Since the banking crisis, I’ve always seen Barclays (LSE: BARC) and Lloyds Banking Group (LSE: LLOY) as the ones most likely to bounce back the soonest. Barclays didn’t need a state bailout, but did need to find a pretty big capital injection to keep it going, and that fact that private investors were willing to stump up said a lot for the bank’s relative health.
Lloyds, meanwhile, was in trouble, but nowhere near as deeply as Royal Bank of Scotland, after the damage inflicted under ex-Sir Fred. And it’s shown, with the RBS recovery being at least a year behind that of Lloyds. HSBC and Standard Chartered both have the extra whammy of China to deal with, so they surely have further troubles for a few more years.
Scandals
With all the various scandals — including product mis-selling, colluding to fix Libor rates, allegations of money-laundering, illegal dealings with proscribed countries — confidence in the sector is still some way away. And it’s largely to do with uncertainty — the City hates uncertainty and usually over-reacts to it ( at least, when looked back on later in the longer term).
However, at least one such uncertainty could be due to end, and that’s the extent of claims for the mis-selling of payment protection insurance (PPI). More than £20bn has been paid out by the banking sector as compensation so far, and while there’s no time limit for claims there’s effectively a blank cheque sitting there waiting to be filled in.
The Financial Conduct Authority (FCA) has now decided that maybe something needs to be done to draw a line under the PPI problem, and it’s set to launch a consultation on whether to impose a deadline for claims. The FCA reckons there should be a window of at least two years, and with the consultation period certain to extend into next year, it’ll be Spring 2018 at the earliest before any such limit would take effect.
Lingering uncertainty
As we’ve seen with BP and its lingering compensation battle over the Gulf of Mexico disaster, it’s probably as important to be able to quantify the potential risk as it is to minimize its magnitude — at least in the eyes of institutional investors, who quake in their boots at the prospect of short-term volatility led by uncertainty.
But would this really improve the prospects for Barclays and Lloyds? Well, I think both are good value investments right now, with Barclays shares on a forward P/E of only 11 for this year, dropping to 9 based on 2016 forecasts. Dividends are coming back too, with a yield of 3.6% penciled in for 2016.
Lloyds doesn’t have the same earnings growth predicted, after the flotation of TSB, but is on a lower 2015 P/E of only 9 and already looks set to offer a dividend yield of 3.3%, rising to 5.1% on 2016 forecasts.
Charges escalating
At the interim stage this year, Barclays reported a further PPI charge for the half of £750m, based in an updated estimate, with a redress provision of £1,268m as of June 2015. And in its first-half accounts, Lloyds included a PPI charge of £1.4bn, which CEO António Horta-Osório described as “disappointing”.
With sums like this still being bandied about, shareholders will surely welcome the FCA’s latest moves.
