Lloyds Banking Group Plc (LLOY), Britain’s biggest mortgage lender, reported a first-half net loss after Irish bad loan provisions increased, funding costs rose and the lender set aside 3.2 billion pounds ($5.2 billion) for mis-sold loan insurance.
The bank posted a 2.31 billion pound net loss for the period compared with a profit of 596 million pounds in the first half of last year, the London-based bank said in a statement today. That missed the median loss of 2.2 billion pounds estimated by nine analysts in a Bloomberg survey. Lloyds, 41 percent-government owned, said its net interest margin, the difference between what it earns on loans and its funding cost, shrank to 2.07 percent from 2.12 percent in the same period of 2010. The shares slumped to the lowest in more than two years.
“We’ve been seeing the effect on the margin of repaying the relatively inexpensive government and central bank funding and replacing that with more sustainable long-term funding for the group,” Finance Director Tim Tookey said in a call with journalists today.
Lloyds’s funding costs are rising as Chief Executive Officer Antonio Horta-Osorio, 47, weans the bank off low- interest government loans and onto costlier wholesale funding. In June, the bank announced it was cutting 15,000 jobs to help reduce costs by 1.5 billion pounds, in addition to the 27,000 roles slashed since its acquisition of HBOS Plc in 2008.
The bank’s stock dropped 6.8 percent to 36.3 pence at 9:14 a.m. in London, its lowest price since April 2009 and the worst performance in the 46-member Bloomberg 500 Banks Index.
Irish Loan Provisions
“Revenues are little bit better than expected,” said Cormac Leech, an analyst at Canaccord Genuity Ltd. in London, who has a “buy” rating on the stock. “The good news is offset by higher-than-expected loan losses. Loan losses were substantially worse than expected.”
Lloyds said another 11 percent of its 27.6 billion-pound Irish loan book became impaired in the first six months and that “further vulnerability exists.” The bank now has about 17.7 billion pounds of impaired Irish loans, 64 percent of its overall holdings. Lloyds took a charge of 1.78 billion pounds in the period.
Lloyds shares have fallen 40 percent since April when the government-appointed Independent Commission on Banking recommended the bank sell substantially more assets than the planned sale of 632 branches. The commission issues its final report on Sept. 12. Lloyds shares are the worst-performing British bank stock this year.
“I have some concerns about the trajectory of the retail net interest margin which declined substantially on the back of increased wholesale funding costs,” said Joseph Dickerson, an analyst at Espirito Santo Investment Bank in London. “It remains to be seen their ability to pass on increases in funding costs to customers in the current, competitive environment.”
The bank’s loan-to-deposit ratio improved to 144 percent from 154 percent, indicating it lends 144 pence for every pound of deposits it receives. It was 176 percent at the end of June 2009, and Horta-Osorio plans to reduce it to 130 percent.
Lloyds’s acquisition of HBOS in a government-brokered deal as it neared collapse three years ago, forced it to accept a taxpayer-funded bailout of more than 20 billion pounds.
HSBC Holdings Plc (HSBA) said this week it would eliminate 30,000 posts by the end of 2013, while Barclays Plc said it planned to cut 3,000 employees in 2011 as revenue in Europe and the U.S. slowed. Credit Suisse Group AG, UBS AG (UBSN) and Goldman Sachs Group Inc. have also announced job cuts in the past month.