Shares in Close Brothers jumped on Thursday after RBC upgraded its view on the lender’s stock, which has been dragged down by its exposure to a City watchdog review into unfair car loans.
The FTSE 250 merchant banking group gained as much as 10 per cent to £5.40 in early trading following the upgrade at RBC Capital Markets.
The broker raised its recommendation to outperform from sector perform and upped its price target to 620p from 375p.
In a note, analysts said Close Brothers’ share price has underperformed the sector by roughly 55 per cent so far this year, driven by worries over its historical auto lending practices.
Close Brothers is considered the most exposed bank in relative terms to a review by the Financial Conduct Authority (FCA) into now-banned discretionary commission arrangements that enabled brokers to raise interest rates on car repayment plans.
RBC has estimated that Close Brothers could be on the hook for up to £350m in compensation fees – almost half of its current market capitalisation. In March, the group outlined plans to bolster its finances by £400m to cover potential costs.
The FCA is due to set out its next steps on the motor finance review in May 2025. RBC expects Close Brothers to take a total provision of £250m between 2025 and 2026.
Close Brothers’ shares have plunged by roughly a third since the FCA announced its probe in January.
“Whether you are looking at historical or sector-relative valuation, Close Brothers’ shares screen as cheap,” analysts said on Thursday.
“We had previously argued that this discount was justified. However, with the market myopically focused on capital, we see a number of potential catalysts.”
These include an expected softening of Basel 3.1 capital rules due to be released in September, any future settlement tied to litigation against its legal finance arm Novitas and approval of its application to the Bank of England to use its own internal models to assess risks on its motor and property books.
Analysts added that Close Brothers’ net interest margin – measuring of the gap between interest received on loans and rates paid for deposits – is “agnostic” to a falling interest rates, which have weighed on banks’ earnings this year.