What to do with the PPI pay-out

Posted by Tracy Alloway on Jun 27 09:57.

Did you know? 0.4 per cent of British consumer spending could be coming from the banks this year.

To figure out why, all you have to do is look at the recently announced pay-outs on the Payment Protection Insurance sold by UK banks. As much as £6-9bn could be winding its way to the pockets of British consumers. Though, as UBS notes, the amount is likely to be somewhat smaller.

Here’s what analysts Andrew Hughes, Adam Cochrane and Isabel Green say:

Clearly this is a one-off benefit compared with the ongoing pressures faced by UK households. In addition, not all of the anticipated £6-9bn may be received by policyholders. Some may be deceased, some may not claim, and others may decide that it is worth paying the 25% (+ VAT) that seems to be the going rate for expert groups handing claims on a “no win, no fee” basis. To the extent that there are arrears on the original borrowings, we would expect some of the PPI rebate may be offset against this. Some may well be saved. Below, we assume a net figure of £4bn.

Total consumer spending in the UK in 2010 was c£900 billion (source ONS). If we assume net PPI receipts will be c£4bn, then this would account for 0.4% of consumer spending over a full year. Some areas of expenditure, however, will see very little income elasticity. These would include, for example, petrol, utilities and food, which are current exerting downward pressure on other areas of spending as commodity prices rise.

And here’s where they think the money will be spent:

The cash will start to be repaid from August onwards. Given that the summer holiday season will have passed, we think that a large proportion may be spent on household goods. If one third of the assumed £4bn is spent in this category, we estimate it would add 3% to sales for the full year, or almost double this in the second half. We believe this could add to any benefit from weaker comps in the run-up to Christmas.

Major beneficiaries are likely to be those with a high proportion of UK sales – preferably in the household goods sector – and high operational gearing. These are likely to be those hurt in the spending squeeze over the last few years, such as Home Retail, Dixons and Carpetright, where we think the EPS upside could be significant.

Erm, thank you banks? For millions of spanking-new rugs and assorted furniture.

Related link:
Are claims companies cashing in on PPI? – Which?

This entry was posted by Tracy Alloway on Monday, June 27th, 2011 at 9:57 and is filed under Capital markets. Tagged with , , , , .

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