Shares in Close Brothers (CBG) leapt 17% to 458p after the lender issued a positive update on motor finance claims. The cost of the scheme is now expected to be broadly in line with the group’s existing provisions, meaning it doesn’t need to raise fresh capital.
Claims ‘comfortably absorbed’
Following the FCA’s revised guidance, Close Brothers says the compensation scheme will cost it around £320 million. Given it has already provisioned £294 million, the balance can therefore be ‘comfortably absorbed by existing capital resources’.
This would reduce the group’s CET1 (core equity tier one) capital ratio by just 0.25% to 14%, ahead of its 12% to 13% target. As a result, the bank doesn’t need to take any further provisions for claims.
The firm reckons its average redress per customer will be around £500 including compensatory interest. This is well below the FCA’s headline estimate of £829 due to a smaller average loan size and lower commission levels.
The firm is assuming a 75% claim rate, in line with the FCA’s working thesis. A 5% increase or decrease would result in an £18 million upward or downward adjustment to the payout.
Analysts and investors will be high-fiving themselves after today’s confirmation that finance claims are essentially covered. Until the FCA’s recent announcement, there had been a lingering concern the bank might have to raise fresh capital.
That fear was stoked in no small part by short seller Viceroy Research, which claimed provisions would have to double. Viceroy also claimed Close Brothers had ‘systematically misrepresented’ its exposure and could face claims of over £1 billion in total.
For management, with claims for compensation covered they can get back to the day job of delivering on the bank’s updated strategy. Having simplified the group, the aim now is to optimise through cost cuts while targeting double-digit returns by 2028.
Read the press release here: https://www.closebrothers.com/investor-relations
