Lloyds Banking Group has revealed a surge in annual profits driven by increased interest rates, alongside earmarking £450 million for a Financial Conduct Authority (FCA) investigation into motor finance practices.

The group, which includes Lloyds Bank, Halifax, Bank of Scotland, Black Horse and Lex Autolease, reported a pre-tax profit of £7.5 billion for 2023, marking a 57% rise from the previous year.

The bank’s net interest income climbed to £13.3 billion in 2023, up from £12.9 billion in 2022. However, a 0.1% narrowing in the net interest margin (NiM) to 2.98% was noted between the third and fourth quarters due to pressure to offer better deals to savers and an expected peak in interest rates.

Investors sought clarity on Lloyds’ exposure to the FCA’s review of now-prohibited motor finance commission arrangements. Lloyds confirmed a £450 million provision for potential repercussions, including estimates for costs and redress.

Analysts project the auto lending industry may face up to £16 billion in compensation payouts from the FCA probe. Lloyds, owner of the UK’s largest auto lender Black Horse, could reportedly be liable for up to £2 billion, but the full extent is uncertain until at least September.

Lloyds emphasised that the motor finance probe differs from prior remediations, countering comparisons to the PPI scandal. The bank posted reduced loan impairments at £303 million in 2023, down from £1.5 billion in 2022.

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Operating costs reached £9.1 billion in 2023, a 5% YoY increase, aligning with expectations. Forecasts anticipate a rise to approximately £9.3 billion in 2024, factoring in severance charges and inflation.

Despite the profit surge, the bonus pool for 2023 fell to £384 million from £466 million in 2022.

CEO Charlie Nunn, while receiving a £3.7 million pay package, down slightly from £3.8 million in 2022, affirmed progress toward ambitious strategic goals for 2024 and 2026.

Close Brothers faces unprecedented challenges amid FCA Motor Finance Review