Lloyds Bank (LLOY.L) on Thursday announced a steep drop in annual profit, as the cost of mis-sold payment protection insurance (PPI) stung the bank.
Pre-tax profit at Lloyds dropped 26% in 2019 to £4.3bn ($5.5bn), which was slightly worse than the City expected. The slump was largely driven by a £2.4bn charge for PPI mis-selling, up from just £750m in 2018.
“The group's statutory performance was impacted by a substantial PPI charge related to the deadline for claims submission,” chief executive Antonio Horta-Osorio said in a statement. “Underlying performance was resilient, reflecting the health of our customer franchise and the strength of the business model.”
Lloyds was forced to set aside an extra £1.8bn to cover a surge in claims for mis-sold payment protection insurance (PPI) at the end of last year. Profit slipped 97% in the third quarter as a result.
Fourth quarter profit bounced back to £1.4bn, Lloyds said Thursday, but it was not enough to reverse the damage done earlier in the year.
Return on tangible equity, a key measure of bank performance, fell by 3.9 percentage points to 7.8% in 2019.
Revenue at the bank also dipped slightly, down 4% to £17.1bn in 2019. This was in-line with analysts’ forecasts.
Horta-Osorio said 2019 had been “tough” due to the slowing global economy and political uncertainty around Brexit. However, he noted that the UK economy had been “resilient” and was more upbeat on prospects for 2020.
“With a new majority government now in place, and the UK having left the EU, there is now a clearer sense of direction and there are some signs of gradually improving economic indicators,” he told journalists on a call.
Horta-Osorio highlighted strong household spending growth, all-time employment highs, and said there was “evidence of a gradual recovery” in business market and “early signs of upturn” in housing market.
But he added: “We have to also bear in mind that risks remain.” Horta-Osorio cited uncertainty around EU-Brexit trade negotiations and the impact of the current coronavirus epidemic as key risks.
Lloyds said it expects return on tangible equity to bounce back to between 12% and 13% in 2020, as PPI costs recede and profit grows.
Lloyds raised its final dividend by 5% to 3.37p per share and Horta-Osorio said the bank would “continue to target a progressive and sustainable ordinary dividend.”
“In 2020, the group will also commence paying dividends quarterly, accelerating payments to shareholders, with the first dividend being paid in June 2020,” he said in his statement.
While profit and revenue dipped, they were broadly in line with what analysts had expected. Joseph Dickerson and Aqil Taiyeb, banking analysts at Jefferies, said on Thursday: “Expectations were low coming into Q4, and we would expect a good market reaction to the results.”
Lloyds shares were 1.4% higher in London after just over 20 minutes of trading.