Close Brothers has struck a deal to sell its wealth management division for up to £200m amid efforts to strengthen its capital position to cover costs from a City watchdog review into unfair car loans.
The FTSE 250 merchant bank said the sale of Close Brothers Asset Management (CBAM) to funds managed by Oaktree Capital Management was expected to be completed in early 2025 following regulatory approvals.
Close Brothers said it intended to retain all upfront cash proceeds from the transaction, totalling around £172m, which would “strengthen the group’s capital base and improve its position to navigate the current uncertain environment”.
Mike Biggs, the bank’s chair, said the deal “represents competitive value for our shareholders, allowing us to simplify the group and focus on our core lending business”.
The bank added that it would mark “significant progress” towards plans unveiled in March to bolster its finances by around £400m in response to a Financial Conduct Authority (FCA) review into whether customers were overcharged via now-banned discretionary commission arrangements on car loans.
Close Brothers’ shares are down by around a third since the FCA announced the probe in January. Analysts have said the review could leave the auto lending industry on the hook for up to £16bn in compensation fees, with Close Brothers considered the most exposed bank in relative terms.
The potential fallout caused Close Brothers to scrap its 2024 dividend and place its 2025 dividend under review in February. It said on Thursday that not paying a dividend for 2024 had allowed the bank to retain around £100m of common equity tier 1 capital.
Close Brothers’ 2024 financial year results, published on Thursday, showed its statutory pretax operating profit came in at £142m for the year to 31 July 2024, up 27 per cent from 2023 – when the bank set aside £114.6m for bad loans tied to its now-defunct legal funding specialist Novitas.
Excluding the Novitas provisions, its profit came in at £218.6m last year. On an adjusted basis, Close Brothers’ 2024 operating profit fell 22 per cent to £170.8m when excluding Novitas.
The 146-year-old lender flagged £28.6m of adjusting items, including complaints handling expenses and other operational costs tied to the FCA’s motor finance review, as well as a separate industry-wide probe into borrowers in financial difficulty.
Close Brothers said its operational costs for the motor finance probe were estimated to be between £10m and £15m in the 2025 financial year.
It added that group net expenses were expected to be between £55m and £60m in 2025, primarily due to “elevated” professional fees and other costs tied to the review’s potential impact and a decline in income as interest rates fall.
RBC has estimated Close Brothers could end up with an up to £350m bill, nearly half of its current market capitalisation. Lloyds, which owns the UK’s largest auto lender, Black Horse, made a £450m provision for the review in February.
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.
The results come shortly after Close Brothers announced on Monday that chief executive Adrian Sainsbury had taken a “temporary medical leave of absence” from the business. Group finance director Mike Morgan has assumed Sainsbury’s primary responsibilities.