Liberum upgrades Close Brothers to 'buy'

(Sharecast News) - Liberum upgraded Close Brothers to 'buy' from 'hold' on Friday, arguing that the recent share price fall was overdone.

In the same note - on challenger banks and specialist lenders - the broker also lifted its price targets on OneSavings Bank and Paragon to 790p from 645p and to 650p from 630p, respectively, maintaining a 'buy' rating. Liberum lefts its price target for Close Bros unchanged at 1,490p.

It said: "Although Russia's invasion of Ukraine may lead to lower economic growth in the short-term, with the market expecting the UK base rate to rise to 2.0% by year-end, banks are at long last set to benefit from economic tailwinds.

"This, coupled with the potential for further Covid-19 provision releases, should lead to earnings beating estimates, which remain conservative. We continue to prefer the specialist lenders, as they have carved out niches and are becoming leaders in their respective markets, such as BTL mortgages and SME lending."

Liberum said Close Brothers has a resilient and time-tested business model of lending conservatively at good margins. Despite this, loan growth over the last 18 months has been "impressive", helped by government support schemes and cash flow deficits at SMEs.

"Moreover, the net interest margin has improved, evidencing continued pricing discipline. The group has outperformed peers during downturns and with the current uncertainty and trading at FY22E P/TBV of 1.2x and a P/E of 8.6x for return on tangible equity of 14.6%, and with a dividend yield of 5.8% we believe the recent share price fall is overdone." Hence the upgrade.

At 1350 BST, Close Brothers shares were up 2.2% at 1,217p.