Lloyds to return billions to investors after profit hike

Bank of Scotland owner Lloyds Banking Group announced that it will return up to £4 billion to shareholders as it reported a 13 per cent increase in profits.

The group has been restructuring its Bank of Scotland network which has seen several branches closed. Picture: Louise Kerr

The banking giant posted pre-tax profits of £5.96 billion for 2018 compared with £5.28bn the previous year. On an underlying basis, profits rose 6 per cent to £8.07bn.

Lloyds hiked its shareholder dividend by 5 per cent to 3.21p per share and proposed a share buyback of up to £1.75bn, which represents a total return of up to £4bn to investors.

Operating costs were relatively steady in 2018 at £8.17bn and the bank now expects costs to be less than £8bn this year, which is 12 months ahead of its initial target.

Lloyds, which also owns the Scottish Widows investment business, expects to increase return on tangible equity by 14 per cent to 15 per cent this year with strong profits and lower charges as well as a net interest margin of about 2.9%.

Chief executive Antonio Horta-Osorio warned that the outlook for the UK economy is unclear, but that in the past year the economy has been “resilient”.

He said: “Over 2018 the UK economy has proven itself to be resilient, with record employment and continued GDP (gross domestic product) growth. Although the near-term outlook for the UK economy remains uncertain, our strategy continues to deliver for our customers.

“I remain confident that, with our unique business model and market-leading efficiency, we can continue to increase investment in customer propositions and grow our leading digital bank, whilst at the same time delivering strong financial performance and market-leading returns.”

He added that in 2018 the group “made significant progress” in its three-year strategic plan.

“2018 has been a year of strong strategic and financial delivery, as we build on our unique capabilities to transform the group to succeed in a digital world.

“We have made significant progress against the priorities we set out at the start of the year when we launched the third stage of our strategic plan, which is supported by investment of more than £3bn over the plan period,” he said.

Pay details have been released alongside Lloyds’ results and showed that Horta-Osorio saw his base salary rise 1.6 per cent in 2018 to £1.24 million. His total remuneration, however, fell 2.5 per cent to £6.27m from £6.43m.

Lloyds’ gender pay gap narrowed by 1.3 per cent last year to 31.5 per cent, which the bank claims is better than the average for financial services firms.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “Lloyds is still in good shape, despite what its share price performance might suggest. The bank has managed to grind some extra income out of a static loan book, and has controlled costs while investing to become more efficient.

“The big jump in profits can be almost all explained by falling charges for PPI compensation. To date PPI has cost Lloyds £19bn, and with the claims deadline looming in August, that’s going to be a millstone the bank will be glad to leave behind.

“That means more cash can flow through to shareholders, which is precisely what we’re seeing with an increased dividend and share buyback programme to boot.”

He added: “With such a high market share in key banking markets, the question is where Lloyds goes next. Part of Lloyds’ new strategy is to shuffle sideways into the financial planning and retirement market, and the bank is targeting one million new pension customers by the end of 2020.

“This is an ambitious target seeing as the government’s automatic enrolment programme has already prompted a round of company pension switches. However the strategy makes sense to give Lloyds some diversification from its core banking activities, and allow it to spread its wings in another market.”