Lloyds announces record annual profits but sets aside £450m for FCA motor finance probe

Lloyds Banking Group has reported an uptick in annual profits on the back of higher interest rates while setting aside £450m for an FCA motor finance probe.

The group also announced it was planning an up to £2bn share buyback, which together with a 1.84p per share final dividend would see £3.8bn returned to shareholders.

Britain’s largest domestic banking group – which owns Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows – posted a pretax profit of £7.5bn for 2023, up 57 per cent from £4.8bn in 2022 and an all-time high for the lender. Analysts had expected a figure of £7.4bn.

The bank’s net interest income rose to £13.3bn in 2023, from £12.9bn in 2022. However, its net interest margin narrowed by 0.1 per cent to 2.98 per cent between the third and fourth quarters as the group faced pressure to offer savers better deals and a likely peak in interest rates.

Investors have been clamouring for more details on Lloyds’ exposure to an FCA review into now-banned motor finance commission arrangements.

Today the bank confirmed it made a £450m provision for the potential impact of the review, which it said included “estimates for costs and potential redress”.

“There remains significant uncertainty as to the extent of any misconduct and customer loss, if any, the nature of any remediation action, if required, and its timing,” Lloyds said. “Hence the impact could materially differ from the provision, both higher or lower.”

Analysts have estimated that the auto lending industry could be on the hook for up to £16bn in compensation payouts from the FCA’s probe.

RBC estimates that Lloyds, the owner of the UK’s largest auto lender Black Horse, could be on the hook for up to £2bn in compensation but flagged that it would not know the size and scope of the issue until at least September.

Although some experts have likened the motor finance probe to the PPI scandal, Lloyds chief financial officer William Chalmers stressed in a call with reporters that it was “not like prior remediations”.

Lloyds posted loan impairments of £303m in 2023, down from £1.5bn in 2022. It explained that the year-on-year decrease included “a significant write-back and improved economic assumptions”.

The Barclay family paid £1.2bn in debts owed to Lloyds in December to regain ownership of The Telegraph.

Lloyds saw operating costs of £9.1bn in 2023, up five per cent year-on-year but in line with guidance. It expected operating costs to rise to around £9.3bn in 2024, reflecting severance charges and inflation.

The bank confirmed last month that it had cut 1,600 jobs across its branch network in a bid to reduce costs and transition to online banking.

Chief executive Charlie Nunn said on Thursday: “2023 was a critical year in building towards the ambitious strategy we announced two years ago, as we look to grow our business and deepen relationships with our customers.

“As demonstrated in our recent strategic seminars, we have made significant progress and are on track to meet our 2024 and 2026 strategic outcomes, helping us build towards higher and more sustainable returns.”

Despite the jump in profits, the bank’s bonus pool fell to £384m for 2023, from £466m in 2022. Nunn received a £3.7m pay package, down from £3.8m in 2022.

Lloyds shares dropped 1.7 per cent on Thursday morning.

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