Proactive Investors - The City watchdog's review of motor finance is going to lead to a bigger worst-case impact of up to £16 billion on bank profits than previously thought, analysts have warned.
Following guidance for analysts from the Financial Conduct Authority on its review of historical motor finance commission arrangements, estimates of the potential impact for UK banks have been revised sharply.
The proportion of the impact for the motor finance sector falling on banks could be between £6 billion and £16 billion, said analysts at RBC Capital Markets, based on the new forecasts.
Lloyds Banking Group PLC (LON:LLOY) is seen as facing the biggest impact, according to RBC, in line with forecasts from other sets of analysts.
For Lloyds an impact of £2 billion is now forecast by RBC, up from £1 billion before; for Barclays PLC (LON:BARC) and Santander (BME:SAN) £250 million and £850 million respectively compared to zero for both before. For Close Brothers Group PLC the impact is still £150-230 million.
The changes to estimates mean that the analysts also cut their share price targets for Lloyds to 60p from 67p, for CBG to 800p from 925p.
The scope of the review is from April 2007 to January 2021, as before April 2007, the Financial Ombudsman was not responsible for motor finance-related complaints.
A conclusion that the arrangements were unfair/unlawful is not a “done deal”, RBC noted following the guidance given on the call, with the FCA "setting out to identify if the potential losses faced by consumers were caused by banks, motor finance brokers or both whilst also considering the potential financial impact and materiality for the motor finance market as a whole.
"The price customers paid and the components of the deal are important to answering the question of what is a reasonable rate of interest and in assessing harm."
The next communication from the FCA will be around September.
Of the estimated worst-case impact for the motor finance sector, a proportion of this would fall on the shoulders of the banks, with estimated PBT impacts for BARC (£120-320m), ) and LLOY (£900-2,300m), SAN (£400-1,000m). We estimate the related possible downside impact in Group tangible book value & capital terms would be: BARC (TBV 0.7%; CET1 9bps), CBG (TBV 16.8%; CET1 235bps), LLOY (TBV 7.7%; CET1 105bps), SAN (TBV 1.5%; CET1 18bps).