The U.K.’s big banks are facing ongoing threats to their profitability from litigation charges and the costs of past bad conduct, says Moody’s Investors Service in a new report.
The rating agency says that litigation and conduct remediation charges present considerable risk for the U.K’.s five largest banks, including Lloyds Bank plc, Barclays Bank PLC, HSBC Bank plc, The Royal Bank of Scotland plc, and Santander UK PLC. Moody’s says that while it observed some decline in these charges in 2013-2014, “this drain on banks’ profitability persists,” as revealed by high provisions in the first half of 2015.
The five banks made combined provisions of £47 billion to cover litigation and conduct remediation from 2011 through the first half of 2015, Moody’s says its data shows. The bulk of that, £26.5 billion worth, relates to payment protection insurance (PPI).
Claims involving packaged bank accounts also increased significantly during 2014 and the first half of 2015. Three of the U.K.’s five largest banks — RBS, Barclays and Lloyds — provisioned a total of £732 million to compensate for the possible mis-selling of packaged bank accounts.
“We believe that the U.K.’s five largest banks have made adequate provisions to cover potential conduct and litigation charges in 2015-2016. However, they continue to weigh on the four largest banks’ profitability, and to a lesser extent, on Santander UK,” says Laurie Mayers, associate managing director, financial institutions group, at Moody’s.
“We positively note that the UK’s five largest banks have been decreasing their risk appetite and are moving towards more standardized, less complex products in order to mitigate against future conduct issues,” Mayers says.