Taxpayer-backed banks braced for hits after PPI mis-selling pay-outs

By SCOTT REID
Published on Monday 20 February 2012 00:00

PAY-outs for the mis-selling of payment protection insurance (PPI) are set to push Royal Bank of Scotland and Lloyds deep into the red this week, as the City seeks assurances that the worst of the financial crisis is over.

Significant losses are certain to revive fears that taxpayers will have to wait several years before recouping the £66 billion pumped into the banks at the height of the credit crisis.

Both Lloyds and RBS have endured a turbulent year, with the country’s economic downturn and the eurozone debt crisis hitting performance, as well as the ongoing bonus furore.

Lloyds, which is 41 per cent owned by the taxpayer, is tipped to report a full-year loss of between £3.5bn and £4bn after taking a hit from the mis-selling of PPI.

RBS is expected to post an underlying deficit of between £1bn and £2bn when it publishes its results on Thursday, a day before Lloyds. However, the bank – 83 per cent state-owned – is forecast by analysts at Nomura to report bottom-line pre-tax profits of £138 million, compared to a £239m loss the year before.

While there has been some recovery in their share prices in the last couple of months, both banks are close to 50 per cent lower than they were a year ago, amounting to a paper loss of more than £30bn for the government.

John-Paul Crutchley, an analyst at UBS, said RBS had been one of the best-performing European banks so far in 2012, as shares have gained nearly 40 per cent, adding some £8bn of market value.

“With the benefit of management clearly apparent, it seems surprising that the political establishment which, we think, should be aligned with a good investment outcome for RBS shareholders, is potentially putting this at risk by raising concerns over the chief executive’s remuneration,” he added.

RBS has been at the centre of a row over bankers’ pay in recent weeks, which ultimately led to chief executive Stephen Hester waiving his near-£1m all-shares bonus.

Rival Barclays set the bar high for pay disclosure earlier this month when it revealed the average bonus for each group employee, each investment banker and introduced a cap on the cash element of bonuses.

RBS has moved to strip down its investment arm – Global Banking and Markets (GBM) – amid increased government pressure to focus its operations on UK high street services.

GBM, which employs 18,900 worldwide, deals with a range of financial services such as debt advice, equity trading and mergers and acquisitions.

The City will be looking for a fresh estimate on how much RBS thinks the reshaping of the division is going to cost.

Robert Law, senior banking analyst at Nomura, said: “What these measures will cost is unclear and we believe it is likely to be substantial.”

Lloyds is expected to report a statutory loss as high as £4bn for 2011, compared to a profit of £281m the previous year. The bank took a big hit from the PPI mis-selling scandal, as well as writedowns on loans made by HBOS before the two banks merged.

The City will be looking for an update on how much this restructuring will cost the bank, which owns more than 2,000 branches in the UK.

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