Why Lloyds Bank can shrug off weak Q4 and £450m car finance charge

Disappointment over how Lloyds Banking Group (LSE:LLOY) finished 2023 failed to hold back shares today as the City turned its results focus on the potential for additional shareholder returns.

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​​​​​​The lender initially fell on aspects of its fourth-quarter performance, including much higher operating lease depreciation and a retreat in its net interest margin (NIM) to below 3% due to mortgage pricing and deposit mix headwinds.

It also set aside £450 million after the Financial Conduct Authority (FCA) announced a review of the industry’s motor finance commission arrangements dating back to 2007.

Lloyds is seen in the City as being potentially the most exposed, one reason why its shares have fallen around 10% at a cost of £3 billion since the FCA announcement in January.

Analysts at Morgan Stanley described today’s provision as a “credible number”. However, it added: “Uncertainty remains, and until we understand what the FCA redress scheme may look like, it’s difficult to narrow outcomes.”

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The provision was offset by a significant write-back following the repayment of loans by a single client, thought to be the Barclay family in relation to the Telegraph and Spectator.

Together with a brighter economic outlook, this meant the impairments provision for the year improved by 80% to £308 million and underlying profits lifted by 11% to £7.8 billion. Net income improved 3% to £17.9 billion but operating costs also rose 5% to £9.1 billion.

Guidance for the year ahead includes a floor for the net interest margin at 2.90% and operating costs of about £9.3 billion.

Lloyds also said it intends to buy back another £2 billion of its shares after revealing its intention to reduce its capital buffer to 13.5% from today’s 13.7%. Buybacks are beneficial for all shareholders by reducing the number of shares in issue, raising the potential for an increase in the dividend per share.

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The ultimate goal by the end of 2026 is for a capital requirement of 13%, which Morgan Stanley estimates would allow for £1.6 billion of additional shareholder distributions.

The total capital return for 2023 amounted to £3.8 billion, representing about 14% of the lender’s market value. This included a £1.17 billion full-year dividend of 1.84p a share, up from 1.60p the year before. The shares will trade ex-dividend on 11 April and the dividend will be paid on 21 May.

The total dividend for the year of 2.76p is up 15% on the previous year, in line with the group’s “progressive and sustainable” dividend policy.

The improved capital returns outlook helped Lloyds shares recover from their weak start to the trading session, reaching lunchtime 1.6p, or 3.7%, higher at 44.9p. That’s still below where the widely-held stock started the year but better than last week’s 41.2p.

City analysts continue to see an upside for shares, although the uncertainty of the FCA motor finance review means UBS recently removed Lloyds from its European top picks portfolio.

The Swiss bank has a price target of 50p, while Jefferies sees upside to 59p, and Morgan Stanley is at 64p through an “overweight” rating.

The US bank said this morning: “Q4 was a miss versus expectations, however guidance implies only a modest earnings downgrade to pre-provision profits, which together with the share buyback should temper any potential share weakness.”