Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc are set to post losses for 2011 this week before returning to profit as the state-controlled U.K. banks cut thousands of jobs and finish a series of writedowns.
RBS may report a net loss of 1.1 billion pounds ($1.75 billion) for the 12 months to Dec. 31 and post an 887 million-pound profit for 2012, according to the median estimate of 13 analysts surveyed by Bloomberg. Lloyds is estimated to report a 2.6 billion-pound loss for 2011 and a 1.5 billion-pound profit for 2012, according to a separate survey of 12 analysts.
Lloyds would have returned to profit last year if it hadn’t set aside 3.2 billion pounds to compensate customers who were improperly sold personal-loan insurance, while RBS’s loss would have been narrower without a 950 million-pound charge for similar insurance sales. RBS has announced 6,800 job reductions since August, while Lloyds said it was cutting 15,000 employees as the two banks restructure their businesses in the wake of bailouts four years ago.
“Impairments are coming down as the businesses shrink and losses are reduced,” said Shailesh Raikundlia, a banking analyst at Espirito Santo Investment Bank in London. “These things are not expected to be repeated. RBS and Lloyds are going to return to profit in 2012.”
RBS reports 2011 figures on Feb. 23, with Lloyds following a day later. The companies’ shares have risen 41 percent and 40 percent respectively this year, following a rally by lenders across Europe on speculation the worst of the region’s financial crises is over.
A Lloyds spokeswoman declined to comment on the earnings estimates. An RBS spokesman didn’t immediately return voicemails requesting comment.
The government was forced to rescue RBS at the height of the financial crisis, injecting 45.5 billion pounds of taxpayer money into the lender, making it the costliest bailout of any bank in the world. Lloyds ceded a 41 percent stake to the state and sought a bailout of more than 20 billion pounds after buying HBOS Plc, the U.K.’s biggest mortgage lender.
The taxpayer’s investment in both banks is about 29.7 billion pounds underwater, according to Bloomberg calculations. The U.K. paid about double the current market price for its shares in both companies.
Cost reductions from cutting jobs and exiting businesses won’t aid their profitability much this year, according to Gary Greenwood, an analyst at Shore Capital in Liverpool. He said RBS may report more detail on savings from its investment bank, which is exiting unprofitable cash equities, merger advisory and equity capital markets businesses.
Deposit ‘Price War’
Lloyds and RBS’s 2011 results were also affected by rising borrowing costs as the banks weaned themselves from low-interest government loans and took on costlier funding in wholesale markets. As the European sovereign-debt crisis continues to roil bond markets, the banks have been forced to compete for customer deposits as a source of funding.
For that reason, “market intelligence suggests retail funding costs are being bid up,” the Bank of England said in its December financial stability report. Banco Santander SA confirmed the trend when its U.K. unit reported results Jan. 31.
“A price war for deposits” may “be a driver of net interest margins coming back down,” said Bruce Packard, an analyst at Seymour Pierce in London.
RBS’s loan-to-deposit ratio fell by 2 percentage points to 112 percent in the third quarter, meaning the bank lent 112 pounds for every 100 pounds it took in deposits. At its worst in 2008, the ratio was 154 percent.
In response to having its senior debt and deposit ratings cut in October, RBS said it had made “significant progress” in strengthening its credit profile since 2008.
Lloyds improved its loan-to-deposit ratio to 140 percent in the third quarter from 154 percent a year earlier. It was 176 percent at the end of June 2009, and Chief Executive Officer Antonio Horta-Osorio plans to reduce the ratio to 130 percent.
Horta-Osorio said in January he’ll spurn his 2011 bonus given the bank’s full-year loss and his nine-week absence for exhaustion. Yesterday former CEO Eric Daniels was stripped of 40 percent of his bonus, losing about 580,000 pounds worth of deferred stock, as a result of the improper insurance sales.
While the banks will likely make profits in 2012, revenues aren’t going to improve, said Simon Willis, an analyst at Daniel Stewart Securities Plc. Lloyds’ full-year revenue for 2012 will fall 0.2 percent to 20.5 billion pounds, according to the Bloomberg survey, while RBS revenue will contract 2.7 percent to 26.3 billion pounds.
“Three years ago, quite a lot of people were looking for positive earnings from RBS and Lloyds in 2011 and certainly 2012, so the recovery has been deferred at least twice,” said Willis. “People will expect a recovery, but there’ll be an element of not entirely believing it until you see it.”
Still, smaller banks making fewer new loans may curb the likelihood of future problems, said Greenwood.
“These banks haven’t been writing a lot of new business and have been shrinking their balance sheets,” he said. “The scope for further big nasty losses is becoming more limited.”