Lloyds Banking Group has set aside £450 million to cover its potential customer compensation bill from a brewing scandal involving motor finance commissions.
There is mounting speculation that the vehicle loans industry could be embroiled in a mis-selling affair after the Financial Conduct Authority (FCA) announced last month that it was reviewing historical commission arrangements in the motor finance market.
Investor worries about the review have already forced Close Brothers, a merchant bank that provides vehicle loans, to cancel its dividend last week to bolster its balance sheet as it braces itself for the fallout from the FCA’s inquiry. Scrapping its shareholder payout has saved Close Brothers £100 million this year.
Lloyds in its annual results has become the first bank to make a formal provision for the regulator’s inquiry, which it said was to cover “estimates for costs and potential redress”. The company, which owns the Black Horse motor finance business, has the biggest exposure to car loans of any high street bank, with a loan book totalling £15.3 billion as of the end of last year.
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“There remains significant uncertainty as to the extent of any misconduct and customer loss, if any, the nature of any remediation action, if required, and its timing,” Lloyds said of its motor finance charge. “Hence the impact could materially differ from the provision, both higher or lower.”
The potential financial fallout from the watchdog’s work is highly uncertain, partly because the scope of its review is so wide. Its inquiry encompasses financing arrangements agreed between April 2007 and January 2021, when it banned discretionary commission structures on car loans.
Jefferies analysts have estimated that Lloyds may face a £1.8 billion hit as a result of the FCA’s review and analysts at RBC Capital Markets have pencilled-in a possible liability of £2 billion.
Lloyds, which is led by Charlie Nunn, its chief executive, disclosed the charge as it posted a 57 per cent jump in pre-tax profits last year to £7.5 billion, slightly higher than forecasts for £7.4 billion. Its figures for 2022 were restated to reflect accounting changes.
The hit from the motor finance provision was offset by a write-back of about £700 million that Lloyds enjoyed after the Barclay family last year repaid the £1.16 billion of debts that they owed the bank to regain control of the Daily Telegraph newspaper. The lender had previously written down the loans.
Nunn said: “That’s a recovery of course of losses that we incurred over the previous years. So it was a good outcome, I think, obviously for our shareholders but also for our customers in this context.”
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Like other lenders, Lloyds was boosted last year by higher interest rates, which allowed it to expand its margins. Its net interest margin, which measures the difference between what it charges for loans and pays on deposits, increased to 3.11 per cent from 2.94 per cent in 2022.
Nunn said: “The group delivered a robust financial performance, meeting our 2023 guidance, driven by income growth, cost discipline and strong asset quality.”
As a result, Lloyds announced that it would return £2 billion to stock market investors through a share buyback. This is on top of a final dividend of 1.84p a share that it declared for 2023, which is equivalent to £1.17 billion.
