- The merchant banking firm posted a first-half operating pre-tax loss of £103.8m
Close Brothers swung to a first-half loss after setting aside a higher-than-expected provision to cover mounting costs related to the ongoing motor finance scandal.
Shares in the merchant banking firm plunged on Tuesday after it posted an operating pre-tax loss of £103.8million for the six months ending January, compared to an £88.1million profit a year ago.
The group, which is scheduled to return to the FTSE 250 later this month in the latest reshuffle, has previously said it would book a £165million provision to cover legal and remediation costs for customers who paid commissions when buying their vehicles.
But Close told investors on Tuesday it now expects costs associated with handling those complaints and other legal expenses to be about £22million for the year to 31 July, compared to previous forecasts of £10million to £15million.
Close shares plummeted by 16.9 per cent to 287p in early trading.
In a landmark judgement last October, the UK Supreme Court ruled that car sellers could not receive a commission from lenders if the vehicle buyer had not given their ‘fully informed consent’ to the payment.
The judgement rocked the British car finance sector, with Close Brothers announcing a temporary freeze on all new motor loans, which make up a fifth of its total lending.
Last week, the Financial Conduct Authority said it would likely consult on an industry-wide scheme to compensate motor finance customers if the Supreme Court ruled that lenders and brokers should have been more transparent about commissions.
Reserved: Close Brothers has set aside £165million in relation to a motor finance scandal
Ratings agency Moody’s estimates the industry could end up forking out £30billion in compensation to motorists.
However, one senior Financial Conduct Authority lawyer believes the figure could surpass the £50billion banks paid to settle payment protection insurance claims.
The Supreme Court did grant permission for Close Brothers and MotoNovo owner FirstRand to appeal the October verdict. It has scheduled a hearing for the appeal from 1 to 3 April.
Mike Morgan, chief executive of Close Brothers, said on Tuesday: ‘Our goal is to ensure that, once the motor finance commissions uncertainty has been resolved, the group is well positioned to generate strong, sustainable returns.
‘Alongside a stronger capital position, delivering on these priorities will create a more efficient and resilient business, one that delivers greater value for shareholders and continues to support customers, as we have through many cycles.’
In expectations of compensation payouts, Close Brothers has suspended dividends and recently completed the sale of its wealth management division to Oaktree Capital Management in a £200million deal.
Growing expectations that the Treasury could seek to intervene on behalf of the beleaguered motor finance sector has helped to lift shares in recent weeks.
Close Brothers shares remain up 17.7 per cent since the start of the year, despite Tuesday’s fall, but have still lost more than 70 per cent over the last five years.
The company additionally reported on Tuesday that its first-half operating income fell by 1 per cent to £390million owing to lower income from its banking arm and central functions.
Meanwhile, its loan book shrank by 3 per cent to £9.8billion, which the firm blamed on ‘seasonality and selective lending’ from optimising risk-weighted assets and boosting its capital levels.
Analysts at Peel Hunt placed Close shares under review, but welcomed ‘resilient performance in difficult circumstances’.
The broker said: ‘We are not surprised that challenging circumstances are prompting downgrades and note management has flagged that current returns are unsatisfactory… and action will be taken.
‘We intend to update our estimates, target price and recommendation shortly.’
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