Lloyds hit by bad deeds and bad debts

By Iain Withers and Lawrence White

LONDON (Reuters) - Britain's biggest domestic lender Lloyds Banking Group reported a 26% drop in annual profit on Thursday, hit by increasing bad debts and billions of pounds of customer compensation.

Provisions to cover payouts to customers mis-sold payment protection insurance (PPI) reached nearly 2.5 billion pounds in 2019, dragging down pretax profit to 4.4 billion pounds.

Impairments on bad loans spiked to 1.3 billion pounds, up from 937 million pounds the previous year, as weakening second-hand car prices hit its motor finance business and two large company failures hit its commercial division.

The plunge in profit, though in line with analyst expectations, showed Lloyds paying a toll for past misconduct while the rise in bad loans hinted at potential trouble ahead for Britain's economy.

Lloyds is viewed as a bellwether for the British economy, given that it is the country's largest provider of home loans and one of its biggest backers of businesses.

Chief Executive Antonio Horta-Osorio remained upbeat despite the profit downturn, saying the economy remains "resilient". Though there is uncertainty over Britain's post-Brexit trading relationships, the country now has "a clear sense of direction", he said.

Lloyds shares rose 3% in early trade, outperforming the FTSE 350 banking index, which analysts attributed to more positive than expected guidance on the bank's ability to build capital reserves.

It had said it will build capital at a rate of about 1.7 to 2 percentage points, a more positive forecast than expected.

The bank also announced a dividend of 3.37 pence per share, but the buyback some investors had hoped for was not forthcoming.

The total payout of 2.4 billion pounds is well short of the 4 billion pound bonanza the previous year after cancellation of a planned 650 million pound share buyback once the full costs of PPI became apparent.

Staff have also paid a price for the bank's past misconduct, with the lender cutting its bonus pool by a third to 310 million pounds in recognition of the PPI mis-selling scandal and other misdeeds.

Horta-Osorio and operations chief Juan Colombas asked to be excluded from the 2019 bonus scheme in recognition of the poor performance and misconduct, though they were still paid 4.7 million and 2.6 million pounds respectively.

Lloyds said that other misconduct issues that hit its performance and staff bonus pool included its treatment of customers affected by fraud at its HBOS Reading branch.

(Reporting by Iain Withers and Lawrence White; Editing by Sinead Cruise and David Goodman)