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Big Four regroup after £66bn in penalty payouts

Big Four regroup after £66bn in penalty payouts

The Big Four banks are finally turning a corner after incurring £66bn in conduct and litigation charges over six years since  2011 -  just over 10 per cent of their revenue.

In the 2016, total conduct and litigation charges declined by a quarter and charges related to payment protection insurance (PPI) more than halved for the four largest UK banking groups.

However according to a report from S&P Global Ratings, "such charges have been a drag on the statutory earnings of these four banks since 2011 and, in absolute terms, the figures remain staggering”.

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According to S&P Global Ratings' calculations, in 2016 Barclays, HSBC, Lloyds Banking Group, and The Royal Bank of Scotland Group racked up £10.8bn in conduct and litigation charges such as PPI.

This represents a £3.7bn reduction from the six-year peak of £14.5bn seen in 2015, with charges of over £66bn in aggregate over the six years from 2011-2016, or just over 10 per cent of their revenues.

These four banks accounted for roughly 90 per cent of all conduct and litigation charges for the U.K. banking system over the past six years, during which they also reported over £25bn of restructuring charges, as efforts to simplify their business models continue.

Over the course of 2017, S&P analysts expect “total conduct and litigation charges to continue to gradually subside".

"We believe 2016 will prove to be the last year in which charges remain at the outsized levels we have seen recently.

"That said, we acknowledge that new conduct issues may emerge and that the timing of such charges is uncertain, given the complex nature of pending legal settlements. For example, RBS reported a £3.1bn provision in fourth-quarter 2016 related to legacy residential mortgage-backed securities (RMBS) lawsuits in the US, brought forward by the US Federal Housing Finance Agency (FHFA).”

Additionally, the report pointed out that the Financial Conduct Authority (FCA) has extended the cut-off date until August 2019 for lodging complaints related to PPIwhich could lead to a further last gasp of claimants.

However, S&P analysts do not expect to lower their ratings on UK banks as a direct consequence of conduct and litigation issues over the next two years, although higher than expected charges could constrain the ratings upside.