The fresh round of PPI hits flagged by RBS, Virgin, and Co-op were always going to serve as hors d’oeuvres to Lloyds. The main course has proven harder to stomach than anyone could have expected: a late spike in claims that could cost the bank up to £1.8bn.
Complaints had been running at just under 200,000 a week but that number quadrupled as the deadline agreed between the banks and the Financial Conduct Authority for submitted them approached.
If Lloyds’ worst case scenario is realised, the total cost to the industry will come in at over £50bn, of which it will have contributed just under £22bn.
It is, of course, possible that the final cost of the pre deadline claims spike will come in towards the lower end of Lloyds’ range, which the bank put at £1.2bn.
Some of the late rush may be the result of people just rolling the dice and submitting claims with little validity.
When banks huff and puff about their customers doing that, it pays to remember that it wouldn’t have happened if they hadn’t ripped off millions of people in the first place.
That said, the thing to remember about PPI is banks’ worst case scenarios have time and again proven to be wildly over optimistic.
The financial hit from this latest provision will have real world consequences for Lloyds’ investors. While bank has sought to reassure that it will have sufficient capital to pay its dividend, its share buy back programme (another means of returning capital to investors) has been suspended.
That had been helping to prop up the share price of late.
Big investors suffering fall out from this, even if it’s limited, is a very welcome development.
Few of them raised any questions when banks were aggressively selling millions of worthless PPI policies, despite the fact that the profit margins on them were so wildly out of whack when compared to other insurance policies that it ought to have raised alarm bells.
Institutional shareholders, with a time horizon longer than a few months, should have been asking how those sort of margins were produced and whether they were sustainable. If it looks to good to be true in banking, that’s because it usually is.