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Close Brothers Group PLC (LSE:CBG) has faced significant challenges in 2024, evident from its sharply reduced share price. However, equities analysts at RBC Capital Markets view this situation as presenting a promising opportunity.
The decline in Close Brothers’ valuation is primarily attributed to an ongoing probe by the Financial Conduct Authority (FCA) into the motor finance sector, which could result in a costly consumer redress scheme. Some analysts have highlighted that Close Brothers might be particularly vulnerable due to its substantial involvement in motor finance.
Berenberg, for instance, has indicated that Close Brothers could face significant charges related to potential redress, alongside increased expenses due to the FCA investigation. Despite these challenges, RBC Capital Markets believes the market has overreacted to the situation.
RBC analysts argue that the current valuation of Close Brothers appears undervalued when compared to historical and sector benchmarks. While previously there was an understanding that the discount on the stock was warranted, RBC now identifies several potential catalysts that could positively impact the company. These include a potential easing of Basel 3.1 regulations, a settlement with Novitas, and approval for the Internal Ratings-Based (IRB) approach.
Basel 3.1 pertains to regulations for calculating risk-weighted assets within the banking and finance sector, which could affect the company’s financial standing. The IRB approach allows institutions to use their own internal models to estimate credit risk, potentially offering a more tailored evaluation of risk.
Despite the ongoing uncertainty surrounding the FCA probe and Basel 3.1 regulations, RBC has raised its rating for Close Brothers from “sector perform” to “outperform” and set a target price of 620p, up from a previous target of 375p. Early trading on Friday saw Close Brothers' shares at 546.6p.
RBC’s revised outlook suggests a belief that the market has overemphasized the negative impact of regulatory concerns on Close Brothers. The analysts anticipate that the company’s robust financial structure, particularly its net interest margin which remains stable in a declining rate environment, will support its recovery and growth potential.
