After years of uncertainty, financial regulators are now considering imposing a time limit on claims for payment protection insurance mis-selling. This can only be good news for banks like HSBC (LSE: HSBA), which has been forced to fork out billions in compensation for mis-sold PPI during the past few years.
Uncertain outlook
It’s not the cost of these claims that is doing the damage; it’s the uncertainty.
Banks are now paying PPI claims on products sold to customers more than two decades ago, despite the fact that data for these products sold is patchy. So far, the scandal has cost the UK banking industry a total of £26bn, and costs could continue to increase over the next few years as yet more claims come to light.
HSBC has set aside are £2.5bn for PPI claims so far, less than more UK-focused rivals such as Lloyds, Barclays and RBS but still more than management first anticipated. The bank has been forced to increase continually the level of cash set aside for claims over the past few years, and this has inhibited growth in some areas.
And if there’s one thing the market doesn’t like, it’s uncertainty. Until the uncertainty surrounding PPI mess is cleared up, investors will continue to tread carefully in the UK bank sector.
Still, as the FCA contemplates imposing a cap on mis-sold PPI claims, the banking industry’s outlook should improve. Investors and banks alike should be able to make more concrete plans for their capital.
Perfect time for a spin-off
The FCA’s proposed PPI mis-selling cap comes at a great time for HSBC. As the bank prepares to spin-off its UK arm during the next few years, it should help improve the spin-off’s outlook, and, as claims will be limited, the spin-off will be able to boost cash returns to investors.
HSBC has announced that its UK spin-off will be named HSBC UK. The new name will take effect from January 2018, a year before ring-fence laws come into effect.
That being said, although a cap has been proposed for 2018, there’s still the question of how big the final PPI bill will be. On top of the £26bn already forked out, analysts believe the UK’s big four banks could be liable for an additional £33bn in a row over secret commissions linked to PPI. Further, there could be a rush of PPI claims before the proposed FCA claims deadline.
Outlook improving
Although there is still much uncertainty surrounding the banking industry, PPI costs and bank regulations, the FCA’s cap on PPI mis-selling claims should help the industry regain some composure.
Before the financial crisis set in, UK banks used to be generous dividend payers and an end to PPI costs should help them regain this crown.
HSBC is already a generous dividend payer, the bank currently supports a dividend yield of 6.5%, and City analysts expect this yield to hit 6.7% next year. Further dividend increases are likely as HSBC’s legal obligations fall away.
