Lloyds Profits Miss Forecasts

Lloyds Banking Group PLC raised its 2017 dividend by 20% and announced a £1 billion ($1.39 billion) share buyback as it reported an increase in profits and unveiled its new strategy.

The bank posted a statutory profit of £5.3 billion for the year to the end of December 2017, up 24% on 2016 and the highest level since 2006—but below analysts’ expectations of £5.7 billion, Proactive Investors reported.

A final dividend of 2.05p per share was recommended by the board, bringing the total for the year to 3.05p, compared to 2.55p in 2016. The lender said it plans to implement a share buyback of up to £1 billion, equivalent to 1.4p per share, supported by strong capital generation.

“This is a sign of the bank’s health, and of its own independence as it returned to private ownership last year,” said David Madden, market analyst at CMC Markets UK.

Lloyds generated 245 basis points of common equity tier 1 capital last year, slightly more than the 240 bps estimated in October. The pro-forma CET1 ratio—a measure of capital strength—stood at 13.9% at the end of 2017, including dividends and the share buyback, compared to 13.0% a year earlier. Shares in the lender were up 1.8% to 69p in Wednesday morning trading.

In the strategic plan for 2018-2020, unveiled alongside the full year results, Lloyds said it expects capital generation of 170-200 bps per year and plans to deliver “progressive and sustainable ordinary dividends whilst maintaining the flexibility to return surplus capital to shareholders”.

The bank plans to invest more than £3 billion in its strategic initiatives, including its digitization and improving customer services. The new commitment marks a 40% increase on the previous strategy.

“The strategy outlined today will enable the group to deliver strong statutory profit growth supported by targeted asset growth in key segments, a resilient net interest margin, lower operating costs, strong asset quality and lower remediation costs, whilst delivering strong capital generation and sustainable and superior shareholder returns,” said chief executive Antonio Horta-Osorio.

The plan is to claw back the money spent on its investment by targeting operating costs of less than £8 billion by 2020. Lloyds has already been making savings by closing down branches and axing jobs in response to the rise of online banking.   

The group expects to achieve a cost-income ratio in the “low 40s” as it exits 2020, including future remediation costs.