Prudence Pains Lloyds – US-FOREX.US
Like a few other European banks reporting this week, Lloyds Banking Group is doing its best to put a positive spin on a stunningly bad set of results. The British bank explained Wednesday that it was being “prudent” by marking down billions of dollars worth of legacy assets it had taken on after its controversial takeover of mortgage lender HBOS. The impairments totaled 13.4 billion pounds , versus 2.9 billion pounds in charges last year. Around 80% the first-half charges were associated with property loans doled out by HBOS before it collapsed in Sept. 2008 and was subsequently taken over by Lloyds. This led to a 4 billion pound loss at Lloyds Baking Group
, more than wiping out the 11.9 billion pounds in revenue the bank had brought in in the first six months of 2009. But Lloyds is putting a brave face on the numbers. Chief Executive Eric Daniels said the bank’s core business had “delivered a resilient performance, despite the weak economy.” Crucially, he added that the loan impairments at the bank had “peaked” in the first half, and that Lloyds expected the group’s results to improve in the second half through to 2010. This comment seems to be what gave the market hope on Wednesday morning: shares of Lloyds jumped 10.3% to 92.94 pence in London. The shares must trade above 122.6 pence for the British government, which owns 43% of Lloyds, to break even on its investment. There is a big “if” here, though. Lloyds needs not only the economy but house prices in Britain to pick up if it wants its mostly-property related legacy assets from HBOS to regain value. House prices in Britain rose by 1.1% in July, according to mortgage lender Halifax, which is owned by Lloyds. There may also be more hope for Britain’s economy: activity in Britain’s services sector in July grew at its fastest rate in nearly a year and a half, according to the Chartered Institute for Purchasing and Supply. Unlike fellow British bank Barclays
, whose second-quarterly results benefited from a relatively strong performance at its investment bank, the famously conservative Lloyds relies on its retail banking operations more than its investment banking to bring it revenues.
While its investment banking, or “wholesale” division posted a 3.2 billion pound loss on Wednesday, attributed to bad HBOS loans, its retail division brought in a 360 million pound profit, down from 1.7 billion pounds last year. Lloyds’ wholesale division brought in just 37 million pounds in profit last year. In the mean time, Lloyds is in negotiations with the British government about putting its bad assets through the spinner and sharing some of its subsequent losses with U.K. taxpayers. The bank said Wednesday that “approximately three quarters” of the impairment charges it had booked in the first half would be included in the state’s so-called asset protection scheme. This is a process by which the government will limit the bank’s losses on its bad loans by booking some of the losses on the state balance sheet; Royal Bank of Scotland
is also taking part in the program. Lloyds said it was working with the Treasury to finalize the terms of its participation. “The operation of the scheme and the impact on our business is complex,” it added. Indeed, it’ll be a while yet before Lloyds actually participates in the program. The Treasury said in May that Lloyds was intending to place 260 billion pounds worth of bad assets into the plan after paying a participation fee of 15.6 billion pounds . Lloyds would have to absorb the first 10%, or the first 25 billion pounds or so of any losses, while the government would take on the remaining 90% and Lloyds stayed on the hook for a further 10% of residual losses. As part of the program the government’s stake in Lloyds will rise to around 65%.”There is little additional commentary on the asset protection scheme,” noted analysts at Nomura, “other than that the company still expects to conclude it.” Since Lloyds has yet to reach the 25 billion-pound mark to be eligible to hand its bad loans over to the state, it’s shareholders will have to continue bearing the pain of mark-downs for some time to come.