Lloyds Banking Group PLC's (LSE:LLOY) decision not to increase provisions for motor finance compensation appears justified, according to analysts at Shore Capital, although uncertainty around the final cost remains.
The UK's largest lender previously set aside £1.95 billion to cover potential redress for the misselling issue. That figure reflects a range of scenarios, though the bank has not disclosed detailed assumptions.
Shore Cap analyst Gary Greenwood said the stance "appears reasonable" (given changes to the Financial Conduct Authority’s framework have reduced expected industry costs), but warned that key risks persist around litigation and customer participation.
He noted that the FCA's final rules have eased elements of the framework, including lowering the assumed participation rate to 75% from 85%. This has reduced the regulator’s estimate of total industry costs to £9.1 billion from £11.0 billion.
However, the benefit for banks is more limited, with expected costs falling only modestly, to around £5.2 billion from £5.6 billion. Non-bank lenders are seen to benefit more from the most recent tweaks to the system.
While Lloyds’ provision remains unchanged, Shore Capital said the outcome could still vary depending on legal proceedings, operational costs and the eventual level of claims.