Lloyds Banking Group revealed it has set aside £1.2billion to cover a car loans misselling scandal as profits tumbled 20 per cent.
The lender, which also owns Halifax and Bank of Scotland, has earmarked an extra £700million for compensation on top of a previously announced £450million.
City analysts believe the motor finance saga could cost the banking sector billions of pounds and compared it to the £50billion payment protection insurance (PPI) debacle a decade ago. It has even been dubbed ‘PPI on wheels’.
Lloyds, which owns car-loan business Black Horse, could be hit hardest among the major UK High Street banks.
A crucial Supreme Court hearing in April will see judges rule on whether customers taking out motor finance were properly informed over how commission was paid.
Appeal court judges in October last year said it was unlawful for dealers to receive commission on car loans from lenders without a customer’s consent.
Costs: Lloyds, led by boss Charlie Nunn (pictured), has earmarked an extra £700m for compensation on top of a previously announced £450m
Hundreds of thousands of drivers have complained and the Financial Conduct Authority (FCA) has begun an investigation. Banks were dealt a blow this week after judges blocked the Government’s attempt to intervene on behalf of lenders.
Santander has said its UK business is on the hook for £295million, while Barclays has set aside £90million. Close Brothers has estimated it could cost it up to £165million.
Lloyds, led by chief executive Charlie Nunn (pictured), said yesterday that the £1.2billion provision is the ‘best estimate of the potential impact’ but there was significant uncertainty in terms of the final outcome.
‘As a result, the final financial impact could differ materially to the amount provided,’ the bank said.
Russ Mould, investment director at AJ Bell, said the increase ‘is unlikely to have caught investors on the hop’. He added: ‘The fact the Government’s attempt to intervene was rejected by the Supreme Court is unhelpful and the increased provision meant profit came in below forecasts.’
Matt Britzman, an analyst at Hargreaves Lansdown, said: ‘While you could argue the provision is overly cautious, Lloyds holds the largest exposure of any major UK bank, and the outcome remains uncertain.’
The extra provision helped push earnings down 20 per cent from £7.5million to £6million in 2024, lower than the £6.39billion predicted by City analysts. Lloyds, the UK’s biggest mortgage lender, was also hit by a drop in income as customers remortgaged at lower rates after the Bank of England cut borrowing costs.
Net interest margin – a measure of the difference between money earned on loans and what the bank pays out on savings – was 2.95 per cent, from 3.11 per cent a year earlier.
But Lloyds hiked its dividend by 15 per cent to 3.17p and announced a £1.7billion share buyback programme. Its shares rose 4.9 per cent, or 3.06p, to 65.9p.
Richard Hunter, at Interactive Investor, said: ‘Lloyds finds itself in the midst of attacks from several angles but, all things considered, is standing up defiantly.’
Gary Greenwood, an analyst at Shore Capital, said the dividend and share buyback suggested management ‘is not overly concerned about the motor finance issue spiralling out of control’.
And while Lloyds shares have risen lately, they have performed far better than Close Brothers – where car finance is a far larger portion of business, meaning that it has more to lose – and where the shares are down 60 per cent since the start of last year.
Bosses and investors cash in after bumper year
It’s been a bumper year for bank bosses – and investors. Lloyds chief executive Charlie Nunn landed a £5.6million payday in 2024 – though this was dwarfed by awards at HSBC and Barclays.
But while the pay deals will raise eyebrows, particularly at a time of branch closures and the car loans scandal, investors have also cashed in.
In fact, since January 2024, UK banks have kept pace with the ‘Magnificent Seven’ US technology stocks.
The benchmark index of FTSE 350 banking stocks has risen 63 per cent since the beginning of 2024, which is exactly the same percentage as the tech firms Apple, Microsoft, Amazon, Google-owner Alphabet, Meta, Nvidia and Tesla. Barclays chief CS Venkatakrishnan took home most in 2024 after his payout more than doubled from £4.6million in 2023 to £10.5million last year.
It was the highest annual pay package awarded to a Barclays boss since Bob Diamond’s controversial £17million payday in 2011.
At NatWest, Paul Thwaite earned £4.9million in his first full year after replacing Alison Rose. The board has proposed raising his maximum pay to £7.7million in 2025.
And HSBC, which this week revealed plans to axe even more jobs as part of cost-cutting plans, paid Noel Quinn – who left the top job in September – £9.2million last year. His successor, Georges Elhedery, took home £5.4million.
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