Lloyds Banking Group posted a huge 95 per cent fall in profit for the first quarter of 2020 today as the coronavirus crisis took hold in the UK.
Profit before tax slumped to £74m from £1.6bn the previous year as Lloyds took a massive impairment charge of £1.43bn as it expects bad loans to mount up in a worsening British economy.
“Given the economic outlook we will inevitably be impacted both within the existing book and potentially in the new lending we are undertaking to support our customers,” Lloyds said.
Lloyds’ impairment charge of £1.43bn dragged profit down to just £74m for the first three months of 2020. Profit after tax also dropped, down 65 per cent year on year to £480m.
The bank’s return on tangible equity (RoTE, a measure of shareholder profit after interest and tax) more than halved to five per cent from 12.5 per cent the year before.
But the lender said its CET1 ratio – a core measure of liquidity – “remains strong” at 14.2 per cent.
Lloyds hailed a “solid” trading surplus of £1.99bn. That figure was down 19 per cent from the first three months of 2019 but up seven per cent since the fourth quarter.
Net income of £4bn represented an 11 per cent year-on-year decline and its net interest margin of 2.79 per cent was tighter than the 2.91 per cent Lloyds enjoyed a year ago.
Earnings per share dropped from 1.5p to 0.5p, while the bank has cancelled its dividend in line with peers over coronavirus.
Why it’s interesting
Lloyds’ share price dropped 3.7 per cent to 33.48p in early trading as investors digested the coronavirus hit.
The bank lacks an investment arm to rake in profits from market chaos. That means its £1.42bn provision for bad loans and historic lows of 0.1 per cent interest rates have devastated profits. Lloyds’ 95 per cent drop compares poorly to HSBC and Barclays, whose profits halved.
Lloyds ‘feeling the pinch’ from lack of investment bank
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said Lloyds is “feeling the pinch” from its lack of an investment bank.
Both Barclays and HSBC saw investment units’ profits leap amid the coronavirus market volatility.
But Hyett said Lloyds “must take a hit on the chin”.
“Fortunately the balance sheet has proven more than capable of handling the pressure in the first quarter, and the cancellation of the dividend means the bank’s key capital ratios have actually improved,” he added.
“Ultimately, the long-term impact of all this on Lloyds will be determined by the length of the lockdown and speed of the economic recovery. A cost base that’s among the lowest in the industry will provide some support to profits, but without the counter cyclical boost provided by increased trading activity, it’s going to be a painful slog for Lloyds.”
The lender is the most exposed British bank to an economic downturn, according to analysts. Lloyds has predicted a five per cent drop in GDP over 2020 and a five per cent decline in house prices.
Lloyds says strong capital ratio can survive coronavirus
However, chief executive Antonio Horta-Osorio today presented Lloyds’ CET1 ratio of 14.2 per cent as evidence the bank will survive the downturn. That is despite increased demand for business loans and mortgage holidays.
Lloyds revealed 400,000 customers have taken mortgage holidays so far, and 200,000 have delayed credit card repayments, while 100,000 have frozen car lease payments.
Horta-Osorio insisted Lloyds could ramp up lending and maintain a strong CET1 ratio despite the Bank of England’s move to encourage banks to spend capital buffers on loans earlier this year.
And yesterday the EU moved to ease bank capital rules to further boost lending. That eases the obligation on banks like Lloyds to maintain a strong capital ratio in the coronavirus crisis.
“Our overall lending will expand and we are absolutely ready to support that demand,” Horta-Osorio told media on a call. “Contrary to other banks we do not seek any trade off between CET1 levels and trading to customers.”
“We will see where that leaves us in our CET1 ratio but really we are very comfortable and we don’t see any trade off there.”
“We have a very significant buffer to our minimum capital requirements that leaves us in a very strong position,” he added. “According to our internal estimates we think [demand] will continue to increase and ask us for more loans. The retail demand for loans will go slightly down but we see a significant upwards demand in SMEs [who want loans].”
Banking on a quick economic recovery
John Moore, senior investment manager at Brewin Dolphin, said Lloyds’ results showed “resilience” despite its exposure to the UK economy.
“While the bank is in a strong financial position in the immediate term, analysts will keep a close eye on the performance and quality of its loan book amid pressure to lend over the next year and beyond,” he added.
“That scrutiny, combined with an interest rate environment that challenges profitability, explains why banks’ share prices have been hit so hard over the past month or so.”
Lloyds predicts a five per cent drop in GDP in 2020, followed by a two per cent rise in 2021.
What Lloyds said
Chief executive Antonio Horta-Osorio said:
The coronavirus pandemic presents an unprecedented social and economic challenge which is having a significant impact on people and businesses in the UK and around the world.
The economic outlook is clearly challenging with the longer-term outcome dependent on the severity and length of the pandemic and the mitigating impact of government and other measures in the UK and across the world.
Throughout this period of uncertainty we will continue to work closely with government, regulators and other authorities and use the strength of our balance sheet and business model to ensure that we play our part in supporting our customers and the UK economy.
I would like to pay tribute to the exemplary dedication being shown by all our colleagues across the group providing vital banking services to those in need, but also in going above and beyond in countless and often unseen ways to support the most vulnerable.
More to follow.