Lloyds ‘Capital Beast’ Set to Reward Investors With More Payouts

Lloyds Banking Group Plc Chief Executive Officer Antonio Horta-Osorio is poised to present investors with what they’ve been waiting for: plans to increase the dividend.

The bank, which last year paid its first dividend since a 2008 bailout, next week may announce a payout of 1 pence per share for the first half and set out plans for future increases, analysts at Keefe, Bruyette & Woods wrote in a note. Morgan Stanley sees the dividend reaching 5 pence by 2017.

Horta-Osorio, 51, has cut thousands of jobs, sold assets and shrunk the retail network, returning Britain’s largest mortgage provider to its first annual profit in five years in

2014. Unlike Royal Bank of Scotland Group Plc, which hasn’t paid a dividend since its bailout, Lloyds is generating more capital than regulators require it to hold against assets, bolstered by lower costs and falling impairments for bad loans.

“This will become a capital-generating beast,” said Eric Moore, a fund manager at Miton Group who helps to oversee about 2 billion pounds ($3.1 billion) of assets including Lloyds shares. “Some clarity on their dividend plans would be helpful, and I think we’ll probably get it.”

Horta-Osorio, who took over in 2011, has said he plans to push a “progressive dividend policy,” with a payout ratio of at least 50 percent of sustainable earnings over the medium term. Lloyds paid a dividend of 0.75 pence per share in 2014, or about 535 million pounds.

Lloyds will report fist-half earnings on July 31.

Share Buyback

The CEO could announce share buybacks or special dividends, said Joseph Dickerson, an analyst at Jefferies International Ltd. in London. Lloyds probably won’t follow RBS in pledging to return surplus capital above a threshold to investors, he said.

RBS, which is still owned by the government, has said it plans to return all excess cash above a common equity Tier 1 capital ratio of 13 percent, a measure of financial strength, to shareholders. The measure was at 11.5 percent at the end of March, trailing a CET1 ratio of 13.4 percent at Lloyds, the highest among major U.K. banks.

“Capital rules are still being finalized for Lloyds,” said Dickerson. “Most of their businesses don’t consume a lot of capital, they tend to be a mortgage focused bank, they’re bringing down their costs, they’re becoming more efficient, which also throws off more capital.”

Lloyds may report a first-half pretax profit of 2 billion pounds, up from 863 million pounds a year earlier, according to analysts at KBW. That’s even after a 1 billion-pound charge to compensate customers for wrongly sold loan insurance.

PPI Scandal

The fresh provisions for payment protection insurance would come on top of 12 billion pounds the bank has already set aside to compensate customers, more than any other U.K. lender, in the costliest banking scandal since the financial crisis.

The bank must also account for a 100 million pound fine from the U.K.’s Financial Conduct Authority in June over failures in its handling of PPI complaints, according to Ian Gordon, an analyst at Investec in London, with a hold recommendation on Lloyds shares and a buy on RBS.

Lloyds will “look to pay good dividends as soon as they’re able to,” said David Moss, head of European equities at BMO Global Asset Management who helps to oversee about $254 billion of assets including Lloyds shares. “By virtue of where they are now, capital will accrete fairly rapidly and therefore the dividend will follow suit.”

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