Down 70% with a P/E of 3.5! Is this FTSE 250 stock on the verge of a MASSIVE comeback?

Motor finance lenders are getting a second chance in court that could avoid £30bn in penalties. Is this FTSE 250 stock about to make an explosive recovery?

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2024 hasn’t been a good year for shareholders of FTSE 250 financial services group Close Brothers (LSE:CBG). The bank’s seen its valuation collapse by over 70% since January, as it found itself navigating a series of regulatory entanglements.

The most prominent issue is related to the ongoing FCA investigation into motor financing loans being issued with undisclosed commissions. In October, its fate seemed to have been sealed when a court ruling deemed it illegal for banks to pay a commission to car dealers without obtaining a customer’s informed consent.

This means that all the lending institutions involved could now be on the hook for billions of pounds worth of borrower compensation. In fact, analysts at Moody’s have estimated total redress costs could reach as high as £30bn.

However, there may still be some hope for banks like Close Brothers. And if everything goes in their favour, the stock could be set to enjoy a skyrocketing recovery in just a couple of months.

A second chance at court

Earlier this month, the UK Supreme Court granted auto lenders permission to challenge the earlier October ruling. This gives Close Brothers a second chance to present its case and potentially avoid an estimated £640m penalty based on current analyst projections.

The case is due to be heard between January and April. And Close Brothers won’t be the only bank attending, with other financial institutions such as Lloyds and Santander. So what are the odds of a favourable outcome?

At this stage, it’s difficult to say due to the complexity of the situation. But it’s worth pointing out that historically, challenges at the Supreme Court typically only have around a 30% success rate. Needless to say, while the odds aren’t impossible, they’re not exactly in Close Brothers’ favour.

Worst-case scenario

Let’s assume the Supreme Court upholds the previous ruling. What does that mean for Close Brothers shareholders? The actual cost of compensation to customers is currently unknown. After all, the FCA investigation’s still ongoing. But management’s already putting aside £400m to cover the potentially incoming expense.

In order to raise this capital, the firm’s selling its asset management division for £200m to a private equity group. The deal won’t close until early 2025, but that’s before any expected penalties could arrive, giving some ideal timing.

Sadly, this transaction also means operating profits moving forward will be slightly lower due to the discontinued operations. Yet what I find more concerning is that CEO Adrian Sainsbury’s currently on a medical leave of absence during this challenging time.

Overall, Close Brothers is in quite a tight spot. It goes without saying that there’s enormous risk attached to an investment right now. Personally, it’s too high for my tastes. And while its price-to-earnings ratio of just 3.5 does look exceedingly cheap, it’s not a stock I’m tempted to buy right now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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