Growth in high street lender Lloyds Banking's (LLOY) core business has helped the group report its first full-year profit since its £20 billion bailout in 2008. The bank reversed last year’s £600 million loss into a £415 million pre-tax profit, but shares fall 3% to 80.9p as bonuses and dividends dominate the headlines.

More than 90,000 of Lloyds’ staff shared a £395 million bonus pot, almost 10% more than it paid in rewards last year. Chief executive officer (CEO) Antonio Horta-Osorio is set to collect a £1.7 million bonus in shares.

The bank confirmed that it will apply to the regulator in the second half of this year to re-introduce its dividend, which would eventually lead to it return half its sustainable earnings to shareholders in the medium term. Analysts reckon that means dividends may not recommence until 2015, whereas many people had expected something later this year.

There was no word on when the government plans to further reduce its stake in the lender, following September 2013’s £3.2 billion share sale.

Lloyds’ lending grew 3% to £436.9 billion, while it took 4% more on deposit that it did in 2012 at £438.3 billion. This increased its net interest margin by 19 points to 2.12% and reduced its reliance on the risky wholesale banking market by 19% to £137.6 billion.

During the period the size of its loan book compared to its deposits shrank to 113% from 121% a year ago, highlighting that the bank is reducing its financing risk as the economy improves. It is also well capitalised with a core tier 1 ratio of 14%, meaning that it should be capable of absorbing any losses caused from another crisis.

Analyst Gareth Hunt at Canaccord Genuity remains cautious. ‘UK policy rates remain the key risk to the investment case. While liability margins will expand as the Bank of England lifts rate,s asset margins are likely to contract, we believe, as the unusually high proportion of mortgages on high(er) margin SVR (standard variable rate) product switches back to lower margin fixed rate. Lloyds' ability to manage this process will be key to ensuring NIM (net interest margin) stability over the next five years.’

Web - Lloyds - 13 February

Lloyds has generated growth throughout its main divisions. Profits in its retail business grew 18% to £3.7 billion, thanks to improved margins, falling costs and a 5% rise in net interest income.

It lent 7% more cash to small businesses during the year and took 13% more on deposit, which helped to turn 2012’s £324 million loss into a £1.5 billion profit. The greatest improvement came in its wealth management and asset finance division, where taxable income improved 38% to £632 million.

Insurance was the only looser with its profits down 2% to £1 billion, due to it writing 8% less premiums and its new commission arrangements, although it did collect £692 million cash during the year.

But its results ended on a low note. It allocated £3.5 billion more to compensate those it mis-sold products to during the year. Paying for its past sins look to be a continuing theme for the bank.

Issue Date: 13 Feb 2014