Lloyds announces £1bn share buyback but profit falls short

Lloyds Banking Group announced a £1bn share buyback and increased its annual dividend by a fifth as the bank reported full-year profit short of expectations.

Pre-tax profit for the calendar year rose 24% to £5.3bn, less than the £5.7bn average analyst forecast due to higher provisions for payment protection insurance (PPI). Underlying profit rose 8% to £8.5bn, slightly below expectations for £8.6bn.

Lloyds said it would buy back up to £1bn of shares to increase capital returns to investors. The bank also announced a 20% increase in the full-year dividend to 3.05p a share – an important measure for the bank's army of small shareholders.

Chief executive António Horta-Osório said Lloyds was positioned for strong growth after the government sold the last of the shares it bought during the financial crisis. Horta-Osório, who will be paid £6.4m for 2017, said the bank would invest £3bn over the next three years to improve customer service, embrace digital technology and become more efficient.

Horta-Osório said: “2017 has been a landmark year in which the group has made significant strategic progress and returned to full private ownership. We have delivered another year of strong financial performance with improved profit and returns on both a statutory and underlying basis and have now built the largest and top rated digital bank in the UK. We are therefore well prepared to succeed in a digital world.”

Lloyds will start buying its own shares in March and expects to finish the buyback by the end of 2018. Including the buyback, capital returns for 2017 will be up to 46% higher than the year before and the total payout will be as much as £3.2bn. The bank also set out targets for lower operating costs, resilient asset quality and higher shareholder returns that cheered investors.

Profit was less than expected because of higher charges for PPI after the Financial Conduct Authority’s TV advertising campaign featuring Arnold Shwarzenegger attracted more complaints. The cost of compensating PPI customers was £1.7bn compared with analysts' average forecast of £1.4bn. Other conduct provisions were about £160m higher than expected at £865m.

Analysts at Morgan Stanley, led by Alvano Serrano, said Lloyds guidance for costs to fall below £8bn signals a big reduction in charges for PPI and other one-offs. They upgraded their forecast for 2020 earnings per share by 11% and pencilled in £1bn of buybacks a year, implying a dividend yield of 7%. The buyback "should more than compensate" for the profit miss and investors' "focus should be on the strategy plan".

Investors appeared to do just that as Lloyds shares rose 2% to 69.23p by 09:11 GMT. After three years of large increases the ordinary dividend will rise more slowly from now on with buybacks or special dividends adding to returns, the bank said. Lloyds reinstated its dividend in 2014 after scrapping the payout when the government bailed out the bank during the financial crisis.

Gary Greenwood, an analyst at Shore Capital, said: "The strategy update implies a sharp improvement in statutory profitability is anticipated, with continued strong capital generation (which should support further significant capital returns) and with impairment ratios that are more optimistic than consensus is expecting."

Horta-Osório, who took over at Lloyds almost seven years ago, scrapped international operations and surplus businesses while cutting thousands of jobs to take Lloyds back to its UK retail banking roots. The bank said it would pay him £6.4m for 2017, up from £5.8m a year earlier. His pay includes £1.2m salary, a £1.3m bonus and £2.3m of shares under the bank's long-term incentive scheme.