Lloyds Banking Puts Aside GBP450 Million For Motor Finance Regulator Review — Update

By Elena Vardon

Lloyds Banking Group booked a 450 million pound ($568.7 million) provision for the potential impact of the U.K.'s financial regulator's review into the motor finance industry, the British lender said as it launched a GBP2.0 billion share buyback program and posted better-than-expected profit for the fourth quarter of 2023.

The British lender put the money aside in view of the Financial Conduct Authority's investigation into historical car finance discretionary commission arrangements, to which the bank is exposed to through its Black Horse brand, which is the U.K.'s largest motor finance provider.

The overall financial hit could be materially higher or lower than the figure, Lloyds said on Thursday, given that "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." Analysts caution that further material provisions can't be ruled out and, while estimates for the total costs to the group differ, most model over GBP1 billion over two years.

The charge--which it based on "various scenarios using a range of assumptions" and includes operational and legal costs as well as potential redress--was part of the GBP541 million remediation costs for the fourth quarter. The bank also booked a GBP541 million write-back, likely related to its recovery of the Telegraph newspaper loan, offsetting the charge's hit on its bottom line.

For the three months to Dec. 31, Lloyds posted pretax profit of GBP1.775 billion pounds compared with GBP1.06 billion for the same period a year earlier and with GBP1.65 billion expected by a company-compiled consensus.

The FTSE 100-listed company 's net income fell to GBP4.23 billion from GBP4.69 billion for the year-earlier period, missing estimates of GBP4.43 billion. Net interest income made up GBP3.32 billion of the total, against expectations of GBP3.37 billion.

Its net interest margin--the difference between what it earns on loans and pay out on deposits--for the quarter was 2.98% and missed expectations of a 3.01% margin. For 2024, it guided for margin above 2.90%--while analysts pencil in 2.96% for the year--as the benefits from higher interest rates which boosted its top line over the previous year start to taper off.

It also sees heavier-than-expected costs for the year ahead and guided for around GBP9.3 billion in operating expenses, up from its previous view of around GBP9.2 billion and reported GBP9.14 billion for 2023.

The bank closed the quarter with a pro forma common equity Tier 1 ratio--a key measure of balance-sheet strength--at 13.7% and lowered its target for 2024 to around 13.5%, and sees it falling further to around 13.0% by the end of 2026, freeing up additional capital.

The board declared a final dividend of 1.84 pence, bringing the full-year payout to 2.76 pence. Including the buyback, capital returns for 2023 amount to up to GBP3.8 billion or around 14% of its market capitalization. This should reassure investors but uncertainty around the motor finance review is taking the spotlight, according to analysts.

Shares in London, which have shed almost 11% of their value since the start of the year, fall 1.8% to 42.5 pence at 0908 GMT while the blue-chip index trades flat.

Write to Elena Vardon at elena.vardon@wsj.com

(END) Dow Jones Newswires

February 22, 2024 04:24 ET (09:24 GMT)

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