By: Emma Dunkley, Retail Banking Correspondent
Bank’s earnings boosted by sharp decline in cost of PPI mis-selling scandal
Lloyds Banking Group has unveiled a £2.2bn dividend payout after more than doubling its annual pre-tax profits on the back of lower provisions for mis-selling payment protection insurance.
The bank, which is now less than 5 per cent owned by the UK government, set aside £1bn for the PPI debacle last year, compared with a total bill of £4bn in 2015.
The pre-tax profit of £4.2bn, up from £1.6bn a year earlier, undershot analyst estimates of £4.4bn but was Lloyds’ best performance since the financial crisis, underscoring the extent of the bank’s recovery.
The sharp decline in mis-selling costs is a boon to shareholders, who have seen successive profit announcements hit by the PPI scandal. The bank’s total compensation pot amounts to £17bn.
However, other conduct charges — including mis-selling of packaged accounts — amounted to £1.1bn, up from £837m the previous year, which chief financial officer George Culmer described as “disappointing”.
Lloyds announced a special 0.5p dividend on top of a 2.55p ordinary dividend in respect of 2016 — amounting to a £2.2bn payout.
Shares in the bank were up 3.7 per cent in early morning trading, to 69p.
The results bolster government plans for offloading its remaining stake in the bank over the next few months, drawing a line under the financial crisis some eight years after Lloyds’ £20.5bn bailout.
Stripping out the impact of PPI and other one-off items, Lloyds delivered underlying profit of £7.9bn, down from £8.1bn in 2015.
The bank said income amounted to £17.5bn compared with £17.6bn a year earlier, while operating costs reached £8bn, down from £8.3bn.
The bank is targeting a cost/income ratio of 45 per cent by the end of 2019. António Horta-Osório, the bank’s chief executive, said it “is an ambitious target . . . but we are very confident we are going to achieve it”.
He said he believed interest rates would “no longer decrease” over the next few years, and that revenues were expected to increase, helping to reach the cost/income target.
Lloyds eased off mortgage lending last year to preserve its net interest margin — the difference between the interest it receives from lending and what it pays out on savings. The bank posted a NIM of 2.71 per cent, up from 2.63 per cent the year before.
Mr Horta-Osório is focused on the bank growing in consumer credit and other sectors where it is under-represented relative to its size. Lloyds struck a £1.9bn deal to acquire MBNA, the UK cards business, at the end of last year.
Lloyds said at the time the deal would hit capital reserves by 0.8 percentage points, which the bank has revealed it earmarked in the fourth quarter.
The bank strengthened its capital reserves, bolstering the common equity tier one ratio to 13.8 per cent post dividend - but before the MBNA provision - from 13 per cent at the end of 2015.
Lloyds increased its bonus pool by 11 per cent to £392m as a result of its strong profit growth.
However, Mr Horta-Osório’s total pay packet dropped to £5.5m, down from £8.5m the year before, largely due to the fall in the bank’s share price following the Brexit vote last June, which hit his long-term incentive plan.
The immediate impact of the Brexit vote has not been as acute as some analysts had feared.
Ian Gordon, analyst at Investec, said: “The market’s expectations for impairments went up dramatically post-Brexit.” Lloyds said impaired loans had increased by 14 per cent to £645m.
Mr Horta-Osório said: “As we’ve been saying since summer, we’ve not seen any change . . . consumer behaviour is exactly the same, behaving as they were pre-referendum.”
Mr Culmer added that Lloyds would “most likely” convert its Berlin branch into a subsidiary to secure market access to the EU when Britain leaves the bloc.
Lloyds also announced board changes on Wednesday. Anthony Watson, a senior independent director, will retire from the board in May at the annual general meeting. He will be replaced by Anita Frew, who will take on the role in addition to her current position as deputy chairman.
Nick Luff, an independent non-executive director and chairman of the audit committee, will also step down in May. He will be replaced by Simon Henry, an independent non-executive director, as chairman of the audit committee.
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