Close Brothers shares surge after UK bank says it can ‘comfortably absorb’ cost of car finance compensation | Motor finance
Close Brothers shares rose on Wednesday after the British bank said it could “comfortably cover” its share of the £9.1bn compensation bill for the motor finance scandal, hours after one of its rivals said it would sell its UK operations due to looming costs.
Specialist lender says it is awaiting final terms of Financial Conduct Authority (FCA) compensation plan will cost approximately £320 million, It is a “generally similar” sum to previous estimates and the £294 million allocated to date.
Close Brothers said the extra £26 million could be “comfortably absorbed by existing capital resources, leaving the group well positioned to continue executing its strategy”. The news reported that shares were up 17% as of Wednesday afternoon.
The FCA’s compensation scheme, finalized last week, aims to put a lid on the car finance scandal in which drivers are being overcharged for loans as a result of commission payments between lenders and car dealers. It is predicted that victims will be in line for payments averaging £830 but will ultimately cover a smaller number of contracts than previously anticipated.
The bank’s market update allayed fears over whether it could survive the scandal, particularly after short-seller Viceroy Research claimed last month that Close Brothers would have to at least double its car finance provision to somewhere between £572 million and £1.07 billion. Close Brothers has already sold off its brokerage and asset management businesses to shore up its balance sheet and is on track to cut 600 staff – around a quarter of its workforce – to cut costs.
Close Brothers’ update comes just hours after rival South African group FirstRand announced it would sell its UK operations, trading as Aldermore and vehicle loan provider MotoNovo, amid frustration over the FCA’s compensation scheme, which it said was “deeply flawed”.
The group said it would have to raise an extra £510 million to cover compensation costs, take its total provisions for the motor finance scandal to £750 million, cut earnings forecasts and spin off its UK businesses.
FirstRand said in a trading statement: “The group has consistently shared with all regulators in the UK its concerns that if the remediation plan results in the level of provisioning that has now emerged, it will have to consider whether it will be able to continue to participate in motor finance lending in the UK market on a sustainable basis.”
The group said it would now seek to “facilitate an orderly transition of ownership” at the Aldermore business, although it had done everything it could to protect its shareholders from a compensation scheme it considered deeply flawed.
A spokesman for Aldermore, which employs 1,500 staff across offices in London, Reading, Manchester and Cardiff, did not respond to questions about whether the business could end in bankruptcy if a buyer cannot be found.
“Aldermore Group is a financially strong business that continues to deliver sustainable growth,” the spokesman said. “We continue to operate as usual in our markets, delivering significant positive results for our customers.”
