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Investing.com -- RBC Capital Markets downgraded Close Brothers Group (LON:CBRO) to “sector perform” from “outperform,” saying the bank’s sharp share price recovery this year has left little room for further gains, in a note dated Monday.
Shares of the merchant banking group were down 1.4% at 03:43 ET (07:43 GMT).
The analysts noted that Close Brothers’ stock has risen about 120% year to date and now trades at 0.56 times one-year forward tangible book value, compared with a long-term average of 1.56 times.
The shares remain well above the November 2024 low of 0.21 times, but the valuation discount of 0.48 times to U.K. peers contrasts with a historical premium of 0.53 times.
The downgrade follows the Supreme Court ruling on motor finance commissions on Aug. 1, which RBC described as a clearing event for the sector.
The brokerage has already set aside £165 million in provisions, close to RBC’s modeled impact of £170 million. For the wider industry, the analysts continue to forecast an impact of about £12 billion.
Under different redress assumptions, RBC projects a pre-tax profit impact for Close Brothers of £115 million in an upside scenario, £171 million in its base case, and £214 million in a downside scenario.
Profitability remains subdued compared with peers. RBC estimates Close Brothers’ adjusted return on tangible equity at 6% in fiscal 2025, falling to 5.6% in 2026 before recovering to 7.3% in 2027.
That compares with an 8.3% return delivered in 2024 and remains 7.2 percentage points below U.K. peers’ average of 13.1%.
Adjusted diluted earnings per share are forecast at 55.13p for 2025, 53.12p for 2026 and 73.90p for 2027, down from 76.26p in 2024.
The brokerage held its price target at 525p, close to the current market level of 516p.
Its scenario analysis sets out an upside case of 625p, reflecting potential regulatory and litigation wins, and a downside case of 150p, assuming higher-than-expected costs from motor finance remediation.
The analysts removed the “speculative risk” label previously attached to the stock.
Close Brothers’ capital position is forecast to remain above regulatory minimums. The CET1 ratio stood at 12.8% in 2024 and is projected at 13.4% in 2025, 14.2% in 2026 and 13.7% in 2027. Tangible book value per share is expected to rise from 921p in 2024 to 1,039p in 2027.
Income trends remain pressured. Total income is estimated at £762 million in 2025, falling to £722 million by 2027. Expenses are projected at £542 million in 2025, easing to £454 million by 2027.
Pre-provision profit is seen at £221 million in 2025, £222 million in 2026 and £268 million in 2027.
Impairments are expected to remain steady at around £93-98 million per year, leaving adjusted pre-tax profit at £127 million in 2025, £128 million in 2026 and £170 million in 2027.
Dividend payments remain suspended in the near term, with RBC forecasting a resumption in 2027 at 30p per share, equating to a 5.8% yield.
Net customer loans are projected at £9.85 billion in 2025, £10.19 billion in 2026 and £10.62 billion in 2027.
The net interest margin is forecast at about 7% across the period, with cost of risk stable at 0.9%.
RBC said that while catalysts such as dividend reinstatement, regulatory approval of internal ratings models, or a settlement related to Novitas could provide upside, they are unlikely in the short term.