UK banks are set to be embroiled in controversy once again with fresh claims of mis-selling.
UK bank shares took a tumble when the Financial Ombudsman earlier last week said they had received up to 4,000 complaints (a week) about mis-sold loan insurance. The overall figure, however, is thought to be much larger — around 2 million UK customers.
UK customers believe they have been mis-sold insurance to cover events such as credit card fraud. The Financial Conduct Authority said 11 lenders and card issuers had voluntarily agreed to compensate customers including Barclays (LSE: BARC), HSBC (LSE: HSBA.), Lloyds Banking Group (LSE: LLOY) and Royal Bank of Scotland (LSE: RBS).
Where does another mis-selling scandal leave the UK High Street banks?
Lloyds has so far set aside £11.3bn for compensation for the mis-selling of loan insurance, more than any other bank. Lloyds set aside nearly £10bn worth of PPI compensation — more than any of the “Big Four”. Barclays, Royal Bank of Scotland and HSBC have also set aside billions of pounds of compensation, which will have a knock-on effect for their balance sheets.
In relation to PPI mis-selling, Barclays set aside £3.95bn of which £2.7bn has been paid out. Royal Bank of Scotland has taken a total charge of £3.1bn, and paid out £2.2bn.
With the “Big Four” narrowly passing the Bank of England “stress tests” before Christmas, the future doesn’t look rosy. Should investors therefore invest elsewhere?
Barclays is still mired by the Libor-fixing scandal. Lloyds is planning 9,000 job cuts and 200 branch closures; the government is scaling back its stake in the bank to 20% over the next six months by drip-feeding up to £3bn of Lloyds’ shares into the stock market in the run-up to the general election in May, which may place an “unwelcome cap” on the share price. Finally, Lloyds has yet to resume dividend payments. However, analysts at Shore Capital predict that Lloyds could start with a final dividend for 2014 payable in the spring, estimating a payment of 1.5p per share.
Royal Bank of Scotland, as well as being rocked by this new loan mis-selling scandal, has confessed to misleading some small business customers as part of the £2.3bn of loans the bank has made under the Enterprise Finance Guarantee (EFG) scheme. RBS, which is 80%-owned by the taxpayer, has been the biggest user of the EFG scheme, which was set up in 2009 to encourage additional lending to small and medium-sized enterprises.
Finally to HSBC, whose share price has been under pressure of late, not helped by broker Investec who lowered its rating for the stock from “Add” to “Hold”, saying that the bank’s upcoming fourth-quarter results could disappoint. The broker said that a weak showing from the bank on February 23rd will “trigger downgrades”, as it lowered its target price for the shares from 650p to 630p.