Lloyds Posts Unexpected First-Half Loss on Insurance Redress

Lloyds First-Half Net Loss Misses Estimates on PPI Compensation
Lloyds set aside an extra 700 million pounds during the period to compensate customers who were mis-sold loan insurance. Photographer: Chris Ratcliffe/Bloomberg

Lloyds Banking Group Plc, the first of Britain’s four biggest banks to report earnings, posted an unexpected loss after setting aside additional money to compensate clients mis-sold loan insurance.

The net loss narrowed to 641 million pounds ($998 million) in the first half from 2.28 billion pounds in the year-earlier period, the London-based lender said in a statement today. Analysts had predicted a 314 million-pound profit, according to the median estimate of five surveyed by Bloomberg. Lloyds set aside a further 700 million pounds in the second quarter to compensate customers mis-sold payment protection insurance.

Today’s provision brings the total the bank has earmarked for redress to 4.3 billion pounds, more than the sum set aside by Lloyds’s three largest British competitors. Regulators have ordered U.K. banks to compensate clients who were forced to buy, or didn’t know they had purchased, insurance to cover repayments on credit cards or mortgages they were taking out.

“This is an industry wide problem, and other banks are going to follow Lloyds and do something similar,” said Gary Greenwood, an analyst at Shore Capital Group Ltd. in Liverpool, England. “The banks underestimated how aggressive the lawyers were going to be in pursuing PPI claims.”

Lloyds fell 1.1 percent to 28.97 pence in London trading. The stock has gained 12 percent this year, making it the best performer in the six-member FTSE 350 Banks Index. The Treasury, which owns about 40 percent of the bank, paid about 73.6 pence a share for its stake.

More Provisions?

“I’d like to say categorically the 700 million represents the final word on PPI provision,” Finance Director George Culmer told reporters on a conference call today. “However, it’s made on future claims and, while we’ve conducted as much research into that, we can’t really speak for what the ultimate number might be.”

The increase in PPI provisions will mean lower profits and so bonuses this year will be lower than they would otherwise be, Chairman Win Bischoff said at a press conference in London today.

Chief Executive Officer Antonio Horta-Osorio blamed so-called claims-management companies, which help individuals pursue cases against firms for a fee or percentage of any successful award, for inflating the costs. More than half of claims received from some firms were linked to insurance policies that didn’t exist, he said on the call. The lender has added 1,000 more people to process erroneous claims, he said.

“Mis-sold PPI policies are an industry legacy issue but by redressing those affected quickly we continue to do the right thing for our customers,” Horta-Osorio, 48, said in the statement. “We are on track to deliver our strategic aims and we are making significant progress with our financial targets.”

Barclays Reports

Barclays Plc, which analysts expect will post an 11 percent increase in first-half pretax profit tomorrow, has set aside 1.3 billion pounds for PPI. HSBC Holdings Plc, Europe’s largest bank, has made a 770 million-pound provision and Royal Bank of Scotland Group Plc 1.2 billion pounds. The two report next week.

In all, the country’s four biggest banks by assets have set aside about 7.6 billion pounds for compensation. The Financial Services Authority estimated last year banks would need to pay about 9 billion pounds.

Lloyds said it will implement early the Independent Commission on Banking’s recommendations to erect fire-breaks around its consumer banking unit. Firms have until 2019 to comply with the plans in full, though Bischoff said investors would force banks to implement the proposals by 2015.

“This will be another important step toward providing sustainable returns for our shareholders and support to our customers and communities,” Horta-Osorio said on a call with analysts today. “By doing that we will return the bank to profitability and that will ultimately give taxpayers the opportunity to get their money back.”

Libor Suits

Lloyds said it’s also been named as defendant in U.S. class action lawsuits linked to allegations banks manipulated the London interbank offered rate, the benchmark interest rate for more than $500 trillion of securities from derivatives to student loans. Barclays was last month fined a record 290 million pounds for rigging the rate.

Horta-Osorio declined to give an estimate for the potential cost of Libor lawsuits and regulatory settlements. The lender may be fined 420 million pounds by regulators over its role in the scandal and face a further 38 million pound charge to settle civil lawsuits, Morgan Stanley analyst Betsy Graseck said in a July 12 report to clients.

‘Ultimate Outcome’

“It is currently not possible to predict the scope and ultimate outcome of the various regulatory investigation or private lawsuits, including the timing and scale of the potential impact of any investigations and private lawsuits,” Lloyds said in today’s statement.

Lloyds’s revenue and profit margins are being squeezed as the U.K. economy contracts and the Bank of England holds its benchmark interest rate at a record low. Lloyds’s underlying revenue, which excludes one-time items, slid 17 percent to about 9.3 billion pounds in the first half, the bank said.

Net interest margin, the difference between what Lloyds earns on loans and its cost of funding, fell to 1.93 percent by the end of the first half, from 2.12 percent at the end of June last year, the bank said. That met the 1.93 percent estimate of Credit Suisse Group AG analysts led by London-based Carla Antunes da Silva. Horta-Osorio said in May the margin would narrow to less than 2 percent in 2012.

Impairments for souring loans fell 42 percent to 3.2 billion pounds in the first half, as charges in Ireland fell by half. Lloyds’s earnings have been hurt as it set aside more than 10 billion pounds to cover losses on real estate loans in the country, where commercial real estate prices slumped more than 65 percent and house prices almost halved since 2007.

Irish Notes

“The rate of increase in newly impaired loans in Ireland has slowed through the second half of 2011 and the first half of 2012,” Lloyds said in today’s statement.

Lloyds set up a so-called non-core division after its bailout to house assets, such as its Irish operation, that it plans to sell or wind down. The bank shrunk the division by 44.9 billion pounds to 117.5 billion pounds in the year through June. The lender said it expects to reduce non-core assets to less than 70 billion pounds by the end of 2014.

Horta-Osorio said the bank would either sell or close its Intelligent Finance unit after the Co-Operative Bank Plc said it did not want the business as part of the package of 632 branches that it bought last week for 750 million pounds. Lloyds was told to sell the branches and Intelligent Finance to comply with European Union rules on state aid European Union rules on state aid in the wake of its rescue by the British government following the 2008 financial crisis.

The lender boosted its core Tier 1 capital ratio, a measure of financial strength, to 11.3 percent from 10.8 percent at the end of last year. It will also raise its target for lending to small- and medium-sized businesses by 1 billion pounds to 13 billion pounds in 2012.

Investors will force banks to implement Vickers’ reforms by 2015, long before the 2019 deadline, Lloyds’s Bischoff said.

Bischoff, 71, said he planned to retire from the bank within one to two years. He took over from Victor Blank in 2009, and was formerly chairman of Citigroup Inc. and Schroders. Bischoff was knighted by Queen Elizabeth II in 2000.


Before it's here, it's on the Bloomberg Terminal. LEARN MORE