Lloyds shares reverse losses despite motoring financing provision fears

Lloyds shares were weaker in early trade Thursday despite announcing a fresh £2bn share buyback and Q4 profit before tax coming in higher than analyst estimates.

However, early disappointment diminished as a fairly sizeable share buyback provided the desired effect on Lloyds shares on Thursday. Lloyds performed well during the last quarter with Q4 profit before tax coming in at £1.8bn compared to a £1.7bn analyst consensus.

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While underlying performance was strong, bad memories of provisions related to wrongdoing dominated the Lloyds share price in early trade Thursday as the company set aside £450m in provisions for a motor financing probe by the FCA.

“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,” said Matt Britzman, equity analyst, Hargreaves Lansdown.

“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.”

Concerns about future provisions and the potential amount Lloyds will be liable for may be a factor weighing on Lloyd’s share price today. Lloyds shares were down 2% before reversing losses to trade 2% higher at the time of writing.

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It is not too long ago that each quarterly update from Lloyds and other UK banks was poured over for how much they were forced to set aside for PPI claims.

After the financial crisis, the PPI saga rocked UK banking valuations and the sector has never fully recovered. The sector trades below the FTSE 100 average PE Ratio and individual banks are valued well beneath book value.

Although today’s £450m provision was less than it could have been, investors will fear further provisions in the coming quarters and this seems to be offsetting any positivity around buybacks or higher profits.

Notwithstanding provisions for motoring financing, Lloyds had a relatively good quarter. Net interest margins met guidance as underlying net interest income rose 5% to £13.8 billion.

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