British bank shares jump after Supreme Court ruling on car loan claims

By Iain Withers

LONDON (Reuters) -Shares in British lenders surged on Monday after a Supreme Court ruling on motor finance claims last week went largely in their favour, although it still left banks facing billions of pounds of potential compensation claims collectively.

Lloyds Banking Group shares jumped 7%, on track for its biggest daily gain in three years, while specialist Close Brothers' stock was up 21%.

Barclays, a smaller player in the market, gained 2.3%, while Bank of Ireland and Santander - both exposed through their UK arms, gained 3% and 2.3% respectively.

Britain's Financial Conduct Authority (FCA) said on Sunday it would consult on a redress scheme for motorists claiming to have been overcharged, estimating the total bill could hit between 9 billion and 18 billion pounds ($12-24 billion).

However, that cost is likely to be substantially lower than analysts' early estimates of more than 30 billion pounds, after the Supreme Court on Friday overturned an earlier Court of Appeal judgment that had widened the scope of valid claims.

Banking analysts at RBC said they expected the cost to come in at 11.5 billion pounds, leaving several banks under-provisioned and potentially needing to set aside more cash, but less than the market had expected.

Lloyds said on Monday it would keep under review its 1.2 billion pound ($1.6 billion) provision for motor finance claims, and that any change was "unlikely to be material."

Close Brothers, which had previously set aside 165 million pounds, made no mention of its provision on Monday but said it would engage with the FCA on its consultation.

South African bank FirstRand, which mounted the Supreme Court appeal alongside Close Brothers, said it may need to update its own provision following the judgment.

"(The judgment) has taken the worst case scenario off the table," said Gary Greenwood, analyst at Shore Capital.

He said lenders would likely still face some claims if consumers could prove they had been treated unfairly.

Lloyds, Close Brothers, Barclays, Santander and Bank of Ireland had previously set aside nearly 2 billion pounds between them.

"We expect this move to accelerate M&A activity due to some lenders having decreased risk appetite but also because of (some) unused provision amounts," said Hyder Jumabhoy, partner at law firm White & Case.

The FCA said on Sunday it would launch a consultation on its redress scheme by early October. Car loans dating back to 2007 would possibly qualify for redress.

($1 = 0.7534 pounds)

(Reporting by Iain Withers, Additional reporting by Charlie Conchie and Danilo Masoni; Editing by Kirsten Donovan and Bernadette Baum)