Annual results from Lloyds Banking Group PLC (LSE:LLOY) saw the shares fall in early trading before surging higher from late morning, with investors and analysts seeing several positives in the numbers.
On the downside, profits fell in the fourth quarter, but were in line with expectations despite a £450 million provision to cover potential costs of a motor finance probe from the Financial Conduct Authority.
One car finance boss said the move by Lloyds, which operates Black Horse motor finance, "reads as a tacit acknowledgement of the scale of the car finance mis-selling problem", with the FCA probe highlighting this "sharp practice" and "systemic problems that tipped the balance too far away from consumer interests".
Lloyds, the UK's largest high-street lender, also revealed that the FCA has opened an investigation into the group's compliance with UK money laundering regulations saying it is "not currently possible to estimate the potential financial impact, if any".
Positives included capital returns, where a final dividend of 1.84p per share and a buyback of up to £2 billion meant £3.8 billion of returns have been declared for 2023, equivalent to 14% of the bank's market cap.
Analyst Gary Greenwood at Shore Capital said the buyback was a positive surprise, as he felt it was "something [the board] may step back from given the uncertainty surrounding the motor finance review", which he thinks could cost the bank nearer £1 billion in the end.
Max Georgiou, analyst at Third Bridge, said the FCA review "could present challenges in the future, Lloyds is thought to have the largest exposure across UK peers and could present a challenge in RoTE targets moving forward".
The car finance provision is "a nasty detail which may be provoking some nervousness among investors", said Russ Mould at AJ Bell.
“Anyone with memories of the PPI scandal will have doubts over whether the amount set aside so far will represent the final cost of dealing with this issue. Time will tell if £450 million represents the tip of the iceberg or an appropriately conservative assumption. Lloyds admits there is considerable uncertainty on this front."
It was the "key news" for analysts at KBW, who said while it is "highly unlikely" to be the end of the story, it is "orders of magnitude below market fears" and the fact that the regulator approved a £2 billion buyback "does suggest that they are not expecting outsized charges later this year".
UK banks are "clearly still not through the margin woods", the KBW analysts said, "the others have just stopped talking about it", but with Lloyds shares trading on 5.6 times 2025 earnings and 0.8 times book value, "it is hard to argue that it is not well reflected in the price".
At UBS, analysts highlighted that fourth-quarter underlying PBT was 2% above the analyst consensus, driven by an impairment write-back from the repayment of a Daily Telegraph loan by the Barclay family, though pre-provision profit was 34% below forecasts, driven mostly by the motor finance charge.
Net interest margins and CET1 capital levels were also lower than the consensus, UBS said, while the dividend was in line.
2024 guidance was "slightly below" the City consensus, the UBS analysts said, seeing a "low to mid-single digit downside to 2024 consensus PBT" due to lower net interest income and higher operating lease depreciation partly offset by lower impairments.
Guidance for return on tangible equity – a key gauge of a company's profit efficiency – was guided to fall from 15.8% last year to circa 13%, which UBS said was as expected, with Lloyds saying it should recover to 15% by 2026.