Close Brothers Group PLC (LSE:CBG) has been in the eye of the storm in 2024 and its heavily discounted share price reflects that.
But this, according to equities analysts at RBC Capital Markets, presents an enticing opportunity.
As a major player in the world of motor finance, Close Bros’ tumbling valuation is a direct result of a Financial Conduct Authority probe into the sector which could lead to a punitive consumer redress scheme.
Some analysts believe Close Bros has “outsized exposure” to this probe.
Berenberg, for instance, reckons Close Brothers is facing a “material charge for potential redress, as well as higher expenses” as a result of the FCA probe into motor finance lending
While these headwinds are undeniable, RBC believes the market has overreacted.
“Whether you are looking at historical or sector-relative valuation, CBG's shares screen as cheap.
“We had previously argued that this discount was justified. However, with the market myopically focused on capital, we see a number of potential catalysts including a softening of Basel 3.1, a Novitas settlement and IRB approval.
“Structurally, it is helpful that CBG's (net interest margin) is agnostic to a falling rate environment.”
Basel 3.1 refers to regulations surrounding the calculation of risk-weighted assets in the banking and finance sector.
IRB refers to an ‘internal ratings-based approach’ that allows companies to use their own internal models to estimate the risk of credit exposures
The jury is still out on what the outcomes will be for the FCA probe and Basel, but in the meantime, RBC has upgraded Close Bros’ stock rating from sector perform to outperform with a 620p price target (formerly 375p).
Shares were swapping for 546.6p in early Friday trades.