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Lloyds profits jump on absence of

fresh PPI provision but shares fall

amid Brexit fears (AND LEGACY ISSUES)

Renae Dyer



Lloyds has had a strong stretch of profit growth is facing mounting risks from its exposure

to unsecured lending

Lloyds has had a successful turnaround but is now facing headwinds

Lloyds Banking Group PLC (LON:LLOY) achieved a jump in third quarter

profit, supported by the acquisition of credit card business MBNA and the

absence of further provisions for its payment protection insurance misselling


But shares in the bank fell 1.78% to 66.20p as it warned that risks remain

with Brexit uncertainty, an increase in PPI claims and ongoing legacy issues.



“Lloyds has been making solid progress but it now faces some headwinds,”

said Neil Wilson, senior market analyst at ETX Capital.

“After a strong stretch of profit growth it was definitely the star of the UK

banking show, but as we have been flagging there are mounting risks from its

growing exposure to unsecured lending at a time when the economy looks

more likely to hit the skids than deliver a marked improvement.”

Profits rise with no fresh PPI charges

In the three months to 30 September, statutory pre-tax profit came to

£1.9bn, up 141% on the £811mln reported the same period a year ago.

Total income rose 8% to £4.6bn from £4.3bn last year, driven by a 12%

increase in net interest income to £3.1bn from £2.9bn.

Net interest income was boosted by lower deposit and funding costs along

with a contribution from MBNA following the completion of the £1.9bn

takeover of the credit card firm from Bank of America in June.

Full year net interest margins is expected to be close to 2.85%, including


In October the company also announced the acquisition of Zurich

Insurance’s UK workplace pensions and savings business as it expands its

retirement business.

Russ Mould, investment director at AJ Bell, said Lloyds seems to be readying

itself to end its own era austerity following its acqusitions of MBNA and

Zurich’s workplace pensions and savings business. But Mould said investors

would rather own a safe bank that can continue to increase dividend


“While the bank cannot shrink for ever, and the need for a solution to the

UK’s savings crisis is acute, shareholders may be wary of this dash for

growth, especially at this stage of the credit and economic cycle, which is now

getting long in the tooth,” he said.

“All acquisitions bring risk, especially if they are funded by debt, as very few

actually deliver the targets, while the Bank of England and Financial Conduct

Authority both continue to warn about rapid growth in unsecured consumer


PPI claims rise


The lender said there were no additional charges for PPI taken in the third

quarter after putting aside £35mln in the first quarter and £700mln in the

second quarter to cover claims.

However, Lloyds noted that PPI claims increased during the period after the

Financial Conduct Authority’s advertising campaign to raise awareness of the

29 August deadline for making complaints.

Claims reached about 16,000 per week following the launch of the ad ,which

featured a model of actor Arnold Schwarzenegger, in August but have since

reduced to about.11,000 per week – higher than the bank’s assumed run-rate

of about 9,000 per week.

Ecnomonic uncertainty

Lloyds also warned about the risks that it faces with the uncertainty

surrounding Brexit negotiations and its potential impact on the economy.

The Brexit vote has already sent the pound lower, causing inflation to reach a

five-year high at 3% in September and putting a strain on disposable


Chief executive António Horta-Osório said: “The UK economy remains

resilient following strong employment and GDP growth in recent years

together with private sector deleveraging and rising house prices.

He added: “Inflation is however now rising above disposable income given

the recent depreciation in sterling and, while this may affect consumption

going forward, the economy should benefit from rising exports and earnings

from foreign assets.”

Laith Khalaf, senior economist at Hargreaves Lansdown said: ‘All the dials

are pointing in the right direction at Lloyds, but the share price is still being

held back by a consensus of angst over Brexit. The bank is heavily plugged

into the domestic economy, and so could sustain collateral damage if Brexit

negotiations prompt a slump in UK growth.”

Lloyds grabbles with legacy issues

In addition to economic uncertainties and PPI claims, Lloyds is in the middle

of a high court trial brought against the bank and five of its former directors

by shareholders over its takeover of HBOS during the height of the financial

crisis in 2008.

The bank, which returned to private hands in May follolwing its taxpayer

bailout shortlyafter the HBOS aquisition, has also set aside £100mln to

compensate victims of fraud at its HBOS Reading branch.

It has missed its self-imposed deadline to make payments before the end of

June but said it was currently undertaking a review of the fraud and is in the

process of paying compensation to the small business owners that suffered



Taking into account its risks, the bank has bolstered its capital buffers,

raising its common tier equity 1 ratio to 14.0% at 30 September from 13.8%

at 31 December. Including an interim dividend of £75 mln, however, the CET

1 ratio fell to 13.5% from 13.8%.

Still the company said it continues to be “strongly capital generative” with

100 basis points of capital in the period.

Lloyds continues to expect capital generation in 2017 at the upper end of the

170-200 basis points ongoing guidance range. It also believes a CET 1 ratio of

13% is sufficient to meet regulatory requirements and cover uncertainties.

Cost savings target for 2017 on track

The bank added that its so-called ‘Simplification’ programme is on track to

achieve targeted £1.4bn of annual run-rate savings by the end of 2017. It has

so far delivered £1.2bn of savings after streamlining its operations, cutting

branches and axing jobs.

“We have announced improved financial targets for 2017, reflecting the

strong financial performance in the year, and we remain on track to deliver

our longer term guidance,” said Horta-Osório.


The next strategy update for 2018