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Banks forced to hike PPI provisions

Following RBS’s revelation that mis-selling claims had spiked ahead of the deadline, more UK banks have increased provisions
September 12, 2019

Another trio of UK-listed banks have been forced to raise the level of provisions for historic mis-selling of payment protection insurance due to a higher-than-anticipated number of claims during the month prior to the 29 August deadline. 

Lloyds Banking (LLOY) has been forced to take an additional provision of up to £1.8bn for historic mis-selling of payment protection insurance, prompting the lender to suspend its £1.75bn share buyback programme. The group experienced a heightened level of claims in the month prior to 29 August, at between 600,000 and 800,000 a week.

In addition to the £1.08bn in provisions outstanding at the end of June, management will set aside between £1.2bn and £1.8bn during the third quarter to account for the extra claims. Capital generation is now likely to be below the ongoing annual target of 170 to 200 basis points, meaning the group expects to miss the targeted return on tangible equity of 12 per cent this year. With that in mind, around £600m of the £1.75bn share buyback programme will remain unused at mid-September. 

Barclays (BARC) said it expected to raise its PPI provisions by between £1.2bn and £1.6bn in the third quarter, but that its common equity tier one (CET1) ratio would be in line with management’s target of 13 per cent at the year-end. 

CYBG (CYBG) was forced to set aside up to £450m for a higher level of claims, which will reduce its CET1 ratio by between 130 and 190 basis points, potentially below a target of 13 per cent. 

For Lloyds, these latest provisions take the aggregate charges for the PPI scandal to £21.9bn and the overall cost to the industry above £50bn. 

Suspending share buybacks is expected to add back around 30 basis points to the group’s CET1 ratio, taking it to between 13.4 and 13.7 per cent, according to Shore Capital analyst Gary Greenwood. However, he believes ordinary dividends remain secure. “The company is running on capital buffers over and above the regulatory requirements,” he said. Earlier this year, management revised its CET1 ratio target to 12.5 per cent, plus a buffer of around 1 per cent. 

That is a view held by Investec’s Ian Gordon. “My inference is that if the provision comes out at the very top of the range, the buyback will be cancelled for this year, and if it comes out at the bottom it will be reinstated,” he added.