Lloyds: Q4 2024 and F2024 Results Negatively Affected by Motor Finance Provisions; Structural Hedge Revenues to Boost Return on Tangible Equity by F2026

On 20 February 2025, Lloyds Banking Group (Lloyds or the Group) reported a net attributable profit of GBP 700 million in Q4 2024, significantly down from GBP 1.2 billion in Q4 2023, largely reflecting higher remediation costs, including GBP 700 million in provisions for motor finance, as well as higher loan impairment charges year over year (YOY) following provisions reversals in F2023.

For F2024, net attributable income totalled GBP 4,477 million, down 19% from GBP 5,518 in F2023, affected by lower net interest income (NII) YOY in addition to higher operating costs and the motor finance provision. As a result, the return on tangible equity (ROTE) was 12.3% in F2024 compared with 15.8% in F2023. Excluding the motor finance provisions, the ROTE was 14.0% in F2024. Morningstar DBRS considers Lloyds' F2024 results to be still strong, and the Group's capital remains solid with a CET1 ratio of 13.5% at the end of F2024, in line with 13.7% the year before.

The Group announced GBP 700 million in additional provisions to cover potential redress in light of the Court of Appeal decision taken in October 2024 on the motor finance commissions for Wrench, Johnson, and Hopcraft. As a result, total motor finance provisions to cover potential operational and legal expenses and redress costs totalled GBP 1,150 million, including the GBP 450 million provision provided in Q4 2023, which is related to the separate Financial Conduct Authority (FCA) review on motor finance discretionary commissions initiated in January 2024.

The potential negative impact of the FCA review and the Court of Appeal's rulings associated with motor financing commissions remains highly uncertain in Morningstar DBRS' view. We expect further clarity from the Court of Appeal case in early April 2025. Furthermore, the FCA plans to announce the next steps about its investigation of motor finance discretionary commissions in May. Morningstar DBRS still expects that the financial impact of these court rulings and the FCA review will be spread over time. Moreover, Lloyds took steps in provisioning for this matter in F2024 and F2023, and the Group has a strong earnings capacity and capital position to absorb additional provisions if required. Lloyds already has expertise in dealing with remediation, given its experience with payment protection insurance.

Besides the update on the motor finance issue, the Group also updated the market on the second phase of its strategic objectives for 2025-26. Lloyds expects revenues to grow significantly in the next two years, supported by a higher contribution from the structural hedge. As a result, the Group is guiding for a higher NII in F2025 than in F2024 and for the ROTE to remain at 13.5% in F2025 and to be higher than 15% in F2026. The CET1 is expected to remain stable in F2025 at 13.5% and to decrease to 13.0% in F2026 by distributing excess capital to shareholders.

Lloyds' F2024 operating income was 3.0% lower YOY, largely reflecting a 7.7% decrease in NII. This largely reflected strong domestic mortgage competition and deposits repricing at higher rates, which was not fully offset by revenues from the structural hedge. The banking net interest margin (NIM) was 2.95% in F2024, down from 3.11% in F2023, although pressure in NIM eased in recent quarters and has slightly improved quarter over quarter since Q2 2024. Remediation costs of GBP 899 million included the additional GBP 700 million related to motor finance, up from GBP 675 million in F2023. Excluding remediation costs, statutory operating expenses were 5.5% higher YOY, driven by inflationary pressures and further IT investments. This included significantly lower restructuring costs of GBP 40 million compared with GBP 154 million in F2023.

Asset quality remained strong in F2024 and Stage 3 loans were down around 11% YOY, representing 2% of gross loans at the end of F2024, which improved from 2.2% the year before. The Group`s cost of risk (as calculated by Morningstar DBRS) was a low 9 basis points (bps) in F2024, similar to 7 bps in F2023.

Notes:
All figures are in British pound sterling unless otherwise noted.