Lloyds Says Bad Loan Provisions Will Fall After Loss
Aug. 5 (Bloomberg) -- Lloyds Banking Group Plc, the U.K.lender that acquired HBOS Plc in January, said provisions forbad loans will decline “significantly” after it posted afirst-half loss of 3.1 billion pounds ($5.2 billion).
The bank set aside 13.4 billion pounds in the period tocover souring commercial and real estate loans, more than the11.3 billion-pound estimate of eight analysts surveyed byBloomberg. Those impairments have “peaked” and will fall inthe second half, London-based Lloyds said in a statement today.
Lloyds sought a 17 billion-pound bailout from taxpayersafter it agreed to buy HBOS in September in a government-brokered deal to prevent the collapse of Britain’s biggestmortgage lender. HBOS accounted for about 80 percent of thecombined bank’s bad loan provisions, Lloyds said today.
“The HBOS loan losses are severe,” said Richard Champion,who helps manage $2 billion including Lloyds’s stock atPrincipal Investment Management Ltd., in Sevenoaks, England.“Looking forward, they are saying we are getting back to morenormal conditions and loss levels are stabilizing, which will betaken positively,”
The stock rose 13 percent to 94.81 pence as of 12:30 p.m.in London trading. The bank has declined 0.9 percent this year,making it the second worst-performer in the FTSE 350 Banks Indexafter Edinburgh-based Royal Bank of Scotland Group Plc.
Global Writedowns
Banks and financial firms worldwide have posted $1.5trillion of writedowns and credit losses since the start of thecredit crisis in 2007, according to data compiled by Bloomberg.The U.K. owns 43 percent of Lloyds and 70 percent of RBS afteragreeing to bail out the banks with a 37 billion-pound capitalinjection last year. Prime Minister Gordon Brown has alsopledged to insure 585 billion pounds of toxic and other assetsheld by the two banks.
“The overall impairment charge has now peaked,” Lloydssaid. “The charge in the second half of 2009 will besignificantly lower than the charge in the first half of 2009.Thereafter, we expect the 2010 charge to be significantly lowerthan the 2009 charge.”
“This isn’t what usually happens before a trough in arecession,” wrote Sandy Chen, an analyst at Panmure Gordon & Co.who has a “sell” rating on the stock, in an e-mailed note toinvestors today.
The U.K. economy will shrink 4 percent this year beforeexpanding by about 1.8 percent in 2010, Lloyds Chief ExecutiveOfficer Eric Daniels said. The bank expects a “gradual return”to economic growth in the next 18 months, adding that anyrebound will be “modest.”
‘Kitchen Sink Job’
“We need to see more detail in the presentation toestablish to what extent this is a kitchen sink job and whetherwe believe this,” said Simon Willis, an analyst at NCBStockbrokers Ltd. in London, referring to the forecast for loanlosses. He has a “sell” rating on Lloyds.
House prices are likely to decline by about 7 percent orless this year before increasing 2 percent in 2010, the banksaid. Commercial real estate prices will probably fall 15percent this year and be “flat” next year, Daniels said.
Lloyds is the U.K.’s biggest provider of checking accountsand has a 27 percent share of the mortgage market. The loss isthe biggest reported so far by a U.K. bank for the period.Northern Rock Plc, the first U.K. bank nationalized during thecredit crisis, yesterday posted a 771 million-pound loss for theperiod as late payments on mortgages climbed.
HBOS Property Book
Barclays Plc, the U.K.’s second-biggest bank, reported a 10percent increase in net income, helped by its securities unit,while HSBC Holdings Plc, Europe’s biggest bank, posted a 57percent drop in profit. RBS will report earnings Aug. 7.
The loss was driven by “the high levels of impairment,mainly from the HBOS property book,” Daniels, 57, said in aninterview today. “The core business is doing extremely well.”The bank expects revenue growth in the “high single digits” inthe next two years, he said, without giving details.
Lloyds’s proforma loss compared with a profit of 1.95billion pounds in the year-earlier period. On a statutory basis,Lloyds had net income of 7.1 billion pounds. That included an11.2 billion-pound gain from the HBOS purchase because the pricepaid for the assets was less than their fair value.
The bank last week named Win Bischoff, 68, as chairman toreplace Victor Blank, who is retiring after brokering the HBOSacquisition. The former Citigroup Inc. chairman and governmentadviser takes up the post on Sept. 15.
Lloyds has cut more than 8,800 jobs this year to reducecosts by 1.5 billion pounds by 2011. The savings are “ahead ofschedule,” Daniels said today.
‘Satisfactory Conclusion’
He’s also shrinking the bank’s balance sheet by cuttingback on riskier loans after HBOS’s loss. The bank won’t renewabout 200 billion pounds of higher-risk loans after they falldue over the next five years, Finance Director Tim Tookey toldanalysts on a conference call today.
Lloyds may be forced by the European Union to sell branchesand other assets to take part in a plan to insure 260 billionpounds of assets with the government. That insurance plan maystill take “months” to conclude, Daniels said.
“We would expect to have a satisfactory conclusion,” headded, referring to talks with the EU.
Lloyds’s net interest margin, a measure of the bank’sprofit on lending, declined to 1.72 percent from 2 percent inthe first half. The margin is likely to widen next year, Tookeysaid. Tier 1 capital, a gauge of financial strength, stood at6.3 percent at the end of June, the bank said. The bank doesn’tplan to pay a dividend for 2009.
“The bank is going through its period of maximum stressright now,” John Paul Crutchley, an analyst at UBS AG in Londonsaid in a note to clients before the earnings were published.“Losses on the HBOS loan book have accelerated to levels beyondoriginal expectations,” said Crutchley who has a “buy” ratingon the stock.
To contact the reporter on this story:Jon Menon in London at jmenon1@bloomberg.net
Last Updated: August 5, 2009 07:35 EDTSource: Bloomberg
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