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Banks make £45B PPI provision but drag on earnings is over: S&P Global Ratings

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Banks make £45B PPI provision but drag on earnings is over: S&P Global Ratings

U.K. banks' total provisions for the cost of miss-selling payment protection insurance exceeded £45 billion but that constraint on earnings has now been eased, said S&P Global Ratings.

The deadline for consumers to claim redress from banks after being mis-sold PPI was reached at midnight on Aug. 29. A surge in claims, prompted in part by the Financial Conduct Authority's advertising campaign, led to the assumption that banks would announce a further top-up to provisioning in third or fourth quarter results, Ratings said.

The ratings agency said further top-ups were unlikely to materially affect its capital projections for banks since most had a stock of unutilized provisions. For instance, the four largest British banking groups, Lloyds Banking Group PLC, Barclays PLC, Royal Bank of Scotland Group PLC, and HSBC Holdings PLC, had a combined £2.5 billion of unutilized provisions.

An overhaul in conduct standards

The agency said the scandal had left an indelible mark on U.K. banks.

"Positively, it forced the U.K. banks to overhaul their conduct standards, product sets and pricing, remuneration and reward policies, and compliance culture. We see this as likely to mean that the sector is now generating more sustainable earnings than before," said S&P Global Ratings in the report published Aug. 30.

However, the agency also said bank earnings would continue to feel the effect of a steady flow of low-level regulatory fines, along with the permanent shift to a more complaints-driven customer behavior and a sustained aversion to the risk associated with advice-driven sales that would constrain sources of fee income in future.

Redress for valueless cover

The FCA has estimated that up to 64 million PPI policies were sold to cover repayments for personal loans, credit cards and mortgages if customers were unable to keep up payments. However, many were mis-sold, with up to a third deemed useless by consumer groups, leaving holders with valueless cover.

However, Ratings said PPI was a valuable source of income for U.K. banks and that cross-selling PPI offset lower margins on loans. Since 2011, when banks chose to contest mis-selling claims, that income has ceased and banks have had to pay redress while processing huge numbers of complaints. Claims management companies have also boosted claim numbers.

The FCA has said PPI payouts from 2011 to June 2019 totaled £36 billion but the ratings agency said bank PPI provisions have been even higher because they relate not only to the cost of paying redress to customers but also to the banks' administration expenses. The agency estimates banks’ provisions now exceed £45 billion.

U.K. banks faced other conduct and litigation charges along with PPI, including mis-selling of interest-rate hedging products, for instance, and the agency said 2015 was the peak year for charges. In 2015, it estimates total charges were about £16 billion while the cumulative figure since 2011 is around £100 billion.