Extra £2bn PPI penalty dashes Lloyds dividend hopes

PROSPECTS for early special dividends or share buybacks at Lloyds Banking Group are dim as the taxpayer-backed bank is set to unveil a fresh £2 billion hit for mis-selling­ loan insurance this week.

Lloyds Banking Group's chief executive Antonio Horta-Osorio is likely to disappointing shareholders who were hoping for a return on their investment this year. Picture: Getty Images

The provision for further payment protection insurance (PPI) claims will come with Lloyds’ annual financial results, and is expected to push the lender into the red for the final quarter of 2015.

Last year, group chief executive Antonio Horta-Osorio said the pace of the bank’s recovery from the financial crash meant there was scope for returns of capital to shareholders – the taxpayer stake is now under 10 per cent compared with more than 40 per cent at the high water mark.

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But he is expected to say at Thursday’s results meeting that the PPI hit, as well as Chancellor George Osborne’s postponement of a retail share offering in the bank because of stock market volatility, means there are unlikely to be special divis or buybacks in the near future.

Ian Gordon, banking analyst at Investec, said: “The Q4 PPI charge will be key. I’m forecasting at least £2bn. People expect a read across from higher Q4 charges already announced by other banks.

“Given what we know now, Lloyds’ share price got ahead of itself last summer, expecting special divis etc. I now don’t expect Lloyds to have had surplus capital at end-2015.”

The latest hit will take the lender’s cumulative PPI bill to £15.9bn. Barclays equity research said in a note that it was increasing its Lloyds’ Q4 PPI provision forecast to £2bn from £800 million.

“We continue to see Lloyds having the ability to return up to 40 per cent of its current market capitalisation to shareholders over the coming years, with recent regulatory clarifications supportive,” said Barclays. “However, the increased likelihood of higher PPI provisions in Q4 reduces near term dividend prospects.”

Gordon forecasts a Q4 loss for Lloyds of £465m, but an annual pre-tax profit of £1.69bn. He has pencilled in a final dividend for the bank of 1.5p, taking the full-year total to 2.25p.

Banks have ramped up PPI provisions because of a flurry of new claims following the government recently setting a deadline of 2018.

On its general financial performance, Horta-Osorio is expected to say that the bank has made more progress on its net interest margin – the dif­ference between what it charges lenders and pays on deposits.

He is also expected to play down recent volatility in banking stocks as Lloyds is the most UK-centric of the big five banks and prospects for the UK economy remain sound.

Royal Bank of Scotland will be in the red for the eighth year running when it posts its annual results on Friday, having told the market last month that it had set aside £2.5bn to cover past wrongdoing and writing down the value of its private banking arm.

RBS said it had put aside £500m for PPI claims in Q4 of 2015. The City expects the bank to post a £2.8bn loss for Q4, and a £2.5bn loss for the full year.

One analyst said: “We still think it could be 2019 before RBS makes a normalised profit. You are looking at a three-year period.

“For 2015, there are likely to be hefty losses in the corporate division as costs have been taken out. However, the performance of the retail and commercial banking arm will be more interesting because it is more representative of what RBS will look like.”