UK bank profits in focus as lenders await critical motor finance court ruling
Investors will be hoping UK banks will report solid earnings as lenders await the outcome of a critical court judgment that could unleash a major car finance compensation scheme.
Lloyds Banking Group will kick off the sector’s half-year earnings with its results on Thursday, followed by NatWest Group on Friday.
It comes at a significant juncture for motor finance lenders, with the Supreme Court set to deliver a final judgment on alleged mis-selling by the end of the month.
If the UK’s Financial Conduct Authority (FCA) concludes that customers have lost out from widespread failings by firms, it could set up an industry-wide redress scheme.
Lloyds has said it is setting aside £1.2bn to cover potential costs and compensation in relation to the issue, with the banking giant exposed to the market through its Black Horse business.
Santander said it had put aside £295m as a provision to cover potential payouts as well as legal costs.
Gary Greenwood, an equity analyst for Shore Capital, said he was anticipating a “common sense outcome” from the Supreme Court ruling.
If firms are found to have mis-sold car loans, the ruling may allow for a proportionate redress scheme that “punishes the worst offenders” but allows others to “get off with a lighter touch, or maybe don’t have a charge or redress at all”, Greenwood said.
He added: “It’ll be painful for Lloyds, but they generate about £4bn of surplus capital every year, so it’s something that they could handle.”
“It’s the difference between something that’s annoying and a bit more annoying, rather than something that will create a systemic issue or raise severe problems for Lloyds.”
Lloyds is expected to report a pre-tax profit of £3.2bn for the first six months of the year – which would be lower than the £3.3bn made over the same period last year.
While NatWest, which is not exposed to the motor finance market, is expected to report a pre-tax operating profit of £3.5bn, which would be up on the £3bn reported this time last year.
Investors are expecting a slowdown in mortgage lending over recent months, after a rush in activity ahead of a deadline for stamp duty relief at the start of April.
And banks are set to give an update on customer savings activity amid uncertainty in the wider economic climate.
Greenwood said consumers are likely to have been keeping cash in accounts they can easily access rather than moving it into those with higher returns, which would mean deposits were stable over the latest period.
He added that the UK “enjoyed a strong cash ISA season, with customers looking to put money aside ahead of the Chancellor potentially introducing greater restrictions on the use of cash ISAs, which has not yet happened and now seems less likely”.
Chancellor Rachel Reeves used her annual Mansion House speech this week to say retail investing had been painted in a “negative light” and that she wanted to encourage more savers to take the leap.
By Anna Wise, PA Business Reporter