Monday 9 September 2019 10:52 am Markets Talk

How did banks get their PPI sums so wrong?

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Lloyds, RBS and CYBG have all had to admit they’ll take much larger hits for PPI claims than originally thought.

The end is in sight for banks and PPI claims, but what’s been made abundantly clear is just how badly they estimated the losses. The total cost to Britain’s banks from PPI is now a cool £50bn. These are not abstract losses or mere balance sheet adjustments – these payments gnaw away at profits and shareholder returns.  

And this is just the end of a multi-year process that has seen the likes of Lloyds and others repeatedly increase the amount they set aside to cover PPI costs. The truth is banks have consistently and systematically failed to account properly for PPI claims. Shareholders should be banging down the board room doors and demanding the heads of those responsible. The other great PPI scandal is how shareholders have been consistently low-balled, fobbed off and undersold the impact of the redress, leaving them with lower capital returns and lower dividends than they would have expected. 

Lloyds again got it sums completely wrong over PPI. In an update to the market on Monday, it took an additional charge of £1.8bn. Following the RBS and CYBG admissions, it was not exactly a surprise.  

Lloyds said it will take an additional charge of between £1.2bn and £1.8bn relating to the final rush of claims made in August. The much smaller CYBG expects to increase its provisions for legacy PPI costs by between £300m and £450m. RBS thinks its PPI bill will rise by £600m-£900m. 

The knock-on effect is not insignificant for Lloyds. Management expects capital build in 2019 to be below the 170 to 200 basis points per year guidance and for the statutory return on tangible equity to be lower than its 2019 guidance of around 12%. It has also suspended the buyback with about £600 million of the up to £1.75 billion programme expected to be unused at mid-September. Investors may also worry about the dividend, however we do know that the later the claims are made, the less chance they have of success. Therefore, investors will be hoping the charge is at the lower end of expectations and that management sticks to its goal of a progressive annual dividend.  

Given Lloyds has followed RBS and CYBG in taking additional PPI charges after the August rush before the cut-off, it seems Barclays will be sure to follow suit. At least the end is in sight for banks and their shareholders.