15th Feb 2024 12:15
(Alliance News) - Close Brothers Group PLC axed its dividend on Thursday, as it prepares for a possible hit from a UK watchdog probe, prompting Shore Capital Markets to cut its recommendation on the stock.
The merchant bank's shares dropped 27% to 289.00 pence each in London on Thursday afternoon. It was the worst FTSE 250 performer.
Close Brothers cautioned on a "potential financial impact" stemming from the UK Financial Conduct Authority's probe of historical motor finance commission arrangements.
The UK financial services watchdog in January explained it is probing whether compensation could be due for people who were potentially overcharged for car loans.
If it finds misconduct, those affected will be compensated. The FCA said it heard from over 10,000 people who are concerned they were charged too much. It added there could be even more yet to come forward.
"While there is no certainty regarding any potential financial impact as a result of the FCA's review, the board recognises the need to plan for a range of possible outcomes. It is a long-standing priority of the group to maintain a strong balance sheet and prudent approach to managing its financial resources. To that end, the board considers it prudent for the group to further build capital strength, while supporting our customers and business franchise," Close Brothers said.
The bank explained it will pay no dividend for the current financial year, which runs to July 31, and the reinstatement of payouts for financial 2025 will be reviewed once the FCA has concluded its probe.
Shore Capital noted Close Brothers shares went into Thursday around 50% lower year-to-date, as the market was already fretting about what the FCA probe could mean for the company.
"Should the group manage its way through this scenario, there could be significant medium-term upside to the shares. Had the dividend been maintained this would have given us confidence to retain our positive stance, but with this cut we feel it makes sense to take our recommendation down to hold (from buy) pending the outcome of the FCA review," Shore added.
Shore also said that Close Brothers shares are trading at a multiple that is among the lowest of the sector, suggesting there could be some catching up for it do should it be spared from a deep hit in the FCA probe.
Close Brothers said it has not booked a provision for the matter in its half-year results, UBS added.
"We think the announcement would be welcomed as a step to proactively manage capital, given the wide range of possible outcomes, but could potentially drive share sales from income investors," UBS added.
The Swiss bank rates the stock at 'neutral'.
By Eric Cunha, Alliance News news editor
Comments and questions to [email protected]
Copyright 2024 Alliance News Ltd. All Rights Reserved.
Related Shares:
Close Bros