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Lloyds Banking profit plummets in anticipation of coronavirus loan hit

Britain’s biggest lender took an impairment charge of £1.4bn

Lloyds Banking Group -

Lloyds Banking Group PLC (LON:LLOY) profits plummeted 95% in the first quarter of the year after taking a sizeable write-down in preparation for bad loans resulting from the coronavirus crisis.  

Britain’s biggest lender took an impairment charge of £1.4bn, which it said reflected the revised economic outlook from the effects of the pandemic and some charges relating to existing restructuring plans.

On top of this, there was another £421mln of charges, mainly relating to negative insurance volatility from falling equity markets and widening corporate bond credit spreads.

Net income also shrank 11% to £4bn as a result of lower interest income and other income amid the lower interest rates and the slowdown in retail and business lending in March as the coronavirus outbreak escalated.

Even though operating costs were down 4%, profit before tax of £74mln for the quarter was down 95% compared to a year ago.

Net interest margin, the key difference between interest charged on loans and paid on deposits, fell to 2.79% from 2.83%.

Lending support

Capital levels remained high, with Lloyds’ CET1 ratio one of the strongest of its FTSE 100 peers, even strengthening to 14.2% from 13.8% at the end of December.

“Given the economic outlook we will inevitably be impacted both within the existing book and potentially in the new lending we are undertaking to support our customers,” the bank said. 

“However, the group's loan portfolio remains robust and well positioned given its low risk business model.”

As the usual market leader in small business lending, Lloyds has come in for criticism in recent weeks, however, for not pulling its weight in the early stages of the coronavirus crisis and being overtaken by RBS and Barclays in the government's Coronavirus Business Interruption Loan Scheme (CBILS).

Having announced at the start of the month that it will pay no dividends this year, the bank said the board will decide on any future dividend distributions at the year-end.

Market reaction

Lloyds shares were down almost 4% by mid-morning trading on Thursday at 33.49p, where they are down more than 47% since the start of the year.

Broker Shore Capital said the results were worse than expected, with the "possibly out of date" consensus forecast expecting PBT of £863mln.  

“While profitability was disappointing, the improvement in the core tier 1 ratio to 14.2% catches the eye and means the group is very well capitalised to weather the COVID-19 storm,” the analysts said.

Neil Wilson at Markets.com said more worrying for Lloyds than the impairment is the 11% fall in revenues, “if the housing market remains sluggish it’s got a lot of exposure to worry about and doesn’t have the investment banking arm to fall back on that Barclays does.”

He also noted the read-across had hit rival RBS, which is similarly exposed to credit impairments in the UK, with shares almost 4% lower.

Given the nature of the pandemic, Richard Hunter at Interactive Investor said Lloyd’s digital presence could also prove to be a boon to its efforts, while the lender also has a currently unused PPI provision of £1bn which, if released, could also contribute to an already flush liquid asset buffer of £132bn that represents a covered ratio of 138%.

“Lower customer activity could worsen going into the second quarter, where fee forbearance from the bank such as payment holidays on mortgages, credit cards and personal and business loans will also negatively affect income,” he added. 

As this has already had a severe impact on the share price, Hunter said: “Despite there being no income for investors in the immediate future, the bank is on an undemanding valuation and its likely ability to weather a crisis such as this provides some longer term comfort.”

   --Adds share price and broker comment--

Quick facts: Lloyds Banking Group

Price: 27.785 GBX

LSE:LLOY
Market: LSE
Market Cap: £19.66 billion
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