Thursday 20 February 2020 9:32 am

Lloyds' 2019 profit sinks after £2.45bn PPI charge

Lloyds Banking Group revealed its 2019 profit sank 26 per cent today as it said it must pay out £2.45bn to settle payment protection insurance (PPI) claims.

Read more: Lloyds Bank announces 56 branch closures this year

The figures

Lloyds recorded profit before tax of £4.39bn, down 26 per cent on 2018, after the £2.45bn PPI charge.

Underlying profit slipped seven per cent to £7.5bn as Lloyds blamed a “challenging external market”.

Earnings per share dropped in line with profit, falling 36 per cent to 3.5p. But the bank upped its dividend five per cent to 3.37p per share, compared to 2018’s 3.21p.

The PPI hit also knocked Lloyds’ return on tangible equity to 7.8 per cent, down from last year’s 11.7 per cent. But the rate was 14.8 per cent on an underlying basis. Lloyds expects it to hit 12 to 13 per cent in 2020, down from 14 to 15 per cent.

The bank’s CET1 ratio, a key measure of a bank’s financial health, also slipped 0.1 percentage points to 13.8 per cent.

The bank’s share price rose 3.6 per cent to 57.77p in early trading as investors welcomed the numbers after a challenging 2019.

Why it’s interesting

Lloyds has already announced the closure of another 56 branches this year, having shuttered 151 in 2018 and 2019.

It also suspended its share buyback scheme last September after it took a £1.8bn PPI hit, and today declined to give a date . Earlier this week HSBC also ruled out any buybacks for the next two years as it overhauled its strategy.

Chief executive Antonio Horta-Osorio’s salary also fell £230,000 in an executive pay dispute with shareholders.

Royal Bank of Canada analyst Benjamin Toms said that Lloyds’ profit expectations miss was “not as bas as the headline number suggests” as it had been driven by remediation costs. Toms said the increase in the bank’s CET1 ratio was “slightly disappointing in our view,” adding: “driven by the news about this year’s buyback the operating environment remains tough”.

Jeffries’ Joseph Dickerson Lloyds’ guidance for 2020 was “in-line to better on the profit and loss elements with capital levels and CET1 targets better than expected”.

Goodbody analyst John Cronin described the results as a “slightly negative” update but “not as bad as we had expected”.“All in all, we see this as a slight miss for [the fourth quarter], an attempt at reassuring the market in relation to the outlook (neutral), and the fact that the capital ratio target range has not been upped suggests management is doing its best to keep investors warm,” Cronin added.


Lloyds said today that it will process its last PPI claim in 2020, but it is not sure how soon that will be after receiving 5m claims in the run up to the August 2019 deadline.

However, it has not made any extra provisions for 2020, and has now processed 60 per cent of claims.

“All of the data we have had … gives us some comfort that [£2.45bn] provision was the correct one,” chief financial officer William Chalmers said.


Lloyds also said it was also working with Sir Ross Cranston to implement the recommendations of his report into Lloyds’ HBOS Reading fraud.

“We have made good progress working on the recommendations,” Horta-Osorio said. “The group is fully committed to implementing all of Sir Ross’ recommendations and ensuring customers who were victims will have their claims assessed in an open and transparent manner.”

However, the bank said it was too early to put a figure on compensation.

Economic outlook

For 2020, Lloyds said it expects to hit a net interest margin of 2.75 to 2.8 per cent as the bank expects to benefit from an end to Brexit uncertainty under a majority government.

Horta-Osorio said: “The economic situation in the UK is very interesting. A very tough situation last year with the economy … finished the year with GDP growth of 1.1 per cent, which I think is a good outcome in spite of those uncertainties.”

“There’s a clearer sense of direction,” Horta-Osorio added. “Household spending power is rising two per cent a year reflecting stronger pay growth and low unemployment.

“We now see public confidence showing evidence of a greater recovery as Brexit uncertainty has reduced.”

Read more: German economy flatlines as eurozone growth hits seven-year low

However, Lloyds pointed to the lack of clarity over a Brexit trade deal and a low interest rate environment to explain its lower return on tangible equity target for the year.

But the government’s green light for HS2, and expectations of looser purse strings at the Treasury since Sajid Javid quit the chancellor role could help Lloyds, whose fortunes are heavily tied to the UK economy.

Horta-Osorio said: “We expect a significant government stimulus through infrastructure projects to be announced at the Budget next month.”

The British bank has already coughed up around £21bn on PPI claims ahead of last August’s deadline. 

What Lloyds said

Horta-Osorio said:

In 2019 the Group has continued to deliver for customers while making significant strategic progress and delivering a solid financial performance in a challenging external market. While it is disappointing that this was impacted by the additional PPI charge in the year, as a result of this performance, the Board has been able to recommend an increased total ordinary dividend of 3.37 pence per share.

Given our clear UK focus, our performance is inextricably linked to the health of the UK economy. During 2019, UK economic performance has remained resilient in the face of significant political and economic uncertainty, supported by record employment, low interest rates and rising real wages. Although uncertainty remains given the ongoing negotiation of international trade agreements, there is now a clearer sense of direction and we remain well placed to Help Britain Prosper, support our customers and deliver strong and sustainable returns for shareholders.