Lloyds Bank: A Look at the Annual Results and Potential for Shareholder Returns

Lloyds Banking Group has encountered some challenges in late 2023, but despite this, the City remains optimistic about the future of the bank. The weak performance in the fourth quarter and a charge of £450 million related to car finance had an initial impact on Lloyds’ shares. However, investors have remained steady, focusing on the potential for increased shareholder returns.

The concerns leading to Lloyds’ initial share fall include higher operating lease depreciation and a drop in net interest margin, falling below 3% due to mortgage pricing and deposit mix headwinds. Additionally, the bank set aside £450 million after the announcement of a review by the Financial Conduct Authority (FCA) into motor finance commission arrangements dating back to 2007. Since the FCA announcement in January, Lloyds’ shares have decreased by 10%, amounting to £3 billion.

Despite these concerns, Lloyds’ annual results also included positive aspects that offset the challenges. This includes a provision write-back due to the repayment of loans by a single client, as well as a brighter economic outlook. As a result, the impairments provision for the year improved by 80% to £308 million, and underlying profits increased by 11% to £7.8 billion. Lloyds’ net income also improved by 3% to £17.9 billion, despite a 5% rise in operating costs to £9.1 billion.

Looking ahead, Lloyds is aiming for a floor for the net interest margin at 2.90% and operating costs of around £9.3 billion. The bank also intends to buy back another £2 billion of its shares and aims to reduce its capital buffer to 13.5%. This move is expected to benefit shareholders by raising the potential for an increase in the dividend per share. The ultimate goal is to have a capital requirement of 13% by the end of 2026, which could allow for an additional £1.6 billion of shareholder distributions.

In 2023, Lloyds returned £3.8 billion in capital to shareholders, representing about 14% of the bank’s market value. This included a full-year dividend of 1.84p per share, up from 1.60p the year before. The total dividend for the year of 2.76p is up 15% on the previous year, in line with the group’s “progressive and sustainable” dividend policy. This has contributed to a positive outlook for Lloyds shares, with analysts predicting potential upsides despite the uncertainty caused by the FCA motor finance review.

Despite the challenges faced in Q4, Lloyds’ guidance implies only a modest earnings downgrade to pre-provision profits, which, combined with the share buyback, should moderate potential share weakness. This has led to varying price targets from analysts at UBS, Jefferies, and Morgan Stanley.

As investors continue to monitor Lloyds’ performance, it is crucial to consider the information provided in this article for informational purposes only and not as personal investment advice. The value of investments can fluctuate, and it is essential to seek advice from a qualified investment adviser if in doubt. For a comprehensive performance analysis, refer to the company or index summary page on the interactive investor website.