Bank of Scotland owner Lloyds Banking Group has become the latest big lender to report “eye-watering” annual profits as it benefits from higher interest rates but its exposure to historic car finance selling practices could mean a bumpy road ahead.

Lloyds said it made a pre-tax profit of £7.5 billion during 2023, up by 57 per cent compared with the £4.8bn generated in 2022, and coming in ahead of analysts’ expectations. It marks record high earnings for the group, which ranks as Britain’s biggest mortgage lender and includes Halifax and Scottish Widows among its other brands.

Last week, Royal Bank of Scotland parent NatWest Group revealed an operating pre-tax profit of £6.2bn for 2023, higher than analysts had estimated and the strongest profit haul since just before the global financial crisis in 2007. On Wednesday, HSBC said its pre-tax profit surged by nearly 80 per cent to top $30.3bn (£24bn) in 2023, while rival Barclays recently unveiled full-year pre-tax profits of £6.6bn, though that was down marginally on the year before.

The traditional headquarters of the Bank of Scotland on The Mound, Edinburgh, and now home to the Scottish HQ for Lloyds Banking Group.

Trade union officials rounded on the big banks saying they have been allowed to “cash in” on higher interest rates after a “monster” government tax break. The TUC claimed Rishi Sunak’s decision to cut the banking surcharge when he was Chancellor would cost the UK £10bn over the next five years.

TUC general secretary Paul Nowak said: “These eye-watering profits will be met with disbelief – especially when millions are struggling to make ends meet. The government has allowed banks to cash in on sky-high interest rates and to benefit from people’s mortgage misery. Rishi Sunak’s decision to slash the banking surcharge has been a huge gift to the City.”

Lloyds’ bumper profit haul was achieved as its underlying net interest income, the difference between what it makes from loans and pays out for deposits, jumped by 5 per cent to £13.8bn. However, the banking group is also in the spotlight as one of the biggest motor finance providers in the UK through its Black Horse brand. It has set aside a remediation charge of £450 million to cover potential costs related to the financial regulator’s probe into historic car finance selling practices.

The Financial Conduct Authority (FCA) last month opened a review into whether people could be owed compensation for being charged too much for car loans, following a high number of complaints. The regulator said that if it finds that consumers have lost out because of widespread misconduct, it will make sure they get compensation in an orderly and efficient way.

Lloyds Banking Group has become the latest big lender to deliver bumper multi-billion-pound annual profits.

Lloyds said it was too early to say what the scale of the redress could be, and that it welcomed the watchdog’s investigation to get clarity. “There remains significant uncertainty as to the extent of any misconduct and customer loss, if any, the nature of any remediation action, if required, and its timing,” the bank added.

The £450m provision, which includes estimates for costs and potential compensation, could be more or less once the FCA completes its probe. But Lloyds’ chief financial officer, William Chalmers, stressed that the car finance probe was “not like prior remediations”, when asked whether he thought it showed any similarities to the PPI mis-selling scandal. The group had to pay billions of pounds to compensate customers who were mis-sold payment protection insurance from the mid-1990s.

Matt Britzman, equity analyst at investment platform Hargreaves Lansdown, said Lloyds had delivered a “decent set of results” and a confident outlook for the medium-term. He added: “On the FCA review, the £450m provision was less than some had feared but there will be question marks around how Lloyds has come to that figure. Lloyds has been honest in saying the outcome of the review is largely unknown. What we do know is that Lloyds is one of the more exposed banks should the FCA deem there was misconduct and customer loss.”

Max Georgiou, an analyst at Third Bridge, noted: “The FCA motor finance review could present challenges in the future. Lloyds is thought to have the largest exposure across UK peers and could present a challenge in return on tangible equity (RoTE) targets moving forward.”

Lloyds Banking Group’s chief executive Charlie Nunn said the bank was “focused on proactively supporting people and businesses through persistent cost-of-living pressures” last year. It reached out to about 7.5 million customers to help with their financial situations over 2023. More customers moved money into accounts with higher interest on their savings last year, but Lloyds said that trend slowed slightly during the final months of the year. Those with money to squirrel away have been benefiting from cash savings rates that are now beating the rate of inflation.

Nunn told investors: “2023 was a critical year in building towards the ambitious strategy we announced two years ago, as we look to grow our business and deepen relationships with our customers. As demonstrated in our recent strategic seminars, we have made significant progress and are on track to meet our 2024 and 2026 strategic outcomes, helping us build towards higher and more sustainable returns.”

Meanwhile, Lloyds announced that Alan Dickinson was to step down as deputy chair and non-executive director at its 2024 annual general meeting. Former Santander UK boss Nathan Bostock is joining Lloyds as a non-executive director. Prior to joining Santander, Bostock was an executive director and group chief financial officer of Royal Bank of Scotland and previously held the post of chief risk officer at RBS. Lloyds’ shares were up about 4 per cent in afternoon trade.

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Bank of Scotland owner Lloyds books 'eye-watering' profits but sets aside £450m for car financing probe: reaction

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