LONDON Lloyds Banking Group (LLOY.L) rewarded investors with a surprise 2 billion pound payout on Thursday, underlining its intent to be the biggest dividend payer among Britain's banks and its recovery after a state bailout.
Shares in Lloyds gained 13.6 percent in their best trading day for more than five years as shareholders were reassured by its ability to boost capital and increase dividends in the face of a sluggish economy and record low interest rates.
Despite weaker-than-expected fourth quarter profits of 1.6 billion pounds ($2.2 billion), Lloyds said it would pay a special dividend of 0.5 pence and an ordinary dividend of 2.25 pence a share.
Lloyds, once a darling of the FTSE index for its payouts to shareholders, offered its first dividend in more than six years last year, part of its recovery from a 20.5 billion pound bailout by the British government during the financial crisis.
The bank said it had increased full-year underlying profits by 5 percent to 8.1 billion pounds, ahead of analysts' forecasts of around 6.4 billion pounds, according to Thomson Reuters data.
"It's a real transition from capital build to capital return," Ian Gordon, analyst at Investec Securities in London, said, while analysts at Barclays raised their 2016 estimates on the stock, citing confidence in its strong dividend prospects.
The bank's common equity tier 1 ratio, a measure of financial strength, stood at 13 percent after the payout.
Steve Davies, manager of the Jupiter UK Growth Fund, which owns shares in Lloyds, said the bank was stepping up its dividend when other big FTSE 100 companies were slashing theirs.
"Lloyds’ payout should step up materially again in 12 months’ time, potentially to the tune of 6p a share and that would support a much higher share price."
It was not all good news for investors, however, with missed cost targets and yet more provisions for its role in Britain's payment protection insurance (PPI) mis-selling scandal.
Lloyds delayed its goal of reducing its cost-income ratio to 45 percent, from 2017 to 2019, while a return on equity target of 13.5 to 15 percent was pushed out to 2018.
The bank also cut its bonus pool to 353.7 million pounds from 369.5 million, partly reflecting conduct-related provisions which hit profit and shareholder returns.
Although chief executive Antonio Horta-Osorio's total compensation fell to 8.5 million pounds in 2015 from 11.5 million a year earlier, he secured a 6 percent rise in his base pay to 1.125 million pounds in 2016, his first since joining the board in 2011. He will take part of the increase in shares.
The bank set aside 2.1 billion pounds in the fourth quarter to compensate customers for mis-selling loan insurance, bringing to 16 billion pounds the total it has had to pay out over policies supposed to protect borrowers against sickness or redundancy but often sold to those ineligible to claim.
Lloyds said this should cover expected claims through to mid-2018, the financial regulator's likely deadline for claims which have forced British banks to set aside some 30 billion pounds, the costliest scandal of its kind in UK banking history.
The UK has a 9 percent stake in Lloyds, down from 43 percent, but has had to put plans to sell at least 2 billion pounds of shares to the public this year on hold due to market turmoil.
($1 = 0.7181 pounds)
(Additional reporting by Richa Naidu and Jane Merriman; Editing by Sinead Cruise and Alexander Smith)