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by Daniel Grote on Feb 27, 2015 at 13:13

The Treasury has apologised after incorrectly telling some investors holding Lloyds (LLOY ) bonds that the bank had won permission to redeem them.

The message was reportedly sent to 34 people, thought to be retail investors holding Lloyds enhanced capital notes (ECNs). It stated that Lloyds had been given permission to redeem the notes by the Prudential Regulation Authority (PRA), when that was not the case.

In the template letter, sent on Monday, the Treasury said: ‘As you are aware, Lloyds has announced that it intends to approach the PRA for approval to call the relevant series of notes and the PRA has approved Lloyds’ application to call the relevant series of notes.’

Nicholas Macpherson, Treasury permanent secretary, has apologised for the error. ‘Due to a clerical error at HM Treasury, incorrect information regarding ongoing regulatory decisions by the PRA has been included in correspondence to certain individuals and sent out under electronic signature,’ he said.

‘HM Treasury incorrectly informed those it wrote to that the PRA had approved Lloyds’ application to call the relevant series of notes. HM Treasury understands that the PRA has not yet made a decision regarding whether to approve Lloyds Banking Groups’ application. We apologise for this error, and sincerely regret any problems caused.’

Retail investors hit

Tens of thousands of retail investors hold around £400 million in the Lloyds ECNs, many of which pay interest of more than 10%. The bank issued them to raise money in the financial crisis, with many investors receiving them in exchange for permanent interest-bearing shares issued by building societies that had been bought by Lloyds, such as Halifax, Cheltenham & Gloucester and Birmingham Midshires.

But the bank claims that the ECNs now no longer count as capital in the eyes of regulators. It said the notes had not counted towards the PRA’s stress test of the bank in December, arguing that gave it the right to redeem the bonds, and that it intended to apply for permission from the PRA.

Lloyds said in December that it could redeem the bonds at ‘par’ — or face value. The bonds are currently trading above par.

Mark Taber, who has campaigned against the banks redeeming the bonds, said the Treasury’s error had ‘worried a lot of people’.

‘The letter will have got to people in the market,’ he said. ‘I’ve had an email from a market participant saying, The markets are confused by this back and forth.’

Tyrie: has called for inquiry

Andrew Tyrie, chairman of the Treasury Committee, said: ‘An inquiry — at least internally — is needed into how potentially market sensitive information was put out in correspondence. The Treasury will need to tighten its controls. Parliament will need reassurance that everything reasonable is being done to ensure that there is not a recurrence.’

Dividend confirmed as profit rockets

The news has threatened to overshadow Lloyds’ announcement that it will pay its first dividend since the financial crisis on the back of a sharp rise in profits.

In a symbolic move for the banking sector, Lloyds said it would pay a 0.75p dividend, which is below reports of a 1p payout earlier this week. This translates to a £535 million return to shareholders, with £130 million going to the government which holds a 23.9% stake in the bank.

Lloyds shares rose 1.7% to nearly 80p after it told investors: ‘The group’s aim is to have a progressive dividend policy, with dividends starting at a modest level and increasing over the medium term to a dividend payout ratio of at least 50% of sustainable earnings. Subject to performance, the intention is to pay an interim and final dividend for 2015.’

Full-year results showed the bank’s statutory profit leaped to £1.8 billion last year from £415 million in 2013, despite having to set aside an additional £700 million to lift provisions for mis-sold payment protection insurance (PPI) to £2.2 billion.

Chief executive Antonio Horta-Osorio is set to receive an £800,000 bonus on top a basic pay of £1 million along with a deferred bonus award of 535,083 shares at 10p a share.

Equity income boost

The resumption of dividend payments at Lloyds will provide a boost to many equity income fund managers. Around one in five of them own the stock, despite the lack of dividends since 2008, with many building up positions in anticipation of a payout. That’s more than the number owning Standard Chartered (STAN ) despite the bank currently offering a yield of 5%.

Frost: eyeing dividend rises

Citywire A-rated Adrian Frost. manager of Artemis Income alongside AA-rated Adrian Gosden. holds 1.7% of the fund in Lloyds. ‘Lloyds has a strong capital position and is achieving its regulatory targets, and as the capital builds it is more a question of when rather than if the dividend rises,’ he said. ‘The opposite is true in that we find it difficult to discern the capital position and capital build at Standard Chartered, and therefore do not regard the existing dividend as secure.’

Online stock broker Hargreaves Lansdown said 14% of share investors on its Vantage platform held Lloyds, with a collective 2.5% exposure to the bank meaning they are ‘overweight’, holding proportionally more than the market. Lloyds makes up 1.9% of the FTSE All-Share.