Conduct Provisions Are Key For Both Companies
Past conduct issues for Lloyds (LSE: LLOY) and Barclays (LSE: BARC) are one of the biggest barriers to sustainable shareholder returns at present and, as such, investors should probably look closely at this week’s interim updates for any indication of 2015’s likely total for provisions.
While some investors may have drawn a sense of relief from the recent proposals by the FCA to introduce a fixed deadline for the submission of PPI claims, any such eventual date is not likely to be before 2019 at the earliest, which means any intervention-driven relief is still a long way off.
Furthermore, 2014’s ruling in the Plevin case, regarding PPI, is now becoming a hot topic — one that could soon lead to a new wave of conduct-related costs for Britain’s biggest banks.
Investors would do well to keep their ears to the ground for management sentiments, at both Barclays and Lloyds, toward this particular issue.
The Plevin Case In Detail
The Plevin case refers to the 2014 ruling by the Supreme Court, which found that the failure of the PPI seller to disclose the value of commission payments made to the intermediary and insurer, as well as the identity of the recipients of these payments, breached the consumer’s rights under the Consumer Credit Act 1974.
This is a legal ruling from one of the highest courts in the land, which now sets a precedent for all lower courts to follow in cases where the relevant facts and questions of law are the same.
Although I am by no means a legal expert, it seems that — aside from an appeal to the House of Lords — there is little that anybody can do to alter a judicial precedent that has been set by the Supreme Court.
This means that investors would probably do well to really begin questioning whether or not they are likely to see the back of conduct-related provisions at Britain’s banks any time soon!
The Obvious: Earnings!
After a strong start to year, Lloyds and Barclays shares have fallen sharply since August. Although they have stabilised since this time, a positive performance in terms of earnings will be critical if both share prices are to avoid further losses.
Both companies are forecast to see earnings grow to varying degrees. However, I will be watching closely to see how much of this growth is ‘real’ and how much is ‘adjusted’ wishful thinking.
At present, both Barclays and Lloyds trade on forward price-to-earnings multiples of 11.4x and 9.5x respectively, while the average broker rating for Barclays is a hold and the average for Lloyds a buy.
A New CEO: Good News For Barclays
On a brighter note, Barclays announced that it had approached ex-JP Morgan investment banker Jes Staley in regards to the vacancy and that he has accepted the role.
This could mark the beginning of a more rational approach toward the investment bank and the group strategy as a whole, which would come at an ideal time given the positive implications of Fed-induced activity (rates) for the much lamented FICC division (fixed income, currencies & commodities).
While the candidate for the role still needs the approval of UK regulators, which is far from a foregone conclusion given the guy’s investment banking background, the very fact that the role has now been offered to somebody (who may as well be Bob Diamond himself) kind of suggests to me that the wider management structure at Barclays may now be re-thinking the decimation of the investment bank.
In my view, this would be more of a positive thing than a negative for Barclays shareholders; however, it still does little to detract from the numerous headwinds facing both Barclays and Lloyds over the near-term for me.
