Lloyds First-Quarter Profit Rises 22% as Impairments Decline

May 01, 2014 11:39 am ET

(Updates with closing stock price in fifth paragraph.)

May 1 (Bloomberg) -- Lloyds Banking Group Plc, Britain’s biggest mortgage lender, posted a 22 percent rise in first- quarter profit as it cut costs and bad loans declined amid a recovering U.K. economy.

Pretax profit before one-time items rose to 1.8 billion pounds ($3 billion) from 1.48 billion pounds in the year-earlier period, the London-based company said in a statement today. That beat the 1.7 billion-pound estimate of Mark Phin, an analyst at Keefe, Bruyette and Woods in London. Impairments for souring loans fell 57 percent to 431 million pounds, and costs dwindled 5 percent to 2.3 billion pounds.

Chief Executive Officer Antonio Horta-Osorio is spearheading an attempt to return the 25 percent government- owned bank to fully private ownership. Lloyds’s impairments are falling and margins widening as Britain’s housing market booms and the economy starts to grow. U.K. house-price growth accelerated in April as a surge in London pushed the annual increase to the most in four years, according to a report by Nationwide Building Society.

“It’s a solid set of numbers for quarter one and the outlook is robust,” said Ian Gordon, an analyst at Investec Ltd. in London with a buy recommendation on Lloyds. “It should be taken well.”

Lloyds jumped 5.5 percent to 79.50 pence in London trading, its steepest gain in nine months and above the 61 pence price at which the government says it will break even after providing a 20 billion-pound rescue in 2008. The stock is up 0.8 percent this year, the best performer among Britain’s five biggest banks.

Stake Sale

The U.K. government sold a 4.2 billion-pound stake in Lloyds in March and may sell a further holding to individual investors in coming months. The lender expects to apply to regulators in the second half for permission to resume dividend payments that have been suspended since its bailout.

The lender plans to start the initial public offering of its TSB Bank operation by the end of June. Lloyds was forced to sell the 631 branches by European regulators after its bailout.

It didn’t set aside any further funds to cover the cost of compensating customers mis-sold payment-protection insurance. The lender has so far set aside 9.8 billion pounds, more than any other lender.

“Our priority is now moving from reshaping and strengthening the group, to further simplifying it and maximizing our growth potential,” Horta-Osorio, 50, said in the statement.

Lloyds is being helped by Britain’s economic recovery. The country is on track to have the fastest-growing economy of any Group of Seven nation in 2014. The International Monetary Fund forecasts the U.K. to outperform its major-economy peers, with growth of 2.9 percent this year.

Margins

Lloyds’s margins are widening as competition for deposits eases, unsecured lending to consumers increases and borrowers take out more mortgages with higher loan-to-vale ratios, which are more lucrative for lenders, analysts said.

The bank increased its forecast for full-year net interest margin, the difference between its income from lending and its cost of funding, by 10 basis points to 2.4 percent. The measure widened 36 basis points over the year-earlier period to 2.32 percent, Lloyds said today.

“They are doing operationally what they promised in terms of improving profitability with better margins,” Joseph Dickerson, an analyst at Jefferies International in London with a hold rating on the stock, said by telephone. “The weak spot was an absence of loan growth year-on-year, and the non interest income still looks soft, but overall a good set of results.”

Loan Growth

Total loans and advances to customers were little-changed from the end of 2013 at 490.6 billion pounds, Lloyds said.

The lender’s common equity Tier 1 ratio, a measure of financial strength, increased to 10.7 percent from 10.3 percent at the end of 2013, while its leverage ratio increased to 4.5 percent under the latest round of rules from the Basel Committee on Banking Supervision.

Statutory pretax profit fell to 1.37 billion pounds from 2.04 billion pounds, beating Phin’s 1.1 billion-pound estimate. Net income dropped to 1.15 billion pounds from 1.53 billion pounds.