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Lloyds Says Income Targets at Risk as Pretax Profit Drops

Lloyds May Miss Income Targets as Pretax Profit Declines 21%
A sign stands outside a branch of Lloyds TSB bank, part of the Lloyds Banking Group Plc, in London. Photographer: Simon Dawson/Bloomberg

Nov. 8 (Bloomberg) -- Lloyds Banking Group Plc said it may miss financial targets even as Britain’s biggest mortgage lender posted smaller-than-expected provisions for bad loans in the third quarter.

Profit before costs linked to the lender’s purchase of HBOS Plc fell 21 percent from the second quarter to 644 million pounds ($1.03 billion), Lloyds said in a statement today. That missed the 754 million-pound median estimate of six analysts surveyed by Bloomberg. Impairments fell 30 percent to 1.96 billion pounds, 300 million pounds less than estimated by Andrew Lim, an analyst at Espirito Santo Investment Bank in London.

Economists are downgrading their growth forecasts for the U.K. economy and pushing back expectations for interest rate increases from the Bank of England. That’s going to squeeze Lloyds’s margins, the difference between what it earns on loans and its funding cost, because the bank relies on Britain for 90 percent of revenue. Lloyds said income targets set in June for 2014 may be delayed.

“There was some nervousness in the market ahead of these results,” said Bruce Packard, a banking analyst at Seymour Pierce Ltd. in London. “The fact that there were no monsters in there is reassuring. I didn’t think their 2014 targets were ever achievable.”

Lloyds rose 4.4 percent to 28.9 pence at the close in London, the first gain in eight trading days. The shares have declined 11 percent this month and are 56 percent down this year. The government paid an average of 73.6 pence a share for its stake in the bank.

Medical Advice

Chief Executive Officer Antonio Horta-Osorio, 47, is taking a leave of absence following medical advice and has been replaced temporarily by Finance Director Tim Tookey, the bank said on Nov. 2. Lloyds has announced plans for a total of 42,000 job cuts in the past three years, closed overseas units and pledged a narrower focus on its core U.K. market as it seeks to wean itself off cheap central bank loans.

Horta-Osorio, who replaced Eric Daniels eight months ago is suffering from fatigue, a person familiar with the matter said last week. Tookey is due to leave the bank in February.

Horta-Osorio is expected back before the end of the year, Tookey told journalists on a conference call today.

“Only four months after delivering its strategic plan, the company is already wavering on its medium-term financial targets,” Gary Greenwood, a banking analyst at Shore Capital in Liverpool wrote in a note to clients. “We were already anticipating them to miss their target. Overall a bit of a messy set of numbers with some disappointment.”

British Economy

A company spokeswoman didn’t specify which of the bank’s goals may be delayed. In June, Lloyds said revenue would grow faster than gross domestic product by the end of 2014. The British economy grew 0.5 percent in the third-quarter. Lloyds’s net interest margin target should rise to between 2.15 percent and 2.3 percent by the end of 2014, the company forecast in June. The third-quarter margin was 2.05 percent, the bank said today.

Bad loan provisions were 300 million pounds less than was expected, according to Lim at Espirito Santo Investment Bank.

Non-core assets reduced by 11 billion pounds in the quarter to 151.4 billion pounds and have shrunk by 42.3 billion pounds this year, Lloyds said in the statement.

“Today’s statement is hardly worse than expected,” Ian Gordon, an analyst at Evolution Securities Ltd. in London, wrote in a note to clients today. “We are hardly the greatest admirers of Lloyds, yet for all its many faults, we see a clear value opportunity at current levels.”

Home Loans

The bank holds more than a quarter of total British home loans and is the country’s second-biggest government-aided bank, with taxpayers holding 41 percent of the shares following a 20.3 billion-pound bailout three years ago. Revenue declined 5.4 percent to 5.16 billion pounds, while costs were little changed at 2.58 billion pounds.

About 10 percent of Lloyds’s “mainstream” mortgage book is made up of loans valued at more than 100 percent of the value of the homes against which they are secured, the bank said today.

Barclays Plc CEO Robert Diamond referred to a period of “considerable challenge and uncertainty” on Oct. 31 and said that the job-cutting trend, which has seen 3,500 posts removed this year, would continue.

RBS, Britain’s biggest government-controlled bank, last week posted a bigger-than-estimated decline in third-quarter profit as Europe’s sovereign debt crisis eroded securities-unit revenue. CEO Stephen Hester said “difficult conditions” would persist this year and promised further job reductions in addition to the 27,000 posts cut since his bank’s 2008 government bailout.

‘Material Reductions’

Lloyds’s investments in Italian banking groups and asset-backed securities fell 31 percent to 1.27 billion pounds from 1.83 billion pounds for the year earlier. Total holdings in Belgium, Greece, Ireland, Italy, Portugal and Spain fell 14 percent to 5.34 billion pounds from 6.21 billion pounds.

“We’ve made material reductions in our exposure to banks across the troubled economies in Europe,” Tookey said. “We’re watching the general euro zone issue with a lot of caution. It’s a very important trading partner to the U.K.”

The company issued 5.4 billion pounds of bonds in the third quarter and has completed its plan for this year, Lloyds said. The bank said it reduced its liquidity support from the government and central bank by 60 billion in the first nine months to 36.8 billion pounds. The loan-to-deposit ratio improved to 140 percent from 154 percent a year earlier.

The bank’s core Tier 1 ratio, a measure of financial strength, rose to 10.3 percent at the end of September from a year earlier.

Lloyds has started talks with the U.K. Listing Authority regarding a possible initial public offering of 632 consumer-banking branches it’s required to sell after receiving a state bailout. The bank has also received “a number of approaches” for the businesses, Lloyds said.

To contact the reporter on this story: Gavin Finch in London at Howard Mustoe in London at

To contact the editor responsible for this story: Edward Evans at

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