Lloyds and Close Brothers shares drop as FCA motor finance review looms

Shares in Lloyds Bank and Close Brothers extended losses on Wednesday as analysts estimate the two firms could be rocked by a City watchdog review into motor finance.

The wider sector was also pegged down as investors digest a surprise increase in inflation, revealed this morning.

Inflation rose unexpectedly in December due to rising duties on alcohol and tobacco, according to latest figures, raising doubt over how soon the Bank of England will cut interest rates.

Lloyds shares fell nearly two per cent on Wednesday morning, while merchant banking group Close Brothers saw its stock fall 4.5 per cent.

The Financial Conduct Authority (FCA) last week announced it would review historic claims of unfair costs on discretionary car finance commissions and ensure consumers receive compensation if it uncovers evidence of widespread misconduct.

The scope of the review includes around £300bn in lending, according to RBC.

Since the FCA’s announcement, Lloyds’ stock has dropped more than 10 per cent, while FTSE 250-listed Close Brothers has plummeted 22 per cent.

Shares in the latter bank have sunk some 45 per cent in the past 12 months after it revealed last January that it was setting aside funds for bad loans in Novitas, the legal finance specialist it acquired in 2017.

Brokers have estimated that UK banks could be on the hook for more than £1bn in compensation over the FCA’s review.

RBC analysts said Lloyds and Close Brothers could lose up to £1bn and £120m respectively. Barclays analysts estimated a potential provision range for Lloyds of between £0.5bn and £1bn but said uncertainty was “high”.

Jefferies today reitereated that Lloyds is the most exposed bank, with £15bn in auto loans and a 14 per cent market share.

“Our initial take is that industry redress costs could be £4bn, with Lloyds’ share at £578m, though it is too early to embed this in estimates,” analysts at the investment bank said.

Numis set its provision estimate for the Big Four lender at between £300m and £1bn.

Money Saving Expert Martin Lewis has said the FCA’s review “could be PPI-type scale”. UK banks have paid some £40bn in compensation for misselling payment protection insurance (PPI) policies.

However, analysts have noted that the sector is less exposed in the case of motor finance and banks have not benefitted from discretionary commissions.

“While £225bn of motor finance was originated between 2014-20, refunds will likely be limited to ‘excess’ interest payments, capping redress across the industry at c.£10bn on our estimates,” said Numis analysts.

“It could also be somewhat lower and, unlike PPI, much of the cost will fall outside of the listed domestic banks sector.”

The FCA will set out the next steps of its review in the third quarter of this year.