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Lloyds hikes dividend and unveils £1bn buyback as profits jump but miss forecasts

Lloyds reported its highest pre-tax profit since 2006 but it fell short of market forecasts
Lloyds unveiled its new strategy for 2018-2020 alongside its annual earnings

Lloyds Banking Group PLC (LON:LLOY) raised its 2017 dividend by 20% and announced a £1bn share buyback as it reported an increase in profits and unveiled its new strategy.

The bank posted a statutory profit of £5.3bn for the year to the end of December 2017, up 24% on 2016 and the highest level since 2006 -- but below analysts’ expectations of £5.7bn.

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A final dividend of 2.05p per share was recommended by the board, bringing the total for the year to 3.05p, compared to 2.55p in 2016.

The lender said it plans to implement a share buyback of up to £1bn, equivalent to 1.4p per share, supported by strong capital generation. 

"This is a sign of the bank's health, and of its own independence as it returned to private ownership last year," said David Madden, market analyst at CMC Markets UK.

Lloyds generated 245 basis points (bps) of common equity tier 1 capital last year, slightly more than the 240 bps estimated in October.

The pro-forma CET1 ratio – a measure of capital strength – stood at 13.9% at the end of 2017, including dividends and the share buyback, compared to 13.0% a year earlier.

Shares in the lender were up 1.8% to 69p in morning trading.

Lloyds unveils strategic plan

In the strategic plan for 2018-2020, unveiled alongside the full year results, Lloyds said it expects capital generation of 170-200 bps per year and plans to deliver “progressive and sustainable ordinary dividends whilst maintaining the flexibility to return surplus capital to shareholders”.

The bank plans to invest more than £3bn in its strategic initiatives, including its digitisation and improving customer services. The new commitment marks a 40% increase on the previous strategy.

“The strategy outlined today will enable the group to deliver strong statutory profit growth supported by targeted asset growth in key segments, a resilient net interest margin, lower operating costs, strong asset quality and lower remediation costs, whilst delivering strong capital generation and sustainable and superior shareholder returns,” said chief executive António Horta-Osório.

The plan is to claw back the money spent on its investment by targeting operating costs of less than £8bn by 2020. Lloyds has already been making savings by closing down branches and axing jobs in response to the rise of online banking.   

The group expects to achieve a cost-income ratio in the “low 40s” as it exits 2020, including future remediation costs.

Lloyds tackles costs as PPI continues to weigh

The cost-income ratio in 2017 came to 46.8%, down 1.9 percentage points on the previous year. Operating costs rose 1% to £8.1bn, including MBNA costs of £135mln. Excluding MBNA, operating costs fell 1%. 

The company continued to be weighed down by litigation costs and in the fourth quarter set aside a further £600mln to cover compensation claims from those affected by the payment protection insurance (PPI) mis-selling scandal.

Lloyds took a total £1.65bn charge for PPI claims last year, compared to £1.0bn in 2016. 

Lloyds said it received more PPI complaints following a Financial Conduct Authority campaign that featured Arnold Schwarzenegger urging victims to put in claims before August 2019.

The overall bill for the scandal now stands at £18.7bn.

"The race to get claims in before the FCA‘s deadline in August 2019 could see the rate of new claims accelerate, although it does look as though the very worst of this is over – Lloyds is now providing for 11,000 claims per week, above the previous 9,000 and this looks more appropriate," said Neil Wilson, chief market analyst at ETX Capital.

"Lloyds has contacted, settled or provided for just over half (53%) of all the 16mln PPI policies that it sold since 2000. Not all PPI policies were mis-sold, but it’s reasonable to assume that there will have to be further provisions made as the deadline for claims approaches."

MBNA bolsters net income

Net income rose 5% to £17.4bn, including an 8% increase in net interest income, boosted by a £430bmln contribution from the MBNA credit card business.

The net interest margin increased by 15bps to 2.86%, including 7 bps  from MBNA, as lower deposit and wholesale funding costs offset continued pressure on asset margins.

Lloyds sees the net interest margin for 2018 rising to 2.90%, in line with the level reached in the fourth quarter.

The return on tangible equity (RoTE) increased 2.3pp to 8.9% and the group predicts this to rise to 14-15% from 2019.

Return to private hands

Under the leadership of Horta-Osório, Lloyds has had a successful turnaround following its government bailout during the height of the financial crisis in 2008. Last May, Lloyds returned to private hands after the government sold the rest of its take in the lender. 

“2017 has been a landmark year in which the group has made significant strategic progress and returned to full private ownership," Horta-Osório said.

"This is due to the hard work of all our people and I thank them for it."

He added: “We have delivered another year of strong financial performance with improved profit and returns on both a statutory and underlying basis and have now built the largest and top-rated digital bank in the UK. We are therefore well prepared to succeed in a digital world.”

Horta-Osorio was given an 11% pay rise, including bonuses, to £6.4mln in 2017, up from £5.8mln the previous year.

UK rate hike delivers boost

The Bank of England raised interest rates for the first time in a decade in November from 0.25% to 0.5% in a boost to the banks' profits. The central bank said it expects to raise rates twice more over three years.  

"For the banking industry, the prospect of rising rates after a decade of loose monetary policy is a bit like finally coming across an oasis in the middle of the desert," said Laith Khalaf, senior analyst at Hargreaves Lansdown.

"With more rate rises waiting in the wings, this looks like a tailwind that’s going to be blowing behind Lloyds for the foreseeable future."

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