Lloyds sets aside £1.2bn for car finance saga

The banking group is exposed to the market through its brand Black Horse, which is one of the biggest car finance providers in the UK.

In its annual results, Lloyds reported a pre-tax profit of £6bn for 2024, a fifth lower than the £7.5bn generated the prior year, and coming in below analysts’ expectations.

The decline was driven by lower total income for the group, higher business expenses and the higher impairment charge.

Lloyds said the extra £700m provision was taken in light of a court judgment on the issue in October.

This judgment found it was unlawful for car dealers to receive commission on motor finance from lenders without a customer’s informed consent.

The decision opened the door for a potential fresh wave of complaints from consumers who think they may have been mis-sold car finance in previous years.

Lloyds said that “clearly significant uncertainty remains around the final financial impact” and that it welcomes the outcome of a Supreme Court hearing set for April.

Richard Hunter, Head of Markets at interactive investor, commented: “Lloyds finds itself in the midst of attacks from several angles, but all things considered is standing up defiantly to the challenges.

"A number of emerging thorns in the side have combined to deflate the numbers and in turn profitability.

"The remediation for the potential impact of the motor finance commission arrangements continues to overhang the stock and Lloyds took a further provision for the outcome of £700m.

Mr Hunter added: "This is in addition to the £450m previously set aside, and the number had a material effect on fourth quarter profit.”

"The group’s acceleration towards becoming a digital bank is an area where investors have been taking a longer-term view.

"The push towards an increasingly digital business will undoubtedly reap rewards in the coming years, but the associated costs such as branch closures and severance packages are currently resulting in something of a slog until the ultimate aim can be achieved.”

He continued: “Overall, a positive direction of travel towards a more streamlined and digital business, underpinned by a healthy financial position, are elements of proof that the bank remains on track.”

"Despite the headwinds, the shares have been positively rerated of late and have added 47 per cent over the last year, as compared to a hike of 13 per cent for the wider FTSE100.

"Without doubt, Lloyds remains a longer-term play bolstered in the meantime by the potential for generous shareholder returns.

"That being said, the motor finance overhang and the higher valuation attached to the recent share price gain leaves the shares up with events, with the market consensus coming in at a hold for now.”