Lloyds Banking Group is poised to kick off the UK banking results season this Thursday, with expectations of revealing increased annual profits despite continuing to shoulder significant costs from the motor finance mis-selling scandal.
Profit Forecasts Defy Compensation Charges
Most City analysts are predicting the high street lender will deliver a 7% rise in pre-tax profits for the full year, with consensus estimates pencilling in a figure of approximately £6.38 billion. This anticipated growth comes even after the group booked an additional £800 million provision for motor finance compensation during the third quarter, which caused a 36% slump in profits for that period.
The total estimated bill for motor finance redress now stands at around £1.95 billion for Lloyds, representing the heaviest burden among UK lenders caught up in the scandal. However, analysts forecast a strong rebound in the final three months of the year, with fourth-quarter profits expected to more than double to £1.7 billion from £824 million during the same period a year earlier.
Analyst Perspectives on Underlying Performance
Richard Hunter, head of markets at Interactive Investor, commented on the situation, stating: "The third quarter turned out to be one to forget for Lloyds, with the additional motor finance redress provision playing havoc with many of its key metrics. Of course, the motor provision is not life-threatening and without that distraction the underlying progress remains strong."
Michael Hewson at CMC Market Insights offered a similar view, suggesting that with motor finance provisions now "in the rear-view mirror," Lloyds management can focus on driving the bank forward. This strategic direction includes a significant emphasis on embedding artificial intelligence across operations and expanding wealth management services following the recent acquisition of Schroders Personal Wealth.
Regulatory Context and Economic Challenges
The Financial Conduct Authority's investigation into motor finance mis-selling between 2007 and 2024 continues to shape the banking landscape. The regulator's proposals could see approximately 14 million car finance deals become eligible for compensation, with affected customers potentially receiving an average of £700 per agreement.
However, the FCA's plans have faced considerable pushback from lenders across the sector. The consultation period closed in mid-December, with final rules expected to be published in February or March.
Beyond the motor finance issue, analysts note broader economic challenges that may impact Lloyds' performance. Richard Hunter highlighted that "often seen as a barometer for the UK economy, the group will face the additional challenges of a potentially deteriorating backdrop, while previously lower house price forecasts increased impairments in addition to the motor finance hit."
Consumer Resilience and Forward Strategy
Despite these headwinds, Hunter pointed to positive indicators regarding consumer behaviour: "For the most part, however, the UK consumer is alive and well with defaults stable and the previous small number of individual cases moving into default territory within commercial banking appearing to have stabilised."
The timing of Lloyds' results announcement represents a departure from previous years, coming almost a month earlier than usual and aligning more closely with the US bank reporting season. In July, the bank explained that this decision was "consistent with its ambition to move at pace into the year ahead."
As the first major UK bank to report annual figures, Lloyds' performance will be closely scrutinised for signals about the health of both the banking sector and the wider British economy. The anticipated profit increase despite substantial compensation charges suggests underlying operational resilience, though challenges remain in both regulatory and economic spheres.
