Lloyds Banking Group (LLOY.L), the UK’s largest mortgage lender, announced a significant 20.4% decline in annual profit for 2024, falling short of market expectations. The bank attributed the drop to lower interest rates, a sluggish economic recovery, and increased provisions for potential motor finance payouts.
Table Content:
Profit Decline and Contributing Factors
Lloyds reported a pre-tax profit of £5.97 billion ($7.5 billion) for 2024, down from £7.5 billion in 2023. This result missed analyst forecasts of £6.39 billion. The bank cited several key factors contributing to this decline:
Interest Rate Cuts: Reduced interest rates compressed lending margins, impacting profitability. The net interest margin, the difference between savings and loan rates, decreased by 16 basis points to 2.95%. Underlying net interest income consequently fell by 7% to £12.8 billion. This aligns with the broader trend of the Bank of England cutting interest rates to stimulate the economy.
Economic Slowdown: The ongoing sluggishness in the UK’s economic recovery further dampened Lloyds’ performance.
Motor Finance Provisions: A substantial £700 million provision for potential remediation costs related to motor finance commission significantly impacted profitability. This adds to the £450 million provisioned in 2023, bringing the total to £1.15 billion. Lloyds acknowledges significant uncertainty remains regarding the final financial impact of these potential payouts. This provision stems from ongoing investigations into potential mis-selling practices within the motor finance industry.
Q4 Performance and Shareholder Returns
Despite the annual profit decline, Lloyds reported a 3.4% increase in net income for the fourth quarter of 2024, reaching £4.37 billion compared to the same period in the previous year. However, underlying profit for the quarter plummeted by 43.1% year-on-year to £993 million. Earnings per share were just 1 pence, a 41.2% decline compared to Q4 2023.
Despite the challenges, Lloyds announced a 15% increase in its dividend to 3.17 pence per share, including a full-year distribution of 2.11 pence. The bank also plans a share buyback program of up to £1.7 billion, returning excess capital to shareholders. This move signals confidence in the bank’s long-term prospects.
CEO Statement and Analyst Commentary
CEO Charlie Nunn highlighted the bank’s “robust financial performance” in 2024, noting income growth in the second half of the year driven by rising net interest margins and momentum in other income streams. He expressed optimism about the bank’s future performance.
Richard Hunter, head of markets at Interactive Investor, acknowledged the multiple challenges facing Lloyds but noted the bank’s resilience. He described Lloyds as a “longer-term play” supported by potential shareholder returns. However, he cautioned that the motor finance issue and the bank’s current valuation make the stock’s future performance uncertain.
Conclusion
Lloyds’ 2024 performance reflects the challenging economic environment and specific industry headwinds. While the bank demonstrated resilience in certain areas, the significant profit decline and ongoing uncertainty surrounding the motor finance provisions raise concerns. The increased dividend and share buyback program aim to appease shareholders, but the bank’s future performance remains subject to economic recovery and the resolution of the motor finance issue. The bank’s substantial mortgage portfolio also exposes it to potential risks in the UK housing market.
