Lloyds May Face $2.1 Billion Charge on Pension and PPI, UBS Says

  • London-based bank may need funds to meet pensions liabilities
  • Additional PPI charge will probably result in lower dividends

Lloyds Banking Group Plc, Britain’s largest mortgage lender, may take a 1.6 billion-pound ($2.1 billion) charge in third-quarter earnings to cover a pension deficit and customer compensation, according to analysts.

The London-based bank may set aside 800 million pounds to cover its pension fund liabilities and a similar amount for customers who were wrongly sold payment protection insurance, analysts at UBS Group AG led by Jason Napier wrote in a note to clients on Friday. The charges could cut the bank’s 2016 dividend to 3 pence a share from a previous estimate of 3.8 pence, UBS added.

Chief Executive Officer Antonio Horta-Osorio, 52, has already set aside more than 16 billion pounds for PPI, Britain’s costliest banking scandal since the financial crisis. Britain’s markets watchdog extended a potential deadline for PPI claims in August, opening the door for additional charges.

“The investor narrative is very much driven by capital generation and payout capabilities,” the UBS analysts with a buy rating on the stock said. “Though risks around near term capital returns have risen materially, we think the long term prospects are undervalued.”

The Bank of England’s stimulus measures unveiled in August in response to the shock of the Brexit vote have exacerbated low global government bond yields that are worsening the financial position of pension funds.

The measures are hurting many British companies. Consulting firm Hymans Robertson said in a July report that the pension deficit among U.K. companies had increased to about 1 trillion pounds. Royal Bank of Scotland Group Plc took a charge to plug a 1.6 billion-pound pension hole in the fourth quarter of 2015.

UBS also estimated that if Lloyds were to buy Bank of America Corp.’s MBNA U.K. credit card book, it would add about 4 percent to the bank’s earnings, while weighing on capital generation. Lloyds “would be pressed to justify prioritizing a deal over dividends and the organic growth strategy, which is already delivering results in U.K. unsecured lending,” the analysts wrote.

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