Investing.com -- Close Brothers (F:CBRO) Group shares plunged more than 18% on Tuesday following its half-year results, as concerns over mounting provisions for motor finance liabilities and squeezed margins weighed heavily on investor sentiment.
The financial services firm had already warned of a substantial hit earlier this year, but the latest figures confirmed the full extent of the damage, prompting a sell-off.
The company reported a £165 million provision tied to the ongoing regulatory review into historic motor finance commission arrangements, a figure that had been flagged in an unscheduled trading update on February 12.
Additionally, Close Brothers has set aside £8 million for complaints handling and related operational and legal costs, with expectations that this number could rise to around £22 million for the full year—higher than the previously guided range of £10-15 million.
The Financial Conduct Authority (FCA) recently clarified that firms themselves will be responsible for assessing whether customers have been financially harmed, a development that has left investors wary of potential further costs.
Adding to the pressure, Close Brothers lowered its guidance for net interest margin (NIM), a key profitability metric.
Management now expects NIM for the full year to be around 7%, down from the previous estimate of 7.2%.
The company attributed this to "temporary factors" and competitive pricing pressures on new lending.
This revision, coupled with muted loan book growth, has stoked fears of a challenging operating environment in the months ahead.
The broader financials of the company painted a mixed picture. Close Brothers reported a pre-tax loss of £104 million, largely driven by the motor finance-related provision, compared to an adjusted profit of £87 million in the same period last year.
Meanwhile, the company’s cost-to-income ratio soared to 114.3%, reflecting a sharp rise in expenses relative to revenue.
While the company’s capital position remains relatively stable, with a CET1 ratio of 13.4%, analysts at RBC Capital Markets noted that the stock’s valuation now implies concerns over a potential capital raise, even though the firm has not indicated any immediate plans to do so.
"There is a risk that the shares drift until we get more clarity from the courts," the analysts observed, pointing to ongoing uncertainty surrounding the regulator’s final decision and any potential legal ramifications.
Close Brothers had also announced the sale of its asset management arm, Close Brothers Asset Management (CBAM), to Oaktree earlier this month.
The deal, which is expected to contribute positively to the company’s capital position, has so far done little to offset investor concerns about the core banking operations.
The timing of regulatory clarity remains uncertain, with the FCA expected to provide further updates within six weeks of a Supreme Court decision, which is anticipated by the end of June.