Lloyds Banking Group is preparing for a surge in customer defaults, after Britain’s largest retail bank warned that the coronavirus crisis had inflicted more damage on the economy than it had expected.
The bank’s shares tumbled more than 7 per cent on Thursday to their lowest level in eight years after the lender set aside another £2.4bn to cover future bad loans and slumped to a second-quarter loss.
There was a particularly large jump in provisions for soured mortgage loans, which the bank blamed on an “additional reduction in house price forecasts” since its last update to investors in April.
The bank reported a pre-tax loss of £676m in the second quarter, compared with a pre-tax profit of £1.3bn a year ago.
António Horta-Osório, chief executive, who is stepping down next year after more than a decade in charge, said the pandemic had had a “profound” impact on the global economy, as Lloyds became the latest in a string of banks to report weaker-than-expected results this week.
On Wednesday, Santander fell to a €11.1bn loss in the second quarter and wrote down the value of its UK subsidiary by 85 per cent, while Barclays’ net profits dropped 91 per cent due in part to higher than expected loan-loss provisions.
While UK government support schemes and repayment holidays have so far kept customer default levels relatively low, banks are bracing themselves for a sharp increase later in the year as businesses struggle to adapt and the end of furlough schemes drives up unemployment rates.
Mortgages had largely been excluded from the first wave of coronavirus-induced loan-loss provisions earlier this year, but the announcement from Lloyds echoes a warning from smaller rival Virgin Money, which on Monday pointed to the impact of rising unemployment.
Lloyds said its “base case” scenario used for estimating future losses now assumes the UK unemployment rate will reach 9 per cent in the fourth quarter of 2020, worse than the most severe downside scenario it considered at its last set of results in April. The bank has now set aside a total of £3.8bn to cover bad loans this year.
Mr Horta-Osório insisted he was “very comfortable with our mortgage book” because the bank had consciously slowed down growth after becoming increasingly cautious about “exaggerated” house prices in recent years.
Lloyds said it had seen some signs of improvement in recent weeks, with rising levels of consumer spending and housing market activity. However, it cautioned that the outlook “remains highly uncertain and the impact of lower rates and economic fragility will continue for at least the rest of the year”.
Overall revenues for the three months to June fell 21 per cent year on year, to £3.5bn, with lower demand and lower interest rates both weighing on income. Operating costs fell 6.5 per cent.
Restructuring costs were also lower as the bank put some plans on hold when the pandemic first hit. However, Lloyds chief financial officer William Chalmers told analysts the costs would pick up in the second half of the year, and a person familiar with the bank’s plans said it was expecting to restart restructuring efforts — including job cuts — as soon as September.
While the second-quarter provisions were higher than forecast, analysts noted that the bank was slightly more optimistic about the outlook for the rest of the year, forecasting full-year impairments of between £4.5bn and £5.5bn, in line with previous forecasts.
Gary Greenwood, analyst at Shore Capital, said: “While Q2 represented an awful set of results, we think this could be a nadir in terms of quarterly profitability, with economy activity starting to improve and significant forward-looking provisions already set aside.”
Separately on Thursday, the Co-operative Bank highlighted the other challenges facing the UK sector as it reported a first-half loss of £45m.
The bank’s focus on low loan-to-value mortgage lending meant impairment levels remained low, but Andrew Bester, chief executive, said the bank had to rethink some of its investment plans and cut costs to offset the pressure of low interest rates.
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