Photographer: Luke MacGregor/Bloomberg

Lloyds Sticks to Full-Year Targets After One-Off Impairments

Updated on
  • Bad loans rose with a single large corporate impairment
  • U.K. lender increased targets for capital generation

Lloyds Banking Group Plc, Britain’s largest mortgage lender, is on track to meet its full-year targets and insisted that a quarterly rise in impairments isn’t a sign of a deeper trend.

Bad loans rose by almost a third to 270 million pounds ($355 million) in the three months ended Sept. 30 from a year ago, because of a “single large corporate impairment,” and its acquisition of MBNA’s U.K. credit-card business, the London-based bank said in a statement Wednesday. That “doesn’t reflect anything regarding an underlying trend," George Culmer, chief financial officer said on a call with reporters.

The bank didn’t add to its provisions for mis-selling payment protection insurance this quarter, though Culmer said there’s a “risk” it may have to add to the tally set aside, which already surpasses 18 billion pounds. Lloyds suffered a “spike” in low quality claims after a Financial Conduct Authority campaign urged consumers to come forward with complaints in the period, and the regulator has more advertising to come, he said.

“Lloyds may yet have to reach into its pockets to cover further compensation, though with a 2.3 billion-pound PPI war chest on the balance sheet, the bank has a pretty big cushion to fall back on," Laith Khalaf, senior analyst at Hargreaves Lansdown said in a note to clients.

The bank is preparing to outline a new strategy for growth in February, which analysts expect will involve further cost reductions and investment in technology after the company eliminated thousands of jobs. The government sold its last remaining shares in the firm in May some eight years after its bailout. But Lloyds, which has 97 percent of its business in the U.K., remains wedded to the fortunes of the economy as the government negotiates Brexit and edges toward its first interest-rate increase for a decade.

Read more on Lloyds’s expansion in consumer credit

The lender’s third-quarter pretax profit more than doubled to 1.95 billion pounds. Excluding exceptional charges, pretax profit was 2.1 billion pounds, in line with the average estimate of three analysts compiled by Bloomberg News.

The shares fell as much as 2.8 percent and were 0.2 percent lower at 67.3 pence as of 10:36 a.m. in London.

Lloyds will consider a special dividend or share buyback at the end of the year after the bank generated more capital than expected, Lloyds said. However, any payouts are dependent on the U.K. regulator’s final decision on a key capital buffer.

The lender now forecasts capital generation of between 225 and 240 basis points this year from previous guidance of 170 to 200 basis points. The bank’s common equity Tier 1 ratio, a measure of financial strength, rose to 14.9 percent in the quarter, exceeding the assumed minimum of 13 percent, according to the statement.

“While profit performance is in line, capital generation is better than expected,” wrote Gary Greenwood, an analyst at Shore Capital with a buy rating on the stock. “This should give the market confidence around dividend expectations.”

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