Barclays, Lloyds Banking Group and the Royal Bank of Scotland are expected to reveal the extensive damage of PPI (payment protection insurance) scandal in their third quarter results due later this week.
Lloyds is set to report a pre-tax profit of £685 for the quarter, but the profits are set to be eradicated by a sharp increase in PPI provisions. The bank is forecast to shell out a further £2.3 in PPI compensation on top of the £4.3bn it has already paid, pushing its total losses to over £6bn.
Likewise, Barclays has set aside up to £700m in provisions, which when added to £1.1bn in debt-related charges, cuts the bank’s pre-tax profit of £1.7bn to an overall loss of £100m.
RBS is expected to set aside £500m in PPI compensation, on top of an extra £200m in mis-sold interest rate swaps to small businesses, pushing the bank’s quarterly results into the red.
Surpassing the £10bn mark, the billions of pounds in mis-sold PPI has eclipsed even the bleakest estimates, rendering it one of the most aggressively mis-sold retail products in UK banking history. JP Morgan forecasts that the overall cost to UK banks may reach as high £15bn.
The product itself is a form of consumer protection, designed to cover consumers’ loan repayments if the borrower were to fall ill or become unemployed.
The PPI market blossomed during the credit boom, where intense competition squeezed profit margins to paper-thin levels. At profit margins of up to 90 per cent, PPI became a crucial revenue stream for banks.
Between 2000 and 2010, banks sold up to £34bn in PPI, with the insurance constituting almost half of banking retail profits at the market’s peak in the mid 2000s.