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Lloyds 2012 Income to Decline After Full-Year Profit Drop

Lloyds 2012 Income to Decline After Full-Year Profit Slumps
An embossed company logo sits above a branch of Lloyds TSB bank, part of Lloyds Banking Group Plc, in Epsom, U.K. Photographer: Chris Ratcliffe/Bloomberg

Lloyds Banking Group Plc, Britain’s largest mortgage lender, posted a wider-than-estimated full-year loss on a weaker U.K. economy and said income will drop in 2012.

The net loss widened to 2.8 billion pounds ($4.4 billion) from 320 million pounds in 2010, after the bank compensated customers mis-sold loan insurance, the London-based lender said in a statement today. The loss missed the 2.41 billion-pound median estimate of 14 analysts surveyed by Bloomberg.

The anemic economic outlook forced the lender to delay revenue and profitability targets set last year. A prolonged period of low interest rates is also hurting the lender’s net interest margin, the difference between what it earns on loans and its cost of funding. Chief Executive Officer Antonio Horta-Osorio, who took over from Eric Daniels in March last year, today announced an additional 200 million pounds in cost savings by 2014 to maintain profit.

“This is going to be a very difficult year,” Horta-Osorio, 48, told reporters on a conference call today. “We expect the attainment of our income-related targets to be delayed as a result of the weaker economic outlook.”

Lloyds fell 2.3 percent to 35.73 pence in London trading, less than half the 73.6 pence the government paid for its stake when it provided a bailout of more than 20 billion pounds to Lloyds in 2008 after its takeover of HBOS Plc. The Bloomberg Europe Banks and Financial Services Index gained 0.9 percent.

‘Realistic Appraisal’

“Analysts were quite skeptical of his predecessor’s net interest margin target,” said Bruce Packard, an analyst at Seymour Pierce in London with a “hold” rating on the shares. “Now it feels like we are getting closer to a realistic appraisal of the business.”

The bank said today it expects it won’t meet the target it set in June of boosting return on equity to 12.5 percent to 14.5 percent by the end of 2014. Lloyds’s net interest margin fell 14 basis points to 2.07 percent. The margin will drop by the same amount in 2012 and be below 2 percent, the bank said.

“The outlook statement has a lot of home truths in it and contains some very cautious messages,” said Ian Gordon, an analyst at Investec Bank Plc in London, with a “hold” rating on the stock. “We knew that revenues were falling but now we know that they’re falling by a lot more.”

Lloyds said it had made impairments on 90 percent of its 10.9 billion-pound Irish commercial property book as the country’s property market worsened. In all, two-thirds of the bank’s Irish loans are unlikely to be repaid, Lloyds said.

PPI Redress

Pretax profit at Lloyds’s consumer banking unit fell to 3.64 billion pounds from 3.99 billion pounds. At the insurance unit, pretax profit rose to 1.42 billion pounds from 1.33 billion pounds.

The bank in August set aside 3.2 billion pounds to compensate customers who were mis-sold payment protection insurance. The insurance of payments on credit cards and mortgages in case of illness or unemployment, was improperly sold by the biggest U.K. banks. Clients who bought the policies rarely compared prices or terms and sometimes were not covered. Royal Bank of Scotland Group Plc, Britain’s biggest state-owned lender, yesterday posted a net loss of 2 billion pounds on bad loan provisions in Ireland and insurance compensation.

Government Funding

Lloyds is also trying to wean itself off inexpensive government loans and replaces them with wholesale funding. The lender reduced support from the government and central bank by 73 billion pounds to 24 billion pounds last year. The bank raised 35 billion pounds of funding last year, about 10 billion more than initially targeted.

Lloyds has announced about 43,000 jobs in the last three years and closed overseas units to focus on the U.K. as part of a plan to cut costs by 1.5 billion pounds. Horta-Osorio said today that the additional costs cuts won’t lead to extra job reductions.

The bank said today has made “good progress” on its plan to sell 632 branches to Co-Operative Bank Plc to comply with European Union state-aid rules. Lloyds said it expects to complete the sale by the end of 2013.

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 last year. The bank’s former CEO, Eric Daniels, was stripped of 40 percent of his bonus last week, losing about 580,000 pounds worth of deferred stock, as he was penalized for the improper sale of insurance.

Lloyds cut the amount of money it sets aside for employee bonuses by 30 percent to 375 million pounds. Cash payments will be capped at 2,000 pounds and above that level will be subject to deferral and clawback, the bank said.

Finance Director George Culmer joins the bank on May 15, Chairman Win Bischoff told reporters today. He replaces Tim Tookey.

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