Shore Capital sets 490p target price, implying 42% upside, as it argues short-seller's motor finance redress scenarios are materially exaggerated
Shares in Close Brothers Group PLC (LSE:CBG), the FTSE 250 specialist lender, have fallen sharply after a critical report from Viceroy Research argued the company had understated its liabilities from motor finance commission arrangements, but Shore Capital has responded by upgrading the stock to 'buy', arguing the selloff has gone too far.
Close Brothers' management has firmly rejected Viceroy's claims, saying the analysis rests on exaggerated and unfounded assumptions, and Shore sided with that view, cutting its target price to 490p from 510p while concluding that the shares now more than compensate investors for any residual regulatory uncertainty.
The motor finance commission scandal has cast a shadow over several lenders that operated discretionary commission arrangements with car dealers before they were banned in 2021.
Close Brothers has already set aside £300 million in provisions to cover potential redress costs, with a further £135 million added in the most recent half-year results, and its core capital ratio, a key measure of financial resilience, rose 0.5 percentage points to 14.3% after the group completed the sale of its Winterflood market-making business.
The half-year results themselves were described as slightly disappointing, with the loan book contracting 2% to £9.2 billion and adjusted operating profit falling to £65.2 million from £80.5 million a year earlier, as lower average balances weighed on income despite a net interest margin of 7.1%.
On costs, the group accelerated its transformation programme, now targeting annualised savings of around £25 million in the current financial year, up from £20 million previously, and £60 million by the financial year to July 2027, a full year ahead of the original schedule, through outsourcing, automation and operating model changes.
Shore forecast adjusted pre-tax profit of £108 million for the financial year to July 2026, rising to £149 million in 2027 and £198 million in 2028, implying a return on tangible equity (RoTE), a standard measure of profitability for banks, of 9.3% by 2028.
That sits below management's own target of more than 10%, and Shore Capital said achieving that level would require faster loan book growth, stronger margins, or additional cost savings beyond the £60 million already identified.
At 356p (up 3% on the day), the stock trades at 0.4 times its tangible net asset value, a level the broker described as offering significant upside should the FCA's eventual ruling land closer to management's assessment than to Viceroy's more severe projections.