Lloyds mulls taking BofA’s PPI hit in card bid

Bloomberg

Lloyds Banking Group Plc is considering taking on Bank of America Corp.’s (BoA) liabilities in the British payment protection-insurance scandal as it looks to beat private-equity firms in the bidding for the MBNA credit-card business, according to people with knowledge of the matter.
Britain’s largest mortgage lender is vying with private-equity firms including Cerberus Capital Management and Advent International for Bank of America’s MBNA card business in the U.K., which has about 6.7 billion pounds ($8.5 billion) of assets, said the people, who asked not to be identified because the details are private. Barclays Plc is no longer interested in the assets due to antitrust concerns, given its own Barclaycard division controls about 27 percent of the British card market, said one of the people.
While Lloyds is attempting to negotiate protection from Bank of America against future PPI redress, the U.S. bank has told bidders it wants a clean break from the scandal and won’t indemnify them against potential future charges, the people added. Lloyds has had 16 billion pounds of charges for PPI, more than any other British lender.
Lloyds may have an advantage over the private-equity bidders because regulators trust how it has handled PPI customer redress and the bank has experience valuing the size of the potential claims, two of the people said. Although the bank was fined 117 million pounds last year for failing to treat customers making PPI complaints fairly, British regulators may prefer the lender to take on MBNA’s exposure over a private-equity firm with limited experience of the scandal, the people added.

Costliest Scandal
Spokesmen for all the firms declined to comment.
Sky News reported that bidders for MBNA including Lloyds had been asked to submit revised offers and were seeking to negotiate an indemnity for future PPI claims.
PPI, the costliest ever scandal in U.K. banking, saw insurance wrongly sold by all of Britain’s major lenders to customers who didn’t want or need it.
MBNA took a 211 million-pound charge for PPI last year and has set aside more than 1.6 billion pounds since 2010, according to its annual accounts through December 31. The Chester, England-based division could take further PPI provisions in the future, according to its annual report. It has about 1,800 employees and made a net profit of 166 million pounds last year.

Card Growth
Lloyds Chief Executive Officer Antonio Horta-Osorio has earmarked the bank’s credit card business for expansion and could rapidly accelerate that growth with MBNA, which has about 11 percent of the U.K. market. That would almost double Lloyds’s 15 percent share.
As record-low interest rates crimp income from lending, the MBNA credit-card unit’s higher margins could add about 4 percent to the bank’s revenues, analysts at UBS Group AG led by Jason Napier wrote in a note to clients last week.
However, depending on the price paid, buying MBNA could sap the bank’s excess capital and cut the value of dividends paid to investors. Lloyds has already warned it won’t generate as much excess cash this year, and the UBS analysts estimated it may take a further 800 million-pound PPI charge in third-quarter earnings.
The bank “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 added.
BOE Funding
Lloyds could use the Bank of England’s Term Funding Scheme — a 100-billion pound program designed to help lower borrowing costs for British lenders in the wake of the Brexit vote — to finance the card assets following an acquisition, UBS said. MBNA had 4.2 billion pounds of funding from Bank of America at a cost of 1.5 percent, which could be cut to 0.25 percent if Lloyds uses the TFS, the analysts said.
Sellers often indemnify buyers against potential legal matters that might arise following a transaction, or may accept lower bids that take account of such issues if they choose not to offer protection. Royal Bank of Scotland Group Plc provided an indemnity to Union Bancaire Privee over tax evasion probes at Coutts International when it sold the private banking unit to the Swiss lender last year.
Bank of America bought MBNA in 2006 for $35 billion. As borrower defaults rose and regulations reduced the industry’s prospects, it twice wrote down the card unit’s value, sold MBNA businesses in Canada and Ireland and folded the U.S. business into its own operations. Some of the U.K. card assets were sold to Richard Branson’s Virgin Money Holdings U.K. Plc in 2013.