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Lloyds Banking Group has set aside an additional £700mn to cover the fallout from a probe and related court ruling on the historic mis-selling of car finance.
Lloyds announced the provision on Thursday alongside its fourth-quarter results, which showed statutory profits before tax of £824mn in the final quarter of the year, below market expectations of £1.2bn and down from £1.8bn the previous year.
The bank’s return on tangible equity — a key measure of profitability — was 12.3 per cent for the full year, below its target of 13 per cent. Quarterly revenues rose on the previous year to £4.4bn, slightly above expectations of £4.3bn.
It expects a return on tangible equity of about 13.5 per cent next year and has maintained its 2026 guidance. Shares in Lloyds rose 4 per cent in morning trading.
Lloyds already booked a £450mn provision last year to cover potential car finance mis-selling costs, after the Financial Conduct Authority began a probe of “discretionary commission arrangements”, where car dealerships received bigger commissions for charging higher interest rates on car finance loans.
The practice was banned by the FCA in 2021 and the current investigations and legal rulings relate to historical cases.
Analysts have increased their estimates of car finance mis-selling costs after the Court of Appeal ruled in October that it was unlawful for banks to pay any commission to car dealers if customers had not given informed consent.
“The decision by the Court of Appeal . . . seems to be at odds with 30 years of regulation, and that creates a problem in the minds of investors . . . not just for the financial services sector, but actually a broader investability question in the UK,” said Lloyds’ chief executive Charlie Nunn.
Banks have been pushing the government to intervene when the Supreme Court hears an appeal in April. But a panel of judges on Monday rejected the Treasury’s request to do so.
The car finance costs have been an unwelcome distraction as Lloyds enters the final stretch of a £4bn investment plan. It is aiming to modernise its operations and expand in markets such as wealth management that provide more predictable fee-based income and are less closely tied to interest rates.
Chief financial officer William Chalmers said the uncertainties about cost were related to the Supreme Court ruling, the structure of any compensation scheme and customer responses.
Lloyds said in its annual report that it continued “to receive complaints as well as claims . . . in respect of motor finance commissions”.
The company has pushed through cost cuts, including through the introduction of branch-sharing for three of its brands: Bank of Scotland, Halifax and Lloyds. It has also said it will close two offices, in Liverpool and Dunfermline, and is reviewing hundreds of jobs.
Nunn said on Thursday that Lloyds was unlikely to make “fundamental, transformational” acquisitions in the next two years and was focusing on organic growth instead.
Lloyds’ net interest margin — the difference between the interest it charges on loans and the rate it pays on customer deposits — rose to 2.97 per cent in the fourth quarter, up from 2.95 per cent the previous quarter.
The group said it remained “highly committed to shareholder distributions” despite the car finance provision, announcing plans for a 2.11 pence per share final dividend and an up to £1.7bn share buyback.
