Shares in Close Brothers Group PLC (LSE:CBG) fell 4% on Monday after RBC Capital Markets downgraded the specialist lender from 'sector perform' to 'underperform', warning that pressure on margins and regulatory capital is likely to drag on profitability.
RBC’s analysts lowered their price target from 825p to 600p and flagged several headwinds, including muted loan growth, falling net interest margins and uncertainty around dividend payouts.
Close Brothers is currently in discussions with the Prudential Regulation Authority about its Internal Ratings Based (IRB) model application, but RBC does not expect clarity until at least mid-2026.
Margins narrowing, capital stretched
The downgrade follows a difficult stretch for the bank, which has already cut its dividend and announced restructuring charges this year.
RBC expects the group’s core tier 1 ratio, a key measure of financial strength, to remain under pressure, and sees limited scope for capital return.
The net interest margin, a measure of the profitability of lending, has been falling steadily since late 2022. RBC forecasts further contraction into 2026, citing “a more competitive pricing environment and a shift in loan mix”.
“Return on equity remains well below the cost of equity,” the note added, suggesting the business continues to destroy rather than create shareholder value on current forecasts.
Valuation not yet compelling
Although Close Brothers trades on just 0.6 times book value, RBC argues the discount is justified given the weak returns outlook. The bank’s analysts prefer others in the sector, noting they “see better risk-reward elsewhere”.
The next major event for the group is its full-year results in September, but until there is greater clarity on capital and margins, investor sentiment may remain fragile.
The stock fell 20p to 496p.