RBC downgrades Close Brothers Group to “sector perform” after 120% share rally

RBC Capital Markets downgraded Close Brothers Group (CBRO) to “sector perform” from “outperform,” citing the stock's 120% year-to-date rally which has diminished upside potential, despite its current valuation at 0.56x one-year forward tangible book value. The downgrade reflects persistent concerns over the financial impact of the motor finance commissions ruling, which RBC projects could hit CBRO's pre-tax profit by £115m-£214m, and the wider industry by £12bn. While CBRO's capital position remains robust and the “speculative risk” label has been removed, profitability is expected to remain subdued (FY25 adjusted RoTE 6% vs. 13.1% peer average), and dividend payments are not anticipated to resume until 2027, limiting near-term catalysts.

Analysis

RBC Capital Markets has downgraded Close Brothers Group (CBRO) to “sector perform” from “outperform,” primarily because the stock's 120% year-to-date rally has erased much of the potential for further gains. The share price now trades near RBC's 525p target at 0.56 times one-year forward tangible book value, a significant recovery from its 0.21x low but still a notable 0.48x discount to UK peers, contrasting its historical premium. While the Supreme Court's ruling on motor finance commissions has provided some clarity, significant uncertainty remains, with RBC's models showing a potential pre-tax profit impact ranging from £115 million to £214 million against the company's £165 million provision. The company's profitability outlook is a key concern, with a forecasted adjusted return on tangible equity of 6% for FY25, substantially underperforming the 13.1% average for UK peers. This is compounded by declining earnings projections, with adjusted diluted EPS expected to fall from 76.26p in 2024 to 53.12p by 2026. Furthermore, the suspension of the dividend, with no resumption forecasted until 2027, removes a significant near-term catalyst for investors, despite a robust capital position (CET1 ratio projected at 13.4% in 2025).

Key Decisions for Investors

• Given the stock's 120% year-to-date appreciation and the new price target suggesting limited upside, investors may consider trimming positions to realize gains as the near-term risk/reward profile is now more balanced.
• Closely monitor developments regarding the motor finance commission provisions, as the final financial impact remains a key variable with a downside scenario that could push the stock price toward RBC's 150p estimate.
• Despite trading at a discount to its historical valuation, the lack of near-term catalysts, suspended dividend until a forecasted 2027, and lagging profitability suggest the stock is more suitable for patient investors with a long-term horizon rather than those seeking immediate income or capital appreciation.