RBC cuts target prices for UK banks after motor finance ruling

Last Friday, the Court of Appeal ruled that it was unlawful for motor dealers to receive commission from lenders when providing finance unless it was disclosed to the customer, who needs to give their consent. Banks are now liable to return the commissions to the customer because there was an agency arrangement in place.

RBC said there will likely be a delay in the FCA announcing its findings until next summer, extending a period of uncertainty for UK banks about he potential impact that could be incurred.

"Our impact assessment of this issue had remained largely unchanged for nine months. However, today we update our estimates to reflect the higher uncertainty and potential downside which has been created following last week's Court of Appeal judgement," RBC said.

"Three examples of the many questions which have been left outstanding include: (i) does this decision extend beyond motor finance?; (ii) which years are now in scope?; and (iii) do all of the commissions paid need to be returned to the borrowers?"

For Lloyds, RBC estimates a £3.2bn impact, up from an earlier estimate of £2.5bn, while Barclays could be charged £400m (previously £360m) and Close Brothers could see a £320m bill (previously £250m). The estimated impact on Santander UK and Bank of Ireland have also been increased.

Regarding Lloyds, the broker believes the bank will reduce its 2024 buyback programme to just £1.0bn, compared with an earlier estimate of £2.0bn.

The broker has cut its target price for Lloyds shares to 56p from 60p, keeping a 'sector perform' rating on the stock. The target for Close Brothers ('outperform') has been slashed to 435p from 540p while the target for Barclays ('outperform') has been maintained at 285p.