Investing.com — Shares in fell more than 5% on Monday after RBC Capital Markets downgraded the UK merchant banking group to “sector perform” from “outperform” and cut its price target to 470p from 625p, citing renewed uncertainty over the motor finance redress scheme.
The financial services company’s shares closed at 439.80 pence on July 3, RBC said, giving the London-listed lender a market capitalization of £658 million.
RBC analysts said they were “surprised” that the Upper Tribunal granted permission for a judicial review of the Financial Conduct Authority’s motor finance redress scheme.
The tribunal’s decision, confirmed last week, means the case is not expected to be heard until December 2026 or February 2027, a delay of at least three months from the FCA’s earlier guidance that a hearing was unlikely “before Oct’26.”
RBC said the Court of Appeal’s decision last Tuesday to allow motor finance mass omnibus claims “scans negatively.” The FCA has not changed its position that, if the scheme is upheld, payments would begin in 2027.
Close Brothers holds a £320 million provision based on the existing scheme, RBC said, adding that it expects the bank to make no change to that provision, though the FCA has told firms to prepare for a complaints-led approach, including “making the necessary provisions and ensuring appropriate capital is maintained.”
The FCA has estimated that scrapping the scheme could cost lenders an incremental £6.3 billion in administrative costs, of which RBC estimated Close Brothers’ share at approximately £200 million, equivalent to 230 basis points of core tier 1 capital.
RBC said continued uncertainty will likely be enough for Close Brothers to delay declaring a dividend alongside its fiscal 2026 results, and it removed a previously forecast 5 pence dividend from its estimates.
The broker added that Close Brothers is expected to deliver the lowest value-creation across 50 European banks over the next three years, and said “we believe the shares could drift from here.”
RBC’s price target is based on a linear residual income model using an average of its 2027 and 2028 adjusted estimates discounted to fiscal 2026, applying a cost of equity of 13.75%.
Its upside scenario of 700 pence assumes a reduction in Close Brothers’ cost of equity in line with larger UK peers, while its downside scenario of 250 pence assumes a larger-than-expected impact from the FCA’s motor finance review.
Risks to the rating cited by RBC include litigation outcomes, further declines in net interest margin, a UK recession increasing default rates in the small and medium-sized enterprise segment, execution risk around cost-cutting plans, and the possibility that Close Brothers never achieves approval for the internal ratings-based approach to capital.