By Richard Partington RJPartington
Lloyds Banking Group Plc surged after the lender increased its dividend payout and indicated it may have reached the end of charges for wrongly sold payment protection insurance that cost it 4 billion pounds ($5.6 billion) last year.
The firm’s shares climbed as much as 11 percent, the biggest intraday gain since October 2011. Pretax profit for 2015, excluding PPI charges and other restructuring costs, rose 5 percent to 8.11 billion pounds, the London-based bank said in a statement on Thursday. That matched the average estimate of 14 analysts surveyed by Bloomberg.
Chief Executive Officer Antonio Horta-Osorio, 52, is making a virtue of the bank’s focus on lending to U.K. consumers and businesses, as other major European lenders are pruning investment banking operations amid concern over global economic growth and market volatility. He increased the dividend to 2.25 pence a share from 0.75 pence, added a 0.5 pence special payment, and set a higher target for the bank’s lending margins this year.
“This is real, it’s a clean story,” said Joseph Dickerson, an analyst at Jefferies International Ltd. in London with a buy rating on shares. “We don’t see any earnings downgrades which are going to be a theme for western-world banks globally. One of the major headwinds for this company has been PPI. That drag is now removed in our opinion.”
Horta-Osorio is eliminating jobs, closing branches and investing in technology as he says the firm can respond to persistently low interest rates and a potential slowdown in the British economy. The bank’s cost ratio improved in 2015, and the company forecast its loan impairments will remain muted this year.
“Our low risk, U.K.-focused business model continues to be a source of competitive advantage,” he said on a call with reporters. “The future of Lloyds and the future of the U.K. economy are inextricably linked.”
Half a decade of charges to compensate customers for wrongly sold PPI now total about 16 billion pounds, the most among U.K. lenders in Britain’s costliest banking scandal in the wake of the financial crisis. Lloyds said it had seen a fall in the number of claims over recent months and that it took a 2.1 billion-pound charge in the fourth quarter in light of a proposed deadline on fresh complaints of mid-2018 from the U.K.’s Financial Conduct Authority.
Asked whether the charge would be the bank’s final provision, Lloyds Chief Financial Officer George Culmer said on the call with journalists the amount “represents a very prudent assumption and, based on those assumptions, then yes, I do think that will be sufficient in terms of PPI.”
The stock climbed 9.3 percent to 68.01 pence at 10:14 a.m. in London, paring a 15 percent loss for the year before the results were announced. That’s still below the 73.6 pence average price the U.K. paid in its 20.5 billion-pound bailout of the bank at the height of the financial crisis. The government postponed the sale of its 9.2 percent stake in Lloyds last month amid turbulent market conditions, pledging to offer stock to consumers when the situation improves.
“We’re not immune and the market is down,” Culmer said on the call. “In terms of the year-to-date performance, we had on a relative basis outperformed the vast majority of our peers, and I like to think that’s a reflection on the clarity of our strategy and our ability to deliver.”
Net income including tax and the charges for PPI fell to 956 million pounds from 1.5 billion pounds a year earlier. While the firm said its underlying return on equity rose to 15 percent, the charges helped push the reported ROE to 1.5 percent. The bank targets an ROE of 13.5 percent to 15 percent by 2018.
Lloyds’ net interest margin, a measure of lending profitability, rose 23 basis points to 2.63 percent for the year, meeting the bank’s annual target. The company said it expects the measure to be about 2.7 percent in 2016.
Culmer said the bank could pull several “levers” to maintain profitability including tight control on costs. The bank, in the midst of a cost-reduction program it announced in 2014 that includes eliminating about 9,000 jobs and closing branches, narrowed its cost to income ratio to 49.3 percent from 49.8 percent in 2014.
Lloyds reported a common equity Tier 1 ratio, a measure of financial strength, of 13.9 percent before dividend payments, up from 12.8 percent at the end of 2014. It said it expects to generate around 200 basis points of capital annually, enabling it to maintain payouts to shareholders.