Lloyds Banking Group has warned it is likely to take a greater hit from the motor finance scandal than originally expected, costing more than the £1.2bn it had set aside.
The City regulator said on Tuesday night that people who were mis-sold car finance are likely to receive compensation payouts averaging £700 from 14m unfair loans, less than the £950 payouts previously expected.
Shares in car finance lenders, including Lloyds, rallied in response on Wednesday. However, Lloyds’ stock fell by more than 3% on Thursday morning as it indicated its bill for the scandal may rise.
The Financial Conduct Authority put lenders’ total compensation bill at £8.2bn, although it could rise to £9.7bn. This is at the bottom end of its earlier forecast range of between £9bn and £18bn.
However, Lloyds said on Thursday: “Based on our initial analysis and the characteristics of the proposed scheme, an additional provision is likely to be required which may be material.”
The bank added that there were uncertainties around the interpretation and implementation of the proposals, and that further analysis was needed.
The high street bank in February set aside a further £700m to cover compensation payments to customers, taking its total provision to almost £1.2bn.
Its provisions have weighed on its financial performance, pushing its 2024 pre-tax profits down by 20%, to just under £6bn. At the time, RBC Capital estimated that the bank could ultimately be on the hook for up to £4.6bn.
The car finance scandal is the biggest since the payment protection insurance (PPI) mis-selling debacle, where 34 million consumers received an average of about £1,000 each. Lloyds was also the most exposed to that scandal.
Steve Clayton, the head of equity funds at Hargreaves Lansdown, said: “The statement from Lloyds was not in the market’s playbook and the shares have reacted badly, erasing yesterday’s gains, with Close Brothers similarly impacted.”
Shares in Close Brothers, one of the UK’s biggest providers of car loans, fell by 3% on Thursday morning.
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Separately on Thursday, the specialist lender Secure Trust issued a profit warning, sending its shares more than 16% lower. It now expects its underlying pre-tax profit this year to fall below analysts’ expectations by up to £9m, due to the performance of its car finance division. However, it remains confident of 30% year-on-year growth in profits.
Secure Trust is in the process of exiting vehicle finance, which may require additional provisions for onerous supplier contracts, which would be treated as exceptional costs.
The motor and property finance specialist S&U released upbeat financial results, reporting a profit before tax of £15.6m for six months to 5 August, up 22% on a year earlier. Its share price rose by 1.5%.
It set aside nearly £8m for motor finance in the period, against £18m a year earlier.
