Lloyds (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. Like peers Royal Bank of Scotland (RBS) and CYBG (CYBG), the lender experienced a heightened level of claims in the month prior to the 29 August deadline, 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.
These latest provisions take the aggregate charges for Lloyds of the PPI scandal to £21.9bn and the overall cost to the industry of above £50bn.
Suspending share buybacks is expected to add-back around 30 basis points to the group’s common equity tier one (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.
