LLOYDS is set to restore its dividend this week nearly seven years after a state bailout but the banking giant is expected to take an extra £400 million to £500m hit for mis-selling.
A “token” payout of 0.5p to 1p is expected, but is seen by the City as psychologically significant in positioning the bank for solid growth as the UK government sells down its remaining 25 per cent stake further.
It comes amid mounting speculation that rival Royal Bank of Scotland is likely to write down the value of its partly demerged American bank Citizens by about £4 billion ($6.2bn) when it reports results on Thursday, 24 hours before Lloyds.
The City’s consensus expectation for Lloyds’ underlying pre-tax profit in 2014 is £7.8bn, up from £6.2bn in 2013. However, after putting aside hundreds of millions more in the final quarter of last year to compensate customers mis-sold payment protection insurance (PPI), reported statutory profits of about £2bn are expected.
“I think it will have a sizeable impact on stock market sentiment towards Lloyds if the divi is restored,” one analyst said.
“It’s been what everyone has been thinking about for a long time.
“There will be huge disappointment if it doesn’t happen. And much more than relief if it does happen. It would be important because it sets the scene for investors to believe Lloyds would be well on the way to becoming a safe, cash-generative, boring bank again with a decent dividend yield.”
The group, owner of Halifax and Bank of Scotland, was banned by the European Commission from paying dividends in return for its £20bn taxpayer bailout following its disastrous acquisition of HBOS in the financial crash.
Lloyds, the most UK-centric of the Big Five banks, with 34 per cent of current accounts and 30 per cent of mortgages, is expected to ride the continuing economic recovery.
It is expected to say its net interest margin – the key difference between interest charged for loans and paid on deposits – improved to 2.45 per cent in 2014 from 2.12 per cent the previous year.
The extra PPI provision, however, will take its total set aside to £11.8bn. Deutsche Bank also forecasts that Lloyds will have to take further provisions on the long-running scandal of up to £1.5bn over 2015-16.
Simon Willis, banking analyst at broker Daniel Stewart, said: “Lloyds remains more vulnerable to further PPI provisions.
“They pushed harder on bancassurance in the late 1990s and early 2000s than most. The issue remains more of a running sore for them than historical.”
The City expects RBS boss Ross McEwan to report a pre-tax profit of £4.1bn this week, a big improvement on the headline £8.2bn loss in 2013.
However, the expected write- down of goodwill for Citizens – although strictly an accounting issue that will not affect RBS’s capital position – would effectively wipe out that headline profit.
Both banks are expected to bring forward much of their remuneration reports with the results announcements, indicating the scale of bonuses that top staff received for 2014.
One source said: “It would not surprise me if this included what has become the stock question of how many senior or key bankers earned more than £1m over the year.”
At Lloyds, Antonio Horta-Osorio’s annual bonus is expected to come in at just under £1m, one source said. Ross McEwan, his counterpart at RBS, has voluntarily foregone a bonus for 2014.
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