Lloyds Banking Group plc (LON:LLOY) is unlikely to put its payment protection insurance mis-selling saga behind it any time soon, analysts have warned.
The Financial Conduct Authority has set an August 2019 deadline for PPI claims, and while Lloyds is hoping that the provisions it has put aside will see it through until then, costs could still rise.
Lloyds set aside a further £700mln in the second quarter to cover PPI claims after earmarking £350mln in the first three months of the year, bringing its total provision to more than £1bn.
Its latest provision takes the total cost of PPI to more than £18bn, bigger than any UK bank.
In reaction, shares in Lloyds fell 2.24% to 67.56p in late afternoon trading.
“Lloyds has two more years of the PPI storm to weather, after which a significAnt headwind to profitability will have dissipated,” said Laith Khalaf, senior analyst at Hargreaves Lansdown.
Other misconduct costs at play for Lloyds
The analyst also highlighted that there are other misconduct costs at play too, including a £283mln provision in the first half to repay 590,000 mortgage customers mistakenly charged from 2009 to 2016 after going into arrears.
Lloyds is also reviewing compensation claims for the victims of the HBOS Reading fraud that involved siphoning money from struggling businesses. It put aside £100mln for the claims in the first quarter.
But one of the victims, TV star Noel Edmonds, wAnts £300mln. The former Deal or No Deal presenter claims his company Unique Group collapsed after suffering sUBStAntial losses in the loans scam at HBOS, which occurred between 2003 and 2007.
Lloyds chief executive, António Horta-Osório, said: “There will always be redress costs ...there will be mistakes that will be made.”
Lloyds shrugs off PPI to deliver profit growth
Despite sUBStantial misconduct costs in the first half, Lloyds delivered a 4% increase in statutory pre-tax profit to £2.5bn, which missed analysts’ expectations of £2.9bn but marked the biggest half-year profit in eight years.
READ: Lloyds reports biggest half-year profit in eight years but shares drop as PPI storm rages on
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.
Net income also gained 4% to £9.3bn and the net interest margin rose by 8 basis points to 2.82%, supported by a month’s contribution of credit card business MBNA, acquired in May.
The bank expects the net interest margin will be “close to” 2.85% in the 2017 fiscal year, including its acquisition of MBNA,
Shore Capital analyst Gary Greenwood said the guidance on net interest margin is slightly stronger than expected, which should drive upgrades to underlying pre-tax profit estimates. The broker reiterated a ‘buy’ rating and target price of 69p.
“Based on the updated guidance, we provisionally expect our underlying adjusted PBT estimate will increase to around £8.5bn (versus £8.2bn presently and consensus at £7.9bn), implying adjusted EPS at around 8.0p,” Greenwood said.
Dividend hike will reassure shareholders, says Hargreaves Lansdown
Lloyds also hiked its interim dividend by 18% to 1.0p per share.
Khalaf reckons the increase in the dividend will be reassuring for shareholders. “The lion’s share of Lloyd’s dividends are paid at the end of the year, and this latest increase hints that there may be further treasure ahead for income-seekers,” the Hargreaves Lansdown analyst said.
“Overall this is a strong set of numbers from Lloyds, blighted, but not overshadowed, by misconduct costs.”
With the government selling the last of its shares in May following its bailout of the bank during the 2008-09 financial crisis, this removes significant downward pressure on the share price, Khalaf added.
Lloyds boosts capital buffers
Following the Bank of England’s decision to raise the requirements for countercyclical capital buffers to protect banks from any financial shocks amid Brexit uncertainty, Lloyds has raised its common tier 1 (CET1) ratio in the first quarter.
Lloyds said it believes the level of CET1 capital required to meet regulatory requirements and cover uncertainties, remains at about 13%
UBS said the bank’s CET1 ratio of 13.5%, post dividends, in the first half was in line with its expectations.
“Combined with Lloyds repeating its 13% CET1 capital target we think suggests a running yield of 8%,” it said.
UBS repeated a ‘buy’ rating a target price of 85p, adding that the statutory pre-tax profit was 7% ahead of consensus.