Lloyds Banking Group PLC (LON:LLOY) hiked its dividend by 18% as it reported its biggest half-year profits in eight years despite an extra £1bn in conduct charges related to its payment protection insurance (PPI) mis-selling scandal.
In its first set of results since returning to private hands in May, Lloyds posted statutory pre-tax profit of £2.5bn for the six months to 30 June, up 4% on the previous year but missing analysts' expectations of £2.9bn. The interim dividend was lifted to 1.0p per share, compared to 0.85p the same time a year ago.
The bank set aside a further £700mln to cover PPI claims in the second quarter and £283mln to repay 590,000 mortgage customers mistakenly charged from 2009 to 2016 after going into arrears.
READ: Noel Edmonds raises compensation claim against Lloyds to £300mln over HBOS Reading fraud
The company had already earmarked £350mln in the first quarter for PPI ahead of the Financial Conduct Authority's August 2019 deadline for claims, bringing its total provision for the first half to over £1bn. Its latest provision takes the total cost of PPI to more than £18bn, bigger than any UK bank.
Shares fell 1.76% to 67.83p in morning trading as investors focused on the bank's misconduct issues.
Excluding one-off costs such as PPI, the bank reported an underlying profit of £4.5bn in the first half, compared to £4.2bn last year.
Lloyds reviews HBOS Reading fraud compensation claims
The lender also said it is currently reviewing compensation claims for the victims of the HBOS Reading fraud. Lloyds, which set aside £100mln in the first quarter for the case, is in the process of making payouts to those affected for “economic losses, ex-gratia payments and awards for distress and inconvenience”.
Total income increased 4% to £9.3bn, including a 2% rise in net interest income and an 8 basis-point gain in the net interest margin to 2.82%. This included a small contribution from recently acquired credit card business MBNA.
Lloyds completed its £1.9bn takeover of MBNA in May, in its first major acquisition since the government bailed out the lender during the height of the 2008-09 financial crisis.
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Lloyds boosts capital buffers in wake of new Bank of England requirements
The bank also boosted its capital buffers, with the Common Tier 1 (CET1) ratio rising to 14.0%, before dividends, at the end of June from 13.8% at the end of last year, generating about 100 basis points of capital. Post dividend, the CET1 ratio rose to 13.5% from 13.8%.
Raising its capital comes in the wake of the Bank of England’s new initiatives to protect banks from any financial shocks amid Brexit uncertainty.
The central bank last month lifted the requirements for countercyclical capital buffers up to 0.5% from zero and it may rise it to 1% by November 2018.
For the 2017 financial year, Lloyds expects capital generation at the top end of the ongoing “170-200 basis points range”. Lloyds said it believes the level of CET1 capital required to meet regulatory requirements and cover uncertainties, remains at about 13%
The lender also anticipates the net interest margin will be “close to” 2.85%, including its acquisition of MBNA.
Analysts weigh in on Lloyds' PPI storm
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: "Lloyds has two more years of the PPI storm to weather, after which a significant headwind to profitability will have dissipated. The board will be hoping that the provisions it has now made will see the bank through to the end of the claims period in 2019, while prudently expecting that there will still be some incremental charges along the way."
"There are other misconduct costs at play too, in particular a compensation scheme for customers who fell into mortgage arrears between 2009 and 2016, which shows that unfortunately poor treatment of banking customers was not restricted to the period before the financial crisis. However these costs are limited in scope by comparison to PPI claims, where the light at the end of the tunnel is now in sight."
Khalaf said despite the misconduct issues, Lloyds has delivered a strong set of numbers and investors should be pleased by the increase in the dividend.
Neil Wilson, senior market analyst at ETX Capital, warned that PPI remains a "thorn in the side of Lloyds and it could get worse".
"Costs could easily rise again. Lloyds has so far settled or provided for just over half of all the 16m PPI policies sold since 2000," he said. Not all PPI policies were mis-sold, of course, but it would be reasonable to assume that there will have to be further provisions made.”