(Bloomberg) -- Lloyds Banking Group Plc set aside £450 million ($570 million) to pay for possible compensation and other costs linked to car finance, becoming the first major bank to put a price tag on the UK regulator’s review.

The bank also pledged to buy back as much as £2 billion of its shares and raised its dividend as fourth-quarter earnings slightly beat analyst expectations. London-listed shares in Lloyds rebounded from an earlier decline and were trading 6.3% higher at 2:52 p.m.

The Financial Conduct Authority is looking into whether motor loan deals were sold and priced in a way that treated customers fairly. Lloyds is the biggest provider of car finance, with £15.3 billion of motor loans at the end of 2023. 

Lloyds said there was still “significant uncertainty as to the extent of misconduct and customer loss” and the cost could change. Analysts have a wide range of estimates for the ultimate impact of the FCA review, with Jefferies making “very conservative assumptions” of £1.8 billion for Lloyds’s exposure. 

“So far we’ve had one financial ombudsman judgment and we’ve had a series of county court cases, most of which have decided in our favor,” Chief Financial Officer William Chalmers said in a media call. “We’ve taken a provision in the context of welcoming the review to get clarity.”

He added the provision covers operational and legal expenses for the review, as well as a variety of potential redress scenarios. He said the total was “our best estimate based upon all of the facts that are available at our disposal.”

What Bloomberg Intelligence Says

Lloyds Banking Group’s £450 million provision for a UK car-finance probe reflects financial strength that’s enabling it to get ahead of the curve, yet the potential for more legal charges may be a near-term drag on sentiment. The lender’s expected 13% return on tangible equity (ROTE) in 2024 — vs. 11.6% consensus — and £2 billion in share buybacks signal a solid outlook, with guidance for a 2.9%-plus net interest margin and £9.3 billion in costs largely in line with consensus.

— Tomasz Noetzel, senior banks analyst

Pretax profit rose to £1.78 billion in the fourth quarter, above a Bloomberg-compiled estimate (£1.73 billion). Net interest margins dropped slightly to 2.98%, compared to 3.22% in the same period last year, as the boost from higher interest rates gives way to growing competition for savers and borrowers. 

Loans and advances at Britain’s biggest mortgage lender fell about £5.2 billion to £449.7 billion.

Analysts at Barclays said the results were “mixed, but ultimately good.” The outlook for net interest margins is “good enough, £2 billion buyback a big relief, and a reduced target 13% CET1 ratio is clear positive,” they wrote in a research note. 

Lloyds said its results were helped by a “significant write-back,” without disclosing the amount or the borrower. The bank received £1.2 billion from the owners of the Telegraph in December, after a takeover bid for the newspaper group resolved its longstanding debts with the bank. Lloyds had previously written off the majority of the loan. 

Better Outlook

Lloyds, which is considered a bellwether for the UK economy, said it was on track to meet its goals for 2024 and 2026. The UK entered a shallow recession in late 2023, as the Bank of England weighs when to cut interest rates from their current high of 5.25% to deliver relief to borrowers at the expense of banking margins. 

Earlier this year, the UK government met with British banks to discuss reasons for their valuations lagging far behind those of rivals in the US and elsewhere. Lloyds stock was trading at just 0.6% of the bank’s book value last week, implying investors think the business is worth less than its assets.

The results come after British retail banking rival NatWest Group Plc said its revenue was likely to drop this year as it faces pressure from an expected fall in interest rates. 

Other Key Figures:

  • Operating costs of £9.1 billion in 2023, up 5% compared to the prior year. Lloyds expects this to rise to £9.3 billion in 2024.
  • Lloyds assumes house prices will fall 2.2% this year, better than the previous assumption of 2.4% it made in September. Expects unemployment to rise to 5.2%.
  • Staff bonus pool was £384 million, down from £446 million on a year ago due to the bank shifting more of staffers’ compensation into base salary rather than variable pay, while also reflecting impact of FCA car finance review.

(Updates with share price recovery in second paragraph, analyst comment in ninth paragraph.)

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