Lloyds Banking Group set aside another £1.65 billion to compensate the victims of the PPI scandal during 2017, on the back of increased customer complaints.
However, there was good news for investors as profits and dividends increased compared to the previous year.
The bank, which includes the Bank of Scotland, Halifax and Lloyds Bank brands, says the launch of the Financial Conduct Authority (FCA) PPI advertising campaign has helped increased the number of complaints from 9,000 to 11,000 per week.
The FCA says it will not permit any more claims regarding the historic mis-selling of PPI after 29 August 2019.
Despite the PPI setback, Lloyds Banking Group reported a pre-tax profit of £5.3 billion for 2017, 24% higher than the previous year.
It raised the dividends it pays to investors by 20% to 3.05p per share and has also announced plans to spend up to £1 billion buying back shares.
The cost of complaints
In total, the PPI scandal has already cost Lloyds almost £19 billion, although £2.4 billion of this has yet to be paid out. In the year to December 2017 a total of £1.5 billion was paid out to those who were mis-sold the product.
Lloyds estimates that it sold about 16 million PPI policies but that only 53% of customers have been contacted or had a claim settled. It says while it expects to receive 11,000 complaints every week between now and the August 2019 deadline, but that further advertising campaigns and increased use of claims management companies could see this figure rise.
The bank says it expects its costs to rise by around £200 million for every additional 1,000 customers complaints per week above the 11,000 average expected in the next 18 months.
Lloyds also paid out £283 million to mortgage customers who were in financial difficulty but not given enough support by the bank.
“Additional PPI provision is an unwelcome development”
Richard Hunter, head of markets at interactive investor (Moneywise’s parent company), says: “Lloyds looks set to continue its simple, focused path with a strategic review which builds on its success over recent years.
“With the shackles of the government share stake now removed, Lloyds has been able to concentrate fully on financial growth and repair. Pre-tax profits are significantly higher, albeit slightly below expectations, whilst the majority of key metrics display strong improvement.
“Waiting in the wings is a dividend yield of 4% (projected 6.6%) which may return the bank to the halcyon days of being an investor’s core portfolio essential, given the generous and stable dividend.
“However, some potential obstacles need to be addressed. The slight uptick in impairments comes at a time when Lloyds finds itself in an economic sweet spot and therefore needs to be contained, whilst the additional PPI provision – a race surely in its final furlong – is an unwelcome development.”
Helal Miah, investment research analyst at The Share Centre, adds: “Despite the fact that Lloyds Bank’s full year results overall did fall short of analyst expectations. there are many positives to take away leading to the shares trading higher, up by roughly 2% at the open.
“We are seeing a bank heading in the right direction after a decade long process of restructuring following the financial crisis. The bank is no longer in government hands and income investors will be particularly pleased to see the dividend hiked by a further 20% to 3.05p as well as the shares to be supported by a £1bn share buyback programme.”
Should you buy shares in Lloyds?
Laith Khalaf, Senior Analyst, Hargreaves Lansdown says: “A shock to the domestic economy would be keenly felt by the bank. However, the combination of the dividend and the new share buyback scheme means shareholders are getting a pretty tasty 6% return on their investment, which offers some compensation for the chance that Brexit may unfold in a messy manner.”
Mr Hunter says: “The general market view of the shares as a buy is almost certain to remain intact after these results.”
Mr Miah says: “These are a good set of results for one of the lower risk banks in the UK. We would not discourage income seeking investors from looking at the group, but still believe some uncertainties remain in the banking sector. We therefore continue to recommend Lloyds as a ‘hold’ for medium risk investors.”