The absence of further provisions for the payment protection insurance (PPI) mis-selling scandal was a bright spot in Lloyds Banking Group PLC (LON:LLOY), but there are other underlying worries looming for the banking sector as Barclays PLC (LON:BARC) on Thursday, and Royal Bank of Scotland PLC (LON:RBS) on Friday.
Concern about a slowing UK economy at a time when the Bank of England has been expressing concern about overleveraged consumers were a factor weighing against Lloyds solid numbers, given that its exposure has been magnified in the last twelve months with the £1.9bn purchase of the MBNA credit card business from Bank of America.
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According to Bank of England figures it is estimated that total UK credit card debt is around £67bn, while car finance is just below £60bn, across the whole of the UK.
Michael Hewson, chief market analyst at CMC Markets UK pointed out that, while leaving its PPI provisions unchanged, Lloyds increased its impairment provision in the third quarter to £270mln, which was slightly above what markets had been expecting.
Hewson said: “This seems an eminently sensible course of action at a time when there is concern about rising car finance and credit card debt.
“As one of the UK’s major lenders it is only sensible to mitigate against some of those loans going bad, and given recent requests by the Bank of England for banks to boost their capital reserves by up to £10bn this could be an area which may start to weigh on profitability, especially if rates stay where they are.”
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The analyst added that RBS could also adopt a similar stance to Lloyds in regard to setting aside higher provisions for loan impairments, given tighter lending conditions and criteria.
However, he pointed out, the RBS numbers could well be overshadowed by the controversy over how it treated small businesses in respect of its GRG unit.
At the end of last year the bank set up a compensation fund in respect of misconduct at the GRG unit to the tune of £400mln, however this sum could well rise in the coming months given recent headlines that the bank deliberately excluded thousands of small businesses from the scheme.
The unit is currently under investigation by the FCA and is yet another legacy issue that needs resolving before it can truly be said the bank has turned a corner.
RBS continuing to perform well on an underlying basis
Hewson said: “On the underlying business the bank continues to perform well, and speculation about an increase in the base rate will have helped with respect to its margins for the current quarter, but one can’t help thinking that the £400m set aside last year for GRG could be the first of in a number of new provisions over the next few quarters, if the enquiry by the FCA leads to further investigations into alleged criminal practices.”
In the first half of this year RBS made a profit of £939mln, with optimism high that this year could see the majority state-owned lender posts its first annual profit since 2008.
The analysts concluded: “Of the major UK banks RBS shares have probably performed the best over the last month, up from 240p in the middle of September to above 280p now and their highest levels since January 2016.
“It would be a shame if the controversy surrounding what went on in GRG creates another roadblock in the long and winding road to recovery.”