Barclays Headed to $18.30 Despite UK Payment Protection Payouts
Barclays (NYSE:BCS) has been proactive in trying to clear all liabilities from Payment Protection Insurance (PPI) claims it “mis-sold” in the UK. A PPI allows a person to continue to repay a loan, credit card loan or mortgage if the buyer cannot pay, for instance when they lose their jobs. However banks mis-sold these to ineligible people who could never claim the insurance and some didn’t know they were paying for PPI. Barclays became the second bank after the Lloyds Banking group (NYSE:LYG) to settle this dispute by having a “no questions asked” settlement to all its customers who made a PPI complaint before April 20 this year. [1] This decision comes barely a month after the company pulled out of the legal tussle between the Financial Services Authority (FSA) and the British Banking Association (BBA), which foreced competitors like RBS (NYSE:RBS) and HSBC (NYSE:HBC) to follow suit soon.
Our $18.30 price estimate for Barclays stock is at a premium of roughly 10% to the market price.
The PPI scandal is going to cost UK banking industry dearly
The scandal was brought to light way back in 1998 and finally reached a conclusion in April 2011 when the British high court decided in favor of the Financial Services Authority (FSA). [2]
All banks set aside significant amounts to settle the claims that would result – with Lloyds topping the list by setting aside £3.2 billion ($5.2 billion) for compensation claims. Barclays and RBS set aside £1 billion ($1.6 billion) and £850 million ($1.4 billion) respectively to address PPI-related claims.
But this is a step in the right direction by Barclays
Barclays declared that all its customers who registered a complaint before the 20th April cut-off date will be reimbursed the total value of all the premiums they paid, with an additional 8% interest. The claims of all customers who accept the settlement will be addressed by the end of August.
As far as the impact of this decision on Barclays’ value is concerned, as the total expected expenses of $1.6 billion will be realized in Q2 2011, this would reduce our margins estimate for this year by 1.5%. This hardly impacts the company’s value. But it sure goes a long way in ensuring that the damage done due to the bank’s involvement in the PPI scandal is mitigated to a good extent.
See our full analysis for Barclays
Notes:- Barclays offer ‘no questions asked’ PPI payouts, London Evening Standard, Jun 13 2011 [↩]
- FSA wins PPI battle in high court, Guardian, April 20 2011 [↩]