Lloyds puts aside another £1.8b in mis-selling compensation

[LONDON] Lloyds Banking Group, the UK's biggest mortgage lender, has set aside £1.8 billion (S$3.7 billion) more to compensate clients wrongly sold insurance and signalled that it won't pay a dividend for 2013. The stock fell.

The provision brings the total the lender has set aside to compensate clients sold payment-protection insurance (PPI) to £9.8 billion, more than any other British lender.

The bank expects to report a "small" pretax profit for 2013, London-based Lloyds said in a statement yesterday.

Chief executive Antonio Horta-Osorio's efforts to resume paying a dividend are being hampered by the rising cost of regulatory mis-steps. Lloyds last paid a cash dividend in 2008, before its takeover of HBOS plc forced it to seek a £20 billion bailout.

After talks with the Prudential Regulatory Authority, Lloyds said it will make a formal application in the second half for permission to resume payments.

"No dividends for 2013 will be taken as a negative by income funds which were positioned for a build-up in payouts in 2014," said Chirantan Barua, an analyst at Sanford C Bernstein in London, who rates the lender "outperform".

Lloyds fell 2.8 per cent to 81 pence by 10am in London, making it the worst performer among Britain's five largest banks yesterday. The stock is still above the average 73.6 pence a share the government paid for its holding.

The bank said it expects to start dividends at a "modest" level and pay out about 50 per cent of earnings to shareholders over the medium term.

The "dividend payment was expected to have commenced at the beginning of 2014", Shailesh Raikundlia, an analyst at Espirito Santo Investment Bank with a sell recommendation on the stock, wrote in a report to clients. "There were also expectations that the payout ratio would be much higher than 50 per cent going forward."

Lloyds said it expects full-year underlying profit to more than double to £6.2 billion for 2013, more than the £5.84 billion estimate of 14 analysts surveyed by the bank.

UK banks have now set aside almost £19 billion in compensation for clients who were sold insurance on loan repayments that didn't cover them or that they didn't require.

Barclays has earmarked about £4 billion, Royal Bank of Scotland Group £3.1 billion and HSBC Holdings £1.8 billion.

The volume of PPI complaints is falling, with the average monthly number of complaints down 24 per cent compared with the third quarter and 56 per cent below those in the fourth quarter of 2012, according to Lloyds.

The lender will also set aside a further £130 million to cover the cost of compensating small businesses wrongly sold interest-rate hedging products such as swaps, bringing the total so far to £530 million.

The bank's net interest margin, the difference between its income from lending and its cost of funding, widened to 2.12 per cent for the year from 1.93 per cent for 2012. Lloyds's core Tier 1 capital ratio under the full Basel III rules, a key measure of financial health, rose to 10.3 per cent, from 8.1 per cent for 2012.

The bank also said preparations are under way for a sale of government shares in Lloyds to the public. The government sold a £3.2 billion stake in the company to money managers in September.

The sale to the public is unlikely to be affected by yesterday's news, according to Ian Gordon, an analyst at Investec plc in London with a hold recommendation on the shares.

Investors had expected only a token 0.5 pence a share dividend for 2013 "while the future dividend- paying capability remains clear", he wrote in a note to clients yesterday. - Bloom-berg