Simon Dawson/Bloomberg

Lloyds Sees Risk of $1.5 Billion PPI Charge as Profit Drops

  • Third-quarter pretax profit missed analyst estimates
  • Lloyds sees improved net interest margin in full year

Lloyds Banking Group Plc said it may have to set aside 1 billion pounds ($1.5 billion) in the second half to cover wrongly sold loan insurance, as third-quarter profit dropped amid a slide in revenue at the unit housing fixed income and currency trading. The shares fell.

Pretax profit before one-time items fell to 2 billion pounds from 2.2 billion pounds in the year-earlier period, the London-based bank said in a statement Wednesday. That compares with the 2.1 billion-pound average estimate of six analysts surveyed by Bloomberg. Earnings were hurt by a 500 million-pound provision for payment protection insurance and “tougher trading conditions” in commercial banking.

Lloyds Chief Executive Officer Antonio Horta-Osorio, 51, has eliminated thousands of jobs to help resume dividend payments and bolster earnings, battered by almost 14 billion pounds in provisions for PPI. Although Lloyds’s trading operations are dwarfed by those at British rivals Royal Bank of Scotland Group Plc and Barclays Plc, the bank isn’t immune to a slump that eroded revenue at some of Wall Street’s largest investment banks in the third quarter.

Shares Slump

“Everyone has had a poor performance in fixed income and foreign exchange, Lloyds is continuing that story,” said Joseph Dickerson, an analyst at Jefferies International Ltd. with a buy rating on shares. “People don’t invest in Lloyds for its trading income. But it still affects them to a more meaningful degree than people would expect.”

The bank said that “other income,” which includes insurance, commercial banking and fees from run-off assets, slumped 13 percent to 1.4 billion pounds in the third quarter from a year ago. While that revenue is expected to improve in the fourth quarter, it may remain “slightly” below 2014 for the full year,” Lloyds said.

Lloyds shares slid as much as 5.2 percent, the biggest intraday drop since March 2014, and were down 4.4 percent to 73.99 pence at 9:57 a.m. in London. That pared previous gains for the year, with the stock down about 2.4 percent.

Stake Sale

The stock is just above the 73.6 pence average price the government originally paid for the shares. The Treasury has recouped about 15.5 billion pounds by selling shares to institutional investors and through a yearlong trading program due to finish in December.

Rising charges in Britain’s costliest banking scandal since the financial crisis are threatening to overshadow Chancellor George Osborne’s efforts to start selling Lloyds shares to individuals next year. The bank could take another provision for payment protection insurance in the fourth quarter, said Chief Financial Officer George Culmer.

PPI “complaints have stayed pretty flat,” Culmer said on a call with reporters on Wednesday. “It could be one billion pounds if it stays entirely flat for the second half, it’s been pretty flat in the third quarter. Let’s see what happens.”

Even with the PPI charge, lower charges for souring loans and efforts to cut costs over the past year helped the bank to report a 28 percent increase in pretax profit to 958 million pounds. Operating costs dropped to 1.9 billion pounds from 2 billion pounds a year earlier, with impairment charges down 33 percent.

‘Strong Position’

“While these results have fallen modestly short of some analysts’ expectations, the big picture is still of a recovering bank in a strong position in a growing economy,” said Matthew Beesley, head of global equities at Henderson Group Plc.

The bank’s net interest margin, the difference between its income from lending and its cost of funding, was 2.64 percent in the third quarter, down from 2.65 percent at the end of June. Lloyds said it now now targets a full-year margin of 2.63 percent, up three basis points from its previous guidance.

“We are more confident on NIM now than we were three months ago and that’s why we’ve updated our guidance positively,” Horta-Osorio said.

With British regulators preparing for a second round of stress tests later this year, banks have been under pressure to raise their capital buffers. At Lloyds, the country’s first large bank to report third-quarter earnings, the common equity Tier 1 capital ratio, a measure of financial strength, rose to 13.7 percent from 13.3 percent in the second quarter.

Barclays is scheduled to report third-quarter earnings on Thursday, followed by RBS on Friday.

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