Lloyds allocates £1,200 million for car financing as it projects a 20% earnings decline in 2024, citing significant uncertainty in financial impacts.
In a rather disconcerting turn of events, Lloyds Banking Group has reported a staggering 20% decline in earnings for the fiscal year 2024, with profits plummeting to £4.477 billion—down from £5.518 billion the previous year. This decline, which falls short of market expectations, has been attributed to a confluence of factors, including the adverse effects of interest rate cuts on lending margins and the sluggish pace of the UK’s economic recovery. Consequently, this has resulted in diminished revenues and escalated operational costs.
However, the narrative does not end there. A significant portion of this downturn can be traced back to the bank’s decision to allocate a hefty £1.2 billion in provisions aimed at addressing potential compensation costs associated with auto finance fee arrangements. Of this amount, £700 million was earmarked in the final quarter of 2024 alone. The bank has acknowledged the considerable uncertainty surrounding the ultimate financial repercussions of these provisions.
Lloyds, through its Black Horse brand—one of the UK’s foremost car finance providers—finds itself entangled in a legal quagmire stemming from past practices. For years, numerous British car dealers received commissions from lenders, including Lloyds, for facilitating financing for car buyers. Regrettably, many of these transactions occurred without customers being adequately informed about the additional fees they were incurring or the less-than-favorable loan terms being offered.
In a landmark ruling last October, a court deemed it illegal for dealers to accept such commissions without obtaining proper customer consent and providing comprehensive information. This was further compounded in December when a court dismissed a challenge from Barclays regarding this very issue. These judicial decisions have paved the way for affected consumers to potentially file claims against the banks responsible for these suboptimal loans, prompting financial institutions like Barclays, Santander, and Lloyds to set aside substantial provisions to mitigate the fallout.
From a financial performance perspective, Lloyds reported a 5% decrease in net income, culminating in a total of £17.117 billion for the year. Concurrently, costs surged by 5% to £10.341 billion. The bank’s loans and advances to customers saw a notable increase, rising by £10.2 billion to reach £459.9 billion, bolstered by a £6.1 billion uptick in UK mortgages. Customer deposits also experienced significant growth, climbing by £11.3 billion to £482.7 billion.
However, the bank’s net interest income (NII) took a hit, falling by 7% to £12.8 billion, a consequence of the prevailing lower interest rates. Additionally, the net interest margin—essentially the differential between savings and loan rates—contracted by 16 basis points to 2.95%. The Common Equity Tier 1 (CET1) capital ratio concluded 2024 at 14.2%, reflecting a decline of four-tenths of a percentage point from the previous year, while the return on tangible equity (ROTE) dipped by 3.5 points to 12.3%.
In a bid to reassure investors, the Board of Directors has proposed a final ordinary dividend of 2.11 pence per share, culminating in a total ordinary dividend of 3.17 pence per share for 2024—an increase of 15% compared to the prior year, aligning with the group’s dividend policy. Furthermore, citing a robust capital position, the Board has unveiled plans for an ordinary share buyback program of up to £1.7 billion.
Looking ahead to 2025, Lloyds anticipates achieving an underlying net interest margin of approximately £13.5 billion, operating costs around £9.7 billion, an asset quality ratio of about 25 basis points, a return on tangible equity of roughly 13.5%, and capital generation of approximately 175 basis points.
Despite these formidable challenges, analysts, including Hunter, have noted a recent positive revaluation of the stock, which has surged by 47% over the past year, significantly outpacing the FTSE 100’s 13% increase.
