LLOYDS Banking Group has set aside nearly half a billion pounds to provide for claims arising from a probe into motor finance, as it beat market expectations to report a near-60% rise in pre-tax profits to £7.5 billion.

The bank, which is one of the UK’s biggest providers of motor finance through its Black Horse brand, set aside £450 million provision to deal with the potential impact of a review into historical motor finance commission arrangements. The probe was launched by the Financial Conduct Authority in January after a high number of complaints were made to motor finance firms from customers seeking compensation for commission arrangements before they were banned by in 2021.

Matt Britzman, equity analyst at stockbroker Hargreaves Lansdown, said the bank’s provision for potential redress was “less than some had feared but there will be question marks around how Lloyds has come to that figure”. He added: “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.”

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Lloyds, which said its provision includes estimates for costs and potential compensation, said that “while the FCA review is progressing there is significant uncertainty as to the extent of misconduct and customer loss, if any, the nature and extent of any remediation action if required, and its timing.”

“The ultimate financial impact could therefore materially differ from the amount provided, both higher or lower,” it added.

The bank’s chief financial officer, William Chalmers, stressed that the car finance probe was "not like prior remediations", when asked by reporters yesterday whether he thought it showed any similarities to the payment protection insurance (PPI) mis-selling scandal. Lloyds has paid out more than £20bn to compensate customers who were mis-sold PPI from the mid-1990s.

The update was included in annual results for the Bank of Scotland and Halifax owner which showed profits were driven in 2023 by higher interest rates and the improvements to the economic outlook. Lloyds also saw its balance sheet boosted by a significant write-back in the fourth quarter, following the full repayment of debt from a single name client.

Britain’s biggest mortgage lender joined the UK’s other leading high-street banks in highlighting the benefit from the hike in base rates overseen by the Bank of England to combat surging inflation in annual results posted in the last week. The base rate now stands at 5.25%, having risen steadily since its historic low of 0.1% in December 2021.

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Lloyds reported a 5% rise in net interest income to £13.8bn for the year on a net interest margin - broadly the difference between interest banks charge on loans and the amount they pays on deposits - of 3.11%, in in line with guidance. However, net interest margin fell by 10 basis points to 2.98% in the fourth quarter, as the bank highlighted mortgage pricing and “deposit mix headwinds”. Banks have been seeing customers move money from current accounts to interest-bearing accounts to take advantage of higher interest rates over recent months.

Lloyds’ chief executive Charlie Nunn said: “The group delivered a robust financial performance, meeting our 2023 guidance, driven by income growth, cost discipline and strong asset quality. This performance enabled strong capital generation and increased shareholder distributions.”

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The Lloyds results mark the end of the current reporting season by the UK’s major banks. NatWest Group, owner of Royal Bank of Scotland, beat city forecasts to report a pre-tax operating profit of £6.2bn for 2023, 20% higher than the year before and ahead of the £6bn expected. It was the highest profit made by the bank since 2007, prior to its £45.5bn bailout by the UK Government during the financial crisis of 2008 and 2009.

On Tuesday, Barclays saw profits dip by 6% to £6.6bn as it unveiled major restructuring plans, which the lender said will ultimately lead to cost savings of £2bn. HSBC, which is heavily exposed to Asia, saw the biggest intra-day fall in its share price since 2008 on Wednesday, after a $3bn write-down on its investment in China's Bank of Communications dragged fourth-quarter profits down by 80% to $1bn. Its annual profit surged by $13.3bn to $30.3bn, driven in part by the “higher interest rate environment”.

Lloyds recommended a final ordinary dividend of 1.84p per share, resulting in a final dividend of 2.76p for 2023, up 15% on 2022. Dividends will be worth around £1.17bn. The bank also announced plans to implement a share buyback worth up to £2bn.

Shares in Lloyds closed up 6% at…