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As the deadline for PPI compensation finally arrived after eight years, banks were hit by a flurry of last-minute claims, which has had a knock-on effect on share prices. The misselling of Payment Protection Insurance has been one of the expensive scandals to hit British banking, costing over £50 bn in compensation.
Ahead of the August 29 deadline, there was an influx of last-minute PPI claims and Barclays, Lloyds, HSBC, Santander and Clydesdale Bank were some of the major players that all saw a share price slump.
Last minute claims to Barclays added an estimated £1.2 bn to £1.6 bn to its overall PPI bill, taking its total to around £10.8 bn. Subsequently, share prices dropped to an all-time low at the end of August although they have now risen by 10% to 146.89p at the time of writing. There are fears of further falls in the short-term – while the PPI deadline may have been and gone, banks are likely to see bills continuing to stack up. In fact, Barclays has already warned it will need to make provision to cover the PPI bill in the third quarter after it was ‘taken aback’ by the volume of last-minute claims. The uncertainty of Brexit and the possibility of even lower interest rates are all factors that might lead to more losses for Barclays and the banking sector overall. Opinions are divided though – while some analysts think the PPI burden will be too much for the bank, others think that its shares are trading at below net asset value, and with a price to earnings ratio of 6.6, and net earnings of £1 bn in the second quarter, it may provide longer-term yields.
Lloyds has also been hit hard by the PPI deadline – its last-minute influx of claims could have added an extra £1.2 to £1.8 bn to its compensation bill, taking the total to more than £20 bn. As a result, Lloyds has been forced to suspend its share buyback scheme and its share price hit levels last seen in 2013, now at 51.54p at the time of writing.
Lloyds faces some of the same potential problems as Barclays, such as Brexit uncertainty and falling interest rates, so can it bounce back? Since 2013, the bank has been unable to rally a share price of more than 65p so many believe that the downward trend is set to continue. However, some analysts think its shares are undervalued, and with a price to earnings multiple of 9.31 and a price-to-book ratio of 0.7, does Lloyds offer a good value entry point for investors?
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