Lloyds shares leap despite profit drop and fresh £700m motor finance costs

Bank of Scotland owner Lloyds Banking Group has set aside some £1.2 billion so far to cover potential compensation costs for motor finance commission arrangements, as the group’s annual profit fell by a fifth.

Despite those setbacks, market reaction to the results was positive with analysts pointing to a robust underlying performance at the banking heavyweight, pushing shares in the FTSE-100 firm sharply higher. By 1pm they were up 7.4 per cent at about 67.5p.

An additional £700 million provision taken in the final three months of the year adds to the £450m already confirmed last year. The group is exposed to the market through its brand Black Horse, which is one of the biggest car finance providers in the UK.

The landmark Scottish headquarters of Bank of Scotland/Lloyds on The Mound, Edinburgh.

So-called hidden commission arrangements between car finance providers and borrowers are the subject of a detailed review by the Financial Conduct Authority watchdog, as well as landmark court cases. It could result in substantial payouts for those car buyers affected, in echoes of the PPI scandal.

In its annual results, Lloyds, which also owns Scottish Widows, reported a pre-tax profit of £6bn for 2024, a fifth lower than the £7.5bn generated the prior year, and coming in shy of analysts’ expectations on that measure. Earnings were weighed down by the group generating less income last year, spending more on business expenses, and putting more cash aside.

The group said the extra £700m provision for motor finance was taken in light of a court judgment on the issue in October. That found it was unlawful for car dealers to receive commission on motor finance from lenders without a customer’s informed consent. The decision opened the door for a potential fresh wave of complaints from consumers who think they may have been mis-sold car finance in previous years.

Lloyds’ chief executive Charlie Nunn said investors were “concerned” about the issue because the ruling “seems to be at odds with 30 years of regulation, and that creates a problem in the minds of investors”.

Among its banking peers, Lloyds is the most exposed to the UK, and mortgage lending in particular.

He added: “Clearly significant uncertainty remains around the final financial impact. In this context we welcome the expedited Supreme Court hearing at the beginning of April.”

He stressed that the bank was comfortable with the amount it had set aside for the issue, which was its “best estimate” of what the impact could be.

At the same time, Lloyds, which also owns the Halifax brand, revealed it made £1.2bn worth of cost savings last year. This was achieved through changes such as automating more of its services, including lending decisions, as well as saving money from closing branches and a number of its head office functions. The group is planning to shut more high street branches over the next year, and recently outlined plans to shut a support centre in Dunfermline as staff work from home or other locations.

Meanwhile, the lending giant acknowledged that “volatility” in the mortgage market had affected its customers.

“I know there’s been volatility for customers which has been difficult,” Nunn said, adding that it may have been driven by “geopolitical instability and some of the changes in the US” which ultimately feeds through to how mortgages are priced. “We feel very good about how our customers are responding to the very difficult moment when their mortgage rates go up,” he added.

The bank is predicting that house prices will rise by 2.1 per cent over the course of 2025, higher than previous estimates, and is anticipating a further two interest rate cuts this year following February’s reduction.

John Moore, senior investment manager at wealth firm RBC Brewin Dolphin, said: “Lloyds is rounding off the major UK banks’ results with lower numbers than the market expected. Among its peers, Lloyds is the most exposed to the UK, and mortgage lending in particular. Motor finance provisions, falling interest rates and a sluggish housing market were always going to be immediate challenges.

“However, the core of Lloyds remains in a good position, with a robust banking business, capacity exiting the traditional lending market through consolidation, and the bank’s guidance intact.

“But, as ever with Lloyds, the reasonable question to ask is: what’s next? The big opportunity is in what the bank refers to as ‘other’ income, which now accounts for £5.6bn. Moves with Scottish Widows and the acquisition of Embark are positive, but aren’t of a scale that will move the needle - investors may well be looking for news on this front in future updates.”

Matt Britzman, senior equity analyst at investment platform Hargreaves Lansdown, said Lloyds had capped off a solid year with a “clouded” fourth-quarter result, after setting aside the additional provision for potential charges related to the motor finance probe.

He noted: “While you could argue the provision is overly cautious, Lloyds holds the largest exposure of any major UK bank, and the outcome remains uncertain. Despite this, the stock is up over 40 per cent in the past year, reflecting a solid banking outlook and robust performance.

“Beneath the surface, Lloyds is delivering strong results. Excluding the motor finance charge, fourth-quarter figures exceeded expectations, thanks to borrowers performing better than anticipated. Remarkably, Lloyds has managed to improve its loan quality over the course of the year, defying fears that borrowers would buckle under the pressure of persistent inflation.

“Markets have done well to look beyond the noise and recognise the impressive underlying performance. There’s more than meets the eye in this year-end story and having returned around 10 per cent of its current market cap to investors over 2024, there’s been plenty to cheer,” he added.

AJ Bell investment director Russ Mould said: “Lloyds will be hoping for a Goldilocks scenario where rates stay high enough to support margins and the economy remains in decent enough shape that the level of bad debts doesn’t start to escalate from here.”

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