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Lloyds suspends share buybacks as PPI claims surge! Could a dividend cut be next?

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Over the weekend I wrote a piece repeating why I believe Lloyds Banking Group (LSE: LLOY) is a share that should be avoided like the plague.

Brexit is having a devastating impact upon trade at the UK-focused bank right now. But as news released today shows, a stuttering domestic economy is only one of the problems facing the FTSE 100 firm today.

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In a shock announcement, Lloyds said that it’s terminating its share buyback programme because of a PPI-related claims boom it endured ahead of the August 29 deadline. The bank received between 600,000 and 800,000 new weekly claims last month, it said, a “significant spike” from the 190,000 it had been receiving in July.

This means that it’s been forced to raise PPI provisions again, to between £1.2bn and £1.8bn. This is in addition to the £650m it put aside for the first half of 2019.

Buybacks bounced

By the time the dust settles, Lloyds may be forced to pay out a whopping £22bn for PPI misconduct alone. Needless to say, this is having a devastating impact upon the balance sheet — indeed, the firm has advised that, following the August claims rush, that it “now expects capital build in 2019 to be below our ongoing 170 to 200 basis points per annum guidance and for the statutory return on tangible equity to be lower than our 2019 guidance of around 12 per cent.”

I feared that something may have to give and, as I say, shareholders have had to take a punch in the face today, the bank advising that it has suspended the 2019 share buyback scheme immediately, “with £600m of the up to £1.75bn programme expected to be unused at mid-September.”

The claims deadline might have finally passed but Britain’s banks clearly can’t breathe a sigh of relief yet. One analyst, Dominic Lindley of New City Agenda, chimed in last week to predict that the final tally for the entire sector could hit a whopping £53m.

Will dividends stop growing?

And I fear that Lloyds may be forced to abandon its progressive dividend policy as its capital strength comes under increased pressure. The impact of higher misconduct penalties and flagging revenues saw it pro-forma CET1 ratio erode to 14% in June from 14.5% a year earlier, pushing it closer to the new target of  12.5% (plus a “management buffer” of 1%) announced back in May.

Things are starting to look hairy, even if Lloyds today affirmed its desire to maintain its progressive dividend policy. Slipping sales and booming impairments caused pre-tax profits to fall 7% in the first half, a trend that threatens to worsen as Brexit fears persist. And that disappointing PPI news of today should give investors reason to fear that payout growth may fall alongside that buyback programme.

So forget about expectations of a dividend lift in 2019, to 3.4p per share from 3.21p last year. And ignore that 6.8% forward yield. Today’s terrible announcement provides even more reason to avoid the struggling bank right now.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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