RBC Capital adds 'speculative risk' qualifier to Close Brothers rating

5th Nov 2024 08:55

(Sharecast News) - RBC Capital Markets cut its price target on shares of Close Brothers on Tuesday to 425p from 435p and added a "speculative risk" qualifier to its rating as it assessed the impact of premium finance.

The bank said that if the Supreme Court upholds the Hopcraft judgement applying a broad interpretation, motor finance litigation could spread to other products like premium finance.

"There is an outstanding question following last month's Court of Appeal judgement: does the ruling have wider implications outside motor finance? One possible interpretation is that the decision is broad enough to encompass any broker commission in any finance arrangement in which the borrower did not provide informed consent to the commission being paid," RBC said.

"Our focus until now has been on motor; today we broaden our attention to premium finance."

It noted that Close Brothers is the only bank in its coverage that has material exposure here - around 10% of the loan book, 50% retail, and 80:20 motor:home, respectively.

RBC said that its initial estimate of the potential liability for CBG - in the event of a bad outcome in respect of premium finance - is around £250m, of which £100m has been included in its model.

The bank said total commission provisions now in its model are £420m, £320m of which are for motor and £100m for premium finance.

"Whilst CBG's CET1 can absorb this (CET1 trough 11.6%), assuming that the bank unwinds its motor/premium loan books and doesn't pay a dividend in FY25-26, our downside scenarios of circa £640m (motor £390m; premium £250m) suggest there could be a bleaker path," it said.

RBC reiterated its 'outperform' rating on the shares but now includes a "speculative risk" qualifier to account for increased earnings unpredictability.