Lloyds Posts Third-Quarter Loss on Loan Insurance Redress

Lloyds CEO Antonio Horta-Osorio
Antonio Horta-Osorio, chief executive officer of Lloyds Banking Group Plc. Photographer: Simon Dawson/Bloomberg

Lloyds Banking Group Plc, Britain’s biggest mortgage lender, set aside an additional 1 billion pounds ($1.6 billion) to compensate clients wrongly sold loan insurance as it posted a narrower third-quarter loss.

The net loss shrank to 361 million pounds from 501 million pounds in the year-earlier period, Lloyds said in a statement today. The provision brings the total it has earmarked for redress to 5.3 billion pounds, more than any other U.K. bank.

British lenders have put aside more than 10 billion pounds after regulators ordered them to compensate customers who were forced to buy, or didn’t know they had bought insurance to cover their repayments on mortgages, credit cards and other loans. Barclays Plc, Britain’s second-biggest bank, said on Oct. 18 it would take an additional 700 million-pound charge for payment protection insurance, prompting analysts to speculate Lloyds would have to follow.

“There was a big worry that Lloyds was going to have to take another 3 to 5 billion pounds of PPI provisioning,” said Cormac Leech, a banking analyst at Liberum Capital in London who has a buy rating on the stock. “There are quite a few key positives here such as lower loan losses, a smaller-than-expected PPI charge and an improvement” on its return on assets, he added.

The stock closed 8.3 percent higher at 43.94 pence in London. The shares have rebounded 70 percent this year, making Lloyds the best performer in the six-member FTSE 350 Banks Index. The Treasury, which owns about 40 percent of the bank after bailing it out in 2008, paid about 73.6 pence a share for its stake.

Payouts Fall

The amount Lloyds pays out monthly to settle PPI claims fell to 250 million pounds a month in the third quarter from 300 million pounds in the second half, Finance Director George Culmer told reporters on a call today.

“We would expect that trend to continue,” Culmer said. It “remains uncertain” if more provisions are needed, he said.

Claims-management companies, which help customers pursue compensation for a fee or percentage of any award, have inflated the cost of PPI claims and more than half from some firms are bogus, the bank said today.

Barclays has made 2 billion pounds of provisions to cover insurance redress, Royal Bank of Scotland Group Plc 1.3 billion pounds, HSBC Holdings Plc 1.1 billion pounds and Santander U.K. about 731 million pounds. RBS may need to post an extra 300 million pounds when it reports third-quarter earnings at 7 a.m. tomorrow, according to Gary Greenwood, a banks analyst at Shore Capital Ltd. in Liverpool, England.

German Claims

Lloyds also disclosed that it had set aside an additional 150 million pounds in potential compensation for German clients sold policies issued by its insurance unit Clerical Medical Investment Group Ltd. That takes the firm’s total provision to 325 million pounds.

Lloyds’s loss narrowed as provisions for souring mortgages fell 35 percent to 1.26 billion pounds as impairments slowed at its Irish unit. Lloyds has set aside more than 10 billion pounds to cover losses on real estate loans in Ireland, where commercial real estate prices slumped more than 65 percent and house prices almost halved since 2007.

The bank said today it expects impairments to decline to 6 billion pounds in 2012 from an earlier estimate of 7.2 billion pounds.

Beat Estimates

Pretax profit increased to 840 million pounds in the third quarter from 419 million pounds in the year-earlier period, beating the 554 million-pound median estimate of 14 analysts surveyed by Bloomberg.

“We have made further significant progress this quarter, improving underlying performance in a challenging environment,” Chief Executive Officer Antonio Horta-Osorio, 48, said in the statement. “Disappointingly, legacy issues continue to affect our results.”

Lloyds’s profit margins are still under pressure as the Bank of England holds its benchmark interest rate at a record low amid an anemic economic growth.

The net interest margin, the difference between what Lloyds earns on loans and its cost of funding, narrowed to 1.93 percent in the third quarter, from 2.05 percent in the three months to the end of September last year, the bank said.

That missed the 1.94 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.

Lloyds didn’t give any update on its plans for resuming dividend payments, even after telling analysts it would do so in the second half. The bank hasn’t paid a dividend since it was bailed out following its takeover of HBOS Plc.

“There’s nothing in these results that indicates Lloyds is going to be paying a dividend,” said Simon Maughan, a financial industry strategist at Olivetree Securities Ltd. in London. “If they thought they were going to be able to pay a dividend anytime soon, they would be shouting about it from the rooftops.”

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