Lloyds Banking Group PLC plunges to loss after seeing significant deterioration

PLC () plunged to a loss for the first half of the year as it bumped up its provision for bad loans to reflect what it said was a significant deterioration in the economic outlook under the impact of the coronavirus pandemic.

To prepare for potential credit losses, the FTSE 100-listed lender hiked its impairment charge to £3.8bn, including £2.4bn in the second quarter to June 30, 2020.

Its loan books continue to perform well, based on actual defaults to date, the bank said, but the additional provisions were about “building balance sheet resilience” on top of a CET1 capital ratio of 14.6%. 

But with a lower net interest margin (NIM) of 2.59% for the half, down from the 2.79% in the first quarter and 2.9% this time last year, plus more than 1.1mln payment holidays given to households, income fell by 16% to £7.4bn for the half-year.

Combined with the much higher impairment charges, this led to the statutory loss before tax of £602mln, a huge swing from the £2.9bn profit a year ago.

Lloyds pointed to “early signs of recovery” in core markets, such as consumer spending and the housing market, but admitted the outlook “remains highly uncertain and the impact of lower rates and economic fragility will continue for at least the rest of the year”. 

As a result, credit impairments are expected to grow to between £4.5bn and £5.5bn, while NIM is expected to remain depressed at around the 2.4% seen in the second quarter.

“Although the outlook is uncertain, the group’s financial strength and business model allow us to help Britain recover and play our part in returning our country to prosperity,” Lloyds chief executive António Horta-Osório said in the update.

Lloyds shares plummeted 8% to 27.04p by mid-afternoon on Thursday.

Broker Shore Capital said the results fell “well short of consensus expectations”, which was primarily due to much higher than expected impairments as the group has adjusted its macro-economic assumptions to reflect a more challenging outlook.

“However, we are not overly surprised by this and had referenced in previous research that their assumptions seemed optimistic,” the Shore Cap analysts said. 

“Nevertheless, this just adds fuel for the bears and provides little in the way of short-term catalyst for those willing to try and look through the cycle.”

   –Adds shares and broker comment–