Lloyds Seen Reporting Profit as Government Weighs Stake Sale

Lloyds Banking Group Plc, Britain’s biggest mortgage lender, is set to report its first profitable six-month period in three years, prompting the government to start reducing its stake in the lender.

Net income will rebound to about 2.2 billion pounds ($3.4 billion) in the first half, compared with a loss of 676 million pounds in the year-earlier period, according to Shailesh Raikundlia, an analyst at Espirito Santo Investment Bank in London with a sell rating on the stock. Loan impairments fell 31 percent to about 1 billion pounds in the second quarter, Citigroup Inc. analyst Andrew Coombs wrote in a note to clients. Lloyds is scheduled to publish its results at 7 a.m. on Aug. 1.

Lloyds’s shares have gained 43 percent this year and Chief Executive Officer Antonio Horta-Osorio, 49, said in May the bank would return to profitability in 2013 following three years of losses. The government may start cutting its 39 percent stake as soon as next month, said a person with knowledge of the talks.

“Everything now seems to be in place for the government to start selling its stake,” said Gary Greenwood, an analyst at Shore Capital in Liverpool, England, who recommends buying the shares. “Lloyds’s management team have been very smart, and the share price reflects that. The question becomes: why wouldn’t the government sell?”

Stock Rally

The stock was little-changed at 68.27 pence at 10 a.m. in London trading, above the 61 pence the government says it will break even on its holding after providing a 20 billion-pound rescue almost five years ago. Lloyds is the best-performing stock among its European peers in the past 12 months.

Horta-Osorio is lowering expenses to strengthen the balance sheet, applying back-office efficiencies such as integrating information technology systems and reducing the number of suppliers Lloyds uses. He plans to cut costs to about 9.6 billion pounds this year, about 1.4 billion pounds less than in 2010.

The bank has eliminated more than 40,000 jobs since its government bailout, and has announced plans to close more than half of its 30 overseas units to focus on Britain.

Investors are betting that Lloyds is best placed to benefit from a recovery in the U.K. economy, rising property prices and increased clarity over capital requirements.

‘Pure Play’

“With Europe still in recession and Chinese economic growth slowing, the U.K. looks like the best place to be after the U.S. in terms of recovery,” according to Espirito Santo’s Raikundlia. “Lloyds is seen as a pure play on the U.K. economy, though that is already in the price.”

The U.K. economy grew 0.6 percent in the second quarter after expanding by 0.3 percent in the first three months of the year. The International Monetary Fund this month raised its 2013 growth forecast for the U.K. to 0.9 percent from 0.6 percent and predicted expansion of 1.5 percent next year.

The net interest margin, the difference between the bank’s income from lending and its cost of funding, will widen to 2 percent in the second quarter from 1.96 percent in the first three months of the year and 1.91 percent in the second quarter of 2012, Morgan Stanley banks analyst Chris Manners said in a note to clients. Lloyds has a full-year target of 1.98 percent.

The stock price was boosted in May, when Lloyds ruled out raising additional equity to help plug an 8.6 billion pound capital shortfall identified by regulators. It opted instead to sell assets considered not essential to the future of the business.

Since then, the bank has sold holdings of U.S. mortgage-backed securities for about $5 billion in cash and a second stake in wealth manager St. James’s Place Plc. The firm is also considering a sale of Scottish Widows Investment Partnership and its unprofitable Australian business.

Capital Ratio

The disposals boosted Lloyds’s core tier 1 capital ratio under Basel III rules, a key measure of financial health, to 9.2 percent in the quarter from 8.1 percent in the prior three months, Manners said.

Lloyds’s earnings will also be lifted by a 1.6 billion-pound dividend payment in June from its Scottish Widows unit.

“Lloyds has enjoyed many encouraging developments this year, with perceived tail-risks around capital, liquidity and impairments receding rapidly, though we see this as fully priced,” said Ian Gordon, a banks analyst at Investec in London, who rates the stock a sell.

Pretax profit will probably fall to 598 million pounds in the second quarter compared with about 2 billion pounds in the previous three months, depending on the timing of a number of items that may be included, Gordon said.

Osborne Plan

The bank’s return to profitability and the rally in its stock price has allowed Chancellor of the Exchequer George Osborne to accelerate plans to recoup some of the taxpayers’ investment before the next general election in May 2015.

“Five years on from the financial crisis, we can now take the first steps to returning Lloyds to the private sector where it belongs,” Osborne told financiers in his annual Mansion House speech in London on June 20.

The U.K. is considering selling as much as 5 billion pounds of Lloyds shares to money managers as a first step to reducing its holding, a person with knowledge of the plan said last week. The sale, planned for September, may be held sooner if market conditions allow, said the person, who asked not to be identified because a decision hasn’t been reached.


By contrast, Osborne has said he’s “some way off” selling the government’s 81 percent stake in Royal Bank of Scotland Group Plc because it’s saddled with too many bad assets. RBS will report first-half net income of about 605 million pounds, compared with a loss of about 2 billion pounds in the year-earlier period, according to Mark Phin, an analyst at Keefe, Bruyette & Woods Ltd. RBS reports results on Aug. 2.

Lloyds’s bailout stemmed from its government-brokered takeover of HBOS Plc during the financial crisis. Since then, a turnaround 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.

Lloyds Chairman Win Bischoff announced in May he would retire in the next 12 months, saying he was confident the bank’s rebound from its rescue had progressed enough for him to plan his succession.

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