Since the banking crisis, Ive always seen Barclays (LSE: BARC) and Lloyds Banking Group (LSE: LLOY) as the ones most likely to bounce back the soonest. Barclays didnt need a state bailout, but did need to find a pretty big capital injection to keep it going, and that fact that private investors were willing to stump up said a lot for the banks relative health.
Lloyds, meanwhile, was in trouble, but nowhere near as deeply as Royal Bank of Scotland, after the damage inflicted under ex-Sir Fred. And its shown, with the RBS recovery being at least a year behind that of Lloyds.HSBC and Standard Chartered both have the extra whammy of China to deal with, so they surely have further troubles for a few more years.
With all the various scandals including product mis-selling, colluding to fix Libor rates, allegations of money-laundering, illegal dealings with proscribed countries confidence in the sector is still some way away. And its largely to do with uncertainty the City hates uncertainty and usually over-reacts to it ( at least, when looked back on later in the longer term).
However, at least one such uncertainty could be due to end, and thats the extent of claims for the mis-selling of payment protection insurance (PPI). More than 20bn has been paid out by the banking sector as compensation so far, and while theres no time limit for claims theres effectively a blank cheque sitting there waiting to be filled in.
The Financial Conduct Authority (FCA) has now decided that maybe something needs to be done to draw a line under the PPI problem, and its set to launch a consultation on whether to impose a deadline for claims. The FCA reckons there should be a window of at least two years, and with the consultation period certain to extend into next year, itll be Spring 2018 at the earliest before any such limit would take effect.
As weve seen with BP and its lingering compensation battle over the Gulf of Mexico disaster, its probably as important to be able to quantify the potential risk as it is to minimize its magnitude at least in the eyes of institutional investors, who quake in their boots at the prospect of short-term volatility led by uncertainty.
But would this really improve the prospects for Barclays and Lloyds? Well, I think both are good value investments right now, with Barclays shares on a forward P/E of only 11 for this year, dropping to 9 based on 2016 forecasts. Dividends are coming back too, with a yield of 3.6% penciled in for 2016.
Lloyds doesnt have the same earnings growth predicted, after the flotation of TSB, but is on a lower 2015 P/E of only 9 and already looks set to offer a dividend yield of 3.3%, rising to 5.1% on 2016 forecasts.
At the interim stage this year, Barclays reported a further PPI charge for the half of 750m, based in an updated estimate, with a redress provision of 1,268m as of June 2015. And in its first-half accounts, Lloyds included a PPI charge of 1.4bn, which CEO Antonio Horta-Osorio described as disappointing.
With sums like this still being bandied about, shareholders will surely welcome the FCAs latest moves.
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Alan Oscroft owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Barclays and HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.