Lloyds Banking Group (LLOY) capped what had been an eventful bank reporting season for the majors with a record set of operational results, which showed record pre-tax profits up 57 per cent to £7.5bn, although a restatement of the 2022 accounts to reflect IFRS17 changes flattered the comparisons.

This meant management felt confident enough to raise the dividend by 15 per cent and announce a share buyback programme worth £2bn this year. However, this was not enough to lift the share price, which fell on results day, as the market assessed the likely costs of car finance compensation.  

The focus of interest prior to the results was Lloyds’ likely exposure to the Financial Conduct Authority’s (FCA) investigation into historic car finance commission arrangements. The FCA alleges that commission rates of up to 3 per cent charged between finance providers and brokers placed unnecessarily high costs on consumers taking out car finance.

For Lloyds, this meant the bank setting aside £450mn to cover any claims, bringing its total remediation bill for the year to £675mn. Lloyds’ total car finance loan exposure is currently £15bn, out of a total loan book of £450bn. The bank is estimated to have a 35 per cent share of the total UK car finance market.

When it comes to actual banking, Lloyds put in a solid effort, with higher interest rates boosting the net interest margin by 17 basis points to 3.11 per cent. When the impact of securitisation is considered, totals loans fell by £5.2bn in the year to £450bn, but across car finance, unsecured lending and European retail lending, loan growth was largely stable at £4.7bn.

The bank also reduced its expected credit loss charge by £1bn to £4.3bn compared with 2022. Meanwhile, customer deposits were nearly £4bn lower at £471bn as a more competitive savings market caused churn within the book, although management noted that this had started to moderate in the final quarter. Meanwhile, the bank’s underlying operating costs were 5 per cent higher at £9.14bn and management forecasts that these will come at around £9.3bn for 2024 as it targets a return on tangible equity of around 13 per cent.

The regulatory probe won’t help investor sentiment towards Lloyds. FactSet consensus puts the price/earnings ratio at 6.6 for this year. Lloyds is an important income share for many, but also fully valued. Hold.

Last IC view: Hold, 44.82p, 26 Jul 2023