Lloyds Bank Takes $5.3 Billion Hit for Mis-selling Payment Protection Insurance

Lloyds, the UK’s state-backed bank, which has no affiliation with Lloyd’s of London, took a shock £3.2 billion ($5.3 billion) charge against its profits on Thursday to cover compensation for people sold insurance they would never be able to claim.

The hefty charge signaled rivals in Britain and overseas face far higher than expected costs to resolve a mis-selling issue that has dogged the industry for years, sending shares in UK banks into retreat.

Together with loan losses in crisis-hit Ireland and higher funding costs, the charge tipped the rescued bank into loss for the first quarter and raised fears about its recovery prospects.

Lloyds, 41-percent owned by the UK Government after a credit crisis bailout, made the provision against payment protection insurance (PPI) complaints after banks lost a British court case on the way policies were sold to millions of customers.

The policies are designed to protect loan payments in the event of the borrower losing employment or cannot work, but they were sold to self-employed and unemployed people who would not have been able to claim, and a court ruled last month that the banks were at fault.

Banks have until May 10 to appeal that ruling, but Lloyds said it would not do so, a serious blow to any industry defense because it is the biggest PPI provider.

The British Bankers Association (BBA) said it was still considering whether to mount a new legal challenge against the PPI ruling.

Investec analyst Gareth Hunt said the PPI charge was double what the market expected, and that other lenders embroiled in the saga faced booking hits as well.

“At least it is clear, we now know what the charge is and the bank can move forward, but it is definitely bigger than expected. It does suggest everyone else will share some of the same pain,” said Hunt.

Lloyds shares tumbled 8.1 percent to 53.33 pence [$0.8731] by midday, the worst UK blue-chip performer.

It dragged the shares further away from the 63 pence [$1.0313] level, the average price at which Britain bought its Lloyds stake, leaving taxpayers sitting on a hefty loss.

“We knew they were going to take a hit, but the extent has taken the market by surprise,” said Craig Yeaman at Saracen Fund Managers, who recently sold all his Lloyds shares.

Britain’s watchdog has estimated customers were overcharged by £1.4 billion [$2.292 billion] a year from the sale of PPI insurance products.

The industry was expected to suffer a hit of around £5 billion [$8.184 billion], but the scale of Lloyds’ charge could almost double that, analysts said.

There are about 12 million outstanding policies. How that breaks down among lenders is unclear, but Lloyds is estimated to have about one-third of the market.

Losses from bad loans at Lloyds rose to £2.6 billion [$4.253 billion] in the first quarter, up from £2.4 billion [$3.926 billion] a year ago but down from £3.8 billion [$6.216 billion] in the previous quarter. It said the first quarter hit was £500 million [$818.4 million] more than it expected, mainly due to Ireland, where its impairment charge reached £1.1 billion [$1.8 billion].

The double blow from the insurance mis-selling provision and Ireland pushed Lloyds into a first-quarter statutory loss of £3.5 billion [$5.728 billion], down from a £721 million [$1.18 billion] profit a year ago.

Lloyds’s net interest margin — the difference between what a bank charges for loans and what it pays to borrow — also fell to 2.07 percent from 2.12 percent at the end of last year.

Lloyds had been expected to swing to a £5 billion [$8.184 billion] pretax profit this year, and analysts said making an £8 billion [$13.09 billion] profit in the final 9 months of the year looked a tall order.

DRAWING A LINE UNDER DEBACLE…
Following talks with the financial watchdog, Lloyds said there were “certain circumstances where customer contact and/or redress will be appropriate.” It did not give more details on the scale of the possible compensation.

It will affect other banks and some overseas firms. Up to now the most conservative stance had come from Bank of America, which in October took a $592 million reserve related to possible PPI claims.

After Lloyds the biggest PPI providers are estimated to be Royal Bank of Scotland, Barclays, HSBC and Spain’s Santander.

Shares in RBS, which reports results on Friday, were down 4 percent and Barclays fell 1 percent.

Britain also has an 83 percent holding in Royal Bank of Scotland after bailing out both banks with billions of pounds of taxpayer money during the credit crisis.

Due to the bailout, Lloyds and RBS were ordered by European regulators to sell off a host of assets.

Lloyds is looking to sell 600 retail bank branches, but last month the Independent Commission on Banking (ICB) – set up to propose reforming the industry — said Lloyds may have to sell more to improve competition.

Lloyds reiterated its surprise at that proposal, which could delay the sale of branches agreed with the EU.

National Australia Bank UK, NBNK Investments, Virgin Money, and Spanish lender BBVA have all been touted as possible bidders for the 600 branches.

Analysts also expect Lloyds will sell its Scottish Widows and St James’s Place divisions as part of Horta-Osorio’s strategic review, although Horta-Osorio declined to comment on this matter on Thursday.

(Editing by Hans Peters and Andrew Callus)