In a recent financial update, Lloyds Bank, the UK's largest mortgage lender, announced a substantial 20.4% drop in its annual profit for 2024, falling short of market expectations. The bank reported a pre-tax profit of £5.97 billion, down from £7.5 billion in 2023. Analysts had anticipated a slightly higher figure of £6.39 billion. The decline was attributed to several factors, including the impact of interest rate cuts on lending margins and the sluggish economic recovery in Britain. Additionally, the bank set aside additional funds for potential payouts related to motor finance issues, further impacting its financial performance.
The challenges faced by Lloyds were multifaceted. The net interest margin, which measures the difference between savings and loan rates, decreased by 16 basis points to 2.95%. This reduction contributed to a 7% fall in underlying net interest income to £12.8 billion. In the fourth quarter alone, pre-tax profit plummeted by 55% to £824 million, compared to £1.8 billion in the previous quarter. Despite these setbacks, the bank managed to report a 3.4% increase in net income for the fourth quarter of fiscal 2024, reaching £4.37 billion compared to the same period in 2023.
A significant portion of the profit decline can be attributed to the ongoing motor finance scandal. Lloyds has allocated £700 million in provisions for potential remediation costs, adding to the £450 million provided in 2023. This brings the total provision to £1.15 billion, reflecting the bank's best estimate of the potential financial impact. However, considerable uncertainty remains regarding the final costs. Despite these challenges, Lloyds has opted to increase its dividend by 15% to 3.17 pence and plans to implement a share buyback program worth up to £1.7 billion, aiming to return excess capital to shareholders.
Charlie Nunn, the Chief Executive, highlighted the bank's resilient performance in the latter half of the year, noting growth in income supported by rising banking net interest margins and momentum in other income streams. Lloyds also reported an increase in loans and advances to customers by £10.2 billion, totaling £459.9 billion, with significant growth in UK mortgages. Customer deposits saw a substantial rise of £11.3 billion, reaching £482.7 billion.
Despite facing multiple challenges, Lloyds has demonstrated resilience. Shares have experienced a positive revaluation, increasing by 47% over the past year, significantly outperforming the broader FTSE 100 index, which rose by 13%. Richard Hunter, head of markets at Interactive Investor, noted that while Lloyds faces headwinds, it remains a strong long-term investment opportunity, bolstered by generous shareholder returns. However, the motor finance issue and the higher valuation attached to the recent share price gain have led to a market consensus of holding the stock for now.