Lloyds sets aside another £700mn after car finance probe

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Lloyds Banking Group has set aside an additional £700mn to cover the fallout of a probe and related court ruling into the potential mis-selling of car finance loans.

Lloyds announced the provision on Thursday alongside its fourth-quarter results. The bank posted statutory profits before tax of £824mn in the final quarter of the year, below market expectations of £1.2bn and down from £1.8bn the previous year.

The high-street lender recorded a return on tangible equity — a key measure of profitability — of 12.3 per cent for the full year, below its target of 13 per cent. Quarterly revenues rose year on year to £4.4bn, slightly above expectations of £4.3bn.

Lloyds had already booked a £450mn provision last year to cover potential car finance mis-selling costs, after the Financial Conduct Authority began to probe discretionary commissions on the loans.

But analysts have since raised estimates of the potential hit to the UK banking sector after the Court of Appeal ruled that it was unlawful for banks to pay any commission to car dealers without customers’ informed consent.

The decision prompted Lloyds chief executive Charlie Nunn to warn of an “investability problem” for the UK, and banks have been pushing the government to intervene to protect economic growth when the Supreme Court hears an appeal in April. But a panel of judges on Monday blocked the Treasury’s request to intervene in the case.

The car finance costs have been an unwelcome distraction as Lloyds enters the final stretch of a £4bn investment plan aimed at modernising its operations and growing in areas that are less closely tied to interest rates.

Lloyds has also pushed through cost cuts, including through the introduction of “branch-sharing” for customers of its three brands: Bank of Scotland, Halifax and Lloyds. The lender also said this year that it would close two offices in Liverpool and Dunfermline. It is also reviewing hundreds of jobs as part of an effort to digitise its operations.

Lloyds’ net interest margin — the difference between the interest it charges on loans and the rate it pays on customer deposits — rose to 2.97 per cent in the fourth quarter; up from 2.95 per cent the previous quarter as it benefited from a so-called structural hedge that protects it against falling interest rates.

The group said it remained “highly committed to shareholder distributions” despite the car finance hit and announced plans to reward shareholders with a final dividend of 2.11 pence per share. It also said it plans to buy back up to £1.7bn of its own shares.