Lloyds Bank Hit by Missold PPI Claims in Second Quarter

(Bloomberg) --

Lloyds Banking Group Plc shares sank as the lender took an extra charge for a last-minute rush of calls from British customers over missold insurance.

The country’s biggest mortgage lender posted a 550 million-pound provision in the second quarter for customers who were missold payment protection insurance, as a long-running compensation program draws to a close in August. It’s the biggest provision the bank has taken since the fourth quarter in 2017 and it brings its bill to above 20 billion pounds ($24 billion).

George Culmer, outgoing chief financial officer, said the additional charge was “disappointing.” The August deadline “encourages customers to make contact and get paid out and we are seeing that happen. However, the extent at which it’s happening has caught us by surprise.”

Culmer said the bank is getting upwards of 190,000 requests a week, with only 10% being converted into claims.

The PPI charge is well above market estimates, and shares in Lloyds fell as much as 5.3% in London, the largest fall since the week of the Brexit vote in 2016. Analysts at Jefferies International said the PPI charge “casts a pall over otherwise benign” results.

“The bank will hope this is a final Parthian shot from the mis-selling scandal which has cost it billions,” said Nicholas Hyett, analyst at Hargreaves Lansdown. However, Culmer said there are no guarantees this is going to be the last charge.

“I have done it for too long, there is always uncertainty regards the volume” of the claims, he said.

According to the Financial Conduct Authority, banks paid 35.7 billion pounds to PPI customers between January 2011 and May this year. Lloyds’ running total makes it the biggest spender so far. The lender sold approximately 16 million PPI products since 2000, according to its latest annual report.

Policies, which were intended to cover missed debt repayments, were often sold using aggressive tactics and in the worst cases, banks misled customers by telling them that PPI was mandatory for loans. In other scenarios, it was sold without giving clients a full explanation of what it would cover. Royal Bank of Scotland Group Plc has made provisions totaling about 5.3 billion pound so far for the scandal.

The unexpectedly high cost meant Lloyds posted a pretax profit of 1.29 billion pounds for the second quarter, below the analyst consensus of 1.76 billion pounds. The bank also reported a 5% increase in its interim dividend.

As uncertainty lingers due to Brexit, the bank increased its expected credit loss allowance by 50 million pounds. Unlike peers such as RBS, this is the first time Lloyds has set aside a specific provision to cover a deteriorating U.K. economy this year. Culmer said that the charge reflects an "update of the economic outlook” and that “it’s not a big number.” Lloyds’s central scenario remains that there will be “some form of orderly withdrawal.”

“The company is not without risk, not least in regard to the outlook for the U.K. economy,” analysts at Citigroup AG said in a note to clients.

More Highlights:

• Impairments rose to 304 million pounds from 198 millions in the second quarter last year
• Lloyds mentions charges taken for “two corporate cases” in commercial banking without naming the companies involved; Culmer declined to give further information but said that “they are absolutely not Brexit related”
• Banking net interest margin was 2.89%, slightly lower than the first quarter, but in line with bank’s target for 2019

To contact the reporter on this story: Stefania Spezzati in London at sspezzati@bloomberg.net

To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Marion Dakers

©2019 Bloomberg L.P.