- Bank has solid capital ratios
- Outcome of FCA probe unknown
- Motor finance is big business
Merchant bank Close Brothers (CBG) finally delivered the news market-watchers had been expecting for weeks, namely that it was canceling its dividend for the current financial year and could suspend all payouts going forward.
Even though the announcement was no surprise, it didn’t stop the shares falling 16% to 332p, their lowest level in over 15 years, bring year-to-date losses to almost 60%.
FCA REVIEW TO BLAME
Although the business ‘continues to perform well’, with the banking division delivering ‘disciplined growth at strong margins’ with stable credit performance and the asset management division seeing healthy fund inflows, the decision to scrap the dividend is due to the the FCA’s (Financial Conduct Authority) recently-announced review of the motor finance market.
Car finance is big business, with nine in 10 buyers using some kind of credit and UK consumers borrowing £37 billion in 2021 according to the Finance & Leasing Association.
In 2021, the FCA banned what it called discretionary commission arrangements where dealers received an incentive from their finance broker to offer customers a higher-interest rate lease or loan.
Since then, a large number of customers have complained to motor finance firms about their costs and asked for compensation, but many claims have been refused because the firms argue they didn’t act unfairly or unlawfully based on the rules at the time.
Not satisfied by this, just over a month ago the FCA announced it would review the entire motor finance market going back over a decade and warned firms that if it found misconduct it would enforce ‘an appropriate settlement and if necessary resolve any contested legal issues of general importance’.
Some estimates put the potential liability of the finance providers as high as £15 billion, with Lloyds Bank (LLOY) named as the biggest transgressor, but Close Brothers is also a major provider of car loans.
UNCERTAINTY OVER THE OUTCOME
While Close Brothers has a strong capital base and ample liquidity, with a CET1 (core equity tier one) ratio of 12.5% against the minimum buffer of 9.5%, it admits ‘the timing, scope and quantum of any potential financial impact on the group cannot be reliably estimated at present’.
However, rather than put aside a provision for potential claims, the board has fallen back on the relevant accounting standards and decided it is currently ‘not required or appropriate to recognise a provision in the group's half-year 2024 results in relation to this matter’.
Instead it has decided to preserve capital by ditching the dividend for this financial year and says ‘the reinstatement of dividends in the 2025 financial year and beyond will be reviewed once the FCA has concluded its process and any financial consequences for the group have been assessed’.
