Source: Sharecast
"Close Brothers’ shares have fallen sharply in recent days following the publication of a critical Viceroy report alleging that the group has materially understated its motor-finance commission liabilities," the broker noted.
"Management has strongly refuted these claims, arguing that the analysis relies on exaggerated and unfounded assumptions. In our view, the resulting sell-off looks overdone, and we therefore upgrade our recommendation."
Close Brothers tumbled on Monday after Viceroy said the company had "systematically misrepresented" its exposure to the car finance scandal. Viceroy said in a research note that examination of the Financial Conduct Authority’s redress scheme suggests that Close Brothers will have to "at least, double its existing provisions".
The short seller, famous for its exposes on Wirecard and Home Reit, said Close Brothers has not fully provisioned for the redress because further provisions would breach CET1 regulatory capital restrictions and could create "an equity wipeout event".
Viceroy said Close Brothers’ redress exposure ranges from £572m to £1.2bn, which is well above its current provision of £300m.
Close Brothers responded by saying that it "strongly disagrees" with the Viceroy report. The company said its provisioning approach in relation to motor finance commissions and the resulting impact on its capital position was "in accordance with UK-adopted international accounting standards and follows a robust governance process".
Shore Capital argued that the Viceroy report "significantly exaggerates" redress risks, noting that management has firmly rejected its assumptions.
"At today’s valuation, we think the shares more than compensate for remaining regulatory uncertainty, offering significant upside if the FCA outcome aligns closer to management’s view than Viceroy’s severe scenarios," it said.
A day after the research note was published, Close Brothers reported a narrowing of its first-half losses and said it was planning to cut around 600 jobs by the end of financial 2027 as it accelerates its cost-cutting programme.
Shore Capital, which cut its price target on the stock to 490p from 510p, said Close Brothers delivered a "slightly disappointing" H1, with the loan book contracting 2% to £9.2bn and adjusted operating profit falling to £65.2m from £80.5m as lower average balances weighed on income despite a resilient 7.1% NIM.
At 1050 GMT, the shares were up 3.7% at 358.64p.
