Lloyds Seen Reporting the End of Era for Surging Impairments
Lloyds Banking Group Plc (LLOY), Britain’s biggest mortgage lender, may signal the end of an era of surging loan impairments and provisions for improperly sold insurance when it reports first-quarter earnings this week.
Pretax profit rose to 864 million pounds ($1.3 billion) in the first quarter from 288 million pounds a year ago, according to the median estimate of three analysts in a Bloomberg News survey. The bank will release the results at 7 a.m. tomorrow.
Loan impairments probably fell to about 1.1 billion pounds in that period from 1.7 billion pounds a year ago, with the London-based bank seen avoiding further provisions for payment protection insurance, the analysts said. That would mark the lowest quarterly impairments since 2008. The lender said today it sold its Spanish consumer banking operations to Banco Sabadell SA for as much as 104 million euros ($136 million).
“It looks like Lloyds has turned a corner on impairments as they’ve come down a long way from their peak,” said Gary Greenwood, an analyst at Shore Capital Ltd. in Liverpool, England, with a buy rating on the shares. “It also looks like we’re past the worst on PPI as well.”
Lloyds rose 0.5 percent to 53.16 pence at 9:16 a.m. in London. The shares have increased 11 percent this year, giving the company a market value of 38 billion pounds. By comparison, the Stoxx 600 Banks Index has advanced about 4.6 percent.
Lloyds’s return to profitability has been hampered by about 6.8 billion pounds of redress for improperly sold loan insurance and 12.1 billion pounds of losses tied to the real estate collapse in Ireland. The lender, 39 percent owned by the British government, posted its third annual loss in 2012.
Chief Executive Officer Antonio Horta-Osorio, 49, may still find it difficult to return the bank to the private sector even after cleaning up its balance sheet and cutting costs as low global interest rates and tougher regulatory requirements continue to undermine earnings.
“Horta-Osorio is doing a good job on costs and a good job on rebuilding the business,” said Christopher Wheeler, an analyst at Mediobanca SpA in London. “But they still haven’t got enough capital, and there are a number of other uncertainties remaining on the horizon for them.”
At Barclays Plc (BARC), the British lender that’s cutting 3,700 jobs as part of an overhaul, pretax profit excluding losses on the valuation of debt dropped 25 percent to 1.79 billion pounds in the first quarter from a year earlier. That missed the 2.1 billion-pound estimate of eight analysts surveyed by Bloomberg.
Analysts said Lloyds’s net interest margin, the difference between earnings on loans and the cost of funding, remained under pressure in the first quarter. Margins probably fell to 1.94 percent from 1.95 percent a year ago, Mark Phin, an analyst at Keefe, Bruyette & Woods Ltd., wrote in a note to clients. That’s below the bank’s forecast of 1.98 for 2013.
Revenue probably declined 4 percent to 4.63 billion pounds in the first quarter, Credit Suisse Group AG analysts including Carla Antunes-Silva said in a note.
British banks are struggling to revive earnings while meeting demands for higher capital buffers to help avoid future bailouts. The Bank of England last month called on lenders to raise 25 billion pounds of additional capital to cover bigger potential losses on commercial real estate, possible fines for mis-selling and stricter risk models.
Lloyds is currently weighing a sale of its Scottish Widows Investment Partnership unit to boost capital, four people with knowledge of the talks said last week. The bank last month sold a 20 percent stake in wealth manager St James’s Place Plc. (STJ)
Today, Lloyds announced the sale of its Spanish consumer and private-banking operations to Banco Sabadell, saying it was “rationalizing its international presence.” The bank will receive around 1.8 percent of Banco Sabadell’s shares, valued at 84 million euros, which it agreed to hold on to for at least two years, and a further 20 million euros in cash may be payable within five years. The sale will result in a 250 million-pound loss on disposal, according to Lloyds.
The U.K. lender is planning an initial public offering for 632 branches, a disposal required by the European Union following its 2008 bailout, after Co-Operative Bank Plc pulled out of an agreement to buy the assets. Co-Op cited the worsening economic outlook and tougher regulatory requirements for the decision.
Lloyds is also still being investigated by regulators worldwide as part of the probe into the rigging of benchmark interest rates. The bank is probing two money-markets traders over their alleged role in the rigging of interest rates, three people familiar with the matter said earlier this month.
Barclays was fined 290 million pounds for manipulating Libor in June. Royal Bank of Scotland Group Plc, the U.K.’s largest state-owned lender, received a fine of $612 million.
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