plc from "outperform" to "sector perform" and reduced its price target to 470 pence from 625 pence. The broker cited renewed uncertainty surrounding the Financial Conduct Authority's (FCA) motor‑finance redress scheme. Close Brothers' shares closed at 439.80 pence on 3 July, a decline of more than 5%, giving the London‑listed lender a market capitalisation of approximately £658 million.

RBC noted that the Upper Tribunal granted permission for a judicial review of the FCA's motor‑finance redress scheme, a decision confirmed the previous week. The tribunal is not expected to hear the case until December 2026 or February 2027, pushing the hearing back by at least three months from the FCA's earlier guidance that a hearing was unlikely before October 2026. The Court of Appeal’s decision to allow mass omnibus claims in motor finance was also described as scanning negatively.

Close Brothers currently holds a £320 million provision related to the existing scheme, and RBC expects no change to that provision. The FCA has warned firms to prepare for a complaints‑led approach, including making necessary provisions and maintaining appropriate capital. The regulator estimates that scrapping the scheme could impose an incremental £6.3 billion in administrative costs on lenders; RBC apportioned roughly £200 million of that cost to Close Brothers, equivalent to 230 basis points of core Tier 1 capital.

Because of the continued regulatory uncertainty, RBC expects Close Brothers to delay declaring a dividend alongside its fiscal‑2026 results and has removed the previously forecast 5 pence per share dividend from its estimates. The broker also projects that Close Brothers will deliver the lowest value‑creation among 50 European banks over the next three years and suggests the shares could drift from current levels.

RBC’s price target is derived from a linear residual‑income model that averages the bank’s adjusted 2027 and 2028 estimates, discounted back to fiscal 2026 using a cost of equity of 13.75 %. An upside scenario of 700 pence assumes a reduction in Close Brothers’ cost of equity in line with larger UK peers, while a downside scenario of 250 pence assumes a larger‑than‑expected impact from the FCA’s motor‑finance review.

The rating action cites several risks, including litigation outcomes, further declines in net interest margin, a potential UK recession that could raise default rates among small and medium‑sized enterprises, execution risk around cost‑cutting plans, and the possibility that Close Brothers may never obtain approval for its internal ratings‑based (IRB) approach to capital.