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The Lloyds Banking Group (LSE: LLOY) share price edged up a little Thursday (30 July), as the bank beat first-half profit forecasts. But it wasn’t the results making the biggest headlines.
Lloyds also unveiled a plan to cut costs by around £2bn using AI technology, in a move that CEO Charlie Nunn said should deliver “a productivity step change.”
New AI strategy
In the announcement, Lloyds told us its retail priorities “will be enabled by scaling the next-generation core banking engine and rolling out agentic servicing solutions to improve experience and cost-to-serve“.
And in an interview with Reuters, the boss said:
We think at least 50% of what we’re doing in AI is going to be about differentiating and extending what we do for customers into new areas… the other 50% is around helping our colleagues do their tasks more effectively.
CEO Charlie Nunn
Nunn couldn’t be drawn on the implications for possible job cuts, adding: “We don’t put targets around numbers of staff.”
What about the results?
Lloyds reported a 23% year-on-year rise in statutory profit before tax for the half, reaching £4.3bn. It was helped by a 10% rise in net interest income, and we saw the return on tangible equity grow to 17.1%.
The bank raised its interim dividend by an impressive 30% over the first half last year. We’re told the rise reflects “the steps taken to derisk the business, our strong capital base and confidence in the future earnings trajectory of the group“.
The same 30% increase in the final dividend could produce a full-year yield of 4.2%. And that’s nicely ahead of the 3.2% currently forecast.
Lloyds also launched a further share buyback programme of up to £1bn, to add to the £1.75bn announced with 2025 full-year results.
What could go wrong?
As a Lloyds’ shareholder, this all looks great to me. Growing profits, strong cash generation, progressive dividends, and further cost savings… what more could I ask?
Well, I’d love the motor insurance mis-selling affair to become a thing of the past. In the latest update, the bank reported no additional charges relating to redress. And that scares me a little. There’s a danger the final cost could come in significantly higher than planned.
Lloyds has set aside £1.95bn to cover potential compensation, but the FCA currently estimates a total cost to the banking industry of around £9.1bn, based on a 75% customer compensation take-up.
That £2bn in AI-based cost savings might contribute nicely. But it looks like the final cost to Lloyds is going to hang over the share price for some time to come.
Bottom line…
Mis-selling compensation could hurt the Lloyds share price in the medium term. But cash generation and dividend prospects make Lloyds a firm Hold for me.
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Alan Oscroft owns shares in Lloyds Banking Group.
This story originally appeared on Motley Fool
