(Sharecast News) - Shore Capital downgraded Close Brothers on Wednesday to 'hold' from 'buy' as it recommended that investors take profits.
The downgrade came after the merchant bank said the motor finance redress scheme would cost it around £320m, but that this could be "comfortably absorbed". The figure was broadly similar to its existing provision of £294m.
Shore had upgraded the shares to 'buy' following a report from short-seller Viceroy Research a couple of weeks ago, which suggested that Close Brothers would need a materially higher provision that could potentially threaten solvency. The report led to a sharp selloff in the shares.
"At the time, we considered these claims to be excessive, a view supported by management commentary," the broker said.
"Today's announcement suggests that our initial assessment was broadly correct. That said, we note that some uncertainty remains around the ultimate provision, given the potential for legal challenges to the scheme and claims pursued outside the FCA framework by law firms and claims management companies.
"With the shares up 33% since we upgraded our recommendation and having largely closed the gap to our target price (475p), we believe it is now appropriate to take some profits, particularly given that underlying operational performance remains weak and significant execution will be required for the group to deliver on management's FY28F double-digit return on tangible equity target, which we view as stretching."
Shore said it would reconsider its stance on Close Brothers if the shares were to fall back below 400p in the absence of negative new information and/or the group demonstrates a meaningful improvement in underlying operational performance relative to its expectations.
At 1305 BST, Close Brothers shares were up 17.7% at 458.60p.