General Insurance Article - Lloyds provision for FCA investigation lower than expected

Q4 profit before tax £1.8bn vs £1.7bn consensus. Q4 Net interest margin 2.98%. Unwound £541mn of loan loss impairments. £450mn provision for impact of FCA review

 Matt Britzman, equity analyst, Hargreaves Lansdown: “Lloyds delivered a decent set of results and a confident medium-term outlook. Striping out the £450mn provision, set aside as a buffer for any incoming charges from the FCA review into motor financing, and profit before tax was a decent beat. That was driven almost entirely by a release of credit impairments back into the profit line with better economic assumptions and a single-name creditor paying back a hefty chunk of debt.

 On the FCA review, the £450mn provision was less than some had feared but there will be question marks around how Lloyds has come to that figure. Lloyds has been honest in saying the outcome of the review is largely unknown. What we do know is that Lloyds is one of the more exposed banks should the FCA deem there was misconduct and customer loss.

 UK domestic banks are unloved but there’s reason to be optimistic, especially with valuations sitting where they are. Performance has clearly peaked, but there are several tailwinds yet to play out that could give room for upside beyond current consensus. Loan default levels remain low and with the return of real wage growth, plus a stabilising housing market, consumers should remain resilient.

 At the same time, banks are seeing easing conditions in the mortgage market and what looks to be a peak in terms of consumers shifting to higher cost savings accounts. As these tailwinds ease, the power of the structural hedge can come through – think of this like a bond portfolio that’s rolling on to higher yields over the next few years. Lloyds looks well placed to benefit from these improving trends.”

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