Close Brothers Group PLC's (LSE:CBG) share price surged by 11.5% following the announcement of a £400 million strategy to enhance its capital position in anticipation of potential financial impact from a Financial Conduct Authority probe into motor financing.
The FTSE 250-listed merchant bank also confirmed that it has paused its dividend, deeming it wise to take preemptive action amid the "significant uncertainty" surrounding the early stages of the FCA's review, an investigation that could impose up to £16 billion costs on the banking sector.
While not setting aside funds for expected costs, Close Bros plans to bolster its common equity tier one ratio — a key financial resilience metric — by £400 million through significant asset risk transfers and retaining £100 million in earnings
"The FCA's review of the motor finance industry is ongoing and it would be premature to predict the outcome or estimate the potential impact on the group," said chief executive Adrian Sainsbury.
"The board, however, recognises the paramount importance of preparing the group for a range of outcomes from this review. As part of this, the board is taking a number of decisive actions to strengthen our capital position materially.
"These include the difficult decision taken last month not to pay dividends in respect of the current financial year. In addition, we are taking steps to optimise our risk-weighted assets and reduce costs."
The comments were made alongside interim results from the group, which also owns the City market maker Winterfloods. These showed a 20% decline in adjusted profits to £93.6 million.
Of course, the numbers were something of a sideshow to the company's move to shore up its capital position, with the stock price up 38.4p at 372.6p as the Square Mile welcomed the decision.
Broker Shore Capital said: "We currently rate the shares as a 'hold', given uncertainty regarding the potential outcome of the FCA’s review into historical discretionary commission payments, but believe management is taking appropriate action to strengthen the business to cope."