Close Brothers downgraded to 'BBB' by Fitch amid business challenges

Fitch Ratings has downgraded Close Brothers Group PLC (LON:CBRO) to ’BBB’ from ’BBB+’ with a Negative outlook, removing it from Rating Watch Negative. The downgrade reflects ongoing uncertainty from the motor finance commission review, expected to continue into 2026, alongside weakened financial performance, reduced scale from recent disposals, and an impaired loans ratio of 7.6% as of January 2025. The Negative outlook underscores risks from restructuring, potential FCA redress costs (estimated £100 million could reduce CET1 by 100 basis points), and sustained pressure on profitability and capital.

Analysis

Fitch Ratings has downgraded Close Brothers Group (CBRO) to 'BBB' from 'BBB+' and maintained a Negative outlook, reflecting significant operational and financial headwinds. The primary driver for the downgrade is the prolonged uncertainty surrounding the UK Financial Conduct Authority's (FCA) review into historical motor finance commissions, with a potential redress scheme not expected to be detailed until late 2025. This regulatory overhang is compounded by weakening fundamentals, including deteriorating asset quality evidenced by an impaired loans ratio that rose to 7.6% as of January 2025. Furthermore, the group's strategic disposals, including Winterflood, have reduced its scale and diversification, impacting its business model. While the sale of Winterflood is projected to lift the pro-forma CET1 ratio to 14.3%, providing a 30 basis point cushion, Fitch highlights the vulnerability of this position by estimating that a £100 million redress cost would erode the CET1 ratio by approximately 100 basis points. Profitability is expected to remain suppressed below 1.5% of risk-weighted assets through FY26, a notable decline from pre-FY23 levels due to margin compression and anticipated redress-related expenses.

Key Decisions for Investors

• Investors should recognize that the Negative outlook from Fitch signals a material risk of further downgrades, with the FCA's motor finance review representing a significant valuation overhang for CBRO that is unlikely to be resolved before 2026.
• Monitor the Common Equity Tier 1 (CET1) ratio closely, as the potential £100 million redress cost, which would erase 100 basis points from the ratio, could substantially weaken the bank's capital position.
• Evaluate the strategic impact of recent disposals; while they provide a near-term capital boost, the resulting reduction in scale and business diversification may impair long-term profitability and resilience in a competitive market.
• Closely track asset quality metrics, particularly the impaired loans ratio, as the current level of 7.6% is elevated compared to peers and any further increase would signal deepening stress on the loan book.