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Investing.com -- Shares of Close Brothers (F:CBRO) Group plc (LSE:CBG) fell by 3% following the company’s announcement of a significant provision for motor finance commissions that could impact its capital position.
The provision of £165 million, expected to be included in the first half of fiscal year 2025 results, has created uncertainty among investors, as the ultimate cost to the Group could be materially higher or lower than currently estimated.
The financial services group reported its first half of fiscal year 2025 summary, revealing an adjusted operating profit (AOP) of approximately £75 million, which aligns with the limited consensus available from Visible Alpha. This figure excludes the impact of the newly announced motor finance provision. When compared to the company-compiled consensus AOP for the full fiscal year 2025, the H1’25 results are about 1% above expectations.
The banking division, excluding the motor finance provisions, reported an AOP of £104 million for the first half, in line with the full year consensus if projected annually. Despite a contraction in the loan book due to selective lending practices, credit performance remained resilient, and margins were described as strong.
Winterflood, part of Close Brothers, reported a £1 million loss at the AOP level for the first half, while the Corporate Centre saw a net expense of £28 million. The company did not provide an update to its full year 2025 guidance.
Additionally, Close Brothers provided an update on the sale of its asset management division, CBAM, to Oaktree. The completion of the transaction is expected soon and is anticipated to boost the company’s CET1 ratio by approximately 100 basis points.
This increase is based on the asset values at the end of the second half of fiscal year 2024 and excludes any immediate reduction in operational risk RWAs or any impact from the contingent deferred consideration. The estimated gain on disposal is expected to be recognized in the second half of fiscal year 2025.
In light of the motor finance provision and the anticipated benefits from management actions, Close Brothers expects their CET1 ratio to be around 13.0% by the end of fiscal year 2025.
RBC analysts commented on the broader implications of the provision, stating, "In our view, the Hopcraft CoA decision in Oct’24 will have changed the probably weightings that different banks apply to their provisioning, which will lead to higher provisioning with H2’24 results.
Based on our own impact assessment, CBG’s announcement today would imply an incremental LLOY provision at FY24 results of £1.2bn, on top of £450m already taken at FY23. We have a £1.0bn buyback in our numbers for H2’24 which compares to consensus expectations of £1.7bn. On our numbers this would also imply that BIRG takes a provision of £390m (EUR470m). We have a EUR500m buyback in our numbers for H2’24."
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