Lloyds Posts Loss on Loan Insurance, Swaps Compensation

Lloyds Banking Group Plc, Britain’s biggest mortgage lender, posted its third straight full-year net loss and indicated profit margins will be narrower than analyst estimates amid a faltering economic recovery.

The loss narrowed to 1.43 billion pounds ($2.2 billion) from 2.8 billion pounds in the year-earlier period, the London-based lender said in a statement today. Lloyds forecast a net interest margin, the difference between earnings on loans and the cost of funding, of 1.98 percent for 2013, less than the 2 percent estimate of Ian Gordon, an analyst at Investec Plc in London.

Margins are being pressured by higher wholesale funding costs and increased competition for deposits as Chief Executive Officer Antonio Horta-Osorio struggles to turn around the 39 percent government-owned lender. His efforts to return the bank to profit are also being stymied by past regulatory missteps such as the improper selling of loan insurance and interest rate hedging products that will cost an additional 1.81 billion pounds in compensation payments, Lloyds said today.

“In terms of forward-looking guidance and margins, there’s going to be bit of disappointment there,” said Gordon, who rates Lloyds a sell. “The market will focus on that.”

Shares Fall

The shares declined 2.2 percent to 53.25 pence in London. The government paid the equivalent of about 61 pence a share when it bailed out the lender following its acquisition of HBOS Plc in 2008, according to Lloyds.

“The government’s strategy remains to see Lloyds continue the progress it has made in reforming itself into a strong and sustainable bank,” a spokesman for the Treasury said in a statement today. “There is still work to be done as it continues to deal with the legacy of the past.”

Lloyds earmarked 1.5 billion pounds in the fourth quarter to compensate customers wrongly sold payment protection insurance, taking its total charge for the products to about 6.8 billion pounds, more than any other U.K. lender. The bank also increased its provision for wrongly sold interest rate swaps by 310 million pounds. The lender didn’t provide an estimate for how much it may have to set aside to settle allegations of Libor-rigging.

Total Bill

Britain’s biggest banks have reserved more than 13 billion pounds for PPI compensation. Royal Bank of Scotland Group Plc yesterday made an additional PPI provision of 450 million pounds and 650 million pounds for clients wrongly sold interest-rate swaps.

Horta-Osorio is reducing expenses to strengthen the bank’s balance sheet and forecast a reduction in total costs to about 9.8 billion pounds in 2013 from about 10 billion pounds, the company said. The bank has cut more than 40,000 jobs and closed overseas units to focus on the U.K. since it acquired HBOS.

“He’s achieved a lot but there is nothing Horta-Osorio can do about the state of the U.K. economy, on which Lloyds is dependent,” said Simon Maughan, a financial strategist at Olivetree Securities Ltd. in London. “Where are the comments about rising revenue, where is the talk about future growth? There’s not much on that in here.”

Lloyds didn’t give any update on its plans for resuming dividend payments, which haven’t been made since it was rescued.

Reduced Risk

“We are now ahead of plan in creating a competitive advantage through a reduced risk premium and best-in-class efficiency,” said Horta-Osorio, 49. “We expect this to enable us to return to profitability.”

Even after posting a third straight yearly loss, Horta-Osorio will receive a bonus for 2012. He won’t receive the 1.49 million-pound award until the shares rise above 73.6 pence or the government has sold a third of its stake for more than the price it paid. Horta-Osorio didn’t take a bonus for 2011.

Lloyds has said it is assisting regulators in their investigations into Libor wrongdoing and has been named as a defendant in U.S. class-action lawsuits linked to allegations various banks manipulated the benchmark interest rate for more than $350 trillion of securities from derivatives to student loans.

Lloyds’s loss narrowed as provisions for souring loans fell 42 percent to 5.7 billion pounds last year as impairments slowed at its Irish unit. The firm said it expected to see a “substantial reduction” in the charge for this year. The net interest margin fell to 1.93 percent in 2012 from 2.07 percent.

Branch Sale

The bank said it expects to complete the sale of 632 branches to Co-Operative Bank Plc to comply with European Union state-aid rules by the end of November.

The 750 million-pound sale, agreed in July, has stalled after the Financial Services Authority questioned whether the company’s managers have enough banking experience to run the enlarged business.

Concern was heightened by the departure last month of Chief Financial Officer James Mack, the latest senior executive to quit the firm. Lloyds has planned for an initial public offering of the branches as a “fall back option,” the company said today.