(Reuters) -British lender Close Brothers’ shares plunged 21% on Tuesday after the company raised its estimate for costs linked to the fallout from a court ruling into motor finance commissions.
The company’s shares hit their lowest level since January 2024 and were the biggest loser on London’s small-cap index. They have fallen about 50% since September as concerns grew about a rising compensation bill for car finance customers.
Last week, Britain’s Financial Conduct Authority said it would likely consult on an industry-wide scheme to compensate motor finance customers if the Supreme Court ruled that lenders and brokers should have been more transparent about commissions.
London’s Court of Appeal ruled in October that it was unlawful for car dealers to receive commission from banks without a customer’s informed consent. This order has been challenged in the Supreme Court, with a hearing expected on April 1.
Close Brothers, among the companies most affected by the ruling, said it expected costs associated with handling those complaints and other legal expenses to be about 22 million pounds ($28.56 million) for the fiscal year ending July 31.
It had previously projected those costs to be about 10-15 million pounds.
It said it has set aside 165 million pounds for possible claims, unchanged from its estimate last month, with total direct and indirect costs associated with motor finance claims to be about 200 million pounds.
Close Brothers has made efforts to manage its capital by limiting lending, disposing of its wealth business following a strategic review, not paying a dividend and cutting costs wherever possible.
“The business is well capitalised post the disposal of (its wealth business) and other capital measures … but the wildcard remains motor finance where … a wide range of possible outcomes could still come to pass,” Panmure Liberum analysts said in a note.
Close Brothers forecast its net interest margin for the full year would be around 7%, lower than the 7.3% reported for the first half.
It also swung to a first-half pre-tax loss of 105.6 million pounds, against a profit in the same six-month period a year earlier.
Despite the share price tumble, the price of Close Brothers’ bonds have held up. Its 7.75% June 2028 bond was last down 0.18 pence at 102.236, yielding 6.961% on the Tradeweb platform.
The bank said it continued to have strong access to funding markets, with retail deposits increasing by 12% in the first six
months of the financial year.
“We adhere to a conservative funding strategy, borrowing long and lending short,” it said.
Though still well in excess of regulatory requirements, Close’s 12-month average liquidity coverage ratio dropped to 953% as of January 31, from 1,034% as of July 31 2024.
($1 = 0.7702 pounds)
(Reporting by Pushkala Aripaka in Bengaluru; Additional reporting by Amanda Cooper, Tommy Reggiori Wilkes and Sinead Cruise; Editing by Janane Venkatraman and Susan Fenton)
