Lloyds Exceeds Target on Asset Reductions as Profit Rises

Lloyds First-Quarter Profit Jumps as Loan Impairments Fall
A sign hangs on the wall outside a Lloyds TSB bank, in Thame, U.K. Photographer: Chris Ratcliffe/Bloomberg

Lloyds Banking Group Plc will shrink assets further and faster than forecast as Britain’s biggest mortgage lender reduces its reliance on short-term funding.

The lender raised its asset-reduction plan for the year by 5 billion pounds ($8.1 billion) to at least 30 billion pounds and expects to meet its 2014 target a year early, London-based Lloyds said in a statement today. Pretax profit in the first quarter more than doubled to 628 million pounds, beating the 422 million-pound median estimate of seven analysts surveyed by Bloomberg.

Chief Executive Officer Antonio Horta-Osorio, 48, is seeking to strengthen Lloyds’s balance sheet by selling assets, cutting costs and bolstering its capital strength. Lloyds, which cut more than 30,000 jobs since its 20 billion-pound taxpayer rescue in 2008, reduced its reliance on short-term funding by 41 percent in the first quarter. The bank plans to provide a schedule for the potential resumption of dividends after it reports first half earnings in July, Horta-Osorio told analysts today.

“Lloyds is very much focused on getting its balance sheet in order and this shows they are making good progress,” Gary Greenwood, an analyst at Shore Capital in Liverpool, said. “Pretty much all the balance sheet metrics are moving in the right direction.”

Lloyds rose 8.3 percent to 33.6 pence in London trading, less than half the 73.6 pence the government paid for its stake when it provided a bailout in 2008 after its takeover of HBOS Plc. The shares have gained 30 percent this year, making it the third-best performer in the five-member FTSE 350 Banks Index.

‘Strong Progress’

The lender hit its target of reducing its loan to deposit ratio to 130 percent two years early and is seeking a 120 percent ratio within 12 months, Lloyds said. That means the company would lend 120 pence for every pound of deposits. The bank had a loan-to-deposit ratio of 148 percent in the first quarter of last year. Lloyds increased customer deposits 6 percent to 412 billion pounds in the period.

“The strong progress we have made in the first quarter supports our confidence in the delivery of our 2012 financial guidance, despite economic and regulatory headwinds and competitive markets,” Horta-Osorio, said in the statement. “Our income driven medium-term financial targets are achievable over time.”

Margin Narrows

The bank said in February it won’t meet the target it set in June of boosting return on equity to between 12.5 percent and 14.5 percent by the end of 2014. The bank had a 6.2 percent loss on equity for 2011. Horta-Osorio said he expects the bank’s net interest margin, the difference between what it earns on loans and its cost of funding, will be below 2 percent in 2012, maintaining his earlier guidance. The margin narrowed to 1.95 percentage points in the first quarter, from 2.16 percent points a year ago.

Lloyds cut its reliance on wholesale funding by 24 percent to 231.3 billion pounds. Funding with a maturity of less than one year fell by 41 percent to 91.4 billion pounds. The bank boosted its core Tier 1 ratio, a measure of financial strength, to 11 percent in the quarter, from 10 percent a year earlier. That exceeds the 9.5 percent target required by the Basel Committee on Banking Supervision for lenders such as Lloyds, which are deemed too big to fail.

The bank shrank its use of the Credit Guarantee Scheme, the British government’s banking-assistance program, by 10.6 billion pounds and the lender said it will repay the remaining 12.9 billion pounds this year. Lloyds, which has weaned itself off emergency funding support from the Bank of England, took 11.4 billion pounds of three-year loans from the European Central Bank at a Feb. 29 auction.

‘Path to Normality’

‘The path to normality for Lloyds is now well advanced,’’ said Ian Gordon, an analyst at Investec Securities in London. “The loan to deposit and the core Tier 1 ratios are much better than expected. They appear to have shrunk the balance sheet by more than expected without any negative surprises.”

Following its bailout, Lloyds set up the non-core division, which houses operations designated for sale or winding down such as its entire Irish operation. Lloyds shrunk the division by 44.6 billion pounds to 128.3 billion pounds in the year through March. The lender said it has completed its program of bond sales in 2012.

The drop in loan impairments in the first quarter was driven by lower charges in Ireland, which fell to 526 million pounds from 1.14 billion pounds. More than two-thirds of all its Irish loans were impaired at the end of the first quarter.

Insurance Mis-Selling

The bank set aside an additional 375 million pounds to compensate customers who were mis-sold payment protection insurance after a 3.2 billion-pound charge last year. PPI complaints increased in the first quarter, driven by claims-management companies, the lender said.

Lloyds reported a statutory pretax profit of 288 million pounds in the quarter, compared with a 3.47 billion loss a year earlier.

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.

“Lloyds and HBOS sold this product for too long and with significant intensity,” Horta-Osorio told reporters on a conference call today. “As soon as I became CEO, it was something I stopped.”

Barclays Plc last week set aside an additional 300 million pounds for compensation after 1 billion-pound charge last year.

Lloyds said last week it would consider alternative bids for 632 branches it has to sell, exiting an “exclusivity agreement” it had with Co-Operative Group Ltd., and paving the way to reopen talks with NBNK Investments Plc. Lloyds has to sell the assets by the end of November 2013 to comply with European Union state-aid rules after its bailout.

Horta-Osorio said today he’s “very happy” there’s renewed interest in the branches and is “very much” willing to engage with NBNK.


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