Lloyds Quarterly Profit Jumps as Loan Impairments Subside

Lloyds Banking Group Plc, Britain’s biggest mortgage lender, posted a near-threefold increase in first-quarter profit as impairments for souring loans dropped by more than analysts estimated.

Pretax profit before exceptional items rose to 1.48 billion pounds ($2.3 billion) from 497 million pounds in the year-earlier period, beating the 1.03 billion-pound median estimate of nine analysts surveyed by Bloomberg. Provisions fell 40 percent to 1 billion pounds, the London-based bank said in a statement today. Analysts had forecast 1.1 billion pounds.

Chief Executive Officer Antonio Horta-Osorio’s attempts to return the 39 percent government-owned bank to full-year profit have been hampered by more than 12.1 billion pounds of losses tied to the collapse of the Irish real estate market and the rising cost of compensating clients who were sold payment-protection insurance they didn’t need. The lender today made no additional provision to the 6.8 billion pounds it has already set aside for PPI redress.

“The balance sheet is steadily improving,” said Cormac Leech, an analyst at Liberum Capital Ltd. in London with a buy rating on the shares. “The fact they can do as well as they have in this environment shows their market dominance.”

Lloyds rose 1.6 percent to 54.33 pence in London trading, for a market value of about 39 billion pounds. The stock, which has climbed 13 percent this year, still trades for less than the 61 pence the government paid for its holding when it bailed out Lloyds in 2008 following its takeover of HBOS Plc.

Net Interest Margin

The bank posted a net profit of 1.53 billion pounds in the first quarter, compared with a 5 million-pound loss in the year-earlier period. Underlying revenue rose 3 percent to 4.89 billion pounds in the first three months, beating the 4.63 billion pound estimate of Credit Suisse Group AG analysts including Carla Antunes-Silva.

Lloyds said it reduced assets at its non-core unit by 6.3 billion pounds in the first quarter to 92.1 billion pounds, putting it ahead of its target to reduce assets by 20 billion pounds this year. The firm said it expects the unit to shrink to less than 70 billion pounds by the end of 2014.

The net interest margin, the difference between the bank’s income from lending and its cost of funding, widened to 1.96 percent in the first quarter from 1.95 percent a year ago. While that was below the bank’s target of 1.98 percent for 2013, the lender said today it still expects to meet that goal this year.

“We delivered a significantly improved” performance, Chief Financial Officer George Culmer told reporters on a conference call today. “The group’s core business is strongly capital-generative. Our transformation is ahead of schedule.”

Cost Targets

Horta-Osorio is cutting expenses to strengthen the bank’s balance sheet and said costs had fallen 6 percent to 2.4 billion pounds in the quarter. Lloyds said it expects to reduce expenses to 9.2 billion pounds this year, about 2 billion pounds less than in 2010 and twice the lender’s initial target.

The bank has eliminated more than 35,000 jobs since the bailout and announced plans to close more than half of its 30 overseas units to focus on Britain. Culmer said today the lender isn’t planning further job reductions.

“We remain confident in achieving our existing guidance,” Horta-Osorio, 49, said in the statement. The lender expects a “substantially reduced” impairment charge for 2013.

Capital Talks

Lloyds said it had not yet been told by regulators if it needs to bolster capital. 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’s core Tier 1 capital ratio under the latest rules set by the Basel Committee on Banking Supervision, a measure of financial strength, remained at 8.1 percent in the period. The bank expects the measure to increase to 9 percent by the year-end and more than 10 percent by the end of 2014.

Claire Kane, a London-based analyst at Royal Bank of Canada with an outperform rating on Lloyds, said in a report that those capital targets should make a 2014 dividend “more likely.”

In the meantime, Lloyds has been selling assets to bolster capital. Last month, it sold a 20 percent stake in wealth manager St. James’s Place Plc and it is weighing a sale of its Scottish Widows Investment Partnership unit.

Including the proceeds from asset sales and a 776 million-pound gain from the sale of government securities, Lloyds’s statutory pretax profit jumped to about 2 billion pounds in the quarter from 280 million pounds.

Co-Operative Bank Plc this month pulled out of an agreement to buy 632 Lloyds branches European regulators are forcing the bank to sell following its bailout to comply with government-assistance rules. Lloyds said today it will cost about 1.3 billion pounds to prepare the branches for an initial public offering in the middle of next year.

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