Shares in banks hit by last-minute dash for PPI claims
Investors holding shares in the banking sector have been dealt another blow after a last-minute rush of compensation claims for mis-sold payment protection insurance (PPI). This has pulled down shares in the sector and raised concerns that UK banks may not be able to afford such generous dividends in the near-term.
A ‘significant spike’ in compensation claims for PPI ahead of the 29 August deadline has forced Lloyds Banking Group (LLOY) to suspend its share buyback plan in order to preserve cash.
Having already put aside £21bn of provisions for PPI mis-selling, more than any other UK bank by some way, Lloyds announced that it would take an incremental charge of between £1.2bn and £1.8bn in the third quarter. It blamed the volume of PPI enquiries spiking from 190,000 per week in the first half to 600,000 to 800,000 per week in August.
Given the uncertainty around the final figure the bank suspended the remainder of its £1.75bn buyback with £600m still unspent.
It also ditched its target to raise its capital reserves by 1.7% to 2% a year and warned that its return on tangible equity would be below its 12% target. Investors will have to hope that Lloyds can still honour its dividend commitments come the end of the year.
Barclays (BARC) also updated on its PPI claims, saying it would increase provisions by between £1.2bn and £1.6bn in the third quarter after it faced a significantly higher than expected volume of claims last month.
This comes on top of almost £10bn of provisions up to the end of June, the bulk of which have already been used.
Royal Bank of Scotland (RBS) recently said it faced an extra £600m to £900m in charges this quarter, again due to ‘significantly higher than expected’ claims. Like its rivals, it cautioned that the ultimate provision could be higher depending on the quality of the claims.
Curiously HSBC (HSBA) hasn’t updated the market on its PPI situation since publishing its half-year results, nor has Santander or the Co-operative Bank, but none of them are likely to have escaped the industry-wide spike in claims ahead of last month’s deadline.
In terms of stocks poised to benefit from PPI mis-selling, technology and services firm Equiniti (EQN) may potentially see additional revenue from its ‘reparations’ business which will be busy for some time helping the banks plough through the extra volume of compensation claims.