FTSE 250 stock Close Brothers (LSE: CBG) has experienced a major drop recently. Back in early January, it was trading near 800p. Today however, the share price is around 400p.
So, what’s going on with the banking and wealth management business? And is this a great investment opportunity?
Why the share price has tanked
The massive share price fall here is down to uncertainty over a potential fine from the Financial Conduct Authority (FCA) in relation to car finance mis-selling.
The FCA recently announced that it will be reviewing historical motor finance commission arrangements and sales across several firms in the UK. The regulator has said that, as a result of discretionary commission arrangements – which allowed brokers to increase the interest rates they offered for car finance – some customers may have been charged too much on car loans made before January 2021.
As a result of this investigation, City analysts have estimated that UK banks could be on the hook for more than £1bn in compensation. And many analysts seem to think that Close Brothers could be in the firing line. According to RBC, the company could be looking at a fine of up to £200m.
If Close Brothers was to be hit with a fine of this magnitude, it would be a disaster for the financial services company. Unlike big banks such as Barclays and Lloyds, this is a relatively small business. Last financial year (ended 31 July 2023), its statutory operating profit before tax was only £112m.
It’s worth noting that since news of the FCA investigation came to light, brokers have been cutting their price targets for Close Brothers shares. For example, on 7 February, analysts at Peel Hunt cut their target price to 518p from 785p.
Are the shares worth buying?
I’ve always thought Close Brothers is a decent company. I like the fact that it has a diversified business model and has exposure to different areas of financial services such as wealth management and securities trading.
But the FCA investigation adds a lot of uncertainty from an investment perspective. Ultimately, it makes the stock a bit of a gamble, to my mind.
Realistically, I have no idea what near-term earnings are going to look like, meaning it’s hard to value the company at present.
I also have no idea what’s going to happen to the dividend (which is one of the big attractions of the stock). If profits are wiped out, the dividend may be cut completely.
Given the high level of uncertainty, I’m going to pass on the FTSE stock.
There’s a chance that today’s share price of 400p could turn out to be a bargain. I’m just not willing to take a gamble on the stock though.
I prefer to invest in companies that have a high level of earnings visibility. I’ve found that this can help to preserve my capital and improve my returns.
