Big five banks run up £100bn bill in bad loans and legal costs over the last five years

Hayley Kirton
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he UK's big five banks, which report full-year results next week, have run up a bill of nearly £100bn over the last five years for a toxic mix of fines and bad loans according to a new analysis.

However, the era of sour loans and megafines that dwarf the banks' dividend payouts could finally be drawing to a close, eight years after the credit crunch.

Russ Mould, investment director at AJ Bell which conducted the research said: “The good news is that, unless there are any very nasty surprises when the banks report their full-year results next week, 2016’s forecast combined dividend payments are forecast to outstrip conduct costs for the first time since the first provisions were incurred back in 2011."

Source: AJ Bell

HSBC, Lloyds Banking Group, Barclays, Royal Bank of Scotland and Standard Chartered all reveal their full-year figures next week.

According to AJ Bell, the quintet of lenders has racked up £57.7bn between them in litigation, conduct and compensation costs over the last five years. This includes hefty bills for payment protection insurance (PPI) claims at the banks with UK retail arms, and benchmark rigging charges such Libor and forex manipulation at some of the banks.

Over the same period, the lenders have also been hit for £36.6bn in bad loan impairments as banks have worked hard to shed their problem debt.

Read more: Watchdog to growl again: FCA's toothless 2016 won't be repeated

AJ Bell revealed the five banks had run up costs for misconduct and litigation of just £5.5bn in the first nine months of 2016, the lowest it has been for five years.

"If the Big Five can now keep themselves out of trouble with the regulatory authorities their profits could blossom once more, something which patient investors will be pleased to see, especially as improved earnings could turn into higher dividends," said Mould, investment director at AJ Bell.

Simon French, chief economist at Panmure Gordon, told City A.M. he agreed the days of skyrocketing regulatory costs could soon be over, but warned that different problems lay ahead.

"Banks have been facing a cocktail of headwinds including a sticky legacy cost base, challenge of digital disruption, low economic growth and compressed net interest margins. So it is a case of one challenge fading but a range of other challenges still prevalent."

And although the legal costs may no longer be rising, that may not be reflected in the banks' bottom lines just yet.

An analysts' consensus for HSBC, which will announces results next Tuesday morning, predicts the lender will report profits before tax of $2.7bn in its fourth quarter, which, if added to the $10.6bn the bank has already reported for the first nine months of the year, brings its full-year total to around $13.3bn. That figure is considerably down on its 2015 profit before tax of $18.9bn.

RBS, which reports on Friday, is also expected to have less than stellar news for investors. The taxpayer-backed lender has reported losses attributable to shareholders of £2.5bn for the nine months to last September. Having revealed last month it has added £3.1bn to its provision for an as yet unsettled fine from the US Department of Justice for mis-selling mortgage-backed securities, is now on track for its ninth consecutive year of losses.

However, Lloyds, which will be reporting on Wednesday and poured £1bn into its PPI provision during the first nine months of 2016, is predicted to report statutory pre-tax profits of £4.4bn, more than double the £1.6bn it reported for 2015.

Lloyds first took a £3.2bn provision to cover payment protection insurance (PPI) claims in the first quarter of 2011. The deadline for PPI claims has yet to be fixed but is expected to be June 2019.

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