Close Brothers swings to £122 mln loss on motor finance provisions, business exits

Close Brothers Group reported a full-year loss of £122.4 million, primarily due to a £165 million provision for potential motor finance commission costs, alongside other charges, which outweighed underlying profitability. This resulted in a 14% decline in adjusted operating profit and the board withholding a final dividend, citing ongoing uncertainty from the Financial Conduct Authority's review of motor finance arrangements. Despite these challenges, the group improved its Common Equity Tier 1 ratio to 13.8% through strategic asset sales and achieved £25 million in annualised cost savings, with further reductions targeted.

Analysis

Close Brothers Group (CBRO) reported a significant downturn in its full-year financial performance, swinging from a £132.7 million profit in the prior year to a statutory loss of £122.4 million. The primary driver of this loss was a £165 million provision booked in anticipation of costs related to the Financial Conduct Authority's (FCA) review of historical motor finance commissions. This regulatory headwind, combined with other charges including £33 million for customer remediation, overshadowed underlying performance, which also weakened. Adjusted operating profit declined 14% to £144.3 million, with key metrics such as return on average tangible equity falling to 7.1% from 9.3%. The group's Banking division saw its loan book contract by 4% to £9.5 billion, partly due to a pause in motor lending, although the net interest margin remained stable at 7.2%. In response to these challenges, management has undertaken significant restructuring, divesting several businesses including Winterflood and Close Brothers Asset Management. These sales, along with cost-saving initiatives delivering £25 million in annualised savings, have strengthened the group's capital base, lifting its Common Equity Tier 1 (CET1) ratio to 13.8% from 12.8%. However, the board has withheld a final dividend, citing the ongoing uncertainty from the FCA's review, which remains the most critical factor for the company's near-term outlook.

Key Decisions for Investors

• Investors should treat the stock with caution due to the significant uncertainty surrounding the final cost of the FCA's motor finance review, which could materially differ from the current £165 million provision.
• Monitor the execution of the group's restructuring and cost-saving programs, as the improved CET1 ratio of 13.8% and divestment of non-core assets indicate a strategic effort to de-risk the business and strengthen the balance sheet.
• Given the suspension of the dividend and negative statutory earnings, the stock is currently unsuitable for income-focused portfolios, while potential value investors must weigh the deep regulatory risk against any post-resolution recovery potential.