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Lloyds braced for up to £1.8 billion PPI hit to profits

Lloyds Banking Group

PPI charges will blow a hole in the bank’s profits (pic: Terry Murden)

Lloyds Banking Group is expecting an extra charge to cover further compensation claims relating to payment protection insurance of between £1.2 and £1.8 billion in the third quarter.

At the top end it would pip Barclays which today said PPI compensation reached £1.4bn. Barclays reported a 16% rise in adjusted third quarter pre-tax profit to £1.8bn from £1.4bn last year but post-litigation it fell to £246m. Royal Bank of Scotland yesterday said its PPI payout for the third quarter hit £900m.

The surge in PPI claims came ahead of the August deadline and the banks will be relieved that the biggest mis-selling scandal is now reaching an end.

The payout expected at Lloyds, which reports next Thursday, adds to a total conduct and litigation bill of £25.8bn, dating back to the first quarter of 2011.

Besides persuading Lloyds to halt its share buyback programme, it will also knock a hole in the Q3 2019 profits. In the same quarter a year ago Lloyds generated pre-tax income of £1.8bn and underlying profit – excluding items such as conduct costs – have been running at some £2bn per quarter.

Analysts will also be looking at loan impairment costs. Bad loan write-downs rose at all five of the Big Five FTSE 100 banks and Russ Mould at AJ Bell says a continuation of this trend – albeit from very low levels – would be a potential concern as it could suggest that borrowers are struggling, even after just very minor interest rate increases.

“It might also explain why central banks are performing a policy pivot and cutting rates, rather than hiking them,” he said.

In Q3 2018 loan impairments came to £284 million and that had crept up to £304 million in Q2 2019.

“The other item that analysts will be scrutinising is the net interest margin figure.  Thanks to falling interest rates, or at least a flattening yield curve and competition, especially in the mortgage market, net interest margins have been falling and this crimps profits. The net interest margin in Q3 2018 was 2.93% and it had slipped to 2.89% in Q2 2019.”



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