UK lender Close Brothers' shares plunge on motor finance and margin woes

By Pushkala Aripaka

(Reuters) -British lender Close Brothers' shares plunged 21% on Tuesday after the company flagged pressures on margins and raised its estimate for costs linked to the fallout from a court ruling into motor finance commissions.

The company's shares, which have tumbled by around 50% since September, fell to their lowest level since January 2024 and were the biggest loser on London's small-cap index, as worries about the scale of possible redress hit investor confidence.

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 rules that lenders and brokers should have been more transparent about commissions.

The Supreme Court is due to hear on April 1 a challenge to the ruling by a lower court last October that hurt several lenders, including Lloyds Banking Group and the UK arm of Santander

"Once the motor finance commissions uncertainty is resolved, we want the group to be in a position to generate strong and sustainable returns, and that's what we're going to do," Close Brothers CEO Mike Morgan told Reuters.

The company has strived to manage its capital by limiting lending, disposing of its wealth business, scrapping dividend and cutting operational costs.

Still, wider economic woes like rising interest rates and wages have hurt some of its customers and affected margins, Morgan said, with some pressure also coming from lending that is focused on longer term returns instead. 

Close Brothers forecast net interest margin for the full year would be around 7%, lower than the 7.3% reported for the first half when it also swung to a pre-tax loss against a profit last year.

Morgan said that despite uncertainties, Close Brothers saw no reason to cease motor finance lending, adding that the group was confident in its estimates for claims, which some analysts have said remains a "wildcard".

"The reality is, it's a great business. We need to make sure that that business going forward can deliver the returns that we want," Morgan said.

Close Brothers expects costs associated with handling motor finance complaints and other legal expenses to be about 22 million pounds ($28.56 million) for the fiscal year ending July 31, up from previous estimates of 10-15 million pounds.

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 expected to be about 200 million pounds.

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 group said it continued to have strong access to funding markets, with retail deposits increasing by 12% in the first half, but its 12-month average liquidity coverage ratio dropped to 953% as of January 31.

($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)