Close Brothers has agreed to divest its wealth management division, Close Brothers Asset Management (CBAM), to funds managed by Oaktree Capital Management in a deal worth up to £200 million. This strategic move by the FTSE 250 merchant bank is expected to be finalised in early 2025, pending regulatory approvals.
The financial transaction is set to yield approximately £172 million in upfront cash proceeds, which Close Brothers intends to retain to bolster its capital base. The company stated this would improve its position amidst the current uncertain financial climate. Mike Biggs, the bank’s chairman, highlighted that the sale offers competitive value for shareholders and will allow the bank to simplify its operations and concentrate on its core lending business.
This divestiture is part of a broader initiative announced in March aimed at strengthening Close Brothers’ financial standing by around £400 million. The initiative was a response to an ongoing Financial Conduct Authority (FCA) review into whether customers were overcharged through now-banned discretionary commission arrangements on car loans. Analysts have noted that Close Brothers is particularly exposed to the potential financial fallout from this review, with some estimates suggesting the auto lending industry could face up to £16 billion in compensation fees.
Close Brothers has experienced significant share price decline since the FCA announced its probe in January, with its shares falling by approximately one-third. In response to the potential financial impact, the bank cancelled its 2024 dividend and indicated that the 2025 dividend is under review. By not paying a dividend for 2024, the bank preserved about £100 million of common equity tier 1 capital, reinforcing its financial resilience.
The bank’s financial results for the fiscal year ending 31 July 2024 showed a statutory pre-tax operating profit of £142 million, marking a 27 percent increase from the previous year. However, this figure includes provisions for impairments related to the bank’s now-defunct legal funding specialist Novitas. Excluding these provisions, the bank’s profit was £218.6 million last year. When adjusted for Novitas, the 2024 operating profit fell by 22 percent to £170.8 million.
The operational challenges do not end there. The bank has been dealing with additional costs related to the FCA’s motor finance review and an industry-wide investigation into customers facing financial difficulties. Close Brothers has earmarked between £10 million and £15 million for the motor finance probe in the 2025 fiscal year and anticipates group net expenses to be between £55 million and £60 million, primarily due to elevated professional fees and decreased income from lower interest rates. RBC analysts project that Close Brothers could face up to £350 million in total provisions related to these issues, which is nearly half of its current market capitalisation.
Adding to the bank’s challenges, CEO Adrian Sainsbury has taken a temporary medical leave of absence, with Group Finance Director Mike Morgan assuming Sainsbury’s primary responsibilities. Despite these hurdles, Close Brothers’ shares saw a 5.2 percent increase in early trading on Thursday, which some analysts attribute to the competitive valuation of the bank’s shares. Benjamin Toms from RBC Capital Markets noted that the adverse news about the FCA’s review is already well-embedded into market expectations and that current valuations may present an attractive opportunity for investors.
The sale of Close Brothers Asset Management to Oaktree is a significant step for Close Brothers as it seeks to navigate financial uncertainties and regulatory challenges. This transaction is expected to provide necessary capital to strengthen its core operations and weather ongoing financial challenges effectively.
