Bank of Ireland chief executive Myles O’Grady will hope the lender is a step closer to putting the fallout from the UK motor finance debacle behind it, after sharply increasing the amount of money it has set aside for payouts arising from the issue.
The issue, which is close to industry wide in the UK, stems from whether motor finance customers were being overcharged because of historical use of discretionary commission arrangements between car dealers and lenders. At its core, lenders paid higher commission to dealers if a customer paid a higher rate on the financing it had signed up for to buy a car.
The practice was banned in 2021 but the UK Financial Conduct Authority has been examining cases for the previous 14 years.
Bank of Ireland had set aside £143 million (€164 million) to cover costs tied to the probe but more than doubled that to £350 million on Monday.
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“The estimated increase is due to the increased likelihood of a higher number of eligible cases, the construct of the proposed redress methodology and the customer engagement approach,” Bank of Ireland said in a statement.
There is a whiff of the kitchen sink about this increased provision. Just this month, analysts at RBC Capital Markets had forecast a total provision of £210 million, while Goodbody had estimated it would be £231 million.
Clearly, the bank is looking to get ahead of what maybe coming down the tracks. One of the lessons for banks which survived the 2008 crisis was to max out on provisions and then reduce as needed, rather than keep adding to it and create the impression they weren’t in control.
[ Bank of Ireland says its UK motor finance bill could more than double to €403mOpens in new window ]
The market appears to have agreed with this plan. Bank of Ireland shares rose 1.2 per cent on Monday.
“Although clearly unhelpful, today’s announcement brings further clarity to an area which has been an overhang on Bank of Ireland for some time,” Goodbody analyst Denis McGoldrick wrote in a research note. “There remains the potential for a lower outcome than what Bank of Ireland have guided depending on the success of the industry’s representation efforts over the coming weeks.”
Crucially, that size of a provision shouldn’t impact the bank’s ability to make shareholder payouts in the next few years, whether that be dividends, buy-backs or take other forms.
Bank of Ireland isn’t out of the woods on the motor finance debacle yet, but it moved a step closer on Monday to drawing a line until the debacle.
