Lloyds expects to commence dividend at 'modest' level

Lloyds Banking Group's shares fell after saying it set aside 1.8bn pounds in the fourth quarter to cover the cost of compensating customers for mis-sold payment protection insurance (PPI).The state-backed lender also put aside a further provision of £130m relating to the sale of interest rate hedging products to certain small and medium-sized businesses. The PPI provision increase is mainly based on the bank's revised expectations for complaint volumes, uphold rates, and related administrative costs.As a result the group predicts a 'small' statutory profit before tax for the year, and a pro-forma fully loaded common equity tier 1 ratio of 10.3%, in line with guidance.The lender forecasts 2013 underlying profit of £6.2bn (Jefferies: £6.4bn), a net interest margin of 2.12% and core loan growth of 3% following 'substantial progress on its strategic plan'.In the second half of 2013, the firm kicked off discussions with the Prudential Regulatory Authority (PRA) for resuming dividend payments. The PRA has confirmed that it will consider the group's applications to make dividend payments as Lloyds has strengthened its capital position and improved its financial performance.Lloyds will apply in the second half of 2014 to restart dividends, commencing at a "modest level". The board expects thereafter to have a progressive dividend policy with the aim of moving, over the medium term, to a dividend payout ratio of at least 50% of sustainable earnings.That came as a disappointment to analysts at Jefferies, who had factored in a 40% pay-out for 2015. That expectation has now been left looking optimistic, they say. A pay-out greater than 50% is now not seen until 2018 at best. Chief Executive António Horta-Osório, said: "Over the last three years we have reshaped, simplified and strengthened the business to create a low-risk efficient Retail and Commercial bank that is focused on our customers and on helping Britain prosper. "Our significant progress in delivering sustainable improvements in our capital position and our profitability, despite legacy issues, is testament to the strength of our business model and the commitment of our people, and has enabled the UK government to start to return the bank to full private ownership." Lloyds has also confirmed that preparation of documents required for a proposed sale of shares in the state-backed bank to the public has started.Shares dropped 3% to 80.80p at 10: 53 on Monday.RD