Lloyds Posts Fourth Consecutive Loss on Costs of Redress

Lloyds Banking Group Plc (LLOY), Britain’s biggest mortgage lender, posted its fourth consecutive annual loss after earmarking 3.5 billion pounds ($5.8 billion) to compensate clients mis-sold products including loan insurance.

The net loss narrowed to 838 million pounds for 2013 from 1.47 billion pounds in 2012, missing the 519 million-pound median estimate of seven analysts surveyed by Bloomberg. Underlying profit, which excludes items such as customer redress and restructuring charges, more than doubled to 6.2 billion pounds, Lloyds said in a statement today.

The provision brings the total Lloyds has set aside to compensate clients sold payment-protection insurance that didn’t cover them or they didn’t need to about 9.8 billion pounds, the most among the U.K.’s banks. The rising cost is complicating Chief Executive Officer Antonio Horta-Osorio’s efforts to resume dividend payments as well as the government’s efforts to reduce its 33 percent stake in the bank.

“The legacy items such as PPI continue to weigh,” said Simon Willis, an analyst at Daniel Stewart Securities Plc in London. The rising cost of PPI is eroding Lloyds’s tangible net asset value, “which creates a constraint on share price performance. The valuation looks full,” he said.

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A pedestrian shelters from the rain beneath an umbrella as she stands outside a Lloyds Bank branch, a unit of Lloyds Banking Group Plc, in London. Close

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A pedestrian shelters from the rain beneath an umbrella as she stands outside a Lloyds Bank branch, a unit of Lloyds Banking Group Plc, in London.

The stock tumbled 2.7 percent to 81.32 pence in London trading today. It’s still up 47 percent in the past 12 months, making it the best-performing stock among Britain’s five largest banks.

Dividend Prospects

Horta-Osorio, 50, said the lender expects to apply to the regulator in the second half for permission to restart dividend payments. In the medium term, the bank expects to pay at least half its “sustainable” earnings in dividends, Horta-Osorio, 50, told reporters on a conference call today.

Lloyds is seeking to attract investors with the prospect of the payment as the government prepares to sell a further stake in the lender to individual investors. The bank last paid a cash dividend in 2008, before its takeover of HBOS Plc forced it to seek a 20 billion-pound bailout.

The Treasury sold a 3.2 billion-pound stake in the company to money managers in September, and Lloyds said earlier this month preparations are under way for a further sale. The stock is trading above the 61 pence the government says it will break even after providing its bailout.

“We are now a normal bank in the eyes of the regulator and therefore are concentrating now even further on simplifying the bank,” Horta-Osorio said.

Photographer: Simon Dawson/Bloomberg

A Lloyds bank sign sits outside a branch operated by the Lloyds Banking Group Plc in London. Close

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A Lloyds bank sign sits outside a branch operated by the Lloyds Banking Group Plc in London.

CEO’s Bonus

Horta-Osorio will receive a 1.7 million-pound bonus in stock that will vest in 2019. The bank will also pay about 395 million pounds in bonuses to employees, up from about 365 million pounds for 2012.

The lender set aside about 3.1 billion pounds to compensate clients wrongly sold PPI in the year as well as a further 130 million pounds for small- and medium-sized companies improperly sold interest-rate hedging products such as swaps.

The bank received about 37,000 complaints a month over PPI in the fourth quarter. Lloyds said that while the number fell in the fourth quarter, “we are now forecasting a slower decline in future volumes than previously expected.”

U.K. banks have now set aside about 19 billion pounds in compensation for clients wrongly sold payment-protection insurance. Barclays Plc (BARC) has earmarked about 4 billion pounds, Royal Bank of Scotland Group Plc 3.1 billion pounds and HSBC Holdings Plc (HSBA) 1.8 billion pounds.

Dwindling Impairments

Impairments for souring loans fell 21 percent to 1.52 billion pounds as losses from Ireland slowed while net interest income from rose 8 percent to 10.6 billion pounds. The lender expects to increase net lending in 2014 as the economy expands.

The net interest margin, the difference between its income from lending and its cost of funding, widened to 2.29 percent in the fourth quarter from 1.94 percent in the year-earlier period. Lloyds said it expects the measure to stabilize at the fourth-quarter level in 2014. In the core parts of the business Lloyds intends to keep, the margin widened to 2.64 percent.

“Investors will question whether the margin expansion story is over or if the company is generating room for upside surprise,” said Jonathan Tyce, a senior banks analyst at Bloomberg Industries in London.

The bank’s core Tier 1 capital ratio under the latest Basel III rules, a key measure of financial health, rose to 10.3 percent at Dec. 31 from 8.1 percent at the end of 2012.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Howard Mustoe in London at hmustoe@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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