Banks Make Massive Loss
Lloyds fell to a £3.5 billion loss in the first three months of the year as the UK’s largest retail bank took a £3.2 billion provision to pay compensation for payment protection insurance.
The huge provision was “sensible, prudent and the right thing to do”, said Antonio Horta-Osorio, Lloyds’ new chief executive.
The bank’s shares fell more than 8 per cent to 53.2p in late morning trading.
The sum is thought by Lloyds, historically one of the biggest sellers of PPI, to be enough to cover legitimate compensation claims for customers who were mis-sold the controversial loan insurance.
Lloyds will now pull out of the legal fight by the British Bankers’ Association to clarify the Financial Services Authority’s policy on PPI and cap the amount of compensation lenders should have to pay to angry customers over the issue.
“I do not want to continue the long-running dispute with our regulator,” Mr Horta-Osorio said.
Issuing its interim management statement for the first quarter today, Lloyds said that the charge for bad loans had risen from £2.4 billion in the first three months of 2010 to £2.6 billion, driven by higher impairments of £1.1 billion in Ireland.
The larger provision reflects the fact that Lloyds believes commercial real estate prices will fall a further 10 per cent in Ireland. The bank has now provisioned for 60 per cent of its £27 billion Irish loan book to be impaired.
Lloyds’ pre-tax loss of £3.5 billion compares to a £721 million profit in the same period last year.
Following warnings about rising funding costs hurting profits made by Lloyds at its full-year results presentation in February, the bank said its net interest margin shrank from 2.12 per cent in the final three months of 2010 to 2.07 per cent.
Lloyds, which is 41 per cent taxpayer-owned following a £20 billion Government bailout during the financial crisis after it bought stricken rival HBOS, said it was pressing ahead with the sale of 600 branches mandated by the European Commission in return for its state aid.
It warned that the recent proposal by the Independent Commission on Banking that Lloyds should sell more branches to reduce its market dominace in certain areas may “significantly delay” its ability to sell the branches by the end of 2013 – the deadline imposed by the European Commission. Lloyds is expected to send an information memorandum on the for-sale business to interested buyers later this month.
Mr Horta-Osorio replaced Eric Daniels as chief executive on March 1 and was widely expected to use the first quarter results to “kitchen-sink” the numbers. The Portuguese banker strongly denied that he had done so, saying the provision reflected the fact that Lloyds was “addresssing significant problems that exist”.
Due to its enormous balance sheet, Lloyds is still one of the European banks that most depends on government and central bank funding. During the quarter Lloyds cut its use of these facilities by £26 billion to £70 billion.
It also pressed ahead with shrinking its balance sheet, selling £10.7 billion of assets such as structured credit instruments.
The sale contributed to the reduction in Lloyds’ income to £5.2 billion from £6 billion in the first quarter of last year. Lloyds said its net lending, calculated after redemptions, to small businesses was positive, despite the fact that the overall market shrank.
All eyes are on Mr Horta-Osorio for a wide-ranging review of Lloyds’ future direction that he will deliver in June. Despite the uncertainty thrown up by the banking commission, the Government is hoping to sell part of its stake in Lloyds to the market either late this year or early next.
Katherine Griffiths Banking Editor
Last updated May 5 2011 7:55AM