Lloyds Banking Group (LLOY.L) disclosed a 57% surge in annual profit on Thursday, notwithstanding Britain’s faltering economy and a £450 million ($571 million) charge for potential costs from a regulatory review into motor finance.
Shares in the bank dropped by 1.4% at 0920 GMT as analysts questioned whether the funds allocated for potential compensation for customers asserting they were overcharged on car loans would suffice.
In a convoluted earnings report for 2023, the bank’s profit was propelled by an unexpectedly slight charge for bad loans – even as Britain entered a recession in the latter half of 2023 – amounting to £308 million, significantly lower than the previous year.
CEO Charlie Nunn confirmed in a discussion with reporters that this was partly due to a £700 million writeback on historic loans extended against Britain’s Telegraph newspaper, subsequent to their repayment by the Barclay family in December.
As Britain’s largest mortgage lender, Lloyds’ fortunes are intimately entwined with the struggling wider economy.
However, akin to its competitors, Lloyds has experienced a substantial surge in lending revenue due to elevated Bank of England interest rates – which anchor borrowing costs – while mitigating losses from potential unpaid loans.
Lloyds stated it embraced more optimistic economic projections for 2024, aiding in keeping its bad loan charge minimal, and now anticipates UK growth of 0.5% this year with house prices expected to decline by a more moderate 2.2%.
Lloyds reported a pre-tax profit of £7.5 billion ($9.5 billion) in 2023, up from £4.8 billion and slightly surpassing analyst predictions.
The bank declared a final dividend of 1.84 pence and a share buyback of £2 billion. It also outlined subdued performance forecasts for the year, with core margins predicted to decline to 2.9% and returns to 13%, before rebounding to 15% by 2026.
Regarding CAR FINANCE PROVISION, Lloyds stated it was not admitting liability or wrongdoing by setting aside a £450 million provision to address potential redress claims linked to an ongoing regulatory review into charging by car finance lenders. Some analysts speculate the bank’s potential costs could escalate to as much as £2 billion.
Chief Financial Officer William Chalmers described the provision as the bank’s “best estimate” and refrained from commenting on analyst models.
“There will be question marks around how Lloyds has come to that figure… What we do know is that Lloyds is one of the more exposed banks should the FCA deem there was misconduct and customer loss,” said Matt Britzman, equity analyst at Hargreaves Lansdown.
Analysts at RBC have projected the sector’s total compensation bill could soar to £16 billion, marking it as the most expensive consumer banking scandal since the mis-selling of payment protection insurance (PPI).
Lloyds’ CEO Nunn received £3.7 million in remuneration in 2023, a 2% decrease from 2022 earnings, primarily due to a reduced bonus.
Lloyds also revealed the appointment of former Banco Santander (SAN.MC) executive Nathan Bostock to its board, subsequent to deputy chairman Alan Dickinson announcing his resignation.
Bostock served as chief executive officer of the Spanish lender’s UK arm from 2014 until 2022.