Lloyds banks record profits but sets aside £450m to cover car finance probe

Lloyds Banking Group has revealed record annual profits but also a provision of £450m to cover potential costs from a regulatory probe into car loan practices.

Britain’s biggest mortgage lender, whose brands include Bank of Scotland and Halifax, reported a pre-tax profit for 2023 of £7.5bn.

That was more than 50% up on the previous 12 months.

Lloyds credited higher interest rates, mostly a consequence of Bank of England action to tackle inflation, for the jump in income.

The profit figure came in above market expectations for £7.4bn.

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Lloyds rewarded shareholders with a final dividend of 1.84 pence per share and a share buyback of £2bn.

Shares were, however, down by almost 2% in response in early trading on the FTSE 100.

The reaction was initially muted, but later shifted, as Lloyds remained cautious on the outlook ahead amid stiff competition in the mortgage market.

Fixed rate deals, which shot up to 2008 financial crisis levels way above 6% last summer, have been coming down since the Bank of England paused its programme of interest rate hikes.

The prospects for rate cuts ahead helped spark a mortgage price war as 2024 began but that has lost steam in recent weeks over fears the Bank may wait until June to introduce any reduction.

The impact was clear to see in the Lloyds results release as its net interest margin – a key measure of underlying bank profitability – fell to 2.98% in the final three months of 2023 from 3.08% during the previous three months.

It predicted a level of 2.9% for 2024.

Lloyds set aside £308m to cover potential unpaid loans, well down on the £1.5bn sum seen last year.

Its chief executive, Charlie Nunn, told Sky News it was yet to see a deterioration in distress levels among customers but acknowledged there were still many yet to see their fixed rate mortgage reflect the leap in rates.

“Those that can’t make ends meet is less than 1%”, he told Business Live with Ian King.

“That’s stabilised or got a bit stronger in the last quarter or two. That’s really important to focus on those customers and we’re very focused on them.”

The other £450m provision relates to the Financial Conduct Authority’s (FCA’s) investigation into whether people could be owed compensation for being charged too much for car loans.

The regulator is looking into historic so-called discretionary commission arrangements across the motor finance market – a practice that was banned in 2021.

Lloyds is exposed to the inquiry through its Black Horse brand.

A forecast by RBC has suggested the car finance sector as a whole could face payouts of up to £16bn if the FCA investigation’s conclusions side in favour of consumers.

Matt Britzman, equity analyst at Hargreaves Lansdown, commented: “The £450m provision was less than some had feared but there will be question marks around how Lloyds has come to that figure.

“Lloyds has been honest in saying the outcome of the review is largely unknown. What we do know is that Lloyds is one of the more exposed banks should the FCA deem there was misconduct and customer loss.”

Lloyds was the last of the major UK lenders to report on their progress over 2023.

NatWest revealed last week a 20% increase in profits despite its troubles behind the scenes, including the fallout from the Nigel Farage debanking scandal that forced out the then chief executive Dame Alison Rose.

Barclays‘ earnings were hit by a weaker performance from its investment banking arm.

It responded to investor concerns over its reliance on that division by announcing a shake-up of its operations.

On Wednesday, HSBC shares fell sharply after its record annual profits were dented by its exposure to the troubled Chinese market.

Lloyds banks record profits but sets aside £450m to cover car finance probe

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