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Lloyds slumps to rare loss as bad loans take toll

Bank of Scotland

Lloyds bank trades as Bank of Scotland north of the border

Lloyds Banking Group, which includes Bank of Scotland, Scottish Widows and Halifax, plunged to a pretax loss in the first half of 2020, as it set aside £2.4 billion to cover a likely hike in bad loans resulting from the Covid crisis.

The quarterly provision for loan losses was worse than a forecast £1.5bn forecast. The fresh charge pushed Lloyds’ provisions for the first half to £3.8n.

The first half loss compares with pretax profits of £2.9bn last year. The bank posted a statutory post-tax profit of £19 million, largely due to tax credits earned on some of its most valuable assets.

Lloyds’ net interest margin – a key measure of lending profitability – sunk by 20 basis points to 2.59% in the three months to end-June.

The bank is searching for a CEO after António Horta-Osório said this month he would step down by next year after a decade leading the bank.

Market reaction

Donald Brown, senior investment manager at Brewin Dolphin, said: “Lloyds’ pre-tax loss is worse than analyst expectations and, like Barclays earlier in the week, it has had to set aside a large amount of capital to offset the potential impact of Covid-19 on its loan book, with bad debts expected to rise sharply.

“However, the bank is well capitalised and strong liquidity and increased customer deposits mean it has the opportunity to lend into the recovery, with the potential to underpin longer-term growth.

“Of all the major banks, Lloyds is most exposed to the performance of the UK economy which brings with it its own set of challenges – not least the influence of Brexit, which is still taking shape in the background. Nevertheless, the underlying tone of the statement is gloomy, as the bank seeks a new CEO to guide the group forward.”

Russ Mould, investment director at AJBell, said: “The banking sector has had its hands tied behind its back this year, making it almost impossible to do business normally.

“More than a million payment holidays have been granted to Lloyds’ customers because of the pandemic. Net interest margins – the difference between the money it earns from loans and that paid out on deposits – have fallen amid low Bank of England interest rates. It has also made advance payments for life and critical illness claims to support customers in financial difficulty.

“Furthermore, the bank has booked billions of pounds in provisions for bad loans because of the worsening economic outlook with lower GDP and higher unemployment.

Antonio Horta-Osorio Youtube

Leaving: Antonio Horta-Osorio

“To make matters worse, shareholders have been denied their valuable source of income, which for many is the primary reason to own the stock. Dividends are off the menu for the entire banking sector for now.

“Lloyds needs consumer spending and the housing market to pick up before its outlook can improve.

“The latest results are thoroughly miserable, and it is certainly going to be a tough period ahead.

“However, the whole banking sector is now well versed in crisis management and will benefit from being in a stronger financial position versus 12 years ago when the global financial crisis damaged the industry.”

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