Duncan Mavin is a former Bloomberg Gadfly columnist.

Lloyds announced earnings that barely met most analysts' expectations Thursday -- and the stock jumped 10 percent.

There is no discrepancy here. Bank investors care deeply about one thing these days: dividends. In this respect, Lloyds delivered.

The bank tripled its total ordinary dividend for 2015 to 2.25 pence per share, and added a special dividend of 0.5 pence. That's equivalent to a 4.4 percent yield, Citigroup analysts note. The total payout of 2 billion pounds ($2.8 billion) makes Lloyds the ninth biggest U.K.-listed dividend-paying stock in cash terms, according to analysis from AJ Bell.

Pay Pals
Lloyds' dividend payments for 2015 are among the biggest among U.K-listed companies in cash terms
Source: AJ Bell

Yet even as the bank doles out payments, there are reasons to be cautious about its prospects.

The legacy of misselling payment protection insurance continues to drag. The bank recorded an additional 2.1 billion pounds of provisions in the fourth quarter, taking the total for the year to 4 billion pounds. That's a hefty sum and most of the cost should be covered, but it wouldn't be a surprise if more provisions related to conduct costs crop up down the line.

Lloyds's Spending Struggle
The bank wants to achieve an annual cost-to-income ratio of 45 percent by 2019
Source: Company reports

More broadly, costs are not coming down as fast as management wants. CEO Antonio Horta-Osorio wants to slash 1 billion pounds from the cost base and has previously targeted a ratio of costs to income of 45 percent by 2017. But cost cutting gets tougher the further you slash back because there are fewer 'easy' wins and a higher chance that cuts hurt the business.

The bank's now aiming to hit its cost to income target "as we exit 2019." The ratio inched down from 49.8 percent in 2014 to 49.3 percent in 2015. That's among the best in the industry, but the hardest work likely lies ahead.

Nor is growth is easy to come by. Lloyds has a market leading position in U.K. mortgages but it's proving tough to get much bigger. Its book of mortgages increased 1 percent in 2015. Lloyds said this is below the rate of growth in the broader market and that it is focusing on maintaining margins -- in other words, competitors are cutting prices to try to get more market share.

Meanwhile, the prospect of U.K. interest rates staying low for longer than previously anticipated is bad for the entire banking industry. It will also intensify the fight for business among Lloyds' rivals -- including a raft of challenger banks -- putting more pressure on margins.

Horta-Osorio notes that Lloyds is "inextricably linked" to the strength of the U.K. economy, which grew 2.2 percent in 2015. That is stronger than many other countries, but whether it can maintain that momentum is questionable. Financial-market volatility that's rippling across the globe is a concern for Britain, as is the uncertain outcome of the upcoming referendum on its membership in the European Union. At the very least, the run-up to that vote could weigh on investment and prospects for activity to stay strong.

Horse Power
Lloyds shares have fared better than those of U.K. rivals over the past year
Source: Bloomberg

Still, there is the dividend. At Lloyds' rival Royal Bank of Scotland, the key question is when the bank can get back to paying a dividend. At HSBC, investors are focused on whether CEO Stuart Gulliver can keep to his pledge to grow dividends. There are plenty of challenging issues for Horta-Osorio. But a robust dividend payout is buying plenty of goodwill too.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Duncan Mavin in London at

To contact the editor responsible for this story:
Jennifer Ryan at