Lloyds Banking Group PLC (LON:LLOY) set aside a further £550mln in the second quarter to cover claims arising out of the payment protection insurance (PPI) mis-selling scandal.
The bank said the additional provision was driven by a significant increase in complaints received ahead of the Financial Conduct Authority’s August 29 deadline for making claims.
The group had earmarked an extra £100mln for PPI claims in the first quarter, taking total provisions for the first half to £650mln.
“Given the below the line charges, including PPI, in 2019 we now expect capital build to be at the lower end of our ongoing 170 to 200 basis points range, and for return on tangible equity to be around 12%, the bank warned.
Profits drop in first half
The PPI charge led to a 7% drop in statutory pre-tax profit to £2.8bn for the six months to the end of June.
Profit was also dented by a £140mln charge to settle a dispute over a £100bn fund management contract with Standard Life Aberdeen.
Restructuring costs fell to £182mln from £377mln a year ago when it incurred charges for the ring-fencing of retail operations and the integration of credit card business MBNA.
Net income fell 2% to £8.8bn in the first half, reflecting lower interest-earning banking assets.
The net interest margin – the difference between money earned on loans and money paid on deposits – edged down 3 basis points to 2.90% amid tough competition in mortgage lending.
Lloyds expects the net interest margin to remain at 2.90% for the year.
The common equity tier 1 capital ratio – a key measure of financial strength – dipped 0.5 percentage points to 14.0% in the first half after dividends and PPI.
The lender raised its interim dividend by 5% to 1.12p.
Economic uncertainty could impact the outlook, says Lloyds
“The group has continued to make strong strategic progress during the first half of 2019 and delivered a good financial performance with market leading efficiency and returns,” said chief executive Antonio Horta-Osorio.
“The economy has remained resilient although economic uncertainty has led to some softening in business confidence as well as in international economic indicators.
“In this environment our strategy continues to be the right one and we are well placed to support our customers and continue to help Britain prosper.”
Lloyds said its long-term targets beyond 2019 remain unchanged, although continued economic uncertainty could impact the outlook.
Shares fell 3.6% to 53p in morning trading.
AJ Bell investment director Russ Mould said: “Management will want to draw a line under the PPI issue so the bank’s financial results can start to reflect its day-to-day business rather than endless ‘one-off’ items associated with compensation payments.
“There is likely to be a last minute rush from people putting in PPI claims and so we won’t have heard the last of the issue until it reports full year results.”