By Scott Wright
SHARES in Lloyds Banking Group rose as investors looked beyond a near-30 per cent fall in profits at the Bank of Scotland owner, which delivered an upbeat assessment of the UK’s economic prospects.
Lloyds reported a pre-tax profit of £4.93 billion for the year ended December 31, down from £5.96bn, as hefty provisions for payment protection insurance (PPI) claims weighed heavily on the bottom line.
Its share price initially increased by more than 3%, before ending the day up 1.4%, or 0.77p, at 56.55p.
Lloyds, Britain’s biggest mortgage lender, set aside a further £2.45bn during 2019 to cover PPI claims after experiencing a surge in enquiries ahead of the final claims deadline on August 29. It took the group’s total provision for PPI to nearly £22bn.
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Analysts also pointed to higher impairment charges, which rose by 38% to £1.29bn. Lloyds put the higher charges down mainly to two material corporate cases in commercial banking, while also highlighting some weakening in used car prices in Black Horse, its motor finance division.
Taken alongside a fall in net income, which dipped 4% to £17.1bn, these factors contributed to the bank’s underlying profit dropping 7% to £7.5n in a “challenging external market”.
Despite the profits fall, chief executive Antonio-Horta Osorio was upbeat in his assessment of the outlook. He said the UK economy, to which Lloyds’ performance is “inextricably linked”, has shown resilience amid “significant political and economic uncertainty, supported by record low employment, low interest rates and rising real wages”.
He added: “Although uncertainty remains given the ongoing negotiation of international trade agreements, there is now a clearer sense of direction and some signs of an improving outlook.”
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The Lloyds results were announced as the bank revealed Mr Horta-Osorio had seen his pay cut by 28% cut to £4.73m, which comes after the bank caused controversy over the £6.27m he received last time. It came in for heavy criticism when it emerged Mr Horta-Osorio’s pay included a pension contribution of 46%, compared with a maximum of 13% for other employees.
In a recurring theme for the UK’s biggest banks, Lloyds’ net interest margin remained under pressure last year, dipping to 2.88% from 2.93% as the base rate remains at near historic low of 0.75%. It expects the margin to be in the range of 2.75% to 2.8% this year.
The period saw Lloyds acquire Tesco Bank’s £3.7bn residential mortgage portfolio for £3.8bn, which brought with it 23,000 customers. The deal helped the size of Lloyds’ open mortgage book rise by £3.5bn to £270.1bn by the end of the year. Total costs were reduced by 5% to £8.3bn, with the bank guiding on further reduction this year to less than £7.7bn.
Nicholas Hyett at Hargreaves Lansdown said: “We expected Lloyds to report a fairly tough end to 2019, with both retail and corporate customers cautious in the run-up to the election. However, the outlook for 2020 is more important, and there we have some good news.
"The bank reckons it can squeeze more out of its already market leading cost base, and forecasts for capital build bode well for both the dividend and potentially a renewal of the suspended share buyback programme. We also note that, despite a spike in bad loans in 2019, the bank doesn’t expect conditions to get worse next year.”
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The Lloyds results brought down the calendar on the reporting season for the big UK banks.
Royal Bank of Scotland caused controversy when it announced plans to change its parent company name to NatWest Group. The Royal Bank name will be retained for branches in Scotland, with chairman Sir Howard Davies stating the institution will not be “unscrewing any brass plaques” in Edinburgh when asked if there would be any ramifications for its Scottish head office.
HSBC said it will slash 35,000 jobs across its global operations as it reported a 33% fall in pre-tax profits to $13.35bn (£10.2bn).
Lloyds is recommending a final ordinary dividend of 2.25p per share. That would take the total ordinary dividend to 3.37p – up 5%.
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