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Close Brothers has announced a £400mn plan to bolster its capital position as it prepares for the impact of a regulatory probe into motor financing deals that analysts estimate could cost the banking industry up to £16bn.
The FTSE 250 bank, which last month suspended its dividend, said on Tuesday it would be “prudent” to further strengthen its balance sheet and cut costs in light of “significant uncertainty about the outcome” of the review “at this early stage”.
The group said it currently had “no legal or constructive obligation” in relation to the Financial Conduct Authority probe and did not take a provision as a result. However, it unveiled a series of measures in an effort to strengthen its common equity tier one ratio, a measure of financial resilience, by £400mn by the end of its 2025 financial year.
Among them was a “significant risk transfer of assets” and other actions including “cost management initiatives” and retaining £100mn in earnings if required.
“The FCA’s review of the motor finance industry is ongoing and it would be premature to predict the outcome or estimate the potential impact on the group,” said chief executive Adrian Sainsbury. “The board however recognises the paramount importance of preparing the group for a range of outcomes from this review.”
Shares in Close Brothers have plummeted nearly 60 per cent since the Financial Conduct Authority announced in January that it was investigating discretionary commissions on car financing deals dating back a decade, saying they gave lenders and dealers an incentive to charge customers higher interest rates.
Experts warned that it was too early to reliably estimate the impact of the review until the regulator provided more clarity in September, but estimates from banks range from £6bn to £16bn for the entire UK banking industry. Analysts at Royal Bank of Canada estimated that Close Brothers would be hit with a £250mn redress bill.
Close Brothers, which also owns Winterflood Securities and an asset management branch, is the most exposed lender to car finance in relative terms, with motor finance deals representing 22 per cent of its gross loan book at the end of 2021, according to analysts at Fitch.
The 146-year-old City merchant bank last month suspended its dividend because of uncertainty about the impact of the review, and said it would decide whether to reinstate it in 2025 “once the FCA has concluded its process and any financial consequences for the group have been assessed”.
Lloyds Bank, which owns Black Horse, the UK’s largest car finance provider, last month set aside £450mn to cover potential redress costs linked to the probe.
Close Brothers on Tuesday reported a £93.8mn statutory operating profit for the six months to January, up from £11.7mn the previous year, when it took a £115mn impairment charge linked to losses at its now-defunct legal funding specialist Novitas loans.
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