LONDON - Lloyds Banking Group said Monday that it would set aside 1.9 billion pounds to cover potential claims related to the improper selling of insurance and other products â€" the latest European bank to increase its reserves in the fourth quarter for past sins.
Deutsche Bank and Royal Bank of Scotland have recently announced their own multibillion pound charges related to mortgage-backed securities and other legal liabilities.
Lloyds, which is partly owned by the British government, also said it expects to ask the Prudential Regulatory Authority, the financial regulator, for permission in the second half of 2014 to resume paying a dividend “at a modest level.†The bank said it aims to move, over the “medium term, to a dividend payout ratio of at least 50 percent of sustainable earnings.â€
The bank also has begun the process that will allow the British government, which provided Lloyds with a £17 billion bailout during the financial crisis, to sell more of its stake to the public, a priority for George Osborne, the chancellor of the Exchequer. The British government sold a 6 percent stake in the bank in September, and still holds a 33 percent stake.
“Our significant progress in delivering sustainable improvements in our capital position and our profitability, despite legacy issues, is testament to the strength of our business model and the commitment of our people, and has enabled the UK government to start to return the bank to full private ownership,†said António Horta-Osório, chief executive of the Lloyd’s group.
Lloyds said that it would take a further provision of £1.8 billion, or about $3 billion, to cover additional claims related to payment protection insurance, a contentious insurance product that has cost British banks billions of dollars, and an additional £130 million for interest-rate hedging products sold to small- and medium-size businesses.
Despite the provisions, Lloyds said it expects to report an underlying profit of £6.2 billion for the full year, ahead of analyst expectations of £5.8 billion. The bank is expected to report its full-year results on Feb. 13.
The increased reserve for payment protection insurance, or PPI, reflects in part the bank’s revised expectations for a slower decline in complaint volumes than originally forecast. The bank previously took a charge of £750 million for PPI in the third quarter.
With the additional provision, Lloyds has set aside £9.8 billion to cover potential PPI claims. About £2.8 billion had yet to be utilized as of Dec. 31.
In a research note Monday, Andrew Coombs and Ronit Ghose, Citigroup banking analysts, said the added compensation for insurance clients should put Lloyds in line with R.B.S. in terms of its usage of the money they have set aside for potential claims, following R.B.S.’s recent profit warning.
“The main focus today is likely to be on the dividend announcement, which we view as disappointing,†Mr. Coombs and Mr. Ghose said.
The market was looking for a small dividend in the second half of 2013, they said, “and while the target payout ratio is inline with Citi estimates it is lower than some had anticipated.â€
Including the latest provision, the bank has set aside £530 million in total for interest-rate hedging product claims. About £368 million of the total provision had yet to be utilized as of Dec. 31.
