Bank of Scotland owner stung by PPI and mortgage costs

Despite the hit, Lloyds saw its first-half profits rise. Picture: John Devlin
Despite the hit, Lloyds saw its first-half profits rise. Picture: John Devlin
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Lloyds Banking Group has taken a £1.6 billion hit to cover ballooning compensation costs linked to the mis-selling of payment protection insurance (PPI) and to resolve its mistreatment of mortgage customers.

The Bank of Scotland owner said its PPI costs for the six months to 30 June swelled to £1.05 billion, having earmarked £350 million for claims in the first quarter, and provisioned for another £700m in the second quarter.

The group said it will help cover a jump in PPI claims from around 7,700 a week to 9,000 through to the claim deadline set for the end of August 2019, but brings its total bill for PPI misselling to more than £18bn.

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Chief financial officer George Culmer said it was “disappointing to be having to do it again” but did not take a further rise off the table.

“It will depend upon where those future volumes go,” he said.

Lloyds has also agreed to compensate about 590,000 mistreated mortgage customers, some of whom were mistakenly charged unaffordable fees after falling behind on payments between 2009 and 2016.

The Financial Conduct Authority said Lloyds expects to shell out £283m as part of the redress scheme, prompting the bank to set aside a further £155m in the half year to June 30.

Arrears repayment costs were bundled into a £540m provision meant to cover additional conduct issues including alleged mis-selling of packaged bank accounts.

Results today showed that Lloyds’ underlying profits rose 8 per cent to £4.5bn for the first six months of the year, with total income 4 per cent higher at £9.3bn.

Chief executive Antonio Horta-Osorio, who earlier this year was the subject of speculation over a possible move to rival HSBC, also pledged his continuing commitment to the group, saying: “I enjoy the job. I like the people here at Lloyds. I have no intention of going anywhere.”

It was the first set of results to be released by the bank since it was returned to private hands earlier this year.

Despite the PPI and mortgage arrears hit, statutory pre-tax profits grew 4 per cent to £2.5bn, and the group – which also owns Scottish Widows and Halifax – said its interim dividend would increase 18 per cent to 1p a share.

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Horta-Osorio said the hike in its payout to shareholders was “in line with our progressive and sustainable dividend policy”.

Against the backdrop of additional provisions for PPI mis-selling and redress for mortgage customers, he said: “When issues arise we have to take care of them”.

But he pointed out that it was impossible to draw a complete line under redress, comparing mis-selling and sometimes inappropriate behaviour to bad debts. “There will always be redress costs, just like impairment losses. In the retail business there will be mistakes that will be made.”

Horta-Osorio said that uncertainty remains over the ongoing EU exit negotiations, adding that he did not expect any outcome to be much clearer much before the 2019 deadline.

He also said that Lloyds wants to expand in the motor finance sector because its market share of 14 per cent was lower than its general retail financed market share of 21 per cent.

Lloyds – which rescued HBOS at the height of the financial crisis – is still in the process of paying victims of fraud at the hands of HBOS Reading staff between 2003 and 2007, having set aside £100m in the first quarter to deal with those compensation costs.

The corrupt financiers were jailed earlier this year for the £245m loans scam.

Lloyds is also set to fork out a further £200m to cover the rising costs of setting up its ring-fenced retail bank, meant to meet new UK rules designed to shield households and firms in the event of another banking crisis. Its ring-fenced operations are still set to open in 2019, Lloyds said.

Hargreaves Lansdown senior analyst Laith Khalaf said: “Overall this is a strong set of numbers from Lloyds, blighted, but not overshadowed, by misconduct costs.”

He added: “The bank’s fortunes are heavily reliant on the UK economy, which still hangs in the balance as we leave the European Union, though even if we are entering a period of economic weakness, Lloyds is at least doing so from a position of strength.”

Culmer said the group’s net interest margin – the difference between what it pays on deposits and charges on loans – would be about 2.85 per cent in the second half, up from 2.82 per cent for the first six months.

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