By Elena Vardon

Lloyds Banking Group put more money aside for a potential hit from a regulatory probe into the motor-finance sector, but posted a set of solid underlying results that allayed investors' concerns.

The British lender on Thursday said it booked a 700 million-pound ($881.1 million) provision to cover the potential impact of the probe into historical commission arrangements on car loans, whose scope has widened in light of a recent court judgement. It had already booked a 450 million-pound provision at its third-quarter results.

The group has been grappling with a landmark case and the financial watchdog's review into the motor-finance sector since early last year. Lloyds is the largest provider of motor finance in the U.K. and is exposed to these issues through its Black Horse brand.

While significant uncertainty remains around the final financial impact, this estimate--which includes redress and operational costs--is the best at this time and is something the group is able to cope with, Lloyds said.

The Supreme Court's hearing is set to start in April and follows a surprise judgement last October which deemed it unlawful for car dealers to get a commission from motor-finance lenders without the customer's informed consent.

"The decision...seems to be at odds with 30 years of regulation, and that creates a problem in the minds of investors, not just for...the financial services sector, but actually a broader investability question in the U.K.," Chief Executive Charlie Nunn said in a call with reporters

For the three months ended Dec. 31, Lloyds posted pretax profit of 824 million pounds compared with 1.775 billion pounds for the same period a year earlier and a 1.25 billion pound estimate taken from a company-compiled consensus.

The bank--which is the country's largest mortgage provider--reported an on-year 1% rise in net income to 4.38 billion pounds, slightly beating consensus' 4.34 billion pound estimate. Net interest income made up 3.28 billion pounds of the total, against expectations of 3.25 billion pounds.

Its net interest margin--the difference between what it earns on loans and pay out on deposits--for the quarter was 2.97%, improving slightly from 2.95% in the third quarter.

Like its peers, the structural hedge that Lloyds has in place to mitigate the impact of interest-rate moves by the Bank of England are set to continue to provide a tailwind.

Lloyds expects to bring in around 13.5 billion pounds in net interest income in 2025, an increase compared with the 12.845 billion pounds it reported for 2024.

It also guided for around 9.7 billion pounds in operating costs for the year, heavier than last year's 9.44 billion pounds.

"Based on the expected macroeconomic environment and confidence in our strategy, the group maintains its guidance for 2026," it said. Lloyds also expects more than 1.5 billion pounds in additional revenue from strategic initiatives next year.

Despite the motor-finance provision denting its bottom line, the bank said it remains highly committed to shareholder returns. The board declared a final dividend of 2.11 pence, bringing the full-year payout to 3.17 pence, and announced an up to 1.7 billion pound share buyback program, as expected.

Shares rose more than 5% in European morning trading to 66 pence--their highest price in five years--as investors' fears were allayed by the sizeable distributions and comforted by the underlying results.

Write to Elena Vardon at elena.vardon@wsj.com

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(END) Dow Jones Newswires

February 20, 2025 06:33 ET (11:33 GMT)

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