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Lloyds Banking Group has set aside £450mn to cover the potential costs of a regulatory probe into whether customers were overcharged for car financing loans, which analysts have said could cost the industry up to £16bn.
The Financial Conduct Authority last month said it would investigate certain commissions charged on car financing deals dating back a decade, saying the agreements gave lenders and dealers incentives to increase the interest rate charged to customers.
Analysts say the probe could cost the industry billions of pounds. Lloyds owns Black Horse, the UK’s largest motor finance provider.
Lloyds announced the provision on Thursday alongside its fourth-quarter results. The UK’s largest high street lender said underlying pre-tax profits were £1.8bn in the final quarter of the year, slightly above analyst forecasts. Quarterly revenues fell year on year to £4.2bn, below estimates of £4.4bn.
For the full year, profits rose to £7.8bn, matching expectations, as the bank benefited from from higher interest rates that have boosted the entire sector.
Shares in Lloyds were down 0.5 per cent in early trading and have fallen about 10 per cent since the start of the year, partly because of worries about its ownership of Black Horse.
Despite the unexpected £450mn provision for future costs linked to the FCA probe, the bank recorded an impairment credit of £541mn in the fourth quarter, thanks in part to a windfall of about £700mn from the repayment of debt owed by the Telegraph media group and the improved economic outlook.
Lloyds pushed the group into administration last year over £1.1bn of unpaid debt owed by the Barclay family. But the bank was repaid when the Barclays secured financial backing from Abu Dhabi-backed RedBird IMI in December.
Analysts at RBC Capital Markets have estimated the car financing problems, which have echoes of the payment protection insurance scandal, could cost Lloyds £2.5bn, more than any of its rivals.
The regulatory probe comes as UK banks struggle with low valuations, an issue that prompted chancellor Jeremy Hunt to call in industry executives to discuss how to boost share prices.
Some bank executives have raised concerns that increased regulatory scrutiny of how customers are treated could depress share prices further.
Lloyds’ chief executive Charlie Nunn welcomed the regulator’s review but warned that “more certainty around the regulatory environment in which we operate” was “one of the big questions on our investors’ minds”, alongside stability and confidence in the national economy.
The bank said the £450mn provision included operational and legal costs, as well as potential customer redress. However, it said there remained “significant uncertainty” about “the extent of any misconduct and customer loss” as well as the nature of “remediation action, if required, and its timing”, adding that the costs could therefore end up being materially higher or lower.
Experts said it was too early to predict the hit from the regulatory probe but estimates from banks including Jefferies, JPMorgan, HSBC, RBC Capital Markets and Shore Capital range from £6bn to £16bn for the entire UK banking industry.
Like other retail banks, Lloyds has benefited from the Bank of England’s rate increases over the past two years. However, this windfall is widely believed to have peaked, with the BoE expected to start cutting interest rates this year.
Customer deposits fell by 1 per cent to £471bn in 2022, as people spent more and moved savings to take advantage of higher rates. Lloyds, which is seen as a bellwether for the UK economy, said mortgage arrears had been “relatively stable” despite a slight increase at the start of the year, mainly linked to loans given between 2006 and 2008.
The bank said it would buy back up to £2bn of its shares and pay a final ordinary dividend of 1.84 pence per share.
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