Lloyds Bank’s first-quarter profits were almost entirely wiped out by the impact of coronavirus, as the UK’s largest retail bank announced a 420 per cent increase in provisions for bad loans.
Pre-tax profit fell 95 per cent year-on-year, to £74m, due to £1.4bn of charges to cover expected credit losses. The provisions were more severe than many analysts had expected, and shares in the bank dropped as much as 5 per cent in early trading on Thursday.
However, António Horta-Osório, Lloyds chief executive, stressed that the company was still “very comfortable” with the strength of its balance sheet, and could continue to meet “whatever demand there is” from customers for loans.
Banks have been grappling with new accounting rules that require them to book expected losses further in advance than previously. Year-on-year increases in impairment charges in the first quarter have ranged from 80 per cent at Santander to more than 1,000 per cent at Standard Chartered.
Andrew Coombs, analyst at Citi, cautioned that Lloyds’ estimates “look optimistic”, and said he was disappointed by the lack of further guidance on how the business would be affected throughout the rest of the year.
Mr Horta-Osório said that “we think we took a prudent view of the different possible scenarios”. The bank said it expected a further rise in impairments in the rest of the year, “particularly if economic expectations deteriorate further”, but said the potential impact was “difficult to quantify given the significant uncertainty”.
Under the base case estimates used to calculate Lloyds’ expected loan losses, the UK economy would recover to its pre-crisis size by 2022, though house prices would still be lower. Under its most severe scenario, the economy would shrink 5.1 per cent between 2020 and 2022.
The bank said it had a relatively low exposure to the sectors most affected by the crisis, such as restaurant and hotel businesses, though the impairment charge was partly driven by the recent growth in its credit card business.
Lloyds has grown its unsecured lending business in recent years, including through the £1.9bn purchase of MBNA from Bank of America in 2017. The expansion helped prop up its profit margins as other lenders were squeezed by competition in the mortgage market, but leaves it more exposed to credit losses in times of stress.
Revenues, already under pressure before the crisis thanks to the competition in mortgages, dropped 11 per cent to £3.9bn.
The lender also defended its record in providing assistance to companies through the government’s small business rescue scheme. Lloyds has been one of the slowest major banks in providing assistance to companies through the coronavirus business interruption loan scheme, providing just £500m of loans since the programme started in late March, compared with £1.4bn from rival UK Royal Bank of Scotland.
Mr Horta-Osório said “our numbers are progressing” well after the slow start, and said many of its customers had preferred to ask for capital repayment holidays or overdraft extensions rather than loans.
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